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Operator: Good afternoon, and welcome to the HireQuest, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, John Nesbett of IMS, Investor Relations. John, the floor is yours. John Nesbett: Thank you, Tom. I'd like to welcome everyone to the call. Hosting the call today are HireQuest's Chief Executive Officer, Rick Hermanns; and Chief Financial Officer, David Hartley. I'd like to take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements and terms such as anticipate, expect, intend, may, will, should or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief or current expectations of HireQuest and members of its management as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described by HireQuest's periodic reports filed with the SEC, and the actual results may differ materially from those contemplated by such forward-looking statements. Except as required by federal securities law, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. I would now like to turn the call over to the Chief Executive Officer of HireQuest, Rick Hermanns. Please go ahead, Rick. Richard Hermanns: Good afternoon, and thank you for joining our call today. As you can see from our third quarter results, the staffing market is much the same as it's been for the past 10 quarters now in terms of staffing demand and broader market sentiment. With that said, I'm pleased to report that we delivered another quarter of profitability, highlighted by net income of $2.3 million or $0.16 per share, and we continue to keep our expenses in check despite market uncertainties. Our results in this quarter underscore the flexibility and strength of our franchise model, which has consistently enabled us to remain profitable in soft markets when many others in our industry have struggled. Over the history of HireQuest, our model has proven to perform well and importantly, be profitable in all cycles. Since its exceptional -- inception over 20 years ago, HireQuest has been profitable each year through all of the economic downturns and consistently provided valuable operational and financial support to our franchisees. Over the long term, we are confident that this is a winning formula for shareholders. The overall staffing market has provided some mixed signals throughout 2025, which has been impacted by a variety of macroeconomic factors, including tariffs, immigration policies and impending interest rate cuts. Our temp staffing and day labor offerings are outperforming permanent placement and executive search, which can be less predictable by nature. While demand for temp and day labor staffing can fluctuate based on locations and seasonality, our franchisees have a keen understanding of the market. And with our support and resources, they are able to provide the very best in temporary and day labor staffing services. This dependability and service quality is what keeps our customers coming back to HireQuest in the many geographies that we operate in throughout the United States. Snelling, our nationwide temporary and direct hiring recruiting service, performed well in the third quarter relative to our other offerings with some of these franchisees scoring big wins indicating at least a slight increase in demand for longer-term staffing in the light industrial and administrative fields. Permanent placement and executive search continues to lag, which has been the case for well over a year now, as many of you know. In addition to macro uncertainties that have been amplified by tariffs and other uncertainties, the MRINetwork mostly saw that one of the biggest problems was the several MRINetwork franchisees elected to not renew their franchise agreements over the last few quarters, which has negatively impacted year-over-year comparisons. While this is unfortunate, our current MRINetwork franchisees saw shrinking declines in their perm placement business over the quarter, which is positive. I do want to emphasize that MRI franchises operate differently from the traditional franchise model that you see in our HireQuest Direct or Snelling offices. Our MRI offices are more of a network of somewhat related recruiting firms. In fact, many of them have their own names instead of a tight network of offices that share the same name, brand and operating standards like HireQuest Direct, for example. In other words, these are essentially independent recruiting offices operating under the MRI umbrella, making franchisee retention less of a sure thing than our traditional model, especially in a down market. As always, M&A remains a key part of our growth strategy. There are several opportunities that we are looking at that could be immediately accretive to the HireQuest model, and we're keeping our ears close to the ground for any new deals. This is an especially interesting time for deals given the status of the market where smaller firms or long-term owners eyeing retirement may be planning their exit strategies. We're constantly scanning for new opportunities, and we're well equipped with a proven strategy that's helped us to close and successfully implement numerous acquisitions over the lifespan of the company. With that said, I'll now turn over the call to David to provide a closer look at our third quarter financial results. David? C. Hartley: Thank you, Rick, and good afternoon, everyone. I appreciate you all joining us today. I'll now provide a summary of our third quarter results. Total revenue was $8.5 million compared with revenue of $9.4 million in the prior year or a decrease of 9.8%. Our total revenue is made up of 2 components: Franchise royalties, which is our primary source of revenue; and service revenue, which is generated from certain services and interest charged to our franchisees as well as other miscellaneous revenue. Franchise royalties were $8.1 million compared to $9 million for the same quarter last year. And our service revenue for the quarter was $387,000 compared to $428,000 last year. Underlying these franchise royalties are system-wide sales, which are not a part of our revenue but are a helpful contextual performance indicator. System-wide sales reflect sales at all offices, including those classified as discontinued. System-wide sales in the third quarter were $133.6 million compared with $148.6 million last year. Sequentially, system-wide sales increased about 6.1% this year over Q2, which was favorable compared to last year when the increase was only 1.7%. The third quarter is typically our best sales period for HireQuest Direct and to a lesser extent, Snelling. And this year, both offerings saw double-digit sequential growth compared to only mid-single digits last year. Selling, general and administrative expenses in the third quarter were $5.1 million compared to $5.4 million in the third quarter of 2024. I'd also like to point out that we recognized a workers' compensation benefit in the third quarter of just under $100,000 compared to Q3 of last year when we had a net expense of $500,000. We are pleased with the results from the changes we've implemented to our work comp program. But just so you guys don't get the wrong idea about the other expenses, I think it would be helpful to break down SG&A just a bit more. Core SG&A, which excludes the impact of net workers' comp insurance, MRI ad fund-related expenses and any other nonrecurring operating expenses were $4.6 million for the quarter, which is flat with last year. We provide a table in the press release issued earlier this afternoon with a detailed reconciliation of core SG&A to SG&A as well as tables for the non-GAAP profitability metrics, net income to adjusted net income and net income to adjusted EBITDA that I'm going to talk about shortly. Our net income after tax this quarter was $2.3 million or $0.16 per diluted share compared to a net loss of $2.2 million or a loss of $0.16 per diluted share last year. Adjusted net income for this quarter was $3.4 million or $0.24 per diluted share compared to last year when it was $2.8 million or $0.20 per diluted share. Adjusted EBITDA was $4.7 million compared to $4.9 million last year, and our adjusted EBITDA margin this quarter rose to 55% from 52% last year. For both adjusted net income and adjusted EBITDA, a large component of the favorable year-over-year results this quarter can be attributed to our controlling of network comp expense. And while there have been times over the past few years where it would have been nice to be able to include it as an adjustment, we're pleased that the changes we've implemented in recent years are moving us in the right direction. Moving on to the balance sheet. Our total assets as of September 30, 2025, were $94.9 million compared to $94 million at December 31, 2024. Current assets included $1.1 million in cash and $46.9 million of net accounts receivable, while current assets at 2024 year-end included $2.2 million of cash and $42.3 million of net accounts receivable. Working capital was $31.5 million as of September 30 compared with $25.1 million at 2024 year-end. Current liabilities were 42% of current assets as of December -- as of September 30 versus 49% at 12/31/2024. We had a $2.2 million draw on our credit facility as of September 30, 2025, and that gives us about $42.5 million in availability, assuming continued covenant compliance. So that puts our net debt at the end of this quarter at around $1.1 million, which is down about $1 million from the end of Q2 and down about $11 million compared to 9/30/2024. So as we stand today, we have a good amount of flexibility and room for short-term working capital needs as well as the capacity to capitalize on potential acquisitions. We paid a regular quarterly dividend since the third quarter of 2020. Most recently, we paid a $0.06 per common share dividend on September 15, 2025, to shareholders of record as of September 1. We expect to continue to pay a dividend each quarter, subject to the Board's discretion. With that, I will turn the call back over to Rick for some closing comments. Richard Hermanns: Thank you, David. As always, I'd like to thank our employees and franchisees for their hard work and commitment, and we look forward to speaking with you again when we report our year-end results in March. With that, we can now open the line to questions. Thanks. Operator: [Operator Instructions] And the first question today is coming from Kevin Steinke from Barrington. Kevin Steinke: I wanted to start off by asking about the day labor business. It sounds like a little more optimism around that business this quarter? I think on the second quarter call, you talked about some of the softness in the manufacturing environment impacting that business. So I'm just wondering if there was a kind of a meaningful improvement in trend in that business that you saw in the third quarter compared to the second quarter. Richard Hermanns: So Kevin, thanks for the question. Good to talk to you. I don't know if I would go as far as -- it has been stabilizing, I think, is the best way of putting it. And it's been generally -- it's been generally a reasonable market for the on-demand labor in many markets. We have a couple that are still a bit more troublesome that are -- typically are related to 1 or 2 clients that have either stopped using temporary staffing or there's just not the same volume that's there. So anyway, that's a muddled way of saying we're approaching the bottom, we think. But I mean, we were still down a bit overall, obviously, from where we want it to be. But again, there is room for optimism. And I would say the other part is in the fourth quarter, we've had -- obviously, we're what -- we're 5 weeks in. And of the 5 weeks in, half of those weeks, we beat our prior year-over-year comparisons for the Snelling and HireQuest Direct division. And the other couple of weeks, we've been down. But -- so there's room for optimism that we're -- that we've hit that bottom. Kevin Steinke: Okay. Good. And then you called out there some big wins for the Snelling franchisees in the quarter. I mean, should we think about those as competitive takeaways or I don't know, again, a sign of, I guess, as you said, at least some stabilization or small improvement in the market? Richard Hermanns: So I think it's -- obviously, the large wins are more just the result of exceptional franchisees earning more business. That said, even throughout, it's -- in most markets, it's been better. And so Snelling in particular, performed pretty well. Now again, obviously, large accounts are great when you get them and they're terrible when you lose them. But this past quarter, we've been fortunate in that -- picking up a couple more than what we lost. And so -- again, but it's more, as you said, though, it's more competitive wins than it is overall improvement. But again, that said, it's pretty stable right now. It seems -- it feels pretty stable right now. And so I say feels -- I'd point back to the -- where we are so far in the fourth quarter with a couple of weeks exceeding the prior year period, similar period. Kevin Steinke: Okay. Got it. And in the discussion about MRI, you had talked about some nonrenewal of franchisee agreements. So were there any meaningful nonrenewals specific to the third quarter? Or were you kind of talking about quarters previous to the third quarter? Richard Hermanns: Yes. And I think we can't recall which quarter we addressed it, but there were a couple of -- especially in the first quarter, there were a couple of good-sized departures. And so we're obviously seeing those in the comparisons now. And what I would say, what is a positive sign is during the quarter, same sort of active ongoing MRI franchisees by the end of the quarter, we're starting to run flat, almost flat anyway with the prior year-end period -- I mean, the prior year similar period. So again, while the active offices were still declining, like I said, that leveled out by the end of the quarter, whereas most of the decline came from those closed or basically people who had left the network. Now look, I'm not going to sugarcoat it. People losing the network -- leaving the network is not good for us. But, like I said, from a sentiment of where the market stands, it again indicates that the market seems to have bottomed out or certainly stabilized. Kevin Steinke: Okay. Understood. Maybe just a couple more. I mean you mentioned looking -- you're looking at several accretive M&A opportunities. Just kind of wondering what the pipeline looks like in this market environment? Has it picked up a bit given maybe some of the stress on some of your smaller competitors? Richard Hermanns: It's been surprisingly stable. And we're obviously always in the market to buy competitors. And there are always competitors that are available. I would have thought there would have been a bit more opportunities than maybe what there are, but there's plenty. So I don't read that the wrong way. So there's certainly plenty. I think part of it, we tend to -- it's towards this time of the year when we start seeing more activity anyway. People try to get through the year so that they have full year results to things that they can package it when they go to sell it, whereas a lot of people are -- they're not going to optimize their exit multiple if they're working off of interim numbers. So I would expect a bit more opportunities over the next, let's say, 3 to 6 months, but there's plenty as they -- there are plenty of them as they are right now. I'd like to think that they would be better. But again, they are better than what they were certainly 3 years ago, which just reflects the state of the market. Kevin Steinke: Okay. Understood. And then lastly, I just wanted to ask about tighter immigration enforcement and you had talked on the last quarter's call about that driving some new business for you given less competition from undocumented workers or companies that use undocumented workers. Is that trend continued? Or is that kind of helping your pipeline still? Richard Hermanns: So here's the thing. There are absolutely a couple of decent-sized business wins that we can point directly towards immigration enforcement without question. I have to be honest with you, a lot of the reports that I've seen state that more than 2 million people have self-deported. I really would have expected a much larger uptick in our demand if that were the case. So I'll admit -- I don't know how they calculated the 2 million people self-deported. If they did, like I said, it just seems like our demand would be stronger. So I'm a bit skeptical. I'll admit I'm skeptical about that. That said, a lot of this is cumulative as well. We're in a situation where the number of people coming in has been at a very low point now for 11 months, 10 months. And so part of that takes a while for it to roll through. I think that what's going to be important in combination with immigration enforcement is once some of these, let's say, reshored facilities actually start employing nonconstruction people, meaning basically start staffing up the factories themselves, that will also hopefully push up demand. And so when you read okay, Japan has agreed to invest $500 billion in American plants. Well, it doesn't mean that you snap your fingers and those plants are built and all of a sudden, there's 150,000, 200,000 new jobs. So those are going to take a while to fit in. But again, if immigration remains at such a low point and that continues on, it's a very favorable -- it should be a very favorable trend for us or it should create a big tailwind for us. Operator: [Operator Instructions] And there are no further questions in queue. I would now like to hand the floor back to management for closing remarks. Richard Hermanns: I want to thank everybody for joining us today for our earnings call. Again, I want to thank our employees, our franchisees and our investors. It's been a challenging really 11 quarters now. But what has hopefully been demonstrated through all of this is we remain profitable despite the challenging environment. And when you look at our peer group, there are -- it is covered with red ink, whereas we've remained profitable, which is one of the main attractions of our model. And so -- and I think that this quarter is a great demonstration of that, that despite weaker demand than what we would prefer, we remain solidly profitable and with good adjusted EBITDA despite the relatively challenging circumstances. And so again, thank you for joining us, and we look forward to talking to you again in March. Thank you. Operator: Thank you. This does conclude today's conference call. You may disconnect at this time. Thank you once again for your participation, and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2025 Metallus Inc. Earnings Call. [Operator Instructions] I would now like to turn the call over to Jennifer Beeman. Jennifer, please go ahead. Jennifer Beeman: Good morning, and welcome to Metallus' Third Quarter 2025 Conference Call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, Chief Executive Officer; Kris Westbrooks, President and Chief Operating Officer; John Zanarec, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. You all should have received a copy of our press release, which was issued last night. During today's conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release. Please refer to our SEC filings including our most recent Form 10-K and Form 10-Q and the list of factors included in our earnings release, all of which are available on the Metallus website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike? Michael Williams: Good morning, and thank you for joining us today. I want to start with safety. Throughout the year, we've been dedicated to our mission of being recognized as having the safest specialty metals operation in the world. In line with this mission, we continue to make substantial investments in the safety of our people. We remain on track to spend $5 million to further enhance our safety management systems and critical equipment this year. To date, in 2025, we've had 0 serious injuries. These are events which are life-threatening or life altering. We have also had a 15% reduction in days away and restorative work cases and a 34% reduction in lost and restricted work days compared to the same period a year ago. In October, we successfully completed our planned annual maintenance shutdown at the Faircrest facility. These shutdowns are highly coordinated efforts involving collaboration between our teams and external contractors. Over the course of 9 days, we performed essential maintenance to ensure the 2026 reliability and performance of our melt shop assets. Most importantly, I'm proud that the Faircrest shutdown was completed without any serious safety incidents. As a reminder, we will see additional shutdown activities in our other facilities in the late fourth quarter. Customer feedback continues to reaffirm the strength of our service and quality. We recently wrapped up our annual customer survey. And I'm pleased that over 97% of respondents said they would recommend Metallus products to others, a testament to the exceptional work our teams deliver every day. As expected, the survey showed that most customers prefer buying steel made in the United States, and it's a key factor in their purchasing decision. We're seeing continued interest from both new and long-standing customers who are actively shifting toward domestic supply chain solutions. So far in 2025, we successfully sold to over 2 dozen new customers, which will contribute to the future business growth. In addition, we saw a substantial year-over-year increase in our overall order backlog. Specifically, aerospace and defense backlog is up approximately 80% compared to a year ago. As we enter the final quarter of the year, we've begun our annual commercial contract negotiations. Our goal remains to secure approximately 70% of our long products business through annual agreements. While we're in the midst of negotiations, customer conversations have been encouraging for 2026. Now turning to business results. for the third quarter. Despite shipments being down slightly from the second quarter, sales increased as a result of favorable product mix with continued expansion in the aerospace and defense end market. On a year-over-year basis, shipments in the third quarter improved by 36%, driven by broad-based improvements across all end markets. Our current lead times extend to late January for our SBQ bars and February for our seamless mechanical tubing products. Adjusted EBITDA rose sequentially to $29 million, driven by our growing participation in the aerospace and defense end market and stability across the other end markets. Additionally, higher levels of production during the quarter resulted in greater fixed cost leverage. Now let's cover some of the third quarter highlights of our specific end markets. Industrial shipments decreased slightly in the third quarter on a sequential basis. Distribution customer inventories have improved, but still remain lean and in line with demand. Several key customers have indicated plans to ramp up operations and are projecting stronger forecast for 2026, while others remain cautious, closely monitoring year-end inventory levels. Automotive shipments increased slightly on a sequential basis. Key automotive customer demand was solid throughout the quarter, and we have not yet experienced any disruption due to global supply chain challenges. Energy shipments remain at reduced volumes on a sequential basis. With import levels declining and tightened enforcement of tariffs, we are beginning to capture greater customer share for 2026. However, overall energy market conditions still remain subdued. Finally, higher shipments in aerospace and defense contributed to a favorable product mix this quarter. We continue to gain traction across both new and existing programs., ,all supporting our targeted annual A&D sales run rate of $250 million by mid-2026. In the quarter, we added several new customer opportunities for our specialty bar and tubing products for applications, including new munitions programs, gun barrels and aerospace bearings. We also recently secured prototype orders with multiple customers that once fully commercialized, will utilize Metallus' carbon and specialty alloys and newer warheads and in rocket motor casings. These are applications where strength, efficiency, quality and shorter lead times are critical. Today, Metallus supports several dozen defense programs with growth coming from both traditional prime contractors and emerging industry producers. We are on track with the construction of bloom reheat and roller furnaces, both assets will increase our capability and optimize our throughput. We remain optimistic about the future in the growing aerospace and defense market. Turning to another bright spot. We are focused on growing our participation in the vacuum arc remelt or VAR steel product line. We recently executed a long-term supply agreement with a trusted partner for VAR Steel, strengthening our strategic position and securing a reliable high-quality material stores to support ongoing sales and profit growth. Before I turn it over to John, I'd like to provide a brief update regarding our labor negotiations. As we announced on October 30, members of our local USW have voted not to ratify the tentative labor agreement we had reached with the union Negotiating Committee. While we're disappointed by the outcome, we remain committed to securing a fair agreement that supports our employees and aligns with Metallus' long-term strategic goals. The current contract has been extended by 90 days to January 29, 2026, and we expect our operations to continue without disruption. We appreciate the support of our shareholders, the trust of our customers and the dedication of our employees as we look forward to a stronger 2026. Now I'd like to turn the call over to John. John Zaranec: Thanks, Mike. Good morning, and thank you for joining our third quarter earnings call. During the quarter, our team delivered sequential increases in net sales, melt utilization and profitability consistent with our earnings guidance. We also advanced our capital investment safely, on budget and on schedule. As it relates to our top line, third quarter net sales totaled $305.9 million, a sequential increase of $1.3 million, primarily driven by higher shipments in aerospace and defense and steady volume across auto and industrial end markets. Net income was $8.1 million in the third quarter or $0.19 per diluted share. On an adjusted basis, net income was $12 million or $0.28 per diluted share. Adjusted EBITDA was $29 million in the third quarter, a sequential increase of 9% primarily driven by improved product mix and continued improvement in melt utilization, driving better fixed cost leverage. This marks the fourth consecutive quarter of sequential growth in both net sales and adjusted EBITDA, underscoring the consistency of our commercial execution, improving operations, sustained demand in our core markets and our focus on growing in aerospace and defense. During the third quarter, operating cash flow was $22 million, primarily driven by profitability, partially offset by a slight increase in working capital needs to support the growing business. At the end of the third quarter, the company's cash and cash equivalents balance was $191.5 million, inclusive of approximately $21 million of government-funded cash on hand for future outlays as we finalize our capital projects funded by the U.S. government. In the third quarter, capital expenditures totaled $28.4 million, including approximately $22 million of third quarter CapEx and supported by previous government funding. Planned capital expenditures for the full year 2025 are approximately $120 million, slightly lower than previous guidance due to timing of cash payments. The full year CapEx guidance includes approximately $90 million of spending, which was funded by the U.S. government, consistent with our previous guidance and the continued successful execution of the projects. As it relates to government funding, during the third quarter, the company received $10 million of cash from the government as part of the previously announced nearly $100 million funding agreement in support of the U.S. Army's mission of increasing munitions production. To date, through the end of September, the company has received approximately $82 million of government funding with an additional $4.1 million received in October. Receipt of the remaining committed government funding is expected in early 2026, as mutually agreed upon milestones are achieved. As a reminder, this funding will substantially pay for both the new bloom reheat furnace at the company's Faircrest facility and the new roller furnace at the Gambrinus facility. In terms of shareholder return activities, in the third quarter, the company repurchased 178,000 shares of common stock for $3 million. At the end of September, a balance of $90.9 million remained under our share repurchase authorization. Since the inception of common share repurchases in early 2022, combined with the convertible note repurchase activities, we've reduced diluted shares outstanding by a significant 25% or 13.5 million shares compared to the fourth quarter of 2021. These actions reflect the strength of the company's balance sheet and the confidence in through-cycle cash flow generation. As it relates to liquidity, total liquidity remained strong at $437 million and no outstanding borrowings as of September 30, 2025. Turning to our near-term business outlook. Commercially, fourth quarter shipments are expected to be 5% to 10% lower than the third quarter, primarily due to normal year-end seasonality and customers' potential global supply chain challenges. Base price per ton is anticipated to increase slightly as we realized the previously announced bar and 2 price increases of 5% that will take effect through the fourth quarter. Product mix is expected to be less favorable than the third quarter due to the mix of sales within the industrial and aerospace and defense markets, which is primarily timing related. In summary, commercially, we expect lower shipments and slightly weaker product mix compared to Q3, slightly offset by increased base price per ton but the net impact is expected to be a $2 million to $3 million adjusted EBITDA sequential headwind. From an operational perspective, annual shutdown maintenance in the fourth quarter will be approximately $11 million, a sequential increase of approximately $8 million from the third quarter. The planned annual shutdown maintenance timing and the normal fourth quarter commercial seasonality will result in a decrease in melt utilization from the 72% achieved in the third quarter and is anticipated to result in a sequential decrease in fixed cost leverage of approximately $3 million. And finally, depending on the status and timing of a new labor agreement, we could also face additional labor and benefit costs that could result in a sequential fourth quarter cost increase. Given these elements, the company expects the fourth quarter adjusted EBITDA to be lower than the third quarter, primarily driven by our normal year-end seasonality, planned annual shutdown maintenance costs and timing and a few potential customer global supply chain challenges. As compared to the fourth quarter of 2024, we expect adjusted EBITDA to improve slightly. To wrap up, thank you to all of our employees, customers and suppliers for their support. We're well positioned for a successful 2026 and beyond as a high-quality U.S.-based specialty metals producer supporting critical markets. We remain committed to delivering value to our shareholders by driving profitable growth and executing our capital allocation strategy. As always, thank you for your interest in Metallus. We would now like to open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of John Franzreb with Sidoti & Company. John Franzreb: I'd like to start with the automotive business. It was up nicely on a year-over-year basis. And last quarter, you talked about regaining share domestically. I'm curious if that's the case. And I have a follow-up to that when you answer it. Michael Williams: Sure, John. Thanks for asking the question. Yes, I mean if you look at the platforms, that we're on, those are the typically the SUVs, trucks, et cetera, that continue to sell at a decent rate. And they actually -- the auto companies were giving us a forecast that they thought the quarter would be lower, but that didn't materialize. So people are still buying vehicles. They're still having to build transmissions and motors, et cetera, to supply those vehicles, and that's our sweet spot. So we'll see how the fourth quarter develops. We do expect seasonality from them. And then there are some risks of some supply chains in the fourth quarter, their supply chains disrupting potentially vehicle production at the level that we saw in Q3. Does that answer your question? John Franzreb: Yes. And when you referenced supply chains, you actually said global. So I'm curious, are you referencing specifically the Ford problems? Or is there something more to it? Michael Williams: Well, there's concern or at least there's been public voice concern over chip supply and other issues with their supply chain. So -- but yes, Ford is the one that stands out because we've seen a lot of that in the public press reporting. John Franzreb: Okay. And regarding the $3 million to $5 million that you expected to incur with the labor negotiations, how much did you incur in the third quarter relative to your expectations? Michael Williams: Barely nothing except for our cost to negotiate. A lot of those -- that $3 million to $5 million is tied on the final negotiations. So more to come yet on that. John Franzreb: Fair enough. And have you seen any impact from the tariffs? We talked a little bit about last quarter that there was kind of a wait-and-see status. I wonder if you've seen customers gravitate more to reacting to the tariff environment. And maybe another thought on that is, does the government shutdown impact maybe the A&D business at all? Michael Williams: No, we've seen no A&D impact. This is the #1 priority is national security, and they need the volumes of munitions and weapons programs supplied. So no, we've not seen any impact on that. What was the first part of your question? John Franzreb: Any impact from tariffs on customers? Last quarter, you kind of said there was a wait and see... Michael Williams: Actually, I mean, the tariffs environment has been favorable to us. We are taking new customers. We've seen new customers come in. And we've seen a tremendous amount of inquiry activity for 2026, where more people are trying to position the domestic supply chain as you heard us in our comments. So from a commercial sales perspective, it's been fairly -- pretty positive. It's just the rate of speed in which that domestic awards are made. But there is a negative in the fact that we are seeing some tariff impacts on certain materials that we purchase offshore for our operating supplies and manufacturing. Operator: Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Philip Gibbs: Mike, the -- and I know you talked a little bit about that with the last question, but what are exactly the global supply chain challenges you're mentioning? Is that more so -- is that more so with automotive and Ford? Or is there more to it? Just wanted some context? Michael Williams: No. I mean there's been information out there that we've been told that there is concern over, again, some chip supply. Of course, you know the impact to the Ford F-150 with the aluminum supply domestically. So those are kind of things that we're aware of. We haven't seen that impact yet, but that's a potential going forward. So we just want to put it out there. Honestly, it's just a timing issue. So whatever they don't produce, they will produce because they want to meet sales targets, et cetera, for 2026. Philip Gibbs: Got it. And with your commentary of improved year-over-year EBITDA in the fourth quarter, does this contemplate any of the potential employee contract negotiations? Or would that be separate to that commentary? Michael Williams: Well, I'm not quite clear what your question is. We've identified if we do get a contract settlement -- in the fourth quarter, we're going to see those outlined costs that John referenced in his comments. . John Zaranec: And we didn't quantify it yet, but I think there would be potentially some additional costs. It really depends on the timing. Michael Williams: Yes. It's all about timing. I mean right now, we have an extension until January 29. We just -- we're going to work hard to negotiate a fair and equitable contract and align with our longer-term strategic objectives. Operator: Your next question comes from the line of Dave Storms with Stonegate. David Storms: I want to start with the energy end market here. What do you see as a potential for volumes to rebound over 2026? Michael Williams: Well, I mean a lot of it's driven by the price of oil and overall global demand, right? I think there are some other influencing factors like what sanctions and how effective sanctions against Russian oil are. And would that increase domestic production in North America? And then we would -- we most likely would benefit from that increased production, higher oil prices tend to drive increased production too. Other areas where as these LNG plants come on over the next couple of years that they're building, that will drive gas consumption, pipelines, et cetera, or natural gas production et cetera, to feed the global markets that they're targeting, that's all positive stuff for, but that takes time. We are seeing where we're -- actually probably where we're seeing potential increases in 2026 is that energy end market has historically procured a lot of SBQ into offshore and those tariffs are starting to affect their thinking and their buying strategy. So we've seen a tremendous amount of inquiries for 2026 for our energy end markets and customers. David Storms: Understood. That's very helpful. Turning to your order book. Just curious as to how you feel it's tracking relative to this point last year? I know you mentioned you want to be about 70% booked going into the year. Do you feel like you're on pace to meet that goal relative to last year? Or just maybe were do things stand there? Michael Williams: Yes. We're pretty strong believers that we're going to get to that 70%. It could be a little bit higher depending on the pricing landscape. We are seeing customers telling us, not every customer, but some key customers telling us their internal production forecast for next year are going up, and we see them asking for more volume for 2026. So we're very happy about that, and we look forward to delivering an even better 2026. David Storms: Understood. That's very helpful. And then just maybe one more for me. I know last quarter, we talked about energy input prices and that you were working on a new negotiation there. Would just love to hear where that stands going into the new year. Michael Williams: I think the biggest one is electrical energy. And we had a long-term contract that expired in May of this year, and we had to go to market. I can tell you that prices -- market prices change significantly for the time of that really nice electrical energy contract we had. So yes, and we've been transparent that we're seeing cost increases on our electrical energy purchases. We currently have a 2-year agreement for a large portion of our requirements, but there is a small portion that's exposed to market pricing, and we'll watch that very closely. We have many projects in the pipeline to work on reducing our electrical energy consumption and let alone also increase our efficiency of production with how much electrical or kilowatt per ton we use. And on the natural gas side, we're purchased forward for 70% to 80% of our needs for next year. And we actually probably are out 5 years at various supply requirements, but we're an active buyer in the market, and we're very opportunistic. So we looked for the best competitive prices we get and position ourselves for the best cost in those unit prices for both electricity and natural gas. John Zaranec: Yes. And Dave, real quick, one thing to add to that, what Mike was saying on electricity is we -- if you recall at the end of Q2, we said $2 million to $3 million of sequential cost increase, that's what we experienced. So we kind of guided that, and that's what we saw. And that's aligned with the contracts that we've lined up for the next 2 years. Operator: [Operator Instructions] Your next question is a follow-up from John Franzreb with Sidoti & Company. John Franzreb: I'm just curious about the CapEx spend. You dropped it down a little bit this year. What does next year look like? Michael Williams: Well, we're in the planning phases of that right now. The reason why we dropped down the forecast is it's all about timing. It's tied to completion of work as well as payment terms tied to after that completion and how long before we have to pay them. So it's all a timing issue. On the -- for 2026, we're in the planning phases right now, John. So we'll talk more to that early next year. John Franzreb: Okay. And if I recall, you brought in a third party to help you maybe with your floor operations. Any kind of progress you can report about that and how that's going? Michael Williams: Yes. We're very pleased with the progress, and you're going to start to see those results throughout the remainder of this year. The project is not over, but we're very pleased with the outcomes of the findings, the improvements that they're assisting with and helping my team implement them. This project goes on until late March. So a lot of those benefits will be realized in 2026. John Franzreb: Actually helpful. And I guess lastly, on the new A&D awards, maybe any additional color you want to provide and maybe the timing of revenue recognition or material revenue recognition from those jobs? Michael Williams: Yes. We're starting to actually see some of that now, particularly in the VAR VIM sales that continues to grow, which is just value creation for this company. And that's only going to continue to grow in 2026. We expect the munitions to continue to build demand build as some of the downstream supply chain issues get resolved throughout the end of this year and early next year. And then we're getting awarded as we commented earlier, a number of new programs, weapons programs, gun barrel programs, aircraft bearings, et cetera, that demand and the realization of that value growth is really going to materialize in 2026, in my view, as a notable rate. And like we said, our objective overall was to achieve or exceed a run rate of $250 million a year of revenue, and we're very confident that we'll hit at least that in 2020 -- by mid-2026. Operator: That concludes our question-and-answer session. I will now turn the call back over to Jennifer Beeman for closing remarks. Jennifer Beeman: Thank you all for joining today, and that concludes our call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Fairfax's 2025 Third Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today's call is Peter Clarke with opening remarks from Derek Bulas. Derek, please begin. Derek Bulas: Good morning, and welcome to our call to discuss Fairfax's 2025 third quarter results. This call may include forward-looking statements. Actual results may differ perhaps materially from those contained in such forward-looking statements as a result of a variety of uncertainties and risk factors, the most foreseeable of which are set out under Risk Factors in our base shelf prospectus, which has been filed with Canadian securities regulators and is available on SEDAR+. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements, except as required by applicable securities law. I'll now turn the call over to our President and COO, Peter Clarke. Peter Clarke: Thank you, Derek. Good morning, and welcome to Fairfax's 2025 Third Quarter Conference Call. I plan to give you some highlights and then pass the call to Wade Burton, our President and Chief Investment Officer of Hamblin Watsa, to comment on investments; and Amy Sherk, our Chief Financial Officer, to provide some additional financial details. We had an excellent third quarter with net earnings of $1.2 billion, up from $1 billion in the third quarter of 2024. This gives us net earnings of $3.5 billion for the first 9 months of 2025. Operating income from our insurance and reinsurance companies adjusted to an undiscounted basis and before risk margin was $1.3 billion in the third quarter, up from $1.1 billion in the third quarter of 2024. Our interest and dividend income was $655 million. Underwriting income was very strong in the quarter at $540 million, while our share of profits in associates was $305 million. We had strong operating income from our noninsurance consolidated companies at $211 million and net gains on investments in the quarter were again very healthy at $426 million. All in, our book value per share increased to $1,204, up 15.1% for the first 9 months of the year, adjusted for our $15 dividend. Now some additional comments on our insurance operations. Underwriting results in the quarter, as I said before, were very strong with a combined ratio of 92%, producing an underwriting profit of $540 million. We've only had 2 quarters with a higher underwriting profit, and those were the fourth quarters in both the last 2 years, both of which we benefited from reserve releases following the full reviews conducted in the fourth quarter. All our insurance segments continue to produce underwriting profit. We benefited from a lower level of catastrophe losses in the quarter with the third quarter historically being more volatile quarter from catastrophes. Our global insurers and reinsurers had a combined ratio of 91.3% and underwriting profit of $326 million in the quarter. Allied World had an excellent quarter with a combined ratio of 88.9%, Odyssey Group, 91.2%. Brit's combined ratio was 92.1% and Ki had an elevated combined ratio in the quarter of 105.4%, primarily due to costs from the separation from Brit. As we previously mentioned, in 2025, Ki began operating as its own separate company. Excluding separation costs, Ki's combined ratio year-to-date is 95%. After a difficult first quarter due to the significant catastrophe losses from the California wildfires, our global insurers and reinsurers have produced underwriting profit of $606 million year-to-date. Our North American insurers had a combined ratio of 93% for the third quarter, led by Northbridge with a very strong combined ratio of 86.9% Crum & Forster had underwriting income of $60 million or a combined ratio of 94.8%, while Zenith, our workers' compensation specialist, after a number of quarters with a combined ratio above 100 came in at 99.7%. Zenith has been dealing with multiple years of rate decreases in the workers' compensation space, but we are happy to say rates have now begun to stabilize and Zenith are pleased to see some premium increases coming its way. Our international operations delivered a very good quarter with a combined ratio of 92.4%. Bryte, who has been taking underwriting actions the last number of years are seeing it come through in their results. They had a combined ratio of 93.8%. Latin America posted a combined ratio of 94%. Central and Eastern Europe was at 94.5% and Fairfax Asia posted a 94.5% combined ratio as well. Eurolife General Insurance had a great quarter at 91.2%, benefiting from favorable reserve development and Gulf Insurance, the largest company in our international operations, had an excellent combined ratio of 90.5%, also benefiting from favorable reserve development. Gulf's combined ratio has been trending positively after being elevated in 2024, normalizing to its historical combined ratio levels. The strong results of our insurance operations have not gone unnoticed by the rating agencies. In the second quarter, Standard & Poor's upgraded the financial strength rating of our core operating companies to AA-. A.M. Best also upgraded Allied World, Crum & Forster and Northbridge's financial strength ratings to A+. Odyssey was already at the A+ level. In the third quarter, we wrote $8.2 billion of gross premium, down slightly from the third quarter of 2024. If you exclude Gulf Insurance, our premiums were up 3.1%. Our global insurer and reinsurer segment was up 3.2%, with gross premiums of $4.2 billion in the third quarter, reflecting growth across all our companies in this segment. Brit's gross premium was $720 million in the quarter, up 4% year-over-year, with growth in its programs and facilities business as well on the reinsurance side through its Bermuda reinsurer, Brit Re. In the third quarter 2025, Ki wrote $226 million of premium, up 15% from the third quarter of 2024, principally in property treaty, marine and energy lines of business. Odyssey Group's premiums were up 3% in the quarter with gross premium written of $1.6 billion. Its insurance business was the driver of the growth at both Nine and Hudson, while its reinsurance business was relatively flat. Allied World premium increased 1.7% in the quarter with gross premiums of $1.7 billion. Insurance was up 1.6%, driven by their Global Markets division and their Reinsurance segment was up 2.3%. Our North American Insurance segment wrote gross premiums of $2.4 billion in the third quarter, approximately flat over the third quarter of 2024. Zenith premium was up 10%, reflecting new workers' comp business and price increases in its agribusiness book. Crum & Forster premium was 1.4%, driven by its Accident & Health business and Surplus and Specialty segment, offset by credit insurance, and Northbridge's gross premium was down 4% in Canadian dollar terms compared to the third quarter of 2024. The decrease at Northbridge reflects moderating rates for commercial lines in Canada. The international insurance and reinsurance operations gross premiums were $1.5 billion, down 11.6% in the third quarter of 2025 versus the third quarter of 2024. Excluding Gulf Insurance, the international premium was up 10%. Bryte in South Africa had strong growth across its distribution channels with premium of $128 million in the quarter, up 20%. Our Central and Eastern European business led by Colonnade continues to grow profitably, writing $200 million of premium in the quarter, up 11.7%. Fairfax Asia was up 13% with strong growth across all its companies. And in Latin America, premium was up 6.1%. As I mentioned earlier, offsetting the growth in our International segment was Gulf Insurance, whose net premium was down 13%, principally due to timing. This will normalize in the fourth quarter. Our international operations now make up 20% of our total gross premiums and the long-term prospects of our international operations are excellent and will be a significant source of growth over time, driven by excellent management teams that are more and more collaborating among themselves and leveraging the strengths of the group within our decentralized structure. In the third quarter, our insurance and reinsurance companies recorded favorable reserve development of $111 million or a benefit of 1.6 combined ratio points on our combined ratio. Each of our major segments recorded favorable reserve development with releases coming primarily on short-tail lines of business. Our companies performed full actuarial reserve reviews in the fourth quarter and are in that process now. In the fourth quarter of 2024, we benefited from reserve releases of $301 million. Our overall reserve position remains strong. Through our decentralized operations, our insurance and reinsurance companies continue to produce outstanding results, writing over $33 billion in annualized gross premium with healthy underlying margins. While the general trends in the market are softening, we do not believe we are yet in a soft market. The wide variety of markets and segments our companies participate in allow us to grow in more attractive areas while curtailing our activity in less attractive ones. We also benefit greatly from our team of long-standing presidents running our companies. Our experienced teams have managed effectively through the insurance cycles in the past, both hard and soft. As the market turns, we will maintain underwriting discipline through quality risk selection and price adequacy with a laser focus on the bottom line. The company's robust capital position, strong reserve base, margins in our existing business and the scale and diversification of our operations will allow us to be patient for opportunities to arise. I will now give you some additional detail on our investment earnings for the quarter. Our consolidated investment return was solid in the third quarter with a quarterly return of 1.9%. Consolidated interest and dividend income of $655 million was up 7.5% year-over-year benefiting from a growing investment portfolio and increased dividend income in the quarter. Profits of associates was strong at $305 million, up by $45 million compared to the third quarter of 2024. Profits of associates continue to be driven by Eurobank and Poseidon Corp. In the quarter, we had net gains on investments of $426 million, driven by gains on our equity exposures of $525 million, offset by losses on our bond portfolio of $44 million, primarily from government bonds and losses on other investments of $54 million, primarily reflecting unrealized losses on our preferred shares in Digit Insurance. Net gains of $525 million on our equity and equity-related holdings were driven principally by unrealized gains on Orla Mining, Commercial International Bank and [ Forum ]. We have always said, and please remember, our net gains or losses on investments only make sense over the long term and will fluctuate from quarter-to-quarter or for that matter, year-to-year. More on investments from Wade. As mentioned in previous quarters, our book value per share of $1,204 does not include unrealized gains or losses in our equity accounted investments and our consolidated investments, which are not mark-to-market. At the end of the third quarter, the fair value of these securities is in excess of carrying value by $2.5 billion, an unrealized gain position or $117 per share on a pretax basis, an increase of approximately $1 billion for the year, primarily driven by Eurobank. In October, we announced an agreement to sell our 80% interest in Eurolife's life insurance operations for approximately $940 million to Eurobank. At the same time, Fairfax will purchase a 45% interest in Eurobank's property and casualty company in Cyprus, ERB Insurance for approximately $68 million. We are pleased to be able to maintain focus of our insurance operations on property and casualty insurance and reinsurance while still benefiting from the continued success of Eurolife's life business through our ownership stake in the bank. We wish the very best to Nikos, Delendas and the entire team that will be moving under the ownership of Eurobank. We expect a pretax gain of approximately $250 million on the transaction that will be trued up and accounted for on closing of the transaction, which is expected in the first quarter of 2026. We are also happy to announce that Alex Sarrigeorgiou, the current CEO of Eurolife, will transition to become Executive Chairman of Eurolife's General P&C Insurance operation and Chairman of our new Cyprus company. Vassilis Nikiforakis, currently CFO of Eurolife, will become Managing Director and CEO of the General Insurance business. Vassilis has been with Eurolife for 18 years and is another great example of the internal transactions that we like to make within our organization. Earlier this week, Fairfax and Bill McMorrow, Chairman and CEO of Kennedy-Wilson, issued a take-private offer to the Board of Directors of Kennedy-Wilson for $10.25 per share, a premium of approximately 38% of the closing stock that day. Their Board has formed a special committee to evaluate the proposal and its options. We do not plan to provide any updates on last and until we enter into a definitive agreement regarding the proposed transaction. There have been some questions recently regarding share ownership of our executives. I wanted to highlight that all our senior executives receive a significant amount of their annual compensation in Fairfax shares with the shares vesting over time. It is not often, but there are times when some executives may sell shares for personal reasons such as estate planning or general tax purposes. We don't generally comment on the specific personal circumstances of any reporting insider, but we can say that it's important to us that all members of our executive team maintain meaningful significant proportions of their personal wealth and Fairfax shares, which is the case today, especially due to the long-term tenor of our officers and executives. As an insider and Hamblin Watsa executive, it was reported in the quarter that Wade Burton had sold some Fairfax shares for family and estate planning. After the sale, he continues to hold 80% of his original position. Fairfax bought the shares sold by Wade in the open market. And as we mentioned in our press release, Fairfax continued to buy back shares in the third quarter and in the fourth quarter as well under our share buyback plan. We view this as a great long-term investment for the company. We continue to benefit from a stable base of annual operating income of approximately $5 billion. And we expect, of course, no guarantees, it is sustainable for the next 3 to 4 years, with $2.5 billion from interest and dividend income, $1.5 billion from underwriting profit with normalized catastrophe losses and $1 billion from associates and noninsurance companies. Fluctuations in stock and bond prices will be on top of that, but this only really matters over the long term. I will now pass the call to Wade Burton, our President and Chief Investment Officer of Hamblin Watsa, to comment on our investment. Wade Burton: Thank you, Peter, and good morning. We continue to be in excellent shape on the investment side at Fairfax. Just as a reminder, our portfolio is roughly broken into 3 categories: fixed income to support the reserves, public mark-to-market common stocks and preferred investments and equity accounted associates and privately owned companies. Our fixed income investments ended the quarter at $50.9 billion with an average yield of 5.1%. The fixed income investments are conservatively positioned with low duration and very little credit risk. What we do take on for credit risk like our mortgage portfolio is stringently underwritten credit by credit. Our team spends a lot of effort analyzing the credit quality on anything not backed by government. Over the years, our performance on this class of fixed income has been outstanding. Our common stock and preferred investments ended Q3 at $14.2 billion. Outside of the Fairfax TRS, which we see as excellent value, the biggest investments are Metlen Energy and Metals, Orla Mining, CIB Bank in Egypt, Strathcona Energy and Strathcona Energy, a Western Canadian oil company capably run by Adam Waterous. We know all of these investments well. Management in all cases is outstanding, all are well financed and cheap. And from an underlying business standpoint, it's easy to see the path to compounding our investment dollars on each one. The equity accounted associates and privately owned companies ended Q3 at $11.8 billion, led by Eurobank, Poseidon and Recipe, but now also including Sleep Country, Peak Achievement and Meadow, all are in outstanding shape, and most are having a strong 2025 so far. In all our controlled investee companies, operations are decentralized. The presidents run their businesses. Fairfax is in charge of the capital decisions, the President is in charge of operations. We also get involved in succession to make sure any transitions are seamless. While we hope our presidents live forever, sometimes it's not the case, and we work to ensure the companies continue in the Fairfax mold. Lastly, given it's a quiet quarter on the investment side, I thought I'd touch on our investment team. In the beginning and for many years, it was Prem, Roger and Brian, the founding group, who really ran the investments. Over the last 15 years or so, we have added a lot of outstanding talent, and it's really exciting to see how well the team is working together with the founding group. The team is a big part of why I'm so optimistic and confident about the investment side of Fairfax. It's a sensible, accountable and experienced group focused on the right things for shareholders and really working well together. With that, I'll pass it over to Amy Sherk, our CFO. Amy Sherk: Thank you, Wade. I'll begin my comments by discussing our noninsurance company results in the third quarter of 2025. Noninsurance companies reported operating income of $211 million in the third quarter of 2025 compared to $49 million in the third quarter of 2024, primarily reflecting the acquisition of Sleep Country on October 1, 2024, and the consolidation of Peak Achievement on December 20, 2024, which recorded operating earnings of $34 million and $53 million, respectively, in the third quarter of 2025. Additionally, operating income for the third quarter of 2025 benefited from higher margins at AGT and higher business volumes at Grivalia Hospitality. Our noninsurance company segment also include our consolidated holdings in Recipe, Fairfax India, Dexterra, Sporting Life, Thomas Cook and Meadow Foods. As Wade mentioned, all of these companies have continued to perform well in the first 9 months of 2025. Looking at our share of profit from investments and associates in the third quarter of 2025, consolidated share of profit of associates of $305 million in the third quarter of 2025 principally reflected our share of profit of $141 million from Eurobank, $68 million from Poseidon and $39 million from EXCO. A few comments on transactions within the quarter. On August 13, 2025, the company acquired all of the units of the Keg Royalties Income Fund that it did not already own for purchase consideration of $150 million or CAD 207 million. and subsequently completed a reorganization to amalgamate its wholly owned subsidiary, Keg Restaurants Limited with the Keg Fund. The company then partnered with LSG Growth Partners led by Mr. Richard Jaffray and on September 25, 2025, deconsolidated the assets and liabilities of the Keg from Recipe and its noninsurance reporting segment and has recorded its retained interest in the Keg as an investment in associates. On August 1, 2025, Blue Ant Media became a public company via reverse takeover of Boat Rocker, which was then renamed Blue Ant Media Corporation. The company deconsolidated the assets and liabilities of Blue Ant Media from its noninsurance reporting segment and recorded its retained interest in Blue Ant Media at fair value through profit and loss within portfolio investments. Subsequent to September 30, 2025, the company has purchased 107,525 of its subordinate voting shares for cancellation at an aggregate cost of $178 million or $1,659 per share. The company's consolidated statement of earnings in the third quarter and first 9 months of 2025 were also impacted by changes in interest rates and specifically the effects they had on discounting on prior year net losses on claims and our fixed income portfolio. Net earnings of $1.2 billion in the third quarter of 2025 included a net loss of $308 million, reflecting the effect of changes in interest rates during the quarter, comprised of a net loss on insurance contracts and reinsurance contracts held of $263 million and net losses on bonds of $44 million. We generally expect that a decrease in interest rates will result in an increase to the carrying values of the company's fixed income portfolio and its liability for incurred claims, net of reinsurance, resulting in the partial mitigation of interest rate risk. In the current quarter, however, we recorded net losses on both. Net losses on bonds were disproportionately impacted by unrealized losses on certain other government bonds that experienced an increase in yield during the quarter, which outweighed gains on U.S. treasuries and other bonds that benefited from declining yields, while the net loss on insurance contracts and reinsurance contract assets held primarily reflected decreased short-term discount rates. Comparatively, net earnings of $1 billion in the third quarter of 2024 included a net benefit of $64 million, reflecting the effect of changes of interest rates comprised of net gains on bonds of $829 million, partially offset by net losses on insurance contracts and reinsurance contract assets held of $765 million. When you compare the year-over-year change on a pretax basis, the changes in interest rates resulted in an approximate $371 million movement in our pretax earnings. Despite the unusual results in the third quarter of 2025, on a year-to-date basis, the company recorded a net loss on insurance contracts and reinsurance contracts held of $486 million and net gains on bonds of $419 million, which aligned with our general expectation for the partial mitigation of interest rate risk. Please refer to Page 37 of our MD&A within the company's interim consolidated financial statements for the third quarter of 2025, for a table that presents the company's total effects of discounting and risk adjustment on our net insurance liabilities and the effects of changes in interest rates on the company's fixed income portfolio set out in a format that the company believes assists in understanding our net exposure to interest rate risk. I will close with a few comments on our financial condition. Maintaining an emphasis on financial soundness at September 30, 2025, the company held $2.8 billion of cash and investments at the holding company, has access to our fully undrawn $2 billion unsecured revolving credit facility and an additional $1.9 billion at fair value of investments in associates and consolidated noninsurance companies owned by the holding company. Holding company cash and investments support the company's decentralized structure and enable the company to deploy capital efficiently to its insurance and reinsurance companies. On August 14, 2025, the company opportunistically completed offerings of $290 million or CAD 400 million and $218 million or CAD 300 million principal amounts of 4.45% and 5.1% unsecured senior notes due in 2035 and 2055 for net proceeds of $288 million and $216 million, respectively, after discount commissions and expenses. At September 30, the excess of fair value over carrying value of investments in noninsurance associates and market traded consolidated noninsurance subsidiaries was $2.5 billion compared to $1.5 billion at December 31, 2024. The pretax excess of $2.5 billion is not reflected in the company's book value per basic share but is regularly reviewed by management as an indicator of investment performance. The company's total debt to total capital ratio, excluding noninsurance companies, increased to 26.5% at September 30, 2025, compared to 24.8% at December 31, 2024, primarily reflecting increased total debt and redemptions of the company's Series E, F, G, H and M preferred shares partially offset by increased common shareholders' equity. The company's total debt to total capital ratio remains within the company's internal targets. Common shareholders' equity increased by approximately $2.7 billion to $25.7 billion at September 30, 2025, up from $23 billion at December 31, 2024, primarily reflecting net earnings attributable to shareholders of Fairfax of $3.5 billion, other comprehensive income of $372 million, primarily related to unrealized foreign currency translation gains, net of hedges as a result of the strengthening of foreign currencies against the U.S. dollar, partially offset by purchases of 541,794 subordinate voting shares for cancellation for cash consideration of $857 million or $1,581 per share and payments of common and preferred share dividends totaling $364 million. In closing, book value per basic share was $1,204 at September 30, 2025, compared to $1,060 at December 31, 2024, representing an increase per basic share in the first 9 months of 2025 of 15.1% adjusted to include the $15 per share common dividend paid in the first quarter of 2025. That concludes my remarks, and I will now turn the call back to Peter. Thank you. Peter Clarke: Thank you, Amy. Denise, we are now happy to take any questions you might have. Operator: [Operator Instructions] Our first question comes from Stephen Boland with Raymond James. Stephen Boland: First. You mentioned some pockets of softness and that you're able to be a little bit more nimble, growing in the areas that are not soft, curtailing premium in some of the other areas. I'm just wondering if you could give a little bit more detail where you're seeing some of that softness? Is it geography? Is it certain business lines? If you could provide a little more detail, that would be great. Peter Clarke: Sure. Yes. Like I said in the prepared remarks, we benefit greatly from our diversified operations. We write right across the world. We write about $33 billion of premium today. And as I said, that the markets -- we do see softening in the market, but it's not a soft market. And to highlight as well that the underlying margins in the business, we continue to see to be very strong. And on the pricing side, we're getting single-digit price increases. On the casualty side, it tends to be much higher, property side, lower and especially on the property cat business, reinsurance, in particular, we're seeing pricing pressure. For that, that's not necessarily a bad thing as about 20% of our business is reinsurance. The other 80%, we buy reinsurance on that. So overall, our premiums continue to grow, but we're very focused on when pricing is coming down, we're focused on the bottom line. Operator: The next question comes from Jaeme Gloyn with National Bank Capital Markets. Jaeme Gloyn: Yes. I guess if I can ask a couple of questions here in one shot before I get cut off. First, I may have missed it, but can you talk about the strategic exited line in Canada? And then second, on the investment side of the equation, can you give us your thoughts around what are -- what's the strategy for the total return swap and using excess cash and capital to invest in businesses similar to the KW transaction, Peak transaction in businesses that you own. Is that a more likely use of capital in the near term? Peter Clarke: Sure. Thanks, Jaeme. And could you repeat your first question? Jaeme Gloyn: There was a strategic exited line at Northbridge. Peter Clarke: I'm not exactly sure of the strategic exit unless you're talking about their TruShield business, that might be what you're thinking of, and that was just a small book of business they wrote on small businesses. They did exit that, but it wasn't significant for the company. On your TRS, Fairfax TRS, we continue to hold the position. As we said in the past, it's an investment position for us, and we continue to see good value for that. And then on the private side, yes, no, if there's companies we know really well with strong management positions and there's minority interest -- if value is there, we'll continue to look at allocating capital to that. But it's all part of the bigger picture really. First is our financial strength we're focused on. Second, capital in our insurance companies, maintaining that, buying back our own shares. We have minority interest in our own insurance companies as well that we'd like to buy back over time. And then we can invest any excess capital in whichever way Hamblin Watsa thinks where the value is. So thank you for your question. And next question, please. Operator: [Operator Instructions] The next question comes from Tom MacKinnon with BMO Capital. Tom MacKinnon: I'm going to follow James' strategy of trying to get in with 2. The first is just with respect to the noninsurance companies, some pretty good lift in terms of their contribution. A lot of it's embedded in align, that's other. You've got Grivalia Hospitality, maybe AGT in there, some other companies. If you can give us a little bit more color what you're seeing there, if there's anything unusual in the quarter? And then the other is about the cash component of your investment portfolio. It's 17% now, and I think it was 15% in the second quarter. Any comments about why that may have increased and what you're thinking about there? Peter Clarke: Sure. Thanks, Tom. Just on our noninsurance consolidated investments, you're exactly right, it's performing very well. Eurobank and Poseidon continue to drive the results. And if you look at both of those companies, the largest companies in that group, continue to perform very, very well. We think there's still good value in both of the companies. They're trading at maybe around 8x earnings. And so with the management teams at both of those, we're very excited about the future. And then adding in that bucket, we have Fairfax India. We have Recipe, Meadows, Peak. So a lot of good companies there that have strong earnings, and we're very excited about the future for these noninsurance consolidated investments. Your second question on the cash position. You're exactly right. It's been building over time. It's about 17% of the portfolio. With the markets where they are today, we want to keep our portfolio as conservative as possible and with investment flexibility. That's why we have a large cash position. We have a large government bond position. And in the meantime, we're earning a nice return on that. And we can wait for opportunities to come our way and react accordingly. So thank you for your question, Tom. Operator: That comes from Daniel Baldini with Oberon Asset Management. Daniel Baldini: Wonderful results once again. So my question is about prediction markets. And I noticed a couple of months ago a little article on a website called Risk Market News entitled the Prediction Markets Are Coming for Risk Markets and Insurance. And there were a couple of lines in there that I'll read quickly. So weather prediction markets now handle trades reaching tens of thousands of dollars with institutional participation growing rapidly as firms explore parametric hedging outside traditional insurance structures. The implications are profound, where insurers traditionally relied on cat models and broker negotiations, prediction markets offer instant liquid pricing for weather-related exposures, and it goes on and on. Anyway, the volumes clearly are very small, but ICE just announced a $2 billion investment in Polymarket. So I'm wondering if you could talk a little bit about how you might position Fairfax to avoid being disrupted by prediction markets. Peter Clarke: No, thank you for the question. No, and it's a good question. We're always looking at the future of insurance and insurtech and how it could disrupt our business going forward and especially with AI, we have a group of a team at Fairfax made up from all our companies that are focusing on AI. And in particular, on the weather-related and cat side, we still just -- we traditionally -- we just focus on the reinsurance side. We don't participate on a lot of the models -- I mean, the index models and writing that types of business. But it isn't a risk to our industry. And we look at it carefully. We analyze it. All our companies are on top of it. But for now, we're happy where we are. We're not really participating in that, and we'll see how it goes over time. So thank you for your question. Operator: The next question comes from [ Josh Donfeld ] with [ Greenland ]. Unknown Analyst: I want to ask you about how you're looking at some of the bank privatizations and potential M&A in India. Peter Clarke: Yes. No, our -- we have -- as you know, we have a significant investment in India, primarily through Fairfax India, and we have a long history of investing there, and we have a team on the ground that has done an outstanding job. So we'll continue to look at India. We're very high on it as we have some significant holdings such as the Bangalore International Airport, CSB Bank, IIFL Holdings, all within Fairfax India. Outside of that, we have Thomas Cook, Quess and Digit Insurance, our P&C insurance company within India. On the banking side, currently, CSB is our largest banking position. On privatization, there's really nothing that we would comment on at this time. Thank you for your question. Operator: There are currently no further questions. Peter Clarke: Well, thank you, Denise. If there are no further questions then, thank you for joining us on our third quarter 2025 conference call. Thank you. Operator: Thank you. That does conclude today's conference. Thank you for dialing in. We appreciate your participation. Have a great rest of your day, and you may disconnect.
