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Shrinal Inamdar: Thank you, operator. Good afternoon, everyone. Thank you for joining our third quarter 2025 results conference call. As usual, before we begin, I would like to remind you that we'll be making a number of forward-looking statements during this call, including, without limitation, those forward-looking statements identified in our slides and the accompanying oral commentary. Forward-looking statements are based upon our current expectations and various assumptions and are subject to the usual risks and uncertainties associated with companies in our industry and at our stage of development. For a discussion of these risks and uncertainties, we refer you to our latest SEC filings as found on our website and as filed with the SEC. In a moment, I will hand over to Leon Patterson, our Executive Vice President and Chief Business and Financial Officer, who will provide an overview of our recent business and partnership updates, along with financial results for our third quarter 2025. Following this, Dr. Sabine Mikan, our Senior Vice President of Clinical Development, will provide progress updates on our Phase I programs ZW191 and ZW251. We will then pass the call over to Dr. Paul Moore, our Chief Scientific Officer, who will provide a brief overview of recent R&D developments. At the end of the call, Leoni, Sabeen, Paul and Ken Galbraith, our Chair and CEO, will be available for Q&A. As a reminder, the audio and slides from this call will also be available on the Zymeworks website later today. I will now turn the call over to Leon. Leone Patterson: Thank you, Shrinal, and good afternoon, everyone. I'd like to start the call by walking you through recent progress on both clinical and preclinical programs within our wholly owned product pipeline. As you know, our team was pleased to present initial clinical data from the Phase I trial of ZW191, an antibody drug conjugate targeting folate receptor alpha at the ENA conference in October. Sabeen will provide a recap of the data we presented during our poster presentation later on today's call. We are encouraged by the preliminary Phase I data for ZW191, which provides early clinical validation of our ADC approach. And we are pleased to announce that we have dosed the first patient in the Phase I clinical trial of ZW251, a DAR4 ADC targeting GPC3 in hepatocellular carcinoma. Again, Sabeen will talk more about the trial design later on today's call. We also continue to present preclinical data of ZW1528, a bispecific inhibitor of IL-4 and IL-31 to address respiratory inflammation at the European Respiratory Society Annual Congress. Additional information can be found on the ERS Congress website, and a copy of the poster is available on the Publications page of Zymeworks website. Meanwhile, our partnered programs also continue to provide encouraging data at ESMO. Our partner, Jazz, presented a trial in progress poster on the DiscovHER PAN-206 Phase II study of zanidatamab in HER2 overexpressing solid tumors as well as a 2-year follow-up in first-line metastatic colorectal cancer showing durable responses and a favorable safety profile. In addition, yesterday, Jazz announced that the ITT population for the primary PFS and interim OS analysis of the HERIZON-GEA-01 trial will include the full patient population enrolled in the study of 920 patients. Also at ESMO, J&J presented translational findings from the first-in-human study of pasritamig in metastatic prostate cancer, linking T-cell phenotypes with clinical activity. These updates highlight the strong momentum in our partnered portfolio and the long-term value these collaborations continue to build. With this in mind, I'm pleased to announce that this quarter, we recognized a $25 million development milestone as revenue from our collaboration partner, J&J, in association with clinical progress of pasritamig, a first-in-class bispecific T-cell engager targeting KLK2 in Phase III studies in metastatic castration-resistant prostate cancer, which was an engineering -- engineered using Zymeworks Azymetric platform. As a reminder, we remain eligible to receive up to a further $434 million in development and commercial milestones from the J&J collaboration in addition to potential mid-single-digit royalties on global product sales. In addition, this quarter, we earned royalties of $1 million based on Ziihera net product sales by Jazz and BeOne Medicines. And we look forward to pivotal data from the HERIZON-GEA-01 study expected in the fourth quarter. I'd also like to highlight that as of November 4, 2025, we have completed share repurchases of $22.7 million of the remaining $30 million under our previously authorized share repurchase program. which reflects the leadership team's confidence in the company's outlook, the strength of our pipeline and our long-term commitment to shareholder value. This program was primarily funded from Ziihera development milestones and cumulative royalties received from Jazz and BeOne related to initial regulatory approvals in biliary tract cancer in both the U.S. and China, allowing us to efficiently deploy excess capital while maintaining full flexibility to fund operations and growth initiatives. This action reinforces our view that the stock remains undervalued, and it aligns with our disciplined, balanced approach to capital allocation designed to drive sustainable long-term returns. Turning now to our financial results. Total revenue was $27.6 million in the third quarter of 2025 compared to $16 million for the third quarter of 2024. The increase was primarily due to a $25 million nonrefundable milestone recognized from J&J in relation to clinical progress on pasritamig in Phase III studies in metastatic castration-resistant prostate cancer and $1 million of royalty revenues from Jazz and BeOne medicines. These increases were partially offset by a reduction in development support and drug supply revenue from Jazz and due to a nonrecurring milestone from GSK that was achieved in the third quarter of 2024. Overall, operating expenses were $49.7 million for the 3 months ended September 30, 2025, compared to $50.2 million for the same period in 2024, representing a decrease of 1%. The decrease was primarily due to a reduction in expenses from ZW220 and ZW251, zanidatamab and zanidatamab zovodotin and a decrease in personnel expenses. This was partially offset by an increase in preclinical and research expenses for our ZW209 and ZW1528 programs, progression of clinical studies for ZW171 and 191 and an increase in noncash stock-based compensation expense. Net loss was $19.6 million for the 3 months ended September 30, 2025, compared to a net loss of $29.9 million for the same period in 2024. This was primarily due to an increase in revenue, partially offset by a decrease in interest income and an increase in income tax expense. As of September 30, 2025, we had $299.4 million of cash, cash equivalents and marketable securities, which is a decrease in cash resources compared to $324.2 million as of December 31, 2024. Our cash resources as of September 30, 2025, did not include the $25 million milestone from J&J recognized in the third quarter and expected to be received in the fourth quarter. We remain well capitalized. And based on our current operating plans, we expect our existing cash resources as of September 30, 2025, when combined with the assumed receipt of certain anticipated regulatory milestones will enable us to fund planned operations in the second half of 2027, which is anticipated to take us through multiple catalyst events on our pipeline. These achievements underscore the strength of our foundational partnerships and the relevance of our platform across multiple products moving into clinical development by our partners. For additional details on our quarterly results, I encourage you to review our earnings release and other SEC filings as available on our website at www.zymeworks.com. With that, I'd like to hand over to our Senior Vice President of Clinical Development, Dr. Sabeen Mekan, to run through progress on our clinical development programs. Sabeen Mekan: Thank you, Leone, and good afternoon, everyone. I'd like to start off by providing a recap of the initial Phase I data for ZW191 as presented at the AACR-NCI-EORTC conference last month. As it pertains to the safety, we are encouraged by the tolerability profile that we've seen. The safety profile for ZW191 allowed us to escalate dose up to 11.2 milligram per kilogram, which is quite high for topoisomerase payload of this potency similar to deruxtecan. Across all treated patients, there was a low incidence of grade 3 or higher treatment-related adverse events and adverse events leading to dose interruptions or reductions were infrequent. The most commonly reported events were nausea, fatigue and anemia, which are generally consistent with our expectations for an ADC. Importantly, there were no serious treatment-related adverse events, no discontinuations due to adverse events and no deaths observed in this study. These findings support a favorable safety profile, particularly in a population that has been heavily pretreated. Overall, these data gave us confidence that this drug is well tolerated at clinically active doses, providing a solid foundation for ongoing and future studies. Moving now to the efficacy results. This slide shows the waterfall plot summarizing the best change in tumor size across dose levels. What we see here is also very encouraging. There are meaningful reductions in tumor size across multiple dose levels with objective responses observed at doses as low as 3.2 milligram per kilogram and the majority of patients continuing on treatment at data cutoff. Importantly, these responses were seen across the spectrum of folate receptor alpha expression, an important observation as we think about future development and patient selection. In participants with gynecological cancers dosed between clinically relevant doses of 6.4 and 9.6 milligram per kilogram, we observed an objective response rate of 64%. Taken together, these early data show promising antitumor activity across multiple dose levels and tumor types. reinforcing the potential of this program to be a best-in-class folate receptor alpha directed ADC. Based on the integrated assessment of safety, efficacy and pharmacokinetic data, we have selected 2 doses of 6.4 milligram per kilogram and 9.6 milligram per kilogram for optimization with approximately 30 patients planned in each cohort. Enrollment is expected to begin in this quarter, and this will allow us to further refine the balance between efficacy and safety and inform optimal dose registrational studies. We expect to share additional data at a future medical conference with a larger and more mature data set. Overall, early results support ZW191 as a potential best-in-class asset with promising early activity and a manageable safety profile. We continue to be data-driven in planning further development for registration and expanding into earlier lines of therapy and in combination. As we move forward, we -- our focus remains on disciplined clinical execution while exploring strategic partnerships that could accelerate development and expand global reach. Based on the encouraging clinical findings for ZW191, we are moving forward with the clinical development of our second ADC candidate, ZW251 and are pleased to confirm the dosing of the first patient in our Phase I open-label multicenter study of ZW251. The study is actively recruiting and aims to enroll approximately 100 participants across North America, Europe and the Asia Pacific region. The patient population includes advanced or metastatic hepatocellular carcinoma that has progressed after standard of care treatments where regardless of gpiin-3 expression levels and with measurable disease as per RECIST. Part 1 of the study will evaluate escalating doses of ZW251 to determine safety and maximum tolerated dose. Part 2 of the study includes randomized dose optimization at 2 selected doses of ZW251 in order to further evaluate safety and explore efficacy according to the RECIST evaluation criteria. I will now hand over to our Chief Scientific Officer, Dr. Paul Moore, to provide an overview of R&D developments. Paul Moore: Thank you, Sabeen. I'd like to just add a few final thoughts on the developments disclosed this quarter for both ZW191 and ZW171. Firstly, the initial data presented on ZW191 provides important translational insights that could help accelerate and reduce risk in the future development of ZW251 and other pipeline ADCs using our ZB06519 payload. As you can see on this slide, behind 191 and 251, we also have preclinical stage candidates targeting more novel antigens such as Ly6E and PTK7. Also, our NaPi2b program remains IND ready, and we continue to explore next-generation ADCs. Importantly, each of our ADCs has been tailored to factor in target biology by toggling drug-to-antibody ratio and the Fc modifications. Furthermore, we also ensure to utilize the most optimal antibody to deliver an internalized payload, whether this be a superior monoclonal antibody to benchmark as ZW191 or LE or a biparatopic antibody such as in the case of PTK7. Our approach of tailoring these parameters to target biology, patient population needs and preclinical safety efficacy data aims to ensure optimal therapeutic windows while minimizing off-target toxicities. Secondly, I wanted to touch briefly on our decision to discontinue the development of ZW171 and importantly, the valuable insights, both scientifically and operationally that we took from this experience. Internally, we hold ourselves to very high standards when it comes to our target product profiles. That discipline is important because we have a broad and productive pipeline, and we want to ensure our capital and our focus go to programs with the clearest path to meaningful patient benefit. Based on the totality of the dose escalation data, we concluded that as a monotherapy, this program did not fully meet our internal threshold to advance further within our portfolio as it was unlikely to support a benefit risk profile consistent with the desired monotherapy target product profile. It was not an easy decision as we continue to believe there is potential for mesothelin-directed therapies, including ZW171, perhaps in specific subpopulations in combination settings or through the right external partnership. So we felt it was the right choice to prioritize programs that more closely align with our long-term strategic and clinical goals. Our experience of taking 171 through dose escalation significantly strengthened our understanding of the T-cell engager design and provided clinical experience, which will aid us in executing future clinical trials for our next-generation T-cell engagers. For example, we were able to advance 171 safely and efficiently through dose escalation in under a year, which is a real testament to our team and technology. We also deepened our understanding of dosing strategies, routes of administration and investigator engagement, all of which we can apply to our next generation of trispecific T-cell engagers. The study also reinforced our hypothesis around the importance of co-stimulation for T-cell engagers, the use of our novel CD3 epitope and tailoring our candidates for patient characteristics and target biology. Our ongoing portfolio management is a reflection of our discipline, our high scientific standards and the strength of our portfolio. We will continue to hold ourselves and our target product profiles to high standards of success and remain focused on advancing the programs we believe can have the most impact for patients, partners and shareholders. With that in mind, we look forward to presenting 3 poster presentations at the SITC Annual Meeting this weekend with one showcasing the versatility and application of our innovative TriTCE Co-Stem T-cell engager platform to enable diverse targeting strategies across different target tumor types, one featuring a next-generation tumor targeted Mast IL-12 enabled by Iometric and the third covering new research co-authored with NeoGenomics on ADC resistant mechanisms using spperum models. Together, we believe these presentations showcase our continued leadership in advancing innovative and target oncology research. With that, I'll hand over to our Chair and CEO, Ken Galbraith, to conclude today's call and open up the call for Q&A. Kenneth Galbraith: Thanks, Paul. Over the last 2 years, we've redefined what this company can achieve by combining R&D innovation, smart partnerships and disciplined capital allocation to help deliver potential best-in-class therapies while helping to grow shareholder value. Our partnership-based model continues to generate value today while also providing opportunities for growing potential cash flows. We plan to continue leveraging partnerships across our wholly owned pipeline to bring in external capital and accelerate development. We believe this approach allows us to main control of our R&D innovation while helping to derisk clinical development and to help ensure that every investment we make has the potential to contribute meaningfully to durable value creation. As we look beyond important near-term events for our pipeline and partner programs, our long-term focus is on compounding returns from Ziihera and protecting and enhancing future cash flows that can be reinvested to drive the next wave of innovation. With this in mind, this quarter, we announced some changes to our Board of Directors to align governance and leadership with the next phase of our strategy. We welcomed 2 new directors in August and 3 members transition off the Board effective today. We'd like to thank those 3 directors for their service to Zymeworks. In October, we appointed Dr. Adam Schayowitz as acting Chief Development Officer to help advance our portfolio and strengthen our partnership-driven strategy. With this refreshed leadership, we believe we're well positioned to transit our scientific innovation into a scalable model that builds durable royalty streams and deliver sustainable long-term value for our shareholders. To close, I want to emphasize that our capital allocation decisions, whether investing in R&D, advancing partnerships or returning capital through share repurchases, all serve one purpose to help build sustainable long-term value. Our R&D priorities remain focused on programs with clear differentiation and strong scientific rationale, and we'll continue to fund those using partnerships to extend our reach and offset development risk. Those collaborations also aim to provide a meaningful revenue floor through milestones and royalties, giving us the flexibility to invest with conviction and discipline. This is how we plan to sustain momentum through focus, partnership and the power of compounding. I want to thank you for your continued support. I'd like to turn the call back over to the operator for the question-and-answer session. Operator?[ id="-1" name="Operator" /> The first question comes from the line of [Technical Difficulty]. Unknown Analyst: Can you hear me? Shrinal Inamdar: Yes, we can hear you. Yue-Wen Zhu: Perfect. Congrats on the progress. Two from me, if you don't mind. First one, we heard it from Jazz yesterday and I think earlier today as well. But wanted to get your thoughts perhaps on the update in the PFS analysis for HERIZON-GEA to include the ITT rather than the PITT population, your thoughts here and perhaps what drove that change? Kenneth Galbraith: Yes. Thanks, Charles. I think Jazz provided some guidance on that yesterday in their earnings call in the prepared remarks, I think in question-and-answer session. We don't have anything to add beyond what Jazz has shared other than that we're aligned with the regulatory strategy that they laid out for the readout of HERZON-01 and how to analyze that data. So I really can't add anything beyond that. Yue-Wen Zhu: Got it. Fully understood. And perhaps for my second question, I want to say congrats on the folate receptor alpha data at Triple meeting. That was quite impressive. Kind of also wanted to get your thoughts on what does this mean for GPC3, especially when we're thinking about a DAR4 construct in the liver cancer population. And similarly, if we see anything that comes close or is similar or even exceeds what we saw with 191, what would your thoughts be on potential development in-house versus partnership versus out-licensing of this asset in liver cancer? Kenneth Galbraith: Yes. No, good question, Charles. Yes, we're intrigued as your question suggests as well and looking forward to continued recruitment of ZW191 in dose escalation, moving to dose optimization, which provide a larger, more mature data set. At the same time, as we announced, we're recruiting patients now in the ZW251 study. So far, our clinical execution is as good as it has been to date with our prior programs. We're looking forward to that. I think in terms of what we think about that, I think maybe I'll give Sabeen and then Paul both a chance to add their flavor to that because it's a really, really interesting intriguing question for us as well. So I don't know, Sabeen, if you want to go first and I'll ask Paul to follow up. Sabeen Mekan: Yes. I can go first. So as you know, hepatocellular carcinoma is a population with very high unmet medical need, particularly post first-line setting. There are not many treatment options for those patients. And that's why we think we should be able to create a difference given the construct of our ADC and what we've observed in ZW191 based upon the clinical data that we've observed. One of the key concerns with the hepatocellular population is concern for safety because this patient population often is very fragile and they have underlying liver disease. So the concern for safety is very important. And it is for this reason that we have selected DAR4 for this ADC molecule. And given the safety profile that we've observed with ZW191, we're fairly confident that we should be able to have a good safety profiles and to be able to have a therapeutic window in terms of treatment for hepatocellular carcinoma patients. I'll pass over to Paul. Paul Moore: Yes. No, I think Sabeen really captured the key points. I think the tolerability -- I mean, from the 191 study, it was both the tolerability was really what we were hoping for, but we also got the efficacy. And we've gone with the DAR4, we know from preclinical studies that we can maintain the same -- we can get to the same activity level with that. So we were really being careful on just making sure we had the most tolerable molecule to develop in such a challenging cancer indication. And I think the data from the Phase I sort of supports that we're in the right direction with the way that we selected the payload. We were very careful in how we pick that payload in the sort of the space of the topisomerase inhibitors that it would support a tolerable profile while maintaining our ability to get good dose into patients, and you could see that from our data. I think ultimately, we want the molecules to be combinable with other modalities as well so that we can go up in line. But obviously, first, we want to establish the profile as a monotherapy, and this really energizes us now after seeing the 191 data to really chase after the 251. [ id="-1" name="Operator" /> The next question comes from the line of Yaron Werber of TD Cowen. Yaron Werber: Congrats as well on the folate receptor alpha. I got maybe a couple of questions actually on the pipeline. Maybe the first one, while we're staying on GPC3, B1 today on their call said that with their bispecific GPC3 4-1BB, they actually established proof of concept. So they're moving forward. That's definitely very encouraging. In terms of the payload that you're using is irinotecan and typically -- I'm sorry, a TOPO1 kind of based payload. That's not -- are TOPO1 typically used in liver cancer? And kind of maybe give us a little bit of a sense from the preclinical data, what are you expecting in terms of showing efficacy? And then secondly, for the next IND in the first half of next year, the DLL3 CD3, CD28 trispecific, we know DLL3 is a great target, and we've seen a lot of activity with both the bispecific on the market and the ADC. CD28 has not worked out so far in most other cases. So maybe what makes you more optimistic this time around? Kenneth Galbraith: Yes. I'll let Paul talk about the DLL3 and then maybe let Sabine and Paul both comment about CDC3, that's okay. Paul Moore: Yes. So yes, maybe I'll -- yes, I'll take the second question first. And then -- so great question, Yaron, on why do we think we can make CD28 work where others have had challenges, right? And so I think we do take precedents from the CAR-T space where adding in co-stimulation has shown benefits. So something like CD28 or 4-1BB that you refer to in the context of the B1 molecule. But -- and a lot of people have chased after that because of the attraction of getting that CD28 costimulatory signal to the T-cell to maintain or enable activity that you don't achieve just by having signal 1 through CD3. And I think what the challenge has been is actually getting that timing, that simultaneous engagement of CD3 and CD28 in the kinetics and the timing that you need to get that benefit. So that is what we took the challenge on when we developed a trispecific so that we knew that when we engage CD3, that T-cell could be then engaged with CD28. And no one's really developed a solution until what we think we have the solution for that. And so that's where we feel we can make an impact based on our preclinical data that gives us encouragement that we'll see that impact in the clinical setting. So it's a little bit to do with just the way we design it. Others have tried doing CD3 bispecific plus the CD28 bispecific. And in some cases, that may work. But we feel a more precise way is to hit the same T-cell with the primary and the secondary signal in a concert in a manner that can be done with a single molecule. So that's the DLL3. And certainly, we've presented data, we'll show a little bit more actually at SITC this week and that really shows the benefit that we can achieve with that above like a bispecific molecule, but doing it safely in the preclinical setting. For the TPC341BB, and I think also your question was about why do we think a chemo can work there in the liver setting. And certainly, it isn't a standard of care chemotherapy for liver cancer, but there is precedent for chemo working in liver cancer. It's just that it's not -- it just can't be tolerated. It's not just well -- given as a systemic treatment. So we think there is precedent there, and we think the way that we can deliver payload or chemo such as a topo inhibitor with our ADC gives us the opportunity to do it in such a way that we can thread the needle and get the right level of payload to the patient that can enable then the sustained exposure that will give you the benefit, but still with doing it within a tolerable profile. So that's kind of the preclinical hypothesis or the hypothesis and the preclinical data that we have has shown that when we've looked at like a scan of different HCCPDX models, we see 8 out of 10 or that sort of range of responses of models responding, but we can go up to like 100 mg per kg with this molecule in cynomolgus monkeys. So we have the safety tolerability profile with the evidence of efficacy with some glimpses that in patient population they can under certain conditions respond to chemo, we think we can open that window up with the ADC. Kenneth Galbraith: Sabeen, anything you want to add from a medical perspective with this patient population and the idea of chemo versus a payload delivery with an ADC construct? Sabeen Mekan: Yes. So I would like to say that chemotherapy has been tried in hepatocellular carcinoma with limited success, but there has been some incidence of success there, especially trying to localize chemotherapy that's been effective. And that actually makes us believe that giving cytotoxic in an ADC format, particularly with our higher internalizing antibodies and the fact that hepatocellular carcinoma has very high expression of GPC3 gives us confidence that we should have the therapeutic window that is needed in this patient population to be successful. [ id="-1" name="Operator" /> The next question comes from the line of Andrew Berens from Leerink Partners. Andrew Berens: Congrats on the progress. Just a question. I know Jazz is controlling the trial, but I was wondering, would the increase in the -- to the intent-to-treat analysis today also increase the number of PFS events that are necessary to trigger the analysis? Just try to put this announcement in context. Kenneth Galbraith: Yes. No, thanks for the question, Andy. I think I going to answer the same way before. I think Jazz provided all the guidance appropriate around that decision of the patient population that will be utilized for the ITT patient population, both from a PFS perspective and OS. And I don't want to go further than the guidance they've provided. Obviously, we've been working on the study for 4 years from a Zymeworks perspective and proximity data is very close. And so I'll just let Jazz provide that guidance, and we'll just have to wait for a future announcement and presentation to understand anything further beyond that. [ id="-1" name="Operator" /> The next question comes from the line of Stefan Wiley of Stifel. Stephen Willey: Just curious how we should be thinking about the starting dose levels of 251 relative to 191. I know obviously, different DARs, different target organs. But is there anything you can say qualitatively or maybe even quantitatively about how you're thinking about pushing dose here? And I guess, did that dose escalation schema for 251 change at all as some of the 191 data started to come in? And I just have a follow-up. Kenneth Galbraith: Yes. Good question, Steve. Sabeen, do you want to -- obviously, we haven't disclosed the starting dose yet. We'll obviously look to do that probably a similar way we did with 191. But Sabeen, is there anything you want to add about the dose schema for dose escalation for 251 as it relates to the 191 schema that now people have seen? Sabeen Mekan: So I would say that the schema for 251 is very similar to 191, although as you rightfully pointed out, this is a DAR4 as opposed to 191, which was a DAR8. So there are differences. And also with 191 was our first ADC into the clinic. So we were very conservative with our initial starting dose. And now that we've gained some clinical experience, particularly with regards to safety, I can say that we have more confidence in our starting dose, but we are not disclosing that yet. We will be disclosing that later similar to what we did with 191. Stephen Willey: Okay. That's helpful. And then -- maybe just a question for Paul. Just curious how big the universe of target antigens you think is for a trispecific format beyond DLL3. I know that target has a pretty exquisite expression profile between tumor and healthy tissue that obviously mitigates some of the concerns about amplifying off-tumor tox with a signal 2. But just curious where and how you might be able to leverage this format to other targets of interest. Paul Moore: Yes. No, thanks, Steve. That's definitely very much in our mind. And actually, I sort of alluded to we have actually a presentation this weekend at SITC and what we're going to show there is application of the technology to different targets and the way that we designed the molecule for the target. So the base molecule on the context of the CD3/CD28, we know sort of the positions of those molecules. We're not telling people really the secret sauce there and how they're in the geometry of the molecule. But what we also can think about is how do you then target the antigen and design the targeting of the tumor antigen in such a way to get that maximum window. So we are looking at that. We're looking at targets both in solid tumor and in hematological cancers. We can deploy against sort of the 2 plus 1 strategies. We can think about logic gated strategies as well. So there are ways with the Azymetric so versatile and flexible that we can put in multi binding sites to help us get more selectivity and targeting. We can share more of that. But that we're very much thinking about how do we tailor that so that we can have that therapeutic window. We don't rule out the use of masking. We do have masking technology. We're actually applying that to the IL-12 molecule, and that can also be adapted to our T-cell engagers. So we have that toggle if we feel we need it as well. But we just run it through, we test all the different permutations of the molecules, let the data drive and then we have the preclinical models that then allow us to understand the toxicity profile and the therapeutic window. So we're very excited about the application of that. And again, looking forward to pushing forward with the DLL3 program, but we do have other molecules coming behind as well. [ id="-1" name="Operator" /> The next question comes from the line of Brian Cheng of JP Morgan. Brian Cheng: Just 2 quick ones from us. So in a trial design for GPC3, we noticed that you're recruiting patients actively through the patients who have been through standard of care. So just one is, Paul, I'm curious what you saw in the preclinical setting that gives you confidence that GPC3 will be active in the post-IL setting, given that NIVO IPI got approved in the first-line HCC not too long ago. And then just on the biomarker side, I'm curious if you perceive a potential need for -- to develop a biomarker assay near term, is there a need for it today? Just curious what you think about that front, too. Kenneth Galbraith: I'll let Paul start on that. I think Sabine may have something to add also on those, but I'll go ahead, Paul. Paul Moore: Yes. No, thanks. So I think from the preclinical setting, your question was how do we -- what's our confidence that we can go behind other standard of care, right? So I think the expression level of GPC3, we've looked at that. And that doesn't -- we don't anticipate or any -- there's no proof that, that would be modulated by IL treatment. So I think the complementary mechanisms and how they work wouldn't really preclude us going with a targeted medicine that's going after GPC3. And we've got preclinical data in different PDX models. Some of those will be collected potentially after treatment, right? But I think just mechanically, we don't see that as a barrier. And I think one of the Yaron mentioned there's encouraging data with other GPC3 modalities that are also going behind -- they would be tested behind standard of care from those clinical trials. So we take encouragement from what others have seen with GPC3 targeted therapies using different modalities. We just feel the ADC modality could just give us an additional mechanism that -- and the power of that approach can just give us an opportunity for more meaningful differences in benefit there. So that was the thinking there. And then on the biomarker side, there, just like we did with folate receptor, we will look at GPC3 levels and make a decision on whether that would be something that we would need as we move forward in clinical development, and we'll collect that data as we go on that. And Sabeen can reiterate that or elaborate on that. Sabeen Mekan: So I'm answering a question regarding NIVO IPI being approved not too long ago. I don't think that changes our development plan. If you look at the treatment landscape for first-line hepatocellular carcinoma, the treatment is currently includes checkpoint inhibitors and VEGF and also checkpoint inhibitors plus CTLA. So prior to approval of NIVO IPI durvatremi has been approved as well. So it's the same mechanism of action, and it really doesn't have an impact on how we think an ADC, particularly a topoisomerase ADC would perform in this setting. So I think we remain confident with regards to that. And I think Paul answered all your questions regarding the biomarker. We are enrolling similar strategy to our 191 enrolling patients regardless of expression and be able to ultimately do a correlation of how the expression level relates to clinical activity. [ id="-1" name="Operator" /> The next question comes from the line of Mayank Mamtani of B. Riley Securities. Mayank Mamtani: Congrats on a productive quarter. Can you talk a little bit more about your expectations on durability for 191, just given what you've seen at the dose levels you're at? And at what point you'd also be able to explore combination, obviously, important in PROC, but also in other solid tumor types that you may want to explore there? And just kind of put it together, when you think you have a sort of partnership enabling package here, just your latest thoughts on that. And then I have a follow-up. Kenneth Galbraith: No. I'll just answer the partnership question quickly, and then I'll turn it over to Sabine, I think can answer part 1 A, B and C of your first question. But obviously, we found the data from 191, although early in initial clinical data, very interesting. I think there are others who are interested in other ADCs that are differentiated. We think ours clearly are. And so we'll continue to talk to parties who might have an interest in joining us and moving that forward that might allow us to accelerate development, might allow us to find a better ability to compete even on a time basis and explore the full potential of ZW191. So we'll continue to have those discussions. And as I think you've seen that data was very intriguing to KOLs and obviously, people on this call and especially to us. And I think there are potential partners where that data was also very intriguing. And so we'll continue to let the data mature, continue to collect more data and have ongoing discussions at the same time. And I'll let Sabeen answer the subparts of your first part of your question, if that's okay. Sabeen Mekan: So with regards to durability of responses, I think some of the key things when you look at efficacy is the number of patients who responded. So our overall response rate looks pretty encouraging, particularly in the doses we would like to take forward that is 6.4 to 9.6 milligram per kilogram. Key things that we noted were we have a pretty wide therapeutic index with responses starting at 3.2 milligrams per kilogram, that actually gives us a lot of confidence. And if you look at our swimmers plot that we shared in our poster, a few things that give us encouragement is that most of the responses, particularly at higher doses occurred early. And looking at the waterfall plot, the depth of responses, we had a pretty good depth of responses in terms of reduction in tumor size for the target lesions, even though our follow-up is relatively short. And vast majority of patients are staying on treatment. So combined with our safety profile, which would hopefully allow patients to stay on treatment for a long period of time, I think that would help us give the durability that we're going to need to achieve the PFS and OS that we -- that would be important in these indications. Mayank Mamtani: And then on the learnings from 171 to 209, were there any step-up dosing learnings you're looking to apply here as the DLL3 program gets into the clinic? I know you're not saying what dose levels you may start at, but I was just curious, the therapeutic window should be very different consideration given the target differences in mesothelin and DLL3 from an off-target toxicity standpoint. Any thoughts there would be great. Kenneth Galbraith: Yes. I'll let Paul talk about just learnings from our 171 program and how they're going to apply to our thoughts around 209. Paul Moore: Yes. And I think one of your questions was just thinking