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Operator: Ladies and gentlemen, welcome to the Evonik Industries AG Q3 2025 Earnings Conference Call. I'm Mattilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Kullmann, CEO. Please go ahead. Christian Kullmann: Thanks a lot, and welcome to our Q3 earnings call. Looking around in our boardroom, I see a very different setup here today. First of all, welcome to First of all, welcome to Claus Rettig, our interim CFO, who is sitting left to me. Many of you already know him. In his previous roles, he represented Evonik at many investor conferences and Capital Markets Day. His extensive experience and knowledge of our company is helping us in this new role while the search for our CFO is ongoing. I would like to take the opportunity here today to thank Maike Schuh for many years in different roles at Evonik. She has left the company at her own request in September. And while this was very sudden, we have to accept that. I would like to thank her for her efforts and the positive impact she had on our organization. Second, after 49 -- worthwhile to repeat, after 49 reported quarters as a public listed company, Tim is not sitting on the right side of this table anymore. For more than a decade, he has built an Investor Relations program, which is highly regarded by all of you out there. Now he is taking a well-deserved sabbatical. Thank you, Tim, for your lasting commitment to the Evonik Equity story. Christoph, whom all of you already know pretty well, will have a strong foundation to build on in the coming years. And with that, let's go into today's results release. We will be largely focusing on the outlook during the short prepared remarks. You will know that we are facing a very tough environment currently, although already coming from quite a low level, customers currently are acting even more cautiously across all segments and in nearly all end markets. Demand stayed very weak, exiting the summer break. That is why with our prerelease end of September, we had to lower our full year guidance to around EUR 1.9 billion of adjusted EBITDA, coupled with a cash conversion rate between 30% to 40%. Your and our look today goes ahead into the fourth quarter. For that, I'm now handing over to Claus, who will show you why we are confident to achieve our outlook for both EBITDA and cash conversion in the last 3 months of the year. Claus Rettig: Yes. Thank you, Christian. As you already said today, I'm here in my role as interim CFO, which I took over a good month ago. I have to say, during my almost 30 years at Evonik and in my different roles, I've joined quite some meetings, events, investor presentations, presentations, discussions with customers, suppliers and partners. Nevertheless, this earnings call marks a first for me. And unfortunately, we have to report a weak quarter 3 for Evonik. However, I spent most of my time in my new role already on the future. Let me therefore comment on the fourth quarter in 2 parts. I would like to start with the supporting factors for our earnings development. And then I would like to comment also on our free cash flow and net working capital expectations. Starting with the EBITDA. There are several supporting factors in Q4. We will see the typical year-end recognition of sales and earnings in our Health Care segment, which will be more pronounced this year versus a weaker last year. In Animal Nutrition, we will see a pickup in sales coming from the low levels in Q3, especially compared to previous year. And these low levels were, of course, impacted by a planned maintenance shutdown. In Q4, almost full capacity will be available again. And we have already rather good visibility on the booking levels today. Another aspect to address are lower personnel costs. For several quarters, we are seeing a reduction in our FTE numbers, which will come through more and more into the bottom line. In addition, bonus provision releases are further supporting our earnings and also in the upcoming quarter. So all in all, with the environment that will stay tough, the finish until the end of the year will also certainly not be easy. But there are good reasons why we are confident to deliver around EUR 1.9 billion of EBITDA this year. The same is true for the free cash flow. We are on track to deliver our guidance, which we gave as between 30% and 40% cash conversion. In the first 6 months of the year, the weaker-than-expected environment has made it difficult for us to reduce the net working capital as intended. Now we have adapted to the new situation, which has resulted in a positive free cash flow of around EUR 300 million in Q3. And we have seen an acceleration in net working capital reduction throughout the quarter, making most progress in September. This makes us optimistic for further significant steps in quarter 4. To reach the midpoint of our guidance range, we will need another EUR 380 million of free cash flow in Q4. Again, as with the EBITDA, it will not be easy. But looking into the past years, it is doable, and that's what we are going to do. And with that, I hand back to Christian. Christian Kullmann: Thanks a lot, Claus. Ladies and gentlemen, in this tough environment and facing clearly weaker results than we would like to see, the execution of our long-term strategy is more important than ever. Continuing to transform our portfolio and to optimize our administrative and operational processes is a necessity, and we have made good progress in both regards this quarter. A significant milestone is for Europe, carve-out of our infrastructure activities, although maybe not so visible from the outside, this is one of the most complex reorganization projects in our history. More than 3,500 employees are directly affected, many more indirectly. So it is good to see that we are well on track in our initial project plan. The new SYNEQT, that is the name of the new company, will start in January of next year as a 100% subsidiary of Evonik Industries. The different options for the future will then be evaluated. But also our Evonik Tailor Made program and the Business Optimization programs like in high-performance polymers or health care are progressing as planned. Compared to the end of last year's third quarter, the number of employees has shrunk by more than 740 without divestments. And these are mostly leadership roles, mostly in Germany. This impact will be lasting and felt all the more once demand recovers. Executing those projects will help us to focus on our core activities, which is essential in these difficult times. Having said so, we are now happy to take your questions. Operator: [Operator Instructions] The first question comes from the line of David Symonds from BNP Paribas. David Symonds: Yes, two from me, please. So just the first one, if you could give any comments on October trading and what you're seeing so far and whether it's supportive of hitting the EUR 1.9 billion on the nose. And then the second one, so I'm a little bit confused by Advanced Technologies. And if I bridge from last year, taking relatively minor impacts from price, volume and FX sales and the standard drop-throughs, then I would probably come to an EBITDA number of around EUR 260 million for this year's Q3. Then you've reduced full-time employees in this division by around 450 year-on-year. So I would think that would contribute sort of EUR 10 million to EUR 12 million positive. And yet the eventual number was only EUR 202 million EBITDA. So there's arguably -- there's a EUR 70 million gap compared to what I'm able to bridge. And I'm just wondering are there any sort of production effects or anything in this quarter? I can see that you've reduced working capital. Did you reduce production in Advanced Technologies in Q3 in order to support cash and so had less coverage of fixed costs? Or where does that gap come from, please? Christoph Finke: Yes. Thank you, David. Both questions actually go to Claus. So the first one on Q4 and October trading and the second one and then on Advanced Technologies. Claus Rettig: Yes. Yes. Thank you for the question. And let me answer them as following. Maybe first on current trading and outlook. Like I said before, we are absolutely confident to reach our guidance around EUR 1.9 billion. And there are certain factors that are supporting this. So like I said, we have a very strong demand on the health care side, which we see in Q4. And we have some of the negative impacts we have seen in Q3, not anymore, like that goes into costs for maintenance shutdowns we had. Our methionine business was really weak in Q3 because of this maintenance shutdown costs plus lower business. This we don't have in Q4 anymore. And we also, like I said, have already a good visibility in our order book on the methionine side. So this is clearly giving us confidence. Another piece that gives us confidence is when you look to our Q3 development month by month, September was already clearly on the upside. We had a weak August, but also not as weak as August, but a weak July. September, certainly better. September contribution margin from the market was above the average of Q2. And first indications of October are also that we are on the level of September. So we head into the Q4 really along what we are expecting. And that makes us very, let's say, confident that we can reach our guidance range as published. Maybe so far for this one. The other one was Advanced Technologies. Yes, it looks when you -- on the first glance, when you look to the numbers, of course, it looks strange because the EBITDA is much weaker than you would expect when you look to the loss on sales. However, some of the factors I already mentioned here is we had methionine shutdown, which created quite a bit of cost on the cost side. But even more so weighing on the EBITDA was quite a big step in inventory reduction. As we said, last year, we have done inventory management maybe a little bit earlier than this year. That's why we had a better cash flow last year at the same time. Now in Q3, we really, really go down on the cash flow side, management of cash flow, reducing inventories is a big portion of this. And when you look to the numbers we provided to you with our KPIs, financial KPIs, you will see that when you look into the Advanced Technology, yes, we dropped down from EUR 1.5 billion in Q3 '24 to EUR 1.4 billion, you can say, in Q3 '25. And we almost lost the same amount on the EBITDA line from EUR 296 million to EUR 202 million. But when you look on the cash flow side, you see that cash flow increased. So from EUR 146 million previous year's quarter to EUR 182 million this quarter. And that gives you clearly indication this is due to working capital management. And as you all know, this is suppressing EBITDA. And -- so these are the 2 factors, net working capital reduction, maintenance shutdown costs, mainly on the methionine side, with also force majeure on the crosslinker side in the last quarter, which also was jeopardizing our crosslinker business. These elements have contributed to this low EBITDA in Q3. Operator: The next question comes from the line of Martin Roediger from Kepler. Martin Roediger: Three questions. Number one, the earnings effect from the release of bonus provisions in Q3 has been obviously above the EUR 20 million level you had in Q2 already. Can you provide some color how much above EUR 20 million was it? And what are the targeted bonus provision releases in Q4? Secondly, on the cost savings, based on what you have announced or done already so far with restructurings and disposals, what are the incremental cost savings in 2026? And thirdly, a more general question. Do you see any rising imports from Chinese competitors into Europe because export volumes, which were initially dedicated to the U.S. market are now rerouted to Europe due to the implemented tariffs. If so, in which product categories is this the case? Christoph Finke: So yes, a lot of questions for Claus today. So we will start with the cost savings and incremental savings in 2026. And then going to the additional imports from China. On the bonus provisions, Martin, I think I can answer that. We don't comment and break that down in detail. So of course, it has been an impact in the other line in the third quarter. It will continue to support us to a certain degree, but there's also a structural element to that. As we mentioned during the prepared remarks, we have 740 FTEs less this year. So on the personnel cost side, it's a combination of both. And with that, over to Claus for the 2 points on cost savings and imports from China to Europe and the rest of the world. Claus Rettig: Yes, let me comment on this as well. So like I said, we have the structural cost savings from all our cost savings programs, mainly ETM, Evonik Tailor Made. And you heard before, they are actually proceeding fully as planned. So -- and one of the most significant key performance indicators is we are now year-on-year 740 FTEs less by the end of September, and that's a very hard cost saving element. So this is by far the biggest one. And then like Christoph said already, we don't disclose and publish bonus pieces. Of course, they play a role, but to a much lesser degree. And so I think the structural part is going on. It's going to continue into the next year and also going to continue into Q4. So we have the 740 less as we speak. But of course, they are being released or leaving us during the course of the year. That means we don't have the 740 FTE cost impact for full year yet. But in the Q4, of course, we have a full element of this. And of course, even more so in 2026. So from that point of view, we have also -- there's no doubt about it, we have compensating factors. We have inflation. Unfortunately, this year, we had pretty high salary adjustments in the chemical industry. They are on the other side. So that's counteracting these cost savings. Nevertheless, without the structural improvements, we would have a bigger problem. So that's maybe to the cost saving -- maybe inflation last year, salary cost inflation, to give you a number, around 7%. I think that's a pretty high number. Then the other one, imports from China. When you look to the general statistics, imports from China into Europe have been rising. That's clear. We have certain areas in our business where we see this as well. It's sometimes indirectly, I'll give you one example. We have imports on the silica side, so which are used in tires. There we see directly, but you see also an indirect impact that the entire tire is coming from China. And therefore, tire demand or tire production in Europe is going down. So yes, we have these effects. I could not quantify it at this moment in time exactly. But there are elements like this, the crosslinker, I think we mentioned this some time before. We have pretty tough competition from China as well. It's not across the entire range, but in certain areas, it is. And from that point of view, it has an impact. Unfortunately, I cannot quantify it for you now. Operator: We now have a question from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: My first question was following up on Martin's question in a slightly different way. Maybe this goes to Christian. I think the message you gave us, it seems is much more of earnings pressure due to what you call broad-based demand weakness. I'm just curious, if I look at what BASF mentioned last week that they think the global chemical production is up 4% year-on-year. It doesn't feel like the demand itself is so bad. So what I'm trying to understand is how much of the pressure that you see and not just you as in Evonik, but also as an industry right now in Europe is actually structural in a way because there's just genuinely more competition across many, many product segments than we ever used to. And if that's the case, why should we think next year perhaps will be any different? That's one. And second, maybe a bit related to that. If I look at your Q3 earnings or Q3 EBITDA, if I just run rate that, we are close to EUR 1.8 billion annualized EBITDA right now. I mean what are the key moving parts into next year, which can help your number grow versus that run rate? Christoph Finke: Thank you, Chetan. Christian will start, and I think Claus can then add a few points on 2026 performance, maybe a bit more on the business side. Christian Kullmann: Chetan, I appreciate it to take your questions. Maybe first about the market environment. The simple math is the higher your businesses are positioned in respect of specialties, the better will be a chance in 2026. And if you look at our numbers and figures in respect, for example, of our Custom Solutions businesses, you could see that they have been able, even in this tough environment, to hold the prices up. So that is somewhat I would take as sign, which is providing me with confidence, first. Second, it was about your expectations now in detail. Chetan, as you know, if I could, I would provide you with the very specific details, but it is a little bit early than to give you now a complete picture about what we do see in 2026. But for sure, that we -- and I guess you could do the same. So it's fair to assume that the macroeconomic environment will stay somewhat challenging also in next year. Are there reasons that it could become better? Are their signs? For example, the German stimulus program, which we think the German industry, and that means also we could benefit from the second half of the year. That is something we see as supportive. And then it is to see how the weak U.S. dollar will next year -- how the Americans will manage on the other side. And that is what I guess it is in those times of uncertainty worthwhile to underpin that we do remain delivering on our revised EBITDA and our free cash flow guidance. And here, as Claus has already conveyed to you, we are confident to get it. So in a nutshell, it is about the long view. It is about executing our strategy of reducing costs and bettering our position in regards of growth and optimization. And I guess, having said so, I do hand over to Claus. Claus Rettig: Yes. Thank you, Christian. Yes, Chetan. So maybe to add -- the Q3, I think, would not be a good quarter to extrapolate because I think the reasons I tried to explain before, this is a very weak quarter for certain also extraordinary factors, like we said. 2026, super difficult to judge right now, even though we are in the middle of the discussions of how to see 2026, what kind of budget we are going to have. And of course, we always have the ambition to be the next year better than the year before. But so far, super difficult to judge. However, there are certain areas which clearly make us confident that 2026 for Evonik can be better and should be better than 2025. The total environment, we don't believe will change much. Even though you have seen President Trump and President Xi in South Korea agreed upon, let's say, call it a cease fire, which helps. But since it's only a year, it does not really remove the underlying total uncertainty, but it certainly will help. So from that point of view, we believe the environment will be as tough as it is in 2025. Will it be worse? I don't think so. So then it comes back to our own kind of elements that we believe are supporting us in 2025. We have a very weak Oxeno business, our C4 business in 2025. Here, we clearly see an improvement coming up in 2026. And Oxeno this year is not contributing at all, as you know, this will be different in 2025. Will it be back to 2024 levels? No, but something in between. So that is certainly a major element, which we see. Then we -- like we said, we have capacities that are ramping up. One is older, our polyamide 12. And by the way, polyamide 12 also in 2025 has volume growth. So it's on the way up and it's going to continue. We have the membrane business where is this year a little bit weak. We expect better business next year. We have the price erosion on the crosslinker side that has come to a standstill. It's starting to reverse. And -- yes, then we have methionine. And not to forget, we have methionine as, of course, a challenge, maybe new capacity coming on stream or most certainly on stream. When exactly? Not clear yet. That can have a suppressing factor on the price. At the same time, we have improved our cost position. In Singapore, where I'm living, we have put a new technology into a methionine plant this year, which is not only increasing the capacity, but also improving the cost. And over and above, even bigger cost improvement will come in our U.S. plant once we have the back integration in methyl mercaptan on stream, which also will happen next year. So this is -- then we have new plants. We have a new alkoxide plant in operation now in Singapore. The demand for biodiesel catalysts and biodiesel is strong. So there, it's going to ramp up, contributing next year. We have just started the new plant for aluminum oxide, highly dispersed aluminum oxide used in 2 big fields. One is lithium ion battery and the other big field is coatings. This is moving into markets where the demand is there, and we have this new plant will contribute. Maybe I already mentioned health care. Health care is also a market segment where the demand is strong. So it's not really affected by the general weakness. You know that we have also tendencies that health care production is coming back from Asia to the United States and to Europe. I think we are going to benefit from this. And -- so there are these kind of elements which make us confident that we can increase our business in 2026 a little bit despite still remaining challenging market conditions. Operator: The next question comes from the line of Geoff Haire from UBS. Geoffery Haire: I was just wondering, could you help us understand what the sustainability of the profitability in Infrastructure and Other is? Obviously, that was a big surprise, at least relative to what we were forecasting on consensus going forward because obviously, there's one-offs from bonus releases in there and how -- what proportion of that is one-off and what portion is ongoing. Christoph Finke: Yes. Geoff, this goes to Claus. Claus Rettig: The sustainability -- just to make sure I understood it correctly, is sustainability of... Christoph Finke: The earnings level was better than in the past quarters in Infrastructure and Other lines. Claus Rettig: Others. Yes. Okay. As you know, in Infrastructure and Others, we have grouped our , like I said, infrastructure business, which we are currently carving out into a separate legal entity. And we have also our Oxeno business in this. And here, the profitability improvement is coming from Oxeno in the next year. So this year, like I said, it's weak. Here, of course, we have profited from -- this is a very FTE-heavy operation. So a lot of the -- many of the FTE reductions are taking place there. Also in the course of the carve-out, we streamlined the processes. So absolutely sustainable. And the Oxeno part in it, like I said, we had to deep dive into our Oxeno business, you can believe me. And here, we're also confident that we are improving step-by-step over the next years, and we will certainly make a step in 2026, which we also -- okay, this is, of course, also depending on market conditions. The part which is on the bonus side, which is the lower part in the end is, I have to say, hopefully not sustainable. We all won't have a normal bonus again. And so we are aiming for not making that sustainable, that's for sure. Operator: We now have a question from the line of Anil Shenoy from Barclays. Anil Shenoy: I have two, please. The first one is on lipids. So you've spoken about lower demand for lipids in Custom Solutions in Q3. So I was just wondering if you could quantify in terms of percentage, how much was it down quarter-on-quarter and year-on-year as well? I mean, any kind of color on it would be very helpful. And on that note, if you could give us an update on the new lipids plant in U.S. I'm trying to understand what kind of a contribution could we expect in 2026 from it? And if you could remind us the EBITDA contribution that you expect once the plant is fully ramped up? So that's my first question. And the second question is on the divestments, especially SYNEQT. Now that you have carved it up as a separate entity, do you have a time line? Or would you like to give any color on it as to when can we expect the sale of SYNEQT? And would you be okay with the JV structure like the one Macquarie did with the infrastructure assets of Dow? And would you expect similar kind of multiples to that of Dow's assets? So those are my questions. Christoph Finke: Okay. Thank you, Anil. This time, both questions will go to Christian. So lipids and then SYNEQT. Christian Kullmann: Maybe first about the lipids. We are quite happy with the ramp-up of the capacities we have started to build in the United States of America. And here, we made good progress. So we are confident that we will benefit from it in future. But besides, it is a long-term perspective. So maybe give us now, first of all, a chance to build the -- to finalize the construction and then to ramp the capacities up. But nevertheless, and worthwhile to underpin it, here, we are confident that it will in future become a good and attractive EBITDA contribution business. All the more, as you see that the government of the United States of America has started some reshoring initiatives to bring pharmaceuticals and in particular, these on this very high level, high technological level back to the United States of America. So here, we are confident. In respect of Infrastructure, first of all, yes, we are progressing pretty well in respect of separation. This is close to be completed. And from January next year onwards, we will have a legal entity with SYNEQT fully organizationally and legally independent. And then as you know, all options are lying on the table. What do I mean talking about this? Could it be a partnership? Could it be a straight divestment? Could it be a JV? Yes. And for us, it means that we will tackle these different opportunities and that we will judge upon how to move ahead over the next year. But for Evonik, it is quite clear that the main benefit will be that we will have a less amount of CapEx, which we will pump in future -- which we would have to pump in future into our infrastructure businesses, and that is, for sure, helpful. So having said this, and then maybe that was -- you have asked about the revenues, somewhat -- the revenues and the EBITDA. In 2024, these infrastructure businesses have gained around EUR 1.8 billion of revenues. Here, it is fair to say Marl plus Wesseling plus C4. So in respect of the EBITDA, it was half -- first half of this year, EUR 100 million in the Infrastructure plus C4. But because C4 was virtually -- they have not contributed to the results, you could take this as, by thumb rule, EUR 100 million half a year, EUR 200 million full year in respect of our infrastructure business. I guess these are the two questions I have taken pride to answer. Operator: The next question comes from the line of Thomas Wrigglesworth from Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Firstly, on Custom Solutions, you've done well with pricing, but volume has fallen 8%, which might suggest that pricing is coming at the expense of volume, which in itself might be a harsh statement. But then I look at the EBITDA change, much like Advanced Technologies, and it's substantially weaker in 3Q for the loss in sales than we've seen in 2Q. So is it that we're losing high-value tons in the volume? Or -- yes, I'm just kind of keen to unpack that a little further. Secondly, on methionine, I think you called out the methionine prices are down and yet you've been taking maintenance in 2Q and 3Q indirectly managing the volumes into the market. As you add tons and have full availability into 4Q, how do you expect pricing to perform? And do you think that your return of tons will weigh on prices into 2026 as well? Christoph Finke: Thank you, Tom. First one, Custom Solutions to Claus and then Christian on methionine. Claus Rettig: Okay. Good. Yes, Custom Solutions, I can actually first say, when you look -- we can do the same as with Advanced Technologies. If you look to the data we provided you, you will see that some of the EBITDA decline is not reflected in the cash flow. That's because we have also here, not to the same degree as in Advanced Technologies, but also certainly substantial net working capital reduction to align the inventories mainly to the current sales and demand. You can see that even though the EBITDA is down from EUR 287 million in Q3 '24 to EUR 215 million in Q3 '25, cash flow remains the same at EUR 172 million. So this is something we have to consider. Yes, volumes are down, which is unusual, I have to say, for this usually very stable business. And it shows also how broad, I have to say, the weakness in the market is because here in Custom Solutions, as you certainly know, we have a very broad portfolio, which makes it usually resilient because not all markets go down at the same time. But when I look right now to the performance in Custom Solutions, you can see an impact everywhere. I can see it in almost all the businesses. And I think in Custom Solutions, all the businesses have an impact to different degrees, yes, but also in all regions, and it shows -- first of all, it's a general slowdown of the demand. Nevertheless, I think what we are looking into is exactly what you are mentioning, is our price volume strategy, the right one. And are we not sacrificing volume to keep the margins high, and that's certainly on our agenda for the next months to come. And from that point of view, pricing, I think in these days, remains super critical. Also in the market, everybody knows in the market going for market share is not a good idea. And because with lowering the prices, you don't create more demand. But nevertheless, we will look into this. So it's one of the agenda points on our agenda. Christian Kullmann: Okay. And I take then the methionine question. First, maybe let me split my answer up into 2 parts. First, about the expectations in the fourth quarter. Here, we see a demand which remains overall pretty healthy. Yes, fair to say. And that is what we could give to you because we have a quite good visibility on the already booking level for the fourth quarter. So in a nutshell, the volumes will be up compared to the last quarter. And in respect of the prices, it might. It might end up a few cents lower, but it depends. It depends first on the ramp-up of a new capacity of NHU. So here, it depends. I won't call it -- it's a question, but let's say it depends. And second, on the [indiscernible] side, we do have the situation in the United States of America, where the businesses are protected by the U.S. tariffs. That is why I would say, for sure, volumes up compared to last year -- to last quarter and in respect of price, could be down in some sense, but don't forget that there is an exception in respect of the trade tariffs in the United States of America. Now maybe outlook 2026, what do we think about this? First, it's somewhat like an evergreen, an evergreen that we do see a market growth that will continue in an average between to 3% to 4% to 5%, maybe by thumb rule around 4%, which translates into an additional capacity of 80,000 tons per year. On the other side, we are aware that there are some new capacities which could come on stream over the course of the next year, but it is hard to judge as of today when they will come on stream. And you should keep in mind that there's a new brand-new competitor in. We could not really calculate if he could bring his capacity without having any experiences in this market and with this technology right into the market in the first step. So let's see how this will work. And on the other side, don't forget that some older capacities could be taken offline. That is what we have seen, what we have observed over the course of the last year. For sure, the market is in a restructuring period. And let's see how this will work over the course of 2026. That is what we could give to you in respect of methionine for 2026 as of today. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Christian Kullmann for any closing remarks. Christian Kullmann: Yes. Ladies and gentlemen, it was great having had you today. This is what now ends our call. So far, thanks a lot for your attention. Have a happy autumn and hope to meet you soon in person. Take care, and goodbye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Thank you for standing by. This is Betsy, the conference operator. Welcome to the Fortis Inc. Third Quarter 2025 Earnings and New 5-year Capital Outlook Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Stephanie Amaimo, Vice President, Investor Relations. Please go ahead. Stephanie Amaimo: Thanks, Betsy, and good morning, everyone. Welcome to Fortis' Third Quarter 2025 Results and New 5-year Capital Outlook Conference Call. I'm joined by David Hutchens, President and CEO; Jocelyn Perry, Executive VP and CFO; other members of the senior management team as well as CEOs from certain subsidiaries. Before we begin today's call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slide show. Actual results can differ materially from the forecast projections included in the forward-looking information presented today. Non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U.S. GAAP financial measures in our third quarter 2025 MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David. David Hutchens: Thank you, and good morning, everyone. Today, we are proud to announce another solid quarter marked by strong execution and momentum from our regulated growth strategy. Operationally, we continue to deliver safe and reliable service to our customers. And through September, our utilities invested $4.2 billion in our systems. For the full year, we expect to invest approximately $5.6 billion. Financially, we delivered adjusted earnings per share for the third quarter of $0.87. In September, we completed the sale of FortisTCI. The sale strengthens our balance sheet and reduces our risk profile. More recently, we entered into an agreement to sell our investments in Belize, including the non-regulated hydro generation facilities to the government of Belize. I am happy to announce that the transition closed last Friday and that Fortis is now comprised of 100% regulated assets. We recognized these were long-held assets in the Fortis family, and we wish our best to the teams in Turks and Caicos and Belize as they continue to serve their customers and communities. And today, we are pleased to unveil our 5-year capital plan and announced that our Board of Directors has declared a fourth quarter dividend increase of approximately 4%. Our new $28.8 billion 5-year capital plan is up $2.8 billion compared to the prior plan. This supports rate base growth of 7% and annual dividend growth guidance of 4% to 6% through 2030. This new plan was developed with a strong emphasis on maintaining customer affordability. We prioritize capital investments that provide cost savings that flow through to our customers. This includes the coal to natural gas conversion at the Springerville Generating Station in Arizona, which is more economical compared to the new energy resources included in the prior plan. Our utilities are also continuing to manage operating costs by finding efficiencies through innovation and process improvements. As you can see on the slide, the growth in our 5-year plan is largely driven by higher transmission investments. At ITC, the $2 billion increase was primarily driven by new interconnections, including the Big Cedar Load Expansion project as well as the MISO long-range transmission plan and baseline reliability projects. At UNS, transmission and distribution investments increased $1 billion with FERC-regulated transmission making up $700 million of the increase. This was largely attributed to a new transmission line at TEP. Generation investments at UNS were reduced by $900 million driven primarily by the planned conversion of the Springerville Generating Station to natural gas, which I spoke to previously. The remaining increase is driven by growth at our other regulated utilities and a higher assumed foreign exchange rate. The new plan is highly executable with approximately 77% directed towards transmission and distribution investments and critical infrastructure that drives stable, predictable returns. The capital program is low risk and anchored in 100% regulated projects and includes only 11 major capital projects representing 21% of the plan. Consolidated rate base is expected to increase by $16 billion from approximately $42 billion in 2025 to $58 billion in 2030, supporting average annual rate base growth of 7%. This is up 50 basis points from the 6.5% in the prior plan. Now I'll take a few minutes to dig a little deeper into our larger utility capital plans. ITC's capital plan of $9.8 billion is the largest in the company's history and support strong rate base growth of 8%, up 100 basis points compared to the prior plan. Key elements of ITC's plan includes investments for base infrastructure, MISO's long-range transmission plan, customer connections and grid security. Significant opportunities above and beyond the base plan exists at ITC, including approximately USD 3.3 billion to USD 3.8 billion post 2030 for tranche 2.1 projects assigned through rights of first refusal. Work is also underway at ITC to evaluate projects within the tranche 2.1 portfolio that are subject to the competitive bidding process. If any of these projects are awarded to ITC would be incremental to ITC's plan. Other avenues of growth at ITC include customer connections associated with over 8,000 megawatts of load growth for proposed data centers and economic development projects in various stages of development across their footprint. This is up 3,000 megawatts just since last quarter. ITC may also realize future opportunities associated with the ongoing MISO LRTP process. All in all, it's a very exciting time at ITC with a significant transmission build-out. Let's now turn to UNS Energy. Their capital plan of $5.6 billion supports average annual rate base growth of approximately 7%. As a vertically integrated utility, investments are spread across the value chain. Notably, 1/3 of the capital plan is concentrated in transmission with the balance consisting of generation and distribution investments. Regulated generation includes the coal to natural gas conversion of 800 megawatts at the Springerville Generating Station, which is aligned with TEP's exit from coal by 2032 as well as the Black Mountain generation project at UNS Electric. While there is no new generation reflected in the plan associated with data centers or other large load growth, a new era of demand is approaching with a significant interconnection queue. As we discussed last quarter, TEP reached an energy supply agreement to serve a demand of approximately 300 megawatts that starts to ramp up in 2027 and will use existing and planned capacity. The agreement awaits ACC approval as well as other contractual contingencies. Negotiations are actively ongoing for an incremental 300 megawatts of capacity to support a full build-out of 600 megawatts at this initial site. TEP is also in active negotiations for additional capacity to second site in the range of 500 to 700 megawatts. If agreements are finalized for these subsequent phases, we estimate new generation in the range of approximately USD 1.5 billion to USD 2 billion through 2030 would be required as well as new transmission. We expect the supply will include a mix of renewable energy, natural gas generation and energy storage. All agreements will be structured to maintain reliability and provide financial protections for our customers and the company. Other opportunities beyond the plan include new energy resource investments required at TEP and UNS Electric as part of their next integrated resource plans expected to be filed in 2026. In British Columbia, our natural gas infrastructure is in focus. FortisBC's capital plan of $4.9 billion supports projects that ensure system reliability and integrity as well as major capital projects for LNG and advanced metering infrastructure. Beyond the base plan, we have several opportunities. Just last week, the BCUC approved the Tilbury LNG Storage Expansion project. Given our capital plan assumes a smaller storage tank, we now have potential upside of approximately $300 million. This project is contingent on an environmental assessment, which we anticipate next year. Other opportunities include LNG expansion at Tilbury for marine bunkering as well as customer and load growth in the Okanagan electric service territory. Some of these opportunities have the potential to fall within the plan period. This is a dynamic and promising time to be an energy delivery utility in North America. As we execute our base 5-year capital plan, we are concurrently focused on unlocking growth opportunities above and beyond the plan across all our jurisdictions. Turning now to our favorite slide. Today, we announced the declaration by our Board of Directors of a fourth quarter dividend of $0.64 and representing a 4.1% increase. This brings us to 52 consecutive years of increases in dividends paid, a track record that speaks for itself. With our strong dividend history and regulated growth strategy, we are extending our 4% to 6% annual dividend growth guidance through 2030. Now I will turn the call over to Jocelyn for an update on our third quarter financial results. Jocelyn Perry: Thank you, David, and good morning, everyone. For the quarter, reported earnings were $409 million or $0.81 per common share, and on a year-to-date basis, reported earnings were $1.3 billion or $2.57 per common share. As you can see on this slide, reported earnings include income taxes and closing costs of approximately $0.06 per share associated with the disposition of FortisTCI. Excluding this impact, adjusted EPS for the quarter was $0.87 per common share, up $0.02 compared to the third quarter of last year. And year-to-date September adjusted EPS was $2.63, up $0.18 per common share compared to the same period last year. Adjusted EPS growth to date in 2025 reflects strong performance across all our regulated utilities. On Slide 14, you will see the adjusted EPS drivers for the quarter by segment. Our U.S. Electric and Gas utilities delivered a $0.03 increase in EPS, higher earnings at UNS reflected an increase in transmission revenue and higher AFUDC associated with ongoing major capital projects. As we discussed last quarter, earnings at UNS are tempered by regulatory lag, driven largely by over USD 700 million of rate base, not reflected in rates. The increase in earnings at Central Hudson was due to rate base growth as well as a change in the recognition of a regulatory deferral for uncollectible accounts effective July 1, 2025. Growth was moderated by a contribution to a customer benefit fund associated with the joint settlement agreement, which concluded an ongoing enforcement proceeding. Together, these regulatory items impacted adjusted EPS by $0.01. Moving to ITC, continued capital investments and related rate base growth increased EPS by $0.02, the increase was partially offset by higher stock-based compensation and holding company finance costs. For our Western Canadian utilities, EPS increased $0.01, largely driven by rate base growth, including earnings associated with FortisBC Energy's investment in the Eagle Mountain Pipeline Project. The expiration of a PBR efficiency mechanism and a lower allowed ROE effective January 1, 2025, at FortisAlberta tempered earnings for this segment. And while not shown on the slide, at our Other Electric segment, EPS was largely consistent with the third quarter of 2024. Rate base growth was offset by the September 2 disposition of FortisTCI. For the full year, we expect the sale of FortisTCI to have a $0.02 impact on adjusted EPS. A higher U.S. dollar to Canadian exchange rate also contributed a $0.01 EPS increase for the quarter. For the Corporate and Other segment, the $0.03 decrease reflects higher holding company finance costs, unrealized losses on foreign exchange contracts and lower unrealized gains on total return swaps. And as David mentioned, we sold our assets in Belize in October and do not expect the transaction to have a material impact to adjusted earnings going forward. And finally, higher weighted average shares impacted EPS by $0.02, driven by shares issued under our dividend reinvestment plan. While most of the factors discussed for the quarter are the same for the year-to-date period, the increase in earnings for the 9-month period also reflects growth at Central Hudson due to the rebasing of costs and a higher allowed ROE effective July 1, 2024, as well as the timing of operating costs in 2025. Earnings year-to-date also reflect lower margins on wholesale sales at UNS Energy and the timing of operating costs at FortisAlberta. Through September, we raised over $2 billion of debt, including an inaugural corporate hybrid issuance of $750 million at 5.1%. Proceeds from both the hybrid issuance and the sale of FortisTCI during the quarter were used to repay our corporate credit facilities, including the non-revolving term loan providing funding flexibility as we focus on executing our capital program. As I just mentioned, with the recent hybrid issuance and asset dispositions, the growth in our capital plan is expected to be funded largely from cash from operations, utility debt and our dividend reinvestment plan. Our $500 million ATM program has not been utilized to date and remains available for funding flexibility as required. Overall, our funding plan remains largely consistent with the previous plan and supports average cash flow to debt metrics up over 12% through the period with ample cushion in the latter part of the plan. This balanced approach to funding supports both our growth objectives and strong credit profile. Turning now to recent regulatory activity with one item of note. In August, the New York State Public Service Commission approved Central Hudson's 3-year rate plan with retroactive application to July 1, 2025, including the continuation of an allowed ROE of 9.5% and a common equity ratio of 48%. That concludes my remarks. I'll now turn the call back to David. David Hutchens: Thank you, Jocelyn. At our core, we are a utility built on strong fundamentals and a clear, disciplined regulated growth strategy with a long CapEx runway supported by FERC-regulated transmission and retail load growth opportunities in Arizona. For our customers, we remain committed to prioritizing safety, reliability, affordability and the delivery of cleaner energy. For our shareholders, we offer a compelling low-risk return profile reinforced by our capital investment plan and dividend growth guidance through 2030. That concludes my remarks. I will now turn the call back over to Stephanie. Stephanie Amaimo: Thank you, David. This concludes the presentation. At this time, we'd like to open the call to address questions from the investment community. Operator: [Operator Instructions] The first question today comes from Maurice Choy with RBC Capital Markets. Maurice Choy: Just first question is on the timing and likelihood of some of the opportunities over and above the base plan. But within this 5-year period plan, specifically, you mentioned earlier that there is about USD 1.5 billion to USD 2 billion of incremental generation opportunities at TEP that may be required through 2030, and also another $300 million for the LNG Tilbury storage expansion upside. If my math is right, that's about $2.5 billion to $3 billion of incremental investments or another 100 basis points addition to your rate base CAGR. Any reason why you think that these two items may not come through in the coming months, such that we probably could potentially put this as part of our base estimates? David Hutchens: I like your optimism, Maurice, but there's a lot of wood to chop between here and there, right? So we have to get the agreements done with these counterparties. We obviously have to have the ability to build the infrastructure that's needed in the time line that they want. So all those things are definitely possibilities, but still getting generation cited, getting things in the queue, all of those pieces and most importantly, getting these customers to sign up for all the protections that we want for us from a credit perspective and for our customers from a rate perspective. And then going through the regulatory process. There's just a lot of steps between here and there, specifically around the data centers. And then also for the storage tank in BC, still have to go through the EA process there. So we obviously are very excited and bullish and after these projects as much as we can be. But as you know, we don't drop those things into our capital plan until we have signatures on the dotted line. And we'll keep you posted as those negotiations go and once we reach agreements with some of those third parties. Maurice Choy: Understood. If I could finish off with the question on the funding plan on Slide 17, where there was a mention about the balance of equity funding to be satisfied from, among others, asset sales. Obviously, you've sold a number of things here, Turks and Caicos as well as Fortis Belize and Belize Electricity and also Aitken Creek gas storage in the past. So you're 100% regulated right now, as you mentioned, thoughts on what else might be worth trimming, optimizing? Or do you feel like this is no longer an avenue that's worth exploring? David Hutchens: Yes. So we're focused mostly on executing that 5-year capital plan and that laundry list of additional opportunities above and beyond the plan that we just went through. So there is no read-through from the transactions that we just completed. Our portfolio is a great portfolio. And we do have 100% of our assets being regulated now. So there's -- that's not -- when you read that sentence that was looking back not forward. So that's we look at funding our capital plan is clearly laid out by that funding plan on the slide. And I'd reiterate that the DRIP is the only source. We don't have any discrete equity in there. So the DRIP is the only source of equity. We have the ATM and hot standby, but that's not needed in the current capital plan process. Operator: The next question comes from Rob Hope with Scotiabank. Robert Hope: Good to see the update on the capital plan. Maybe to follow up on the USD 1.5 billion to USD 2 billion of new generation in Arizona. Can you maybe help us understand kind of the timing of when this capital could be secured, just understanding that a lot of these items have relatively long lead times and when they could be in service? David Hutchens: Yes. So if you ask the customers who are asking for this, it's pretty much tomorrow is when they want it. But obviously, it takes time to build data centers. It takes time for us to get the siting and permitting, and of course, building additional generation, you're going to have to get in the Q4 combustion turbines or combined cycles whatever the resource portfolio requires. But it's also kind of not fully defined at this point where you can look at things that are available, as I mentioned in my prepared remarks, we expect this to be a mix of different energy resources, including battery storage, which can happen pretty quick. Renewables, of course, which can supply a good chunk of energy. And then you look at what the best capacity resource, whether that's a combustion turbine or combined cycle depending on the load features. So that I still think that when you look at longer term, like the current time line that we have with the project in Arizona for the first 300 megawatts as they're looking to be online in '27 and ramping up over the next year or so after that. So I would expect other time lines to be similar to that. But when we look at our plan that goes all the way to 2030, depending on availability of, say, combustion turbines, which would probably be the critical lead item on that. We still think that, that's doable to get that done in that next 5-year time period. Robert Hope: All right. Great. And then maybe taking a look at ITC. So you mentioned that there's 8 gigawatts of potential loan growth associated with data centers and you have Big Cedar in hand. Can you maybe add a little bit of color on how many opportunities you're looking at for that 8 gigs as well as could we see some sanctioning in the next 12 months? David Hutchens: Yes. I'll turn that over to Linda to give some details, but I will remind folks on the call that our three largest customers are DTE, CMS and Alliance. So I'm sure you've seen some of the conversations in those earnings calls as it relates to some of this development as well. So Linda, I'll turn it over to you. Linda Blair: Great. Thank you, Dave, and thanks for the question, Rob. Yes, certainly, the 8 gigawatts that certainly, we are -- we have sort of insight into in terms of those conversations with customers, ongoing planning studies to accommodate them. Certainly, we remain hopeful. I would say there's a lot of activity. We're working closely, as Dave mentioned, with our customers. We're really not in a position to really say or identify just sort of from a time line perspective. I think what we can say is that we continue to see that queue of those prospective data center or other economic development projects continue to grow. So we remain hopeful and optimistic that we will continue to see further announcements. But really, at this point in time, it's premature for us to speculate on which projects were or exactly when. But I would say the queue continues to get larger, and we remain optimistic. Operator: The next question comes from Ben Pham with BMO. Benjamin Pham: Could you update us on your thoughts with respect to an EPS CAGR initiation, if there's any? David Hutchens: Yes, we still continue whether or not we want to take that next step and give earnings guidance, but we have been pretty happy with all the details that we -- and we hope our investors and analysts are happy with the details that we give on rate base growth and seeing how clear our capital plan and funding plan tied together. We give the dividend guidance as well. And we always evaluated, I think probably the last time I've had conversations with you all kind of the one thing that we're waiting for because there's a lot of variability in earnings in Arizona to see the outcome of the Tucson Electric Power rate case. Formula rates will provide a much steadier earnings outlook for us, which would allow us to give a little bit more visibility and detail for you all, whether or not we -- I'm not saying that if we get formula rates, we're going to give earnings guidance. But that's one thing that's keeping us from giving it now. Benjamin Pham: Okay. Understood. And then maybe next on the asset sale side of things. Maybe not to talk specifically on Caribbean valuations. But can you share just the trends you've seen with buyer appetite for those assets? And it seems like you're willing to more do deals with neutral to maybe slightly dilutive perhaps. And just how do you think about CUC in the overall for this portfolio mix today? David Hutchens: Yes. I'd say the interest like in any market, waxes and wanes. I mean, we've seen that over many years as folks had approached us about the Caribbean assets, et cetera. But it's -- there's no like kind of consistency necessarily there. And of course, the buyer universe changes almost on a year-to-year basis. So -- but again, just as far as CUC goes, this isn't a read-through that we're exiting the Caribbean. This is -- those are two distinct and discrete transactions that we did and it doesn't mean we're looking to do anything else. Operator: The next question comes from Mark Jarvi with CIBC. Mark Jarvi: Just wanted to come back to sort of like friction points on potentially higher spend. As far as I can tell, it doesn't seem like customer affordability is one or balance sheet. So really, is it just equipment availability and permitting, Dave? David Hutchens: Yes. So I'm glad you brought up affordability because when you think about these new large load customers that actually can and well, should be, if you design it rightly, if you correctly, you would get the new customers, the large data center to pay for the growth that is needed in your infrastructure is the kind of growth pays for growth argument. So we definitely want to structure them that way so that in the end, we have a positive impact on customer affordability. They either get improved reliability and don't pay any extra or you end up with the great reliability that we always provide and actually seeing some downward rate impact because of all the energy and infrastructure that those larger customers are now paying part of basically paying a bigger part of the pie. So now that is a very difficult conversation, not necessarily to say, but for folks to hear and understand that because there's a lot of mixed messages out there that are telling people in different markets that data centers can drive your cost up. Well, when you have the control over the full value chain like you do in a vertically integrated utility, you can make sure that doesn't happen. And your regulators will make sure that doesn't happen. So that's the tack that we're taking in Arizona. And so when it comes down to it, I mean there's always additional things like making sure that your -- the community is supportive that you -- if you have, whether it's water cooled or air cooled that you understand what that means from a resource perspective, which is one of the reasons that in Arizona, they are all shift into air cooled -- air cooling for the data centers instead of water cooling to kind of take that out of the argument. So it is all of those things permitting, siting. They're great for economic development and jobs in the area, tax base. I mean, it's a great story to tell. But sometimes, it's a bit of a hard story to make sure everybody hears it all. Mark Jarvi: You brought up the shift to air cooling. Just on that 300 megawatts, the initial site, is that all moved ahead? Is there anything else that need approval for that 300 megawatts? And then in terms of other municipal support or other approvals, what's required then to get to the sort of investment decision on the next 300 megawatts of data center load? David Hutchens: Yes, I'm going to turn that over to Susan. We do have the -- as I mentioned, the energy supply agreement has been filed with the Corporation Commission, which is the first thing we have to get through, but I'll turn it to Susan to talk about any of the other pieces that might need to happen. Susan Gray: All right. Thanks, Mark, for the question. So yes, as Dave mentioned, on our side, the biggest approval that we need is that Corporation Commission approval, which we expect to get by the end of this year. But on the data center side, I think the main approval that they need as a permit to dig a well, which is a state permit. This is on county land and the state would actually approve the water. And that's water just for regular building use like kitchens and bathrooms kind of things. So that's for the first 300 megawatts. I would say anything beyond that, we're still negotiating contracts. And so not really sure what the types of approvals we would need, but certainly, anything beyond this first contract, we would need to build something new in terms of a generation resource. So that's going to be a more extended period of time. As Dave talked about earlier, it all depends on the resource mix and certainly, some of the generation resources can be built a lot more quickly than others. Mark Jarvi: So the customer would like to push the time lines, but you need to do your own sort of analysis on generation mix to come back to them with a solution, is that right? Susan Gray: I would say we need to do the analysis on the overall grid impact and make sure that we have all the infrastructure in place to serve the new customers as well as our existing customers as reliably and affordably as possible. I think in terms of what we would build, the customer will have a huge influence on that, right? So if the customer wants to go primarily renewable, that would be their decision and based on what they're willing to pay in terms of resource mix. So we're willing to build whatever they need, whatever they prefer as long as the customer is willing to pay for that incremental cost of maybe increasing the amount of renewable resources. Mark Jarvi: Understood. And then, Jocelyn, a question for you. Just in terms of the funding plan for the next 5 years, does it contemplate further hybrid issuances? And if yes, can you kind of outline roughly the quantum? Jocelyn Perry: Yes. Thanks, Mark. Yes. No, we don't have any further hybrid included, but we do have capacity. So with that growth that we're talking about here today that is not in the plan, should it come in the plan, then it's possible that we will explore the hybrid market when we look at that growth. And we may also look at it regardless, depending on the market and how the hybrids are pricing relative to other instruments. So yes, definitely an area that we're exploring. Operator: The next question comes from John Mould with TD Cowen. John Mould: I'd like to take another stab on the large load front in a couple of places. Maybe just starting with ITC. And I'm not asking for a view on in-service dates, but I'm just wondering if you can provide a little more detail on how the timing of the connection requests are paced. And this 3 gigawatts of growth that you've seen since last quarter, in particular, the pacing of at least what customers are looking for. David Hutchens: So are you asking like how soon they come in before they need it, or just... John Mould: Yes, how soon they're seeking to get connected, like just if I was trying to map out the timing of all those requests, is there a particular time period to which it's weighted? David Hutchens: Yes. Let me -- I don't have any visibility to that. Linda, do you have a view on kind of the detailed queue, I guess, CODs that they're looking for? Linda Blair: Look, I mean, I think I would be sort of generalizing, but I think back to Dave, I think on an earlier comment you made is that look, they all want to be connected as soon as possible. Certainly, there's practical realities just in terms of where they are looking to locate their facilities? Are they co-located with existing transmission infrastructure? If not, what is the infrastructure that's necessary, the MISO approval process to get that infrastructure through the MISO queue. So it's a difficult question. I guess I would generalize and say for the majority, I would say, of the conversations that we are involved with prospective customers, I would say that many of their requests as well as what is reasonably doable, we're looking at the outer years of that existing 5-year plan. Obviously, there's different ramp perspectives around those because some of them want to move more aggressively faster. Some of them are willing to be able to take what they can get as quickly as possible. So I think it's a really difficult question to give any specificity on, but I would say at least for the existing conversations that we are engaged with, I would say, the majority of those requests are looking at the latter part of our existing 5-year plan, so out into the '28, '29, '30 time frame. So hopefully, that provides some context. John Mould: Yes. That's very helpful color. And then just on Arizona and the new IRPs that you're planning to file in 2026. By what time would you need on the large load side to have something more definitive in place so that, that's reflected in the broader IRP and also allows you to potentially demonstrate the rate benefits that could potentially come from that in the various IRP portfolios. Just wondering what the timing looks like there. David Hutchens: Yes. So the IRP is going through its process. They've had a couple of workshops and we'll continue more for -- through 2026 with a target of filing those integrated resource plans, I think, in August of next year. But there will be a bunch of different resource portfolios based on different load growth scenarios with and without data centers. And I think even if we file an integrated resource plan and it doesn't include something that we need later, we just we just update that, right? I mean it's just -- that's basically putting a stake in the ground for sort of the bread and butter resources that we need to serve our load growth. But any of these additional investments that we would see and need and require for additional data center growth. I kind of think of it as almost like its own little mini IRP and rate base that would have its own revenue requirement that would be served by, or that would be met by these customers. So it's a bit of a different model. You wouldn't necessarily need to put them all together. And it's not like we filed this thing in August and say, okay, we got to close up shop any more data centers that come in and ask us for energy, we can figure this out. I mean, this is basically what we've been doing for the past a couple of years while we've had the 2023 integrated resource plan in effect is we still have these conversations, look at how we can meet the load and then adjust accordingly. Operator: The next question comes from Patrick Kenny with National Bank Capital Markets. Patrick Kenny: Just looking at the rate base CAGRs by utility and seeing Alberta and BC continuing to lag the 7% portfolio average. You touched on some upside in the Okanagan, but I'm just wondering if there might be any other macro or political tailwinds that you're watching out for that might help these two utilities close the gap relative to the group average growth profile, say, over the next 3 to 5 years? David Hutchens: Yes, for sure. So the Okanagan one is -- actually, it's a smaller part of the BC utility portfolio. But I think, has some good substantial growth opportunities there. So I know we don't usually talk too much about the electric business in BC because of the gas business is so big, but that does definitely have some additional opportunities there. And then on the LNG front, I mean, this is all about not just the extra upsized, I'll call it, storage tank that just got approved by the BCUC, that's one piece of additional investment. But also the additional LNG liquefaction capacity that we could put there for increased bunkering -- mostly for increased bunkering at that Tilbury site. And there are some political tailwinds, I know there's been a lot of conversations about some major projects and across Canada, related to trying to get the economy jump started. I think maybe some of the more of those details might come out later today when the budget is released, but there is some good emphasis on LNG investments in BC. We hope some of that bleeds down and has some good impact on looking at additional LNG investments for bunkering for BC. So there are some investments there. And I should note, I'll come to BC's defense here a little bit as well. These things are cyclical, right? So the load growth when you complete a bunch of big projects, and then do a new 5-year plan, it might not look as robust as the last one. But believe me, there's a lot of stuff in there. They've executed well on the past and look to add to that on a going-forward basis. Patrick Kenny: Okay. That's great. And then maybe for Jocelyn, just back on the funding plan, looking at that 5-year average cash flow to debt ratio of, call it, 12.4%. Is that 40 basis points above S&P's threshold anyway. Is that where you'd like to see it on a sustained basis? Or would you still like to see a little bit more cushion built over time? I guess maybe a different way to look at it, like how much dry powder might you have based on your debt metrics to flex the capital program or to handle any further weakness in the Canadian dollar? Jocelyn Perry: Yes. Thanks, Patrick. Yes, you're right. The average for the S&P metric over the 5 years is 12.4%. But as you get to the latter part of the plan, we're actually pushing more like 100 basis points. And you've probably heard me say before that, that's sort of where we have been targeting our cushion. It gives us a lot of dry powder to have the flexibility to finance the projects that are not in our capital plan that we're talking here today. So yes, so this is a plan that sets us up nicely to actually get to that adequate ample cushion in the latter part of the plan. I'll actually say 100 basis points is actually a lot of cushion. So I feel comfortable really having like 75 to 100 bps above the threshold of 12%, and we're getting there. And so it's -- this plan has actually improved over the prior year plan, which is a good thing. And in large part, it came from the fact that we've done some asset dispositions and we've continued our DRIP. So yes, the cushion is certainly met on average of 12.4%, but we do get to the, I'm going to call it the ideal cushion by the latter part of the plan. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Amaimo for any closing remarks. Stephanie Amaimo: Thank you, Betsy. We have nothing further at this time. Thank you, everyone, for participating in our third quarter results and new 5-year capital outlook conference call. Please contact IR should you need anything further and have a great day. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Ladies and gentlemen, welcome to the Evonik Industries AG Q3 2025 Earnings Conference Call. I'm Mattilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Kullmann, CEO. Please go ahead. Christian Kullmann: Thanks a lot, and welcome to our Q3 earnings call. Looking around in our boardroom, I see a very different setup here today. First of all, welcome to First of all, welcome to Claus Rettig, our interim CFO, who is sitting left to me. Many of you already know him. In his previous roles, he represented Evonik at many investor conferences and Capital Markets Day. His extensive experience and knowledge of our company is helping us in this new role while the search for our CFO is ongoing. I would like to take the opportunity here today to thank Maike Schuh for many years in different roles at Evonik. She has left the company at her own request in September. And while this was very sudden, we have to accept that. I would like to thank her for her efforts and the positive impact she had on our organization. Second, after 49 -- worthwhile to repeat, after 49 reported quarters as a public listed company, Tim is not sitting on the right side of this table anymore. For more than a decade, he has built an Investor Relations program, which is highly regarded by all of you out there. Now he is taking a well-deserved sabbatical. Thank you, Tim, for your lasting commitment to the Evonik Equity story. Christoph, whom all of you already know pretty well, will have a strong foundation to build on in the coming years. And with that, let's go into today's results release. We will be largely focusing on the outlook during the short prepared remarks. You will know that we are facing a very tough environment currently, although already coming from quite a low level, customers currently are acting even more cautiously across all segments and in nearly all end markets. Demand stayed very weak, exiting the summer break. That is why with our prerelease end of September, we had to lower our full year guidance to around EUR 1.9 billion of adjusted EBITDA, coupled with a cash conversion rate between 30% to 40%. Your and our look today goes ahead into the fourth quarter. For that, I'm now handing over to Claus, who will show you why we are confident to achieve our outlook for both EBITDA and cash conversion in the last 3 months of the year. Claus Rettig: Yes. Thank you, Christian. As you already said today, I'm here in my role as interim CFO, which I took over a good month ago. I have to say, during my almost 30 years at Evonik and in my different roles, I've joined quite some meetings, events, investor presentations, presentations, discussions with customers, suppliers and partners. Nevertheless, this earnings call marks a first for me. And unfortunately, we have to report a weak quarter 3 for Evonik. However, I spent most of my time in my new role already on the future. Let me therefore comment on the fourth quarter in 2 parts. I would like to start with the supporting factors for our earnings development. And then I would like to comment also on our free cash flow and net working capital expectations. Starting with the EBITDA. There are several supporting factors in Q4. We will see the typical year-end recognition of sales and earnings in our Health Care segment, which will be more pronounced this year versus a weaker last year. In Animal Nutrition, we will see a pickup in sales coming from the low levels in Q3, especially compared to previous year. And these low levels were, of course, impacted by a planned maintenance shutdown. In Q4, almost full capacity will be available again. And we have already rather good visibility on the booking levels today. Another aspect to address are lower personnel costs. For several quarters, we are seeing a reduction in our FTE numbers, which will come through more and more into the bottom line. In addition, bonus provision releases are further supporting our earnings and also in the upcoming quarter. So all in all, with the environment that will stay tough, the finish until the end of the year will also certainly not be easy. But there are good reasons why we are confident to deliver around EUR 1.9 billion of EBITDA this year. The same is true for the free cash flow. We are on track to deliver our guidance, which we gave as between 30% and 40% cash conversion. In the first 6 months of the year, the weaker-than-expected environment has made it difficult for us to reduce the net working capital as intended. Now we have adapted to the new situation, which has resulted in a positive free cash flow of around EUR 300 million in Q3. And we have seen an acceleration in net working capital reduction throughout the quarter, making most progress in September. This makes us optimistic for further significant steps in quarter 4. To reach the midpoint of our guidance range, we will need another EUR 380 million of free cash flow in Q4. Again, as with the EBITDA, it will not be easy. But looking into the past years, it is doable, and that's what we are going to do. And with that, I hand back to Christian. Christian Kullmann: Thanks a lot, Claus. Ladies and gentlemen, in this tough environment and facing clearly weaker results than we would like to see, the execution of our long-term strategy is more important than ever. Continuing to transform our portfolio and to optimize our administrative and operational processes is a necessity, and we have made good progress in both regards this quarter. A significant milestone is for Europe, carve-out of our infrastructure activities, although maybe not so visible from the outside, this is one of the most complex reorganization projects in our history. More than 3,500 employees are directly affected, many more indirectly. So it is good to see that we are well on track in our initial project plan. The new SYNEQT, that is the name of the new company, will start in January of next year as a 100% subsidiary of Evonik Industries. The different options for the future will then be evaluated. But also our Evonik Tailor Made program and the Business Optimization programs like in high-performance polymers or health care are progressing as planned. Compared to the end of last year's third quarter, the number of employees has shrunk by more than 740 without divestments. And these are mostly leadership roles, mostly in Germany. This impact will be lasting and felt all the more once demand recovers. Executing those projects will help us to focus on our core activities, which is essential in these difficult times. Having said so, we are now happy to take your questions. Operator: [Operator Instructions] The first question comes from the line of David Symonds from BNP Paribas. David Symonds: Yes, two from me, please. So just the first one, if you could give any comments on October trading and what you're seeing so far and whether it's supportive of hitting the EUR 1.9 billion on the nose. And then the second one, so I'm a little bit confused by Advanced Technologies. And if I bridge from last year, taking relatively minor impacts from price, volume and FX sales and the standard drop-throughs, then I would probably come to an EBITDA number of around EUR 260 million for this year's Q3. Then you've reduced full-time employees in this division by around 450 year-on-year. So I would think that would contribute sort of EUR 10 million to EUR 12 million positive. And yet the eventual number was only EUR 202 million EBITDA. So there's arguably -- there's a EUR 70 million gap compared to what I'm able to bridge. And I'm just wondering are there any sort of production effects or anything in this quarter? I can see that you've reduced working capital. Did you reduce production in Advanced Technologies in Q3 in order to support cash and so had less coverage of fixed costs? Or where does that gap come from, please? Christoph Finke: Yes. Thank you, David. Both questions actually go to Claus. So the first one on Q4 and October trading and the second one and then on Advanced Technologies. Claus Rettig: Yes. Yes. Thank you for the question. And let me answer them as following. Maybe first on current trading and outlook. Like I said before, we are absolutely confident to reach our guidance around EUR 1.9 billion. And there are certain factors that are supporting this. So like I said, we have a very strong demand on the health care side, which we see in Q4. And we have some of the negative impacts we have seen in Q3, not anymore, like that goes into costs for maintenance shutdowns we had. Our methionine business was really weak in Q3 because of this maintenance shutdown costs plus lower business. This we don't have in Q4 anymore. And we also, like I said, have already a good visibility in our order book on the methionine side. So this is clearly giving us confidence. Another piece that gives us confidence is when you look to our Q3 development month by month, September was already clearly on the upside. We had a weak August, but also not as weak as August, but a weak July. September, certainly better. September contribution margin from the market was above the average of Q2. And first indications of October are also that we are on the level of September. So we head into the Q4 really along what we are expecting. And that makes us very, let's say, confident that we can reach our guidance range as published. Maybe so far for this one. The other one was Advanced Technologies. Yes, it looks when you -- on the first glance, when you look to the numbers, of course, it looks strange because the EBITDA is much weaker than you would expect when you look to the loss on sales. However, some of the factors I already mentioned here is we had methionine shutdown, which created quite a bit of cost on the cost side. But even more so weighing on the EBITDA was quite a big step in inventory reduction. As we said, last year, we have done inventory management maybe a little bit earlier than this year. That's why we had a better cash flow last year at the same time. Now in Q3, we really, really go down on the cash flow side, management of cash flow, reducing inventories is a big portion of this. And when you look to the numbers we provided to you with our KPIs, financial KPIs, you will see that when you look into the Advanced Technology, yes, we dropped down from EUR 1.5 billion in Q3 '24 to EUR 1.4 billion, you can say, in Q3 '25. And we almost lost the same amount on the EBITDA line from EUR 296 million to EUR 202 million. But when you look on the cash flow side, you see that cash flow increased. So from EUR 146 million previous year's quarter to EUR 182 million this quarter. And that gives you clearly indication this is due to working capital management. And as you all know, this is suppressing EBITDA. And -- so these are the 2 factors, net working capital reduction, maintenance shutdown costs, mainly on the methionine side, with also force majeure on the crosslinker side in the last quarter, which also was jeopardizing our crosslinker business. These elements have contributed to this low EBITDA in Q3. Operator: The next question comes from the line of Martin Roediger from Kepler. Martin Roediger: Three questions. Number one, the earnings effect from the release of bonus provisions in Q3 has been obviously above the EUR 20 million level you had in Q2 already. Can you provide some color how much above EUR 20 million was it? And what are the targeted bonus provision releases in Q4? Secondly, on the cost savings, based on what you have announced or done already so far with restructurings and disposals, what are the incremental cost savings in 2026? And thirdly, a more general question. Do you see any rising imports from Chinese competitors into Europe because export volumes, which were initially dedicated to the U.S. market are now rerouted to Europe due to the implemented tariffs. If so, in which product categories is this the case? Christoph Finke: So yes, a lot of questions for Claus today. So we will start with the cost savings and incremental savings in 2026. And then going to the additional imports from China. On the bonus provisions, Martin, I think I can answer that. We don't comment and break that down in detail. So of course, it has been an impact in the other line in the third quarter. It will continue to support us to a certain degree, but there's also a structural element to that. As we mentioned during the prepared remarks, we have 740 FTEs less this year. So on the personnel cost side, it's a combination of both. And with that, over to Claus for the 2 points on cost savings and imports from China to Europe and the rest of the world. Claus Rettig: Yes, let me comment on this as well. So like I said, we have the structural cost savings from all our cost savings programs, mainly ETM, Evonik Tailor Made. And you heard before, they are actually proceeding fully as planned. So -- and one of the most significant key performance indicators is we are now year-on-year 740 FTEs less by the end of September, and that's a very hard cost saving element. So this is by far the biggest one. And then like Christoph said already, we don't disclose and publish bonus pieces. Of course, they play a role, but to a much lesser degree. And so I think the structural part is going on. It's going to continue into the next year and also going to continue into Q4. So we have the 740 less as we speak. But of course, they are being released or leaving us during the course of the year. That means we don't have the 740 FTE cost impact for full year yet. But in the Q4, of course, we have a full element of this. And of course, even more so in 2026. So from that point of view, we have also -- there's no doubt about it, we have compensating factors. We have inflation. Unfortunately, this year, we had pretty high salary adjustments in the chemical industry. They are on the other side. So that's counteracting these cost savings. Nevertheless, without the structural improvements, we would have a bigger problem. So that's maybe to the cost saving -- maybe inflation last year, salary cost inflation, to give you a number, around 7%. I think that's a pretty high number. Then the other one, imports from China. When you look to the general statistics, imports from China into Europe have been rising. That's clear. We have certain areas in our business where we see this as well. It's sometimes indirectly, I'll give you one example. We have imports on the silica side, so which are used in tires. There we see directly, but you see also an indirect impact that the entire tire is coming from China. And therefore, tire demand or tire production in Europe is going down. So yes, we have these effects. I could not quantify it at this moment in time exactly. But there are elements like this, the crosslinker, I think we mentioned this some time before. We have pretty tough competition from China as well. It's not across the entire range, but in certain areas, it is. And from that point of view, it has an impact. Unfortunately, I cannot quantify it for you now. Operator: We now have a question from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: My first question was following up on Martin's question in a slightly different way. Maybe this goes to Christian. I think the message you gave us, it seems is much more of earnings pressure due to what you call broad-based demand weakness. I'm just curious, if I look at what BASF mentioned last week that they think the global chemical production is up 4% year-on-year. It doesn't feel like the demand itself is so bad. So what I'm trying to understand is