Operator: Good morning, everyone, and thanks for waiting. Welcome to the conference for the disclosure of results of the third quarter '25 of Cogna Educação. [Operator Instructions] We inform you that this conference is being recorded and will be available in the RI site of the company, www.cogna.com.br, where you can find the whole material for this result disclosure. You can also download the presentation in the chat icon even in English. [Operator Instructions] Before going on, we would like to clear that eventual declarations being made in this conference regarding the business perspectives of Cogna, projections, operational and financial targets are the beliefs and premises of the company and the management as well as the information available for Cogna. Future information are not guarantee performance, and they depend on circumstances that may happen or not. So you have to understand that the general conditions, the sector conditions and other operational factors may affect the future results of Cogna and may lead to results that will be materially different from those expressed in future conditions. I'd like now to pass on the floor to Roberto Valério, CEO of Cogna to start his presentation. Mr. Roberto, please, the floor is yours. Roberto Valério: Good morning, everyone. Thank you for participating on the conference to discuss the results of the third quarter of '25. As we always do, we have Frederico Villa, our CFO here; Guilherme Melega, the Head of Vasta. This call will last 1 hour in which we'll have a 40-minute presentation and 20 minutes for the Q&A. So I'd like to start this meeting by saying once again that we understand this is one more quarter with great results in our understanding. We keep growing with the ability of operational delivery in a quite good way. It grows in a fast pace in double digits in the quarter and in the 9 months. So we are growing almost 19% of revenue in the third quarter and 13% in the 9 months. And I'd like to say that both the core business, therefore, higher education and basic education are growing double digits, and we keep investing in new fronts and future opportunities as it is the case of our business line for governmental sales as another example with our franchise starting. So from the point of view of growth, we understand that the core has a lot of capacity to deliver results. We are growing double digits with the same assets. Since the beginning of the structure in 2021, we understand that the core business still have a lot of opportunity to grow, basically refining and improving processes and the client experience. But we keep here planting and seeding new business to grow the company. The same way, the operational results keeps growing in double digits, basically 10% in the quarter and 12.4% in the year in the accumulated of the year. So this is the 18th consecutive quarter with the EBITDA growing. I'd like to reinforce our concern with consistency and it's a structural growth. So it's been 4.5 years that we are consecutively growing operational results. From the point of view of EBITDA margin, this quarter is pressured by an increase in the PCLD regarding Pague Fácil that was something that we did in Kroton in the commercial cycle. We will explore in the next slides as well as lower margin in Saber due to seasonality. And as you know, Saber, as Somos has the fourth quarter and the first quarter as strong quarters from the point of view of results and the third quarter is a smaller one. But in this case here of Saber, it pressured a little, but we'll talk specifically about PCLD later on. Now talking about the net revenue, we had BRL 405 million in the 9 months accumulated. So in spite the delta growth in the quarter to the net income was BRL 220 million because we had losses in the third quarter of '24. And when we analyze the 9 months, the delta of the net income is BRL 450 million. Obviously, it's being fostered by the improvement in operational results that we emphasize in the quarters we are talking about, but not especially, but also due to the reduction in the financial expenses to reduce the debt and our liability management strategies that allow the cost of debt to be lower. Therefore, the operational results with the lower expenses is happening in the net income. In terms of cash generation, we reached BRL 392 million with BRL 1.9 million less compared to last year. And as we always do, we let you judge if these points are one-offs or not. But in the third quarter of '24, we recovered taxes in cash of more than BRL 115 million. Obviously, if we compare operational to operational in the recover of taxes, our growth in the GCO would be 38%, therefore, quite a strong one. In the accumulated 33% of growth, almost BRL 940 million in post OGC. So the highlight of the quarter and the 9 months is the free cash flow. We reached BRL 300 million in this quarter, BRL 583 million in the 9 months accumulated. Just to emphasize, there's almost BRL 584 million in 9 months. This is 50% more than all the free cash flow generation in the whole year of '24. So in 9 months, as we generated more cash, 50% more of free cash flow than the whole year of '24. Now going to the debt, we reduced the net debt in BRL 474 million in the 12 months. I emphasize that only in the second quarter here, our reduction was more than BRL 220 million. So the cash generation is, in fact, being used to reduce debt. And then Fred will explain that aside from the reduction, we can also have important reductions in the average cost of the debt. Regarding leverage, we reached 1.1x the EBITDA, the lowest one in the last 7 years. The last time we had this level of leverage was in 2018. Therefore, we are quite satisfied with the results and prospectively thinking for the fourth quarter into '26, we keep having the same -- we keep optimistic and trusting that we have everything to have consistent results. Now going to Slide 5, we will talk about the operational performance of Kroton. And I think I can start by emphasizing the growth in intake more than 7% in the period. I would like to emphasize specifically the growth of the presential one. That is not the first cycle of intake. It's the third cycle that we have growth in the presential. And with the growth, I'll talk later, but with the growth specifically in the high LBV, I mean the most expensive courses, which help us in the ticket. And I relate this growth and the presential to our commercial model that is fine-tuned in the campy and is allowing this growth. And in distance education with a growth of 6.4% that is specifically to the change in the regulation for GL that fostered the course, mainly the health care courses that bring not only the benefits of growth, but also the improvement of the average ticket. So in the mix, it helps a lot. Obviously, we have a lot of evolution in the team, improvement of processes, systems and commercial strategies, but I reinforce that in the presential, this fine-tuned model in the campus helped a lot and the change in the regulation of DL fostered the enrollment, mainly in the health care courses that are the most impacted by the new regulations. The student base grew 2.7% in total. But if we consider only ProUni and ex ProUni, the ones that, in fact, pay and generate cash to us, the student base grew 4%, quite important and consistent as it's been over the last years. From the point of view of average ticket I also have emphasis here in this quarter because the Kroton as a whole is growing 11.7% in 3 segments: presential, DL and on-site -- I'm sorry, KrotonMed, and we have 2 points helping the average ticket. Newcomers, as I mentioned, in on-site, we have more enrollment in the most expensive tickets and in DL, also more newcomers in the health care courses on average with a greater ticket. But I also have to mention that we can repass the inflation to the old students in KrotonMed on-site and DL. So we have both old and new students with an increase in the average ticket, which pushed this growth to almost 12 points. Now in Slide 6, talking about the net revenue. Obviously, if we have more enrollment. And I forgot to say something important here about intake reinforcing that, obviously, the volume of intake is important to us, but the balance between volume and ticket is very relevant. We are always analyzing take analyzing the revenue in the period and the revenue grew 41% in this period. When you have a new period growing the revenue, and we know that the students will be with us for many semesters. In perspective, we have quite a positive result regarding the revenue for the next months and quarters. Now talking about revenue specifically. So we grew almost 21%, growing a lot on-site and online education. So we grew a lot in both front. So to be completely transparent, even if we reclassify the discounts that, as you know, we have a complete disclosure with all the items we are using since we reclassified the discount with inactive students for IDD with a neutral impact in the EBITDA, but adjusting the revenue, this growth instead of 20.9% would be 15.9%, but even though quite a strong double-digit growth. I'm talking about the accumulated, it's the same, 17% in on-site and DL. And here, we see the effect of Pague Fácil that we'll talk later is more diluted. Therefore, the delta between the growth we see of 17.4% and the growth ex Pague Fácil is smoother. Now in Slide 7 and talking about the gross profit as a whole, it grew 21.5% with a small increase in the gross margin from 79.4% to 79.9%. And in the same way in the accumulated in the year, we had an important growth in gross profit and a slight growth in the gross margin, which shows that the growth in operation in its core that is revenue minus cost is quite positive, and we are gaining on efficiency when we analyze the 9 months. The gross margin improved 0.7% with a small reduction in the margin of KrotonMed, and it's important to emphasize that in the 18 courses that we have, the medicine courses that we have, 3 are new. And as they mature, they increase the base of cost as we hire more professors. So the amount of hours increased, the general cost increase. So it pressures a little the margin, but according to expected and completely in line with our plans. So in Slide 8, costs and expenses. As you can see when we analyze cost and expenses with the percentage of net revenue, we have a gain in performance in all lines. So corporate expenses with a small gain in performance, the operational ones gaining more than 3 point percent of market and sales with diluting 1 point percent as the cost, as I mentioned in the previous slide. So the company grows and grows keeping the costs controlled and specifically the expenses controlled, which makes us gain efficiency and diluted with the percentage of net revenue. The only difference is PCLD that I'll explore in 2 slides because in the third quarter of '24, it was 6.2% growing 7.6% going to 13.8% due to 2 factors, both the reclassification of the discounts for inactive students as well as the greater penetration of Pague Fácil, but I will talk about it in other slides. When we look at the accumulated, you see that we keep growing in efficiency with no operational expenses and marketing and cost and I'm in Slide 9. So we have more -- 2 points more of dilution and marketing, 1.4%. So gaining efficiency, we see that the operation is quite adjusted. Now in Slide 10, so that we take more time here explaining those differences in the PCLD, we made this diagram to be easier to understand. So I am on the left and considering the third quarter of '24 with the first information, you can see the net revenue, BRL 939 million, which was published in the third quarter '24. The PCLD was BRL 58 million. Therefore, the percentage would be 6.2%. With the reclassification of the discounts that is so that we didn't have a reduction in the revenue every time we renegotiated with an inactive student, we would start classifying the discounts in the PDA. So in the pro forma of the third quarter of '24, the PDA would be BRL 98 million and not BRL 58 million, but the revenue would increase from BRL 939 million to BRL 980 million. So in the pro forma comparing it, the third quarter of '24 to '25, the PDA divided by the NOR would be 13.4% and 13.8%. Therefore, an increase of 3.7% in the PDA. So I explained the first delta of the 6.2% that adjusted by the reclassification of discount would be 10.1%. And if we consider delta for Pague Fácil, that is the offer that we implemented in this quarter, the PDA would be stable. And why would it be stable? Because our inadequacy is not increasing. It's kept the same. The fact is that when we offer more offers in Pague Fácil, that is the facility to pay the first installments. We don't have the history of credit of the students. So we provision more than students that we already have their history so that you have a reference. The level of provisioning is close to 10% to the student with the history. And in this case here of the students coming with this offer of Pague Fácil, we provision 47%, therefore, a greater provision. So that's the explanation, so why the PDA is growing. So it increases in this quarter because this is when we give the offer to the student. And in the fourth quarter, we don't have the offer anymore because we don't have newcomers anymore. So you see a convergence of the PDA to the closer number of pro forma. So explaining the movements, I would like to take some minutes here for you to understand the offer itself. So with the change of the regulatory framework, many players among us started communicating that they should take the period before the regulatory framework change to enrolling courses that won't be available anymore. But during the intake process, we realized that many players were offering discounts in the monthly payment. So in practice, it reduces the LTV of the student because all the payments that we come along the life of the student will be with a lower ticket. So we decided another offer. So to keep the average ticket, but offering to pay the second -- first and second payments in July and August in our case, installment. So the student enrolls because they are making the enrollment in middle of August when classes started. So they didn't pay July and they didn't pay August. They are starting to pay from August on. So these 2 parcels were not a bonus. So we divided them installments during the period of the student course. So in this case, the students in 4 years would be divided into 46 months. So as we don't know the credit profile of the students, they are new. So we provision more with these 2 payments that we booked and we are receiving month by month. So for you to understand clearly the offer, that's it. And it makes sense because we don't give up on the average ticket. We don't reduce the LTV of the student. We simply consider installments for the payment of 1 or 2 monthly payments along their course of time. So if you have more doubts regarding that, we can discuss in the Q&A. And we have a second table that is the deadline for receiving, which shows that the default is still positive. That's why we are decreasing the average deadline from 47 to 34 days. So this is the clear proof that is the P&L because we see that the student is, in fact, generating cash. Now going to Slide 11. The consequence of all that is the EBITDA result. Therefore, the EBITDA in the quarter grew 10% in the year accumulated 15.8%. So you can see a drop in the margin between the third quarter of '24 and '25 going from 37% to 36%. So the reclassification of discounts and the additional provision of Pague Fácil is pressuring the margin because it is increasing the PDA, but all the other costs like marketing, operations, corporate is all -- they are all diluted and gaining on efficiency, and we see that clearly in the results and in the cash generation. With that, I finish the explanation of Kroton, and I'd like to pass on the floor to Guilherme Melega for the comments on Vasta. Guilherme Melega: Thank you, Roberto. I'll go on with Slide 13 on the net revenue. I'll concentrate on the graph on the right with the commercial cycle because the third quarter is the one finishing what we call the commercial cycle of Somos Educação that goes from October to September. So here, we have the total idea of how the classroom behaved and everything that happened and will -- that happened in '25. So we reached BRL 1.737 billion, which is 13.6% considering the cycle of '24. The highlight is the subscription products with the teaching and complementary solutions that grew 14.3%, reaching BRL 1.32 billion. And now the non-subscription had an increase of 17%, reaching BRL 118.6 million result of the growth of our 2 flagships all in Anglo, one in São José do Rio Preto and the Pasteur Institute also with a growth in the pre-SAT courses in the year. So we acknowledge the growth in the 2 main business lines of the company. I also emphasize the B2G, bringing a natural volatility, but we could with new contracts keep the balance in this line of revenue, also keeping a similar level to '24, reaching BRL 76.2 million, BRL 66.8 million, I'm sorry. In Slide 14, I'll show our subscription sector. So we start on the right, where we have the breakdown of the core segments that are the learning and teaching segment. The complementares, the social emotional bilingual, makers and other complementary activities to the basic subjects, our growth was quite robust, reaching 14.3% in total. But the core segments grew 12.5% and the complementary segments, 25% as we can see a faster growth in the complementary over the years. And I'd also like to emphasize something that Roberto commented that is quite important to us. That is our consistency over the years, delivering that. So on the left, we see the first ACV of Vasta that is in 2020 when we acknowledge BRL 692 million compared to BRL 1.552 billion that we are delivering by the end of this semester. It represents 2.3x more, so a figure of 17.5%. So we are quite satisfied with the performance we can reach with the gain in market share and the penetration that our products are having on the private market. Now going to Slide 15, talking about the EBITDA, we grew 10.6% in our EBITDA, focusing here also in the cycle. We reached BRL 480.9 million EBITDA, the greatest one of Vasta in the commercial cycle, representing a margin of about 28%, in line with the previous year. And here, we will decompose a little our expenses going to Slide 16. I'll talk briefly because the third quarter to Vasta is not so significant, but it is important to note when we look at the table, our recurring gain in lower provisioning of PCLD. So we had a provisioning here, a lower one as we observed in other quarters. And we have more investments in marketing and sales because we are in the peak of the campaign for '26. But when we analyze the next slide, 17, we have an idea on how our expenses behaved in a complete cycle. So here, we have our total expenses when we analyze the table with the percentage of revenue, keeping in 71% with emphasis to the gains in productivity that we have in corporate expenses, operational expenses and PDA, as I mentioned in the previous slides. We have small investments in marketing and sales that should keep the double digit of the revenue. And in costs, I call your attention to the impact of 2.1% result of a mix that comprises more and more complementary products that we pay royalties for. So they have a higher cost like bilingual and social emotional as well as the Mackenzie system that grows in a fast pace. So these products have royalty, they increment a little our costs. On the other hand, we do not deliver capital to develop the product. So when you look at the benefit that we have in the cash, it's much greater than the small points of margin that we observed in the total costs. And lastly, I would like to emphasize that we are in the peak of the commercial campaign for the cycle of '26. We are quite optimistic with this period to keep the growth and keep the history of ACV as we saw before, we will have probably quite a good '26. I emphasize that we reached more than 50 contracts and we are operating 6 units this year. Next year will be 8 as franchising with a total of 14 units and the B2G is a big path of growth that we have with a lot of prospection at this moment, and we hope to have quite a hot fourth quarter to supply the cycle of '26. Now I pass on the floor to Fred to go on the presentation. Frederico da Cunha Villa: Thank you, Guilherme. Good morning, everyone. I'll start the presentation of Saber. And remember that Saber has some businesses, the national program of didactic books, languages, other services encompassing governmental solutions and so on. So note the graph on the left that in the quarter, we grew the revenue from -- of 9.4%. So this growth was fostered by the hitting of 2 business. First of all, 17% in languages; and secondly, the growth of Acerta Brasil that is governmental solutions with a growth of about 38%. It's important to remember that in '25, this is the year of purchase for high school and repurchase for elementary school. In high school, we had a gain of 8% in market share, which shows the growth that we have in our products with the program of didactic books. However, we see that there is no representativity in the quarter. We had a displacement from the third to the fourth quarter. Now going to the graph on the right, in the accumulated, I had a reduction of 9% in 9 months comparing '24 to '25. So this reduction, as I mentioned before, is only a reflect of the displacement and the reduction of the PDA, but it's according to the fourth quarter, and we had businesses with a positive impact of about BRL 32 million in 9 months in '24. And in the year, in the 9 months, the big effect here was in the first quarter that we've had a revenue that walked back in about BRL 60 million, but our expectations, as I mentioned before, is that we will have a stronger fourth quarter with the displacement of the didactic books program. So going to Slide 20, talking about the recurring EBITDA and margin EBITDA. As we said before, this is a year to grow the margin, but with the EBITDA growing and it shouldn't mainly due to the effects of investments that we will have in the material for marketing and all the commercial part, mainly, as I mentioned before, due to the repurchase program of high school and in the accumulated of 9 months that finishing September 30, we saw a growth in our EBITDA of 16%, leaving from -- going from 67.5% to 78.5% with an expansion of margin and 4.7%. So it's a neutral semester with a growth in revenue, but without growing the EBITDA, but this is due mainly to the displacement of the PDA. Our expectation is to have quite a positive fourth quarter. Finishing the presentation of Saber, I start now Cogna. Cogna represents our 3 main businesses like Kroton and Somos and Vasta, and I just mentioned Saber. So just a brief summary going to the final presentation. We had a growth in the revenue in the quarter in Cogna of 18.9%, reaching BRL 1.523 billion. So we grew revenue in all businesses. And in the accumulated, we also reached BRL 4.816 billion with a robust growth. That going to Slide 23, we have the demonstration in the recurring EBITDA and margin EBITDA. So we grew the EBITDA in the third quarter 9.8%, reaching an EBITDA of almost BRL 423 million. And as I mentioned, we grew the revenue in our 3 main businesses in Saber. We decreased the EBITDA, but we have the effect, as Roberto mentioned before, the effect of our commercial strategy in Kroton for intakes via Pague Fácil. And the main goal here was to keep the average ticket. You can see in our release that we can keep and have even growth in our intakes, and we had an impact in the PDA. We grew with the program to pay installments in Kroton, and in this way, we grew the PDA in the accumulator of 9 months, we grew 12.4% reaching an EBITDA of BRL 1.530 billion. Now going to Slide 24 with net profit and margin. In the quarter, the third quarter of '24, we had losses of BRL 29 million, and now we reached a net profit of BRL 192 million with a growth of more than 700% and a growth in the margin of net profit. And this comes from the growth of our operational results and it grew about 10%. We had a reduction of our financial results. So with many initiatives here in liability management and renegotiation, we reduced our financial results in 13%. And the main effect here is the effect of taxes of BRL 126 million and the reason we demonstrated this continuation and the operational effects and what are these effects mainly here with the reversion in the contingency that is not going over our EBITDA and the recurrent results, and we had the condition of the income that I briefly explain means that we had a company, Saber that had the tax losses in revenue income. And we incorporated this company so that we had this benefit in this year and future benefits. So look at this year, we had accountability effect of BRL 126 million. But in the fourth quarter, we will compensate BRL 11 million in taxes. So this operation brings not only accountant benefits, but in the cash of '25 and the years to come. If the accumulated, we reached almost BRL 406 million next year -- last year, in December 31, '24, we had a profit of BRL 879 million. Just remember that part would come from a reversion of contingency and our net profit of the operation was BRL 120 million. So in 9 months, ex effect of the income taxes, we reached the net profit of the operation compared to the previous year. And finishing that, the most important to us in the company is as we manage the company and we look a lot that for getting EBITDA and now analyzing the net profit and the cash generation and free cash. So we can see that in the operational cash generation, we had a slight reduction of 12%, reaching -- going from BRL 392 million last year. And last year, we had a positive effect of BRL 150 million of receivables of taxes from the federal revenue, and we had this benefit last year. We didn't have the benefit this year, but it's part of the game. So there is no adjustment. We are not proposing that. We are just explaining. But the most important to us is the free cash flow that we grew in the free cash flow. And when I say that, it is the generation of operational cash post CapEx and debt. So we reached BRL 300 million with a growth of about 3%. I'd like to mention also that the company analyzing the risks, we kept the second quarter of '24, '25 compared to the third one or the third of '24 with the third quarter of '25, we had a risk neutral with a small decrease of about BRL 9 million regarding the second quarter of '25 and BRL 17 million compared to the third quarter of '24. So you can see that the cash -- the free cash flow is not coming from postponing the risk. We are reducing our risk. And just to finish the free cash flow, an important data is that in the accumulated, we reached BRL 584 million last year. We had a generation of BRL 395 million. So remember that our fourth quarter, as I mentioned, is strong here in the national program of didactic books, and it's also a strong quarter in Somos Educação. So we are thrilled with what is about to come to the fourth quarter. Now going to the end of the presentation, our cash position and debt, we -- in Slide 26, I would show that the important is that we are reducing the net debt. So we reached BRL 2,576 million. We finished the third quarter in a strong cash position with BRL 1.277 billion. And the message here is analyzing the amortization schedule. In '26, we don't need to do any debt, and we have no amortization for '26, which is generally a difficult year because it's the elections year. Now going to Slide 27, the last one of my presentation, I'd like to show the leverage of the company. We reached the leverage of 1.11x, our lowest level of leverage since the fourth quarter 2018. Considering the third quarter of '24, our leverage would be 1.58x. We had a reduction and more than leverage. We monitor also the net debt. So we had a reduction of net debt compared to the last year, BRL 474 million. And regarding the second quarter of '25 compared to the third one, a reduction of BRL 230 million, which shows that in the last 4 years, we are doing what we say, what we committed to hit the revenue and generate EBITDA that will do the deleverage of the company, free cash flow and reduction of net debt. And last but not least, our average cost of debt is reducing. So in the third quarter '24, we had an average cost of 1.82%. And in the third quarter, it's 1.52%. And as we understand the market and our rating that we maintain that, but with a positive prognostic. We have cost of an eventual debt for future liability management in a lower cost than this one that I mentioned of 1.52%. So we are still thrilled with more execution, more work. And I pass on the floor to Roberto Valério for the final considerations. Roberto Valério: Thank you. Now going to Slide 28. I reaffirm our pillars and growth is one of the pillars. It's not by chance, it's the first in the list. As we showed, we grow in all operations, and we are planting and developing new pathways of growth to the future. As Fred mentioned, we are thrilled to the end of the year, the fourth quarter that is generally with no news in Kroton, but given the diversity of our portfolio, we have good quarters in Vasta and Saber with a positive perspective to the year. And we see no different challenge to '26. We see the level of unemployment very low, people with good income. This is -- next year is electoral year, which benefits our businesses. We are quite positive to this item of growth. From the point of view of efficiency, it's in the DNA of the company. We have quite well designed all the processes. We are converging systems to 1 or 2 single systems to gain on synergy and speed. So we are working in improvement of processes, automation systems, implementing AI. That is something we've been doing since '23. So basically 2 years, almost 3. And this is something that is spreading in our value chain, and it will keep bringing efficiency in gross margin and reduction of expenses. So this is another front that we see opportunities. Experience, the client experience is something that is the core of our decisions. We keep improving the NPS of students and partners. So just for you to understand in this third quarter, we had 4 important awards that are related to customer experience in many segments. So it is still our focus, and we understand that we serve well to reduce the churn and improve the growth. And culture -- people and culture is an important pillar. We are investing a lot in training and development and assessing performance and skills and feedback of our workers so that they know how to develop and external trainings and courses, I think we are progressing a lot in this front. And it's not by chance that we could be in the ranking of the best companies -- Great Places to Work. So we have the GPTW, still, we've had that, but being in the ranking is very difficult, and we are there at the 12th position, and we are in the 6th position, I'm sorry. And it's quite nice and innovation, we are supporting the business areas of the company, speeding up the B2G and new ideas that are under discovery in the initial steps, but I'm pretty sure are the seeds for our growth in education that is a big segment, and our approach is not only one segment. We have a multi-segmentary strategy. We have a broad portfolio, which in fact increases the options of growth to us. From the point of view of ESG, it is still important in the agenda. We held the V Education & ESG Forum this quarter. We were acknowledged in the ranking besides being acknowledged for being the best companies in customer satisfaction by the MESC Institute and some awards among which the best legal department in the education sector. So it's said by other people, which is also more important because it's not our opinion. It's the experts in the sector saying that to us. With that, I finish our presentation, and I open for the Q&A. Thank you. Operator: [Operator Instructions] The first question is from Marcelo Santos, sell-side analyst, JPMorgan. Marcelo Santos: I have 2 questions. First, I'd like to mention Pague Fácil because you've always had the PMT. So I understand that, in fact, you increased the amount of that, but the program would be the same. So I'd like to be sure of that. And was it more focused in DL? Is it -- does it have something to do with competition? I would like to understand why it's stronger in the divisions that you showed. And I would like to know if next year, it will be more normalized. And the second question is related to the cash generation because the fourth quarter last year was very good. So is there any event, any effect to change the seasonality for this year? Or you would bet to say that it would be the same as last year? Roberto Valério: Well, Marcelo, thank you for the question. So regarding Pague Fácil, you are correct. It's the same program we already had. So the mechanism is the same. The only thing is that now we are offering to more students. In general, we would offer the benefits to the students later on in the course when they enter in August or September, and we offer now since the beginning of the intake process when we start offering the benefit beforehand, more students make use of this. So the penetration of the program increases. So it's the same program with the same -- greater penetration for newcomers, which means that looking ahead, we should then see new growth. It should be more stable when comparing the quarters because the penetration was almost absolute, let's say, quite high. Basically, all students enrolled took advantage of Pague Fácil in the period. And regarding the cash generation, Fred will say. Frederico da Cunha Villa: Well, Marcelo, thank you for your question. In the fourth quarter last year, we had a strong operational cash generation. This is the beauty of our business, the diversity that we have. So last year, we had a positive effect of the national program of didactic books and also governmental solutions. And the cash here wouldn't have anything different compared to what happened in Kroton last year. And our expectation is to have a positive cash, and it comes with the same effect that we've had last year with the national program of the didactic books. A point of attention here is that we are a little late. We would imagine that our third quarter would be stronger. The government is late. So it may bring some impact to the cash in the fourth quarter, but our expectation is not different from previous years. It is to receive in the fourth quarter. But if we don't, Marcelo, then we should receive in the first 15 days or the first 2 any -- first days in January '26. But as I mentioned, it is our daily life. Marcelo Santos: Just a follow-up in Pague Fácil, Roberto, it is more concentrated in some of the units due to the competition, it was more in DL or is it general? I would like to understand this point. Roberto Valério: Sorry, you asked this question, and I didn't answer. It's generated. It's not focused in DL, both on-site and DL and the corresponding courses of KrotonMed. Operator: The next question comes from Vinicius Figueiredo, the sell-side analyst, Itaú BBA. Vinicius Figueiredo: I'd like to discuss a little bit about this quarter because we had a more concentrated effect. You mentioned a lot PDA in Pague Fácil that reached the margin. But having that said, a good behavior of all lines in this quarter, along with the fourth quarter not being with such a strong PDD due to the lower intake. So does it make sense that this quarter was quite atypical regarding the performance comparing the margins of the years, and we would see the cycle again an expansion in the fourth quarter? And then in the context of next year, will this effect along with the investments to adequate to regulation, how is that as a whole? And the second point is a follow-up to Marcelo's question. What would you see here as the balance point to Pague Fácil? Outside this context -- this is a typical context of the second semester and looking ahead, what is the participation it should have as a whole? Roberto Valério: Vinicius, thank you for your questions. I think it is quite an important topic to us that you have it quite clear in Pague Fácil and PDD. So as basically all students came via Pague Fácil, there shouldn't have any additional impact in any other quarters. So let's consider that in the third quarter '26, if all students have Pague Fácil, the delta should be only the growth of the enrollment and not the take rate of Pague Fácil. So we have nowhere to go because basically all students took Pague Fácil, whatever grows in the PCLD is related to the intake for the future. So this is the first point. The second point, you are correct. As in the fourth quarter, we don't have newcomers. Therefore, we don't have the pressure of Pague Fácil. The trend is that PCLD comes to the average and reduces to a lower level like the inadequacy and the numbers that we have here, as Fred always mentioned, a PDA of processes of inadequacy would convert to that, therefore, remove the pressure of the PDA improving the margin trend. And you are perfect in your observation. Obviously, we cannot predict -- we cannot give a specific guidance, but this is the specification. I don't know, Fred, do you have any additional comments? Frederico da Cunha Villa: Well, no comments. It's exactly that. The comment I would make is that that as we collected more with Pague Fácil because Pague Fácil and PMT are only different commercial names, but basically, it's the same. So the important is that the PDA is high due to the payment installments if our inadequacy is in X. So this effect is in line and close to 10%. So we'll see the quarters and understand that there's nothing new because it's already provision if we improve the inadequacy and improve the dropout, we will have an upside to the future. Otherwise, the PDD is already correct. So regarding the perspectives for DL, considering the regulation, it's difficult to predict, but we can have some ideas considering 2 important aspects. One that in the beginning -- in May, when it was disclosed, how much of restriction of courses that were DL and now are semi-presential and how it could restrict the movement of the student, I mean, going from DL to on-site. So this is the first doubt. We are seeing that, yes, there is quite a positive migration effect in the first weeks, we are in the beginning of the cycle. But in the first weeks where the nursing courses are not available in DL, we don't have the regulation defined. We see quite a strong growth of the courses, especially nursing in on-site. So the first doubt, well, if the fact we don't have cheap DL, the students won't be able to study. Therefore, we won't have so many enrollments. We don't see that. We see a strong growth in the on-site, which is positive from the growth point of view with the pressures on the margin because the on-site courses have lower margin, but the nominal contribution is much greater. The final benefit to the cash generation is quite positive. So this is the first element. The second one that is in the air, and we expect to have more information in the last weeks is how the fast track of approval of the nursing courses will be and how -- from there on, how many units and colleges will offer this course, and we are quite optimistic that MEC will propose a transition rule to allow that those operating -- keep operating. But this is only an expectation. We don't have any official information. Regarding the cost impact, we keep having the same view that we've had since the regulatory framework was launched. And if you know that from the point of view of cost, we understand it's quite not relevant, both in online and semi-presential or DL. So they are prone to repasses in the average ticket of the student. As you can see, we keep repassing inflation. The average ticket is growing for newcomers and old students. So we have the same view, and we don't have elements to say that DL will have a non-manageable impact, let's say. Operator: The next question comes from Caio Moscardini, sell-side analyst of Santander. Caio Moscardini: Could you talk a little bit more of Vasta ACV, what we can expect in this new cycle? If the 14% that we saw in '25 is a good proxy? I think it helps a lot. And in Saber, just to confirm if this market share of 30% is regarding a new cycle of the PDA from '26 to '29 that the government has a budget close to BRL 2 billion? And what should we expect in terms of EBITDA for Vasta in the fourth quarter, if we can grow this EBITDA of Saber in '26 comparing year-to-year? Guilherme Melega: So thank you, Guilherme here. I'll talk about the Vasta ACV. As shown in the presentation, we are having quite a positive track record in the evolution of ACV. We have a CAGR of 17,000, but I can tell you that we'll keep the growth for '26 at a similar level as we had from '24 to '25. So in the mid-double digit of growth. Roberto Valério: Okay. Thank you, Melega. Regarding your question of Saber, Caio, you are correct. The last purchase of high school government typically makes 1 purchase a year. It can be fund 1 or 2 of the average. In the fourth quarter, we are talking about high school. We've had market shares in schools and teaching systems choosing 30% of all the purchase being with our books from Saber. And we'll have a take rate of 30% of the program compared to a take rate of 22% in '21. So it's 8% more in share. So this is the information. So yes, we do expect to grow our income in this sense. And we know that MEC as FNDE are discussing budget to comply with this purchase. And remember that next year's program is the new high school program. It's different with more disciplines, more content. But your interpretation is correct, basically confirming what you said in your comment. Caio Moscardini: Okay. And regarding Saber in the fourth quarter, going from '24 to '25, it should grow year-by-year. Frederico da Cunha Villa: Caio, Fred speaking here. Our point of attention is only seasonality. If you have a displacement from the fourth quarter to the first one, as I mentioned, due to the delays, but EBITDA should be neutral positive because as it is a year of purchase, as Roberto mentioned, I also have expenses with marketing and advertising, which affects a lot of the cost, but due to the growth of 8%, it can be positive. Operator: The next question is from Samuel Alves, sell-side analyst at BTG Pactual. Samuel Alves: My first question is about receivables and maybe it's related to the comments before about Pague Fácil because we saw an important increase in receivables after 1 year. So can it be related to Pague Fácil so that I get your idea about the aging? This is the first question. And a second question is having a follow-up on the topic of the PDA. If I'm not mistaken, the company had a certain target of EBITDA to '25 in Saber of about BRL 200 million, BRL 230 million, if I'm not mistaken, but something like that. So you were mentioning this point that Fred mentioned now about the marketing expenses and the cycle of purchase as a challenge. So it caught my attention, the comment of EBITDA being neutral or positive compared to the years in the fourth quarter because it would be above that. So was it my misperception of not understanding your comment considering it was BRL 360 million. I guess the EBITDA last year of BRL 200 million was adjusted. Just to make it more clear about Saber's performance. Roberto Valério: Well, Samuel, I'll start with Saber and Fred will talk about the aging. It's important to consider that Fred's aspect is that we are not so certain or clear on the income of high school in the fourth quarter. As the orders are delayed, maybe part of this income will decrease in the first week of January. So it's difficult to be content and understand what is the EBITDA in the fourth quarter considering the uncertainty in the displacement of income. We have almost no doubt regarding the effectiveness of the purchase of the government. Therefore, government needs to handle the books to students in February when classes start. So maybe this misperception is a little more regarding the conviction that we have that the fourth quarter specifically will have a neutral positive EBITDA without knowing exactly what is the displacement of the income. So any displacement should be of weeks because the program must be carried out. I don't know if I made myself clear, if you have any doubts, we can discuss more. And I'll then pass on the floor to Fred to talk about aging. Frederico da Cunha Villa: Samuel, Fred here. About the aging of receivables, you are analyzing the IPR of the company. So I have the growth in the installment programs for Pague Fácil. So I'm growing this potential, but the second effect of growth in the aging above 365 days is not for Pague Fácil. It's the fat effect PP, the program that already finished. And here, we have more than 70% provision. So we have our natural efforts here for charging, nothing different from what we already have, nothing different from previous quarters or years. Operator: Our question is from Lucas Nagano, sell-side analyst, Morgan Stanley. Lucas Nagano: We have 2 questions as well. The first one is regarding Pague Fácil. And first of all, I'd like to check some points on the coverage because you mentioned the provision in the beginning is 40% and inadequacy default is converted to 10%. So if it's 47%, is it the same of the PND of the previous year or it varies in the cycle? And the second one is regarding nursing, considering that the government will facilitate the accreditation. How far it could smoothen the effects of the margin? How feasible would be the implementation and offer of professors and the demand available for this level of teaching? Frederico da Cunha Villa: Lucas, Fred, I'll start with Pague Fácil doubt because our provision uses always the history -- as a criteria, the past history because, as I mentioned, Pague Fácil and PMT are just the commercial trade name. So I need to use the history, and we use it. In the beginning, we provisioned 60%. But as I naturally have returns every month, the index of provision coverage is 47%. So just to make it clear to you, I use the history in the beginning, and I provisioned 60% of the budget. And in the history, it's 47%. You can do the math, okay? Roberto the second question. Roberto Valério: Okay. Thank you, Fred. Well, Lucas, regarding nursing, your question about the feasibility to carry out on-site nursing and this transition, the feasibility on our site is complete. I would like to emphasize 2 things. One, our nursing costs where we would offer nursing in the post already had on-site hours of 42% with the new rule, it's 70%. So I already have tutors and professors and labs and classrooms and everything. So we would be working in a lower percentage. So going from 42% or 52% to 70% is as simple as increasing the amount of hours of the professors and tutors that we have. This is our reality because we always operate with health care courses with off-site labs. We didn't have practice of offering nursing as you asked. In 100% online model, we always have the labs and so on. So if we have a fast track made by MEC based on the evidence that we already have the lab and all the colors, it would be quite fast this impact and it's fast and the impact basically 0 considering that students are migrating from DL to on-site where we have these offers presentially. So this is my understanding. Obviously, we need to leave to be sure that the scenario is the practice, but I have enough elements to say that, yes, that's it. Lucas Nagano: And just a quick follow-up, how should it affect the first point of this post. Roberto Valério: Well, the average price of an on-site nursing course is 30% higher than the semi-presential. This is how the prices were made. And I think that pricing is less related to ability of payment of the students and more related to the level of competition of prices among the many players in the city. If you remove players because they have no labs or professors or so on, the trend is that you can repass the prices and students can pay. So that's why we are seeing a strong growth in the campus even with the on-site being more expensive than semi-presidential or DL. Operator: The next question is from Eduardo Resende, sell-side analyst, UBS. Eduardo Resende: I have 2 questions here. The first regarding the migration of DL students to the on-site or hybrid model as you mentioned. And I would like to understand what was the difference in the commercial strategy now to the next cycle that you see this movement. So anything that you had to do differently in the marketing or other fronts that might be helping that. And the second question is regarding Acerta Brasil and Saber. This year and last year, we had this line contributing a lot to the growth. And I'd like to understand if we have space to expand in the next years or if we now raise the bar too low for that? That's my question. Those are my questions. Roberto Valério: Eduardo now to answer your questions regarding the new commercial strategies to foster the migration from DL to on-site. The answer is no. It's a natural movement on the market. The students had options, and we are talking specifically about the campus. We had the on-site and DL offers as DL is cheaper, we have more demand on DL, but we kept making groups and enrolling students for on-site. We don't have DL. Now they have to enroll for the on-site education. So we keep the levels of enrollment the same, but they simply migrated from a simple line of product to the other one with a higher average ticket, which means a net profit with a greater nominal contribution. As I said, a lower percentage of profit, but with a greater nominal contribution. But directly talking about your question, we have nothing specific. It's a natural movement of the market. And now talking about Acerta Brasil. There's no doubt Acerta Brasil reinforces the learning, especially for Portuguese and math that we deal with the state and Municipal Secretaries of Education. It's a good product. The indicators show that the evolution of the students using this material. And we still have space to grow. Brazil has many states and cities, and we have more than 5,000 cities, and we sell to a small amount of that. So we believe we still have space to grow. Operator: Next question is from Flavio Yoshida, sell-side analyst, Bank of America. Flavio Yoshida: My doubt here is regarding Pague Fácil as well. I'd like to understand better the economics of the students in Pague Fácil when we compare to out-of-pocket students and understanding the dropout and the quality of payment of Pague Fácil. And my second question is specifically regarding the technology CapEx. We know that when we consider the 9 months of '25 compared to the previous year, we had an expressive increase of almost 70%. So I would like to understand the drivers here and if we should wait impressive growth in '26 as well? Roberto Valério: Fred, you start with CapEx. Frederico da Cunha Villa: Yes, I start with CapEx. Flavio, thank you for your question. Regarding CapEx, technology is a product here. So we have strong investments in technology. We are doing this investment and note that in the 9 months compared to '24 and '23, we also grew, and we are here building this too, that is an academic RP, and we believe nobody has that on the market aside from the investments we are also making to improve the student learning and all the development of AI. And here, this is what we look in terms of product view. What we mentioned before is that we don't understand that in the total CapEx of the company, we are not growing nominally here compared to the year. And for the next years, we believe that the CapEx is simply a see-saw reduced technology and invest more in the field, but it's natural. I cannot say only technology, but the CapEx as a whole should even grow nominally comparing the years. Roberto Valério: The second question regarding Pague Fácil. Well, Flavio, it is important. I'll try to explain better because the student Pague Fácil is the out-of-pocket students, they pay, they are not funded. We don't fund any student. All of them pay to us every month. We don't fund -- we haven't funded students for a while, and this is Pague Fácil because the first monthly payments that are -- as they understand latest that they pay in installment. So considering January so that you understand, if the student enrolls in December, for example, December '25 to start studying in February '26, when they pay the monthly fee in December, what are they paying? They are paying the January monthly fee. So the second is February, the third day, March, April, so on. So when it is already March and the student comes late, they say, "Hey, but it's not fair. Why do I have to pay January and February if I didn't study. We still didn't have classes, it's already March," and then we say, "Well, in fact, the point is you pay for the semester in 6 installments as it's already March. I am facilitating. That's why it's called Pague Fácil, easily. So you are late. So I let you pay installments January and February. So you choose 46 or 47 installments." So we explain to the students and to make it clear, Pague Fácil historically is a student that is late in paying the installments. They don't want to pay it all the time. So we facilitate by paying the installments. So there is no difference between Pague Fácil and the one that pays. The difference is that we only had this offer of Pague Fácil start in February, March, April, and now we are offering even for December, January for those who were correcting payments. So that's why we increased the penetration of Pague Fácil. So in this case, there is more quality or less quality. We understand they have more quality because if you enroll previously, you are scheduled to that you organize if you are enrolling in January or December, they are more organized and more engaged, probably a better payer. So in our understanding, the fact of allowing the monthly fees in installments wouldn't facilitate the dropout because they are good students. They come before the ones that are late in their enrollment. So it's important to say that all this process to the students is quite clear. They sign a contract acceptance terms, so they can pay the installments that are, let's say, late or they choose how to participate. So obviously, they have to choose the benefit. That's why they have such a big penetration. So that's why we are completely transparent in all questions that we understand this strategy than simply reducing the prices to be competitive commercially. So this is the strategy plan of Pague Fácil. Operator: The next question is from Renan Prata, sell-side analyst, Citi. Renan Prata: Quite briefly regarding the results, I think this line that we have 4 semesters with gains. I would like to understand your point of view on this funding. And I don't know what you are thinking for this line and the other, if you can give an update of the trade-off of Vasta because there was some delay regarding SEC, but if you can update us, it will help as well. Roberto Valério: Renan, the first question of risco sacado. The risk is something that we know we are keeping that. And in this case, it is in Saber and Vasta that is the installment, the funding of our raw material, mainly paper and printing. There is a correlation with the growth of revenue. As I grow the revenue, I need more paper and print the books and so on. So note that I'm growing the revenue in Somos Educação and not Saber, but this strategy is ongoing. So why? Because today, my average cost of debt is CDI plus 1.5% and risco sacado is 2.9%. So what happens is that we are doing that naturally, Renan, because if I simply remove all the risk and put it into a debt, I have no problems in leverage and the debtor risk was always clear in the company. But if I do that, I reduce the operational cash at the moment 0 in BRL 490 million. So naturally, you will see that this line that was correlated to the revenue will be a line that will reduce quarter-by-quarter until we understand that we do not have to consider the debtor risk is the main reason is the average cost of the debtor risk regarding our debt. First question. The second one regarding the trader offer of Vasta, it's public. So I won't say anything different. So we are just waiting for the American SEC that is the Brazilian CGM that is in the shutdown process due to political problems in North America. So we are waiting for the reopening of SEC so that we can have the operational and legal bureaucracy for the operation. We postponed the operation due to the shutdown of the SEC. And until the deadline that is December 9, our expectation in discussions with our legal consultants in North America that SEC will open in November, and this is a data that I'm just repassing what I've heard. There is no commitment in what I'm saying. So the expectation is that until 9 we can have more elements in this operation to close everything. Operator: The Q&A session is over. So we will now pass on the floor to Mr. Roberto Valério to his final considerations. Roberto Valério: Well, I thank you all for your participation. I'd like to reinforce my thanks to everyone of the 26,000 workers that are working nonstop so that we can reach the results and get better to our clients and students. Thank you very much. And we are still available with our team to clear any doubts necessary. Thank you very much, and we see you in the next quarter. Operator: The results conference regarding the third quarter of '25 of Cogna Educação is over. The Department of Relation with Investor is available to clear any doubts you might have. Thank you very much to the participants, and have a nice afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good afternoon, ladies and gentlemen, and welcome to the Innodata Reports Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on November 6, 2025. I would now like to turn the conference over to Amy Agress. Please go ahead. Amy Agress: Thank you, Michael. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata; Rahul Singhal, President and Chief Revenue Officer; and Marissa Espineli, Interim CFO. Also on the call today is Aneesh Pendharkar, Senior Vice President, Finance and Corporate Development. We'll hear from Jack first, who will provide perspective about the business, followed by remarks from Rahul, and then Marissa will provide a review of our results for the third quarter. We'll then take questions from analysts. Before we get started, I'd like to remind everyone that during this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations, assumptions and estimates and are subject to risks and uncertainties. Actual results could differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking information. In addition, during this call, we may discuss certain non-GAAP financial measures. In our earnings release filed with the SEC today as well as in our other SEC filings, which are posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliation of these measures with comparable GAAP measures. Thank you. I will now turn the call over to Jack. Jack Abuhoff: Thank you, Amy, and good afternoon, everyone. Our third quarter was another record quarter for Innodata. We delivered record revenue of $62.6 million, representing a 20% year-over-year organic growth and a 7% sequential quarterly growth. Adjusted EBITDA was $16.2 million or 26% of revenue, up 23% sequentially, showing margin expansion even after factoring in growth investments I'll be talking about later in this call. Cash rose to $73.9 million, up by $27 million since year-end and $14.1 million since last quarter. Our results exceeded analyst expectation across key metrics. As a result of strong business momentum, we reiterate prior guidance of 45% or more year-over-year growth in 2025, and we anticipate potentially transformative growth in 2026. This afternoon, I'll share the basis of our confidence, including the significant growth we are anticipating from existing strategic vectors and the strong early returns from new investment areas. I'll then share how we are preparing the organization to reach the next level. I'll start with our existing strategic vectors. Since we last reported, we have continued to make substantial progress deepening relationships of trust with high dollar value big tech customers. Our deal momentum continues to accelerate with meaningful expansion across a diverse set of foundation model builders, both existing and new customers. Of the 8 big tech customers we talked about recently on these calls, we are currently forecasting 6 of them to grow next year several quite substantially. For example, we just received verbal confirmation for additional expansions with our largest customer and verbal confirmations of the deal we expect to potentially result in $6.5 million of revenue with another big tech. Beyond that, our expectations are grounded in the assessment of these customers' 2026 training data and evaluation budgets and the accelerating trust we believe we're earning with them through proofs of concept, pilot and scale deployments. Now in addition to these 8 customers, we landed in Q3 or expect to finalize shortly 5 additional big techs. We believe all 5 of these new big techs are poised to contribute meaningfully to our 2026 growth. Three of these new 5, we believe, are positioned to allocate up to hundreds of millions of dollars annually to generative AI data and evaluation, and we believe we're well positioned to capture a share of that spend. It is worth noting that 2 of these are global leaders in commerce, cloud and AI. Now let's turn to our new 2025 initiatives, 6 in total, several of which I'm sharing with you for the first time today, all of which are already bearing significant fruit and all of which we believe will contribute significantly to 2026 growth. The first initiative has been creating pretraining data at scale. Now pretraining data teaches the model language skills and knowledge. Up until now, our business has been primarily focused on post-training data, which teaches models how to reason, follow instructions and perform tasks. But earlier this year, we observed researchers drawing increasingly strong correlations between LLM benchmark performance and the quality of pretraining data. Models that trained on higher-quality pretraining corpora consistently did a better job understanding nuance, context and intent across languages and domains. And when we saw this research, we concluded that our customers would increasingly be seeking sources for higher-quality pretraining data. So we invested about $1.3 million to build new capabilities to create high-quality pretraining corpora. This has proven to be a great investment. We've since signed contracts we believe could result in approximately $42 million of revenue, and we expect to soon sign contracts, which we believe could result in approximately $26 million of additional revenue on top of that. So that's $68 million of potential revenue from these programs that are either signed or likely to be signed soon. These programs span 5 customers. There are only a few months in motion and are just ramping up. We believe the majority of the anticipated revenue would flow through 2026. but we've already fully recaptured our investment. As pretraining data gains recognition as a strategic differentiator for next-generation LLMs, we believe we are well positioned to capitalize on this early trend. Today, we announced the launch of Innodata Federal, a dedicated government-focused business unit designed to deliver mission-critical AI solutions to U.S. defense, intelligence and civilian agencies. We expect this business unit to be a material revenue generator for us in 2026 and beyond. Today, we're also announcing that the business unit has won an initial project with a new high-profile customer. We anticipate this initial project to result in approximately $25 million of revenue mostly in 2026. We have additional projects under the discussion with this customer, and we expect them to be large. This new relationship is strategically significant, not only for its potential size, but also for the visibility and market leadership we believe it will convey. We expect to issue a joint press release about the relationship prior to year-end. We view it as a potential game changer for our next phase of growth. Additional early market validation includes the company's first direct government award from a major defense agency, potential engagements with other prominent defense technology companies and submitted proposals spanning the DoD, intelligence community and civilian agencies. What sets Innodata Federal apart is our ability to deliver the complete AI life cycle, not just data annotation or point solutions, but true end-to-end capabilities from data collection through model deployment and operational support. Our platforms and expertise already serve the world's leading technology companies and Fortune 1000 enterprises. We are now bringing that same proven excellence to federal missions with the security, compliance and speed that government operations demand. We believe the timing could not be better. Federal agencies are moving decisively to adopt AI. In July, the administration released America's AI action plan and signed 3 executive orders to streamline procurement and accelerate deployment. The General Services Administration, or GSA, is now revamping its acquisition processes to make AI services easier for agencies to procure. Historically, federal procurement has been slow and complex, but that's changing rapidly, and we intend to meet that demand and that opportunity head on. As we announced today, General retired Richard D. Clarke, a retired four-star Army General and former Commander of U.S. Special Operations Command has joined the Innodata Board. We're excited about his expertise and relationships in helping guide the trajectory of Innodata Federal. Another key focus this year has been on advancing our participation in the emerging sovereign AI market. Initiatives by governments around the world aimed at independently developing, deploying and governing AI systems as a matter of national interest. These efforts seek to ensure national control across the entire AI technology stack from the semiconductors on which models are trained to the data that gives them intelligence. We believe this is one of the most significant structural shifts in the global technology landscape. The drive for sovereign capability has already triggered large-scale state-directed investment programs, effectively creating government-backed demand guarantees for the entire AI ecosystem from chip makers and cloud platforms to data engineering providers like us. As we have toured several countries in the Far and Middle East, we've been struck by the level of interest in our services. These countries, in most cases, do not have a homegrown enterprise like Innodata with a proven track record of helping enable generative AI and LLM initiatives. We were rapidly engaging in advanced discussions with sovereign AI entities across several regions, and we expect to announce one or more strategic partnerships over the next few months. Their economic capabilities and desire to move quickly is truly impressive, and we could not be more excited about this newer area of growth for the company. Meanwhile, our enterprise AI practice is also gaining traction and holds promise for 2026. It provides full stack support to help enterprises integrate generative AI into products and operations. For example, the practice is helping a major social media platform automate its content monitoring and monetization workflows using generative AI and assisting a hyperscaler to integrate generative AI into their data center operations for real-time analytics. We expect these projects to typically start in the $1 million to $2 million range and offer strong expansion potential and repeatability. We are also in discussions about strategic relationships that could help propel our enterprise AI practice forward in 2026. The next initiative I'll talk about is Agentic AI. As I've said before on these calls, we believe Agentic AI will unlock the usefulness of generative AI in the enterprise and that autonomous agents will soon be as ubiquitous as human employees performing many of their tasks. It's still very early days for Agentic AI. We're working with big tech model builders to evaluate and refine autonomous agents across many real-world use cases, creating evaluation models and human-in-the-loop systems designed to measure, interpret and guide agent behavior. We start by judging task success, did the agent achieve the goal? And then we analyze why the agent behaved the way it did and profile how it generally behaves to inform further fine-tuning. These capabilities, diagnostic judge, task success judge and profiling judge are increasingly used in RLHF and RLHA frameworks for Agentic systems, where agents act autonomously across multistep real-world workflows. We've also been building agents within our agility platform as a way of enhancing the product and consulting with a number of enterprise customers about incorporating agents within their environments. This brings me to our sixth area of 2025 investment, model safety. As agents gain autonomy, companies must learn how to monitor and continuously improve them. Our goal is to become a trusted partner to software companies and other enterprises, helping them benchmark for safety, reliability and ethical behavior. Here's one example of the work we are now doing. Recently, we began engaging with a leading chip company to stress test its multimodal AI products, simulating real-world risks like data exfiltration, privilege escalation, instruction manipulation and multimodal injection attacks. And once we identify vulnerabilities, we generate targeted mitigation data, fine-tune the model and prove the results with repeatable benchmarks. Our objective is to increase model safety with no degradation in model capabilities from the retraining. We believe the area of model safety holds enormous potential, so much so that we've engaged one of the world's top consultancies to help us refine our product and go-to-market strategy around model safety. That's a quick recap of the 6 investment areas that we've driven in 2025, several of which we're announcing publicly for the first time today. In every case, our investments have been modest, but our returns have been outsized and product market fit has come quickly. We believe that there are start-ups that have raised tens of millions of ambitious valuations to chase some of these same opportunities. Yet we're getting more done faster and with far less capital investment at risk. This year, we anticipate incurring approximately $9.5 million of capability building investments in these and other similar initiatives. This includes $8.2 million of SG&A and direct operating costs and $1.3 million of CapEx. We are also absorbing costs for substantial excess capacity within the organization in anticipation of likely soon-to-be captured business. While we could have elected not to incur these costs and instead present higher adjusted EBITDA, we believe these investments represent compelling short-cycle investments that position us for accelerated growth in markets. We believe we're prepared to serve, and we believe will yield considerable benefits in 2026 and beyond. We've also strengthened our leadership bench and operational foundation for the scale we're anticipating. I'm pleased to announce the appointment of Rahul Singhal as President and Chief Revenue Officer. Rahul joined Innodata in 2019 and has been instrumental in helping shape our strategy and building deep relationships with our largest customers. We're also welcoming 2 outstanding new Board members, Don Callahan, who brings deep digital transformation expertise from Citigroup and Time and close relationships with Silicon Valley and Enterprise CEOs through Bridge Growth Partners; and General retired Rich Clarke, who retired four-star Army General and former Commander of U.S. Special Operations Command, who brings outstanding defense insight and strong federal relationships. Their expertise aligns with our focus on big tech, defense and enterprise markets, and I'm confident they'll help guide us through our next stage of transformative growth. Finally, I want to thank Nick for 5 years of Board service. Nick has been tremendously helpful to me and to the company. He is stepping away to devote his time to a new opportunity outside of our markets, and we wish him very well. With that, I'll turn the call over to Rahul. Rahul Singhal: Thank you, Jack. I'm honored to step into this expanded role. Many of you may have seen Time Magazine recently ranked Innodata #24 on the inaugural list of America's Top 500 Growth Leaders for 2026, recognizing companies that "Capture trends and stay ahead of time." That mindset, seeing what's next and acting fast is core to who we are now. You are seeing the results of that today. We are deepening relationships with both existing and new Silicon Valley customers while delivering quick successes across the 6 investment areas Jack just outlined and increasing number of world's largest technology companies and enterprises are seeing the value we bring today. Looking past 2026, over the medium and long term, we believe the work we do with frontier model builders will expand and will become more complex. The next generation of models won't just need more data. They'll need more smarter data, data from simulation labs, large-scale synthetic generation and [ RL ] gems that capture human judgment, context and values. On top of this, the AI enterprise services market, which we are now successfully aligning to, will likely grow to be 10 or more times larger than the model builder market. We believe Innodata is purpose-built for this broad enterprise transition. Our work alongside frontier model builders give unique insights into how large models are trained, tuned, scaled and evaluated. And we are succeeding at packaging these insights into solutions that bring value to enterprises. For example, we have just begun -- recently begun providing model safety and remediation solutions that leverage the working we have done hand in glove over the past year or so with engineering teams from leading AI hyperscalers. Today, we are bringing those capabilities to one of the world's leading SaaS software companies and one of the world's leading generative AI chip designers. In short, I believe we are at the very beginning of the generational technology shift that Innodata is at the center of and poised to capitalize on. When I look at the competitive landscape, there are not even a handful of companies that have the capability to service $50 million, $100 million or larger order sizes in our space. And that's the need for hyperscalers today and sovereign entities. Plus they don't have the proven ability to scale the organization, provide flawless data accuracy and be highly nimble to addressing the changing client needs in a very dynamic environment. What an amazing time to be alive when the world is going through a seismic change driven by AI and to be in such a privileged position to help lead a company that is a critical part of catalyzing the change. I'll now turn the call over to Marissa. And after her remarks, we'll be available to take your questions. Marissa Espineli: Thank you, Rahul and Jack, and good afternoon, everyone. Revenue for Q3 2025 reached $62.6 million, up 20% year-over-year. Sequentially, revenue increased 7% from Q2's $58.4 million. Adjusted gross profit for Q3 2025 was $27.7 million, an increase of $4.8 million or 21% year-over-year with an adjusted gross margin of 44%. Adjusted EBITDA was $16.2 million or 26% of revenue, up 23% quarter-over-quarter, reflecting the strong operating leverage in our business. Net income for Q3 2025 was $8.3 million compared to $17.4 million a year ago. The decrease was mainly due to the tax benefit arising from the utilization of net operating loss carryforward in Q3 2024. We ended the quarter with $73.9 million in cash, up from $60 million at the end of the prior quarter and $46.9 million at year-end 2024 and did not draw down on our $30 million Wells Fargo credit facility. As Jack mentioned, based on our current momentum, we reiterate our prior guidance of 45% or more year-over-year growth in 2025, and we anticipate potentially transformative growth in 2026. Thank you, everyone, for joining us today. Operator or Michael, please open the line for questions. Operator: Now for Q&A. Our first question comes from Allen Klee with Maxim Group. Allen Klee: Great job on the quarter. Just I was adding up the -- you mentioned a bunch of potential contract wins and what they could represent. And if I -- the ones that you put dollars amount on added up to close to $100 million. But what I wasn't sure about is these -- some of these could be contracts over multiple years. Is there a sense of what amount of that could potentially be in 2026? Jack Abuhoff: Allen, it's a great question. I think the contracts that we -- when we talk about annualized recurring revenue, those are generally the contracts that we think will kind of roll at the number that we state is a year's value from that. Other contracts that we talk about, we're going to try to do some ramping up of some of them in this quarter, but then that revenue would primarily be falling into next quarter -- excuse me, next year. Allen Klee: Okay. And then in terms of -- you mentioned that you're going to spend an extra -- I think you said $8.2 million in incremental SG&A. Could you just explain what -- that's over what time period? And the way to think of that is over what type of base? Jack Abuhoff: So that would be year-over-year, and that would be incremental in 2025 versus 2024. Allen Klee: Got it. And then with your largest customer, I think you've mentioned now more than once of potential to expand the relationship, which could be very large. But any commentary on just the existing business of them? Is that -- should that be considered kind of stable? Jack Abuhoff: So the relationship is strong and the business is stable. I think as you'll see, the business went up sequentially in the quarters. And as we discussed just a few minutes ago, we got a verbal on what's potentially a very large new program that would come into -- with that customer. We haven't really baked that into anything yet because we're not sure of what the ramp-up would be, but it's certainly very significant relative to next year. Operator: Our next question comes from George Sutton with Craig-Hallum. George Sutton: Quite an update, and congrats both Jack and Rahul for your expanded roles. Relative to the verbal comment, Jack, with your largest customer, I assume that would just run through an existing statement of work, so you could take that business on relatively quickly? Jack Abuhoff: That's correct. I mean, mechanically, it would run through the existing master services agreement and probably be a new statement of work. But your point is correct that it will be very easy and seamless in order to onboard that new requirement. George Sutton: So I was thrilled to hear about your federal market win. And it begs the question, and I think you addressed it with your GSA comment. But typically, you need to be part of a FedRAMP program to take on material business like this. Can you just walk through how you're doing this under this GSA process? Or what's different than a normal FedRAMP process? Jack Abuhoff: Yes. So I think the point that we were making is that the timing for us starting this practice is ideal. The federal government has clearly communicated the strategic emphasis that they're putting on AI and AI enablement, both in the DoD, the IC and even civilian agencies. So you have that -- on top of that, they're recognizing that the procurement and acquisition programs and processes are cumbersome, and they will impede the AI progress that they're intending to make. And therefore, they've issued executive orders. I think there may even be some new pronouncements expected to come out tomorrow on that subject. So when you take these 2 things in combination, the prioritization that the government is placing on AI, again, spanning the entirety of federal on the one hand and then on the liberalizations that they're making in terms of acquisition and procurement, it really couldn't be a better time for us to be in that market. George Sutton: Got you. And then finally, Rahul, you made a very interesting comment that the services market could be 10x the model builder market. I wondered if you could just put a little bit more meat on that. And how much of that do you think you've started to see thus far? Rahul Singhal: Yes, George. So if you think about the enterprise market today and the frontier models, these models are now getting integrated into workflows that are transforming either for cost reduction, predominantly today for cost reduction. And soon, we're going to see transformative workflows that will drive new business models and revenue generating. As we talked about, we are seeing for one large social media company, we were able to dramatically save them over $24 million worth of cost. So it's early stages. We are starting to get into the stage where we are starting to deploy Gen AI solutions into our customer base, and we hope to expand this service in the future. Operator: Thank you very much. That appears to be our last question. I will now turn the conference over to Jack Abuhoff for any additional remarks. Jack Abuhoff: Thank you. Yes, I guess Innodata is executing really from a position of strength. We had another record-breaking quarter. Revenue is at an all-time high. We see profitability growing and the results exceeded our analyst expectations. Looking out ahead to 2026, we see the potential for continued transformative growth powered by deepening relationships among the Mag 7 and other Silicon Valley leaders. And we see that growth coming from 2 sources. First, the continued expansion we're driving with existing and new customers. And then secondly, the strong returns we're beginning to see from our recent investments. Today, I talked about 6 specific investment areas. And across each of them, across the board, we're showing what happens when we do exactly what Time Magazine recognizes for, seeing what's next and acting fast. So to recap quickly some of these early wins. First, $68 million in new pretraining data wins, $42 million that signed, $26 million that we believe gets signed very soon. The $25 million win with a new strategic federal customer that we expect to name soon, and we believe this is potentially the first of many projects with them, an additional expansion with our largest customer based on verbal confirmation, a $6.5 million verbal confirmation of the deal win with another big tech customer and new partnerships emerging with key AI and sovereign AI players, which we expect to be announcing in 2026. So thank you all for joining us today. We couldn't be more excited about what lies ahead. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Agus Aris Gunandar: Good afternoon, everyone. Thank you for joining today's earnings call for PT Lippo Karawaci Tbk. My name is Agus Aris Gunandar, Head of Investor Relations, and I'll be your moderator for today's session. With me is Pak Fendi Santoso, our CFO, who will give you a presentation of the company's results for the 9 months ending September 2025, which will then be followed by a Q&A session. [Operator Instructions] Pak Fendi, can you please proceed with the presentation. Fendi Santoso: All right. Thank you, Pak Agus. Good afternoon, everyone. Thank you for attending this earnings call that will discuss 9 months performance of PT Lippo Karawaci Tbk. So let me just go straight jump into the performance for the 9 months. Probably before we start with the results, let me just give you -- give everyone a context to what we see from the macro point of view. We still see that demand is relatively a bit soft in this quarter. And the overall economy still remains pretty relatively soft with the Indonesian consumer buying power also remain subdued. That being said, we are starting to see that on a quarter-on-quarter basis, third quarter compared to the first quarter and second quarter of this year has improved a lot. And we are also seeing that's happening across our businesses, both in real estate, lifestyle and health care. So for the first 9 months of 2025, our marketing sales for the real estate reached IDR 4 trillion, and this is compared to -- this is 64% compared to our full year target of about IDR 6.25 trillion that we've guided everyone earlier this year. Our revenue continued to post a very strong year-on-year growth, 74%, registering IDR 5.51 trillion of revenue and EBITDA increased by 4% at about IDR 843 billion. And our product launches for the first 9 months includes the premium series as well as the more affordable housing. We'll touch base on real estate performance later on the next few slides. But moving on to the lifestyle. Overall, relatively stable. Lifestyle revenue hit IDR 994 billion with EBITDA increased by about 21%. So our mall is actually doing relatively well with growth of about 6%, 7% on the visitors side, occupancy also improved by about 5 percentage points to 84%. This is higher than the average occupancy rate of mall in Indonesia. But our hotel revenue continued to see headwinds, and this is driven by the government budget cut spending that happened earlier this year. That being said, on a quarter-on-quarter basis, we are actually seeing improvements on our hotel business where occupancy rate improved quite substantially from the second quarter of this year. On health care revenue, Siloam’ performed extremely well for the third quarter. The first 9 months, it recorded about IDR 7.29 trillion, which is 3% increase year-on-year and EBITDA at about IDR 2.08 trillion with margins standing at about 29%. So that's overall on -- I'll spend a little bit more time on each segment later on the next few slides. But just on the statutory level, we will be posting about IDR 6.5 trillion of revenue for the first 9 months of 2025, slight lower compared to what we published last year, but this is because of Siloam’ still was consolidated in the first 6 months of 2024. And as such, the occupancy sits obviously higher. But then if we remove Siloam’ from the first half of 2024, we're actually seeing that the revenue grew by about 52% compared to last year on a pro forma on a like-for-like basis. Similar on EBITDA, we posted about IDR 997 billion for the first 9 months of 2025 compared to last year, lower because of the consolidation of Siloam’ in the first half of 2024. And if we remove this, our EBITDA actually grew by about 4% this year. This is the P&L that we will -- that we published in the 9 months 2025. We will touch base on revenue and EBITDA. Income from associates obviously increased, and this is because 9 months 2025 already fully deconsolidated and assumes and classify Siloam’ as our associate company and as such, contributions from its profits goes to the income from associates. So that's up by about 230%. I think additionally, we have also seen improvements from our [indiscernible] performance and contribution is actually quite positive this first 9 months of 2025. Net interest expense come down and is driven by our liability management as we've reduced our debt quite substantially over the last 12 months. And amortization and depreciation and taxes also reduced because of -- mostly because of the deconsolidation of Siloam that happened last year. And that resulted in our underlying NPAT of about IDR 442 billion, higher by about 8% compared to last year and NPAT of IDR 368 billion, substantially lower from last year, given that last year, we've enjoyed quite a lot of nonoperational and one-off items, including the gain from our deconsolidations of Siloam last year as well as the sale that we did on our Siloam stake last year. This is the cash flow for LPKR. I think relatively, we remain -- our liquidity remains strong. The focus of this year was to complete a lot of our projects that we sold in the previous years. And as such, the payments of about IDR 4.6 trillion that we had in the first 9 months of the year, this is offset obviously by the collection that we've gotten from consumers, from our customers from marketing sales. Net interest expenses, IDR 175 billion. This is substantially lower compared to last year where we spent about IDR 765 billion, and this is reflecting a successful deleveraging initiative and commitment to ensure that we have a stronger balance sheet moving forward. This is also in the cash from financing activity, IDR 1.8 trillion outflow given that we've settled all our U.S. dollar bonds in the beginning of the year as well as continue to repay our loans with the banks. On the financing side, I'm pleased to announce, I think we've shared this in the last -- in the previous earnings call that we've successfully secured a loan from BTN to refinance our syndicated loans. So I'm pleased to announce that we've now successfully reduced our cost of funds by about 60 basis points. So today, we are paying about BI rate plus 1.4%, which translates to about 6.15%. And then this is on [ ideal ] loans, which I think will continue to support our liquidity moving forward. As I mentioned, we fully paid all our U.S. dollar bonds. Now our liabilities are all in rupiah denominated. So and as such, we managed to remove the FX risk that's inherent in our business in the past. So now the revenue and cost and liabilities are matched. And we landed in September 2025 at about $2.75 trillion net debt and an improved debt maturity profile following our refinancing of the syndicated loans. So I'll move on to segment by segment. I'll touch on the real estate first. So on the property development projects sold in the first 9 months, we've sold 22 projects of landed residentials, around 9 projects of low-rise to high-rise residentials and then 16 shop houses projects. We spoke about marketing sales in the previous slides, but 70% of our landed housings -- 70% of our total marketing sales are contributed by our landed housings. We've done about 11 launches in the first 9 months. Lippo Karawaci, we've done 5 launches: Park Serpong 4 and 5, Bentley Homes and Bentley -- Belmont and Bentley Homes in Central and Marq in the heart of [indiscernible] cities. Lippo Cikarang, we've launched 3 launches, The Allegra at Casa De Lago, The Hive Tanamera and The Hive Neo Patio, which is shop houses and also 3 launches in Tanjung Bunga. Financial performance, I think we've touched base on this. But moving forward, we continue to focus on the affordable homes designed for young families as well as moving -- focusing more to the premium residents that meet lifestyle aspirations of the affluent market. Marketing sales, IDR 4 trillion for the first 9 months, 64%, as I mentioned, compared to what we've targeted for this year at IDR 6.25 trillion. I think the majority of the marketing sales are coming from [indiscernible] residentials at about IDR 2.1 trillion, followed by Lippo Cikarang at about IDR 1.2 trillion. We still have plenty of land bank that we can develop and which translate about 25-plus years of remaining land bank that we can develop at the current run rate. Highlights of marketing sales for the first 9 months, Lippo Karawaci is still dominated by landed housing at 77% in terms of value and 84% in terms of number of units. Lippo Cikarang, I think it's more balanced between landed housing, which contributed about 55% of the total marketing sales and commercial area, which is about 34%. In terms of the payment method, mortgage is still dominating the way our customers are buying our property at about 65%, which is lower compared to last year because a lot of people are opted for installments this year. In terms of the ticket size, still dominated by product with price less than IDR 1 billion that contributed about 66% and with -- and then the product that priced at IDR 1 billion to IDR 2 billion accounts for about 25% of total marketing sales. This is the project handover highlights. I think in totality for the first 9 months, we've handed over around 8,000 units. And obviously, predominantly from -- the Park Serpong is just an example of the cluster of Park Serpongs that we've completed and handed over, Cityzen Park East, Citizen Park North and Park West. In Lippo Village, we've also done quite a bit of handed over in the first 9 months, Cendana Essence, Site A Area 1 and 2, Cendana Cove Verdant and Cendana Cove also in Lippo Karawaci and also the handovers that we've done in [ Makassar ]. This is just to give you the highlights of the product innovations. There are a bunch of products that we introduced in the third quarter of this year from a building area of about 35 square meters at price at about IDR 397 million, up to close to 100 square meter property with price at about IDR 897 million in rupiah. I think 2 products that I would just give you a context to what the customers are liking is Treetops Alpha Livin and Goldtops, which is a 3-story homes that we've recently introduced in the first half of the year. This is just a picture of the grand launching of Park Serpong Phase 5. It was done on 30th August 2025, pretty successful at 87% takeup rate. We've sold about -- we've made about IDR 200-plus billion of marketing sales from the launching only. We continue to enhance our offering in Park Serpong. We will be introducing Lentera National, which is a K1 to 12 education school campus supported by Pelita Harapan Group. So this is part of the [indiscernible] Pelita Harapan education offerings. So this is, I think, going to enhance our propositions to -- and our service to the residents of Park Serpong. We've also introduced minimart, some sports facilities just to support the communities. We've also introduced shuttle bus that connects Park Serpong with some key establishment within the areas. And also, we are developing a modern market. We're going to introduce this very soon, situated in Park Serpong. And we've secured about 1.5 hectares for this modern market that will actually enhance our shop houses' marketing sales as when this product launches. So that's on the real estate segment. I'll move on to lifestyle. Just to recap for everyone, we've managed about 59 malls nationwide across 39 cities with net leasable area comprises of about 2.5 million square meters with very well diverse tenant mix comprising of grocery retailing, department store, F&B, leisure, fashions, casual leasings and all that from -- and then supported by well-known tenants, both locally as well as internationally. Performance continued to show a pretty strong growth. Revenue increased by about 7% and EBITDA increased by 15%, given the operating leverage that we enjoyed for this business. The mall visitors also continued to grow year-on-year by about 7% and occupancy rates also improving from 80% last year to 84.4% this year. We continue to do a lot of activities. This is just to give you some highlights to activities that we had in our mall properties. The Lippo Mall Kemang celebrated its 13th anniversary. And then we've held an event of fashion show, live music and community tenants in the month of September and October. Cibubur Junction is undergoing an upgrade. We are repositioning our tenant mix and going to renovate the program starting Q4 2025. So there's going to be more exciting tenants coming in. I believe that once this project is completed, I think it will drive more traffic into Cibubur Junctions. We also done a tenant gathering of Lippo Mall Indonesia and Plangi Nusantara, which received a lot of support from our tenants, too. On our hotel business, we've operated about 10 hotels and 2 leisure facilities across 9 cities in Indonesia. The performance is still facing headwinds with revenue comes down by 6%. And this is, as I mentioned earlier, this is driven by the challenges that we had for hotels that have been enjoying a lot of [ government ] events as the government cut spending and hold budgets of spending in the first half of the year and EBITDA coming down by 24%. Occupancy is lower compared to last year by 7% to 60%. However, just wanted to highlight that in the third quarter of this year, occupancy actually stands at about 71%. And compared to the second quarter of this year, so Q-on-Q, it's actually improving by 10 percentage points. So it was 61%, increased to 71% in the third quarter. So we have started to see things are recovering pretty nicely from our hotel business, but yet still not where we want it to be compared to last year's. Average room rates also improved by about 2% to IDR 635,000 per night. Now moving on to our third segment, which is health care. I think overall, we are starting to see that our health care business in the third quarter improved compared to the soft demand in the first half of the year with revenue actually improved by 7.8%. And then this is despite of a few unfavorable external events happening in the third quarter of 2025. If you recall, in early August, there was demonstrations happening across Indonesia, especially in Jakarta, where it affected our hospital operations as well as in earlier September or late August, there was a flooding also happening in Bali that impacted our hospital operations in Bali, where we had to shut down for 1 week. So those 2 incidents actually contributed to a lower revenue of about IDR 49 billion. So if we added up that loss of revenue to the third quarter of 2025, our revenue actually on a quarter-on-quarter basis improved by about 11%. So hopefully, in the fourth quarter, there's no more unforeseeable external events that's impacting our business, and we'll continue to see the recovery trends happening on the next few quarters. EBITDA, up by 19% also. On the operating metrics, I think overall, it's pretty positive on a quarter-on-quarter basis. Our outpatient visit improved by about 8.5% to 1.1 million in the third quarter of 2025. Our OPD to IPD conversions quite -- remains quite stable at 2.9%. Inpatient admissions also increased by 8.2% compared to the previous quarter. Inpatient days also improved by about 9% with ALOS stands pretty stable at about 3.1% compared to the last quarter. And occupancy rates improved by about 3.6 percentage points to 65.8%. So that's contributing to a relatively strong performance in the third quarter of this year. I think that's all I have for today's 9-month performance of Lippo Karawaci. I'll pause there to see if there's anyone have questions. Agus Aris Gunandar: Thank you, Pak Fendi, for the presentation. We do have received several questions in the Q&A box. Let me read the question as follows. The first one is from [indiscernible]. He's asking for an update on the MSU or [indiscernible] handovers and how much is left as of 9 months of 2025? Fendi Santoso: Yes. So I think mostly we've done all our obligation for the MSUs units that we need to hand over this year. I think in terms of the units already available, I think we are in the process of completing that handover, which the team is going to complete this by end of the month or early December. So I think we've done about 4,600, if I recall correctly, 4,500 to 4,600 for this year. Yes. So I think there's another question here. What is the occupancy rate of Lippo Malls as of current? I think I've mentioned this earlier. In the third quarter of this year, we had about 71%. So that's improving actually from the previous quarter of 61%. Overall, for the first 9 months on average, it's about 60% -- sorry, the Lippo Malls, 84%, sorry. I think we had that 84%, sorry, for the mall. So there's another question on the presales forming 64%. What will be the driving factor for the fourth quarter to reach this target? So we are actually doing a few more launches this year. We just had one launch that happens in Manado, which is getting quite a bit of good traction. And there are a few launches that we are going to do this year. So I think we are still -- the team is still aiming to hit that IDR 6.25 trillion marketing sales target for the year. So yes. Agus Aris Gunandar: Okay. I see there's no more questions on the chat box. So I think we have reached a conclusion of our discussion today. We'll be sharing the presentation material shortly after the session. And once again, thank you for joining Lippo Karawaci's 9-month 2025 Earnings Call. And we do look forward to meeting you again for our full year 2025 earnings call. And we wish everyone a very, very good afternoon. Thank you. Fendi Santoso: Thank you.
Operator: Hello, and welcome to today's Heritage Global Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this call may be recorded. [Operator Instructions] It is my pleasure to turn the program over to IMS Investor Relations, John Nesbett. John Nesbett: Thank you, and good afternoon, everyone. Before we begin, I'd like to remind everyone that this conference call contains forward-looking statements based on our current expectations and projections about future events and are subject to change based on various important factors. In light of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements, which speak only as of date of this call. For more details on factors that could affect these expectations, please see our filings with the Securities and Exchange Commission. Now I'd like to turn the call over to Heritage Global's Chief Executive Officer, Mr. Ross Dove. Ross? Ross Dove: Thank you, John, and welcome, everyone, and thank you for joining. The older I get, the faster every 90 days seems to come. What never changes is every 90 days presents new opportunities and challenges. Earning $1.4 million in EBITDA in this 90 days was to me more than meets the eyes. My brother and lifetime business partner always said, Ross, numbers don't lie. To put that in context, every Sunday he was on the golf course, and I was in the card room. Of course, he was correct. But what I have learned is there are many factors to the story beyond the numbers. The greatest challenge in the business is not always execution, but equally significant, how you play the cards you dealt. For many reasons, we were challenged and succeeded through a wait-and-see economy for transactions. We made a profit more like a journeyman fighter going all 12 rounds because we kept swinging. With many large transactions slowed in a wait-and-see time with interest rate and tariff considerations and overall less ability to execute large transactions, there were no needle movers. Opportunities we performed were at a high conversion rate on transactions. That did occur, albeit a lot of smaller ones. Without overemphasizing the future outlook, on the financial side, regional banks continue to report an increase in distressed assets and every indicator says asset flow is on the rise. On the industrial side, a continued push towards lean manufacturing and the prediction of more consolidation over time also bodes well for increased asset flow. We have built both our balance sheet and staffing and systems very prepared to garner market share as opportunities arise. Further, I am excited to report after a 2-year phased approach to our M&A, we are well past fine-tuning our strategy and 100% now in tactical execution. We have isolated the companies that I define as plugging in the gaps, that will create long-term shareholder value with the fastest accretion dynamics. I call it our GS plan, geography and sector growth. We know the sectors we believe we can serve as needle movers and the geographies we can win and execute in. We are also in advanced negotiations with who we have identified as best practices and as important, a shared vision, like-minded DNA and all in one to new paddles in tandem. When is day 1 on this. Near term is now our emphasis and all hands are on deck. With that, it's time for Brian to drill down on the quarter, and I'm here to answer any questions once he shares the current results. Thank you all for joining. Brian, you're up. Brian Cobb: Thank you, Ross, and good afternoon, everyone. I'll begin with a brief overview of our third quarter operating results before walking through our Industrial and Financial segment performance. Consolidated operating income was $1.3 million in the third quarter of 2025 compared to $1.5 million in the third quarter of 2024. Our Industrial Assets division reported operating income of approximately $900,000 in the third quarter of 2025 compared to approximately $700,000 in the prior year quarter. Our Financial Assets division reported operating income of $1.6 million in the third quarter of 2025 compared to $1.8 million in the third quarter of 2024. Our Industrial Assets division executed well on Auctions and Liquidation opportunities, and we saw growth in our Refurbishment and Resale segment. ALT reported improved operating income of approximately $400,000 in the third quarter compared to approximately $200,000 in the third quarter of 2024. The third quarter also included a healthy amount of auctions, though the volume was primarily comprised of smaller scale activity as certain companies opted to hold off on larger scale nonessential transaction decisions amid ongoing economic uncertainty. As we close out the year, we are energized by the opportunities ahead and proud to be nearing the completion of our new facility in San Diego, a key milestone that supports our next phase of growth. Our Financial Assets division reported solid profitability in the third quarter. While our Brokerage business was down slightly quarter-over-quarter, NLEX continues to proactively add new sellers to our existing clients. Transaction volumes from our largest recurring clients softened early in the quarter, but ended September in an upward trend leading into the fourth quarter, which historically represents a stronger period as lending institutions work to optimize their balance sheets ahead of year-end. Overall, consumer debt remains at high levels even as credit performance metrics suggest that the market has stabilized this year. At the same time, regional banks are facing increased scrutiny over the quality of their loan portfolios, which we believe will lead to higher charge-offs and nonperforming loan volumes as these institutions begin to offload underperforming assets. Additional consolidated financial results include the following: adjusted EBITDA was $1.6 million compared to $1.9 million in the prior year period. Net income was approximately $600,000 or $0.02 per diluted share compared to net income of $1.1 million or $0.03 per diluted share in the third quarter of 2024. The change largely due to a noncash adjustment made to the valuation allowance against our deferred tax assets as we fine-tune our estimated utilization of net operating loss carryforwards prior to expiration at year-end. Our balance sheet is strong with stockholders' equity of $66.5 million as of September 30, 2025, compared to $65.2 million at December 31, 2024, with net working capital of $17.9 million. Our cash balance reflects a total of $19.4 million as of September 30, 2025. And after removing amounts due to our clients or payables to sellers on our balance sheet, our net available cash balance was $12.6 million. M&A remains a critical component of our long-term strategy and capital deployment framework. Now with a sharpened focus, our team is laying the groundwork for accretive transactions that will define the next phase of the company's strategy and growth prospects. We are optimistic and motivated. This is the right time and the opportunities ahead are compelling. We did not repurchase any shares in the quarter as we have prioritized maintaining our cash position given our advancing progress on the M&A front. With that said, the company authorized a new share repurchase program on July 31 that allows for the repurchase of up to $7.5 million in common stock over the next 3 years, though it remains a part of a capital allocation strategy. And with that, I'll send it back over to Ross. Ross Dove: Thank you, Brian. After hearing you, I think it's worthwhile to take a moment to add some details to our M&A strategy. We're focused on businesses that are very capable of operating independently that we also believe can scale significantly and thrive within HG, companies with systems and processes that are a match day 1. Our goal is to build shareholder value that both lasts long term and have built a last heritage, while we're also mindful that the value also needs to be transferable to the market at large. This took a long time to get there, but we're well on the way now and excited about our future. Thank you all for listening in. We're here for any questions. Operator: [Operator Instructions] We'll take a question from Mark Argento of Lake Street. Mark Argento: Just one in terms of capital allocation question. I know M&A is important from a strategy perspective, you guys have been focused on it for a while. But with the stock kind of where it's at, you kind of come into this question of just -- do you just get aggressive and buy more of your own stock back in the business you know and know well versus allocating capital to new acquisitions. Probably the answer is somewhere in between, but how do you guys think about it? What are the criteria when you're looking at M&A from both the strategic perspective, but also from an accretive financial perspective? Ross Dove: Right. So we thought these M&A transactions were more in the distance than they are then we would have put a greater emphasis on buying the stock back. Yes, we think the stock is way undervalued. But at the same time, we think that these acquisitions are really going to help grow the company and showing growth in the company is really the most significant and most important thing we can do. However, we did authorize $7.5 million and are prepared to flip the switch, so to speak, and start buying stock back. But right now, there's a heightened emphasis on getting some things that are right in front of us done first, Mark, if that's a fair answer. Mark Argento: Yes. No, that's a fair answer. Just pivoting to the business. You said the Industrial Assets, you saw a decent amount of activity, but there were smaller -- either smaller ticket type transactions or a little different mix. What is it in particular? I think you've kind of called it taking a wait-and-see approach, but what is it that you see a lot of these potential sellers or customers? What are they waiting for? Are they waiting to see government... Ross Dove: It felt like a lot of companies were releasing some surplus assets in kind of a hold-on mode rather than shutting down. And it felt like other companies were holding assets because they're looking at -- and these are the larger companies. They were looking at M&A, but they have concerns about if the supply chain is going to be wide open and they can get new assets. So there was just a certain amount of people that weren't making the significant big decisions. So we made a profit working really hard, doing a lot of work on a lot of smaller transactions that were less needle movers, but fortunately, you added them all up together and they added up to a profit. But we didn't have that 1 big or 2 big or 3 big, really large auctions that we usually get in the quarter. Mark Argento: Got it. And one more housekeeping one for Brian. So it looks like you guys paid off the remaining couple of million dollars on that ALT note. And really, at this point, really the only real debt you guys have on the books is just the mortgage, right, for your new headquarters. Am I looking at that correctly? Brian Cobb: Yes. So we purchased the building early this year for $7.3 million approximately and took out a $4.1 million interest-only mortgage for 3 years. And we did pay off the ALT note after 4 years. So that's the only debt currently on the balance sheet other than we have the capacity on our line of credit, which is at a 0 balance currently, $10 million capacity. Operator: [Operator Instructions] And it appears that we have no further questions. I'd be happy to return the call to management for closing comments. Actually, we do have a follow-up from Mark Argento of Lake Street. Mark Argento: If I got the mic, I got the mic, right? Let's keep going. Ross Dove: Yes. Go for it. Go for it. Mark Argento: Well I was going to ask, but I wanted to see if somebody else would was just any updates on any progress in regards to Heritage Capital and working down of the portfolio there and the related assets there? Ross Dove: There's real progress, but I'll let Brian take over. Brian, go ahead. Brian Cobb: Yes. So just a couple of high-level notes. This is really a long-term workout that requires a couple of things, meaning, one, alignment with our senior lenders and the borrowers, so all parties that are involved and requires a good plan. So we do have alignment with our senior lenders, and we do have a plan. And we've talked about the plan being one of the key initiatives in that plan being allocating cash to the legal process. So we've been spending. We've been investing in that process since late last year and initial results are positive right now, and we're kind of on an accelerated time frame now after those results to get as many consumer accounts into the process as we can. So progress is solid right now. No change to the reserve. And as long as we continue along this path, I think we'll be in the best position in the long term. Mark Argento: Got it. It looks like you guys maybe paid it down a little bit, like a couple of hundred thousand dollars or something in the quarter. Is that accurate? Brian Cobb: Yes. We have a small portion of really high-performing loans and good borrowers that spins off some interest income. So we do -- we are operating at a small profit right now. Operator: And it appears that we have no further questions at this time. I'd be happy to once again return the program to our management for closing comments. Ross Dove: Thank you all for joining. Thank you all for listening. Thank you all for sticking with us. I leave the call, like I started the call, feeling very positive that we're in the right place at the right time with the right opportunities right in front of us, and we positioned ourselves well to capture and optimize what exists in front of us. So I'm feeling good, and hopefully, you enjoyed the call, and we've given you some decent insight into where we're going. So thanks for joining. We're always available if you want to check in with us. Everyone, have a great day. Operator: This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today as we present our third quarter results for 2025. My name is Vincent Clerc. I'm the CEO of A.P. Møller - Maersk. And with me in the room today is our CFO, Patrick Jany. As usual, we start with the highlights of the quarter just passed. We are pleased with the strong execution shown during the quarter in all businesses. We improved our performance across the board and delivered on an EBITDA of $2.7 billion and an EBIT of $1.3 billion, up from the previous quarter. All segments showed strong sequential volume progression, while costs were kept under tight control. These efforts paved the way for the strong results, notwithstanding the external environment. Specifically, in Logistics & Services, we are staying the course, focusing on operational margin improvements on both prior year and quarter to maintain the streak of good progress in 2025. We also registered good underlying and seasonal volume growth, which more than offset the softening observed in North America. For Ocean, this third quarter was the first full and clean quarter of the Gemini cooperation. While we kept delivering reliability at 90-plus percent, we also generated cost benefits well above the target we had communicated. This excellent performance was supported by strong volumes and high asset utilization as well as asset turns. As expected, rates softened during the period as new capacity continued to be inflated ahead of demand. Finally, our Terminal business delivered again record high revenues and profitability, driven by strong volumes, not least the ones delivered as a consequence of the Gemini implementation and the highest ever utilization across our portfolio of gateway terminals. With another quarter of sustained high demand, especially out of China, we expect a market growth around 4% for the full year. This strong demand, combined with the successful implementation of Gemini and progress across all segments allows us to narrow the full year 2025 guidance to an underlying EBIT of between $3 billion and $3.5 billion. As usual, more details will follow on this later in the call. Now taking a closer look at each of our business segments. First, Logistics & Services continued to track positively. We achieved an EBIT margin of 5.5%, up from 5.1% last year and 4.8% last quarter. The key levers of progress remain asset utilization, productivity improvement and stringent cost management. Aside from these efforts, the top line also grew 2% year-on-year and 9% sequentially, the latter reflecting both seasonal strength and new win implementation, which offset the softening of demand in North America. In Ocean, as mentioned, we had our first full and clean quarter of Gemini -- after the Gemini implementation. From already the first month since the implementation in February, we have seen the network deliver reliability above 90% and show resilience against disruptions such as weather, which we have seen recently in the Far East with the worst typhoon season in 10 years. Meanwhile, we continue to deliver 90-plus percent reliability in the third quarter, and we also achieved significant cost savings even compared to the ambitious target we had communicated to you earlier this year. I will go into more details on this very shortly. What Gemini has allowed us to do with these savings is to use our fleet more efficiently and capture more volumes. Our volumes are up 7% year-on-year and 5% sequentially for this quarter, while the average loaded freight rate was more or less in line with the prior quarter. Good volume development has also driven high utilization of 94% for the quarter, up 0.5 percentage points sequentially. All of this happened against the backdrop of decreasing rates as expected. In Terminals, we delivered another excellent quarter, driven by record on volumes, revenue, EBITDA and EBIT. What we have not talked about so much until recently is the volume uplift in our gateway terminals from Gemini, which has been a key contributor to our performance this quarter. Return on invested capital has delivered a further uptick to 17.2%. Here, we note that with utilization close to 90%, we are approaching the full potential at which operations in some of our locations become less efficient and volume growth opportunities become more limited in the short term. We continue to invest to debottleneck our existing terminals as well as grow with new locations as exemplified by the inauguration of Rijeka Terminal in Croatia less than 2 weeks ago and several other projects in the pipeline. Turning to our midterm target. As you can see, we have shown almost full delivery on our 2021 commitment. As mentioned, we continue to stay the course of regular progress in Logistics & Services, which is tracking positively with EBIT margin up both year-on-year and sequentially, although more needs to be done on that field. We continue to make good operational progress with our challenged products of Air, Middle Mile and Last Mile, while seeing good revenue growth in our other products, more in line with our organic revenue growth targets. Our priority is to continue to improve in the fourth quarter as we round off the relevant period of these targets. Taking a step back from this quarter, I want to just take a couple of minutes to get into more detail as to what has been driving such a robust demand growth in Ocean and some of the consequences of this phenomenon, which we do not think are sufficiently well understood. Despite talks of deglobalization, nearshoring, trade wars, container demand has shown a remarkable resilience over the past few years that has confounded many observers and models. During this period, China's export growth into all regions of the world, except for North America, has not only been resilient, it had gathered pace. China's share of global export has increased significantly and never as fast as it has over the past 2 years. Specifically, its global export share has increased steadily from 33% only 2 years ago to about 37% this year. This growth is part of a longer trend as reflected from the chart to the left, but has accelerated recently. It affects all regions with the Far East, excluding China being the biggest market and growing at 12% per annum, and Europe the second biggest market and growing at 10% per annum. North America, which, in this case, is including Mexico, which is the third biggest market, has been weaker, but still has seen growth at 5% per annum despite the known trade tensions in 2025. Given the widely available production capacity in China and the very competitive products that are being exported, we do not expect this trend of accelerated export growth from China to stop. The momentum is strong. The consequence for us are not only the resilience of demand growth, which will contribute to absorbing some of the new capacity coming online, but also the increased trade imbalance that it is causing, which over time will lead to higher production cost and lower asset intensity for the industry. On both fronts, Gemini offered us a much needed flexibility so that we can capitalize on the growth opportunity while minimizing the cost impact. Moving back to Q3 and to Gemini specifically, this is the first quarter where we can see the full effect of the new network, and we are pleased that the savings are higher than our original guidance. To give you a sense of the benefits, we separate the Ocean cost savings, which were the ones we had communicated into 2 buckets, namely Bunker Savings and Asset Turn increase. Aside from these, we can also present an upside that we have seen in Terminal as a direct result of this new cooperation. Now taking each of this in turn and starting with Bunker. We can see that the advantages of Gemini stemming from a more efficient use of our vessels, for instance, through lower speed, shorter sailing distances and shorter dwell time are allowing us to reduce the bunker consumption. This quarter, we saw a 6% higher capacity, but about -- but about 3% lower total bunker consumption. And this translates in an approximately 8% bunker consumption reduction corrected for the changes in capacity. Then on our Asset Turn side. From the most efficient use of our vessels, Gemini allows us to transport more volumes at the same capacity. This quarter, we saw the capacity growth of about 6% against the volume growth of 7%. The delta of about 1% point represent the improvement in asset turns. Both these buckets are driven by improvements we have been able to do under Gemini. First, we have been able to deploy our largest vessels in most effective routes and on shorter loops. Secondly, the shorter loops have had fewer port calls and more efficient ones. Thirdly, locations outside the shorter main liner loops have been serviced by fit-for-purpose shuttles rather than underutilized mainliners. We can quantify the bunker consumptions improvement to about 8% at fixed bunker into cost benefits of about $135 million for the quarter, which annualized is about $450 million to $550 million based on the full year implementation and normal seasonality. Likewise, we can quantify the asset turn improvement of about 1 percentage point, which against our total network cost translates into about $50 million of cost benefit in the quarter, which annualized is about another $150 million to $200 million benefit. The cost benefits on the Ocean side alone, therefore, sum up to around $600 million to $750 million on an annualized basis. Another advantage of Gemini has been to increase volumes in some of our gateway terminals, allowing us to significantly increase the throughput. These additional moves have improved port moves per hour and expanded operating terminal capacity. The additional uplift has generated about $40 million in benefits, which annualized is about $120 million to $200 million based on full year implementation and seasonality. Overall, across Ocean and Terminal, therefore, we have generated about $225 million in cost benefits in the third quarter or $720 million to $950 million in annual savings compared to our previously announced targets of about $500 million. As mentioned earlier, we now expect container volume growth to be around 4% for 2025, given the strong demand that we continue to see outside of North America. There is no change to our assumptions on the Red Sea disruptions, which we still expect will not reopen in the near term, absorbing net supply in the industry as long as it remains closed. Against the backdrop of these factors as well as a strong year-to-date performance, we refine our financial guidance to the full year 2025 to an underlying EBITDA of $9 billion to $9.5 billion from previously $8 billion to $9.5 billion, and an EBIT of $3 billion to $3.5 billion, previously $2 billion to $3.5 billion. And finally, free cash flow of positive $1 billion or higher, previously negative $1 billion or higher. Our CapEx guidance for '24 and '25 combined is revised down to about $10 billion, down from $10 billion to $11 billion, while the guidance for '25 and '26 remains unchanged. And I will now hand out to Patrick, who will walk you through the detailed financials at segment level for our performance. Patrick Jany: Thank you, Vincent, and welcome to everyone on the call. Q3 '25 was a quarter with strong financial performance across the group, significantly up sequentially. Overall, we generated an EBITDA of $2.7 billion and an EBIT of $1.3 billion, implying a margin of 18.9% and 9%, respectively. As expected, the delta to the previous year is driven largely by the shift in rates we have seen in Ocean since the peak levels in mid-'24, which was at the height of the Red Sea disruption, while the progress on the previous quarter is driven by higher volumes and operational improvements across all 3 businesses. Net profit after tax was $1.1 billion, generating a solid return on invested capital of 9.6%, still at a good level, but decreasing as strong 2024 quarters progressively fall out of the yearly calculation. Solid free cash flow supported a strong balance sheet with cash and deposits standing at $20.9 billion at quarter's end. Our net cash position is down from $5.6 billion last year to $2.6 billion, driven mostly by the strong returns to shareholders, which totaled $4 billion in the first 9 months. Let's take a closer look at cash flow on Slide 12, where we see that cash flow from operations increased sequentially to $2.6 billion in the third quarter, driven by higher EBITDA of $2.7 billion, while the movements in net working capital was largely flat. Overall, we had a strong cash conversion of 97% up from 89% last year and 81% last quarter. Further, across the chart, gross CapEx for the quarter was $1.2 billion, in line with our multiyear CapEx guidance, driven by our Ocean fleet renewal program. Meanwhile, capitalized losses -- capitalized leases stood at $868 million, also in line with expectations and down from the previous quarter, which was impacted by the Port Elizabeth concession extension and free cash flow was therefore at $771 million. Capital return via share buyback was $578 million this quarter. And finally, most of the $850 million you see in movements in borrowings relates to our 9-year EUR 500 million green bond issuance in September, extending our maturity profile early in light of extending bonds maturing in March next year. Taking all together, cash generation was strong in the third quarter and supported an already strong balance sheet alongside the continuation of our share buyback. Turning to our Ocean segment on Slide 13. Ocean delivered a strong operational performance in the third quarter, which marked the first full quarter of Gemini implementation. From a financial standpoint, Ocean generated an EBIT of $567 million, implying a margin of 6.2%. This is down on last year, driven by the expected rate decline, but significantly up sequentially, driven by the strong volume growth of 7% in Gemini. Specifically on Gemini, as Vincent mentioned earlier, the new network generated cost benefits in the form of bunker savings and higher asset turns, without which we would have expected our third quarter Ocean costs and therefore, EBIT to be impacted negatively by about $185 million. Meanwhile, freight rates were significantly down year-on-year, driven by the ongoing market pressure on rates since 2024, but broadly in line sequentially. CapEx was in line with guidance and comprised mainly installments on vessel orders announced last year as well as a broader equipment renewal and vessel deliveries that are part of our Ocean fleet renewal program. As usual, the chart on Slide 14 illustrates the main elements of the year-on-year EBITDA development in our Ocean business. On the left, you can see the large impact on profitability from the 31% lower freight rates, cushioned by the tailwind of the 7% increase in volumes year-on-year. Ocean also saw a positive impact of $211 million from lower bunker prices compared to last year, while container handling and network costs increased driven by higher empty repositioning and terminal costs. Also note that EBITDA was further supported by higher detention and demurrage revenue and a positive delta in revenue recognition, the latter of which accounts for the vast majority of the net $551 million in the final bucket. All in all, these offsetting factors allowed EBITDA in the third quarter to settle at $1.8 billion, down from the previous year, but up on the previous quarter. Let's now have a look on the Ocean KPIs on Slide 15. Ocean's operational performance in the third quarter is highlighted in these metrics with strong volume performance and Gemini helping to offset headwinds in cost and rates. Loaded volumes increased by 7% year-on-year, reaching 3.4 million FFEs as demand was strong on key trade lanes. Sequentially, volumes grew by 5.2%. As mentioned earlier, our average loaded freight rates declined by 31% year-on-year, reflecting market fundamentals that we have seen since 2024 from growing excess capacity. Nevertheless, as reflected in the flat sequential development, the lower levels in the third quarter at quarter end were actually offset by the high levels at the start of the quarter, therefore, providing a fairly benign rate environment in the quarter. On the cost side, unit cost at fixed bunker decreased both year-on-year and sequentially by 0.8% and 2.2%, respectively, as strong volume performance, high utilization as well as cost benefits from Gemini offset the general cost pressure. Bunker costs were down 14% year-on-year due to both lower fuel prices by 13% and increased efficiency from Gemini, leading to lower bunker consumption of 3.2%. This is despite us carrying more volumes and managing a larger fleet. Specifically on the fleet, the average operating fleet grew 5.5% year-on-year, reaching 4.6 million TEUs, all while capacity utilisation remained high at 94%. Let's now turn to our Logistics & Services business on Slide 16. In the third quarter, Logistics & Services delivered revenue of $4 billion, up 2.3% year-on-year and 8.6% sequentially, the latter reflecting seasonal strength. The year-on-year growth was driven by growth across most products. On the bottom line, EBIT showed a significant increase to $218 million, which also implied a continued EBIT margin improvement of 0.4 percentage points year-on-year and 0.7 percentage points sequentially to 5.5%. The margin improvement is primarily driven by the continued operational progress that the team has made in fulfilled by Maersk, all while continuing to exercise stringent cost control across all service models. CapEx is down on last year, but remains at a stable level sequentially to support growth with particular focus on Depot and Warehousing this quarter. Now let's have a look at the breakdown by service model within Logistics & Services on Slide 17. Starting with our supply chain management offering. Revenue here decreased by 4.8% year-on-year to $594 million, with the EBITDA margin decreasing to 22.6%, down from 24.2% last year. This decline was driven by weakness in Lead Logistics, our 4PL business, volumes primarily from China to the U.S. on the back of the stop-and-go volatility we have seen in the external environment. In Fulfillment Services, operational progress in Middle Mile North America and Warehousing led to significant improvements in profitability with an EBIT margin of negative 0.9%, up from minus 4.5%. Revenue increased by 2.9%, reaching $1.5 billion. Finally, revenue increased in Transported Services to $1.9 billion, equal to a 4.3% increase year-on-year. This was supported by higher volumes in Landside Transportation in the peak season. However, the EBITDA margin was impacted by weakness in Air, landing lower on the previous quarter at 7.3%. We round off with our Terminals business on Slide 18. Terminals delivered another excellent quarter, continuing the positive trend. Revenue grew by 22% year-on-year to $1.4 billion, driven by 8.7% higher volumes supported by Gemini and improved rates. Specifically on the Gemini impact, volumes from Maersk Ocean increased 26% year-on-year. The higher volumes brought a further uptick in utilization, which stands at 89%. As mentioned earlier, while this is supportive of higher margins, it also highlights the necessity to invest in capacity extension in the coming years to cater for the long-term growth of our port operations. Revenue per move increased by 7.8%, reflecting improved rates and mix. Meanwhile, cost per move increased by 6.7%, largely due to labor inflation and higher SG&A costs, but mitigated by higher utilization. Overall, EBIT increased by 69% year-on-year to $571 million with a margin of 39.4%, up 11 percentage points from last year and 4.1% higher sequentially. This underlying good margin was supported by a net $139 million positive impact from one-offs, including the reversal of impairments due to the successful extension of a concession. ROIC rose to a record 17.2%, underlining the intrinsic strong return profile of this business, although levels will taper down progressively with increased renewals and investments. CapEx for the quarter came in at $154 million, more or less in line with previous year and reflect the continued investment in our gateways portfolio. Turning to the breakdown of Terminals EBITDA on Slide 19. Terminals delivered an increased EBITDA from $424 million last year to $501 million. The increase in cost per move of $56 million was more than offset by higher revenue per move and volume impact. Currency exits and other movements brought a further positive impact of $29 million, bringing the EBITDA to a record level for the quarter. And with that, we finished the review of our business segments and are ready for the Q&A. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Patrick Creuset from Goldman Sachs. Patrick Creuset: Just 2 questions. First on the outlook. If we look at your Q4 EBITDA, you're implicitly guiding based on the full year range of somewhere between $1.3 billion and $1.8 billion. Can you provide a little bit of color on what sort of volume and rate assumptions are embedded or would be embedded at the top and the bottom? And also based on what you see so far going to Q4, do you see a skew more likely at the top or low end? And then just on the buyback, you've got a cash position of around $15 billion or so. In the past, you've sometimes given the market a sense on how comfortable you felt on buybacks in the year ahead. Can you again give us a bit of sense today, assuming, for instance, stable trading environment at these levels, would you see a reason to discontinue the buyback next year or keep it? Patrick Jany: Thanks very much, Patrick. So indeed, when you look at the guidance for Q4, it implies a continuity of the pace that we have currently. We have seen rates stabilize by September and early October. And that is, I would say, the pace that we have continued to forecast for the Q4. And the volume development actually seems still to be pretty strong as we can see it. So I would rather mentally see, let's say, the revision of the guidance towards indicating the higher end of the guidance, which is what we are doing by narrowing the range, and that's what we intend to signify here, which at group level is more or less a breakeven. It will depend on the last few weeks for the Q4. When you look at the cash position and balance sheet, it is strong. And as we have indicated as well when we restarted the share buyback back in February this year, the intent is to certainly see this as another 1-year event. And in your assumption of a stability of externalities, I think there's nothing that speaks against the continuation of the share buyback indeed. Operator: Our next question comes from Muneeba Kayani, Bank of America. Muneeba Kayani: Firstly, just on the logistics EBIT improving at the margin to 5.5%, can you remind us what seasonality in this business? And if there was any benefit on that and kind of how much of this is kind of the improvement which can continue? And then secondly, we've seen in container shipping, the order book-to-fleet ratio for the industry is around 32% now, which I believe is the highest since the global financial crisis. So what do you think is driving that? And how do you see it playing out? Vincent Clerc: Muneeba, so if I start with your first question on Logistics, I think most of the improvement that we're seeing are due to the cost containment and productivity improvement that we are putting in place. In general, the business will have a seasonality a bit tilted towards the second half year versus the first half year. But -- and mostly, I would say, towards the very end of the year, depending on your product exposure. But I think when we look at it, and you can see that in the volumes and the top line, we see some seasonal improvements that are helping. We also see some of the wins that we have taken in that are helping, but I think most of it is actually coming from the work that we're doing on margin. From the order book, I think you're correct that at 32%, the order book is quite high. I want you to -- I just need you to remember 2 things. I think the first one is that the time to order, so the number of years over which this is going to phase in is more than it was during the -- before the financial crisis. So if you -- we're going to -- there's a longer installment, if you will, that is being ordered. So that's one thing. And the second thing is the story that we had about China. The market is growing at about 4%. But on the head haul, it's growing at about 7% and what we're seeing is as long as it grows at 7% on the head haul, you need 7% more capacity to be able to carry this. So I think there is -- this dichotomy that there is between head haul growth and average growth is absorbing a lot more capacity. The longer order books is -- it means that it's not phasing as brutally as one would expect. And then the last point that there is, is not a single ship has been scrapped for the last 6 years, but the ships all got 6 years older in that period. So there is pent-up demand for that. And so I think over time, we will see that some of the levers that so far have come at us, whether it was higher demand from China or selling around the Cape of Good Hope or COVID, this will fade away, and we'll be back to having to use the tools that we normally use in the industry, which is scrapping, idling, slow steaming and so on. And there, there are still significant levers that we can lift to actually balance the outlook. Operator: The next question comes from Ulrik Bak, Danske Bank. Ulrik Bak: So on the volume side, Ocean volumes, you obviously have very strong growth, 7% in the quarter. I'm just curious to hear what if there is a split between the feeder legs and the main haul legs? And if there is any issue with double counting, anything because it just looks so extraordinary, your volume growth. And then if I can sneak in a second one. So this overperformance versus the market, how long do you expect this to be sustained? Vincent Clerc: All right. So I can guarantee you that there is no double counting of volume like we count the containers and the bills of ladings only once. It's much better. You would see it in the revenue development very different if we were double counting. So I think that we're pretty -- we can be quite categorical around. I think when I look at what we're able to do right now as a result of Gemini from a cost perspective, I think it's a pretty significant lever that we have unlocked here. And this has, I think, legs to continue into the coming quarters. I cannot give you how many quarters this advantage will last. I think it's going to last quite a while, but it depends also on what we do next and what competition does next. And I'm not in control of all of that. But I think that what we have shown on the slide with Gemini is there are a few levers where we have broken some efficiency frontier that we had under the previous deployment and that we have moved them now to being higher. And this is what allows us to actually lift the cost impact of Gemini quite significantly. Operator: The next question comes from Omar Nokta, Jefferies. Omar Nokta: Just wanted to follow up on the share buyback discussion. You mentioned last quarter, you continue to view that as a focal point of the capital allocation strategy. It sounds like that's going to continue for '26 as well. But just in terms of how you're thinking about the size, $2 billion this year, how can we think about how that looks for '26 as you set the budget? Does it become a portion or a function of how much free cash flow was generated this year? Or what's it based on? Is it based off of earnings next year? Any color you can give would be helpful. Patrick Jany: Yes. Thanks very much for your question, Omar. No, as we said, clearly, share buyback is a fundamental piece of our capital allocation and will continue to be as well for next year. I think when you look at the dimensioning, you know that we actually maxed out this year, right, just from the free float and the rules on the daily volumes. So I would expect this to be, say, a maximum amount. But then the exact dimensioning will be done, obviously, in February and when we come out with our guidance for full year. I think it will be premature now to guide. But I think certainly, the willingness to continue a sizable share buyback is certainly there. Operator: Our next question comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I have a question on the Gemini cost savings. I'm looking at that slide that you put together, and it looks like the bulk of the benefits come on the bunker side of things, which I think makes sense. What I am surprised about is why the asset turn benefit is not higher? Maybe you could just talk through like what I'm missing there. Maybe I've just thought that the asset turn would be better. You could optimize the network more, long voyage, big vessels, feeder vessels, et cetera. I'm just trying to understand that split that the bunker number and the asset turn number are not sort of closer to each other? Vincent Clerc: Yes. Thank you, Cedar. I think let me try to explain that I think the asset turn, it depends also on what is your base. We had an extremely high utilization last year. So we've been able to lift this with 0.5%. We're continuing to look at whether we can actually increase that number in the coming quarter. The bunker, we can very much control because that -- as soon as you're into the deployment, since we measure it against the capacity, we get the full saving calculated there. And we've tried to disaggregate that because we could have just done this in terms of total unit cost per container, and I would have mixed the bunker and the efficiency on the fleet or on the utilization. So I think the bunker, we see 100% of the saving right away. As long as we deliver on the reliability, this will be pretty steady. I think on the asset turns, this is where I think we have some opportunity to continue to fine-tune and improve the network. So this one, I would look at as still having a bit of leg that we need to exploit in the coming quarters. Cedar Ekblom: Okay. And then, yes, just a follow-up there. So obviously, container handling unit cost at a fixed banker hasn't really come down year-over-year. It obviously has come down sequentially, which is helpful. Could you give any sort of guide around how to think about that sort of container handling cost on a unit basis or maybe network costs on a unit basis? Like are we talking about a 5% decline from here unit-wise? Or I don't know if you could help us quantify how to think about that run rate into '26? Vincent Clerc: Yes. So the issue with container handling is the fact that, as I mentioned, with an average market growth at 4% and a head haul growth at 7%, trades become more imbalanced. And then under container handling, the amount of empty containers we're moving around increases because there is just more containers going one way and fewer containers going the other way. And that means more empty repositioning. And that's what I mentioned in the slide for China. I think as we see this imbalance continue to grow, it's important that we understand that we're going to need more and more capacity to cater for growth because it's more and more asymmetrical because between the head haul and the backhaul, but it will also increase our cost per FFE above that because of the increasing balance and more empty containers being moved around. Operator: Our next question comes from Kristian Godiksen, SEB. Kristian Godiksen: Yes. Also a couple of questions on the Gemini part. So just a house of question to start out with the improvement in Terminals, is that in the -- is that for the hubs and hence, included in the Ocean part of the business? Or is that for the Terminals business? And then if you could maybe comment a bit on the unit cost advantage you see compared to the peers that are not using the hub and spoke model? And then maybe just finally sneak in a question on whether you've had any preliminary discussions with the clients on a potential price premium for your higher schedule reliability? Vincent Clerc: Yes. Thank you, Kristian. So I think the -- what is important with Gemini from the gateway perspective is the fact that before when we were in 2M, we were paired with probably the other line that has the most comprehensive terminal portfolio. And it means that in a lot of locations, we have to split volumes between the different parties. Here, we are with a partner that has less -- much less of a terminal portfolio. And it means that net, we're getting more locations where 100% of the throughput is not split between 2 different facilities, but it's all going to our facilities. So for the gateways, this is very, very positive because they get the full 100% of the support from Gemini. And that is something that is an uplift for this, and it will last for as long as Gemini lasts. So it's quite positive. On the unit cost, I think we're going to need 1 or 2 quarters more of data from also the competition to know because we can see how much we have saved sequentially and how much we have saved year-on-year. Obviously, the world doesn't stand completely still. They will also do certain things. What we can see with the numbers that have been released so far is that we're making more progress on unit cost than what they're making, and we attribute this to Gemini, which is the big thing that we did to lower our unit costs. So we're quite positive on the fact that we are opening up a gap now with Gemini that is going to be -- that is going quite handy, especially in the current rate environment, and we will continue to work at making it as big as possible. Then finally, on customer discussion, I want to say that the customers' reaction is really very, very positive. Obviously, for the premium, this is a conversation that we have started, but it's a bit too early to talk because we need to be certain also that we have a long enough track record that it unlocks value for them that we -- where we can then capture some of that value for us. So for instance, concretely, today, every customer has a buffer stock and that reliability needs to unlock a reduction of that buffer stock. They need to trust that this has weathered sufficient ups and downs and be steady that they can take out some of that buffer stock. And if they do, they pocket that saving and then we can capture some of it in form of a premium. I think that process is starting. It's a long-haul process to take place, but certainly something that where we see some potential at least to capture some value, but we need to -- it's just a few months. It's the first quarter we're going with it today, where we have the full Gemini. Some of them have been in transition with -- not everything is yet fully in a place where value has been unlocked yet, but we're very positive with the discussion so far. Operator: Our next question comes from Jacob Lacks, Wolfe Research. Jacob Lacks: So you've discussed in the past maybe a bit of a shift in how quickly contracts get repriced when the market is tightening up. Have you seen customers actively work to reprice contracts again with rates moving lower now? And to that end, do you think the current rate environment will largely be reflected in Q4? Or could there be some incremental pressure in '26 when new contracts are signed? Vincent Clerc: So we've not -- thank you, Jacob. We've not seen any big movements on contract being open now, which since the contracts have been trending down during Q3, and it was not very timely for people to do it until they -- when they know they have the negotiation coming soon and as long as things are moving their way. So I think that from that perspective, that's one of the things that also holds the contract good. So those have not moved. You will have noticed that over the past few weeks, the rates have actually come up again a little bit. It's too early to call anything on the contracting season. I think we'll have certainly a discussion around this in February when we come with the full year guidance for 2026, and we have some of the early negotiations under wrap. But I think for now, what we have seen in terms of behavior from customers is that whatever the price did during Q3 did not lead to customers actually reopening contracts or wanting to have commercial discussions on price. And contract adherence has been quite strong as well. So it's not like the volumes just disappeared. I mean they were living up to their commitment. Operator: The next question comes from James Hollins, BNP Paribas. James Hollins: Obviously, you discussed buybacks a lot pretty important to the market. I was just wondering, I mean, clearly, another way you might not do buybacks is aggressively pursuing M&A. I was wondering how you're looking at M&A if we are indeed looking quite extensively and globally at potential deals? And secondly, a bit of a sort of generic question, but as I look at consensus for 2026 Ocean, Bloomberg consensus has a loss of $2.8 billion. I mean that would be a business scenario like 2009, you'll come to deposit [ $1.7 billion ], apart from showing how on that forecasting. Maybe just get sort of your view on how you would see, I guess, particularly that Bloomberg consensus against the reality of what you might see in this industry based on someone that's been in it a long time, your work on cost, your work on the alliance and basically whether that's way too pessimistic. Vincent Clerc: James, I think let me start with the 2026 and give you the standard answer that I look really forward to talking about it in February. But before that, I think we'll have to pause on giving any type of views. With respect to the M&A I think what we need to remember is that all 3 segments that we operate in are actually over time, segments with -- that are quite competitive and very low margin. So when I hear something like aggressive pursuit of M&A, I hear a premiums that will be difficult to justify through synergies afterwards and a lot of risk to destroy shareholder value. So whereas we've said it and we continue to say that M&A will be a part of the continued repositioning of Maersk. And whenever we see opportunities, we have both the wherewithal and the interest to pursue them, but maybe an aggressive thing right now, given some of the outlook is not necessarily something we will pursue. Operator: Our next question comes from Parash Jain, HSBC. Parash Jain: I mean just first with respect to Red Sea, I know nobody has a crystal ball, but given the recent developments, is it first half of next year looks more likely than ever before? And my second question is, we heard a lot about front-loading by the U.S. retailers, in particular, now that we are well into the peak season, are there any signs of front-loading, which has been reflected into the fourth quarter's volume run rate? Vincent Clerc: Yes. So for the Red Sea, let me start by saying that, obviously, the ceasefire in Gaza is a significant -- first, it's a great thing for people in Gaza and for the world in general. But it is also a significant step towards being able to reopen the Suez Canal since the -- the situation in Bab al-Mandab and in Gaza have been linked since the beginning. I think the way we think about this is that we need now to make sure that this moves into a process where it becomes clear that the ceasefire is entrenched and doesn't risk going backward at some point and then we fall back into a new phase of a conflict. And that's the situation we're monitoring quite closely. And we're also figuring out what is the posture of the Houthis specifically to see if we can start to have a safe passage. So I would whether it's more likely now to be early at some point or whatever, I think if the ceasefire holds, then I think we've crossed a gate and made a big step towards returning through the Red Sea. But I think we need to see that get entrenched, and we need to see the process move ahead. And once that happens, then we'll have a better view of what that means for a return to the Red Sea. Then in respect of front-loading, I think there was a lot of discussion on front loading, especially end of '24, beginning of '25 before the tariffs in April. We certainly saw following the implementation of tariff that things softened in North America. And we certainly still have seen this still into the third quarter and even, I would say, during the month of October, I will say that what we're seeing now is there is somewhat of a push also into the U.S. for some of the seasonal goods to get there. So I think from a demand perspective, very resilient demand across all geographies and the U.S. that is picking up a bit of pace following this month between April and October that have been a bit more soft. Operator: Our next question comes from Alexia Dogani, JPMorgan. Alexia Dogani: Just firstly, could you explain a little bit the unit revenue development because we're struggling to reconcile with the trade lane numbers you report on the group level. If you can just explain how it normally developed as per the 6-week lag, the spot versus the contract, has it performed versus expectations, whether it's underperformed or overperformed because, yes, struggling to reconcile a little bit the outcome. And secondly, on the unit cost, again on Ocean, I mean, clearly, you talked positively about the Gemini contributions. But overall, your unit cost at constant bunker is only down 1% despite you growing 7% capacity and 5.5% volumes -- sorry, the other way, 5.5% capacity, 7% volume. So when we look at into next year, what further cost savings can you deliver if there is less volume growth because I imagine the capacity benefits annualized. And then finally, obviously, the IMO has now delayed its kind of net zero initiatives. How should we think about the implications for industry capacity discipline? And I guess, more importantly, for yourselves that have invested in green CapEx, which comes at a higher cost. And so it kind of takes you in a relative disadvantage? Vincent Clerc: Yes. There's quite a few questions. So let me try to cover that to the best possible. I think, first of all, when you look at the cost, there is one element that we're missing. And it is that the net position that we have on our different VSAs, whether it's a plus or a minus is reported under other revenue. And the fact is that our position in 2M was balanced and our position in Gemini is that of a net seller of capacity. And that means that out of the 11% that you see in growth in the network cost, half of that is due to that net position. And once you take that out, then the growth of our network cost is actually 5.5% for 7% volume increase. So I think that's just important to position this. We see the unit cost being decreased. The biggest efficiency is because we've chose to slow steam and be reliable is going to be seen on bunker. So that was always -- it doesn't matter so much which line item it shows, but we've made choices. We could have gone a bit faster and save a few ships and also generate some cost savings that you would have seen more on the network cost. We've chosen to really focus on bunker. So I think for the unit cost, there is this -- when we look forward, I think we have 3 levers for cost savings, for further cost savings. One is the expansion of Gemini. Two is actually some of our other costs here under organizational cost that we're looking into. And then finally, I think as the rates soften, we will see also a softening in the time charter market, and that will generate further savings in the unit cost that we have by basically being able to lease ships at a cheaper price. So those are, I think, the 3 key things. I will say that we anticipate -- you mentioned like less volume growth. We don't expect necessarily less volume growth, but we'll talk about this in February. But I think that's not an assumption we should have. So that's both for the unit cost and the growth. The IMO, I would say, from a CapEx perspective, it's -- what happened at the IMO is a nonevent. Seen from that, that today, every single ship that is on order more or less is a -- has a dual fuel engine. It's either dual fuel LNG bunker or it's dual fuel methanol bunker. And I think everybody understands that it makes sense when you take a bet on the next 30 years by ordering a ship that you cannot just base yourself on what the IMO is doing now, but you need to understand what optionality you have for the next 30 years. And I don't expect that people will start to order only bunker ships because they will think that for the next 30 years, this is not -- green transition is not going to be an issue at all. So I think from that perspective, I don't think operationally, IMO is a problem. I don't think CapEx-wise, IMO is a problem. It's a problem to execute the energy transition because definitely, it's a loss of momentum. But from an operational perspective, we are not at disadvantage, and I don't think it's going to change order behaviors or supply and demand. Patrick Jany: And let me come back on your rate on your first part of your question. So what you have to consider is that we have increased the share of short-term rates in our mix, as you can see as well in our disclosure to 53% compared to 47% long term in the quarter, and which was positive during Q2, Q3. As short-term rates decreased during Q3, you see that our full year estimate for '25 sees an increase of the long term. So we are pushing the contract fulfillment and the long-term rates, which are more resilient to the erosion of the rates in the short term. So you have a progressive change of mix constantly to optimize the revenue there. Another factor when you try to reconcile is also the very different geographical evolution of the rates. So the North -- the East-West rates are the ones which we always follow very publicly and those ones came down. However, you do have much more resilient rates development in North-South and then the interregional rates as well. So that's a bit of a mix that you see always in our total figure. I hope that helps. Operator: Our next question comes from Marco Limite, Barclays. Marco Limite: So my first question is on demand because you are talking about a fairly strong demand, while some of your competitors in other subsectors are talking about soft demand. You have also mentioned that you expect U.S. demand being sort of strong over the next 6 months. And then also, you have mentioned that China outbound has grown 7% and expect a similar rate going forward. Do you -- what kind of visibility have you got on basically these assumptions? And especially the fact that China has been very strong this year is not that a risk for growth next year on a very high comps, is the first question? And the second on capital allocation. We have been discussing about potential for M&A and share buyback and so on. But when we think about terminal expansion, I mean, this week, you announced a $2 billion investment in the terminals. But first question is that on your balance sheet or off balance sheet as you have got a minority stake. But more in general, is it a problem for you to have, let's say, the terminal business in the overall Maersk umbrella, where, of course, you cannot take a lot of leverage, but terminal business needs big CapEx investments and also a larger balance sheet buffer? Vincent Clerc: Yes. So on -- let me start with the demand. First of all, the strength of the demand, if I look at year-to-date, both last year and year-to-date, I mean, this is -- I hope this is undisputed by anybody, at least when it comes to container traffic because you can verify it in the CTS statistics, [ GOC ] statistics and any other widely available port statistics that you can find. So is the fact that China makes up a large part of this and that this shows no signs of abating. So personally, I don't see any reasonable argument or data source that would go against the fact that demand has been above 5% last year and will be around 4% this year, which is actually quite significant. The demand from China and the growth from China, at least so far shows no sign of abating. And unless at some point, somebody can point to a reason for why this would abate, then I think it's a reasonable assumption to say that if there is no reason for it to slow down or stop, then why would it? And then you can discuss whether given -- as you mentioned, given the comps, whether it's going to continue to be 11% or that the base becomes so big that it becomes 10% or 9%. But the fact is that it's still quite significant. And at least so far, as we show in the graph, the last 2 years has been accelerating, not decelerating. So I think from a demand perspective, we feel quite confident that demand growth is very strong. There's a lot of cargo out there to move, and that has a lot to do with China. And I think that there is ample data to back that up. You want to? Patrick Jany: Yes. On your question on the capital allocation and terminals. I think -- so first of all, on the capital allocation, I think our first priority is organic growth, and we have always said that we would dedicate the sufficient funds to grow in Logistics, grow in Terminals and renew our fleet for Ocean. That is part of our guidance of the $10 billion to $11 billion CapEx over 2 years. So that's factored in. I think what you have to see is actually Terminals is a brilliant business that complements Ocean. We capture a lot of the value as we actually just showed on Gemini of the value of the Ocean leg into the port, right? And the margins there are actually higher than in Ocean. So it is good to have. It comes with, I would say, a high CapEx profile when you have new terminals, but a lot of the CapEx is actually expansion of existing, right? Of existing capacity where you can grow. And then you have a few new ones which are planned. We just announced the -- we just opened one recently and there are others in the pipeline, which, again, are absolutely included in our guidance and do make absolute good sense. Overall, I would say it is still an asset-lighter business than Ocean is. So it's absolutely fine with our balance sheet, and we have the balance sheet structure and financing to fund that development as well. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Thank you again for joining us today. And to summarize the discussions, we have demonstrated strong execution in this quarter in which uncertainties did persist in the external environment, but where we carried to deliver strong results across the whole business portfolio. We've made good progress across the portfolio and continue to see supportive demand, and this has allowed us to narrow the full year guidance. We look forward to seeing many of you on our upcoming roadshows and investor conference. Thank you for your attention again, and see you soon. Bye-bye.