about the dosing and how we go about thinking about the step-up. And what we did for 171 was we used QSP modeling and we sort of leaned on prior clinical precedents to allow us to really nail what we thought was a good starting dose and then how we could accelerate through the dose escalation. And that approach we will use a similar approach for projecting the starting dose and the step-ups for 209. And what I would say is that those projections when we looked at the exposure levels in the PK, they seem to really fit nicely with what we had projected. So we're anticipating that we can use that again. Obviously, the target toxicity profile, the safety profile is a little bit different for DLL3 than it is for mesothelin. But we still think there's relevant learnings from the design of them -- from the clinical design. But then also there was also some design features in 171 that we're also carrying over into 209. I think that also gives us confidence then that we have that human experience with that approach that it sets us up well for 29. [ id="-1" name="Operator" /> The next question comes from the line of Robert Burns of H.C. Wainwright. Robert Burns: Just one, if I may. So one of the things that I noticed in the presentation for ZW191 was that you used an score categorization, low negative 0 to 74 intermediate 75 to 199 and high 200 to 300 versus the majority of the competitors are using a PS2+ method to define high versus low. So I was just curious about the correlation between those 2 different scoring methodologies so we could sort of assess them in a more apples-to-apples comparison. Kenneth Galbraith: Yes. Thanks for the question, Robert. I think I'll let Sabeen start addressing that question and then see if Paul has something to add to that response as well. But excellent question. Sabeen Mekan: So I would say that H-score is pretty well-known and very well-validated research method in evaluating expression levels of different targets, and it combines both intensity, which is usually measured in IC treatments for 1, 2 plus intensity as well as the number of patients with positive -- number of cells with positive scores. So it's a pretty well integrated method for evaluating the number of pay cells that express the target. And it has had a pretty good correlation with both TPS score, which is often used in certain assays that are ultimately commercialized as well as IHC scores. So that is why we use the H score. It's a composite, and it's got a pretty wide range from 0 to 300, and that gives us a pretty good evaluation across the range for the expression level. So one of the things that we did also do in our poster is categorize the H-score into 3 different categories, high, intermediate and low. And within those categories, the high category that we defined is correlates with high expression that of folate receptor that is used for treatment with ELAHERE. And that is a measure where we can evaluate how many of our patients responded who would have been candidates for ELAHERE versus patients who were low or negative and were not candidates for that treatment. Paul, if you want to add something. Please go ahead. Yes. Paul Moore: Yes. No, I think that's good. Yes. No, great, Sabine, you covered it. I think with the H-score, it just gives us a little bit more granularity across that than using the PS2+ score. But by having the H-score, the score the way that, that specimen sample is scored with the test, we can -- as Sabeen alluded to, we can also calculate the PS2+. That's doable. So you can -- we can take that data and analyze it whichever way we want. But we felt for this analysis, this was the appropriate way to show the H-score because it just gives people more breadth and understanding of the profile of the patients that we're seeing. Robert Burns: Yes. No, I completely understand that, and I appreciate the granularity. So just if you don't mind, like would it be an accurate assumption to say the patients that you defined as high expression per the H-score of 200 to 300 would fit the category of PS2 plus greater than or equal to 75? Or would there be some discrepancy between them? Sabeen Mekan: It should be a very high correlation. Robert Burns: I guess last question for me. Given the data that we've seen from RENA-S as well as the Eli Lilly compound, obviously, they're using a PS2+ scoring system. In those non-high patients, how do you think that ZW191 stacks up against those 2 compounds in the lower expressing or intermediate expressing folate receptor alpha patients? Sabeen Mekan: So as you saw from our data, we showed pretty transparently across a spectrum of H scores across low and negative that we observed clinical activity across folate receptor expression levels. We're looking at data from -- which we are pretty confident about, and we're showing pretty good activity. Given in our sample size, we had roughly around 2/3 of patients who were low negative roughly. which correlates very well to the number of patients who are not candidates for ELAHERE. And comparing our data to the competitors you talked about GES and Lilly, I think we feel pretty confident about our activity in the low negative patient population from what we've observed so far. Obviously, we're going to continue to follow our patients. We are enrolling very actively in our study with more patients in dose escalation and longer follow-up, and we are initiating our Part 2 dose optimization, which will provide us more data at the doses that we would like to move on. I think that would give us a lot of confidence in our activity across the spectrum for expression levels, including low and negative. Robert Burns: I can't wait to see the additional data for ZW191. [ id="-1" name="Operator" /> The next question comes from the line of Akash Tewari of Jefferies. Phoebe Tan: This is Phoebe on for Akash. On ZW191, it looks like a key differentiator between this and other next-gen folate receptor alpha ADCs is safety, specifically on Grade 3 cytopenia. Can you talk about the importance of this difference in terms of potential combinations maybe in earlier treatment lines? Kenneth Galbraith: Good question. I think we see a number of potential differences, differentiating factors between ZW191 and data we've seen from others. But I'll let maybe Sabeen talk specifically about the tolerability profile we've seen so far in our data set. Sabeen Mekan: The tolerability profile, we're very pleased, particularly with our safety event rate. Most of the safety events that we saw were pretty expected, as we mentioned, which were mostly not vomiting cytopenias. Our cytopenia rate is -- actually, we're very pleased with that rate because this is something that you would expect very typically from a topoisomerase ADC. And the rates that we observed for anemia, neutropenia and thrombocytopenia are well within expected for an ADC, particularly with the fact that we're going at relatively high doses compared to other ADCs with similar payload. So with that, we are confident that, that would help us drive efficacy. And at the same time, the safety profile with cytopenias helps us combine with treatments in earlier lines of therapy. As you know, in ovarian cancer, earlier lines of treatment consists of a combination of platinum, taxanes and bevacizumab. So that gives us a lot of confidence to combine with all of these treatments going in earlier lines of treatment, particularly some of the pitfalls that we've seen with other ADCs, cytofolate with combinations in earlier lines is neutropenia, and that often leads to reduction in doses to the point that it affects efficacy. And we're hoping with our safety profile and particularly the lower rates of neutropenia that we're observing, ZW191 should be able to be combinable with the platinum agents at a much more efficacious dose. So that's one of the key areas. The other thing that we're thinking about in earlier lines of therapy from a tolerability perspective, obviously, is the ability to treat patients for much longer, particularly in the maintenance setting. And I think these are all areas where we can differentiate. [ id="-1" name="Operator" /> The next question comes from the line of Jon Miller of Evercore. Jonathan Miller: I'll follow on a question on the DLL3. I guess we've seen some really great data from other T-cell engagers there even pretty recently. So I'd love what do you think are the key places where you'd hope to differentiate? What would make your molecule a best-in-class molecule in your opinion? And where do you think you can target that? And then I've got a follow-up. Kenneth Galbraith: Okay. Paul, do you want to... Paul Moore: Yes. No, I think absolutely. I mean, DLL3, a lot of excitement. It's a attractable target in solid tumors. We're getting encouraging response rates. For sure, we think there may be patients that could still -- that could benefit from -- that don't respond that don't have the T-cells that can really mount a response or a prolonged response. And that's really what we're trying to do here with our molecule. So really change the game and really get the next level of response and durability of response is really what we're hoping for. And we think by having the CD28 co-stimulation, it gives us opportunity to do that. So there may also be some benefits in the mechanism that can lead to thinking about the duration of response and the way that we dose the molecule. They could also be intrinsic in the design and the fact that we have that extra T-cell response, but that will away further analysis. But it's really more patients responding and longer responses. Again, that's the goal, Jonathan, and our data suggests that we can from a preclinical, we have a chance to achieve that. Jonathan Miller: Fair enough. I guess since you were talking earlier about being almost finished with your repo, I am curious, given the expected upcoming milestones from Jazz would be one on the GEA readouts, what is your expected use for future milestones? Should we be expecting that repo will make a return when you have cash inflows in that response? Or is that money spoken for, for your internal programs? Kenneth Galbraith: Really good question. I think as we started this last year, we do want to have the ability to always have an authorized stock repurchase program that then gives us the ability to allocate capital to reducing share count at what we think is attractive prices to boost TSR. So we always want to have that optionality. So I think you should expect that we will always have an authorized stock purchase plan in place. We get to decide when and how we use that for shareholder benefit. So I think you should just expect as we're getting to the end that we should always have one in place to be able to do that. It's not the only place we've been allocating capital over the past period of time. We have been allocating capital to R&D programs that make sense for us and when the data justifies it, continuing to move forward with additional investment as we are with ZW191. We've obviously talked a little bit about our strategy of maybe creating another area to allocate capital as capital comes in from milestones and royalties from Ziihera and hopefully eventually pasritamig. Having the ability to then decide to allocate that capital back into a royalty portfolio, given that those royalty portfolio we have right now, it earns very attractive annualized rates of return, we think, from holding it from development through commercialization and having the ability as some of those gains are realized through payments from our partners to put that back into an attractive royalty portfolio that could generate really interesting rates of return is something another piece of the puzzle and strategy that we've talked about putting in place, and we'll talk more about this in the weeks and months ahead. So I think you should see us in in the future, be disciplined on capital allocation. I think we'll obviously have a stock repurchase plan authorized, and we've obviously shown that we like to use it to generate TSRs. We'll allocate capital into R&D when we think is differentiated and productive and data justifies it. And I think we'll develop the capability, infrastructure and strategy and the interest to consider putting some of the cash flows that come out of our licensed products back into a royalty portfolio with potentially other licensed products, and we'll talk more in the future about the strategy and differentiation of how we think we can accomplish that. And I think all 3 of those together, having the optionality to allocate capital to those resources is important for us. I think getting the mix right is important for us. I think if we can do all 3 of those in the right way at the right time and the right mix, we can generate some very interesting long-term TSRs in Zymeworks. And that's what we've been working on and we'll continue to work on as our licensed products move from development to commercialization. [ id="-1" name="Operator" /> The last question comes from the line of Yigal Nochomovitz from Citi. Unknown Analyst: This is [ Shuan ] on for Yigal. Congrats on the progress. Maybe just a quick one from us. You spoke on it a bit already, but just wondering if you could provide additional color on potential time lines of third-party milestones beyond what might be expected from Jazz. Kenneth Galbraith: Yes. We haven't, as a practice, provided much guidance in that regard. Obviously, we've tended to wait until we've earned or receive milestone payments as we did this quarter with the $25 million that we earned from Johnson & Johnson with respect to pasritamig moving into Phase III studies. So for right now, I think we'll keep that guidance. I think as we move forward, especially with Ziihera into commercialization, we might provide some additional guidance around milestones from both Jazz and B1 as they become closer, more approximate and more probable just so people understand a little bit more about cash flows that might be realized in those licensed products and then obviously, then where that capital might be allocated to. So until then, you just have to wait and see, but not too long, I think. [ id="-1" name="Operator" /> This does conclude the question-and-answer section. I would now like to hand the call back over to Chair and CEO, Ken Gabre. Ken, please go ahead. Kenneth Galbraith: That's great. So thanks, everyone, for your time and attention and questions on today's call. Obviously, back in 2021, we designed and initiated a really important clinical study with zanidatamab, the HERIZON-G01 study. And we're really pleased that Jazz continues to be optimistic and confident of reporting out the top line data in this quarter. And we're as interested as anyone in understanding that data set and what the potential is for zanidatamab to be practice-changing in this patient population. And we're very pleased that we won't have to wait that long to understand that. And so please stay tuned and look forward to talking about that further with our partners, Jazz and B1 as appropriate. So thank you very much for your time, and we'll talk to you all very soon. [ id="-1" name="Operator" /> This concludes today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Heritage Insurance Holdings Third Quarter 2025 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead. Kirk Lusk: Good morning, and thank you for joining us today. We invite you to visit the Investors section of our website, investors.heritagepci.com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience. Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and subject to uncertainty and changes in circumstances. In our earnings press release and our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, and we have no obligation to update any forward-looking statements we may make. For a description of the forward-looking statements and the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our annual report on Form 10-K, earnings release and other SEC filings. Our comments today will also include non-GAAP financial measures. The reconciliations of and other information regarding these measures can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I will now turn the call over to Ernie. Ernesto Garateix: Thank you, Kirk. Good morning, everyone, and thank you for joining us today. We delivered strong third quarter results, having achieved net income of $50.4 million, up significantly from a year ago and maintaining the positive trajectory of our earnings. As Kirk and I have been discussing on our earnings calls over the last year, we continue to see tangible results from the successful implementation of our strategic initiatives, which were designed to generate positive and consistent shareholder returns by attaining and maintaining rate adequacy, managing exposure, enhancing our underwriting discipline and improving claims and customer service levels. This has created a significant amount of earnings power within Heritage, which continues to show through. As part of that strategy, we re-underwrote our personal lines book while taking needed rate increases to achieve adequate rates. This has led to a steady contraction in our policies in-force over the last 4 years, while our in-force premium increased from approximately $1.1 billion to an all-time record in the third quarter of $1.44 billion. At the same time, we improved both the quality and the diversification of our book of business. Looking out over the next 6 months, we expect our personal lines policy count to return to growth as we have now opened nearly all of our geographies to new business as compared to only 30% a year ago. We are already seeing our new business production ramp up with new business premium written for the third quarter of $36 million, representing an increase of 166% as compared to $13.7 million of new business written in the third quarter of last year. The decline in our policy count continues to moderate, having decreased by 6,800 policies in the third quarter as compared to a decrease of over 19,000 policies in the third quarter of 2024. In fact, our third quarter PIV count reduction was the smallest decrease that we have experienced since we deployed these strategic initiatives in June of 2021. While it takes time to open our territories, we are seeing good new business momentum continue across our regions. Based upon these factors, I believe that we are on a firm path to deliver full year policy growth in 2026. Importantly, we have long-standing relationships with agents and brokers across our geographies that we have maintained over the last 4 years despite slowing new business growth and re-underwriting our book of personal lines business. In the Northeast and portions of the Mid-Atlantic, we predominantly produce business through Narragansett Bay Insurance Company domiciled in and operated out of Rhode Island. Over the years, we have built a successful homeowners insurance business, which has expanded across the coastal regions of the Northeast and Mid-Atlantic. The company has strong relationships with independent agents based upon a trusted brand. Likewise, Zephyr Insurance operates in and serves the Hawaiian market. Although Zephyr initially focused on exclusively on Hawaiian hurricane wind risk, we subsequently expanded Zephyr's product offering to meet the needs of our customers in the overall Hawaiian market. Our organization benefits from the agility and the rapid market responsiveness typical of a regional enterprise, while also leveraging the economies of scale found in larger super regional companies. We have consolidated many functions to gain efficiency but retained the underwriting, marketing and customer service functions in each region to better address the unique needs of each market. Every region has its own unique dynamics and operating the business locally allows us to quickly adapt to changing conditions as well as provide outstanding customer service to our policyholders and agent partners. As we grow, our robust infrastructure allows us to write new personal lines business without adding significant administrative expense. We understand each of our markets and have built relationships with hundreds of master agencies, which represent thousands of agents throughout our geographic footprint. Our long-standing agency partners have expressed a willingness and desire to grow with us, which in turn provides confidence in our outlook for improved growth in the year ahead. We also remain focused on making decisions based on our data and analytics. This has been the cornerstone of our disciplined underwriting process across all of our geographies, which we will maintain as we grow and which contributed to the lower net loss ratio this quarter. As we grow, we will maintain our disciplined underwriting processes as well as rate adequacy and managing exposures. An example of our disciplined approach can be seen in the commercial residential business, which we reduced in the third quarter due to more competitive market conditions. I believe this further demonstrates the discipline of our management team. Fortunately, we have ample room to grow our personal lines business and can choose to be selective across the 16 states where we do business. We are also exploring expansion opportunities into new regions of the country as well as the delivery of new products to our existing markets. We have a long runway ahead of profitable growth of our business and deliver value to our shareholders. Reinsurance is a critical component of our business, and we have maintained a stable indemnity-based reinsurance program at manageable costs with an excellent panel of highly rated and collateralized reinsurers. Over the course of the third quarter, we continue to meet with our reinsurance partners who continue to support our growth and from whom we anticipate will offer incremental capacity as we look to our 6/1 renewal next year. Additionally, we are seeing the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation, which our reinsurers should begin seeing in the coming months. Given the improved litigation environment in Florida, the lack of reinsured losses and the capacity entering the reinsurance market, we are optimistic that reinsurance pricing will continue to improve looking ahead in 2026. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. To conclude, our business continues to gain momentum and the earnings power of the company is building. We are also growing capital, which will support our managed growth strategy as we expect to begin to deliver policy count growth in the quarters ahead. We are also now in a capital position to review our capital allocation strategy and believe our shares are trading below intrinsic value and do not reflect the many opportunities that we have to further grow the company. As a result, we restarted our share repurchase program in the third quarter, having repurchased 106,000 shares for a total cost of $2.3 million. I would also like to reiterate our dedication in navigating the complexities of our market with a strategic focus that prioritizes long-term profitability, shareholder value and customer service driven by our dedicated workforce. Kirk? Kirk Lusk: Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $50.4 million or $1.63 per diluted share in the third quarter, which compares very favorable to the $8.2 million of net income or $0.27 per diluted share that we reported in the third quarter last year. The increase was primarily driven by a significant reduction in losses and loss adjustment expenses, combined with a decrease in other operating expenses. For the 9 months ended September 30, we reported net income of $129 million or $4.17 per diluted share, which is a substantial increase from the $41 million of net income or $1.35 per diluted share that we reported for the first 9 months of 2024. Gross premiums earned rose to $362 million, up 2.2% from $354.2 million in the prior year quarter, reflecting the rate actions that we have taken, combined with organic growth in selected geographies as we open more regions for new business. This was partially offset by a decline in commercial residential business due to competitive market conditions. As Ernie touched on, we expect our growth to accelerate at a managed pace through 2026 as we ramp our new business efforts across our recently opened geographies. Net premiums earned were $195.1 million, down 1.9% from $198.8 million, resulting from increased ceded premiums. The increase in ceded premiums was driven primarily by a $4 million reinstatement premium for Hurricane Ian and an increase in the Northeast quota share program as written premiums from that program grew from the prior year quarter. The result was an increase in ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the previous year third quarter. Our net investment income for the quarter was $9.7 million, relatively flat due to a higher portfolio value, offset by a lower interest rate environment. We continue to manage our investment portfolio while maintaining a conservative portfolio with high-quality investments that are durations liability matched. Our total revenues for the quarter were $212.5 million, relatively unchanged from our prior year quarter. As discussed, we expect our revenues to return to growth through 2026 as we ramp our new business efforts. Our net loss ratio for the quarter improved 27.1 points to 38.3% as compared to 65.4% in the same quarter last year, reflecting significantly lower net loss in LAE. Net weather losses for the current year quarter were $13.8 million, a decrease of $49.2 million from $63 million in the prior year quarter. There were no catastrophe losses in the current quarter as compared to $48.7 million in the prior year quarter. The reduction in weather losses was coupled with favorable reserve development as compared to the prior year. Our attritional losses continue to remain fairly stable as we believe is associated with the enhanced underwriting strategy over the last several years. Additionally, favorable net loss development was $5 million in the third quarter compared to adverse development of $6.3 million in the prior year quarter. Our net expense ratio for the quarter was 34.6%, a 60 basis point improvement from 35.2% in the prior year quarter, driven primarily by a decrease in policy acquisition costs. The reduction in policy acquisition costs was driven primarily by higher ceded commission income associated with both a larger amount of ceded premium under the net quota share program and a higher ceding commission rate due to favorable loss experience for that program. This resulted in a 1.2% reduction in policy acquisition costs, which was partially offset by a 60 basis point increase in the net general and administrative expense ratio. The net combined ratio for the quarter was 72.9%, an improvement of 19.6 points from 100.6% in the prior year quarter, driven primarily by the lower net loss ratio as well as the lower net expense ratio just highlighted. Turning to our balance sheet. We ended the quarter with total assets of $2.4 billion and shareholders' equity of $437.3 million. Our book value per share increased to $14.15 at September 30, 2025, up 49% from the fourth quarter of 2024 and up 56% from the third quarter of 2024. The increase from December 31, 2024, is primarily attributable to year-to-date net income as well as a $15.7 million net of tax benefit associated with the reduction in unrealized losses. The unrealized losses are related to a decline in interest rates that occurred through the third quarter. The average duration of our fixed income portfolio is 3.13 years as the company has extended duration from the prior year quarter to take advantage of higher yields further out on the yield curve while still maintaining a short duration, high credit quality portfolio. Nonregulated cash at quarter end was $50.1 million. In addition, combined statutory surplus at our insurance companies affiliates at quarter end was $352.2 million, which is up $93.4 million from the third quarter of 2024. The increase in statutory surplus provides for additional growth capacity as we open territories to get up to full capacity. Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our diversified portfolio and distribution capabilities, along with our overall proactive management approach to exposures, rate adequacy and investing in technology will position us well for continued success. Thank you for your time today. Operator, we are now ready for questions. Operator: [Operator Instructions] The first question is from Mark Hughes with Truist. Mark Hughes: The growth prospects, you talked about the PIV growth in 2026. How do you evaluate the opportunity in Florida versus outside of Florida? Ernesto Garateix: Sure. So there's still plenty of opportunity for us in Florida. If you kind of go back to a couple of years, we derisked a bit in Florida, especially in some of the Tri-County areas. So there's plenty of runway for us in Florida. We understand there's more new markets in Florida, but our name has still been predominant with the agents, and that's why we talked quite a bit about our agency relationships, which remain strong. And the agents have been -- we've been working with the agents. They have reached out to us about continuing to write. So as we mentioned on the call there, $30-plus million of new business premium is something that is only gaining more momentum in Florida. Mark Hughes: Okay. Of that new business momentum, I think you talked about $36 million was -- how much of that was Florida? Ernesto Garateix: We have that number here. I'll get that for you. Mark Hughes: In the meantime, I'll ask, how do we think about the pricing or competitive environment in Florida? It looks like commercial property is really a tremendous amount of pressure. I know in homeowners, the pricing cycle is a whole lot slower. But what's your current anticipation in terms of pricing? I think you've talked about filing for maybe low mid-single-digit rate decreases in 2026. Is that still a fair assessment? And is that... Ernesto Garateix: That's still a fair assessment, right, we have a current filing with the -- pending with the OIR for a rate decrease. And the plan would be as well in '26, we've also planned for a single-digit rate decrease. Regarding commercial, you're right, there is more pressure, but I also remind people where the beginning point is when you're talking about CRs in the 70s, yes, they have pushed up slightly to 80%, but an 80% CR is still very profitable in the commercial lines arena. Kirk Lusk: About $17 million of that new business was Florida. Mark Hughes: Okay. So kind of consistent with your current mix. And then ceded premiums in absolute dollars, is this a good starting point when we think about the fourth quarter, the $166 million, $167 million? Kirk Lusk: Yes. It's probably going to be a little high. We had about a $4 million onetime adjustment in there due to reinstatement premium. So yes, I think if you look at backing off some of that, then you're going to be about where the number needs to be. Mark Hughes: So low $160s million. Is just reinstatement premium from Ian? Kirk Lusk: Yes, Ian and Milton -- sorry, it was Ian. Mark Hughes: Okay. So it shows up a couple of years later? Kirk Lusk: Yes. Mark Hughes: Okay. How much growth can you support with the surplus that you've got, the $352 million up pretty substantially? Will that be good enough for kind of what you're seeing in 2026? Kirk Lusk: Yes. Well, I think if you look at kind of where our change in statutory surplus is for the year, it's up about $66 million. And then if you assume that, that is 3:1 ratio, that type of stuff, that gives us over $180 million of net earned premium to write. And again, that's net written. So then you actually figure that, that number is going to be a little higher because of the ceded. And so therefore, I mean, you're looking at roughly well over $225 million, $250 million of premium that we can write based upon that increase in surplus. And then again, that doesn't include any improvements in that number in the fourth quarter. Mark Hughes: Yes. Yes, which I guess leads to the question, with your level of earnings and your strong capital position already, I think you talked about $2 million in buybacks in the quarter, but it seems like there's going to be a lot of excess capital floating around in pretty short order. What are the priorities there? Is that something you could act sooner rather than later on maybe further buybacks? Kirk Lusk: And again, one of the things we also mentioned is that the Board did authorize an additional $25 million worth of stock buybacks. And again, I think if you look at our capital priorities, again, it's one, it's using capital for growth because of the ROEs we're able to generate. Second of all is we do look at where our stock is trading. We still think it's undervalued. So therefore, stock buybacks is our second priority and then dividends after that with the ROEs, if we can't generate what we think are substantial ROEs. So that's kind of like the priority of our capital utilization. Mark Hughes: Yes. Yes, I hear you. Yes, your net income relative to your market cap relative to your capital requirements is pretty striking when you put all that together. Kirk Lusk: Yes. Yes, it is. Operator: The next question is from Karol Chmiel with Citizens. Karol Chmiel: I just have a follow-up question to Mark's question about the new business. So if $17 million of the $36 million was Florida, roughly $19 million was outside of Florida. Can you just maybe comment on where you're seeing the most momentum of those territories outside of Florida? Ernesto Garateix: Yes. So Virginia is a new growing state for us as well as growth in Hawaii. New York is also ramping up. And the one reminder there is that we did take additional 9%, which made us rate adequate in New York. So that started midyear. So that is only beginning and will kind of roll into '26. So additional states as California on an E&S basis also is another positive momentum growing for us. Karol Chmiel: Okay. Great. And just a quick question on this favorable development of $5 million. Is this still due to the reserve strengthening of last year? Kirk Lusk: Yes. It has partially to do with that, and it just also has to do with just kind of what we're seeing in the underlying portfolio. So again, we think that we're adequately reserved for sure. So yes, it does have to do a little bit with that where we did take a hard look at last year. Operator: At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks. Ernesto Garateix: We'd like to thank everyone for joining the call and thank especially our workforce and our employees for all their hard work this year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Upland Software Third Quarter 2025 Earnings Call. [Operator Instructions] The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the third quarter 2025 earnings release, which was distributed today at 8:05 a.m. Central Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir. John McDonald: Thank you, and welcome to our Q3 2025 earnings call. I'm joined today by Mike Hill, our CFO. On today's call, I will start with our Q3 review. And following that, Mike is going to provide some detail on the numbers and guidance. After that, we'll open up for Q&A. But before we get started, Mike, could you read the safe harbor statement, please? Michael Hill: You bet, Jack. During today's call, we will include statements that are considered forward-looking within the meanings of the securities laws. A detailed discussion of the risks and uncertainties associated with such statements is contained in our periodic reports filed with the SEC. The forward-looking statements made today are based on our views and assumptions and on information currently available to Upland management. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. On this call, Upland will refer to non-GAAP financial measures that, when used in combination with GAAP results, provide Upland management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our financial results, which are available on the Investor Relations section of our website. Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, I'll turn the call back over to Jack. John McDonald: All right. Thanks, Mike. So the headlines in Q3, we beat our revenue guidance midpoint, and we met our adjusted EBITDA guidance midpoint. Our Q3 core organic growth rate was 3%. Q3 adjusted EBITDA was $16 million, which resulted in adjusted EBITDA margin of 32% and free cash flow for the quarter was $6.7 million. We welcomed 97 new customers in the quarter, including 14 major customers. We also expanded relationships with 168 existing customers, 13 of which were major expansions. The new and expanded relationships continue to be spread across our AI-powered product portfolio. As we announced previously, in Q3, we successfully refinanced our debt, which moved the maturity of the debt out 6 years to July of 2031. We also added a $30 million revolver. So it really puts us in a place with well-restructured debt and ample liquidity. Our net debt leverage is now down to 3.8x, and we are on track to achieving our net leverage goal of 3.7x by the end of the year. And we plan, of course, to use our ongoing free cash flow generation to continue to delever our balance sheet in 2026 and beyond. On the product front, in Q3, we earned 49 badges in G2's Fall 2025 market reports, reflecting strong momentum across our portfolio. I'd note that Upland RightAnswers and Upland BA Insight are now available in the AWS Marketplace with BA Insight featured in the new AI Agents and Tools category. This expanded presence makes it easier for customers to discover and purchase and deploy these AI solutions, simplifying the purchasing process and accelerating enterprise AI adoption. We were also recognized in Forrester's Customer Service Solutions Landscape, their Q3 2025 report. That study highlights leading vendors who are advancing customer service operations, and we believe that our inclusion reflects the impact of products like Upland RightAnswers in helping companies resolve issues faster, improving agent productivity and delivering more consistent, high-quality customer support and of course, positioning products like Upland RightAnswers as a key enabling technology in these broader Agentic AI customer service deployments. And again, across the product suite, we continue to deliver innovation that boosts productivity, data intelligence and customer outcomes. InterFAX added AI features to improve the discovery of fax content. Adestra rolled out enhanced bot-click detection and a Raiser's Edge NXT integration and Second Street introduced a QR code generator to extend its competitions platform. On the sales -- on the bookings side, we also closed a number of attractive deals this quarter, but 2 new major AI deals that I would highlight. The first was a $2 million multiyear agreement with a Fortune 100 tech company, which adopted RightAnswers as the foundation for an intelligent generative answer engine for all employees, integrating AWS Bedrock AI and S3 to reduce support costs and drive self-service. Another one I'd highlight is a $1 million multiyear deal with a global pharmaceutical company that selected our AWS Bedrock-powered BA Insight platform to replace a legacy enterprise search system, thereby cutting cost and improving search accuracy and governance. And again, these are the results of the work we've done over the past couple of years in AI enabling the portfolio, and we're seeing some of our products really getting slotted in as enabling tech for these broader enterprise AI implementations. So we see that as something to really look at in terms of whether the plan is working. And again, these are early green shoots, but meaningful ones. So in summary, our Q3 results -- reported results support and illustrate the dramatic improvements we've made in the business. We've streamlined our product portfolio with a focus on markets where we can drive growth and profitability. We're generating positive core organic growth. And now look, quarterly results will fluctuate as they have in the past, but the long-term trend reflects progress. As I've described, we're seeing big new customer wins, validating our product market fit and validating our AI product strategies. Now we just need to continue to stack these wins going forward. Our adjusted EBITDA margins have dramatically expanded. We continue to see strong free cash flow. Mike is going to talk a little bit more about this, but with a target of around $20 million this year and increasing next year. And again, we've strengthened our balance sheet by paying down debt, extending the maturity of our debt by 6 years, lowering our debt leverage and with forecasted continuing deleveraging. And again, we've boosted our liquidity with the new revolver. So with that, I'm going to turn the call back over to Mike. Michael Hill: All right. Thank you, Jack. And I think Jack covered a lot of these points on the financials for the quarter, so I'll just make a few additional comments here. On the income statement for Q3, revenues were as expected when taking into consideration our recent divestitures. Q3 gross margins increased from Q2 as expected as a result of the higher margins realized in our ongoing product lines. Our adjusted EBITDA and adjusted EBITDA margin came in as expected with our adjusted EBITDA margin of 32%, up from 21% from the third quarter of 2024. And we still expect full year adjusted EBITDA margin of around 27%. For the third quarter of '25, GAAP operating cash flow was $6.9 million. And as Jack mentioned, free cash flow was $6.7 million. Our full year 2025 target free cash flow remains at around $20 million. And on our balance sheet at the end of Q3, we had outstanding net debt of approximately $217 million, factoring in approximately $23 million of cash on our balance sheet, which is about a 3.8x net debt leverage ratio to trailing adjusted EBITDA, and we're on track to hit our target of 3.7x net debt leverage by year-end. For guidance, for the quarter ended December 31, 2025, we expect reported total revenue to be between $46.4 million and $52.4 million, including subscription and support revenue between $44.1 million and $49.1 million, for a decline in total revenue of 27% at the midpoint from the quarter ended December 31, 2024, this year-over-year decline is primarily due to the divestitures completed earlier this year. Fourth quarter 2025 adjusted EBITDA is expected to be between $13.8 million and $16.8 million, which at the midpoint is a 3% increase as compared to the quarter ended December 31, 2024. Fourth quarter adjusted EBITDA margin is expected to be 31% at the midpoint, which is a 900 basis point increase from the 22% adjusted EBITDA margin for the quarter ended December 31, 2024. For the full year ending December 31, '25, we expect reported total revenue to be between $214 million and $220 million, including subscription and support revenue between $202.5 million and $207.5 million for a decline in total revenue of 21% at the midpoint from the year ended December 31, 2024. This year-over-year decline, as I mentioned, is primarily due to the divestitures completed earlier this year. Full year 2025 adjusted EBITDA is expected to be between $56.5 million and $59.5 million, which at the midpoint is an increase of 4% from the year ended December 31, 2024. Full year adjusted EBITDA margin is expected to be 27% at the midpoint, which is a 700 basis point increase from the 20% adjusted EBITDA margin for 2024. Now additionally, I'll note that we lowered the midpoint for our full year 2025 total revenue and adjusted EBITDA guidance ranges by $800,000, primarily as a result of lower forecasted perpetual license revenue, but I'll point out that the midpoint of our subscription support revenue guidance range remains unchanged. So to recap, our product portfolio is now much more focused around the KCM market. Our core organic growth rate is in a positive multiyear uptrend from negative 2% 2 years ago to negative 1% last year to now around positive 1% this year, and we are targeting 3% next year and 5% plus thereafter. Big new customer wins have validated our product market fit in several key markets, and those major wins have validated our product AI strategy. Our adjusted EBITDA margin is in a significant multiyear expansion trend to over 30% here in Q3, noting that our margins are always highest in the back half of each calendar year. And when we zoom out, we see adjusted EBITDA margins expanding further from 20% last year in 2024 to our guidance midpoint this year of 27% to a target of 29% plus next year, a target of 31% plus in 2027 and then, of course, our long-term operating model target of 32%. Cash flows remain strong as we continue to target around $20 million of free cash flow this year, as I mentioned, and we're targeting an increase of about 10% next year, so targeting around $22 million of free cash flow next year. We have significantly strengthened our balance sheet, improved our liquidity, paying down $242 million of debt since the beginning of last year, refinanced our debt, extended the maturity by 6 years out to July 2031, added $30 million undrawn revolver, providing us with ample liquidity, and we are forecasting continued deleveraging with our free cash flow generation. So with that, I'll pass the call back to Jack. John McDonald: All right. Thank you, Mike. Let's open the call up now for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Scott Berg with Needham. Scott Berg: I guess, I got a couple. You guys had a much better core organic growth quarter here, as you called out. I think Jack mentioned targeting 3% next year, 5% next year. Maybe it was Mike, I apologize, I didn't write down who it was. But tell me 1 quarter is never quite a trend. I guess what are you seeing in the current sales pipelines and the opportunities that you're working that gives you confidence that those targets look reasonable to achieve over the next year or 2? John McDonald: Yes, I think you're right. One quarter doesn't make a trend. And of course, as I indicated, things will bounce around quarter-to-quarter. But as Mike pointed out, the long-term trend is positive, right? In '23, we were negative 2%, in '24, negative 1%. For full year '25, looking at positive 1% and then again, targeting 3% for full year '26. So I think the overall trend is good. The green shoots that we're seeing that give us confidence in that outlook are some of the larger deals I talked about. For a number of years, we were not getting those larger deals. And now with the work that's been done to AI-enable the product portfolio and to position some of our core knowledge and content management products as key parts of enabling tech and these broader enterprise AI implementations and driving partnerships with some of the biggest players in the market, the Microsoft and Amazons of the world. We're starting to see some of these in Google. We're starting to see some of these larger opportunities. So I mentioned a $2 million multiyear deal for a Fortune 100 tech company, a $1 million multiyear deal for a major pharmaceutical company. It's the opportunities in the pipeline for those larger deals that give us optimism as we go into next year. Scott Berg: Helpful there. And then I guess I wanted to ask a clarification on the fourth quarter guidance, Mike, you mentioned license revenue is going to be down about $800,000 in the quarter than prior expectations. Is that a deal that just flipped subscription and you won't take the revenue in the quarter? Or is that something that moved out? Just maybe help understand what that movement is relating to. Michael Hill: Yes. Most of that $800,000 is a perpetual license revenue that we had originally projected, forecasted that doesn't look like it's going to happen. So that's just pure license revenue, Scott. Now there's a small bit of professional services revenue as well that won't show up either to kind of combine to make that $800,000. And of course, that falls to the bottom line on EBITDA. So that's why subscription support revenue guidance at midpoint remains the same. Scott Berg: Helpful, Mike. And I'll just sneak one last one in here is on the quarter. Any change to gross revenue retention trends or maybe net that helped drive the 3% growth number? Michael Hill: We -- so we don't report on net dollar retention rates during the year. That's a year-end metric. We did see -- excluding the divestitures, that was 99% at the end of last year, at the end of 2024. And we're targeting to remain in the upper 90% here this year. So I think those trends are sort of intact and consistent. Operator: Our next question comes from the line of DJ Hynes with Canaccord. David Hynes: Congrats on a nice quarter. It seems like pretty down the middle print. Good to see the improving growth in margins. And Jack or Mike, I appreciate your comments. Jack, maybe just one for you. As you look at the opportunity and think about the growth matrix going forward, how much should come from installed base versus net new? And I guess the follow-up to that is like does the presence of a couple of these key products in the AWS Marketplace help with either of those efforts more than the other? John McDonald: So in terms of growth from the installed base versus net new, if you look at our net dollar retention rates over the past few years, they've trended up from low to mid-90s to upper 90s. And so that's providing a solid foundation for growth. And now we just need to stack some of these growth deals with new customers on top of that to get to growth targets. And so as we look at where that's going to come from, it's really around our knowledge and content management product portfolio, which is roughly 75% of our revenue and products like the ones we've talked about, RightAnswers, BA Insight, Panviva, Qvidian, InterFAX and others will play a key part in that. David Hynes: And then a follow-up just on AWS, the marketplace. Like is that a tool that's more powerful for making it easier for existing customers to buy more? Or is it like a discoverability that may help with landing new customers? John McDonald: Yes, it's a little bit of both. And so it's positive on both fronts there. And then there are broader partnerships, right, with some of these major players whereas folks are going in and doing these agentic enterprise AI implementations, having a knowledge solution that is auditable and reliable and not prone to hallucination is key. So some of these sort of headless knowledge management opportunities where we are part of a broader enterprise AI implementation. I think that's going to be a promising area for us over the next couple of years here. Operator: And our last question comes from the line of Jeff Van Rhee with Craig-Hallum. Jeff Van Rhee: Jack, on the sales and sales execution, you guys are constantly trying to refine the process. Just maybe spend a second there, what's working, what's not? How are you tweaking the process at this point? John McDonald: I think what's working is upgrading the sales force, bringing in more expert domain sellers on the field side. What's working is the SEO strategy that we began rolling out a few years ago. So we're getting higher quality leads into the hands of those salespeople and our SDR team has been doing a nice job there. What's working in early stages, but we're starting to see some promising results from is the use of intent data from platforms like 6sense to refine our outbound motions. And frankly, it impacts our inbound motions as well to really focus in on prospects that are in the market actively looking for solutions. I'd say what's working is the investments that we're starting to make in channel and specifically in working more closely with larger partners like Amazon and Google and Microsoft to play our role in some of these larger enterprise AI implementations. So I think those are all green shoots on the demand gen and sales side. It's not going to be perfect every quarter, and we've got sales cycles to deal with and all of that. So as I mentioned before, it will bounce around quarter-to-quarter. But I think the long-term trend here, as we talked about, is positive. Jeff Van Rhee: And maybe just a similar question on the development side. Obviously, with the remaining portfolio trying to drive up those retention numbers, you want to stay on the leading edge of innovation. How do you feel about the pace of new product introductions? Kind of any call-outs there in terms of trend that gives you some measurables around how quickly you're innovating versus maybe what you were a year or 2 ago? John McDonald: Yes. It's a dramatic improvement. It really started with the center of excellence in India as a core for our development effort. Obviously, our development efforts are broader than that. We've got onshore teams as well as offshore teams in India and elsewhere. But the work that's been done across the board in terms of solidifying the foundations, increasing uptime and availability and reliability of the products, in terms of introducing AI into the product portfolio and smartly and efficiently AI enabling these products where it makes sense. In terms of the partnership with product management to make sure we're prioritizing the right items in the road map to meet the demands, both of existing customers and of new prospects. It's been a steady improvement over the past 3 or 4 years, like Dan Doman and his team. Dan is our Chief Product and Operating Officer and his team, a tremendous amount of credit there. And it's been steady progress, one foot in front of the other. And now we look back on what's been done over the past 3 or 4 years, and it's really starting to bear fruit. And we're seeing it, frankly, again, in getting a shot at these larger deals and starting again to land these million-dollar deals, multimillion dollar, multiyear deals, which we frankly hadn't seen for a while. So yes, that's the picture there. Jeff Van Rhee: Good. And maybe last, if I could sneak, the last one in here on the perpetual reduction. Was that presumably as a new customer? And is that an instance where that revenue is gone or just pushed out? If it's gone, was it a competitive deal you just lost? If so, why? I know that's maybe 5 questions, but if you can tackle that, that would be great. Michael Hill: Jeff, yes, it wasn't just one customer. It was just the perpetual license revenue. We typically have a Q4 uptick. We just didn't see it this year. And it's really -- it's not some big story or some big target that went away. So it's just a little bit less on the perp license side. Operator: That concludes the question-and-answer session. I would like to turn the call back over to Jack McDonald for closing remarks. John McDonald: Okay. Well, thank you so much. We look forward to seeing you on the next earnings call. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. Thank you for attending the FIGS Third Quarter Fiscal 2025 Earnings Conference Call. My name is Matt, and I'll be the moderator for today's call. I'd now like to pass the conference over to our host, Tom Shaw, Senior Vice President of Investor Relations. Tom, please go ahead. Tom Shaw: Good afternoon, and thank you for joining us to discuss FIGS Third Quarter 2025 results, which we released this afternoon and can be found in our earnings press release and in the shareholder presentation posted to our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and Chief Executive Officer; and Sarah Oughtred, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations or estimates, including about future financial performance, market opportunity or business plans. Forward-looking statements involve risks and uncertainties, and actual results could differ materially. These and other risks are discussed in our SEC filings, including in the 10-Q we filed today. Do not place undue reliance on forward-looking statements, which speak only as of today and which we undertake no obligation to update. Finally, we will discuss certain non-GAAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the shareholder presentation we issued today. Now I'd like to turn the call over to Trina. Catherine Spear: Thanks, Tom, and good afternoon, everyone. Our third quarter results are built on the momentum generated during the first half of the year, delivering our highest quarterly year-over-year revenue growth over the past 2 years, supported by strong performance across the board. Net revenues were up 8% for the quarter, well ahead of our plan. Importantly, this success was pronounced across the core parts of our business, scrubwear, the U.S. and our business as usual selling days. At the same time, we drove the core while executing our plan to pull back on promotions. We believe these positive trends within our foundation are a great sign of our brand health and support the sustainable growth story we see ahead. We also executed well across the P&L in Q3. Gross margin remained healthy, approaching 70% despite the growing impact of tariff headwinds. Substantial SG&A leverage reflected both the lapping of outsized expenses last year, but more importantly, the success of our ongoing efficiency and tariff mitigation efforts. Overall, this execution supported an impressive 900 basis point improvement in our adjusted EBITDA margin to 12.4% for the period. As we look ahead, we are seeing this positive momentum carry over to the start of Q4, and we are meaningfully increasing our outlook as a result. We now expect Q4 to be our strongest net revenue growth of the year, driving our full-year estimate to approximately 7% growth. We also have increased our adjusted EBITDA margin expectation above the high end of our original outlook and back to low double-digit levels. This reflects the great progress we have made during the year despite the onset of tariff headwinds. Overall, we are executing exceptionally well against our expectations and driving better consistency. I'm so proud of our team's collective effort as we look to deliver to all of our stakeholders, most importantly, our healthcare professionals. Reflecting on our year-to-date results, we have seen an outstanding response to our brand and wanted to spend some time on this call walking through some of the dynamics we see contributing to our top line outperformance. At the highest level, it really comes down to our success in delivering a great product assortment and impactful connections. Starting with our product strategy, we are excited about the direction we are headed in and how we are more effectively delivering our portfolio to healthcare professionals. We see 4 interrelated areas of focus that are both paying dividends today and setting us up for success in the future. These include improved function and fit, expanded head-to-toe solutions, strategic inventory investments and stronger calendar alignment. We recognize the importance of function and fit. These are already hallmarks of our brand, but areas to continually improve in to address the evolving needs of healthcare professionals. From a functional standpoint, we are delivering impactful and relevant new silhouettes, which are resonating with new and existing customers. This focus has been key in driving our core while also demonstrating success in elevating our assortment. Function also informs fabric leadership, where our category-defining FIONx fabrication remains the centerpiece of our brand. However, we know that there are opportunities to address the full range of activities that healthcare professionals go through every day. Our FORMx fabrication debuted in Q1 for environments where comfort and stretch are paramount, and we have seen momentum build as we have methodically expanded offerings throughout the year. We also just announced our next fabric solution, FIBERx, which is set to debut in Milan at the 2026 Winter Olympics. Lightweight yet structured, soft yet durable. This fabric is designed to work in environments, like for those supporting our Olympic athletes, where durability is particularly important. Looking at our fit initiative, our efforts are already paying off with lower returns, fewer inbound comments to our customer experience team and improved customer trust. With our obsession with function and fit coming together, we are also excited with how our enhanced product design work will elevate the entire product portfolio in 2026 and beyond. Continuing to build this strength in our core opens the aperture for outdating healthcare professionals from head to toe. For example, our recently introduced ArchTek compression socks demonstrate our latest commitment to category leadership as the first ever patented medical-grade compression socks in the market. Across additional areas such as outerwear, underscrubs and footwear, our team has developed a road map of how we plan to prioritize and build out these opportunities in the years ahead. With confidence in great product, we are investing appropriately. Coming off recent periods of more conservative buying plans, we have made more informed and deeper inventory investments across certain styles and colors. This action has contributed to a better flow of newness to our healthcare professionals while also supporting better overall in-stock levels. Finally, this all ties directly to our enhanced merchandising work around calendar alignment. We have added more rigor to how and when we deliver our product and messaging, efforts that have not only enhanced productivity across launch moments, but also our ability to leverage those moments in driving demand back to the core. This work has added importance as we reset our promotional cadence this year and as we execute against a repeatable, scalable framework for consistently delivering great products. As excited as we are with our product direction, our impact would not be what it is without our unique ability to serve our community and build connections in ways that only FIGS can. We are seeing the payoff of our amazing top-of-funnel moments that started with some of last year's big brand splashes and have continued throughout 2025. Looking at some of our recent successes, let's start with what was a unique opportunity heading into this year's Emmy awards. Last call, we detailed our advocacy work in Washington, D.C. with actor Noah Wyle, work which went viral across our community. When Noah was then nominated for Best Actor for The Pitt, he challenged us to make a tuxedo for the Emmy that was as comfortable as the scrubs he wears onset. We stepped up to the challenge by creating a first-of-its-kind tuxedo. With subtle details and craftsmanship, we are proud to support Noah's desire to bring the healthcare community directly to the red carpet. As the night progressed and momentum built, we strategically aired our Where Do You Wear FIGS spot during the last commercial segment before the awards for Best Actor and Best drama were announced. This was executed perfectly as Noah and The Pitt went on to win both of those awards coming out of the break. On stage, Noah eloquently dedicated his award to anybody who's coming on shift tonight or anyone who's coming off shift tonight. This overall moment became among the most viral in our history with multiple best dress nods for Noah and 175 total placements across traditional media and social, including over 30 top-tier press articles across fashion, entertainment and lifestyle outlets. Most importantly, our actions led healthcare professionals, our awesome humans, to feel seen in a way they rarely do on the world's biggest stage. Our brand work was just getting started as we continued our year-long celebration of ready-to-wear FIGS. Following the Emmys, we debuted our global installment of the campaign filmed across Tokyo, London, Mexico City and Los Angeles, showing how medicine is a universal language. We are excited to be able to amplify our message in key countries with upper funnel support. It is also important to highlight our work supporting breast cancer awareness. It's easy to highlight the commercial success of the campaign with our Epping Pink and Fight Club Pink color launches being one of our top-performing color drops in our history. The more important part, the harder part was showing the inspirational work of healthcare professionals, including Dr. Elisabeth Potter, a breast reconstruction surgeon from Austin, Texas. The success of our campaign underscored how much she resonates and is at the forefront of industry conversations in the medical community. It also reinforced the type of impact that we aspire to with Dr. Potter proclaiming, you guys listen, we feel represented and you care about what we're going through. The success of these campaigns are further proof points of how we strike a deep emotional cord with healthcare professionals through the stories we tell. This has always been part of the secret sauce at FIGS, but since our Olympics campaign in 2024, we've been on a run of our best top-of-funnel campaigns ever, and we're determined not to slow down. Not only are our campaigns resonating in unprecedented ways for the brand, but we are also matching this work with added sophistication in our measurement. Performance marketing tools are giving us added insight into when to lean into brand moments and how to optimize our messaging. Importantly, we still have considerable opportunities ahead as we think about leveraging unique views of healthcare professionals to better personalize their experiences. Finally, it's important to highlight that our great execution is bolstered even further by an industry backdrop that is returning to its pillars of fundamental strength that most other apparel industries can only dream of. This includes the replenishment-driven, largely non-discretionary and seasonless nature of our scrubwear that healthcare professionals return to over and over again. It also involves a massive industry that is among the fastest-growing brand any sector with over 23 million U.S. and over 100 million international healthcare professionals. To put it simply, we are serving a strong industry with professionals that need uniforms to do their jobs. Raising the bar further in these foundational areas also helps fuel our efforts across our 3 emerging growth drivers: international, teams and community hubs. We are making important investments across all 3 of these opportunities in 2025, and each is expected to scale in importance in the years ahead. Starting with international, our expansion is a significant focus and one where we have a number of recent developments. With over 80% of global healthcare professionals located outside of the U.S. and driving less than 20% of our revenues, international remains a massive opportunity. We are rapidly expanding our footprint this year, jumping from 33 countries to nearly 60 planned international markets by the end of this year. We are driving this expansion in a disciplined way through 2 strategies, either go broad or go deep. To go broad, we are focusing on low-touch ways to open markets, leveraging technology and regional commonalities to efficiently expand. Following 12 new Latin American markets we announced last quarter, we are on the cusp of opening 11 new markets across the Middle East and Africa region. We know that healthcare professionals globally have the same awful experience as they used to have domestically, and this strategy is an easy way to begin to reshape expectations in many smaller markets while also informing potential future investments. With our go deep strategy, we're focusing on markets with more clearly defined opportunities and taking additional steps to more directly invest. For some of our more established markets like Canada, U.K. and Mexico, investments extend to infrastructure as we look to localize and scale. This includes adding in-market talent, brand marketing to drive awareness and logistics to drive more efficient operations and support profitable growth. This strategy also informs our approach to several new markets, including the launch of Japan in Q2. This market is trending well to-date and providing great early learnings with how to serve locally. We also took the same level of care as we opened South Korea in October. We are excited to announce today that we plan to debut in China through Tmall later this quarter. While near-term contributions of these 3 new markets are expected to be modest, we see the opportunity for each to be significant drivers of our long-term international growth story. We are also actively investing in our teams and community hub opportunities, solidifying each of their own foundation for meaningful growth going forward. With teams, we want to both capture the legacy demand for institutional-led buying and also influence behavior with great solutions to drive this mix even higher. To power these efforts, we have added talent to both nurture our great existing partnerships and also to better cultivate new ones. We also have a focus on unlocking seamless and customizable solutions for a wider range of institutions and are excited to begin deploying updated technology this quarter. With Community Hubs, we are excited to debut 3 new stores this quarter, starting with New York's Upper East Side planned next week and then followed by planned openings in Houston and Chicago. Each of these locations will apply key learnings from our first 2 stores and apply updated design and merchandising elements to enhance the overall experience. We continue to see the value of having a physical presence for the brand, particularly with nearly 40% of customers coming in new to the brand. We remain confident in our disciplined approach and are well-positioned to accelerate our cadence of openings in 2026. Before turning the call over to Sarah, I would like to reiterate how excited we are with our progress. As we have highlighted, the foundational pieces of our business are strengthening. Our community engagement has never been more impactful, and we see significant opportunities to sustain momentum in 2026 and beyond. Importantly, we will never lose our unyielding focus in support of the healthcare community. This is an intangible thing to measure, but one that defines our brand's leadership, caring, connection and authenticity. This is our non-negotiable. It's how we drive relevance and staying power. At the same time, we're applying more discipline, talent and rigor across all the other factors that drive our business. We are positioned well to continue our momentum and amplify the brand over the long term. With that, I'll pass it over to Sarah. Sarah Oughtred: Thanks, Trina. Our year-to-date performance highlights the growing potential of the FIGS story as we more closely align our product strategy with our unique ability to drive impact for healthcare professionals. We are particularly encouraged to drive this high level of execution in a year where we had both a planned headwind with our promotional repositioning as well as an unplanned headwind with tariffs. As I'll discuss, we are excited to see the progress reflected in our full-year top and bottom line expectations that have moved markedly higher the past few quarters. First, let me start with details of our strong third quarter performance. Net revenues increased 8% year-over-year to $151.7 million, ahead of our outlook of flat to up 2%. As Trina highlighted, our performance was underscored by both scrubwear growth and U.S. growth, each reaching 2-year highs as well as the extremely encouraging strength and momentum across our business as usual selling period. These indicators continue to support our successful ability in resetting our promotional strategy this year, particularly with more aggressive action planned across the back half of the year. From a measurement standpoint, average order value increased 6% to $114, primarily driven by higher average unit retail due to product mix and a higher rate of full price sales. Active customer growth has remained consistent throughout the year at plus 4%, pushing our active customer count to a company record of nearly 2.8 million. This growth comes despite our promotional reset, and we have seen momentum in our acquisition trends and sustained success in bringing lapsed customers back to the brand. We were also pleased to see our trailing 12-month measure for net revenues per active customer inflect positive for the first time in 3 years with 2% growth in the period to $209. By category, scrubwear grew 8%, representing 84% of net revenues for the period. Results were ahead of plan with strength in our core products supported by impactful color stories, strategic positioning in key styles and effective merchandising and marketing. Color launches and cadencing were successful in not only driving excitement to new offerings, but also energized our core colors. Looser-fitting silhouettes are increasingly resonating, particularly in bottoms, and we are leading and investing in these areas. Complementing our great assortment, we continue to drive cohesion with how and when we deliver and message to our customers, which is driving productivity. Non-scrubwear increased 7%, representing 16% of net revenues. We saw strong growth in underscrubs, which included new 3-quarter length versions of our popular Salta and Mercado styles and were inspired by customer feedback. Shoes rebounded from some of the executional challenges in last year's period and were supported by strong coordination with our color stories. We were excited to launch our ArchTek socks at the end of the quarter, which we believe will be a great core offering to address healthcare professional needs going forward. Notably, results also reflect the comping of some Olympics-driven newness in areas like outerwear and bags, but we remain excited with the pipeline of products in these key areas going forward. By geography, U.S. sales increased 8% to $127.3 million. This was our strongest performance over the past 9 quarters and continue to reflect balanced growth across both new and repeat customers. International net revenues increased 12%, led by particular strength in driving new customers. Headline growth was solid, but had some nuances that understated our overall strength. In particular, we had a more significant reduction in promo days relative to the U.S., which had an outsized impact on Canada and Australia, 2 of our larger markets. Nonetheless, we are excited as we look at our overall performance, including active customers up strong double digits, AOV up in all regions and ahead of the consolidated growth and fantastic business as usual growth. Gross margin for Q3 expanded 280 basis points to 69.9%. Key contributors to this year-over-year performance included lower discounts from the reduction in promotional days, improved return rates and processing, lower duties and reduced freight costs. These tailwinds were partially offset by higher tariffs. Results were significantly better than planned, driving our best quarterly performance since early 2023 with broad-based upside, including conservative sell-through assumptions of the mix of non-tariff goods and through our improved returns processing work. Our selling expense for Q3 was $35.8 million, representing 23.6% of net revenues compared to 27.5% last year. As a reminder, last year's third quarter included the majority of transition costs associated with the opening of our Arizona fulfillment center. In addition to lapping these costs, we drove continuous improvement here as we further optimize our business. We also saw improvements in shipping given our successful actions to optimize our carrier mix, improve pricing and drive strong service levels. Marketing expense for Q3 was $23.5 million, representing 15.5% of net revenues, down from 20.3% last year. The reduction in the spending rate primarily reflected lapping last year's strategic investment to outfit the Team USA medical team at the Olympic Games and efficiency in marketing spend. G&A for Q3 was $37.1 million, representing 24.5% of net revenues compared to 25.3% last year. Consistent with prior quarters, the lower G&A expense rate was primarily due to a meaningful reduction in stock-based compensation expense, partially offset by higher people costs. In total, our adjusted EBITDA for Q3 was $18.9 million with an adjusted EBITDA margin of 12.4% compared to 3.4% last year. Net income for the quarter was $8.7 million or diluted EPS of $0.05 compared to net loss of $1.7 million last year or diluted loss per share of $0.01. On our balance sheet, we finished the third quarter with a strong net cash, cash equivalents and short-term investment position of $241.5 million. Inventory increased 23% year-over-year to $151.2 million or up 20% on a unit basis. Several factors are impacting the buildup of inventory. As indicated last quarter, it starts with our action to support both product introductions and deeper investments in key styles, which we believe has helped drive some of the upside opportunity during the back half of the year. We also saw a higher-than-planned level of in-transit inventory, reflecting earlier timing given some of the process improvement we have been working to drive across the supply chain. While the gap between unit growth and dollars growth was modest during the quarter, we expect the growing impact of tariffs will contribute to a wider spread in Q4. On the capital allocation side, we did not repurchase shares this period and have $52 million available for future repurchases under our current share repurchase program. Capital expenditures for the quarter were $2.9 million, primarily related to our 3 new community hubs, and we now expect approximately $7 million for the full-year. Now turning to our updated outlook to close out the year. Full-year 2025 net revenues are now expected to grow approximately 7% year-over-year, ahead of our prior outlook of up low single digits. On top of our strong Q3 results, we see several factors supporting even better implied growth in Q4. To start, we had fantastic momentum coming out of the third quarter, starting with our hugely successful breast cancer awareness campaign and extending into our business as usual selling days. As I also mentioned, we are investing more strategically in our inventory position to ensure better availability of key products and styles. This also drives what we expect to be our best balance of new colors and styles offered year-to-date, which is also proving effective at supporting the core business. We are excited to continue to launch this newness with the same discipline that has supported our strong productivity this year. Finally, we will complete our year-long promotional reset this quarter, though do not expect the corresponding revenue drag to be as meaningful as Q3. Looking at gross margins, our full-year 2025 outlook has improved from our prior call and now expect only a modest year-over-year decline from last year's level of 67.6%. A large part of the sequential improvement comes from the Q3 upside, though we do now expect less overall drag in Q4 as well. As a reminder, we faced 2 sizable headwinds in Q4. First, we expect ramping sequential tariff pressure as more impacted goods average into our product costs. We continue to assume added tariffs of 20% in Vietnam and 15% in Jordan, which combined drive nearly all of our production. Second, we are also lapping a sizable onetime benefit from duty drawback claims in the year ago period. However, similar to Q3, we have several items that are helping offset these pressures, including lower discounts, improvements in our returns processing and freight. Additionally, we are starting to get better scale on certain styles in conjunction with demand. The full-year SG&A story continues to show strong