how much of the pressure that you see and not just you as in Evonik, but also as an industry right now in Europe is actually structural in a way because there's just genuinely more competition across many, many product segments than we ever used to. And if that's the case, why should we think next year perhaps will be any different? That's one. And second, maybe a bit related to that. If I look at your Q3 earnings or Q3 EBITDA, if I just run rate that, we are close to EUR 1.8 billion annualized EBITDA right now. I mean what are the key moving parts into next year, which can help your number grow versus that run rate? Christoph Finke: Thank you, Chetan. Christian will start, and I think Claus can then add a few points on 2026 performance, maybe a bit more on the business side. Christian Kullmann: Chetan, I appreciate it to take your questions. Maybe first about the market environment. The simple math is the higher your businesses are positioned in respect of specialties, the better will be a chance in 2026. And if you look at our numbers and figures in respect, for example, of our Custom Solutions businesses, you could see that they have been able, even in this tough environment, to hold the prices up. So that is somewhat I would take as sign, which is providing me with confidence, first. Second, it was about your expectations now in detail. Chetan, as you know, if I could, I would provide you with the very specific details, but it is a little bit early than to give you now a complete picture about what we do see in 2026. But for sure, that we -- and I guess you could do the same. So it's fair to assume that the macroeconomic environment will stay somewhat challenging also in next year. Are there reasons that it could become better? Are their signs? For example, the German stimulus program, which we think the German industry, and that means also we could benefit from the second half of the year. That is something we see as supportive. And then it is to see how the weak U.S. dollar will next year -- how the Americans will manage on the other side. And that is what I guess it is in those times of uncertainty worthwhile to underpin that we do remain delivering on our revised EBITDA and our free cash flow guidance. And here, as Claus has already conveyed to you, we are confident to get it. So in a nutshell, it is about the long view. It is about executing our strategy of reducing costs and bettering our position in regards of growth and optimization. And I guess, having said so, I do hand over to Claus. Claus Rettig: Yes. Thank you, Christian. Yes, Chetan. So maybe to add -- the Q3, I think, would not be a good quarter to extrapolate because I think the reasons I tried to explain before, this is a very weak quarter for certain also extraordinary factors, like we said. 2026, super difficult to judge right now, even though we are in the middle of the discussions of how to see 2026, what kind of budget we are going to have. And of course, we always have the ambition to be the next year better than the year before. But so far, super difficult to judge. However, there are certain areas which clearly make us confident that 2026 for Evonik can be better and should be better than 2025. The total environment, we don't believe will change much. Even though you have seen President Trump and President Xi in South Korea agreed upon, let's say, call it a cease fire, which helps. But since it's only a year, it does not really remove the underlying total uncertainty, but it certainly will help. So from that point of view, we believe the environment will be as tough as it is in 2025. Will it be worse? I don't think so. So then it comes back to our own kind of elements that we believe are supporting us in 2025. We have a very weak Oxeno business, our C4 business in 2025. Here, we clearly see an improvement coming up in 2026. And Oxeno this year is not contributing at all, as you know, this will be different in 2025. Will it be back to 2024 levels? No, but something in between. So that is certainly a major element, which we see. Then we -- like we said, we have capacities that are ramping up. One is older, our polyamide 12. And by the way, polyamide 12 also in 2025 has volume growth. So it's on the way up and it's going to continue. We have the membrane business where is this year a little bit weak. We expect better business next year. We have the price erosion on the crosslinker side that has come to a standstill. It's starting to reverse. And -- yes, then we have methionine. And not to forget, we have methionine as, of course, a challenge, maybe new capacity coming on stream or most certainly on stream. When exactly? Not clear yet. That can have a suppressing factor on the price. At the same time, we have improved our cost position. In Singapore, where I'm living, we have put a new technology into a methionine plant this year, which is not only increasing the capacity, but also improving the cost. And over and above, even bigger cost improvement will come in our U.S. plant once we have the back integration in methyl mercaptan on stream, which also will happen next year. So this is -- then we have new plants. We have a new alkoxide plant in operation now in Singapore. The demand for biodiesel catalysts and biodiesel is strong. So there, it's going to ramp up, contributing next year. We have just started the new plant for aluminum oxide, highly dispersed aluminum oxide used in 2 big fields. One is lithium ion battery and the other big field is coatings. This is moving into markets where the demand is there, and we have this new plant will contribute. Maybe I already mentioned health care. Health care is also a market segment where the demand is strong. So it's not really affected by the general weakness. You know that we have also tendencies that health care production is coming back from Asia to the United States and to Europe. I think we are going to benefit from this. And -- so there are these kind of elements which make us confident that we can increase our business in 2026 a little bit despite still remaining challenging market conditions. Operator: The next question comes from the line of Geoff Haire from UBS. Geoffery Haire: I was just wondering, could you help us understand what the sustainability of the profitability in Infrastructure and Other is? Obviously, that was a big surprise, at least relative to what we were forecasting on consensus going forward because obviously, there's one-offs from bonus releases in there and how -- what proportion of that is one-off and what portion is ongoing. Christoph Finke: Yes. Geoff, this goes to Claus. Claus Rettig: The sustainability -- just to make sure I understood it correctly, is sustainability of... Christoph Finke: The earnings level was better than in the past quarters in Infrastructure and Other lines. Claus Rettig: Others. Yes. Okay. As you know, in Infrastructure and Others, we have grouped our , like I said, infrastructure business, which we are currently carving out into a separate legal entity. And we have also our Oxeno business in this. And here, the profitability improvement is coming from Oxeno in the next year. So this year, like I said, it's weak. Here, of course, we have profited from -- this is a very FTE-heavy operation. So a lot of the -- many of the FTE reductions are taking place there. Also in the course of the carve-out, we streamlined the processes. So absolutely sustainable. And the Oxeno part in it, like I said, we had to deep dive into our Oxeno business, you can believe me. And here, we're also confident that we are improving step-by-step over the next years, and we will certainly make a step in 2026, which we also -- okay, this is, of course, also depending on market conditions. The part which is on the bonus side, which is the lower part in the end is, I have to say, hopefully not sustainable. We all won't have a normal bonus again. And so we are aiming for not making that sustainable, that's for sure. Operator: We now have a question from the line of Anil Shenoy from Barclays. Anil Shenoy: I have two, please. The first one is on lipids. So you've spoken about lower demand for lipids in Custom Solutions in Q3. So I was just wondering if you could quantify in terms of percentage, how much was it down quarter-on-quarter and year-on-year as well? I mean, any kind of color on it would be very helpful. And on that note, if you could give us an update on the new lipids plant in U.S. I'm trying to understand what kind of a contribution could we expect in 2026 from it? And if you could remind us the EBITDA contribution that you expect once the plant is fully ramped up? So that's my first question. And the second question is on the divestments, especially SYNEQT. Now that you have carved it up as a separate entity, do you have a time line? Or would you like to give any color on it as to when can we expect the sale of SYNEQT? And would you be okay with the JV structure like the one Macquarie did with the infrastructure assets of Dow? And would you expect similar kind of multiples to that of Dow's assets? So those are my questions. Christoph Finke: Okay. Thank you, Anil. This time, both questions will go to Christian. So lipids and then SYNEQT. Christian Kullmann: Maybe first about the lipids. We are quite happy with the ramp-up of the capacities we have started to build in the United States of America. And here, we made good progress. So we are confident that we will benefit from it in future. But besides, it is a long-term perspective. So maybe give us now, first of all, a chance to build the -- to finalize the construction and then to ramp the capacities up. But nevertheless, and worthwhile to underpin it, here, we are confident that it will in future become a good and attractive EBITDA contribution business. All the more, as you see that the government of the United States of America has started some reshoring initiatives to bring pharmaceuticals and in particular, these on this very high level, high technological level back to the United States of America. So here, we are confident. In respect of Infrastructure, first of all, yes, we are progressing pretty well in respect of separation. This is close to be completed. And from January next year onwards, we will have a legal entity with SYNEQT fully organizationally and legally independent. And then as you know, all options are lying on the table. What do I mean talking about this? Could it be a partnership? Could it be a straight divestment? Could it be a JV? Yes. And for us, it means that we will tackle these different opportunities and that we will judge upon how to move ahead over the next year. But for Evonik, it is quite clear that the main benefit will be that we will have a less amount of CapEx, which we will pump in future -- which we would have to pump in future into our infrastructure businesses, and that is, for sure, helpful. So having said this, and then maybe that was -- you have asked about the revenues, somewhat -- the revenues and the EBITDA. In 2024, these infrastructure businesses have gained around EUR 1.8 billion of revenues. Here, it is fair to say Marl plus Wesseling plus C4. So in respect of the EBITDA, it was half -- first half of this year, EUR 100 million in the Infrastructure plus C4. But because C4 was virtually -- they have not contributed to the results, you could take this as, by thumb rule, EUR 100 million half a year, EUR 200 million full year in respect of our infrastructure business. I guess these are the two questions I have taken pride to answer. Operator: The next question comes from the line of Thomas Wrigglesworth from Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Firstly, on Custom Solutions, you've done well with pricing, but volume has fallen 8%, which might suggest that pricing is coming at the expense of volume, which in itself might be a harsh statement. But then I look at the EBITDA change, much like Advanced Technologies, and it's substantially weaker in 3Q for the loss in sales than we've seen in 2Q. So is it that we're losing high-value tons in the volume? Or -- yes, I'm just kind of keen to unpack that a little further. Secondly, on methionine, I think you called out the methionine prices are down and yet you've been taking maintenance in 2Q and 3Q indirectly managing the volumes into the market. As you add tons and have full availability into 4Q, how do you expect pricing to perform? And do you think that your return of tons will weigh on prices into 2026 as well? Christoph Finke: Thank you, Tom. First one, Custom Solutions to Claus and then Christian on methionine. Claus Rettig: Okay. Good. Yes, Custom Solutions, I can actually first say, when you look -- we can do the same as with Advanced Technologies. If you look to the data we provided you, you will see that some of the EBITDA decline is not reflected in the cash flow. That's because we have also here, not to the same degree as in Advanced Technologies, but also certainly substantial net working capital reduction to align the inventories mainly to the current sales and demand. You can see that even though the EBITDA is down from EUR 287 million in Q3 '24 to EUR 215 million in Q3 '25, cash flow remains the same at EUR 172 million. So this is something we have to consider. Yes, volumes are down, which is unusual, I have to say, for this usually very stable business. And it shows also how broad, I have to say, the weakness in the market is because here in Custom Solutions, as you certainly know, we have a very broad portfolio, which makes it usually resilient because not all markets go down at the same time. But when I look right now to the performance in Custom Solutions, you can see an impact everywhere. I can see it in almost all the businesses. And I think in Custom Solutions, all the businesses have an impact to different degrees, yes, but also in all regions, and it shows -- first of all, it's a general slowdown of the demand. Nevertheless, I think what we are looking into is exactly what you are mentioning, is our price volume strategy, the right one. And are we not sacrificing volume to keep the margins high, and that's certainly on our agenda for the next months to come. And from that point of view, pricing, I think in these days, remains super critical. Also in the market, everybody knows in the market going for market share is not a good idea. And because with lowering the prices, you don't create more demand. But nevertheless, we will look into this. So it's one of the agenda points on our agenda. Christian Kullmann: Okay. And I take then the methionine question. First, maybe let me split my answer up into 2 parts. First, about the expectations in the fourth quarter. Here, we see a demand which remains overall pretty healthy. Yes, fair to say. And that is what we could give to you because we have a quite good visibility on the already booking level for the fourth quarter. So in a nutshell, the volumes will be up compared to the last quarter. And in respect of the prices, it might. It might end up a few cents lower, but it depends. It depends first on the ramp-up of a new capacity of NHU. So here, it depends. I won't call it -- it's a question, but let's say it depends. And second, on the [indiscernible] side, we do have the situation in the United States of America, where the businesses are protected by the U.S. tariffs. That is why I would say, for sure, volumes up compared to last year -- to last quarter and in respect of price, could be down in some sense, but don't forget that there is an exception in respect of the trade tariffs in the United States of America. Now maybe outlook 2026, what do we think about this? First, it's somewhat like an evergreen, an evergreen that we do see a market growth that will continue in an average between to 3% to 4% to 5%, maybe by thumb rule around 4%, which translates into an additional capacity of 80,000 tons per year. On the other side, we are aware that there are some new capacities which could come on stream over the course of the next year, but it is hard to judge as of today when they will come on stream. And you should keep in mind that there's a new brand-new competitor in. We could not really calculate if he could bring his capacity without having any experiences in this market and with this technology right into the market in the first step. So let's see how this will work. And on the other side, don't forget that some older capacities could be taken offline. That is what we have seen, what we have observed over the course of the last year. For sure, the market is in a restructuring period. And let's see how this will work over the course of 2026. That is what we could give to you in respect of methionine for 2026 as of today. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Christian Kullmann for any closing remarks. Christian Kullmann: Yes. Ladies and gentlemen, it was great having had you today. This is what now ends our call. So far, thanks a lot for your attention. Have a happy autumn and hope to meet you soon in person. Take care, and goodbye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Ladies and gentlemen, welcome to the HUGO BOSS Q3 2025 Results Conference Call and Live Webcast. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Stohr, Senior Vice President, Investor Relations. Please go ahead. Christian Stoehr: Thank you and good morning, ladies and gentlemen. Welcome to our third quarter 2025 results presentation. Hosting our conference call today is Yves Muller, CFO and COO of HUGO BOSS. Before we begin, please be reminded that all growth rates related to revenue will be discussed on a currency adjusted basis unless stated otherwise. To ensure a smooth and efficient Q&A session, we kindly ask you to limit your questions to 2. And with that, let's get started. Yves, the floor is yours. Yves Muller: Thank you, Christian, and a warm welcome from Metzingen, ladies and gentlemen. As outlined in our press release this morning, HUGO BOSS delivered a solid set of third quarter results despite ongoing headwinds across the global consumer landscape. While the environment remained volatile and traffic levels in many markets faced pressure, we executed with discipline and focus, prioritizing the levers within our control. In particular, we stayed committed to advancing our long-term priorities with a strong emphasis on further strengthening our brand equity through investments in brand building initiatives. This dedication coupled with our focus on operational excellence and strict cost discipline resulted in robust gross margin improvements and notable bottom line enhancements. Let's, therefore, take a closer look at our Q3 financial performance. Group sales declined 1% year-over-year mainly due to an unfavorable timing of wholesale deliveries. In reported terms, revenues were down 4% as substantial currency headwinds, particularly from the weaker U.S. dollar, weighed on the top line performance. Meanwhile, EBIT remained stable at EUR 95 million with the EBIT margin improving by 30 basis points to 9.6%. This solid margin expansion highlights the success of our structural efficiency measures across both COGS and OpEx. Beyond the numbers, Q3 was marked by several high profile initiatives that further elevated the desirability of our brands fully aligned with the priorities of our CLAIM 5 strategy. The 2 key events deserve a special mention. The BOSS Spring/Summer 2026 Fashion Show in Milan, which captured global attention and achieved even higher social media engagement than last year's event. Additionally, the second drop of the BECKHAM x BOSS collection in late September saw a successful start delivering strong social media results and promising sell-through rates. This underscores the relevance and influence of David Beckham and the unique value of our partnership. Building on these achievements, let's take a closer look at how our brands performed in Q3. Our BOSS Menswear business once more demonstrated its resilience in the third quarter with revenues remaining stable year-over-year. This performance highlights the enduring appeal of our premium positioning and the versatility of our 24/7 lifestyle approach. At the same time, we advanced our strategic efficiency measures initiated earlier this year for BOSS Womenswear and HUGO. These initiatives focused on sharpening product assortments and refining distribution strategies are now in full swing and are critical to positioning both brands for sustainable value creation in the years ahead. And while they are temporary, weigh on top line development with revenue for both BOSS Womenswear and HUGO below prior year levels in Q3, we remain confident in the underlying strength of both brands. By addressing these short-term challenges we targeted and decisive actions, we are creating a solid foundation for future growth. Let's now turn to our performance by region. In EMEA, sales declined 2% year-over-year. Revenue improvements in both Germany and France were offset by softer trends in the U.K. reflecting the muted discretionary spending across the market. Moving over to the Americas where momentum continues to improve sequentially and drove revenues up by 3%. The performance was supported by another quarter of growth in the important U.S. market while Latin America even accelerated to double-digit growth. In Asia Pacific, sales declined 4% year-over-year mainly driven by lower revenues in China. Encouragingly, however, revenues in China showed a slight sequential improvement quarter-over-quarter. To further support brand relevance locally, at the beginning of October we celebrated the release of the latest BECKHAM x BOSS collection with a pop-up launch event in Shanghai. Meanwhile, Southeast Asia Pacific achieved a modest revenue increase in Q3 supported by another solid performance in Japan. Turning to our channel performance. Our brick-and-mortar retail business showed a modest sequential improvement with sales remaining stable versus prior year period. This performance was primarily driven by stronger conversion rates and higher sales per transaction, which helped to offset muted store traffic seen across several markets. Also, our digital business continued its positive trajectory with sales up 2% to last year. Growth was supported by a solid performance on hugoboss.com alongside sustained momentum in our digital partner business, both grew by 2% in the third quarter. Meanwhile, in brick-and-mortar wholesale, sales declined 5% year-over-year primarily due to the timing of delivery, which impacted Q3 performance by approximately EUR 20 million. However, we are confident that this effect will be fully offset in the fourth quarter as our Fall/Winter collections continue to resonate well with our partners. Accordingly, we anticipate a recovery in wholesale revenues in the final quarter complementing the momentum in our retail business as we approach year-end. Turning to the gross margin, which was a clear standout in the quarter and a testament to our progress in driving structural efficiency. In Q3, our gross margin improved by a strong 100 basis points reaching 61.2%. The expansion was fueled by further efficiency gains in sourcing, lower product cost and reduced global freight rates. At the same time, we experienced slightly negative mix effects while promotion activity had a neutral impact on gross margin development. Let's now shift to our cost base. Operating expenses declined 3% year-over-year marking 5 consecutive quarters of disciplined OpEx management. These gains were achieved across key business areas including sales, marketing and administration and underscore our commitment to operational excellence. In particular, selling and marketing expenses decreased 3% supported by a 4% reduction in brick-and-mortar retail expenses. In addition, we further optimized marketing investments, which amounted to 7.1% of group sales in Q3 and 7.4% for the first 9 months. Our approach remains highly targeted, prioritizing brand initiatives that generate the greatest commercial impact while continuously strengthening brand relevance. Lastly, administration expenses declined 2% compared to the prior year period as we continue driving efficiency across our global support functions. Driven by the robust gross margin expansion and our focus on optimizing operating expenses, EBIT reached EUR 95 million in Q3, thus stable compared to the prior year period. This translated into a 30 basis point increase in the EBIT margin reaching 9.6%. Below the operating line, our financial results significantly improved year-over-year supported by favorable ForEx effects and lower interest expenses. As a result, net income after minority increased by 7% translating into earnings per share of EUR 0.85, equally up 7% compared to last year. Also when we look at the first 9 months of the year, we delivered solid profitability improvements. Our gross margin expanded by 30 basis points to 61.8% while operating expenses declined by 2% underlying the continued success of our various efficiency measures. Consequently, the EBIT margin improved by 30 basis points to 7.9% in the first 9 months while earnings per share rose by 9% year-over-year. Looking at cash flow and key balance sheet items. Trade net working capital increased 11% in currency-adjusted terms reflecting both higher inventories and lower trade payables. Importantly, when compared to the previous quarter, inventories improved slightly and were down 1% reflecting our ongoing commitment to inventory management. On a 12-month moving average basis, trade net working capital amounted to 20.2% of group sales. Capital expenditure, on the other hand, declined substantially year-over-year down 51% to EUR 44 million. The decline was driven by increased investment efficiency and a more disciplined allocation of resources. As a result, for the full year, we now expect CapEx to come in at the lower end of our guidance range with investments expected to total around EUR 200 million in 2025. Altogether, our disciplined cost control combined with enhanced CapEx efficiency drove a solid improvement in cash flow generation in the third quarter. Free cash flow increased by 63% to a level of EUR 66 million. Importantly, we further expect improvements in cash generation in the final quarter, which has historically been our strongest period for cash generation. Ladies and gentlemen, this concludes my remarks on the third quarter performance. Let's now turn to the full year outlook and how we're approaching the final quarter of 2025 from an operational perspective. As we enter Q4, we remain fully committed to executing our strategic agenda. Building on the progress of previous quarters, our approach is twofold. First, to unlock growth opportunities and strengthen brand relevance in order to support top line momentum. And second, to drive operational excellence while optimizing cost efficiency across key business functions. It is our deepest passion to inspire our consumers globally and strengthen engagement with both our brands, BOSS and HUGO, and Q4 has a lot to offer in that regard. After a busy October with a stunning BOSS Bottled event in New York City and the immersive in-store experience with Aston Martin, the countdown to BOSS Holiday Campaign has now begun. Officially launching tomorrow, the capsule represents a unique collaboration between BOSS and iconic plush toy company, Steiff. It will be visible across all key markets and will help to further fuel brand excitement heading into the peak season. Driving customer engagement remains another priority. In this context, we are building on the successful rollout of our customer loyalty program HUGO XP, which was launched in China and the U.S. during the third quarter. With now almost 30 million members worldwide, the global expansion of XP is well underway. The program enables us to deepen relationships with our most important customers, foster long-term loyalty and leverage commercially relevant moments during the upcoming holiday season and beyond. Equally as important, we will continue to leverage our global sourcing platform in the fourth quarter to secure additional efficiency gains and thus tailwinds to our margin development. In addition, the low to mid-single-digit price increases that we are currently introducing with the Spring/Summer 2026 collections are expected to provide a modest positive contribution to profitability in the final quarter. Last, but not least, we will stick to our rigorous optimization of operating expenses, particularly in sales and marketing and administration. Taken together, these actions will ensure that HUGO BOSS is well positioned to strengthen its earning profile and successfully deliver on its full year commitments. In light of our performance during the first 9 months and our determined improvement game plan, we confirm our full year outlook for both sales and EBIT. As indicated in today's release, we now anticipate both top and bottom line results to come in at the lower end of our respective guidance ranges. This reflects the ongoing volatility in the global consumer environment as well as substantial currency headwinds recorded throughout the year. To be more precise, we now expect group sales for fiscal year 2025 to come in at a level of around EUR 4.2 billion. This includes an estimated negative currency impact of around EUR 100 million for the full year, primarily reflecting the depreciation of the U.S. dollar during the course of 2025. Consistent with this, we now expect EBIT to come in at the level of around EUR 380 million, likewise reflecting anticipated currency headwinds of up to EUR 20 million. Accordingly, we now forecast EBIT margin to improve to a level of around 9% as compared to 8.4% in the prior year. Ladies and gentlemen, let me briefly summarize today's key takeaways. As we look back on the third quarter and forward towards the end, a few points stand out. First, our performance in Q3 demonstrates the resilience and strength of our business model supported by sequential improvements in brick-and-mortar retail, solid gross margin expansion and the continued effectiveness of our cost efficiency measures. These factors provide a strong foundation as we enter the final quarter of the year. Second, while Q3 wholesale revenues were impacted by the timing of deliveries, we anticipate a recovery in Q4. Alongside continued efforts to drive our global D2C business, this positions us for a renewed acceleration of group sales heading into year-end. And third, the disciplined execution of our operational priorities together with our ongoing brand investments positions us well to further progress in Q4 and achieve our full year targets. Finally, looking beyond 2025, we are set to take the next steps on our CLAIM 5 journey. On December 3, we will share an update focused on the progress achieved so far in the key strategic areas that will guide our work in the years ahead. The update will reaffirm our strategic direction and underline how we are building on the foundation established over the past 4 years. And with this, we are now very happy to take your questions. Operator: [Operator Instructions] And the first question comes from Grace Smalley from Morgan Stanley. Grace Smalley: My first one, Yves, would just be on the strategic update in December. You touched on it at the end there, but could you just give us an idea of what we should be expecting come December? Will there be kind of multiyear financial targets, 3-year targets, 5-year targets? And just broadly, any high level thoughts on how you see the strategy evolving from here? And then my second question, understood on the wholesale shift between Q3 and Q4. But as you look at wholesale order books into 2026, could you give us an update on how you're seeing those order books evolve especially in the U.S. market given the uncertainty there? Yves Muller: Yes. Thank you very much for your questions. Taking your first question regarding the strategic update. Yes, like I said during my presentation, we will talk about what we have achieved during CLAIM 5 and we will give you a kind of strategic update for the next years. Don't expect this to be for the next 5 years because I think in this kind of volatile environment, a 5-year horizon is far out. So rather expect a kind of, let's say, midterm perspective of strategic priorities that we are taking on our journey. And regarding the wholesale shift, yes, overall, our Q3 results, and I just want to make it clear, were impacted by around EUR 20 million. The positive thing is we can see already in Q4 that we see the reversal of this delivery shift. So the October results show a material improvement regarding the wholesale development in Q4 and that this delivery shift has somehow reversed, which is a positive. And overall, we have seen regarding our wholesale orders and I said this already back in August that we have seen a kind of softening of our wholesale orders. I think please bear in mind that over the last years we have seen -- over '21 and '24, we've seen a CAGR of 20% of growth in wholesale brick-and-mortar and this is actually what we overall have expected a kind of softening. And for the Fall collection, we are just selling it. It's too early to call because we're in the middle of the selling period. So no further news on these kind of order impacts. Operator: And the next question comes from Manjari Dhar from RBC. Manjari Dhar: I had 2 as well, if I may. My first question is just a quick follow-up on wholesale. I just wondered if you could give some color on how much the replenishment business is down and perhaps sort of color -- I presume most of the softness there is in the U.S., but any color on that would be helpful. And then secondly, just a question on the sourcing efficiency gains. I just wondered sort of as you look forward, how much more upside do you see for gross margin from sourcing efficiency and how much more work do you think there is to be done in improving that sourcing layout? Yves Muller: Manjari, I was just talking to Christian because I tried to recall your first question regarding wholesale and the replenishment business. So the replenishment business in Q3 was down by low to mid-single digit. It was more or less somehow also expected was a kind of slight improvement also versus our Q2 results. And regarding U.S. wholesale preorders, it's pretty similar with the overall general view that we have given. So the order intakes and the delivery, it's very much in line with the global development. So not a kind of, let's say, further comments that need to be done on the U.S. market. And regarding your second question regarding sourcing efficiency, I think sourcing efficiency was a major driver in Q3 regarding our performance on gross margin and this is actually to be continued going further. So we still see more potential in terms of vendor consolidation and optimizing our portfolio and this should be continued. And actually what we are expecting for our gross margin going into the -- or finalizing our year 2025 that we want to be actually above the 62% gross margin. Originally that was our target. And we are very confident that with the support of the sourcing efficiency and with the freight cost optimization that we will get beyond the 62% gross margin mark. Operator: And the next question comes from Jurgen Kolb from Kepler Cheuvreux. Jurgen Kolb: First of all, on number of stores. If my numbers are not incorrect, I think you closed stores in the APAC region for the first time in a long history. Is that a change of positioning in that region? First question. And then secondly, on the inventory side, which is still obviously a little bit up or, let's say, inflated. How much of this inventory level is covered by your order book and how do you see really the freshness and the current situation of the inventory side? Yves Muller: Jurgen, thank you very much for your 2 questions. Regarding the space in retail. So I think it's worth mentioning that if you compare the space Q3 2024 versus 2025, there has been actually no effect from space so it was on the same level. And those stores that might have disappeared in APAC, these are actually continued optimizations that we are taking. For example if we don't achieve those results in renegotiating the rents, we take a risk approach in closing stores. I think I said this already in August and this will -- at the end, we want to have a robust store portfolio and this applies not only to APAC, but also applies to EMEA and the United States. We have defined clear profitability levers and if we do not achieve this by renewing the rents, we might take the action to close those stores. So there's nothing specific that we want to call out besides a continuous optimization of the store portfolio. And regarding the inventory, I think it's also worth mentioning that our inventory position slightly declined versus Q2, point one. And point two is that our aged merchandise, if I compare my aged merchandise in comparison to last year, has also in percentage improved versus last year. So the merchandise is very fresh. It's driven by stock in transit and by the current collections and the aging of the inventories have not deteriorated year-over-year. Operator: And the next question comes from Andreas Riemann from ODDO BHF. Andreas Riemann: Two topics. First one, HUGO and Womenswear, both are down significantly year-to-date and it sounds like you are reducing the product range and there's also adjustment in the distribution. So can you explain that in more detail and when is this exercise going to end? This would be the first topic. And the second one, the U.S. business. So to what extent did you adjust the prices actually in North America? And would you say your price increases in the U.S. are in line with what you see in the market or did you differ? These would be my 2 topics. Yves Muller: Yes. Andreas, thank you very much for your 2 questions. Actually you already took your answers for HUGO and BOSS Womenswear. So we are streamlining our product range. This is point one for both brands, BOSS Womenswear and HUGO. So this has something to do with collection complexity. So the mindset is to get better before bigger. So this is the mindset we have for those 2 brands. And the second thing is that we look at the distribution and for example, especially for BOSS Womenswear, if our space is somehow limited, we'd rather take BOSS Womenswear out with BOSS Green into those spaces if the space is somehow limited in the distribution. This is the exercise that we have now started with Q2 and will materialize over the second half of this year. And I think further comments I would somehow refer to our strategic update on the 3rd of December to be more explicit for the way forward for both brands, BOSS and HUGO. And regarding U.S. so like I said already back in August, we have taken a kind of global price increase overall low to mid-single digit for the Spring campaign. So this will be visible now in the second half of Q4 where we drop this kind of merchandise. This will also help us in terms of top line development globally and also will help us from a profitability standpoint. But your question was related to the U.S. I think we try to do smart price increases and we are very much in line with our competition here how we increase the prices and we observed the market. But nothing that would -- really needs to be emphasized regarding the U.S. market. Andreas Riemann: Yes. But maybe a follow-up. Is the U.S. then more than low to mid or is it in line with low to mid that you did for the group? Yves Muller: It's in line with low to mid. Operator: And the next question comes from Anthony Charchafji from BNP Paribas. Anthony Charchafji: Just 2. The first one on top line and then one on profitability. So just on top line given the low range of the guide, it would imply an organic growth in Q4 rather flattish to slightly positive, which would be 1 or 2 percentage point improvement. Could you please comment on the retail part? Comps are getting quite tougher especially in December for the whole sector. Could you maybe give some color on current trading retail and how you see it evolves? And my second question is on profitability. If I take again the low end of the guidance, EUR 380 million, it seems that your Q4 is quite derisked because you have some quite a bit of impairment in the base EUR 47 million. What changed in terms of deciding, I would say, to narrow the range? Do you previously expected some impairment reversal and now not anymore or is there anything else to have in mind? Yves Muller: Anthony, thank you very much for your questions. So first regarding top line, let me try to phrase it. First of all, I think from a wholesale point of view, you have to keep in mind that this delivery shift will or, like I already said, has materialized. So this is the kind of tailwind that we are seeing. Secondly, regarding retail brick-and-mortar, you have seen now over the last quarters a kind of sequential improvement coming from minus 4% to minus 1% now to flattish in terms of retail improvement. So we expect that this improvement will prevail also going into Q4. Thirdly, I think what is worth mentioning is that with the sale of the Spring season, you will see also a kind of price increase that will somehow materialize and will help us. And fourthly, I think we are now really entering into Black Friday. You have seen also on hb.com and our digital sphere that we have seen major improvements from Q3 versus Q2. So we will somehow take this kind of improvement also into Q4 to reach our top line targets. And regarding profitability, I think you're right. We have disclosed we had our impairments last year on the level that were close to EUR 50 million. They were definitely kind of elevated if I look at the latest -- if I look at the last years of impairments that we did. So I think what you can expect from a bottom line perspective that we can see a kind of technical support coming from the impairments for the year in 2025. Operator: And the next question comes from Daria Nasledysheva from Bank of America. Daria Nasledysheva: This is Daria from Bank of America. Can I please ask what is your view on promotional backdrop as we head into Q4? Wondering on a global basis, but also in the U.S. considering the inventory positions, yours and more broadly for the industry? And my second question is could you please help us contextualize the trends that you have seen during Q3 especially on retail? What has been the cadence of the quarter? Did trends improve in September to support your expectation of improvement into Q4? Yves Muller: Thank you, Daria, for your questions. So regarding promotions, I think it's worth mentioning that overall that the promotional activity is overall intense. On the other side, you have to bear in mind that our promotional numbers were somehow neutral in Q3 and actually we expect this also for Q4 that they are more or less neutral. I mean they have been elevated now for the last 5 quarters and we expect that the promotional activity, I would say, globally because if you look at the consumer sentiment globally, I think it's a remark that applies for a lot of important markets. I think they will remain on this elevated level and our expectation is that they remain -- it's neutral. And regarding retail, I was pointing out in the last question in my answer that actually for Q4 that we further expect the kind of, let's say, sequential improvement also that were visible now for the latest quarters, I said Q1, Q2, Q3. So we've seen this kind of slight improvement over the last quarters and we expect that this continues to prevail now for the final important quarter. Operator: And the next question comes from Robert Krankowski from UBS. Robert Krankowski: Just 2 questions for me, please. So first one is just on the cost control. You made pretty good job on the cost control year-to-date. But I just want to think in terms of, let's say, persistent pressures on your top line going forward, would you consider maybe stepping up investments behind the brand to support the growth? And you talked about the acceleration in Q4 that you expect towards the end of the year and could you talk maybe a bit about the beginning of the quarter? I think the comp is relatively changing. Maybe if you could give us a bit more color on the regions; the U.S., Europe; how the quarter has started. Yves Muller: Yes. So thank you very much for your words around cost control. So I think it's worth mentioning that we are continuously working on cost control. You have seen that we started actually last year in Q3 with these kind of cost decreases and now actually the comp base is getting more difficult. But I think we have shown also in Q3 that we really have a high cost discipline and that we have come up with some structural efficiency moves also when it comes to cost now because now year-over-year, we have seen 2 years not only in 2024 and Q4, but also in 2025 in Q3, a kind of cost decrease. So we really lay emphasis on this in order to have the full alignment between our top line performance and bottom line. And definitely even if you look at marketing, we are now after 9 months at 7.4% marketing spending. We always said during CLAIM 5, we want to be in the range between 7% and 8%. So I would say even from a marketing perspective, we are well in line with what we have promised to the capital market. Of course we see positive impacts. We are now starting our Holiday Campaign. So we keep on investing into the brand. I think this is very important for us. On the other side, I want to highlight that we want to make our marketing spendings more efficient. So the idea is always to get most out of EUR 1 spend. A good example is for example the Fashion Show, which was less expensive than last year, but we got higher media value out of our Fashion Show with positive comments. I think this is what we like if we spend less and actually get more out of it, it has a higher impact. So definitely, we want to invest in our brand. There are a lot of initiatives coming up in the most commercial period of the year and at the same time we keep our costs under control. And regarding the color of current trading, let me be -- let's say, let's keep it on a global level because otherwise the discussion gets, let's say, too detailed around regions. But I can comment that we were happy how we started into the Q4 like I already said in the beginning. Christian Stoehr: Great. Thank you, Yves. Thanks, Robert, for your question and thanks to all of you for today's session. There is no further questions or hands raised in the queue. So I would like to thank you for dialing in today. This officially concludes today's conference call. Thanks for your participation. And of course we look forward to connecting with many of you over the next days and weeks. Look forward to speaking to you soon. Thanks very much. And in case of any questions, please reach out to the IR team. Yves Muller: Thank you and have a great day. Bye now. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
William Lundin: Welcome to IPC's Third Quarter Results Update Presentation. I'm William Lundin, the President and CEO; and alongside with me today is Christophe Nerguararian, our CFO; as well as Rebecca Gordon, our SVP of Corporate Planning and Investor Relations. I'll begin with the quarterly highlights and provide an operational update, then Christophe will expand on the financial details for the quarter. Following the presentation, we'll take questions via the web online or through conference call. It was another strong quarter for IPC with average production rates of 45,900 barrels of oil equivalent per day for the quarter, which was above guidance for the quarter specifically, and our full year production guidance of 43,000 to 45,000 barrels of oil equivalent per day is maintained. Operating costs were slightly below guidance at $17.90, marginally lower unit per production figure than expected, partially due to the production outperformance achieved in the quarter. Full year operating costs are maintained at USD 18 to USD 19 a barrel, likely to end the year around the lower end of this range. We're very pleased today to announce the transformational Blackrod Phase 1 development project is expected to be delivered a quarter ahead of the original scheduled guidance with first steam expected by year-end and first oil in Q3 2026. So great progress on the project has been made to date, which I'll go into more detail later in the presentation. Super proud of the team's efforts to be positioned for an earlier start-up compared to that of our original sanction guidance in early 2023. As a result, we've accelerated some activity from 2026 into 2025, mainly being drilling the final well pad at the Blackrod asset. So IPC full year CapEx is therefore revised to USD 340 million for 2025 compared to the original CMD guidance of USD 320 million. In the quarter, $82 million was spent with about $56 million of that allocated to the Blackrod Phase 1 development. So Dated Brent averaged around $69 a barrel in the quarter. Our operating cash flow was USD 66 million, and our full year operating cash flow is forecast to be between $245 million to $255 million between $55 to $65 Brent for the remainder of the year. Free cash flow for the third quarter after all CapEx was minus USD 23 million or positive USD 36 million pre-Blackrod expenditure. Full year free cash flow forecast inclusive of our final major growth spend year at Blackrod is forecast between minus USD 160 million and minus USD 170 million between USD 55 and USD 65 Brent for the remainder of the year. We successfully refinanced our Nordic bonds subsequent to Q3, took place in October, and that has a coupon rate now of 7.5% maturing in October 2030. Net debt at the end of September stands at USD 435 million with gross cash available to the business of USD 45 million plus additional headroom exists under our RCF in Canada. So for the oil hedges in 2025, we have a mix of swaps and zero cost collars for flat price and differential hedges for around 50% of our exposure for the remainder of 2025. We also have taken advantage of the tight WTI to WCS differential and added around 5,000 barrels per day and a differential hedge for 2026 at $12.50 per barrel. No material incidents recorded during the quarter. We also completed our normal course issuer bid program, the 2024-2025 program in Q3, marking in excess of 6% reduction in our shares outstanding over the course of that buyback program. We have the intention to renew the next NCIB program in December. Production for the quarter, again, was just shy of 46,000 barrels of oil equivalent per day for Q3, and we're averaging around 44,600 BOEs per day year-to-date. So implying we're very well positioned to deliver within our original CMD production guidance of 43,000 to 45,000 barrels of oil equivalent per day. IPC production mix is weighted to 2/3 oil and 1/3 natural gas. Year-to-date operating cash flow is USD 196 million and $4 and $11 per barrel differentials for the Brent to WTI and WTI to WCS, respectively, for the first 9 months of 2025. $66 million out of that $196 million was generated in Q3. There's a slightly tighter differential on the WTI to WCS dip for that quarter. Full year OCF guidance is expected to be between USD 245 million to USD 255 million between $55 and $65 per barrel Brent for the remainder of the year. Really pleased with the base business cash flow generation given we're expected to land in the middle of our original CMD, OCF guidance, as can be seen on the slide, which was based on a $75 per barrel Brent price and the year-to-date settled oil price plus the strip for the remainder of the year is well below that $75 per barrel Brent. Capital expenditure, inclusive of decommissioning spend is forecast at USD 340 million for 2025. So again, slightly increased compared to our CMD guidance, largely due to the acceleration of the drilling activity in 2025 from 2026 for the last well pad at Blackrod given the earlier start-up expectation. And the majority of our non-Blackrod related capital investments have taken place already, mainly relating to the sustaining activities at Onion Lake Thermal and Malaysia. Free cash flow year-to-date, excluding Blackrod CapEx is just shy of USD 80 million, inclusive of Blackrod CapEx, it's minus USD 125 million. With the updated pricing outlook for the remainder of 2025 between $55 and $65 per barrel Brent, we're expecting $80 million to $90 million in free cash flow, excluding the Blackrod CapEx and minus USD 160 million to minus USD 170 million in free cash flow, including the Blackrod CapEx. So this full year outlook has been updated to include the bond refinancing cost, which was opportunistically executed in October this year, and Christophe will touch on that in his section, as well as the additional costs associated with the Blackrod given the acceleration of the activity. At the end of Q3, we completed our seventh buyback program since the company was formed. We do intend to renew the next NCIB in early December. So a total of 77 million shares have been repurchased through all of these programs at an average price of SEK 79 per share or CAD 11 per share, which is well below our current share price level. There's less shares outstanding compared to that when the company was formed and the size of the portfolio has materially grown with current comparatives to 2017 in production being 4.5x higher. We've seen a 17x increase in our 2P reserves, added in excess of 23 years to our 2P reserves life index and added greater than 1 billion barrels of contingent resources and enhanced our NAV by USD 2.5 billion. So the per share metrics are a key focus for the company and driver for maximizing shareholder value. IPC's 2P NAV as at year-end 2024 is in excess of USD 3 billion, representing a fair share price of SEK 287 per share or CAD 37 per share. No value is assigned to our large contingent resource base in this net asset value calculation. Current share price levels suggest we're trading at an approximate 40% discount to our 2P net asset value. So the Blackrod Phase 1 development, this is on budget and progressing ahead of schedule. The original sanction guidance in 2023 suggested a growth capital expenditure for the Phase 1 development of USD 850 million for the total installed cost of the central processing facility and the well stock needed to fill the plant and first oil was guided for late 2026. With the significant progress achieved to date, we now expect first oil in Q3 2026, around a quarter ahead of the original sanctioned time line. So the Phase 1 cumulative capital that's been incurred from 2023 to the end of Q3 2025 is USD 785 million or approximately 92% of the total growth CapEx. So all the surface kit is in place at the central processing facility. Construction and progressive commissioning is ongoing, supported by a lot of manpower at site. Some key milestones have been achieved and derisking the path to startup. Notably, we have commercial gas usage in place now and islanded power generation has been successfully commissioned. So with the detailed sequencing of events planned out and a closer line of sight to start-up, we feel confident pulling the schedule forward, as mentioned. And with that, we have brought forward the drilling of the final well pad into 2025 from 2026. It's a very exciting time at Blackrod for the company as a whole. I'm especially proud of the strong safety record achieved to date with no material incidents since development activities started in 2023. So key items to highlight here on the schedule really is emphasized here with the first team and first oil activity moving to the left, given the great progress that's been made on the project. Moving on to our producing assets. It was a fantastic quarter at Onion Lake Thermal with incremental production benefits coming in from our short-cycle sustaining investments, 4 infills and final well pair tied in from L Pad. So in September, as you can see in the production plot, we saw nearly 14,000 barrels of oil equivalent per day at the asset, which is one of the best monthly production figures achieved at the asset to date. The Suffield area assets is very steady, predictable low decline production from the Suffield area assets and solid low-cost optimization work on the oil side and solid inventory of drill-ready candidates are actionable discretion of the company. So the other assets, this is Canada, as you can see on the map on the right, is yielding around [ 4,000 ] barrels of oil equivalent per day. So seeing great response from our Phase 2 polymer flood at the Mooney asset. In Malaysia, we successfully completed a 2-week turnaround at the end of September and early October. Our investment program in Malaysia was also successfully executed, which can be seen on the production chart. We saw solid production boost come in July and in August, which will come back following the start-up from the shutdown. And France continues to provide stable low decline production. Now over to Christophe for the financial highlights. Christophe Nerguararian: Thank you very much, Will, and good morning to everyone. So again, very pleased to be reporting a solid quarter with very strong operational performance with a production this quarter just shy of 46,000 barrels of oil equivalent per day. And so the average year-to-date production is 44,600 barrels of oil equivalent per day. So we feel really comfortable about our ability to deliver within that 43,000, 45,000 guidance range for the full year. Coupled with operating costs, which on dollar per barrel of oil equivalent remained this quarter below USD 18, partially driven by low gas and electricity prices. So with relatively low costs, it's driven a very strong financial performance as well with operating cash flows and EBITDA this quarter of USD 66 million and USD 62 million, respectively. With $81 million -- $82 million of CapEx this quarter and USD 280 million year-to-date, it's -- this quarter we generated a negative free cash flow of $23 million, $36 million positive before Blackrod CapEx. And our net debt now stands at USD 435 million. As you can see, realized prices were reasonably stable when you compare the second and the third quarter. On average, Brent was at $69 per barrel during this quarter, WTI $65 and WCS was very tight, so that's the good news. I would say, now we have the proof is in the pudding, and we've been able to see over the last few quarters how tight the WTI/WCS differential has been, and that's really a reflection of the expansion of the TransMountain pipeline, which came on stream more than a year ago. Now we can finally benefit in Western Canada from excess egress capacity, which is -- which really bodes well for our production from our base assets today. But also when we bring Blackrod on stream and ramp it up, we should continue to benefit from reasonably strong WCS prices in the future. We're continuing to enjoy a premium of Dated Brent. In Malaysia we're selling our oil on parity with Brent in France and on party with WCS in Canada. You have the examples here of Suffield and Onion Lake. Gas prices, it's not entirely clear yet, but while Q3 was a very weak quarter when we realized that below CAD 1 per Mcf during that quarter. We might be seeing some light at the end of the tunnel. Clearly, 2026 forward curve is showing some good sign with even the summer months in between CAD 2.5 and CAD 3 per Mcf next year, next summer. So it's very encouraging. We hope that the storage are going to continue to reduce. And we're expecting as well the LNG Canada project on the West Coast of Canada to continue to ramp up in Q1. So those elements together should help alleviate the weakness we've seen in the third quarter and which also partially explains why our OpEx per barrel were reasonably low again this quarter. You can see here that on a cumulative basis for the first 9 months, our operating cash flow was just shy of USD 200 million and EBITDA around USD 185 million for the first 3 quarters. And you can see that this third quarter was in terms of contribution to the year-to-date performance was in between the first and the second quarter, driven by very high production at Onion Lake Thermal. In terms of looking ahead at our operating cost per barrel, we still anticipate higher operating cost per barrel driven by some specific project and maintenance or some workovers in the normal course of business in France or Canada. But overall, year-to-date, our operating cost per barrel remained below $18 per barrel. And so we feel very good about our ability to deliver within the guidance range of $18 to $19, which we provided for the whole year and which we keep unchanged. The netbacks have been around $16 per barrel when you look at the gross cash revenues minus production costs or whether you're looking at operating cash flow or EBITDA per barrel of oil equivalent for the first 9 months were at $16 and $15 per barrel, respectively, which is slightly better than our base case guidance netback from our Capital Markets Day. Reconciling the opening to the closing net debt of the last 9 months. You can see here that this is the last year where we are spending so much CapEx because obviously, with 92% of the budget spent on Blackrod, we're getting much closer to first steam and then first oil in Q3 next year. So you can see here with $196 million of operating cash flow during those first 9 months that fully covered the CapEx of the Blackrod Phase 1 CapEx. But then with the CapEx from the rest of the assets, some cash G&A at $12 million, so less than $1 per barrel. Over $30 million of cash financial items and $100 million of share buyback, the closing net debt was $435 million at the end of September. Our net financial items are very stable. You can see a very small increase in net interest expense quarter-on-quarter, driven by the limited drawdown under our revolving credit facility. Otherwise, the costs are very stable. The exception is this FX loss, which is a non-cash item, really driven by some accounting reassessment revaluation of intra-group loans. It doesn't bear any weight on the cash flows of the business. The G&A remain in cash terms around USD 4 million per quarter or less than $1 per barrel. The financial results now. So in the -- during the first 9 months, our business generated close to USD 510 million of revenues, generating a cash margin of around USD 200 million, gross profit of close to USD 100 million and net profit for the whole first 9 months of $34 million. When you look at our balance sheet, it's very obvious what's happening, and it's an interesting way to look at the way we've been funding the investment in Blackrod. You can see our oil and gas assets increasing by close to USD 250 million, which is the net effect between the CapEx invested and some depletion. And you can see our cash, which has decreased from $247 million down to $45 million over that same period. Looking at our capital structure, Will touched upon it. We were lucky or very smart. We marketed the refinancing of our bonds at the end of September, which was one of the -- really one of the best weeks to go to market. The oil price was still in between $65 and $70. More importantly, the credit spreads were as low as they've ever been over the last 5 years. So as you know, the coupon is a result of the U.S. 5-year swap rate and the credit spread. And bringing those 2 elements together, even if the credit spread was much tighter than at our inaugural bonds, the overall coupon was slightly higher. And so the previous coupon was at 7.25% and now the current coupon is 7.5%. The good thing is that the maturity was extended as a consequence to October 2030. And we've introduced a new feature. We've introduced a $25 million semi-annual amortization starting in April 2028 once we have reached essentially the plateau production at Blackrod. The rest of the capital structure has not changed. And on this last slide of my presentation part, you can see a recap of all of our hedging positions. We're continuing to make money to generate money under our oil WTI swaps or oil WTI collars between $65 and $75, losing money on our WTI/WCS differential swaps at minus $14.2. But we've seen, as we mentioned, the tightness in that differential, which led us a couple of weeks ago to hedge 5,000 barrels a day of our 2026 exposure at minus $12.5, which is one of the best levels we've ever seen in the market for the year ahead. We continued to have 2,000 barrels a day of Brent hedged at close to $76 per barrel. We've recently layered in just shy of 10,000 -- 10 million standard cubic feet a day of hedges. I mentioned that we can really see the forward curve for gas prices improving going into next year. And so we hedged at CAD 2.8 per Mcf, the summer months, the summer strip from April to October, which is typically based on the seasonality, the lower gas prices months. In terms of FX, we've hedged in the past our FX exposure for most or 80% of our exposure to the Blackrod Canadian spending. CapEx, we have nothing in -- as for 2026 yet. We may layer in some FX protection swaps next year given the reasonable weakness in Canadian dollar, but that will be the decision will be made between now and year-end. So again, as a recap, a very strong operational performance, which has driven a very strong financial performance in this third quarter, good performance in the first 9 months, where we're going to deliver essentially within the guidance range we provided at our Capital Markets Day in all our material key performances. Thank you for that. And I will let Will conclude this presentation. Thank you very much. William Lundin: Thank you, Christophe. And so with the final slide and the summary slide, investment year-to-date through the first 9 months of the year in 2025 has been USD 281 million, USD 194 million of that has gone towards the Blackrod Phase 1 development. Production, again, for Q3, was very strong at 45,900 barrels of oil equivalent per day. Annual production guidance maintained at 43,000 to 45,000 BOEs PD. Very stable operating cost base of $17.90 for Q3 and maintaining the full year guidance of USD 18 to USD 19 per BOE. Good prices and healthy production, good cost discipline translated into strong cash flow generation for the quarter with $66 million in operating cash flow generated and $36 million in free cash flow for the quarter, excluding Blackrod CapEx there. Balance sheet, again, net debt, we have $435 million as at the end of Q3 and gross cash of $45 million. No material incidents took place in the quarter. And we completed our share repurchase program in the quarter as well. So with that, that concludes the presentation overview and happy to turn it over to the operator for questions. Operator: [Operator Instructions] We'll now take our first question from Teodor Nilsen of SB1 Markets. Teodor Nilsen: Congrats on good Blackrod progress. First question then is on the Blackrod production profile. Can you just give us a reminder of what kind of ramp-up profile you expect there now, assuming first oil in Q3 next year? Second question that is on your leverage. When do you expect the net debt to EBITDA to peak? I assume that will be around or maybe slightly later than first oil at Blackrod. And my third and final question, that is on the LNG Canada project. Could you just discuss the potential price impact on your realized gas prices of that project and time line for the project? William Lundin: I'll take the Blackrod question, and then I'll hand it over to Christophe for the net debt-to-EBITDA and LNG Canada, second and third parts of your question. So as it relates to the Blackrod schedule advancement, what we had originally guided for Blackrod was first oil in late 2026 and 30,000 barrels of oil per day to be achieved in 2028 with the great progress that's been made and the scheduled advancement of around a quarter, and we expect that profile to move a little bit to the left as a result of that. And so more details around the exact profile will be refreshed coming into our CMD presentation in 2026. Christophe Nerguararian: Yes. Thank you very much. On the leverage, you're absolutely right, Teodor. You should expect the leverage to progressively and then a bit faster reduce once we reach the first oil on Blackrod. As for gas prices, I mean, the reality is that the weather forecast is quite cold right now in Alberta, so that's clearly helped. Over the last few days increased the spot AECO price and the whole forward curve moves with it. So that's -- this is more the tactical review, if you wish, where AECO gas price is right now and the impact on the forward curve. Well, the forward curve tends to move altogether with the spot price. But now on the fundamentals, we understand that the ramp-up of the LNG Canada project is progressively increasing the local gas demand and is going to continue to help, hopefully, increase gas prices. Certainly, this is what the market anticipates when you look at the gas forward curve, which is in excess of CAD 3 for the whole year next year. Operator: And we'll now move on to our next question from Rob Mann of RBC Capital. Robert Mann: I'm just curious if you could dig into some of the factors that have allowed you to pull forward the schedule of Blackrod. I imagine it's a combination of things, but just curious if you can provide any further details there. William Lundin: Yes. Thanks Rob. And so further to the explanations provided in the development section in the Blackrod part of the presentation, exceptional progress is made to date here. And with certain milestones achieved such as acceptance of first gas into the plant and commercial gas, firing up our power generation. We have 2 turbines that provide 15 megawatts of power each, so a total of 30. Those have been successfully commissioned and with the overall progressive commissioning and turnover strategy and some of the other milestones that have been achieved, it's given us further confidence to be able to pull forward that schedule. We have water inventoried in tanks now as well. And so everything is being lined out to have a higher degree of certainty around that first steam and then corresponding first oil date. So we feel good at this point in time with not being too far away to provide that update to the market overall. Robert Mann: Yes, that's great. Maybe just shifting gears to one other question, if I could. You've added some hedges on in 2026. So maybe just curious how you're thinking about that program moving forward, just given the commodity price outlook here and as you move toward completion of Blackrod? William Lundin: Yes, that's correct. So we've added some differential hedges in place as well as some gas hedges for the summer period at this point in time. We will monitor forward curves on the flat price as well as further differentials and gas prices and it's potential for us to add on more hedges, provided they're at prices that we deem attractive overall. We do have a significant amount of our CapEx rolling off as a result of Blackrod getting to its final stages before starting up here. And as well with getting the refinancing done, which would have matured in early 2027 previously, that also is a significant factor that's been executed and taken care of by the company. So for next year, I mean, the strip that's pretty flat in the curve as we look at flat price right now as maybe a tiny bit of contango. Still feel prices are relatively low as it relates to Brent and WTI looking forward into 2026. But if there were to be a bit of a spike or a bump, we may look opportunistically to lock in some hedges. Operator: And we'll now take our next question from Christoffer Bachke of Clarksons Securities. Christoffer Bachke: Christoffer from Clarksons is here. First of all, congrats on a strong quarter. So only one question today, and that relates to Blackrod. So given that the Blackrod Phase 1 is now progressing ahead of schedule and also now close to the first steam, could you please elaborate on what specific efficiencies or lessons learned that have driven that outperformance? And also whether any of those gains could translate into cost or timing benefits for potential future Blackrod phases? William Lundin: Given we're still in the midst of the project execution, I mean, it all comes down to the overall planning that the team has put forth before sanctioning this project and putting allowances in place on schedule and cost is always a prudent thing to do. So we set ourselves up for success on the onslaught of sanctioning this project. And with the steady execution that's taken place across all key disciplines, whether it be mechanical, electrical and the construction, on operational hires, and the drilling front, everything has been going very, very well. That's put us into this position to update the overall schedule advancement for Blackrod. As it relates to the overall budget, we are maintaining that overall budget of USD 850 million to first oil at this point in time. And I think once we get this asset fully fired up and producing at plateau production rates, there's undoubtedly going to be positive lessons learned from undergoing this development where, of course, we have 100% working interest and have been the controlling developer in this process. So definitely something that we will add into our toolbox that will be beneficial for unlocking future phase expansions of the asset. Operator: [Operator Instructions] And we'll now move on to our next question from Mark Wilson of Jefferies. Mark Wilson: Excellent progress. You've clearly got a hell of a team up there at Blackrod. We've seen it in-person and on the ground and now you've accelerated that start-up. Now Will, you said you'd update on the ramp-up at the CMD. I'd like to ask about that and then the bigger picture because you've just mentioned on the last question, unlocking future phase expansions. And with Blackrod Phase 1 having a ramp-up potentially towards 2028 and combining that with the improved WTI/WCS situation that you've spoken about with TransCanada, you're in a completely new situation in terms of your outlook. I just want to know how much you want to derisk the production from Phase 1 before you may start thinking about committing to Phase 2? William Lundin: Thanks, Mark. Appreciate the color and the commentary that you provided. That's right, we had a great field visit earlier in Q2 with yourself and many others included there. So no, hats off to the team at site. They've done a tremendous job pushing this project forward. So very pleased with where we're at overall. It is a great situation when you look at the WTI to WCS outlook right now as well with it being very tight and there being excess takeaway capacity relative to the supply for the future years ahead, which matches the ramp-up profile quite nicely with respect to Blackrod, which should also hopefully translate into higher flat prices as well at that point in time to give us good cash flow generation. So I think as we look forward, we remain opportunistic in our capital allocation approach at all times. And so it's going to be a balance of always targeting to maximize shareholder value. So looking at stakeholder returns, organic growth, M&A, it's going to be a balance of all 3 of those. We have to monitor our liquidity position, balance sheet and take into account all the learnings as well from Blackrod. We are very confident, of course, in terms of what to expect for that production ramp-up, given that we have direct analogs at the asset with well -- pilot well pairs that have been successfully producing for many years, specifically -- well pair 3. So it's a bit difficult to give an exact time line in terms of when we would look to do a sanction of the future phase expansion at Blackrod. It's really going to be dependent on oil prices, liquidity, leverage position, and of course, taking into account some of the learnings from Blackrod over the course of the start-up. But what we've said previously is we'd expect sometime, likely end of the decade provided oil prices were healthy. And so this is something that sits within our contingent resources. And until we really go forward and mature that into reserves, it will be something that will keep us upside in the back pocket. Operator: And we'll now take our next question from Jonas Shum of Clarksons. Jonas Shum: Congratulations on the progress on Blackrod. So given that you have kind of progressed very well, can you elaborate a bit on kind of what are the key remaining milestones, and the risks for that. You mentioned that the weather forecast for Alberta was indicating relatively cold weather. Could that have any ramifications on kind of the progress during the winter time here? William Lundin: Yes. Thanks Jon. So as we look forward going into the start-up for Blackrod, weather is for sure a variable that exists for start-up overall, and we have seen some snow take place a little bit earlier than expected. And so things like heat trace are very important at site, which the team is all over and heat trace is largely installed in the key areas and the rest of it will be implemented as well in due course here. As we look to the overall start-up, as I'd mentioned, we have some water inventoried in some tanks. And so it's really getting the downstream equipment of that ready to be fired up with respect to the associated pumps in the boiler feed water system leading up into the steam generation and then going downhole. So -- of which we expect that to be completed and fired up by year-end to give us first steam by year-end and then correspondingly first oil in Q3 of 2026. Operator: We have no further questions in the queue. I'll now hand it over to the company. Rebecca Gordon: Okay. Thank you, operator. So we did have a lot of questions on the sequencing of Phase 1 and Phase 2, which I think you've already covered there, Will. But we also had some questions on potential growth programs in Malaysia and France. Can you give a bit of detail on that? William Lundin: Yes. So as I mentioned in the presentation in the international asset section, we're really pleased with the production boost that we've seen at the Malaysian asset as a result of that step-out drilling campaign and the workover that's been achieved. That this asset, we do hold a couple of wells in our contingent resources, but we don't have any further development wells held within our 2P reserves at Malaysia. In France, there are a number of robust investment opportunities and specifically within a field called Fontaine-au-Bron that looks very attractive and is ultimately ready to be sanctioned at the discretion of the group, which will be largely dictated by oil prices. Rebecca Gordon: Great. And also a couple of questions on Canadian natural gas prices, which I think you've covered, Christophe. But perhaps you could give a bit of color on a question, which is, will Blackrod eventually make you a gas net consumer? If so, when is this point going to be reached? Christophe Nerguararian: Yes, that's correct. Obviously, as we are ramping up the oil production, we're going to ramp up our gas usage as well. And we're expecting at this stage that towards the end of the decade, so 2029 to 2030, we will turn into being -- everything being equal, we will turn into being a net gas consumer. That is the projection at this stage. Rebecca Gordon: Yes. And I think, Will, you've covered off really our sort of capital allocation priorities in the future. There were a couple of questions there about whether we would look to buy back shares in the future, whether it was Blackrod Phase 2. There was actually another question on M&A. So it would be interesting to hear your perspective on the recent M&A activity in the sector, thinking specifically of the big interest in the market for the long-lived assets of MEG. Any thoughts would be appreciated. William Lundin: Yes, it's been very interesting item to monitor in the market with respect to the MEG and Cenovus deal that is likely to close quite soon here, I believe. That type of -- how do you say, the takeover bid that took place or the hostile actions that have taken place on MEG were something that not, I think, a lot of the industry was expecting, quite savvily done in general by the Strathcona company. Obviously, very high-quality asset at Christina Lake and the Tier 1 oil sands deposit that they have within the MEG portfolio that we expected to close and go over to Cenovus very soon here. And so I think overall M&A landscape, I think I'd expect to see further consolidation to take place through time. And we're a company that's executed quite a few acquisitions in our recent history. And so something like growing through M&A is, again, within our DNA, and we're going to be opportunistically looking to assets or companies to grow through and combine with, provided they fit the right criteria for the company. Rebecca Gordon: Okay. Fantastic. I think that most of these other questions have actually been answered through the course of the operator questions. So we'll leave it there. We're out of time. So thanks to everyone. Will, you want to close? Christophe Nerguararian: Thank you. William Lundin: Thanks very much, Rebecca. Appreciate it. And thanks, everyone, for tuning in. And look forward to the next update, which will be our year-end results and Capital Markets Day presentation in early February 2026. Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to TIM S.A. 2025 Third Quarter Results Video Conference Call. We would like to inform you that this event is being recorded. [Operator Instructions] There will be a replay for this call on the company's website. [Operator Instructions]. Vicente Ferreira: Hello, everyone, and welcome to our earnings conference for the third quarter of 2025. I'm Vicente Ferreira, Investor Relations Officer of TIM Brasil. This video highlights our recent financial and operational performance as well as the initiatives that support our strategic plan. Following the highlights, we will have a live Q&A with our CEO, Alberto Griselli; and CFO, Andrea Viegas. Please note that management may make forward-looking statements, and this presentation may contain them. Refer to the disclaimer on the screen on our Investor Relations website. Now let's review our results. Alberto Griselli: Hello, everyone. I'm Alberto Griselli, CEO of TIM Brasil. Today, we'll explore how our commitment to innovation, customer experience and operational excellence is driving sustainable growth and value creation. Let's dive into the highlights and key achievements that are shaping our journey this year. We've achieved a 5.2% year-over-year increase in service revenues for the first 9 months of 2025, a sustainable growth pace that combined with our robust cash conversion machine is fueling solid value creation. We keep evolving our B2B to expand new revenue streams. The TIM Smart Mining solution is gaining traction with a new partnership with Vale, the mining company. Additionally, EBITDA rose 6.7% year-over-year with a 50.3% margin and net income up 42.2% year-over-year. Our disciplined approach to CapEx has kept investment efficiency and operational cash flow reached BRL 4.5 billion. Notably, we announced BRL 1.8 billion in interest on capital and repurchased BRL 369 million in shares, reinforcing our commitment to shareholder remuneration. Once more, we stood out in ESG practices. TIM reached the top 10 of the FTSE Russell Diversity and Inclusion Index, being the only Brazilian company and the only telco to appear on the list. As I pointed out, our net service revenues continues to grow at a solid pace, driven by the mobile segment. Postpaid expansion remains a key contributor, supporting overall growth. The more-for-more strategy is helping ARPU evolution and mobile service revenues increased 5.6% annually over 9 months and 5.2% in the third quarter. This quarter, we added 415,000 postpaid lines, with prepaid to postpaid migrations up by double digits. Postpaid monthly churn remains low at 0.8%, reflecting efficient customer base management. Our more-for-more approach optimizes the cost benefit equation by balancing offer attractiveness and revenue growth. Exclusive Black Friday offers, including iPhone 16E and PlayStation 5 are enhancing our value proposition, and we expect them to help maintaining a solid trend in postpaid. In prepaid, we are seeing first sign of stabilization, supported by targeted offers and improved customer experience. TIM ULTRAFIBRA is also showing operational improvements with broadband ARPU at BRL 94 in the third quarter. Stable ARPU and the client base resuming growth at 3.7% year-over-year marking 8 consecutive months of positive net adds should reduce the negative dilution for broadband to our numbers. TIM is reinforcing its leadership in network with 5G now available in 1,000 cities across Brazil. We have the broadest 4G and 5G coverage in the country. Sao Paulo's network modernization case is setting the base for next-generation connectivity. The project reached its completion with 100% of sites upgraded this November. We are now leaders in download speed in all rankings that measure throughput. We expanded our leadership in consistent quality indicator, leaving the second player even further down the scale. On top of that, we are seeing the first sign of operational improvement with churn linked to network reasons reducing by 1 quarter. All in all, our modernization efforts are successfully supporting customer base management and delivering superior network quality, and we are expanding this project to other cities. Completing our 3Bs approach, let's talk about service. Providing excellent service is at the heart of our strategy. The revamped MyTIM app is transforming the customer experience and selling journey. With over 17.7 million unique users and 33% penetration, the app is driving digital engagement and e-commerce growth. We are the first telco to integrate with Apple Pay and Google Pay, enabling secure direct recharges for prepaid customer, simplifying the journey and encouraging recurring transactions. Digital service Net Promoter Score for postpaid and prepaid are on the rise, signaling that we are on the right path to elevating the experience with our service. Our more than 60 million customers are TIM's most valuable asset. Having this thing in mind, we are always trying to improve our relationship with clients and better monetize this asset. TIM Mais is our enhanced loyalty program, offering more benefits, experiences and convenience. Since its launch at the beginning of the year, we have seen over 2 million monthly active users enjoy the program's benefits. We have distributed 120,000 movie tickets and 20,000 Uber Rides gift cards. The program NPS is over 80 points and reflects strong customer satisfaction. In parallel, we are accelerating base monetization with mobile ads. We reached over 1,000 campaigns and 270 advertisers by September. Through the combination of our own inventory with Google and Meta, we are boosting digital engagement and expanding revenue streams beyond connectivity. Mobile ads revenues closed the quarter growing in double digits versus last year. B2B is a key aspect of our strategic plan and another way to diversify our revenue base. Since we have little legacy, the evolution of connectivity through coverage as a service is the main driver for expanding our presence. B2B IT solutions now cover with 4G and NB-IoT, 23.5 million hectares, over 7,600 kilometers of highways, and we have sold almost 400,000 smart lighting spots, generating BRL 435 million in contracted revenues since first quarter '24. The mining vertical is gaining traction, and now we have another anchor customer. Vale is joining our portfolio of clients and will be able to enjoy the benefits of TIM Smart Mining solution. We offer 5G, 4G, IoT and artificial intelligence solutions to create safer, more efficient and more sustainable environment for our customers. TIM Smart Mining can be a key enabler of automation and reduce environmental impact in the mining industry. With that, I'll hand it over to Andrea Viegas, our CFO, who will walk you through the financials. Andrea Palma Marques: Hello, everyone. I'm Andrea Viegas, CFO of TIM. This quarter, we delivered another chapter of consistent and disciplined execution. We've stayed focused on what matters most: sustainable growth, productivity gains and creating value for our shareholders. Our efficiency program remains one of the basis of our strategy. Thanks to effort across all areas, we kept cost growth at just 1.8%, well below inflation. This discipline translated into a 7.2% increase in EBITDA with margin reaching 51.7%. EBITDA after lease also advanced 8.3% year-over-year with robust margin expansion, a direct result of our industrial cost optimization strategy, which we've been executing across 3 fronts: our make model, contract renegotiations and network sharing agreements. Also, CADE approved the expansion of our own sharing agreement with Vivo 2 weeks ago. These initiatives are helping us to keep lease costs stable and margin expanding even in a challenging environment. Our net income rose by a solid double digit in the quarter, reaching BRL 1.2 billion and bringing the year-to-date figure to almost BRL 3 billion. This performance enabled us to distribute BRL 1.8 billion in interest on capital and repurchased BRL 369 million in shares, reaffirming our commitment to create value for our shareholders. Building on this momentum, our operational cash flow measured as EBITDA after lease minus CapEx reached BRL 1.7 billion in the quarter, up 8.1% year-over-year, supported by a resilient financial structure. In 9 months, this metric is up by double digits, reaching BRL 4.5 billion. With a strong balance sheet, we are well positioned to sustain growth and deliver long-term value. Now back to Alberto. Alberto Griselli: Thank you, Andrea. As we close, I want to reinforce that in Brasil is on track to achieve its 2025 goals and set the stage for 2026 of continuous evolution. We are delivering on our full year guidance across service revenue, EBITDA, CapEx and shareholder remuneration. With results on the right track, we are confident we can finish the year successfully and continue delivering value through the following drivers: one, our mobile postpaid and B2B segments to keep performing strongly; two, prepaid and broadband to continue recovering; three, efficiency are keeping costs and leases under control; and lastly, the buyback program is accelerating, and we are maintaining strong momentum in shareholder returns. Thank you for your attention. Now let's move to the live Q&A session. Operator: [Operator Instructions] Our first question comes from Bernardo Guttmann from XP. Bernardo Guttmann: Congrats on the solid results again. My question is about mobile service revenues. We saw a slight deceleration this quarter. How much of that comes from competition versus the natural normalization of growth after the strong cycle we had over the last years? And if I may, I have a second one. There has been a lot of market talk around potential moves and M&As in the fiber space. How do you see this environment? Could this wave of consolidation change your strategy or timing around your fiber business? Alberto Griselli: Bernardo, thank you for the question. So let's start with the first one. So when you look at the mobile service revenues, I think that we anticipated in the previous quarter, this sort of dynamics, and it's pretty consistent with what you see in other years as well. So we have a curve whereby we are at a higher growth at the beginning of the year when we do our price adjustment, and then it tends to decelerate going forward. I think that in this quarter, looking at the revenue dynamics on our side, we have pretty favorable outcome in terms of maintaining our postpaid engine growth, double digit, whereby reducing the deceleration of prepaid. And this is a trend that we are going to expect in the coming quarters, whereby we are likely to balance a bit the growth with postpaid maintaining the growth momentum and prepaid, we are working to decelerate less year-over-year. So I would say that it's less dependent on the competitive dynamics that remain rational and more related to our own strategy and seasonal patterns. This is for the revenues, okay? And when we look at the M&A, I think that the -- we always say that he Brazilian market being hyper fragmented is a market that is not attractive at this point in time because of the pressure that we have on ARPU and churn. And therefore, we are looking to optimize our capital allocation in terms of how we allocate capital to broadband. So we got our specific strategy that is dependent on our specific situation whereby broadband for us is a limited revenue line. So the broadband is something that the market has been expected for many years. Given the number of players, it is going to be a process that will take some time. And we have our own strategy, organic and inorganic towards this space, and it is unchanged versus what we discussed in the previous calls. What has changed a bit is the results that we are having on broadband because as you see now, we have a quite better operating momentum in terms of net additions. ARPU is still under pressure. We posted still a negative revenue growth this quarter on broadband. But given the fact that on the net additions, we are on a positive territory or we have been on a positive territory for 8 months now. We are likely to see improvements on the top line as well as we move forward. That's okay, Bernardo? Bernardo Guttmann: Yes, it's very clear, Alberto. Operator: Our next question comes from Marcelo Santos from JPMorgan. Marcelo Santos: The first is, if you could just paint a bit what's the competitive environment on mobile? And the second, do you see room to increase pure postpaid prices maybe this year or maybe the next. This year maybe already over, so maybe in the next. Alberto Griselli: Okay. Yes, Marcelo. So when you look at the competitive environment, I would say that the competitive environment on mobile remains positive in our view. So of course, there are promotions here and there. But overall, I think that the price adjustment this year went through quite nicely. And we are coding in our systems as we speak, the price adjustment that we're planning to execute the back book prices for next year. The -- as for -- so the market dynamics remain favorable. Of course, you have the smaller players that are a bit more aggressive. But all in all, they're not disrupting the national market dynamics in terms of pricing. And when you look at pure postpaid, I think we have an opportunity to adjust it. Now we are on a promotional campaign because we just launched the Black Friday promotions. So it's -- from now to the end of the year, it's unlikely that we are considering an adjustment, but it's something that we are certainly assessing for the beginning of next year. Operator: Our next question comes from Leonardo Olmos from UBS. Leonardo Olmos: Can you give us more color on the lease efficiency plan, especially in terms of timing of the expected impacts coming from the partnership with IHS and rent sharing agreement and leasing contract renegotiations? Andrea Palma Marques: Leonardo, related to the -- our lease efficiency, as we mentioned, we are in a continual discussions with all the partners that we have. Specific about the agreement that we made with IHS was we wanted the [ operation ] to make sites. And we made this agreement with someone who have the acknowledgment and the people to construct sites for us. So this kind of site is for some specific customers like agrobusiness or mining. And we will fund a financial and they will build for us these sites. What we expect in the leases is -- or our goal for this year, as we mentioned before, is to have the leases growing related to the inflation, although we have an increase in the number of sites for our increasing in coverage of 5G. But our goal is to increase just the inflation tax this year. I don't know if I answer your question. Leonardo Olmos: Yes. Yes. Your mentioned about IHS and the overall goal. I was just wondering if -- I don't know, maybe you could talk a little bit about the RAN sharing and maybe if it's not so delicate about the renegotiations. Andrea Palma Marques: Yes. Sorry, you mentioned about RAN sharing. RAN share cards just allowed us to continue. We changed a little bit the series that we have before with Vivo. So we will continue our plan to make the RAN shares especially for the 3G and 4G. And we are continuing to discuss -- we are continuing to renegotiate our partners on the towers company to achieve our plan that is to not reduce the lease because we can, but growing the lease only related to inflation. We have another agreement, but we are not -- now we can't disclose it. But as soon as we achieve our new agreements, we will disclose for you. Leonardo Olmos: Okay. Okay. Sounds great. And you have been delivering quite excellent development on that front. Congratulations. Operator: Our next question comes from Vitor Tomita from Goldman Sachs. Vitor Tomita: Two main questions from my side. One is a quick follow-up on the fiber business. Just if you have an update on the organic side on what has been supporting those improving net additions, if it's the same initiatives that you had in place before, such as focusing more on higher-end customers, higher value customers [indiscernible] churn or if there is anything new that's interesting on the strategy there? The other question is a bit of a follow-up on what people are asking about the competitive environment. Very specifically, there has been some noise in markets in October due to new banks, new sell MVNO, increasing commercial outreach in some areas, promotions to some extent. Was that noticeable at all from the standpoint of our commercial teams or very -- or something in my mind or just noise? Alberto Griselli: Sorry, Vitor, I had my mic switched off. So going to the fiber business. So what happens -- what happened on the fiber business are primarily a number of things. primarily related to the quality of the acquisitions and the management of the customer life cycle. So when you go into the quality of the acquisitions, it's primarily related to optimization on our credit scoring of the customer base and local targeting and the commercial channel footprint. So there are some channels that are naturally -- that provides naturally more quality, whereby other channels provide less quality. And so we changed over time the mix of our acquisition, and we targeted better high-value segments within the footprint. So this is for the entrance of customers. On the other side, there has been a lot of improvements on the churn management side. And this is partly related to the first question because if you get more quality at the beginning, you lose less customers because of bad debt and delinquency rates. And at the same time, we improved the quality of the service as a whole. So these are the 2 main areas when we had some relevant progress that moved us into net growth. When you go to the competitive environment, you're right that over the last quarter since the launch, [indiscernible] has been increasing progressively the allowances to their customers. So they started with 3 plants with a specific allowance. And then over time, this is, I think, the third time where they're increasing their allowance, so more gigabyte per price. And to some extent, I think they reduced the price in some plants on some BTL offer to our knowledge. I would say that the -- playing the gigabyte per revenue side is something that we can respond quickly because it's our network. It's -- we are deploying 5G. We've got [ 4 ] of spare capacity. We didn't do so yet because so far, the -- what we see, it doesn't request an answer on our side. And so we keep monitoring the progress in terms of losing customers or potentially losing customers to them. So far, no need to respond. Operator: Our next question comes from Maria Clara Infantozzi from Itaú BBA. Maria Infantozzi: I would like to [indiscernible], please, how do you see the growth opportunities coming from B2B and IoT? You have been vocal about the monetization coming from the market. So just wanted to ask you about how do you see the size of the opportunity, your long-term goals and how you see the evolution of revenues in the short term? Alberto Griselli: I'm not sure that, Maria, understood correctly your question. I will try to rephrase it. And basically, if I understood correctly, is how we are going to maintain the growth in the BIoT segment? What is the question? Maria Infantozzi: Yes. Actually, I asked you to please explore more how you see the long-term growth coming from B2B as you have been vocal about the monetization opportunities. And if you could please comment how short-term and long-term goals are perceived by you, and where are the opportunities would be great. Alberto Griselli: Okay. So -- and Maria, just to be clear, it's just B2B or it's in general? Maria Infantozzi: B2B and IoT, which is... Alberto Griselli: B2B and IoT, okay. Got you. So, Maria, it's basically, the way we're -- as you know, our legacy on B2B is pretty small. So if you compare us to other players in the market, we don't have a legacy. And therefore, we put together a strategy that is specific to our DNA. So we selected some verticals and the verticals we selected, for the time being, are agribusiness. It is the first one that we launched. Infrastructure was the second one. We got utilities that it's quite promising in Brazil and mining. And we selected these verticals because we think they got a larger fit with our technological, let's say, DNA, let's put it this way. And the way we look at this is that we started organically now, and we got quite a traction on these 4 verticals on a concept that we call coverage as a service, primarily. And this has been driving in the -- as we speak, the growth in these verticals. When you look more at the medium term, we have the ambition to increase our portfolio of solutions to include security, to include cloud that we can cross upsell to our services and possibly to expand the number of verticals we are servicing. As an example, the one that we are working is manufacturing. And these competencies and capabilities, we can grow them internally, and we are working on that already. We've been working on that already. But we are also looking at ICT inorganic moves that will provide us the ability at a faster pace to win a larger share of wallet of our customers. So this is not something that -- so we moved -- it's something new within our strategy. It's been launched a few years ago. We almost reached BRL 1 billion of contracted revenues over these years. We are recognizing as a leading partner in the verticals where we operate. If you look at the clients we have there, we've been successful commercially. And now we have, in the coming years, the objective is to consolidate our positioning and expand the portfolio of services and the relationship with our customers. And therefore, if you look more on the medium term, it's going to be a mix of organic and inorganic growth. Operator: Our next question comes from Phani Kanumuri from Santander. Unknown Analyst: So I have a couple of questions here. The first one is on your operating cash flow after lease. In the first 9 months, it has a growth rate of 11.8%, but it's trending slightly lower than the 14% to 16% for this year. So what is driving that? And the second one is looking at the competitive situation now, how do you -- how confident are you on your 3-year plan in terms of revenue guidance and results? Alberto Griselli: Let me take the first one, and I will pass the second one to Andrea. I will repeat it just to be sure that we understand it correctly. So the first one in terms of competitive environment, we -- as I mentioned, I think, to Bernardo in the first question, we -- the overall -- at least on mobile and not on broadband, but on mobile, the competitive environment remains rational. And therefore, we are in the position basically to keep growing the top line according to the guidance that we shared with you last year. Of course, as every year, in February next year, we're going to upgrade it. And therefore, when you look at the overall mobile environment, I would say that it didn't change versus the picture that we presented when we shared our guidance in February. And therefore, everything is confirmed. Of course, there are nuances whereby we see postpaid in mobile driving the growth. and a potentially improving situation in the prepaid environment. When you look -- and the second question, if I understood correctly, is the operating free cash flow dynamics, 11.8% versus our guidance of 14%, 16%. Was that the question, Phani? Unknown Analyst: That's the question, Alberto. Alberto Griselli: Yes, that's the question. Basically, if you look at our dynamics, we are confirming our guidance. And we believe that when you look at how revenue growth, EBITDA expansion, EBITDA after lease expansion and CapEx will combine in the next quarter. This will put our operating free cash flow expansion within the range of our guidance. Now since we are at the end of the year, basically, you can easily do the calculation and see what this will imply in our numbers, but I'll leave this to you, but we are confirming our guidance for the full year. Operator: Next question comes from David Lopes from New Street Research. David-Mickael Lopes: Just a couple of follow-ups. On the price increase you did in Q3, I was wondering if you could give a bit more color like maybe the magnitude and what's the percentage of the base affected? And now that prepaid trends are easing, I was wondering if next year, do you have a possibility to do a price increase next year on prepaid? Or is it still too early? And the second question is on B2B. I was wondering if you could give any maybe color on margins you're getting from B2B? Is it dilutive to your margins or not? Alberto Griselli: Okay. David, I got the last 2 questions. I will address. I lost the first one. So on the second one, this is a prepaid price increase. Just an overall comment. Basically, the -- when you look at the more-for-more strategy, this is the way we implement it. So generally, it's a price adjustment that always comes with some extra benefits for our customer base. And on prepaid, given the construct of the offer, it's a bit trickier to change the price -- as today, we're basically marketing BRL 1 per day. So it's deeply linked in the offer construct as a sort of easy to deconstruct. I would say that we are exploring as a way to monetize our customer base, the prepaid to control migration. And that's a way that we found very effective to monetize our customer base. We'll keep doing it. And the other thing we are looking at is the way we balance the benefits between prepaid and control to make sure that the migration makes sense as we increase prices. And so therefore, not entering into a lot of details into how we're going to do this, we can explore this in the one-to-one section, where we got some plans there as well. When you look at the marginality of B2B, so the marginality of B2B, generally speaking, when you look, we got 50-plus EBITDA margin, the B2B offering goes below typically this number. But when you look at what really matters, which is cash flow generation, they are accretive. So they generally tends to be dilutive on the EBITDA margin, but that tends to be accretive on the bottom line. And that's it. The first question, I'm not sure I got it. There was a first question or was these 2 questions, David? David-Mickael Lopes: It was just on the -- if you could comment on the magnitude of the price increase you did and what percentage of the base? Did you do the price increase just to hybrid or some pure postpaid customers? Alberto Griselli: This year, we did -- there are 2 types of price adjustments. We classify front book and back book adjustment. On the back book adjustment, we impacted both control and pure postpaid. We did it already. And it's not 100% of the customer base because we personalize this depending on a number of things in order to minimize attrition and churn management. But we did the back book price adjustment at the beginning of the year for both control and pure postpaid. When you go to the front book price adjustment, we did those adjustments in midyear for control, and we didn't do it for pure postpaid. And I think that was the question from a colleague of yours before. And basically, what we are looking at is to make this adjustment. We are assessing. We didn't decide yet, but we think that there is space to adjust them, not now because we are in a promotional -- in a seasonal period of the year with the Black Friday and the Christmas campaign. So it's something that is probably going to happen in the first quarter of next year. Operator: [Operator Instructions] Ladies and gentlemen, without any more questions, I will return the floor back to Mr. Alberto Griselli for his final remarks. Please, Mr. Alberto, you may proceed. Alberto Griselli: So thank you all for joining today's video call. We are arriving at the end of the year with strong momentum. We are executing our strategy with discipline and consistency. Despite being just 2 months away from 2026, we still have a lot to accomplish in '25. This year-end will be very exciting, and we expect to deliver on the promises we made to the market. I really want to thank the entire team for their commitment and relentless drive. Thank you. And I look forward to catching up with you guys in the one-to-one session. Lastly, a final message to our sales team. We put together a special Black Friday offer for our customers. Let's go for it. Operator: We conclude the third quarter of 2025 conference call of TIM S.A. For further information and details of the company, please access our website, tim.com.br/ir. You can disconnect from now on, and thank you once again.
Operator: Good day, and welcome to Addus HomeCare's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead. Dru Anderson: Thank you. Good morning, and welcome to the Addus HomeCare Corporation Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2025 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its third quarter 2025 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir. R. Allison: Thank you, Dru. Good morning, and welcome to our 2025 third quarter earnings call. With me today are Brian Poff, our Chief Financial Officer; and Heather Dixon, our President and Chief Operating Officer. As we do on each of our quarterly earnings calls, I will begin with a few overall comments, and then Brian will discuss the third quarter results in more detail. Following our comments, the 3 of us would be happy to respond to any questions. As we announced yesterday afternoon, our total revenue for the third quarter of 2025 was $362.3 million, an increase of 25% as compared to $289.8 million for the third quarter of 2024. This revenue growth resulted in adjusted earnings per share of $1.56 as compared to adjusted earnings per share for the third quarter of 2024 of $1.30, an increase of 20%. Our adjusted EBITDA was $45.1 million compared to $34.3 million for the third quarter of 2024, an increase of 31.6%. During the third quarter of 2025, we experienced strong operating cash flow at over $50 million for the quarter. As of September 30, 2025, we had cash on hand of approximately $102 million. We ended the third quarter with bank debt of $154 million, leaving us with net leverage of under 1x adjusted EBITDA, allowing us the flexibility to continue to evaluate and pursue strategic acquisition opportunities. As most of you know, Heather Dixon became our President and Chief Operating Officer on September 15, with our former President and COO, Brad Bickham, moving to the position of adviser to the CEO until his official retirement in March of 2026. I want to welcome Heather to our team and thank Brad for all he has done for Addus over the past 9 years. This transition has been moving forward over the past several weeks as Heather and Brad have worked closely together to make this change as seamless as possible. I appreciate the efforts of both of them, along with the members of the operations team during this transition. While we will miss Brad, we are very excited to have Heather join us as part of our leadership team. As we mentioned on our last earnings call, both the states of Texas and Illinois have announced rate increases for our personal care services. The Texas rate increase was effective on October 1 of this year. The Illinois rate increase will be effective January 1, 2026, subject to the standard federal approval process. We believe the Illinois and Texas rate increases as well as favorable reimbursement support from many of the states in which we operate is due to the recognition of the value that personal care services provide to both state Medicaid programs and managed care partners through a reduction in the overall cost of care. We continue to believe these and other benefits associated with home-based care put us in a favorable position as changes to the funding and other aspects of various Medicaid programs are implemented as part of the OR. We continue to work through our legislative efforts in other states to help them understand the benefits for supporting these services with future rate increases. On July 30 of this year, CMS finalized the fiscal year 2026 hospice wage index and payment rate update, resulting in a 2.6% increase effective on October 1 of this year. This increase reflects a 3.3% market back increase, reduced by 0.7% productivity adjustment. Based on our current geographic and acuity mix, we expect to realize a 3.1% increase in our hospice rates. We are appreciative of this increase as it helps offset a portion of the added costs associated with providing this critical service to patients and their families. As for our home health, on June 30, CMS released the calendar year 2026 proposed home health payment rule. This proposed rule projects a 6.4% aggregate reduction in Medicare payments to the home health agencies in 2026 compared to 2025. As you would expect, there has been a great deal of advocacy put forth by the home health industry working with CMS to positively affect this potential rate reduction. While we do not have a finalized home health rate for 2026, we are hopeful that these efforts will have a positive impact on the final rate, which we expect to be published in the next few weeks. During the third quarter of 2025, we continued to experience strong hiring performance, especially in our Personal Care segment. For the third quarter of this year, we achieved hires per business day of 113, which is an increase of 6.6% over the second quarter of this year. In addition to our strong hiring numbers, we saw our starts per business day improved to 86 for the third quarter. Clinical hiring remains consistent with what we have experienced over the last 2 years and has been mostly stable outside of a few more challenging urban markets. Now let me discuss our same-store revenue growth for the third quarter of 2025. For our personal care segment, our same-store revenue growth was 6.6% compared to the third quarter of 2024. During the third quarter of 2025, we also saw personal care same-store hours increase by 2.4% compared to the same period in 2024. We also experienced incremental improvement in our percentage of authorized hours served. On a sequential basis, personal care same-store billable census was up slightly as we continue to see the impact of Medicaid redeterminations in Illinois near its end. In Illinois, our personal care admissions have started to exceed our discharges, which we expect should lead to census growth by the end of the fourth quarter of this year. As we have stated over the past several quarters, we expect volume growth to comprise a greater percentage of our personal care same-store revenue growth going forward. Turning to our clinical operations. Our hospice same-store revenue increased 19% when compared to the third quarter of 2024. Our same-store average daily census increased to 3,872 for the third quarter, up from 3,534 for the same period last year, an increase of 9.5%. Our third quarter 2025 same-store admissions were up 6.5% year-over-year. For the third quarter of 2025, our hospice median length of stay was 30 days, up 2 days sequentially. During the third quarter, we saw an improvement in our Medicare cap cushion as a result of our balanced admissions growth, which resulted in no additional cap liability being accrued during the quarter. We have been very pleased by the continuing growth in our hospice segment over the past several quarters as a result of our operational improvements. While our home health same-store revenue decreased 2.8% when compared to the same quarter of 2024, we have seen year-over-year admissions level out. I also want to point out that over 25% of our hospice admissions in New Mexico and Tennessee are currently coming from our Addus home health operation, which overlap in these 2 markets. We are pleased to see more patients receiving the benefit of the full continuum of post-acute care and anticipate a similar dynamic to develop in Illinois, where we also have both home health and hospice operations and we will continue to evaluate opportunities in other markets. In our earnings release yesterday, we announced that on October 1, we closed on our acquisition of the personal care operations of Del Cielo Home Care Services, which operates in the South Texas market, including Corpus Christi, increasing our personal care density in this area of Texas. This transaction continues our acquisition and development strategy of enhancing our geographic coverage and density in Texas. Our team is excited about this acquisition, and I want to officially welcome the Del Cielo Home Care team to the Addus family. Going forward, our development team will continue to focus on both clinical and nonclinical acquisition opportunities to increase both the density and geographic coverage to our current states. While the proposed home health rule will most likely continue to delay any meaningful home health opportunities, we will be evaluating smaller clinical transactions along with personal care service transactions that fit our strategy. Before I turn the call over to Brian, I want to thank the Addus team for the care they are providing to our elderly and disabled consumers and patients. We all have come to understand that the overwhelming majority of clients and patients want to receive care at home, which continues to remain one of the safest and most cost-effective places to receive this care. We believe the heightened awareness of the value of home-based care which we are seeing is favorable for our industry and will continue to be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on both our dedicated caregivers and other employees who work so incredibly hard providing outstanding care and support to our clients, patients and their families. With that, let me turn the call over to Brian. Brian Poff: Thank you, Dirk, and good morning, everyone. The third quarter marked another strong financial and operating performance for Addus in 2025, as we continue to deliver consistent organic growth and benefit from our recent acquisitions. Our results were highlighted by 25% top line revenue growth and a 31.6% increase in adjusted EBITDA compared with the third quarter last year. Our personal care services segment was a key driver of our business with a solid 6.6% organic revenue growth rate over the same period last year, including a 2.4% increase in hours per business day. This growth trend has consistently tracked well above our normal expected range of 3% to 5% over the past several quarters, supported by strong hiring trends and favorable rate support for personal care services in some of our larger markets. This includes a statewide reimbursement increase in Illinois, our largest market, which was effective January 1, 2025, and a recent 9.9% rate increase in Texas that was effective on September 1, 2025. With Texas now being our second largest personal care market, this increase will have a positive impact on our business going forward, adding approximately $17.7 million in annualized revenue, with margins consistent with existing Texas personal care business of just over 20%. State of Illinois, which represents our largest PCS market, has also announced an additional 3.9% increase, which is set to be effective January 1, 2026, subject to customary federal approvals and will add approximately $17.5 million in annualized revenue for Addus, with margins consistent in the low 20% range. Our personal care results also include the Gentiva Personal Care operations, our largest acquisition to date, which we completed on December 2, 2024, and 2 months of operations for Helping Hands Home Care Services acquired on August 1, 2025. We continue to see steady improvement in our hospice business in the third quarter with strong 19% year-over-year organic revenue growth, driven by increases in admissions, average daily census, patient days and revenue per patient day. Hospice care accounted for 19% of our revenue for the third quarter. Going forward, the 2026 Medicare hospice reimbursement rate update was effective October 1, which will increase our rates by approximately 3.1% based on our current geographic mix. Our home health services represent our smallest segment, accounting for 4.9% of third quarter revenue. We continue to look for ways to support and expand the service line, including via acquisitions, as it is part of our strategy to offer all 3 levels of home-based care in select markets. In addition to the consistent organic growth we have achieved in 2025, we have benefited from our recently acquired operations. The Gentiva acquisition completed in December 2024, added approximately $280 million in annualized revenues and significantly expanded our market coverage. In August this year, we acquired Helping Hands Home Care Service, a provider of personal care, home health and hospice services in Western Pennsylvania with annualized revenue of approximately $16.7 million. And yesterday, as Dirk noted, we announced the acquisition of the personal care assets of Del Cielo Home Care Services located in South Texas, adding approximately $12.7 million in annualized revenue and further expanding our market presence in Texas. We continue to source and evaluate additional similar acquisitions as well as opportunities to add new personal care markets where we can enter at scale, as we believe having geographic coverage and density provides us with a competitive advantage. With our size and expanding scale and the support of a strong balance sheet, we are well positioned to continue to execute our acquisition strategy. As Dirk noted, total net service revenues for the third quarter were $362.3 million. The revenue breakdown is as follows: personal care revenues were $275.8 million or 76.1% of revenue. Hospice care revenues were $68.9 million or 19% of revenue. Home health revenues were $17.6 million or 4.9% of revenue. Other financial results for the third quarter of 2025 include the following: Our gross margin percentage was 32.2%, an increase from 31.8% for the third quarter of 2024. This was a slight decrease sequentially from 32.6% in the second quarter of 2025, primarily as a result of one extra holiday during the quarter. Looking ahead, we expect normal seasonality in the fourth quarter of 2025 with the hospice reimbursement update to benefit our gross margin percentage by approximately 40 basis points and a sequential benefit of approximately 20 basis points from lower unemployment taxes. G&A expense was 21.9% of revenue compared with 21.7% of revenue for the third quarter a year ago and lower sequentially from 22.1% in the second quarter of 2025. Adjusted G&A expenses for the third quarter of 2025 were 19.8%, a decrease from 20% in the comparable prior year quarter and a decrease sequentially from 20% in the second quarter of 2025. The company's adjusted EBITDA increased 31.6% to $45.1 million compared with $34.3 million a year ago. Adjusted EBITDA margin was 12.5% compared with 11.8% for the third quarter of 2024. Adjusted net income per diluted share was $1.56 compared with $1.30 for the third quarter of 2024. The adjusted per share results for the third quarter of 2025 exclude the following: Acquisition expenses of $0.08, noncash stock-based compensation expense of $0.18 and restructuring and other nonrecurring costs of $0.06. The adjusted per share results for the third quarter of 2024 exclude the following: Acquisition expenses of $0.08 and noncash stock-based compensation expense of $0.12. Our tax rate for the third quarter of 2025 was 24.7%, in the range we anticipated. For calendar 2025, we expect our tax rate to remain in the mid-20% range. DSOs were 35 days at the end of the third quarter of 2025 compared with 37.7 days at the end of the second quarter of 2025. We have continued to experience consistent cash collections from the majority of our payers. Our DSOs for the Illinois Department of Aging for the third quarter were 32.5 days compared with 38.8 days at the end of the second quarter 2025. Our net cash flow from operations was $51.3 million for the third quarter of 2025 and $92.7 million year-to-date. As of September 30, 2025, the company had cash of $101.9 million with capacity and availability under our revolving credit facility of $650 million and $487.7 million, respectively. Total bank debt was $154.3 million at the end of the quarter, a reduction of $18.7 million from the end of the second quarter and net of the acquisition of Helping Hands on August 1. We continue to have a capital structure that supports our ability to invest in our business and pursue strategic growth initiatives, including acquisitions. As mentioned, we will continue to selectively pursue acquisitions that complement our organic growth and align with our strategy. At the same time, we will maintain our disciplined capital allocation strategy and continue to diligently manage our net leverage ratio through ongoing debt reduction. This concludes our prepared comments this morning, and thank you for being with us. I'll now ask the operator to please open the line for your questions. Operator: [Operator Instructions] The first question comes from Matthew Gillmor with KeyBanc. Matthew Gillmor: I wanted to ask about the same-store volume growth on the personal care side. Dirk had mentioned the improvement in the penetration of hours. And I think within that, you've talked about the benefit you're seeing from the caregiver app rollout in Illinois. Can you give us a sense for sort of how much more opportunity there is within Illinois? And then I believe you're rolling that out to New Mexico. And any update in terms of how that's gone and the penetration or the opportunity that would be with New Mexico? Brian Poff: Matt, this is Brian. I'll talk a little bit about just the penetration and Heather can talk a little bit about the schedule for the rollout in additional markets. But I think Illinois, a pretty mature market for us. We have seen some uptick there in our fill rate. I think in our view, going to New Mexico and Texas next. Their fill rate traditionally has been a little bit lower. So I think in our view, a little bit more of an opportunity, a little more headroom there to see some improvement. We saw some total improvement consolidated this quarter from last quarter. I'll let Heather talk a little bit about the rollout coming in New Mexico and Texas on the caregiver app. Heather Dixon: Sure. Matt, it's Heather here. That rollout is going very well. We're seeing the caregivers really driving some utilization in a nice way in Illinois, where we have rolled it out. As Brian mentioned, next, we'll go to New Mexico, and then we'll follow in Texas, where we think we have a little more headroom to see some improvements. That app is really giving caregivers the ability to use the app to gain information that they will find useful to themselves personally, such as their pay expectations, et cetera, but also to just be more efficient. As an example, they can see what the capacity is for their clients. They can actually reschedule a visit directly in the app without visiting or even calling the office. So we're seeing that really drive some of the utilization in a positive way. If I go back to how you started your question, the growth that we're seeing on a same-store basis in revenue and PCS, that was partially due to the rate increases that we talked about in the script, but also just notably an uptick in the billable hours, which we also mentioned in the script. That's coming in at a very nice rate, and that's partially the focus on hiring and also the fill rate consistency. But we're seeing, of that 6.6% same-store revenue growth, over 1/3 of that is actually coming from the hours, the billable hours increases. Matthew Gillmor: That's great. And then Brian, I was just going to follow up on the cash flow. It was particularly strong in the quarter, and it seems like the Illinois Department of Aging DSOs continue to decline. Is that just normal fluctuation? Or is there any effort on their part to pay in a more timely way? Brian Poff: No. I think traditionally, you're always going to see a little up and down just based on timing, nothing specific with them. I think what we like to see this quarter, Q1 and Q2 probably had a little bit of a headwind from working cap in both of those quarters. We saw that revert in Q3. I think where we sit today, year-to-date, we have, I think, net a little over $5 million benefit from working cap changes. So pretty consistent, but it's all just timing related, nothing specific. Operator: The next question comes from Ben Hendrix with RBC Capital. Benjamin Hendrix: Welcome, Heather. Just wanted to follow up on that prior line of questioning in terms of the organic momentum you're seeing. How are you thinking about, especially in light of the strong Texas rate increase and what you're seeing in Illinois, the hiring trend into 2026? Is this strong volume growth that we saw kind of how we should think about a jumping off point for organic growth in 2026? Brian Poff: Yes, Ben, this is Brian. I can jump in. I think what we're seeing really on the hiring front, Dirk mentioned, 113 hires per business day, the highest mark we've seen all year. So I think we've gotten some good momentum on that side. The labor market continues to be pretty consistent. I think to your point exactly, when you get almost 10% rate increase in Texas, margins are going to be pretty consistent. So the caregivers are going to get some increases there. Well we've seen that in the past in other markets where caregivers are -- with the ability to pay more that traditionally has benefited hiring on the other side of that. So I would anticipate seeing something similar in Texas, which is a big market for us. I think it kind of plays all back into our overall thesis. If the rates are there where we can hire more caregivers, that's always going to help us on the organic volume side. So I think we feel like we're in a good spot here toward the end of '25, headed into '26, have some good momentum on that side. We've been talking about it for a bit. We really are targeting trying to keep above that kind of 2% year-over-year volume growth. We've kind of been at it or just below it early this year, seeing 2.4% this quarter was really nice, and we hope to keep that momentum going into '26. Benjamin Hendrix: Great. And just a follow-up also on your commentary about the complementary home health and hospice assets in specific markets. Obviously, a lot of uncertainty in home health, but solid rate update in hospice. How is that kind of changing your appetite right now? What would you expect in the near term in terms of how you're going to allocate capital to those markets where you're looking for that 3 legs of the stool? R. Allison: Yes. We are always interested in home health in overlap markets where we can put them together with personal care and hospice. I think you see what we're seeing in New Mexico and Tennessee is validation of the strategy, which we believe where home health plays for this company. As we look to increase our home health segment, we will be careful. Obviously, the rate discussion that's out there now has kind of lowered the temperature for anybody to be able to do anything of size in home health. So we'll continue to monitor that. But again, remember, home health for us is truly an add-on to our personal care and hospice business. And so strategically, just like we've done in this past year, if we find companies that have home health in a market where we have these other 2 services, we're not opposed to going ahead and pull the trigger. Operator: The next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats, again, on the quarter. Maybe, Brian, as I think about 2026 -- I know we're obviously not giving guidance, but as I think about your ability to drive margins, I think we can build the building blocks to EBITDA on revenue. But how are you thinking about the margin opportunity as we think about next year? Brian Poff: Yes, I think the main thing to keep in mind as we continue to grow top line and we're continuing to see that kind of consistent growth, particularly in PCS and hospice, we should get some additional leverage on G&A. I think that's been our model all along. We're not going to grow those cost bases at the same rate. So thinking about just bottom line margin year-over-year, we would expect to see some benefit from that in '26, everything else being the same. I think, obviously, what we do in the mix and M&A can play into that as well. If we're a little more active on the clinical side, there's a little higher margin profile. But business as it is, I think it's more leverage on G&A costs with top line growth. Brian Tanquilut: Got it. And then setting aside the fact that we're still waiting for this home health rule, we'll see when it is. But how are we thinking or how are you guys thinking about the home nursing business within your book? I know there are some moving pieces there. So just curious what efforts are being put into place to drive inflection there? Brian Poff: Yes. I'd say, we talked about a little bit, I think, in the last couple of calls, Brian, where we have really kind of 3 key markets in our home health business, New Mexico, Illinois, Tennessee, all through acquisition. We've done a lot of things over the last, I'd say, 9 months or so to really kind of get processes standardized, really trying to get the profitability level straight. I think still on the growth side, we have not kind of seen that take off, I think, particularly in Tennessee. We've got some new leadership in there to really try to kind of get that thing moving in the right direction. So outside of the rate, we'd like to see that business start to perform a little bit better. We're looking for, probably at a higher level, some leadership to come in and help with that as well. Heather can jump in on that here in a sec. But I think a focus of ours, but really to Dirk's point, a real benefit for us there, not necessarily the operations of that business per se, but the benefit that it provides indirectly into hospice. It's something you don't see on a segment level in the results of home health, but they're definitely benefiting in the hospice area. But I'll let Heather talk a little bit about that as well. Heather Dixon: Yes, I'll pick up on that. We're working on several initiatives within that business, and we're seeing admission volumes stabilize on a same-store basis. But what we're seeing is a decline, sorry, in recertifications, which is attributable to what Brian is referencing. So I'll talk about that for a minute. That's the bridging program that we've put in place to make sure that patients are receiving care in the right setting and the right level of care. And that's been in place for a while in New Mexico, and then we rolled it out, as Brian mentioned, within the last 12 months in Tennessee, and we're seeing it really start to take off there. And what we're seeing is an uptick in our admissions from a hospice perspective in those markets from these referrals. And in fact, as we mentioned earlier, in New Mexico and Tennessee, over 25% of our hospice admissions come from the home health segment and from this program. So we see this as a real benefit in having the 3 levels of service in the markets that we serve and particularly between home health and hospice, where home health is just really a complementary line of service to the other businesses. Operator: The next question comes from Joanna Gajuk with Bank of America. Joanna Gajuk: So maybe first, couple of, I guess, numbers and clarifications. On your comments about fourth quarter gross margins, right, sounds like it implies maybe high 32% or so for gross margin. And then if we assume G&A, call it, below 21%, I guess it implies adjusted EBITDA above 13% or so in Q4. Is that the right way to think about numbers? Brian Poff: Yes, Joanna, I think that's fair. I think if you look at the seasonality of our business and our company, Q4 is always the high watermark for margins for us, and I would expect that to be the case. We've been solidly in the 12s all year. But Q4, based on what we see right now, expectation of being 13% over for that quarter, I think, is definitely reasonable. Joanna Gajuk: And I guess you answered the other question around the margins for next year. So if you grow high single digits or low double digits revenue, right, it's going to be G&A leverage. So growing from, call it, 12.5% or so for this year, adjusted EBITDA, that should be kind of our thinking about next year, right, growing from that level? Brian Poff: Yes. I think that's fair. I think back to my earlier comment, I think top line growth is always going to get us some additional leverage on G&A. So everything else being equal. Obviously, everything can change at any time as we all know, but everything else being equal, that should be the case. Joanna Gajuk: Okay. And my question on the topic of rate updates from your key states, [ that you did great in ] Texas and Illinois. And on your last call, you alluded to the idea that there's an expectation that New Mexico, Pennsylvania might have some rate increase. It doesn't seem like Pennsylvania is in a position to increase rates, right? So is there a risk to a rate cut in that state in particular? And any other states that you're on the lookout for? And maybe give us a little bit update on New Mexico. Brian Poff: Yes. I think New Mexico, when they get into their budget cycle for next fiscal year, which is still early, we're not in that range yet, I think we're hopeful that with their consideration of a rate increase this year, that will be something that they'll consider next year. And obviously, we'll be working with the industry on advocacy for that in the next cycle. I think on Pennsylvania specifically, yes, I think they had considered a rate increase this past year. I think with everything going on there, I think our most recent intelligence from what's going on in their budget or inability to get a budget would probably put us in a position of thinking we'll probably be flat again. I don't think we're anticipating a rate cut, but probably not as optimistic as we were about a rate increase in Pennsylvania in this next budget. Joanna Gajuk: And any other states that we should be looking out for in terms of any major increases or, I guess, potential for cuts? Brian Poff: No, nothing that we're aware of at this point. I think usually, a lot of those states when they get into session, it's going to be probably more early '26, early the spring time, but nothing that we are aware of that would be worth mentioning at this point, no. Operator: The next question comes from A.J. Rice with UBS. Albert Rice: Welcome aboard, Heather. Maybe just to think broadly about the acquisition and deal pipeline. I know that's an important part, obviously, of your ongoing inorganic growth strategy. Can you just update us on what you're seeing competitively across the main buckets, how pricing is evolving? And what does the pipeline look like, whether it's pretty deep or a lot of things are just on hold right now? Brian Poff: Yes, A.J., I think I'd characterize it that we haven't seen probably a lot of shift from where we have been probably over the last, I'd say, 1.5 years or so. Most of the things that we're looking at or are in our pipeline today are probably on the smaller side, similar to Del Cielo we just closed, Helping Hands that we closed last quarter, in markets that we're in, providing some density, low multiples. PCS on the small end are still going to be -- could be as low as 4x and 5x. Even larger size could be maybe 7x, maybe 8x. That really hasn't moved much. I think on the clinical side, there's been a couple of large -- very large hospice organizations that traded this year for very high multiples. It seemed like there maybe was a little bit of moderation coming in, but still probably mid-teen type expectations, so still a little pricey on that end. We would always be interested in hospice, but probably at a little lower price point. And then home health, as Dirk kind of mentioned earlier, there is some benefit to us and how that feeds into or works with personal care and hospice. So if there's opportunities on the home health side, it's going to be probably on the smaller side for us in markets that we're in kind of overlapping. Those are things we'd be interested in, but those tend to still be a little on the inexpensive side. So if they're smaller, it could be upper single digits, maybe it presses closer to 10-plus times if it's more sizable. But obviously, we'll always work into our performance on any home health deal, what might be going on with rates. We're very cognizant of that as well. I think what we're hearing from folks externally thinking about '26, there could be some things that might be on the larger side that might be available. Some of those might be interesting to us. So early conversations, nothing really to report, but we're hopeful maybe there's a little more opportunity for us to do some larger chunkier things next year. Albert Rice: Okay. And I know you've been asked a couple of times about home health. But if, say, we get the rate noticed and it gives clarity as to sort of the trajectory, is that enough, do you think to maybe step up the pace in home health a bit? Or do we need some time for everything to settle out, assuming we get some kind of a rate action, either the 6.4% is proposed or maybe they happen or something like that. Does it take some time for the market to sort itself out? Or do you think people will react pretty quickly and you might be able to step up the activity in home health there? R. Allison: Well, I think getting this year's rate finalized will certainly take one of the issues that's on the table as far as doing much in the home health industry. The problem you're going to have, A.J., is that unless they come out with a fix for the potential clawback, which is, what, 400 basis points of this year's potential rate reduction, if they do away with that, are they going to send a signal that, that is passed and won't come back up again? As long as that overhang is still out there on any potential clawback, I think it's going to continue to keep the acquisition in the home health market a little moderated in the future. Operator: The next question comes from Jared Haase with William Blair. Jared Haase: I wanted to ask another one on your comments about the value of having overlapping operations in New Mexico and Tennessee and the impact that has on referrals between home health and hospice. So I'm curious, when you look at the data, do you actually see a meaningful difference? When you have the overlap there, do you actually see a meaningful difference in either patient satisfaction, quality of care, anything to that effect when you kind of have that density of service offerings in a particular market? Heather Dixon: Jared, this is Heather. We do -- we see a couple of benefits that are coming from that referral ability from home health to hospice. The first, it's better for the patient and for the family to be in the right setting of care and to be receiving the right level of care. So we see that benefit that comes through. We also see continuity of care from those 2 different settings of care from home health to hospice. So what we're seeing from the patients and from their families, of course, once they're in hospice has been positively influencing some of the decisions that we're making as we see those hospice admissions that are really supporting -- or being supported by home health. Jared Haase: Got it. That's helpful. And then I just wanted to follow up as well on the comments around clinical labor. And it sounds like that's been stable for at least a few quarters now. I think you mentioned outside of a few challenging urban markets, though. Just wanted to understand that a little bit better. So what specifically is sort of challenging in some of those markets? Is that largely just a function of kind of the broader reimbursement environment makes it harder to compete on wages in certain areas or something else we should be thinking about? Heather Dixon: No, I think it's really largely just related to some of the larger urban markets. And more specifically on the skilled side, we're seeing better opportunities for hiring than what we have seen in the past. But as pockets are arising out there or continue to be managed through, it's very limited to those skilled hires, I would say, and then the urban market. Jared Haase: Okay. Got it. I guess maybe just a point of clarification then. If we did get some sort of meaningful relief on the reimbursement rate in the home health space, do you feel like the labor market is such that you would be able to kind of attract the folks that you need to return to more consistent organic growth there? Heather Dixon: Yes. Operator: The next question comes from Raj Kumar with Stephens. Raj Kumar: Maybe just kind of focusing on hospice. I know the company has kind of talked about making key investments in the team over the past few quarters. And maybe just kind of want to break down what they've been able to identify, clearly strong results organically this year. And have they been able to reconcile all what they've identified in 2025? Or should we expect a kind of multiyear opportunity in terms of being able to display kind of above targeted same-store revenue growth for that segment? Heather Dixon: Well, maybe I'll start with some of the initiatives that we have that are driving the results, and then Brian can talk about sort of how we think that will develop from a future perspective. But you're right, we're seeing very nice volume growth in that hospice segment. And I think there are a few things that I would point to. The first is just a focus on better execution. That includes a focus on our onboarding and training efforts across the board, but specifically related to the utilization of community liaisons. We've mentioned that we've made some leadership changes there, and we've invested in a sales function that is focused on structured sales efforts and developing local market strategies for business development, including a better utilization of those community liaisons. We've mentioned we're seeing success from that bridge program that we put in place to drive the right referrals from home health into hospice, and we've talked about that, that that's really been something positive that we're seeing. And so we do see a lot of positive momentum in that hospice business that we've seen through the quarter. We've seen that building and that we would expect to continue. Brian Poff: Yes. And Raj, I think, obviously, 19% organic growth is probably not something we would expect to have into perpetuity. But I think we've said for a long time, everything else being equal, we would expect our hospice business to have an opportunity to grow in the kind of mid to at least upper single-digit range. So I think all the changes that we've made, I think the comps that we're seeing over the last year is probably driving some of the percentage increase. But as we get settled into a nice trend, I think that upper single-digit range is probably still fair. So our business, we're going to get the benefit of a little over 3% on rate. So if you think about what that leaves for ADC growth, I think we feel pretty comfortable that we could continue in that range. Raj Kumar: Got it. And then maybe just on home health, kind of fee-for-service mix trended kind of lower sequentially and year-over-year. I know there's been progression on the margin front with that business as you kind of case to optimize the whole book. But trying to get a better picture of kind of how margins did trend in this quarter given the mix shift dynamics. And there was kind of higher MA mix. So maybe trying to gauge also if there's any incremental case rate or episodic reimbursement wins on the MA side in the quarter. Brian Poff: Yes. I think we continue to make a little headway on just getting better rates and working with MA plans and moving to more episodic. That's really our focus, not necessarily Medicare fee-for-service versus MA, but really episodic versus non-episodic. And I think we've made some progress there. I think in this quarter's numbers, you're seeing a little bit of impact. It's small, but Helping Hands was largely MA's a little bit of home health business up there. And I think in Tennessee, we've got contract changes that we've gotten done down there that have helped kind of shift a little bit of that business in that Tennessee market. But nothing, I think, on a high level that I would flag out as being material overall. Operator: The next question comes from Constantine Davides with Citizens. Constantine Davides: Just a quick one on Del Cielo. Their website says they also offer other levels of service. So I just wanted to confirm that the only thing you're getting is just the pure personal care business. Brian Poff: That is correct. We only purchased the personal care assets of that business. Constantine Davides: Great. And then just a follow-up on this 25% figure, New Mexico and Tennessee in terms of impacting growth in hospice. You've obviously got a PC footprint that's multiples bigger than what you have in home health. And I was just wondering if you could articulate some of the benefits of being in personal care as it pertains to maybe the growth algorithm in both home health and hospice. R. Allison: Yes. Thanks. That's a great question. It's part of our overall strategy that we've been following for a number of years now. We believe that everything starts with personal care. That is something that we have stated before and we will continue to state. The problem with getting a bridge program today as strong as we see from home health to hospice from personal care up to other levels of care is the EMR in which we operate today. So if you look at today, we've got Homecare Homebase in the home health and the hospice. So everything can be done from an electronic standpoint where we can use systems to kind of look at our patient base and recommend levels of care and changes that may need to happen in the future. The problem we have today with personal care is it's on a different system. So everything from a bridge process is much more manual. And so that is why 3 or so years ago, we started working with Homecare Homebase to develop a strong personal care system that we could put in place and then use going forward to have one EMR, so that we could start a bridge program all the way through our levels of care. We are early in that transition. We are still working with Homecare Homebase. There are still some things we need to finalize. I think today, we have 5 small states that are using that today, and we're learning from that. But the whole plan going forward is to get this on one system, so that then you will start to see the same sort -- in our minds, the same sort of bridge results that we currently get between home health and hospice, you can then start with personal care. So that, again, kind of encapsulates our entire strategy that we've been applying for the last 4 or 5 years. Operator: The next question comes from Christian Borgmeyer with TD Cowen. [Operator Instructions]. Christian Borgmeyer: I had a question about the hospice side. Revenue per patient day was really strong in the quarter, and you also cited an improvement in the Medicare cap cushion. I was curious if this was a tailwind to revenue per PD in the quarter? If there may be a similar dynamic in 4Q? And then just curious what sort of clinical dynamic drives this Medicare cap liability. Brian Poff: Yes. I think -- this is Brian. On the Medicare cap side, Dirk mentioned we had no liability this quarter. We actually took a little bit of a charge in Q2. So I think sequentially, you saw a benefit of that flow through the revenue per patient day. I think the other thing that impacted this quarter, I think just on a year-over-year basis, we did see some positive effect from the good old implicit price concession or revenue adjustment or whatever you want to call it. But we had some positive experience in collecting some older aged AR, and I think that benefited a little bit in this quarter, but nothing that was, I think, overly material. I think just going forward, just talking about cap, I think we feel like we're in a pretty good position. I think we've had a lot of focus in a couple of locations where we had that issue creeping in. We have done a lot there to make progress on our referral mix, and balancing that out is a highlight for us. So I think if you look at us historically, we've always had probably 1 or 2 locations every year that might slip a little bit into cap. It's nothing new for us. It's something that we manage kind of day-to-day, but I think we feel pretty good where we are coming out of Q3 into Q4 that we're in a good spot. Operator: The next question comes from Andrew Mok with Barclays. Mingchuan Song: This is Jeffrey Song on for Andrew. Medicaid payers have been under a lot of pressure recently. Can you help us understand the nature of the dialogue between payers and providers in the home health space in recent months? R. Allison: Yes. If I understand your question and what you're trying to get to, I do think the OBRA out there has put some pressure on states with their Medicaid programs. They're having to look at how do we take the dollars we're continuing to receive from the Feds and apply that effectively to our Medicaid program. And I think that's where that puts Addus squarely in an important seat in that discussion, because if you think of our service, when people are qualified for first care services, they also would be qualified for nursing home services if we cannot keep them in their home with the amount of hours that the states are giving us. So we have demonstrated to a number of states and a number of our managed care partners through value-based care contracts that by following certain protocols, keeping them in the house, we're able to reduce various aspects of other costs related to those patients that would be covered by Medicaid, whether that's emergency room visits, whether that's readmits to the hospital, or quite frankly, SNF, where people would end up in 24-hour SNF care, which is much more expensive to the state. So it's our job as an industry, it's our job as Addus to continue to work with the states to show them the value proposition of if they are looking where to put their dollars for the Medicaid program to be the most effective to make sure that they put it into the personal care business, which is going to save them money overall. Operator: This concludes our question-and-answer session. I would like to turn the conference over to Dirk Allison for any closing remarks. R. Allison: Thank you, operator. I want to thank each of you for taking the time to join us on our earnings call today, and I hope you all have a great week. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADTRAN Holdings Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Peter Schuman, Vice President, Investor Relations. Please go ahead. Peter Schuman: Thank you, Carly. Welcome, and thank you for joining us today, and welcome to all those joining by webcast. During the conference call, ADTRAN representatives will make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including those detailed in our earnings release, our annual report on Form 10-K as amended and other filings with the SEC. These risks and uncertainties could cause actual results to differ materially from those in our forward-looking statements, which may be made during the call. We undertake no obligation to update any statements to reflect events that occur after this call. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP measures and certain additional information are included in our investor presentation and our earnings release. We have not provided reconciliations of our fourth quarter 2025 outlook with regard to non-GAAP operating margin because we cannot predict and quantify without unreasonable effort, all of the adjustments that may occur during the period. The investor presentation has been updated and is available for download on the ADTRAN Investor Relations website. Turning to the agenda. Tom Stanton, ADTRAN Holdings' CEO and Chairman of the Board, will provide key highlights of the third quarter of 2025. Tim Santo, our Senior Vice President and CFO, will review the quarterly financial performance in detail and provide our fourth quarter 2025 outlook, and then we will take any questions you may have. I'd like to now turn the call over to Tom Stanton. Thomas Stanton: Thank you, Peter. Good morning, everyone. ADTRAN delivered solid third quarter results with revenue near the upper end of our guidance and higher operating margins. All 3 business categories achieved double-digit year-over-year growth, reflecting disciplined execution, new customer wins and healthy demand for fiber networking solutions. Operating profit exceeded the midpoint of our outlook, underscoring the solid execution and our focus on leveraging financial performance as a driver of longer-term value creation. The quarter was led by strong results in Optical Networking and Subscriber Solutions, while Access & Aggregation reflected anticipated buying patterns of 2 large European customers. We expect those customers to come back online either early -- late in the fourth quarter or early next year. We remain confident on the overall market for the remainder of this year, however. During the quarter, we closed on a $201 million financing transaction that lowered our borrowing cost and increased financial flexibility, important steps that strengthen our capital structure and position us to execute confidently on longer-term strategic objectives. Turning to the quarterly results. ADTRAN reported $279.4 million, reflecting strong year-over-year growth across all 3 revenue categories. This marks the fifth consecutive quarter of sequential growth and fourth consecutive quarter of year-over-year improvement, proof points that our portfolio strategy and market positioning are driving sustainable momentum. This consistency underscores the health of our business, continued improvement in market conditions and the progress we are making in strengthening our foundation for the longer-term growth. From our customers' perspective, engagement across our portfolio continues to strengthen as we broaden our technology reach. We're making it easier to choose ADTRAN, not just because of what we build, but because of how seamlessly our solutions work together. Our integrated portfolio means fewer handoffs, faster time to value and one accountable partner across optical, access, subscriber and software. Our technology is the enabler, but the outcome is what matters; simpler operations, greater efficiency and a trusted relationship that continues to open new opportunities for collaboration. Our Optical Networking solutions grew 47% year-over-year and 15% sequentially, driven by strong momentum in Europe, including deployments with a new large service provider. We added 15 new optical customers in the quarter, reflecting continued share gains and the expanding reach of our portfolio. Demand remains robust and geographically diverse, supporting a wide range -- array of applications. These include national networks throughout Europe, secure connectivity for major enterprises and government clients worldwide with high-capacity interconnects for large-scale content providers. Access & Aggregation revenue grew 12% year-over-year, supported by ongoing fiber access investments among regional operators in the U.S. and Europe. While revenues from our small and medium service providers in the U.S. were substantially up, this increase was offset by the seasonal buying pattern of 2 major European customers. We added 14 new customers for our fiber access and Ethernet aggregation platforms, demonstrating continued traction across both new and existing markets. In Subscriber Solutions, revenue grew 12% year-over-year and 21% sequentially, driven by demand for both residential and wholesale applications. We added 18 new customers during the quarter as service providers continued expanding fiber reach and upgrading Wi-Fi capabilities. This quarter, we introduced Mosaic One Clarity, a new application built on our carrier-grade Agentic AI platform that enables predictive maintenance, guided issue resolution and proactive network optimization. Early results from customer pilots are promising, demonstrating a reduction of up to 75% in network-related trouble tickets. This is a strong validation of our AI-driven approach to network intelligence and a clear example of how innovation within Mosaic One is helping operators improve performance and efficiency. Structural shifts across our industry from core to edge computing and the advent of intelligent networks are reshaping connectivity worldwide. AI isn't just transforming data centers; it's redefining the entire network. The rise of distributed computing and edge processing is driving new requirements for bandwidth, latency and reliability, fueling demand for high-capacity optical solutions, next-generation access platforms and intelligent software to automate operations. ADTRAN is uniquely positioned at the intersection with our differentiated portfolio and our Mosaic One operating platform. As investment accelerates in AI and cloud computing, upgrades will follow across the network through metro transport, access and aggregation, and ultimately, the subscriber edge. Our Optical Networking, Access & Aggregation, Subscriber Solutions and Mosaic One software are built for that cascade, delivering higher throughput, lower latency and smarter, more efficient operations at scale. In summary, Q3 was another quarter of solid execution and strategic progress, marking a clear step forward in both performance and positioning. We delivered top line momentum and profitability improvements while enhancing our ability to invest and operate with greater financial flexibility, all of which reflects the disciplined way our teams are executing across the business. More importantly, we are setting the foundation for sustained value creation. The actions we've taken to enhance efficiency, strengthen our balance sheet and sharpen our focus are enabling us to operate from a position of greater agility and confidence. As Tim will discuss in more detail during the financial review, our scale efficiencies are creating meaningful operating leverage across the business. With disciplined cost control and strengthened balance sheet, we see line of sight to continued margin expansion and earnings growth as we move through 2026, all while maintaining the same financial discipline that has guided our progress. With that, I will turn the call over to Tim to review the financial results in more detail. Tim? Timothy Santo: Thank you, Tom, and thank you all for joining us this morning. We delivered solid results in the third quarter, reflecting strong discipline and consistent execution across the business. As Tom shared, we achieved broad-based revenue growth, higher margins and improved operational efficiency as benefits from increased scale began to take hold. Demand was strong in optical networking and subscriber solutions, supported by healthy customer activity and continued broadband investment globally. Over the past quarter, we've reinforced the operational fundamentals of the business and enhanced our financial controls and processes to support growth. These actions strengthen reliability and transparency of our published results and position us to deploy capital effectively, aligning operational execution with long-term value creation. As Tom shared, the third quarter also marked a significant step in strengthening our capital structure. The $201 million transaction that we completed has lowered borrowing costs, improved liquidity and substantially reduced risk. While it also unlocks significant availability under our revolving credit facility, it does not change the strategic priorities we've outlined to monetize our non-core assets. As many of you know, we recently engaged new partners to represent the sale of our Huntsville campus. Together, we have relaunched a targeted marketing process and are actively speaking with interested parties. We will remain disciplined on terms and timing, and we'll provide updates as appropriate. Simply put, we are moving forward the process with focus and intent. Maintaining a healthy balance sheet remains a top priority. We've made tangible progress this year, and our balance sheet today is more resilient, flexible and better aligned to support long-term growth. Turning to the financial results for the third quarter of 2025. Revenue was $279.4 million, up 23% year-over-year and 5% sequentially, finishing at the high end of our guidance. Growth was broad-based, led by Optical Networking, which increased 47% year-over-year. Geographically, non-U.S. revenue accounted for 57% of total revenue, while the U.S. represented 43%. One customer contributed more than 10% of total revenue during the third quarter. Non-GAAP gross margin improved to 42.1%, up both sequentially and year-over-year, driven by scale efficiencies, product mix and component cost reductions. We remain focused on sustaining gross margin in the 42% to 43% range over the long term. Non-GAAP operating profit rose to $15.1 million or 5.4% of revenue, exceeding the midpoint of our outlook. On a sequential basis, operating profit increased by $7.1 million or 89% compared to $14.6 million from approximately 0 in the prior year. Operating income during the same period has increased to 5.4% in Q3 2025 from 3% in Q2 2025 and 0.2% in Q3 2024. Currency had a minimal impact on our earnings this quarter. While volatility persists across both revenue and expenses, our natural hedging framework continues to mitigate risk. Building on the stronger forecasting, reporting and treasury processes established this year, we are now expanding our FX strategies to further protect our balance sheet and working capital. Non-GAAP tax expense in Q3 2025 was $3.5 million or an effective rate of 38.3%. Non-GAAP EPS was $0.05 compared to breakeven in Q2 2025 and compared to a loss of $0.07, 1 year ago. We continue to strengthen our financial position with working capital improving by $13.2 million. Accounts receivable increased by $13.9 million, resulting from increased sales with DSO remaining relatively flat at 59 days. Inventory declined by $16.3 million sequentially, reducing days inventory outstanding by 11 days to 124. Accounts payable totaled $188.9 million with days payable outstanding remaining flat at 70 days. We remain focused on maintaining a healthy balance sheet with our objective of achieving a net positive cash position. Operating cash flow was $12.2 million, and year-to-date, we've generated $38 million in free cash flow. We ended Q3 2025 with $101.2 million in cash, cash equivalents and restricted cash and importantly, a stronger liquidity position. In summary, Q3 reflects disciplined execution, profitability improvement and continued financial progress. We entered the fourth quarter with confidence, despite typical seasonal factors, fewer shipping days, holiday-related customer acceptances and budget timing. While those dynamics remain, we expect solid demand and our execution to offset the usual headwinds. We expect revenue between $275 million and $285 million and anticipate a non-GAAP operating margin of 3.5% to 7.5%. We expect OpEx to remain relatively flat compared to Q3. We look forward to a strong finish to the year and remain focused on driving sustainable growth and maximizing long-term stockholder value. I now turn the call back to Tom for some concluding remarks. Thomas Stanton: Thanks, Tim. I think we'll open up to some questions first. Carly, at this point, we can open up the question queue for any questions people may have. Operator: [Operator Instructions] Your first question comes from Michael Genovese with Rosenblatt Securities. Michael Genovese: I guess my first question is, looking at the Access & Aggregation and the comments on the European customers there as well as the information put out by ADTRAN Networks in Europe talking about, I think, a little bit of a timing change. So my question is, is there -- was there like a pushout of some things? I mean I know the first half of the year tends to be seasonally stronger than the second half in that Access & Aggregation European business. But versus prior expectations, was there some kind of push out in the timing of some of those shipments? Thomas Stanton: There has been -- there's been, let's say, I don't -- push out alludes to the fact that there may be some risk in that. I don't think there's any risk, but there has been some changing in some of the timing. We have 2 big customers that tend to be front-end loaded. In fact, they're 2 of our biggest customers in the year. And then one of the customers has a calendar that is offset from typical -- their financial calendar is different. So that means budget cycles are different. But yes, there's always some puts and takes. So the answer is yes. Michael Genovese: Okay. And I'm sorry, I just -- in terms of what you said, I think you gave us an update on the real estate, but I was a little bit -- just I couldn't follow exactly what you said about. So could you talk about that again? Thomas Stanton: Sure. Basically, what Tim mentioned was, we have put the both buildings back on to the market. We are actually receiving -- we've got multiple offers coming in, right, Tim? Let me let you cover that. Go ahead. Timothy Santo: We've -- in this past quarter, where we left off, we are under an exclusivity agreement, and we pulled the buildings down while we were working through that. As we disclosed last quarter, they're back on the market and very actively being marketed. Both the parts of the campus, we have interests from multiple parties and are having regular conversations. Michael Genovese: Okay. And then finally, I'm just going to -- kind of a bigger picture question, which is, traditionally, telecom has not been a super-fast growth market, right? It's the telecom in general is a single-digit growth market. So, if ADTRAN is going to grow higher than that on the top line and be more of like a high single or double-digit growth company, is it because there's fundamental acceleration in what you're doing in fiber and access or you're gaining share? Or is there some repositioning to higher growth markets like more data center exposure? Like what -- just how do we think about 2026 and sort of what the drivers of the business are from a high level? Thomas Stanton: Yes. So I kind of agree with everything you're saying. I mean you typically see the telecom market in the single digits, kind of mid-to-high single digits and it kind of varies year-to-year from there. Our premise has been, there is that typical growth. We do believe markets in general are that -- effectively that the focus right now on data center -- speeds and data center capacity is starting to affect the overall market, although I don't think that's really in numbers today. But the premise is, there's a significant market share disruption that's happening in Europe right now, and we are the #1 winner in that market share grab that's going on in Europe. I mean the largest player in Europe is being displaced. Michael Genovese: Last follow-up on that. Is there anything incrementally in Germany happening where -- I believe that Germany had already decided to kind of cap Huawei, but I'm not sure if they ripped and replaced yet. Could that become something incremental actual rip and replacing of Huawei? Thomas Stanton: Yes, they could. I think over time, rip and replace is going to have to happen everywhere just because you have to maintain the network and you can't be getting new drops of code all the time. There are -- as you know, there's been a lot of talk over the last few weeks about trying to accelerate that process in Germany. I don't think there's been any material rip and replace at this point in time. I think what they've been trying to do is effectively cap utilization on an ongoing basis. Operator: Your next question comes from Ryan Koontz with Needham & Company. Ryan Koontz: I want to ask about Optical. It looks like the best quarter you've had there in a couple of years. Tom, any color you can give us in terms of trends in terms of product mix, geo mix within the Optical domain would be helpful because Optical is obviously gaining a lot of momentum with regard to cloud and AI spend really starting to ramp up. Thomas Stanton: Yes. I would agree with you on what the outcome of the quarter was, and I would tell you that the momentum there is strong. It's both in the U.S. and in Europe. The quarter was definitely helped though by us picking up a larger Tier 1 in Europe, and we started initial shipments into that carrier. But we've kind of seen a dethaw kind of across the market, most notably in Europe though. So, we're expecting a good year next year as well. Ryan Koontz: Great. And as Mike mentioned about the Huawei displacement opportunities, I mean, how would you broadly characterize those today with regards to deals you've won as well as prospective deals you hope to like win in the next 12 months, relative to revenue opportunity? Thomas Stanton: Yes. So, it has been a significant positive influence even going through the downturn with what we've won. But if you look at the number of carriers that have actually converted, like there's some discussion here on Germany, they've been slow. And that momentum continues to build quarter-over-quarter. It definitely is impacting our numbers now, and that impact will grow over the next 2 to 3 years. So, it's definitely a positive mover. I -- let me add a little because I think there are different dynamics in the access versus optical space. I think there's a good chance that optical will probably -- we will see an increase in momentum earlier on in the optical space. Access has been a constant just move, but there's millions of customers that are involved versus -- and because of that widespread infrastructure versus kind of optical moves on a project-by-project basis. Ryan Koontz: Got it. Great. And maybe one on margins, if I could sneak it in around -- are you guys happy with where you're at here at 42% non-GAAP? And do you think this is where you got it pegged or is there further upside we can aim for? Thomas Stanton: No, our longer-term goal is 43%, and I think we're within line of sight to that. I think we'll be bumping up against that next year. Operator: Your next question comes from Christian Schwab with Craig-Hallum. Christian Schwab: Great. Some other players in the space have started mentioning that they've got their first BEAD orders. Would you anticipate an improved BEAD spending environment possibly impact you in calendar '26? Thomas Stanton: Yes. That's an easy bar, but yes. I mean it's starting to -- it's been dead now for a while, but it's definitely going to -- there's a whole lot more activity going on there. So the answer is yes. Christian Schwab: Is that something that you guys would anticipate seeing orders in the first half of calendar '26? Or is that yet to be determined? Thomas Stanton: I think we'll see orders in the first half of '26. Christian Schwab: Great. And then, you guys talked about operating margin expansion in 2026. I know you've outlined the goal of getting to double digits eventually. But what should we think about the potential for operating margin expansion in calendar '26? Thomas Stanton: We expect to have expansion in '26. I mean, I think the key to us -- so gross margins have been fairly consistent and have been, I would say, over time, upwardly moving. The whole key to us is the operating expense line. That, of course, is impacted by FX, but the operating expense line on a kind of constant currency basis, were -- if you look at year-over-year, were at high 90s, which equates to kind of where we are right now. So we've been holding it firm. I think the real question is, how long can you hold it firm? Our belief at this point in time is that we have enough R&D firepower and the right product set to not have to substantially increase the R&D spend. We will be -- we'll continue to -- we have sales expense that is variable depending on the revenue to some extent. But structurally-wise, we don't see big movements right now required to get us to that kind of $300-ish north of $300 million level, which kind of gets us to our target. So I would expect expansion through next year. But Tim, let me let you answer it. Any comments on that? Timothy Santo: I think as we continue the expansion, you'll see $300 million in second half of next year or late -- or early 2027. And I think on a constant currency basis, you get to the double-digits once you get somewhere around $315 million in revenue. Operator: Your next question comes from George Notter with Wolfe Research. George Notter: I guess I'm just curious about the minority interest in the business with the old ADVA shareholders. Any new perspectives there? Would you -- did you redeem any shares in the quarter? Any new thoughts in terms of how you deal with that obligation going forward would be great. Thomas Stanton: Well, we're happy if they redeem at this point. So, we would like to see some. I think there was one redemption in the quarter, will, Tim? Timothy Santo: It's in the subsequent events. It happened early this quarter. But yes, we continue to see nominal activity and expect there to be some level of run rate. Thomas Stanton: Yes. But nothing worth sharing. And like I said, it's -- well, that stock is trading up right now, if you take a look at over the last 6 months. But redemptions are a good thing at this point. George Notter: Got it. Would you look to do anything proactive? I mean, obviously, you did the financing this quarter. Would you look to get more proactive with those shareholders? Is that something that's in the cards at this point or does it hinge on selling the buildings in Huntsville? Like how do you think about that? Thomas Stanton: Without a doubt, selling that building does give us substantially more headroom. My sense is, we'd be getting more actively on that base towards the tail end of next year. We're probably still a little -- a few quarters away from that. Having said that, redemptions are a good thing. Operator: Your next question comes from Tim Savageaux with Northland Capital Markets. Timothy Savageaux: A non-core asset question to start with, and that centers on the old ADVA kind of sync and timing business. I assume you capture that in Optical, although I really don't know. That's one question. And I wonder if you can give us a sense of the dynamics around the business, kind of overall size, growth rate, profitability? Anything you can share along those lines? And I have a follow-up. Thomas Stanton: Yes, it is in the Access & Agg business. We really don't break that out separately, but it's in the Access & Agg category. It is growing. As you know, we're doing kind of a relook at that business and segmenting that business to be able to -- that is a different business. It is a different selling rhythm, different sales type of, I'll say, people, but it's really different contacts within the different customer bases. So we are in the midst right now of, let's say, readjusting how that business operates. Timothy Savageaux: Okay. And can you hear me? Thomas Stanton: Yes. Yes, go ahead. Timothy Savageaux: Okay. Sorry. The second question was going to be on any impact from memory prices, especially on the subscriber side of the business and what you're seeing there? Thomas Stanton: There has been some -- well, that's been over some period of time, but nothing that's -- I would say the gross margin in that business, we've been able to keep -- let me think about the proper answer. The gross margin of that business, we've been able to keep at a fairly constant level over the last few quarters and think we'll be able to do that on a going-forward basis. A lot of that is just churn on different -- that business churns, we have new generations of subscriber product. We have more new generation of subscriber product than any other product in our portfolio. Timothy Savageaux: Got it. Maybe one more for me. You mentioned starting to ramp with one of the Tier 1 European wins, I guess, on the Optical side. And I think that win included Access as well. So, do you expect that to start ramping soon? And anything else to call out in terms of upcoming Tier 1 ramps here in the next quarter or 2? Thomas Stanton: Yes. I think that one will -- it will take longer. The optical thing was incredibly quick. And there was a lot of work that went in front of that in order to make that happen so quick. I think all the access portion will take longer, but we'd expect to see movement of that next year. And in general, everything is moving forward, not at the same -- at the pace that we would like, but everything in Europe is moving forward. We haven't lost any pieces. The other ones that we've talked about in the past with very specific -- there is some rip and replace going on in different parts of Europe. That is moving forward. So I think all of that would just be kind of a positive tailwind next year. Operator: There are no further questions at this time. I'll now turn the call back over to Tom Stanton for closing remarks. Thomas Stanton: Okay. Thanks very much for joining us on our conference call. And I really would like to extend my appreciation to our teams around the world. Thank you for everything that you do. I also want to thank our stockholders and our customers and partners for the confidence and the collaboration that you've shown us over the last year. So thanks very much, everyone. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and welcome to the CareRx's Third Quarter 2025 Financial Results Conference Call. Please note that this call is being broadcasted live over the Internet, and the webcast will be available for beginning approximately one hour following from the completion of the call. Details of how to access the webcast replay are available in today's news release announcing the company's financial results as well as on the company's website at www.carerx.ca. Today's call has been accompanied by a slide presentation. Those listening on their phones can access the slide presentation from the company's website in the Investors section under Events and Presentations. Certain statements made during today's call, including answers that may be given to questions, may include forward-looking information, including information constituting a financial outlook under applicable Canadian securities laws. Forward-looking information, including financial outlook information, includes statements regarding future events, conditions or results, including the company's future plans, strategies, objectives and expectations. Forward-looking information and financial outlooks are based on the information available to management as well as their assumptions and expectations as of the date of the presentation. Forward-looking statements and financial outlook information is given as of the date of this presentation, and the company assumes no obligation to update any forward-looking information as a result of new information or future events, except as required under applicable laws. Forward-looking information is subject to risks and uncertainties, some of which may be unknown to management or beyond the control of the company, which could cause actual results to differ materially from those contemplated by the forward-looking statements or financial outlook provided today. Given these risks and uncertainties, investors are cautioned not to place undue reliance on the company's forward-looking information. For additional information on the risk factors that could cause actual results to differ materially from those contemporary forward-looking information and the factors and assumptions associated from such forward-looking information, please refer to the company's MD&A for the 3- and 9-month periods ended September 30, 2025 and 2024, and other documents filed on the company's profile on www.sedarplus.ca. I would now like to turn the call over to Puneet Khanna, President and CEO of CareRx Corporation. Thank you, and over to you, sir. Puneet Khanna: Thank you, and good morning, everyone. Welcome to our third quarter 2025 earnings call. With me this morning is our Chief Financial Officer, Suzanne Brand. We achieved growth across all key metrics in the third quarter, both year-over-year and quarter-over-quarter. In Q3, we delivered revenue of $93.2 million and adjusted EBITDA of $8.3 million, with our adjusted EBITDA margin expanding once again now to 9%. Net income in the quarter was $1.6 million, our third consecutive quarter of positive net income. Average bed service grew to 91,298. The tremendous progress we've made in our financial and operating results are a testament to the CareRx team's dedication and hard work. I'd like to acknowledge and sincerely thank the teams across the country who every day support the delivery of the best in pharmacy services and continue to deliver exceptional care to our residents and home partners. On September 3, CareRx hosted Ontario's Minister of Long-Term Care, The Honourable Natalia Kusendova-Bashta at our Oakville pharmacy location to showcase the innovative pharmacy services and technologies we use to deliver integrated pharmacy services and programs to residents across the seniors housing spectrum. We also highlighted the critical role our team plays in personalized medication management and enhanced clinical support, helping drive safer, more effective care for Canada's aging population. We continue to have a productive and collaborative relationship with the government. And together with the ministry, our home partners and long-term care associations, our team is excited to help shape the future of senior care. As a reflection of the CareRx team's commitment to a disciplined capital allocation strategy that provides the flexibility to fund growth initiatives while delivering strong returns to shareholders, in the third quarter, the company announced its intention to pay a quarterly dividend and on October 15, 2025, paid a dividend of $0.02 per share. This milestone underscores our confidence in our strong financial position, robust operating performance and the sustainability of our cash flows. Additionally, we renewed our annual Normal Course Issuer Bid since we continue to believe that our share price does not adequately reflect the fundamental value in our underlying business and near- and long-term growth potential. Through our balanced capital allocation strategy, which includes investments in organic and strategic growth, share buybacks and now dividends, we are well positioned to drive shareholder value and are optimistic about our momentum. I will now turn the call over to Suzanne, who will discuss our third quarter financial results in more detail. Suzanne? Suzanne Brand: Thank you, Puneet, and good morning, everyone. As Puneet outlined earlier, we achieved broad-based growth in the quarter, both year-over-year and quarter-over-quarter. Average beds serviced in the third quarter increased to 91,298 from 89,099 in the third quarter of 2024 and from 90,048 in the second quarter of 2025. Revenue of $93.2 million remained consistent from $92.8 million last year and $91.4 million in the second quarter of 2025. The year-over-year revenue comparison reflects a change in the mix of branded and generic pharmaceuticals dispensed even as the number of average beds serviced increased. Adjusted EBITDA for the third quarter increased year-over-year by over 7% to $8.3 million from $7.8 million in the third quarter of last year and increased by over 4% from last quarter. Adjusted EBITDA margin increased by 60 basis points year-over-year to 9% and increased 20 basis points quarter-over-quarter. The year-over-year and sequential improvement in adjusted EBITDA and adjusted EBITDA margin was primarily the result of the onboarding of the new beds and improved efficiencies and cost savings initiatives. We delivered our third consecutive quarter of positive net income at $1.6 million compared with a net loss of $360,000 in the third quarter of 2024 and net income of $561,000 last quarter. The growth in our net income was due primarily to new onboards and lower finance and transaction costs. Cash from operations was $10.1 million compared to $12.2 million last year and $3.8 million in the second quarter of 2025. The year-over-year comparison is largely due to changes in noncash working capital items. Cash at September 30 grew to $15.5 million from $8.7 million at the end of the second quarter, which was the primary driver behind the improvement in net debt to $28.8 million compared to $34.8 million last quarter. Net debt to adjusted EBITDA at the end of the third quarter improved to 0.9x from 1.1x in the second quarter of 2025. Subsequent to quarter end and following the September 30 National Day for Truth and Reconciliation, the company completed a number of transactions that reduced our quarter end cash balance. We made a dividend payment of $1.3 million, repaid $2 million of principal and interest on our outstanding debt and repurchased for cancellation, a 139,500 shares under our Normal Course Issuer Bid at an aggregate cost of approximately $497,000. The initiation of a quarterly dividend and the renewal of our share buyback program are evidence of the confidence we have in the strength of our financial position, our sustained and improving operating performance and the predictability of our cash flows. And with that, I will turn the call back over to Puneet. Puneet Khanna: Thank you, Suzanne. Before we close, I would like to take a moment to highlight some of the ways we continue to engage with our communities, employees and industry partners this quarter. We were proud to introduce our new Voices of CareRx video series on LinkedIn, a bimonthly social media video series which shines the light on CareRx team members. Through their stories, we showcase the compassion, dedication and professionalism that defines our organization, what inspires them about working at CareRx with seniors in our communities and the positive impact our teams have on residents and their families. In addition, our teams also presented at ISMP Canada, the Institute for Safe Medication Practices, where they shared important insights on medication safety in long-term care. Their participation demonstrated our ongoing leadership and expertise in advancing best practices in medication management across our homes and pharmacies nationwide. Finally, I'm proud that our team continues to actively participate in community events, including Long-Term Care Community Engagement Day, an event that brings together residents, health teams, families and community leaders to share stories and celebrate the vital role long-term care homes play in our communities. We also participated in the Strides for Seniors Walk and Run, which raised over $2 million to support York Region's first nonprofit residential Respite Dementia Care Center. These initiatives allow us to collaborate with partners across the continuum of care, advocate for the needs of seniors and strengthen our connection to the people and communities we serve. Together, these activities reflect our commitment not only to operational performance, but to being a trusted voice and a partner in the long-term care and seniors care sector. With that, I would now like to open the call to questions. Operator? Operator: [Operator Instructions] We have the first question from the line of Gireesh Seesankar from Bloom Burton. Gireesh Seesankar: Just on bed growth, it was fairly modest from the end of Q2 to now. Could you provide any color on the gross bed growth for this quarter? And were there any large rollovers? Also, how many beds did you end the quarter with? Puneet Khanna: So I can tell you from a year-to-date growth, we've had just over 4,200 beds. We did have about 800 beds in Q3 that were supposed to start in the last 10 days. And then the customer asked us to push and roll that over into the first 2 weeks of October. So that was a bit of a push where obviously, we wanted to win it, but you want to start off the relationship with the customer, right, and we really ended up pushing that into Q4. Gireesh Seesankar: Okay. And how much visibility do you have on new bed wins for the remainder of the year? And are you still confident in that 6,000 to 8,000 beds added for the year expectation? Puneet Khanna: Yes. Yes. So look, I mean, I think if you look at the 4,200 we've already added year-to-date plus the 8 I just mentioned, we're already at 5. And so even on the low end of our target at 6, it's in sight, and we are looking to close a few more deals, which would get us to at least that number. Gireesh Seesankar: And just one last one. Are you still on pace for the double-digit EBITDA margin by the end of the year? And have you felt the full impact of the Burnaby facility yet? Suzanne Brand: Thank you. So with respect to Burnaby, we continue to manage and try to -- we will get those efficiencies in the latter half -- so in that last quarter. So we're starting to see those efficiencies and gaining that with the lower Mainland now. We're doing everything we can with respect to driving margin expansion in terms of exiting with respect to double-digit growth, but that is something that we would really strive for as we pull through the efficiencies in the P&L in the future. Operator: We have the next question from the line of Gary Ho from Desjardins Capital Markets. Gary Ho: So I believe the Extendicare contract is a shorter-term contract. Just wondering if you have kind of reopened that file with that client for the next contract term? Would you approach the bidding differently this time around? Puneet Khanna: So we are pursuing everyone all the time everywhere, whatever the saying is. So yes, we think we have a compelling service offering and value proposition to customers as well. And so we're always engaged in ongoing conversations with any one not serviced by us. And I think to answer your question, when we amalgamated a number of these pharmacies a few years ago, I think we were still trying to knit it together and figure out who and what we could become. I think we now are pretty confident in, again, that service delivery and who we are. And so -- and I think some of the wins you're starting to see over the last couple of quarters are representative of that. And I think we would take that to the market going forward, be it that opportunity or anyone else. Gary Ho: Okay. Great. And then my second question. I know you've been ramping up the Oakville and North Burnaby mega facilities. Any discussions on looking at our third facility yet? Or is that too early? And also, I just want to get an update on your piloting of the hub-and-spoke strategy, leveraging the scale of these facilities? And what are you seeing so far from locations you've onboarded or tested so far? Puneet Khanna: Yes. So still a bit early to make a decision on anything else. I think from our pilots and what we have moving with the hub-and-spoke, we are extremely encouraged by it. Obviously, we are in budget cycle and sort of taking that into our consideration into our model. But we're being able to leverage those high-volume packaging machines. So particularly in Oakville, the BD rolls that we have to get more use out of it to cover off other locations. And so you're really using that value to help offset labor costs in other pharmacies. So yes, look, we're excited. We think that is the future. But I think as with anything we've done, we're going to be measured and make sure before we jump into anything. Operator: We have the next question from the line of Justin Keywood from Stifel. Justin Keywood: Are you able just to refresh us on the organic growth opportunity? I believe there's several potential RFPs or contracts that are set to go in the next 12 to 18 months? Puneet Khanna: Justin, thanks for the question. So the pipeline continues to look robust. I think we're seeing a number of things like just organic opportunities where we're starting -- we're seeing either RFPs or our sales team that is soliciting have targeted a number of things, and we have those built into our pipeline. I think I've publicly stated 6,000 to 8,000 was our target for this year. We are comfortable for that same target next year for what we see in the pipeline. And then I think the other thing that will continue to be a really strong tailwind are the new developments and new builds that we're seeing. And I think the Ford government announced those 58,000 new and redeveloped beds, which we will see more and more of them come online in '26 and '27. So we will -- we expect to have some growth based on there. And then I think the last piece similar to what we did over the last couple of years on M&A and consolidation. We are seeing that on the home operator side. So when you look at the large REITs and the large players in this market, they're consolidating. And so we definitely have some upside there as well. Justin Keywood: That's very helpful. And then on the mention of the Ontario government investing more in long-term care. Is there any elements of the federal budget today that we should be looking out for that could be of note for CareRx and the sector in general? Puneet Khanna: Not that we expect. So health is provincial and particularly with pharmacy, it's provincially driven. So that's why most of our focus is in conversations with provincial governments in the jurisdictions we operate in. Operator: We have the next question from the line of Kyle McPhee from Cormark Securities. Kyle McPhee: Just on the topic of margin expansion, potentially still on the come beyond what you've already successfully delivered in recent years here, is there any material margin expansion still on offer from your efficiency and cost savings efforts? Or is any material margin expansion largely just going to come from organically adding beds, getting that favorable contribution margin? Just help us understand how those moving pieces might play out over the next year or so. Puneet Khanna: Yes. Thanks for the question, Kyle. So yes, look, I think a couple of different levers for us to pull here. One, we've -- as you said, the bed growth in the system and the network and the platform we've built, we've built capacity. And so when you're adding beds into these locations, we are not doing it at the same labor increment that is required. So you're adding beds not necessarily adding the same amount of labor. So we will get the efficiency from that standpoint. I think we had gone down the path of the lean daily management. We have almost 70% of the network rolled out. We obviously started with our largest locations working our way down so that we got the biggest bang for our buck. So there's those opportunities. And then I think similar to the question that was asked earlier on hub-and-spoke, we feel there's opportunity on margin that. And then just on procurement and continuing to consolidate vendors that we use in our business as further opportunity. Suzanne Brand: Yes. Maybe I can just add to that a little bit. With respect to purchasing efficiencies, Puneet just already commented on that. We'll continue with some of the major providers of things like delivery and supplies. And then we'll continue maybe at a -- it won't be as material, but in terms of managing all of the lines, right, whether that be customer delinquency and/or customer expenses, we continue to manage and ensure that we deliver efficiencies through those methods as well. Kyle McPhee: Got it. Okay. And for the visible near-term bed adds that you would know about internally, how is that contribution margin shaping up on those beds versus the math of the past? Is the competitive environment changing at all, irrational actors out there bidding down the economics? Or maybe most of what you're adding is not even facing competitive bidding processes, can you offer any thoughts on that? Suzanne Brand: Sure. Thanks for the question. We continue to manage and pull on our new offerings from customers at the most economic way. So we continue to manage and ensure that we're doing it most efficiently. Again, as Puneet commented earlier, we'll do that with most efficient labor add and in the most competitive way. So I haven't seen anything different in terms of our approach. Puneet Khanna: No. And I think the other piece is in what we're starting to unleash and being able to offer with respect to robustness in services and programs. That is valuable to the customer, too. So the mindset we've taken, Kyle, is sort of that operating partnership mindset to say, what can we bring forward that helps save nursing time, what -- how do we keep residents healthier longer in these homes, so they're not being transferred back and forth between hospitals. And all of those pieces are valued by prospects and customers. Kyle McPhee: Got it. Okay. I'll squeeze in one last one here. Can you just offer some CapEx guidance for 2026? It sounds like you're still in your budgeting process, but maybe high level, the budget and how it allocates across maintenance versus investment in bed adds versus investment in your efficiency plan? Suzanne Brand: Yes. I appreciate that question. We are still, as you said, hammering out our 2026 planning horizon. With that, we continue to be in around the $8 million to $10 million mark with respect to capital additions annually. And we are -- every year is a little bit different with respect to that allocation, but we'll put the capital behind what provides value at the end of the day. But again, $8 million to $10 million from a 2026 perspective. Operator: We have the next question from the line of Doug Lee from Leede Financial. Douglas W. Loe: Congratulations on the quarter, folks. All arrows pointing upward here. Congratulations, as I said. So maybe just building on Kyle's question about CapEx, maybe just over a longer-term time horizon, I mean your footprint in Canada is considerable in all of what we consider to be the high-value geographies, but there are a few pockets where you could establish fulfillment centers if desired, I guess. So just wondering if there are any plans in order to expand your geographic footprint dependent of the organic head count growth that you talked about in your original comments? Puneet Khanna: Yes. Thanks, Doug. I think we are comfortable in the provinces we are in. I think we've been fairly forthcoming in a discussion that we sort of jumped over Quebec to go into the Maritimes in Moncton, New Brunswick. So we do operate there. We are interested in the Quebec market, but I think I'll be a bit of a broken record here in saying, look, we understand the uniqueness of that market and no different than Central Fill or hub-and-spoke or any of the other pieces we do. We like to do our homework and be comfortable before we jump into anything. And so we'll continue to look at Quebec or any other markets as they present themselves to us. Douglas W. Loe: And then not really a follow-up, but a different question. I mean, I see that in the commentary in your MD&A, I mean you continue to talk about the potential for professional fee reduction in the province of Ontario. Fortunately, that's the gift that keeps on not giving 5 years in counting. But I was just wondering if there's a time frame over which this officially goes away or officially gets established as part of your pricing dynamics in Ontario? That's it from me. Puneet Khanna: Yes. Look, I think it is one of those that -- we've seen that continue to just get rolled over. Again, I think to the conversations we've had, I think the Ford government in Ontario, very supportive of long-term care. This minister, particularly is a nurse, understands the value of pharmacists as an interdisciplinary participant and collaborator in the care spectrum. So look, I think we feel optimistic by our relationship, and those are ongoing conversations we have with both the minister and her staff. Operator: We have the next question from the line of Douglas Cooper from Beacon Securities. Doug Cooper: I just want to dig in further to something -- can you hear me? Puneet Khanna: Yes, we can. Doug Cooper: Just something that was brought up earlier about the consolidation of your -- of the major home operators, Extendicare, Chartwell, and Sienna in particular, for you guys. How many did you -- of the bed growth this quarter, how many were realized through, if any, from wins -- from M&A activity they did, getting beds that you didn't have prior to their M&A activity? And if not seen yet in the third quarter, what do you think that will come in the fourth quarter or early next year? Puneet Khanna: Yes. Good question, Doug. So I think we may have had -- I don't know off the top of my head, but I think there was one small home that got added this quarter. I don't believe we anticipate anything for next quarter, but we do expect some of those bed adds to come through early in '26. Doug Cooper: Can you quantify them at all? Puneet Khanna: It's a retirement home -- it's a retirement group that was acquired. So I think total suites was 1,000, but we don't get full connectivity on all of it. So we're just working through what the exact number of beds would be serviced on that business. But I would -- if I had to guess, I would say, it would be 500 to 650, but again, it should be determined. Doug Cooper: Okay. With your balance sheet now in probably the best shape it's been at certainly in recent memory, I can't remember the last time debt-to-EBITDA was below 1. Will this accelerate any M&A activities you may be contemplating, particularly, I guess, for those companies that may lose beds upon a Sienna or Chartwell acquisition that gets moved to you, somebody is losing them, that may be [indiscernible] for acquisition. Is that -- maybe just some comments on M&A given your balance sheet and the opportunities? Suzanne Brand: Thanks, Doug. With respect to the balance sheet, thank you. It is in probably the best shape that we've seen in a very long time. It is one of those things where it provides great opportunity in terms of making the right choices in terms of how we want to invest for value in the future. So while we have and can rely on the strength of our balance sheet, it really does open up opportunities for M&A that does become available and allows us with flexibility in how we handle that. So it is very strong, and we do have opportunity for choice in how we want to add beds. And I'll maybe add to that. Puneet Khanna: Yes. And look, I think all our competitors know we are open for business, and they all know how to get a hold of me, Doug. Doug Cooper: Okay. And final one from me, just on the dividend. What prompted the -- I guess, the implementation of a dividend and as opposed to M&A, for example, or paying down debt further or whatever, like is it going to be $0.03 per quarter? Is that what you anticipate going forward? Puneet Khanna: Yes. So we did a robust review of cash strategy, which was presented to the Board. And look, I think we felt we were able to provide some value back to shareholders who've been supportive of the business for a long time. And at the same time, continue to have the opportunity. We've got cash. We're going to continue to generate cash to do M&A to support growth to do the NCIB. So we didn't feel like we were handcuffing ourselves. And I think I've been sort of forecasting that a little bit in sort of the last few quarters saying, look, we are really comfortable where debt is at and paying down debt just didn't make sense at this point. Doug Cooper: Okay. Maybe just final one from me. Just Suzanne, what was free cash flow in the quarter? Operating cash flow, you had $10 million, but what was free cash flow? Just -- so dividend payment represents what of free cash flow in the quarter? Suzanne Brand: Yes. Dividend payment represented about $1.2 million with respect to cash flow for the quarter. So -- and maybe I'm not sure if I misheard you, but I just want to make sure that I thought I heard you say $0.03, but it's $0.02 just to confirm. Doug Cooper: Yes, 0.02%. And just wondering what free cash flow was in the quarter? Suzanne Brand: So the free cash flow in the quarter would have been approximately $10 million. I can get that number more accurately for you. Operator: This concludes our question-and-answer session. I would now like to turn the conference back over to the management for closing comments. Puneet Khanna: Thank you, everyone, for participating in today's call and your continued interest in CareRx. We look forward to reporting on our continued progress next quarter. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Eve Holding, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lucio Aldworth, Director of Investor Relations at Eve. Please go ahead. Lucio Aldworth: Thank you, operator. Good morning, everyone. This is Lucio Aldworth, the Director of Investor Relations at Eve, and I wanted to welcome everyone to our third quarter 2025 earnings conference call. Our CEO, Johann Bordais; and CFO, Eduardo Couto, are joining me on the call today. And after their prepared remarks, we will open the call for questions, at which point, Luiz Valentini, our Chief Technology Officer, will also join us for more technical questions. We have a deck with a few slides and additional pictures that show our achievements in the quarter as well as the testing phase of our full-scale prototype. The deck is on our site at ir.eveairmobility.com. So please feel free to download it and follow along. Let me first mention that today's conference call includes statements about events or circumstances that have not yet occurred. These are largely based on our current expectations and projections about future events and financial trends affecting our business and our future financial performance. These forward-looking statements are based on current expectations and involve risks and uncertainties that could cause financial results to differ substantially from those expressed or implied in this conference call, and we undertake no obligations to update publicly or revise any forward-looking statements because of new information, future events or other factors. For a more detailed list of these risks and uncertainties, please refer to our SEC filings available on our website. With that, I will now turn the presentation over to our CEO. Johann? Johann Christian Jean Bordais: Thank you, Lucio. Good morning, everyone, and welcome to the 2025 third quarter conference call. We had a strong third quarter marked by several key achievements, and we continue to advance the program's development at a steady pace. We are in the final stages of testing our engineering prototype before its flight campaign starts. We announced an additional supplier for our commercial aircraft, the E100, with a contract with Embraer for their landing gear. Additionally, the Iron Bird has begun to operate and is already contributing to the testing of the actual hardware that will equip our aircraft. Our schedule remained unchanged with an expected Type certification and entry into service in 2027. Starting with Slide 3. We have now received from Beta Technology Company, all of the electrical motors for our engineering prototype. They have been previously tested in specially designed equipment and installed in their respective nacelles. As mentioned previously, we had already performed integration test between the prototype and the remote pilot station that we also call the RPS, to make sure that there is a successful communication via the dedicated radio link. As a reminder, this prototype will be remotely controlled with a pilot sitting in the RPS, and this is the white [ track ] at the far end of the right picture. We are running the last set of tests to make sure that electrical power units were properly integrated with the inverters, battery and other systems and subsystems in the vehicle. Therefore, we're confident in starting soon our flight campaign with our first flight by the end of this year or early next year. Slide 4 is about the selection of our 22nd primary system supplier. Embraer will produce landing gear for our aircraft. Embraer comes with a strong landing gear manufacturing heritage for their commercial and executive jets as well as military aircraft. The landing gear was introduced as a result of a constant interaction between Eve and its customers, understanding how the aircraft will be operated. Now, the wheels on our eVTOL will be used for taxiing and repositioning the aircraft. This means greater energy efficiency when compared to the hovering. The landing gears also provide the capability of maneuvering the aircraft on the ground, eliminating the use of ground support equipment for the purpose, facilitating operation and reducing time on ground. The next Slide #5 shows what is now our functional Iron Bird cockpit. As a reminder, the Iron Bird is a deconstructed eVTOL in which we integrate all the different actual components on our eVTOL into a physical system to make sure that all systems work together properly. This is the interface through which the pilot will control the entire system. As you can see, the simulator has approximately 270 degrees view and is connected with all the different rigs of the vehicle system and components. For instance, the joystick is connected to actuators and motors in another adjacent room, and they react physically to all pilots command. All of these are connected to the avionics and the flight control computers with our fifth-generation fly-by-wire control laws. The motors are connected to the battery with its own thermal management system. As much as possible, all wires and cables replicate the composition, width and length of the actual harness that will be on our eVTOL. This assures a representative result of the simulation, allowing the Iron Bird to be used as a tool for vehicle development, flight test clearance of a new feature and product evolution as well as optimize the test campaign. Through this strategy, we maximize the number of prototypes, streamlining the flight test campaign and making the most efficient use of these assets. So, not only does the Iron Bird help us to better integrate and understand how all the systems work together and troubleshoot potential problem on the ground, but it also has an important role for the aftermarket benefit. The Iron Bird will help us improve the system and component maturity, and these are important inputs for successful entry into service and an efficient maintenance program. In total, we have logged more than 10,000 hours of test in these rigs. Another advantage is that the Iron Bird has also helped us to expedite and reduce the costs related to our certification campaign. Keep in mind that some tests can be performed on the ground 24/7, such as electrical systems, circuit breakers, et cetera, and the Iron Bird becomes a very valuable development and certification tool. Moving on to Slide #6. Together with our customers and authorities, we are also developing a strong network of partners in different areas, such as infrastructure and energy, to address one of the many challenges ahead of the Urban Air Mobility, which is to create a whole new ecosystem besides simply developing an aircraft. On the certification side, we participated in ICAO Assembly in Canada, along with ANAC, the Brazilian Air Force and other government officials, along with representative of several other certifying authorities throughout the world. This reinforces our confidence level that we have the right approach to certify our aircraft with ANAC as a primary certifying authority. Besides that, we are increasing our presence in the Middle East with an agreement to support the adoption and growth of eVTOLs in the region with the Kingdom of Bahrain. The agreement positions Bahrain as a regional hub for electrical aviation and will accelerate its regulatory, operational and infrastructure ecosystem for eVTOLs. The agreement also calls for Eve to possibly conduct test flight in the region in 2027. Slide 7 shows our total pre-order backlog that stands around 2,800 aircraft for a total value close to $14 billion based on the list price of 2025. This includes nonbinding letters of intent from 28 different customers as well as Revo’s firm order. Out of the 28 customers, we also have secured contracts with 14 different customers for Eve TechCare suite of aftermarket products and services, which could bring up to USD 1.6 billion in revenue to Eve over the first few years of operation. As you can see, we also have 21 different customers for our air traffic management solution, Vector, and I believe this reflects the market's leading value proposition we bring to our customers. Now I would like to invite our CFO, Edu, to review the financial results and the 2025 milestone checklist. Eduardo Couto: Thanks, Johann. Eve has successfully concluded a new funding raise of $230 million through a registered direct offering in August. This equity placement has not only improved our cash position to its highest level ever, but also extended our cash runway to about 2.5 years. We are very comfortable with our current liquidity and estimate it is sufficient to fund our operations and R&D expenses through 2027. The offering was anchored by 2 strategic and long-standing investors, the Brazilian Development Bank, BNDES, and our controller, Embraer, showing strong investor support and commitment to our project. Also, we had more than 30 U.S. and Brazilian institutional investors participating in this round. The strong institutional participation expanded our public floating and Embraer now has 72% of our total equity, down from 82%, and Eve's daily trading volume in the New York Stock Exchange is averaging $7 million per day. Now moving to Slide 10 (sic) [Slide 9]. Eve is a pre-operational company, and our financials reflect mostly the costs associated with our program development. That said, I would like to highlight some of our numbers. Eve invested $45 million during the third quarter '25 in our program development. We continue to accelerate our program development with more engineers from Eve and Embraer as well as higher engagement with suppliers. We also deployed about $7 million in SG&A during the third quarter, in line with previous quarters. Including R&D and SG&A, Eve reported a net loss of $47 million in the third quarter 2025. We also recognized a gain related to the fair value of our outstanding warrants, which is a noncash gain. Moving to cash flow. Our operations consumed around $60 million in the quarter, reflecting higher program activity and overall engagement with engineering and other R&D functions to progress our eVTOL development. With $143 million in cash consumed in the first 9 months of the year, we are on track to hit the low end of our guidance of total cash consumption between $200 million to $250 million for the full year of 2025, reflecting our cost discipline, simple business model and advantages of leveraging Embraer's capabilities. Finally, on liquidity, we ended the quarter with $412 million in cash, again, the highest ever cash level for Eve. Including an awarded grant and an undrawn BNDES credit lines, total liquidity is now at $534 million. These standby facilities continue to help Eve to preserve a solid cash position. Now going to Slide 10. We remain on track to deliver our milestones this year. As Johann detailed earlier, our first full-scale prototype is concluding final tests and installations to start to perform its initial flights in the upcoming months. In parallel, we continue talks with ANAC, Brazil's certification authority, to detail the certification plans. We expect it to be published by the end of the year to begin certification tests. We continue to engage with suppliers working on the initial parts of our conforming prototypes. And in parallel, we have started to receive the necessary equipment and tooling to produce the certification vehicles. Lastly, our cash consumption for the year is in good shape and in line to reach the low end of our guidance of $200 million to $250 million. With that, we conclude our remarks, and I would like to open the call for questions. Operator, please proceed. Operator: [Operator Instructions] And the first question comes from Savi Syth with Raymond James. Savanthi Syth: Just -- congrats on the progress and financing deals. But I'm kind of curious about the Bahrain update yesterday. Just -- could you talk a little bit more about how that would work? It looks like 2027 you'll be doing work there. Is that flight testing using the engineering prototype or maybe the certification aircraft that you're building? And is that still part of that agreement? Johann Christian Jean Bordais: Great, Savi. Thank you. Yes, we're thrilled about this announcement that we did with Bahrain, with the Ministry of Transportation & Telecommunication. It was also on Sunday, right? We're -- it was talked about at the Gateway Gulf Investment Forum. Very important. We've been in talks with the Middle East and the UAE for some time now. And I think this really proves that we're bringing the solution that they're looking for. This is a sandbox that will work to accelerate the readiness of the regulatory aspect, the operational, the infrastructure also, the ecosystem. We're going to be starting different fronts, like I mentioned, looking at the vertiports, looking at the operation. And when it comes to the testing, we're looking at the possibility of maybe starting some test flights, right, in 2027. It's not defined yet, but this is what we're definitely working on, maybe using a prototype, this is something that we're thinking about, but definitely for the operation in '28 in the region. Savanthi Syth: And does that come with any revenue stream? Or it's just kind of more of a demonstration? Johann Christian Jean Bordais: Well, no, it will have revenue stream. But definitely on the demonstration, we haven't defined exactly the scope and how it's going to be, right, at this stage. Eduardo Couto: No, we expect to get orders, right, Savi, as we start to fly and go to the region, we expect for more orders. PDP is the traditional type of sale with other customers. Savanthi Syth: That makes sense. I appreciate that. And then just on the cash flow side, I just wanted to clarify -- again, congrats on getting that deal across last month or a couple of months ago. But is that -- this current spend still the thought process that this is kind of the level of spend for 2026 as well? Eduardo Couto: Yes, we're consuming around $60 million, right? We consumed that in the third quarter, $6 million. Probably fourth quarter should be around $6 million as well, and we may close the year around $200 million. For next year, if we keep that pace, which I think is, I would say reasonable, we may consume a little bit more, right, than $200 million, so something maybe around $250 million. We're still working on the details for 2026, and we still don't have a guidance. We may provide something by the fourth quarter results, but I think it's reasonable to expect to keep that pace. Operator: And the next question comes from Andres Sheppard with Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on the quarter and all the great progress. I wanted to maybe follow up from Savi's first call just on the expansion to the Middle East. Hoping maybe you can give us a bit more detail there? So you're targeting commercial services in 2028 and then further expansion in 2029. But I'm curious, just given the region's maybe more leniency towards the certification process, is there an opportunity here perhaps to commercialize ahead of FAA certification? Is that something that's being explored? Or what's overall the strategy here in the region? Johann Christian Jean Bordais: Thanks, Andres. That's a good question. Obviously, our primary authority is ANAC, and this will start for us with ANAC and then with the bilateral agreement that they have it will be FAA. Now ANAC has been also in contact and have agreements with all other authorities in the world. And it wouldn't be different, like we've done at the Embraer for many, many years where they would accept the ANAC certification. So it's actually independent of what will happen at the FAA, right? But I'll let also Valentini give you a little bit more insight. Luiz Valentini: Yes. Thank you, Johann, and good question, Andres. This is -- this doesn't change the path that we have of certifying first with ANAC and then validating with other authorities. As Johann mentioned, we work to expedite this process by aligning -- or promoting alignment of not only vehicle characteristics and understanding by all of the authorities, but also supporting ANAC and all that we can in their arrangements and agreements for their certification basis to be accepted by other authorities. So we support the process of having these authorities, accept the ANAC certification basis, and that is done in a way to shorten the time that we have their validation once we have the ANAC type certificate. Andres Sheppard-Slinger: Got it. Okay. That's super helpful. Appreciate it. And maybe just as a quick follow-up. Just on your test flight program, just to make sure I have it right. So we are targeting first test flight, I think, before year-end and then to kind of ramp up the program all throughout next year, starting with hover flights and then heading towards a transition. Just can you break that down for us, just what does that flight path look like, just the timing again and just confirm what that looks like for this year and next year? Luiz Valentini: Sure. Yes. So we'll start reengineering prototype flights, as we had mentioned in the end of this year or at the beginning of next year. So that will start first with, let's say, simpler flights with hovering only, and then that will gradually expand what we call the flight test envelope. So increasing speeds, making maneuvers that cover, let's say, a more extended range of capabilities of the vehicle. And then from there, expand also to transition flight, which is what we call the phase of flight between hover and cruise flight, the fixed wing part of the flight, right? So that's made in a way for us to validate parameters of our analysis today. So we still have some calibration, some knowledge that we expect to gain from the hover flights themselves. So for example, we believe that we'll be able to gain more insight on the noise of the vehicle once we start flying the hover. So even the hover test phase has significant information for us. But then, evolving towards the transition is also important for us because even though it's a short phase of flight, it has a significant, let's say, a physical phenomenon happening. So it's important that we get that very well, not only for engineering and certification, but also for the comfort and for the user experience inside the vehicle, right? And then in the end, we'll also perform cruise flights or fixed wing airplane flights with this engineering prototype. But that's the, let's say, the working of the vehicle in which we have more confidence from the background that we bring for previous Embraer programs. So that's the progress that we are expecting to make all that to happen next year. Operator: And the next question comes from Eegan McDermott with Jefferies. Eegan McDermott: Maybe on the supplier with Embraer signing on to provide the landing gear, could you remind us of what other suppliers or component agreements you still need to secure? And maybe at a higher level, what kind of advantages does your extensive supplier network provide compared to peers who have a more vertically integrated approach? Luiz Valentini: So, thank you for the question. So, this is really the last main system that we have introduced to the vehicle with respect to bringing new suppliers in. So we don't expect to have any other supplier for any major aspect of the vehicle coming in from now on the program. And then, we've been working with -- on the second part of your questions, with suppliers that we believe bring a differential to our program given their background on aviation product and their knowledge on certification of these products. So for example, the fact that we are working on the battery supply with BAE, we believe that puts us on a good path for certifying this system, which is one of the critical systems of the vehicle, right? So, as we mentioned previously, we believe that the list of suppliers that we assembled was a list that for our program optimize not only the maturity that they bring to our project and the background that they have on the vehicle, but then optimizes what we have in terms of integration of these systems on the vehicle from the previous experience of Embraer projects. Does that answer your question? Eegan McDermott: It does. Yes. And maybe one follow-up or slightly unrelated question. But in terms of the motor when it comes to performance test, could you provide an update of what you're monitoring there in terms of performance testing? And are you going to continue to dual source motors from Nidec and [ Beta ]? Or is there any intention to source both the lifter and pusher from one supplier? And what would be your priorities in making such a decision if so, whether it's cost performance, scale or else? Luiz Valentini: Yes. So as we mentioned last time, we -- the flight test of the engineering prototype is part of a process for us to optimize the vehicle characteristics, and that goes through choosing what are the right systems and components to compose the vehicle, right? So, we are still on that path that we mentioned on the last call, to understand the opportunities that we have for supply of the motors, both lifters and pusher. And then based on the choices that we have and the fit that we get from the tests, then choose the final configuration. We choose these components on a number of parameters, I'd say, most importantly, parameters related to performance, so such as weight and the controllability that they provide to the vehicle. But also cost, of course, is an important one and what we believe is the capability of these companies to provide a good product for the life of the vehicle, right? So for production, for support, for spare parts and all of that. So it's really a complete set of parameters that we analyze to -- that will eventually lead to the choice of the supplier for these components. Operator: And the next question comes from Sameer Joshi with H.C. Wainwright. Sameer Joshi: I just had a couple of questions. First, on the cash burn expectations for this year. I think I heard that you were expecting to be closer to the lower end of that $200 million to $250 million. Is there a reason for that? Were there some programs that were slowed down? Or what was the -- or were you more efficient than you expected to be? Eduardo Couto: In terms of the cash for this year, you're right. We believe we're going to be closer to the low end of the guidance range of $200 million to $250 million, pretty much because we are trying to optimize our cash consumption the whole time, right? We control expenses. We make sure we're spending money the right way. We try to increase payment terms and have some working capital gains. We are always discussing with suppliers payment terms. There is a lot of work that is done by Embraer as well that we have on the service agreement. So there are different pockets, right, of cash consumption that we're always trying to optimize. We leverage a lot of existing infrastructure, existing capabilities, things that the Embraer Group already has, in order to have this more optimized cash burn, and we're going to continue to do this way, okay? Sameer Joshi: Okay. Got it. And then just a broader question. Of course, you have like a $14 billion sort of backlog of orders, including from the Eve TechCare and Vector offerings. How are you continuing to engage with these customers? Because the flights are -- the commercial flights are not until 2027. What kind of -- what level of interaction do you have with them? Do you have feedback from them on design -- interior design and stuff like that? Johann Christian Jean Bordais: Yes. Thanks for this question, Johann speaking. This is the essence of how Eve is built on, is really based on workshop with our customers, that we have those workshops, whether it's on the HMI, like a human machine interface workshop that tells you how the pilots interact and what we need to have or whether it's all the [ conops ] that we've been doing since the very beginning, whether it's in Rio or Chicago or in London. This is really building together like what will be the Urban Air Mobility environment and type of operation and it shapes not only the vehicle, and this is why you can see over the last 5 years how the vehicle has evolved outside, but also inside. And with the cabin and those full flex cabin concept where you can -- in one day you can change -- within a couple of hours you can change your configuration, whether it's a full cargo or removing the first row, putting in the club configuration for the operation. So this is something that we've been doing since the very beginning, and that's what led us to have the 28 customers and the largest pre-order backlog because we bring not only the vehicle, but the whole solution, where there's the full suite strong from the Embraer heritage, where the 4,000 people that are around the world, the customers understand that we have the DNA and what it takes to support an operation, not only to certify and deliver the first airplane, but make sure that you guarantee a dispatch reliability rate or a [ schedule ] reliability rate, which is exactly what the customers want to make sure the asset is available and it has the most competitive operating cost. And this is the 2 pillars that we have. And the third one is eventually not at the beginning because we can start the operation with the existing infrastructure and airspace management system. But eventually, if we're going to be putting -- and we will be putting thousand, not only us, but the others putting thousands of those vehicles in the air, then we need to make sure that we have urban traffic management software adequate. And I think this is all this DNA that we're bringing, aviation DNA that really pushes the customer to elect Eve. Operator: And the next question comes from Andre Madrid with BTIG. Andre Madrid: When you think about scaling production moving forward, where might you anticipate the largest bottlenecks forming? Or I guess, maybe put more broadly, are there any risks that you see throughout your supply chain currently? Eduardo Couto: No, we believe the way we are going to be doing the manufacturing, right, the industrialization of the eVTOL, is going to be modular, right? We start with -- we're going to have basically 3 modules, right? The first one, 120 eVTOLs per year, 120, doing in the Brazilian factory. Then we can go from 120 to 240 just with an extra shift, right? The first one has 2 shifts. Together, the 240 will go to the third shift. Then we can double the 240 to 480 with some additional tooling and equipment. Nothing major for the 240, probably we're going to be investing around $100 million, for the 480, $150 million. So we have all of that method. The suppliers -- as Valentini mentioned, right, we have very good suppliers. They have production capabilities, a lot of production capabilities as well, and we keep them informed of our production plans. As we ramp up production, we believe suppliers will be ready also to ramp up their supply. So we're not envision any major challenge to get this 500 eVTOLs per year. Of course, to deploy all those eVTOLs in the markets and so on, we may need some local assembly. But in terms of the production of the eVTOL itself, we're confident on this initial 500 eVTOLs per year capability. Andre Madrid: Got it. Got it. I'll return now. Johann Christian Jean Bordais: Andre... Andre Madrid: Yes, go ahead. Johann Christian Jean Bordais: No, sorry, yes, I just want to [ compliment ] another aspect of the -- what we've done with our 22 primary suppliers is those contracts, it took us 1 year, but each of them, it's based on the strong experience of supply chain management the Embraer is bringing. And we know on the conventional aviation, I mean, it is a challenge that we got to cope with and that we've been really learning from. And all the contracts that were negotiated are lifetime agreement, right? Not only for the prototype, not only for the production, but also for the aftermarket. So given all this, we've taken the best breed of negotiation and learning from Embraer and then we've negotiated this contract where one example, I mean, it's not single source program, right? Those are conditions that we had with the suppliers, and it allows us also to derisk the ramp-up or the production, different flows that we can have. So -- and also another one that we've taken to the next level is also we are the face of the customer on the aftermarket. That's another angle just to make sure that we are in touch with our customers on a constant basis and guarantee what I told you from the suppliers and then it goes through us and then we support the customers on the dispatch availability or operating cost, right? So those are really advantages and a strong learning that we've had from the past that -- for someone from a company that's done it for 56 years. Operator: And the next question comes from Austin Moeller with Canaccord. Austin Moeller: So based on you said about Bahrain, is ANAC looking to form similar dual cert partnerships with -- for eVTOLs with other countries similar to the relationship that they have with the FAA once the means of compliance are published? Luiz Valentini: So Austin, the work we've done -- we're doing with Bahrain with respect to certification is very similar to how we're working with other authorities. So we've been trying to, as much as we can, work on the certification basis so that if we don't have a full harmonization, we have good alignment of the requirements. So that means from early on engaging with these authorities to understand their expectation in terms of the requirements for the vehicle and then developing the vehicle in a way that we will be able to show compliance with those requirements, right? So we start talking to these [indiscernible] following what we believe will be important markets for our eVTOL and then start building this alignment on the certification basis. That's something that Eve does. In parallel, as I mentioned earlier, we promote and we try to support as much as we can, a work that is done directly between authorities, so from ANAC to other authorities in the world, in bilateral agreements that they have within the authorities and also agreements that they have with respect to validation of type certificates, for example, right? So we support that. And we try to steer that, and we do that by giving information to the authorities -- is steer that to where we believe we should focus with respect to what markets are most important for our vehicles. So it's a very similar process to what we're doing with the Bahrain certification authority, is to connect with these authorities in the world, build early engagement and then also promote the connection between the authorities to, again, shorten the time that we have for validation once the TC from ANAC is issued. Austin Moeller: Great. And can we talk about what stage we're at on assembly for each of the conforming prototypes right now? And how close any of them might be to finishing assembly? Luiz Valentini: Yes. So for now, we are -- we're still on the definition of much of the design of these prototypes. There are some more long lead parts that are already being manufactured by the suppliers. So those have -- already have drawings released and are also already in production by the suppliers. We will receive -- start to receive those parts next year and then assemble the prototypes next year. So, so far, we are not assembling. We are still working with the manufacturing of the more long lead items and also designing the ones that are, let's say, shorter to manufacture which then we expect to start manufacturing next year. Operator: And this concludes our question-and-answer session. I would like to turn the conference to Lucio Aldworth for any closing comments. Lucio Aldworth: So we accomplished several important milestones this past quarter. We're fully engaged and moving fast, and there's much more to come. So we're going to continue updating you on our progress through the next few quarters, which will be very exciting, and we look forward to meeting you in the upcoming events we're going to attend. As always, if you have any questions, please don't hesitate to reach out to our team. Thanks, and have a good day. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Neuronetics 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, Mark Klausner, Investor Relations. Please go ahead. Mark Klausner: Good morning, and thank you for joining us for the Neuronetics Third Quarter 2025 Conference Call. Joining me on today's call are Neuronetics’ President and Chief Executive Officer, Keith Sullivan; and Steven Pfanstiel, Neuronetics’ Chief Financial Officer. Before I begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business, strategy, financial and revenue guidance, the Greenbrook integration and other operational issues and metrics. Actual results can differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. For a discussion of risks and uncertainties associated with the Neuronetics business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's quarterly report on Form 10-Q, which was filed premarket today. The company disclaims any obligation to update any forward-looking statements made during the course of this call, except as required by law. During the call, we'll also discuss certain information on a non-GAAP basis, including EBITDA. Management believes that non-GAAP financial information taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash and other expenses that are not indicative of trends in our operating results. Management uses non-GAAP financial measures to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in the tables accompanying our press release, which can be viewed on our website. With that, it's my pleasure to turn the call over to Neuronetics' President and Chief Executive Officer, Keith Sullivan. Keith Sullivan: Thanks, Mark. Good morning, and thank you for joining us today. I'll begin by providing an overview of the third quarter performance and key operational updates. Steve Pfanstiel will then review our financial results, and I will conclude with some comments before turning to Q&A. In the third quarter, we built real momentum as we work through the integration and optimization of our combined operations. We are finding opportunities to improve efficiencies, take advantage of our scale and streamline operations to capture the full value of the combined businesses. Our recently announced partnership with Elite DNA is a great example of this, which I'll provide more details on later in the call. Total revenue was $37.3 million, up 11% on a pro forma basis compared to prior year quarter. This growth was primarily driven by strong performance at our Greenbrook clinics, which generated $21.8 million in revenue, up 25% on an adjusted pro forma basis compared to the prior year quarter. Our integration efforts are delivering high treatment volumes across the NeuroStar TMS and SPRAVATO patients. Within the NeuroStar business, we had a solid quarter for system sales with 40 systems shipped, an average selling price above our target for the third quarter in a row. That tells us customers see real value in our technology and support. Importantly, total NeuroStar treatment session utilization in the third quarter grew 11% versus the prior year on a pro forma basis. Beyond our revenue performance, we made significant strides on our path to cash flow positivity. That progress comes from careful expense management and better cash collections. Now turning to an update on our achievements during the third quarter. First, our Greenbrook growth strategy delivered strong results and continues to be a significant opportunity moving forward. Contributing to the growth is our regional account manager or RAM program. The optimization of the RAMs continues to produce results. As part of the initiative to build awareness among referring physicians, we executed a targeted outreach campaign during the third quarter. We quickly scheduled over 350 physician meetings for our RAM team, most of which took place in the third quarter, with the remainder in the fourth quarter. These educational sessions are already building awareness and driving results. To build on this momentum, we have dedicated 2 full-time intake team members to this effort, equipping them with educational materials that will make it simple for the physicians to refer patients to Greenbrook clinics. We have also seen notable enhancement in patient conversion rates through the coordination of automated patient transfer process, QR codes and the Greenbrook intake team. This process engages patients while they are still at the referring physician's office, which significantly increases the likelihood that they will follow through with the treatment in a Greenbrook clinic. In the third quarter alone, patients referred through the RAMs totaled more than 2,200. Our SPRAVATO rollout remains on track with 84 of the 89 SPRAVATO-eligible clinics now offering the therapy, and we are on pace for a full rollout by year-end. As we scale the program, we learned a lot about the economics of billing methods of Buy & Bill versus administer and observe across our network, mainly that reimbursement varies by contract, by state and by clinic. Based on these insights, we have expanded Buy & Bill where the economics are favorable. And this quarter, we added this billing method in Connecticut, Texas, Missouri, California and Virginia. We can now use the best model for each patient and location, allowing us to drive increased sequential SPRAVATO treatment session volume while delivering stronger margins. Turning to our second focused area, our Better Me Provider Program. This remains a key growth driver. We now have nearly 425 active BMP sites with another 100 sites working towards qualification. The numbers prove this works. BMP sites respond to patients faster and are more knowledgeable about NeuroStar TMS, resulting in them treating significantly more patients per quarter than the non-BMP practices. Our NeuroStar Provider Connection program keeps building momentum. As I mentioned last quarter, this program takes what is working at Greenbrook and applies it to our NeuroStar customers. Through this initiative, our practice development managers are building awareness of NeuroStar TMS within primary care settings, where 69% of patients with depression are currently being treated. Since we launched this program in April, we have hosted over 300 primary care physician meetings, educating approximately 3,000 providers on NeuroStar TMS and the results it can deliver for their patients. The impact has been significant. Many of these doctors did not know about NeuroStar TMS and are now excited to have a new option for patients who have not responded to antidepressants. We do not just educate them about NeuroStar TMS, we help connect them with the NeuroStar provider in their area. Many of the primary care physicians we talk to prefer to send patients to the BMP sites because of their commitment to patient responsiveness and education. The feedback I have heard from our customers validates this approach. For example, Dr. Ken Pages, who operates a private practice in Tampa, Florida, told us that the NeuroStar Provider Connection Program has been the most valuable resource we have offered to help grow his practice. He explained that having our representative personally visit local psychiatrists, therapists and primary care office to share information about NeuroStar TMS has been a home run for his business. Dr. Pages noted that for providers who have never heard of NeuroStar TMS, it is a great introduction. And for those who have referred to him in the past, it serves as a helpful reminder to keep their treatment option in mind for patients who could benefit from it. In addition to our outbound cold calling team, we have also launched a direct-to-provider ad campaign that has generated significant interest from PCPs who have requested a meeting with our local NeuroStar practice development manager. Now turning to our third strategic priority, operational excellence and cash optimization. We made real progress here this quarter. Since closing the Greenbrook acquisition, we have been improving efficiency across the network and several initiatives are driving results. For example, our self-check-in kiosks. As of mid-November, the kiosks are live in over 30 centers. More locations are coming online each week, and we are on track for a full network rollout by mid-November. Adoption has been exceptional. Nearly every patient uses the kiosk for check-in and payment. The impact was immediate. Sites saw an increase in collection in the first week after installation. We have integrated the kiosks with our EMR system, so paperwork gets completed right on the kiosk. Check-in is faster. Front desk bottlenecks are reduced, and this enables our staff to focus more on direct patient care. The feedback has been positive. These tools led our technicians and intake coordinators to care for more patients daily without adding headcount. We also plan to leverage AI and digital forms in the intake process. These tools will reduce the traditional 45-minute consultation call by enabling patients to enter personal health information on their own time from home, reducing the friction and improving the patient experience while freeing up resources. While technology is enabling efficiency, we are also taking a hard look at our organizational structure. Last quarter, I mentioned that we had brought in a consultant to review operations across the Greenbrook network. That review found opportunities to eliminate overlapping responsibilities and reduce management layers. Many of these changes are being implemented. For example, we have moved staff from our intake team to our provider connection group to support growth initiatives without additional headcount. We have identified several other opportunities that will be implemented in the fourth quarter. Revenue cycle management has been a major priority, and we are seeing real gains. We have accelerated collection timing compared to earlier quarters. We are also shifting more patient payments to time of service through the kiosks, which speed up cash collections. For the first time, we collected more cash in the quarter than we booked as revenue in the quarter. That is real proof that the improvements we have made are working. While we have made progress, we are not done. The entire executive team is dedicated to further improvements. Beyond these 3 priorities, we also focused on expanding treatment access and advancing our clinical evidence. We recently submitted a filing to the FDA, which would broaden the eligible patient population. I'm also pleased to share that as of October 1, New York State Medicaid began covering NeuroStar TMS therapy for adults with major depressive disorder, expanding access to over 5 million members statewide. Together, these regulatory and reimbursement advancements show growing recognition of NeuroStar TMS as an effective treatment option and reflect our commitment to making sure patients who need NeuroStar therapy can access it. To wrap up, our third quarter results demonstrate solid execution across our priorities. The Greenbrook integration keeps beating our expectations. The BMP program is scaling effectively, and our operational improvements are producing progress towards cash flow positivity. I am confident in our team's ability to execute and in the value we are creating for both patients and shareholders. I'd like to turn the call over to our CFO, Steve Pfanstiel, for a financial update. Steven Pfanstiel: Thanks, Keith, and good morning, everyone. Unless otherwise noted, all performance comparisons are being made for the third quarter of 2025 versus the third quarter of 2024. Total revenue in the third quarter of 2025 was $37.3 million, an increase of 101% compared to the revenue of $18.5 million in the third quarter of 2024. The increase is primarily driven by the inclusion of Greenbrook operations following our acquisition in December 2024. On an adjusted pro forma basis, which includes adjusting for both the impact of the Greenbrook acquisition and site closures, third quarter revenue in 2025 increased by 11% versus the prior year. Total revenue from our NeuroStar business, which includes our system revenue as well as our treatment session revenue was $15.5 million in the third quarter of 2025. On a pro forma basis, taking into account the impact of the intercompany revenue, this represents a decrease of 4% versus the prior year. The change was primarily driven by the previously announced realignment of our capital team to focus on strategic higher growth accounts and a change in customer purchasing patterns for treatment sessions in 2025 versus 2024. U.S. NeuroStar System revenue was $3.5 million in the third quarter of 2025 and included shipment of a total of 40 systems. The third quarter also represented our third consecutive quarter of system ASP greater than our target, demonstrating the value of our system and its features. U.S. treatment session revenue was $10.5 million in the third quarter of 2025. As Keith mentioned, third quarter NeuroStar treatment session utilization increased 11% versus the prior year and treatment session purchases in the third quarter were closely aligned with utilization. The decrease in third quarter treatment