Operator: Ladies and gentlemen, welcome to OTP Bank's Conference Call regarding the financial results for the first 9 months 2025. Please be advised that the conference will be recorded. [Operator Instructions] At this point, I would like to hand over the floor to Mr. Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, the stage is yours. Laszlo Bencsik: Thank you, and thank you, everyone, for joining us today. Good morning or good afternoon, depending where you are. Let me jump into the presentation. As usual, the deck is available for download on the website, but we are also projecting it parallel to the con call. So maybe we go to Page 3, where we have the most important numbers, yes. So first of all, we have this kind of noise in the data due to the fact that many -- most of these extra taxes or all the excess taxes in Hungary were booked in the first quarter for the entire year and some other supervisory fees as well in various other countries. Therefore, if you want to capture the -- properly capture the business performance, and we need to accrue those costs over the year. So you have -- you can see 2 sets of numbers, one at the bottom with gray that's reported and then this kind of the other set of numbers with green where between the quarters, we have accrued allocated evenly the one-off costs. So if we look at the kind of accrued numbers, then the first 9 months was HUF 886 billion. That's like EUR 2.2 billion, EUR 2.3 billion, 5% up last year first 9 months. But I mean, the actual business performance was stronger than that. If you look at the, for instance, the pretax profit, then this growth was already 8%. That's due to the fact that the extra taxes primarily in Hungary increased a lot. And we put these extra taxes, the bank tax and the extra profit tax into the tax line. And on that line, just in Hungary, the extra profit tax increased by HUF 38 billion year-on-year. So that's a major factor actually in the profit after tax number. Now if we were to look at the operating profit year-to-year performance, then it was actually 16% up for the first 9 months. And then obviously, risk cost was somewhat higher, as you can see on this chart on the credit risk cost rate and the total risk cost rate. Having said that, most of this kind of extra risk cost is coming from Russia due to volume effects, the Russian risk cost rate was 7.6%. So that's part of this kind of consolidated number. And if we were to take out Russia, Ukraine, Uzbekistan from the risk cost rate and the credit risk cost rate and the total risk cost rate we would get quite similar numbers to last year actually. So I think it's safe to say that we have had another strong quarter in the third quarter of this year. And there's no reason to believe that the following quarters will be anything worse. So we remain quite optimistic regarding the current trend, the current run rate and also the potential future developments. This profit growth has primarily been driven by especially the operating profit growth by volume growth. We indicated at the beginning of the year that we expected more than last year credit growth. Last year, we had 9%. And the good news is that already at the end of the 9 months this year, the year-to-date performing loan growth was 10%, and it's going strong. So I think it's fair to assume that we will not just have higher number than last year, but materially higher, substantially higher growth rate. And this seems to be the run rate at the moment. Return on equity, again, this kind of accrued ratio, 22.7%. Cost to income, 39%, below 40%, very good and net interest margin stable. And I already a little bit talked about the credit risk cost rates, which are higher than last year, but mostly driven by the contribution from Russia. The following slide is rather technical. It shows this kind of difference between the reported and this kind of accrued or even recognition special items. So I'm not going to dwell into this, but that explains this almost HUF 37 billion difference between the 2 numbers. So let me go to the core performance, OTP Hungary. Again, 5% up year-on-year, but this extra profit, the windfall tax increase is primarily here or substantially here in Hungary. So the pretax number again, with this even recognition of the one-off cost would have been 15% up. So after-tax profit, 5% up, pretax profit, 15% up year-on-year. And this was primarily driven, again, loan growth and some margin improvement. I mean, last year, first 9 months, the NIM was 2.84%. This year, 3.09% and slightly increasing quarter-by-quarter. Here, you can see this kind of detailing of the extra burdens in Hungary. And you can see how much the windfall tax, the extra profit tax increased. Last year, we paid HUF 7 billion altogether. And this year, we expect to pay HUF 54 billion. And there was a strong increase in the transaction tax as well. The tax rates were increased last year and that they became effective late last year, and the impact is actually quite substantial for this year. Having said that, there is plenty of good news regarding our performance in Hungary. So if you look at the recent novelty on Page 6, this is the home start loan program, another subsidized mortgage program, which was -- which started in September this year. And you can see -- I mean, the -- if you just look at the stock numbers, the impact is relatively modest given that it was -- it only started in September. But if you look at the applications, you can see how much the applications increased. So the September level was kind of 3x, more than 3x on average monthly level. So this is a very popular program. It provides opportunity for clients to take mortgage loans at 3% fixed. So this is what they pay, and we receive an interest rate subsidy. And with that subsidy, it is actually a reasonably profitable product. So it is clearly beneficial for clients, and it's also a profitable product for the banking sector. Now this means that the current run rate of, let's say, annualized 12% because the first 9 months, as you can see on this chart, mortgage loan growth was 9% year-to-date. We annualize it just roughly, it's like 12%. So this 12% annualized run rate can increase, and we definitely expect this to increase for the next year, for the next 12 months at least. And that can be up to, I mean, high teens, even closer to 20% till at least till the end of the second quarter next year. If we look at the other product segments in Hungary, consumer loans going strong, almost 39% higher contractual demand in the first 9 months of this year than last year. Our market share is very strong. Now this is a quite attractive profitability product. That's one of the profitability drivers for us in Hungary. So having this strong market share and having this strong growth rate, this is quite good news. Our market share recently increased. The other kind of important market share number on this slide, I think it's in the kind of lower right corner, 41.4% is our market share from retail deposits, and it's again, quarter-on-quarter increased a little bit. You may remember that the first half of the year, a large chunk of retail government bonds were repriced and that caused some reallocation of funds by retail clients. And the good news is that we seem to manage -- be able to manage this transition well and our market share again started to grow in deposits. Corporate. Corporate is probably even more exciting it does seem to be that finally, we see a turnaround in corporate loan growth, especially in micro small. So as you can see on this chart, micro small year-to-date growth rate was 12%, large corporate or total corporate 5%. And that's a big improvement compared to '23, '24, where volumes were basically flat. And we read this now as an indicator of a potential turnaround, at least in our client portfolio. Obviously, this trend reversal has been supported by the current subsidized scheme, which is the called Széchenyi Card MAX+ scheme targeting like small corporates in Hungary. Our market share is very strong in this product. And due to all these changes, as you can see on this page, we reached a historic high in terms of our market share to Hungarian corporates, loans to Hungarian corporates above 20% historically highest number, very good news. We are very happy about this. On Page 9, you see some of the -- or well, all of the non-Hungarian bank performances. It's -- I think it's quite solid across the board. Maybe the only kind of pledges in Uzbekistan. We talked about this. As you can see, both the nominal profit declined materially compared to last year and the ROE also went down. I mean, this is something we discussed in detail in previous presentations. We had to limit the volume growth of consumer loans for quite a long period for almost 1 year until we fixed the IT infrastructure and then kind of restarted the growth of consumer lending somewhere in the second half of the second quarter this year. And these results are very strong and very, very promising. I will show you in a few slides, I will show you the details how well new production is building up in Ipoteka, Uzbekistan. So I'm very hopeful that starting from now quarter-by-quarter, we will be able to improve our performance and reach back potentially to previous levels. The NIM development, net interest margin development, again, it's fairly stable quarter-on-quarter, even on a basis point level. And since the beginning of the year, 5 basis point improvement. The improvement is primarily coming from Hungary. Hungarian margin keeps improving, while in some of the other banks in Uzbekistan, where cost of funding increased in Bulgaria, where it's a euro rate environment, and this is due to the euro somewhat lower rate than last year overall and Serbia having some hit. But primarily, the improvement, as I said, was driven by Hungary improvements. Let's have a look at the volume trends, the performing loan volume trends. across the group, 10% year-to-date. And again, we don't have any reason to assume that growth slows down. It's actually quite the opposite. In Hungarian mortgages, we expect definitely acceleration in the first -- in the last quarter, in this quarter. And also in Uzbekistan, as you can see, this 13% increase year-to-date is not evenly distributed between the quarters. First quarter was flat. second quarter, 4% growth and third quarter, 9% growth just in 1 quarter. So this is when we are kind of up to maybe not 4%, but a much higher speed than previously. The other, I think, important development is Ukraine. As you can see, we -- somewhere at the end of last year, we decided to be more active in lending in Ukraine, and that resulted in more than 50% growth in consumer lending. Obviously, this is from a relatively low base, but nevertheless, we started to grow and also corporate and leasing started to grow meaningfully this year, and this is in line with our kind of strategic decision to be active on the lending side in Ukraine, obviously, selectively, but we believe that there's a well defined, actually broad segment of clients who are quite able to take on some leverage and loans. Maybe a few more words about the Uzbekistan development because this is important for us strategically. As you can see, we -- on this one, you see the cash loan volume changes and disbursement numbers by quarters and our market share. And we had this difficult period starting from the first quarter last year, which period pretty much ended a year after. And in this time, we lost market share, our operating results declined. and our profits declined, but now I believe we have reached a turnaround. And as you can see, our market share started to grow in the third quarter. And you can see how much we were able to ramp up production of cash loans. And now this is -- now we believe that we are giving these loans based on sound understanding of clients' creditworthiness and it's well supported by data. So we feel confident that these are going to be quite profitable vintages what we are churning out. In terms of deposits, Again, a strong performance year-to-date, 9%. And just to remind you, the net loan-to-deposit ratio of the group is 74%. So nominally, we have 50% more deposits than loans. So despite the somewhat lower growth rate, the actual nominal increase was substantially more in deposits than in loans. So the group level kind of liquidity situation improved due to this. And the primary drivers here are in Hungary core and Bulgaria and in the retail. These are the 2 countries where we have dominant market share in retail deposits around 40% in both countries. And in both of these countries, retail deposits are very profitable. So this is a kind of growth and profit engine of the whole group, retail deposits in those 2 countries and so far, so good. quite strong performance in both sides. In Bulgaria, there's an additional big event. By the end -- by 1st of January, Bulgaria finally joins the Eurozone after around 25 years in the currency board in a fixed currency -- successfully fixed currency regime, very well deserved, and we expect further positive ramifications from this -- from the accession to the Eurozone. And the only -- I mean, where we had decrease, it was Uzbekistan, But again, funding, especially retail deposits is quite expensive and the growth -- the volume growth in retail loans was not as strong as we originally planned for. So therefore, we scaled back somewhat the deposit volumes in order to optimize for profitability. But again, this recently as the volume growth recovered, we again started to somewhat increase deposit volumes. So this is subject to pricing basically. On Page 14, credit quality. Again, Stage 3 ratio compared to the end of last year improved compared to the second quarter, flat, strong coverage, as you can see, in comparison to some of the other players as well. There's no major development on that front. In terms of capital adequacy, 18.4%, which is still a decline compared to end of last year, but that's mainly due to the Basel IV impact, which kicked in 1st of January, 90 bps negative. And still a 20 basis points transitionary measure is being out phased by the end of this year. So the kind of fully loaded number year-end -- if you fully load with the changes expected till 1st of January, then it would have been 18.2%. Nevertheless, strong and well above regulatory requirement. In terms of liquidity, I mean, quite liquid. The liquidity coverage ratio, 235%. Again, the minimum required is 100%. We -- during this year, we started with a Tier 2 in January, and then we have done 2 covered bonds, very successful, quite -- we're quite happy with the pricing levels and a senior preferred and offshore yuan bond, another one. We are trying to diversify our investor base on the debt capital markets as well. Now -- so this is the kind of internal performance and then some reflections in the mirror, right, how others see us. First of all, rating, there have been many upgrades. Moody's was the very recent one. They improved the counterparty rating of OTP Bank to A3 and the senior preferred bond, the negative outlook disappeared. So it's Ba3 stable and also the Tier 2 rating improved to Ba1, and then prior -- previously during the year, S&P improved our rating. So there, the senior preferred rating is BBB, which is actually a notch higher than the sovereign rating, which is BBB- the Hungary sovereign rating. So again, this is, I think, a rare event that the bank is rated higher than the sovereign, but I believe this is very -- that's a realistic situation. So scope rating even higher. And we have a Fitch rating for Ipoteka Bank, Uzbekistan Bank, which also improved during the year, and they have been through a very successful issuance. They just printed a bond recently, which was very well received by the market. Page 18, that's the -- we like to show this one. This is S&P kind of capital Global Market Intelligence unit. It's just a financial comparison of -- comparison of financial performance of the largest European banks. Last year, we were #1, this year, #2. So next year, we want to get back to #1 as well. And then EBA stress test #13 that was done during the early part of the year. So we are in the first kind of 1/4 of the participants. And just very recently this week, there was an ESG upgrade. MSCI upgraded our ESG rating to A. So I mean, forward-looking, we are I'm sure you will ask questions about that. But as usual, we will share with you our expectations, our guidance for next year when we present the annual numbers, and that's going to be the first week of March, as usual on a Friday. So I won't talk much about next year. But I think it's clear that we have a strong momentum, and there's no reason to believe that this strong momentum should deteriorate. So I mean, especially if we look at the macro environment, on a very high level, we expect basically GDP growth improvements in most of the countries where we operate. And where it's not improving, the kind of slowing down is quite moderate and from quite high levels. So Bulgaria slowing down to 3%, Croatia to 2.9%, but these can be better numbers, to be honest, because the recent data in these countries actually outperformed our previous expectations and maybe Uzbekistan also slowing down. But in the case of Uzbekistan, again, the latest GDP data was much better than what the market expected. So even these countries are doing well. And the biggest kind of improvement in terms of GDP growth is expected in Hungary, where, I mean, next year, our expectation is 3%. It's an election year. Consumption. The order the strong consumption is going to further accelerate and then we don't expect further decline in investments. So this actually seems a quite realistic expectation to go up to 3% after 3 difficult years, '23, '24 and '25. The short-term expectation, we decided not to kind of formally change them compared to what we did in the -- at the end of the second quarter. But I think it's very obvious that loan volume growth, which already 10% compared to 9% last year. So this 9 months year-to-date 10% and obviously, we expect the run rate to continue or even somewhat improve, as I said, in case of Hungarian mortgages and in case of this big consumer loans for sure. So we are not just going to have higher number, but I think it's going to be a materially higher number in the loan growth, and that's going to have obviously positive impact for next year earnings. Margin, again, I mean, the -- it's actually very stable. So again, no reason to believe that it's going to be otherwise. Cost-to-income ratio, this is where we kind of improved the guidance at the end of the second quarter. And now the new guidance is close to 41.3%. We are still below 40%. So I think this is, again, quite likely. And in terms of risk cost, the risk cost rate Actually, first 9 months was higher than last year. But again, this was primarily driven by especially the Russian volume growth and higher rate there. And ROE 22.7%, again, strong number. And it's -- I mean, the denominator is obviously much bigger than last year. We are accumulating capital faster. That's the reason behind the return on equity somewhat lower still this year than last year. In terms of capital actions or capital strategy, I'm sure again, that you will have questions, but we will keep our usual custom and announced how much dividend payment the management will propose to the AGM next year when we present the annual numbers first week of March next year. What we do now, we are executing this buyback program. We did HUF 60 billion at the beginning of the year, and then we started another HUF 150 billion program at the end of April when we got the second package approval from the Central Bank. And we are at HUF 88 billion, and we continue this program. So that's pretty much the kind of short presentation going through the highlights, so to say, of the year or the third quarter. And please, if you have questions, ask them and we try our best to answer. Operator: [Operator Instructions] the first question is from Gabor Kemeny, Autonomous Research. Gabor Kemeny: The first question would be -- I would pick up on your points on loan growth, please, which is indeed pretty strong, I believe, around 12%, 13% annualized in -- as of Q3. And yes, I was kind of blown away by the home start numbers you showed on Page 6 by the applications. It seems like there's a broader strong trend. So how do you think about the loan growth outlook going into '26, accelerating towards the mid-teens, possibly the high teens? Is that conceivable? And related to that, do you think your NII growth will be kind of proportionate to the loan growth? Or would you like to highlight any possible changes in customer spread, securities income, which could shape your NII going forward? And my last question would be on M&A. I believe you were linked to ForteBank in Kazakhstan recently in the press. Can you share any views about your appetite to enter into Kazakhstan, please? Laszlo Bencsik: Okay. Yes. I mean, I share your enthusiasm regarding loan growth. I think this is, as you said, a strong run rate. And if you look at the forces -- the current forces shaping the future trajectory of the loan growth, they seem to be positive, right? Certainly, Hungarian mortgages, very clear. Certainly, Uzbek consumer loans, these are trend kind of new trends, which have already been set, and we expect them to continue. The other positive development is in Hungary, right? The Hungarian corporate has started to grow finally. And now I think it's kind of -- we believe that now it's actually a new trend. And all the other countries are doing well and the GDP numbers that I showed, we expect to get stronger or remain at elevated level. So again, allow me not to give a concrete guidance for next year because just kind of policy-wise, we are not doing it now. But I think your observation is very correct that the run rate is 12%, 13% and the factors which may influence the future growth rate seem to be rather positive. Now I mean -- and that's obviously supportive for NII. Now in NII, I mean, there are 2 factors which are very important here. One is actually deposit growth and more specifically, deposit growth in retail and especially in Hungary and Bulgaria, and these 2 countries have been growing quite strong and Bulgaria joining the Eurozone. So then it's conversion, we might end up having somewhat higher kind of one-off kind of current account volumes as well. In Hungary, we -- I mean, disposable income growth may accelerate given the -- that it's kind of pre-election period, and there are various kind of disposable income increasing factors for various parts of the retail, so that, that's also kind of marginally positive. In Bulgaria, we are going to -- when they join the Eurozone, the current 12% reserve rate is going to go down to the Eurozone 1%. And we don't -- and currently, we don't receive any interest on the 12% reserve rate. So that's going to be a boost. Plus we have the kind of replacement of the kind of old lower-yield Hungarian government bonds with higher-yield ones. So that's also kind of supporting factor. So again, in terms of NIM without net interest margin, without giving a numeric guidance, again, I think the kind of factors which influence the NIM forward-looking seem to be rather supportive. And plus, there's a big plus. So it doesn't seem to be the case that the euro rate is going to plunge substantially further and the reasonably stable euro rate going forward is again, a support for the NIM in the euro-related part of our book. Sorry, I cannot comment anything specific regarding M&A. In terms of geographies, I mean, we have been clear about this before that we consider Central Asia as a region with high growth potential, and we consider the whole region attractive. And we are quite happy with what we did with the investment in Uzbekistan despite the difficulties what we faced, but that's -- I think that's okay, given that it's a new market and we brought a bank through privatization. And so yes, I mean, the region we quite like. And the country you mentioned is part of that region. But no specific comment, sorry. Operator: The next question is from attendee joined via phone. Unknown Attendee: I have a couple of questions on -- related to growth outlook, if I may. First of all, I've seen that in a number of locations, be it Russia, Serbia, Croatia, you had been facing somewhat negative regulatory environment, which affected both fees as well as NII development. And I'm wondering what do you think, what the future holds in those countries and maybe some others where the credit growth is pretty high like Bulgaria. What do you think in general, the regulations, how that's going to affect the growth going forward? And second question also related to growth is on Slovenia. Probably if I'm seeing right, your year-to-date loan book growth after the merger is somewhat falling behind major competitors, I believe. So if you could comment how you're going to, in a way, fix the situation and come back to a more growth-oriented strategy there? Laszlo Bencsik: Well, yes, I mean, there have been some macro prudential measures, Russia, Uzbekistan. But this -- we usually welcome macro prudential measures because make lending kind of more rational business, and it discourages players who have, in some cases, very different risk appetite than we have and can kind of do harm to the market. That can -- that happens, right? So macro prudential measures, we are usually happy with, even if they slow down somewhat the overall growth of the market and so on, but we welcome them. Now Serbia was different. In Serbia, the measure was that we -- it's a forced lowering of the consumer loan APRs, right? We -- all the banks were strongly suggested to voluntarily decrease their APRs, the interest rates of consumer loans to clients who have less than the average wages and income. And that's very harmful. So that's a distortion to risk-based pricing. It's a kind of rude interference into the market conditions. So it's a kind of mixed basket. But in Serbia, this change, it's not going to slow down lending. It's going to boost lending, obviously, right, because it means that we have lower rates potentially higher demand. Now Slovenia, I mean, Slovenia, the problem is pricing. Some of our competitors and unfortunately, not exactly the small competitors follow pricing strategies, which we -- which are very difficult to understand, put it this way, what was the economic rationale behind that. And this is a challenging situation. Well, we try to do our best. I mean the other thing that -- I mean, this is a country where we recently got a new CEO of a very dynamic and very experienced colleague who has very ambitious targets and aspirations. But even with this comment, I think kind of 6% year-to-date growth, I mean, annualized 8%. It's actually a well-developed Eurozone country. I don't think that kind of 8% annualized run rate growth rate is not kind of acceptable in a way in a Eurozone mature market. Having said that, again, this is probably the country where we have the biggest challenge in terms of pricing behavior of some of our competitors. Unknown Attendee: Yes. Understood. May I also maybe revisit the case for subsidized mortgage lending in Hungary. During the conference, I just want to confirm if I got it right. I think a figure of around 20% annual rate was mentioned. And I just wanted to specify, did you allude to the segment or subsegment of Hungarian subsidized mortgage outstanding? Or was it the figure which was related to Hungary for all outstanding loans? I presume you referred to mortgage segment, but I'm not sure whether that was the total mortgage segment or the subsidized mortgage segment only. Laszlo Bencsik: Yes. As I said it, I think, today as well that the current run rate without this home start program was annualized 12%. And our original expectation and early experience regarding demand suggests that this 12% run rate can improve. And I said, yes, that it can be for the next kind of till the end of second quarter next year, at least, can go up to high teens, even close to 20%. We don't know exactly, but it's very clear that acceleration should be expected. And again, as I shared with you, the early data do support that previous assumption. And this number refers to mortgage loans altogether, mortgage volume growth in Hungary, not just the subsidized but total. Operator: The next question is from Simon Nellis, Citigroup. Simon Nellis: Just a few questions from me. I guess the first one would just be on risk cost and how you feel about the outlook going forward. I think risk cost has been a bit more elevated than in earlier quarters, last 2 quarters. So just would be interested in hearing your thoughts about any imminent risks or lack of risks going forward. And then my -- maybe let's start with that one. I have 2 more, if that's okay. Laszlo Bencsik: Yes. I mean, if you look at the third quarter risk cost of HUF 57 million, HUF 29 million came from Russia, and that's just related to the I mean, the nature of the product there. We do consumer lending, it's growing and it's a high kind of normal risk cost level. And I mean profitability is really strong there. So it's not a concern at all. And other than that, we increased provisioning in Bulgaria. It's related to consumer loans as well primarily. But it's, again, within the expected range and quite okay, and we have strong loan growth. And we actually had a corporate -- actually 2 corporates in Uzbekistan, which resulted in another couple of billion more. So these are the kind of focus points of the provisions what we created. We don't see reason to be worried or we don't see a change in the kind of underlying portfolio quality dynamics anywhere. So no. Simon Nellis: Okay. And could you update us on the core banking system upgrade and if there's any implications for cost growth going forward there on that front? Laszlo Bencsik: Cost growth. No. We are actually doing very well. So the first 2 products, we -- I mean, very niche products, and it's kind of small volumes, but they actually started to operate. So far, so good. So we are progressing according to plan. we are happy with the vendor. We are happy with the system. I mean, it's a lot of work in the problem with core system replacements that is the positive business impact is not that obvious, right, because you typically don't have a whole range of new functionalities. It's just a simpler and more efficient and easier to develop environment in a more sustainable environment. So no, we don't expect cost to increase due to this at all. And in a kind of midterm scenario, there might even be over -- I mean, we expect a kind of overall reduction in the total cost of operating this environment. But I mean, usually costs we like to talk about when we manage to reduce them. So this is -- but the expectation here is not that we are going to have a huge peak in the OpEx in Hungary because we introduced the system. No, that's not the case. The extra effort, extra expenditure and cost, which is involved with the core banking system replacement, it's already there in our cost structure this year. So the full team is engaged. No additional cost increase. And hopefully, midterm, when we are done, there might be some improvement in the cost structure even. Simon Nellis: And then just one last one on me on capital return. So I think you have an ongoing buyback. If that buyback completes before the year-end, would you do another one? Or would we expect some new news on capital return only with the full year result? Laszlo Bencsik: There's no -- we haven't decided on this. But I mean, we seem to be strong in capital generation. And if you ask me, the share is still undervalued. So I'm quite supportive personally to continue the program. But we are not close to the end. So we are only -- there's still -- we brought back HUF 88 billion, I think. And so there's still quite some to go. Operator: The next question is from Gabor Bukta, Concord Securities. Gabor Bukta: I have 2 questions. First of all, just a follow-up on capital allocation. So I think you have executed around 60% of the current share buyback program. And if you won't finish it until the year-end, is it possible to extend it? Or what's going to happen with the remaining shares? Because I'm a bit concerned about how you can execute by the year-end because the liquidity of the stock is relatively low versus what you should buy back on the market? And the second question is regarding the provisions, but not on loan provisioning rather than on the Russian bond portfolio because as far as I know as I see the provisions you created for Russian bonds amounted to HUF 97 million by the end of the quarter and stopped setting aside any provisions for these bonds. What is your strategy? And once you think you created any provision for this bond, how would you see when you ref those provisions of the coverage? Laszlo Bencsik: Yes. I mean the extension of the program is possible, but it requires supervisory approval. I mean, given the level of capital adequacy and all the numbers around our performance, I don't see why this would not be given if we were to ask for it. So yes, it is possible, but it requires approval. Indeed, this kind of 79% coverage on these bonds, which majority of these bonds are actually paying regular interest. That's a question. We increased this coverage based on the very firm requirements of our supervisor. So this is conservative. And to be honest, I don't know. I mean this reflects the current view. There will be an event in early December, the first of the bonds, which are kind of performing at the moment, we have a repayment date. And so this is going to be the first principal repayment. And if this happens without any problem, then -- and we don't see any -- we don't foresee any problem sir. So if it does indeed happen, then I think that's going to be a kind of trigger point where we have to discuss with our supervisor if they want to change or don't want to change their view on the required level of provisions or required level of conservativeness on the -- regarding the these bonds. So I mean -- and this is just assuming the status quo. Obviously, if this terrible war ends and the sanction environment potentially changes, then there's, I believe, an even bigger room to release these provisions. But today, I mean, the official answer is that this is the level what we decided conservative enough to reflect the situation and to respond to our supervisors' requirements. Operator: [Operator Instructions] the next question is from Máté Nemes, UBS. Mate Nemes: I have just a few questions left. The first one would be on corporate lending on Slide 8. I heard you clearly that this might be the green shoots we're looking for in terms of the turnaround in corporate lending, the 5% year-to-date. Can you talk a little bit about the nature of the corporate lending here? Are these -- is this essentially pent-up demand for investment type of loans or we are not quite there yet? That's the first one. The second question would be on growth of the various countries. It's clear you're seeing really high loan growth in a number of markets, including Bulgaria, including Russia, including Hungary. Can you talk about perhaps the mix effects you're expecting both in terms of top line and bottom line in the next few years? What sort of weight do you feel comfortable with for one or the other operating countries that are currently showing high growth? And the last question would be on the cost/income ratio guidance. I think you've been quite clear that the FX adjusted organic performing loan volume growth north of 9% is basically not a problem, and that's just a conservative guidance. Is it also the case for the cost/income ratio? Or shall we expect the usual sort of strong seasonality in the cost base in Q4, and we could see that 39% pro rata number deviate materially? Laszlo Bencsik: The corporate -- the large corporate growth is not investment driven. That's mostly working capital, to be honest. And that's -- so we don't see a big new investment cycle coming. There's still a potential upside. And I don't think this is going to happen in the next 6 months. But at least working capital demand is getting there. And where we see actually more fundamental growth is the micro small segment, which is kind of -- and these are the typical kind of small Hungarian mid-caps, put it this way, which are more consumption-driven and more kind of retail oriented. There's actually new investment on their scale, obviously. And there's kind of capacity increase as well in line with the strong growth in consumption. So I think in the micro small segment, there's underlying fundamental, I think, improvement. On the larger corporate, it's not yet a new investment cycle. Now this mix effect, again, I mean, there are 2 clear pockets or segments where we expect acceleration. It's Hungarian mortgages and we expect consumer loans, right? That's clear. Other than that -- and Hungarian corporates started to grow after kind of 2 years of kind of 0 growth. And Ukraine started to grow as well, which was, again, not growing much or actually declining in '22 and then kind of flat '23, '24 and started to grow this year. So this now seems kind of strong across the board. And if you further adjust with Hungarian mortgages for the next year and for Ipoteka consumer loans, if you just kind of -- you increase this year-to-date to the run rate, the quarterly run rate, then I think you got a picture which reflects the current situation. And I don't -- and I don't see why there should be big shifts in the mix, except when the -- if the war ends, if the war ends, then Ukraine can be substantially stronger. I mean there will be a huge opportunity then for -- and that opportunity will only be kind of constrained by our risk appetite. So I think this is the kind of potential further structural changes in the future should the war finally end, which I hope is near. Cost-to-income ratio, I think the usual kind of seasonality can be expected. So the rate will be somewhat more -- the cost-to-income ratio will be somewhat higher than the first 9 months. But we already improved the guidance because we originally expect -- the original guidance was higher than last year. Now it's around last year. I mean, we try to do our best and not to have too much seasonality, but some seasonality is actually quite natural. So yes, somewhat higher than 39.3% is realistic. Mate Nemes: Got it. That's very helpful. Can I just follow up on the second question on the mix effects and very, very helpful color there. Do you see any areas where you feel like this or the other markets may be running too hot or certain product groups and that perhaps might not be sustainable at these levels beyond the next 2, 3 quarters? Laszlo Bencsik: The last 3 years, the kind of fastest growing was Bulgarian mortgages, and that's actually quite a ride, what we have seen there. And there came macro prudential measures, which somewhat calmed down, but not too much the growth. So this is a question, and we expected slowdown this year and the growth rate actually exceeded expectations. So that's -- I think if you look at Page 11 and the kind of across the group growth rates, it's Bulgarian mortgages where I think it would be natural to slow down. Operator: The next question is from attendee joined via phone. Unknown Attendee: Given the credit market running quite hot and spreads level being quite tight, are you considering AT1 issuance? Or is that a possibility only if M&A opportunities come up down the line, as you suggested in the past? Laszlo Bencsik: Issuance of? Unknown Attendee: AT1 additional... Laszlo Bencsik: AT1. No, no. I mean, AT1, again, this is the -- our earmarked reserve for a potential big acquisition, right? So if a potential -- if a big acquisition happens, then we issue. Unknown Attendee: Okay. I thought maybe given where spreads are and different players doing the AT1, it could have been a good timing also for you, but it seems like not. And for next year, maybe in terms of funding, would it be every currency euro? Or I mean, you talked before about diversifying your investor pool, et cetera, et cetera, and you currently have deals with different currency out there. So just wondering. Laszlo Bencsik: We are typically opportunistic between dollar and euro. And we -- as you see, we have started to open up to Chinese yuan and so far offshore. But we always swap back to euro. So whenever we issue FX on a group level, we swap back to euro because that's kind of one of the core balance sheet currencies of the group. Operator: [Operator Instructions] As there are no further questions, I hand back to the speaker. Laszlo Bencsik: Thank you very much. Thank you for participating. Thank you for your very good questions and for your interest. I wish you all the best, and I hope you join us when we present the annual results early March next year. Thank you. Goodbye. Operator: Thank you for your participation. The first 9 months 2025...