leverage following last year's outsized investment. While Q4 is still expected to show some expense rate deleverage, the magnitude has been reduced primarily by the impact of our improved top line assumptions across each of our expense buckets. More specifically, this quarter, selling expenses should continue to benefit from our scaling efforts and tariff mitigation strategies. The marketing expense rate is planned to meaningfully increase, reflecting both lower spend rate from the prior year as well as our ramping support for the forthcoming 2026 Winter Olympics. The G&A rate will continue to reflect lower year-over-year stock-based comp, partially offset by higher planned people costs. Overall, we are updating our full-year adjusted EBITDA margin to approximately 10.3% compared to the prior range of 8.5% to 9% and ahead of the original outlook of 9% to 9.5%. We also want to provide several high-level comments that pertain to our early 2026 planning. First, on net revenues. We are committed to growing the business in 2026, which should continue to be supported by strong current momentum and ongoing process improvements. Additionally, we expect the investments we have made in our 3 emerging growth drivers, international teams and community hubs will begin to have more material impact. While not all of these factors will have linear contributions, we are excited to further unlock these businesses given our strengthening core. Next on tariff mitigation. As we have discussed, we have a number of levers across both product costs and SG&A that we have already pulled and some that remain in consideration. We have already seen strong execution as we optimize costs across inbound and outbound shipping and at our fulfillment center, benefits that we plan to extend into 2026. Our supplier negotiations have been productive and are expected to yield additional savings next year. While we do not plan to take any pricing action in 2025, it remains a lever for next year. Finally, on margins, the bar for 2025 adjusted EBITDA margins has been raised despite an estimated unmitigated tariff drag of approximately 110 basis points. However, with an estimated annualized unmitigated impact of closer to 440 basis points, we expect that the majority of tariff headwinds is still ahead of us in 2026. As such, we will use our ongoing planning process to continue monitoring the overall environment while also balancing our ongoing discipline, the full range of tariff mitigation as well as strategic investment levels. While it is too early to provide specifics, we do think it is important to note that we see opportunity for 2026 adjusted EBITDA margins to be within range of current 2025 expectations. Overall, we are energized to be in such an incredible industry where serving healthcare professionals is paramount. With improving profitability and ample balance sheet flexibility, we believe we are positioned to remain on offense and drive the sustainable long-term growth story we see ahead. I will now turn the call back over to the operator for Q&A. Operator? Operator: [Operator Instructions] First question is from the line of Bob Drbul with BTIG. Robert Drbul: Nice quarter. A couple of questions for you. Just on the gross margin performance this quarter, I guess when you look at it a little bit longer term into next year, but I would even say when you look at your historical results, given your ability to sort of navigate a lot of the tariffs, can you just talk us through how you envision that segment, that line item of the business over the next several years, I guess, at this point? Catherine Spear: Bob, yes, so we saw a really great gross margin for this quarter, up to 69.9%. Obviously, that's been quite higher than where that rate has been. We did see some components there, some that will continue into the future, but some that are unique to the quarter. We are seeing improved discount rates from the pullback in our promo strategy, and we'll see that continue into Q4 as being a benefit year-over-year. Longer term, that increase year-over-year will moderate as that promo strategy normalizes into next year. We've been working hard with our new returns partner and seen some good improvement in our refurbishment rates. Then there was a bit of nuance in how some returns processing happened with the prior year DC transition. We do expect some of those improvements in refurbishment rates to continue going forward, but not at the same rate that we saw in the quarter. We've been really working hard to optimize our inbound rates, and we saw the benefit of that this quarter, and that should continue into next year until we annualize that. Obviously, tariffs are the biggest piece, and so that will have a 440 bps total impact next year or up 330 bps. There's still some unknowns around how tariffs will remain. We'll continue to monitor that, but feeling good with our measures of how we're able to continue to find efficiencies within margin and carry that into future to continue to work on offsetting those tariffs. Operator: Next question is from the line of Rick Patel with Raymond James. Rakesh Patel: Congrats on the strong execution. Can you expand on the demand that you saw during the business as usual days when you didn't offer promotions. How is Q3 performance on those days relative to where it was in the first half? Second, given tariffs are intensifying and demand is holding up well, what do you need to see to revisit the pricing lever for next year? Catherine Spear: Great. In terms of our business as usual days, we've seen acceleration each quarter in those business as usual days. Really great to see that. It's really from the broad-based performance that we're seeing across both the U.S. and international as well as both scrubwear and non-scrubwear. Really happy with that performance, and it's really that acceleration that has had revenue growth rates overall accelerate each quarter. Really happy with what we're seeing there. Then I think you asked on pricing, and so our pricing remains consistent with what we've shared previously. Several considerations that we've shared before that still remain, which is healthcare professionals need our products to do the critical work that they do. Nearly 2/3 of our customers make under $100,000 a year. We have 16 core styles that generate the majority of our revenue. Our ability to simply flow through higher prices into new seasons or new styles is limited. We want to be prudent, and there is still some open-endedness on where tariffs will land. We've been working really hard on our tariff mitigation and these efforts include optimizing our supplier base, negotiating discounts with our suppliers and driving efficiency in inbound and outbound. The great news is that we've seen strong progress on these measures to-date. We're not going to be taking pricing in 2025. If we were to take any future pricing, that decision would be held to share with our healthcare professionals first so that we can control the narrative and deliver with the care that our healthcare professionals deserve. Operator: Next question is from the line of Brooke Roach with Goldman Sachs. Brooke Roach: Trina, Sarah, I was hoping we could discuss the trends that you're seeing in AOV, understood that some of this is coming from the promo reset, but how are you thinking about the opportunity for AOV to contribute to revenue growth as you look ahead into 2026? Similarly, can you talk a little bit about the customer trends that you're seeing? Are your customers engaging more frequently? Are they staying for longer? Are you seeing better reactivation trends or better new acquisition trends? Are you seeing any trends specifically within any age or income cohorts given the broader macro environment? Catherine Spear: Great. I'll start with the question on AOV. In terms of AOV, we've been seeing that increase each quarter and saw a fairly large increase in the current quarter, up 6%. That is driven from both mix shift in our product as well as the pullback in our promotional efforts. I think as we think about 2026, we still think there is some opportunity for AOV to continue to increase. That's largely with how we're thinking about product mix and continuing to build out that full assortment head to toe of that healthcare professional and continue to drive into a higher wallet share that we know is available to us. Sarah Oughtred: I'll just add in terms of the trends we're seeing in our consumer. Brooke, as you know, we don't -- we serve a different consumer than the average apparel or even e-commerce company. Our customer works in an industry that has a real like level of stability. People need healthcare workers. They're not going anywhere. If anything, our industry is really accelerating. It's the healthcare jobs are the fastest-growing job segment. They're growing 3x faster than the overall job market. The demand for healthcare professionals is expected to remain high. A lot of the trends that we've seen in the quarter, some of it is the fundamentals of the industry and obviously, what we're doing on the product side, on the marketing side to execute at the level that you're seeing. To your question around like the trends we're seeing, we're seeing our customers come back. If you look at repeat frequency and you kind of remove the impact of the promotional pullback, we're seeing repeat frequency up significantly. We're seeing our reactivations up significantly, and we're seeing actually cohorts performing across all income levels. Really great trends across the board. We feel really confident that the post-COVID overhang is easing, and we're operating in a much more normalized environment, and it's great to see. Operator: Next question is from the line of Matt Koranda with ROTH Capital. Matt Koranda: It's probably just a follow-up from some of the earlier questions. Just wanted to hear a little bit about what's driving the acceleration that you're implying into the fourth quarter despite the tougher comparison year-over-year. I just wanted to hear a little bit more about customer strength. It sounded just like Trina, like you just said, even your lower income cohort is still performing well. I just wanted to hear you kind of talk a little bit more about the drivers of the acceleration into the end of the year here. Sarah Oughtred: Matt, yes. I mean, we've been seeing some really broad-based and healthy trends that have continued to progress as the year has gone on and see the opportunity for that to continue into Q4. We feel good with how our product and marketing is set up for the fourth quarter. We think we can get there with continuing the trends that we've seen. We've been seeing that new customer acquisition has turned positive in terms of growth for the last 2 quarters and seeing that momentum also really come from our domestic business, which carries weight in terms of the overall growth. We're seeing some great trends in the business as usual days that has been accelerating. All of those components has been captured in how we're thinking about the fourth quarter upcoming. From a promotional perspective, our stance has still remained with how we had seen before. The improvement in revenue growth expectations from Q4 really comes from our business as usual days. No change in how we've been thinking about promo. For Q4, the focus will be on Black Friday, Cyber Monday, but similar to previous quarters, there will be a pullback in our efforts versus the prior year. Matt Koranda: Can I ask about community hubs? You guys sounded more excited, I guess, than usual about the opportunity to lean in there going into '26. Just wanted to hear a little bit more about the potential drivers of growth with Community Hub and where we are with store formats, how they're set up for growth next year. Catherine Spear: Sure. Thanks, Matt. We're really excited about our community hubs. We're about to more than double the amount that we have. We only have a community hub in Century City in Los Angeles today and in Philadelphia and Rittenhouse Square. We're about to open New York City on the Upper East side at 69th and 3rd. We're right in what's called hospital row, which is incredible. You have Memorial Sloan Kettering, you have the hospital Special Surgery, New York-Presbyterian Weill Cornell, Rockefeller. These are powerhouse healthcare institutions that are literally at the same intersection of where we are. Houston, we're opening right near Texas Medical Center, the world's largest medical complex. It has 120,000 employees, 10 million patient encounters a year, over 180,000 surgeries a year, and so Houston, incredible healthcare professional city, and it's a great place to be, and we're really excited. Finally, Chicago. We're located less than 2 miles west of the loop. We're in Illinois Medical District. It's one of the largest urban medical district clusters in the United States, 4 major hospital systems, 2 medical university campuses, 40-plus healthcare-related facilities. That's just -- those are just opening the rest of 2025, and it's November 6 today. Couldn't be more excited. We're taking our learnings from what we've seen with our first 2 hubs 40% of customers are still coming in new to the brand. 30% of customers that are coming into our community hubs are becoming omnichannel customers coming back into the stores, coming back to us online. Really strong -- and we're seeing really strong incrementality in the markets that we're in, and so took a lot of the learnings from our 2 hubs. We've redone the format, the space, how much inventory we can get on the floor, how we're approaching our color drop stories, our newness, our layering, our fit and how we can showcase that in a new and original way. Finally, customization. Everyone wants their scrubs embroidered with their name and their logo so they can tell the world who they are and what they do. These are just being in person with our community, having them feel and touch and experience our product and our brand is -- it's so amazing and so important, and we're really excited. Operator: Next question is from the line of Brian Nagel with Oppenheimer. Brian Nagel: Nice quarter. Congratulations. I've got a couple of questions. I guess one near term and then one long term. On the near-term side, as we look at the sales acceleration in the business, particularly what's happened here in the third quarter, then as you're telegraphing in the fourth quarter, to what extent is that sales acceleration being driven by new products, the new product introductions? Then my follow-up question, I guess, is longer term, a little bit longer term in nature, but now as we're watching the top line of FIGS start to solidify, you're seeing the sales growth. Is there any updated thinking on how the margin – particularly, the EBITDA margin profile of the business should evolve over time? Should we have the potential to get back to the peak operating margins? Sarah Oughtred: Great. In terms of your question on is the growth coming from new products, I mean, actually, what we're really excited to see is the majority of the growth is coming from our core products and even in our core colors. That's a great foundation for the long-term health of our business. Obviously, we've seen growth in some of our newer styles and in our color, and it's really showing that when we showcase some of that newness and innovation, it actually drives the halo effect to our overall core. Really great for us to see there that we have the ability to continue that momentum longer term from a sales growth perspective. In terms of EBITDA, for next year. For now, we've made the commitment that our adjusted EBITDA margin rate would be within range of our guide for 2025. We do have 330 bps of tariff headwind year-over-year into next year. We would be offsetting that in order to stay within range of this year. Our ability to meaningfully offset that is from improvements that we are making in the business to be more efficient, to drive into savings while still being able to invest for the longer term. We'll have some harder ability to expand margin next year just due to the tariffs. Longer term, we see the path for this foundation to continue to go forward and us for -- to drive growth, both top line and into bottom line. Operator: Next question is from the line of Dana Telsey with Telsey Group. Dana Telsey: Nice to see the progress, Trina. Two things. As you think about the Olympics coming up and the marketing for the Winter Olympics, what will be the same or different than what you did for the Olympics in Paris, knowing that summer, this is winter. What do you see as the difference? One of the interesting things in the quarter is the sequential improvement in the growth rate of the non-scrubs business, up high singles compared to the slight decline last quarter. What are you seeing there? What categories are resonating? Catherine Spear: Thank you so much, Dana. We're really excited about our continued partnership with Team USA. As you know, we're the first company ever to outfit a medical team for any country globally, and we're really proud to be able to do that again for these upcoming winter games in Milano Cortina. There's a few things that we really learned and we're going to be applying from our lessons in Paris. First one is that we're finding more ways to have an impact. We learned a lot on the ground. We've created an even better, if you can imagine, a more dedicated space at the Team USA, welcome Experience. That's really exciting. We have a brand-new fabrication called FIBERx. It's really made for healthcare professionals in more high-impact environments like what you would be doing outside in winter and especially for the medical professionals supporting our athletes during the winter games. I do believe this fabrication is going to go well beyond that to serving healthcare professionals within hospitals and offices and clinics, and it's a really, really great lightweight durable fabric that is awesome. You're going to love it. Then finally, I think we've learned a lot in terms of how to optimize our marketing spend and how to ensure that we're really balanced across the funnel. I think you've seen that throughout this year, really taking these very strong top-of-funnel marketing campaigns that, in some ways, are breaking the Internet and how do we bring that all the way down to our healthcare professionals that are on social or across channels and to meet them where they are with really strong product that serves their needs and really strong messaging that resonates and really shows the best of them back to them. I think that's what this campaign is going to do again. Then your question on non-scrubwear. In Q2, the growth rate was negative, and that was really impacted by comping over the same quarter of the prior year that had some additional non-scrubwear launches. What we've seen with category performance for non-scrubwear is that it can vary based on promotional comparisons, the impact of new styles in different quarters and our work to reinvent a few areas. Happy to see that we inflected positive in non-scrubwear this quarter. Even still, we are comping against the stronger quarter last year from where we had Olympics. We had strong accessories and outerwear growth from Olympics last year that doesn't annualize this year. I would say that our non-scrubwear did perform to our plan and has outperformed the first half. We've been happy to see consistent attachment rates and really excited about the opportunity ahead for many of the categories within non- scrubwear. Operator: Next question is from the line of Ashley Owens with KeyBanc Capital Markets. Ashley Owens: Congrats as well. Maybe just first to touch on international. With this now being 16% of revenue of the quarter, if we kind of parse that out and think of that as just shy of $100 million run rate for the business, could you just walk us through some of the next building blocks as to how you're planning to scale these regions? I know regions like Japan, South Korea are still really new. China is obviously coming on board. Would just be curious on thoughts as to if international could sustainably grow at double digits for the next several quarters and how you're thinking about that long-term mix target there? Catherine Spear: Yes. I mean we have a two-pronged strategy, Ashley, in terms of where we go broad and where we go deep. It's been really exciting to see that we'll be at 60 markets by the end of this year. That's driven by our ability to leverage both technology and our understanding of each region and use the commonalities across regions to open up markets very efficiently. If you think about we just -- in Q3, we opened up 12 new markets, Argentina, Bolivia, Chile, Ecuador, I won't list them all, but you can get that. Then in the fourth quarter, we opened up a number of countries in the Middle East and in Africa. That's really exciting. Then to your point, how do we go deep, right? That's the second part of the strategy, where once certain markets reach scale, think about Canada, Mexico, U.K., Australia, we're able to really invest more in the brand and brand awareness. Really localized deeply, deeper engagement with our ambassadors with events, in-market support and so, and having talent on the ground in these places. It's very exciting to continue to build out in both -- in newer markets, but also really go deep in these larger markets that have hit what I would call critical mass. No matter where you live, prior to FIGS, you had this horrible experience with your uniform. Our goal is to get some more healthcare professionals around the world and help change the game for them. Ashley Owens: Then just quickly to follow-up. Maybe on the return rate improvement, if you could help us contextualize how much of the progress there benefited margin for the quarter or the magnitude of the decline you saw? Then just following up, moving down the P&L, any other quantifiable cost savings from fewer restocks and reverse logistics activity that you'd be willing to share? Sarah Oughtred: Yes. Within returns, we've seen overall improvement in our return rates, and that is largely attached to some of our improvements to fit. We definitely saw an outsized benefit related to returns processing. It is quite meaningful of a bump that we saw in Q2. You can really see how the implied guidance for Q4 does step down. That's both with tariffs and mix shift into non-scrubwear that seasonally happens in Q4, and not recognizing the same degree of benefit on returns that we saw in Q2. Operator: Next question is from the line of John Kernan with TD Cowen. John Kernan: Obviously, a lot of upside to on a few line items in Q3. And I just want to go back to the prior question on the fourth quarter guidance because it does assume quite a bit of the momentum on the margin level doesn't continue. Can you just unpack the gross margin and then maybe the selling and G&A in fourth quarter and the expectations there, given you have a lot of momentum coming out of Q3 on the top line and the margin profile? Just curious what's maybe changing in Q4. Sarah Oughtred: Yes, certainly. We will have quite a step-up quarter-over-quarter from Q3 into Q4 on tariff impact. There will be quite a step-up on the incremental amount of tariffs that Q4 has to carry. That will continue to step up as we go into 2026 as a higher portion of our inventory captures the full amount of tariffs. We also have seasonality to consider, so we have a much higher proportion of our business in the fourth quarter that has non-scrubwear that carries a lower margin rate. You'll kind of see that seasonal mix if you look back at the proportion of non-scrubwear business in Q4. Planning similarly, and that will have some drag on the quarter. Then also just to consider from a year-over-year perspective, as you're looking at Q4 that we did have a sizable duty drawback benefit in the fourth quarter last year that was onetime catch-up, so we won't -- that will have a headwind into year-over-year growth in Q4 as well. Then I think you're asking in terms of the overall P&L profile. I mean, as we think about our selling costs, we've continued to see improvement there each quarter and happy with our efforts there, and that will continue into Q4. A lot of really great work that's been done to negotiate with our vendors, bring on multi-carriers and at the same time, being able to provide even better service. That will continue into Q4. From a marketing perspective, the marketing rate will increase in Q4 from what you've seen each quarter in 2025, and that's a function of us starting our investments to support the Olympics, which happened in Q1 of 2026. Then as we go into G&A, we've been continuing to see the decline in our stock comp expense year-over-year, and that trend will continue into Q4 as well. I think those are the main puts and takes on how we think about the profile for Q4. Operator: Our final question will come from the line of Angus Kelleher with Barclays. Angus Kelleher-Ferguson: This is Angus Kelleher on for Adrian. Congrats on a solid quarter. I wanted to ask how you are balancing -- how you're balancing the elevated inventory growth against the plan to pull back on promotions? What safeguards are in place there to avoid margin pressure or excess stock? I guess just more broadly, how do you feel about the composition of that inventory? Sarah Oughtred: Yes. Thanks. We've been intentionally investing in inventory to support demand and improve our core in-stock levels. We've really seen improvement in those in-stock levels, which has been supporting our sales growth. We did have an impact from higher-than-expected in-transit inventory in the quarter, which we do view as positive as it does result from the work we're doing with our partners to drive consistency and execution, and it's ultimately driving shorter lead times. If you were to adjust for that higher in-transit, our unit growth would be low double digits. So much more in line with our Q3 growth and our Q4 guide, while also giving us the opportunity to potentially capture upside. We're effectively getting product more efficiently, and we do need to adjust. As we look at the go forward, we would expect some moderation in unit growth, and that's really just as this in-transit timing adjusts. Then from a dollar growth perspective, we actually expect that to increase into the fourth quarter, and that's really a function of those tariffs impacting that inventory that's coming in, so our inventory is higher. We do have some pockets of inventory that we are working down. We've got some older fit profiles and areas we intend to reinvest in the future seasons. We have made some good progress here, including with our targeted promotional efforts and selective write-offs we were able to do. We do continue to make progress here and in the quarters ahead. We're working on improving greater discipline and efficiency to our buying process. Over time, we do expect that inventory balance to come down over 2026 despite the higher tariffs. Angus Kelleher-Ferguson: Then if I could just squeeze one last one in about Teams. How is the Teams strategy evolving? How has the target customer shifted over time there? Then just if possible, any margin commentary you could share on the contribution of that business? Catherine Spear: Well, first off, Angus, I just want to thank you for not ending on the inventory question. Thank you for adding something about Teams because I'm so excited to talk about our Teams business. It's really -- we've been really focused on investing in our Teams business as we look to ensure an optimal foundation to set us up for the future. We've talked about our outbound strategy, bringing on new institutions that are looking to standardize and brand their teams, and we've made a lot of progress. The biggest kind of item that we're excited about is the upgraded technology. We mentioned it in the earlier part of this call, and so this is really designed for healthcare teams of all types and sizes. This platform is going to give organizations much more flexibility and functionality to purchase in a way that makes sense for their team. We are on our way to becoming the employee store for all different types of healthcare professionals that's going to go well beyond traditional group ordering. This is going to introduce new capabilities like sipeins, like gifting, different types of discounts based on your employee type. We're really excited about being able to roll out this upgraded Teams experience. It's going to feature our full product assortment. It's also going to be able to support international teams customers, which hasn't been the case. We think we're going to be able to unlock meaningful growth in the future. And so -- and then you asked about the margin. Sarah Oughtred: The margin profile. The teams profitability is accretive bottom line. It has a lower gross margin profile just to the offering of a higher discount. Then operating expense structure is much more favorable with the efficiencies, both within outbound shipping as well as marketing. I'm excited with the overall economics that this business provides. Operator: There are no additional questions waiting at this time. I'll pass the call back to Trina Spear for any closing remarks. Catherine Spear: Thank you all for joining us. Really excited to speak with you all, and we'll talk again soon. Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the nLIGHT, Inc. Third Quarter 2025 Earnings Call. After today's prepared remarks, we'll host a question and answer session. [Operator Instructions] I will now hand the conference over to John Marchetti, VP, Corporate Development and Investor Relations. John, please go ahead. John Marchetti: Good afternoon, everyone. Thank you for joining us today to discuss nLIGHT's Third Quarter 2025 Earnings Results. I'm John Marchetti, nLIGHT's VP of Corporate Development and the Head of Investor Relations. With me on the call today are Scott Keeney, nLIGHT's Chairman and CEO; and Joe Corso, nLIGHT's CFO. Today's discussion will contain forward-looking statements, including financial projections and plans for our business, some of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call, and we undertake no obligation to update publicly any forward-looking statement, except as required by law. During the call, we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release and in our earnings presentation, both of which can be found on the Investor Relations section of our website. I will now turn the call over to nLIGHT's Chairman and CEO, Scott Keeney. Scott Keeney: Thank you, John. Q3 represented another solid quarter of execution for nLIGHT with total revenue at the high end of our guidance range and both gross margin and adjusted EBITDA beating our expectations. Third quarter revenue of $67 million grew 19% year-over-year and were once again driven by record aerospace and defense revenue of $46 million, with defense product sales growing more than 70% year-over-year. I am particularly pleased with the expansion of our product gross margin, which came in at a record 41% and increased from 29% in the same quarter a year ago. Our adjusted EBITDA was also above our expectations at more than $7 million in the quarter. The expansion in our gross margin and the subsequent growth in our adjusted EBITDA demonstrate the leverage that is inherent in our operating model. In Aerospace and Defense, we remain focused on 2 key markets: directed energy and laser sensing. And revenue from both markets outperformed our expectations in the quarter. In directed energy, we are uniquely positioned with our vertically integrated and industry-leading high-power laser technology, developed over the past 2 decades, and spanning the entire technology stack from chips to components to full laser systems and beam directors. All of which are designed and manufactured in the U.S., have generated revenue at nearly every level of vertical integration in the directed energy market, and we have established ourselves as one of the most comprehensive suppliers to the U.S. government, other prime contractors and foreign allies. During the third quarter, we continued to make solid progress on our HELSI-2 program. As a reminder, this is a $171 million program to develop a 1-megawatt high-energy laser with a completion date expected in 2026. The shipment of critical components towards the HELSI-2 program was a significant driver of our record defense product revenue in the quarter and is expected to be a substantial contributor to growth through the remainder of the year and into 2026. We continue to transition our latest generation of amplifier products into advanced production by leveraging nLIGHT's experienced manufacturing teams and implementing quality and control processes. This transition, while not without risk, is progressing well and is critical as we continue to optimize our amplifier production line for higher volumes. Our work on the Army's DE M-SHORAD, Short-Range Air Defense program is nearing completion, and we look forward to delivering this 50-kilowatt high-energy laser and beam director to our partner. Once delivery is completed, the system will begin field testing. Overall interest in U.S. directed energy programs remains high, particularly for counter-UAS applications, and we expect new contracts to be awarded in the coming quarters from different agencies as part of the President's Golden Dome executive order, which specifically highlights non-kinetic missile defense capabilities as an area for development. With a mandate to build these systems in the United States, we believe we are well positioned to benefit from these efforts over the coming years, and we are hopeful that the coming quarters will provide additional details on the scope and timing of these initiatives. We've also continued to have success in the international markets for directed energy. We began shipping to a new international customer last quarter, and we have a growing pipeline of new global opportunities as allied nations look to accelerate directed energy programs for cost-effective counter-UAS and other threats. Our laser sensing markets are also performing well. Our laser sensing products include missile guidance, proximity detection, range finding and countermeasures, and we have been incorporating in several significant and long-running defense programs, all of which are poised to grow in 2026. During the third quarter, we signed a new $50 million contract for an existing long-running missile program that incorporates one of our laser sensing products. nLIGHT has been a long-term supplier into this program, which our customer expects to remain a key priority associated with the nation's munitions restocking efforts. Our historical performance on these programs and our early success in multiple classified programs has increased both the number of prospects and the size of our sensing pipeline. In addition, further opportunities under Golden Dome initiatives have emerged and could also become significant contributors to our growth in 2026 and beyond. Commercial revenue was slightly ahead of our expectations at $21.2 million on a sequential increase in microfabrication sales and relatively flat results in our industrial markets. We have been pleased with the stability of our microfabrication markets year-to-date and have been encouraged by the growth in our advanced manufacturing products, where we see alignment with our aerospace and defense customers and our technology remains differentiated. Let me now turn the call over to Joe to discuss our third quarter financial results. Joseph Corso: Thank you, Scott. Our third quarter results were characterized by another quarter of strong execution. Healthy revenue growth, a favorable mix of business and continued execution from our manufacturing and operations teams drove meaningful upside to our gross margin. That upside, combined with operating expense discipline, resulted in significant improvement to profitability and cash flow, demonstrating the leverage that is inherent in our model. Total revenue in the third quarter was $66.7 million, an increase of 19%, compared to $56.1 million in the third quarter of 2024 and up 8%, compared to the second quarter of 2025. Aerospace and defense revenue was a record $45.6 million in the quarter, up 50% year-over-year and 12% sequentially. A&D growth was driven by record aerospace and defense products revenue, which grew 71% year-over-year and 32% compared to last quarter. Development revenue of $19.1 million grew 28% year-over-year as we continue to execute on multiple directed energy programs. The quarter-over-quarter decline of 8% was the result of several smaller programs having been completed in the prior quarter. We expect A&D revenue to continue to grow sequentially in the fourth quarter. Third quarter revenue from our commercial markets, which includes industrial and microfabrication, was modestly ahead of our expectations at $21.2 million, a decrease of 18% year-over-year, but up slightly compared to last quarter. Revenue from our microfabrication markets was in line with our expectations at $11.6 million, while revenue of $9.6 million from our industrial markets was slightly better than expected as an increase in demand for our additive manufacturing products offset continued declines in cutting and welding. While we are pleased with the overall stability that we saw in our commercial markets in the third quarter, we do not believe that the overall demand picture has significantly changed from what we described in prior quarters. Total gross margin in the third quarter was 31.1% compared to 22.4% in the third quarter of 2024 and 29.9% last quarter. Products gross margin in the second quarter was a record 41%, compared to 28.8% in the third quarter of 2024 and 38.5% last quarter. Third quarter products gross margin was positively impacted by a favorable customer and product mix driven by record revenue from our A&D markets and an overall increase in volume. Development gross margin was 6.4%, compared to 4.7% in the same quarter a year ago and 13.1% last quarter. The sequential decrease in development gross margin was largely the result of some smaller, higher-margin programs that finished in the prior quarter and did not contribute to the third quarter results. Going forward, we expect development gross margin to remain in the 8% range. GAAP operating expenses were $28.1 million in the third quarter, compared to $24.4 million in the third quarter of 2024 and $22.7 million in the second quarter of 2025. Included in our third quarter GAAP operating expenses were higher stock-based compensation expenses associated with previously announced performance shares and a restructuring charge of approximately $1.7 million as we further reduced our activities in China and in cutting and welding. Non-GAAP operating expenses were $17.5 million in the quarter, down from $18.3 million in the third quarter of 2024 and up from $16.8 million last quarter. We expect non-GAAP OpEx to remain in the $18 million range in the fourth quarter. GAAP net loss for the third quarter was $6.9 million or $0.14 per share compared to a net loss of $10.3 million or $0.21 per share in the same quarter a year ago and a loss of $3.6 million or $0.07 per share in the second quarter of 2025. On a non-GAAP basis, net income for the third quarter was $4.3 million or $0.08 per diluted share compared to a non-GAAP net loss of $3.7 million or $0.08 per share in the third quarter of 2024 and non-GAAP net income of $2.9 million or $0.06 per diluted share last quarter. Adjusted EBITDA for the third quarter was a positive $7.1 million, compared to a loss of approximately $1 million in the same quarter last year and a positive $5.6 million in the second quarter of 2025. We ended the third quarter with total cash, cash equivalents, restricted cash and investments of $116 million. We generated $5.2 million in cash flow from operations despite continuing to invest in working capital ahead of growth, and we were free cash flow positive in the quarter. Turning to guidance. Based on the information available today, we expect revenue for the fourth quarter of 2025 to be in the range of $72 million to $78 million. The midpoint of $75 million includes approximately $55 million of product revenue and $20 million of development revenue. We expect sequential growth in A&D in the fourth quarter, and we expect full year 2025 A&D revenue growth to exceed our prior outlook for A&D growth of at least 40% year-over-year. Overall gross margin in the fourth quarter is expected to be in the range of 27% to 32%, with products gross margin in the range of 34% to 39% and development gross margin of approximately 8%. As we've mentioned previously, as a vertically integrated manufacturing business, gross margin is largely dependent on production volumes and absorption of fixed manufacturing costs. Finally, we expect adjusted EBITDA for the fourth quarter of 2025 to be in the range of $6 million to $11 million. With that, I will turn over the call to operator for questions. Operator: Your first question comes from the line of Greg Palm with Craig-Hallum. Greg Palm: Congrats on the results. I was wondering, first, if you could just address HELSI-2, I mean, based on the results, the guide, I mean, is there a chance that you're pulling ahead the completion date here? I know you've talked about completion in 2026, but curious if that time line has changed at all just based on the volumes that you're able to complete. Scott Keeney: Greg, it's Scott here. Thanks for the question. No, we're on track is the bottom line. We will announce progress results when we are able to do so, but we're on track for 2026. Greg Palm: And then as it relates to product, so your guiding revenue up quite a bit sequentially, but gross margins down. I know you're coming off of a pretty tough compare, I guess, sequentially when you put up 40-plus percent product gross margins. But just can you give us a little bit more color what's going on? It doesn't sound like mix is going to change all that much? Joseph Corso: Yes. No, Greg, thanks for the question. As we've talked about in the past, you can have some pretty -- what seems like a pretty big swings from a gross margin perspective when you're still talking about revenues at the levels that we are at. Really not much in terms of Q3 to Q4 on the gross margin guide, probably 150 or 200 bps of it is related to actually freight and duties, right, as we've had the higher cost of materials that are going to -- we're now going to start to feel in Q4. And then the rest is really just mix within each of our end markets. The mix within defense, the mix within commercial can change in any given quarter. And then there's just a handful of other items that as we forecast in any given quarter that are there. But generally speaking, we're pleased that gross margin has expanded, and it remains really a function of 3 things: higher volume mix, where we are and then just overall how we're levering the factory. So we're pretty happy with where we were in Q3 and not much to think about for us in Q4. Operator: Your next question comes from the line of Ruben Roy with Stifel. Sahej Singh: This is Sahej Singh on for Ruben Roy. First off, congrats. You guys are past your breakeven point, which I think was $55 million to $60 million and turning profitable, so congrats on that. HELSI-2, I think if I do the math is, you said it earlier, $171 million contract with 3-year estimated time line. So annualized, that's about $57 million ceiling per year, which is about $14 million lower than what you're operating on, on a trailing 12-month basis within Aerospace and Defense products. So 2 questions there, and then I have a follow-up. It seems like a fixed firm price contract with the moves you're making on amplifiers. Can you give us some sense of how much incremental margin benefit you're seeing from that this quarter and expect to see maybe through the course of next year as you're ramping down on that contract? And the second part to this is as that contract ramps down, do you see sensing tied to Golden Dome and the classified programs and maybe international sales more than offset that HELSI-2 contract revenue loss, which I imagine will be probably starting second half of '26? Joseph Corso: So there's a lot there. So help me if I don't get it all right, I can follow up. I would say on the HELSI-2 contract, first, it's a good way to look at it, right, it's $171 million contract, but it's not going to be recognized linearly, right? So it's a cost-plus type contract. So it really depends on the type of activities that we are engaged in at any given period of time during that contract. So you shouldn't think about that linearly. Certainly, it is a big driver of the A&D products revenue that we have been generating and amplifiers are the key component that we are selling into that contract. Now more generally, as we think about products gross margin expansion, we've really focused on products that enable us to drive incremental gross margins of meaningfully north of 50%. And so amplifiers and other products that we are selling are meeting that today, and we expect that to continue to expand. I think the last part of your question just around the trajectory of HELSI-2 into 2026, you're absolutely right, right? At some point in the back half of 2026, we'll start to see the revenue that we're generating from HELSI-2, everything around HELSI-2, start to trail off. But we've got plenty of other programs, both in directed energy and in laser sensing that will make up for that reduction in the second half revenue. Sahej Singh: Very helpful. And then the second -- the follow-up I have is -- on DE M-SHORAD, which I guess is now ramping down, if I'm not wrong, and please correct me if I am, it's an R&D contract, which means it probably sits in advanced development. That said, advanced development seems to be ramping quite nicely also on a trailing 12-month basis. What's driving that growth? And I guess, to what degree should we look at that as a leading indicator for future sales on the A&D laser products, as you're mentioning into '26, '27, let's say? Joseph Corso: So you are correct that DE M-SHORAD is ramping down. So we are at the very end stages of delivering that product to the customer. So that's not really contributing meaningfully at all to revenue this quarter nor will it contribute to revenue going forward. The advanced development segment of our business includes all of the development revenue that we do, including HELSI-2 and other programs. And while not all of the programs that we are working on that are classified as advanced development go into -- will ultimately end up as programs of record, it is a good indicator that the activities that we have in directed energy and in laser sensing are putting us in a good position so that when those programs do transition or there are new programs, where there are opportunities to become program of records that we're well positioned to capture them. But you can't draw a line directly from our advanced development revenue to what long-term defense product revenue will be. Operator: Your next question comes from the line of Jim Ricchiuti from Needham & Co. James Ricchiuti: So the question I had is just relating to the previous question. If HELSI-2 does wind down in the second half of the year, you've talked about a pretty full pipeline. If you -- when would you have to see new orders come in, should be able to offset some of the hole that we could see from having completed HELSI-2. In other words, is it -- do you anticipate orders coming in, in the next couple of quarters that would allow you to fill a potential hole related to HELSI-2 in the back half of next year? Joseph Corso: Jim, based on what we are working on today, the hole is already filled. What is somewhat dependent upon timing of bookings and how quickly we can get to work on a handful of new programs will determine how much we grow in 2026. James Ricchiuti: Could you also maybe just clarify, I just maybe misheard. On the laser sensing contract that you alluded to, is this a follow-on piece of business? Scott Keeney: Yes is the short answer. It's an ongoing program of record that we have been supporting for over a decade. James Ricchiuti: So Scott, this basically just extends that. And then one final question. I know all of the questions have been around the A&D business, but it's interesting to see, I guess, what, a second quarter of sequential improvement in the microfabrication area. You're characterizing it as stabilizing. What is leading to some of the stabilization? Where is it coming from? Joseph Corso: Yes, it's coming from -- certainly, in microfabrication, that has always been a business that is difficult for us to predict. It's largely book and ship in the -- during the quarter, it's a really long tail of customers. And the last couple of quarters, we've seen some stabilization in that business. So it's difficult to point to 1 or even 2 things that are driving that business, but we're pleased to see stabilization there. Similarly, on the industrial side of our business, the quarters have been, frankly, a little bit better than we had expected, which is a welcome development for us. But what we'll say is our overall view of the commercial business as we go into 2026 is the same as we've been saying now for a couple of quarters, right? That business is expected to again decline in 2026. James Ricchiuti: And just with respect to microfabrication, the seasonality of that business tends to fall off a little bit in Q1. But the levels that we're seeing Q2, Q3, is that a reasonable level moving aside from the seasonality we might see in Q1? Joseph Corso: Yes. Jim, you're absolutely right. That is probably the most seasonal of our businesses. And in the last couple of quarters, we've seen that plus or minus $10 million of revenue. I think that a good range for us is probably $8 million to $12 million. We don't have better visibility than that. And obviously, China microfab business has declined precipitously over the last couple of years, and we've seen continued sequential declines in that business as well. Operator: Your next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Congratulations on a great quarter, guys. I think I heard you guys say the amplifier transition continues to progress. One, I guess, is that correct? And then once that's complete, how should we see that reflected in results? Will it make for more efficient and easier recognition of revenue? Or is it going to be lower cost? Or what's going to be the financial statement impact when the transition is complete? Joseph Corso: Well, I'm not sure the amplifier transition is not complete per se. I think what is going to be complete is the amplifiers that are delivered into one particular program, which is HELSI-2, and that will happen over the course of 2026. Generally speaking, we have a lot of programs into which we are delivering amplifiers domestically. And as we've said the last couple of quarters, there's also opportunities for us that we are working on with a host of allies internationally. So we expect our amplifier business to continue to grow. And so that is one of the reasons that you are starting to see some of the margin expansion is due to the fact that we are selling higher volumes of amplifiers. And at the same time, we're working hard to take what is a really difficult product that is pushing the limitations of physics and make it more manufacturable. So I think over time, you're going to see both revenue growth and margin expansion as we start to mature our ability to manufacture those amplifiers. Keith Housum: That's helpful. Appreciate it. Your restructuring charges in China cutting and welding, is that more to rightsize these businesses based on your expectations going forward? Or what's the reason behind that? Joseph Corso: Yes. No, that's exactly what it is, right? I mean we were operating in Shanghai for a very long time, not an easy transition to move assembly of our lasers from Shanghai to Fabrinet and to the U.S. And so there's lots of ongoing support activities that are required to do that. And so you're seeing some of that in that restructuring charge. And then there's also a bit of expectation that the cutting and welding business are going to continue to decline. And so we want to make sure that we are rightsizing our investments for our expectations of those markets going forward. Keith Housum: Appreciate it. And then I'm not sure if it's a true statement or not, but is there an opportunity for you guys in the counter-drone technology space? Scott Keeney: Sure. Yes, absolutely. That's one of the big applications for directed energy. Keith Housum: So we're still in relatively early innings in that area as well. But obviously, it gets a lot of press that we read today. Scott Keeney: Correct. And direct energy goes well beyond counter drones. Operator: [Operator Instructions] We have a follow-up question from Greg Palm with Craig-Hallum. Greg Palm: You said something that I thought was pretty important in terms of programs next year that could offset or that could make up the absence of HELSI-2. So I just want to make sure we're clear. Are those programs that have been booked? Or is that still in the pipeline? Joseph Corso: Those are programs that have been booked, Greg. Greg Palm: And then I'm just curious, can you talk a little bit about -- are those directed energy? Are those laser sensing? And I don't know if I missed it, but the 2 confidential laser sensing programs, one of them was supposed to go to LRIP by the end of this year. Is that still the case? Has that begun? And what's the status of the second one? Scott Keeney: Good. So let's see your first question is the work for '26 that is key that we're highlighting is in both directed energy and in sensing first. Let's see your second question was around. Greg Palm: Yes, the 2 major sensing programs that you -- the confidential ones that we've been talking about for the past, well, multiple quarters. Scott Keeney: Yes. The summary is they're both progressing. I want to be pretty sensitive to the specifics of the time line, but they're both progressing that supports the outlook that we're providing generally in the business. Greg Palm: But -- and then to be clear, going back to my first question, there are programs -- these are not the programs that are necessarily supposed to offset, it could help, but there's new additional programs that have been once booked, that is going to help offset that loss in HELSI-2 business. Joseph Corso: Yes, Greg, so let me parse it a little bit more finely for you. So there are programs that we are on today that are not HELSI-2 that we expect to continue to grow. There are new programs that we've won, right, that will plug the hole that we will see as HELSI-2 trails off. Those are both directed energy and laser sensing. And then there are other very high probability of win and go programs that we expect in 2026 that will drive growth in defense beyond what it is today. Hopefully, that helps. Operator: Your next question comes from the line of Brian Gesuale from Raymond James. Brian Gesuale: Really nice job on the quarter. I'd like to maybe talk a little bit when I've spent some time in D.C. the last few weeks, and it just seems like there's a lot of opportunities around directed energy. Could you maybe take -- give us the thoughts on the pipeline, both domestically and globally? And then maybe talk about your capacity because it seems like demand is pretty vibrant right now. Scott Keeney: Yes, that's right, Brian. I've been spending a lot of time in D.C. also. And I think there is a lot of new work that's going on. It's a little frustrating, obviously, with the details around the shutdown on some of the details. But at the senior level, we are seeing very good engagement across all levels, whether it be from Pentagon to the services and really across the breadth of direct energy from the lower power systems through the higher power systems. So we are seeing continued progress in the U.S. programs and that is supported, it's reinforced by also some of the international programs. I think over the last quarter, we've seen news out of Israel of the demonstrations of the success of Iron Beam out of the U.K. We've seen success out of Dragonfire, and there have been other international efforts that both are opportunities for us as we engage internationally, but they also have played a role in reinforcing what's going on in the U.S. So high level, yes, direct energy remains a very important area for us in addition to sensing. Brian Gesuale: Fantastic. Is there any thoughts on the urgency with some of the things that are happening in Europe? Do you see more rapid adoption there over the next few quarters, particularly with the government shutdown or it seems like the domestic market has accelerated a lot when I talk to a lot of the customers and look at some of their demand outlook over the next year or so. Scott Keeney: Yes, I think that's right. And I think in the coming weeks, you'll learn more about the acquisition reform that's being promulgated to address that. So I think we're all eager to see some of that formally launched to change the way that at least the U.S. pursues procurement to more rapidly implement some of these systems. So I think we will see some of that. I think there is urgency around the world actually to get the technology implemented in new ways. Operator: Your next question comes from the line of Troy Jensen. Troy Jensen: Sorry, can you hear me? Scott Keeney: Yes. Troy Jensen: Sorry about that. So first of all, congrats to another great print for you guys. Just a quick question. I know you're getting lots of questions on the development revenues here, but can you just give us the number of customers that are in your development product line or revenue line? Joseph Corso: We're probably working in total on a dozen, just plus or minus a dozen programs. They're all of obviously different sizes and at different periods of time, but that's a pretty good number. Troy Jensen: And then just on the sensing stuff, I did -- as you were going through your prepared remarks, Scott, it kind of felt like you're upticking on that. I guess most of the strength in A&D over this past year or so has been on the directed energy side. Would that be a true statement? Do you feel like you're upticking? Or are these contracts just kind of sustaining? Scott Keeney: On the sensing side, Troy, you mean? Troy Jensen: Yes, sensing specifically. Scott Keeney: Yes. Yes, I think you read that correctly. I think that direct energy, there's a greater awareness of the set of applications in directed energy and what's going on. Sensing, it gets a little more challenging to describe how lasers are, I would say, supplementing, augmenting radar and other systems, but that is a very important area and listed as one of the critical technologies by the Pentagon and one that we're very well positioned for. Operator: We have a follow-up question from the line of Ruben Roy with Stifel. Sahej Singh: Just trying to understand, so your comment on HELSI being an R&D contract makes sense, while it's an advanced dev. And of course, it is my mistake there. But the jump up in revenue really looks like it's coming from your products within A&D. And I know you guided advanced dev to $25 million next quarter. So I'm assuming that's either -- I'm assuming that's mostly HELSI. But can you maybe talk through the A&D product side and just help us understand what drove this jump this quarter? I think someone asked whether it was government shutdown or are you expecting this to sort of sequentially improve? Joseph Corso: Yes, we are expecting A&D products to continue to improve. When we sell -- so we sell a variety of products that are booked as in the products segment of our financial statements. Amplifiers that we sell into the HELSI-2 program, which is a cost-plus development program, those amplifiers are reflected in our revenue as product revenue. There are also laser sensing products that are being sold that are A&D product revenue. And so you start to look at that, and that's why you see the growth in the A&D product side of the revenue. Operator: There are no further questions at this time. I will now turn the call back to John Marchetti for closing remarks. John Marchetti: Thanks, everyone, for joining us this afternoon. And as always, thank you for your continued interest in nLIGHT. We will be participating in a number of conferences over the next several months. So we look forward to speaking with everybody as we continue to go through the quarter. And thank you again for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. My name is Margie, and I will be your conference operator today, and welcome to the Carriage Services Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Metzger, President. Please go ahead, sir. Steve Metzger: Good morning, everyone, and thank you for joining us to discuss our third quarter results. In addition to myself, on the call this morning from management are Carlos Quezada, Chief Executive Officer and Vice Chairman of the Board of Directors; and John Enwright, Chief Financial Officer. On the Carriage Services website, you can find our earnings press release, which was issued yesterday after the market closed. Our press release is intended to supplement our remarks this morning and include supplemental financial information, including the reconciliation of differences between GAAP and non-GAAP financial measures. Today's call will begin with formal remarks from Carlos and John and will be followed by a question-and-answer period. Before we begin, I'd like to remind everyone that during this call, we'll make some forward-looking statements, including comments about our business, projections and plans. Forward-looking statements inherently involve risks and uncertainties and only reflect our views as of today. These risks and uncertainties include, but are not limited to, factors identified in our earnings press release as well as in our SEC filings, all of which can be found on our website. Thank you all for joining us this morning. And now I'd like to turn the call over to Carlos. Carlos Quezada: Thank you, Steve. Good morning, everyone, and thank you for joining our third quarter earnings call. I am excited to share our performance and the progress we are making towards our 2030 vision. This quarter reflects continued momentum and demonstrates the effectiveness of our strategic objectives, grounded in disciplined capital allocation, relentless improvement and purposeful growth, which continue to deliver meaningful and sustainable results. During this call, I will highlight the key financial and operational drivers. Then John will take a deeper dive into our financial performance, balance sheet, recent divestiture activity and guidance for the remainder of the year. Before we begin, I want to thank our incredible Carriage team. Your passion, ownership mindset and unwavering commitment to creating premier experiences for the families and communities we serve are at the heart of this company. You continue to build a best-in-class culture rooted in trust, partnership and service excellence. Through every premier experience, you elevate the reputation of our funeral homes and cemeteries across the country, one family at a time. Thank you. I also want to welcome the newest members of the Carriage family, Faith Chapel Funeral Homes and Crematory, Osceola Memory Gardens Cemetery Funeral Homes and Crematory, Porta Coeli Funeral Home and Crematory, Fisk Funeral Home and Crematory, Funeraria Borinquen and Cremation Care Providers of Central Florida. We are honored you chose to partner with Carriage. We will work every day to protect and elevate your legacy. Welcome to the team. Now turning to our financial results. Total operating revenue for the quarter grew to $101.3 million, an increase of 5.2% over the same period last year, primarily driven by an impressive 21.4% year-over-year increase in preneed cemetery sales. Another strong driver was general agency commission revenue tied to insurance-funded prearranged funeral sales, which grew to $2.6 million, up 61% from last year's third quarter. As we look at each segment, funeral operating revenue was down $753,000 or 1.3%, primarily driven by a 2.1% reduction in funeral volume. The summer months, July and August produced lower volumes than expected. However, we're glad to see volume return to normal in September. And based on what we have seen in October, we expect a normalized volume trend to continue in the fourth quarter. As it relates to our cemetery segment, it continues to be a key long-term value engine with operating revenue reaching $35.6 million, an increase of $4 million or 12.6% year-over-year. This performance underscore a strong runway for purposeful growth as we continue our investment in property development, technology-enabled sales capabilities and deepening community relationships, which we believe will create enduring value for families and our shareholders. Regarding our insurance-funded pre-arranged funeral sales strategy, we're very pleased to report that our progress is exceeding expectations, with September setting an all-time high and surpassing the $7 million mark in preneed funeral sales. This accounted for 50.5% of the year-over-year growth in financial revenue from general agency commissions. We continue to work hand-in-hand with our sales partners, the National Guardian Life Insurance Company and Precoa to identify ways to leverage their technological capabilities and increase preneed sales. With our continuous focus on execution, we believe we can sustainably grow preneed funeral sales through 2026. Total field EBITDA for the quarter was $46.3 million, an increase of $1.4 million or 3.1%. This growth was driven in large part by renewed momentum in preneed cemetery sales following permit delays earlier in the year, resulting in a strong 21.4% increase over the same period last year. We are very excited about the short-term future of our preneed cemetery sales strategy with the launch of Sales Edge 2.0, our upgraded CRM platform, which now integrates a marketing module to generate and convert leads more effectively. And in November, we will introduce Titan, our AI-powered sales agent designed to generate leads and schedule appointments for our preneed counselors. Sales Edge 2.0 and Titan represents a significant step forward in leveraging technology, innovation and data analytics to accelerate sales growth. We remain confident in our sales strategy and continue to grow preneed cemetery sales within our previously stated range of 10% to 20%. During the third quarter, adjusted consolidated EBITDA grew to $33 million, up $2.2 million or 7.3% versus last year. And adjusted consolidated EBITDA margin was 32.1% compared to 30.5% during the third quarter of last year, an expansion of 160 basis points, reflecting our strong operating leverage and positive momentum heading into the last quarter of this year. Adjusted diluted earnings per share were $0.75, up from $0.64 in the same quarter last year, an increase of 17.2%, reflecting our continued operational momentum and disciplined financial management and reinforcing our commitment to long-term shareholder value creation. In closing, we are very pleased with our third quarter results. They reflect disciplined execution and our unwavering focus on delivering premier experiences for the families we serve. These results also underscore the strength of our team, the power of our partnerships and the meaningful progress we're making as we elevate the experience and lead with a true passion for service. Our focus remains grounded in successfully executing on our 3 strategic objectives: disciplined capital allocation to invest in long-term strategic value creation while maintaining a strong balance sheet, relentless improvement to elevate performance, efficiencies and talent at every level and purposeful growth, fueled by culture, innovation, partnerships and strategic acquisitions. We believe our greatest strength is our culture, rooted in trust, empowerment, innovation and a sincere passion for delivering premier experiences to every family every time. Our field leaders exemplify compassion, excellence and ownership, redefining how families are served and advancing our mission every single day. We are continuing to build something enduring, a modern, innovative, values-driven Carriage positioned for sustainable long-term value creation for our families, our employees and our shareholders. As we enter the final quarter of the year, we do so with momentum, confidence and a clear vision for the future. Thank you, and I now turn the call over to John. John Enwright: Good morning, and thank you, Carlos. The third quarter results are a testament to our team's commitment to excellence and strategic focus. Building on a strong first half, we delivered adjusted EPS growth of 17% reflecting our commitment to disciplined execution across all business segments. Year-to-date, our 21% EPS growth demonstrates how our strategic objectives are driving consistent results. I am proud of our organization's dedication and look forward to sustaining the momentum. My comments today will primarily focus on our performance in the third quarter of 2025 compared to the third quarter of 2024. We achieved consolidated adjusted EBITDA of $33 million, 32.1% of revenue, up from $30.7 million or 30.5% of revenue in last year's third quarter. This improvement came from better results in our cemetery segment and prearranged funeral program, which resulted in an increase in EBITDA of approximately $2.7 million, offset by a small decline in funeral home volume compared to last year. Our adjusted EPS performance in the third quarter of 2025 increased to $0.75 from $0.64, which is an increase of $0.11 compared to the prior year's third quarter. When looking at GAAP results, our EPS in the third quarter was $0.41 compared to $0.63 in the third quarter of 2024. As we anticipated, our GAAP performance was negatively impacted by a loss on divestitures and impairment of long-lived assets from businesses held for sale at the end of the third quarter of 2025. To provide further insight into our divestiture strategy, we successfully completed the sale of several noncore assets in the third quarter. Over the past 5 years, we have systematically divested businesses that no longer fit our long-term growth strategy. By reallocating the proceeds from these transactions, we have made significant progress toward achieving our target leverage range by paying down debt and investing in acquisitions that offer greater potential in strategic markets. Throughout this period of portfolio transformation, we have consistently grown both revenue and profitability while steadily reducing our leverage. Looking ahead, although occasional divestiture opportunities may arise, we do not anticipate any substantial activity in this area going forward. Moving on to cash from operating activities. We saw an increase of $3.8 million over the prior year or an 18.3% increase, primarily a result of year-over-year improved operating results. Based on these results, our adjusted free cash flow in the quarter increased by 7.7% over the prior year. The $3.8 million increase in cash from operating activities was almost offset by a year-over-year increase in our capital expenditures in the quarter. During the quarter, significant activity occurred related to acquisitions, divestitures and capital expenditures. The net cash outflow from these activities for the quarter amounted to $44.7 million. Year-to-date, these activities have led to a total cash usage of $31.9 million. In alignment with our disciplined capital allocation strategic objective, our leverage ratio improved to 4.1x this quarter, down from 4.2x last quarter. We reduced our debt by approximately $5.1 million compared to last year's third quarter. Due to our focus on managing debt, interest expense fell by $1.1 million, and our average interest rate was roughly 180 basis points lower than last year. Capital expenditures for the quarter totaled $6.7 million compared to $4.6 million in the same period last year. Of the $6.7 million, $1.7 million was allocated to maintenance capital and $5 million to growth capital. Overhead expenditure totaled $13.7 million or 13.4% of revenues compared to $14.2 million or 14.1% of revenues in the same quarter of the previous year. Our teams remain committed to actively managing controllable expenses, such as overhead spending. Throughout the year and during the quarter, corporate spending has consistently been aligned with the targeted range of 13% to 14%. Now moving on to our updated outlook. With 1 quarter remaining in the fiscal year, we have narrowed our guidance ranges and are reaffirming the midpoint previously communicated. Achieving these results would mark record highs for revenue, adjusted consolidated EBITDA, adjusted diluted EPS in our company's history, which includes results during the peak of the pandemic. We believe these results will position us strongly for 2026. Our current outlook anticipates revenues in the range of $413 million to $417 million, adjusted consolidated EBITDA between $130 million and $132 million, adjusted diluted EPS of $3.25 to $3.30, overhead expenses ranging from 13% to 13.5% of revenues, adjusted free cash flow between $44 million and $48 million, leverage ratio ending 2025 between 4x to 4.1x. This concludes the prepared remarks. I will now turn it over to the operator to open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of George Kelly of ROTH Capital. George Kelly: A couple for you. I'll start with the contract weakness that you flagged for, I think it was July and August. Can you quantify what you saw monthly just intra-quarter? And then you mentioned that you expect 4Q to kind of return to normal. What did October look like? Carlos Quezada: George, thank you so much for the question. So I don't have a specific volume for each one of the 2 months. What we saw from a percentage perspective, somewhere around middle-digit percentage of negative volume on both months of July and August, but then came back very strong in the month of September. Therefore, I have been able to make up a lot of the ground we lost in those 2 months. There's no specific reason. What I can tell you about what we found out from our partners and vendors across the industry is that it was pretty broad across the board, not just consolidators, but also privately owned funeral homes and -- experienced the same thing. As it relates to October, we see very positive trends in the month of October. I don't want to disclose the number just yet, but I do feel pretty positive about the fourth quarter. And specifically related to volume, we did better than last year. George Kelly: Okay. That's helpful. And then another question on the same theme. Just thinking high level for 2026, is it fair to just kind of baseline like with a low single-digit volume growth year be reasonable? Carlos Quezada: I believe so, George. What we have typically modeled or been talking about modeling for next year is a 1% to 2% growth on the funeral home side related to volume. George Kelly: Okay. That's great. And then just one last question for me. Your preneed cemetery business was again really strong in the quarter after a little bit lower growth in the first half of the year. Was that related to 1 or 2 kind of specific CapEx projects? Or I know you were working through permitting. Like anything you can flag there? And what's the expectation going forward in that business? Carlos Quezada: You bet. So if you remember during the first quarter and the second quarter, I mentioned that we did experience some delays in some of our largest cemeteries, the ones that are actually giving a lot of the contribution from a preneed cemetery sales perspective into our performance. And that was the delay. Although, I mean, we still had some pretty nice middle single-digit growth in the first quarter and second quarter. But our range is typically 10% to 20%. For this month, we have some pretty significant numbers at almost 21.4%. And so our running expectation of range remains at 10% to 20%. We do see a strong fourth quarter from that point of view. I don't foresee many more delays as we have some good learnings from the permit process in some of those states that are a little more restrictive. And we're taking all the precautions and all the time ahead as we continue to develop premier inventory in those cemeteries. John Enwright: George, to Carlos' point, and we've commented to this in the past, at the beginning of the year, we had a large cemetery that had a sinkhole that we were working through, and we saw some of that benefited really. We were able to recognize some of those sales in the third quarter associated with sales that happened, but the development didn't get completed until the third quarter. So that was partially a result of some of the cemetery performance in the third quarter. Operator: Your next question comes from the line of Liam Burke of B. Riley Securities. Liam Burke: Carlos, you mentioned that overall macro, the industry saw slower activity in the funeral home side. Margins were lower year-over-year. Is that just a function of volume? Or are there any other expenses in there that need to be worked through? Carlos Quezada: No. When you look at our margins, remain pretty strong. It's just that on the cemetery side, we are promoting a lot of premium cemetery sales in this year. Liam Burke: I'm sorry, Carlos. This is just on the funeral home side. Carlos Quezada: On the funeral home side, I'm sorry. Yes, on the funeral home side, it really is just a leverage question, right? At the end of the day, ultimately, sales were down. And when calls are down, it's a high fixed cost segment. So when we see calls down, we see margin, call it, closer to the high 30s. In the first quarter, when you saw volume up, you saw us in the low 40s. So it really is a -- the leverage really is just a driver being a fixed cost. Liam Burke: Perfect. That's what I thought. And on cemetery, now that Carlos brought it up, margins were great there. Obviously, they bounce around from quarter-to-quarter, but -- and I don't need a specific number. Are you sensing a floor EBITDA margin level at the cemetery business? Carlos Quezada: I really don't. You see the fluctuations come from our ability to recognize what we're selling on the preneed sales side. If for some reason, we are selling, let's say, it's a large private mausoleum that is going to take time to develop or is a recently developed project that is not fully completed, it won't be able to be recognized. So that month, you're going to get a greater cost from the commissions coming from those preneed cemetery sales, but you won't be able to recognize the revenue related to those sales. So that dynamic plays a little bit, as you know, on the cemetery side. As the months go through and you develop and deliver that inventory, then you are able to recognize the revenue, and that's where you see those fluctuations. But overall, as you see for the year-to-date numbers, they're pretty strong. Liam Burke: Yes, they are. Operator: Your next question comes from the line of Parker Snure of Raymond James. Parker Snure: I just wanted to hit on the insurance-funded preneed progress, making a lot of good progress there. I know you said that you think it can grow sustainably into 2026. But I was just hoping you could maybe just dive a little deeper there just in terms of like what inning in the kind of baseball analogy, do you think we are kind of getting that fully rolled out? Is this fully rolled out to all of your