session revenue versus the prior year is largely due to the impact of a change in customer purchasing patterns, which led to increased customer inventory levels during 2024. U.S. clinic revenue was $21.8 million for the 3 months ended September 30, 2025, a 25% adjusted pro forma increase, driven by growth in treatment sessions across both NeuroStar TMS and SPRAVATO patients. SPRAVATO volumes were up sequentially in the third quarter versus the second quarter, while we also shifted to a higher percentage of administer and observed compared to Buy & Bill. This reflects our strategy of optimizing our SPRAVATO offering to drive the strongest profitability, which we evaluate on a by-state, payer and clinic basis. Gross margin was 45.9% compared to 75.6% in the prior year quarter. This change in gross margin was primarily a result of the inclusion of Greenbrook's clinic business, which operates at a lower margin. Operating expenses during the quarter were $24.4 million, an increase of $2.7 million or 12% compared to $21.7 million in the third quarter of 2024. The increase was primarily attributable to the inclusion of Greenbrook. During the quarter, we incurred approximately $1.4 million of noncash stock-based compensation expense. Net loss for the quarter was $9.4 million or $0.13 per share as compared to a net loss of $13.3 million or $0.44 per share in the prior year quarter. Third quarter 2025 EBITDA was negative $6.4 million as compared to negative $11.6 million in the prior year. Turning to the balance sheet. As of September 30, 2025, total cash was $34.5 million, consisting of cash and cash equivalents of $28 million and restricted cash of $6.5 million. As previously communicated in our August earnings call, we became eligible and received an additional $10 million of funding under our existing debt agreement with Perceptive Advisors. We became eligible for those funds as a result of achieving required revenue conditions under the Tranche 2 funds. We remain eligible for an additional $5 million of funds under the Tranche 2 funds. Additionally, within the third quarter, a total of 2.3 million shares were sold through the company's at-the-market facility, contributing net proceeds of $8 million. The addition of these funds strengthens our cash position, providing us with strategic financial flexibility for the future. Turning to cash flow. I am very pleased with our progress this quarter. Our cash used in operations for the third quarter was $0.8 million, which represents our second consecutive quarter of substantial improvement. To put this in perspective, our operating cash burn has decreased from $17 million in Q1 to $3.5 million in Q2 and now just $0.8 million in Q3. This steady sequential improvement validates the operational initiatives we have implemented. The progress reflects multiple factors coming together. Revenue cycle management improvements are accelerating the timing of current collections as well as ensuring collection of longer age receivables. Additionally, expense discipline is paying off and operational efficiencies across Greenbrook and Neuronetics are taking hold. Now turning to guidance. For the fourth quarter, we expect net revenue of between $40 million to $43 million. For the full year 2025, we now expect total revenue of between $147 million and $150 million compared to previous guidance of $149 million and $155 million. The change in guidance is primarily driven by our expectations around SPRAVATO Buy & Bill usage. As we have learned more about the state and payer reimbursement dynamics, we have adjusted our SPRAVATO offering to include the Buy & Bill option only where reimbursement makes financial sense to do so. For gross margin, we now expect our full year to be between 47% and 49% versus our prior guidance of approximately 48% to 50%. The change is driven by a shift in the overall mix of the business. We continue to project operating expenses of between $100 million and $105 million for the full year. We continue to target positive cash flow from operations in the fourth quarter of 2025 with a projected range of between $2 million of positive and $2 million of negative operating cash flow. We further project year-end 2025 total cash, consisting of cash, cash equivalents and restricted cash to be in the range of $32 million and $36 million. I will now turn it back to Keith for his closing remarks. Keith Sullivan: Thank you, Steve. Looking ahead, we are focused on driving growth across the business while being smart stewards of capital and cash collections. Before I end, I want to highlight 2 exciting near-term opportunities within the NeuroStar business. As outlined in last year's Q3 earnings call, one of the key benefits of the Greenbrook transaction is that our scale allows us to provide broader service offerings to all of our customers. By leveraging our central intake center operation, we can help manage patient calls and education more efficiently, potentially increasing conversion rates and reducing the administrative burden required to meet the demands of NeuroStar TMS. Late in the third quarter, we finalized a 3-year agreement to be the sole provider of TMS systems within Elite DNA Behavioral Health, one of Florida's largest and fastest-growing mental health networks, which has over 30 clinics. As part of this agreement, through a new wholly-owned subsidiary, we would utilize the intake center to pilot a fee-for-service offering to Elite DNA, which would include processing patient PHQ-10 responses as well as conducting and scheduling consultations and preassessments. In another important partnership, we deepened our relationship with Transformations Care Network, which operates 72 clinics in the Northeastern United States. Through our service offerings, we can accelerate time to treatment for patients by leveraging the Greenbrook Intake Center's expertise in performing benefits investigations. These partnerships will expand NeuroStar's footprint and will bring advanced NeuroStar TMS access to thousands of patients through a scalable, systemized model of care. Before we open up the call for questions, I would like to comment on the announcement today that I intend to retire from Neuronetics on June 30, 2026. I'm extremely proud of what we have accomplished in the 5-plus years with the company. These accomplishments include the acquisition of Greenbrook TMS, which has vertically integrated the company's value chain and the advancements of the NeuroStar TMS technology and the millions of treatments we have performed that have saved so many lives. Our performance in the third quarter, combined with the strength of our balance sheet has us entering the fourth quarter and 2026 with tremendous momentum and has the company well positioned for long-term growth. I am confident in the company's ability to execute on our priorities and create meaningful value for both our patients and our shareholders. I look forward to participating in the search for my successor and to working closely with the new CEO once on board to ensure a seamless transition. With that, I'd like to turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of William Plovanic of Canaccord Genuity. William Plovanic: Just to kick it off, I was wondering, definitely, you're seeing solid growth on pro forma in the Greenbrook sites and maybe less so in the former NeuroStar sites. I'm just kind of curious what's really driving those dynamics? Steven Pfanstiel: Yes, Bill, thanks for the question. I think on the Greenbrook side, certainly, we've given out kind of our clinic activity and looking at that quarter-over-quarter, you could see that's up nearly 28% year-over-year. I think that is leaning into SPRAVATO, inclusive of the Buy & Bill offering, although we're being very smart about how we optimize that. But also, we continue to see growth on the TMS segment as well. So I think in general, we've got the right clinics to be driving that growth. We're very focused on having a nice extra growth driver in SPRAVATO, especially with B&B. But we just see kind of continued strong growth in Greenbrook driving along. On the NeuroStar side of the business, I think the big thing to remember is we look at kind of, hey, what are the actual treatment utilization. So how many times of our systems being used year-over-year. What we're seeing is that's more than double digit year-over-year compared to Q3 a year ago. I think the change and why we're not seeing that happen translate to revenue growth is that this year, we're seeing those treatment session usage match the purchases. That makes sense. It means our customers are keeping a pretty steady level of treatment session inventory. This is different from 2024, where we saw customers strategically increasing inventory levels. Some of that was their own purchasing processes. There were some marketing, other incentives that drove a little bit of that. But particularly in Q3 of last year, we were still dealing with the impact of the Change Healthcare cyber events, which caused a lot of our customers to shift orders from Q2 into Q3. So in fact, while we're up utilization 11% year-over-year, that's more than offset by the fact that our customers in Q3 of last year bought 13% more than they utilized in Q3. So that's 11 days they increased inventory just in Q3 of last year. So that headwind is really kind of what's driving, I would say, the lack of translation of that utilization increase to the revenue side. I think the positive note is for us is as we enter 2026, we expect it will be with normalized inventory levels, and we wouldn't expect this kind of headwind to reoccur as we get into '26. We'll have normal kind of comparator periods. William Plovanic: Perfect. Okay. And then just on the gross margin dynamics, it's really been different, the reality or the outcomes versus what the expectations were at the time of the Greenbrook merger. And I'm just trying to figure out kind of what changed different than expected? And are there any onetime headwinds kind of hitting things today? How should we think about this? Steven Pfanstiel: Yes. I'll start with the general comment there. When I look at the margin, I really view it as we're kind of a mix of kind of a higher margin and a lower-margin business. If you look at the NeuroStar margins prior to the acquisition, go look Q3 year-to-date, you'd see that our GP margin was just under 75%, right in that mid-70% range. That cost structure for the NeuroStar business largely remains the same today. There's been no significant change there. So really, what's happened is we mixed in this Greenbrook acquisition with the clinic business, we know that's operating at a lower margin. So the big piece in my mind is, okay, as you bring these together, it's understanding that revenue mix and how much are you growing on the NeuroStar side relative to Greenbrook. So trying to bring that together, it's somewhat a math, but really the big picture is what is that revenue mix that's going to drive ultimately that gross profit margin. Now with that said, in the quarter, if I compare, say, Q3 to Q2, we saw a slight decline of about 70 basis points in our overall margin. I would say between Q2 and Q3, these were smaller items, really not significant long-term drivers. We had capital sales that were a little bit higher percent of the NeuroStar sales. We were still optimizing Buy & Bill in Q3. We had some carryover of patients where we know it's just not as advantageous from a reimbursement standpoint. And we had some revenue in Q3 from our Compass collaboration that we had revenue in Q2 that didn't repeat in Q3. If you just excluded that kind of episodic Compass revenue, that would account for 60 of the 70 basis point change we saw between Q2 and Q3. If I think long term, what I'm probably most excited about on the Greenbrook side is we see the opportunity to optimize SPRAVATO, making sure we stick with A&O where that makes financial sense and then expanding B&B where the reimbursement allows us to do that. With the volumes we're seeing, we have some pretty significant leverage that we'll see in the 95 clinics. And that is our focus, getting those 95 clinics as efficient as possible, where we'll be able to leverage provider fees, which are a big part of that cost of goods. But also we're leaning into some of the automation and other things that I think are going to help us continue to drive high patient growth and high treatments, but also do that very cost effectively where we're not having to add cost and in some cases, hopefully reduce costs. William Plovanic: And then lastly, as I think about some of the operational efficiencies you announced that you're finding even a year later after the deal, I was wondering if you can quantify that for us. Is this another $2 million, another $5 million in cost savings? Because I mean you're so close to that cash flow positive, I mean it's a pretty important cost savings. So I'm just trying to wonder if you could quantify that for us. And Keith, I know you'll be around a couple more quarters, so I'm not saying goodbye yet. Keith Sullivan: Thanks, Bill. Steven Pfanstiel: Yes, Bill, I don't think we've specified kind of the total full impact that we can have. We are leaning into, like I said, on a few places where we have -- automation is going to help us. I think the challenge here in the short term, maybe in the next quarter or 2 is there are some places where I think investment is going to make sense short term that's going to drive long-term efficiency here. So the clinic kiosks are one we've talked about that was cost to implement in Q3 and Q4, but that's going to make us more efficient from a scheduling collection standpoint. There's also additional automation we can do. We've just started leaning into patient text alerts. I know that's been around for a little while, but we're adding that into our arsenal as well. So there's going to be investments in Q4 and probably even into Q1 that I think will offset some of those gains. Obviously, we guided -- kept the guidance the same on OpEx. But I do view it as long term, there's still a significant opportunity for cost reduction. And I think we'll provide more detail on that as we get towards next year. Operator: Our next question comes from the line of Adam Maeder of Piper Sandler. Kyle Edward Winborne: This is Kyle Winborne on for Adam. Maybe just to try a little bit more on the treatment session revenue in the quarter. Even when you add back kind of the $2.2 million that was attributable to Greenbrook, it was still down year-over-year. And I understand some of the commentary there, maybe it's a little bit of a comp issue year-over-year with the inventory dynamic. Just curious maybe like what gives you confidence going forward that there's enough resources to kind of drive success in both this business and the Greenbrook business, just kind of to alleviate any worries that like there's a little bit of cannibalization going on there. Just any additional color would be helpful kind of as we think about the treatment session business going forward. Steven Pfanstiel: Yes, absolutely. I think the key piece, and we've added 2 slides to our investor presentation deck towards the back, but we are showing kind of quarterly trends on utilization for the NeuroStar system. And I mentioned that earlier. That's the key to me, are our systems being used more and more for specific treatment sessions, that utilization piece, the fact that we see it at around 11% year-over-year, and we expect to continue to see that type of growth, that gives me just a lot of confidence that we have momentum in this business, and it really is a comp issue that we're dealing with from last year. Otherwise, I wasn't seeing double-digit increases year-over-year, maybe I feel different. It's actually the same on the Greenbrook side. If you look, the clinic visits year-over-year are up almost 28% from Q3 a year ago. Again, that's an incredible momentum we have in the business, not just for SPRAVATO but TMS as well, continuing to grow. Those to me are the kind of the leading signals to say, hey, do I have a healthy business? Do I feel good about, hey, driving to increased revenue growth on the NeuroStar side, but maintaining a high revenue growth on the Greenbrook side. Those are the trends we look at, and that's the type of thing that gives us comfort that we're executing. We're still finding ways to take cost out but continue to drive top line growth. Keith Sullivan: This is Keith. I also think a good indicator for us is what we're seeing on both the RAM referral side and the provider connection. Both of those are gaining traction within the primary care network, and we are seeing a large number of providers who are interested in sending their patients to either a Greenbrook clinic through the RAM program or through provider connection. So I think we have seen that when a provider refers a patient in, they show up at a much higher rate than a patient that we get off of our marketing. So it's very encouraging to see the adoption on both sides. Kyle Edward Winborne: Super helpful color. And then maybe, I guess, last one for me on guidance, the $40 million to $43 million for Q4. I was curious if you could kind of just unpack the different businesses there. Just since this was a little bit below where we were and where the Street was for Q4, just would be helpful to kind of hear how you're thinking about the business trends for these different businesses looking out to the year-end. Steven Pfanstiel: Yes, happy to share a little bit more color. Obviously, we guided to $40 million to $43 million for the fourth quarter, which translates to $147 million to $150 million for the full year. This really reflects, I think, just a couple of items. The biggest piece is really the impact of the SPRAVATO mix between A&O and B&B. We continue to see strong total SPRAVATO growth, but that mix between A&O and B&B is something we have to monitor. In the third quarter, A&O represented about 86% of our SPRAVATO volume. That was up 300 basis points from where we were in Q2. So obviously -- and that's a big revenue driver. In fact, if we had held our percentage of A&O flat from Q2 to Q3, our Q3 revenue would have been $38 million. So that's about a $0.75 million impact of shifting to a higher amount of A&O. We know A&O provides less revenue on a per patient basis. But with A&O, we don't have to cover the cost of the drug, handling the drug, inventory. And as we said, there's just times where B&B just doesn't make financial sense, we don't get the right margin return. So this $147 million to $150 million really reflects that shift of strategy to making sure we optimize that B&B offering. That's something we spent a lot of time on this past quarter, as Keith mentioned, the additional geographies that we're going to launch B&B here or just starting to launch in Q4. We wanted to be very deliberate and take our time on that. I was actually proud in Q3 of how quickly we were able to pivot and shift the percentage of A&O higher, moving in those regions where we just weren't getting the right return on B&B. We moved that very quickly, much more quickly than actually I would have thought. So our updated guidance is really, I think, primarily driven by this assumption of how we see the A&O and B&B mix evolving for the SPRAVATO business. Other than that, I don't think there's a lot of impact from what we've been seeing on the NeuroStar side of the business. Q4 is generally a good growth driver on the NeuroStar side of the business. We do have a little bit of summer seasonality as you look at the month of July and into August. But there's also some positive capital seasonality we see here in Q4, just things lined up for people to do heavier purchases at year-end. So hopefully, that gives you a little color on the trends as we think about the fourth quarter and the full year. Operator: Our next question comes from the line of Daniel Stauder at Citizens. Daniel Stauder: First question I have was just on operating expense. It looks like you're making good progress on the G&A line, but I wanted to ask how we should be thinking about the sales and marketing spend, both as we contemplate fourth quarter and 2026. So from our understanding, the provider connection program should be a more efficient use of your marketing dollar, but just wanted to ask your broader thoughts on this spend and any strategy you have going forward. Steven Pfanstiel: Yes, Danny, I think on the OpEx, obviously, we kept that guidance flat to $100 million and $105 million. We don't break out the selling and marketing relative to the other. That would put our Q4 spend between [ 23% and 28% ] kind of for total OpEx there. I think we're going to continue to drive the cost efficiencies across the board. And those are in selling and marketing in addition to our other G&A pieces. In terms of Q4, I think I'd go back to what I said earlier is there's places where we're going to make investments in patient alerts, other technologies. We're doing some, I think, some great things doing more targeted marketing in several regions for the Greenbrook side of the business that I think could pay off. So for me, it's really a balance of there's some key investments we want to make that are going to drive long-term efficiency, but also things that are going to drive long-term top line growth. So I think as we get into '26, like I said, we'll give a little more color on some of the other efficiencies and cost reductions and where we see OpEx heading. But my commitment here is to make sure that we have great cost control. We're investing where it makes complete sense. But we still know that there are a ton of opportunities here for efficiencies via cost reduction. I just want to be really smart about how we evolve and make sure we put the right investments in place. So as we're reducing costs, we are not sacrificing top line growth. Daniel Stauder: Okay. Appreciate that. And just one follow-up for me. I wanted to ask on the adolescent indication. I think last quarter, you mentioned you saw an uptick in patient starts here and saw some pretty good trends. But I don't think you gave too much color on it today. So I was just curious on what you're seeing there in the third quarter and what we should expect in the rest of '25 and into '26. And also wanted to ask with this indication in mind, are you seeing more of a benefit from the provider connection program for these patients? Keith Sullivan: Thanks, Danny. This is Keith. So on the adolescent front, we are seeing an uptick every single quarter, and a lot of it is starting to come from the provider connection network where these primary care physicians really had no idea that there was another alternative for their younger patients with depression. So I don't think we're breaking out exactly how many patients that is, but it is good growth with it. We also mentioned on the call that we have another submission into the FDA that I think will also be meaningful as soon as we hear back from them. Operator: This concludes the question-and-answer session. I would now like to turn it back to Keith Sullivan for closing remarks. Keith Sullivan: Thank you for your interest in Neuronetics, and we look forward to updating you in the next quarterly call. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the IAC Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Christopher Halpin, COO and CFO. Please go ahead, sir. Christopher Halpin: Thank you. Good morning, everyone. Christopher Halpin here, and welcome to the IAC Third Quarter Earnings Call. Joining me today are Barry Diller, Chairman and Senior Executive of IAC; and Neil Vogel, CEO of People Inc. IAC has published a presentation on the Investor Relations section of our website today entitled Q3 Earnings Presentation. On this call, Barry, Neil and I will provide some introductory remarks referencing that presentation and then open it up to Q&A. Before we get to that, I'd like to remind you that during this call, we may make certain statements that are considered forward-looking under the federal securities laws. These forward-looking statements may include statements related to our outlook, strategy and future performance and are based on current expectations and on information currently available to us. Actual outcomes and results may differ materially from the future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent annual report on Form 10-K and in the subsequent reports we filed with the SEC. The information provided on this conference call and in the presentation should be considered in light of such risks. We'll also discuss certain non-GAAP measures, which, as a reminder, includes adjusted EBITDA, which we'll to refer to today as EBITDA for simplicity during the call. I'll also refer you to our earnings release, investor presentations, our public filings with the SEC and again, to the Investor Relations section of our website for all comparable GAAP measures and full reconciliations for all material non-GAAP measures. And now I will hand it over to Barry Diller. Barry Diller: Thank you. I'm very glad to be with you all today. I've been talking to investors lately and I more than get everyone's desire for more clarity about IAC's future. With the departure of our CEO and the spin-off of Angi, it's understandable that there are questions about our direction and our future. And I'm going to address those this morning, both in my remarks and in answering any of your questions. There are 2 core parts to IAC today. They're underpinned by a strong cash position and our balance sheet. They are people and our investment in MGM. Broadly, we have been, and we will continue to slim down IAC's assets and our overhead. We'll get lean and crystal clear that People and MGM are IAC until something else wildly compelling comes along. What we want to do is, first, reimagine People Inc. from defense to offense. Second, help MGM's excellent management teams simplify its businesses and change its pitiful multiple. Next, we'll divest our noncore holdings and reduce our overhead and finally, continue to be opportunistic on share purchases -- repurchases. It certainly seems to me that opportunistic is now, as is increasing our ownership of MGM. There's this huge discount in the value of our shares and a mind-blowing discount in the value of MGM. I mean it's selling at an emergency multiple. There's no chance that is going to continue to infinity. Time will correct this, but we won't let time stand still. So let's start talking about People Inc. As for transparency, changing the name from the awkward DDM was a good first step. We are the largest digital and print publisher in America. We way outperform our peers with our brands and our content and our technology. The market narrative says content is dead, given all the AI talk of disintermediation and Google's continuing drive to shrink the revenue it shares with publishers. It's all a giant overreaction, and it ain't our reality. Yes, there's a transition in Search. Yes, we're getting declining traffic from Google. But for some years, we've known these disruptions were coming, and we've been preparing and mastering for this rocky environment. Our results speak to that as Neil Vogel and Chris Halpin will soon detail. If you just play the old game, like most publishers and yes, you're in trouble. We've been doing the opposite for several years now, and we're transferring these great brands built over a century in the old media mold into digital powerhouses. We built out a massive modern content engine behind these brands that allows us to reach consumers wherever they are on our sites and apps, via social media, and news platforms through video, at events, actually everywhere. And for monetization, no one comes close to us. But beyond all that excellent execution from the great people at People, there is the evolution we're conducting beyond the hide-bound publishing industry. What we're going to do is invert the base publishing model. I've used the following examples to my colleagues like what if 5 years ago at Travel + Leisure, which has always had these great pictures every place in the world, covers vacation spots, just some of the best photography and best experiences. What if they thought of White Lotus and produced it? What if our Food & Wine magazine, knowing so much about all that, food and wine and stuff, they thought, why don't we invent Casamigos? Why didn't Investopedia, one of our sites, invent Shark Tank? There's just -- and the other thing is at People, we test an astonishing 16,000 products a year. It's just got to be a pony in that. It goes on and on from there to every property we've got and all these incredible opportunities to invert our content businesses into a whole stream of new businesses. If we get that going, there's really no ceiling to what we can create, and it is to create and not be on the back foot like almost every other publisher seems to be these days. That's what we'll be doing while we continue to execute on the day-to-day grind of today's publishing business. Neil has got more to tell you. But for the first time, since we've acquired these assets, I am giantly excited about their future, frankly, if we spent all our time on this one asset of ours, we can create a giant octopus of owned and operated companies and businesses for the future. All right. MGM, here we're dealing with the opposite of the fear of disintermediation. MGM is a giant hedge against disintermediation. I use that a lot, because it's in the genuine and proper -- because it really is the genuine and proper scare word for the disruption from artificial intelligence. For sure, AI will affect everything other than live entertainment and travel experiences, as there is no simulation that's going to get between MGM and its worldwide customers. Please think on this. These assets can never be disintermediated. Las Vegas can never be disintermediated and no one, nowhere is ever going to build the depth and scale of Las Vegas. It's now and it's forever going to be the entertainment capital of the world. It's got more infrastructure per square inch than anywhere else. Sports, gaming, performances from every big-time entertainer, the best food, on and on. It may ebb and flow given macroeconomic issues from time to time. But it's been a constant build over 30 years or 30 years really when Steve Wynn kind of reinvented the city. Las Vegas is actually almost 100 years old. And MGM's footprint in Las Vegas with 9 resorts is so violently strong that it has zero comparison. Back in 2020 at the height of COVID, we invested in MGM. We bought it right, understanding its extraordinary position in Las Vegas that had a superb management team, exciting digital opportunities and was building a truly most extraordinary resort in Japan. Our expectations have been realized. Revenue rebounded from the lows of the pandemic. Digital operations scaled to profitability and have bought back astounding 45% of its shares. Shockingly, despite all this, MGM share prices declined 29% since the beginning of '22. As management said on the last earnings call, if you back out the value of MGM's publicly traded holdings in MGM China and the value of its 50% stake in BetMGM, everything else in MGM is trading at less than 3x EBITDA. It's extraordinary to say the least, and it will not continue. Think about what we got at MGM. Just think about it without all the gnarling on this and that individual stat, 9 casinos, 40,000 hotel rooms, convention centers at scale that no one else has anywhere, restaurants, hundreds -- 400-or-so restaurants, 120 music halls, arenas, et cetera, upcoming F1 and more sports teams coming along in the next years. It just can't be duplicated anywhere. Our ownership at MGM is now at 24%, and I believe it will increase over time, both by our direct purchases as well as MGM stock purchases. I'm continually awestruck that the stock market seems to yawn, too focused as it always does, I guess, in the short term. But bears point to the economic overhang of Las Vegas after this massive post-pandemic bounce, the 50-50 JV structure at MGM, BetMGM and the fact that Japan is going to take some years before it comes online. When Japan comes online, the only casino in the entire country of Japan -- I mean, can you imagine? Well, all these people naysay in MGM, they're all wrong and time will certainly tell. On IAC capital allocation, which I telegraphed earlier, we purchased an additional $100 million of shares since our earnings call in early August, which brings our total year-to-date purchases to $300 million, which is 7 million shares or 8% or so of our shares outstanding. Our cash balances are over $1 billion and they will be enhanced when we sell these noncore assets. I don't intend for our capital sit idle, nor to be spent on acquisitions at high prices and speculatively questionable concepts. We've been inventing and building businesses at IAC for over 30 years. We had a greenfield for decades in Internet and e-commerce. That period has pretty much ended, but it doesn't take a birdbrain to be sure there are going to be opportunities in the future and in our future. But I'm patient. Well, I'm not really very patient about almost anything. But I'm cautious now of the pricing of assets, and I've got no intention of splurging. And if needs more saying, I will say it again, People and MGM have enough opportunity to fully engage us. So now Neil Vogel will give you more detail on People Inc. Neil Vogel: Thanks. Hello, everyone. I share BD's confidence and optimism around our business. We had a strong quarter. It was our eight consecutive quarter of digital revenue growth. The 9% digital revenue growth in Q3 was the second quarter in a row at 9% and high end of our guidance range. We've talked to you guys a lot about what drives our performance, and it remains consistent. Our performance resulted from 3 things: our iconic portfolio of brands, the scaled audiences we've built, and our superior execution around those 2 things. We've continued to focus, as we said we would, on diversifying our sources of revenue and audience in the quarter. And you can see the evidence of that and the strong results in our licensing and performance marketing revenue streams and our continued extremely strong off-platform audience growth. We've got real traction, and we're excited about it. Even with our investments in the quarter, we saw improved profitability, $72 million of digital EBITDA, 27% margins and 26% incremental margins around that. And we're positioned to grow as we evolve the business. And as BD said, we're doing this on our front foot, not our back foot, and we feel very good about that. So going to the next slide. Our core asset and advantage is our iconic brands. These are incredible brands with real gravitas, real cultural resonance and real history. People, Food & Wine, Travel + Leisure, household names. And each has scale that puts us near the top in audience size or at the top in audience size of every category that we participate. Fun fact, we reach over half the U.S. population each month with our assets. And importantly, for our brands and the type of content we do in an era where content feels increasingly artificial and manufactured and is, in fact, increasingly artificial and manufactured. We are authentic. And our audiences want more of what is authentic. You see it in our growing audiences, and we see it in the responses to our offerings. We have a real relationship between our audiences and our brands that's been built over decades. That is the core, and that is the underpinning of the opportunity to grow the medium business and do a lot of the things BD talked about. So if we go to the third slide of our presentation, an important concept is we are where audiences are and where audiences are going. Diverse sources of audience have become a real strength of ours and have been a real focus of ours for a longer time than it's been sexy. We've -- what we've been doing across audience categories is exactly what drove our growth over the last 8 quarters. And let's talk about our different categories, just so everybody understands what we do. The first is sort of the left side of the slide, which are owned and operated assets. These are assets obviously we own, they're scaled, it's diverse ways to reach audiences, everything from events to websites to e-mails to our direct-to-consumer properties. Off-platform, where our content lives on other platforms and increases the value of those platforms. It is where audiences are increasingly online and we're there with them. Apple News, YouTube, TikTok, our recent Feedfeed acquisition we'll talk about, et cetera, et cetera. And then the third category is addressable audiences. An addressable audience for us is how can we take our assets and our skills and extend them across the open web. What -- and we do that with something called D/Cipher, which we've talked a lot to you guys about. We can leverage our trove of proprietary first-party data around consumer intent and use that to target ads not only on our sites, but around the web. Our ads perform in a superior way to almost anything we can find online, and we can extend that across the Internet. This allows us to 4 and 5x the addressable market for our ad products and unlocks the ability for us to target CTV as well, which we're very excited about. D/Cipher is our fastest-growing product by revenue growth, our fastest growing by investment. Since its launch, it has grown every quarter sequentially and we're excited. It's going to be a meaningful contributor in 2026 and really expands what we can do with our audiences. Slide 4 outlines our audience trends. And let's specifically talk about changes in Google Search traffic and what that has meant to us. As you can see from the first chart on the left, and this is the first time we've shared this, the rise of AI overviews on the Google Search results page for searches that we compete has been rapid and dramatic. Google Search as a traffic source for our core brands has gone from 54% of our traffic 2 years ago even more than that, if you go back to the time we put Dotdash and Meredith together to 24% of our traffic this past quarter. The good news, and this is the good news is we've maintained our scaled audiences despite this because we were prepared for it, as BD said. We were very early to recognize changes in Google, and we are very early to recognize AI, and that is why every other meaningful source of traffic has increased for us over the past 2 years. We expect the Google Search challenges will continue, but believe our strategy and investments are going to enable us to maintain our overall growth. If you look at core sessions, as we mentioned at the Goldman conference a bit ago, we expect it to be down this quarter in the range of 4% to 6%. We're down about 6%. That was due to some tough comps. We lapped the Olympics last year and the lead up to the election and obviously, the Google challenges. This is the primary reason our ad revenue declined 3% in the quarter, which was very much volume-related, not rate-related, but we expect to return to growth in Q4 despite continued pressure on Google sessions. And off-platform use has been a bright spot. Again, it's something we've been focused on for a long time. And again, I can't say this enough times. It is where consumers are and it's where consumers are growing, off-platform audiences accelerated 66% year-over-year. Over 1/3 of this quarter's revenue is not based on user sessions and this is our fastest-growing revenue stream at 16%, our fastest growing -- faster growing than the sessions-based revenue. And I want to talk a little bit about our Feedfeed acquisition. Feedfeed, as I think most of you know now, is a leading food influencer network. It's the first time we have bought a capability and not just a media property, it just shows our focus on how we're going to monetize audiences off platform and how we're going to play in an influencer marketplace, which is increasingly important as a media mix, particularly when selling to advertisers. Social advertising is the fastest-growing sector, digital, and this really put some wind in our sails in that area. And we go to the last slide, we can talk about our execution, where we go from here. The first thing we should probably talk about is a bit of news that was in the release last night. Our AI conversations are heating up. As you saw in the release, we have an agreement with Microsoft to be a launch partner of what they're calling their publisher content marketplace, it is essentially a pay-per-use market where AI players directly can compensate publishers for use of their content on sort of like an a la carte basis. As we've said, we intend to have a seat at the table as these content markets develop, and we work directly with Microsoft. We are physically in the room with Microsoft, helping to concept this marketplace. The really interesting thing about this is Microsoft has committed to paying for content to support its AI efforts and Microsoft's Copilot is going to be the first buyer in this marketplace. It's a very strong endorsement of us to be in the room with them and a very strong endorsement of the publishing marketplace and the value of content to make AI that is of high value. If you zoom out a little bit and you take a look at the broader AI deal landscape, which is obviously of great interest to us and to many of you guys. There seems to be 2 types of deals happening in the world, sort of like this deal, the a la carte Microsoft type deal, which is a marketplace, a vibrant marketplace where people can buy content as they need it, or broad use deals like we have with OpenAI, kind of the all-you-can-eat deal, where people can access our content as much as they would like. We are very happy in either model. Both can be viable as long as our content is respected and paid for. We can work in either model. Now let's briefly talk about where we're focusing and we've talked about this on past calls as well. We are doing 2 things. We're trying to connect directly with our consumers and we're trying to connect directly with our advertisers and our marketers. In key investments and growth initiatives, we have a deep pipeline, again, as BD alluded to, of direct-to-consumer ideas that we are going to be trying, running down, and we're very excited about them. We call it inversion ideas around here, but these are new ideas, harnessing the power of our brands. We've done some of this already. We've discussed MyRecipes and the People app. We recently launched something called WeReview, which is a new commerce offering based on our great commerce relationships for product categories that our brands don't typically cover. And we've got real momentum around these direct-to-consumer properties. We're also very focused on editorial tentpoles that can drive multiple revenue streams, we just launched something called Red Plaid Café at Better Homes & Gardens, and most of you have heard of Best New Chefs and Travel + Leisure World's Best and Food & Wine. Moving down the page, we talked about Feedfeed. And off platform, we talked about D/Cipher and all the different networks that our content lives. And to close, we've made some hard decisions this past quarter. We laid off about 6% of our workforce. We did that essentially to free up capital to make all these investments and to be very mindful of our profitability goals. So to close, we had a strong quarter. Our brands are great. Our audience are strong. Our execution has been pretty good, and we got all the ingredients we need for a bright future. I'll now turn it over to Chris. Christopher Halpin: Thanks, Neil. I'll be efficient so we can get to Q&A, but there was some expense noise in the quarter, which on first blush cloud's results we were quite happy with. Just turning to Slide 11. Let's quickly walk through People Inc.'s third quarter financial performance. As Neil said, we realized 9% digital revenue growth at the top end of our previous range. Strong growth in performance marketing and licensing offsetting decline in advertising revenue. I'm sure we'll talk about that more in Q&A. Focusing on profitability. These numbers are pro forma excluding the 2 major onetime impacts in the quarter. $15 million of severance expense deriving from People Inc.'s reduction in force and a $5 million favorable gain for the buyout of a lease on attractive terms as we rationalize our real estate footprint. Reconciliations for both these onetimers are in the appendix. Digital adjusted EBITDA grew 9% pro forma in the quarter to $72 million. Incremental margins were in line with total margins. Continued cost management in the print division led to only a 10% decline in adjusted EBITDA and a 15% revenue decline, which we are happy with, and corporate costs declined 15% pro forma. So in aggregate, excluding the 2 onetime items mentioned before. People Inc. produced $75 million in adjusted EBITDA in the quarter, above the high end of our previous guidance range, which had specifically excluded the impact of severance. Looking forward, we expect digital revenue growth in the 7% to 10% range and the usual strong adjusted EBITDA margins in the fourth quarter. For the year, we've slightly lowered the bottom end of our adjusted EBITDA guidance range to $325 million to $340 million. Note, this excludes both the $15 million in severance and $41 million of lease gains year-to-date. The wider reflection under -- reflects -- the wider range, sorry, reflects some uncertainty around the continued disruptions in Google Search as well as approximately $4 million of legal expenses for our ad tech litigation at Google. The timing of this litigation has accelerated due to favorable judge's decisions and we view this spend as worthwhile given the magnitude of the sought damages underlying our claims. But it will have a negative impact on profitability in the fourth quarter this year and going into next year. Turning to Page 12. We wanted to highlight some large onetime items that impacted the quarter beyond those at People Inc. Care's profitability was impacted by $3.5 million of nonrecurring charges deriving from a lease impairment and severance. Additionally, our Emerging & Other segments swung to negative $20 million of EBITDA this quarter driven entirely by $21 million in legal expenses for litigation that concluded in the quarter related to a legacy business. We had included costs for this litigation in our guidance, but the final costs increased over prior estimates. Importantly, we would note that the total expense for this legal matter for the year were $34 million that future expenses related to the matter will be negligible and that the rest of emerging and other is profitable. Going to our company's Care as mix performance. Good news is consumer continues to return to growth, great work by Brad Wilson and team on product, marketing, and we're seeing improvement in sign-ups and retention. Unfortunately, enterprise business has slowed significantly over the past few months due to employers tightening their spend with Care. For the fourth quarter, driven by those enterprise pressures, we expect 7% to 9% revenue declines in Care. We expect consumer and have line of sight to return to growth in the second quarter next year and then the whole business to grow in the back half of the year. For the full year, we're modifying our adjusted EBITDA range for Care to $45 million to $50 million reflecting the aforementioned $3.5 million in onetime severance and lease impairment costs as well as a little bit from enterprise revenue headwinds. And then finally, turning to Page 14. As Barry said, we bought back $100 million in the quarter. We bought back $300 million, about 8% of the company year-to-date. As Barry said, buybacks continue to be a core part of our capital allocation strategy and our shares at present would seem to be even more attractively priced than earlier this year and there's a high bar on M&A. With that, let's go to Q&A. Operator, first question, please. Operator: The first question will come from Dayton Helfstein with Oppenheimer. Jason Helfstein: Barry, nice to have you on the call. I was going to ask about your current thinking on MGM's valuation, what the market is missing, but I think you've covered that pretty thoroughly. So I guess it's really, I guess, why would an investor want to invest in MGM through you? Why wouldn't they just buy it directly, intellectually wouldn't it inherently trade at a discount, like under IAC, and I guess you'd say, that's -- you get it cheaper if you buy it through IAC, but then over time, how do you close the discount and obviously, the Arab community is involved here and they find ways to make money. But I guess -- it just feels like fundamental investors are struggling with the IAC stock with MGM just such a big piece of the value. You can look out the stock trades. It literally mirrors the MGM stock price. So that's question number one, I guess, is just like what you can do to get kind of IAC to separate from the performance of MGM. That's question one. And then question do, Chris, how should we think about the onetime expense cleanup in 3Q? Is there more to come as far as in the P&L? Or should we think about just the numbers should be clean going forward? Barry Diller: Well, I mean I don't think the issue is separate from MGM. As I said before, IAC is now will be primarily People Inc. and MGM. One, by the way, is, as we talked about, we are -- this, I believe, and increasingly going to become this publishing content and businesses that come out of that. And I would think any acquisitions we make, I wouldn't say any, but certainly, acquisitions in line with that, we just made a very small acquisition, but a good one, I think what was it? Total purchase price was? Neil Vogel: We didn't disclose it, but not material. Barry Diller: Well, fine. So like around $10 million, whether we disclose it or not. There it is, disclosed, Neil. But, acquisitions in line with where we're kind of inverting this publishing business where we're going to create new businesses out of publishing. So that's kind of -- that is in the world of disintermediated media that I think we're going -- we are dodging it better than our competitors, and we're going to continue to dodge it on that side of it. And then we've got this absolute undisintermediated asset of MGM. The one is -- I wouldn't call it a hedge against the other. But there's -- you can certainly go out and buy MGM but if you buy IAC, you are getting our ambitions in publishing and you're getting MGM. And I think that, that is a very good balance. I don't think that's going to hold forever. I think new things are going to come out of that over time. But it is what it is. Well, you can buy MGM on its own, as they say, we're a twofer. Christopher Halpin: Yes. I think the -- I'll just quickly add to that, you are owning MGM, in our view, even cheaper through -- buying it through IAC than owning MGM. We fully support you buying MGM directly. We think both stocks as Barry said are outrageously discounted. But within IAC, you're getting as evidenced on the first slide on our private assets, all our holdings, People Inc., Care, Vivian, our little search business that keeps chugging, Daily Beast and other holdings at a discount at a negative value. So embedded, you have even more value upside and optionality in the IAC stock if you believe in MGM. With respect to the one-timers, and we do feel like we cleaned up a ton this quarter. we don't expect the severance or at least gains, we don't see anything of that continuing at People. We'll always be optimizing our cost structure, but large onetime charges at People, we see a clean path forward. Care, the lease impairment and severance there were onetime. And then on the emerging and other legal case, that is fully behind us. And as we said, we expect any future costs associated with that to be negligible. We also had an adverse ruling on a real estate dispute that showed up in other expense and income, and that was settled through previously escrowed funds. So we really cleaned up a lot in the quarter. Looking forward, the only thing in my mind that I'd highlight would be the Google litigation, where we said we're spending about $4 million this quarter and expect to spend a little bit. But in that case, we are plaintiff seeking damages. So again, it's what we believe is an ROI... Barry Diller: And the range of damages, potentially. Christopher Halpin: We're seeking hundreds of millions of dollars in damages. Barry Diller: Yes, from any point of view that we've looked at, we went into this and said, is it really worth it for us to do it. It was almost as if, because I don't like lawsuits, if we actually couldn't have done it, I wouldn't have done it, but we had no choice. There are hundreds and hundreds of millions of dollars that are potentially to be gained here. Operator: The question will come from Cory Carpenter with JPMorgan. Cory Carpenter: Maybe for you, Neil, just thanks for the background on People. You had a busy quarter, the risk, the Feedfeed acquisition, the Microsoft AI deal. Maybe pulling all together, just latest thoughts on the state of the business and what this indicates about your kind of view on the future, recognizing you covered some of that already. And then I want to follow up on the People litigation, which you just referenced. What's the update on that, Chris, I think you mentioned there was another ruling that has indications that came through recently. So how should we think about that going forward? Neil Vogel: I'll go first, and then I'll pass it to Chris. I think in aggregate the things you mentioned are all reasons for confidence and optimism. The first is the Microsoft deal, which we talked about the mechanics of it. But I think what it is, is an indication that these deals are happening now. this summer, we started to block AI crawlers. It was very effective. It brought almost everyone to the table. I expect, and I think the punditry also expects there will be more deals happening. Hopefully, we'll have some news for you over the coming months and quarters over deals, that could be both sort of the all-you-can-eat deals, any a la carte deals. So we feel very good about that. And the value of our content is becoming clear to people. That is very important. Second Feedfeed is just an evidence of how well we're doing off-platform and how important that is to our future. We're going to continue to look to ways to monetize these audiences. And I think it's worth noting, and it's something that Chris has talked about before. Our relationships with platforms like Instagram and TikTok and YouTube are very different than our relationship with Google. Google, took and use our content and then had to send traffic out to us, right? So there's an inherent conflict built into that, that they lose value in theory when they send us traffic. These other platforms, our content makes better. We make excellent content, excellent video. We have very close relationships with these, and our content makes these platforms better. So the state of the relationships and nature of the relationships is stronger, and it allows us to do things like Feedfeed, and I think there'll be more things like that in the future. Christopher Halpin: And then on litigation, just to give the background, the lawsuit builds on the government's antitrust case against Google from an ad tech perspective, where Google was found to have monopolized the ad server and ad exchange markets, harming online publishers. We, Dotdash and Meredith combined into People Inc. today are and were one of the largest of those publishers who were harmed. And we, like several other publishers, brought suit to hold to Google accountable and recover the lost revenue resulting from Google's anti-competitive behaviors. Now damages will be proved in the litigation, but we seek to recover hundreds of millions of dollars and damages. And to your question, Cory, you likely saw the recent ruling in favor of the Gannett and Daily Mail cases where the court ruled that the publishers in those cases don't need to prove again what the government has already proved that Google engaged an anticompetitive conduct. Just what are the specific claims and the damages there. The timing of our case was accelerated by our judge, which we view as a positive. So we now expect to spend about $4 million in the quarter and continue to spend in the coming quarters after that, total magnitude of spend or the pace of it is hard to predict. We'll keep you guys updated. But we believe, as Barry was saying, the spend is more than warranted by the opportunity to recover significant damages we believe we're owed. Barry Diller: That is demanded, given what's there for the -- given what the government has already found, it's not just a question of saying, totaling up all our stuff. And I think just sending out checks, but I simplify things. All right, let's go on. Operator: Next question will come from James Heaney with Jefferies. James Heaney: Just can you give us an update on what you're currently seeing in the macro environment so far in Q4 across the different IAC businesses? And then I had another one. Barry Diller: I think just the macro environment, everything is good at the middle and upper end, not so great at the lower end. And you can make any prediction you want about what's going to happen in the future. But -- it's been this for a while. Again, for exogenous event, I suspect that will continue for a while. Christopher Halpin: Yes. I'd say if you look at our performance marketing and credit to Neil and his team, but it's growing strongly. The consumer -- the U.S. consumer is hanging in there and spending. It is skewed to the high end. On the Care enterprise side, we have seen corporations belt tightening, probably due to a bit to reducing head count and also due to pressures on health care costs and others. So we have seen some pressures on the corporate benefit side. But broadly, things seem, in the macro economy seem pretty good. Neil Vogel: Yes. I mean I'll just add one thing. I think looking at the ad markets in the macro sense, I think it's in line with what BD said. I think if you had a 10-point rating scale, they're probably at 6, healthy moving ahead, but there are challenged categories. The challenged categories aligned with what BD said, CPG, food and beverage, there's real momentum in some of the higher-end categories like travel and tech and some other things. But I think the ad market is solid, not fantastic, but solid. Barry Diller: I can tell you for travel... James Heaney: And maybe just -- sorry, go ahead. Barry Diller: No, I was just going to add. I'm also involved as the Chair of Expedia and Expedia in the general travel market with some exceptions, Canadian travel to the U.S., some other little things, but Travel is exceptionally strong. And we've been double-digit growing at Expedia now for, I don't know, 12 quarters, and it only accelerates. So anyway, enough on all that. Next question. James Heaney: And then the second part of my question was just around capital allocation going forward. We saw the $100 million buyback in the quarter. Curious how to think about that going forward as you kind of think about potentially M&A or other uses of cash? Barry Diller: Well, I mean, I kind of think I talked about that. I don't know what we call it, a signal or a giant flag, green flag going down or saying, we're opportunistic. The opportunity is now. We're going to be buying stock in IAC. We're going to be buying stock in MGM. That's what we're going to do with our capital at this point as far as acquisitions go. I've said before, I said it earlier, a lot of things are too pricey. And we're not anxious. We're always interested. We're always curious. We're always digging around and seeing what's on the -- what's around the next corner, which we've been doing fairly interestingly for 30 years. I expect there'll be more of that, but I ain't out there banging at things that are overpriced, of which many are. We are wildly underpriced. So I want to stay on that track. Operator: Your next question will come from Eric Sheridan with Goldman Sachs. Eric Sheridan: Maybe 2 with respect to People Inc. Can you talk a little bit about the building blocks of growth, both the headwinds and the tailwinds that you're seeing with respect to digital revenue that inform your forecast for Q4 and how we should be thinking about those broadly going into '26 and the second part of the question that maybe feeds back into it would be how should we be thinking about the growth trajectory of off-platform traffic and revenue for People Inc. and the resulting margin impact from that traffic and revenue going forward? Neil Vogel: I'll take a crack at the first and then I'll hand it over to Chris. I feel like going forward, I think we're in a pretty good position. I think we expect a solid Q4 despite the session challenges. The session challenges is what I would say is the primary headwind in the business. Ads will improve. We're a very good sales team. We have very happy clients. We have very good premium sales, off-platform is going to improve. D/Cipher is going to start to kick in. Commerce will continue to be strong, although due to the timing of some payments, it might not be as year-over-year strong in fourth quarter, licensing continues to perform and be strong. Our brands are really resonating. They're resonating on our own assets, including a lot of the new stuff like People app and the events we're launching and all this other stuff, they're still resonating with sessions. It's still a big number, even though it's not growing. And again, it's really working off platform, and it's really working in all these other places. So we feel really good about the formula for Q4. I think it's going to be the same formula for 2026 roughly. The mix is all going to change. Again, I think in 2026, you're going to see real improvement -- real growth, not just improvement in D/Cipher+, and some other things and get some real traction on some of these new things we've launched. And we'll go to Chris. Christopher Halpin: Yes. And to talk about margins, there are multiple different components of our off-platform traffic, including Apple News+, social media, as Neil said, D/Cipher+, they have different margins, but I think for simplicity and this is, in many ways, probably a modeling question that you guys would have as you forecast higher growth in off-platform. For simplicity and conservatism, incremental digital EBITDA margins on off-platform, you can assume are neutral to slightly accretive to our aggregate annual digital EBITDA margins of plus/minus 28%, 29%, maybe a little more. So I would think of it as around 30%, maybe a little bit more of incremental digital adjusted EBITDA margins on off-platform and then on platform, as we've said before, is higher. Operator: Next question will come from Ross Sandler with Barclays. Ross Sandler: Great. Just following up on that last question, Neil, like there's some crazy forecast out there. I think Forrester just put something out that said Open Web display is going to decline 30% next year because of the shift to Gen AI. I doubt that's what's going to happen. But as you're talking with agencies and brands about outlook, what are you hearing? And how should we think about the context of People growth relative to the industry in '26. And if we strip out like the impact from Google, which is down to mid-teens of revenue from that traffic, is the rest of People going to grow in line, faster or slower than the broader Open Web display industry? Neil Vogel: What I'll say is we are not hearing down 30%. We -- again, we are the biggest publisher in America. We have scale. We have terrific brands. We have a history of ad performance. We have great assets. We're launching a whole host of new things. There's a lot of energy around everything we're doing from events to off-platform to influence things. So we're actually hearing the opposite. There's a lot of energy around our business and our ability to reach audiences. I can't speak to the long tail Open Web, I don't know where this information comes from, but it is inconsistent with what we are hearing. Look, we feel pretty good about next year. And I think when you get the mix of brands and trust and the new things we're doing and our history of performance and our history performance for advertisers, I think we're much more likely to be share takers in this market than anything else. Barry Diller: We have been, and going to be. I mean, you can narrow at this or that little stat or that, whatever. But this business, for the last, I don't know, how many quarters that we've been growing, and despite everything that has been thrown at it, this People Inc. and this group that Neil has -- and how many people you got in this thing? Neil Vogel: 3,500 plus. Barry Diller: I mean, they've been executing just in such an outstanding way through this while at the same time, we're going to build new businesses inside and out of all the content we produce and all the knowledge that we've got in almost every sector. How many books do we publish? Neil Vogel: I mean we've got 40 brands. We're actually in print. We have 6 books still in print. Barry Diller: How many print? Neil Vogel: 6. Barry Diller: How many... Neil Vogel: More than 200 million actual books get printed a year. Barry Diller: Right. That sit on People's tables that -- you look at Southern Living, which I see all over -- just been in the South. I was in Savannah last weekend. It's all around. Every place you go, you see Southern Living, it has such great influence, but not only from the south, but beyond it. So you've got all these things cooking. And as you say, I don't know, how do you say it any better. You say you're confident the fourth quarter and your projections for next year are solid and good. Plus, we're building all these new businesses. It seems to me like pretty good. Operator: Next question will come from John Blackledge with TD Cowen. John Blackledge: Two questions. First, could you talk about corporate costs and how we should think about trajectory into the fourth quarter? Barry Diller: I can think about corporate costs going lower. Christopher Halpin: Keep going, John. John Blackledge: Yes. In the fourth quarter in 2026. And then second question is, how should we think about the timing of slimming down the IAC's assets? And should we consider everything outside of people and MGM is noncore? Barry Diller: Okay, Chris, you don't want to answer. Christopher Halpin: On corporate overhead, we talked about how we've been rationalizing over the year. Right now, we're at a run rate of basically $22 million to $23 million on a quarterly run rate basis. That is -- there's a little bit of onetime noise in the last quarter that we're still working through. As we've said before, Q1 was highly elevated due to spin costs, CEO separation, et cetera. We expect to be in the mid-80s range from there and we'll -- next year, and we'll continue to look to rationalize costs. Barry Diller: Yes, it's going to come down. What was the second thing? Christopher Halpin: Just the approach to exiting or strategic... Barry Diller: Look, we're not going to do it, dumbly. I mean we're going to get good prices for everything that we've got. But we are going to -- anything, frankly, other than really -- other than not really, other than MGM and People, those are the core, right? No more. So -- and we've got several other businesses that have real value in them. Christopher Halpin: Yes. We know we have strategic assets and we receive inbounds from time to time. Barry Diller: So timing, 3 months, 6 months at the most. And then we'll probably have another, I don't know, $1 billion or so of capital. Neil Vogel: Well, we're not going to speculate too much, but we will... Barry Diller: I said around that. I just speculated. Operator: Your next question will come from Dan Kurnos with The Benchmark Company. Daniel Kurnos: Chris, can you maybe just talk a little bit about on the run rate savings from the RIF. How much do you expect to reinvest, how much will flow through to the bottom line? And then Neil, I guess, sort of a 2-parter. I've asked you before a lot about communitizing your properties. Obviously, Feedfeed looks like more of a move in that direction. And I still think people don't get the value of the off-platform interactivity that you're building. So is there a way to throw more gas on that fire and are there any creative new channels to expand distribution on? Christopher Halpin: I'll do savings first. So we said it's about $60 million of run rate savings. I think you can think about half of that being realized in profitability and margins than half being reinvested in high ROI digital activities. We've called out previously the drag on our incremental margins that have been occurring Q2, Q3 with our investments in D/Cipher+, MyRecipes and People app, et cetera. So we do have these investments we can make as well as content. We're conservatively saying we'll reinvest about half as we go, but we'll be thoughtful as we look at the performance of the market and our growth to make sure we drive profitability and margins using the RIF savings. Neil Vogel: Yes. So I think your question is how do we pour gas on some of the off-platform stuff we're doing. And what I would say is we're really focused on doing that. Our brands are uniquely permission to play in these places. People love them. And again, I go to, in a world where things are fake and artificial and no one know who's made what. When you see things from our editors, our influencers, our brands on social. The response is great, and the stats of them are great. Like for instance, last night on Jimmy Fallon, we announced this year's Sexiest Man Alive, the 40th Sexiest Man Alive. That will be... Barry Diller: Who is it? Neil Vogel: Jonathan Bailey from Wicked. I think it's a great choice. I wanted to take an [ Barkley ], but they gave me... Christopher Halpin: You guys were 2 finalist, I wasn't in the running. Neil Vogel: But -- so -- but where you will see that today is there will be so much in and around social on that from just a simple release to almost like reality type event type buildups for how we got here. Another great example of what we're doing is in, InStyle, we launched a series as we called it, The Intern, which is like a mock reality show, 3-, 4-minute episodes. We are getting millions of use per episode on this, and it's a bit of a phenomenon among like the Gen Z female crowd, and it's been a huge hit. We are -- if you're in the target market of our brands, I am very sure and you're active on social, you will see us everywhere in all kinds of ways. And it's part of what Chris just talked about, we are pivoting our resources to where the audiences are, and you're going to see much, much more from us here. Operator: Your next question will come from Youssef Squali with Truist. Robert Zeller: This is Robert on for Youssef Squali. Just one, sorry if I missed this. Curious what the deal with Microsoft looks like, how long it's for and the unit economics there. And any prospects for new deals on any of the other businesses? Neil Vogel: I'll answer it as quick because we already covered it. Yes, I anticipate there will be new deals coming forward. And two, we didn't disclose any terms of the Microsoft deal. Those are confidential. But again, it is a pay-per-use marketplace. So it's a little more a la carte where something like our open AI deal is much more all-you-can-eat, much more of a blanket deal. Operator: The next question will come from Stephen Ju with UBS. Unknown Analyst: This is Vanessa on for Stephen. So just a couple of questions, the LLM that have been designated as high-value content seems to be changing and publishers are making the change in real time to adjust away from traditional SEOs. So can you just talk more about the steps that you have taken so far. And the other question is in the deck, it mentions that Google search now accounts for 24% of core sessions. And it seems like the rate of decline has been accelerating, but at the same time, it's also de-indexed from being half your traffic from 2 years ago. So the headwinds have to dissipate over the coming quarters. So can you talk more about the steps you're taking to control what you control, especially as it regards to the traffic you're getting from elsewhere? Neil Vogel: So let's do the second question first. I didn't totally understand the first question. So I'll make you reask that after I answer the second. Yes, you did -- I mean, you did the math right. We have -- we're down from at the time of our merger, 60-ish percent of our traffic came from Google Search and now it's down to 24%. So we can see the other side of this. We know what the world looks like, where Google is a very limited source, I don't know where it ends. It's definitely not going to 0. I mean we still get traffic from searches where there is an overview. So we still do pretty well, and they're not in every category. So I don't know where it ends up, but we're confident we can deal with it. In terms of -- I think what you're asking is how do we fill the sessions gap to keep sessions healthy as part of our mix. That's a combination of a whole bunch of things. It's our own e-mails, it's Google Discover, which is their version of Apple News. It's traffic from direct, it's referral traffic. It's traffic from our direct consumer things we've built, like MyRecipes and some of the People app stuff. There's a whole host of things we're doing to keep sessions healthy that we'll continue to do. Can you ask your... Barry Diller: No, no. That is enough. Operator: Last question will come from Matt Condon with Citizens. Matthew Condon: I'll just ask one here. Barry, you talked about launching or standing up businesses based on People's content and brands. Just what stage are we in today with that? Would we expect these products to be launched during the coming quarters. Barry Diller: I don't know about coming -- well, certainly, quarter-by-quarter. What I can tell you is, Neil can talk about this, but we started this process this inversion idea, a couple of months or 2 ago, we're going like book by book as deep as we can in sessions where given how much we know about these things. it seems to me, at least probable that we'll be able to invent, take out of that knowledge, new products that we own, whether they're new shows, as I raved on White Lotus. But it seems just very obvious to me. If you got travels, you know so much about travel and you're sitting around looking at all those pictures and you say, well, you know a show about a resort, not hard to think about. It's just the skim of the surface, in every one of the categories. And we cover, I mean, almost every category of content. So looking at our content, as a way to give out of it, all sorts of new things that we can start that we can own seems so juicy to me. We can spend -- I mean, the next forever, just doing that deep and wide. So I would say it isn't going to come kind of next quarter, but -- we're in it now. Neil Vogel: But I want to be clear, we do -- we have a roster and pipeline of ideas that are like the People app and like MyRecipes ideas that are a little closer to fundamentally what we do now that we are going to roll out over the coming quarters. There's not going to be a quiet period. These ideas are coming up. Barry Diller: The fundamentals and all the stuff that is natural has been done, is being done, will come out in the next quarters. The stuff I'm talking about, which is real invention here, I think, is going to take a while. But that's why I think it's got -- I think there's more future in this. I talked earlier about the greenfield of e-commerce that we've exploited for 20-some-odd years. I think there's greenfield here from now to forever. Christopher Halpin: Because of the strength of the brands. Barry Diller: Because of how much -- what's in -- look, just in the initial sessions, Neil, that we had with our colleagues, we just came up with this, that and the other... Neil Vogel: It's incredibly energizing to have these brands that have permission to do these things, and it's fun and it's going to be exciting. Barry Diller: Yes. But -- so I really do think and I don't think I'm overhyping it, but this inversion concept of dealing with our brands in this way, while we are out competing everybody else in publishing and chugging through to the other side of the search -- all these search downtrends, I think that just puts us in a just fantastic issue. Anyway, with that, thank you, Neil. Thank you, Chris, certainly. And glad to be somewhat noisy with you on this call, and I hope that I will be able to continue that. So thank you all for your time. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to Gartner's Third Quarter 2025 Earnings Conference Call. This call may be recorded. I would now like to turn the call over to David Cohen, Senior Vice President of Investor Relations. Please go ahead. David Cohen: Good morning, everyone. Welcome to Gartner's Third Quarter 2025 Earnings Call. I'm David Cohen, SVP of Investor Relations. [Operator Instructions] After comments by Gene Hall, Gartner's Chairman and Chief Executive Officer; and Craig Safian, Gartner's Chief Financial Officer, there will be a question-and-answer session. Please be advised that today's conference is being recorded. This call will include a discussion of third quarter 2025 financial results and Gartner's outlook for 2025 as disclosed in today's earnings release and earnings supplement, both posted to our website, investor.gartner.com. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA with the adjustments as described in our earnings release and supplement. All contract values and associated growth rates we discuss are based on 2025 foreign exchange rates. All growth rates in Gene's comments are FX neutral, unless stated otherwise. All references to share counts are for fully diluted weighted average share counts unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2024 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Now I will turn the call over to Gartner's Chairman and Chief Executive Officer, Gene Hall. Eugene Hall: Good morning, and thanks for joining us today. Gartner's Q3 financial results were ahead of expectations. The macroeconomic environment remains dynamic with DOGE, changes in the federal government and evolving tariff policies. We made operational adaptations that are starting to yield results. We continue to deliver great value to our clients. Enterprise client retention remains strong and contract renewal rates improved from the second quarter. Finally, we repurchased more than $1 billion of stock in the quarter, reducing share count by 6% year-over-year. AI will be one of the most innovative and pervasive technologies in history. We're seeing unprecedented demand for help with AI, and we're meeting that demand. We're helping tens of thousands of clients in thousands of enterprises across every function, every size enterprise, every geography and every industry determine how best to use AI. We've developed indispensable AI insights that are captured in more than 6,000 documents, and our insights are growing every day. To put this into perspective, if you read 10 documents per day, it would take about 2 years just to get through our current library. While enterprise leaders are excited about the prospects of AI, they continue to chase returns on those investments. We've cataloged more than 1,000 AI use cases, spanning roles and industries that outline which have the highest ROIs and why. These are indispensable insights. In addition, our entire client base has access to our AI-driven tool, AskGartner. AskGartner enables quick access and generates in-depth summaries of our business and technology insights. We continue to accelerate and enhance AskGartner's capabilities at a rapid pace. Our insights are derived from Gartner's vast pool of proprietary data that is unique, highly differentiated and not available in the public domain. This includes data from Gartner IT Key Metrics, which is the industry's largest key metrics database, our vast online peer network of more than 139,000 unique users, our more than 500,000 one-on-one client discussions annually and our more than 3 million ratings and reviews of technology and software services. All of this and more uniquely positions Gartner as the best source for helping clients determine the right AI tools, applications and benefits. We're also leveraging AI to improve productivity and effectiveness internally. Gartner's data science team is using our sophisticated proprietary AI model to quickly and systematically determine the topics of greatest interest to our clients. We've provided our experts with advanced proprietary AI tools for content production. The amount of content published per analyst is up 31% year-over-year. Over time, we expect this will have a meaningful impact on retention, and we've reduced our average publishing time by 75% compared to last year. This allows us to respond to changes in the market faster than ever. Our service delivery teams are leveraging our AI tools to be better prepared for client discussions, and our sales teams are using AI to hone their selling skills. As we continue to navigate the dynamic external environment, our adaptations are beginning to yield results. Client engagement is a leading indicator of future retention. Client engagement was up in the quarter. Client retention is higher than last year. Productivity of our business development executives who sell to new enterprises is strong. And across GTS and GBS, our new business pipeline is up double digits. Gartner Conferences is also an important indicator of client value. Licensed users who attend our conferences retain at higher rates. Prospects who attend our conferences convert to clients at higher rates. Attendee ratings of our conferences are reaching all-time highs. I recently returned from our 35th Annual IT Symposium/Xpo in Orlando, Florida. We hosted more than 7,000 technology leaders over the 4-day in-person conference. You can't find this many senior technology executives gathered together anywhere else. Attendance at the conference was up 8% year-over-year, excluding the U.S. federal government in Canada. Attendees gave the conference a very strong Net Promoter Score of 75. About 1/3 of the nearly 600 sessions on site covered the topic of AI. Our opening keynote framed the AI journey across 2 dimensions: AI readiness and human readiness. Gartner analysts discussed how CIOs can navigate vendor choices, reimagine the workforce and redefine organizational identities to be agents of change. It was our highest rated keynote ever. Looking ahead, advanced exhibitor bookings for our 2026 conferences are strong. In summary, while the macroeconomic environment remained dynamic, Gartner's Q3 financial results were ahead of expectations. We made operational adaptations that are starting to yield results. We continue to deliver great value to our clients. Enterprise client retention remains strong and contract renewal rates improved for the second quarter, and we repurchased more than $1 billion of stock in the quarter. AI will be one of the most innovative and pervasive technologies in history. Gartner is the best source for clients to determine the right tools and applications for their environments. And of course, we continue to help in other mission-critical priorities such as cybersecurity. We're also leveraging AI to improve productivity and effectiveness internally. compelling client value, strong demand, operational adaptations and modest normalization of the external environment give us a clear path back to long-term sustained double-digit growth over the medium term. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian. Craig Safian: Thank you, Gene, and good morning. Third quarter contract value, or CV, grew 3% year-over-year. Excluding the U.S. federal government, CV grew 6%. Financial results in the third quarter were better than expected, and we are increasing our guidance for the full year. Our client value proposition is unique and compelling. Our Insights products are subscription-based. They help senior operating executives make better decisions on their journeys to address their strategic priorities. Because we sell to leaders across all major enterprise functions in every geography, industry and company size, we have a long runway for growth in a large addressable market. We see a unique opportunity to create long-term value for our shareholders by repurchasing our stock at an attractive price point. In the third quarter, we bought $1.1 billion of stock. We will generate more free cash flow and have fewer shares outstanding over the course of the next several years. This, coupled with accelerating growth in 2026 and beyond, will create significant value for shareholders. Third quarter revenue was $1.5 billion, up 3% year-over-year as reported and 1% FX neutral. In addition, total contribution margin was 69%, up 90 basis points from last year. EBITDA was $347 million, up 2% as reported. FX was a 3-point benefit in the quarter. Adjusted EPS was $2.76, up 10% from Q3 of last year. And free cash flow was $269 million as our year-to-date performance remains strong. During the quarter, we made a change in our segment reporting structure. Most of the Insights non-subscription revenue is now reported as other revenue in the P&L. Insights, which is almost 100% recurring subscription revenue remains our largest, most profitable operating segment. In the earnings supplement, we provided several quarters of historical data for the new Insights segment. Insights revenue in the quarter grew 5% year-over-year as reported and 4% FX neutral. Third quarter Insights contribution margin was 77%, up 30 basis points versus last year. Contract value was $5 billion at the end of the third quarter, up 3% versus the prior year. Excluding the U.S. federal government, CV growth was about 270 basis points faster at around 6%. Global NCVI in the quarter, excluding U.S. federal government, was positive $62 million, a sequential increase of $49 million from Q2. This $49 million improvement is larger than the sequential improvement from Q2 to Q3 last year. CV growth was broad-based across practices, industry sectors, company sizes and geographic regions. Across our combined practices, all the industries, except public sector grew at mid-single-digit rates. Energy, transportation and banking led the growth. CV grew at high single-digit or mid-single-digit rates across all commercial enterprise sizes. We drove double-digit or high single-digit growth in more than half of our top 10 countries. We had more than $240 million of new business in the quarter, which is down about 4% year-over-year, excluding U.S. Fed. Outside of U.S. Fed contracts, in-quarter renewal rates improved from Q2. This largely reflects benefits from the adaptations we've been making. Nearly all of our U.S. federal contracts will come up for renewal during 2025 with more than 85% having transacted in the first 3 quarters of the year. Dollar retention year-to-date was around 46%. At September 30, we had approximately $165 million of U.S. federal CV. Global Technology Sales contract value was $3.8 billion at the end of the third quarter, up 2% versus the prior year. Excluding the U.S. federal government from both periods, GTS CV grew about 300 basis points faster or 5% in the quarter. Tech vendor CV increased mid-single digits with small tech vendor growth continuing to improve. For tech subsectors unaffected by tariffs such as software and services, the CV growth was low double digit or high single digits. Wallet retention for GTS was 98% for the quarter. Excluding the U.S. Federal business, wallet retention was more than 100%. In-quarter contract renewal rates improved from Q2 to Q3. GTS new business was down 12% compared to last year and down about 4%, excluding the U.S. federal government. GTS quota-bearing headcount was up 1% year-over-year as we continue to optimize our territories. Our regular full set of GTS metrics can be found in our earnings supplement. Global Business Sales contract value was $1.2 billion at the end of the third quarter, up 7% year-over-year. Excluding U.S. federal government, GBS CV grew about 160 basis points faster at around 9%. Half of the major GBS practices grew at double-digit or high single-digit rates. Growth was led by the sales, legal and finance practices. GBS NCVI was positive $17 million in the third quarter. Excluding the U.S. federal government, GBS NCVI was positive $25 million. Wallet retention for GBS was 102% for the quarter. In-quarter contract renewal rates, excluding the U.S. federal government, improved from Q2 to Q3. GBS new business was down 10% compared to last year. Excluding the U.S. federal government, new business was down about 4%. GBS quota-bearing headcount was up 5% year-over-year. As with GTS, our regular full set of GBS metrics can be found in our earnings supplement. Conferences revenue for the third quarter was $75 million. On a same conference basis, revenue growth was around 6% FX neutral. Contribution margin was 37%. We held 10 destination conferences in the third quarter as planned. Q3 consulting revenue was $124 million compared with $128 million in the year ago period. FX was a benefit of about 200 basis points in the quarter. Consulting contribution margin was 29% in Q3. Labor-based revenue was $94 million. Backlog at September 30 was $195 million. We had one large project which slipped out of Q3, affecting revenue and backlog. In contract optimization, we delivered $30 million of revenue in the quarter, up 12% versus Q3 of last year and 11% FX neutral. Our contract optimization revenue is highly variable. Consolidated cost of services was about flat year-over-year in the third quarter as reported and down 1% FX neutral. SG&A increased 7% year-over-year in the third quarter as reported and about 6% on an FX-neutral basis. SG&A increased in the quarter compared with 2024 as a result of headcount growth and 2025 merit increases. EBITDA for the third quarter was $347 million, up 2% from last year's reported. FX contributed almost 3 percentage points. We outperformed in the third quarter through modest revenue upside, effective expense management and a prudent approach to guidance. Depreciation in the quarter of $31 million was up 6% compared to 2024. Net interest expense, excluding deferred financing costs in the quarter was $15 million. This is favorable by $2 million versus the third quarter of 2024 due to lower interest expense and higher interest income on our cash balances. The Q3 adjusted tax rate, which we use for the calculation of adjusted net income was 23% for the quarter. This compares to last year's rate of 26%. The tax rate for the items used to adjust net income was 14% for the quarter. Adjusted EPS in Q3 was $2.76, up 10% compared to Q3 last year. We had 75 million shares outstanding in the third quarter. This is an improvement of about 3 million shares or approximately 4% year-over-year. We exited the third quarter with 73 million shares on an unweighted basis. Operating cash flow for the quarter was $299 million. This compares with $291 million in Q3 2024, adjusting for last year's $300 million of conference cancellation insurance proceeds. CapEx was $29 million, up about $4 million year-over-year. This was primarily due to real estate-related costs and in line with our expectations. Third quarter free cash flow was $269 million. This compares with $265 million in Q3 2024, adjusting for last year's insurance proceeds. Free cash flow on a rolling 4-quarter basis was 137% of GAAP net income and 76% of EBITDA. As we previously noted, there were several items that affect rolling 4-quarter net income and free cash flow, including cash taxes on the insurance proceeds in Q4 of 2024, 2 real estate lease termination payments and tax planning benefits. We also had a noncash goodwill impairment charge in Q3 2025. This relates to the Digital Markets business, which now sits in the Other segment. Adjusting for these items, free cash flow on a rolling 4-quarter basis was 20% of revenue, 83% of EBITDA and 154% of GAAP net income. At the end of the third quarter, we had about $1.4 billion of cash. Our September 30 debt balance was about $2.5 billion. Our reported gross debt to trailing 12-month EBITDA was well under 2x. Our expected free cash flow generation, available revolver and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy. Our balance sheet is very strong with $2.1 billion of liquidity, low levels of leverage and almost 90% fixed interest rates. We repurchased $1.1 billion of stock during the third quarter. Year-to-date through the end of September, we have purchased around $1.5 billion of our stock. Our repurchase authorization is about $1.3 billion. We expect the Board will refresh the authorization as needed. As we continue to repurchase stock, we create value for shareholders through EPS accretion and increasing returns on invested capital. We are increasing our full year guidance to reflect recent performance and trends. Based on October FX rates, we expect revenue growth to benefit by about 80 basis points and EBITDA growth to benefit by about 165 basis points for the full year. As a reminder, about 1/3 of our revenue and operating expenses are denominated in currencies other than U.S. dollar. For Insights revenue in 2025, our guidance reflects Q3 contract value, which provides very high visibility for the fourth quarter. For conferences, we are basing our guidance on the 53 in-person destination conferences we have planned for 2025. We have good visibility into current year revenue with the majority of what we've guided already under contract. For Consulting, we have more visibility into the next quarter or 2 based on the composition of our backlog and pipeline as usual. Contract optimization has had several very strong years and the business remains highly variable. Our updated 2025 guidance is as follows: we expect Insights revenue of at least $5.06 billion, which is an increase from last quarter and is FX-neutral growth of about 4%. We expect Conferences revenue of at least $630 million, which is an increase from last quarter and is FX-neutral growth of about 6%. We expect consulting revenue of at least $575 million, which is growth of about 2% FX neutral. This is unchanged from last quarter. We continue to expect at least $210 million of other revenue. The result is an outlook for consolidated revenue of at least $6.475 billion, which is an increase from last quarter and is FX-neutral growth of 3%. We now expect full year EBITDA of at least $1.575 billion, up $60 million from our prior guidance. This reflects full year margins of 24.3%, up from last quarter. We expect 2025 adjusted EPS of at least $12.65, an increase from last quarter. For 2025, we expect free cash flow of at least $1.145 billion. This reflects a conversion from GAAP net income of 165%. Our guidance is based on 76 million fully diluted weighted average shares outstanding, which incorporates the repurchases made through the end of the third quarter. We exited Q3 with about 73 million fully diluted shares. For Q4, we expect adjusted EBITDA of at least $400 million. Our financial results in Q3 were ahead of expectations, and we've increased the guidance for 2025. Contract value, excluding U.S. federal business, grew 6% in the quarter. Third quarter contract renewal rates, excluding the U.S. federal government, improved from Q2, and we saw a year-over-year increase in our sequential NCVI improvement. We are positioned to accelerate CV growth in 2026 on a path to long-term sustained double-digit growth in 2027 and beyond. We'll also deploy our capital on share repurchases, which will lower the share count over time and on strategic value-enhancing tuck-in M&A. With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator? Operator: Our first question comes from Jeff Mueler with Baird. Jeffrey Meuler: I heard positive callouts, I think, on business development, productivity to new enterprises, in-quarter contract renewal rates and pipeline. Can you just comment, I guess, on upselling and downselling ex federal government trends? And are you starting to see improvement there? Or are there challenges from like elevated seat-based churn as we look to the 2026 expected acceleration in CV? Eugene Hall: Jeff, it's Gene. So what I would say is that the selling environment has improved modestly. And you mentioned the areas that I think are the most impacted. So if you look at new sales to new enterprises, those we've been quite -- doing quite well. And there are other parts of the business that are also doing well, as you mentioned. If you look at our -- a lot of our business comes from upselling existing enterprises. That's the place that we've been hurt the most is where we have existing enterprise instead of getting growth there, maybe we'll lose a seat. But I'd say overall, the selling environment improved as we move to Q3. Jeffrey Meuler: But are you starting to see any sort of change in some of the leading indicators for upselling to existing? Eugene Hall: I think the -- we are seeing changes. I'd say, first, as I mentioned on the call, our engagement is going up. So the amount of documents people are reading, the amount of one-on-one conversations with our experts that we're having, conference attendance, conference ratings, we look at all those as being leading indicators of future demand and all those indicators are up significantly, and we're very happy to see that. I think it does bode well for the future. Craig Safian: Sorry, Jeff, the one other thing I'd add is the other key indicator that aligns with and correlates to upsell is retention. And as we noted on the call a few times, the in-quarter retention rates improved from Q2 to Q3. And I'll state the obvious, much easier to upsell an account when they're renewing than when they're not. And so I think very positive also that we saw an in-quarter improvement in the renewal rates. Operator: Our next question comes from Andrew Nicholas with William Blair. Andrew Nicholas: It sounds like the selling environment is a little bit better than last quarter, some positive trends. I think last quarter, you talked about the tariff-impacted industries specifically. Can you give an update on maybe CV growth there relative to the rest of the business? Craig Safian: Andrew, so the non-tariff affected industries, as we track them, continue to perform about 200 basis points faster from a CV growth perspective than the tariff affected. So maybe a little smidge better than the gap we saw in Q2, but by and large, about the same performance-wise compared to Q2. Andrew Nicholas: Okay. I guess just as a follow-up to that, does that give you any pause in terms of your expectation for improvement next year, I think part of the ramp back up to high single-digit plus in contract value growth in '26 is kind of alleviation of that headwind. Just kind of curious how you're thinking about that or if we should be applying some conservatism to that number given how things have trended over the past couple of months. Eugene Hall: So I'd say the selling environment with tariff impacted companies is starting to improve. When there was more -- even more uncertainty with tariffs, if we went back a few months ago, companies were reluctant to make purchase decisions. And what we see now is there's more certainty with regard to tariffs in certain geographies. And because of that now, our clients are starting to make decisions they were unable to make before. And so I'd sort of characterize as the tariff impact industries actually, I think next year, I expect we'll be actually doing better because there's more tariff certainty and clients are how do you deal with it? And they still need help with AI, cybersecurity, data analytics, all that kind of stuff. And so I'd say there's a marked improvement in the tariff impacted industry's ability to make decisions to buy. Operator: Our next question comes from Faiza Alwy with Deutsche Bank. Faiza Alwy: I wanted to follow up on the improvement in the renewal rate. And I'm curious if you think that's just a function of the macro environment? Or is it more a function of if you're selling differently or some of the new sort of strategies or services that you talked about like cost optimization last time. So yes, I would love some additional color around what drove the improvement. Eugene Hall: Yes. I think it's 2 factors primarily. One is that we have made a lot of adaptations in terms of accelerating the pace of our research, the quantity of our research, et cetera. And so I think a lot of it -- and how we're selling, how we're training our salespeople. So we've made a number of adaptations that I think improve our ability to sell those clients. And then on top of it, as I mentioned, especially in the tariff impacted industries, there's less uncertainty in certain geographies. And so for those geographies now, clients are making decisions about buying from us. Faiza Alwy: Understood. Okay. And then just a follow-up around sort of it sounds like you've had pretty good expense management. So curious if you can talk a bit more about that and sort of how sustainable that is and how you're sort of balancing investments versus cost optimization? Craig Safian: Faiza, it's Craig. Thanks for that question. So on the expense side, and we've been doing this all year long, just ensuring that we are appropriately balancing both the OpEx in year and also the exit run rate for next year while also making sure that we are investing in core areas that we know are ingredients that support catalyze or lead to double-digit growth in the future. And so I think we've been very disciplined on the expense side. We're looking to drive productivity in lots of areas, automate wherever possible, leverage lower-cost geographies wherever possible. All those things are plays that we've been running for a really long time. We've amped those plays up. And again, we've amped it up even -- we've amped it up so that we can afford to make investments in key areas. And so we fully expect next year to accelerate our CV growth, and we fully expect next year also continue to make investments that catalyze that CV growth and sustain that CV growth into the future. Operator: Our next question comes from Toni Kaplan with Morgan Stanley. Toni Kaplan: I actually wanted to follow up on that last question. Just in light of the environment, what are your expectations for sales headcount growth in '26 for both of the segments, please? Craig Safian: So we're in the midst of hardcore operational planning for next year. There's obviously a wide range of scenarios and outcomes that we are planning around, and we've got a wide range of potential investment scenarios that comes out of that as well. I think the base level assumption, though, should be that we'll grow our headcount 3 to 4 points slower than our expected CV growth. Again, back to that outlook or that algorithm, if you will, going forward so that not only do we fully expect to reaccelerate CV growth based on the people we have in seat today or we exit the year with, the investments we make next year will be to sustain that growth as we roll into '27, '28 and beyond. And so expectation around continuing to invest in the sales force at a rate, call it, 3 to 4 points slower than the expected CV growth rate is what you should expect. Toni Kaplan: That's great. And then just as a sort of broader question, in an environment where we're seeing some large headcount reductions at corporations and also AI potentially driving efficiency, so maybe you do need fewer employees, like I think -- like does that sort of change your view on the seat-based model? And would you ever consider going more towards an enterprise-based model? I know that's not been the preference in the past, but just given those dynamics, I just wonder your views on that. Eugene Hall: Toni, so if you look at who our clients are, the first, we sell to the C-level executives that report to the CEO. So the Chief Information Officer, the Chief Financial Officer, the Chief HR Officer, the Head of Supply Chain, the General Counsel and so forth. And then we sell to the people that report to them. And so if you think about like the Head of Data and Analytics and IT department, Head of Cybersecurity or the Head of IT Operations, and so if you look at those, those are our target client roles. And so as companies have headcount reductions, they still have a CFO. They still have a head of accounting. They still have a CIO. They still have a head of cybersecurity. They have a head of data analytics. They have a head of IT operations. And so the staff reductions that clients are taking doesn't directly affect our clients. In fact, many clients want help figuring out how do they get more effectiveness out of technology, which plays right to our strengths in terms of helping to achieve those broader headcount reductions. Operator: Our next question comes from George Tong with Goldman Sachs. Keen Fai Tong: I want to see if you can elaborate on what your expectations are for how the trajectory of CV improves, if you expect essentially a bottoming in the fourth quarter and then the reacceleration across all of 2026 exiting the year in the high single digits. Just some additional color on the trajectory and pacing of improvement would be great. Craig Safian: George, it's Craig. So we'll provide more color on 2026 in February when we do our Q4 earnings and do our initial guide for 2026. You're right from a headline perspective in terms of our expectations, which is to reaccelerate over the course of 2026 into the high single-digit growth rates. And then obviously, our job is not just that 1 year, but to continue to accelerate the CV beyond that back into double-digit growth and then ultimately into our medium-term objective range. As we've talked about in the past, the growth can be lumpy, just it's based on math and based on ups and downs in that business that pushes or business that comes in sooner than we expect. Obviously, the compares in the first half of the year are favorable from a CV growth perspective. But we fully expect to accelerate over the course of 2026 into the high single-digit range. Keen Fai Tong: Got it. That's helpful. And then sticking with CV, could you give some details on how tech vendors performed? Craig Safian: Yes, George, I'll start. And if Gene has anything to add in, we can throw that in. So we're seeing basically 2 trends within our tech vendor business. And I alluded to some of this during the prepared remarks. And so if you look at tech vendor broadly, there are subsectors that are not tariff affected like software and services. And there are subsectors that are impacted by tariffs like hardware, semis, et cetera. And when we look at the tech sector, it's inclusive of all those things. And so what we're seeing is in the software and services side of the house, our CV growth is high single, low double-digit growth rates, and that's been improving. We've seen improvement across that portfolio with a particular improvement in small tech software, which has improved probably the most over the last 12 months. But that is somewhat muted by what we're seeing from the tariff-affected pieces of the tech subsector like hardware and semiconductors. Operator: Our next question comes from Jason Haas with Wells Fargo. Jason Haas: I'm curious as -- I know it's early, but as your clients start to use AskGartner, I'm curious if that's changing the types of reports that they're consuming. And then do you plan to change how your analysts are writing reports? Are there certain reports that do better and are more suited for an environment where you're seeing more of your customers use AskGartner? Eugene Hall: Yes, Jason, I think that in terms of what AskGartner is doing is not changing what content clients are reading, but it does actually get them to use more content, which we know when they read more content, it actually results in higher retention. And so it's driving not different readership, but more readership. And the second part in terms of changing sort of how we write, we look at this all the time, which is we look at how do clients want to consume documents, like do they want both the structure of the document, how long it is, et cetera. And so we're always fine-tuning that. And I'd say that it's a continuous thing. So AskGartner will impact that as we look at it. But it's not like we never did that. We always look at, say, what link do people want? Do they want a summary upfront and so forth? What topics do they want to cover? What kind of standard document types like Magic Quadrants do they want to have. And that's constantly evolving again, AskGartner will be one more input into that constantly evolving process. Jason Haas: Got it. That makes sense. And then as a follow-up, if you could comment on the nonsubscription business. You mentioned and we've seen in the release that it's been moved to the other segments. So I'm curious how you're thinking strategically about that business. And I know it's been softer recently. So if you could talk about your plans to reaccelerate that, that would be very helpful. Eugene Hall: Yes. So that business helps small businesses identify the right software for their business. There are literally millions of small businesses in the U.S. and then there are many millions more outside, and we serve both of those markets. And you think about things like funeral homes, for example, there's funeral home ERP system, basically management software. And there are obviously a lot of funeral homes around the world, and they -- that software helps to run the business more effectively. So there's -- but if you're a funeral home manager, you're not a software expert, you're not a technology expert. It would be unusual for you to be. And so they need to help figure out what software they want to have. Conversely, if you're making software for one of these segments, it's hard to find the clients. And so what we -- the value we provide there is we write all the software and then we figure out we help the end users which software is best suited for their needs. And then we help the vendors actually connect with those people that are the best fits. So it adds value to both the end users and the technology vendors, and that's a lot of value to them. So that's kind of a strategic role of the business. Operator: Our next question comes from Surinder Thind with Jefferies. Surinder Thind: Following up on the earlier question about just the enterprise model and your target clients, what would be the downside of trying to maybe move to an enterprise model where maybe you can get a little bit more penetration or if there's maybe a bit more usage more broadly within the firm that maybe things would be a little bit stickier. Eugene Hall: Yes. So the -- as I mentioned before, our target market are the C-level executives that report to the CEO and then their direct reports and in some cases, their direct reports as well. So think about it as a couple of levels down the organization. That's a small group of people. So if you've got an IT department that has 5,000 people, our target audience wouldn't be all 5,000 people. Now that doesn't mean we couldn't, in the future, develop products that are designed for that larger group. And we certainly are considering that because it gives us another avenue of growth. But right now, our target clients are more in the senior executives. And so if we get an enterprise license, it doesn't really add to, because our content is targeted at those specific individuals, if you're, for example, an individual developer organization, content on how a CIO organizes their department isn't really useful to you. And so that's kind of why we don't do that today. Again, that's certainly a growth avenue that we're open to in the future. Surinder Thind: That's helpful. And then maybe, Craig, when I think about just kind of the cost management side of the equation, I see a little bit of lower stock-based comp, maybe some more CapEx. How much of that is kind of onetime related to this year? And then how much of that is maybe going to continue on into or benefit 2026? Craig Safian: Surinder, great question. So in terms of the OpEx management, we've obviously been, as I think I noted earlier, managing the P&L so that we deliver on our commitments for 2025, but we're also very mindful of making sure that as we enter 2026, we've got strong profitability and strong free cash flow set up as well. And so what we've been doing is less about the onetime benefits of things and more about the ongoing benefits of things. Again, the real key for us as we've been managing this is less about what we save in 2025, more about what is our exit run rate for 2025 look like. So that, again, we've got the right people in the right places aligned against the right strategic priorities as we roll into 2026, again, with an expectation that CV growth will reaccelerate during 2026. And obviously, the revenue growth will follow that with a slight lag. But overall, it's really more about "permanent savings" so that we can deliver on our profitability and free cash flow targets and goals going forward. Operator: Our next question comes from Manav Patnaik with Barclays. Manav Patnaik: My first question, Craig, was it's helpful to -- obviously, you called out the growth in the non-tariff impacted being better than the tariff impacted. Just to frame it, like how much of your, I guess, total business is tariff impacted like the mix? And then within, I guess, tech vendors since you called that out, too? Craig Safian: Yes, sure. Manav. So on the total business, about 40% of our contract value falls into the intersection that we've identified as tariff effected. So about 40% of the CV. On the tech vendor side, I don't have that number completely handy. It's probably in the 20% to 30% range would be on the tariff affected side. Obviously, several hardware, semi, et cetera, companies are long-standing great clients of ours, but the bulk of the business sits with -- in software and services. Manav Patnaik: Got it. And then just -- and this might just be a definitional clarification, but you guys talked about pipelines up double digits and things looking improving. And then -- but then you had the new business down 4%. So can you just help bridge that gap? Craig Safian: Yes, sure. So as we talked about, obviously, pipeline is an indication of new business performance, but it's not a guarantee of new business performance. What I'd tell you, which we talked about coming out of last quarter, it's certainly better to be in a position where our new business pipeline is up and up significantly on a year-over-year basis. It does 2 things for us. One, it reinforces that there continues to be significant demand. And so these are not just random opportunities when we look at the pipeline, it's actually a factored pipeline with named opportunities where a seller has had at least one conversation and usually multiple conversations with the potential end users. And so the demand is still there. Two, it does remain a challenging selling environment, maybe modestly better in third quarter than second quarter, but still pretty darn challenging. And so we're seeing longer sales cycles that has continued. We're seeing things kicked up for higher levels of approval, that has continued. But the good news is if we keep building that pipeline and keep working it, we have a high degree of confidence that a significant portion of it will turn into new business for us. And then the other thing I'd note, again, this is why the year-over-year compare is really important. Obviously, we're in the midst of our largest conference season, and we leverage those conferences across the board as a retention vehicle, a brand-building vehicle, an awareness vehicle, but also as a new business vehicle for us as well. And so the pipeline being up, especially in a quarter where it's a huge number just because of the volumes we drive in the fourth quarter, and it's in support of our busiest and largest conference season, I think, is very promising for us. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: So jumping off of the last comment that you made, Craig, about Q4, I guess, usually, it is a big selling season for you guys. Could you just kind of compare the environment now to like a normal year or last year? What similarity or differences do you see in the selling environment in this particularly large quarter of selling for you guys? Eugene Hall: So it's some of the things we've talked about in the past, which is, again, there still are challenges in the U.S. federal government. Those challenges have not gone away. There are still challenges with tariff impacted industries. But I'd sort of say, again, as I mentioned earlier, it's better than it was earlier in the year, worse than last year, but better than it was early in the year because now there's some certainty in certain geographies with tariffs, and that's allowing companies to make decisions. So that's a better selling environment for us. And then you have companies that are not impacted by tariffs directly, but they are indirectly impacted because they're often selling to the tariff impacted companies or they have some small amount of materials or tariff impact that impacts them. And so they're being more careful about their spending. But I sort of say all that put together, it's a better environment than it was earlier in the year, which again why, as Craig said, our pipeline is up double digits. And we're feeling like it's, again, not as good as last year, but better than it was earlier this year. Craig Safian: And then I would just add to that, Josh. The adaptations we've been making, we feel like will yield benefits as well, have started to yield benefits in Q3 and will yield benefits in Q4. And then also fourth quarter, as you noted and I noted earlier, is by far our largest new business quarter, our largest NCVI quarter. It corresponds with our sales and quota year-end. So we have an amazing sales force, and they are all very motivated to finish the year strong, and they have a lot of reasons and incentives to finish the year strong as well. And so that all aligns to what we think should be a strong finish to the year. Joshua Chan: That's great color on that. And then I guess if you think about the reacceleration in 2026 and the different components that drive that, I know some of it is just math. But for the ones that are not math, which ones are you more or less confident in standing here at this point in driving the acceleration in CV in 2026? Craig Safian: Yes, Josh, I think we wouldn't keep banging the drum that we have a high degree of confidence if we didn't have a high degree of confidence in the ones that are more mechanical or math and the ones that are adaptation or market related. And so again, as we look at that reacceleration, it's the same big 4 categories we talked about last quarter. The good news is on the more speculative ones that we talked about last quarter, which is really the adaptations and things of that nature, we did start to see some benefit in the third quarter. [indiscernible], it's still challenging selling environment, right? So that is still the macro situation or dynamic selling environment. That's the macro situation. But the combination of the mechanical improvements like U.S. Fed, the continued acceleration of our tech vendor business, tariff affected being even modestly better than what we've been dealing with this year and then all the other adaptations that we've already made and will be making is what gives us confidence on that reacceleration next year. Operator: Our next question comes from Jeff Silber with BMO Capital Markets. Jeffrey Silber: I just was wondering if you can talk about the pricing environment, if you can remind us when you institute pricing increases in terms of expectations of pushback, et cetera. Craig Safian: So our -- the bulk of our price increase globally goes into -- went into effect a couple of days ago on November 1. As we've done historically, our normal price increases -- our normal price increase is around 3% to 4%. We've been over that in some years when inflation was significantly higher, particularly wage inflation, but we're more normalized now. So expectation around 3.5% went into effect earlier this week. Eugene Hall: And Jeff, we don't get a lot of pushback on price increase. You think about we've got a client that's spending $200,000 a year with us and you increase prices 3% or 4%, you're talking about $6,000 or $7,000. And so their decision isn't about the $6,000 or $7,000, it's what's the value I'm getting from Gartner. Jeffrey Silber: Okay. I appreciate that. I know in your prepared remarks, you broke out ex federal government, but we've had a government shutdown in the past month or so. Have things gotten worse and things slowed down because of that? Craig Safian: Yes. It's a little bit, Jeff. Obviously, we are still conducting business with the federal government, we signed deals during the month of October, while the government was shut down, it sort of requires that the people on the other side be deemed as essential employees and then we can get things done. We're hopeful that this resolves itself. The good news is it's our smallest renewal quarter. We just came off the federal fiscal year-end, which was Q3. So we only have about 15% of the CV we started the year with remaining to go in the fourth quarter. And as I mentioned, we have secured renewals and new business. over the course of October, but it is dependent on whether the agency is deemed as essential or the people we're dealing with are deemed as essential and are working. If they are, we get the deal. If they're not, we're waiting for the deal. Operator: Our next question comes from Jasper Bibb with Truist Securities. Jasper Bibb: Hoping to get an update on AskGartner. Can you share some early indications on customer engagement there? And also, I just wanted to confirm whether that's going to be part of normal license access and not a separate charge because I got a few questions on that this morning. So I just wanted to make sure we clarify there. Eugene Hall: Yes. So AskGartner has now been rolled out to all of our licensed users. So 100% of our license users to get it. There is no additional fees included in the base package. And the key impact it's had on our clients is that it's been used by them, and it's increased their overall usage of our content, their overall engagement with us. And so we think it will help with retention as they have more engagements. Jasper Bibb: Got it. And then the client count ticked down a little bit quarter-over-quarter again. Is that primarily on the small tech vendor piece? And do you expect client count to stabilize or increase in '26 if small tech vendor picks up? Craig Safian: Jasper, it's Craig. So the story on the client count remains small tech vendor churn. That's the bulk of it. We're still adding lots of small tech vendors, but continue to churn through some as well that are either going out of business, losing funding, et cetera. Over the medium term, to get back to double-digit CV growth and ultimately 12% to 16% CV growth, we would expect to see over that period, stabilization and then modest growth in the enterprise count. It's not necessarily required given that we have historically generated huge amounts of growth in new business from existing clients. We could drive a lot of growth that way. But to get us into the 12% to 16% range, we certainly need significant contribution from new logos as well. So we would expect that number to go up over time. Operator: Our next question comes from Scott Wurtzel with Wolfe Research. Scott Wurtzel: Just one for me. I just wanted to get a little bit more color on the quota-bearing headcount trends, just seeing kind of the increase quarter-over-quarter in GTS and down quarter-over-quarter in GBS, just given that kind of see GBS as being a kind of stronger growth engine for the business. Just wondering if you can talk about the dynamics going on there. Craig Safian: Yes, sure. Scott. So on a quarter-by-quarter basis, I wouldn't read too much into the numbers. It's really dependent on when people leave and when new people come on board to replace them. And so there can be a little choppiness there. I think the 2 things I would highlight is you're looking at net numbers. And so we, as an example, did recalibrate or resize our U.S. federal sales force and have been continuing to do that to make sure it aligns with the new reality of the business there. And so you're looking at a net number on ex U.S. Fed, obviously, the headcount growth would be a little bit higher. And then the second thing I'd say is, as we've talked about in the past, we are always optimizing where that QBH goes. And so whenever we have turnover, we're analyzing the territory that was vacated to determine what the next best action should be with that territory. In some cases, it's a fruitful territory, it's profitable. And so we replace the person who left like-for-like. Other times, we are reallocating within our overall portfolio to make sure that we are aligning our assets and sellers to go after the most profitable, most fruitful opportunities. And so within the numbers, just no, it's not a stable -- these people are calling on the same exact accounts as we had a year ago. We're constantly optimizing to make sure that we are optimizing essentially our investment in sales to go after the most profitable long-term opportunities from a growth perspective. Operator: And our last question comes from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: Just a broader question. As you've had more conversations with customers and prospects, how often does LLM, if any, comes up in those conversations as an alternative to Gartner? Eugene Hall: Yes. So when we talk to clients, the main thing that comes up with regard to AI is helping them with their -- getting value out of AI, getting ROI out of AI. And so that's the main thing that comes up. If you look at like on a deal level, how many deals does a client say, "Hey, I'm thinking about using AI instead of using Gartner", it would be extremely small. We track, as I talked about in the past, in our system, we actually ask our salespeople to track it. We have follow-up calls. We have a lot of interactions. And basically, in terms of when a client actually says, "Hey, I'm thinking about using Gartner versus literally AI", that comes up a very, very, very small number of transactions. Ashish Sabadra: That's great color. And then as we think about the different insight access, reference adviser versus guided, have you seen a difference in retention trend or new business growth across any of those tiers? Eugene Hall: So historically, we've had different levels of retention in reference adviser and guided. Those traditional trends have held. They're very similar. So there's no kind of different than what we've seen historically. Operator: There are no further questions at this time. I'd like to turn the call back over to Gene Hall for closing remarks. Eugene Hall: Well, here's what I'd like you to take away from today's call. While the macroeconomic environment remained dynamic, our Q3 financial results were ahead of expectations. We made operational adaptations that are starting to yield results. We continue to deliver great value to our clients. Enterprise client retention remains strong and contract renewal rates improved in the second quarter, and we repurchased more than $1 billion of stock in the quarter. AI will be one of the most innovative and pervasive technologies in history. Gartner is the best source for clients to determine the right AI tools and applications for their environments. And of course, we continue to help on other mission-critical priorities such as cybersecurity. We're also leveraging AI to improve productivity effectiveness internally. Compelling client value, strong demand, operational adaptations and modest normalization of the external environment give us a clear path back to long-term sustained double-digit growth over the medium term. Thanks for joining us today, and we look forward to updating you again next quarter. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good morning, and thank you for standing by. Welcome to the Sphere Entertainment Co. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ari Danes, Investor Relations. Please go ahead. Ari Danes: Thank you. Good morning, and welcome to Sphere Entertainment's Fiscal 2025 Third Quarter Earnings Conference Call. Today's call will begin with our Executive Chairman and CEO, Jim Dolan, who will provide an update on the business. Robert Langer, our Executive Vice President, Chief Financial Officer and Treasurer, will then review our financial results for the period. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website. Please take note of the following: today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company's filings with the SEC for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income, or AOI, a non-GAAP financial measure. And with that, I'll now turn the call over to Jim. James Dolan: Thank you, Ari, and good morning, everyone. For today's call, I'd like to focus on two important areas to the Sphere business model, the technology that powers Sphere and the opportunities it creates for our company, and our progress in expanding the Sphere venue footprint around the world. Behind virtually every aspect of what we do is the proprietary technology we have developed. This is reflected in what audiences experience at Sphere in Las Vegas to the work taking place at Sphere Studios in Burbank. We own key technology component providers to Sphere and have a portfolio of over 60 patents in the U.S., spanning across Sphere, venue design, audio delivery, video capture and display, 4D technologies and more. We have also continued to secure international patents to protect our innovations around the world. And we are not standing still as we continue to invest in technology and content to extend our leadership position. The use of these technologies is also not limited to Sphere venues. For example, this year, we introduced our advanced audio system, Sphere Immersive Sound at Radio City Music Hall, transforming the audio experience in nearly a 100-year-old venue. And we're now exploring additional commercial opportunities for Sphere Immersive Sound as well as other aspects of our technology portfolio. In terms of original content, the Wizard of Oz in Sphere utilizes the advanced technologies like generative AI in ways that haven't been done before. As we look ahead, we intend to use these AI tools in partnership with Google for additional Sphere Experience projects. We are also actively pursuing opportunities to utilize these AI tools for content on other distribution platforms. We expect to have more to share in the months ahead. Turning to our venue expansion plans. In Abu Dhabi, we are nearing completion of the preconstruction phase with the Department of Culture and Tourism. We also have discussions with a significant number of domestic and international markets as well as potential financing partners. These discussions span across small, medium and large-scale Spheres. Our designs include seating capacities of approximately 3,000, 6,000 and 18,000. And behind each venue design is an economic model that we believe will generate an attractive return on investment. We look forward to updating you on our progress. And with that, I will now turn the call over to Robert, who will take you through our financial results. Robert Langer: Thank you, Jim, and good morning, everyone. For the September quarter, we generated total company revenues of $262.5 million and adjusted operating income of $36.4 million. Our Sphere segment generated revenues of $174.1 million, an increase of 37% against the prior-year period. This growth was mainly driven by higher revenues from the Sphere Experience and reflects approximately 1 month impact from the Wizard of Oz at Sphere, which launched on August 28 and has seen strong demand since its opening. As a result, in mid-October, the production passed 1 million tickets sold and achieved over $130 million in ticket sales already. In addition to higher revenues from the Sphere Experience this past quarter, we also saw revenue growth from concert residencies and Exosphere advertising and sponsorship and our efforts to bring the world's second Sphere to Abu Dhabi. Overall, revenue growth was only partially offset by the absence of a marquee sporting event and a corporate event held in the prior year quarter as well as other revenue decreases. Third quarter adjusted operating income for our Sphere segment was $17.1 million as compared to an adjusted operating loss of $26.3 million in the prior-year quarter. This reflected the increase in revenues as well as lower SG&A expenses, partially offset by higher direct operating expenses. The increase in direct operating expenses includes higher expenses associated with the Sphere Experience, mainly due to the impact of the Wizard of Oz at Sphere. It also reflects the increase in the number of concerts held at Sphere compared to the prior-year quarter, which was partly offset by lower other event-related expenses. SG&A expenses for the September quarter were $92.7 million, a decrease of $12.3 million year-over-year. This includes the impact of the company's focus on driving cost efficiencies this year. Turning to MSG Networks. The segment generated $88.4 million in revenues and $19.3 million in AOI in the September quarter. This compares to $100.8 million in revenues and $16.1 million in AOI in the prior-year period. These results reflect an approximately 13.5% decrease in subscribers as well as the impact of recent amendments to MSG Networks' media rights agreements with MSG Sports and certain other professional teams. Turning to our balance sheet. As of September 30, our Sphere business had net debt of approximately $205 million. This reflected approximately $329 million of unrestricted cash and cash equivalents, $259 million in convertible debt and a $275 million credit facility related to Sphere in Las Vegas. In addition, as of September 30, MSG Networks had net debt of approximately $144 million. This included $200 million outstanding on the MSG Network term loan, which, as a reminder, is debt that is recourse only to MSG Networks. Following the end of the quarter, MSG Networks repaid an additional $31 million on the term loan using cash on hand at MSG Networks, bringing the current principal outstanding to approximately $169 million. During the quarter, we repurchased $50 million or approximately 1.1 million shares of our Class A common stock. Following these repurchases, we now have approximately $300 million remaining under our current buyback authorization. And with that, we'll now open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Brandon Ross with LightShed Partners. Brandon Ross: Jim, I want to let you enjoy the Oz success you're having, I guess, especially this quarter, but I wanted to ask you about the original content program beyond Oz. And to that end, what have you learned from Oz's success? And do you expect it to influence the original content program going forward from here? I know Edge or From the Edge is next, but afterwards, are you going to lean more into known movie IP like you did with Oz? James Dolan: Okay. Well, let's see. What have we learned? The first thing is we learned is there's no place like home. But look, the Wizard of Oz really is the first piece of content that unlocks the medium itself. The -- and I think probably one of the things we learned content-wise from Wizard is that the 4D effects actually are even more important to the content than what we originally thought. We obviously thought the screen and the sound was going to be important, but 4D has turned out to be even more important with our customer base. But look, there's still a lot more to go in terms of exploring the medium. And From the Edge should do that, should help us delve further into it, primarily because it's a completely different way than Wizard of approaching the medium. Wizard is a remake of a 1939 classic, From the Edge -- and there were no -- with Wizard, we just basically took that content, and you know what we did with it. The -- but the content already existed and the -- and so all of the work was primarily done in editing studios, AI, et cetera. The -- with From the Edge, we now get into a live capture and we start to use our Big Sky system, right, to create these environments and experiences. And that's a completely different way of creating content than what we did at Wizard of Oz. So we're -- I'm anxious to see how it does. That -- having said that, after From the Edge, I mean, I think we'll probably look to see what else we can do to push the medium, right, to create even more experience for our customers because that's clearly what they're interested in. Brandon Ross: Great. And then in the prepared -- you started off talking about the value of your technology, and I was hoping you could give us a little more, what tech in the portfolio beyond audio do you think has third-party value? What are the use cases? And over time, do you expect licensing this technology is going to be a real meaningful contributor to revenue and more importantly, AOI? James Dolan: It serves multi purposes. So -- and your question sort of has two parts to it. But in terms of the platforms, right? Remember, if you -- in my comments, I talked about taking the technology and migrating it to other platforms. One of the things that we did with Wizard of Oz was we worked very closely with Google, but we did set up a process and a pipeline to handle AI. And over the 2 years that it took us to make Wizard of Oz, we got pretty good at it. We got pretty good at things like not only just using the AI, but transferring the data from place to place, being able to work on it, that whole infrastructure. So when Wizard of Oz finished, the -- we were sitting with this already built infrastructure that processes AI quite well. And so we're now exploring how to utilize that infrastructure beyond the Sphere. And we'll have -- as I said in my comments, we'll have more to say about it this next quarter. But that is a technological advance that Sphere Studios has that I think that we're going to be able to monetize. And I think we'll have some interesting announcements over the next 3 months on that. Other technologies beyond -- I mean, Sphere Immersive Sound, I have to tell you, I don't want to wax-on this too much, but I know that we did a full orchestra test yesterday in -- at Radio City. Don't underestimate that the -- what a great sound experience will mean for a venue. That the -- I mean, all you got to do is go to any big stadium and listen to the announcers or try and go to a concert at a big stadium and you know that the sound is muddled, changing that dynamic in the live experience is significant. And I do think that we're going to be able to monetize it maybe even to the level where it gets to the home. But I'm excited about what's going to happen at Radio City. And I'm excited to see whether our customer base recognizes the improvement in the quality and sees it as a real feature that makes our content even more attractive. Operator: Your next question comes from the line of David Karnovsky with JPMorgan. David Karnovsky: Jim, with Wizard of Oz, I wanted to see how you're thinking about optimizing revenue from here in terms of price, show count or adding sections? And then maybe as a follow-up to a prior question, assuming Oz demand remains strong through 2026, when would be the right time to launch From the Edge, which I believe you've announced for the next calendar year? James Dolan: So we're -- From the Edge, first off is not finished yet. So it's got a ways to go. I expect that it will be ready by the end of the summer. But that doesn't mean that we'll launch it at the end of the summer. It can -- it will stay fresh. And we plan on basically running Wizard of Oz until we see the demand to start to fall off. That could be a lot longer than a year. In addition, the -- we're planning a -- what would you call it? We're going to Wizard of Oz 2.0, right, an enhanced version that we will launch on the anniversary of the premiere. And this is likely going to include some new features to the film such as we might just take you for a ride on a witch's broom during the show, and how much more life that will breathe into Wizard of Oz? I'm not really sure, but I think it might be pretty good. I always tell my team, Cirque du Soleil's O has been running for 30 years in Las Vegas. It's basically the same show. So I mean what's the lifespan of Wizard of Oz? It wouldn't surprise me if we were we were showing Wizard of Oz 10 years from now. But the other thing that right now, we're creating for one venue and what's great is that we can monetize that content just with the one venue. But we want to build more venues, and we are building more venues, and that will help us take things like content costs and overhead costs, right, and spread them out against more revenue streams and should make the company much more profitable. Operator: Your next question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Jim, maybe just following up on that last point there, you've had this incredibly successful debut of Wizard of Oz over the last few months, and it certainly seems to be surpassing Postcard in a lot of ways. I would just be curious, as you look ahead into 2026, to get your thoughts on what you think the trajectory of Oz could look like from a business and performance perspective? To what extent you think this momentum that we're seeing in adding show count and some of the higher sell-through that we've seen over the last couple of months can continue into the next 12 months? Or perhaps a framework you're thinking about as it compares to Postcard as you look out into '26 and try to gauge how meaningful and successful this piece of content can be? James Dolan: Well, Postcards was what we call the first pancake. And so it wasn't perfect. The -- it did an okay job of showcasing the medium to start off with. Wizard of Oz took it to the next level. How long can it go for? I think it can go a long time. The -- I don't -- I mean, in terms of demand on the marketplace, Las Vegas is a great market. I'd love to clone that market. With over 40 million visitors every year, right, there's a lot to be [ plucked ]. And I think one of the reasons that O was as successful as it was is because it stands up with that 40 million people coming in. Pretty much everybody over the years has seen O, who's gone to Vegas. I think Wizard of Oz can perform the same way. But I'm hoping that we -- I mean, that's one of the beauties of the Sphere, I mean, when you look at that shows like, O, there was a huge capital investment in the beginning and they're just -- and they're running it out. I think they did a refresh here and there, but it's basically the same show. We can change the show, right? We can do Wizard of Oz right at 1:00 in the afternoon, right? And From the Edge at 5:00 in the afternoon, the -- and we can add more, et cetera. So the idea of keeping the Sphere filled and in demand, I mean, I think that with the way we've designed the technology, et cetera, we can keep the Sphere going to keep it filled for a long time to come. Operator: Your next question comes from the line of Peter Supino with Wolfe Research. Logan Angress: This is Logan Angress on for Peter. Jim, you mentioned in an interview that you hope to have a small Sphere announcement by the end of the year. I'm curious if you can share any insight into expectations for that venue? And specifically, is the expectation that it will be capital free? Or do you expect to be a minority investor in that venue or in venues to come? James Dolan: Well, let's see. The -- do we expect to be capital free? We have a model that where we are capital free and I think that is a preferred model. Would we invest? Well, look, I think it's a really good investment, the economic models that we've built around all of the different versions of Sphere have really good ROIs. So I mean as we have free cash to invest, et cetera, that is something that the -- you probably -- I would think we'll do some things. Plus, I mean, it does show a level of confidence, right, that the company has in the project when you, say, take 10% of the equity right? It also helps the lending model, et cetera. So I think we're flexible in that way. And I think that kind of answers your question. You want to know when we're going to announce something and where. Well, that's what announcements are for. Logan Angress: Got it. And then a quick follow-up. You mentioned you're in conversations with a bunch of different potential partners. I'm curious how, if at all, the success of Wizard of Oz has changed those conversations with those potential franchisees? James Dolan: I think Wizard of Oz opened up the floodgates, at least from the -- from our phone ringing, although people's phones don't actually ring anymore, e-mails and text that the -- we're hearing from all over the world, domestically, internationally, right? The -- I mean, what we're doing in Abu Dhabi is really kind of interesting that the -- we're not going to reveal exactly the location, but I will tell you that they have taken Sphere and put it into a much larger plan for the entire marketplace that they have and Sphere is like the diamond sitting in the top of the ring. And so it has that kind of impact on urban development, et cetera. And so when you look around the world, you look at who's developing their marketplaces, who is developing their urban infrastructures, et cetera, particularly when it comes to entertainment, et cetera, Sphere just fits so nicely into all of those plans. And I think what the Wizard of Oz did was woke people up to that fact. And so that's why we're seeing so much interest. Operator: Your next question comes from the line of Ryan Sigdahl with Craig-Hallum. Ryan Sigdahl: Jim, you mentioned in an interview with New York Post in late August. The Sphere had booked up until September 2027 with a residency pipeline. So it implies that pipeline continues to build extremely well with lots of kind of artists that want to play there. But realizing there's a healthy competition with -- or I guess, for the Sphere space. But my question is, ultimately, do you expect more concerts in 2026 versus 2025? And then how do you think about the upper limit for the number of concerts per year within the Sphere? James Dolan: It's interesting you asked that question because we just had a discussion about this yesterday about what the optimum combination is on a day in the Sphere. What we came out with is the best combination is a concert like the Eagles or Zac Brown or whatever in the evening with at least two to three shows of like the Wizard of Oz, right, in the afternoon, that generates the most amount of cash flow, et cetera, in a day. Honestly, the problem that we're having, and it's what my old manager used to call first-class problem, right, is that the -- we're trying to find more opportunity to put more into the Sphere. So I mean, I do think that, that concerts and those kinds of things are important to the Sphere. I mean, particularly if you're coming to Las Vegas to see a concert at the Sphere and then at the same time, the next day, you get up and, in the afternoon, you go see the Wizard of Oz, et cetera, it's -- that's a pretty good formula. But we're having -- we're nothing has slowed down in terms of artists who want to play at the Sphere. In fact, that's one of the things that we're juggling is how do we get all these artists in. I've definitely got a lot more demand than I do capacity at this point. Operator: Your last question comes from the line of Peter Henderson with Bank of America. Peter Henderson: So just two, if I may, one on Sphere, one on MSG Networks. First on Sphere, regarding the Exosphere and sponsorship, I was just wondering if you can give us an update on the go-to-market approach, the forward demand outlook and progress in establishing a recurring book of business? And then on MSG Networks, just wondering if you have any updated thoughts around possibility for strategic acquisition? James Dolan: Okay. I'm actually going to give that first one -- you ready, Jen? You take that first. Okay. Jennifer Koester: I think the excitement and the interest that Jim was talking about coming from our live residencies and Wizard of Oz isn't just kind of opening the floodgates when we think about additional Spheres and expanding our physical footprint, we're seeing a lot of renewed interest and incremental interest when it comes to advertising and sponsorships with the Sphere. We've talked about it. This has been a year of transition for us, right? We've adjusted our go-to-market strategy. We brought in our sales team in-house as of September, that sale team is largely in place. And we're seeing positive results already. This past quarter, we had double-digit percentage increase when it comes to our sponsorship and Exosphere sales. And I think we've got a strong start to next year already. Part of our go-to-market strategy adjustment was to really lean into tentpole events. And if I look at what we're seeing ahead for CES, we've got strong growth year-over-year for that conference, and it is part of our key strategy to lean in the conferences that are in town. We're also leaning into the creation of these multiyear sponsorships. And we've recently announced a few of those with Lenovo and Zoox, and we will be announcing a few more in the coming months. So I think we continue to build a really solid base when it comes to Exosphere advertising and sponsorships. And I think during the next calendar year is a high barrier of growth for us. James Dolan: And the second part of the question, what was the second? Jennifer Koester: Networks. James Dolan: Networks. Before I get to that, Jen, by the end of the day tomorrow, how many tickets do you think we'll have sold to the Wizard of Oz? Jennifer Koester: 1.2 million. James Dolan: 1.2 million. So it's not slowing down. Jennifer Koester: Not at all. James Dolan: As far as networks goes, the -- we were able to put -- to pay down some of the debt again. So that was -- that was good. They -- look, regional sports is a very powerful product. The problem in that business is that because of the shift from linear over to streaming, right? The monetization of that product, right, has took a real hit. And it's still figuring out its way. But the good news is that the product itself hasn't lost any luster with the marketplace. I mean, the opening game for the Knicks, I think, had over 50,000 streams with the -- and if you value those streams at $10 a stream, that's $0.5 million for one game. You add that to the linear revenue, et cetera. And it's -- the point is, I guess, is that the business is still finding itself, but it's still got a very strong product. And strategically, the -- what I'd like to see is I'd like to see the marketplace come together with all of its teams to have a single seamless offering to the consumers in the New York market for all of the teams, obviously, other than football because that's all national. But every other team. Having said that, we're not there yet. We are partners with the Yankees, and we have the Nets and we added them in. And so we're getting there. But I think -- in terms of the business, that's probably the future of the business. That's the way to make the business really strong. But it's got quite a ways to go. And what M&A and machinations happen between now and getting to that product, it would only be a guess on my part. Operator: That concludes our Q&A session. I will now turn the call back over to Ari Danes for closing remarks. Ari Danes: Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day. Operator: Ladies and gentlemen, thank you all for joining, and you may now disconnect. Everyone, have a great day.
Operator: Good day, and welcome to the Q3 2025 SunCoke Energy, Inc. Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shantanu Agrawal, Vice President, Finance and Treasurer. Please go ahead, sir. Shantanu Agrawal: Thanks, Nick. Good morning, and thank you for joining us to discuss SunCoke Energy's third quarter 2025 results. With me today are Katherine Gates, President and Chief Executive Officer; and Mark Marinko, Senior Vice President and Chief Financial Officer. This conference call is being webcast live on the Investor Relations section of our website, and a replay will be available later today. Following management's prepared remarks, we'll open the call for Q&A. If we do not get to your questions on the call today, please feel free to reach out to our Investor Relations team. Before I turn things over to Katherine, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements. The cautionary language regarding forward-looking statements in our SEC filings apply to the remarks we make today. These documents are available on our website as are reconciliations to non-GAAP financial measures discussed on today's call. With that, I'll now turn things over to Katherine. Katherine Gates: Thanks, Shantanu. Good morning, and thank you for joining us on today's call. This morning, we announced SunCoke Energy's third quarter results I want to share a few highlights before turning it over to Mark to discuss the results in detail. We delivered Q3 2025 consolidated adjusted EBITDA of $59.1 million representing a sequential improvement over the second quarter, although not to the extent we expected at the end of Q2. We completed the acquisition of Phoenix Global on August 1, and are pleased with the progress we've made on integration activities thus far. We expect to begin recognizing synergies in 2026. Phoenix's financial results will be reported in our new Industrial Services segment, which also includes our former Logistics segment. During the quarter, we also extended our coke-making agreement with U.S. Steel at Granite City through the end of 2025. With the Phoenix acquisition complete and an updated view of market conditions driving the balance of 2025, we are revising our consolidated adjusted EBITDA guidance range to between $220 million and $225 million. Our updated guidance is inclusive of the addition of 5 months of Phoenix results, partially offset by the impact of a deferral of the sale of approximately 200,000 coke tons due to a breach of contract by one of our customers. Our revised guidance contemplates the production and storage and inventory of the 200,000 tons of coke until there is a resolution of the issue. Any changes to these assumptions could impact our guidance range. We are actively pursuing all legal means to enforce the contract. Earlier today, we also announced a quarterly dividend of $0.12 per share payable to shareholders on December 1, 2025. This is our 25th consecutive quarter announcing a dividend. While the dividend is evaluated on a quarterly basis by our Board, we expect to continue the dividend to reward our long-term shareholders. With that, I'll turn it over to Mark to review our third quarter earnings in detail. Mark? Mark Marinko: Thanks, Katherine. Turning to Slide 4. Net income attributable to SunCoke was $0.26 per share in the third quarter of 2025, down $0.10 versus the prior year period. The decrease was primarily driven by the mix of contract and spot coke sales coupled with lower economics from the Granite City contract extension in the Domestic Coke segment. Additionally, an $0.11 per share impact is due to the absence of the gain on elimination of the majority of legacy black lung liabilities recorded in Q3 2024. Transaction and restructuring costs had an impact of $0.09 per share in the quarter. These dilutive impacts were partially offset by a $0.32 per share improvement driven by lower income tax expense driven by capital investment tax credits. Consolidated adjusted EBITDA for the third quarter of 2025 was $59.1 million compared to $75.3 million in the prior year period. The decrease in adjusted EBITDA was primarily driven by the mix of contract and spot coke sales and unfavorable economics on the Granite City contract extension in the Domestic Coke segment. lower transloading volumes at the logistics terminals and the absence of the $9.5 million gain on the elimination of the majority of legacy black lung liabilities recorded in the third quarter of 2024 partially offset by the addition of 2 months of Phoenix global results. Moving to Slide 5 to discuss our Domestic Coke business performance in detail. Third quarter domestic coke adjusted EBITDA was $44 million and coke sales volumes were 951,000 tons compared to $58.1 million and 1,027 000 tons in the prior year period. The decrease in adjusted EBITDA was primarily driven by the change in mix of contracted spot coke sales resulting in lower pricing and lower economics and volumes at Granite City from the contract extension. Lower cold coke yields at Haverhill and a weather event at Indiana Harbor resulted in lower production volumes during the quarter as well. While this quarter's performance didn't fully meet our expectations, we did realize modest improvement over the second quarter with sequentially higher adjusted EBITDA and coke production and sales tons. During our second quarter earnings call, we projected a more favorable mix of coke sales in the second half of the year with higher contract volumes driving improvement in the Domestic Coke segment. However, due to the breach of contract by one of our customers, we had marginally lower sales volumes in the third quarter and currently expect a significant impact to results in the fourth quarter. For that reason, we are updating our guidance to reflect the impact of approximately 200,000 tons of unsold blast furnace coke production, which will be stored in inventory. Our full year 2025 Domestic Coke adjusted EBITDA is now expected to be between $172 million and $176 million. Now moving on to Slide 6 to discuss our new Industrial Services segment. Our Industrial Services segment, which includes our logistics business, and our Phoenix Global business generated $18.2 million of adjusted EBITDA in the third quarter of 2025 compared to $13.7 million in the prior year period. The increase in adjusted EBITDA was primarily driven by the addition of 2 months of Phoenix Global results, partially offset by lower volumes at our logistics terminals due to unfavorable market conditions. Going forward, the Industrial Services segment will report total volumes handled by our logistics terminals and customer volumes serviced at our Phoenix Global sites. The third quarter total logistics handling volumes were 5.2 million tons. Phoenix customer volume service were 3.8 million tons for the 2 months included in third quarter results. Similar to the Domestic Coke segment, the improvement in logistics business during the third quarter did not match what we previously anticipated due to persistent weak market conditions. While we expect to see further improvement quarter-over-quarter, the full year logistics business contribution is expected to be moderately lower than previously guided. We are updating our full year Industrial Services adjusted EBITDA guidance to between $63 million and $67 million, reflecting 5 months of Phoenix Global results and lower-than-expected volume improvement at logistics terminals in the second half of the year. Now turning to Slide 7 to discuss our liquidity position for Q3. SunCoke ended the third quarter with a cash balance of $80.4 million and revolver availability of $126 million, representing ample liquidity of $206 million post acquisition. Net cash provided by operating activities was $9.2 million and was negatively impacted by 2 items: number one, the accounting treatment of a portion of Phoenix Global's acquisition price. Phoenix's management incentive plan and transaction cost cash payments totaled $29.3 million were included in the acquisition price but flowed through our operating cash flow as a use of cash. Number two, the timing of cash receipts of $23 million at quarter end, which was subsequently received in October. Without the impact of these 2 onetime items, our operating cash flow would have been approximately $52 million higher. Net borrowing on our revolver was $199 million, cash acquired from the Phoenix Global acquisition was $24.3 million, and after factoring in the $29.3 million flowing through our operating cash flow, the net purchase consideration for Phoenix was $295.8 million. We spent $25.5 million on CapEx and paid $10.1 million in dividends at the rate of $0.12 per share this quarter. SunCoke has a strong track record of generating steady free cash flow, and we expect the trend to continue with the addition of Phoenix Global. As Katherine mentioned earlier, we intend to continue utilizing our free cash flow to reward our shareholders with a regular dividend, which is reviewed and improved on a quarterly basis by our Board of Directors. Let's move to Slide 8 to discuss our updated 2025 guidance. The summary is our full year 2025 adjusted EBITDA guidance. We now expect domestic coke adjusted EBITDA between $172 million and $176 million, reflecting the impact of a deferral of approximately 200,000 coke sales tons. We expect Industrial Services adjusted EBITDA between $63 million and $67 million, reflecting the addition of 5 months of Phoenix Global contribution, partially offset by lower volumes at our logistics terminals due to weak market conditions. Consolidated adjusted EBITDA is now expected to be between $220 million and $225 million. Any changes to the assumptions related to the deferral of the coke sales could impact our guidance range. We have updated our CapEx guidance to approximately $70 million, reflecting lower CapEx at our coke plants plus the inclusion of Phoenix's portion of CapEx. Our free cash flow guidance has changed significantly due to several factors. Last quarter, we updated our free cash flow guidance to include the favorable impact from tax law changes and lower CapEx spend partially offset by transaction and debt issuance costs. We are now also expecting a $70 million unfavorable impact to our free cash flow for the full year, resulting from the deferral of cash receipts from our customers' breach of contract. This estimate is based on the information we have as of today. As Katherine mentioned, we intend to pursue all avenues to recover our losses from this event, and it is possible that we will reach a conclusion by later this year or early next year. Additionally, the $29.3 million related to Phoenix's management incentive plan and transaction costs, which were reflected in the acquisition price are now running through operating cash flow and impacting our free cash flow for the year. We now expect free cash flow in the range of negative $10 million to 0 and expect $62 million to $72 million in operating cash flow for the full year. With that, I will turn it over to Katherine. Katherine Gates: Thanks, Mark. Wrapping up on Slide 9. While we're not in a position to give guidance for 2026 at this time, we are optimistic about what is to come next year. We continue to have a strong, profitable long-term coke business, underpinned by the 3 pillars of Indiana Harbor, Middletown and Jewell Foundry, which have consistently delivered excellent performance and results. Our Granite City coke plant is distinctly tied to U.S. Steel's need for Coke as well as the granulated pig iron project. Our Haverhill plant is tied to Cleveland-Cliffs, Algoma and the spot market, which remains weak. We're in active dialogue with Cliffs on contract negotiations, but have not signed a final contract yet. We'll have more to say on these plants when we give our 2026 guidance. We continue to have a positive long-term outlook for our Industrial Services segment. 2026 will benefit from a full year of Phoenix Global adjusted EBITDA contribution. We believe the headwinds we are facing in the logistics business are transitory with modest recovery expected in the logistics business next year. As always, we take a balanced yet opportunistic approach to capital allocation. On the back of our steady and healthy cash flow generation, we intend to continue our quarterly dividend as approved by our Board, which has always been well received by our long-term shareholders. We continuously evaluate the capital needs of the business, our capital structure and the need to reward our shareholders, and we'll make capital allocation decisions accordingly. We're committed to maximizing value for all of our stakeholders which means operating and investing in our assets in the best and most efficient way possible. Overall, we see the strong fundamentals of our business and expect our 2026 results to be an improvement over 2025. Let's go ahead and open up the call for Q&A. Operator: [Operator Instructions] And your first question today will come from Nick Giles with B. Riley Securities. Henry Hearle: This is Henry Hearle on for Nick Giles today. So to start off, following the deferral of the 200,000 tons, what is your level of confidence that incremental deferrals won't occur? And then also, would you be able to specify which facilities this deferral is from? Katherine Gates: So thanks for the question. The 200,000 tons are tons that we anticipate making and putting into inventory for 2025. So as you think about the guidance that we're giving for 2025, it contemplates the production and storage of that coke. We don't talk about specific facilities and contracts in detail. What I can tell you and what you do know is that we make and produce coke for Algoma out of our Haverhill facility. We have flexibility to produce and make coke for Algoma and other customers out of other facilities. But the customer that is in breach of contract and that is resulting in our producing and storing these tons and having the impact on our guidance for 2025 is Algoma. Henry Hearle: Okay. And then we also mentioned that you're pursuing remedies. What do those currently look like? Katherine Gates: So I know you can appreciate that from a legal perspective, there really is very little that we can say. What I will say is that we absolutely think that we have an enforceable contract. We are working with counsel. These are what we call long-term take-or-pay contracts. So without being able to get into litigation strategy and talk about it in more detail, it's very important to note that we think that we have an enforceable contract. We're working with counsel. We're pursuing all of our legal remedies in order to recover any financial losses that have occurred from their breach. Henry Hearle: Right. And if the contract cannot be enforced in the off chance that happens, where do you go next? Katherine Gates: Well, we -- I mean, we think that the contract hand and will be enforced, and we're pursuing the proper legal avenues to do that. And so what we're doing now, including the assumed production and storage of this coking inventory doesn't impact our ability to recover those financial losses. So we expect to be able to recover and we're going through the process to do that. Henry Hearle: Okay. And then one more for me before I turn it over. So according to our math, if you annualize those 200,000 tons, you get 800,000 tons. And at $47 per ton that would be an EBITDA impact of around $40 million. And this year, you've drawn $272 million year-to-date on your revolver and you're guiding to near free cash flow breakeven. Could you please walk us through your level of confidence in retaining the dividend and liquidity going forward? Shantanu Agrawal: So Henry, one thing to note, the 200,000 tons, that is the total exposure left for this year to Algoma. So that's the extent of it. It's not that it's 200,000 on an annual basis or anything like that. That's just the exposure that we have to Algoma that is being currently being produced and stored and that's what kind of the disputed amount is. Operator: And your next question today will come from Nathan Martin with Seaport Global. Nathan Martin: It's actually with The Benchmark company, but good morning, everyone. Sticking with the Domestic Coke business for a second, can you guys talk about your strategy for 2026 that you're unable to renew Granite City and Haverhill production under a long-term contract? Katherine Gates: Yes, absolutely. I mean we're really -- as I sort of said in my remarks, we're really optimistic for 2026. So if you think about the different pieces that we have going into the year, first, we're going to have a full year of the Phoenix results and we expect to have the synergies that we talked about when we announced the transaction. So that will be flowing through in '26. I mentioned that when we sort of build our '26 with logistics, we see that some of the challenges we had this year in terms of just the market imbalance domestic, having higher prices than international, we had 2 customer force majeure events there. Those really caused us to be lower than what our expectations were at the time of Q2. But as we look to 2026, we see modest recovery in that portion of our Industrial Services segment. So then when you think about Coke, you really have the pillars of the Coke business. And those are Middletown, which is a very profitable contract through December 2032. Indiana Harbor likewise through September 2035 and then you have our foundry coke business, which we continue to grow and has had very strong results for us out of Jewell. With Haverhill, we are in active discussions with Cliffs for a contract with our anticipated coke coming out of that facility, although as I mentioned earlier, we can supply out of other locations. So that we're in active dialogue with Cliffs. If we are not able to contract for the full capacity of that plant, then we would have to obviously look at selling into the spot market or selling to others in the North American market, seaborne market, what have you. If we couldn't do that profitably, then in that case, we would have to look at rationalizing our facility. And then with respect to Granite City, that is, as I mentioned, really a plant that's very much tied to U.S. Steel. We're in active discussions with U.S. Steel regarding the extension of that contract. But if we weren't able to extend that contract either because of they're not needing coke or not moving forward with the GPI project. In that instance, then we would not expect to continue to run that facility because it's just so tied to U.S. Steel. But as I said before, we are in active discussions with U.S. Steel regarding the extension of Granite City, we are in active discussions with Cliffs regarding the extension of what I'll call the Haverhill contract. And as we look ahead to '26 and we think about having that full year of Phoenix results, having the modest recovery on the logistics side and then really having that for foundation of Middletown and Indiana Harbor and Jewell foundry, we expect that our results in 2026 are going to be stronger than 2025. Nathan Martin: Katherine, I appreciate that thorough rundown. Just maybe any updates you can give on that Granite City GPI project in those negotiations you just referred to? Katherine Gates: You just appreciate that obviously, those are -- those discussions are confidential, but they are ongoing. So we expect that we'll have more to say when we give guidance in early '26. Nathan Martin: Okay. That's fair. Maybe shifting over to the new industrial segment. Is there any way to break out how much of the $18 million in adjusted EBITDA was specifically from Phoenix? Shantanu Agrawal: So kind of when we announced the Phoenix acquisition, right, like we laid out their LTM EBITDA of around $60 million on an annual basis. So that's kind of a good baseline to use like on a -- like you can divide it by 12 and take it a monthly number. So that's kind of a good proxy for what the Phoenix contribution is and going forward, right, like because it's one segment now, we look at it as like Industrial Services. They're similar businesses, logistics -- formerly logistics and Phoenix Global going forward. We are going to be reporting them together. But that's a good proxy to use for these results. Nathan Martin: Okay, Shantanu. And then from a I guess from a customer volume perspective, right, the 3.8 million tons you guys shipped from the legacy Phoenix business over the 2 months. Is that a good run rate for a monthly call it, 1.2 million tons. So that kind of gets you to that $60 million EBITDA number you just referred to. Shantanu Agrawal: Yes, roughly. I mean, I think we'll give a more refined number when we give the 2026 guidance, that will be a yearly number. but it's in the ballpark, the 1.9 million tons of customer volume service, we are calling it. That's a good monthly number to get to the $60 million annual EBITDA. Nathan Martin: Okay. Perfect. I'll pass it on. Appreciate the time everybody in best luck in the fourth quarter. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Katherine Gates for any closing remarks. Katherine Gates: Thank you, guys, again for joining us on today's call and your continued interest in SunCoke. Let's continue to work safely today and every day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Yum China Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Ms. Florence Lip. Please go ahead. Florence Lip: Thank you, operator. Hello, everyone, and welcome to Yum China Third Quarter 2025 Earnings Conference Call. With me on the call are our CEO, Ms. Joey Wat; and our CFO, Mr. Adrian Ding. Before we begin, I need to remind everyone that our remarks and investor materials contain forward-looking statements. These are subject to future events and uncertainties, and actual results may differ materially. Please consider these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filings. We'll also be talking about non-GAAP financial measures. We encourage you to review the comparable GAAP measures, along with the reconciliation of non-GAAP and GAAP measures provided in our earnings release, which is available on our Investor Relations website at ir.yumchina.com. You can also find both the webcast replay and a PowerPoint presentation on our IR website. Please note that all year-over-year growth rates discussed today exclude the impact of foreign currency, unless we mention otherwise. With that, I will now turn the call over to Joey Wat, CEO of Yum China. Joey? Joey Wat: Hello, everyone, and thank you for joining us. Building on our first half momentum, we achieved another solid quarter 3, accelerating store openings, driving growth in both same-store and system sales and expanding margins. Delivering growth across all three dimensions was no easy task, but we made it happen. System sales grew 4% year-over-year, outpacing the China restaurant industry. Same-store sales grew for the second consecutive quarter. Restaurant margin expanded to 17.3%. Together, these gains drove an 8% year-over-year increase in operating profit to $400 million, a quarter 3 record for adjusted operating profit. These results reflect the resilience of our established RGM strategy, which stands for resilience, growth and moat and the steadfast execution of our teams in a dynamic market. Store expansion accelerated in quarter 3 with 536 net new stores. Our total store count exceeds 17,500 stores, keeping us on track to reach 20,000 stores by the end of 2026. As we promised in our last Investor Day, leveraging our portfolio of brands and flexible store formats, we are penetrating deeper into more cities while enhancing convenience in existing cities. By brand, KFC is as resilient as ever with 2% same-store sales growth, strong and steady restaurant margins and a year-to-date record pace of new store openings. Pizza Hut accelerated store openings from the first half of 2025, surpassing the 4,000 store milestone while expanding restaurant margins year-over-year for the sixth consecutive quarter. Our dual focus on innovation and operational efficiency underpins our success, starting with our sales initiatives. We have delivered same-store transaction growth every quarter since 2023, 11 in a row. Notably, Pizza Hut has achieved 17% same-store transaction growth for three consecutive quarters. These results highlight the success of our pricing strategy, keeping KFC price points relatively steady and lowering them at Pizza Hut, amid improving restaurant margins. By making our food more accessible to more consumers, we attract more traffic. At the same time, we have transformed our operations for better efficiency. Great value and great prices must be accompanied by innovative, good tasting food. Our focus spans three key areas: hero products, limited time offers and new growth drivers. First, our hero products remain powerful growth driver and inspire strong repeat purchases. At KFC, chicken wings have been one of our core categories, featuring our hero products, roasted wings and hot wings. We extended this core category with the launch of the latest Crackling Golden Chicken Wings, [Foreign Language], extra crispy outside, juicy inside. This Chinese style wing is packed with a sweet and spicy garlic punch. During the promotion, sales of the new wings surged, matching the popularity of our roasted wings and showing great potential as a future growth engine. At Pizza Hut, pizzas account for over 40% of sales, with double-digit sales growth this quarter. We serve a broad range of pizzas, including pan and stuffed crust to satisfy diverse taste. Most recently, our new hand-crafted thin-crust pizza [Foreign Language] became our best-selling crust within just 2 months of launch, now making up one in every three pizzas sold. Perfectly crispy with abundant toppings, it earned rave reviews and drove promising repeat purchases. Second is our LTOs or limited time offers. We keep our core menu focused to ensure operational efficiency while introducing highly selective products for limited time periods to drive repeat visits. These offerings are not onetime wonders, but are designed for lasting appeal, in some cases, enduring for decades. [Foreign Language] KFC has developed several classic LTOs with a proven sales record that return periodically, such as Chicken Taco and Double Down each time we add fresh choices, like our Spicy Beef Wrap with crunchy lotus root [Foreign Language] which became our best-selling beef wrap LTO in the last 4 years. Third, we are constantly exploring new growth drivers. New products such as KFC's whole chicken, along with Pizza Hut burgers are showing strong growth. We also see opportunities across our price ranges. Entry-level combos at KFC and entry-level pizzas at Pizza Hut achieved double-digit sales growth year-to-date. Taking it a step further, KFC is now exploring satisfying meals priced below RMB 20 to better reach customers with tighter budgets via select channels in some regions. These initiatives will also strengthen our relevance and appeal in lower-tier cities. With our menu innovation and superb supply chain, we deliver outstanding value and drive traffic to our store at solid margins. While great tasting food is fundamental, emotional value is just as important. We collaborate with leading IPs in animation, gaming and sports on themed food, packaging and gifts, attracting new and young customers. In quarter 3, delivery sales accounted for 51% of total sales, up from 40% in the same quarter last year. While there have been increased promotions on delivery platforms, as we discussed before, our core brands maintain a balanced approach, driving top line growth while protecting margins. KCOFFEE Cafes took the opportunity to increase exposure and drive additional traffic, and Lavazza achieved double-digit same-store sales growth in quarter 3. Let me now turn the call over to Adrian to discuss our results in detail. Afterwards, I will share additional color on our strategy. Adrian? Adrian Ding: Thank you, Joey. Let me now update key highlights by brand. Let me start with KFC. KFC opened a record of 402 net new stores in quarter 3, expanding its portfolio to 12,640 stores. System sales grew 5%. Same-store sales grew 2%, led by same-store transaction growth of 3%. Ticket average was CNY 38, down 1%, primarily due to the rapid growth of smaller orders. Our side-by-side modules grew nicely and delivered incremental sales and profits. KCOFFEE Cafes expanded to 1,800 locations, well ahead of our expectations. Daily cups sold per store increased 30% year-over-year in quarter 3, driven by strong menu innovations and platforms promotions. We saw strong repeat purchases, particularly for our most popular beverages, Sparkling Americano series. Riding on strong summer demand, sales of this signature series grew over 50% quarter-on-quarter. Similar to KCOFFEE Cafes, KPRO also enjoy synergy with KFC by sharing its store space, in-store resources and membership programs. Offering lighter options such as Energy Bowl and Super Food Smoothies, KPRO is designed to capture the fast-growing light meal market. It stands out with its excellent value for money and KFC's trusted quality standards. We have expanded KPRO to 100 locations. Initial results have been encouraging. We're continuing to refine the model and plan to scale it further, primarily across higher-tier cities. Our membership data indicates that a significant majority of our members have yet to try KCOFFEE and KPRO. As such, we see huge potential for growth. Now turning to Pizza Hut. Pizza Hut surpassed the 4,000 store milestone in quarter 3. Store openings accelerated with 298 net new stores year-to-date, keeping us on track for double-digit percentage growth in total store count for 2025. System sales growth sequentially improved from 2% in quarter 1 to 3% in quarter 2 and 4% in quarter 3. Same-store sales rose 1%, driven by 17% same-store transaction growth for the third consecutive quarter. Ticket average was CNY 70, down 13% year-over-year, in line with our strategic focus on the mass market segment. Alongside our investments in food and value for money offerings, we improved restaurant margin by 60 basis points by streamlining operations and enhancing supply chain efficiency. Pizza Hut WOW has expanded to 250 stores, adding nearly 50 stores year-to-date with its low CapEx model and streamlined operations. These openings have taken us into 40 new cities with no prior Pizza Hut presence. We'll continue to ramp up new WOW store openings, primarily focusing on lower-tier cities. Let me now go through our quarter 3 P&L. System sales grew 4% year-over-year and same-store sales grew 1%, both in line with our targets. Our restaurant margin was 17.3%, 30 basis points higher year-over-year. Savings in cost of sales and occupancy and other costs offset increases in cost of labor. Cost of sales was 31.3%, 40 basis points lower year-over-year. Our continued efforts to optimize supply chain efficiency and favorable commodity prices contributed to the improvement. This enabled us to pass some of the savings to customers, offering great value for money. Cost of labor was 26.2%, 110 basis points higher year-over-year. While non-rider costs as a percentage of sales remained relatively stable year-over-year, the higher delivery mix led to higher rider costs overall. We continue to optimize store operations to partially offset wage inflation and the impact of higher delivery mix. Occupancy and other was 25.2%, 100 basis points lower year-over-year as a result of better rent and store CapEx optimizations. G&A expenses were 4.5% of revenue, even with the prior year period. Our OP margin was 12.5%, 40 basis points higher year-over-year, primarily driven by improved restaurant margin. Operating profit was $400 million, growing 8% year-over-year. Core OP also grew 8% year-over-year. Effective tax rate was 27.6%, 30 basis points higher year-over-year. Net income was $282 million, 5% lower year-over-year. Excluding our investment in Meituan, net income grew 7% year-over-year. Our investment in Meituan had a negative impact of $8 million in quarter 3 compared to a positive impact of $26 million in quarter 3 last year. As a reminder, we recognized $8 million less in interest income in quarter 3 this year due to a lower cash balance, resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.76, 1% lower year-over-year or up 11% year-over-year, excluding the impact from our Meituan investment. Let's now move on to capital returns to shareholders. Year-to-date, we returned a total of $950 million to shareholders, including $682 million in share repurchases and $268 million in dividends. In September, we announced an additional $270 million share repurchase program on top of the $866 million previously announced for 2025. With a quarterly dividend of $0.24 per share, we are on track to return a total of approximately $1.5 billion to shareholders in 2025. From 2024 to 2026, we are committed to returning approximately $1.5 billion each year to shareholders or annually around 8% to 9% of our current market cap. Our cash position remains healthy with $2.7 billion in net cash as of the end of quarter 3. Turning to our outlook. We accelerated store openings in quarter 3, bringing our year-to-date net new store count to 1,119. This keeps us on track for 1,600 to 1,800 net new stores in 2025. Franchise mix of net new stores year-to-date was 41% for KFC and 27% for Pizza Hut. We expect similar ratios for the full year, in line with our target ranges of 40% to 50% for KFC and 20% to 30% for Pizza Hut. Our 2025 CapEx target of $600 million to $700 million remains unchanged. Per store CapEx for new openings continue to decrease. KFC per store CapEx has decreased from CNY 1.5 million in 2024 to CNY 1.3 million to CNY 1.4 million currently, while Pizza Hut has fallen from CNY 1.2 million in 2024 to CNY 1.0 million to CNY 1.1 million. For quarter 4, with solid new store openings, we remain on track for mid-single-digit system sales growth. Predicting same-store sales growth is always challenging, but our goal is to keep quarter 4 same-store sales growth at similar levels as quarter 3. We're also working hard toward achieving our 12th consecutive quarter of positive same-store transaction growth. On margins, we continue to expect core OP margin for the second half to be slightly higher year-over-year, with quarter 4 broadly in line with last year due to tougher year-over-year comparisons. Last year's base benefited from Project Fresh Eye and Red Eye, while higher rider costs from a larger delivery mix remain a headwind. We'll focus on enhancing efficiency to mitigate these headwinds. As a reminder, quarter 4 is traditionally our low season with smaller sales and profits. Overall, we remain committed to meeting our full year target of mid-single-digit system sales growth and moderately improved margins. With that, let me pass it back to Joey for her closing remarks. Joey Wat: Thank you, Adrian. Let me share a few thoughts on our strategy. On the front end, our multi-brand portfolio, diverse modules and offerings cater to a wide range of customer segments and occasions. Through continuous innovation, we unlock new opportunities that drive incremental sales. On the back end, we are fostering even greater synergies. We expect more sharing, centralization and consolidation of resources in and across stores, regions and even brands. This will enable deeper market penetration and faster, more efficient expansion. For example, Mega RGMs manage multiple stores and support rapid store portfolio expansion. Side-by-side modules share KFC's in-store resources and membership programs to drive additional sales and profits with lighter investment and operating costs. We see tremendous opportunity ahead of us as we leverage synergies to grow our businesses while protecting margins. We are excited about our growth potential and look forward to sharing more at our Investor Day. Before we turn to Q&A, let me recap the three key takeaways from today. First, our dual focus on innovation and operational efficiency enable us to deliver yet another quarter of solid results. We accelerated store openings, recorded 1% same-store sales growth and expanded margins, delivering growth across all three dimensions. Second, we grew our businesses by leveraging synergies while protecting margins. KFC's KCOFFEE Cafes expansion is ahead of plan, and both KPRO and Pizza Hut WOW are building encouraging momentum. And lastly, our established RGM strategy, resilience, growth and moat, and our team's strong execution, we are on track to meet our 2025 targets while setting the stage for future growth. With that, I'll pass it back to Florence. Florence Lip: Thanks, Joey. Now let me share a quick preview of our upcoming Investor Day, which will be held in Shenzhen on November 17. Joey, Adrian, along with our leadership team, will share updates on our RGM strategy and 3-year growth algorithm. A live webcast of the presentations will be available on our IR website. For those visiting in person, we planned visits to a range of store formats and locations. Investors will be able to gain firsthand insights into the local market, see our operations in action as well as sample our signature and innovative menu items. With that, we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A. Operator: The first question comes from the line of Michelle Cheng from Goldman Sachs. Michelle Cheng: Joey and Adrian, congrats again for this very resilient result. We understand that the environment has been very challenging. So my question is about the delivery. So you have been mentioning that you will be disciplined in managing this delivery platform, subsidy campaign. But can you share with us more on your observation on the subsidy impact on the company and the whole market in the near term and in long term? Particularly, I think there is another round of concerns on this deflation. So how should we think about the pricing trend and also the competitive landscape impact? So that's my question. And actually, I just saw a news coming out regarding Yum! Brands, they mentioned something about Pizza Hut. So I'm wondering whether Joey can also comment on that. It looks like there's a review of the strategic options for Pizza Hut. So wondering whether there's any impact on the Yum China Pizza Hut business as well. Joey Wat: Thank you, Michelle. I would like to make three comments on the delivery and subsidies, and then Adrian can address the Pizza Hut question. Three comments here. One is, we have observed a more pronounced decrease in the subsidies in -- via the delivery platforms in coffee and tea but only a slight decrease in QSR. Point two is, overall, we still expect the impact on us to be limited as we have been and will continue to maintain our strategic focus and balanced approach with our core brands. That means we are driving sales growth while protecting margins at the same time. We will be capturing sales while ensuring long-term brand positioning. Point three, in the longer term, we do see -- and we've learned from the, I think, 2017, last time, similar scenario, that subsidies will eventually normalize. Therefore, it's important that we have the discipline as a company, as a brand to focus on menu innovation, good quality, customer service and protect the price perception, particularly for a well-established brand, like ourselves. So these are all fundamentals to the competitiveness of the business in the long term. Thank you, Michelle. Adrian? Adrian Ding: Sure, Joey. Michelle, on your question regarding Pizza Hut and Yum! Brands' announcement earlier today, we are aware of the development, and we understand Yum! Brands will be initiating a formal review of a range of strategic options. Obviously, Yum China and Yum! Brands are two independent companies. So we're not in a position to comment on their process of strategic review. But regardless of the outcome, we are confident in the strength of Pizza Hut brand in China, and our ongoing operations and significant growth potential of Pizza Hut here in China remain unchanged. Also, I would like to say that Yum! Brands and ourselves have been close and long-time partners, and it will continue to be the case. And I guess part of the question is the impact of Yum China, right? I'm not sure if you are implying whether we will be participating in some way or form into this strategic review process. Our policy is not to comment on any specific transactions. With that said, we have always taken a prudent approach, Michelle, as you appreciate, to evaluate potential investment opportunities, and we'll continue to do so. We set a very high bar. We'll conduct M&A only when the transaction is strategically sound and expected to create great value for our shareholders. Additionally, all M&A matters are subject to rigorous evaluation and discussions with our Board. Thank you, Michelle. Operator: The next question comes from Brian Bittner from Oppenheimer & Co. Brian Bittner: Can you give us a refreshed overview of what you are seeing from a macro perspective as it relates to restaurant industry in China and consumer spending by the China consumer? It seems like visibility is improving relative to past quarters and years, maybe the opposite of what you're seeing with the U.S. consumer. Any color there? And I think, Adrian, you said that you expect 4Q same-store sales to look similar to 3Q. Just want to confirm you said that. Any additional color on that dynamic would be helpful. Joey Wat: Thank you, Brian. In terms of the macro, as we have observed in quarter 3 and then probably even a little bit on the October holiday, the performance, as we can see the result and also as we can see a little bit now is -- it was good and it's in line with expectations. The traffic is good as people are traveling around, particularly during the holiday. But consumers still remain value cautious. And for us, if we look into the details of the performance across regions, it's similar. Lower-tier cities still, but they perform slightly better due to greater domestic travel here. But again, the consumer is still value cautious. So for us, we are acutely aware that it's not just about having good price. It's about pricing right, providing value for money together with good quality food and emotional value. So we continue to provide our customers with innovative products and together with breakthrough business models. Our focus is still focused on delivering the same-store transaction growth. And although it's nice to have the same-store sales growth as well, particularly for KFC with 2% same-store sales growth. And then along the way, we'll continue to focus on the operational efficiency and innovation at the same time. Thank you, Brian. Operator: Our next question comes from Chen Luo of Bank of America. Chen Luo: Joey and Adrian, congrats again on the solid Q3 results. My question is, again, on our expansion strategy to focus on smaller formats and franchise stores. So if we do the math, approximately 10% expansion in Q3 lead to around 4% sales growth. So can we say that this kind of 40% ratio can be maintained in the coming few quarters as we continue to pursue a shift to the smaller format? And meanwhile, if you look at the franchise stores, I understand that we try to improve the economics to P&L in the future. But where are we now? Is there any progress at the moment? Adrian Ding: Thank you, Lou Chen. Firstly, I think the observation of system sales growth at around 40% of the store count growth, that will not necessarily be true down the road because there are a few dynamics and nuances. Firstly, as I mentioned in the prepared remarks, both this quarter and previous quarter, this year, we have some strategic optimization of the store portfolio, with closure of some of the large stores with higher sales and opening of some of the smaller stores with a slightly lower sales. And as you correctly pointed out, new store sales is at an initial year at a discount to the mature store. And as I previously provided, the figure, is that the ratio is roughly 50% to 60% for the new stores in the initial year. Obviously, in the first 3 years, it will ramp up. So that's the first factor, right, the strategic optimization. So all else equal, even if the net new store is still 10% growth, if we don't have this factor, the system sales growth would have been a bit higher. So first thing. Second thing is the timing and opening and closure within the quarter affected the total operating weeks. For this quarter, as you can do the math very nicely, the timing of openings, particularly for KFC, there is a shift towards the September, so the third month of the quarter, thereby, even with the similar net new openings, that will impact the store week and thus the system sales growth. And for Pizza Hut, we're catching up in the store openings this quarter as well as the store week. I would say that's more evenly spread across the quarter, across the 3 months. So you can see with a similar net new store openings, the system sales did sequentially improve. And thirdly, as always, we have some little rounding differences. So in a nutshell, the system sales growth as a percentage of the -- compared to the net new build percentage, the discount will not stay the same down the road. And I guess your natural question would be what is the system sales growth down the road in the coming quarters and years? That exactly leads to our kind of guidance and outlook in our Investor Day in 2 weeks' time. So please bear with us and look forward to the Investor Day. I think the second part of the question -- I can't [ think]. Economics. Okay. Franchise improvement economics, yes. So we made some progress in improving the economics for our franchise business. As I mentioned in previous quarters, currently, it's still slightly lower than our equity business, right? Our operating margin for equity business is anywhere between 10% to 11%. For franchise business, without G&A, the operating margin is also around 10%, right, basically 4%, 5% out of 40%, 50% of system sales, so around 10%. But if we do a proper G&A allocation, the franchise operating margin will be high single-digit percentage of sales of our revenue. We did have some progress in the quarter. Obviously, I think some of the analysts and including yourself already noticed that we have some slight revision in our pricing mechanism for our franchisees, basically sharing some of the savings from our Project Eye Fresh and Red Eye between franchisees and ourselves. So that's a little progress. While we have more savings from these efficiency projects, we'll do a bit more of that. And hopefully, in the mid- to long run, the operating margin for franchise business will be in line with the equity business. And overall, in conclusion, I would say, in the short run, there will be no margin dilution from our franchise initiative because the mix is still small, and the margin is actually very similar already. In the mid- to long run, not only there will be no margin dilution, but more importantly, there will be ROIC improvement over the mid- to long run given the efficiency and capital for the franchise business. Thank you, Luo Chen. Operator: [Operator Instructions] Our next question comes from Lillian Lou of Morgan Stanley. Lillian Lou: My question is on the delivery as well, but it's more a little bit of short term. So I would like to understand in terms of the delivery order mix from food aggregators and also from our own system because I think in this quarter, the contribution of membership sales kind of dropped sequentially and also on a year-on-year basis. So is it -- are we seeing more orders from aggregators for the time being given the subsidy program, et cetera? And what kind of business initiatives or efforts we're making trying to get the customer back in terms of order generation into our own system? And related to that, I just want to understand whether there's any cost saving initiatives in terms of the riders costs in the future. Adrian Ding: Thank you, Lillian. So first of all, as you pointed out that the membership sales contribution to the overall sales has slightly decreased for the quarter. I would say this is more of a mechanical or mathematical result because when we account for membership sales contribution, we exclude our members who spend on the aggregators. Because -- actually, we know who are spending on the aggregators. If they are our members, but we exclude those parts. So when aggregator mix goes up, our membership, in the disclosed metric -- membership contribution will slightly go down. So that's a mechanical result. But if we take into account our members who spend on the aggregators and take everything into account, the overall so-called adjusted member sales contribution is actually very stable quarter-over-quarter, year-over-year. So that's the first part of the question. The second part of the question is the increase in delivery mix and the rider cost. Yes, we are actually not only working on the rider cost per ticket, which is indeed going down, but the delivery mix is going up. So that impact of the delivery mix going up have a higher overall impact, thus causing a headwind in our COL. By the way, this is exactly as we cautioned the market back in February, right, before even the delivery-aggregator war started, that we'll face headwind on delivery costs. So we are optimizing the delivery efficiency. But in addition to that, on COL, for the non-delivery part, we are doing a lot to improve the efficiency, right, in terms of streamlining, automating and centralizing processes so that the operational efficiency hopefully more than offset not only the wage inflation, but also partially offset the impact of the delivery mix increase. But all in all, we would say the COL continues to face a headwind. That's actually been very consistent ever since we started to give the guidance back in February. But we'll make all efforts to try to achieve a slightly improvement in both the UC margin and a moderate improvement in OP margin for the year for Yum China. And also, as we commented on the mid- to long run for both brands, we said KFC's margin -- restaurant margin will be stable. Pizza Hut, there's a good potential for margin improvement. Those comments actually do take into account the different scenarios of delivery aggregator subsidy and delivery mix. So hopefully, that addresses your question, Lillian. Joey Wat: I'll just make two quick comments, Lillian. Adrian talked about all the short term technical measures we are doing to protect our P&L. But at the same time, as you can see, we are also pushing for innovation and operational efficiency, at the same time in a slightly longer term, to protect the P&L. So one example is our continued acceleration of like KPRO and KCOFFEE. When we pursue the front-end segmentation of sales and then back-end consolidation of the operating costs, we -- in the longer term, in a more holistic situation, we manage the cost structure and protect it, if that makes sense. Thank you, Lillian. Operator: Our next question comes from Sijie Lin from CICC. Sijie Lin: So I have one question. We see more and more attempts at expanding new store formats and new categories. For example, besides KCOFFEE and Pizza Hut WOW, there are also KPRO, Fried Chicken Brothers, et cetera. So trying to learn more about our strategic planning and methodologies for these. So whether we have identified a few promising categories and concentrate our efforts, or we just try out various options, and they may work as a total? And also, what are the key considerations when we decide to develop a new model or new category? Maybe like, some competitors have proved it's a promising category, or it can create synergy with our other business? Joey Wat: Sijie, I think we will have more holistic, robust discussion with this particular topic in Investor Day for sure. It's a focus. However, right here right now, I would like to make a few points here. We are very focused on the growth initiatives to focus both of the same-store sales and system sales. So KPRO is one example. KCOFFEE is another one. And KCOFFEE actually were ahead of schedule. We originally tried to get to like 1,500 or 1,600 locations. I think right now, we are there already. So we'll continue to pursue it where we could. And I think KCOFFEE need no further introduction. KPRO, it's a concept we developed actually 9 years ago, but we keep working on it. And then this year, we certainly see the acceleration of the concept. So the thinking behind it, as I mentioned in my prepared remarks and also earlier, we understand we can pursue more growth with front-end segmentation of the customer and occasion. [Foreign Language] But at the back end, we just utilize our equipment, resources, labor, on the back end, to deliver the operational efficiency. So that's one way to do it, and it works. I mean, otherwise, it's very hard to grow new business to deliver incremental sales and incremental profit. Secondly is a promising category. Yes, of course. So we are focusing on fried chicken. But at the same time, KPRO is a concept that we deliver alternative for customers. And as we can see from the membership or the customer of KPRO, a very high percentage of KPRO customers are actually KFC customers. But they need a choice during -- once or twice during the week, and we provide the choice. So it's close enough, the category is niche, and we also have the food safety that customer trust. So we'll just continue to explore. But for new category or new concept, of course, the success rate is not 100%. So there's always some trial and then figure out how the new model -- new module will work. And then KFC fried chicken, Brothers or whatever, it's one of those trials. It's very, very early days. But we keep trying different things. Thank you, Sijie. Operator: Our next question comes from Xiaopo Wei from Citi. Xiaopo Wei: I have a question on KFC business. If we look at the 3Q results, 2% same-store sales growth with 5% system sales growth, very impressive. But however, if we look at the restaurant profit growth, which was at 5% and OP growth was only at 6%, we didn't see a lot of positive operating leverage. Shall we say that the delivery-driven strong growth will not have a lot of positive operating leverage in your business? If that is the case, will you work on something to try to improve that part of business to expand the OP margin of KFC to looking forward? Adrian Ding: Thank you, Xiaopo. KFC is a very resilient business. As we actually guided in the previous quarter's earnings release, we do expect the second half -- we did expect the second half of KFC restaurant margin to be broadly stable year-over-year. And that's kind of consistent to the real results that we see in the quarter. And one key philosophy we've always been mentioning throughout -- actually ever since 2019, over the past 6 years is, we expect the KFC's restaurant margin to be stable in the mid- to long run because it's actually at a very healthy level today, above 17%, full year basis, and it's one of the highest, if not the highest, in the restaurant industry. To the extent we have some leverage -- sales leverage that we generate from KFC today and in the future, we do look to share that margin upside with multiple partners, right, including our suppliers, landlords, frontline staff and also retain a small portion within the group and share with the shareholders. So that's quite consistent with our philosophy there. And tactically, for the quarter, for quarter 3, we do see a significant increase in the delivery mix, right, to 51% last year, quarter 3 was around 40% or so. So the significant increase in the mix caused a significant headwind in the COL as we cautioned the market. You can see the COL, KFC surge more -- around 160 basis points for KFC as a brand. For the group, it's [ 1 to 10 ] basis points. That's all because of the delivery mix increase. And we are -- we were successful in more than offsetting that increase with the benefits of COS and O&O. So technically, there is that driver there. But philosophically, in the mid- to long run, we do stick to our philosophy of keeping KFC restaurant margin broadly stable at a very healthy level. Thank you, Xiaopo. Operator: Our next question comes from Christine Peng from UBS. Christine, your line is open. You may unmute locally. Christine Peng: Sorry, I was muted. So I have a quick question regarding the same-store sales growth of KFC. So obviously, 2% same-store sales growth was upside surprise given Adrian previously mentioned about 0% to 1% same-store sales growth. So I was just wondering how sustainable you think this level of same-store sales will be continued going forward? The reason I ask is because, obviously, in the third quarter, there are some benefit from the subsidy provided by delivery platform. On the other hand, we also noticed that your management has been very diligent to launch new formats such as the tea, coffee, KPRO. So I was just wondering whether management can provide us some colors in terms of the contributions from delivery subsidy and the new formats launching to this 2% same-store sales growth. In addition to that, if you could talk a bit about the KPRO economics just briefly, I think that will be very helpful for us to understand the economic benefits of this new format. Adrian Ding: Thank you, Christine. So first of all, SSG for KFC, 2%, is actually slightly above our own expectation as well. It's also similar for KCOFFEE Cafes, right? Our own expectation, as Joey mentioned, was like 1,700 or so. And now in quarter 3, we already achieved 1,800 locations for KCOFFEE Cafes. So those are actually encouraging results, and we're happy to be wrong. We're happy to be wrong there. So it's slightly above our 0% to 1% target. And as to whether that level is sustainable, obviously, predicting SSSG is always difficult. The market is still quite dynamic, and consumers stay quite rational. But as we mentioned in the prepared remarks, we are working very hard to keep the quarter 4 SSSG at similar levels of the quarter 3 and achieve 12 consecutive quarters of same-store transaction growth. I think transaction growth is, I guess, slightly more within our control. And for SSG, in overall, it will be subject to different situations, including different factors, including competitive dynamics, including macro, et cetera, et cetera. So I will not be able to give outlook or guidance on whether this level of SSG will be sustainable. And on your second part of the question on KPRO economics, obviously, similar to KCOFFEE Cafes, KPRO is a module. It's a side-by-side module to our KFC mother store, and it contributes incremental sales and incremental profits. And as one can reasonably expect, the incremental sales contributed by KPRO will be larger than the incremental sales contributed by KCOFFEE Cafes because it's a restaurant concept, right, so restaurant module. But we have not given any guidance on the exact economics for KPRO because it's still in the early stage. We only have slightly more than 100 modules for KPRO and -- but the initial progress we made is encouraging. And we'll be ready to share more color on the economics and growth potential for KPRO as well as other modules or other initiatives, as some of the analysts asked during the early part of the call, in due course when we think we're ready. So hopefully, that addresses your question, Christine. Joey Wat: I'll add some color to the KPRO, Christine. So [ the need of ] KPRO, we share. We really utilize the synergy with KFC brand. So we leverage KFC store space, the membership program, the kitchen, the COL. And this is incredibly important because then the incremental investment is much smaller than a stand-alone store, which you are familiar with from the KCOFFEE. And because of so much synergy that we're pursuing, so it is -- the concept, it is delivering incremental sales and incremental profit. But at the same time, as you know us well after all this year, whenever we do something new, new concept, new product, we always look at sales first and profit later, step by step. Thank you. Operator: In the interest of time, we'll now take the last question from Linda Huang from Macquarie. Linda Huang: My question is regarding for the sales. Because we are pleased to see that in the third quarter, right, our sales up 4% faster than industry. But looking ahead, do you think that we have a chance to accelerate the growth to like high single digit? And if we can achieve this growth rate, will it come from the macro factor? Or is there any company-specific strategy that we can buck the trend to go faster? So that's my simple question. Adrian Ding: Thank you, Linda. Well, actually, you asked a question that we will share exactly the same topic in the Investor Day in a couple of weeks' time. So I'll try to keep some secret there to the Investor Day in 2 weeks. But overall speaking, as you correctly point out, from a company-specific perspective, we are ready in terms of lots of fundamental improvement, a lot of new modules are ready, new initiatives are being tested. The innovation is spread across all different parts of business, name it, right, menu innovation, store model innovation, emotional value, the new emotional value, exciting ones that also involves innovation, et cetera, et cetera. So I would say we're very well positioned to capture future opportunities. And obviously, we will not be settled with a mid-single-digit top line growth, system sales growth. But as to the exact growth algorithm over the next 3 years, that will be some topic we'll share in 2 weeks' time. Yes. So please stay tuned. Thank you, Linda. Joey Wat: Linda, I think I just have one quick comment here is, although KPRO [indiscernible] really exciting because it's new, but the biggest growth driver will still be from the core brand, ourselves. For example, KFC, the small-town mini, the different modules and then Pizza Hut, the bowls are doing very well to enter new cities, which we are very excited about. And then the hero product, in the prepared remarks, we talked about hero product. It's incredibly exciting to, again, focus on "surprise, surprise, fried chicken," and for KFC and then for Pizza Hut, "surprise, surprise, the pizza -- the new thin dough pizza." So we'll go through the building blocks or the key modules of these key drivers of the business in the Investor Day. So we look forward to it. Florence Lip: Thanks, Joey, Adrian and also thanks, Linda. This concludes our Q&A session. Thank you for joining the call today. Operator: Yes. That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines. Joey Wat: Thank you. Adrian Ding: Thank you.
Operator: Good morning. My name is Kathy, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to The Marzetti Company's Fiscal Year 2026 First Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO; and Tom Pigott, CFO. [Operator Instructions] Thank you. And now to begin the conference call, here is Dale Ganobsik, Vice President of Corporate Finance and Investor Relations for The Marzetti Company. Please go ahead. Dale Ganobsik: Good morning, everyone, and thank you for joining us today for The Marzetti Company's Fiscal Year 2026 First Quarter Conference Call. Our discussion this morning may include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Also note that an audio replay of this call will be available on our website investors.marzetticompany.com later today. For today's call, Dave Ciesinski, our President and CEO, will begin with the business update and highlights for the quarter. Tom Pigott, our CFO, will then provide an overview of the financial results. Dave will then share some comments regarding our current strategy and outlook. At the conclusion of our prepared remarks, we'll be happy to answer any of your questions. Once again, we appreciate your participation this morning. I'll now turn the call over to Marzetti Company's President and CEO, Dave Ciesinski. Dave? David Ciesinski: Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our first quarter results for fiscal year 2026. In our fiscal first quarter, which ended September 30, consolidated net sales increased 5.8% to a record $493 million. Excluding noncore sales attributed to a temporary supply agreement, or TSA, adjusted net sales increased 3.5% to $483 million. I am also happy to report that we achieved first quarter records for gross profit, which reached $119 million and operating income, which grew to $59 million. In our Retail segment, net sales increased 3.5%. This was led by our category-leading New York Bakery frozen garlic bread products, including notable contributions from the delicious gluten-free Texas Toast that we launched last fall. Volume gains for our successful licensing program also contributed to the increase in Retail segment sales, driven by Chick-fil-A sauces, Buffalo Wild Wings sauces and Olive Garden dressings. Circana scanner data for the quarter ending September 30 showed strong performance for several of our core brands and licensed items. In the Frozen Dinner Roll category, our own Sister Schubert's brand in our licensed Texas Roadhouse brand combined to grow 27.4%, resulting in a market share increase of 650 basis points to a category-leading 66.5%. In the Frozen Garlic Bread category, our New York Bakery brand grew sales 8.6%, adding 350 basis points of market share for a category-leading share of 44.1%. In the Produce dips category, sales of Marzetti brand increased 4.1%, adding 220 basis points of market share for a category-leading 82.1%. In the Shelf Stable Sauces & Condiments category, sales of Chick-fil-A sauces grew 9.6%, well ahead of the category, 0.2% growth rate, resulting in 17 basis points of share growth. Chick-fil-A sales benefited from both expanded distribution into the club channel that began during our fiscal fourth quarter and increased sales of the iconic sauces with traditional retailers. In the Foodservice segment, excluding the noncore TSA sales, adjusted net sales grew 3.5%, while volume measured in pound shifts increased 0.5%. In addition to the benefit of inflationary pricing, the increase in Foodservice segment sales reflects increased demand from several of our core national account customers. During the period, we are pleased to report a 7.2% increase in gross profit to a first quarter record of $119 million. Our focus on supply chain productivity, value engineering and revenue management, all remain core elements to further improve our margins and financial performance. I'll now turn the call over to Tom Pigott, our CFO, for his commentary on our first quarter results. Tom? Thomas K. Pigott: Thank you, Dave. Overall, the company delivered against this growth algorithm. Both the top line and gross margin performance improved and investments were made to continue to drive growth. First quarter consolidated net sales increased by 5.8% to $493.5 million. Breaking down the revenue performance, higher core volume and product mix drove a 210 basis point increase. Net pricing was accretive by 140 basis points. In addition, the company reported $10.7 million or 230 basis points of growth that resulted from a temporary supply agreement with Winland Foods, the seller of the Atlanta-based manufacturing facility that we acquired in mid-February. We entered into this agreement to facilitate the closing of the transaction. It's important to note that these temporary and noncore sales are expected to conclude during the quarter ended March 31, 2026. Consolidated gross profit increased by $8 million or 7.2% versus the prior year quarter to $118.8 million and reported gross margin expanded by 30 basis points. The gross profit growth was driven by our ongoing cost savings programs and volume growth. Note that excluding the $10.7 million in sales from the temporary supply agreement, which did not contribute meaningfully to gross profit, adjusted gross margin expanded by 80 basis points. Selling, general and administrative expenses grew $3.5 million or 6.3%. The increase reflects a higher marketing spend as we invested to support the continued growth of our Retail brands, higher brokerage expenses as well as increased compensation and benefits. During the quarter, the company recorded $1.1 million in restructuring and impairment charges. The charges are attributed to the planned closure of our sauce and dressing facility in Milpitas, California that we previously announced. This closure was part of our ongoing initiative to optimize our manufacturing network. Production at that facility has concluded and the property is currently being marketed for sale. Consolidated reported operating income increased $3.4 million, driven by the strong gross profit performance, partially offset by the higher SG&A expenses and the restructuring and impairment costs. Excluding the restructuring and impairment charges, adjusted operating income grew by 8.1%. Our tax rate for the quarter was 22.4% versus 22.8% in the prior year quarter. We estimate our tax rate for fiscal '26 to be 23%. First quarter diluted earnings per share increased $0.09 or 5.6% to $1.71. The restructuring impairment charges I mentioned reduced diluted earnings per share by $0.03 in the current year quarter. With regard to capital expenditures, our payments for property additions totaled $15.6 million for the quarter. For fiscal '26, we are forecasting total capital expenditures of between $75 million and $85 million. We will continue to invest in both cost savings projects and other manufacturing improvements as well as the newly acquired Atlanta facility. In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $0.95 per share paid on September 30 represented a 6% increase from the prior year's amount. Our enduring streak of annual dividend increases stands at 62 years. Our financial position remains strong with a debt-free balance sheet and over $182 million in cash. During the quarter, the company generated $69.5 million in operating cash flow, an increase of $49.6 million versus the prior year quarter. To wrap up my commentary, our first quarter results demonstrate strong execution across a number of areas that drove top line and bottom line growth in a difficult operating environment. In addition, we continued to make investments to support further growth and cost savings. I will now turn it back over to Dave for his closing remarks. Thank you. David Ciesinski: Thanks, Tom. Suffice it to say, it's a dynamic and some might add challenging time in the food industry, tariffs, stubborn inflation, GLPs, MAHA and consumers under financial pressure often make it difficult to generate organic growth. Against this backdrop, I couldn't be more proud of our team at Marzetti, which continues to leverage our portfolio of trusted brands and our industry-leading innovation capabilities to make great-tasting, consumer-relevant products and deliver sustainable growth for our shareholders. As we look ahead, The Marzetti company will continue to leverage the combined strength of our team, our operating strategy and our balance sheet in support of the 3 simple pillars of our growth plan, to: one, accelerate core business growth; two, to simplify our supply chain to reduce our cost and grow our margins; and three, to expand our core with focused M&A and strategic licensing. Looking ahead to our fiscal second quarter and the remainder of our fiscal year, we anticipate Retail segment sales will continue to benefit from growth from our licensing program, including expanding distribution for the popular Texas Roadhouse Dinner Rolls and contributions from our own brands. In the Foodservice segment, we expect to benefit from sales to select quick service restaurant customers in our mix of large national accounts. Like many of you, we continue to monitor external factors, including U.S. economic performance and consumer behavior that may impact the demand for our products. With respect to input costs, in the aggregate, we anticipate a modest level of cost inflation in the quarters ahead that we plan to offset through contractual pricing and our cost savings programs as we remain focused on continued margin improvement. In closing, I would like to thank the entire Marzetti Company team for all their hard work this past quarter and their ongoing commitment to grow our business. This concludes our prepared remarks for today, and we'd be happy to answer any questions that you may have. Operator? Operator: [Operator Instructions] Your first question comes from the line of Alton Stump from Loop Capital. Alton Stump: Great. Congrats on the quarter. Obviously, it was great to see volume growth exceed expectations in both of your segments during the quarter. I guess I want to ask you about the inflationary front on your Foodservice business specifically. Could you remind us sort of how the pass-through mechanism works in a segment. It's obviously different versus Retail operations. Just how much of a lag there is, if anything, when you're passing through what appears to be an inflating environment on the Foodservice side? David Ciesinski: Yes, Alton, I'd be happy to answer the question. So as you recall, 75% of our business or so is tied to large national accounts. And every one of those customers have an agreement whereby on a quarterly basis, we sit down and we mark-to-market on their key ingredients. So usually, what we'll see happen is if, let's say, in said quarter, we start to see one of our commodities inflate, we'll sit down with them and we'll document that. And that's passed along right into the price of the product. And it's true as we inflate and it's also true as we deflate. In the current environment, what we're seeing, Alton, is that we're seeing things like soybean oil back off a little bit. We're seeing eggs back off a little bit. Shelled eggs are moving up, but the eggs that we buy, which are yolks and whole eggs are backing off of some of their historical highs. So what we continue to see in this environment is modest inflation that we feel more than comfortable that we can cover by way of pricing and then value engineering work that we have. Alton Stump: That's great, Dave. And then I guess just one follow-up and I'll hop back in the queue. But just on a quick reference to Chick-fil-A sell-through data, being up almost 10%, I mean, obviously, this has been a huge home run for you guys when it first came out some years ago, but that I think is one of the bigger growth numbers that we've seen from Chick-fil-A over the last 2 quarters, as you obviously are up against, of course, tougher and tougher comparisons each year. And of course, you referenced the increased club channel distribution. Was that really the key driver of that? Or was there any sort of core underlying strength that you saw to drive that almost 10% sell-through number? David Ciesinski: Yes. Great question. A lot of that was expanded distribution into club. And we did see some growth also in our core Retail business as well. And I think it's worth stepping back, it was in April of 2019 that we flew to Chick-fil-A and we met with that great partner. We talked about the idea of taking the product into Retail, and they very excitingly got behind it. And we did all the work necessary to bring in into the market. So here we are 5 years on. And if you combine the Retail sales of both the sauce and the dressings, we're talking a $200 million, $220 million in Retail sales business. So with a lot more that we both believe, we being The Marzetti team and Chick-fil-A that we can do with this great brand platform. So we're very excited. I think the other notable thing with club is that it's allowing us to further improve our household penetration and reach more customers. So we believe that channel is going to be an important long-term way for us to reach consumers in addition to mass and retail. Operator: Your next question comes from the line of Jim Salera with Stephens. James Salera: I wanted to drill down a little bit more on Foodservice. Given the strong results there, even when we strip out the TSA, particularly given what a lot of restaurant companies are reporting right now. Can you just walk us through where the outperformance there came from, again, as kind of restaurant commentary across the industry is pretty downbeat. Is it the type of products that you're supplying to your restaurant partners are kind of more in demand? Is it the brands that you're servicing? Just any color you can provide there would be helpful. David Ciesinski: No, I'd be happy to. So I think you understand as well as anybody else that the core of our Foodservice business, our large national accounts. If you look at the most recent period, 5 of our 7 largest national accounts were actually growing sales and traffic in the period, led -- in that group led by Chick-fil-A, which is doing an amazing job with pretzel club sandwich that they launched that LTO, which we were more than happy to provide the sauce for. Domino's is another very important strategic customer for us, and they've been growing in this period. Taco Bell grew in the period and then others did as well. So I think part of what's happening here, Jim, if you kind of ladder back and you look at the challenging backdrop, I would point to 2 things. One is we are blessed enough to be able to win with the winners. The people that have a value proposition in this environment that consumers continue to find relevant and they're willing to spend their hard-earned money against. The second is we're playing in categories that are relevant for these customers. They're all looking for ways to differentiate themselves and cut through this noisy backdrop and screen flavor. And that really is our wheelhouse. So that's how we feel like we've been able to do it in the quarter. It helped us offset a bit of a gap that we had that we've been talking to you guys about with some discontinued items. And it sets up, I think, for us to continue to be able to grow and it highlights part of the durability of our overall business strategy, which is flavor, flavor, flavor on consumer-relevant forms that our customers in Foodservice continue to see as important and their consumers, the end-using consumers ultimately enjoy eating. James Salera: Great. And Dave, if I remember correctly, when you talked in fourth quarter, the expectations for Foodservice for full year '26 were kind of flattish. Any update to that outlook given the outperformance in 1Q and then some of the dynamics you just referred to? David Ciesinski: Yes. If you remember, we were a bit cautious about the volume outlook because we had a couple of big customers that discontinued items. And we thought we were going to get flattish on sales by way of a little soft volume and a little bit of inflationary pricing that got us there. And I think if anything, what we're seeing in this environment is that the Foodservice outlook has improved modestly based on what we're seeing. Operator: Your next question comes from the line of Scott Marks with Jefferies. Scott Marks: I wanted to ask on the profitability side. You made some comments in the prepared remarks about some increased marketing spend. Just trying to gauge how much that impacted the Retail segment. I think profit for that segment came in a little light of what folks were looking for. And I know you've been playing a little bit with some of the marketing, some of the promotional spend. So just wondering if you can share an update on that and how we should be thinking about that. Thomas K. Pigott: Sure. So overall, when you look at Retail profitability, it was down in the quarter as you highlighted. Three main drivers to that. First, as eggs prices have gone up considerably, we price for that. But we've priced for the longer-term outlook. So right now, in this particular quarter, PNOC was negative for Retail and that impacted the margin profile this quarter. The second thing on the margin aspect of Retail is we've done a lot of efforts on the network to close the Milpitas facility to activate the College Park. A lot of those savings are flowing more to the Foodservice P&L. So over time, we'll begin to get more productivity savings on Retail. But right now, as you look at the Foodservice profitability, it's getting the main benefit. Now getting to your -- the core of your question, the investments in marketing, we see an opportunity to continue to elevate our marketing in Retail. We're below a lot of the peers in what we've spent. And we're getting great response in terms of the programs we're putting in place with the marketing team. So we're going to continue to invest in that space. When you look at the SG&A in Retail, the majority of that increase was that marketing spend. We also had slightly higher brokerage costs relative to the higher volume performance for the segment. So overall, we feel good about the investments we're making into the Retail segment and the overall profitability outlook. Scott Marks: Appreciate the color there. A follow-up question would be, there's been a lot of commentary from some of your peers recently around a softer U.S. consumer. Obviously, your business seems to be bucking the trend a little bit, have some benefits from some of the distribution initiatives. But just wondering if you can kind of help us understand how you're seeing the consumer today? And how are you feeling about kind of the core underlying business relative to some of those distribution wins that you noted? David Ciesinski: Yes. No, Scott, we're seeing the same thing that everybody else is. We're looking at a consumer that's under pressure. All that being said, the consumers are still eating and flavor still matters. And I think what we're choosing to do is really leverage our innovation capabilities and bring to the market products that they're finding relevant. Maybe I could kick off a couple. I would, on the Retail side, point to New York Bakery, which is in a bit of a sleepy category, right, garlic toast. If you look at it sequentially, we've been growing that business quarter after quarter, at least to 44.1% share in the most recent period. That's behind our own toast. It's behind the new gluten-free item which has increased in velocity and a value pack of bread sticks that we have. So great item even in this economy that consumers are finding relevant -- as it pertains to our roll business here, again, I think we were up about 650 basis points, if I recall, or thereabouts in overall market share. We're growing our share. We're also growing the category considerably. Our own Sister Schubert's brand was roughly flat, and the real growth there is coming from the Texas Roadhouse roll, which is terrific. We love to repeat on that item, great tasting roll, affordable price point, where consumers can treat themselves. If you move around and you look at our Marzetti brand, we've had a great season so far in our dips and caramel dip. And I think all of these are just affordable luxuries that even against a challenging backdrop, consumers can afford. So is it challenging? Yes. Do we see pathways to leverage innovation and good execution to continue to grow? Yes. Would we like the growth to be even faster? Absolutely. But -- and we're going to continue to press for it. But we continue to see against all of our different owned brands and licensed brands, the ability to, even against this backdrop, grow because flavor matters and we believe that our innovation capabilities around flavor is among, if not the best in the industry. Operator: If there are no further questions, we'll now turn the call back to Mr. Ciesinski for his concluding comments. David Ciesinski: Well, thanks, everybody. It's been a short call, but a good call. We enjoyed sharing our results with you. We look forward to seeing all of you guys on the road during the course of the next quarter and look forward to getting together when we announce our next earnings in February. Have a great rest of the day. Operator: Thank you, and thank you for your participation. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Shoals Technologies Group Third Quarter 2025 Earnings Conference Call. Today's call is being recorded, and we've allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Matt Tractenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin. Matthew Tractenberg: Thank you, Charlie, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties and should not be considered guarantees of performance or results. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investors section of our website at investors.shoals.com. With that, let me turn the call over to Brandon. Brandon Moss: Thank you, Matt, and thanks to everyone joining us on the call. I'll begin by sharing key results from the third quarter. I'll then discuss the current demand environment in the U.S. And finally, I will review the progress on our strategic growth initiatives. Dominic will dive deeper into the third quarter results and provide our outlook on the fourth quarter 2025. We'll then finish the call with questions from our analysts. I'm very pleased with our execution during the third quarter. We delivered record revenue of $135.8 million, slightly above the high end of our expected range. Revenue grew 32.9% over the prior year period and was up 22.5% sequentially over second quarter results. Our commercial team continues to drive significant growth in our book of business. We added approximately $185.4 million in new orders in the period, helping to achieve a company record for backlog and awarded orders or BLAO, of $720.9 million, a 21% year-over-year increase. This resulted in a very strong book-to-bill of 1.4 this quarter and supports the continued growth we see as we look ahead toward 2026. As of September 30, 2025, approximately $575 million of our BLAO has shipment dates in the upcoming 4 quarters running through the third quarter of 2026. Next year is shaping up to be another year of strong growth for Shoals. As you are aware, 2025 brought with it some volatility, largely a function of an uncertain and rapidly shifting political environment. However, as you've seen in our results thus far, our business has been resilient. The actions we've taken to attract and retain customers over the past 2 years are paying off. We've improved our relationships with EPCs and developers and signed new MSAs that reflect our shared objectives. Our focus on providing innovative solutions to meet customers' needs has led to new product development and additional opportunities for growth. We continue to improve our operating model to drive out inefficiencies and increase capacity. And we've maintained excellent liquidity and positive free cash flow despite increased capital expenditures and warranty remediation needs over the past year. As a result of our strong Q3 results and the current demand environment, we have slightly increased the range of anticipated revenue for the full year 2025, now representing between 17% and 20% year-over-year growth and above the range presented at our September 2024 Investor Day. Adjusted gross profit percentage remained in the expected range for the quarter, landing at 37%. Gross profit was $50.3 million, the highest quarterly amount since 2023. Dominic will provide more insight into the impact of both product mix and tariffs on our margins in a few moments. The sequential increase in SG&A this quarter was largely a function of increased legal expenses. The ITC hearing during the third quarter was one driver, but we also had elevated legal expenses related to the pending shrinkback litigation as we work through fact discovery, depositions and expert analysis. Our third quarter adjusted EBITDA was within our expected range at $32 million or 23.5% of revenue. And finally, the remediation work for known shrinkback issues progressed as expected. The probability that some additional work may be required in the coming quarters still remains, so we are not changing our estimated range of expense this quarter. However, we are pleased with our ability to respond to all customers that express concerns thus far and resolve those issues requiring remediation. Congratulations to our customer support team, and thank you to our customers for their continued trust and patience. Turning to the broader U.S. market. While current headlines remain distracting and somewhat disconnected from the underlying demand for solar energy, our customers remain as busy as ever. Developers have safe harbor projects for several years with many projects confirmed through 2030. While we do not expect a significant number of projects to be pulled forward, it is reassuring to know that the industry is healthy and growing. As we have discussed, the need for new energy supply is real. The massive investment cycle in AI and data centers, combined with the potential industrialization and onshoring of manufacturing will result in low growth far in excess of what we've seen in recent decades. Solar is best positioned to meet these rising energy needs today and through the balance of the decade. The U.S. Department of Energy acknowledged that solar will play a notable role meeting the growing demand given its speed of deployment and favorable cost structure. Following the passage of HR 1 in July and the treasury guidance issued in August, we believe developers will successfully navigate the tax incentive landscape and as a result, have not seen material changes to project calendars. Less uncertainty and the unrelenting focus on bridging the power supply gap is driving continued investment. Turning to our business units. Third quarter was another strong period of growth within our core utility scale solar market. Customer project calendars remain tight with little excess capacity to move things around. Labor availability is a focus for the industry and will likely remain so for the foreseeable future. That said, our quote volume exceeded $900 million in the third quarter, a sequential increase of more than 20%. These are projects that would generate revenue in late 2026 and 2027, further supporting our long-term growth trajectory. Our core utility scale market is resilient, and our commercial strategy continues to drive growth. I'd like to now discuss progress we are making in other strategic areas of our business. Shoal's additional growth opportunities include international, CC&I, OEM and BESS. Our progress in each of these is meeting or exceeding our expectations. The opportunity set across international markets continues to expand. Our pipeline exceeds 20 gigawatts and includes projects in Latin America, EMEA and Asia Pacific. We've hired an experienced commercial leader in Australia, where the government mandate has been expanded to target 40 gigawatts of new capacity, including 14 gigawatts of clean energy capacity by 2027. This is expected to stimulate approximately $73 billion in overall electricity sector investment. It's a very attractive market and one we're aggressively pursuing. We recognized more than $6 million of revenue in Q3 from 2 ongoing projects in LatAm and in Australia. We expect to complete all 3 of these international projects in the fourth quarter. Our team anticipates continued acceleration and diversification across our focus markets through 2026. In addition, our relationships with large global developers with ties to the U.S. Export-Import Bank are opening doors and growing our pipeline in developing markets outside our targets of Australia, Latin America and Europe. Our community, commercial and industrial or CC&I business is performing well. We are engaged with large, well-respected electrical distributors that are driving meaningful quote volume increases. While this market remains small as compared to our core utility scale opportunity, it is one that provides us a path to create lasting relationships and future growth with new customers. Our OEM business is tracking ahead of expectations as our partner continues to see strong demand for their panels. Our deep engineering and manufacturing relationship with the largest domestic module provider is a strategic advantage for Shoals and one we're committed to maintain and expand. The opportunity we've received the most questions about this year is our battery energy storage solutions or BESS offering. So I'd like to provide a little bit more detail today. Last year, we introduced a BESS solution targeting the solar plus storage market, specifically when new solar plants are built with attached storage systems. That opportunity remains exciting for us today since it builds upon our relationships with existing customers and developers. In addition to that opportunity, there are also 2 additional use cases that we are now pursuing, grid firming and data centers. Let's start with grid firming solutions. Utilities are very interested in providing more reliable and consistent power to their customers. One method is to add grid scale battery storage solutions to their existing grids in order to provide real-time balance between supply and demand. Shoals' product offerings can play a part in providing solutions to system integrators in this area, and we are actively quoting opportunities in this space. In addition to grid firming, there are emerging use cases with data centers. Once again, consistent and dependable energy is critical to operations. Battery storage solutions can provide uninterrupted power as well as to help regulate power demand spikes and troughs created by artificial intelligence processing. This is an area that has significant market potential in the coming years, and we are actively engaged with system integrators in this market as well. This is an exciting time in a relatively young market, but one we are investing heavily in. I'm pleased to share with you today that we have already signed 2 MSAs to deliver products in these emerging BESS markets and are in conversation with several others about providing Shoals systems and their unique solutions. At the end of Q3, we had approximately $18 million of BESS in our backlog and awarded orders. In summary, our domestic utility scale market is healthy and growing. We are executing our strategic framework of market diversification as anticipated, and we are leveraging our expertise, engineering and manufacturing capabilities to pursue new opportunities with speed and purpose. It is an exciting time to be at Shoals. With that, I'll now turn it over to Dominic, who will discuss our third quarter financial results in more detail and our outlook for the fourth quarter. Dominic? Dominic Bardos: Thanks, Brandon, and greetings to everyone on the call. Turning to our third quarter financial results. Revenue increased by 32.9% year-over-year to $135.8 million. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of international, CC&I and OEM contributed to year-over-year revenue growth in the quarter. Gross profit increased to $50.3 million compared to $25.4 million in the prior year period. Our GAAP gross profit percentage was 37.0% compared to 24.8% in the prior year period within our expected percentage range of mid- to upper 30s. There are a few dynamics worth mentioning with regards to gross profit percentage. First, I'd like to discuss product mix. Certain EBOS solutions drive more value for customers than others. As such, those custom and engineered solutions typically carry higher margins than other product lines. Some new products such as long-tail BLA drive incremental revenue in our share of wallet, but do not carry the same gross profit percentage as our traditional BLA solution. Long-tail BLA does, however, provide incremental gross profit dollars and has allowed us to capture additional share while meeting customer needs. Second, I'd like to provide some color regarding tariffs. Our supply chain team is constantly working to drive material costs out of our products. Months of work to test new raw materials, negotiate terms and onboard new suppliers can be undone in a moment as trade policies change without notice. Unfortunately, like many others, Shoals has been impacted by these policy shifts this year. And as a result, some margin-enhancing savings could not be realized as expected. Moving on to general and administrative expenses. G&A was $29.4 million, which is $10.7 million higher than the prior year period. Our legal expenses, which accounted for approximately $5.7 million of the increase, remain elevated while we make our way through ongoing litigation matters. Approximately $6.8 million of legal expense was specifically related to the ongoing wire insulation shrinkback litigation. Income from operations or operating profit was $18.7 million compared to $4.5 million during the prior year period. Operating profit margin was 13.7% compared to 4.4% a year ago. Net income was $11.9 million compared to a net loss of $300,000 during the prior year period. Adjusted net income was $21.0 million compared to $13.9 million in the prior year period. Adjusted EBITDA was $32.0 million compared to $24.5 million in the prior year period, representing 30% growth. Adjusted EBITDA margin was 23.5% compared to 24.0% a year ago, driven primarily by lower gross margin flow-through. Adjusted diluted earnings per share of $0.12 was approximately 50% higher than the prior year period. During the third quarter, we spent $11.9 million on wire insulation shrinkback remediation and had a remaining warranty liability on our balance sheet of $7.2 million as of September 30. The current portion of the remaining liability related to shrinkback is now $4.2 million. Operationally, we generated $19.4 million of cash in the third quarter, driven by higher net income, an increase in accounts payable and higher accrued expenses. These increases were partially offset by a higher accounts receivable balance, driven by strong sales volumes and increased spend on warranty remediation. On a year-to-date basis, we have generated $21.2 million in operating cash flow. Free cash flow was $9.0 million in the third quarter, reflecting both the $11.9 million impact of remediation costs and elevated capital expenditures related to our new facility. These 2 items impacted free cash flow by a total of $22.4 million in the quarter. We received our certificate of occupancy for our new facility in Portland, Tennessee, and we began moving into the new facility in September. We expect to begin consolidating operations from our 3 existing facilities in the fourth quarter and expect to complete the entire consolidation by mid-2026. Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $8.6 million and net debt to adjusted EBITDA of 1.2x. Our net debt was $118.2 million, a slight decrease over the prior quarter. We paid an additional $5.0 million down on our revolver during the period, which had an outstanding balance of $126.8 million at the end of the quarter. With regards to capital allocation, given the number of competing priorities for our cash this year, including shrinkback remediation and factory consolidation, we did not purchase any shares in the third quarter under our share repurchase program. Backlog and awarded orders ended the third quarter at a record $721 million, a sequential increase of $50 million. Backlog constitutes $298 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming period can be achieved. As of September 30, $575 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters with the remaining $146 million beyond that. Turning now to the outlook. Quarterly pacing within the year has continued to follow the strong back half we've been communicating since February. For the quarter ending December 31, 2025, the company expects revenue now to be in the range of $140 million to $150 million, representing 36% year-over-year growth at the midpoint and adjusted EBITDA to be in the range of $35 million to $40 million. This will result in full year 2025 revenue between $467 million to $477 million and adjusted EBITDA in the range of $105 million to $110 million. In addition, for the full year, we expect cash flow from operations to remain in the range of $15 million to $25 million, capital expenditures to remain in the range of $30 million to $40 million and interest expense to remain in the range of $8 million to $12. With that, I'll turn it back over to Brandon for closing remarks. Brandon Moss: Thank you, Dominic. The demand environment over the last few years has been volatile, driven not only by the macroeconomic and political backdrop, but also labor availability, supply chain disruptions and permitting. That said, 2025 appears to be playing out slightly better than we had anticipated when we provided guidance in February. The changes we've implemented, which span both commercial and operational process improvements and shifts in strategic direction and focus are enabling exciting and visible improvements across the company. The transformation from a company with a narrow customer mix, product offering and geographic footprint to a diversified multinational energy solutions provider is beginning to take shape. These changes do not occur overnight, but through the deployment of repeatable processes that improve productivity, visibility and scale, through the hiring of seasoned business leaders who can execute with consistency, through the focus on developing new innovative product solutions for customers facing real-world problems and through an unyielding focus on improving the customer experience from start to finish. We are building the next version of Shoals, one that will deliver attractive returns for our shareholders through profitable growth and strong cash flow generation. I'm very encouraged about the progress we've made and how well we're set to continue the journey in 2026 and beyond. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from Christine Cho of Barclays. Christine Cho: I just wanted to start with the data center opportunity. Brandon, I think in your prepared remarks, you talked about conversations with system integrators. Is that how you expect the data center opportunity to materialize through integrators? And if that's the case, how should we expect the opportunity will show up in your bookings? Should we think something like this $18 million that you guys talked about this quarter, like more consistently every quarter? Or could we see a lumpy large booking? Also, if you could provide some more information on the MSAs, maybe size, type of counterparty, how we should expect orders from these MSAs to make it into backlog? Brandon Moss: Thanks, Christine. As you mentioned, we are excited about the 2 new MSAs. We're excited about the $18 million of backlog and awarded orders. Specifically, our channel to market, the question around system integrators, we could be partnering with system integrators directly. We could be partnering with EPCs directly on the projects, and we've talked about in past quarters, even a sale to a hyperscaler. So it's a new market and how we partner for a particular project may change from project to project. I think the important thing for us is that we are engaged in some way, shape or form with these projects and are helping customers engineer solutions. Many of these solutions at data centers, and I know you asked specifically about who the MSAs are with and the size, as you know, this one, the data centers, typically, there's a level of confidentiality about where they are and who they are. And specifically with our MSAs, our partners may be deploying some proprietary system architecture. So we're limited about what we can share for those specific opportunities. As we've talked about in the past, this business for us because of the newness of it and even the size and scale of some of these projects, our backlog and awarded orders may at times be lumpy. So I wouldn't specifically count on, hey, we've booked $18 million, and we're going to continue to book that quarter after quarter. We can have some lumpy bookings. That said, as we begin recognizing revenue on this, the revenue should be somewhat stable as customers take deliveries. On this specific -- or these specific opportunities in our backlog and awarded orders, I would anticipate revenue beginning to materialize in the beginning of second quarter. So very young and evolving market, new product set for us. We're very excited about it. And as we've commented in the past, we're dedicating about 15% of our floor space, our operating floor space here in our new facility to our BESS product offering, and that build-out is underway. So things are progressing ahead of plans. Christine Cho: Okay. Great. And then just moving on to gross margins. They were soft this quarter despite system solutions being a bigger part of the business than it has been for a while. Can you just help us parse out how much of this is due to tariffs? Is it lower pricing to get back some share? You talked about the lower margin BLA. Is there a margin drag from the expansion of the new manufacturing? Just kind of help us parse it out and if you can give us some idea of how we should expect it to trend over the next year? Dominic Bardos: Sure, Christine, it's Dominic here. Yes. So the margins have been stable this year and right within the range that we've expected, the 35 -- the mid-30s to upper 30s percent. So coming in at 37% was right within our expectations. In my prepared remarks, I did talk about a couple of things because the new long-tail BLA, as an example, is one where the margins will fall on a percentage basis. There's a large section of that, that expands our share of wallet into the solar field for the feeder cable, and that is just not the same amount of value engineering on that section of revenue. So we've talked about that, and that is part of what's going on as expected. Now the tariff thing is also an interesting one for us because while we're largely protected and mitigated from an increase when we're quoting jobs, we can pass those along as we do the final purchase order. There are some things that we're doing behind the scenes to drive cost out of the system. And that's what I was referring to on the prepared remarks that all the work of our supply chain team to onboard with our engineers to test the new products and to really get new raw materials ready to go, it was actually undone for us. So we did not realize the margin lift that we were expecting. It was still within the range. I would quite honestly hope to have a more pleasant surprise on the upside there, but we were not able to achieve that due to the tariffs that changed in the middle of that process for us. So on the tariffs alone, on that savings, we actually had forecast about a 100 to 200 basis point improvement in margin, and that was undone for us this year. So while we still have very stable margins, keep in mind that the projects that we've done thus far in 2025 were priced in 2024, they still have some of the new incentives that we provided, new customers to come back to Shoals. And I do believe that our stability in the gross profit margin is fine. As I mentioned, we are shifting and have been trying to focus on cash generation, our strong cash flows and operating profit, and we will continue to do so going forward as well. Matthew Tractenberg: Charlie, next question, please. Operator: Our next question comes from Julien Dumoulin-Smith of Jefferies. Julien Dumoulin-Smith: I'm going to try this from a slightly different perspective. You alluded here in your prepared remarks that you're doing slightly better than planned for 2025. But I'd love to hear how you're doing against the longer-term metrics you articulated from September '24's Analyst Day, right? You've got this 20% plus year-over-year increase in backlog, the $900 million quoted here in the quarter. How are you looking at the beyond '25 period at this point versus the targets and ranges that you implied at the time here? Dominic Bardos: Sure. So I'll start and ask Brandon to join in because as he said in his prepared remarks, all of these areas are exceeding our expectations that we laid out at Analyst Day. Of the metrics that we've talked about, I certainly want to focus a little bit on the revenue growth. As we've also said, it's exceeded the expectations and the range that we laid out a year ago. And keeping in mind that a year ago, we also thought that we were victorious in our voltage case with the ITC. So as we look ahead, we're not guiding to 2026 and '27. We certainly are very encouraged at the growth in our book of business. I couldn't be more positive about our backlog and awarded orders. And on our end, I think there was a bit of a glitch when I was talking about the $298 million of backlog, which is approaching records again. So I believe that the metrics that we've laid out remain very strong. Of those the metrics that we talked about in terms of the various strategic pillars, the BESS opportunity is the one that we believe has the opportunity to significantly exceed what we laid out a year ago. And so I will pause on that because Brandon will talk more about that. Brandon Moss: Yes. Julien, it's a great question. Let me maybe give a big picture view and then step through some of the growth pillars. I think holistically, revenue -- the revenue generation is exceeding plan and what we laid out in our Investor Day, effectively almost a year ahead of what we've said at Investor Day. So we are very excited about that. Our core focus here has been to protect and grow our core market, return that to growth. The utility scale solar business, as Dominic mentioned, is operating at record levels. Our backlog and awarded orders fantastic at $720 million. I'm really excited when we can have a record revenue quarter and have a book-to-bill of 1.4x. That is fantastic execution by our commercial team. So I feel really good about our core business. As it relates to our pillars of growth and our diversification strategy, I think all are performing at or above our expected ranges. Our CC&I business, if you think about that alone, we're up 36% year-over-year. So that is performing at very solid rates of growth. Our OEM business, expanding substantially. As you guys are aware, we have a core customer in that product portfolio that is also expanding, and we are partnering and growing with them, and we're excited about that. Our international business, shipping 3 projects in a quarter is great for us. That probably has not happened in the existence of Shoals. We're excited about the 2 projects in LatAm and one in Australia. Our pipeline is very strong there, and we are building a team out to really focus on that Australian market so -- and New Zealand. So great things to come there. As Dominic mentioned, couldn't be more excited about our battery energy storage program. The 2 MSAs for us in the quarter are big. As well as starting to really see some proof points in that business in those MSAs driving data center and grid scale opportunities. So we are very excited about that. Our team, commercial team with operations, driving a substantial amount of new product development this year. And quite honestly, that's what is -- what's driven some of the international growth. The 3 international projects that we've started shipping this past quarter all have new products as part of those projects, which is very exciting. And really finally, from an operations standpoint, our consolidation is underway. We are excited. We are actually sitting in our new facility today. Our SG&A team, our salaried staff, this is probably the first time in the history of the company since maybe it's beginnings that we have all been in one building. And so we're excited to build that sense of community and culture within the organization. From an operations, a true operations standpoint, just to commend the ops team. We started our planned consolidation in Q3. We actually moved out of one of our facilities. As we previously disclosed, we sold a building in Q2, I believe it would have been, and we moved out of that building. For perspective, our team moved 540 truckloads of material out of that facility and still met record production levels in Q3. So a fantastic job by them and obviously a confidence boost for us as we complete this consolidation as we can make moves in buildings and produce at record levels at the same time. So I'm excited about how the company is executing for the future. Matthew Tractenberg: Julien, did you have a follow-up? Julien Dumoulin-Smith: It's excellent to hear. Can you quantify any of these? Yes. Can you just quantify real quickly just within the backlog addition, some of these MSAs? And/or any of the BESS or data center wins with system integrators? Brandon Moss: Yes. So in our awarded orders for the quarter, we had $18 million. A vast majority of that is driven by the MSAs. I can say probably since quarter close, we have moved a significant portion of that $18 million to backlog and have signed purchase orders. I would think of it maybe in the range of 3/4 of that $18 million. So we do have now signed purchase orders, which we're excited about. And again, we'll begin production in Q2. Dominic Bardos: And perhaps I could help just on the MSAs themselves. Unlike the MSAs where we've announced specific targets for volume, these MSAs do not give a specific target for volume. It's the partnership. It has all the terms and conditions so that we can move with haste when purchase orders are ready to go. So I don't want -- there is no additional backlog and awarded orders beyond where we actually have those orders, as Brandon mentioned. So nothing else from the MSAs would impact our record BLAO. Matthew Tractenberg: Thank you, Julien. Charlie? Operator: Of course, our next question comes from Philip Shen of ROTH Capital Partners. Philip Shen: I wanted to dig into the margin topic a little bit more. Can you give us a little more color on the tariffs? Were they the Section 232 inclusion for aluminum on electric cabling that adversely impacted you? I think that came out in August. And as a result, would you expect that to be relieved? Or would you expect to be able to pass that along? Because that was a very sudden kind of inclusion, right, of electric cabling. And so do you think that tariff can be passed along in the near term to your customers? And then as a result, that 100 to 200 basis point operational improvement that, Dominic, you highlighted can then be realized perhaps partially in Q4? Or is it more in first half of next year? So I wanted to see if you could map out how that might play out. Brandon Moss: So Phil, that's a great question. Section 232 aluminum tariffs obviously have impacted us and others in the marketplace. Think about that specifically, almost in equal parts with the country-specific tariffs. We've got a pretty diverse supply chain. And the way those tariffs are calculated for wire specifically is interesting. You can sort of parse out the aluminum piece of that on 232, you can also parse out the country-specific tariffs there. So I won't get into the granular detail of that specifically on the call here today. But what I would say -- and as Dominic mentioned, we have the ability to pass on tariffs to many of our customers that requires tariff documentation, things like that. And we are doing so, and we'll continue to do so into the future. What Dominic specifically mentioned around the 100 to 200 basis points was part of our material cost-out savings initiatives that we put together in our annual operating plan. And material cost is very important to us. It drives the profitability of our company, quite frankly. And we had great cost-out savings projects identified. And as Dominic mentioned, you switch a supplier and then that supplier is potentially impacted by a tariff that eliminates any potential savings we may have baked into our business plan. So if the tariff landscape change or if these tariffs are ruled unlawful and we would potentially get reimbursed for tariffs paid, you [Audio Gap] through our income statement and impact us positively. Dominic Bardos: Yes. And the point, Phil, about are they passed along? If it's something that comes along and there was an unexpected tariff, we do work with the customers. But we typically look at our market-based pricing for the products as we're quoting going forward. And if we know that something is going to be tariff, it is going to be baked into the prices that we're quoting. So ultimately, our material costs will drive our profitability there, and that's why the material cost out savings are so important to us. It's probably 70% of our cost of goods sold. So it is a very important initiative for the team. We'll continue to focus on that. Philip Shen: Got it. So looking ahead, can we expect an improvement in the first half of next year on margins? And then can you share what the margins in your recent bookings might be as a comparison to the Q3 levels? Dominic Bardos: Yes. So Phil, if you want to come to a staff meeting here, that would be great. We'll talk about those internally. I can't obviously discuss that. We do have -- it's too early to guide for 2026. As I've said before, our margins are -- have been consistent and within the range that we've been talking about, about mid- to upper 30s. We are -- I think Christine asked the question, are we incurring new facilities expense? And yes, we did incur rent in September, the last month of the quarter for our new facility and the depreciation all starts impacting us. And we're not fully operational yet. We haven't received the cost-out savings there from a labor standpoint. So we will guide to 2026 margins if that's really where we need to focus. My preference would be to talk about the growth of our business segments, our excitement around our new growth opportunities, our strategic pillars and continuing to drive our operating cash. And that's what we're really after. But we'll guide next quarter. Matthew Tractenberg: Thank you, Phil. Charlie, next question, please. Operator: Our next question comes from Brian Lee of Goldman Sachs. Brian Lee: I guess just on the BESS opportunity again, you guys obviously are sounding more bullish, have said that of all the different growth verticals here, that's probably the one that's tracking ahead of expectation more so than others. So can you guys maybe provide a bit of an updated TAM for us in terms of the BESS opportunity with the products that you have? And then how much of that is data center tied? Are you able to kind of quantify for every 100-megawatt data center opportunity amounts to x dollars worth of revenue potential for Shoals given the product set? And then maybe any thoughts around margin implications as well? And I had a follow-up. Brandon Moss: Sure, Ron. I'll take that. I think when we when we initially launched the BESS opportunity at Investor Day last year, we had approximately $360 million as an available market to us in the solar plus storage space. We've since added data centers and grid firming as 2 market opportunities. We have internal estimates. These markets are changing rapidly, as you can imagine, particularly driven by the data center AI space. And the applications of our products within some of these system architectures is proprietary. And so a 100-megawatt data center in a specific situation may result in one use of our product, which drives significantly higher ASPs up to maybe $100,000 a unit. And in other architectures, we may use a smaller product, a 1,200 amp product that may carry a $25,000 ASP. So it's going to vary architecture to architecture. What is exciting for us is specifically our engineering team is engaged with customers to design specific products for their architecture, and we are building prototype products, shipping prototype products to be vetted by these customers. So we are excited about the potential opportunity. As everybody knows, if you watch the news or read a newspaper, the size and scale of these data centers is changing almost on a daily basis as is our total available market. So more to come in coming quarters about the actual size of the market. Brian Lee: Okay. Fair enough. We'll look forward to hearing more. Maybe just a follow-up on that. You mentioned the $18 million of BESS bookings this quarter and then starting to monetize that in Q2 of '26. It's about 3% of backlog today. Is that sort of the sales cycle and sort of the rev rec cycle we should be thinking about on these projects? And if that's the case, are we talking sort of like a mid-single-digit type of revenue mix from this opportunity next year? Because presumably, all the MSAs aren't going to ship in Q2. They just start to ship in Q2. So assuming more bookings coming in, maybe you get to like mid-single-digit percent of mix next year and then it grows beyond that? Just trying to understand where we should be budgeting expectations on this. Dominic Bardos: Well, sure. So while we haven't specifically guided to 2026, and it is early for us to try to do that, you're right in that we're ramping up. This is an emerging -- these use cases are emerging. Now keep in mind that we have had battery energy storage solutions sold all year long. It hasn't been to the magnitude of what these 2 new use cases are bringing to us. And so that's why we're excited to share with you the $18 million and the fact that those were driven by the MSAs that have been signed with the alternative use cases. So we haven't guided yet, but clearly there will be some cabinetry and recombiners sold all year long just in our traditional channels. And then we will ramp up these others as the year goes. We will try to provide more color going forward next year. We actually are in discussions about how much we can share, but our expectation is that this is an area of interest, and we want to be as transparent as we can. Brandon Moss: Brian, maybe just some color around the sales cycle. We can speak to that a bit. As Dominic mentioned, we've had -- while not significant, we have recognized some revenue on BESS all year. A C&I solar and storage job would have a pretty quick sales cycle. I mean, we may book and turn on order inside of 6 months, whereas a larger grid firming or data center project, they probably follow more of a traditional sales cycle that would look at like a utility scale solar site. So we could be engaged a year, 18 months before we're shipping unit 1 to those individuals for inspection and validation. So longer, probably obvious, smaller sites, shorter sales cycle, larger opportunities, longer sales cycle. Dominic Bardos: And once we've gotten the actual designs firmed up for certain customers, the sales cycle will shorten. We've been working on these projects for the vast majority of the year. And we're just excited now here sitting in November to share with you that we've got purchase orders and revenue will start coming next year. But once we've actually landed that, if we continue -- if they continue to win business and award more business to us, those designs have now been approved and vetted and tested out. So then the sales cycle would shorten. Matthew Tractenberg: Thank you, Brian. Charlie? Operator: Our next question comes from Jon Windham of UBS. Jonathan Windham: You made some comments earlier about LatAm and Australia. I was wondering if you could just give a little bit more color on how the international business is progressing in terms of specific products being sold, margins, long-term growth? Just any color you have on that. Appreciate your time today. Brandon Moss: Thanks, John. We're excited about the international business. We've carried roughly 13% of our backlog and awarded orders has been tied to our international business. I think we're probably 10%, 11% now of our BLA [indiscernible] is tied. So excited to be shipping these first 3 projects. I think of our international business really in 2 buckets, an organic growth bucket in our specific targeted regions, which 2 of the 3 projects are entering in LatAm and Australia. And then I think of our -- the rest of the business in an export bucket. And so the margin profiles for those 2 buckets will look slightly different. Our organically developed markets where we're playing in region, we may be building products outside of the United States, which we actually did on these 3 projects. The margin profile will be slightly lower than our norms. That being said, our export business, which constitutes the greatest portion of our backlog and awarded orders, and we expect projects to begin releasing in next year, and we've got a very strong backlog there. Those projects, for the most part, are funded by the U.S. EXIM Bank, and they need to be manufactured in the United States. And the margin profiles of those jobs will look, by and large, like a domestic utility-scale solar job, maybe minus some shipping costs here and there, but largely the same. So we are excited about the growth of the international business. As I mentioned maybe in the prepared remarks, we're focusing heavily on Australia. There's been a mandate there to add 40 gigawatts new solar in this decade, which we're very excited about. So we've hired an experienced leader, and we're building out a team in Australia to capitalize on that. Australia is also a very, very strong BESS market, arguably probably stronger than the United States at this point. And we believe there's some opportunity for us from an international perspective on our BESS product line. So they're tracking as planned and excited that some of these export projects will finally begin to materialize in 2026 and also excited about the growing pipeline there. Matthew Tractenberg: Charlie? Operator: Our next question comes from Dimple Gosai of Bank of America. Dimple Gosai: As electrical balance of system players and inverter OEMs kind of push into this BESS opportunity, can you talk a little bit more about what differentiates Shoals' architecture and go-to-market model? Like where is your moat as the market scales? And separately, who are you having conversations with mostly today? Is it more of the alternative chemistry players and so forth given the [indiscernible] overhang? Brandon Moss: Yes. Dimple, that's a great question. So I guess there are inverter companies that are highly engaged in data center architectures. I would say, in conjunction with the products that we sell, to create potentially some alternative architectures that work more efficiently for data center, specifically AI architecture to try to maybe balance and smooth power frequencies in those larger data centers. So we don't think of them -- we don't think of the inverter companies maybe as competitors. We think of them as partners in the system architecture. So I think that probably answers the first question. Dominic, can you… Dominic Bardos: Yes. I was just going to say that in some of these cases, Dimple, what we're doing is we're actually engineering the solutions in partnership with these innovations out there. So part of that is something that some of the larger electrical companies are not going to be interested in doing. So when we're working with these integrators, it's very important that our engineers can go work back and forth and come up with custom solutions. So being first in and driving that value for them is very important to us. And the chemistry, we are agnostic to the chemistry. So yes, if lithium is challenging and someone uses alternative long-form battery discharge power, that's fine because we're agnostic to that. We are still focusing on the DC coupled side of things with our solutions. Brandon Moss: Yes, that's great add on, Dominic. And to be more specific about your questions, are we talking to folks that use alternative chemistry technologies? Yes. I mean, we certainly are. So we've got a wide opportunity and quote funnel for this particular end market, and we are very excited about the growth potential. Matthew Tractenberg: Charlie, next question. Operator: Our next question comes from Praneeth Satish of Wells Fargo. Praneeth Satish: Maybe just sticking on the data center BESS opportunity, just kind of 3 quick ones here. First, maybe if you could help us understand how the sizing is trending on some of the quotes that you're looking at? Is it kind of in that 50 to 100-megawatt range? Or are you seeing potential for some larger installations? You did mention hyperscaler as well. So I assume that's kind of in the gigawatt range. And then maybe as a follow-up to that, are there meaningful differences in terms of the competitive landscape at each of those different size tiers? And is there kind of a sweet spot for you where there's less competition? And then finally, the third one here is in addition to kind of the TAM for data center, new data centers, is there an opportunity maybe to displace some of the diesel generators and drive kind of an expanded TAM from that perspective as well? Brandon Moss: Absolutely, and a great line of questions. I think the simple answer to probably those 3 questions are yes, yes and yes. So there is a difference. I think you're talking about float size, what are we seeing? Do we see 50, 100-megawatt scale opportunities? We do. Do we see significantly larger opportunities in that? We do. So we've got a product set, one that is standard and configurable that lends well to maybe the smaller data center opportunities that, as I mentioned, I think it was Brian's question, you think of that as more quick turn C&I business. And then the larger opportunities where we're partnering and designing a specific product for their proprietary architecture is also an opportunity for us. So the competitive landscape varies. As Dominic mentioned, we've got experience here with DC power. I think that plays well. We've got experience in really building engineered-to-order highly configurable solutions at scale. That is probably our core competency if you really boil down what Shoals does well, we are able to build engineered-to-order products at scale. That's what we do every single day in the solar market, and that lends well into this BESS data center opportunity. So we can provide both product sets. As it relates to can these architectures potentially at some point eliminate or reduce diesel backup, yes, potentially. I think there's probably a lot of information out there, white papers, for instance, that talk about different data center architectures, and that's certainly something we've got our eye on. Matthew Tractenberg: So Charlie, I believe that's the last question that we have time for today. But Brandon, you had some final comments before we close out, and I'll finish this off. Brandon Moss: Yes, absolutely, Matt. I think, look, at the end of the year and even the end of the quarter, it's always important to reflect a bit, and I'm very proud of what this company has delivered and the transformation it is making over the past couple of years. Big picture, we have navigated a complex warranty issue. And during that warranty issue, we've maintained customer relationships along the way, potentially strengthen customer relationships throughout that. During that period, we have self-funded that $70 million remediation project, self-funded that project and the legal costs associated with the ongoing Prysmian litigation. And while that's a great accomplishment on its own, we've also invested heavily in our business during that time. If you think about this year alone, we'll invest probably 3x on a normal CapEx rate. And while, hey, it's great to spend that money, we also have to implement that CapEx. And so we are creating a sustainable operations platform for the future, and I'm very, very proud of what we're building. Additionally, during the period, a $25 million share repurchase, and we've paid down $50 million of our debt. So I believe this company is very well positioned for the future. We've got a leading market position with a blue-chip customer base. We've got a very strong balance sheet and the ability to generate strong free cash flow. Our diversification strategy, as we mentioned on this call, is meeting or exceeding plans, and we're excited about the new end markets we're entering. We've built a fantastic, fantastic management team here that's going to guide this company into the future. And very exciting for both our salaried and hourly staff. We've got one heck of a nice new facility to support our growth for the future. So it's a fantastic time to be with this organization. I'm excited about the market backdrop we have. We look forward to fantastic results in the future. So I want to thank everybody that has joined our call today and supports this company. Thank you. Matthew Tractenberg: And I just want to remind our audience that before we let them go, that we have a very active IR calendar throughout the end of the year. We announced those events a few weeks back via press release. They're listed on the Investors section of our website. So if you're attending any conferences through November and December and you'd like to meet with us, please let us know. We'd love to speak with you. If we can help you further, please reach out to investors@shoals.com with any questions. Have a good day, everyone. Brandon Moss: Thanks all. Dominic Bardos: Thank you. Operator: Thank you all for joining today's call. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Great Lakes Dredge & Dock Corp Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Eric Birge, Vice President of Investor Relations. Please go ahead. Eric Birge: Thank you, Arie. Good day, and thank you, everyone, for joining us. Welcome to Great Lakes Dredge & Dock's third quarter 2025 financial results conference call. Before we begin, please note that certain statements made during this call are forward-looking in nature and are subject to various risks, uncertainties and assumptions. These factors may cause actual results to differ materially from those anticipated. For a detailed discussion of these risks, please refer to our filings with the Securities and Exchange Commission. We will also be discussing certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of these measures to the most direct comparable GAAP measure can be found on our earnings release or on our Investor Relations section of our website at investors.gldd.com. Along with other supplemental operating information. Joining me on today's call are Lasse Petterson, our President and Chief Executive Officer; and Scott Kornblau, our Senior Vice President and Chief Financial Officer. Lasse will begin with a review of our quarterly key developments, followed by Scott, who will provide a detailed overview of our financial performance. Lasse will then conclude with commentary on the business outlook and market trends. With that, I will now turn the call over to Lasse. Lasse Petterson: Thanks, Eric. Following strong financial results in the first half of the year, the momentum continued into third quarter with high utilization and strong project performance through the execution of complex port deepening and coastal restoration projects, leveraging the capabilities of our team and our fleet. We ended the quarter with revenues of $195.2 million and adjusted EBITDA of $39.3 million. Our dredging backlog remains strong at $935 million, with 84% in capital and coastal protection projects, plus an additional $194 million in awards and options pending. During the third quarter, we were awarded new projects totaling $136 million. Our successful bid strategy from last year resulted in a large number of projects wins, which resulted in a high-quality backlog, which will support full utilization and revenues for the remainder of 2025, as well as providing a good base and revenue visibility for 2026. Our current backlog includes 3 major port deepening LNG projects, the Port Arthur LNG Phase 1 project, the Brownsville Ship Channel project, part of next decade Corporation Rio Grande LNG initiative; and Woodside Louisiana LNG, which is expected to commence dredging early 2026. We have seen no interruption to our business during the current government shutdown. Our operations remain unaffected, and we continue to conduct the business as usual, maintaining full schedules, both in bidding, awards and we received payments on time. Our support to the core would proceed without disruption, and our backlog of projects are fully funded. During the third quarter, our offshore energy team commenced rock placement operations on Equinor's South Brooklyn Marine Terminal. And during the fourth quarter, installation of armor rock commenced on Empire Wind 1, utilizing a chartered vessel until delivery of the Acadia in Q1 of next year. At the end of October, we completed the refinancing and upsizing of our revolver credit facility, increasing capacity to $430 million and extending the maturity to 2030. With the increased capacity, we elected to repay our $100 million second-lien term loan. Scott will provide more details later on. Moving on to our new build program in the third quarter with the delivery of our sixth hopper dredge, the Amelia Island, marking a significant milestone in our dredging new build program, which is now complete. Leaving us with the largest and most advanced hopper dredge fleets in the United States. Upon delivery of the shipyard, the Amelia Island was straight to work and is performing extremely well. The Amelia Island and a sister-ship to Galveston Island have been specially designed for shallow and narrow waters in the United States Coast lines and our effective tools for us to work on coastal protection projects such as beach restoration, wetlands improvements and Barrier Island construction. The final vessels in our newbuild program, the Acadia, the first U.S. Flagged Jones Act compliant subsea rock installation vessel is also currently under construction and hit a key milestone with a launch from the dry dock in July. Delivery is expected in the first quarter of 2026, at which time she will go straight to work on Empire Wind 1. The target markets for the Acadia include domestic and international offshore work protecting critical subsea infrastructure such as oil and gas pipelines, power and telecommunication cables and offshore wind installations. I'll now turn the call over to Scott to further discuss the results of the quarter, and then I'll provide some commentary around the market and our business. Scott Kornblau: Thank you, Lasse, and good morning, everyone. I'll start by walking through the third quarter, which resulted in revenues of $195.2 million, net income of $17.7 million and adjusted EBITDA and adjusted EBITDA margin of $39.3 million and 20.1%, respectively. Despite having 3 dredges at the dock at various times during the quarter, undergoing regulatory dry docking and repairs revenues of $195.2 million increased $4 million from the prior year's third quarter as every active dredge was working for the majority of the quarter in addition to the newly delivered Amelia Island, which commenced work in August. Current quarter gross profit and gross profit margin increased to $43.8 million and 22.4%, respectively, compared to $36.2 million and 19%, respectively, in the third quarter of 2024. The increase in gross margin is primarily due to improved utilization and project performance and a large number of capital and coastal protection projects, which typically yield higher margins. These projects accounted for over 85% of our third quarter revenue. Current quarter's operating income of $28.1 million increased $11.4 million compared to the prior year's quarter's operating income of $16.7 million. The year-over-year increase is driven by higher gross profit and lower general and administrative expenses. Net interest expense of $4.6 million for the third quarter 2025 was down slightly compared to $4.9 million in the third quarter of 2024, and net income tax expense of $6.1 million increased from $3.2 million in the same quarter of 2024 due to the stronger results. Rounding out the P&L, net income for the third quarter of 2025 was $17.7 million, up from $8.9 million in the prior-year quarter. Total capital expenditures, including capitalized interest for the third quarter were $32.8 million made up of $8.3 million for the completion of the Amelia Island, $18.6 million for the construction of the Acadia with the remaining $5.9 million for maintenance and growth CapEx. Full year CapEx guidance of between $140 million and $150 million, including capitalized interest remains relatively unchanged from the prior quarter. Turning to our balance sheet. We ended the quarter with $12.7 million in cash and nothing drawn on our revolver. And as Lasse mentioned earlier, on October 24, we upsized our revolving credit facility to $430 million and extended the maturity out to October 2030 at lower borrowing rates than the previous facility. With the increased capacity, we elected to immediately repay our $100 million second-lien notes in full reducing interest expense by almost $6 million per year. Our balance sheet is in great shape with a trailing 12-month net leverage ratio of 2.5x liquidity of nearly $300 million, no debt maturities until 2029 and a weighted average interest rate on our total debt now under 6%. For the first 9 months of this year, we've had positive free cash flow of $52 million despite the new build payments. And as our new build program will be substantially complete at the end of this year, we expect to be significantly free cash flow positive starting in 2026. Looking forward to the fourth quarter, we expect to end the year on a high note, even with 2 hopper dredges in the shipyard undergoing the regulatory dry dockings as every other active dredge will be working the majority of the quarter, including a full quarter of utilization for the Amelia Island. With the strong fourth quarter, we're on pace to achieve, our expectation is that 2025 will be the highest EBITDA year in company history by a large margin. With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward. Lasse Petterson: Thank you, Scott. Our business operations continue without disruption during the current government shutdown. We remain fully operational, maintaining regular project schedules. We're responding to ongoing bid activities, receiving the contract awards, and we receive timely payments. All current and upcoming projects in our backlog are fully funded. Our $935 million backlog includes a robust mix of large and complex projects in the beach restorations and port deepening markets, enabling us to continue operations on a very busy 2025 and provides clear revenue visibility extending well into 2026. As we predicted at the beginning of the year, the 2025 dredging bid market has been normalized after coming off a very strong port-deepening bid market in 2023 and 2024. We expect the 2025 bid market to come in about $1.8 billion more focused on coastal protection projects, which are funded by the 2023 Disaster Relief Supplemental Appropriations Act and dredging maintenance projects funded by the U.S. Army Corps of engineers. As we look ahead, we're beginning to see meaningful progress on the next phase of port deepening projects, including New York, New Jersey, Tampa and New Haven and Baltimore, amongst others, with work most likely to commence in 2027. Turning to the U.S. offshore wind markets. In May, we saw the reversal of the temporary pause from the Bureau of Ocean Management and Empire Wind or Equinor's Empire Wind project has resumed in accordance with its original schedule, which is part of our offshore energy backlog. Between Empire Wind 1, Ørsted's Sunrise Wind and the additional scope for Sunrise Wind we were awarded last week. We have secured full utilization for the Acadia in 2026. In response to early signs of potential delays in the U.S. offshore wind market, we proactively adjusted our strategic outlook for the Acadia. Over the past couple of years, we have looked at and include for the safeguarding of critical subsea assets, including oil and gas pipelines, power transmission lines, telecommunication cables, and international offshore wind farms, increasing our opportunity into a broader range of services that we now refer to as offshore energy. The Acadia is engineered to precisely deposit rock for the protection of subsea infrastructure against environmental forces, such as weather and potential acts of sabotage or hostile entities. We are actively pursuing engagement across these sectors and are making good progress in securing full utilization of the Acadia in 2027. In conclusion, building on strong performance in the first 9 months of 2025, the company continues with great momentum and expects to achieve outstanding results for the remainder of 2025 and continuing into 2026. This success is a result of excellent project execution, the strength of our modernized fleet and our competent and excellent teams. And with that, I turn the call over for questions. Operator: [Operator Instructions] Our first question comes from the line of Julio Romero of Sidoti & Company. Julio Romero: I wanted to start on just thinking about bidding trends and the trajectory of orders for dredging expected for the remainder of '25 and '26. And kind of given the end of that capital project cycle, just talk about your expectations about bidding and winning coastal protection orders through '26 to help you kind of bridge you to the next East Coast deepening cycle expected in '27? Lasse Petterson: Yes. As I said, we are under a CR that is now extended to November 21 to see what happens when Congress get together. Probably we get an extension of the CR to the end of the year and into -- maybe into 2026. And under the CR, the core can bid out the same amount as they had for the previous years. The only change is that new stock projects cannot start up, and there hasn't been that many new start projects. So we expect bidding to continue as normal for maintenance dredging projects and for coastal protection and restoration projects. As I said, the bid market for 2025 is a reduction from '23 and '24. That was very active with port deepening projects, but it's getting back to more normal mid-market size. Julio Romero: Understood. And congratulations on upsizing and expanding your revolver a few weeks ago. Going forward, does cash interest expense and GAAP interest expense converge? And if so, what's your estimation of kind of a good quarterly run rate to use going forward? Scott Kornblau: Yes. So as I mentioned, just taking the 2L out, putting on the revolver, that by itself, say $6 million of cash interest a year. as you know, Julio, and I'll kind of walk through the next few quarters, we're still capitalizing interest, while the Acadia is being finished up. So when I look forward to fourth quarter, we will have a onetime noncash expense to interest, and that's for the extinguishment of the financing costs on the 2L. We ended up paying it off 3.5 years early. So you see about a $7.5 million charge. Again, I reiterate noncash -- in addition to that, we will start seeing interest coming down. We'll probably have, in addition to that $3.5 million of interest expense down from about $4.5 million as we'll still be able to capitalize, but we have the reduced rate. So looking at probably about $11 million of interest expense in Q4 at about $3 million to $3.5 million being the noncash, excluding the noncash charge. Looking forward to Q1, we're probably in about the $3 million interest expense then the Acadia gets delivered. So going forward, that is when cash interest and interest expense will be the same. But as we've talked about on prior calls, our priority next year is to start paying down the revolver. So the $6 million savings that we're seeing, I expect to increase quarter-over-quarter as we pay down and eventually pay off that revolver balance. Operator: Our next question from the line of Joe Gomes of Noble Capital. Joseph Gomes: Congrats on the quarter. Maybe you can just walk me through this just because it's different from a number of other companies that I cover that are in the government space, understand the whole continuing resolution stuff. But with the shutdown, many the other government services companies are saying they aren't getting paid that because so many of those people in those offices have been laid off or not coming to work. So maybe just clarify how you guys are getting paid? Lasse Petterson: Yes. You have to realize that the Corps of Engineers has about more than 30,000 employees and only 1,000 of those are furloughed. And that is a consequence of that only 3% of the U.S. Army Corp of Engineer workforce is funded through annual appropriations. Most of the Corp staff is funded through project-based accounts. And you can see that the -- this works out. We have not had any issues. We're getting paid. We -- ongoing projects are being executed as normal. And we also see the bidding going on at a reduced rate because of the reduction in the overall bid market. But yes, we have not been affected by the shutdown, and we don't expect to be up either going forward. Joseph Gomes: Great. And much appreciated. Lasse, what -- kind of early days, but what are you seeing as the '26 bid market. I know you said 25% is coming back to a more normalized rate, but what do you think your '26 outlook is looking for? Lasse Petterson: That's a good question, and it depends on a lot of things. We have a CR that is ongoing. Congress is discussing whether to extend that to the end of the year, some wants to extended into 2026, some are predicting extensions all through 2026. Anyway, under a CR, the budgets are remaining the same as it was in 2024, which was at a high level. So the core is funded and can bid out work. There is more maintenance related. But the only thing we don't -- we cannot see is new starts going forward. So what I expect to happen is that we continue the CR into 2026. And then towards the end of 2026, these new port deepening projects that have been in -- in study phase up to now, will probably be bid out and then with operations starting in 2027. We will see a lot of coastal protection projects being bid out that is not affected by the CR as along with more maintenance strategy. Joseph Gomes: Okay. And then 1 more. We've talked about this in the past certainly Acadia got '26 fully booked, '27, we're working on with some of the other markets that you talked about the new cables for power of transmission, telecom, oil and gas. Have you had success, I mean, contracts signed with those other non-wind oriented customers for the Acadia or is this still more of a work in progress? Lasse Petterson: It's still work in progress, but we have, as I said, for the last 2 years, been very active in Europe because we saw a reduction in activity in the United States. And there is a market for cable protection in Europe, which is expanding as a consequence of the kind of the political uncertainties surrounding us. And then the offshore wind market is continuing in Europe. We have bid several projects for execution in '27 and '28 and onwards. But in Europe, this market is a more mature market. So contrary to what we saw here in the United States, where the developers wanted to secure capacity very early on and so, our contracts on Empire and on Sunrise. In Europe, it's a more mature market. So the time between contract award and execution is shorter more like 6 to 9 to 8 months to a year. So we have not -- we have did a lot of work, and we are waiting for the outcome of those bids, but none awards as to now. Operator: Our next question comes from the line of Adam Thalhimer of Thompson Davis. Adam Thalhimer: Congrats on a great quarter. Scott, I can't help myself. You sounded so good on Q4. I'm just curious, maybe you can compare your expectations for Q4 to the high watermark for the year of Q1? Scott Kornblau: Yes. I knew, if somebody tried that, it would be you, Adam. Adam Thalhimer: I'm glad I didn't disappoint. Scott Kornblau: You didn't. I mean, again, as you know, I mean the Q1 we had was one of the best, if not the best in company history. Q4 is going to be extremely strong. Now again, I did say we do have 2 hopper dredges in dry dock during the quarter. And you know the impact of that, the additional cost and of course, the 0 in the revenue line. We did not have the same cadence of dry dockings in the first quarter on those type of vessels. That being said, just as we typically do the book in quarters are really, really strong Q1 and Q4, and we're going to see that again in the fourth quarter. Adam Thalhimer: I'll take that. And then the next one, I'm a little -- so you started booking offshore energy revenue in Q3. And your backlog has grown -- grew in Q2, grew again in Q3. for the offshore. It seems like that work is starting earlier. You talked about leasing a vessel to get to work. Is it starting early or maybe you can just level set what's going on there? Lasse Petterson: Well, what -- it's going on as scheduled. We were planning to use the Acadia for executing the work this year, but the delay at the shipyard resulting in -- to perform the scopes that is our scope on Empire Wind 1. We have chartered in a vessel, and that work is ongoing right now. Scott... Scott Kornblau: Yes. And in addition to the work that's ongoing on Empire 1, the third and the fourth quarter, we did right at the beginning of the third quarter when an additional scope of work for Equinor and it's on the South Brooklyn Marine terminal. So that we began executing again with a chartered vessel. That was never contemplated to be the Acadia, but it is to support the Empire Wind project. So that's the revenue that you're seeing in the third quarter, that project will continue into the fourth quarter, along with the commencement of the armor layer of work on Empire 1. So you will see Q4 revenue on offshore energy increase from the third quarter. So the increase that you saw in backlog is related to that South Brooklyn Marine terminal, which was not in Q2 backlog. Adam Thalhimer: Okay. And does it -- so next year, does it stay at that Q4 rate, Scott? Or is there a further step up? Scott Kornblau: Well, no, next year -- you say on a quarterly basis, yes, I mean it runs around that because we will then take delivery of the vessel. We will go straight on to Empire, do some work there. Then we'll go straight on to Sunrise. And then you may have heard Lasse mention post quarter end, so it's not in the backlog. We did win a little additional scope on Sunrise. So that is what fills out 2026. Adam Thalhimer: Okay. Last 1 for me, just high level. What are you seeing in the coastal protection market and potentially upcoming bidding opportunities? Lasse Petterson: Yes. We see a number of beach restoration and coastal protection projects coming out to bid as we go into Q4 and into Q1 next year. It's different funding streams, as I mentioned in my brief remarks. So it's a funding stream that is different from the normal appropriations to the Army Corps of Engineers and that's why it continues during the CR. As you know, we like to do these complex and difficult projects because we perform well under those circumstances. And then we see the maintenance dredging being bid up from the U.S. Army Corps of Engineers. I just want to say that also part of what we've been able to do is to diversify our client portfolio. So we are now 50% private and 50% federal government funded the work we do, and that gives us a good balance in our backlog. Operator: Our next question comes from the line of Alex Rigel of Texas Capital Securities. Alex Rigel: Yes. Sorry about that. Very nice quarter. Can you talk a bit about your very strong cash flow as we look into 2026 and beyond? And maybe what some of the uses of the cash flow is going to be? Scott Kornblau: Yes. I mean, so as I mentioned, even this year despite writing some really big checks to finish the new build program, we are cash flow positive and that will grow even more so next year as the new build program is over. Priority 1 right now look at it, is to delever that we just did one of the maneuvers, which was to take out the second-lien and greatly reduced interest expense by putting it on the revolver, we have the flexibility to pay that off when we want as cash flow from operations come in. So priority next year, finish the Acadia, used the excess cash to start paying that down and then would just be left with the $325 million notes. Those will mature until '29 and they've got a fixed interest rate at $5.25. Operator: Our next question comes from the line of Jon Tanwanteng of CJS. Jonathan Tanwanteng: I was wondering, if you could talk a little bit more about Q4. I think you guys mentioned ending the year on a high note. Maybe give us a little bit more color on what is currently scheduled to revenue from a backlog perspective and then given the dry docking schedule and how margins are likely to compare to Q3? Scott Kornblau: Yes. Again, I'm not going to give specific guidance, but I'll reiterate every vessel is working majority of the quarter with the exception of the 2 hopper dredges that we'll spend part of the quarter within dry dock, but they work up until the dry dock and then when they come out, typically, and I don't see the fourth quarter being really any different. We are starting to work on some environmental window work, and those usually do come with higher margins. So revenue will be extremely strong despite having the 2 vessels in dry dock and margins will be extremely strong based on the work that we plan to be executing during the quarter. Jonathan Tanwanteng: Okay. Great. That was helpful. And then just in Q3, can you help break out the offshore margin contribution so that maybe we can back into the dredging margins? Scott Kornblau: Yes. And again, we're not going to give or ever give project by project, and there was only 1 project being executed, $6 million of revenue. Again, we just commenced the project. And I'll just tell you, it's the expectations we had going into this market, which were really healthy margins that this project did not disappoint. Jonathan Tanwanteng: Got it. So we shouldn't expect a change in the margin profile as you bring the Acadia online, if that's the case, is that fair to say? Scott Kornblau: That's correct. Jonathan Tanwanteng: Okay. Great. And then last 1 for me, just given the outperformance this year at an EBITDA level and maybe the changes in mix as you head into next year, is it possible to meet or beat the EBITDA that you're generating this year in '27 with 2 new ships coming online? Or is that going to be hard to do with the mix coming off and the hard comp from Q1? Scott Kornblau: Yes. I mean -- so yes, we're -- we definitely have entered this year with well over $1 billion of backlog. We're still going to enter next year with healthy backlog. And the mix of projects are still going to be strong. What we have in backlog now, the $934 million post quarter end, we've had some additional awards. There's also about $190 million in low bids and options pending. One of those options -- 2 of the options are on the LNG projects, which have very high margin. Our expectations are those do get exercised, sometimes next year, and we'll execute those. So I do think when we look at 2026, we will have a similar mix of revenue like we saw this year. So again, I'm not going to give you guidance as to how next year compared to this year, but we see no reason why next year won't be an extremely strong year as well. Operator: I'm showing no further questions at this time. I would now like to turn it back to Eric Birge for closing remarks. Eric Birge: We appreciate the support of all our shareholders, employees and business partners. I want to thank everybody for joining the discussion today about the developments and initiatives of our business. We look forward to speaking to everybody next quarter. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to CPI Card Group's Third Quarter 2025 Earnings Call. My name is Janine, and I will be your operator for today. [Operator Instructions] And now I would like to turn the call over to Michael Salop, CPI's Head of Investor Relations. Sir, please go ahead. Michael Salop: Thanks, operator, and welcome to the CPI Card Group Third Quarter 2025 Earnings Webcast and Conference Call. Today's date is November 4, 2025. And on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Jeff Hochstadt, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, free cash flow and net sales growth, excluding the impact of the accounting change implemented in the second quarter. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release as well as the presentation that accompanies this conference call are accessible on CPI's Investor Relations website, investor.cpicardgroup.com. In addition, CPI's Form 10-Q for the third quarter will be available on CPI's Investor Relations website. For today's call, all growth rates refer to comparisons with the prior year period unless otherwise noted. The agenda for today's call can be found on Slide 3. After our remarks, we will open the call for questions. We can start on Slide 4, and I'll turn the call over to John. John Lowe: Thanks, Mike, and good morning, everyone. As we come closer to wrapping up the year, I'm going to spend some time updating you on our strategic initiatives, where we are making great progress growing our core businesses and diversified, including in our digital solutions. But first, let me touch on the highlights of our third quarter performance. Overall, the third quarter results were largely in line with our expectations. Our Software-as-a-Service instant issuance business once again delivered strong growth and Arroweye continued to perform well. In our Debit and Credit segment, we believe we gained market share as contactless card volumes increased nicely. Card revenue, though, was impacted by a mix shift to higher volume orders and lower average selling prices. This mix, combined with tariff impacts and other in-year investments has continued to impact margins. Overall, sales increased 11% for the quarter due to the addition of Arroweye compared to a very strong level in the prior year, which benefited from strong growth across our portfolio. Adjusted EBITDA decreased 7% in the quarter, primarily due to the unfavorable sales mix and tariff expenses. We continue to work on various initiatives to counter these margin pressures in 2026 and beyond, including key supplier negotiations, driving automation and operational efficiencies in production, achieving Arroweye synergies and general overhead cost management. We have already obtained future savings on key components in our supply chain and our new Indiana facility is now fully operational with all work moved over from the previous facility, which should aid efficiencies in 2026. For 2025, we have updated our full year outlook to low double-digit to low teens net sales growth and flat to low single-digit adjusted EBITDA growth as we expect margin impacts in debit and credit to continue in the fourth quarter, and we anticipate certain prepaid orders may move into 2026. Our prepaid business remains a clear market leader. And as the pace of package innovation rises to combat fraud, order timing has been a bit uneven. That said, more prepaid complexity, including the potential for the use of chip technology is a positive over the long term as this increases values and demand for our solutions. We still expect strong year-on-year growth in the fourth quarter for both net sales and adjusted EBITDA with levels significantly higher than the third quarter. Jeff will give you more details on the quarter and our outlook in a few minutes. But first, I want to update you on our strategy execution. Our vision and strategy can be seen on Slide 5. With everything we do, our organization is focused on the customer, quality and efficiency, innovation and diversification and our people and culture as we strive to be the most trusted partner for innovative payment technology solutions. We have made great progress on multiple strategy initiatives in 2025, including our efforts to expand our addressable markets to enhance growth for the future, and I'll highlight some of the most recent developments on Slide 6. We are starting to provide tours to customers in our new Indiana production facility, and we believe we should be able to leverage our innovation and automation investments across our debit and credit portfolio to drive share gains and do so even more efficiently. We are continuing to expand and cross-sell our Arroweye solutions and are very excited about the initial progress and interest from new and existing customers. We believe our Software-as-a-Service instant issuance business is headed to a record year with growth in new verticals and from additional financial institution penetration. The value proposition of our integrations into the U.S. payments ecosystem continues to drive our share growth and is starting to show realization in our other digital solutions, too. Although revenue in our other digital solutions is small today and will still take time to build, we continue to sign more issuers and build out even more integrations to broaden our addressable market. When we provide our full year 2025 results, we look forward to sharing more on our higher-margin digital solutions performance. Health care payment card expansion is also progressing with share gains of additional programs with existing customers and advances into new areas. Our value-based metal card offerings are also generating good interest with incremental sales again in the third quarter. In closed-loop prepaid, we are now in production and expect shipments in the fourth quarter. We've also invested in go-to-market for the space to expand beyond existing program managers we work with for open loop and are in discussions with several potential new customers. As I mentioned before, complexity continues to rise for open loop packages, which not only further solidifies our position as a market leader, but also benefits our go-to-market plans for closed loop. And our most recent expansion initiative builds on this growth in prepaid complexity as we have entered into a strategic relationship with Karta, an Australia-based prepaid program manager and digital technology provider. We will be Karta's exclusive U.S. supplier of its digital card validation solution, producing contactless prepaid cards with chip technology embedding Karta's SafeToBuy [ applet ]. Karta's solution eliminates the need for data to be printed on cards, significantly reducing the risk of prepaid fraud. As a reminder, prevention of prepaid gift card fraud can be accomplished through more complexity in packaging or through the adoption of chip technology and prepaid gift cards. CPI is uniquely positioned in our markets with deep expertise in both areas, we believe this can be a great complement to our secure prepaid solutions and will provide more choice for prepaid customers in the market. We are already piloting the solution with a large national retailer in the U.S. and look forward to further developing our relationship with Karta. Many of these growth initiatives are starting to yield tangible results, and we look forward to continuing to update you on the progress as we move forward. I will now turn the call over to Jeff to cover the third quarter results and 2025 outlook in more detail. Jeff? Jeffrey Hochstadt: Thanks, John, and good morning, everyone. Let's start on Slide 8 with the third quarter results. Third quarter net sales increased 11%, which was primarily driven by the addition of Arroweye and growth in our instant issuance business, partially offset by a decline in prepaid sales. Debit and Credit segment sales increased 16% as Arroweye contributed $15 million of sales and our Card@Once instant issuance business delivered strong growth, led by solution sales. Contactless card sales were flat in the quarter compared to a very strong prior year sales level, which includes some large eco-focused card orders. Contactless volumes increased, but average selling prices were down due to sales mix. Personalization services were also flat in the quarter, an improvement from the first half trend. Prepaid sales declined 7%, largely due to timing and comparisons to large sales in the prior year period. Similar to the second quarter, gross profit margin in the third quarter decreased from 35.8% in the prior year to 29.7%, driven by unfavorable sales mix resulting in lower average selling prices and increased production costs. Production costs in the quarter included $1.6 million of tariff expenses and $1.7 million of increased depreciation, which was primarily related to the Arroweye acquisition as well as the new Indiana production facility. SG&A expenses in the third quarter, including depreciation and amortization, increased approximately $1 million from the prior year, primarily due to acquisition and integration costs of $1.8 million and the inclusion of Arroweye operating expenses, partially offset by reduced employee performance-based incentive compensation and lower severance costs. Our tax rate for the quarter was 38%, which brought our year-to-date rate to 34%, higher than anticipated coming into the year due primarily to nondeductible expenses related to the Arroweye acquisition. For the full year, we expect an effective rate between 30% and 35%. Net income increased 78% in the quarter as the prior year quarter included debt retirement costs related to the full redemption of our previous senior notes and replacement of our previous ABL revolving credit facility. Third quarter adjusted EBITDA decreased 7% to $23.4 million and margins declined from 20.1% to 17.0% as the impact of higher sales was offset by unfavorable sales mix and tariffs. Year-to-date results and variance explanations can be found on Slide 9. Year-to-date variances generally reflect the same factors that impacted the third quarter with year-to-date reported sales also negatively impacted by the revenue recognition change implemented in the second quarter, which primarily affected the prepaid segment. Prepaid sales decreased 5% through the first 9 months on a reported basis, but increased 8%, excluding the accounting change. A reconciliation of the accounting change impact on sales can be found in the exhibits of our earnings press release. Turning to segment results on Slide 10. Income from operations for the Debit and Credit segment decreased for the quarter and year-to-date as sales growth, including the addition of Arroweye, was offset by lower gross margins and increased SG&A expenses, including the impact of additional headcount from the Arroweye acquisition. Debit and credit gross margins were impacted by sales mix and higher production costs, including tariffs, which primarily impact the debit and credit segment and increased depreciation related to Arroweye, the new Indiana production facility and other capital equipment purchases. Prepaid debit segment income from operations decreased in the quarter and year-to-date due to decreased net sales. On a year-to-date basis, the decline was a direct result of the revenue recognition accounting change. Turning to the balance sheet, liquidity and cash flow on Slide 11. Our cash flow generated from operating activities for the first 9 months increased from $16.7 million last year to $19.9 million in the current year, driven by lower working capital usage. As we have discussed previously, 2025 has been a major investment year, including spending for our new Indiana production facility and other advanced machinery to support operating efficiency, capacity expansion and new capabilities such as closed-loop prepaid. Year-to-date, our capital spending has increased almost $10 million compared to prior year, resulting in free cash flow of $6.1 million in the first 9 months of this year, down from $12.5 million in the prior year. Following the third quarter, as John mentioned, we finalized a strategic relationship with the Australian prepaid technology firm, Karta. This relationship also included an equity investment of $10 million to acquire 20% of the company, which is also backed by the Commonwealth Bank of Australia. For the investment, we paid $2.5 million in upfront cash with the remaining $7.5 million expected to be settled through performance of commercial arrangements as we work together to bring new digital technology to prepaid cards in the U.S. market. Turning to the balance sheet. At quarter end, we had $16 million of cash, $47 million of borrowings on our ABL revolver and $265 million of senior notes outstanding. As we mentioned last quarter, in July, we exercised an optional redemption feature on our 10% coupon senior notes and retired $20 million of notes at a redemption price of 103% of par value. We have utilized our $100 million ABL facility to help fund the Arroweye acquisition and the senior notes redemption and plan to pay down borrowings over time as we generate cash flow. Our net leverage ratio at quarter end was 3.6x, which we also plan to work down as cash flow is generated. Before we move on to our 2025 outlook, we have provided the latest U.S. cards and circulation trends from Visa and Mastercard on Slide 12. For the 3 years ended June 30, cards in circulation in the U.S. increased at a 7% CAGR. Large issuers have continued to report card and account growth in their latest earnings reports, which indicate card issuance remains healthy. I will now turn to our 2025 outlook on Slide 13. We have updated our 2025 outlook to reflect sales mix in our debit and credit segment and timing of orders in our prepaid segment. Our net sales outlook is now low double-digit to low teens growth, which compares to low double-digit to mid-teens growth in our prior outlook. Adjusted EBITDA outlook is now flat to low single-digit growth, down from our previous range of mid- to high single digits due to the margin impact of sales mix trends. Our current outlook reflects existing tariff rates and does not reflect potential impacts from the proposed semiconductor chip tariffs, which have not been enacted and details on implementation timing and exemption criteria remain unclear. I'll now turn the call back to John for some closing remarks. John Lowe: Thanks, Jeff. Turning to Slide 14 to summarize before we open the call for Q&A. The third quarter was largely what we expected with good sales contribution from Arroweye and good demand from our core solutions, while we still face margin pressures, which we are working to counter. We have updated our outlook, and we expect strong sales and adjusted EBITDA growth in the fourth quarter. We continue to execute our strategy and are pleased to have transitioned our new Indiana production facility and advanced multiple long-term growth initiatives, including entry into closed-loop prepaid and our agreement to bring new prepaid chip-enabled technology solutions to the U.S. prepaid market with Karta. We have faced many challenges this year, but we are confident in our core business growth moving forward and are excited to see many of our growth initiatives begin to yield results. Operator, we will now open the call up for any questions. Operator: [Operator Instructions] Our question comes from the line of Andrew Scutt from ROTH Capital Partners. Andrew Scutt: First one for me is just if you could provide some more details around the impact of tariffs. I know this is kind of tough for you guys to parse out. But following your previous call, you guys said you expected around $5 million in charges on the year. I believe it was a $1 million headwind to EBITDA in the second quarter. So any further details around that in the third quarter would be great. John Lowe: Andrew, I'll let Jeff cover that. Jeffrey Hochstadt: Andrew, yes, we said $1 million, you're right in Q2 -- in Q3, we mentioned about $1.6 million of tariffs. So -- and we did think in Q2, it's going to be closer to $5 million. China -- we did get a reduction in the China rate to 45% recently. And just -- we're still trying to push back every single day on our suppliers to some of that tariff impact. So we're actually thinking more in the range of $4 million to $5 million now. We're hoping it's closer to $4 million. But every day, we're trying to push back on our suppliers to try to reduce the impact to us. And then I would just say that started in April. I'm not -- we're not giving color for next year, but obviously, that would probably grow a little bit into 2026 just because you got a full year impact next year. Andrew Scutt: Yes. Understood. And I appreciate the color. Second one for me, and then I'll hop back in the queue. Your prepaid segment, you guys have added a bunch of additional programs now, health care, some payroll cards and whatnot. So previously, kind of analyzing the segment, it was just gift cards. So can you kind of give us the puts and takes in prepaid among your kind of different sales verticals? John Lowe: Yes. Let me cover the kind of overview of what we're doing in prepaid because it has changed a little bit, and Jeff can give any color on the numbers for Q3 and the rest of the year. Our prepaid business, just as a reminder, we're the market leader in prepaid packaging solutions in the United States. And so as fraud rises within the prepaid market, the complexity of what our customers are asking for, what we're innovating with our customers continues to rise. That's actually created lumpiness in orders, I would say, for this year within our open loop packages. But that's a good thing. It creates kind of greater value over the longer term of what we're producing. And then we're also investing in closed loop, which is operational. We expect to have orders shipping in Q4. And that's again because fraud impacts are bleeding into the closed loop side of the prepaid market. But additionally, I think you saw the announcement a couple of days ago, we issued a press release. We talked about it this morning on the call. We invested in a kind of innovative technology company based in Australia. They're a program manager. They're backed by the largest bank in Australia as well. That's another one of their big investors. And they've got unique technology that we're working with our program managers to actually chip-enabled payment cards in the prepaid space. We're already piloting that with a large national retailer in the U.S. So you look at the prepaid space, you look at our unique position to both lead in the packaging side, lead in our unique chip capabilities. And we believe our strategic initiatives entering into closed loop as well as expanding our capabilities in the open loop side are going to benefit us over the longer term. So we're happy about the prepaid performance, but definitely this year, a little bit lumpy on the revenue side. Jeffrey Hochstadt: Yes. And Andrew, I'll just add a little bit color on the revenue side. Last year, there was a lot of -- our clients were looking to increase the security of the packaging. So we did a lot of innovation. We actually rolled out some new security measures, fraud prevention packaging last year, and you saw a pretty really strong growth here last year, especially in the second half. So as John said, it can be a little bit lumpy, but we do have pretty strong comps to grow over this year. I mean we still feel really good with the prepaid business that does, especially in the second half, have some strong comps year-over-year. Operator: [Operator Instructions] We have a question from Jacob Stephan from Lake Street Capital Markets. Jacob Stephan: First, I just wanted to ask on the Visa and Mastercard data. Obviously, the graph in your chart or in your presentation shows prepaid actually decreasing but credit being up. And most recent guidance here talks about timing of prepaid shipments. I guess maybe kind of help us think through what the timing in prepaid, what that portion of guidance was? And maybe do you expect that in 2026? Or are these pushed out indefinitely? John Lowe: Jacob, let me comment on that first, and then I'll let Jeff add color. The credit side actually went up quarter-to-quarter. The debit side, not prepaid actually reduced a little bit. That said, it's 1 quarter. You look back over the last 3 years, your CAGR is still 7%. What we're seeing within our markets, what we're hearing from banks opening new accounts, we continue to see growth. So we're pretty confident on card growth and what we hear from our customers, we're still seeing growth in new programs coming on board. This year, our card volumes are actually up, so we're winning share. So winning share in a growing market, we're happy about it. Jeffrey Hochstadt: Yes. And I would just say I don't think that is correlated necessarily to delay in orders. Just as John mentioned, the prepaid ordering can be lumpy at times. And if something does get pushed off to early 2026, it would be more delayed to early 2026, not necessarily going away. So it's really -- we're just talking about the timing. Is it going to hit really in December? Is it going to hit in January, February? That's kind of more of what we're talking about. Jacob Stephan: Okay. That's helpful. And then also wanted to touch on Karta a little bit. I guess my perception of them is that they're kind of a credit card provider. I know they have kind of a travel -- a premium travel card launch, but help us kind of think through the safe to buy technology. What -- overall, I know fraud preventative packaging has been a big growth driver for you. But what is adding the chip capability to -- for you in prepaid along with the fraud preventative packaging? John Lowe: Well, let me cover the first part. I think you're mixing them up with another company that has a similar name based in Southern Florida. That's a different company than we're investing in. This company is based in Australia. They're a prepaid program manager there. But just to touch on why the capability is unique and why it will benefit our markets as well as our company over the long term. They have the ability to essentially enable chips in a payment card and create a payment card where [ the PAN ], the 16-digit number is constantly changing. So your fraud and ability to kind of pull that 16-digit number off of the card, deal it, if you will, significantly reduced through putting their technology onto a chip into a payment card. Why that's good for a market is because the fraud volumes, the amount of fraud has significantly increased in the prepaid market, it hurts the reputation of our customers, hurts the reputation of those retailers out there, the 100,000-plus points of distribution that have to deal with it every day. But additionally, if you think about our debit and credit market and you think about the transition in our debit and credit market from mag stripe to chip-enabled cards and now fully to contactless, the value grows. And that's exactly what we're starting to see hints of in the prepaid market, and we want to be on the front end of it. So that's why we made this investment. We have a right to buy a majority share of the company if we choose to. They're great partners of ours. And like I said, we're already piloting this with a large national retailer. So to the extent that this is successful and to the extent that the market moves more towards chips and prepaid payment cards, not only does it help our customers, help our market, but it also rises the value of what we're selling into that prepaid market and benefits our prepaid business. Jacob Stephan: Very helpful. Maybe just kind of a quick last one. Adding the chip to prepaid, how significantly does that change kind of the ASP? John Lowe: Yes, I wouldn't comment on the exact ASPs, but just for context, if you're on the debit and credit side, mag stripe card versus a chip-enabled card, I mean, the chip-enabled card is generally more than 2x the cost. It's a little bit different on the prepaid side, but the price is higher. We'll try to put more pen to paper and give more color as we give more color on how the pilot is going when we released in March. Operator: Our last question comes from the line of Peter Heckmann from D.A. Davidson. Peter Heckmann: I had some follow-ups. In terms of thinking about the potential for tariffs on semiconductors and thinking about your suppliers and whether or not they have manufacturing facilities in the U.S. I guess any additional thoughts and then how you're positioned, how you might be positioning inventories ahead of this? And potentially, depending upon the timing and whether it's retroactive or a date in the future, do you think there's the potential to pull forward some larger projects ahead of a tariff implementation? Jeffrey Hochstadt: Yes. Fair question. Everything we hear today in the market about semiconductor, we thought we would hear something late summer. It hasn't happened. The administration really hasn't come out with anything new in the last several months that we've been aware of. Our providers are pretty confident that if there was a tariff that they would be exempt just because of their -- like you said, their production facilities in the U.S. and their investment in the U.S. No one can be certain at this point. We also know if semiconductor tariffs do go into effect, it's going to affect the entire industry equally. So we're aware of that. We're really hoping either they're exempt or it doesn't impact the industry. But we'll just see. We're just waiting like everyone else. So we don't really have any more color than we did 3 months ago. But with that said, if you look at our balance sheet, we did we did have a high inventory balance. So we've been buying chips at a little bit higher rate than we normally would have, just knowing what could potentially happen. I mean that could help us for a little bit of time if we had a higher balance of inventory. It's not completely sustainable, but it would help us in the short term. So we have been purchasing chips at a higher rate so far this year. We do expect just the timing of chips, that inventory balance may come down a little bit in Q4. But we do have a higher-than-average amount of chips on hand right now. So we've been taking a little bit aggressive approach on keeping that balance relatively high. Peter Heckmann: Sorry, yes, I was on mute. I was going to say just as regards to the instant issuance business, in terms of thinking about other use cases there outside of the financial institution channel, you talked about a public sector customer last quarter. Any additional thoughts there in terms of opportunities to roll that out? And remind us, that subset of revenue for 2025, would you expect Card@Once grows faster than the overall company? John Lowe: Yes. Card@Once, our instant issuance business is growing faster. Just as a reminder, Pete, it's a higher-margin business than the rest of our business. It goes hand-in-hand with our other digital solutions. And the value proposition there is really the solution, the technology and the fact that we're integrated to most all processors and cores that support banks across the payments ecosystem. That's the exact same value proposition that we're using to win with our other digital solutions where we've been signing a number of issuers and growing, again, with higher-margin products, but our other digital solutions are fairly small right now. That said, our instant issuance business, we're on track to have a record year. You're exactly right, there's a value proposition not only in the [ FI space ], but in any location where you'd want to issue a payment card on spot. And so we are continuing to kind of push to expand that market and diversify. And we're happy with our instant issuance business performance. They've done a great job this year, and we expect them to have a record year and then look forward to what they're going to do in coming years. And just as a reminder, we said this in the call, our instant issuance business historically has been roughly 10% of the business. That's a little bit more now. Our digital solutions that we're adding continue to add to kind of our broader digital solution suite, if you will. And so we plan more on the performance, more metrics, if you will, when we release in March going into next year. So I look forward to sharing more on those businesses and especially given the value they create for CPIs [indiscernible]. Operator: As there are no further questions in the queue, I would now like to turn the call over back to John Lowe for closing remarks. John Lowe: Thanks, operator. As we head into the holiday season, I want to thank all of our CPI employees for their contributions and dedication to the company and our customers and wish everyone a safe and happy holiday. Thank you all for joining our call this morning, and we hope you have a great day. Operator: Thank you for joining the call today. You may now disconnect.