Operator: Good afternoon, ladies and gentlemen, and welcome to the Ensign Energy Services Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions]. This call is being recorded on Friday, November 7, 2025. I would now like to turn the conference over to Mike Gray, Chief Financial Officer. Please go ahead, sir. Michael Gray: Thank you. Good morning, and welcome to Ensign Energy Services Third Quarter Conference Call and Webcast. On our call today, Bob Geddes, President and COO; and Mike Gray, Chief Financial Officer, who will review Ensign's third quarter highlights and financial results, followed by our operational update and outlook. We'll open the call for questions after that. Our discussions today may include forward-looking statements based upon current expectations that involve several business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to, political, economic and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company's defense of lawsuits, the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for services supplied by the company. Additionally, our discussion today may refer to non-GAAP financial measures, such as adjusted EBITDA. Please see our third quarter earnings release and SEDAR+ filings for more information on forward-looking statements and the company's use of non-GAAP financial measures. With that, I'll pass the call to Bob. Robert Geddes: Thanks, Mike. Good morning, everyone. Let's start with some introductory comments. The positive third quarter results were reflective of year-over-year market share growth of our Canadian business unit in the high-spec single and high-spec triple rig types coupled with performance-driven market share growth in the U.S. as well as consistent rig activity in our International segment. We successfully generated cash to clip off another chunk of debt in the quarter and expect to maintain our 3-year target of $600 million of debt reduction by the end of first half '26. Operationally, we ran plus or minus 25 drill rigs and 50 well service rigs around the world through the third quarter every day with stronger than expected gross margins. Our Drilling Solutions team also successfully field beta test at the EDGE AutoDriller Max with positive results adding to our technology suite of drilling rig controls technology. The finance team led by Mike Gray, successfully negotiated our banking arrangement out 3 years saving interest expense and improving liquidity. We also added to our forward book with over $1.1 billion of forward contract revenue under contract, increasing our long-term contract base quarter-over-quarter, which now brings us to about $300 million of long-term contract margin forecast in the future. And we also achieved all this with another quarter of industry-leading record safety metrics. For a deeper dive into the third quarter financials, I'll turn it over to Mike Gray. Michael Gray: Thanks, Bob. Volatile crude oil commodity prices and fluctuating geopolitical events that reinforce producer capital discipline over the near term, impacting certain operating regions. However, despite these short-term headwinds, the outlook for oilfield services is relatively constructive and have supported steady activity in several other regions. Overall, operating days were down in the third quarter of 2025 in comparisons to the third quarter of 2024. The company saw a 4% increase in the United States to 3,194 operating days, a 9% decrease in Canada's 3,509 operating days and a 29% decrease internationally to 935 operating days. For the first 9 months ended September 30, 2025, overall operating days declined with United States recording a 2% decrease. Canada recording a 1% decrease, in international recording an 18% decrease in operating days, respectively, when you compare to the same period in 2024. The company generated revenue of $411.2 million in the third quarter of 2025, a 5% decrease compared to revenue of $434.6 million generated in the third quarter of the prior year. For the 9 months ended September 30, 2025, the company generated revenue of $1.22 billion, a 3% decrease compared to revenue of $1.258 billion generated in the same period in 2024. Adjusted EBITDA for the third quarter of 2025 was $98.6 million, 17% lower than adjusted EBITDA of $119 million in the third quarter of 2024. Adjusted EBITDA for the 9 months ended September 30, 2025, totaled $282.3 million, 16% lower than adjusted EBITDA of $336.7 million generated in the same period in 2024. The 2025 decrease in adjusted EBITDA was primarily as a result of lower base revenue rates and onetime expenses related to activating and deactivating and moving drilling rigs. Offsetting the decrease in adjusted EBITDA was the favorable foreign exchange translation on U.S. dollar-denominated earnings. Depreciation expense in the first 9 months of 2025 was $252 million, a decrease of 4% compared to $261.8 million for the first 9 months of 2024. General and administrative expense in the third quarter of 2025 was 5% lower than in the third quarter of 2024. General and administrative expenses decreased primarily due to nonrecurring expenses incurred in the prior year and tight cost controls. Offsetting the decrease in the annual wage increases and the negative translation effect of converting U.S. dollar-denominated expenses. Interest expense decreased by 23% to $18.4 million from $23.8 million. The decrease is a result of lower debt levels and effective interest rates. During the second quarter of 2025, $40.8 million of debt was repaid for a total of $83.8 million, repaid during the first 9 months of 2025. The company has revised its previously announced debt reduction target of $600 million, which now will likely be achieved in the first half of 2026. The revision is a result of current industry conditions and the reinvesting into the company's -- company through capital expenditure. If the industry conditions change, these targets may be increased or decreased. Total debt net of cash has decreased $98.5 million during the first 9 months of 2025 due to debt repayments and foreign exchange translation on converting U.S. dollar-denominated debt. Net purchases of property and equipment for the third quarter of 2025 was $62.4 million consisting of $13.9 million in upgrade capital and $50.5 million in maintenance capital, offset by dispositions of $2 million. For 2025, maintenance CapEx budget is set at approximately $154 million and selective upgrade capital of approximately $35.5 million, of which $19 million is funded by the customer. The increase in upgrade capital expenditures in 2025 is due to the previously announced awarded 5-year contract for 2 additional rigs in the company's Oman operations as well as rigs being relocated from Canada to the United States. On that, I'll pass the call back to Bob. Robert Geddes: Thanks, Mike. So let's start with an operational update. The summer was quite active for us right across all of our world in a different country. So as we methodically grew rig count in the very active higher-margin, high spec triple and high-spec single rig type categories in North America. Let's start with Canada. Canadian drilling, we have 43 drilling rigs active today in Canada and expect to add a few more before year-end, and we expect to peak in the first quarter '26 of roughly 55. We're starting to see more and more clients go along in their contracts especially on the higher spec rigs. One example, we just signed 2 of our super high-spec triples on 3-year contracts, locking in $100 million of revenue, roughly $30 million EBITDA out to late 2028. While we have seen some spot market prices drop into the fourth quarter on the cold rigs as people try to get them going, we have generally been raising our prices in our 2 high utilization categories. Again, the high-spec single and the high-spec triple by about 2% a quarter. The trend for the entire year has been steadily moving up on these rig types as supply tightens. The value proposition is still valid for decline as we continue to perform by improving drilling efficiency, offsetting any rate increases. Also because the rig equipment is being run closer to its technical limits more and more, rate increases are quite just to offset the higher operating costs. We continue to see the Canadian market adopt our EDGE drilling rig automation more and more every quarter, which provides a high-margin bolt-on incremental revenue stream of anywhere from $1,000 to $2,600 a day across high-spec triples generally. We continue to address any upgrades that operators request by assisting the upgrade capital to be paid for by the operator with a notional rate increase or we adjust the day rate incrementally in order to achieve a 1-year payout or less on incremental capital with the incremental rate increase. Moving to the U.S. drilling. While the statement, drill, baby, drill, is true in the sense that more footage was drilled year-over-year, the problem is that because the rigs are drilling more footage per day, we have the same number of rigs making more whole. We are finding that the double-digit rig efficiency gains of years past has slowed into the single digits as we get closer to the technical limits of the rig equipment itself. This is good news and an indication that we are at or near a trough. Operators now focused on continued duplication of their best wells. We also have a situation where most operators are starting to look at Tier 2 acreage now as we move along in the future. We also saw the U.S. iredoil production close to 14 million barrels per day. So with the technical limits of rig establishing somewhat of a ceiling and with Tier 1 acreage finishing, we will need to see rig count move up if we were to hang on to 14 million barrels a day of production in the U.S. I have mentioned before, it's interesting to start hearing from operators more and more, the geologic headwinds are stronger than the tailwinds from technology and operational efficiency gains in the last 5 years. Again, another indication we have troughed. So in U.S. today, we have 41 high-spec rigs, mostly high-spec triples, out of our fleet of 70-plus high-spec ADRs operating across the U.S. California to the Rockies down into the Permian. Permian, of course, being our busiest area with roughly 25 rigs operating daily there. We've been able to increase our market share in the U.S. by about 50 bps through the year, the result of our high-performance rigs in cruise in concert with our EDGE Drilling Solutions technology. We're also starting to see some light at the end of the tunnel in California and expect mild increase in rig activity there. On that note, our EDGE Drilling rig controls product line continues to expand with increasing adoption of products like our ADS, the automated drill system, not only do we get a superior rate for our EDGE AutoPilot technology, we capture the upside value generated to the operator through performance metrics. Everybody wins. The operator delivers wellbores for lower cost and help derisk that with our PBI contract for at higher margins than Ensign. Our directional drilling business, which is essentially a proprietary mud motor rental business continues to improve some of the best motors of high-quality rebuild the longest runs in the Rockies. We're expecting a solid year for 2025. International, we have a fleet of 26 high-spec rigs that operate in 6 different countries outside of North America which are 13 are active today, up 2 from our last call. In Kuwait, we have been successful in contract extensions on both our 3,000-horsepower ADRs, taking us well into mid-2026. We started back up in Venezuela with the first rig a few months back. And just this week, we started up our second rig. As you know, there's a lot of things going on in Venezuela. Last call, we mentioned we had an unplanned incident in one of our ADR 2000s. In Argentina, happy to report that we're able to minimize the downtime of the operation by replacing this intersection and recommissioning that rig in record time, which manifested itself into landing another 1-year contract extension on that rig with a major. We have both our rigs in Argentina under long-term contracts now. In Oman, the new rigs we have undergoing extensive upgrades are on budget the on time with the first rig expected to be operational in December this year and the second rig in late March. This will add to the 3 ADRs currently under contract in Oman and bring us up to 5 eventually in '26. In Australia, we have 4 rigs active today with strong bid activity, which we feel will take us to 5 to 6 rigs by year-end. We're also successful in extending the contract out another year to the end of '26 on our Barrow Island rig. Moving to well servicing. We have a fleet of 88 well service rigs in North America, 41 in Canada, of which we operate 15 to 20 on any given day. Plus we have 47 well service rigs, primarily in the Rockies and California where we operate with relatively high utilization rates in the 70s consistently. Our U.S. well servicing business, which is focused primarily on Rockies and California has battled a tougher market and is off about 24% year-over-year for the quarter and is expecting not much change for the remainder of the year. We are seeing operators stick to their budgets and not accelerate any '26 plans into 2025. Our Canadian well service business folks focuses primarily on the heavy oil market, and that's been a very steady business with rates increasing at about 3% per quarter. Our technology, our EDGE AutoPilot drilling rig control system. In our last call, we reported that we successfully beta tested our Ensign EDGE Auto, Two-Phase control in conjunction with the DGS, Directional Guidance System. This paves the way for seamless control of automated directional drilling with those operators who utilized remote operating centers and utilize in-house DGS systems. I'm happy to report that we're now fully commercial with our EDGE, our Two-Phase control and are charging out our 4 rigs today with the possibility of placing that on a fifth rig for the same operator. We've also initiated the development of an Ensign EDGE state-of-the-art directional guidance system, DGS. We expect to be beta testing this mid-2026. With this, we'll be able to provide a complete and comprehensive drilling control system offering with all the bells and whistles -- excuse me. We have completed our bit of testing of our AutoDriller Max which will further increase penetration rates and be charged out with a daily base rate about $1,000 a day plus a variable per foot or per meter rate so that we can start capturing the upside on the cost and operational efficiencies that our technology enhancements provide to the operator. We plan to roll this out commercially later this year on both sides of the border. So with that summary, I'll turn it back to the operator for questions. Operator: [Operator Instructions]. Our first question comes from the line of Keith MacKey from RBC Capital. Keith MacKey: Maybe just want to start out in the U.S. Contract book looks like everything is currently under 6 months in length. Can you just talk about what do you think that means for where we are in the cycle and potential contract earnings going forward as we look to 2026? Robert Geddes: So we probably have, I would say, a quarter we tied up on annual contracts, Keith. It is a good question in the sense that it is a forward indicator of what operators are thinking. When they start to want to contract to sell longer. And we just responded to a bit here earlier in the week with a major -- and it's a 5-year contract. When we start to see operators asking us for 5-year contracts, it tells me they also believe we're at a trough. So that's a key indicator. Some of the other projects, of course, are smaller companies. They don't have the longer-term projects. They tend to contract a rig for 6 months, somewhere in there. So I think the takeaway is we're starting to see some indication. Like last year, we weren't negotiating anything in 5-year contracts. It was all 1-year contract. Keith MacKey: Yes. Got it. So U.S. operators are starting to, at least on a one-off basis, ask you for longer-term contracts, okay. Robert Geddes: Correct. And as I mentioned in the call, we also have Canada. We've got -- we signed up 1 for 3 years, and we're in the middle of negotiating another one for a longer term as well. So starting to see some indications. Keith MacKey: Yes. Okay. So maybe let's talk a little bit about Canada. Rig count is down year-over-year in Q3, certainly. But we've also seen some of your competitors or at least one of them move rigs back to Canada from the U.S. Can you just talk about the competitive dynamics in the deep capacity or the triple market right now? How is the market unfolding? Is capacity really as tight as you think it as we all think it is? Is there some telly doubles that are kind of taking up some capacity now in the market that you hope triples might displace? Just if you can help us reconcile any of those comments, that would be helpful. Robert Geddes: Yes. So the high-spec triples, the -- but let's say like the 1,200 horsepower class, triples the smaller end of the high spec triples. As you mentioned, we saw a competitor move a couple up into Canada and willing to foot the bill themselves for the upgrades. The higher spec, the 1,500 high-spec triples is tight enough where if an operator asked us to do that, they'd be paying for the whole bill to get it up here and they'd be paying for the upgrades. So it's a tighter market in the 1,500-horsepower class. The 1,200s start to bridge gap between the higher spec deeper telly doubles, but the 1,200s will win that game. So they're filling a little bit of the gap there. But the high-spec triples are definitely, as I mentioned, we were able to negotiate a 3-year contract with a rate increase and it's still a very tight market on the 1,500s. They're running about 80% utilization on those -- on that specific rig category, which is almost full utilization because that's -- you're going to move the rig and everything else. So you never get to 100% utilization. 80%, 85% is almost 100% in essence, from a bidding perspective. Keith MacKey: Yes. And Canada has always been a bit more of a smaller triple market relative to the U.S., but are you starting to see incremental demand for 1,500-horsepower triples? Robert Geddes: Well, yes, if the question is building up into another BCF of LNG, I think that's still a year out. We are seeing people wanting to make sure that the good rigs they have, they keep. So they're able to look into the future at least 3 years and go, hey, these good rigs you want to keep. So they're getting signed up. We have conversations ongoing with a few operators on current rigs that they're using. They're saying, what would it cost to upgrade it with the high-torque top drive, notional items like that. It is a tight market, but we're still a long ways away. We're $20,000 a day for any new build metrics. Operator: Our next question comes from the line of Tim Monachello from ATB Capital Markets. Tim Monachello: Looking at the international market, you guys have done a pretty good job of reactivating equipment. Venezuela, can you talk a little bit about the dynamics at play there? And maybe your view or visibility to those 2 rigs running into 2026 here? Robert Geddes: You're talking in Venezuela or... Tim Monachello: Yes, in Venezuela. Robert Geddes: Yes, yes. Who the hell knows? Quite seriously. It is a dynamic file for sure. We've got a great team down there that our team are Venezuelans. So we've got a client that runs with OFAC. So it's at the whim. But you all read the same thing we do. There's a lot of tension there. I think that it could play out well. But in any case, we don't have to put any capital into these rigs. When we started them up a year ago, the operator wanted new top drives, we said, you buy them, we'll put it on the rig and we'll own them, but you're going to buy them. So we haven't put any cash into the rigs. And we're able to get U.S. dollars out. That's our contracts. And it's only 2 rigs in our world of 100 rigs running every day. But it's certainly a little bit of excitement there for sure. But I'm thinking that it plays out better in '26 than the up and down we saw in '25. But who knows? Tim Monachello: Okay. So essentially, they're on like well-to-well programs and kind of... Robert Geddes: We signed contracts. Yes. We signed 6-month contracts and they just roll over. Tim Monachello: Okay. Got it. And then is there any I guess, visibility into additional rig deployments in the Middle East for '26? Robert Geddes: So as you know, we're major upgrades on 2 ADRs in Oman. And we've got quite a good brand in Oman. The Ensign brand is really the gold standard for operations. And we're always in conversation with -- we've got a mobile rig fleet of 186 rigs around the world that we can put in the different areas. As you saw, we moved 2 from Canada to the U.S. could we move 1,500s from the U.S. into the Middle East? Yes, could we move a 2,000-horsepower from the Middle East into the U.S.? Yes. I mean it all depends on the commercial situation. So we've got a lot of flexibility and mobility of rigs. Tim Monachello: Okay. And then in the U.S., I just want to circle back on the contract terms that Keith was discussing. And I'm curious, given that you see a customer coming looking for 5-year contracts, like the market is not -- I don't think anybody is saying the market is tight in the U.S. So do you think that that's more opportunistic, somebody looking out a couple of years and saying, hey, these are pretty good rates right now, I want to lock them in? Or is there something more structural or something -- some other factor that maybe I'm not considering here? Robert Geddes: I think that when an operator is going and looking for 15 to 20 rigs of different -- in different areas with certain specs, all of a sudden, that tightens the field that or have the ability to bid and meet those specs. So they -- I find some of the majors every 5 years, they'll want to tighten up their rig spec because they now know what is good for what areas and then they go out to bid and they go, here's what we want, tighten up your rig spec and it's usually a high-spec rig spec and let's go forward. And usually, it involves some capital, different companies address that differently and hence, why they usually go out for a 5-year contract as well because they're going, hey, we want to put this on the rig. They do know that contractors are not going to spend a bunch of money on the way it's going to go well. Tim Monachello: Would you entertain a 5-year contract at current rates? Or would you need significant premiums to current market rates or spot rates as well? Robert Geddes: Yes. Yes, we would ask for the operator to provide the grade capital. And it depends on the situation. We have -- we would propose rates at -- with PBI contracts are in the low 30s. That's kind of where we'd be low to mid-30s, which is probably in the upper quartile of our pricing spot bid pricing is lower than that. We would not entertain pricing lower than that for that type of term. And we usually put escalators in those types of contracts as well. Obviously, we have a cost base coverage on any escalation. But if someone said, can you hold your current rate of 5 years, we'd probably be a no to that, and we'd be showing some rate increases forward, and we'd be asking the operator for all the upgrade capital upfront. Tim Monachello: Okay. That's helpful. And then I wanted to circle back again on your comments in your prepared remarks regarding drilling efficiency and geological decline. Are you -- anecdotally, we've been hearing with that for a long time or at least perhaps anticipating it on the horizon. Are you seeing anything in the field like are you seeing your rigs working in Tier 2 acreage more often now or any other sort of tangible evidence that you're seeing acreage declines? Robert Geddes: Well, it's one of those things, people define their acreage differently. There's -- I remember, companies 3 or 4 years ago, had 5 levels of tier. And then some today are going, we have Tier 1, Tier 2, Tier 3. And then there's no real strong definition. We do hear people talk more about, hey, in 2026, we'll be starting to go more Tier 2 acreage. But no one comes up and says, okay, we want you to go to this Tier 2 play and go drill it or go to this Tier 1 play and drill it. It's more the notional conversations. And of course, Tier 2 were not as productive as Tier 1. They are drilling the Tier 1 first. But we're seeing and hearing them talk more about it. So there must be some truth to it. Tim Monachello: I guess on the leading edge, are you seeing any of your operators starting to increase activity? Robert Geddes: We have, I would say, for '25, it's been a budget exhaustion. They've been holding on to their -- our rigs. We've got 2 operators that increased our rig count because of our performance. But you've seen the rig count. You know the rig count as well as I do, it's stuck at 250 in the Permian, about 550 in the U.S. But we are drilling more footage year-over-year, but the rate of increase is now into the single digits. We're running about 5% to 6% more footage drilled per rig where 2, 3 years ago, we were 14%, 15% year-over-year. So we're starting to hit that speed of sound, the technical limit of the equipment is what we're starting to see. And you're seeing operators start to think more about doing a U-turn coming back on their acreage, relooking at their acreage. So those are indications that to hang on to 14 million barrels a day. They're going to have to -- I believe we've troughed at the rig count that we're at today are pretty close to it, let's put it that way, is what the data would tell us. Tim Monachello: Got it. And then the U.S. last question for me. Are you seeing any opportunities in gas stations? Robert Geddes: Well, a little blip in gas this week. But no, and here's why. The gas oil ratio in the Permian as you increase production, the gas oil ratio is going up, which means about a Bcf a year. So takeaway capacity is going up from 3 to 4 to 5 moving up as we increase production of the Permian and gas oil ratios go up. So we're not seeing -- we've got anecdotally, 1 or 2 clients that are saying, hey, we want to maybe go drill a Haynesville well, but it hasn't moved the needle much, no. Operator: Our next question is from Aaron MacNeil from TD Cowen. Aaron MacNeil: Mike, this one is for you. I think, obviously, I can appreciate all the reasons for the pushout of the $600 million debt reduction target. I guess the question is, when you inevitably hit that target, what's sort of next from a capital allocation perspective? Michael Gray: Yes. I think at that point in time, I mean, you look at what's the best use of proceeds. I mean from our point of view, I mean debt reduction is still going to be key. So you'd probably get to that 1, 1.5x debt to EBITDA. So that will be probably another 1.5 years away from that happening. So our view would still be paying off debt, lowering your interest costs which gives you free cash flow into the perpetuity. So yes, I think we'd definitely take a look at it. But debt reduction is still going to be our focus for the next while. Robert Geddes: Yes, complete full discipline on that, absolutely. Aaron MacNeil: Fair enough. And then maybe to build on one of Tim's questions. How do you think about scale in all these international jurisdictions that you operate in? And would you ever consider exiting some of these markets as another potential source of deleveraging to the extent that you could find an interested buyer? Robert Geddes: Yes. Well, we typically don't run. We typically figure out, get through because we understand there's cycles in every area. I suppose Libya is the only area in the world that we've ever left because the Board just took over the equipment. But you've seen how we've managed through Venezuela. You've seen how we've managed through Argentina. To answer your question on scale, we like to get to 5 rigs running in any given area to appropriately manage supply chain and overhead and operational supervision. That's kind of the target. So in Australia, we're there. Venezuela, where we're not, for obvious reasons. Argentina, we only have 2 rigs there. We're in discussions with some people for perhaps a few more rigs. But we'd like to get the 5 there. In the Middle East, we throw a blanket over the Middle East, Oman will be to 5. Kuwait, we have full utilization there with 2 big rigs. And those are 3,000-horsepower rigs, and those rigs don't grow on trees. There's $60 million to $70 million rigs rates are not conducive to add any into that area nor are they looking. So that's how we look at the world. We're also not interested in going into any new markets either. We'd rather double down and get more of the markets we're in and increase efficiency that way. Operator: Our next question is from Josef Schachter from Schachter Energy Research. Josef Schachter: Bob and Michael. Mike, I just want to cover 1 issue that's been covered in the new issue. Going back to the debt, if EBITDA grows and we get $70, $80 oil a couple of years down the road, is the target to have something like $500 million of debt from the $925 million. And are you looking in your guidance for 2026 to give us a number like $100 million each year kind of number? Like I'm trying to get a feel for the progression of debt reduction. Michael Gray: Yes. No guidance for '26 as of yet. But I mean if you kind of look at break consensuses and how CapEx kind of flows out, I mean, it should be $100 million, in excess of $100 million. When we look at the overall debt level, I mean, yes, that $500 million is probably a good number to get to, just given the volatility we see in the market and pre-the Trinidad transaction, we were kind of around that $500 million-ish. Give or take, so I think around that would be a reasonable bumps to kind of run forward, and that gives you the kind of the flexibility to deal with the ups and downs. Josef Schachter: Okay. And then, Bob, I'm reading stuff from -- and listening to interviews, Comstock is talking about drilling 19,000 vertical insulating pipe because 400 degrees Fahrenheit and needing to stack 30,000 feet of pipe. Is that a totally new class of rig? Or can you handle drilling for these deeper zones that are -- that Comstock and others that are going after? Robert Geddes: Yes. No, we absolutely have -- over the last 1.5 years, we've been -- we have a few rigs that can rack 30,000 to 35,000 feet of pipe. We've got no less than 4 or 5 rigs right now that have been modified to that to be able to handle that with 5.5-inch pipe and handle that 30,000-plus racking capacity on pad work with 5.5-inch pipe. So that's not uncommon for us now. We have lots of those kind of conversations. Josef Schachter: Any potential signing up? Or is it just early conversation days? Robert Geddes: No, no, these are rigs that have been modified and are under contract. Yes, it's not a notion. It's happening, yes. Josef Schachter: Yes. Is this your highest day rate rigs? Robert Geddes: Yes, it would be. Yes. Operator: Our next question is from [ Marvin Mameda ] from [ Mucinex ]. Unknown Analyst: Congrats on the release. I had a quick question about the client funded CapEx. When will we see that hitting your cash flow statement, I don't think it has yet, right? Michael Gray: Part of it has. So you'll see it throughout the next sort of 6 to 12 months. So contractually, there are some things that need to be completed for some of the funding to go through. Yes, you'll see it sort of over the next 6 to 12 months. Unknown Analyst: Basically, you're getting paid by the clients after you spend the money within 6 months? Michael Gray: I know there's some prepayments as well. Unknown Analyst: And could you clarify on those 2 rigs signed in Canada. So you said it would be $100 million over the course of 3 years in revenues for each or... Michael Gray: Correct. Robert Geddes: $100 million total for 3 years, yes. Unknown Analyst: But over 3 years at 30% EBITDA margin. Robert Geddes: Right, for both rigs combined. Unknown Analyst: Yes, thank you. Operator: There are no questions at this time. Please continue. Robert Geddes: Okay. I'll move forward to closing statement then. Obviously, the last few months have been a roller coaster with the global markets unsettled and the tariff negotiations, which has impacted, to some extent, some cost of business notionally until now could impact it more if they stay on the cost side of certain pieces of equipment that, again, we typically pass on to operators as escalation. Looking forward, we continue to execute the plan on reducing debt while delivering the highest performing operations safely around the world. As I mentioned earlier, we increased our forward contract booked by roughly $0.25 billion now up close to $1.1 billion of forward revenue booked under contract. We continue to push operations or operators to fund upgrades, and we are still very stingy on capital. We are right on track with our maintenance CapEx program and can manage nicely operating 95 to 100 drill rigs and 50 well service rigs daily around the world in this commodity pricing environment. So with that, we'll look forward to our next report in the New Year. Thanks for calling in. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good day, and thank you for standing by. Welcome to the Brookfield Asset Management Third Quarter 2025 Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Fooks, Managing Director, Investor Relations. Please go ahead. Jason Fooks: Thank you for joining us today for Brookfield Asset Management's earnings call for the third quarter of 2025. On the call today, we have Bruce Flatt, our Chief Executive Officer; Connor Teskey, our President; and Hadley Peer Marshall, our Chief Financial Officer. Before we begin, I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable U.S. and Canadian securities laws. These statements reflect predictions of future events and trends, and do not relate to historic events. They're subject to known and unknown risks and future events and results may differ materially from these statements. For further information on these risks and their potential impact on our company, please see our filings with the securities regulators in the U.S. and Canada, and the information available on our website. Let me quickly run through the agenda for today's call. Bruce will begin with an overview of the quarter and the market environment. Connor will walk through key growth initiatives across each of our businesses. And finally, Hadley will discuss our financial results, operating results and balance sheet. After our formal remarks, we'll open the line for questions. [Operator Instructions] One last item to mention is that the shareholder letter, which this quarter will be a single letter covering the biggest themes across Brookfield will be published Thursday morning alongside Brookfield Corporation's earnings. And with that, I'll turn the call over to Bruce. Bruce Flatt: Thank you, Jason, and welcome everyone. We are pleased to report another strong quarter for our business, marked by record fundraising, earnings deployment and monetization. Quarterly fee-related earnings grew 17% over the past year to $754 million. Distributable earnings grew 7% to $661 million, and fee-bearing capital reached $581 billion, an 8% increase year-over-year, all driven by our strongest fundraising period ever. These results reflect the strength of our franchise and the benefits of our global scale diversification and long-term client partnerships. Our business continues to benefit from the major themes shaping the global economy. The acceleration of AI and data digital infrastructure, the accelerating demand for electricity and the improving strength in the real estate markets, each of these themes plays directly to our strength as an owner, operator and investor in real assets and together, they are fueling multiyear growth across the business. In the third quarter, we raised $30 billion, bringing total inflows over the past 12 months to more than $100 billion. This was our highest pace of organic fundraising ever. Our fundraising in the quarter came from strong closes for two of our flagship funds, and increasing capital from our comp to entry funds and partner manager strategies. Our flagship global transition fund, our venture-focused Pinegrove strategy and our music royalties-focused Primary Wave business, all had closed just recently and each exceeded its target. Turning to the broader market environment. Transaction conditions have improved steadily throughout the year. The global economy remains resilient despite trade and tariff uncertainty. Corporate earnings are healthy. Capital markets are liquid, and the Federal Reserve has begun lowering rates. This is giving the market more confidence and leading to transaction activity significantly increasing. Global M&A volumes are up nearly 25% year-over-year. The third quarter alone saw $1 trillion of announced deals, the highest level since 2021. This resurgence in large cap M&A and a record backlog of sponsor-owned assets are therefore fueling activity. This is creating a good environment for both deployment and also asset sales. We remained active in this environment, deploying large-scale capital at attractive entry points where operating expertise provides us a competitive edge, while also crystallizing value from our mature investments at attractive returns. Our ability to recycle capital efficiently, returning proceeds to clients while raising new funds for the next generation of opportunities is fundamental to how we compound value over time and continue to consistently grow our business. Another important milestone was our recently announced agreement to acquire the remaining 26% in Oaktree Capital Management. As you know, one of the most respected names in global credit investing. When we partnered with Oaktree 6 years ago, the goal was to combine our global scale and real asset expertise with Oaktree's deep credit experience and value-oriented culture. That partnership exceeded expectations, enabling the rapid expansion of our credit platform, supporting the launch of Brookfield Wealth Solutions, and driving a 75% increase in Oaktree's asset base. Bringing Oaktree fully into Brookfield is the next natural step. It combines the scale and reach of our nearly $350 billion credit platform, enables deeper collaboration across our businesses from origination and underwriting to distribution and analytics. Most importantly, it enhances our ability to deliver the full breadth of Brookfield's credit capabilities to clients. Turning briefly to overall credit markets. Liquidity remains ample, and spreads in both public and private markets are near historically tight levels. Certain pockets of private credit such as middle market, direct lending and sponsor-backed leverage have become more commoditized as large amounts of capital is raised for a small pool of attractive deals. We've been disciplined in avoiding these segments of the market and instead of focused on attractive risk-adjusted return opportunities where we have strong competitive advantage, such as infrastructure, renewable power, asset-based finance strategies and opportunistic credit. Across our business, our ability to raise large-scale capital deployed strategically across the megatrends and deliver risk-adjusted returns to trusted clients continues to drive record results. Our balance sheet is extremely solid. Our margins are expanding and double-digit growth trajectory is sustainable. With record fundraising momentum, deep deployment pipelines and healthy monetization activity across our platforms, the foundations we've built over the past years have set the stage for an even stronger 2026. With that, I'll turn the call over to Connor, and thank you for the results. Connor Teskey: Thank you, and good morning, everyone. As Bruce mentioned, this past year was the most active period in our history across fundraising, deployment and monetizations. Our infrastructure and renewable power franchise is one example of this momentum, as over the past 12 months, we've raised $30 billion, deployed $30 billion and monetized over $10 billion at approximately 20% returns, demonstrating strength, scale, and consistency of our platform. Our franchise is the largest and most established globally, serving as a cornerstone of our business and a key driver of long-term growth. Deployment is centered around sizable investments across all sectors, geographies and positions in the capital structure, including by utilities, from a controlling equity investment for an industrial gas business in South Korea, and a minority equity investment in the United States for Duke Energy Florida, across transportation, via structured equity investment in a Danish port, across data with a mezzanine financing for a European stabilized data center portfolio, and across renewables, by an equity investment in a South American hydro platform, and to take private of a global renewable developer concentrated in France and Australia. And finally, across our first AI infrastructure deal with Bloom Energy, which we committed to this past quarter. AI promises unprecedented improvements in productivity but it is simultaneously driving an unprecedented demand for infrastructure, from data centers and power generation to compute capacity and cooling technologies. We estimate that AI-related infrastructure investments will exceed $7 trillion over the next decade. Brookfield's unique position, owning and operating across the full energy and digital infrastructure value chain gives us a tremendous advantage in capturing this opportunity. On the back of this generational investment opportunity, we are launching our AI infrastructure fund. A first-of-its-kind strategy that pulls together our global relationships with hyperscalers, our expertise in real estate, and our leading position in infrastructure and energy into one strategy. With the goal of being the partner of choice to leading corporates, governments and other stakeholders looking for integrated solutions that combine development capability, operating expertise and large-scale capital. We are also preparing to launch our flagship infrastructure fund, which is our largest strategy at Brookfield early next year. Looking ahead, we expect to have all of our infrastructure strategies in the market in 2026, including our flagship infrastructure fund, our AI infrastructure fund, our mezzanine debt strategy, our open-ended super core and private wealth strategies. And in the back half of the year, we expect to launch the second vintage of our Infrastructure Structured Solutions Fund. As a result, despite raising $30 billion over the last 12 months, we expect next year will be even bigger. Within renewable power, this quarter, we also held the final close of the second vintage of our global transition flagship at $20 billion, making it $5 billion larger than its predecessor and the largest private fund ever dedicated to the global energy transition. The success of this fund raise also reinforces the scale, credibility and momentum of our energy franchise. Since launching our first ever transition strategy less than 5 years ago, our platform now produces over $400 million of annual fee revenues. More important, we are investing into an environment that is highly attractive and increasingly constructive for us. Global demand for electricity is increasing at an unprecedented rate. This is the result of the ongoing trend of electrification as large sectors like industrials and transportation are increasingly electrifying. And this growth has now been supercharged in recent years by the surge in electricity demand from data centers to support cloud and AI growth around the world. Data centers are becoming some of the largest single consumers of electricity and the scale of new generation required to support them is immense. Each of these forces is contributing to a structural shortage of generation capacity. To put it plainly, the world needs more power, and it needs it faster than ever before. Our business is uniquely designed to meet this challenge. We are positioned to provide that any and all power solutions that will be necessary to meet this need. Our leading renewable power business can provide the low-cost wind and solar solutions needed to meet this increasing demand. Renewables continued to see significant growth due to their low-cost position, but also their ability to win on speed of deployment and energy security, as they do not rely on imported fuels. And in a world where baseload power and grid stability are increasingly important, in addition to renewables, we have leading platforms in hydro, nuclear and energy storage, all of which play a critical and growing role for electricity grids, both independently and as complement alongside natural gas and renewables in the energy mix. In this regard, we are very pleased to announce, last week, a landmark partnership with the U.S. government to construct $80 billion of new nuclear power reactors using Westinghouse technology. The agreement reestablishes the United States as a global leader in nuclear energy and positions Brookfield at the center of a historic build-out of clean baseload power, creating one of the most compelling growth opportunities across our transition platform, and potentially one of the most successful investments in Brookfield's history. Within our private equity business, we recently launched the seventh vintage of our flagship private equity strategy, which focuses on essential service businesses that form the backbone of the global economy. These include industrial, business services and infrastructure adjacent companies where we can apply our operational expertise to drive efficiency, productivity and scale. Early investor feedback for this strategy reflects a growing recognition that value creation in the current environment is driven less by multiple expansion or financial engineering, and more by hands-on operational improvement, an approach that has long defined Brookfield's success. While many traditional buyout strategies are navigating slower fundraising cycles, we continue to be differentiated. We have consistently returned capital at strong returns from preceding vintages, and are seeing strong demand for our differentiated, operationally focused model. We expect this next vintage to be our largest private equity fund ever. We are also bringing our private equity strategy to the private wealth channel with the recent launch of a new fund structured for individuals. Similar to how we structured our successful private wealth infrastructure fund, this new private equities fund will be able to invest alongside all of our private equity strategies. This means that targeting individual investors in the retirement market does not require us to invest differently, but rather simply package our current investment activity in a different way to meet the growing demand from a new set of clients. Within real estate, we continue to see strong momentum across our property business. Market conditions have improved meaningfully. Transaction volumes are rising, capital markets are robust and valuations for high-quality assets are firming. We are actively monetizing stabilized assets, selling approximately $23 billion of properties, representing $10 billion of equity value over the past 12 months. At the same time, it is an excellent point in the cycle to be deploying capital into certain segments of the market, and we have significant dry powder to put to work following the successful close of our latest flagship real estate fund, our largest real estate strategy ever. The combination of limited new supply, recapitalization needs and improving sentiment is creating one of the most attractive investment environments we've seen in years. We are also taking advantage of the constructive financing backdrop to strengthen our long-term holdings, including the $1.3 billion refinancing of 660 Fifth Avenue in Manhattan, part of the over $35 billion of real estate financings we've closed year-to-date. And finally, on our credit business, we will make a few additional points. We continue to see a large opportunity set to invest in the areas that fit our core competencies. The themes driving our equity businesses will require significant debt capital investment and Brookfield is well suited with its expertise and capital to meet that need, whether it be in real asset, opportunistic or asset-backed finance. As we look ahead to the rest of the year and into 2026, we see the market continuing to be strong for our business. Capital markets remain healthy. Liquidity is abundant, and the opportunity set across our businesses continues to expand. The flagship strategies we are launching will continue to anchor our growth while our complementary products, including our AI infrastructure fund, and our rapidly scaling fundraising channels such as wealth and insurance, are diversifying our platform and driving our consistent high-teens growth rates. The secular forces shaping the global economy, digitalization, decarbonization and deglobalization are the same themes that have guided our strategy for many years. Today, they are accelerating. As these trends converge, Brookfield's global reach, operating depth and access to long-term capital position us well to continue leading the industry. With that, we'll turn the call over to Hadley to discuss our financial results, record quarterly fundraising and balance sheet positioning. Hadley Peer Marshall: Thank you, Connor. Today, I'll provide an overview of our third quarter financial results, including additional color around $30 billion of fundraising, our recent M&A activities, and the strategic positioning of our balance sheet. As previously mentioned, we delivered another record quarter of earnings, driven by strong fundraising, deployment and monetization. Fee-bearing capital increased to $581 billion, up 8% year-over-year. Over the last 12 months, fee-bearing capital inflows totaled $92 billion, of which $73 billion came from fundraising and $19 billion came from deployment of previously uncalled commitments. In the third quarter, fee-bearing capital grew $18 billion, driven in large part by the final close of the second vintage of our global transition flagship fund and continued strong capital raising and deployment across our complementary strategies. Fee-related earnings were up 17% to $754 million, or $0.46 per share, and distributable earnings were up 7% to $661 million, or $0.41 per share. Distributable earnings growth reflected higher fee-related earnings, partially offset by increased interest expense from the bonds we issued over the past year and lower interest and investment income. Overall, growth was driven by a record $106 billion raise over the last 12 months and record deployments of nearly $70 billion. This activity has been a major catalyst for our business and we will continue to be active on the deployment front given strong investment opportunities in front of us. The simplicity and consistency of our earnings anchored almost entirely in reoccurring fees, gives us a strong foundation to continue to build from, especially as we continue to further our capital base and launch new strategies. Lastly, our margin in the quarter was 58%, in line with the prior year quarter and 57% over the last 12 months, up 1% from the prior year period. This margin increase was driven by three offsetting dynamics. First, we continue to acquire a greater portion of our partner managers. These businesses have lower margins, and therefore, while these acquisitions are highly accretive acquisitions, they do weigh a bit on our consolidated margin. Second, Oaktree margins are temporarily lower than usual. At this point in the cycle, Oaktree is returning significant capital, but has not yet called capital for some of its deployment, leading to a natural reduction in fee-related earnings and margins. That trend will reverse as it has in the past given the strong growth in the business. Finally, our margins on our core business continued to increase as expected, more than offsetting these dynamics. Turning to fundraising. In total, we raised $30 billion of capital in the quarter, bringing our 12-month total to $106 billion. Over 75% of that capital came from complementary strategies, reflecting the breadth, strength and diversification of our offerings, which allows for sustained fundraising momentum in addition to our flagship cycle. As for our flagships, we also raised $4 billion for the final close of our second global transition flagship, bringing the strategy size to $20 billion. We continue to raise capital for the fifth vintage of our flagship real estate strategy, bringing in $1 billion from SMAs, regional sleeves and private wealth for the quarter with $17 billion being raised to date for the entire strategy. Within our Infrastructure business, we raised $3.5 billion, including $800 million for our private wealth infrastructure vehicle, bringing our year-to-date total for the fund to $2.2 billion. In our private equity business, we raised $2.1 billion, including a total of $1.4 billion for 2 inaugural complementary funds, our Middle East private equity fund and our financial infrastructure fund. Subsequent to quarter end, we held a final close for the inaugural Pinegrove opportunistic strategy for $2.5 billion, exceeding its initial target and ranking among the largest first-time venture growth, or secondary fund ever raised. And finally, on credit, we brought in $16 billion of capital across our funds, insurance and partner manager strategies. This included over $6 billion across our long-term private credit funds, including $800 million for the fourth vintage of our infrastructure mezz credit strategy, which has raised more than $4 billion for its first close. We also raised $5 billion from Brookfield Wealth Solutions, including an SMA agreement with a leading Japanese insurance company, marking its first entry into the Japanese insurance market, which should be the first of more to come. As we head towards the end of the year, we're confident this will be our best fundraising year ever, and we see that trend continuing with strong momentum for 2026. Broadening the scope to the next 5 years, we recently laid out our plan to double the business by 2030 at our Annual Investor Day hosted in New York. We outlined our plan to continue expanding our product offerings by scaling existing offerings and launching new ones, diversifying our investor base, including across Europe, Asia, middle market and family offices, and on the retail side by launching new private wealth related products. These drivers should enable us to double our business over the next 5 years with fee-related earnings reaching $5.8 billion, distributable earnings reaching $5.9 billion, and fee-bearing capital reaching $1.2 trillion. However, our business plan does not include certain additional growth opportunities such as product development, M&A associated with our partner managers, and opening up of the 401(k) market opportunity, which gives us multiple paths to outperform and to deliver over 20% annualized earnings growth. Turning now to our balance sheet. In September, we issued $750 million of new 30-year senior secured notes at a coupon of 6.08%, extending our maturity profile and diversifying our funding sources. We also increased the capacity of our revolver by $300 million to provide additional flexibility as our business continues to grow. At quarter end, we had $2.6 billion in liquidity, a strong liquidity position. We use our balance sheet selectively to seed new products and support strategic partnerships, such as closing the acquisition of a majority stake in Angel Oak and signing the acquisition of remaining 26% of Oaktree that we currently do not own, both of which occurred after the quarter. On Oaktree, we will invest approximately $1.6 billion to acquire their fee-related earnings, carried interest in certain funds and related partner manager interest. Upon close, it will create a fully integrated leading global credit platform with significant scale and capability. The transaction is expected to close in the first half of 2026 and is subject to customary closing conditions, including regulatory approval. Lastly, we declared a quarterly dividend of $0.4375 per share payable December 31 to shareholders of record as of November 28. In closing, we are confident in our trajectory towards achieving our long-term growth goals. The breadth of our platform, our operational expertise and our global scale continue to give us a clear advantage. Our strategy is aligned with the strong tailwinds of digitalization, decarbonization and deglobalization and we're expanding in areas where these trends intersect AI infrastructure, energy transition and essential real assets. Thank you for your continued support, and we're ready to take questions. Operator: [Operator Instructions] Our first question comes from the line of Alex Blostein with Goldman Sachs. Alexander Blostein: I was hoping we could start maybe with the commentary around fundraising momentum in the business you're seeing into 2026. A number of pretty robust verticals. But at the same time, it sounds like monetization outlook is also picking up. So maybe help us frame what that could mean for management fee growth as you look out into 2026? So maybe we could start there. Bruce Flatt: Thanks, Alex. We're very excited about 2026. Maybe if we can start with fundraising. For 2025, I think we guided that fundraising would exceed 2024's levels ex AEL of $85 billion to $90 billion. Through 3 quarters, we're at $77 billion and expect to meaningfully exceed that target. As we look forward to 2026 with our infrastructure and flagship -- infrastructure and private equity flagships in the market with a bumper year expected in infrastructure fundraising with the closing of Just Group, and the continued growth in our partner managers and complementary strategies, we very much expect 2026 to exceed the levels we'll achieve in 2025. And then when you turn that towards FRE growth, we expect to maintain our momentum and either reach or exceed what has been laid out in our 5-year plan. And this is really driven by two things. One, with the addition of Oaktree, Just Group, Angel Oak, those transactions will add almost $200 million to our FRE on a run rate basis going forward. And then when you add the run rating of the growth in 2025 rolling through our numbers in 2026, and the expected growth just laid out from new fundraising in 2026, we expect next year to be a very strong year. Operator: Our next question comes from the line of Sohrab Movahedi with BMO Capital Markets. Sohrab Movahedi: I just wanted to focus just a little bit on the credit business, if we can. Obviously, an important source of fee-bearing capital growth as part of the 5-year plan. This quarter, the fee rate, the blended fee rate, if I look at the fee revenues relative to the private credit, or the total credit I should say, funds was a bit higher than what we're used to seeing. Can you just talk a little bit about what was the driver of that, if that is a new rate we're looking at, if the fee rate is a little bit higher? Is that consistent? Or is that a one-off? And then there's just private credit has been a little bit more in the headlines. Just curious to kind of get a sense of how you think about it relative to your business and the growth aspirations that you have especially coming from credit? Bruce Flatt: Perhaps I'll start, and then I'll hand to Hadley. In terms of the slightly elevated fee rate this quarter in terms of private credit, it's really driven by two things. Our private credit business continues to evolve as the mix shift within our business adjusts through the transactions and the increasing ownership of our partner managers. And what we would say is on a blended basis, our fee rate is going up marginally. We will acknowledge that particularly within our Castlelake business that is performing very well, there was an outsized quarter with some one-off transaction fee revenue that is creating a little bit of upside in this quarter's numbers, but that shouldn't detract for a broader positive trend that we're seeing across our credit business. Hadley Peer Marshall: Yes. And I'll just talk a little bit about how we're seeing credit more holistically. I mean, there have been a few high-profile credit events in the market. And what we're seeing across our portfolio, and the broader credit trend, is that these events are very isolated and not a sign of a broader credit cycle. And if you actually look at our portfolio, we don't have any relevant exposure to these issues. But when we think about our portfolio, our area of focus has really been heavily around real assets, asset-backed finance, opportunistic. And these are where we have expertise around the structuring, the underwriting of the sectors, the sourcing capabilities and then, of course, our scale. And we've been less focused around the more commoditized part of the private credit market related, especially around direct lending. The one point I would probably also add though, is that if there was a broader credit cycle, that plays to our strength with our opportunistic credit strategies. So overall, we feel really good about our positioning. We have a large, diversified and differentiated platform around our credit business, and that's built for growth and resiliency across the market cycles. And we'll only benefit with the integration of Oaktree. Sohrab Movahedi: Hadley, if I can just ask one quick follow-up on that. Given the pleasant surprise, for example, this quarter, as minor as it was, came out of one of the partner managers that you own. Like is there a potential for negative surprises, I suppose, to come from the partner managers as well? And can you dimension what sort of risk management, I suppose, is in place to color that? Hadley Peer Marshall: No, we don't see that. And it goes back to the area of focus. If you think about our expertise around real assets and the areas within asset-backed finance that we focus on, that's critical because we're doing the due diligence. We've got collateral. We've got strong structures in place, and look, low default rates and high recovery rates. And so that puts us in a really good position. That's why we like that part of credit. Operator: Our next question comes from the line of Cherilyn Radbourne with TD Cowen. Cherilyn Radbourne: With regard to the pending buy-in of the Oaktree minority stake, can you talk about some of the things that you'll be able to do together as a combined company that you can't do today as a majority owner? Bruce Flatt: Thanks, Cherilyn. We're thrilled about the transaction that we've announced with Oaktree. And really what it allows us to do is accelerate the combination of the businesses and unlock the benefits of integrating two leading institutions. And maybe to simplify it, we would say the low-hanging fruit near-term upsides are really in three places. One will be almost instantaneously on closing. Oaktree had its own subsidiary balance sheet. We can immediately collapse that. That's much more efficient for us from a financing perspective. Even further within that balance sheet, there are a number of securities and investment positions, that under Brookfield Asset Management's asset-light model. We will actually monetize those positions and use them to fund a very large portion of our purchase price, making that transaction highly, highly accretive. The second opportunity is really just around operating leverage. When it comes to fund operations, administration and back office, there's tremendous synergies in operating leverage as both our businesses continue to grow from combining our combined capabilities, and that really is a scale business and putting the 2 institutions together will unlock a lot of value. And then the last one is absolutely the most important. And it's the ability to see upsides in our marketing, our client service and our product development. Our ability to combine the power of the 2 organizations in terms of the products and solutions and partnerships that we can offer to our clients, we think, is going to be unmatched. And this is particularly valuable for serving the growing portions of the market, whether it be insurance companies and individual investors going forward. Maybe just on a closing note, the team at Oaktree has been our partners for the last 6 years, and this just takes that partnership to a whole another level. Howard Marks is on the Board of BN. Bruce Karsh is going to go on the Board of Brookfield Asset Management. And it's early days, but our interactions with Armen, Bob, Todd and the fantastic team at Oaktree, we already expect this integration to be far better than we initially hoped. Operator: Our next question comes from the line of Bart Dziarski with RBC Capital Markets. Bart Dziarski: I wanted to touch on the retail theme. So you talked about the infrastructure wealth product and the momentum there and then the PE evergreen strategy, I think that's in the market now. So one theme, but two parter. Just can you give us a sense of the early indication that you're seeing these products and the momentum into next year? And then just a reminder of the distribution strategy as you build these products out into next year? Bruce Flatt: Thank you. I think it goes without saying that the momentum we're seeing in the individual market is very robust. And again, that we will highlight, we view this as a market, the broader individual market, that's your high net worth and your retail investor, that's your annuity and insurance policyholder, that's your 401(k) and your retiree market. We view this as a very significant market opportunity that will continue to grow incrementally for the years and candidly decades to come. In terms of where we're seeing growth opportunities in the near term, we are launching new products into this market. We just recently launched our private equity product for the retail channel. That launched just recently and started with an incredibly successful launch in Canada and is now launching in the U.S. And our expectation is that's really the equivalent to our infrastructure product for the retail market. We expect the private equity product to scale even faster than our infrastructure product has. And therefore, we continue to expect this to be an increasing portion of our growth in earnings going forward. Bart Dziarski: And sorry, just on the distribution strategy? Bruce Flatt: Certainly. So I think there's two key components there. In terms of distribution into the individual market more broadly, the winners in this market are largely going to be driven by who has the track record, the scale and the credibility. And as a result of that, we are seeing the significant opportunity to get our products placed onto the leading bank distribution platforms around the world for that near-term market opportunity in retail. As we think ahead more broadly to other components of the individual market, in particular, the 401(k) and the retiree market. At this point, we are preparing our business for that very significant opportunity, making sure we have the right relationships and the right partners with all the stakeholders in that space. That's the advisers, that's the plan administrators, that's the consultants, that's the record keepers. And there's a significant effort within Brookfield. And we feel, given our focus on real assets that lends itself well to that growing market, we feel we're very well positioned. Operator: Our next question comes from the line of Craig Siegenthaler with Bank of America. Craig Siegenthaler: So our question is on corporate direct lending, both IG and non-IG. From your prepared commentary, it sounds like you're less constructive on the investment opportunity today versus some of what your peers are saying due to intensifying competition. However, when you take a step back, it looks like aggregate LTVs are still pretty low and the spread to publics are still pretty rich. And with the cash yields declining now with Fed rate cuts, the relative attractiveness to retail insurers and institutions should still be there. So my question is, what am I missing here besides the gaining share of private credit versus BSL and high yield? Connor Teskey: So Craig, great question. And maybe just to put some context around this, let's come at it from a few different ways. On a more general basis, we believe private credit for various reasons has become, and will continue to be a very important component of global finance, and it's going to continue to grow beside bank credit and other liquid sources. And that growth is very robust, and it's not short term in nature. It's going to be enduring for the long term. In terms of today within the market, where are we seeing the most attractive returns on a risk-adjusted basis? Obviously, every investment is specific. But broad-based, we're seeing tremendous -- we're seeing a very strong premium in particular, in credit related to real assets, infrastructure and real estate credit and certain components of the asset-backed finance market. I think the comments that you are referring to is there have been a significant amount of capital poured into the direct and corporate lending market. And in some places, we are seeing spreads very compressed. And in other places, we're seeing a little bit of covenant degradation due to the competition to secure some of those lending mandates. Obviously, that is specific on a case-by-case basis. But in general, what we are trying to do is avoid the most commoditized components of the market and really focus to where we're getting that attractive spread premium, and where we can preserve our covenant positions the way we have in the past. But I appreciate the question because what we would not want you to interpret is that we think private credit is slowing down. It is a very large and growing and enduring part of the financial system going forward. Craig Siegenthaler: Thanks, Connor. I have a follow-up on the credit business, and I think you covered a little bit earlier, but I was bouncing around between two calls. But management fees in the credit business went up a lot faster than average fee-bearing AUM. And I know Castlelake went in there. So maybe that had some lumpiness in there. But we still have the fee rate up 10% on the average fee-bearing AUM base. So were there any lumpy items in the revenue side that we should back out? And also, I don't think you hit this part, but were there any lumpy items in the expense side of the credit business? Because sometimes a lumpy revenue item might correlate with an expense item. So we just want to make sure we get the P&L run rate correct as we walk into 4Q here. Connor Teskey: Sure. And it's pretty simple. Thank you again for the question. The outsized growth that we had in credit this quarter, I think the way to think about it is I think that business was up almost 15%. About half of that is just run rate organic growth, the continued momentum we're seeing in that business. And half of that was the full quarter of an acquisition that was made within our Castlelake business. So some of it was M&A related, and some of it was organic growth. Maybe you can think about that as roughly half and half. And then on the fee rate component, within Castlelake, which is a business -- a partner manager of ours that's performing very well. They did have some outsized transaction fees in this quarter. The blended broader fee rate is trending up, but it was somewhat enhanced this quarter by onetime transaction fees. Operator: Our next question comes from the line of Kenneth Worthington with JPMorgan. Kenneth Worthington: Great. Maybe for Hadley. You're operating at 58% operating margins right now. You highlighted on the call that Oaktree margins are depressed, but getting better. Core margins are rising, but that acquisitions are operating at lower margins. How do we put these pieces together, particularly since we've got some of the transactions just closed, or closing? And you mentioned sort of the transaction fees sort of helps in the current quarter. So how do we think about the right level, and then the trajectory once everything gets closed? Hadley Peer Marshall: Thanks for the question. First, I'd say that we are very disciplined when it comes to our cost. And we expect our margins to continue to improve over time as we presented at Investor Day. And that's on the backs of our growth initiatives that will play out and the operating levers that's built into our business, as well as we execute on ways to drive additional efficiencies, including the integration of Oaktree. And in this regard, we are on track and actually ahead of our margin improvement plan that we've laid out. It's also worth pointing out that the consolidated margin increase that we're seeing today is a blend of a few offsetting dynamics. The first being, we acquired a greater share of our partner managers and these businesses, while highly accretive to our earnings do have lower margins, and do mildly dilute our overall margin level. Second is Oaktree's margins are temporarily lower as we point out. As they've been returning more capital and haven't yet called capital for some of its deployment. That's a typical cycle for that business, and it will naturally reverse given the countercyclicality to the overall business. And the last point I'd make is that the margins across our core businesses continue to expand, which is more than offsetting the first two items I just mentioned. So while we focus on continuously improving our margins and are delivering in that regard, we run our business with a focus to grow FRE over the long term, and we don't manage the business to a specific absolute margin level, which obviously can be impacted by the mix. Operator: Our next question comes from the line of Dan Fannon with Jefferies. Daniel Fannon: So lots of momentum in fundraising, but I wanted to talk about private equity, in particular, it sounds like your outlook is quite optimistic around raising a larger fund. That seems different than what we've heard for that asset class from others. So just curious about what informs that optimism given the market backdrop? Bruce Flatt: Thanks, Dan. Our private equity business is a little bit unique, and it has been for 25 years. In that, it focuses on essential assets and services, and it -- and as a result, it produces very consistent results across the market cycle. And why that really plays out well today is, as mentioned, we've just launched BCP, the next vintage of BCP in the quarter, and we do expect it to be our largest private equity fund ever. We do feel that we are differentiated in the market because our focus on, one, high-quality assets that generate cash across the cycle has allowed us to return significant amounts of capital out of this strategy in recent years. So we're not facing the DPI issue that has driven a lot of headline noise in the sector. And then secondly, we, I think, all recognize that the next generation of growth and value creation in private equity, given the more normalized interest rate environment is not going to come from financial leverage and financial engineering. It's going to come from operational improvement. And given that over the 20-year history of our flagship private equity fund, we've delivered over 25% IRRs for 2 decades with over half that value creation coming from operational improvement. We are seeing tremendous market demand for our approach to private equity that we think is -- it works across the cycle, but it's perfectly suited for where we're at in the current economic environment. So it's early days. We've just launched the fund, but we do expect it to be our largest fund to date. Operator: [Operator Instructions] Our next question comes from the line of Jaeme Gloyn with National Bank. Jaeme Gloyn: Good job on the fundraising this quarter this year. One thing that was mentioned at the Investor Day was broadening, or deepening the client base, the institutional client base. So I'm just curious on what the source of fundraising looked like from a breadth of client standpoint? Bruce Flatt: In terms of broadening the fundraising base, I think we can answer this question quite specifically. The growth in our business over the last several years has really been driven by the scaling and increased penetration of large-scale institutions. And while we focus on other additional pockets of fundraising, it's important to remember that component, and that core foundation of our business continues to grow. But what we have done internally within Brookfield and what we've been investing in for the last 12 to 24 months is dedicated fundraising teams that can target a much broader base of investors. This is small or medium-sized institutions. This is a dedicated team focused on insurance institutions. This is a dedicated team focused on family offices. All of those initiatives, we would say, are still in the relatively early innings, and we're seeing tremendous growth across 3 verticals. One, a greater number of clients within each of those groups. Two, a greater number of products amongst those clients that we're bringing on board. And three, simply larger checks from those clients that we have. So we would expect this momentum to continue, but it's really driven by having dedicated teams focusing on all the different subcomponents of the institutional market going forward. Operator: And I'm currently showing no further questions at this time. I'd now like to turn the call back over to Jason Fooks for closing remarks. Jason Fooks: Okay. Great. If you should have any additional questions on today's release, please feel free to contact me directly, and thank you, everyone, for joining us. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Viemed Healthcare Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Trae Fitzgerald, Chief Financial Officer. Thank you. You may begin. Trae Fitzgerald: Thank you. Good morning, everyone, and thanks for joining us today. Please note that our remarks in this conference call may include forward-looking statements under the U.S. federal securities laws or forward-looking information under applicable Canadian securities legislation, which we collectively refer to as forward-looking statements. Such statements reflect the company's current views and intentions with respect to future results or events and are subject to certain risks and uncertainties, which could cause actual results or events to vary from those indicated in forward-looking statements. Examples of such risks and uncertainties are discussed in our disclosure documents filed with the SEC or the security regulatory authorities in certain provinces of Canada. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements made in this conference call are made as of today, and the company undertakes no obligations to update or revise any forward-looking statements, except as required by law. Third quarter financial supplement and financial news release as well as the related financial statements are available on the SEC's website. I'll now turn it over to our CEO, Casey Hoyt, to get things started. Casey Hoyt: Okay. Thanks, Trae, and good morning, everyone. I'm excited to be here today to discuss another outstanding quarter for Viemed, a quarter where we continue to differentiate care, accelerate innovation and deliver strong results that set the stage for sustained long-term success. Our team continues to execute at a high level, driving growth across all of our core service lines while expanding the reach and impact of our patient care model. As of quarter end, our team has grown to 1,386 dedicated employees across the country. This includes the new members of our Viemed family who joined us through the acquisition of Lehan's Medical Equipment. Because the Lehan's team onboarded early in the quarter, we were able to experience a full quarter of collaboration and integration, which has been incredibly rewarding to watch unfold. I'm proud of the dedication and teamwork shown by both our existing staff and our new colleagues as they work together to align systems, processes and culture. Their focus and adaptability have ensured a seamless transition and strengthened our ability to serve patients with consistency and compassion. With our expanded team and broader service capabilities, we continue to deliver exceptional care to the patients, providers and partners who rely on us every day. That commitment to high-quality service and clinical excellence reinforces Viemed's reputation as a trusted leader in home-based health care. With that foundation, let's turn to how our strategic execution this quarter reflects both our vision and our ability to translate strategy into measurable results. Our long-term vision remains clear to expand geographic access to high-quality home-based care, diversify our product service offerings and deliver operational excellence at scale. This quarter represents a meaningful milestone in that journey. While our core ventilation business continues to grow at impressive levels, it now accounts for less than half of our net revenue for the first time in over a decade. This shift reflects both the enduring strength of our legacy services and the rapid expansion of new service lines, positioning Viemed for sustainable, diversified growth and long-term value creation. This diversification underscores the success of our strategy and the strong buy-in of our teams in expanding and strengthening our businesses. By broadening both our payer and referral base, we're creating a more resilient and balanced revenue stream that supports sustained growth through different market conditions. Our disciplined execution continues to produce measurable results with each of our core home medical equipment lines delivering strong performance this quarter in alignment with our strategic priorities. Ventilation remains the cornerstone of our business, providing a strong and reliable foundation as we continue to expand and diversify our services. For another consecutive quarter, ventilation revenue achieved double-digit year-over-year growth, demonstrating sustained demand for our differentiated clinical model. This quarter brought an important win for patients in the courts regarding Medicare Advantage coverage, which is expected to significantly improve access and streamline approvals. The regulatory process toward clear and objective qualifying criteria is something we've long advocated for, and we're pleased to see these efforts coming to fruition. Looking ahead, we continue to execute on the implementation of the new national coverage determination requirements for at-home ventilation. While the policy took effect in June, many of its impacts will begin to materialize in the coming months. Our clinical teams are fully engaged to ensure readiness and compliance, positioning Viemed to capitalize on regulatory changes while maintaining the highest standards of patient care. These initiatives are expected to improve payment flows through Medicare Advantage channels while preserving seamless patient experiences and strengthening our leadership in compliance and clinical outcomes. Sleep growth accelerated meaningfully this quarter, driven by record new patient starts and continued expansion of our long-term resupply base. New sleep patient starts grew 96% year-over-year, while our resupply population increased 51% year-over-year and 33% sequentially. For the first time since disclosing our new sleep metrics, our resupply population surpassed our PAP therapy rental base, an important milestone that highlights the strength of our model in converting short-term therapy patients into lasting resupply relationships that generate recurring revenue. The addition of 2,465 patients from Lehan's further amplified this momentum and expanded our sleep footprint into new markets. Together, these results reflect strong organic execution and seamless integration, positioning us to deliver another record quarter and reinforce sleep as a key driver of Viemed's diversified growth. Our Healthcare Staffing division continues to demonstrate remarkable resilience in an evolving marketplace. Anchored by our behavioral health staffing specialties, the division is delivering sustained growth and generating valuable operational synergies by providing in-house health care recruiting to support our broader patient care services. This performance underscores the strategic value of our diversified service portfolio and reinforces our confidence in staffing as a reliable and growing contributor to Viemed's overall success. Maternity has now become an exciting part of our portfolio through the successful integration of Lehan's medical equipment. This quarter, we built our first maternity claims outside of the acquired Lehan network and made substantial progress toward a national rollout, establishing a scalable platform for this entirely new service offering. Maternal Health is poised to be a significant growth driver in 2026, expanding our footprint beyond respiratory and sleep services while leveraging Viemed's national infrastructure, operational expertise and clinical excellence. These results underscore how the addition of this new service line, combined with disciplined execution across all segments continues to advance our strategic priorities and position Viemed for long-term sustainable growth, outpacing the performance of comparable peers in our sector. Innovation continues to be a key driver of our long-term value. This quarter, we focused on deploying AI-powered revenue cycle management tools, initially targeting our rapidly growing sleep business. Early results are very promising with improved efficiency, accuracy and scalability in billing and collections. We plan to extend these tools across the other service lines in Q4 and into 2026, further leveraging operational efficiencies and improving the patient experience. Through innovation, adaptability and disciplined execution, we remain confident in our ability to drive future growth and deliver lasting value for patients, partners and shareholders. Our strong operational performance continues to provide the flexibility to invest in growth while delivering meaningful value to shareholders. This quarter, we completed our 2025 share repurchase program and successfully integrated Lehan's Medical Equipment. Both initiatives were immediately accretive and clearly reflect our disciplined approach to capital allocation. These actions enhance Viemed's ability to pursue strategic growth opportunities, including targeted acquisitions, technology investments and national service expansion. At the same time, we are broadening patient access and improving outcomes through the continued growth of our sleep and maternal health programs. Combined with proactive preparation for upcoming regulatory changes, these efforts position Viemed to drive sustainable, differentiated growth while creating long-term value for shareholders. None of these achievements would be possible without the dedication and ability of our people. I want to recognize our clinical staff, operational teams and our new colleagues from Lehan's for their hard work and commitment to our patients. We also deeply appreciate our partners and referring providers whose collaboration drives growth and ensures that patients receive the best care possible. It is this culture and teamwork and shared purpose that sets Viemed apart quarter after quarter. As we look ahead, our mission remains clear: to improve lives and deliver lasting value for all of our stakeholders. With a strong quarter behind us and our strategic initiatives well underway, I'll now turn the call over to Todd Zehnder, our Chief Operating Officer. Todd will provide a detailed review of our financial and operational results and guidance for the remainder of the year. Todd? Todd Zehnder: All right. Thank you, Casey, and good morning, everyone. In reviewing the financial results, all figures are in U.S. dollars and our full results have been filed with the SEC. I'll be referencing information available in our quarterly financial supplement, which can also be found on our Investor Relations website. Starting with the top line, we delivered record revenue of $71.9 million, representing 24% growth year-over-year and 14% sequential growth from the second quarter. This strong performance reflects both solid organic growth and the immediate accretion from the Lehan's acquisition, which continues to diversify our business and strengthen our foundation for long-term expansion. Gross profit for the quarter was $41.3 million or a 57.5% gross margin. Adjusted EBITDA reached $16.1 million, up 16% from the prior year, representing a 22.4% margin, a strong result given our continued investments in growth and diversification. Net income for the quarter was $3.5 million or $0.09 per diluted share. Operationally, we continue to see solid momentum across our diversifying patient base. In addition to steady growth in ventilation, PAP therapy patients increased 64% year-over-year and 21% sequentially in the third quarter. Our portfolio is also expanding with the addition of maternal health products from Lehan's acquisition. This mix is broadening our reach, improving scalability and supporting an efficient growth model as we continue to scale. On the cost side, SG&A expenses were 44.4% of revenue, a 160 basis point improvement compared to last year and a 130 basis point improved sequentially. This progress reflects the benefit of our evolving product mix, where our newer offerings tend to carry lower gross margins, but also require less fixed infrastructure, resulting in lower SG&A. Combined with our disciplined cost management and ongoing investments in technology, operations and people, these efficiencies are driving continued improvement in operating leverage as we scale. Gross capital expenditures were $7.6 million in the quarter, down from $11 million a year ago, as spending normalized following the completion of the Philips Vent Exchange program. Including equipment sales, net CapEx totaled $6 million. We continue to fund our CapEx entirely from discretionary cash flow and maintain excellent cash flow conversion. I want to take a moment to talk about free cash flow, which we view as an important reflection of the strength and efficiency of our business model. Throughout our history, we funded our growth through internally generated cash flow and have done so profitably every year since becoming a public company. Today, our scale and operating discipline are driving consistent, sustainable free cash flow generation that gives us tremendous flexibility to invest and grow. Because quarterly results can be influenced by timing of certain payments, we've also started highlighting trailing 12-month free cash flow as a more stable way to reflect the underlying trends in our cash generation. As of quarter end, trailing 12-month free cash flow totaled $23.3 million, up significantly from the prior year, and we expect that positive momentum to remain strong through the fourth quarter and into next year. As long as we're growing organically and generating strong free cash flow, we'll keep putting our capital to work where it drives the most value. That means continuing to invest in profitable growth, pursuing smart acquisitions when the fit is right and returning capital to shareholders when it makes sense. Along those lines, in September, we completed the share repurchase program authorized by our Board. This marks our third buyback program since becoming public. And this time, we repurchased nearly 2 million shares at an average price of approximately $6.69. Our balance sheet remains a key strength and gives us plenty of flexibility and liquidity to invest in growth. At quarter end, we had $11.1 million of cash, working capital of $5.8 million and long-term debt of only $19.6 million, which we've already paid down $5 million of that in October. We also had $38 million available on our credit facilities, plus another $30 million through the accordion feature if needed. With this strong financial position, we are well prepared to execute quickly and decisively, should an attractive acquisition opportunity arise. We're updating our full year outlook to reflect better visibility and the continued shift in our product and service mix. We now expect net revenue between $271 million and $273 million compared to our prior range of $271 million to $277 million. Adjusted EBITDA is now expected to come in between $60 million and $62 million or roughly 22% of revenue versus our previous range of $59 million to $62 million. The narrow range reflects greater visibility as we move throughout the year and our updated assumptions give us a clear view of product level growth. Some of our lower-margin ancillary services, including Staffing, are now expected to grow a little slower than we had projected, while higher-margin lines, especially sleep, are tracking ahead of expectations. Taken together, these trends should modestly improve our projected overall EBITDA margin with a relatively neutral impact to total revenue. Looking ahead, we're confident in the strength of our business model and our ability to sustain solid margins while continuing to generate record levels of free cash flow. As we close out on the year, our focus stays on disciplined execution, integrating recent acquisitions and positioning the business for another year of profitable growth in 2026. We want to thank you for joining us today. This concludes our prepared remarks, and we'll now open up the call for questions. Operator: [Operator Instructions] Your first question comes from Doug Cooper with Beacon Securities. Doug Cooper: Congratulations on another good quarter. Just first of all, Todd, I just wanted to confirm, excluding the contribution from Lehan's, which I guess was a full quarter contribution, organic growth, I get around 13%, 14%. Is that in the ballpark? Casey Hoyt: 14%, I believe, is on the revenue growth. It was -- yes, 14%. Doug Cooper: Okay. What do you -- just on the sleep, obviously, tremendous numbers there. What do you attribute the growth to? You're certainly seeing much higher growth than anybody in the peer group. So are you gaining share there? Or what do you -- maybe just talk about that a little bit? Casey Hoyt: Yes. I mean we're gaining share everywhere we go. You got to keep in mind, Doug, that we really didn't start selling sleep until, I guess, right before COVID around the country. While it was a big part of our corporate upbringing in company history, we started in sleep over here in Louisiana back in '06 and kind of grew into ventilation. So we have a lot of experience with the product and the offering. But we chose not to launch it until we had good insurance contracts and infrastructure set up throughout the country. So it's -- even though it's been around since our inception, we really haven't started pushing it until, call it, 5, 6 years ago. So what you're seeing is we're now hiring reps specific to selling sleep. They're not complex respiratory reps. They're heavily focused on sleep and we'll probably leverage them some breast pump sales for those reps as well throughout the country. But everywhere they go, they're gaining market share in their prospective towns, clicking on all cylinders. We've really done a good job of training them up and getting them to be armed and dangerous and ready to hit new referral sources. we're able to hire a different type of rep than your traditional complex respiratory rep, just a young and hungry go-getter, fits the bill sometimes for the sales rep. And so we're seeing a lot of good success with just some good people -- spread out throughout the country. Doug Cooper: Right. Well, congratulations on that. Just looking at -- I've been reading -- seeing competitive bid keep popping up in articles around, obviously, the government shutdown now, but just some comments around competitive bidding and do you think it comes back? And I'm assuming Lehan's, the breast pump just as, for instance, probably doesn't have any issue with that, but maybe just comment generally on the situation there. Casey Hoyt: Yes. I mean we fully anticipate competitive bidding coming back at some point. And I think like we said last time, if you're operationally sound and if you're larger, you probably tend to win more contracts. So we're not afraid of the bidding program. I think it was heavily commented on by public, and there's a lot of interest in making sure the program is designed correctly. So we'll be paying attention to what the final rule looks like when and if it does come out. And we fully anticipate being a participant in virtually all of those CBAs. As it relates to the maternal side of the business, no, I mean, obviously, Medicare is not going to be paying for breast pumps as that's a 65-year-old generally. And so not going to be in that business market. So that's heavily commercial and Medicaid around the country. So that program is rather insulated from any competitive bidding program. And the other thing I would say, just as a reminder for everyone is that we still generate a significant portion of our revenue stream in the competitive bid products, be it sleep and oxygen primarily from our rural areas. And so those have some impact, but not as dramatic as these large MSAs where the significant potential either consolidation or rates are existing. Doug Cooper: Right. And just final one for me. Another good quarter, all the KPIs trending in the right direction. Stock is down 2.5%. The stock based on your guidance for this year, let alone next year, just on this year, I think it trades about 4x EBITDA. And obviously, while you've been buying back a bunch of stock, the whole health care sector in general is underperforming. And a couple of years ago, all the focus on the Ozempics and GLP-1 drugs, Novo Nordisk I think is down 60% from its peak. What do you think is going to take to get investor interest and get this sector turned around? And I'll leave it there. Casey Hoyt: Yes. Thanks, Doug. And I'll tell you, it's one of the harder questions we get because we know we're not the market it is. But I'll tell you, the way that we are forecasting our free cash flow, I think a multiple reset is just going to have to happen because we're generating as much discretionary free cash flow as anybody in the industry or most health care providers. So I don't know exactly how that will translate into the stock price. But as we've done in the past, we will monitor capital allocation very aggressively to the extent we see the best use of capital is returning that to shareholders virtually -- I mean, very likely through buybacks, we'll continuously analyze that. Right now, we're paying off the debt as fast as we ever thought we could. And once that runs out, we'll look at the acquisition landscape and be very in tune to additional buybacks if the stock warrants that. Operator: Your next question comes from Robert Lynch with Stonegate. Robert Lynch: Just dialing in here for Dave Storms. Congratulations on the quarter. I just have a few questions here. First one being around the payer mix this quarter. It looks like it shifted with lower Medicare exposure. So I guess what are you seeing on the authorization friction, realized rates and DSO as the mix tilts further for Medicare? And how should we think about audit risk into 2026? Casey Hoyt: Yes. I mean we're definitely seeing the payer mix shift pretty aggressively just as the product mix is shifting aggressively and the sales and rental shift is on. And all of that is in our supplement. And really, that's as a result of further diversification. Bringing on Lehan's is a -- they're virtually a 0% Medicare company. I mean they have some in their sleep and other DME. But all of that breast pump revenue, which you can see now makes up 6% of our company, that is a non-Medicare and a lot of that revenue would be in that wedge of sales, which is 30%. I do want to comment, though, Medicare is a great payer. They don't -- they pay timely. They do audit. We all know that, but we welcome audits because we tend to do pretty well with it. And I think what you're seeing, and I don't have an updated DSO, but our AR is pretty low right now. And that means that our revenue cycle team is converting those bills into cash, and we're using that cash to pay down the debt or all those other capital allocation priorities that I just mentioned. Robert Lynch: Great. I really appreciate the color there. I guess next one around just some operational levers -- excuse me, what levers do you think you can pull to protect mix and margin as sleep and resupply end up outgrowing vents and especially as the Chicago footprint scales under the Lehan's acquisition, I guess what does that look like? Casey Hoyt: Well, I think what you'll see is gross margin, if we grow sleep as fast as we're growing it, we'll always have some pressure. We are doing some things that, in Casey's prepared remarks, talked about some technology initiatives that we are using. Just on the sheer number of new patients, we're using some, if you want to call it, AI-based intake, and it's really streamlining the process, helping shave off days to get patients set up, which means that there should be better compliance. All of those things are things that will help the sleep division operate efficiently and hopefully at a higher margin. But it's going to be hard to offset the difference in the gross margin between a vent patient and a sleep patient. With that said, I want to point out, we had a 160 basis point improvement in SG&A amongst the company at a total level, which we think that if we give up a little bit in the gross margin, we should be able to make that up on the SG&A line. And as long as our free cash flow, our net income margins continue to hang in there, we're entirely comfortable about how we're diversifying the company. Robert Lynch: Sounds great. One last one for me around growth. So you guys had an emphasis on rural communities. So what geographies, I guess, do you have with like Tier 1 going into the new year, what's the focus? Casey Hoyt: Yes. I mean the focus is really to stay kind of close to where our next rep is, which does put us in the rural markets. I mean, we're not strong in New York City. We're not strong out West. But we have plenty of opportunity to just hop 60 miles away from the next rep, not run into each other and then be able to leverage a lot of our clinicians. So that's always the wisest way to grow. And we're constantly looking for that next market that makes good sense for us to go to. Today, we have lots of just new data points and AI tools that are really teeing up the opportunity for us down the road. That's very interesting, and that's evolving every day. So we've got more ammunition than we've ever had before to making wiser decisions on when to go and how far to go and so on and so forth. But traditionally, we're just trying to just expand from where we exist today, which is the Deep South into the COPD prevalent areas of the coal miners' region in the hills of Kentucky and Tennessee and West Virginia and so on and so forth. It's not that we're ignoring rural, I mean, metropolitan zones, but that's just been our sweet spot. There's plenty of area to grow right down the road from where we're at. Trae Fitzgerald: Yes. And then I guess I would add too, Robert, on the maternity side, it's really nationwide, right? We don't provide -- we provide those in very limited areas right now outside of Lehan's, Illinois. We started doing some of that with our legacy business as well, but 2026 is going to be a nationwide approach to maternity across everywhere that we currently operate and don't have that offering. Operator: Your next question comes from Ilya Zubkov with Freedom Broker. Ilya Zubkov: I have a question related to the sleep therapy business. I've noticed that revenue per one patient in this segment has been declining sequentially this year. Could you please explain the main factors driving this trend? Trae Fitzgerald: Yes, I'll take this. This is Trae. Well, we don't disclose revenue just for the sleep side of the business. You're probably looking at the other sales, which does include some other products. So keep that in mind. But just in general, thinking about the evolution of the sleep business and going from -- you can see the metric for the first time this period where resupply overtook our therapy patients. They have a slightly different -- they have a slightly different revenue profile, right? One, the therapy patient is on the rental side, that's separate. And then the resupply side is going to be in sales. And so that -- the actual realizations on the sleep side are extremely stable. If you think about a resupply patient, it's 2 orders per year, $200 an order, roughly 50% gross margin. And that's been stable from when this business was, 5% of our business up to 20% of our business as it stands now. Ilya Zubkov: Okay. This is helpful. And you've mentioned the planned investments in technological development. So I'm just wondering what do you see as the priority areas of these advancements in midterm? Where do you plan to focus your investment there? Casey Hoyt: Right now, what we're doing -- I mean, the single largest one that we're making is like we've mentioned in the intake division because it's very manual and you're dealing with fax machines and so forth. So we're doing a lot in that, and it's live in at least the sleep division nationwide, and we're going to push it into our other products. We're not exactly sure what the next process that we're going to try to use AI in, but we have an entire team that is meeting regularly to see which processes could benefit the most. And at the same time, our technology team is out there scouring the tools that are available. And so ultimately, we're not exactly sure what the next one is, but I can promise you there will be more AI/machine learning to help with the operational lift of our company over the next quarter, year, 2 years because they are coming at us very quickly, and it's all upside to our scalability, efficiencies and operational acumen. Operator: And there are no further questions at this time. So I'll hand the floor back to management for closing remarks. Casey Hoyt: All right. Well, we want to thank everybody for listening in. If there's follow-up questions, please reach out to us, and have a good day. Operator: Thank you. This concludes today's call. All parties may disconnect.