salespeople? Is there still some room to go? What is the kind of total amount of commission dollars that you're generating from that business line? And where do you think that can go? And just any other comments on kind of where we are in that trajectory and getting that to kind of more of a sustainable kind of base? Carlos Quezada: Great question. As you have seen probably over the last 1.5 years since we rolled out our partnership with NGL and Precoa, we have been able to fully and completely roll out this everywhere across our network. However, some businesses were able to grow significantly right off the bat and some were lacking. Over the last probably 4 months, we have been working on updating those that were not performing to the level of expectation we have and the opportunity that is in front of us and then tweak some of the models that we have. To give an example, there are different models that we have allocated based on the specificity of the business, the location and the opportunity that is in front of that particular business. That will -- just to give you some examples, one is called proactive model, right? So that marketing opportunity, the ability to create leads, it is owned by the Precoa team, and they are accountable for that. If we take ownership of that and the local manager don't do a good job is not on it, then we won't be able to generate as much lead. So what we did is move some of those selective services businesses now into the proactive model to be a little bit more aggressive. So we do expect additional growth from our strategy. In addition to that, our partner, Precoa, it is rolling out new technological tools to drive. We have a new CRM as well. They have new AI tools that are going to accelerate lead generation and the ability to close on more deals. So I do think from your question, probably we're somewhere around maybe the fifth, sixth inning. We have big targets for pre-arranged funeral. I mentioned in my remarks that we achieved for the first time in one single month, the $7 million mark. I do expect that to continue to grow throughout 2026 to maybe getting to a very low double digit. Parker Snure: Okay. Great. And maybe just remind us where we are in the kind of course of the Trinity implementation. Is there -- I know we're getting towards the end of that, but is there any ongoing kind of implementation costs that are still flowing through the P&L that we can maybe expect those to kind of wean off over the next couple of quarters? And then just what kind of -- remind us what kind of efficiencies you think you can kind of garner from that technology throughout your enterprise? John Enwright: Parker, this is John. So from implementation costs, we'll still have some implementation costs as we roll into next year. So we're at the beginning stages of the pilot that rolls out this year, and then we'll have more of a significant rollout as we hit the first quarter into next year. And that really is specific to call our funeral homes. And then we'll roll into our either combos or cemeteries, which will be in the later part of next year, which will have some costs. So as you think about it, the cost will be equitable to probably 2026, which was down from -- excuse me, equitable in 2026 to '25, which was down from implementation costs from 2024. We'll see the real benefit or some leverage associated with the rollout really into '27 because that's when the whole network will be rolled out. Carlos Quezada: Yes. In addition to that, Parker, I truly believe that you won't see much synergies from this new system in '26, mainly coming from some parallel systems, making sure that the transition is effective and ensuring the accuracy of every single piece of our software. Operator: [Operator Instructions] Your next question comes from the line of Alex Paris of Barrington Research. Alexander Paris: Nice job on the quarter. I appreciate your prepared comments. Just a further question on funeral services revenue and volume and price per contract. I appreciate the comments that July and August were below expectations, returned to normal in September. And in October, you returned to sort of normalized growth, which you're defining as 1% to 2%, if I'm not mistaken. When can we expect this business to get to more normalized growth on a consistent basis, deaths and taxes, right? The death rate influences that, obviously, for larger consolidators such as yourself. We had a pull-forward effect from COVID that I believe we worked our way through largely and demographics should be helping. I don't know if it's helping yet, but just any more color you can give really on the longer-term outlook for funeral services contract growth. Carlos Quezada: Yes, absolutely. From a pull-forward effect, we don't really see much more of that impact to be significant over the next few quarters. We truly believe that's pretty much in the past. As you mentioned, we do believe there's a nice tailwind that's going to help us continue to grow basically because of the demographics. I mentioned in the past that right now, the oldest baby boomer is right about 80 years old, specifically. The average age of death in the United States today is 79.5. So we could expect the beginning of favorable death rates in the near future. We're not putting too much of those numbers into our forecast. We want to be more thoughtful. I am more concerned about the flu season, for example, coming up into this fourth quarter. If you remember, the fourth quarter of last year, typically, you'll have the beginning of the flu season, which drives a greater death rate. And for some reason, it is shifted from December into January, therefore, having a little weaker fourth quarter than expected last year and a stronger first quarter of this year. If that trend remains, it may shift how we perceive quarters in terms of the seasonality. But I do believe, other than that, we should be able to slowly, but surely go back to our normalized volumes and the death rate should stabilize with some significant headwinds over the next many years. Alexander Paris: Yes. I realize it varies by quarter even in a normalized environment. But over the course of the year, it usually tracks with the death rate and demographics favor a rising death rate in the U.S., as you pointed out, morbid, but unavoidable, right? So all right. And then I just wanted to circle back on acquisitions and divestitures. Acquisitions, this is the first acquisition -- acquisitions that you've made in 2.5 years by my count, the time during which you kind of reduced the debt, improved the balance sheet. But first of all, let's start with the acquisitions before we go to divestitures. You announced that on September 9, it was 2 businesses, collectively known as Osceola together, more than $15 million in revenue, one combo, five funeral homes, one crematory and central care facility, one cremation-focused business. And then beyond that, let's talk about pipeline and the multiples you're seeing in the M&A. John Enwright: Alex, as far as the pipeline goes, we're pretty excited about what we're seeing right now. We're in active conversations with a number of premier businesses and owners. We won't see anything this year, but Q1 of next year, we anticipate to be busy. We're also a little more aggressive on our proactive outreach to businesses that we've identified would be good partners for Carriage based on our criteria. So excited about the pipeline, excited about the opportunity that lies there. And then just circling back, you highlighted Osceola, but also we want to welcome Pensacola and the Faith Chapel team. That's another business that joined us that we're really excited about. But integration is off to a good start. So really the team here just excited about being able to get back to growth. Alexander Paris: And then the last question in that list of questions was what is the level of competitive activity in M&A? And what are you seeing in terms of trends in multiples being paid, either what you're paying or what they're paying in the industry for the kind of assets that you're targeting, high-quality assets and demographically favorable geographies? John Enwright: The way I would answer that is there's really 2 categories there. One category are those businesses that we're sourcing internally. It's not really a competitive process. It's based on reputation and us really paying a fair price for a good business. And that's obviously our preferred path. And then the second are businesses that are being led by brokers. Those tend to be fairly competitive. We see the same players show up for those high-quality businesses. We're going to win some, and we're not going to win them all. In terms of multiples, for an average business, I think we all kind of circle around 7 to 8 times. And then for a premium business, you're looking at high single digits on the multiple. The thing I would add to that, though, the EBITDA multiple is one thing we look at, but the reality for us is I use Osceola as an example. If there's a business that has significant levers for us in terms of upside growth. So for example, they have a great cemetery where maybe there's not a diverse selection of inventory. That's something that we're particularly good at here at Carriage, then we see that as an opportunity where we might be willing to pay a bit more of a premium because the upside is there or maybe the market has some synergies for us with existing businesses where we can share resources and we can work together on that front. So we'll look at the multiple, but we'll also be flexible based on the opportunities that a particular business offers us. Alexander Paris: And then lastly, on that topic, you said Q4 will -- we shouldn't expect to see any acquisitions announced, but potentially in Q1. Can you remind us what the methodology is for guidance? When do you factor the acquisition in the guidance? I think it's when it becomes under contract, et cetera. John Enwright: Yes, that's exactly right. So obviously, we're working through the 2026 plan as well as what we'll be presenting for guidance. So if we don't have anything known by the time we present Q4 results, we'll exclude that from our expectations. Alexander Paris: Got you. That's what I thought. And then just moving on to the divestiture of noncore assets. According to the press release, I believe, seven funeral homes, one cemetery. What were the revenues and EBITDA of those operations? And I presume that they are factored into current fiscal 2025 guidance. John Enwright: Yes. So Alex, for the businesses that we divested in Q3, they represented about $2.4 million in EBITDA, about $9 million in revenue and proceeds there were just over $19 million. Carlos Quezada: And in regards to guidance, yes, we took the lost business into consideration when we put the guidance together. Operator: Thank you. This does conclude today's question-and-answer session. I would now like to turn the call back to Carlos for closing remarks. Please go ahead. Carlos Quezada: Thank you for joining us today. Carriage remains focused on driving sustainable, profitable growth through disciplined capital allocation and operational excellence. The strategy is delivering results, making our balance sheet stronger and positioning us to create long-term shareholder value. We're confident in our momentum and in our ability to execute on our strategic objectives. We appreciate your continued support of Carriage, and we thank you, and we'll see you next year as we deliver results for the fourth quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, all, and thank you for joining us on today's European Residential REIT Third Quarter 2025 Results Conference Call. My name is Drew, and I'll be the operator on the call today. [Operator Instructions] With that, it's my pleasure to hand over to Nicole Dolan, Investor Relations, to begin. Please go ahead when you're ready. Nicole Dolan: Thank you, operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about expected future events and the financial and operating results of ERES, which are subject to certain risks and uncertainties. We direct your attention to Slide 2 and our other regulatory filings for important information about these statements. I will now turn the call over to Mark Kenney, Chief Executive Officer. Mark Kenney: Thanks, Nicole, and good morning, everyone. Joining me this morning is Jenny Chau, our Chief Financial Officer. Let's get started on Slide 4 with a high-level update. During Q3, ERES continued to execute on its strategic disposition program, focusing on maximizing unitholder value. We successfully completed several key transactions, including the sale of our commercial properties in Belgium and Germany, the closing of previously announced disposition of a portfolio containing 1,446 residential suites in the Netherlands and the sale of an additional 110-suite property in Rotterdam. Collectively, these transactions generated EUR 397 million in gross consideration, bringing our 2025 disposition total to EUR 489 million, with part of that capital used to repay EUR 238 million in debt. With remaining proceeds, ERES declared and paid a special cash distribution of EUR 0.90 per unit, in line with our commitment to return capital to unitholders. Operationally, rent growth remained robust with same-property occupied AMR increasing by 4.7% to EUR 1,349 at current period end. However, you will see on Slide 5, our residential occupancy was down to 90.8% as of September 30, 2025, on the total and same-property portfolio. This reflects elevated vacancies associated with our disposition strategy as we are intentionally keeping additional suites offline each month in order to maximize sale value. With that introduction, I will now turn the call over to Jenny to highlight our financial results. Jenny Chou: Thanks, Mark. Slide 7 provides some key performance metrics for the third quarter of 2025. Due to lost rent on vacant units combined with an increase in repair and maintenance costs, the REIT's NOI margin was down to 67.8% for the current quarter on a same-property basis from 76.2% realized for the 3 months ended September 30, 2024. Our diluted FFO per unit was EUR 0.13 for Q3, which is down from EUR 0.04 in the comparative period, primarily due to the significant amount of property sales that have been completed since. On Slide 8, we've highlighted our resilient financial position and liquidity. As we've used part of our disposition proceeds to repay debt, our ratio of adjusted debt to market value has decreased to 34% as of September 30, 2025, down from 53% as at comparative period end. We're also actively managing our access to liquidity and ensuring ongoing compliance with all covenants. Turning to Slide 9. You'll see that we have no mortgages maturing over the remainder of 2025 and '26, which provides us with financial flexibility to continue executing on value-maximizing transactions. As we advance on our disposition program, prudent financial stewardship will remain central in our decision-making. With that, I will hand the call back to Mark. Mark Kenney: Thanks, Jenny. By period end, ERES's portfolio consisted of 1,033 residential suites and ancillary retail space in the Netherlands as listed out on Slide 11. We're continuing to work with our financial and real estate advisers on the sale process for this remaining portfolio. Buyer interest is still active, and the REIT is exploring several potential alternatives, including individual asset transactions that present compelling value opportunities in the near term and/or a larger portfolio disposition. These efforts are being advanced alongside certain structural and outstanding tax matters, including the previously disclosed reassessments by the Dutch tax authority. Ultimately, our primary focus is on realizing the full value of the REIT's remaining portfolio and maximizing distribution of capital proceeds to unitholders. While the wind-down process involves complexity and uncertainty, we remain committed to acting in the best interest of all unitholders and providing timely updates as developments unfold. With that, we would now be pleased to take any questions that you may have. Operator: [Operator Instructions] Our first question today comes from Sairam Srinivas from Cormark Securities. Sairam Srinivas: Mark, just going back to the time line of transactions, are you basically comfortable with the idea that this will probably wrap up in Q4? Or are we looking for something beyond that? Mark Kenney: No, we've not provided clear guidance on a final wrap-up of the REIT. There are issues here as we discussed with tax and other issues to work out, but we will be providing definitive feedback when we have more certainty. Operator: With that, we have no further questions in the queue at this time. I'll now hand back over for some closing comments to Mark Kenney. Mark Kenney: Thank you, operator, and thank you, everyone, for joining us this morning. If you have any further questions, please do not hesitate to contact us at any time. Thank you again. Have a great day. Operator: Thank you all. That concludes today's call, and you may now disconnect your lines.
Operator: Good day, everyone, and thank you for standing by. Welcome to the Quebecor Inc. financial results for the third quarter 2025 conference call. I would now like to introduce Hugues Simard, Chief Financial Officer of Quebecor Inc. Please go ahead. Hugues Simard: Ladies and gentlemen, welcome to this Quebecor conference call. My name is Hugues Simard. I'm the CFO. And joining me to discuss our financial and operating results for the third quarter of 2025 is Pierre Karl Peladeau, our President and Chief Executive Officer. Anyone unable to attend the conference call will be able to access the recorded version by logging on to the webcast available on Quebecor's website until January 5. As usual, I also want to inform you that certain statements made on the call today may be considered forward-looking, and we would refer you to the risk factors outlined in today's press release and reports filed by the corporation with the regulatory authorities. Let me now turn the floor to Pierre Karl. Pierre Péladeau: [Foreign Language] and good morning, everyone. So more than 15 years ago, recognizing a huge opportunity in Quebec and across Canada, Quebecor set out on a growth strategy based on wireless. First, launching as an MVNO, then building our own network and further acquiring Freedom Mobile. We have never wavered in our resolve or direction. We invested wisely and established ourselves as a better alternative to the big 3, a solid market disruptor with the best growth momentum and the strongest balance sheet in the Canadian telecom industry. As proof that our strategy is paying off, we continue to outperform our competitors, and I'm proud to report our strongest quarterly wireless service revenue growth since the acquisition of Freedom Mobile. As well as an impressive loading performance of 114,000 net addition in the quarter with more than 323,000 new lines year-over-year despite a generally softer market. Collectively, Videotron, Freedom and Fizz now have over 4,328,000 mobile active lines, a significant milestone achieved in quite a short time in a competitive market. Each of our 3 brands continue to improve its performance quarter after quarter, resonating more and more with Canadians across the country with innovative and affordable product and services. We have created a healthy competitive environment, giving Canadians more choice, lower prices and a better experience, all the while improving our profitability, growing cash flow and continuing to reduce our leverage to maintain the lowest ratio in the Canadian telecom industry. We will spare no effort as we press on with our strategy of sustainable, profitable wireless market share growth. I will now review our operational results, starting with our telecom segment. So our telecom segment continued to deliver strong operational and financial results both in wireless and broadband, reflecting the disciplined execution of our growth initiatives, the strength of our brand portfolio, and our commitment to provide innovative and reliable services to our customers. Our service revenues are up for a second consecutive quarter at 2%, fueled by a 6.4% increase in mobile and 1.1% in Internet. Our mobile service revenue grew by $27 million in the quarter, surpassing our Q2 performance and our best since we completed the integration cycle of Freedom Mobile results. This results from our adding 323,000 new net line over the last year despite the Canadian market affected by lower immigration levels and organic growth, but also from our effective pricing strategy with a balanced and cohesive positioning of our brand. Our consolidated mobile ARPU continued to improve its performance, recording its best since the acquisition of Freedom Mobile, which bodes well for the next few quarters despite a market that remains unpredictable and highly competitive, especially in Quebec where discounting is comparatively and, in our view, irrationally heavy. At this point, we expect current market conditions to continue through the upcoming holiday season's promotional period, but we intend to maintain our disciplined approach, focusing on the quality of our products while continuing to rapidly improve our network. Specifically, on ARPU, we are very pleased with our second sequential quarterly increase, reaching $0.35 and $0.05 compared to $0.34 and $0.76 last quarter, a $0.29 gained in the 3 months. Our year-over-year performance continued to improve with a $0.66 decrease this quarter compared to a drop of $2.30 in Q2 as compared to the same period last year. Our effective mitigation of the dilutive impact of the prepaid services of Fizz and Freedom was an important contributor. As you will have noticed, we adjusted our wireless subscriber base by 51,000 to eliminate 0 revenue accounts, which translated into an approximately $0.40 ARPU pickup. To be completely transparent and contrary to our competitors, we adjusted our ARPU numbers retroactively. With our ever-improving network quality and stellar customer service, more and more Canadians enjoy the richness and peace of mind of our plans, which continues to strengthen our market position and share. Freedom's marketing plans are honest and transparent without any fake employee purchase program, new customers only or B2B offers. We have been upfront with all Canadians since day 1, offering them better services at everyday best prices. Canadians have clearly embraced our approach as evidenced by our significant churn improvement, ARPU and market share growth. An internal survey even reveals that the global satisfaction score of Freedom customers approaches that of Videotron. We are very proud to have successfully transposed the key contributors of our great success in our own market to the other regions of Canada. In terms of new adds, as I alluded to at the beginning of my address, we delivered 114,000 new net lines to our mobile customer base in the third quarter, a strong growth considering the softer market this year. This performance is also attributable to our effective retention strategy, which kept our consolidated churn among top of the industry and thus helped to defend Videotron's solid market position in Quebec and to continue to improve Freedom performance. In wireline, our service revenues continue to improve as we recorded for a second consecutive quarter our lowest decline in year-over-year. Fueled by Internet revenue growth of $3.3 million and net additions of 10,500 in the quarter, these results are very encouraging as we are only still scratching the surface of the opportunity with new services like Freedom home Internet and Fizz TV. We are also counting on the expansion of our Helix technology-based Internet and television services in new territories where they will complement our wireless services already available. Since the end of the second quarter of 2025, Videotron has announced the expanded coverage of more than 180,000 new households in Drummondville, Magog, Rimouski, Saint-Hyacinthe, Trois-Rivieres, Salaberry-de-Valleyfield and Huntingdon, as well as in many cities in Saguenay–Lac Saint-Jean region. Customers will now be able to benefit from a full complement of telecommunication services in competitive packages. We intend to enter these new markets with a disciplined pricing strategy in line with our pricing elsewhere in Quebec, counting on state-of-the-art Helix solutions and our second to none client experience to make ourselves a strong contenders in this territory. In addition to our wireline footprint, we are also expanding our wireless coverage and services areas in the Haute-Mauricie region in partnership with Ecotel and with the support of the Quebec government. This will significantly improve mobile communications in this region of Quebec, making it possible for more than 10,000 residents to subscribe to Videotron mobile services and enhancing connectivity along several highways. Freedom Mobile is also continuing to increase its service coverage now in the Ontario region of Chatham-Kent, where the resident of this large and growing region can now access our fast and reliable wireless network. These expansions reflect our continued progress in delivering on our ongoing commitment to always give our customers more with state-of-the-art advanced technology. This is but one reason why Videotron was ranked as Quebecor's preferred telecommunication provider in a recent Leger survey. Videotron stands out for its remarkable results, confirming its position as an undisputed leader in customer service among telecommunication providers in Quebec, while being recognized as the most reliable and trustworthy telecommunication company in Quebec. Turning now to our Media segment. TVA Group generated EBITDA of $18.5 million in the third quarter of 2025, an increase of $6 million compared to the same period in 2024. This favorable variance is primarily attributable to the impact of streamlining initiatives undertaken over the past 2 years as well as certain favorable nonrecurring retroactive adjustments. These measures are helping, but are in no way sufficient, to mitigate the impact of the structural crisis threatening the sustainability of Quebec television industry, particularly due to the accelerated decline in advertising revenues compounded by the negative impact on the absence of foreign blockbusters in MELS' studios. Having acted recently and respondly over the years by implementing numerous measures and a number of major restructuring plans to address the crisis, TVA Group has done its part. It is high time for our government to take the necessary action on their end. After countless advocacy efforts, hearings and meetings with successive CRTC chairpersons, Canadian heritage ministers and Quebec culture ministers over the years, we can only repeat yet again that we urgently need real action and long-term solution to protect our industry. It was particularly disappointing that the federal government in its budget deposited this Tuesday completely ignored our industry and turned a blind eye to the crisis that is hitting television broadcasting so hard. There is no tax credit for television journalism, no tax incentive for advertising in Quebec and Canadian media, and no information about when the digital services tax already paid by private broadcaster will be refunded. Furthermore, CBC/Radio-Canada annual funding had been increased by $150 million without any requirement to eliminate advertising on its platform and to curb its unfair commercial competition with Canada private television broadcasters. Regrettably, this new government has missed an opportunity to support an industry facing ever-growing challenges and job losses at an alarming rate. Regarding the Quebec government, we reiterate that it must quickly introduce concrete measures to implement the recommendations in the report of its task force of the future of Quebec audiovisual industry filed in October 2025. I will now let Hugues review our detailed financial results. Hugues Simard: [Foreign Language] On a consolidated basis in the third quarter of 2025, Quebecor recorded revenues of $1.4 billion, up 1%, EBITDA of $628 million, up $34 million or 6%, resulting from improvements across all of the corporation's business segments. Cash flows from operating activities increased $36 million to $582 million or 7% compared to the same quarter last year. In our telecom segment, total revenues grew by 1% or $13 million, a first favorable variance since Q1 of last year when we completed the integration cycle of Freedom Mobile results. This positive delivery is largely attributable to our strongest mobile service revenue growth of 6.4% fueled by a significant customer growth, but also by the favorable improvement of our mobile ARPU in the last quarter, resulting from strategic market positioning of our multiple brands and our pricing strategies. This quarter, mobile revenues were offset by our lowest wireline services revenue declines in more than a year, resulting from our effective strategies and mitigating the impact of organic declines of these services. Combined with rigorous cost management initiatives, our EBITDA reached $602.5 million, increasing by $16.6 million or 2.8%, our highest EBITDA growth since Q1 2024. As a result, our EBITDA margin improved by 0.8%, ending at 49.5% compared to 48.7% in the same period last year. Telecom CapEx spending was up by $13 million in the quarter, regulating the timing difference explained in Q2 for wireless equipment deliveries required for our 5G and 5G-plus network expansions and subscriber equipment rentals. Even with that regulation, we still anticipate higher investment levels in the last quarter to stay on track with our objectives, mainly expanding and improving our mobile network. Accounting for these investments, our quarterly adjusted cash flows from operations increased $3 million or almost 1% due to our solid EBITDA growth. Our Media segment recorded revenues of $152 million or 2% decrease, an EBITDA of $23 million, a $9 million favorable variance compared to the same quarter last year. Our Sports and Entertainment segment revenues increased by 7% to $68 million, and EBITDA was up by 28% to $15 million. We reported a net income attributable to shareholders of $236 million in the quarter or $1.03 per share compared to a net income of $189 million or $0.81 per share reported in the same quarter last year. Adjusted net income, excluding unusual items and losses on valuation of financial instruments came in at $242 million or $1.05 per share compared to an adjusted net income of $192 million or $0.82 per share in the same quarter last year. For the first 9 months, Quebecor's revenues were down by 0.3% to $4.1 billion, and EBITDA was up by $4 million to $1.8 billion, partly impacted by a $44 million increase in stock-based compensation charges. Excluding this factor, EBITDA would have increased by $48 million or 3%. EBITDA from our telecom segment grew 2%, an improvement of $38 million over last year, excluding the impact of stock-based compensation. At the end of the quarter, Quebecor's net debt-to-EBITDA ratio decreased to 3.03x, still the lowest of all our telecom competitors in Canada. We remain committed to further deleveraging in the coming quarters and intend to continue operating in this low 3 range, consistent with our current financial strategy. Our balance sheet remains very strong with available liquidity of over $1 billion at the end of the third quarter. I would also like to highlight the success of our recent refinancing where Videotron issued $800 million of senior notes yielding 3.95%. This demand -- the high demand from investors, it was very strong with a book more than 3x oversubscribed, and we were able to negotiate very favorable conditions, most notably the lowest 7-year credit spread seen in the Canadian telecommunications sector, a convincing testament to the strength of our financial foundation, our disciplined management and our growth prospects. The net proceeds will be used for the redemption of our -- or Videotron's rather 5.125% senior notes maturing on April 15, 2027. During the first 9 months of the year, we also purchased and canceled 3.7 million Class B shares for a total investment of $140 million. We thank you for your attention, and we'll now open the lines for your questions. Operator: [Operator Instructions] First, we will hear from Maher Yaghi at Scotiabank bank. Maher Yaghi: [Foreign Language] I would like to first ask you the strong performance in wireless, you mentioned that it came from lower churn and also improved gross loading. Can you maybe dissect a little bit more what drove that strong performance in the quarter? Q3 usually is a strong quarter for Freedom, but how are you thinking about Q4 so far? And which markets -- which submarkets in wireless you still haven't been able to gain market share from that you think over time could provide you more growth down the line? Hugues Simard: Thanks, Maher. So in wireless, yes, I mean, as you said yourself, the Q3 and the back-to-school period is -- has historically been a very strong quarter for us. These are the target markets that we -- that particularly resonate well with us. And again, even though organically and in terms of immigration and all the things we've talked about, the market is a little softer, we've been able to maintain our performance. And why have we been able to maintain our performance? It is because we are increasingly resonating with other cohorts whereas the freedom of the past used to be very strong with first-time buyers and immigrants and people looking for a deal or the cheapest deal. We are now able to attract and retain customers that are willing to -- they want a bit more, that want better performance. We have an increasing number of 5G-plus customers because we have been expanding the access to 5G-plus to many more of our customers. Fizz is also continuing to perform increasingly well quarter after quarter, which should not be a surprise because you will remember us telling you that Fizz was created with a very specific objective -- with very specific objectives in mind, and that was to go after and to target the younger, more urban, more digital savvy generations, which are representing the future. And I think we are showing that we're better than our competitors at reaching out to these people, to these customers. In terms of going forward in the following quarters, I think you will see if you look back that we are very -- not stable, but very consistent in our penetration, in our growth. We are continuing to retain our customers more longer, so churn is down. Our ARPU is going up. So this is really the story in this one. Look at our wireless service revenues, $27 million more in the quarter, which flows down to margin with -- considering our very disciplined cost containment. That's basically how I would call the story of -- the wireless story of the quarter, which bodes, as we said in our -- as Pierre Karl said in his note, bodes very well for the historically competitive Q4, where we intend to continue to perform very well. Pierre Péladeau: That's a pretty good answer, ain't it? Maher Yaghi: It's a very good story for sure, very good story. Maybe just one… Pierre Péladeau: May I add just one thing, is -- well, we all know that when Freedom was under the previous ownership for whatever reason, I mean, historically, the weakness was the network, the quality of the network. And I think it's important to mention that we are investing in the network. And we've been always Videotron an enterprise culture, considering that we need to deliver the best product in our available customers. So we inherit a good brand and certainly also some very good people in this organization. But now I think that we've been doing what is appropriate to improve our product by investing in the network. We will continue to do so and we will continue to do it on a disciplined basis as we've been doing, obviously, in Quebec for the last about almost 15 years now. Maher Yaghi: Yes. And maybe just to touch on the improvement in the cable segment revenue growth rate with the pricing that you passed last December starting to really kick in. But I'm trying to gauge that with Karl's -- your prepared remarks. You specifically called out the very aggressive pricing competition happening in Montreal and Quebec in general on the combo plans, very low prices. Is it easy to pass another price increase this year like you did last year amidst the competition that we're seeing right now in the marketplace? Pierre Péladeau: Well, obviously, you can easily expect that you're going to have an answer for that. But I'll tell you, we're used to that. We've been always in the same kind of environment. So there is nothing new for us. And what we're doing to make sure that we're for this situation is by being as much as disciplined as possible, watching our core cost. And we've always been in that kind of business and we will continue to do so. Historically, pricing between Quebec and all the other areas in Canada for whatever product, it was the same for cable, it's the same for wireless had been lower. So is our competitor, our main competitor, the blue guys have been trying to get market share by having lower prices than elsewhere. They certainly, in the past, being able to benefit from a higher margin elsewhere. Are they using this to compete even more aggressively in Quebec? It's not impossible. But they can do whatever they want. At the end of the day, we're going to continue to be the preferred supplier of Quebecers for many reasons, one of which is that we're offering better customer service and our products are of higher quality. Operator: The next question will be from Stephanie Price at CIBC. Sam Schmidt: It's Sam Schmidt on for Stephanie Price. I wanted to ask a question about ARPU. The declines have been improving sequentially for the last few quarters. How do you think about the timeline to return to positive ARPU growth? And it was strong in this quarter. Any onetime items to call out there? Hugues Simard: I'm sorry, I missed your first name. You're replacing Stephanie, right? Sam Schmidt: Yes. Sorry, it's Sam Schmidt on for Stephanie Price. My first question was just around the ARPU declines that have been improving sequentially for the last few quarters and how you're thinking about a timeline to return to ARPU growth. Hugues Simard: Yes. It's -- you saw our performance. We're very confident. ARPU is turning the corner, and I would expect that corner to be very, very soon. Sam Schmidt: That's helpful. And then just one more for me on mobile equipment revenues. How are you thinking about device financing heading into Black Friday? Hugues Simard: With discipline, how would I say, continued disciplined, reasonable offers. We've said this in the past that Black Friday is a time of the year where we can easily go crazy and lose our shirt, as we say, on equipment device -- on equipment or device subsidies. And we certainly do not intend to do that and to continue to be, as I said, disciplined and reasonable in our equipment offers for the rest of the year. Operator: Next question will be from Matthew Griffiths at Bank of America. Matthew Griffiths: Just on churn, firstly, if I could. It seems as though across the industry, everyone is reporting churn being lower this quarter on a year-over-year basis. I was wondering if you had any comments about how much of your churn benefit in the quarter is just kind of that halo effect of industry churn falling. Or were there things that you were doing that you kind of can see that there's -- that would have been responsible on your side for reducing the churn? And then secondly, if you can make any comments on the kind of decision and how you evaluate the network expansion question. Specifically, you