Operator: Good morning, and welcome, everyone, to Granite Ridge Resources' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to James Masters, Investor Relations representative for Granite Ridge. James Masters: Thank you, operator, and good morning, everyone. We appreciate your interest in Granite Ridge Resources. We will begin our call with comments from Tyler Farquharson, our President and Chief Executive Officer, who will review the quarter's results and company strategy. We will then turn the call over to Kim Weimer, our Interim Chief Financial Officer and Chief Accounting Officer, who will review our financial results in greater detail. Tyler will then return to provide closing comments before we open the call for questions. Today's conference call contains certain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied. We ask that you review the cautionary statement in our earnings release. Granite Ridge disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on these statements. These and other risks are described in yesterday's press release and our filings with the Securities and Exchange Commission. This call also includes references to certain non-GAAP financial measures. Information reconciling these measures to the most directly comparable GAAP measures is available on our earnings release on our website. Finally, this call is being recorded, and a replay and transcript will be available on our website following today's call. With that, I'll turn the call over to Tyler. Tyler Farquharson: Thank you, James, and good morning, everyone. I appreciate everyone joining us today for our third quarter 2025 earnings call. Our results this quarter once again highlight the strength of our business model, grounded in disciplined capital allocation, operational excellence and strong execution across our platform and operating partners. In the third quarter, average daily production increased 27% year-over-year to 31,900 barrels of oil equivalent per day. Adjusted EBITDAX rose 4% from the prior year period to $78.6 million. Capital expenditures totaled $80.5 million, consisting of $64 million in development and $16.5 million in acquisitions. We ended the quarter with a leverage ratio of 0.9x, well below our long-term target range of less than 1.25x. In addition, we continued our quarterly dividend of $0.11 per share, underscoring our commitment to a reliable, competitive return to our shareholders. Subsequent to quarter end, we enhanced our capital structure and liquidity position. Earlier this week, our lending group reaffirmed the $375 million borrowing base on our revolving credit facility, and we successfully issued $350 million of senior unsecured notes due 2029 with an 8.875% annual coupon. Together, these actions increased our pro forma liquidity to $422 million and further enhanced our flexibility to execute our business plan while preserving balance sheet strength. 2025 marks an important inflection point for Granite Ridge as we scale our operator partnership platform and further define our model as publicly traded private equity. Through these partnerships, we combine the control of an operator with the capital discipline of an investment firm, a framework that supports deliberate, cycle-resilient decisions around capital allocation and inventory selection. Year-to-date, approximately 50% of our capital spending has been deployed from these partnerships. We are particularly pleased with the success of Admiral Permian Resources, our largest and longest-standing operator partnership, which continues to set the benchmark for performance. Admiral now controls 30 distinct drilling units across the Permian Basin and as of quarter end, had 63 producing wells with 14 more in progress. Admiral's multi-horizon portfolio has consistently delivered results in line with our underwriting expectations while advancing technologies such as U-turn well design, further enhancing efficiency and cost control while also making them a preferred partner for larger asset managers. So far in 2025, Admiral has added 61 gross, 17.2 net locations for an average of $1.9 million per net location, representing over $200 million of future development capital. In less than 3 years, the partnership has captured 198 wells, 94 net to Granite, representing nearly $1 billion of development capital. Admiral now produces 7,400 BOE per day net to Granite or 23% of Granite Ridge's total production. Admiral's success illustrates why we believe the operator partnership model is our most capital-efficient path to scale. Unlike many E&Ps that make large point-in-time acreage acquisitions exposed to multiyear commodity cycle risk, Granite Ridge executes drilling unit level acquisitions, narrowly underwritten at current strip pricing for near-term development. We believe this approach provides superior risk-adjusted returns and flexibility. While each partnership is unique, Admiral's success has become a blueprint for our other partnerships, including Petrolegacy and 2 recently formed partnerships focused on the Midland and Delaware Basins. Collectively, these partnerships now encompass 28.1 net producing wells and approximately 30.1 net undeveloped locations with an additional 37.7 net locations expected to close before the end of the year. Each partnership is structured to generate operated deal flow, strong full cycle returns and control over capital deployment and development timing. Petrolegacy initiated its drilling program in the Midland Basin at the end of the third quarter, with production contributions expected early next year. Meanwhile, our 2 newer operated partnerships are actively advancing business development initiatives expected to add meaningful high-quality inventory ahead of transitioning to development mode. Our traditional non-op business continues to deliver stable cash flow and diversification. During the third quarter, we participated in 59 gross or 9.3 net wells turned to sales, primarily across the Permian and Appalachian Basins. We remain particularly encouraged by our results in the Appalachian Basin, where we've added over 1,500 net acres this year and consistently outperformed our underwriting expectations. Earlier this year, we increased our acquisition capital guidance by $100 million to capture attractive opportunities across both our operated and traditional non-operated strategies. As of quarter end, we invested $43 million through our operator partnerships, adding 27 net wells and $20 million through non-operated acquisitions, adding 6.7 net wells, primarily in the Delaware Basin and in Appalachia. Before year-end, we expect to invest an additional $47 million to secure 38 net locations, along with additional acreage in the Utica play. Collectively, these additions will add nearly 3 years of drilling inventory at an average cost of $1.7 million per net location. Turning to the macro environment. Oil and gas prices have remained relatively stable over the past 12 months, providing a constructive backdrop for continued disciplined growth. We remain focused on opportunities that clear our 25% full cycle return hurdle and exceed our cost of capital even as we modestly outspend cash flow. As always, our spending and leverage remain guided by our leverage target range of 1 to 1.25x, and we're committed to staying within those bounds. Looking ahead to 2026, we are constructive on the long-term oil outlook but cautious near term given uncertainty in global supply growth. We'll provide detailed guidance with our Q4 release but our strategic framework remains clear. Above $60 oil, we plan on pursuing measured growth with modest outspend. If we see sustained oil prices below $55 per barrel, we plan on pivoting to a maintenance mode targeting roughly $225 million in CapEx while maintaining flexibility for opportunistic acquisitions. Our strategy is designed for agility, supported by a just-in-time inventory model, diversified asset base and minimal drilling commitments, allowing us to remain nimble through varying market conditions. We also continue to actively hedge around 75% of production each quarter with nearly 50% of expected 2026 volumes already hedged. Combined with a strong balance sheet, this ensures we can operate and invest through cycles. Commodity markets will remain volatile, but our platform is built for it. We're confident Granite Ridge is well positioned for another year of disciplined growth, consistent returns and sustainable shareholder value in 2026. With that, I'll turn it over to Kim for a detailed financial review. Kimberly Weimer: Thank you, Tyler, and good morning, everyone. I'll start with a brief overview of our financial results. Revenue for the third quarter was $112.7 million compared to $94.1 million in the prior year period. Adjusted EBITDAX was $78.6 million, up 4% year-over-year. Net income was $14.5 million or $0.11 per diluted share, while adjusted net income was $11.8 million or $0.09 per diluted share. Operating cash flow before working capital changes totaled $73.1 million. On the cost side, LOE came in at $8.03 per BOE, higher than expected, primarily due to an increase in saltwater disposal, contract labor and other service costs in the Permian Basin. Production and ad valorem taxes were 6% of sales and G&A was $2.38 per BOE, consistent with our guidance range. Our disciplined capital allocation approach remains unchanged. For the quarter, total capital spending was $80.5 million, including $64 million of drilling and completion and $16.5 million of acquisitions. We continue to expect full year 2025 capital expenditures of $400 million to $420 million, of which $120 million is expected to be invested in 50 transactions that will add 75 net locations to Granite Ridge's inventory. Our development capital spend is allocated approximately 51% to operated partnerships and the balance to traditional non-op. As we look ahead to the fourth quarter and into 2026, we expect continued production growth from our operated partnerships as new wells come online. We are maintaining our full year production guidance of 31,000 to 33,000 BOE per day with oil expected to represent roughly 50% of the mix. Our balance sheet remains a source of strength, ending the quarter with net debt to EBITDAX of 0.9x, comfortably below our long-term target of 1.25x. We ended the quarter with $11.8 million of cash and $300 million drawn on our $375 million credit facility, resulting in liquidity of $86.5 million. As Tyler mentioned, we completed a $350 million issuance of senior unsecured notes due 2029 at an 8.875% coupon. This transaction strengthens our capital structure as we head into 2026 with net proceeds used to pay down the revolver and bolster cash on hand. On a pro forma basis at quarter end, our liquidity increased to $422 million. We continue to return meaningful cash to shareholders. Our $0.11 per share quarterly dividend remains a central component of our total return framework, equating to an annualized yield of approximately 8.3% at recent prices. With that, I'll hand it back to Tyler for closing comments. Tyler Farquharson: Thank you, Kim. To wrap up, the third quarter was another strong quarter for Granite Ridge, marked by continued operational outperformance, excellent execution across our operator partnerships led by Admiral Permian, robust cash generation and disciplined capital management and steady shareholder returns. We've built a model that combines growth, yield and flexibility, and it's working, delivering durable value for our shareholders through the cycle. Our business offers exposure to some of the best assets and operators in the country with downside protection through diversification, a robust hedge book and low leverage. Thank you to our employees, partners and investors for your continued support. With that, we're happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Scialla with Stephens. Michael Scialla: I want to see if you could talk a little bit more about your third and fourth partnerships. You said they're both moving strategic plans forward. Anything else you can tell us there in terms of what those plans might look like and where they are in terms of potentially drilling or adding acreage? Tyler Farquharson: Yes. So both of those partnerships are in aggregation mode right now. They're both Permian focused. One of the partnerships is focused on some of the emerging plays within the Permian and the other partnership is focused on the Midland Basin. I think that it will take them 6 or so months in order to aggregate what we like to see is about 18 months' worth of development in front of each one of those partnerships before we commit to running a rig full time on each one. So I'd expect for us to have a little bit of activity, development activity in 2026, if they continue to be successful on aggregating inventory here over the next handful of months. During the fourth quarter, we actually have some of the first transactions with one of those partnerships closing in the fourth quarter. So we'll get some inventory via one of those partners in the fourth quarter. And then the last partnership that we signed up isn't too far behind. So I wouldn't expect a ton of development activity from them in 2026 but it just depends on how successful they are in aggregating inventory. Michael Scialla: I appreciate that detail. And Tyler, you mentioned you would in a $55 or lower oil price environment, cut CapEx back to $225 million next year. Can you provide a little bit more detail on that? I assume most of the production would come out of the partnerships. Maybe how much flexibility you have there in lay down rigs and crews? And how would the mix change going forward in that scenario versus your traditional non-op position versus the partnerships? Tyler Farquharson: Yes. Yes, we'd expect to see coming out of the non-op portfolio, operators act rationally. So we'd expect to see a lot less inbound AFEs on the non-op piece. Then on the operated side, on the operated partnership side, we have full control over the timing and the development pace of those partnerships. And as we're starting to construct our '26 plan, we're building in tremendous flexibility there to be able to push some of that activity out if we do see a quarter or 2 worth of oil price in the low 50s. That's why we like the operated partnership so much is we do maintain that control over those partnerships to be able to construct a capital plan that kind of fits our needs as we -- if we end up experiencing some lower prices. In addition to the drilling side, I think what you'd probably see from us in that low price scenario, we pulled back on some drilling. And I think we'd actually probably reallocate those dollars to not only inventory acquisitions, but also potentially maybe some PDP style transactions as well. Michael Scialla: Okay. So not -- it sounds like not really a change in the mix between the traditional non-op and the partnerships but just both would be lower and less focus on drilling, more focus on acquisitions. Tyler Farquharson: Yes. I think we'd love to be more opportunistic on acquisitions in that price environment. Operator: Your next question comes from the line of John Annis with Texas Capital. John Annis: For my first one, understanding that there's lumpiness quarter-to-quarter and you haven't published guidance for next year, how should we think about the growth trajectory in the fourth quarter and into 2026 with Admiral running at full steam and Petro legacy ramping? And then is it fair to assume PLE's production shows up more towards the second quarter or midyear? Tyler Farquharson: Yes. I think on that last point on PLE, I think, yes, that is a midyear production contribution expectation for PLE. They're getting started drilling now. That will probably show up starting kind of late second quarter. On Admiral, they're running 2 rigs now. We expect that to continue through 2026. I think on the production cadence, you're right, we haven't guided to '26 yet. So we can't really speak a whole lot to '26. But on Q4 of '25, we do expect to see somewhere in the high single digits production growth from the third quarter to the fourth quarter. John Annis: Terrific. For my follow-up, can you talk about what you see as the ideal length of inventory that you would like to get to? And how do you weigh that with the commodity underwriting risk that comes with that longer-dated inventory? Tyler Farquharson: Yes. We actually love where we're at right now. Three to 5 years of inventory feels like the right amount of inventory for us. We're not interested in buying long-term inventory and having to warehouse that on the balance sheet for years 5 and beyond. I think having control over the operator partnerships gives us a lot more comfort in having 3 to 5 years' worth of inventory because it's actually controllable inventory now versus having to rely on non-op partners. So we're actually quite pleased with where we are on our inventory. I think if anything, maybe we could get some more durability on some inventory outside of the Permian Basin. But we're pleased with where we are overall, particularly with what we've established in the Permian. Operator: Your next question comes from the line of Noah Hungness with Bank of America. Noah Hungness: For my first question here, I wanted to touch on LOE. It was a little higher than we thought for the third quarter. Can you maybe just talk about how we should expect that to trend in 4Q and also for '26? Kimberly Weimer: Sure. As our production has increased within the Permian Basin, roughly in Q3, about 77% of our oil production was from the Permian. Our saltwater disposal costs have increased. So on total have increased our LOE per BOE. So we would expect that we will be towards the higher end of guidance for 2025 on a full year basis. Noah Hungness: And I guess, how can you think about it for '26, if you can? Kimberly Weimer: Yes. Yes. We haven't guided towards '26 yet. We'll continue to look at our production expectations as we move into 2026 and working with our operated partners, what we can expect for that LOE per BOE going forward, and we'll guide to that at that time. Noah Hungness: Great. And then for my second question here, it's really on Waha. I mean natural gas prices in Waha continue to be really weak. They look like they'll be weak basically until a lot of those pipes come on in second half '26. And then it looks like Waha basis gets really strong at or below basically transport costs out of basin. Do you guys have Waha hedges on today for second half '26 and beyond? And would you consider adding them or adding more to basically eliminate your Waha exposure given how strong the forward curve? Kimberly Weimer: With regards to the first question, we do not currently have any basis hedges in place for our Waha exposure and going forward, have considered adding those, as you mentioned, for the strength of the curve going forward. So we will continue to look at that and evaluate that going forward. Tyler Farquharson: Yes. Noah, there's -- we're also looking at other alternatives for our Permian gas. There's lots of gas to power projects out there that you've seen some other operators in the basin signing up or evaluating and that's also something that's on the table for us. We're looking at a few of those options now. We think that, that could also be a good solution for some of our Waha gas in addition to hedging some of the Waha exposure as well. So we're kind of looking at a solution for Waha gas a couple of different ways as we kind of move into next year. Noah Hungness: I really appreciate that color. Just to kind of build off of that, if I could, how should we -- how could we think about the pricing for that? Is it power exposure? Is it a premium to Waha? Is it flat price? Tyler Farquharson: It would be some power exposure that we'd realize as a premium to Waha. Operator: Your next question comes from the line of Phillips Johnston with Capital One. Phillips Johnston: Thanks for the color on how production volumes could trend into Q4. I wanted to ask the same question on how CapEx should trend into Q4. If we look at what's implied for Q4 based on your unchanged guidance range, the potential range for Q4 is pretty wide at around $125 million to $150 million. So just wanted to know if we should be steering towards kind of the midpoint of that range or towards the low end or the high end. Tyler Farquharson: Yes. Yes. So we had some timing adjustments on the acquisitions. Our development capital actually came in where we thought it would be for the quarter. So we're not changing guidance for the full year. We still expect to close all the acquisitions that we outlined on our last call. for the year. So we just see that timing shifting into the fourth quarter. If I had to guess, I think that fourth quarter would be somewhere in the $125 million range with a big chunk of that being the remaining acquisitions that we're closing for the year. Phillips Johnston: Okay. Perfect. And then I appreciate the color on '26, and it's obviously early. But if we do assume current strip prices hold, how should we think about capital allocation for next year in terms of oil versus gas? Would you be inclined to kind of keep your investment mix roughly the same? Or would you sort of lean into gas a little bit more than you have? Tyler Farquharson: It's all returns driven, right? Where we're seeing the best opportunity now continues to be in the Permian. So I'd expect a very significant oil weighting. That being said, outside of the Permian, we are via the traditional non-op strategy, having a lot of success in Appalachia, and that's more rich condensate phase. We're -- we've been very successful this year on picking up a lot of inventory and acreage in that part of the play in Ohio. And we're starting to see AFEs come in. We actually have a handful of pads already online in Ohio, and I would expect to see additional capital being spent up there on both acquisition front and drilling and development as we go into '26. Operator: There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by, and welcome to the IREN Q1 FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mike Power, VP of Investor Relations. Please go ahead. Mike Power: Thank you, operator. Good afternoon, and welcome to IREN's Q1 FY '26 Results Presentation. I'm Mike Power, VP of Investor Relations. And with me on the call today are Daniel Roberts, Co-Founder and Co-CEO; Anthony Lewis, CFO; and Kent Draper, Chief Commercial Officer. Before we begin, please note this call is being webcast live with a presentation. For those that have dialed in via phone, you can elect to ask a question via the moderator after our prepared remarks. Before we begin, I'd like to remind you that certain statements that we make during the conference call may constitute forward-looking statements, and IREN cautions listeners that forward-looking information and statements are based on certain assumptions and risk factors that could cause actual results to differ materially from the expectations of the company. Listeners should not place undue reliance on forward-looking information or statements, and I'd encourage you to refer to the disclaimer on Slide 2 of the accompanying presentation for more information. With that, I'll now turn over the call to Dan Roberts. Daniel Roberts: Thanks, Mike, and thank you all for joining us for IREN's Q1 2026 Earnings Call. Today, we'll provide an overview of our financial results for the first fiscal quarter ending September 30, 2025, highlighting key operational milestones and importantly, discuss how our AI cloud strategy is driving strong growth. We'll then open the call for questions at the end. So Q1 FY '26 results. Fiscal year 2026 is off to a really good start. We delivered a fifth consecutive quarterly increase in revenues and a strong bottom line. Revenue reached $240 million and adjusted EBITDA was $92 million. Noting, of course, that net income and EBITDA importantly, reflected an unrealized financial gain on financial instruments. This performance reflects our continued -- the team's disciplined execution along with the benefits of having a resilient vertically integrated platform. Microsoft and the cloud contract. So earlier this week, we announced a $9.7 billion AI cloud contract with Microsoft, which was a defining milestone for our business that underscores the strength and scalability of our vertically integrated AI cloud platform. The agreement not only validates our position as a trusted provider of AI cloud service, but also opens up access to a new customer segment among the global hyperscalers. Under this 5-year contract, IREN will deploy NVIDIA GB300 GPUs across 200 megawatts of data centers at our Childress campus. The agreement includes a 20% upfront prepayment, which helps support capital expenditures as they become due through 2026. The contract is expected to generate approximately $1.94 billion in annual recurring revenue. Beyond the obvious positive financial impact, the contract carries strategic value of significance for us. It not only positions IREN as a contributor towards Microsoft's AI road map, but also demonstrates to the market our ability to serve an expanded customer base, which includes a range of model developers, AI enterprises and now one of the largest technology companies on the planet. As enterprises and other hyperscalers accelerate their AI build-out, we expect that our combination of power, AI cloud experience and execution capability will continue to position us as a partner of choice. Looking ahead, we're executing now on a plan that will see our GPU fleet scale from 23,000 GPUs today up to 140,000 GPUs by the end of 2026. When fully deployed, this expansion is expected to support in the order of $3.4 billion in annualized run rate revenue. Importantly, this expansion leverages just 16% of our 3 gigawatts in secured power, leaving ample capacity for future expansion. With that overview in mind, let's turn to the next section, a closer look at our AI cloud platform and how we're positioned to scale in the years ahead. So as I alluded to earlier, a key driver of IREN's competitive advantage in AI cloud services is our vertical integration. We develop our own greenfield sites, engineer our own high-voltage infrastructure, build and operate our own data centers and deploy our own GPUs. Simply put, we control the entire stack from the substation all the way down to the GPU. We believe strongly that this end-to-end integration and control is a key differentiator that positions us for significant growth. This model of vertical integration eliminates dependence on third-party colocation providers and most importantly, removes all counterparty risk associated. This allows us to commission GPU deployments faster with full control over execution and uptime. For our customers, this translates into scalability, cost efficiency and a superior customer service with tighter control over performance, reliability and delivery milestones, driving tangible value and certainty. For those reasons, our customers, including Microsoft, view IREN as a strategic partner in delivering cutting-edge AI compute, recognizing our deep expertise in designing, building and operating a fully integrated AI cloud platform. On that note, we're excited to announce a further expansion of our AI cloud service, targeting a total of 140,000 GPUs by the end of 2026. This next phase includes the deployment of an additional 40,000 GPUs across our Mackenzie and Canal Flats campuses, which are expected to generate in the order of $1 billion in additional ARR. When combined with the $1.9 billion expected from the Microsoft contract and $500 million from our existing 23,000 GPU deployment, this expansion provides a clear pathway to approximately $3.4 billion in total annualized run rate revenue once fully ramped. Importantly, this incremental 40,000 GPU build-out will be executed in a highly capital-efficient manner through leveraging existing data centers. While we have not yet purchased GPUs for the deployment, we continue to see strong demand for air-cooled variants of NVIDIA's Blackwell GPUs, including both the B200 and the B300. And given their efficient deployment profile, we expect these to form the basis of this expansion. That said, we will continue to monitor customer demand closely and pursue growth in a disciplined, measured way. This full expansion to 140,000 GPUs will only require about 460 megawatts of power, representing roughly 16% of our total secured power portfolio. This leaves substantial optionality for future growth and importantly, continued scalability across our portfolio. The key takeaway here is that we have substantial near-term growth being actively executed upon, but also have significant and additional organic growth ahead of us. Turning now to Slide 8, which highlights the British Columbia data centers supporting our expansion to 140,000 GPUs. At Prince George, our ASICs to GPU swap-out program is progressing well. The same process will soon extend to our Mackenzie and Canal Flats campuses, where we expect to migrate ASICs to GPUs with similar efficiency and speed. Together, these sites are allowing us to fast track our growth in supporting high-performance AI workloads, scaling it into what is becoming one of the largest GPU fleets in North America. Turning to Childress, where we are now accelerating the construction of Horizons 1 to 4 to accommodate the phased delivery of NVIDIA GB300 NVL72 systems for Microsoft. We've significantly enhanced our original design specifications to meet hyperscale requirements and also further ensure durable long-term returns from our data center assets. The facilities have been engineered to Tier 3 equivalent standards for concurrent maintainability, ensuring continuous operations even during maintenance windows. A key feature of this next phase is the establishment of a network core architecture capable of supporting single 100-megawatt super clusters, a unique configuration that enables high-performance AI training for both current and next-generation GPUs. We're also incorporating flexible rack densities ranging from 130 to 200 kilowatts per rack, which allows us to accommodate future chip generations and the evolving power and density requirements without major structural upgrades. While these design enhancements have resulted in incremental cost increases, they provide long-term value protection, enabling our data centers to support multiple generations and reduce recontracting risk typically associated with lower spec builds. In short, we're building Childress not just for today's GPUs and the Microsoft contract in front of us, but also for the next generations of AI compute. Beyond the accelerated development of Horizons 1 through to 4, the remaining 450 megawatts, as you can see in the image on screen of secured power Childress provides substantial expansion potential for future horizons numbered 5 through to 10. Design work is underway to enable liquid cooled GPU deployments across the entire site, positioning us to scale seamlessly alongside customer demand. Finally, turning to Sweetwater, our flagship data center hub in West Texas, which has been somewhat overshadowed in recent months by the activity in Childress and Canada. At full build-out, Sweetwater will support up to 2 gigawatts, 2,000 megawatts of gross capacity, all of which has been secured from the grid. As shown in the chart, this single hub rivals and in most cases, exceeds the entire scale of total data center markets today. While the recent headlines have naturally been dominated more about our AI cloud expansion at other sites, Sweetwater is a pretty exciting platform asset, giving us the capability to continue servicing the wave of AI compute demand. Sweetwater 1 energization continues to remain on schedule with more than 100 people mobilized on site to support construction of what is becoming one of the largest high-voltage data center substations in the United States. All exciting stuff. With that, I'll now hand over to Anthony, who will walk through our Q1 FY '26 results in more detail. Anthony Lewis: Thanks, Dan, and thanks, everyone, for your attendance today. Continued operational execution was reflected in another quarter of strong financial performance. Q1 FY '26 marked our fifth consecutive quarter of record revenues with total revenue reaching $240 million, up 20% -- 28% quarter-over-quarter and 355% year-over-year. Operating expenses increased primarily on account of higher depreciation, reflecting ongoing growth in our platform and higher SG&A. The latter primarily driven by a materially higher share price, resulting in acceleration of share-based payment expense and a higher payroll tax expense associated with employees -- $63 million were both significantly up, largely on account of unrealized gains on prepaid forward and cap call transactions entered into in connection with our convertible note financings. Adjusted EBITDA was $92 million, reflecting continued margin strength, partially offset by that higher payroll tax of $33 million accrued in the quarter on account of strong share price performance. Turning now to our recently announced AI cloud partnership with Microsoft. As Dan mentioned, this is a very significant milestone for IREN. It not only delivers strong financial returns, but also creates a significant long-term strategic partnership for the business. Focusing on the financials. The $9.7 billion contract is expected to deliver approximately $1.9 billion in annual revenue once the 4 phases come online with an estimated 85% project EBITDA margin. This strong margin, which reflects our vertically integrated model incorporates all direct operating expenses across both our cloud and data center operations supporting the transaction, including power, salary and wages, maintenance, insurance and other direct costs. These cash flows deliver an attractive return on the cloud investment, i.e., the $5.8 billion CapEx for the GPUs and ancillaries after deducting an appropriate internal colocation charge, ensuring that the project delivers robust cloud returns as well as an attractive return on our long-term investment in the Horizon data centers, which will deliver returns for many years into the future. The transaction has also a number of features that allow us to undertake the transaction in a capital-efficient way. Firstly, the payments for the CapEx are aligned with the phased delivery of the GPUs across the calendar year '26 as we deliver those 4 phases. Secondly, the $1.9 billion in customer prepayments being 20% of total contract revenue, paid in advance of each tranche provides funding for circa 1/3 of the funding requirement at the outset. Thirdly, the combination of the latest generation of GPUs and the very strong credit profile of Microsoft should allow us to raise significant additional funding secured against the GPUs and the contracted cash flows on attractive terms. While the final outcome will be subject to a range of considerations and factors, we are targeting circa $2.5 billion through such an initiative. And depending on final terms and pricing, there is meaningful upside to that, noting again the very high quality of our counterparty. We also have a range of options available to fund the remaining $1.4 billion, including existing cash balances, operating cash flows and a mix of equity convertible notes and corporate instruments. On that note, turning more generally to CapEx and funding. We continue to focus on deepening our access to capital markets and diversifying our sources of funding. We issued $1 million in 0 coupon convertible notes during October, which was extremely well supported. And we also secured an additional $200 million in GPU financing to support our AI cloud expansion in Prince George, bringing total GPU-related financings to $400 million to date at attractive rates. Taking into account recent fundraising initiatives, our cash at the end of October stood at $1.8 billion. Our upcoming CapEx program, which includes the construction of the Verizon data centers for the Microsoft transaction will be met from a combination of the strong starting cash position, operating cash flows, the Microsoft prepayments, as just noted, and other financing streams that are underway. These include the GP financing facilities that we discussed as well as a range of other options under consideration from other forms of secured lending against our fleet of GPUs and data centers through to corporate level issuance, whilst maintaining an appropriate balance between debt and equity to maintain a strong balance sheet. With that, we'll now turn the call over to Q&A. Operator: [Operator Instructions] The first question today comes from Nick Giles from B. Riley Securities. Nick Giles: I want to congratulate you on this significant milestone with Microsoft. This was really great to see. I have a 2-part question. Dan, you mentioned strategic value, and I was first hoping you could expand on what this deal does from a commercial perspective. And then secondly, I was hoping you could speak to the overall return profile of this deal and how you think about hurdle rates for future deals. Daniel Roberts: Sure. Thanks, Nick. I appreciate the ongoing support. So in terms of the strategic value, I think undoubtedly, proving that we can service one of the largest technology companies on the planet has a little bit of strategic value. But below that, the fact that this is our own proprietary data center design, and we've designed everything from the substation down to the nature of the GPU deployment and that has been deemed acceptable by a $1 trillion company, I think that's got a bit of strategic value, both in terms of demonstrating to capital markets and investors that we are on the right track, but also importantly, in terms of the broader customer ecosystem and that validation. And look, we've seen that play out over the days since the announcement. In terms of hurdle rates and returns, I think it's worth Anthony, if you can to jump into this. I think it's fair to say that IRRs, hurdle rates and financial models have dominated our lives for the last 6 weeks. So there's probably a little bit we can outline in this regard. Anthony Lewis: Sure. Thanks, Dan, and thanks for the question. The -- yes, just in terms of -- yes, the returns on the transaction, obviously, as I noted in the introductory comments, we -- when we look at the cloud returns, we obviously take away what we think to be an arm's length colocation rate, right, so effectively charge the deal for the cost of reaching the data center capacity. After we take that into account on an unlevered basis and assuming that there are 0 cash flows or RV associated with the GPUs after the term of the contract, we expect an unlevered IRR of low double digits. Obviously, we'll be looking to add some leverage to the capital structure for the transaction, as we also discussed. And once we take that target $2.5 billion of additional leverage into account, you're achieving a levered IRR in the order of circa 25% to 30%. Obviously, that is assuming that $2.5 billion package and it also assumes that the remaining funding is coming from equity as opposed to other sources of capital, which we might also have access to. I'd also note that we said that the -- might well be upside on that $2.5 billion. Obviously, at a $3 billion leverage package against the GPUs on a secured financing package, you could see those -- that levered return increase by circa 10%. In terms of the RV, we've obviously -- in those numbers, we're just reflecting 0 economic value in the GPUs at the end of the term. If, for example, you were to assume a 20% RV, obviously, that has a material impact. Unlevered IRRs would increase to high teens and your levered IRRs would be somewhere between 35% to 50% depending on your leverage assumptions. Daniel Roberts: Yes. I think maybe just to jump in as well. Thanks, Anthony. That's all absolutely correct. And there are a lot of numbers in there, which is demonstrative of the amount of time we spent thinking about IRRs. So I think just to reiterate a couple of points. One is we've clearly divided out our business segments into stand-alone operations for the purposes of assessing risk return against a prospective transaction. So to be really clear, all of those AI cloud IRRs assume a colocation charge. So they assume a revenue line for our data centers. So our data centers, we've assumed to earn internally $130 per kilowatt per month escalating, which is absolutely a market rate of return, particularly considering the first 5 years is underwritten by a hyperscale credit. So that's probably the first point I'd make. But it's also really important to mention that we've optimized elsewhere. So the 76,000 GPUs that we've procured for this contract at a $5.8 billion price, Dell have really looked after us to the point where they've got an in-built financing mechanism in that contract, where we don't have to pay for any GPUs until 30 days after they're shipped. So there's further enhancements there. And then the final point I'd reiterate is this 20% prepayment, which I don't believe we've seen elsewhere, accounts for 1/3 of the entire CapEx of the GPU fleet. And I guess we've been asked previously why we would prefer to do AI cloud versus colocation. As one very single small data point, we are getting paid 1/3 of the CapEx upfront here as compared to having to give away equity -- big chunks of equity in our company to get access to a colocation deal. So we're really pleased to lead us towards that $3.4 billion in ARR by the end of 2026 on returns that are pretty attractive. Yes, it's a good result. Nick Giles: Anthony, Dan, I really appreciate all the detail there. One more, if I could. I was just wondering if you could give us a sense for the number of GPUs that will ultimately be deployed as part of the Microsoft deal. And then as we look out to year 6 and beyond, I mean, can you just speak to any of the kind of future-proofing you've done of the Horizon platform and what can ultimately be accommodated in the long term for future generations of chips? Kent Draper: I'm happy to jump in and take that one, Dan. So in terms of the number of GPUs to service this contract, I draw your attention to some of our previous releases where we've said that each phase of Horizon would accommodate 19,000 GB300s. And obviously, we're talking about 4 phases here with respect to that. In terms of future proofing of the data centers, there are a number of elements to it, but the primary one is that we have designed for rack densities here that are capable of handling well in excess of the GB300 rack architecture. And to give you specific numbers there, the GB300s are around 135 kilowatts of rack for the GPU racks and our design at the Horizon facilities it can accommodate up to 200 kilowatts of rack. So that is the primary area where we have future-proofed the design. But as Dan also mentioned in the remarks on the presentation, we have enhanced the design in a number of ways, including effectively what is full Tier 3 equivalent concurrent maintainability. So yes, there are a number of elements that have been accommodated into the data centers to ensure that they can continue to support multiple generations of GPUs. Nick Giles: Very helpful, Kent. Guys, congratulations again and keep up the good work. Operator: The next question comes from Paul Golding from Macquarie. Paul Golding: Congrats on the deal and all the progress with HPC. I wanted to ask, I guess, just a quick follow-on to the IRR question. Just on our back of the envelope math, it looks like pricing per GPU hour may be on the rise or at the higher end of that $2 to $3 range, assuming full utilization, so presumably potentially even higher. How should we think about the pricing dynamics in the marketplace right now on cloud given the success of this deal? And what seems to be fairly robust pricing? And then I have a follow-up. Daniel Roberts: Sure. Kent Draper: You go ahead, Dan. Daniel Roberts: Look, I'll let Kent talk a bit more about the market dynamic, but it is absolutely fair to say that we're seeing a lot of demand. That demand appears to increase month-on-month in terms of the specific dollars per GPU hour, we haven't specified that exactly. However, we have tried to give a level of detail in our disclosures, which allows people to work through that. I think importantly, for us, rather than focusing on dollars per GPU hour, which I think your statement is correct, is focus on the fundamental risk return proposition of any investment. And when we've got the ability to invest in an AI cloud, delivering what is likely to be in excess of 35% levered IRRs against the Microsoft credit, I mean, you kind of do that every day of the week. Kent Draper: Yes. Thanks, Dan. And Paul, with regard to your specific question around demand, we continue to see very good levels of demand across all the different offerings we have. The air-cooled servers that we are installing up in our facilities in Canada lend themselves very well to customers who are looking for 500 to 4,000 GPU clusters and want the ability to scale rapidly. As we've discussed before, transitioning those existing data centers over from their current use case to AI workloads is a relatively quick process, and that allows us to service the growth requirements of customers in that class very well. And case in point, we've been able to precontract for a number of the GPUs that we purchased for the Canadian facilities well in advance of them arriving out of the sites. And this is something that customers have historically been pretty reticent to do, but that level of demand exists in the market as well as ongoing trust and credibility of our platform with both existing and new customers that is allowing us to take advantage and pre-contract a lot of that away. And then obviously, with respect to the Horizon 1 build-out for Microsoft, this is the top-tier liquid cooled capacity from NVIDIA. We continue to see extremely strong demand for that type of capacity. And the fact that we are able to offer that means that we can genuinely serve all customer classes from hyperscalers, the largest foundational AI labs and largest enterprises with that liquid cooled offering down to top-tier AI start-ups and smaller scale inference enterprise users at the BC facilities. Paul Golding: As a follow-up, as we look out to Sweetwater 1 energization coming up fairly soon here in April, are you able to speak to any inbound interest you're getting on cloud at that site? I know it's early days just from a construction perspective, maybe for the facilities themselves. But any color there and maybe whether you would consider hosting at that site given the return profile and potential cash flow profile that you would get from engaging in, in the cloud business over a period of time? Kent Draper: Yes. In terms of the level of interest and discussions that we're having, we're seeing a strong degree of interest across all of the sites, including Sweetwater as well. Obviously, very significant capacity available at Sweetwater, as Dan mentioned, with initial energization there in April 2026, which is extremely attractive in terms of the scale and time to power. So I think it's very fair to say that we're seeing strong levels of interest across all the potential service offerings. As it relates to GPU as a Service and colocation, as previously, we will continue to do what we think is best in terms of risk-adjusted returns. Anthony outlined the risk-adjusted returns that we're seeing in colocations -- sorry, in GPU as a Service specifically at the moment. And as we've outlined over the past number of months, that does look more attractive to us today. But as we continue to see increasing supply-demand imbalance within the industry, that may well feed through into colocation returns where it makes sense to do that in the future. But as it stands today, certainly, the return profile that we're seeing in GPU as a Service, we think is incredibly attractive. Operator: The next question comes from Brett Knoblauch from Cantor Fitzgerald. Brett Knoblauch: On the $5.8 billion, call it, order from Dell, can you maybe parse out how much of that is allocated to GPUs and the ancillary equipment? And on the ancillary equipment, say, you wanted to retrofit the Horizon data centers with new GPUs in the future, do you also need to retrofit the ancillary equipment? Kent Draper: So out of that total order amount, I mean, it's fair to say the GPUs constitute the vast majority of it, but there is some substantial amounts in there for the back-end networking for the GPU clusters, which is the top-tier InfiniBand offering that's currently available. In terms of future proofing, we'll have to see how much of that equipment may or may not be reusable for future generations of GPUs. As I was referring to earlier, the vast majority of our data center equipment and the way that we have structured the rack densities within the data center mean that the data center itself is future-proofed. But in terms of the specific equipment for this cluster, it remains to be seen whether that will be able to be reused. Brett Knoblauch: Perfect. And then on the -- maybe the new 40,000 order that sounds like kind of be plugged in, in Canada. You talked about maybe a very efficient CapEx build for those data centers. Can you maybe elaborate a bit more on that? I know when the AI craze maybe first got started 18 months ago, you guys flagged that you guys are running GPUs up. I'm pretty sure that you built for less than $1 million a megawatt. Are we closer to that number for this? Or are we just well below maybe what the Horizon 4 cost per megawatt basis? Kent Draper: So in terms of the basic transition of those data centers over to AI workloads, it is relatively minimal in terms of the CapEx that is required. The vast majority of the work is removing ASICs, removing the racks that the ASICs sit on and replacing those with standard data center racks and PDUs, so the power distribution units. That can accommodate the AI servers. So that is relatively minimal. As we've discussed before, it's a matter of weeks to do that conversion. And from a CapEx perspective, it is not material. The one element that may be more material in terms of that conversion is adding redundancy if required to the data centers that would typically cost around $2 million a megawatt if we need to do that. But obviously, in the context of a full build-out like we're seeing of liquid cooled capacity at Horizon, it's extremely capital and CapEx efficient. Operator: The next question comes from Darren Aftahi from ROTH Capital Partners. Darren Aftahi: Congrats on the Microsoft deal as well. To start, with Microsoft, was colocation ever on the table with them? Did they come to you asking for AI cloud? Or how did those negotiations sort of fall out? Daniel Roberts: Just think about the best way to answer this. So we've been talking to Microsoft for a long period of time and the nature of those conversations absolutely did evolve over time. Is there a preference for the cloud deal? Possibly. But at the end of the day, we want to focus on cloud, and that was the transaction we were comfortable with. So conversations really focused around that over the last 6 weeks or so. I think if I may, I'd talk more generically around these hyperscale customers because obviously, we weren't just talking to Microsoft. I think there probably is a stronger preference from those to be looking at more colocation and infrastructure deals rather than cloud deals. But also is the case that there's an appetite for a combination. So it may be that we do some colocation in the future. Yes, I think different hyperscalers have different preferences. We'll entertain them all. But given the nature of the deal we did with a 20% prepayment funding 1/3 of CapEx and a 35% plus equity IRR, we're feeling pretty good about pursuing AI cloud. Darren Aftahi: Got it. And just as a follow-up with the rest of Childress, is there any significance to the size of the Microsoft deal starting at 200 megawatts? Do they have interest in the rest of the campus? Have you talked to them about that yet? Daniel Roberts: So again, I'm going to divert the question a little bit because we've got some pretty strong confidentiality provisions. So let me talk generically. There is appetite from a number of parties in discussing cloud and other structures well above the 200 megawatts that's been signed with Microsoft. Operator: The next question comes from John Todaro from Needham. John Todaro: Congrats on the contract. I guess just one on that as we dig a little bit more in, any kind of penalties or anything related to the time line of delivering capacity? Just wondering if there's guardrails around that. And then I do have a follow-up on CapEx. Daniel Roberts: There's always a penalty, whatever you do in life, if you don't do what you promise you're going to do. So we're very comfortable with the contractual tolerances that have been negotiated, the expected dates versus contractual penalties and other consequences. I can't comment more specifically beyond that on this call. But the other thing I would reiterate is we have never ever missed a construction or commissioning date in our life as a listed company. So I think you can take a lot of comfort that if we've put something forward to Microsoft and agreed it there and if we put something forward to the market, our reputations are on the line, our track record is on the line, we're going to be very confident we can deliver it and potentially even exceed it. John Todaro: Got it. Understood. And then just following up on the CapEx. That $14 million to $16 million on the -- I think it was the data center side. Just wondering if there's anything kind of additional in there that would get it north of the colo items other folks are talking about, if maybe there's some networking or cabling included in that or any contribution from tariffs are being considered there? Kent Draper: To give some additional color there. So yes, in terms of networking, et cetera, again, as Dan mentioned in his presentation earlier, this is designed -- the Horizon campus is designed to be able to operate 100-megawatt super clusters. Now that does raise a significant level of additional infrastructure that is required over being able to deliver smaller clusters. And so certainly, some of the costs that are in the number that you mentioned are related to the ability to do that. And that will not necessarily be a requirement of every customer moving forward. So that probably is an element that is somewhat unique. Operator: The next question comes from Stephen Glagola from JonesTrading. Stephen Glagola: On your British Columbia GPUs, can you maybe just provide an update on where you guys stand with contracting out the remaining 12,000, I believe, GPUs of the initial 23,000 batch? And are you seeing any demand for your bare metal offering in BC outside of AI native enterprises? Kent Draper: Yes. Happy to give an update there. We previously put out guidance a couple of weeks ago that we had contracted 11,000 out of the 23,000 that were on order. Subsequent to that, we have contracted a bit over another 1,000 GPUs. And primarily the ones that are not yet contracted are the ones that are arriving latest in terms of delivery time lines. As I mentioned earlier, we are seeing an increased appetite from customers to precontract. But these are GPUs that are a little further out in terms of delivery schedules relative to the ones that have already been contracted. Having said that, we continue to see very strong levels of demand, and we're in late-stage discussions around a significant portion of the capacity that has not yet been contracted and continue to see very good demand leading into the start of next year as well and are receiving an increasingly large number of inbounds from a range of different customer classes. So you mentioned AI natives. Yes, that has been a portion of the customer base that we've serviced previously. But we are also servicing a number of enterprise customers on an inference basis. So it is a pretty wide-ranging customer class that we're servicing out of those British Columbia sites. Operator: The next question comes from Joe Vafi from Canaccord Genuity. Joseph Vafi: Congrats from me too on Microsoft. Just maybe, Dan, if you could kind of walk us through what you were thinking in your head. Clearly, some awesome IRRs here on the Microsoft deal. But how are you thinking about risk on a cloud deal here versus a straight colo deal, which probably wouldn't have had the return, but maybe the risk profile may be lower there? And then I have just a quick follow-up. Daniel Roberts: Thanks, Joe. Look, it's funny. I actually see risk very differently. So we've spoken about colocation deals with these hyperscalers. And if you model out a 7% to 8% starting yield on cost and run that through your financial model, what you'll generally see is that you'll struggle to get your equity back during the contracted term, and then you're relying on recontracting beyond end of that 15-year period to get any sort of equity return. So in terms of risk, I would argue that there's a far better risk proposition implicit in the deal that we've signed and going down the cloud route. And then for the shorter-term contracts on the colo side where you may not have a hyperscale credit, you're running significant GPU refresh risk against companies that don't necessarily have the balance sheet today to support confidence in that GPU refresh. So again, we think about it in business segments, we think about our data center business has got a great contract internally linked to Microsoft as a tenant. And that data center itself is future-proofed accommodating up to 200-megawatt rack densities. And it's also the case that in 5 years, the optionality provides further downside protection. So upon expiry of the Microsoft contract, maybe we can run these GPUs for additional years, which we've seen with prior generations of GPUs like the A100s. But assuming that isn't the case, we've got a lot of optionality within that business. We could sign a colocation deal at that point. We could relaunch a new cloud offering using latest generation GPUs. So my concern with these colocation deals is what you're doing is you're transferring an interest or an exposure to an asset that is inherently linked to this exponential world of technology and demand and the upside that, that may entail and you're swapping that for a bond position in varying degrees of credit with the counterparties. So if you're swapping an asset for a bond exposure to a $1 trillion hyperscaler and you're kind of hoping you might get your equity back after the contracted period, I mean, that's one way to look at it. If you're swapping your equity exposure for a bond exposure in a smaller Neo cloud without a balance sheet, then is that a good decision for shareholders? We just haven't been comfortable. Joseph Vafi: I get it, Dan. I mean we've run some DCF here and on some colo deals here in the last couple of months. And there's a lot to be learned when you do it. There's no doubt. And then just on this prepayment from Microsoft, I know you've got some strong NDAs here, but kind of a feather in your cap on getting that much in a prepayment. Any other -- anything else to say on how -- maybe your qualifications or how Microsoft perhaps and you came to the agreement to prefund the GP purchases out of the box? Daniel Roberts: Look, yes, getting the 1/3 of the CapEx funded through a prepayment from the customer is fantastic from our perspective, and we're super appreciative for Microsoft coming to the table on that. And what that allows us to do is to drive a really good IRR and return to equity for our shareholders. And again, linking back to what Anthony said earlier, we expect 35% equity IRRs from this transaction accounting after an internal data center charge. So trying to create that apples-and-apples comparison for a Neo cloud that has an infrastructure charge. Even after that, we're looking at 35% plus. And also what's really important to clarify is the equity portion of that IRR we have assumed is funded with 100% ordinary equity, which given our track record in raising convertibles, given the lack of any debt at a corporate level is probably conservative again. So from a risk-adjusted perspective, linked to a $1 trillion credit and the ability to fund it efficiently, I mean, we're really happy with the transaction. And yes, hopefully, there's more to come. Operator: The next question comes from Michael Donovan from Compass Point. Michael Donovan: Congrats on the progress. I was hoping you could talk more to your cloud software stack and the stickiness of your customers. Kent Draper: Yes, I'm happy to take that one. Yes, to date, the vast majority of our customers have required a bare metal offering, and that is their preference. These are all highly advanced AI or software companies like a Microsoft. They have significant experience in the space, and they want the raw compute and the performance benefits that, that brings, having access to a bare metal offering and then being able to layer their own orchestration platform over the top of that. So that has been by design that we have been offering a bare metal service. It lends itself exactly to what our customers are looking for. Having said all of that, we obviously are continuing to monitor the space, continuing to look at what customers want. And we are certainly able to go up the stack and layer in additional software if it is required by customers over time. But today, as I said, we haven't really seen any material levels of demand for anything other than the bare metal service that we're currently offering. Daniel Roberts: And I think maybe just to add to that, Kent, if you step back and think about it, you contract in with some of the largest, most sophisticated technology companies on the planet that want to access to our GPUs to run their software. It's kind of upside down world to then turn around and say, "Oh, we'll do all the software and operating layer." Like clearly, they're in the position they are because they have a competitive advantage in that space. They're just looking for the bare metal. I think as the market continues to develop over coming years, it may be the case that if you want to service smaller customers that don't have that internal capability or budget, then yes, maybe you will open up smaller segments of the market. But for a business like ours that is pursuing scale and monetizing a platform that we spent the last 7 years building, it's very hard to see how you get scale by focusing on software, which is, I think everyone generally accepts is going to be commoditized anyway in coming years as compared to just selling through the bare metal and letting these guys do their thing on it. Michael Donovan: That makes sense. I appreciate that. You mentioned design works are complete for a direct fiber loop between Sweetwater 1 and 2. How should we think about those 2 sites communicate with each other once they're live? Kent Draper: Yes. I think really the best way to think about it is it just adds an additional layer of optionality as to the customers that would be interested in that and how we contract those projects. There are a number of customers out there who are looking particularly for scale in terms of their deployments. And obviously, being able to offer 2 gigawatts that can operate as an individual campus even though the physical sites are separated is something that we think has value, and that's why we have pursued that direct fiber connection. Operator: At this time, we're showing no further questions. I'll hand the conference back to Dan Roberts for any closing remarks. Daniel Roberts: Great. Thanks, operator. Thanks, everyone, for dialing in. Obviously, it's been an exciting couple of months and particularly last week. Our focus now turns to execution to deliver 140,000 GPUs through the end of 2026, but also continuing the ongoing dialogue with a number of different customers around monetizing the substantial power and land capacity we've got available and our ability to execute and deliver compute from that. So I appreciate everyone's support. I look forward to the next quarter.
Operator: Good morning, everyone. Before we begin the official remarks, I will read the cautionary note regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements within the meaning of applicable security laws, including, among others, statements concerning the company's objectives, the company's strategy to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management and is subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated. Please refer to the cautionary statement and the risk factors identified in our filings with SEDAR for a more detailed explanation of the inherent risks and uncertainties that could affect such forward-looking statements. Following the presentation, we will conduct a Q&A session. I would now like to turn the conference call over to Simon Cairns, Chief Executive Officer. Simon Cairns: Thank you, Steve. Welcome, everyone, and thank you for joining us on today's third quarter 2025 earnings call. I'll start by reviewing the operational highlights for the quarter, then discuss how our strategic pivot towards an integrated outcomes-based platform is meeting growing industry demand. After that, I'll turn the call over to our Chief Financial Officer, Elliot Muchnik, who will review the financial results in detail. Then we'll be happy to take your questions. Our third quarter results demonstrate that our strategic pivot towards an integrated outcomes-based platform in Exchange and Self service supported by Managed services is meeting growing industry demand. Revenue rose 5% year-over-year to $38.2 million, driven by exceptional 103% year-over-year growth in Exchange service revenue. Exchange now represents 54% of our total sales at $20.5 million, more than doubling from the prior year period. This exceptional performance reflects strong execution by our commercial and technology teams in capturing publisher demand as they seek new value that traditional SSPs no longer provide. Self service revenue was $8.3 million, representing 22% of total revenue. Now the headline number appears flat compared to $8.4 million in the year ago period, but that doesn't tell the full story. Our year-over-year comparison continues to be impacted by a single large client that paused spending in early 2025 due to their own restructuring. When you exclude the temporary impact, Self service sales were actually up 15% for the quarter and 34% year-over-year. That's the real trajectory of this line of business. Specifically, we onboarded 23 net new Self service clients during the quarter, reflecting our sales initiatives targeting higher spend clients and positioning us for long-term revenue growth. These aren't just any clients. They are the type of customers who align with where the market is heading and where our platform capabilities provide the most value. In uncertain markets, like we've seen through 2025, illumin is attracting new customers to its Exchange service offering as publishers seek alternatives to older established SSPs. At the same time, more brands are shifting to Self service options with a goal of converting more of their ad spend to actual advertising rather than service fees. The market is clearly moving away from traditional DSPs and towards AI-powered outcomes-based platforms with integrated retail media capabilities. This shift validates the strategic investments we've been making. To lead this transformation, we recently appointed Brian Garrigan as our Chief Revenue Officer. Brian brings proven ad tech leadership and a track record of driving scalable growth, most recently transforming Simpli.fi into a category leader. We're excited to have Brian leading our global sales, account management and client success efforts as we scale our platform. Our investments in leading in-app incrementality measurement are expected to be rolled out later this year and in the first half of 2026. Combined with our plan to transition Self service to a fully generative AI solution in 2026, these capabilities will enable us to add far more value to brands and marketers well beyond the historic customer profile and increase our growth trajectory. This isn't just about keeping up with the market. It's about positioning illumin to lead in an increasingly competitive landscape, particularly in incrementality measurement and AI-powered optimization. These are the capabilities that will differentiate winners from everyone else in our space. Now Managed service revenue was $9.4 million, down from the prior year. As for earlier this year, market conditions have impacted advertisers' willingness to market on a full funnel basis, which has impacted our Managed sales. As such, we can't sugarcoat this. Managed is a challenge, but platform data indicates we have a very sellable solution. Our platform data indicates that we're attracting larger premium-focused agencies as opposed to our traditional mid-market agencies. These agencies are willing to pay a premium for performance, and our Managed services performance and pricing are as good or better than any of the larger brands in our industry. As a result, we are now refocusing our sales pitch around a revitalized Managed, matched with some additional services that reach beyond our traditional DSP capabilities. And as a result, in Q4, we are already seeing better performance in our Managed pipeline. Furthermore, our Managed services is now integrated with Exchange. So just like in Self, we can offer compelling pricing and supply chain optimization to our Managed service and Self service clients alike. This brings our Managed services pitch in line with an outcomes-based approach to the platform that is proving itself out in both Exchange and Self service already. For too long, the Managed line has been sold as us assisting you in producing great campaigns. You will see us reposition the entire sales pitch under our new CRO to focus on outcomes-based approaches and how it can serve as an upsell to Self service solution. Regardless of our revitalized approach in Managed, given the year-to-date challenges in like-for-like Managed sales, we've taken decisive actions to streamline operations through cost containment and to accelerate our shift towards scalable technology-led revenue with a focus on improved cash flow generation and protecting our balance sheet. To be clear, we're not just cutting costs. We're fundamentally restructuring operations to drive profitability and realize platform leverage. Our generative Self service version not only removes friction in customer adoption and spending, but also creates new opportunities to realize that platform leverage. As we close 2025 and move into 2026, our priorities are crystal clear. First, continue scaling Exchange and Self service through platform innovation and sales execution. The momentum is there, we need to capitalize on it. Secondly, continued investment in our product road map to differentiate ourselves in an increasingly competitive market, particularly in incrementality measurement and AI-powered optimization. These aren't nice to haves, they are must-haves for sustainable competitive advantages. And third, complete our operational restructuring to drive profitability and platform leverage. The early benefits from restructuring and cost reduction initiatives we've been implementing this year are already visible, and these actions are helping us position the company for improved profitability as we move into 2026. We're confident this strategy will position illumin for sustainable, profitable growth. Now I'll turn the call over to Elliot to provide a detailed review of our third quarter financial results. Elliot Muchnik: Thank you, Simon. Good morning, everyone, and thank you for joining our third quarter 2025 earnings call. Today, we reported our third quarter 2025 results that included sustained revenue growth driven by another quarter of exceptional performance in Exchange service, which rose, as Simon mentioned, 103% year-over-year as our initiatives to drive adoption and expand demand continue to pay off. I will now provide additional details on our third quarter results. The third quarter revenue was $38.2 million, up 15.4% compared to the $33.1 million in the previous quarter and 5.2% compared to the $36.3 million from Q3 of the prior year. Our year-over-year revenue growth continues to be driven mainly by strong performance in our Exchange service business and stable revenue in our Self service, partially offset by a decrease in Managed service revenue. Our growth in Exchange service was driven by adding new customers in this area as well as an increased volume of spend by our clients. We are now seeing the benefits from our efforts over the past year to invest in key technology improvements, working with external partners to improve these capabilities and by providing better service due to our expanded customer support team. Turning to Self service. Revenue was $8.3 million, relatively stable with last year's third quarter and representing 22% of total revenue for the quarter. Year-over-year comparison in Self service continued to be impacted, as mentioned earlier, by a large client that reduced spending this year due to their own specific circumstances, including undergoing a business restructuring. Excluding the spend of that client from both comparative periods, Self service revenue grew by 15% over the same period in last year and 34% over the 9 months comparative. We onboarded 23 new Self service clients during the quarter, reflecting sales initiatives targeting higher spend clients. Our focus remains on targeting higher spend clients as we see further progress in raising customer adoption, conversion and spend performance in this segment. In Managed service, revenue here was $9.4 million for the third quarter compared to $17.8 million in Q3 2024. This year-over-year change was mainly due to larger economic uncertainty, which has been influencing some customer marketing spend, and we anticipate to continue this in the near term. To mitigate the effects, we're already taking measures to reallocate resources in order to drive improved sales in this Service line as part of a larger series of initiatives. Gross profit or net revenue for the third quarter of 2025 was $14.4 million compared to $17.2 million in Q3 2024, reflecting increased media-related costs, which showed in the gross margin for the quarter as it was 38% compared to 47% for the same period in 2024. This year-over-year variance reflects a shift in our product mix with a higher portion of revenue coming from Service lines with lower margins such as Exchange service. We expect gross margin to return to a level more consistent with prior quarters in Q4 based on our current pipeline. Total operating expenses for the third quarter of 2025 were $17.5 million compared to $18 million during the same period in 2024. The year-over-year decrease reflected lower technology expenses, general and administrative costs and share-based compensation. This was partially offset by increased depreciation and amortization attributable to an increase in capitalized costs, higher funding received in the prior year period and higher sales and marketing expenses, which were primarily related to the increased salaries and benefits as well as commission and bonus costs associated with higher revenues for the quarter. Q3 2025 operating expenses as a percentage of revenue were 45.8% compared to 49.9% in Q3 2024. Third quarter adjusted EBITDA was $0.2 million compared to adjusted EBITDA of $1.9 million in the prior year period. Despite the higher revenues, the year-over-year decline was primarily attributed to lower gross margin as a result of product mix and higher sales and marketing expenses partially offset by lower general and administrative expenses. Net loss for the third quarter of 2025 was $2.1 million compared to a net loss of $1.1 million in Q3 2024. The year-over-year change reflects the lower adjusted EBITDA, as mentioned above, higher depreciation and amortization expense and higher severance expenses as part of our cost containment initiatives, partly offset by net foreign exchange gain versus a loss in the prior period. On December 23, 2024, the company commenced the normal course issuer bid, or NCIB to purchase for cancellation up to $3.9 million of its outstanding common shares. As of September 30, a total of 744,108 shares have been repurchased under this facility at an average price of $1.65 per share for a total cost of $1.228 million. This includes 432,490 common shares during the third quarter of 2025 at an average price of $1.57 per share for a total cost of $680,123. The normal course issuer bid remains open and can continue until December 22, 2025, or until we reach our targeted repurchase limit. Turning to some corporate information. On our balance sheet, we exited the quarter with $43.2 million in cash versus $48.3 million as of the end of the prior quarter. The quarter-over-quarter decrease was primarily attributable to investments in our platform, payments on leases, the repurchase of common shares and negative cash flow from operations. The negative cash flow from operations is consistent with the seasonality of our business and industry and typically reverses in the fourth quarter. We continue to maintain a strong balance sheet in order to support our growth and to support our flexibility to develop our strategy despite ongoing difficult market conditions. As of September 30, 2025, the total number of outstanding common shares stood at 51,821,042, compared to 51,612,725 as of June 30, 2025. The figure reflects the impact of shares issued through the exercise of vested equity instruments, offset by our share repurchases during the quarter. On a fully diluted basis, our shares outstanding are approximately 55.9 million, and our insider share ownership is at 25%. In conclusion, our third quarter results were fueled by strong performance in our Exchange service business as a result of our targeted investments in this segment and stable performance in Self service revenue. As anticipated, operating expenses have started to decline as the majority of our growth investment designed to enhance our product platform, strengthen brand identity, increase client satisfaction, improve efficiencies and drive sales are now behind us. In addition, we continue to implement various cost reduction and restructuring initiatives in order to better align ourselves with the current economic environment. These actions are designed to drive sales growth, enhance our competitive position and to improve efficiencies throughout the organization. We remain confident in our long-term growth prospects as we continue to balance cost management with investments in key growth initiatives to drive revenue and improve profitability. And with that, I'll now turn the call back over to Simon for his closing remarks. Simon Cairns: Thank you, Elliot. Let me summarize what Q3 tells us about where we're headed. Our third quarter results demonstrate real progress in our strategic transformation. Exchange service more than doubled, proving that our platform approach resonates with publishers seeking alternatives to traditional SSPs. When adjusted for temporary exit of one client, Self service revenue was up 34% year-over-year and 15% for the quarter. That's the underlying health of this business. Yes, we are navigating headwinds in Managed services, but we address this head on through operational restructuring that are already showing benefits while accelerating our shift towards a scalable technology-led revenue. The market shift towards outcome-based platforms with AI-powered optimization and integrated retail media capabilities validates our strategic direction. Our investments in incrementality measurement and generative AI for Self service will position us to capture that opportunity. As we move into 2026, we're focusing on 3 things: scaling our high-growth services, differentiating through product innovation and driving profitability through operational efficiency. These aren't just nice-to-have improvements. They are the foundation for sustainable, profitable growth. We appreciate your continued support and look forward to demonstrating continued progress on these priorities. Thank you all for joining us today. This concludes our formal remarks. We look forward to answering your questions. Operator: Good morning, gentlemen, and thank you to everyone for attending this morning's presentation of illumin Holdings Third Quarter 2025 Financial and Operating Results. [Operator Instructions] Gentleman, your first question this morning comes from Aravinda Galappatthige at Canaccord Genuity. Aravinda Galappatthige: Just 2 questions from me. First of all, maybe for Simon. Can you just talk a little bit more about the innovations that you're looking to bring in? I mean, maybe explain the features and how they're different from what you see in the industry, specifically on the AI automation side of things that could potentially attract more Self service revenue? And then secondly, I guess this is a quick question for Elliot. Can you just help us understand what the FX impact was? It looks like a lot of the Exchange revenues are LatAm or Europe-based. I wanted to understand sort of the constant currency revenue trend was? And sorry, just a third quick one. On the margins, how different are the Exchange services margins from Self serve, Managed? just some general color on that. Simon Cairns: Thanks, Aravinda. I'll go first just regarding your -- the product -- your questions around product innovation going forward. So we've seen a material sort of shift in the DSP marketplace from a customer lens, moving away from inputs. In other words, help me spend my advertising dollars across a variety of channels towards really helping understand what value I'm getting from my marketing dollars. In other words, a shift from inputs to outcomes. From our point of view, we have found a very solid pathway through this shift based on some of the extensive investment that the company has made over the last several years in its Self service product, in particular, its journey canvas. So first and foremost, we have found a path to really layer in what the industry calls incrementality. This fundamentally is creating a link between advertising spend and new business growth. Most of the advertising industry is essentially approximation, spend money over here and you will get incremental business over there. We have found a solid pathway to do this within the experience in a near real-time basis as opposed to having to jump out to third-party applications or wait weeks at a time. I am very proud of the product team and what they're doing there to sort of start to roll this out, start to piece it together through Q3, Q4 and into early 2026. That is a solid shift in how the product has historically been positioned and the value prop that it historically offers. And we are seeing climbing interest as a result of that. That also widens up our applicable customer base to a wider array of -- and particularly direct brands. Brands are the ones that want to most solve this problem. So it does create a good link between revised brand marketing, revised product marketing and revised product stance around shifting to an outcomes space. We found a pathway through. And this layers into generative AI quite quickly. We have a lovely drag-and-drop canvas that has been a great wow factor with customers the last several years. Imagine just being able to interact directly with that, either through voice, either through keyboard, have the machine do a lot of the setup, a lot of the refinement. You always have control, of course. And so we see a way to create a very intelligent and a very interactive and most importantly, I think, an absolutely frictionless Self service campaign and orchestration and optimization, not just tool but platform that gives us a data layer that's quite compelling, that gives us an experience layer that I think is unique and different and certainly better than anything I've seen in the market right now. And I like the fact that from an investor's point of view, we leverage a lot of the investment we've already made in the product the last several years to deliver on what I think is the full promise itself. So hopefully, that gives you some commentary. Elliot Muchnik: Was that okay with you, Aravinda, do you want to move on to your second question? Aravinda Galappatthige: Yes, it's good. Yes. Just on the margin differentials. I was wondering if you can just sort of give us a sense of -- and also the FX here. Elliot Muchnik: Yes, absolutely. Thank you for that question. The Exchange FX is really -- because we bill in the U.S., the transaction happens in USD and in Q3, I believe the Exchange rate with CAD, the U.S. dollar strengthened against the Canadian from $1.36 to 1.39. So we were -- that's part of the overall FX gain that you saw on the books. From a margin perspective, the Exchange represents a margin profile that's lower than our other 2 lines and particularly Managed and Self. So it is generally in the low to mid-30% gross take position, but it also has additional SG&A expenses that follow that business and particularly the highly variable, such as hosting, which we don't see in our other lines where we can get more scale. So it's a very solid, strong business for us, and -- but it does represent a smaller proportion from a margin perspective, which is why you see the overall dip because of the proportion of Exchange this quarter as a top line part. Does that answer your question? Aravinda Galappatthige: Yes, it does. Operator: Aravinda, I think there was a third part to your question. That was it. Okay. Our next question comes from Drew McReynolds at RBC Securities. Drew McReynolds: Can you hear me? Simon Cairns: I can, yes. Can you hear me all right? Drew McReynolds: Yes. I can hear you guys. You can hear me. And I think this is the first with our technology on our end. So it's nice to connect any event. Some follow-ups for me. Maybe starting with you, Elliot, just on cost efficiencies. Just where are you in terms of kind of realizing those cost efficiencies with Q3 and kind of how do they funnel in as we go forward? And then second question, maybe for you, Simon, on the Managed services side. Obviously, there is a ton of change that's happening in the ad tech world. What do you see here in this segment as kind of cyclical versus structural? And maybe a third one, just on the Self serve. Just remind me when do we lap that pause in customer spend earlier this year? Elliot Muchnik: Thank you, Drew, and I am really happy that we both have our technology aligned this time around, so we could hear each other clearly. So to your question as to the cost efficiencies that we undertook at the end of the second quarter, we've actually been able to realize those cost efficiencies. There are some tail on that around real estate that's going to take probably until the end of the year to actualize here. But for the most part, we're seeing that. So one of the reasons that it's obviously impacted this year a bit is because it involved people. So there was a severance charge that reduced the cash impact of those savings. And at the same time, as our margin profile changed, it obfuscated some of the savings on our SG&A that we were realizing by the fact that we have a lower gross profit and some additional expenses to support the business that is surging. But we've done what we needed to do. At the end of the second quarter, we've made substantive changes in our headcount, and particularly in North America and repurposed a lot of those investment focus as to what Simon said is to with our existing capital to support these innovations with our existing people and to focus on sales growth. So from our perspective, we've accomplished what we needed to do with the cost savings. We're just looking at the profile of the business and seeing how it's progressing in Q3 was probably -- we saw a bigger fallback in our top line for Managed than we had expected. Does that answer your question, Drew? Simon Cairns: I can take the question as... Drew McReynolds: Yes, that's great. Yes, maybe on to Simon on the Managed services side. Simon Cairns: Thanks, Drew, and thanks for the question. So you asked about cyclical and then also structural. So in terms of cyclical through the first sort of calendar half or 3 quarters of this year, the way I would characterize the cyclical impact on Managed is some of the opaqueness in the global trade economy, in particular, all goods going in and out of the United States, obviously. So specifically, what I mean is if you're a marketer and you're trying to plan your fall or your holiday or your seasonal discount to your offers to capture, say, consumer demand or new customer business in the second half of 2025. And you're starting your brand campaigns, your full funnel campaigns out in January, Feb, March and April in order to drive that demand. A lot of marketers told us that they suffer from being really unclear about what discounts, what offers they can have because they don't necessarily know what the margin is on their products given tariffs, for example. So across the board, they sort of hit pause on some of the top of funnel advertising. This is primarily brand advertising, positioning advertising and instead sort of just went with short-term practical tactical. They secured enough inventory for their products. They know what their prices, they know what margin they're going to make on their products, they know what discounts they can offer. So they went practical tactical in Q2 and Q3, we see that where we see spending, for example, in brands and whatnot active on, say, Self service products to achieve that. Managed offers -- both offer full funnel value, but Managed usually gets more customers who want to do more full funnel work. They want to do a bit of that brand work plus a bit of the practical tactical. And with that brand work sort of shifting downward, across the first half of this year, that is the cyclical side that did impact Managed for us year-to-date. This is not unique to us. There are several industry reports that note that on the whole, full funnel advertising really took a beating in the first half of this year. Most people went practical, tactical on the bottom of the funnel. And again, you can use your Self service product for that at a cheaper rate. And so both agencies and brands have, you can get as good or better results for a more competitive margin, makes sense. And that's part of the reason why on a like-for-like basis, we've seen year-to-date a 34% increase in sort of customers using Self on a revenue basis. In terms of structural, so a slightly different story there. Because we have sort of seen brands and agencies adopt Self and they're getting good results and the margin profile is different naturally. We've seen that the customers who are winning with us on Managed, and that's really my lens. Not so much are we winning, but are they winning with us? Are they getting good value? Are they sticking through? Those customers are slightly different than our historic ideal customer profile. They're actually larger, bigger, more robust agencies who are willing to pay a premium for premium support, premium service, white glove support, insights, ideas, coaching. And so while the Customer segment is -- it shows up in our results, it's definitively smaller, what we're seeing right now, which is why we are seeing a material decline in the Managed results year-to-date. But those customers themselves are actually quite solid. So this means that we do need to rebuild the pitch. We do need to reposition Managed around sort of a bit more of a premium service, a bit more sort of what are the motivators of these larger agencies, for example, who are willing to pay the premium to get that extra differential with their customers. And so with our new CRO and with some other platform innovation we're doing that I mentioned in the previous question, specifically related to outcomes. This is a big piece. We feel like we've got the cards now like in our hands. Finally, I think to have a good meaningful outcomes-centric, performance-centric, upmarket pitch on Managed, it's essential for us to now push that out in the marketplace and get that Managed pipe up and get the Managed sales up in 2026 for sure. So hopefully, that answers your question. Drew McReynolds: Yes, that's a super explanation. And then just lastly, just lapping the one customer. Simon Cairns: Sorry, I think I can say Q1, but Elliot may want to correct me on that. Elliot Muchnik: No, that's absolutely right. They were -- this customer spend, well, throughout the year was particularly focused on the first half of the year and concentrated in the first quarter. Operator: Gentlemen, your next question comes from Thomas Hui from Paradigm Capital. Thomas Hui: My question is just on the revenue mix. So for this quarter, there were some shifts and you guys are going through your transformation and there was the effect of a large customer. My question is whether we could take this quarter as a baseline for maybe Q4? And then as we move further out into '26 and into the future, like where do you see your ideal revenue mix to be in the illumin business? Simon Cairns: I can take -- I don't know necessarily say this guide is sort of similar. I'll let Elliot sort of answer that in terms of Q4, but I will say that we do expect the gross margin in particular to bounce back in Q4. And I would want to call that out and not have that necessarily buried under the lead of your question. So we did see a decline in gross margin this quarter, partly due to some mix shift for sure. But also, we -- again, we've had some larger customers on the DSP side, a larger customer, particularly on the DSP side, who experimenting with us, testing with us and at a lower margin profile, and that pulled it down. So we do expect a bounce back in the gross margin in Q4. So I do want to call that out, but I'll let sort of Elliot provide probably a more adult answer just related to the Q4. Elliot Muchnik: Thank you, Simon. So we don't believe that Q3 is representative of our going forward. We had particularly a quarter where Managed fell off while others remain stable or grew. We believe that with what we're doing with the effort that we're putting in and the things that Simon discussed in his remarks, that those will help us kind of deal with the immediate headwinds in Managed service. And so we're actually -- we believe that, that's a line that we could improve and thereby improving our gross margin overall and our bottom line performance as a result. So I would not draw a line from Q3. It's -- from a proportionality perspective, it's quite out of line. We think that we should be with Managed and Self serves to have the largest proportion of our top line with Exchange still a strong -- a very strong participant, but perhaps not at the level that it has been in Q3. Thomas Hui: And I guess my last question would be the focus on the ideal customers. I think you hinted on a couple of times that you're shifting towards larger agencies as well as brands. Maybe a little bit more about what you can share on that, that would be great. Simon Cairns: We historically have gone after customers of a certain sort of lower mid-market spend profile, sort of maximum 6 figures and where we're seeing better customer, first and foremost, interest in us. And then secondly, spend performance, the willingness to migrate from Managed to Self or from Self to Managed, whether they are an agency or brand. These spenders are in the seven-figure grouping. So Trade Desk has a strong health position in the marketplace, and they're a key agency strategic partner. I'm not saying that. But we have found a strong interest in what we're doing from what we nickname challenger brands. So this is not the category captain, for example, of the brand in the space, but they're the challenger brand, and they have money to spend to get their brand out there, to get their product out there. And they're less subject to, say, the quarterly or the month-to-month whims of the economy. They are committed perhaps on a 1-, 2-, 3-year trajectory to build up their brand or build up their product line. They're not start-ups. I'm not characterizing that. I think you know what I mean when I say a challenger brand. They are very established, and they're really trying to get -- they're essentially trying to break through to the next level of market share in whatever it is that they're doing. That space is proving very interesting to us. It's a little underserved because it is a bit fluid. And at the same time, it has a diverse range of needs. This is a place where national brands with local need, for example, find a home. This is a place where they are hearing from illumin, they are seeking illumin, and we are starting to sort of see that customer mix. From my point of view, I suffer from -- I want everything all the time right now immediately. And so we can't get there fast enough. So that's -- we did a brand relaunch in Q3. If you saw us maybe at Ad Week or even on our website, we are focusing, first and foremost, much more on making a direct sort of human and productivity question between the product and the customer. Typically, historically, DSPs have been marketed as amazing tech and towards men. That's not who is in this space definitively. And secondarily, it is about helping -- it's -- I always joke internally, we're in a hero-making business, that's sort of where we're repositioning the product line and the feature set. And this resonates well with that 7-figure spending customer. And that's where I think we see a lot of interest that's going to emerge or is emerging around self. It's important to get Managed in there. Again, I think we've been so focused on Self the last little bit because that's where the demand is, where attention goes, energy flows. And -- but we have -- we've identified that we see a similar -- slightly different but similar pattern with agencies, in particular, around Managed services who want that premium support. Slightly different story there, but similar enough. And so it's important to get Managed into that arena quickly. And so 2026 is all about getting after this customer, helping make heroes out of them, really transitioning and getting the product, first and foremost, fully out there in terms of an outcomes-based position and approach and then rolling into a generative solution because that generative piece, I get it, like everybody there is talking about AI, great, amazing with that. My actual goal is very simple. The fact that it can remove so much friction to helping people succeed, I think, is going to be a key -- that Canvas plus the generative, I think, is going to be a key long-term unlock in terms of creating value for the customers, which then should return value to the shareholders. So hopefully, that helps your question. Operator: Thank you very much for that, Thomas. I'll just take a quick pass through the audience to see if there are any follow-up questions for Simon and Elliot. As there are no further questions, this will conclude our presentation for this quarter. My thanks to Simon, Elliot, and a special thank you to our analysts and shareholders for attending this morning. Please join us the next time as we present our fourth quarter and full year 2025 financial and operating results. Goodbye for now.
Operator: Good day, and welcome to the EVERTEC's 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 Loyda Montes Santiago, Finance, Property and Investor Relations Senior Manager. Please go ahead. Loyda Montes Santiago: Thank you, and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer; Joaquin Castrillo, our Chief Operating Officer; and Karla Cruz-Jusino, Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report. During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules, such as constant currency revenue, adjusted EBITDA, adjusted net income and adjusted earnings per common share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides, which are available in the Investor Relations section of our company's website at www.evertecinc.com. I will now hand over the call to Mac. Morgan Schuessler: Thanks, Loyda, and good afternoon, everyone. Before we dive in, I'd like to have a moment to recognize Loyda as our new internal point of contact for Investor Relations. In the third quarter, EVERTEC delivered another strong quarter of organic revenue growth and further advanced our presence and capabilities in Brazil by closing on the previously announced Tecnobank acquisition. On today's call, I'll provide an update of the cybersecurity incident we identified in August, give a brief summary of our third quarter results, including an update on our Puerto Rico and LatAm businesses, followed by our updated outlook for 2025. Before we dive in, I'd like to address an important leadership transition that took effect on November 1. I'm pleased to announce that Joaquin Castrillo has been promoted to Chief Operating Officer. In this extended capacity, he will be responsible for the revenue and management across all EVERTEC's commercial areas. During his tenure as CFO, Joaquin was instrumental in establishing strong relationships with the investment community and his strategic vision has been invaluable to the company's growth trajectory. As he transitions to the role of Chief Operating Officer, Joaquin brings with him a proven track record of financial stewardship and a deep understanding of EVERTEC's business, ensuring continued momentum and seamless continuity in the company's leadership team. Succeeding Joaquin as CFO is Karla Cruz-Jusino, who has been promoted from Chief Accounting Officer. Karla has been a keystone to our finance and accounting organization for 6 years, and I'm confident that her track record, strategic vision and dedication to EVERTEC's mission position her to guide the company's financial strategy through its next phase of growth. Overall, these internal promotions reflect the strength and depth of our finance organization and ensure seamless continuity in our leadership. With the transition noted, let me give a brief update on the cybersecurity incident we identified in August. As stated previously, we detected unauthorized activity in Sinqia's PIX environment in the Brazilian Central Bank or BCB. For context, PIX is a real-time payment system in Brazil governed by the Central Bank, and Sinqia has services that enable financial institutions to access this payment system. Once the unauthorized activity was detected, our teams reacted promptly and in accordance with our cyber incident protocols, we were able to contain the situation. The team worked closely with both our clients and the BCB, reviewed and implemented key security enhancements to our systems and obtained approval from the BCB that allowed our systems to be now up and running for several weeks. Additionally, our financial institution clients have now confirmed that the vast majority of the funds have been recovered, significantly limiting the original exposure. Now that our investigation has nearly concluded, we can confirm that this incident was isolated to the PIX real-time payment system in Brazil and did not impact any other EVERTEC products or services or geographies. Our Q3 results for GAAP purposes reflect the impact from costs incurred throughout the incident as well as an estimate of potential claims related to client losses from funds yet to be recovered as we continue to work with our clients and our cybersecurity insurance provider. Moving now to our third quarter results. I'm pleased to announce solid revenue performance. We delivered healthy growth over the prior year and exceeded our internal expectations as we continue to execute at a high level across all regions and business segments. Beginning on Slide 5, I'll start by covering a few highlights from our third quarter results. Revenue for the third quarter was $228.6 million, an 8% increase over the prior year, while constant currency revenue was approximately $227.9 million, representing growth of 8% as we again saw growth across all of our segments. Adjusted EBITDA increased to $92.6 million, up approximately 6% year-over-year, and adjusted EBITDA margin was 40.5% for the quarter. Adjusted EPS of $0.92 was up 7% year-over-year, driven by the strong adjusted EBITDA growth and lower interest expense, partially offset by higher tax expense. Through the first 9 months of the year, we have generated operating cash flow of approximately $157 million and returned cash to shareholders through $9.6 million in dividends and $3.7 million in share repurchases. Our liquidity remains strong at approximately $518.6 million as of September 30. Let me now provide an update on Puerto Rico, beginning on Slide 6. Merchant Acquiring revenue grew 3% year-over-year, driven by higher sales volume. Payment Services in Puerto Rico grew 5% year-over-year, driven by strong performance in ATH Móvil, primarily ATH Business as well as POS transaction growth. Business Solutions revenue grew 1%, primarily driven by projects completed during the quarter. Economic conditions in Puerto Rico remained favorable through the end of the third quarter with positive trends in total employment, strong tourism performance and other key economic indicators. The unemployment rate held steady at 5.6%, near historic lows, while consumer spending continued to demonstrate strength and stability. Moving to Latin America on Slide 7. Revenue increased 19% year-over-year or 18% on a constant currency basis as we continue to see strong organic growth across the region, fueled by the reacceleration in Brazil and the contribution from the Grandata and Nubity acquisitions. Our pipeline in LatAm remains robust and as anticipated, is now beginning to drive key wins. I'm excited to announce that we have signed a deal to provide acquiring processing and risk monitoring services to Banco de Chile, one of the largest financial institutions in Chile, known for its retail and corporate banking services and extensive national presence. With this win, we now have 2 of the largest banks in Chile on our acquiring platform, validating our strategy of investing in dynamic markets and positioning EVERTEC as one of the top processors in the country. I'm also excited to announce that we have signed a deal with Financiera Oh, a leading financial services company in Peru, known for its innovative credit solutions and strong retail presence. We will provide issuing processing of debit, credit and fraud monitoring solutions. This is a key win that also positions EVERTEC with a marquee name in the very attractive Peruvian market. On the M&A front, I would like to acknowledge the closing of a controlling stake in Tecnobank in October. This acquisition strengthens our financial technology capabilities in Brazil and opens new avenues for growth and scale. And I would like to personally extend a warm welcome to the entire Tecnobank team. In summary, we delivered another quarter of strong results across both Puerto Rico and Latin America. More importantly, the key wins announced in the previously mentioned win of Grupo Aval in Colombia demonstrate our ability to win in key markets where the opportunity for EVERTEC continues to be immense. The combination of strong organic growth in LatAm and the contribution from M&A will continue to drive our diversification into growth markets that will lead to a faster-growing EVERTEC over time. These are exciting times for our company. With that, I will now turn the call over to Joaquin to provide deeper commentary around our third quarter results, followed by Karla, who will discuss our improved outlook for the remainder of 2025. Joaquín Castrillo: Thank you, Mac, and good afternoon, everyone. Turning to Slide 9. I'll start with a review of our third quarter results. Total revenue for the quarter was $228.6 million, up approximately 8% compared to the prior year quarter, reflecting strong organic growth across all of the company segments, continued momentum in LatAm and the contribution from acquisitions completed in the fourth quarter of 2024. Revenue also grew 8% in the quarter on a constant currency basis with a minor tailwind primarily attributable to the Brazilian real. Adjusted EBITDA for the quarter was $92.6 million, up approximately 6% from last year, representing a margin of 40.5%, a decrease of 80 basis points from a year ago, but in line with our expectations. Adjusted EBITDA benefited from strong revenue, the M&A contribution and Brazilian market reacceleration in LatAm as well as benefits from previously announced cost initiatives. Adjusted net income was $59.8 million, an increase of approximately 8% year-over-year, driven by growth in adjusted EBITDA and lower cash interest expense, reflecting the positive impact of repricing our debt. These were partially offset by higher tax expense. As expected, our effective tax rate has been increasing slightly as we find ways to lower our interest expense, which drives certain tax efficiencies as well as the growing contribution from our LatAm operations, which are subject to higher statutory tax rates. Adjusted EPS was $0.92, an increase of approximately 7% from the prior year, driven by the higher adjusted net income. Moving to Slide 10. I will now cover our third quarter results by segment, beginning with Merchant Acquiring. Net revenue increased approximately 3% year-over-year to $46.8 million as we benefited from strong sales volume and transaction growth throughout the quarter. Both were positively impacted by new merchant relationships and the impact from the Bad Bunny residency, which resulted in key verticals within the portfolio seeing increased volumes. We also benefited from tax return payments during the third quarter as we got closer to extension deadlines. The positive impact from volumes was partially offset by a slight decrease in spread as we saw a shift towards more card-present transactions. Adjusted EBITDA for the segment was $18.6 million with an adjusted EBITDA margin of 39.8%, a decrease of approximately 30 basis points as we experienced a lower average ticket that drove higher processing costs. On Slide 11 are the results for the Payment Services, Puerto Rico and Caribbean segment. Revenue in the quarter was $55.2 million, an increase of approximately 5% from the prior year. The revenue increase was primarily driven by another quarter of strong performance in ATH Móvil with mid-teens growth driven specifically by ATH Business, where we continue to sign up new merchants driving higher sales volume and transactions. POS transaction growth was 7%, aligned with the same factors that drove sales volume growth in our Merchant segment, such as the Bad Bunny residency. Adjusted EBITDA was $29.9 million, up approximately 5% from the prior year, and adjusted EBITDA margin was 54.1%, an increase of approximately 40 basis points from the prior year. The increase in margin is driven mainly by revenue growth and operational efficiencies related to POS repairs. On Slide 12 are the results for Latin America Payments & Solutions. Revenue in the quarter was $90.4 million, up approximately 19% year-over-year or approximately 18% on a constant currency basis. We delivered double-digit organic growth across the region, in part driven by the reacceleration in Brazil, where we continue to execute on our modernization initiatives, the favorable impact of contract repricing tailwinds and a strong pipeline. Chile continues to deliver strong growth, including the contribution from the Getnet Chile contract. The segment also benefited from Grandata and Nubity, the 2 acquisitions we completed in the fourth quarter of last year, both of which continue to perform as expected or better. These positive impacts were partially offset by the MELI attrition and a $1.8 million onetime Getnet impact recognized prior year. Adjusted EBITDA was $24.4 million, an increase of approximately 18% from the prior year with an adjusted EBITDA margin of 27%, a modest decrease of approximately 30 basis points. The margin decrease is mainly related to the recognition in prior year of the onetime Getnet revenue that was highly accretive to margin. Moving to Slide 13. Our Business Solutions segment revenue increased approximately 1% to $61.7 million. The increase is due primarily to projects completed during the quarter and higher hardware sales, partially offset by a onetime credit related to a managed services contract. Adjusted EBITDA was $25.1 million, a decrease of approximately 2% from a year ago, and adjusted EBITDA margin was down approximately 100 basis points from the prior year to 40.7%. Margin is down year-over-year primarily due to the onetime credit and the lower margin from hardware sales. Moving to Slide 14, you will see a summary of our corporate and other expenses. Adjusted EBITDA was a negative $5.4 million in the quarter or 2.4% of total revenue, which is slightly lower than expected and lower than prior year as we continue to realize more of the benefits from expense management initiatives that we have been executing throughout the year. Moving on to our cash flow overview for the first 9 months of 2025 on Slide 15. Net cash from operating activities year-to-date was $157 million. Capital expenditures were $67.9 million through the third quarter, tracking in line with our plan of $85 million for the whole year. We paid down approximately $22.4 million in debt, paid approximately $8.9 million in withholding taxes on share-based compensation and returned approximately $13.3 million to shareholders through share repurchases and dividends. Our ending cash balance, excluding cash and settlement assets, was approximately $499.7 million, an increase of $201.5 million from the year ended 2024. This cash balance includes approximately $150 million of cash from our revolver that was used on October 1, 2025 to close on the acquisition of the controlling stake in Tecnobank. Moving to Slide 16. Our net debt position at quarter end was $631.8 million, which includes $1.1 billion in total long and short-term debt, offset by $474.7 million of unrestricted cash. Our weighted average interest rate was approximately 6.24%, a decrease of approximately 47 basis points from the third quarter of 2024. Our net debt to trailing 12-month adjusted EBITDA was approximately 1.8x, down from 2.2x a year ago and slightly below the lower end of our leverage target range of 2 to 3x. As of September 30, our total liquidity, which excludes restricted cash and includes borrowing capacity, was $518.6 million, up approximately $50 million from a year ago. Now I'd like to turn the call over to Karla, who will offer updated 2025 guidance, discuss key modeling points to consider and provide some preliminary thoughts on our outlook for 2026. Karla Cruz-Jusino: Thanks, Joaquin, and good afternoon, everyone. Turning to Slide 18. I'll start with commentary on our updated 2025 outlook. We now expect revenues to be between $921 million and $927 million, representing growth of 8.9% to 9.6%. The updated outlook includes a Q3 overperformance and improved foreign currency expectation in Q4 and the acquisition of Tecnobank. On a constant currency basis, we now expect growth of 10% to 11% year-over-year, above our prior constant currency range of 7.8% to 8.7%. Adjusted EPS is now expected to grow between 8.5% and 10.4% from the $3.28 reported for 2024 and higher than our previous assumption of 4.8% to 7% growth. We now expect our adjusted EBITDA margin to be approximately 40%, and we continue to expect the adjusted effective tax rate to range from 6% to 7%. I will now walk you through the key underlying assumptions considered in our outlook, starting with revenue expectations across our business segments. We continue to anticipate mid-single-digit growth in Merchant Acquiring for 2025 as we expect a Q4 outlook in line with Q3 performance. In Payments Puerto Rico and Caribbean, we now expect mid-single-digit growth as we benefit from the continued momentum in ATH Móvil, partially offset by lower processing services to LatAm segment and the impact from the popular discount that began in October. For Latin America Payments and Solutions, we now expect high teens growth driven by strong organic momentum across the region and the contribution from the Tecnobank acquisition completed at the beginning of the fourth quarter partially offset by the headwind of foreign currency mainly in Brazil. On a constant currency basis, growth is not expected to be in the low 20s. As a reminder, we will anniversary both the Grandata and Nubity acquisitions in Q4. Finally, in Business Solutions, we continue to expect low single-digit revenue growth, primarily reflecting the 10% discount to Popular that became effective in October, impacting approximately $18 million annually estimated to be $4 million in Q4. Turning to overall margin. We anticipate approximately 40% for the full year. As we start to shift focus to 2026, while we are not providing guidance, I would like to share key items intended to help you frame your modeling assumptions and provide clarity on the strategic priorities driving our outlook for next year. Beginning with Puerto Rico, the 10% discount on selected MSA services with Banco Popular became effective in October 2025. As we head into 2026, this discount represents an estimated headwind of approximately $14 million, impacting mostly our Business Solutions segment with a more modest impact on our Payments Puerto Rico segment. Additionally, the CPI for September was announced at 3%. And as a reminder, this is capped at 1.5% for our MSA agreement and 2.5% for our ATH processing agreement with Popular. Beginning on October 2026, the CPI escalator will now allow increases above 2%, capped at a maximum of 2%. Specifically, as we look at our segments, while the Merchant Acquiring segment benefited from pricing initiatives through the first half of 2025, these tailwinds are expected to normalize in 2026. Additionally, the boost in transaction volumes linked to the Bad Bunny residency will create a modest headwind. Despite these factors, we remain optimistic about the segment's trajectory and are anticipating implementing key merchants that should continue to drive positive growth in 2026. For our Payments Puerto Rico, we expect a slight impact from the 10% discount to Popular to be offset by the continued strength in ATH Móvil and anticipated growth in POS transactions. In Latin America, we expect continued momentum in 2026, supported by a mix of organic growth and strategic M&A, including Tecnobank. Additionally, while we are very excited about the key wins [indiscernible], these are not expected to have a meaningful contribution to 2026 as these will be either ramping up or under implementation for most of the year. Finally, in Business Solutions, we expect a top line reset driven by the incremental $14 million impact as a result of the 10% discount to Popular that began in October, partially offset by the CPI impact already mentioned. Moving to margins. To offset the impact of the 10% popular discount and the lower margin contribution from Latin American organic growth, we remain focused on executing targeted cost efficiencies initiatives across our business segments. Interest expense is projected to decline year-over-year, supported by successful debt repricing and lower SOFR rates. However, this benefit will be partially offset by incremental debt related to the Tecnobank acquisition. Lastly, regarding taxes, we expect a higher adjusted tax rate reflected increased EBITDA contributions from LATAM and a reduction in interest expense, a key driver of tax efficiency in 2025. In summary, we delivered a strong third quarter and are well positioned to deliver strong top line growth in 2026. We remain focused on executing our strategic priorities and cost initiatives to support long-term value creation. We look forward to sharing more updates on our progress in early 2026. On behalf of Mac, Joaquin and myself, we appreciate your continued support, and I hope to connect with many of you at upcoming conferences over the next few months. Operator, please go ahead and open the line for questions. Operator: [Operator Instructions]. Your first question comes from Jamie Friedman from Susquehanna. James Friedman: Congratulations, Joaquin and Karla, on your respective promotions. And I hope we continue to work together in the future, Joaquin, I learned a lot from you over the years. So Mac, maybe I'll ask, first of all, in terms of LatAm, up 19% year-over-year. This growth seems quite durable. You're signing incremental deals, Banco Chile, et cetera. So any perspective that you could share now as to what you're finding relative to when you began the expansion in LatAm? Is it -- are you resonating? Are you gaining the mind share that you had anticipated? And what's so far surprised you down there? Morgan Schuessler: Yes. So I mean, if I look at long term over the course of the company, I think what we've been able to do is build products through acquisitions so that they're now some of the best products in the region. So if you look at the deals we just announced, Banco de Chile is using our acquiring platform, which is now our second big deal in Chile. If you look in Peru, we now have this deal where they're using our issuing platform. So I think what we've done is we've built these products now that we're scaling across the region. And as you'll see, we're getting good margins. The other piece, I think, that's pretty important was the Sinqia deal. We got that deal. It's now growing at a rate that we're very happy with now that we've integrated. And it also gives us the ability to make other acquisitions like Tecnobank. So those are the 2 big things that I think we've seen is our products are now scalable across the region. We're winning business to demonstrate that. And now we have sort of a cornerstone of our strategy to continue to invest in Brazil through the Sinqia acquisition and the infrastructure we have there. We're super excited about the future, as Karla talked about 2026 and the continued growth that we think we'll see in LatAm. James Friedman: And also about that, Karla, you were talking about the -- return of COAs. I remember that was a theme earlier in the company's history. It sounds like that's coming back. So what typically can be the contribution from those sorts of cost of living adjustments in a typical year? Joaquín Castrillo: Jamie, I don't think that we couldn't hear you clearly. Morgan Schuessler: You're talking about the cost of living adjustments. You're talking about the CPI adjustments on [indiscernible] contract. James Friedman: CPI, what I'm trying to say, CPI, yes. Morgan Schuessler: Yes. No, I got it. So yes, yes. So do you want to talk about the CPI adjustments? Karla Cruz-Jusino: Yes, we did call out that the CPI in this for September was announced at 3%, and it's now currently capped at 1.5% for our MSA agreement with Popular and at 2.5% for ATH processing agreement. Now beginning in 2026, we have mentioned in the past that, that escalator will permit an increase in the CPI above 2%, but now capped at 2%. Operator: [Operator Instructions]. Your next question comes from Marc Feldman from William Blair. Mark Feldman: I'll echo my congratulations to both Joaquin and Karla. I guess, first off, could you talk about potential cross-sell opportunities between Tecnobank and Sinqia's, given Sinqia's presence in the consortium model in Brazil? Morgan Schuessler: Yes. So look, as we tuck in assets to the Sinqia acquisition, it's exciting to have an organization and management team that can manage these investments. Tecnobank has cross-sell opportunities because we do business with a lot of the financial institutions and the financial institutions are primarily -- and the consortiums are primarily the customers of Tecnobank. So there's tremendous cross-sell opportunities where Tecnobank customers can use other products that we already have and vice versa. So there's some Sinqia customers that don't use Tecnobank today. It's a great business on a stand-alone basis, but the cross-sell opportunities, we think are relevant. Mark Feldman: Great. Appreciate that. And then I guess just one more. I know the situation is dynamic, but with the government shutdown and your benefits business and then also the Puerto Rican economy in general, can you talk about any trends that you've seen thus far and what we should be considering for the fourth quarter? Joaquín Castrillo: Sure. So this is Joaquin. Look, so far, no direct impact. Obviously, we're monitoring it closely just like everybody is because the Puerto Rico economy does rely on certain federal funds. One of the biggest impacts could potentially be around the NAP and SNAP programs. A big portion of the Puerto Rico collection does rely on welfare. Having said that, we know that at least through November, that has been funded. So we do have a little bit of runway here to continue to monitor before it starts to have any impact. Operator: Your next question comes from John Davis from Raymond James. John Davis: I'll add my congrats to Joaquin and Karla. Mac, just big picture here, the security incident within Sinqia. Just curious, I understand it's kind of been ring-fenced at this point, but have you seen any adverse impact on business momentum, pipeline, anything like that? I'd just be curious kind of on the state of the momentum at Sinqia more broadly as well. Morgan Schuessler: Yes. At this point, we haven't seen an impact to the commercial business. It was primarily just 2 banks that were impacted. And those 2 banks, we've been able to work through all the issues with those guys. We also think that we can now demonstrate -- I also want to say just -- I don't know that everyone has perspective. This happened to multiple technology companies. So there were criminals trying to take advantage of the PIX system through multiple companies in Brazil. So if you pull the press, this didn't happen to just us. It was several. What I would say is that we believe now that we've really been able to harden our systems that we've been able to demonstrate we have better systems, and we're going to work to make this an advantage versus a disadvantage. But we haven't seen any negative commercial impact at this point. John Davis: Okay. Great. And then Joaquin or Karla, just margins more broadly, I think they're down about 80 basis points year-over-year in the third quarter. I think that's before the changes, the contract changes in [ BPPR ]. But just curious, I heard like average ticket was called out. But more broadly, were those -- I know you guys don't guide margins by quarter, but was that largely in line with your expectations or anything that surprised you on the margin front in the third quarter specifically? Joaquín Castrillo: Yes. I mean, look, when we look at it on a year-over-year basis, John, remember, and we called it out, we had a big one-timer last year in LatAm that was highly margin accretive. But if you look at the sequential growth of our margin, it is aligned to our expectations, right? We had said we were going to start at kind of 39s, grow to like mid-40s and then come back down, right? And that's the trajectory that's been reflected. In the case specifically of merchant acquiring, yes, we did have a slight decline in margin, which is coming because yes, the average ticket is coming down. We have a lot more transactionality than necessarily sales volume, although we did have very good sales volume as well. So I think it's just the nature of how that business moved this past quarter. We need to continue to monitor both trends as it relates to merchant acquiring specifically going into the next quarter. John Davis: Okay. And then last one, Mac. Just on capital allocation, balance sheet is in good shape. I know the Tecnobank deal just closed. But just curious, appetite, you thinking kind of more tuck-in deals, thoughts on potentially buying back stock with the pullback frankly across the whole space. Just curious on updated thoughts with where the stock is trading and also kind of appetite on the M&A side. Morgan Schuessler: Sure. So I mean, what I would say is, look, after -- into the next quarter, we'll be above -- a little bit above 2, right, Karla? Karla Cruz-Jusino: Correct. Morgan Schuessler: So I mean, we'll be between 2 and 3, but on the lower end of sort of what's tolerable. We do recognize where our stock price is, and we are sort of evaluating the pipeline. We still have a good pipeline. And every quarter, we'll take a look at capital allocation and try and make the right decision. But as you know, it's something we're very, very focused on, and we'll balance where the stock price is, but also the M&A opportunities that we have. Karla Cruz-Jusino: Mac, I would add there that we do have $150 million available still under our share repurchase program, and that ends in 2026. So this is another point. Operator: [Operator Instructions]. There are no further questions at this time. I'll now hand the conference back to management for any closing remarks. Morgan Schuessler: Again, I want to thank everybody for joining the call. Again, I want to congratulate all of my colleagues on the call with me, and we look forward to seeing you in the future at investor events. Have a good night. 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 the Third Quarter 2025 E.W. Scripps Company Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Carolyn Micheli, Head of Investor Relations. Please go ahead. Carolyn Micheli: Thank you, Didi. Good morning, everyone, and thank you for joining us for a discussion of the E.W. Scripps Company's financial results and business strategies. You can visit scripps.com for more information and a link to the replay of this call. A reminder that our conference call and webcast include forward-looking statements based on management's current outlook, and actual results may differ materially. Factors that may cause them to differ are outlined in our SEC filings. We do not intend to update any forward-looking statements we make today. Included on this call will be a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public in their analysis and valuation of the company. These metrics are not formulated in accordance with GAAP and are not meant to replace GAAP financial measures and may differ from other companies' uses or formulations. Reconciliations of these measures are included in our earnings release. We'll hear this morning from Chief Financial Officer, Jason Combs; and then Scripps' President and CEO, Adam Simpson. Here's Jason. Jason Combs: Good morning, everyone, and thank you for joining us. We are pleased to be reporting a third consecutive quarter of results that met or exceeded expectations on nearly every reporting line, fueled by our Scripps Sports strategy and strong sales execution as well as tight expense controls. On the M&A front, we've been moving ahead with our plans for our station swaps with Gray and the sale of Fox affiliate WFTX in Fort Myers, Florida. And last week, we announced the sale of WRTV in Indianapolis. We were very pleased with the valuations we received on the Fort Myers and Indianapolis stations. Both sale prices represent multiples well above current local broadcast station transactions, 9.2x to your blended EBITDA for WFTX and 8.5x for WRTV in Indie and actually 9.2x if you adjust for the impact of the Pacer Finals run last June. These 2 cash sales will total $123 million, creating significant cash inflow that will improve the health of our balance sheet and provide for some modest delevering. During the quarter, we closed on the placement of $750 million in new senior secured second lien notes. We locked in a very good rate of 9.78%. Proceeds were used to pay off our senior notes set to mature in 2027, to pay down more than $200 million of our 2028 term loan and to pay off part of our revolving credit facilities. We have since paid off the remaining balance on the revolver, a full quarter ahead of our guidance. We'll get back to debt reduction in a moment. But first, let's review third quarter financial results and fourth quarter guidance. During the third quarter, our Local Media division revenue was down 27% due to the absence of political advertising revenue compared to the prior year. Core advertising revenue was up nearly 2%. We grew national advertising revenue, driven by an increase in our largest category, services. Our sports strategy helped to drive that Q3 performance as well. Local Media distribution revenue was flat. Expenses for the division were down more than 4% year-over-year, aided by lower employee-related costs. Local Media segment profit was nearly $53 million compared to $161 million in Q3 of last year's political cycle. For the fourth quarter, we expect Local Media division revenue to be down about 30%. We expect core revenue to be up about 10%, bolstered by our sports strategy, specifically our newest NHL partnership with the Tampa Bay Lightning as well as the comparison to last year's political advertising displacement of core. We expect Local Media expenses to be flat-to-down low single digits, inclusive of the new sports rights expense for the Lightning. Now let's review the highlights for the Scripps Networks division third quarter results and fourth quarter guidance. In the third quarter, Scripps Networks revenue was $201 million, about flat compared to the year ago quarter. Along with other companies in the National Networks business, we dealt with economic uncertainty, and yet we look to have delivered significantly better results than others. Connected TV revenue was up 41% year-over-year. Just a reminder that our Networks division CTV revenue comes from the extensive streaming distribution of our national networks. Advertising demand continues to be strong for our quality networks programming. In addition, inventory for both WNBA and National Women's Soccer League games commands premium advertising rates. The division's expenses for the quarter were down 7.5% due to lower employee-related costs and operational reductions we made last fall at Scripps News. Scripps Networks segment profit was $53 million, and the segment margin was 27%. For the fourth quarter, we expect Scripps Networks division revenue to be down in the low-double-digit range. This is being driven by a number of factors. We had more than $10 million of networks political revenue in last Q4. We have a lower percentage of upfront advertising compared to the year ago quarter, and our usual Q4 Medicare open enrollment advertising is lower right now, partially due to the government shutdown. We expect Scripps Networks expenses to be down low double digits. Turning to the segment labeled other. In the third quarter, we reported a loss of $7.6 million, about the same loss as Q3 2024. Shared services and corporate expenses were $21.4 million. For the fourth quarter, we expect that line to be about $21 million. For the third quarter, we reported a loss of $0.55 per share. The quarter included a $7.6 million loss on extinguishment of debt, $6.5 million of financing transaction costs, a $1.4 million write-off of deferred financing costs and $2.7 million in restructuring costs. Those items increased the loss by a total of $0.15 per share. In addition, the preferred stock dividend has a negative impact on earnings per share even when we don't pay it. This quarter, it reduced EPS by $0.18. I have an update to a full year guidance number that shows improvement over our previous guidance. We now expect our cash interest paid to be between $165 million and $170 million. This reduces the projected cash we need for interest. Coupled with the improvements we announced last quarter to lower the cash we need for taxes and CapEx, this will drive significantly better cash flow this year than originally anticipated. Turning to our 2 financing transactions this year. We were able to refinance all of our 2026 and 2027 maturities and a portion of our 2028 debt, while limiting the increase in our cost of capital to only 1% despite the current elevated rate environment. We expect to pay off the remaining reduced 2028 term loan balance through cash flow before it comes due, leaving us with no other bond or term loan financings to address until our 2029 senior notes. At September 30, we had no borrowings outstanding on our revolving credit facility and cash and cash equivalents totaled $55 million. Net leverage at the end of Q3 was 4.6x, a significant improvement from 6x in Q2 of last year. Our capital allocation priorities remain the same. We're focused on using cash flow to reduce the amount of our debt, and we place our highest priority on the reduction of our debt and the lowering of our leverage ratio. And now here's Adam. Adam Symson: Thanks, Jason. Good morning, everybody. Thanks for joining us. If you've been waiting for proof that our strategies are working, our strong third quarter results, our fourth quarter guide and the full-year performance they signal should make it abundantly clear. We are seeing real measurable progress at Scripps. We're delivering exactly what we have promised in recent years. We're growing our Sports and Connected TV revenue streams. We are closely managing expenses, resulting in improved margins. We are executing swaps and station sales to improve our local station group margins and pay down debt with more likely to come. And we have been using cash flow to reduce our debt and improve our leverage ratio with more certain to come. We're delivering an outsized ad sales performance compared to local and network peers, and we can credit 2 Scripps growth strategies in particular. These strategies reflect how our mission of deepening our connections with audiences and advertisers is driving business value. First was our decision, unique among local broadcasters to launch Scripps Sports. Over the last 3 years, we have charged full speed into partnerships with the WNBA, the National Women's Soccer League and a host of sports teams and other leagues. Ahead of the market, we saw the opportunity in women's sports, and we carved out a leadership position there for ION. At the same time, we developed a new model for local broadcasting and sports rights. In both cases, we saw where the momentum was building because we understood the passion sports fans have for their teams and because we recognize the value of that authentic connection for our brands and for our advertisers. As you can see from our results, this strategy has been a tremendous success. On the national network side, revenue from the WNBA on ION nearly doubled this season, which is an amazing pace, especially when you consider Caitlin Clark was off the court for much of the season. The WNBA is a big draw for our clients in the advertising upfront, commanding premium ad rates and increasing volume by about 90% this year over the previous upfront with total sports volume up over 30%. Advertisers aren't just taking notice of women's sports, they're competing for this inventory because they understand the demographic and cultural moment we're capturing. The WNBA, the NWSL, our recent successful premiere of the women's professional track competition, Athlos and the upcoming women's college basketball, Fort Myers Tip-off are helping to differentiate ION and the Scripps networks in the ad market. On the local station side, we now have full season agreements with 4 national Hockey League teams, the WNBA Champion Las Vegas ACES, and NWSL team and the Big Sky College Conference. These partnerships are driving up core advertising revenue by several percentage points a quarter, again, real measurable growth. Given the successes at Scripps Sports and with sales execution, we expect to get bolder in our pursuit of sports, following the framework that has paid off so well for us. Affordable and sometimes overlooked national professional leagues, women's sports and other local teams that need to reach their full geographic markets. This has been our winning formula, and we plan to continue to build on it with the same discipline that got us here. We won't chase rights we can't afford, but where we see opportunity to create value, we'll be aggressive. The second strategy we can credit as important as sports was our aggressive pursuit of distribution on streaming services for our networks. Audiences are turning to ION, ION Mystery, Bounce, Grit, laugh, Court TV and Scripps News on nearly all of the major streaming and virtual MVPD services and platforms. That distribution has given us an advertising revenue stream that went from 0 to a projected 2025 amount of more than $120 million in just a few years. Think about that. We created a 9-figure revenue line by being early and aggressive in securing Connected TV distribution. Streaming now constitutes 20% of all Scripps Networks viewing, and we continue to increase our offerings with more streaming content. We're building upon our beachhead with new FAST channels and new distribution like the partnership we announced last quarter that integrates the Scripps Networks into Peacock. We have plenty of room for ongoing double-digit growth in Connected TV revenue. While you can track the impact of our revenue growth strategies in the results, our focus on expense management and transformation should be just as plain to see, with a consistent downward trend this quarter, even including incremental sports rights, which benefit us with revenue growth. On the local side, importantly, network fees are flat and reflect the important change in the network affiliate dynamic we have been foreshadowing for some time, a trend we expect to continue in the right direction going forward. On the Scripps Network side, we expect to deliver a 400 to 600 basis point year-over-year margin improvement through efficiency initiatives and a leaner expense base. Fiscal discipline is a key part of the financial improvement plan, and you can expect it to continue as we balance expense management with strategic growth investments. But expense control only gets you so far. The Scripps transformation office led by Laura Tomlin is spearheading significant initiatives that will make a sustained and measurable impact across the enterprise. We're leaning hard into technology and AI in pursuit of meaningful return on investment, both in the back office and in our operating units. Early results are pointing to real value. In our newsrooms, we're already leveraging automation and AI to strengthen our core mission of local journalism, while improving the economics. These workflow tools allow our journalists to spend more time out in our communities, developing relationships, gathering information and reporting the news. Likewise, automation and AI are helping our sales teams more efficiently identify new prospects and advertising categories, allowing them to spend more time building relationships. This is just the beginning. I expect to share a lot more on the important work of our transformation office early next year. Finally, I'll close with some commentary on our M&A strategy. As I've said from the start, we are totally focused on optimizing our portfolio of stations to structurally enhance performance and economic durability in service to our vision to create connection. We're meeting the moment with a bold plan that will remake our portfolio for the future and improve our balance sheet given the premium sales multiples we've commanded. We've already announced the station swap deal with Gray, where we are exchanging 2 Scripps stations for 5 Gray stations, a transaction that improves our market positioning and creates immediate efficiency opportunities. We also announced station sales in Fort Myers, Florida and Indianapolis for cash. The sale prices represent premium multiples for the industry. These are quality stations we agreed to sell only at strong valuations and the cash we receive will go directly to delevering. And I'm committed to continuing this work. So you can see that we're realizing strong success in executing our ongoing plan to balance fiscal discipline with revenue growth to the benefit of shareholders. We're not just talking about improvement, we're delivering it quarter-after-quarter. The connections we're building with audiences through sports, news and strategic distribution are translating directly into advertising revenue growth. The operational discipline we're exercising is expanding margins and the capital allocation decisions we're making are strengthening our balance sheet. We are heading into 2026 with significant momentum. The midterm election looks to yield record spending across the advertising ecosystem. We will capitalize on our growing portfolio of revenue-driving sports assets and our strategic streaming distribution agreements position us well to capture expanding revenue in the CTV marketplace. Our strategies, our results and the opportunities ahead give you every reason to believe in the Scripps company, its management team and its future. Operator, we're now ready for questions. Operator: [Operator Instructions] And our first question comes from Dan Kurnos of the Benchmark Company. Daniel Kurnos: Yes. Obviously, a good print from you guys good execution across the board. Adam, maybe just more of a higher level, and obviously, Jason, you can pitch in. 2, you guys have done really well with kind of what you said on some of the -- I mean, you call them noncore asset sales, but some of the TV station stuff that you've gotten for really high multiples here. How much more would do you guys think there is to chop there? Obviously, there's got to be some sort of level where you think the portfolio still needs scale, but you're finding good value in the marketplace. And subsequently, there are still other people out there in the marketplace potentially looking for dance partners. So do you think that's still an option that's on the table? And then I have a follow-up. Adam Symson: Yes. I mean, broadly speaking, I do think there's significant opportunity there still for us to identify accretive opportunities for us to buy, sell and swap stations. We've been engaged in discussions around these opportunities to optimize our portfolio. We think opportunities that are going to continue to be available to us and that we'll continue to pursue. Relative to sort of, I think, the larger question around transformational opportunities, I'll say sort of what I've said many times before, we are absolutely committed to doing the work necessary to unlock and maximize shareholder value, period. I just don't think I could be any clear there. There's no question that transformational M&A at this moment can be really accretive in addition to the work we're doing with optimizing our portfolio, and we'll continue to operate in that marketplace. Daniel Kurnos: Very helpful color. And then just on the network side, I appreciate the political call out. So it sounds like that's about 4.5 points of the growth delta. Look Adam, you obviously talked about CTV ramping. I know it's still a relatively smaller portion but growing very rapidly. So can you guys just kind of parse out the impact of the government shutdown, what's going on with scatter, what's going on in DR and then also what you're seeing trends near term in the CTV component just so we have a better understanding of the mix? Jason Combs: Yes. So I can try to unpack that a little bit. So we guided to down low double digits, a lot of different things factoring into that. You alluded to one of the meaningful ones in there, the political more than $10 million last year that's not going to occur again this year. I will say we also have seen some weakness in DR pricing as we entered the quarter. Tariffs continue to really impact that revenue category and the uncertainty around that or just the impact that many companies are seeing from them. Pharma is a little volatile right now given some of the ongoing regulatory discussions. That's creating what I would say is an increasingly fluid marketplace within pharma. And I think this is the first quarter, where you're really seeing sort of the new upfront roll through the P&L and generally outside the sports programming, this wasn't as strong as an upfront as we had the prior year. Adam Symson: Yes. Relative to the upfront, Dan, just obviously, because it's impacting the fourth quarter guide. The story was a little bit mixed. I mean between the power of sports to drive demand and premium CPMs, we saw significant wins across our networks group in the upfront on linear and CTV. As I said in my prepared remarks, total sports volume up 30%, WNBA, in particular, saw significant increases of 90%. All of that drove our upfront CPMs to modest growth for the overall upfront. But there was generally some softness related to macro uncertainty, including with pharmas, as Jason said, I think a lot of advertisers still holding back some of their spend from the upfront and allocating to scatter, which may have accounted for some of the softness in volume. Jason Combs: And maybe just to add on because you typically asked about the CTV outlook as well. Really strong growth year-to-date. I think we're looking to be for the full year, greater than 35% growth for the full year. We kind of alluded to the whole number there in the script. I think there continue to be new entrants in there that does put some pressure as we move forward. We continue to identify new ways to unlock value in that space. And I think as we said in the script, we think it's going to continue to be a double-digit growth engine for us. I will just remind people, as you look at the way that falls because of the value we see in CTV tied to our sports assets generally, you're going to see more growth in the middle part of the year tied to WMA and NWSL then in a quarter like Q1 or Q4 that have very little sports. Operator: And our next question comes from Steven Cahall of Wells Fargo. Steven Cahall: So firstly, just a follow-on on networks. You've got that really strong margin improvement in 2025. I guess is based on some of what you talked about with the upfront and some uncertainty in the market revenues probably implied down next year. Do you think you can still expand margins and kind of continue on this cost journey that you've been on at networks. And then, Adam, just on M&A, kind of a strange question, but I think one thing the investors are trying to figure out is, with the family trust as kind of the voter on strategic M&A. How do those processes come together? Is management lead? Does the Board lead? Does the family lead? Just trying to get a sense of like what the level of engagement and proactivism is and how it works, since there is this kind of seems like once in a decade opportunity for transformational M&A which, as you say, could be really accretive. Adam Symson: Yes. Sure, Steven. I'll take both of those questions. So first, as you pointed out, I'm really happy with the progress our team is making with Networks revenue and margins in a really difficult advertising and economic environment. We are absolutely set to deliver on our promise to increase the margin this year by 400 to 600 basis points. But I would tell you, our work isn't complete. We're really focused on continuing to expand in sports to drive revenue growth and profit. And we're addressing some opportunities with our programming and our distribution, we expect to expand our leadership in fast and Connected TV to fuel revenue growth and identifying new ways to run the business with greater efficiency. So to sort of boil that down, all of this really leads me to be confident that we'll continue to see growth in the margins for Scripps Networks. We're not done yet with Scripps Networks and margin expansion. Relative to the family, look, I don't speak for our controlling shareholders. This is a management-led process obviously, our Board of Directors is very, very involved. And then from there, we bring the Scripps family in I can reiterate what I've said before, over the long history of this company, the family has always acted in the best interest of all shareholders and is committed to doing what is best for the company that creates the greatest shareholder value. Look, just to be very, very clear, this isn't some kind of hobby for the Scripps family. This is a business. It's an investment, and it's their American legacy, and I know they are committed to doing what creates the greatest value for all shareholders. Operator: And our next question comes from Avi Steiner of JPMorgan. Avi Steiner: 2 questions here. Maybe to start, would love your thoughts on the YouTube TV, Disney dispute, what it might mean for the local affiliate group more broadly. And can you remind us what is coming due on the distribution front in '26? And how -- I don't know, you can't size it obviously, but any help color there would be great. And then I've got one more for Jason. Adam Symson: Yes, sure. I'll start with the YouTube TV, Disney dispute and then Jason can talk to you about what I had for next year. Like all ABC stations, we remain dark as a results of the YouTube TV, Disney dispute. I think there's a lot of economic value for Scripps and ABC ahead when that gets resolved. But with that said, the protracted disruption is one of the reasons why we, as local broadcasters believe strongly that we need to seat at the table. We need to directly negotiating with the virtual MVPDs in order for us to ensure that our local audiences are able to access sports and news. It's just that clear for us. There's already been some softness, I would say, in the ratings as a result of the YouTube TV, Disney dispute. Not necessarily, we're seeing that in local, but you can see that in some of the national reports. That's obviously got trickle-down impact. But the reality is because of fragmentation, YouTube TV is only one way our consumers actually consume our content, especially our linear content. And so we're not seeing direct evidence of it impacting our revenue performance or our bottom line. Jason Combs: Avi, on the affiliate renewals. So we have 3 of our 9 CBS is up at the end of this year. And then in '26, we have ABC up at the end of Q2. So that's 18. That's our largest affiliate partner, 18 stations. Avi Steiner: How about on the distribution side, any meaningful retrans potential [ sub-Q ] revenue potential next year? Jason Combs: We have 70% of our retrans traditional MVPD subscriber base renewing mostly in the first half next year. There's a little bit in third quarter, but mostly going to slip between end of Q1 and end of Q2. Avi Steiner: That's very helpful. And then one more maybe for you. I think the premium asset sale multiples was kind of thrown around a couple of times, which is great to hear. Is that the same on an after-tax basis or any after-tax proceeds you can help us think through? And if you could remind us how the proceeds have to be applied to the term loan tranches that would be much appreciated. Jason Combs: Yes. So -- so the multiples we announced were sort of on a gross basis from a tax perspective, there was a $6 million tax payment tied to -- or it will be tied to the Fort Myers sale and $13 million tied to RTV in Indie. From a proceeds perspective, so we have a 12-month reinvestment period, after which time those cash proceeds will be split 70-30 between our B2 and our B3 term loans. We intend to use those proceeds to pay down debt. We also do have the ability to allocate a portion of them accretive M&A if that opportunity were available. But I think what you've seen so far and what you saw with our real estate sales we had last year was that we were very focused on driving those towards debt paydown and delevering of the balance sheet. Operator: Our next question comes from Shanna Qiu of Barclays. Gengxuan Qiu: I was wondering, if you guys could give any kind of early indicators on how you guys are thinking about political in 2026 relative to 2022 midterm? And then just a clarifying question on the asset sales. The 2 that you announced the stations, could you give a little bit more color on how they came to be, I guess, were those marketed through a competitive process after you guys look through your portfolio optimization? Or did you get inbounds from buyers there? Adam Symson: Thanks, Shanna. I'll talk a little bit about political first. This is Adam. I think next year is going to be a compelling year for us relative to political revenue. We've got 7 governor's races, 7 states with high stakes, house races and a Senate race that all look to be very competitive right now. We have a really deep footprint in Arizona, Colorado, Michigan, Nevada, Ohio and Wisconsin and Tennessee, all markets with, I think, significant elections ahead I obviously absolutely expect broadcasting to take the lion's share of the ad revenue spending for the midterm and I think our portfolio is very well positioned. So I'm looking forward to next year. I think it's going to be a very good year. It's part of why I referenced the momentum, the tailwinds that I see as we head into 2026. Jason Combs: So from an M&A perspective, we've talked about our strategy, our buy-sell swap strategy and the fact that we've identified certain assets that we would view as less strategic. From a process perspective, I mean, I think generally, there are inbounds and there is a proactive approach as well. We know our markets. We know who potential buyers are of our markets. And so I can't say definitively, it's one or the other I think, it's probably a little bit more nuanced than that. I think the big takeaway there, Shanna, is just the prices, those multiples, pushing 9x in Fort Myers and north of 9x in Indie when you back out the MDA lift. I think that's one question we've gotten before is on those individual station sales, can you really drive a premium multiple. And I think we have 2 deals now that clearly show that we can. Gengxuan Qiu: Great. Just one more clarifying question for me on the Disney, YouTube TV. For the 4Q guidance, any impact from that blackout in the guidance that you put out? Adam Symson: There is not. In fact, I mean, if you look at our core -- if you sort of think about our core guide, it's -- we're crushing it. So I'm really happy about where we see local revenue as we head into the end of the year. Operator: And our next question comes from Craig Huber of Huber Research Partners. Craig Huber: Jason or Adam, can you just comment a little bit further on the advertising environment right now, how you're feeling about it versus, say, 6 months ago? Obviously, roughly 6 months ago, we were in the midst of tariffs and so forth. People seem like they're more comfortable with it now. What's going on in that front, but you did allude to a tough environment. Just what's your overall sense now versus how you felt 6 months ago, say? Jason Combs: Yes. So I'll maybe kind of segment this out and I'll talk about the local core space first. And I think that, as you look at the results we had for Q3, up nearly 2%, the guide we gave, plus 10%. We're seeing some strength and some momentum there. We saw our categories build as the third quarter progress, and we continue to both see a nice snapback in the political crowd out, continued benefits from our sports strategy, driving growth within our local brand and just excellent sales execution, that is really driving, I mean, those numbers that I just quoted there, up 2% and up 10% in the fourth quarter. Those dramatically beat all of our peers. And so, I think from that standpoint, we're seeing momentum on the local side. I think on the network side, I talked about this a bit earlier. I think you have a bit of a mixed bag, where you continue to see growth through our sports strategy. You continue to see growth through our Connected TV strategy. But you do see in that national ad marketplace, some challenges right now across a variety of fronts, direct response pricing is weak as we started this quarter, Pharmaceuticals are a little weaker, given the uncertainty in regulatory. And so I think that's sort of why, if you look at kind of our Q4 guide, you have a little bit of a different story between local and networks right now. Craig Huber: Okay. And second question, I don't know, if you have this at your fingertips, but just curious, what's your sense on how the viewership is breaking down right now in your local markets and also your Scripps networks between over-the-air streaming, et cetera? Adam Symson: I don't -- this is Adam. I mean Jason might be looking up some of the little stuff, but I did say in my remarks that about 20% of our viewing for networks is now through streaming. And we have been very, very focused on monetizing that 20%, and that's what's also powering the revenue growth there. So we're really pleased with the share of audience that we're driving in the Connected TV marketplace. I think it's a testament to the value of our brands and the value of our programming strategy. And the reality is we probably represent one of the very few platforms that brings premium live sports into the streaming or the free ad-supported television marketplace and that's helping to drive significant CPMs also from our streaming. We saw that play out in the upfront as well. Significant growth in upfront opportunity with Connected TV for us. Jason? Jason Combs: Yes. The only thing I'd add on to that, specific to kind of you pointed out OTA there, I mean, I think that from an OTA perspective, Adam gave that 20% is CTV and networks, the other 80% being linear. We've seen growth in sort of the OTA only percentage of that, 25% watched one of our networks during Prime through OTA during the most recent quarter. And so, I think we're seeing some momentum there. I think the other thing to point out on the local side, and I'd just like to give this reminder because I think sometimes people get very focused on prime and how much that contributes to our core. I'd like to remind people, 50% of our revenue in local comes through our news product and an ever-growing percentage comes through sports, and I would say both of those viewing genres continue to be extremely durable from a ratings and a delivery perspective. Adam Symson: And that, I mean, I think powering our continued ability to attract teams leagues that want more reach is their acknowledgment and recognition that with distribution through Scripps Sports locally and on networks they reach more fans than ever before, especially given the declines in the cable only marketplace. With us, they're reaching them on OTA, paid TV and SaaS. And that's significant additional reach for those leagues and teams. Craig Huber: I appreciate that. You don't happen to have the breakdown for the over-the-air, what percent that is roughly for both segments? Adam Symson: We don't. Jason Combs: We don't right now and it's staying within networks, it does vary greatly from one -- one channel to the next. Adam Symson: Yes. Craig Huber: Okay. Understood. And then also, you guys are pretty plugged in Washington on the regulatory front. Obviously, the government shutdown is delaying things here. But what's your sense on timing of dealing with this 39% ownership cap out there? And how do you think that will get resolved? And do you think the whole thing will get pushed aside here. So it's no longer in place here, but how long you think it might take to get this through? Assuming the government shutdowns ends fairly soon? Adam Symson: Well, I don't know that the government shutdown ends early soon, Craig. I mean, to be perfectly frank, I would have thought that 2 weeks ago, once the government shutdown ends, I fully expect that the FCC will take action on the prohibition against groups like ours owning 2 stations in -- 2 big force in 1 market. that now should be fairly simple and quick. And then the FCC will move forward, I believe, on eliminating the national cap. Craig Huber: And would you be surprised if it took beyond the middle of next year to get rid of the ownership cap, again, I assume the shutdown does end? I know it's... Adam Symson: Yes. I would be very surprised if it took beyond the middle of next year. I think, Chairman [ car ] is committed and doesn't waste a lot of time. Operator: And our next question comes from Michael Kupinski of NOBLE Capital Markets. Michael Kupinski: Just a couple of quick questions. I just want to clarify, you mentioned that the Scripps Networks declined in Q4, somewhat related to the government shutdown. I was just wondering if you can clarify what that revenue decline -- if you can quantify that revenue impact? Adam Symson: Yes. I mean it's a smaller piece. It's a part of the puzzle. I mean you've got the political crowd out from last year. You've got the general softness in DR, and then you've got the impact of the government shutdown on processing the open enrollment for the Medicare Advantage which is impacting demand and buying from our networks a little bit. Michael Kupinski: Okay. In terms of changes in the advertising categories, can you just kind of talk a little bit about any ad categories that might be sensitive to interest rates and the Fed action, maybe from the third quarter to the fourth quarter, maybe even from the first quarter, particularly categories like auto, home builders, real estate and so forth. Any particular changes as we -- from third, fourth, maybe even as the pacings into the first quarter? Jason Combs: Yes. So the first thing I'd say there is it's really hard to really take a lot out of the trends right now because of the amount of political crowd out like everything is up significantly as you kind of exited Q3 and as you get into the beginning of Q4 because of that political crowd out. Certainly, there are some categories more materially impacted that. Automotive, has been a category that's not just interest rate also sort of inflationary and tariff-related has been a struggle for us the last, call it, 4 to 6 quarters. Q3 was -- it was a little bit stronger than it's been probably the smallest year-over-year decline we've seen in a while. I think other categories around retail and around services, which includes things like mortgage-based services certainly can be impacted depending on sort of the outcome of the next rate cut. Michael Kupinski: This is just more of a macro question. Typically, for someone who's been following several decades in the industry that -- the industry for several days. I was just curious, the Fed rate cuts typically have kind of spurred some national network advertising and in some cases, 6 months advance of the Fed rate action. And of course, the Fed rate action has only been pretty modest cuts. But notwithstanding those small rate cuts you would think that there would be a lot more active advertising environment. And I was just wondering, do you feel like advertising would have been a little bit more robust and given the economy that's been a pretty decent economy, do you think that there might be more of a secular issue? Or is there some sort of anomaly here or why isn't there much more of a robust advertising environment, certainly on a national front? Jason Combs: So I think a couple of things. I mean, absolutely, there's some secular component. That is why we are leaning into certain growth strategies around Sports and Connected TV because we're looking for growth opportunities to offset and drive growth as we see some secular challenges. I also do think frankly, the pace of rate cut is not matched up with most people's expectations kind of coming into the year. And I think that, that has negatively impacted the ad markets. And I do think, if we've seen more aggressive rate cuts, that we would see a better ad marketplace right now. Adam Symson: Yes. I would add, although uncertainty is not the end market trend. Uncertainty and economic uncertainty doesn't help consumers. And when things are difficult for consumers, it doesn't help the R advertising. It makes brands and agencies hold on to their dollars for longer because they're unsure of what's next. Now we've got a government shutdown where we're unclear on what the job numbers are like. We're not sure what the Fed is going to do. The Fed's actions thus far have been relatively weak. And so, I think we've got to get past this period of uncertainty and once we do, I think we'll begin to get a better -- a clearer sense of how the advertising market comes back as brands and agencies drive sales. Michael Kupinski: Got it. Well, hopefully, we have a building environment in 2026. Operator: And now we have a follow-up from Craig Huber of Huber Research Partners. Craig Huber: I know you guys talked about AI to some degree. But can you just talk a little bit further there about when you might start seeing material benefit maybe on the cost side of things in the operations at your company? And then also, I guess, Jason, you guys are always turned over every stone here for years to try and make the company more and more efficient on the cost side. Do you feel at this stage that you have a lot more to go in each of your segments and taking out costs here to help the margins? Adam Symson: Yes. I'll take both of those questions, Craig. And they're really the same. I mean, I think we're going to be in a really good position next year to provide you with more information on how a transformation driven by technology really allows us to operate as a much more efficient, effective and growth-oriented company. And I would expect to have more to say about that come February. Operator: I'm showing no further questions at this time. So this concludes the question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, ladies and gentlemen and welcome to the Constellation Energy Corporation Third Quarter Earnings Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's call, Emily Duncan, Senior Vice President, Investor Relations and Strategic Initiatives. You may begin. Emily Duncan: Thank you, Olivia. Good morning, everyone, and thank you for joining Constellation Energy Corporation's third quarter earnings conference call. Leading the call today are Joe Dominguez, Constellation's President and Chief Executive Officer; and Dan Eggers, Constellation's Chief Financial Officer. They are joined by other members of Constellation's senior management team, who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, all of which can be found in the Investor Relations section of Constellation's website. The earnings release and other matters, which we discuss during today's call contain forward-looking statements and estimates regarding Constellation and its subsidiaries that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's materials and comments made during this call. Please refer to today's 8-K and Constellation's other SEC filings for discussions of risk factors and other circumstances and considerations that may cause results to differ from management's projections, forecasts and expectations. Today's presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. I'll now turn the call over to Joe. Joseph Dominguez: Thanks, Emily, and thanks Olivia, our operator this morning for getting us started. Thanks to all of you for your continued support, for your interest in the company and for joining us today at the end of a very busy week for all of you. As always, I want to start by thanking the incredible women and men at Constellation for delivering another quarter of strong operational and financial performance. Powering America is a 24/7 business, and our continued success derives from the simple fact that our folks are exceptional at what they do. This summer, our nuclear plants delivered near-perfect reliability. Our power fleet of gas and renewables answered the bell when dispatched and our commercial and retail teams have once again proven why they are some of the best in the business. I'm going to turn to Slide 5 to get us started with our financial results. We delivered third quarter GAAP earnings of $2.97 per share and adjusted operating earnings of $3.04 per share, higher than the third quarter of last year. Our commercial and generation teams delivered outstanding performance and the stock has performed tremendously again this year, benefiting you, our owners. But this great performance also benefits our people through stock compensation plans that we have aligned with your interest as owners. This year, because of the magnificent performance over a number of years, these plans are triggered and create some nonrecurring O&M headwinds that Dan will cover in his section. But notwithstanding these onetime events, what I don't want you to miss is the continued growth and strong performance of our business. On the data economy front, our team has never been more active with serious and knowledgeable customers. I know in the last call, I hinted that we are far along on a transaction, making use of a baseball metaphor that we were past the seventh-inning stretch. That remains true, and we continue to progress. But as we have recently witnessed in real life baseball and as I'm sure, Dodgers and Blue Jays fans, especially can attest, some of the later innings can seemingly drag out. Nonetheless, we're confident in our ability to complete these transactions, and we will let you know just as soon as we can. But perhaps more important to you than any set of transactions is what we are seeing in the broader data economy market. Our general observation is that the market is hotter now than ever. And the real big difference we're seeing is buyer maturity. In the earliest days, we had a great deal of interest from a lot of customers. But I think it's fair to say in retrospect that many customers in the early days were exploring options, kicking tires, as some might say. Sometimes, they were wondering whether nuclear energy would fit into their own sustainability plans. And even the most serious buyers were still on the shallow part of the learning curve when it came to understanding our markets and the interconnection of really large loads. Today, we're seeing a far more sophisticated and aggressive customer walk through our door. They have done deals. They understand pricing and term. They know they want nuclear. They understand the accounting and the collateral needs of a large transaction. They understand the interconnection process. Most importantly, they walk in our door with a strong understanding of what we can offer and what we need to secure on behalf of our owners and therefore, how to best execute. At the end of the day, we are often paced by the speed of interconnection in these deals. But in terms of our own commercial terms, the negotiations move much more quickly than ever before. Now with regard to the interconnection process, we were encouraged to see the letter from Secretary Wright to FERC, ordering FERC to initiate a rule-making proceeding to develop a standard approach for quickly connecting large loads to the transmission system. It was a clear message from the administration. If America is going to maintain a leadership position in artificial intelligence, we need practical reforms to make it easier to connect large loads to the grid. As you know, this is something we have been saying for a long time. We look forward to FERC's quick action. They have a docket in PJM that is complete with evidence and with arguments. It's ready for decision. Turning to other developments this quarter. We reached a landmark agreement with the state of Maryland and other key stakeholders that lays out the path for the continued operation of Conowingo Dam for the next 50 years. On Slide 5, you can see a picture of the stakeholders that gathered together with Governor Moore and others to celebrate this outcome. You see the handsome guy in the middle of the photograph and to my right, is Governor Moore. This was a win-win outcome. It brought together previously opposed coalitions to create a long-term solution that helps and protects the bay, while ensuring the continued operations of a vital source of Maryland Clean Energy for the region. I want to thank Governor Moore and Attorney General Brown for their leadership. We look forward to continuing to work with them and other elected officials to explore energy options for Maryland and the region. Lastly, Calpine remains on track to close in the fourth quarter. The DOJ is our final approval, and we presently are not seeing any effect on their work from the government shutdown. We're looking forward to getting the transaction closed, and to start working as a combined company to bring coast-to-coast solutions for our customers and to create value for you, our owners and for our communities. Turning to Slide 6. The momentum and support for nuclear has never been stronger. Nearly 3/4 of the public now supports nuclear energy. But it doesn't stop there. 9 out of 10 people think that the licenses on existing nuclear plants should be extended, and you know we're doing that work. And 2 out of 3 people believe we should be building more nuclear plants in the U.S. This is a tremendous level of public support. The public gets it and so do the policymakers. I'd point out to you that just in the last 10 days, the Trump administration and Westinghouse announced a public private partnership with the goal of building 10 gigawatts of new nuclear reactors. And the government is pledging $80 billion to help ensure it happens. Our nation recently announced a trade deal with Japan and the centerpiece of that was the investment of more capital in nuclear and the data economy. And then finally, NextEra, a company known for renewables announced the restart of Duane Arnold, all enabled by another contract with hyperscalers. And that's just what happened in the last 10 days, and it builds upon the bipartisan support that we've seen for nuclear tax credits that not only support new nuclear, but crucially support the existing fleet so that it could continue to operate, uprate and relicense. States are also leading the way through ZEC and other programs to ensure that clean, reliable nuclear power continues to benefit their citizens. Under Governor Hochul's leadership in New York, the state is looking to build 1 gigawatt of new nuclear built on a foundation of the new -- of the existing nuclear fleet that has been so successful for New York. The Public Service Commission has called for the extension of the ZEC programs, and we are involved in that proceeding. All of these developments are wonderful and a great affirmation of what I think has been the core principle of this company from its beginning. Nuclear energy is the most valuable and important energy commodity in the world today, and Constellation produces more of it than any other private sector company in the world. But our advantage doesn't just stop with the existing fleet. I think the most valuable asset that we have, that presently isn't fully recognized is the nuclear sites themselves. This is the place where nuclear was built. It's the place where we have the infrastructure, the land, the capability and the talent to build the next generation of nuclear plants. These land assets that Constellation owns more than anyone provides unique value that is difficult, if not impossible, to replicate. And what it means to me is that the path to new nuclear in many places is going to walk through Constellation. Turning to Slide 7. Constellation has had an excellent track record, as you know, of working with stakeholders to find solutions. And we once again stepped up to meet the needs of the grid by answering Maryland's call with options for the state to consider that would bring new dispatchable generation resources to the state as well as the continued operation and expansion of the world's best 24/7 clean energy resources. As part of the Next Generation Energy Act of 2025, the Maryland Public Service Commission solicited applications for dispatchable generation and large capacity resources that could proceed through an expedited process known as a CPCN or Certificate of Public Necessity. In response, we're providing Maryland options to potentially bring up to 800 megawatts of battery storage and more than 700 megawatts of low-carbon natural gas to help Maryland meet its future energy needs. Being part of the solution is who we are at Constellation, and no other company is doing more to bring and secure power for our communities than Constellation. As you know, we've committed to bring 835 megawatts through the restart of the Crane Clean Energy Center. We continue to provide nearly 600 megawatts from the relicensing of Conowingo that we spoke about a moment ago. We are bringing 160 megawatts of new nuclear uprates online at Byron and Braidwood beginning next year, and we're doing far more than this. As we talked about last quarter, we're collaborating with customers to pioneer about 1,000 megawatts of AI-enabled demand response capacity. We're targeting 500 megawatts under contract this year and another 500 next year. And we have identified an additional 900 megawatts of uprates at our sites, including 190 megawatts at Calvert Cliffs in Maryland. Constellation has and will continue to support reliability everywhere and operate in our competitive markets, effectively and performing well. And we have seen that over a decade since deregulation with generators, the competitive market has provided the best solutions to customers. With that, I'm going to turn it over to Dan for the financial results. Daniel Eggers: Thank you, Joe, and good morning, everyone. Beginning on Slide 8, we earned $2.97 per share in GAAP earnings and $3.04 per share in adjusted operating earnings in the third quarter, which was $0.30 per share higher than last year. In the third quarter, we saw fewer nuclear outage days, both planned and unplanned compared to the same period last year. These results reflect the outstanding efforts of our teams whose dedication and skill have driven higher generation volumes and help us operate more efficiently than ever with lower O&M expenses on a year-over-year basis. Last quarter marked the first period where we recognized a full 3 months of higher PJM capacity revenues following the breakout 2025, 2026 capacity auction. With our plants currently near or above the top end of the PTC zone, the non-CMC units captured almost all of the benefit of higher capacity prices. This capacity upside is partially offset by a reduction in PTC revenues compared to last year when more of our plants were in the PTC zone. Additionally, ZEC prices in both the Midwest and New York were lower compared to the third quarter of last year. As a reminder, for the full year 2025, our Illinois ZEC revenues are about the same as last year, but the timing is different since we booked banked ZECs last quarter, whereas in 2024, more of the ZECs were booked across the quarters. Moving to Slide 9. Our nuclear team continues to execute at levels of reliability and with a commitment to excellence that yields differentiated operating performance. During the third quarter, they once again hit that mark with a fleet-wide capacity factor of 96.8%. Our team consistently delivers a capacity factor about 4% higher than the industry average, which at our fleet size is the equivalent to having another reactor's worth of power on a full year basis. Our renewable and natural gas fleets performed near plan during the quarter, with renewable energy capture at 96.8% and power dispatch match at 95.5%. Consistent, reliable and excellent operations across our generation fleet, especially during the critical summer months, are a testament to the thousands of tasks and hours of planning, our teams complete on an ongoing basis to make sure we can meet our commitment to provide clean, firm and reliable power. Turning to Slide 10. Our commercial team continues to meet the needs of our customers, delivering tailored energy solutions that meet their evolving needs. This collaborative approach is driving strong performance with sales margins above the long-term averages we use in our forecast and above the margins we anticipated at the beginning of this year. The renewal rates for both power and gas remained strong. The quarter-over-quarter decline we experienced in our C&I gas renewal rate is almost entirely driven by the loss of one very large, low-margin customer and expected part of the normal ebbs and flows of the business. Our relationships with long-standing customers remain strong and our scale and ability to deliver products to meet the needs of our customers remains a competitive advantage. Continuing on Slide 11. We are narrowing our full year stand-alone adjusted operating earnings guidance range to $9.05 to $9.45 per share. The commercial and generation businesses have had another outstanding year. Our commercial team's ability to optimize the portfolio and deliver value beyond targets is a key driver again this year. Additionally, the world-class operating performance of our nuclear fleet has also contributed upside to our gross margin. This operational strength reinforces the reliability and consistency of our company's earnings profile. Our stock has appreciated over 50% year-to-date, significantly benefiting our owners, but also creating O&M headwinds from stock compensation, which is offsetting much of the gross margin favorability this year. Finally, as a reminder, our revised guidance is stand-alone to Constellation and does not include any impacts from the Calpine transaction. Speaking of guidance and looking to 2026 with the Calpine deal, we get a lot of questions on what to expect. We plan to provide combined company guidance and modeling tools on or around our typical fourth quarter call in late February. We expect to fold Calpine into our current base and enhanced EPS constructs. And as you all revisit your models in the interim, let me remind you when we announced the transaction in January, we provided preliminary expectations for EPS and free cash flow accretion. Those expectations were based on forward power prices and spreads that look relatively similar to today despite the market having moved around a lot since last December. Calpine also has a history of locking in sales or hedging its fleet like other generators to ensure meeting its financial commitments. So near-term open exposure is relatively limited. And the guidance included our view of expected synergies, which, as we talked about, were not a major value driver for this deal, but were anticipated based on what we knew about putting the 2 companies together, and recognizing Calpine was long held by private equity outside of the public markets. It also reflected estimates for accounting policy harmonization adjustments and purchase accounting with fair value calculations, which are inherently difficult to model from your seats. We will fill in all the details when we get to early spring. But I know it has been a little while since the deal was announced. So we thought a quick refresh back to our original conversation would be helpful for all of you. Turning to Slide 12. In September, we executed a renewal and upsizing of our credit facilities, positioning us for the close of the Calpine transaction. Combining the expanded revolver with the other liquidity tools that we use, we'll have $14 billion of liquidity after the deal closes, underscoring the strength of our balance sheet and the strategic flexibility afforded by our investment-grade credit rating allowing us to move forward with confidence. We're also asked regularly about our capital allocation strategy after the deal closes, and it remains unchanged. With the significant free cash flow the combined company is expected to generate, our priorities remain clear. We will maintain a strong balance sheet and high investment-grade credit ratings targeting a return to our metrics by year-end 2027, deliver at least 10% annual dividend growth, pursue growth opportunities that meet our double-digit unlevered return threshold, and return capital to shareholders with $600 million remaining on our existing buyback program. Our goal remains the same: to deliver long-term value for our owners. The philosophy behind our capital allocation strategy is consistent even as we evolve into a larger, more diversified company with even greater opportunities. With that, I'll turn the call back to Joe for his closing remarks. Joseph Dominguez: Thanks, Dan. So folks Constellation performed very well during the third quarter and throughout the year. But we've got 2 months basically to finish it up. And so we've got a lot of work going on in the business, and we remain focused on closing the Calpine transaction and bringing together these 2 great companies. We're looking forward to proving that 1 plus 1 will equal 3. And that the size and scale of the combined company will deliver value for our customers and for our nation that neither company could have done on its own. We're working hard to execute transactions with our customers in the data economy. And we're working with the states and regulators to provide sensible solutions for meeting this moment where new generation and new capabilities are going to be needed to allow America to lead as it should on AI. Constellation is built on a foundation unlike any other company in the energy sector. That foundation enables us to consistently deliver value to our owners year after year. We generate strong cash flow and base earnings supported by a nuclear production tax credit, which continues to enjoy broad and growing bipartisan support. We have a strong earnings growth profile through the decade, and we are in the middle of strategic transactions or PPAs with hyperscalers, which we expect to complete, which will be additive to both our growth and our base earnings. We benefit uniquely from higher inflation, which causes the PTC floor to automatically adjust and further strengthens the economics of our nuclear fleet. We're well positioned to capture value from the opportunities ahead, selling our megawatts at a premium through long-term contracts with customers, including those in the rapidly expanding data economy, which we've talked about quite a bit during this call. As overall power demand grows and new generation resources are required, our existing fleet is ready to meet the needs with clean, reliable and available today energy, and our land gives us a great opportunity to participate in future development. With that, I look forward to your questions. Operator: [Operator Instructions] Our first question coming from the line of Shar Pourreza with Wells Fargo. Shahriar Pourreza: Joe, just on your hyperscaler comment. I mean, obviously, we've seen a lot of BTM deals being done ironically with nonpower companies. Couldn't quite tell from the baseball analogy, but are you still kind of confident with announcing another hyperscale deal by year-end? Or should we assume early next year. And despite FERC, should we still assume that this deal or any deal will be structured in front of the meter? Joseph Dominguez: Yes. As to the last question, yes, right now, as I've indicated on prior calls, we're really focused exclusively on front-of-the-meter deals, which is why this interconnection process ends up becoming, to a certain extent, the gating function on these deals, and we often have to wait for other parties. Shar, my expectation is that deals will be completed soon. I think it will happen before we talk again. But I don't -- there are these approval processes that customers have to go through that sometimes are time consuming. And I don't want -- I can't guarantee the work of other parties. But we're quite close here. So I'm hopeful that this stuff will get done soon and certainly before our fourth quarter call. Shahriar Pourreza: Okay. No, that's actually helpful. And then just lastly, just from a contracting pricing perspective, I mean, we obviously -- we have a proxy right now in Texas for BTM deal with significant backup gen. Are you seeing FOM and BTM pricing kind of converge in your conversations, especially since you're focused more on the FOM side? And just what about gas versus nuclear, especially as you're closing the Calpine deal? Joseph Dominguez: Yes. I think gas has some capabilities in this space. Just to answer that part of your question. I think the real issue with gas for the customers is twofold. One is, does it meet their longer-term sustainability goals? For some customers, it's okay. For other customers, it isn't. And then separately, in the case of gas, it's sometimes more difficult to predict the kind of long-term pricing. So when you're asking me to compare pricing for gas, whether that's behind the meter or front of the meter to a nuclear deal, we end up having to speculate about what future gas prices are going to be, say, over 20 years, we end up having to speculate whether or not there are going to be other compliance costs associated with carbon emissions from gas. So really hard to do that. Oftentimes, the gas deals leave those issues open to different inputs for either a carbon price, a change in policy and of course, for the underlying cost of gas. So hard to compare the 2 things. And generally speaking, the deals that you're alluding to that have been done really haven't been done with new clean resources that allow for the comp. So a bit hard to say. I do think that from an economic perspective, what we're offering, and I think it's part of the heat that we're seeing in terms of the inflow of customers through the door is very attractive pricing relative to other options, and pricing that's firm and sustainable for a long-term period and something that they know from their own environmental pledges and sustainability goals is going to be compliant for them. Shahriar Pourreza: Got it. But just -- I guess, just focusing a little bit on just nuclear FOM versus BTM pricing. Is there a material difference? Are you seeing when those conversations just honing in on nuclear? Joseph Dominguez: Shar, I think it's hard yet to fully understand what the new nuclear pricing is going to be. I mean, that's -- the bottom line is we do a tremendous amount of work on that. And I think it's far from settled what that's going to look like. Obviously, what we could offer is significantly more economic. And most importantly, it's available right now. Operator: Our next question coming from the line of Steve Fleishman with Wolfe Research. Steven Fleishman: I guess, first, just a question on the Calpine. There were some stories about a potential delay in the asset sale process by you? Just is there anything that we should read into that? Joseph Dominguez: Probably a couple of things, Steve. One is we kicked off the asset sale process because we weren't sure how much time we were going to be given to divest needed assets. And so we're feeling more confident that we're going to have a reasonable amount of time to execute the divestiture post regulatory approvals. And secondly, as we complete the regulatory approvals, it is, as you know, DOJ and FERC utilize different tests. And so we want to make sure we're targeting the exact right assets to divest. Biggest point here is that we just don't feel like we need to be in a hurry to complete an asset sale transaction, and we want to take our time. The market is very supportive of sales of these assets right now. Steven Fleishman: Yes. And I guess there'll be others that have pending ones that will be done later on maybe. That could be buyers. Okay. So the other question is more just high level, I mean for the last several months, we just keep hearing different new entrants to the Power business, whether it's oil companies, gas companies, new technologies, et cetera. And then obviously, huge focus on time to power. But then at the same time, it seems to take a very long time to work out deals for those same customers with the assets that are there already. And maybe you can just help connect the dots of what's going on and your conviction level that you'll be able to kind of execute on the ability to capture these new customers? Joseph Dominguez: I think the excitement and interest in new generation is just really a reflection on how durable this growth cycle is going to be. We're seeing these -- the investment in new data centers just grow over year-over-year, and we're now seeing capital deployment projected to be $0.75 trillion on building data centers. And notably, that's probably twice as large as the 3 largest publicly traded power companies in the United States. So we're seeing an investment in the data economy that's simply enormous, and it's going to call for all hands on deck. And I'm always pleased to see that they believe in it so much that they're lining up power needs that are really going to come on 5 or in certain cases, maybe up to 10 years down the road. So I think that's all indicative of the size of the opportunity that we're seeing. Steve, I'd just simply stand by my earlier comments that the amount of interest we have, the number of deals that are being negotiated is far different now and far bigger and more serious now than it's been before. And so that's what gives me confidence we're going to be able to continue to execute the strategy. And I think we provide something uniquely and that's available now, power, with a predictable opportunity to scale that. Operator: Our next question coming from Jeremy Tonet with JPMorgan. Jeremy Tonet: We just wondered if you could provide a little bit of color on Three Mile Island, it seems like progress is going well there. Just wondering if you could provide any updated thoughts? Joseph Dominguez: Well, just what you said. I mean the progress is going well there. We've had a number of critical items that we've completed just recently. The plant looks really well. We talked at the beginning of this whole project that we are going to need a couple of components, the main transformer being one of them. Fuel was another gating item, getting the people ready to operate the site. That was a gating item, Bryan, who's here and his entire team have just done an exceptional job getting the plant ready and really tackling some of these challenges that we identified. Most importantly, we're not seeing new challenges emerge, right? So as we continue to do our work, there's always going to be some discovery that comes along with the inspections of the plant. And what gives me great confidence is that we're not unearthing anything that we didn't anticipate. And in point of fact, the condition of the plant is better. Jeremy Tonet: Got it. Very helpful there. And just wondering if you might be able to comment a little bit as well separately on power markets. We've seen energy prices moving up recently and just wondering thoughts you have on these moves where it could go, and do you see this having any, I guess, impact on conversations when you're discussing contracts? Joseph Dominguez: Well, I think it has 2 impacts strategically for us. One, right, is the -- questions I think we've already gotten here. Are we seeing some sort of convergence that causes us to think we're not going to achieve our pricing expectations? And I would say the opposite is true. And then secondly, we're going to have to sell some assets here to get through regulatory approvals. And I think the impact there, again, is favorable and that the environment for the sale of assets is more constructive now than probably when we started the -- when we announced the Calpine deal. But let me ask Jim McHugh, who's here to kind of weigh in on what he's seeing in the power markets and their durability. James McHugh: Yes. Yes. Thanks, Joe. I'd break it into a couple of components. One is maybe short term, we've seen a small rebound in the nearby, just kind of the nearby months, maybe gas rebound a little bit, that's had somewhat to do with power upward pressure that we've seen. But actually, the power upside has been longer duration than that, and it's been stronger in the outer years. And it's really outperformed gas. I think we're seeing expansion -- heat rates expanding and spark spreads expanding, mainly due to the data growth we're talking about, the load growth in general that we're talking about. We'll have continued -- some continued retirements down the road. There's less line of sight right now, as we've talked about, to additional megawatts in the grid except for all these wonderful opportunities that we've talked about in -- that Joe talked about in the call earlier as well as what we're seeing in terms of our corporate PPAs, bringing on new generation too. But really, it's -- over the last few months, it's been the realization and positive developments on load interconnection and the reality of load growth happening where I think the power markets are pushing stronger. It's still rather tight on the supply-demand fundamentals in general. And it's really about the expectation that we'll see higher energy prices to go with some of the upward pressure we've seen on capacity prices in these markets, too. Operator: Our next question coming from the line of David Arcaro with Morgan Stanley. David just withdrew his question. Our next question coming from the line of Andrew Weisel with Scotiabank. Andrew Weisel: A few questions for you. First, in Maryland. You talked about the 700 megawatts of natural gas capacity. I believe that's existing assets and you mentioned relocated turbines. Can you get a little more specific, where would those be coming from? And maybe on timing, how quickly would those be available to come online? Joseph Dominguez: They're physically located in buildings in the Midwest and in New England. And they're -- I would describe them as incredibly lightly used assets that we could relocate relatively quickly to Maryland. But in terms of their performance capabilities are relatively speaking, state-of-the-art in terms of their heat rates. And we have taken measures to refurbish those units and get them ready for rapid redeployment. So that, I think, is the answer to your question. Andrew Weisel: Great. Then on new nuclear. I know I'm pretty new to the story, but I know that you sounded pretty cautious about new nuclear construction, given the high cost and risks. But with the announcements from the federal government, has that changed your comfort level or given -- has that changed your appetite? And what would it take you to get you to move forward? Whether you need government support and the customer contracts? I know you've talked about exploring potentially 2 gigawatts near Calvert Cliffs in Maryland. And New York is considering adding a gigawatt, as you mentioned. Maybe just high-level thoughts on all of that? Joseph Dominguez: First and foremost is a PPA, right? We need a durable PPA. And the second thing is, we need clear pricing that we're going to be able to achieve with constructability. And that means good partners that bring the technical capability and the ability to construct along with that. We also think, as I alluded to in my prepared remarks, we also think the land value that we offer is the secret sauce to this whole thing. I think you're not going to build nuclear plants in the places we do business with the exception perhaps of Texas, in communities that have never had nuclear before. And I think there's a huge value to having that talent, having the big water, the rail, all the infrastructure and most importantly, the community acceptance. So what I'm looking to do is to monetize the value of that land and that set of capabilities that we bring and convert that into a position that gives us some of the output of the new units. The next thing we're trying to do is make sure that whatever gets operated on our land because we have operating units, gets operated by us, not by others. So an operating services agreement will have to be part of it. In terms of what enables it, I talked about the importance of a PPA. I think the involvement of the administration and the way that they're talking about with Westinghouse likewise is going to be critically important. And I commend President Trump for his incredible leadership on nuclear. We still need to see the details, and we still need to see, as I said, earlier, some very, very clear cost numbers and some very, very clear commitments to deliver those costs on time and on schedule with an operating unit before we are going to put significant capital at risk for these things. I like the way things are evolving. I have been cautious, and I remain cautious, and I will always be cautious because it's a lot of your money that we are talking about here. But I am gaining confidence daily as more and more qualified players are coming forward. And as we're seeing things like the Westinghouse announcement. We still need to get all of the details to really fully understand it, but it is no doubt a positive. Operator: Our next question coming from the line of David Arcaro with Morgan Stanley. David Arcaro: Could you maybe also reflect on your demand response efforts and the initiative that you're pursuing there? And I know you've talked about flexibility of data centers in the past. Are you seeing progress there in terms of data center willingness to go that route? And just the update on that initiative across different markets? Joseph Dominguez: Well, let me start on what I'm seeing in terms of flexibility from a technical capability. And then I'm going to turn it over to Jim McHugh, again, who runs our commercial team to talk about this exciting work we're doing on demand response. So we have been, since the very beginning, one of the core participants in EPRI and their DC Flex or data center flex capability. And we're seeing a lot of great capability to use backup generation and flex compute. I don't want to overstate that, however, I don't think we're going to get to a point where we could flex on and off the full output of data centers. I think it's going to have a meaningful impact, but it's going to have an impact at the margins. That's why we began to explore using AI to see if we can attract some of our other customers to actually providing the relief or the slack on the system during the key hours, and they would then use their own backup generation or curtail their own consumption of energy during peak hours. And we could play this kind of well, middleman role between the hyperscalers and the data center owners and operators and our other customers through this commercial agreement that gives them the ability to call on our other customers to curtail during high-demand events. So Jim will talk about the work that we've done to start developing that and the exciting progress we've made. James McHugh: Yes. Thanks, Joe. It kind of started with what we were doing in the market prior to kind of the recent dynamics. We still had a large amount of our customers who are interested in peak response programs and managing their energy usage. But really with the dynamic shifting towards supply needed in the capacity markets, we saw the opportunity that some of these customers may be interested in being demand response providers and supply to the capacity markets. So we're partnering with Grid Beyond and who is going to help us do a lot of the execution on the operations side with our demand response customers, but we're seeing interest from our industrial customer base to participate in this demand response product. And what's a little unique about the product we're offering is we've gone to customers to get longer tenors or longer-term commitments and they're interested in potentially longer-term deals with good pricing associated with it and we're providing some floor pricing capability in that too for them to be incented to sign up for these longer duration. So we've found kind of this unique opportunity. We're trying to be innovative around the product structure itself. And the pipeline looks really strong right now. We started executing the deals that Joe talked about working towards 1,000 megawatts or so between now and the next couple of capacity auctions. So things are going well. Joseph Dominguez: And David, what's cool about that is when you think about that 1,000 megawatts at the electric load carrying capacity or through that computation that PJM does, that looks like a new nuclear plant. It's not like a 1,000 megawatts of battery, for example, that would look like at the end of the day, 1/10 of a new nuclear plant. But this portends to look like a full nuclear units worth of output in terms of demand response. So I think we're still in the early days of this, but I think the combination of the two things you talked about in your question, the ability to flex at the top of peak by the data centers themselves in combination with new commercial arrangements to get others to pull back consumption during these hours is really going to open up a lot of room on the system and really pave the way for easier interconnection. David Arcaro: Yes. Understood. Okay. Great. That's helpful color. Then I was wondering if you could just touch on what you're seeing in terms of retail margins in PJM. One of your peers suggested that margins in PJM might be somewhat more competitive. I'm wondering if that's reflective of what you're seeing. Joseph Dominguez: Jim? James McHugh: Yes, I think on the retail side, our margins are on the upper end of the range that we've always talked about. We've certainly seen on the wholesale auction, load auction and polar procurements. So we've seen some new participants coming in, that's gotten a little bit more competitive, but we're still seeing stronger margins than the historical averages there. On the retail side, really on the upper end of the ranges we've always talked about. And I want to -- I would have -- I'd be remiss if I didn't add since we're seeing a lot of success with some of these sustainability products and CFE and other types of solutions that are sustainability related, those margins tend to be stronger than pure true commodity margins, too. Operator: Our next question coming from the line of Angie Storozynski with Seaport. Agnieszka Storozynski: I'm just wondering, and again, somewhat of a playing the devil's advocate here. I mean you have a huge portfolio of generation assets, especially pro forma Calpine. There's this growing chatter about bringing your own generation. And I'm just wondering if you're feeling a bit unease about how many of these units you will be able to sign and granted that solar power curves are rising, but it's not just about earnings, right? It's also about the visibility and the quality of earnings. And so we do need more of your units to have that long-term visibility into their earnings power? Joseph Dominguez: Yes, Angie, and I'll just -- my comments during the call were informed by all things, including what we're seeing in terms of policy regulatory, we still believe that we're going to be able to execute transactions. I think this product offering that Jim just talked about with demand response is a bit of an anticipation isn't it, some of what you're talking about, which is to try to make sure we have BYOG or bring your own generation equivalent as we think about demand response as we think about the turbines that we have on the sidelines as we think about our ability to offer up rates. And we also think that policymakers fully understand that relicensing, while not exactly a new megawatt, is the continuation of megawatts beyond the period that they might otherwise shut down. So we think that there's great awareness of that issue. I think in large measure, it was that issue and other compelling arguments that caused PJM to pull back from their bring-your-own generation kind of requirements that they had in other places. I think we might see some voluntary BYOG. But I'm frankly not concerned with where it is right now in the States. And we're marching forward on these transactions, and that has not been an issue for us right now. Agnieszka Storozynski: Okay. And then so it's been mentioned by you in previous questions that we have seen a lot of announcements from other companies vaguely associated with power for power plants. And I'm wondering, is it -- do you think those are comparable deals like quality-wise, firmness wise, to the ones that you guys are working on? I mean some power companies suggest that those deals are more equivalent to LOIs than firm take-or-pay power contracts that public power companies announce? Joseph Dominguez: Look, I think there's probably room for a bunch of different contracting. But Angie, I feel and I could only gauge this from the customer interest in what we're offering. I feel that what we have and what we're offering outcompetes just about any other opportunity in the space. Operator: Our next question coming from the line of James West with Melius Research. James West: Curious, given all this demand from the data economy and the data centers, how are you thinking about the portfolio of generating assets that you would like to or would be comfortable locking into long-term PPAs versus keeping available for normal generation markets? Joseph Dominguez: Great question. I think -- and you're certainly hearing this from Angie's question and others, I think there's more room to run on the long-term deals that we want to get executed. But there will be a point, and there will be a point where 1 or 2 things is going to happen. Either we're going to slow it up or we're going to change our pricing to more aggressive levels to reflect, frankly, the scarcity value of what we'll be able to offer. We're not quite there yet. But -- look, our incentive is to provide sustainable long-term and growing earnings for our owner base. That's what the company is set up to do. And so in the short term, what we're trying to do is get these deals done. We're happy with the kind of atmospherics in the market being quite positive for us. But we're not at a point where we're even entertaining the discussion of, hey, are we going to stop selling long term? I think it's in our interest, it's in our customers' interest, it's in the nation's interest, for us to meet this demand for this incredibly important load that's coming on the system. And so we're going to continue to execute in that space. And I appreciate your question, but I think it's probably more theoretical than practical at this point. Operator: Our last question coming from the line of Paul Zimbardo with Jefferies. Unknown Analyst: Joe, the powerbroker, that was a nice piece recently, I got to say, nicely done. Let me follow up a little bit... Joseph Dominguez: Well, it's one of those embarrassing things that happens when you're in the middle of something like this, but thank you for noting it. Unknown Analyst: Absolutely. Not too shabby. Look, let me follow up on a couple of things here real quickly. First, with respect to uprates, you've alluded to it, both on scale and scope here. I mean can you speak to the opportunity generically? I'll take note of the Pennsylvania governor's disclosure on costs relative to the 340 megawatts at Limerick. I mean, are there more Limericks out there in terms of effectively providing an upgrade that's tantamount to the size of an SMR? And specifically, as it pertains to Limerick, can you elaborate a little bit on where you are on the transmission interconnect process there? I mean it seems like there's some public disclosure about some potential data center there, if you can? Joseph Dominguez: Yes. So [ Julien ], I apologize for the Paul thing. I now see the 2 of you guys as the same person apparently, sorry about that. We identified about 900 extra megawatts. And so the big chunky ones there are LaSalle and Limerick, which are effectively kind of the same size, but have different costs. LaSalle is a bit easier to execute than Limerick. And I don't think we've published costs on that. And then we've got Calvert Cliffs, 190 megawatts that I talked about. So all told, we're looking at about 900 to 1,000 megawatts that we've completed engineering work on and feel pretty confident about. So that's the answer to the upgrade question. In terms of -- I think you were talking about Crane interconnection. Is that what you asked about? Unknown Analyst: Well, I was thinking about Limerick, right? I mean it seems like there's some transmission, yes, go for it. Joseph Dominguez: Yes. So there's a good deal of demand going in that area. So we're quite hopeful that any new megawatts at Limerick would be welcomed and fairly easy to interconnect. That's a big growing area of Pennsylvania in terms of the data economy. That, and of course, the PPL zone. In terms of what's being done by customers to interconnect data centers around Limerick, I think I'm going to just kind of decide not to answer that question. Unknown Analyst: Don't worry, maybe I'll give you another one to follow up on here. You talked about the cost of new nuclear here, both for yourselves as well as the industry. I mean cost of these uprates though seems to be materially cheaper than any new nuclear costs we're seeing out there, even if it's more relevant than what we've seen historically. Would it be fair to assume that the next round of efforts on your front, especially with this focus on additionality would focus on these -- leveraging these uprate sites first and foremost? I mean, obviously, we've seen your restarts here take a lot of the limelight at the outset, but the uprates seem to be the next wave here of where you could really win on additionality and in contracting, it would seem, right? Joseph Dominguez: Yes. Although [ Julien ], I tend not to think about these things as binary, i.e., you're not going to not do something because you're doing uprates. But in terms of the economic merits of the uprates, you're spot on. Those are great investments for us. They have the advantage of not just being additional. We think the relicensings are additional as well. But they also have the ability to be something that's really well within our wheelhouse to execute. We've done a lot of this work historically. And Bryan, the team do really great work in that regard. As I said, we've done the engineering work. It's in communities that already like this stuff. And most importantly, when you're talking about an uprate like this, reason the economics are so attractive is you're not adding people, you're not adding O&M. The plant is just getting more output, but you don't have either an O&M drag from people and you don't have an O&M drag on extra fuel. So it's hard to compare kind of the capital numbers for an uprate to a brand-new plant, which would, of course, require you to have a whole bunch of additional O&M. And I think let me just -- not to drag this out, but I think sometimes when people are talking about the cost of new nuclear and whether it's going to be competitive as a solution for contracts, so on and so forth. They tend to look at it from a capital cost perspective, and I certainly understand that because that's the way people have become accustomed to looking at things like renewables and storage and even new gas fire generation. But there's a huge O&M piece with nuclear that has to be carefully understood that factors into the ultimate price of that resource. Folks, I think that brings the end, Olivia, right? That's the end of the call list here? Operator: Yes, sir, there are no further questions. Joseph Dominguez: All right. Well, terrific. So we'll bring the conversation for this morning to a close. Thank you again for your interest in Constellation for your time during this busy week, and we look forward to catching up with you at the end of the fourth quarter. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.