mentioned this quarter expanding the wireless network into the Chatham-Kent area. So if you could share kind of just how you evaluate it, how many more opportunities you see for this going forward, it would just be helpful on our side. Hugues Simard: Matt, thanks for your question, Matt. On churn first, probably a little bit of both, to be fair. Our churn, as you know, started from very high with Freedom, the highest in the industry by far, and is now fairly equal to the lowest of the industry. And that was mostly due to the improvements to our network, its performance, its coverage, its reliability, roaming packages, marketing agility, customer experience. I mean it's a -- who knows -- and bundling opportunities. There are so many factors that collectively contributed to this lowering or this decrease in our churn. Now that it has reached, as I said, a very competitive level, then obviously, it becomes naturally a little bit more affected or more influenced by maybe more market-related metrics. And it is our goal to maintain that churn through the various improvements. I mean we're nowhere done. I mean it's not as if we're at the end of the -- of our plan here in terms of improving everything that I've talked about and going after different cohorts, as we said earlier. And as our experience keeps getting better with our customers, we're very confident on the churn level that we have not only reached the industry's best, but that we will maintain the industry's best. Of course, there are the investments that Pierre Karl talked about that will continue. We're taking this very seriously. When we relaunched -- when we bought and relaunched Freedom, we said very clearly that we went about very diligently about fixing all the pain points and making sure that the experience was quickly very much better. And we still have work to do. This is a never-ending work, and we certainly intend to, as Pierre Karl said, continue to invest in our networks and also in our marketing agility to make sure that we continue to resonate with Canadian customers. As to the network expansion, this is the -- these decisions are made on a -- it's a bit of a -- how would I say, it's a bit of a balance between going after strong and interesting regions with -- and balancing it with the investments needed in these regions. So this is something we have a plan, and we're continuing to be very diligent and very disciplined about our network expansions going forward. Focusing on the MVNO areas where we're starting to resonate well, where we're building the business, you will remember us saying that we're not going to build and hope that people come. We will launch MVNOs and where it will make sense for us, we will prioritize network investments. And I think that's the good business way to do it, and that's still what we intend to continue to do. Operator: Next question will be from Jerome Dubreuil at Desjardins. Jerome Dubreuil: The first one is on the free cash algorithm. We were seeing a bit of EBITDA growth, but also CapEx increases. So I'm wondering if you're seeing a potential for free cash growth in the coming year or if value is going to be created more through deleveraging and buybacks. I appreciate there was the share-based comp situation this year. But essentially, will absolute EBITDA growth outpace CapEx growth in the next few years? Hugues Simard: Thanks Jerome, [Foreign Language]. I think you're seeing it in the numbers. We look at our performance in terms of generating margin, generating cash, which provides us with the opportunity to continue to invest in the network, which we had said we would. And from -- I think you will remember, again, us saying from the beginning of the year or even last year that we were going to maintain very strong, stable cash flow, even though we were intending to invest more in our network. So in terms of buybacks, as you know, we flexed in the past on this, and we will continue to do so. And dividends will be -- we will continue stay true to our dividend increase, reasonable increase that we've had in the past. We're still in the soft in the -- not in the soft, in the best spots that we announced between 30% and 50% of our payout. So we feel pretty comfortable with our continued capability to generate cash, very strong cash flows that then give us the leeway to continue to invest in the network and the -- eventually in the network builds. Jerome Dubreuil: I'm just going to push a little bit on the capital allocation point here. You said in the prepared remarks that you're probably happy with leverage in the low 3s. It seems like you're getting real close to destination here on the balance sheet side. So does that mean that we should be expecting a ramp-up in the buybacks probably? Or is that a fair assumption? Hugues Simard: It's not an unfair assumption, but I wouldn't necessarily agree to it now this morning. Pierre Péladeau: And Jerome, I think that we should say it's a prerogative of the Board of Directors. And look at the sequence previously where we've been changing our balance sheet policies. I guess that we should -- that would be a good example or a good illustration of what we can expect being the situation in the future. Operator: Next question will be from Vince Valentini at TD Cowen. Vince Valentini: Let me spin that free cash flow question just more specifically to the near term. Hugh, you've done $1.06 billion of free cash flow through the first 9 months of the year. In the fourth quarter of last year, you did over $300 million in free cash flow. Is there something material in terms of timing issues we should be thinking about for the fourth quarter? Or are you going to -- like, you're going to smash through $1.2 billion or $1.3 billion of free cash flow for the year? Hugues Simard: Vince, no, we've talked about this, I think, last quarter. There are some timing issues. Our CapEx did increase a little bit in Q3, as you've seen, but there still is some timing ahead of us -- timing issues ahead of us in terms of CapEx, which you should expect to be higher in Q4. So I wouldn't go all out in our expectations of us breaking the bank in terms of cash flow. It will be a very strong cash flow and we will more than deliver what we had said we would deliver, Vince. But yes, there definitely is going to be a catch-up in CapEx towards the end of the year -- between now and the end of the year, yes. Vince Valentini: But you would definitely expect to have positive free cash flow in the fourth quarter? Hugues Simard: For sure. For sure. Yes, yes. Vince Valentini: Okay. The second thing, your Internet adds were a bit better than I expected. Is this in Quebec in your core Videotron business? Or are you starting to see some benefit from Freedom Internet in the rest of the country using TPIA? Hugues Simard: Well, a little bit of both. It is in Quebec, but it is also in Freedom home Internet is performing well. Fizz Internet is performing well. So it's -- we are in a very competitive situation and an ever-increasing competitive situation in Quebec. But we've talked about the quality of our services and network. And so we've been performing well essentially everywhere in terms of broadband. Vince Valentini: Okay. And last one, I don't know if there's any materiality to this, but as you know, I'm a happy customer. These roaming SIM cards that you guys have and people on other carriers are allowed to use them when they're traveling, how are you counting those? Are they being counted as a subscriber in the third quarter sub adds? Hugues Simard: No, no. No, they're not -- if you've turned on that SIM card, as I know for a fact that you were finally successful in doing, Vince… Vince Valentini: Yes, I did. Hugues Simard: After some help, you are not counted as a subscriber, no. Vince Valentini: So that is actually -- it is obviously service revenue. So it's going to be helping your ARPU even more than just the underlying trends in the business going forward? Hugues Simard: Yes. That's correct. And by the way, it's high time that you do become a customer of Vince. We're counting on you. Vince Valentini: I'm waiting for your Black Friday offer. Pierre Péladeau: Thanks for your business, Vince. Operator: Next question will be from Aravinda Galappatthige at Canaccord Genuity. Aravinda Galappatthige: Just a couple of quick ones from me. Hugues, you mentioned that one of the reasons for the success of Freedom sub trends is because you're kind of going into other cohorts that the old Freedom did not. I mean should we translate that comment as suggesting speaking to sort of the prepaid-postpaid mix? Any comment around how that mix has changed as you sort of progressed with gains on the subscriber front? And then secondly, just a small follow-up. The wireless ARPU redefinition, can you just clarify what that was? Hugues Simard: As to your first question, Aravinda, postpaids and prepaids for us, we're continuing to perform well on both. We have -- we're a bit agnostic, to be honest, and have continued to work well. So on all the cohorts that I talked about, I think that was more of a general comment applying to both to both postpaid and prepaid -- not specifically a move from one to the other. But we -- to be quite transparent, we're continuing to perform well on postpaid. And your second question, sorry, I've forgotten was to do with what? Aravinda Galappatthige: The ARPU redefinition. I think it was a small definition change of $0.40. Hugues Simard: Yes. Yes, it's about $0.40. We've restated it. But as those were $0 accounts, you'll see that it's almost consistently $0.40 over the last so many quarters that we restated. Operator: Next question will be from Drew McReynolds at RBC. Drew McReynolds: So a couple for me. Maybe for you, Hugh, on the CapEx trajectory in telecom. It looks like you're running a little hotter than the initial kind of $650 million or so of CapEx. Just wondering, and I think your commentary from Q4 would say you come on above that. Is there any kind of change overall to the kind of medium-term trajectory on CapEx from your perspective? And then just tied to that, we are seeing a pretty efficient kind of cable CapEx intensity come down from -- with some of your cable peers. Just wondering your cable CapEx, how you expect that to trend again through the medium term? Hugues Simard: Thanks, Drew. So on medium-term CapEx, both wireless and wireline, we will -- as I said earlier, we will, in Q4, be a little bit higher. That doesn't necessarily change our midterm -- what we said about the midterm that we are -- and we've said this before, that we're in a -- we're continuing to invest, and we're continuing to improve and ultimately expand as well our networks. And as such, it will be -- you should expect a gradual CapEx increase over the medium term. Nothing -- again, gradual, nothing -- no CapEx wall. I have some of your colleagues unfortunately use the term in the past. I don't think there's anything to be worried about, but just very reasonable and very sensible investments in both of our wireline and wireless network going forward. So no change to our midterm CapEx trajectory. Drew McReynolds: Just in the MD&A, you alluded to some favorable kind of provisioning in Q3 within telecom. I'm assuming the 2.8% year-over-year telecom EBITDA growth ex the provisioning is still a reasonably good growth rate. Can you just comment on quantifying those provisional -- favorable provisions? Hugues Simard: I won't give you the number, obviously, Drew, but it's -- no, I think your statement is fair. There's no -- yes, there was some provision adjustments as we do in a number of quarters and almost all quarters and as everybody does, but it's not material enough to impede or to change the conclusion on our increase in profitability for the quarter. Drew McReynolds: Okay. No, that's great. And last one for me, just the usual fixed wireless impact in Quebec, just how that's kind of contributing to the competitive environment, if at all? And that's it for me. Hugues Simard: To be honest, nothing significant. It is -- and by that, don't misread us. We're not saying that this is something to be dismissed. As we said in the past, fixed wireless is -- we're not saying it's not a thing. It may very well become a thing. And we are certainly in our own shop, looking at opportunities for fixed wireless. But certainly, to your -- in answer to your question, so far the impact on us has been very limited in our home turf of Quebec. But we are definitely -- and we've got the teams already lined up to start reflecting on how we will turn that into an opportunity for us in our various markets outside of Quebec. Aravinda Galappatthige: And congrats on great wireless results. Operator: Our last question will be from Tim Casey at BMO. Tim Casey: Hugh, just one modeling question and a couple of others. Working capital is running very positive so far this year. Should we expect a reversal in Q4 or maybe into Q1 next year? And what's driving that? Is that cash management or is it just timing? Hugues Simard: Tim, no, you should -- the answer your question, there should not be -- I don't see any material difference in Q4 or Q1 of next year in terms of working capital. It is -- to be honest, it is something that we've been focusing on for the past year or so, 1.5 years, where we recognized -- I think sometimes you have to be -- you have to question yourself on various occasions. And we weren't as efficient in working -- in managing our working capital as we should have been in the past. And we've tightened up a lot of things and I think it's showing. But we certainly intend to continue to perform well on working cap. And I wouldn't expect -- I mean, there's no bump either way that you should expect in the next quarters. Tim Casey: Okay. Just 2 for me. On the 50,000 subs you removed out of the base, can you give us any color on why they were $0 subs? Was this an aggressive promotion from the relaunch of Freedom? Were they -- was it an enterprise deal? What was happening there that they were so poor ARPU? And second one, as you think about expanding out of footprint on wireline, do you expect to retain similar type economics maybe on a margin basis? I would -- or should we assume that it will be dilutive to ARPU on the wireline side? Hugues Simard: Tim, to your first question, the 50,000 or 51,000 were $0 accounts. It's basically people who had opened an account but never -- or had a SIM card, mostly from before the acquisition and who never really bought a package. So they -- we had them as an account, but they weren't active and they weren't generating any revenue. So we just took them out. In terms of our out-of-footprint wireline, we -- again, our intent is to remain very disciplined and very -- I think that was your question. If I'm not answering the right question, you can ask me. We certainly -- as we've said in our notes today, both Pierre Karl and I, we intend to -- whether it's out of footprint wireline or eventually fixed wireless, whatever, it is our intent to remain very disciplined. And I think if I may make the point right now, we have been and for quite some time, been very disciplined and very predictable in our approach. We say what we're going to do, and we do what we said we were going to do, which I don't think can be said for everybody in telecom in Canada. But we certainly, in terms of wireline, intend to continue to apply that philosophy, if I can call it that. Pierre Péladeau: So we would like to thank you all attending this conference call and expect the same for our next quarter that will be our year-end. So don't miss Hamilton game, the Alouettes against the Tiger-Cats on Saturday. Hugues Simard: And you should root for the Alouettes, right? Pierre Péladeau: Sure. Thank you very much and have a nice day. Hugues Simard: Thanks, everyone. Operator: Thank you. Ladies and gentlemen, this concludes the Quebecor Inc.'s financial results for the third quarter 2025 conference call. Thank you for your participation and have a good day.
Operator: Good day, everyone, and welcome to the Leatt Corporation Third Quarter 2025 Results Conference Call. [Operator Instructions] Please note this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Michael Mason. Please go ahead. Michael Mason: Thanks, Nikki. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the third quarter 2025. The company issued a press release today, Thursday, November 6, 2025, at 8:00 a.m. Eastern and filed its report with the SEC. The press release is posted on Leatt's website at leatt-corp.com. This call is being broadcast live and may be accessed on the company's website. An audio replay of this call will be available for 7 days and may be accessed from North America by calling (844) 512-2921 or (412) 317-6671 for international callers. The replay pin number is 11160350. A replay of the webcast will be available immediately following this call and will continue for 7 days. Certain statements in this conference call may constitute forward-looking statements. Actual results could differ materially from those discussed in this call. Leatt Corporation does not undertake any obligation to update such statements made in this call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated November 6, 2025. The company will make a presentation on the quarterly results and then open the call to questions. I would now like to turn the call over to Mr. Sean MacDonald, CEO of Leatt Corporation. Good afternoon to you in Cape Town, Sean. Sean MacDonald: Good morning, and thank you, Mike, and thank you all for joining us today. The third quarter of 2025 was a solid quarter on a global basis. We achieved double-digit revenue growth for the fourth consecutive quarter and double-digit profitability. It was the fifth consecutive quarter of year-over-year growth following the post-COVID industry-wide revenue contraction and inventory overhang. Revenues for the quarter were $14.34 million, an 18% increase over last year's third quarter. Net income was $539,000, a 366% increase. International distributor sales increased by 17% as demand for our products and market conditions continue to improve. All of our product categories and our core head-to-toe markets, MOTO, MTB and ADV grew by double digits on a year-to-date basis compared to last year, which is especially encouraging. Our recent expansion into the ADV market with a range of products designed for off-road adventure riding has been exceptional, and we believe ADV is a growing and exciting market that represents an important growth opportunity for us. Gross profit as a percentage of sales continued to improve from 43% to 44% when compared to last year's third quarter as domestic trading conditions continue to improve despite some tariff uncertainty. Our U.S. MOTO and MTB sales teams are gaining momentum at the dealer level, and our supply chain team is managing shipping costs and logistics costs efficiently. We continue to build and refine the multichannel selling organization and consumer-facing brands and have added some promising new team members like our new Head of Brand, Marketing and Creative, Nick Larsen, who has a proven track record of building and driving iconic global brands. Continuing to build out a great team is a cornerstone of our future growth plans, and we are excited to have Nick as a key member of our team. For the first 9 months of 2025, our revenues increased by $13 million or 40% to $45.89 million. Net income for the 9 months increased by $4.56 million or 259% to $2.8 million. Cash flows generated from operations was $1.45 million as our liquidity continues to improve. All of our product category revenues have grown by double digits on a year-to-date basis. Body armor has grown by 30%, helmets by 60% other products, parts and accessories, including apparel, goggles and components by 49% and neck braces by 18%. We are confident that consumer direct sales will continue to be a highlight in terms of growth as brand momentum continues and consumer demand remains strong. For the third quarter of 2025, consumer direct sales increased by 61%. And over the first 9 months of 2025, sales increased by 37%. Our digital team continues to focus on building innovative digital platforms and consumer engagement strategies. Now I will turn to more details on sales of our product categories for the third quarter of 2025 compared to 2024. Sales of our flagship neck brace were $860,000, a 14% increase, primarily attributable to a 39% increase in the volume of neck braces sold when compared to the third quarter of 2024. Neck braces represented 6% of our total revenues for the quarter. Our body armor products are comprised of chest protectors, full upper body protectors, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor revenues were $6.1 million, a 6% increase, primarily attributable to a 46% increase in revenues from the sales of footwear, including motorcycle boots and mountain biking shoes. Body armor sales represented 43% of our revenues for the quarter. Helmet sales were $3.33 million, an 11% increase, primarily attributable to strong ADV helmet sales. Our ADV helmets are designed for off-road adventure riding. Helmet sales represented 23% of our revenues for the third quarter. Our other products, parts and accessories category is comprised of goggles, hydration bags and apparel items, including jerseys, pants, shorts and jackets. Revenues were $4 million, a 53% increase, primarily attributable to a 49% increase in sales of MTB, ADV and motor apparel when compared to the third quarter of 2024. Other products, parts and accessories accounted for 28% of our revenues for the quarter. Now I will turn to our financial results in a bit more detail. Total revenues for the third quarter of 2025 were $14.34 million, up by 18% compared to $12.14 million for the third quarter of 2024. This increase in worldwide revenues is primarily attributable to a $360,000 increase in body armor sales, a $320,000 increase in helmet sales, a $1.41 million increase in other products, parts and accessory sales and $110,000 increase in neck brace sales. Income from operations for the third quarter was $630,000, up by 2,333% compared to $20,000 for the third quarter of 2024. Net income for the third quarter was $539,000 or $0.09 per basic and $0.08 per diluted share, up by 366% as compared to net income of $116,000 or $0.02 per basic and $0.02 per diluted share for the third quarter of 2024. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flows from operations. And at September 30, 2025, the company had cash, cash equivalents and restricted cash of $12.39 million and a current ratio of 5:1. Looking forward, we remain very enthusiastic about our future. Although there are still some challenging geopolitical conditions globally and economic risks in the U.S. that may potentially impact inflation and demand, inventory continues to be digested. Our domestic sales are gaining strong traction. Participation remains strong and international ordering patterns continue to improve and deliver strong revenue growth. The consistent growth in all of our product categories is being driven by strong demand for Leatt products around the world. We expect this trend to continue. In conclusion, while we monitor the international trade situation, we are continuing to invest in Leatt as a global consumer-facing brand and to build out a strong and diversified global multichannel sales organization. All of us at Leatt's are energized by the growth of our product categories and our pipeline of cutting-edge products and categories for a much wider rider community. With a strong portfolio of innovative products in the market and in the pipeline, a return to profitability and a robust balance sheet to fuel brand and revenue growth, we remain confident that we are very well positioned for future growth and profitability. As always, I'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for their continued strong support. With that, I'd like to turn the call over for any questions. Operator? Operator: [Operator Instructions] We'll take our first question from Nick Fisher with Pilot Capital. Nick Fisher: First of all, just wanted to get some color on the plan for stock buybacks, what your framework is, et cetera. I see that you were able to purchase some shares here in the quarter. Sean MacDonald: Yes, correct. So we did manage to purchase some shares in the quarter. And I believe that will be open until the end of December. And we're going to continue, obviously, through our plan with the broker to try and buy back some shares within a range. Nick Fisher: Got you. Okay. I appreciate that. Obviously, marketing and sales has been a focus here. I was a little bit surprised to see advertising and marketing decrease in the quarter. Could you just talk a little bit about future plans and investments from that perspective, if you're able to? Sean MacDonald: No, absolutely. So I mean, marketing, sure, was down. A lot of that is primarily just for timing reasons and some cost efficiencies that we've had on the marketing side with video production and photographic production. Having brought Nick Larsen on board, he's a very focused and experienced marketing professional. And I'm expecting to get really great return on investment on all of our marketing activities moving forward. Things are going to be a lot more focused, a lot more driven in terms of creating more consumer demand, creating more brand awareness to a much wider rider audience. So you can expect a strong drive to add fuel to the marketing fire and to the brand fire to generate demand for Leatt products moving forward. Nick Fisher: I see. Got you. And then my last question is with regards to impact of inflation and tariffs and things like that. Are you able to comment on plans for price increases and the like? Sean MacDonald: Sure. So we have increased pricing marginally across the board, 8% to 10%, which is very much in line with industry norms at the moment. We've been following the competitive landscape very, very carefully. So we've managed to increase pricing without having too much of an impact on sales and inventory holdings at the dealer level. I think it's obviously expected that pricing will go up. I think from a general inflationary perspective, I think quite a lot of inflation has still been -- is still to filter through into the market. Just generally, I think a lot of consumers have been shielded by -- basically by companies up until now. So we are expecting to see inflation potentially increasing in the short to medium term. We don't expect it to have a huge impact on our margins or on our profitability or on our demand. I think if the tariffs remain relatively stable moving forward, I think we'll be in a strong position to have strong margins and also to retain strong demand. So I think hopefully, the impact of tariffs so far has been -- we're over the worst of it. And moving forward, things will continue to improve. Operator: We will move next with Christopher Muller, private investor. Christopher Muller: Just a few questions, if I may. First, with regards to the international distributor revenues, I believe you historically had some seasonality there with a stronger back half of the year, Q3 and Q4 benefiting from the initial stocking of next year's line. Looking at the modest sequential decline today in Q3, I'm trying to understand whether those orders were pushed more into Q4 this year or if those distributor order cycles have changed or whether that past seasonality is even applicable to the business today? Sean MacDonald: Yes. I mean I think you can expect a strong Q4 international distributor deliveries. A little bit of a timing impact there. I think some of the seasonality has moved slightly into Q4. I certainly am expecting, as I said, a strong distributor revenues in Q4, and that should all, of course, even out over the year. So when you look at the whole year, international distribution is going to be a strong part of the business as our distributors continue to restock with demand increasing. Christopher Muller: Okay. Very good. And then second, regarding the MTB components line, how is that performing relative to your expectations at last year's launch? Sean MacDonald: Yes, we're continuing to push there. I think exceeded our expectations in terms of the initial push. And we're busy right now refining a lot of those products and a lot of the supply chain around those products, which I think is going to help us to be able to meet the demand that is out there. So I think performing well, expecting further growth in the future as we continue to improve efficiencies around that product line. Christopher Muller: Okay. Very good. Regarding the share repurchase, could you maybe speak to the Board's decision-making that led to the $750,000 size? Was this dictated by market factors like the limited trading volume and float? Or was this just purely the Board's assessment of excess cash after your operational needs? Sean MacDonald: Yes. I think obviously, we had some -- we do have cash on our balance sheet, and I think there's no better investment in Leatt. We do believe that there's still a lot of value potential in the stock price. We just felt that this would be a great investment actually for the company at the moment, considering some of the plans that we have in the pipeline moving forward. So the decision was taken to give some of that cash for those shareholders out there that would like some kind of an exit with the limited liquidity and it really just made sense in terms of the optics right now for us to reinvest back into Leatt and into the shareholders. So that's really why we took the decision. We felt that it was a good valuation opportunity right now. Christopher Muller: Okay. Understood. And then finally for me, it seems like there's quite a wide range of outlooks and forecasts being issued by bicycle brands this year and really across the outdoor recreation space. You've been in a strong financial position to reinvest in recent years when others have been pulling back. So I'm just wondering, today, when you're thinking about product expansion, marketing spend, pricing discipline, how does the competitive environment feel today relative to recent years? Sean MacDonald: Yes. I mean I think on the bicycle side, it's -- I mean, I think it's still tough for many bicycle brands. But I do feel that there's a huge amount of opportunity. So we are continuing to invest in product development, in research and development for new exciting products and absolutely in marketing. I think there's a huge amount of potential for you to reach a much wider group. We still have market share in many, many categories that are still in its infancy and we are doing solid numbers. So my reading is that participation is still strong across the board in terms of riding. And I think that's really what we are focusing on. We do believe that, I mean, riding is the future and off-road riding, which is where our focus is, has been very strong for us, continues to be strong. MTB is recovering quite nicely. MOTO is our most established category and market, and that's also growing on a year-to-date basis. So that's great to see. And of course, ADV has been fantastic. We're quite diversified now, of course, with these 3 different markets, different demographics that we're selling to. And I think that diversification is a strength. And of course, with NCD coming back, I think that's going to really have a positive impact on our results moving forward, Chris. Operator: We will move next with Aaron Gelband with Warren Street Capital. Aaron Gelband: I had one question on the direct business. So big -- last quarter was pretty good with 35% year-on-year growth, and then we accelerated to 60% year-on-year growth. You talked a little bit about digital marketing initiatives. But can you just give a little more color on what's going on to drive that big acceleration? Is it sustainable? Is it concentrated in any specific products? Or is it just a result of the digital marketing campaign? Any color on that would be very helpful. Sean MacDonald: Sure. I mean there's a couple of reasons. I mean, particularly in Q3, we actually launched a new web platform. We're using a new platform now, which has got a lot of capabilities in terms of consumer engagement and creating brand awareness across the Internet, and that's been pretty strong for us. And also, I think a lot of this is about focus, Aaron. We have a new digital department that we set up at the beginning of the year, and they are driven by consumer direct business. And that means this is targeted marketing. It's very specialized. There's a blend between, of course, reaching end consumers with targeted online campaigns and e-mail campaigns. And also, of course, the website is also the home of the brand. So there's fantastic content on there now. So I think it's really about focus. The new digital team is doing really, really well, exceeding our expectations in terms of growth. I think moving forward, direct-to-consumer business is going to be a more important area of our business just in terms of growth and also just in terms of contribution to overall revenues. And I think I'm talking primarily in the U.S. and in South Africa, where we have direct online channels. And I think it's -- as I said, of course, there's the selling opportunity, but there's also the marketing opportunity. I think it creates a lot of brand equity when you can actually target consumers. And it's been exciting to see how the demand has continued to surge online. It's really exciting to be able to see the return on investment when you do, do marketing campaigns that are targeted and to see that filtering through to your revenue. So we've got some specialist skills on board, and we pulled that all together now into a strong digital team that's very focused on the direct-to-consumer business. Of course, it's not only about the website. It's also about having customer service in the back end that can satisfy the needs of consumers when you are used to being a distribution business and traditionally, we've been in distribution and selling, of course, to dealers who might have been online or brick-and-mortar. In order to move over to the consumer space, especially with consumers these days that have got very high expectations in terms of service levels, we've had to invest in customer service, and we have a full customer service department now in the U.S. and also in South Africa to take care of consumers' direct needs. So it's a growing area. It's a focus area for us. We've been putting a lot of energy into it, and it's great to see the increase in demand. And we do expect this to be an important area for us going forward where we are expecting double-digit growth. Aaron Gelband: I'd also assume that the gross margins are higher on that. If this becomes a much meaningful piece of the business, would you expect that to have a positive impact on the company gross margins? Sean MacDonald: Absolutely. When you're selling direct, your margins are better. There are costs involved, obviously, in terms of the marketing. And there's a blend in terms of the margins because you're selling full price items, but when you have Black Friday and those kinds of events, of course, it's also an opportunity to turn some of your inventory into cash if it's maybe a little bit slower moving. We don't have a lot of that. But if it is a bit slower moving, it's an opportunity because you have margin available. So for sure, it should have a positive impact on margins moving forward. Aaron Gelband: Got it. And then one more question on -- so overall performance of the company, 18% growth, I think we'd be happy with that if that continues for sure. But there was a big kind of deceleration, especially in international, which had grown 79%, 74%, and then it dropped off to 17%. And so I think -- and you've been very positive on your comments for international ordering patterns, both last quarter and this quarter. And so maybe just to parse your language a little bit. I mean, when you talk about good international ordering patterns, are you just talking in an absolute sense? I mean, a big deceleration from 74% to 17% would -- it seems inconsistent with kind of saying that the ordering pattern is continuing to improve. But maybe you can just give some color on that. And maybe that just ties into Chris' question about kind of the timing of shipments. Sean MacDonald: Yes, sure. I mean I think when I talk about ordering patterns continuing to improve, I'm talking about like on an annual basis. I'm not talking about a 3-month period of a particular quarter. So when I look at the ordering patterns in general, there's a real strong improvement. So if you look at it on a year-to-date basis, and we've had fantastic growth in terms of ordering patterns, and I do expect that to continue. A little bit of it is timing, as I said. I don't think that our current ordering patterns at 17% is really a reflection of where we're at on the international side. And I think it will be good to also discuss this maybe when we get to the end of Q4 and then we can look back on the year and we can make a real solid assessment because that will take into account all of the seasonality and all of the shipping timing differences. We'll be able to see how the international distribution business has grown on a year-to-date basis at 31 December. Aaron Gelband: Got it. That's helpful. And just to be clear in your response, you said the ordering pattern was up 17%, but you meant that the shipping. Sean MacDonald: Shipping, sorry. The shipping, correct. I meant -- yes, correct. I meant the shipping, correct. So the shipping, which is obviously driven by the orders that we got actually probably a few quarters ago. So absolutely, it's the shipping. Operator: And this concludes our Q&A session. I will now turn the call over to Sean MacDonald for closing remarks. Sean MacDonald: Thank you all for joining us today. We look forward to our next call to review the results of the 2025 fourth quarter. Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Greetings, and welcome to HASI's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Aaron Chew, the Senior Vice President of Investor Relations. Aaron Chew: Thank you, operator, and good afternoon to everyone joining us today for HASI's Third Quarter 2025 Conference Call. Earlier this afternoon, HASI distributed a press release reporting our third quarter 2025 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those stated. Today's discussion also includes some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation. Joining us on the call today are Jeff Lipson, the company's President and CEO; as well as Chuck Melko, our Chief Financial Officer. And also available for Q&A are Susan Nickey, our Chief Client Officer; and Marc Pangburn, our Chief Revenue and Strategy Officer. To kick things off, I will turn it over to our President and CEO, Jeff Lipson. Jeff? Jeffrey Lipson: Thank you, Aaron, and thank you, everyone, for joining the call. Welcome to the HASI Q3 2025 Earnings Call. Before we discuss the prepared slides, I'd like to start the call today by reiterating 4 aspects of our business model and how they interact with recent market developments. One, the demand for energy continues to increase and virtually all forecasts expect this trend to continue. This demand will clearly result in greater supply, facilitating ongoing development by our clients, which in turn increases HASI's total addressable market. Therefore, the current underlying economic trends are a tailwind for our business. Additionally, if demand causes power curves to increase, our existing portfolio of investments will become increasingly more valuable. Two, the operating environment remains conducive to business-as-usual activities. Capital markets have experienced relatively low recent volatility, and our clients' pipelines continues to be active and growing. Therefore, the backdrop remains very supportive for expanding our investment volumes. Three, we continue to demonstrate that our business is able to achieve meaningful EPS growth in all interest rate environments. Since interest rates began to rise in 2022, we've been able to continue to grow our earnings with higher-yielding investments, prudent hedging strategies and opportunistic debt issuances. With 3 investment-grade ratings and our CCH1 co-investment vehicle, we have become even less exposed to changes in interest rates. If the yield curve steepens going forward, we do not expect any material impact on our profitability. And four, virtually all of our investment markets are currently providing attractive opportunities. Utility scale renewables and storage, distributed solar and storage, energy efficiency, renewable natural gas and transportation have all been active markets for us in 2025 and continue to be well represented in the pipeline. And we remain excited with the emergence of our pipeline of Next Frontier opportunities. In summary, these 4 items reinforce the framework of our successful business model, further evidenced by our outstanding results this quarter. We just completed the most profitable quarter in our history and closed the largest investment in our history as we continue to consistently achieve our goals and provide outstanding returns to our investors. Now let's turn to the slides, beginning on Slide 3 and highlight a few key metrics. Our adjusted earnings per share in Q3 was $0.80, the highest quarterly EPS we have ever reported. This result was driven by strong growth in all of our components of revenue, which Chuck will discuss in more detail. Adjusted recurring net investment income, the new financial measure we introduced last quarter is 27% higher year-to-date over last year. And our managed assets, which includes our portfolio as well as our partners' assets in CCH1 and the assets we have securitized off balance sheet, were up 15% year-over-year to $15 billion. And our year-to-date adjusted ROE also has experienced significant year-over-year growth, rising to 13.4%. We are reaffirming our guidance for 8% to 10% compound annual EPS growth through 2027 and noting that we expect to achieve roughly 10% adjusted EPS growth in 2025. As detailed on Slide 4, we continue to make progress in the key areas of value creation for our business: one, originating new investments; two, optimizing return on our existing assets; and three, managing our liabilities and lowering our cost of capital. First, in terms of new investments, as the box on the left indicates, both volumes and returns have been strong year-to-date. Not only did we close more than $650 million of new transactions in Q3 for a total of $1.5 billion through the first 3 quarters of 2025, but we closed on a $1.2 billion investment early in Q4 that has put us on a path to close more than $3 billion for the full year 2025, up more than 30% year-over-year. We will discuss this investment in greater detail later in the call. Importantly, it is not only volumes that have been elevated, but our returns as well, with new asset yield in Q3 greater than 10.5% for the sixth quarter in a row. Meanwhile, our pipeline remains above $6 billion, even after taking into account the large October transaction. Second, we do not simply create value originating investments, but also in how we optimize returns over the life of the investment. One example of this is the targeted asset rotation strategy we executed in 2024 through which we were able to monetize certain lower-yielding assets in our portfolio for a gain while generating cash that we were able to recycle into higher-yielding assets. In Q3 of this year, we refinanced the senior ABS debt within the SunStrong residential solar lease portfolio, resulting in significant paydown of our mezzanine debt investments and a meaningful cash distribution to the SunStrong equity owners, of which we are 50%. This distribution created significant earnings in the quarter as we began to monetize the increasingly valuable SunStrong platform. We have also maintained a strong risk return profile in our portfolio as evidenced by minimal annual realized loss rate of under 10 basis points. This low level of losses reinforces the predictability of our cash flow and our ability to effectively underwrite investment opportunities. And lastly, we maximize value in our business with our low-cost, diversified and efficient debt and capital platform. It's notable to highlight that even after refinancing a portion of our low-cost debt due in 2026 at today's higher market rates, the increase in our cost of debt was only 10 basis points at 5.9% in Q3. In addition, we opportunistically added $250 million in hedges in September that reduced the base rate risk for our next debt issuance. Turning to Slide 5. As I briefly mentioned a moment ago, we are excited to announce a new investment that closed in October but is significant enough to mention on our Q3 call. It is a $1.2 billion structured equity investment in a major component of what will be the largest clean energy infrastructure project in North America once completed in Q2 of next year. HASI's involvement in providing capital to this project is truly a milestone event for our company and a reflection of the transaction size we can now accommodate given our access to capital. Developed and managed by one of the world's largest developers and owners of clean energy and transmission infrastructure, the project has several components. Our specific investment is for 2.6 gigawatts of wind power supplied by the largest U.S. turbine manufacturer and backed by PPAs with a weighted average life of almost 15 years, including counterparties spanning energy majors, utilities, community electricity providers and universities. Consistent with our discussion last quarter, we are investing at a derisked stage as most of our funding will occur in the first half of 2026. The expected return on the investment is consistent with our typical return targets on recent utility scale investments. The total investment commitment is $1.2 billion. However, the net impact to HASI's balance sheet will be much lower due to the investment closing in CCH1, resulting in an initial proportional commitment of approximately $600 million. Subsequently, we may add back leverage to the investment, further reducing our long-term hold. As noted earlier, this is not included in our Q3 financials and will be considered a closed transaction in Q4 with the vast majority of funding expected in Q2 of 2026. Turning to Slide 6. Our pipeline remains above $6 billion, including a pro forma adjustment to remove the $1.2 billion project just discussed as other investment opportunities have replaced this amount in the pipeline. Our pipeline of new investments remains highly diversified with strong undercurrents of demand in each of our key end markets. Higher retail electricity rates are facilitating demand in our BTM asset classes, including not just rooftop solar, but importantly, energy efficiency as well. Meanwhile, residential solar leases are expected to gain market share from loans and cash sales following the expiration of the 25D ITC at year-end. And our business is largely focused on leases and serving this end market. In addition, the grid-connected end market is experiencing larger project sizes to accommodate the growth in U.S. power demand, clearly driven by data centers, but also domestic manufacturing and the expanding use cases of electrification in general. Likewise, demand underpinning our fuels, transport and nature end market remains strong with RNG facilities in construction or in development expected to double the current installed base in North America. And finally, our Next Frontier asset classes remain an exciting new opportunity. And with that, I will ask Chuck to discuss our financial results. Charles Melko: Thank you, Jeff. On Slide 7, we highlight our Q3 profitability. And as you can see, we had meaningful growth in many of our key metrics. Jeff already highlighted our record quarterly adjusted EPS of $0.80, and our year-to-date adjusted EPS is at $2.04, up 11% year-over-year. This growth is driven largely by our primary source of revenue, adjusted recurring net investment income, which grew year-over-year by 42% in the quarter and 27% year-to-date. We are growing the recurring earnings portion of our adjusted EPS, and our equity efficiency has also helped us increase our year-to-date adjusted ROE to 13.4% compared to 12.7% for the same period last year. This growth in our adjusted ROE is demonstrating the meaningful benefits from our CCH1 co-investment vehicle, which I will speak to in a few slides. One last point on our metrics. Our GAAP net investment income does not include the earnings from our equity investments. Therefore, the adjusted recurring NII will continue to be greater than our GAAP NII. Now that I have highlighted the key results for the quarter, some additional context is useful. Jeff mentioned our diversified business model earlier, and I will add that it is also versatile, where we can generate value in different ways, such as through recurring earnings from the underwritten returns on our investments and also optimization transactions where we capture additional value that is embedded in our portfolio, such as through project-level refinancing activities, which we saw this quarter. These optimization transactions may not occur every quarter, but we consistently identify these opportunities year after year. Now on to Slide 8. Through the first 3 quarters of this year, we have closed $1.5 billion of transactions, which is greater than the same period last year. And when incorporating the transaction that Jeff spoke to earlier, we are on track to meaningfully exceed last year's total closed transactions. While transaction closings on their own are not an indicator of profitable growth, if you take into account our ability to generate new balance sheet transaction yields at an attractive level above 10.5%, we're also setting the stage for continued growth in adjusted EPS and ROE. Even as interest rates and our own cost of debt have risen over the last couple of years, it is important to note that we have been able to maintain our margins through the increase in our new asset yields and our hedging program. We expect we will continue to maintain attractive margins as well in a declining interest rate environment given our approach to investment, funding and managing interest rate risk. Next on Slide 9, we are experiencing double-digit growth in our managed assets as well as our portfolio. They have grown 15% and 20%, respectively, from a year ago. This is the base of assets from which we generate our recurring income. As we have discussed previously, we are migrating to a business model that is less dependent on new equity issuance to generate earnings growth. And the factor in accomplishing this is our CCH1 co-investment vehicle. As of the end of Q3, CCH1 has completed funding of $1.2 billion of investments, leaving $1.4 billion of available capital for future investment with the potential to increase it to $1.8 billion with additional debt at the CCH1 level while keeping its leverage level below a debt-to-equity ratio of 0.5. Our portfolio yield is at 8.6%, up from 8.3% last quarter as we are starting to see the new asset investments with yields greater than 10.5% start to come through our portfolio. The portfolio yield is the largest contributor to the growth in our adjusted recurring net investment income that is illustrated on the next slide. On to Slide 10, we provide a buildup of our new financial measure that we introduced last quarter, adjusted recurring net investment income. We are now utilizing this metric in addition to our adjusted EPS to measure the profitability of our managed assets as a whole, inclusive of both the net investment income from our portfolio as well as the recurring fee income from the other assets we manage that are not on our balance sheet. Our year-to-date adjusted recurring net investment income of $269 million has grown 27%. This component of revenue is a consistent source of earnings generated from our existing managed assets. Turning to Slide 11. We highlight a few items that will contribute to managing our liquidity and liability structure and further reduce our cost of capital. Over the past couple of years, we have significantly broadened our sources of capital and between our bank facilities, commercial paper program and our investment-grade ratings, we have a capital platform that is well-positioned to fund our growth needs at an attractive cost. First to mention is a $250 million term loan that closed after quarter end that will provide another source of potential liquidity for the refinancing of our senior bonds due next year. As we reported last quarter, we retired a large portion of the upcoming maturity through a tender offer. With our current liquidity at $1.1 billion at the end of the quarter, this term loan and our access to the investment-grade debt market, we are well-positioned to retire the remaining notes outstanding. Next, in furtherance of our focus on managing our interest rate risk, we executed an additional $250 million of SOFR-based hedges related to anticipated debt issuances and now have hedged up to $1.4 billion of our future debt issuance. On to Slide 12. This slide is a good illustration of the changes we have made to the business over the past couple of years that is accelerating our growth and returns for shareholders. We have historically just provided the total adjusted ROE metric that is highlighted in the dark blue. And while it was steadily increasing over time, it is not painting the complete picture on where our business is headed. With the introduction of CCH1 last year and obtaining our investment-grade ratings, we have meaningfully changed the profile of our adjusted ROE for new transactions. It may take some time for the higher profitability from our incremental business to fully show up in our adjusted ROE given the previous transactions on our balance sheet. So we want to illustrate where our business is headed with the adjusted ROE from incremental business by period. As you can see with our current business model since the start of CCH1 early in 2024, our newer transactions are generating a higher adjusted ROE with year-to-date being 19.6%. We expect this trend to continue and even increase as CCH1 investments are funded from debt at CCH1. Over time, you will see our adjusted ROE increase to the higher ROE that we are generating from our new business. I will now turn the call back to Jeff for closing remarks. Jeffrey Lipson: Thanks, Chuck. Turning to Slide 13, we display our sustainability and impact highlights, noting our cumulative carbon count and water count numbers reflect the significant impact of our investment strategy. We also remain very proud of our recognition, our targeted advocacy activities and the generosity of the HASI Foundation. Concluding on Page 14. To summarize the themes of this call, we just completed the most profitable quarter in the company's history, and we expect our investment volumes to exceed last year's by more than 30%. Economic trends remain favorable to our continued profitable growth. This success is the result of a resilient business model that focuses on asset level investing with long-term programmatic partners. Our approach also relies on disciplined underwriting and reasonable assumptions, and the model is further enhanced by a diversified and prudent approach to obtaining access to attractive sources of capital. Combining all of these elements with a talented and dedicated team results in consistent success despite periodic market volatility. Thank you, as always, to our talented team for this outstanding quarter. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Jon Windham from UBS. Jonathan Windham: Great result, by the way. I'll be very specific. It sounds a lot like you're describing the SunZia project on Pattern Energy in New Mexico. Is there a reason you're not naming the project? That's sort of a quick question. And then any color you can talk about what sort of equity stake and the economics of it would be interesting. Jeffrey Lipson: Thanks, Jon. I appreciate the question. It is the SunZia project and as you described. And -- in terms of returns, I think we talked about it being consistent with returns on recent other transactions we've had in our grid-connected portfolio. So, I think that's probably the best way we could describe the return. And it is a preferred equity investment. So, it has some structure to it. It's not a common equity investment. Jonathan Windham: Right. This is similar to other wind investments you've made in the past, you sort of get paid first. That's on the equity stack. Jeffrey Lipson: Yes. That's correct. Operator: The next question comes from Chris Denginos from RBC. Christopher Dendrinos: Echoing Jon's comments on the solid quarter. I wanted to ask about the pipeline. And I think you mentioned $6 billion, so flat quarter-on-quarter, but you've got -- I guess, if you adjust in the $1.2 billion transaction in October, it'd be up significantly. So can you just maybe talk about the pipeline here? It looks like it's strengthened quite a bit quarter-on-quarter. And just curious what you're kind of seeing from that perspective, if there's any sort of demand pull forward going on as a result of? Jeffrey Lipson: Sure, Chris. I would say, as we discussed in the prepared remarks, we did replace the grid-connected pipeline, in particular, with enough new volume such that it didn't go down after this $1.2 billion transaction that we described. Beyond that, our pipeline disclosure is, of course, not precise. We say greater than $6 billion. So I know it's hard from the outside looking in to tell if it actually went up or down in the quarter. But it's certainly at above $6 billion at a level that we're comfortable we'll have enough to invest in, in 2026 to achieve our goals. And we're not seeing too much in the way of pull forward. I would describe what we're seeing as ordinary course. And as we talked about last quarter, folks executing on their pipeline, meaning our clients, everything they're working on now is grandfathered or safe harbor, but I don't really think this is the result of any kind of pull-through. Operator: The next question comes from Noah Kaye from Oppenheimer. Noah Kaye: I want to ask sort of a broader question around investments resulting from this announcement today, the $1.2 billion. We've historically thought about the business as making smaller investments spread across a large number of projects. This is a pretty big one. But of course, as you said, energy projects are getting bigger. You've talked about data centers as the Next Frontier asset class and they're getting just on the energy infrastructure, this type of investment. So, I guess, how should we think about this investment and what it signals for your appetite to take on larger single projects going forward? Jeffrey Lipson: Well, it's a good question, Noah. We've built the business on some small and modest-sized transactions over time, but we've always, at least after -- since 2020, supplemented that with some larger transactions as well. I think this transaction is a reflection in many ways of our access to capital through both being investment grade and our CCH1 relationship. The amount of capital we can bring to the table is more significant. So, we've become a player in these larger transactions. And when it makes sense, we'll do that. We're, of course, going to manage our risk accordingly. I talked about half of this being in CCH1 and some other pathways to a lower long-term hold level. So, we're certainly managing our risk. But in terms of your broader question of how we think about the business, I think you should think about the business as we're being active in both smaller transactions where we've historically found great value and continue to find opportunities, but also supplemented by some periodic larger transactions where it makes sense for us. And so, I think this is in many ways -- I use the word milestone, but it's we graduating into access to some of these larger transactions, which are going to be more frequent, as you mentioned, because of data centers and the grid-connected development focusing on larger projects. Noah Kaye: It is a milestone, and we want to recognize that. A housekeeping item, just the ABS, the SunStrong ABS refinancing. Can you kind of quantify what the benefit was to the quarter in that because the ROE expansion this quarter was pretty noticeable? Jeffrey Lipson: Sure. And I'm going to ask Chuck to do that. But before I do that, Noah, I'm going to clarify a little bit a few items around SunStrong. I expected us to get a question on it, and I don't want there to be any confusion about what this distribution was. So let me just answer that a little more broadly and say we often refer to SunStrong and folks talking about us refer to SunStrong in a singular capacity, but we actually own 50% of 2 separate entities. One of them is SunStrong Capital Holdings, which is an AssetCo that primarily owns solar leases, most of which have been securitized. And the distribution we received this quarter was the result of refinancing the ABS debt, which due to de-levering and the very strong performance of the underlying leases resulted in essentially a cash out refi. So, there was meaningful cash distribution to the equity owners. And going forward, as an equity owner in SunStrong Capital Holdings, we'll just get the normal distributions from the waterfall of the securitized assets. The refi was a bit of a onetime. Now separate from that, we own 50% of SunStrong Management or SSM, as we call it, which is truly an operating business that provides servicing to consumer and commercial loans and leases, including the legacy SunPower and Sunnova portfolios. Now SSM is an operating business. It has its own executive team. It's performing very well. It has a business plan, which includes ongoing growth in the platform and expansion ideas. And our accounting for our SSM investment is as an equity method investment that we hold at fair value. So to the extent the underlying value of SSM increases, that would positively impact HASI's earnings. So I just wanted to create that clarification of when we say SunStrong, what we actually mean. This distribution that we're talking about in the third quarter was from SunStrong Capital Holdings. So sorry for the deviation to your actual question, I'm going to defer to Chuck. Charles Melko: Noah, so our investment in SunStrong consisted of both mezzanine level loans as well as a small amount of equity. The total proceeds from the ABS that we received was around $240 million. And the composition of that was roughly about $200 million of it went to pay off our mezzanine loans. of which we're redeploying back into additional accretive investments. But then we also -- the other remaining $40 million was related to our equity, of which we did have some small investment, like I said. And of that $40 million that we received, roughly about $24 million of it was a gain in excess of our investment. So the impact to the quarter was $24 million. Operator: The next question comes from Davis Sunderland from Baird. Davis Sunderland: Congrats on an awesome quarter. Just one for me. I wanted to ask just how much the tax credit changes from Big Beautiful Bill have maybe impacted the types of investments you're seeing by asset class? And I guess the root of my question is just wondering if you've seen any opportunities in the last couple of months in discussions to step into a potential hole in the cap stack or any other ways that there have been puts or takes. Jeffrey Lipson: Sure. Thanks, Davis. I'm going to ask Susan to answer that one. Susan Nickey: I think at this point, with the extension of the tax credits for wind and solar, by and large, for 5 years with safe harbor and started construction and storage and some of the other credits that extend longer, I think we're still seeing the traditional combination of tax equity structures and transfer structures to dominate the market. So, we're still -- we still have this longer transition period before we expect to see a change in the capital stack to not include tax credits. Operator: The next question comes from Maheep Mandloi from Mizuho. John Hurley: Jack on for Maheep here. Congrats on the quarter. A lot of third-party ownership have talked about prepaid leases. Is that a kind of product that would interest you guys? And would you see similar yields as traditional leases? Jeffrey Lipson: Sure. Thanks, Jack. I'm going to ask Marc to answer that one. Marc T. Pangburn: Jack, that's something that we could certainly take a look at but haven't been presented any opportunities yet. So we'll have to defer on that until the future. Operator: The next question comes from Vikram Bagri from Citibank. Unknown Analyst: It's Ted on for Vik. Just looking at the principal collections, it looks like it was a larger quarter with about $382 million returns. Could you just give some insight into what the maturity profile and roll-off schedule of the existing portfolio looks like? Should we expect the pace of that to potentially increase as you approach the new wind investment? Charles Melko: Yes. This is Chuck. So, the $300 million number that you're seeing there, the biggest driver of why that's a little bit higher has to do with the SunStrong refinancing that I just mentioned. When I said that roughly about $200 million of the proceeds went to pay down the mezz loans that came through that line. So that was a little bit of an acceleration of normal amort profile that you'll see from our portfolio. But the way I generally think of it is that the lives of our assets, weighted average life is around 10 years or so. So you could expect looking at our portfolio that our amort in any given period will mirror that. Operator: [Operator Instructions] The next question comes from Mark Strouse from JPMorgan. Michael Fairbanks: This is Michael Fairbanks on for Mark. Just wondering if you could talk about how this large transaction and the $3 billion of volumes this year might impact the EPS growth algorithm in '26 and beyond. I know you reaffirmed the 8% to 10% range, but should we be thinking about a possible step-up in '26 from these volumes? Jeffrey Lipson: Thanks, Michael. Good question. Our cadence has consistently been to talk about guidance in February, and I think we're going to stick to that. So we're working diligently right now on our business plan with our Board. And I think we'll have more to say about '26 and '27 in February. Michael Fairbanks: Okay. Great. And then maybe just for a follow-up. It looks like SunZia was excluded from the greater than $6 billion pipeline, which makes sense. Just wondering if it was included in that number last quarter? Jeffrey Lipson: It was. It was in last quarter's pipeline. That's correct. Operator: The next question is a follow-up question from Chris Dendrinos from RBC. Christopher Dendrinos: I just wanted to follow up here. And I think you mentioned during your prepared remarks, the really low rate of bad debt. I think bp Lightsource or subsidiary had reported a default with one of their suppliers. And I'm curious, I think you all have worked with them in the past. Is there anything related to that, that would impact you all? Jeffrey Lipson: Thanks, Chris. No, there wouldn't be. We do work with bp Lightsource. But again, we're monetizing project cash flows. And the challenge that you discussed has no impact on the project in which we're invested. Operator: Thank you very much. There are no further questions at this time. Ladies and gentlemen, that does conclude today's conference for today. You may now disconnect your lines at this time, and thank you very much for your participation.
Operator: Good morning, ladies and gentlemen, and welcome to the Target Hospitality Third Quarter 2025 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the call over to Mr. Mark Schuck. Please go ahead. Mark Schuck: Thank you. Good morning, everyone, and welcome to Target Hospitality's Third Quarter 2025 Earnings Call. The press release we issued this morning, outlining our third quarter results can be found in the Investors section of our website. In addition, a replay of this call will be archived on our website for a limited time. Please note the cautionary language regarding forward-looking statements contained in the press release. This same language applies to statements made on today's conference call. This call will contain time-sensitive information as well as forward-looking statements, which are only accurate as of today, November 6, 2025. Target Hospitality expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date, except as required by applicable law. For a complete list of risks and uncertainties that may affect future performance, please refer to Target Hospitality's periodic filings with the SEC. We will discuss non-GAAP financial measures on today's call. Please refer to the tables in our earnings release posted in the Investors section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures. Leading the call today will be Brad Archer, President and Chief Executive Officer; followed by Jason Vlacich, Chief Financial Officer and Chief Accounting Officer. After their prepared remarks, we will open the call for questions. I'll now turn the call over to our Chief Executive Officer, Brad Archer. James Archer: Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. We continue to build on the progress we've made in advancing our strategic growth initiatives, which focus on expanding and diversifying Target's business portfolio. This focus has led to notable operational achievements for 2025, including multiple long-term contract awards across various end markets. Since the second quarter, we have added over $55 million in committed revenue contracts, bringing the total value of new multiyear contract awards announced in 2025 to more than $455 million. These contracts accomplish multiple elements of our growth objectives by strengthening Target's business portfolio and expanding our reach in new end markets. Target's ability to deliver highly customized solutions that meet specific customer needs highlights our unique value proposition and has opened new growth opportunities in rapidly expanding markets. Strong long-term growth trends and sustained momentum reinforce these opportunities, including the multitrillion dollar investment cycle in data center and AI infrastructure, power generation and critical mineral development. The strengthening market fundamentals have laid the groundwork for a robust and expanding growth pipeline, offering distinct opportunities to continue advancing our strategic growth initiatives. Turning to our segments and specific growth opportunities. Our HFS segment continues to support our world-class customers evolving labor allocation needs by delivering premium services through our extensive network. Target's unique vertically integrated operating model, combined with the scale and efficiencies of our HFS network allow us to support our customers throughout business cycles. Additionally, these attributes continue to support customer renewal rates exceeding 90%, with the average existing customer relationship exceeding 5 years. This proven operating model is key to Target's success, and has served as a blueprint for potential new customers, illustrating the benefit and distinct value propositions of our vertically integrated accommodations platform. These distinctive capabilities and highly customizable solutions have supported multiple contract awards in our WHS segment this year. In February, we announced the Workforce Hub Contract to support the development of critical minerals in Nevada. Construction began this contract has been expanded several times to support community improvement and contract modifications, resulting in a 19% increase from the original contract value. These enhancements highlight the importance of this community to the project's success and demonstrate how Target's operating capabilities enable us to deliver tailored solutions that meet specific customer needs. These unique capabilities and customizable solutions supported the data center community contract we announced in August. We have completed the initial construction mobilization of the 250-bed community and initial occupancy is beginning to increase. As a reminder, this community has the potential to expand and accommodate up to 1,500 individuals, a sixfold increase from the initial community. Our customers' growth plans are accelerating, driven by rapidly growing demand for AI infrastructure. As a result, we are finalizing the first community expansion to keep pace with anticipated customer activity levels. We expect this expansion to add several hundred rooms to the community and plan to provide additional details soon. With increasing demand for AI infrastructure, the pace of data center development and capital investment is accelerating. To meet this demand, estimates suggest that over $7 trillion in global capital investment will be required over the next 5 years as large-scale data center infrastructure becomes increasingly remote, a significant challenge in expanding these projects is attracting and retaining the skilled labor essential to their success. Target's unique capabilities in creating highly customized, all-inclusive communities address this challenge and provide integrated solutions for our customer-specific needs. Aligned with these attributes, Target recently launched its Target Hyper/Scale brand, highlighting our ability to provide a central hospitality solutions supporting multiple facets of the data center value chain. This focused initiative showcases Target's unique ability to build communities that enable quick time-to-market solutions that can rapidly scale alongside customers' dynamic workforce housing needs. These factors have created the most significant commercial growth pipeline we have ever seen. Our reputation as the leading provider of remote hospitality solutions uniquely positions Target to support this rapidly expanding end market demand. We are excited about these growth opportunities, which we believe establish a vital long-term commercial vertical capable of accelerating Target's strategic growth objectives. Now moving to the Government segment. We completed the planned ramp-up of our Dilley, Texas assets in September, and the community is now fully operational and capable of supporting up to 2,400 individuals. The successful reopening of this facility highlights the importance of our decision to keep this community ready to reopen alongside our partner. We continue to actively remarket our West Texas asset and remain confident in this community's ability to provide a vital solution aligned with the government's policy goals to expand available bed capacity. In summary, we have made significant progress toward our strategic goals by expanding and diversified in Target's business portfolio. We are encouraged by the strongest and most active growth pipeline we have ever seen, supported by solid market fundamentals and long-term growth trends. We are well positioned as we pursue these opportunities, which offer multiple pathways to expand our business portfolio and continue advancing our strategic objectives. I will now hand the call over to Jason to discuss our financial results in more detail. Jason Vlacich: Thank you, Brad. Third quarter total revenue was approximately $99 million, with adjusted EBITDA of approximately $22 million. Our government segment generated approximately $24 million in revenue during the quarter. The declines compared to the previous year were mainly due to the termination of the PCC Contract partially offset by the reactivation of our Dilley, Texas assets. Additionally, revenue for the quarter included approximately $11.8 million in reimbursements for certain closeout costs related to the PCC Contract termination. We do not expect any further payments related to the PCC Contract in future periods. We completed the planned ramp-up of the Dilley community in September, and it is now fully operational. As a result, subsequent quarters will reflect revenue contributions aligned with the entire 2,400-bed community. As a reminder, this contract is based on fixed monthly revenue regardless of occupancy. It is projected to generate approximately $30 million in revenue in 2025 with over $246 million over its expected 5-year term. Excluding the impact of the PCC Contract closeout payment, we anticipate increased contributions from the government segment in the coming quarters following completion of the Dilley ramp-up. Regarding our West Texas assets. As a reminder, we have decided to keep these assets in a ready state while actively remarketing them. This approach, similar to our strategy with the Dilley assets, will involve carrying costs of approximately $2 million to $3 million per quarter until a new contract is potentially awarded. Turning to our HFS and all other segments. These segments generated approximately $39 million in quarterly revenue. Target's customers continue to value our premium service offerings and extensive network scale. These qualities, combined with Target's operational efficiencies enable us to provide unmatched solutions across our network in a competitive market. Additionally, we remain focused on finding opportunities to improve margin contribution while meeting customer demand. Moving on to the expanding Workforce Hospitality Solutions segment, or WHS. This segment, which includes our Workforce Hub Contract and the data center contract generated approximately $37 million in revenue in the third quarter, primarily from construction activity related to the Workforce Hub contract. As announced today, the importance of the Workforce Hub contract led to additional modifications and scope expansion during the third quarter. The increased scope of the contract raises the total contract value to approximately $166 million, reflecting a 19% increase from the original contract value. These community improvements will lead to more construction activity, which we expect to be substantially completed by the end of 2025. However, this will shift some previously forecasted services revenue into 2026 and slightly impact margins as construction revenue has a lower contribution profile. As we finish construction, we expect increased services revenue to begin in 2026 and continue through 2027. The scope expansion and contract modifications highlight our ability to deliver customized and tailored solutions for our customers, creating long-term revenue streams that support large-scale remote operations. Regarding the data center contract, we are pleased with the progress of this community and have completed the construction and mobilization of the initial 250-bed facility. As a reminder, this contract is expected to generate approximately $43 million in committed minimum revenue over its initial term through September 2027, with approximately $5 million of revenue in 2025. As we discussed, we are finalizing the first community expansion to support our customers' growing demand. This expansion will have limited impacts in 2025, but will increase revenue in future years. We plan to share additional details once the expansion terms are finalized. Recurring corporate expenses for the quarter were approximately $11 million. As a matter of practice, we continually look for opportunities to optimize our cost structure and enhance margin contributions. Total capital spending for the quarter was approximately $29 million with net capital spending of approximately $15 million. Net capital spending reflects the upfront customer payments we received for the construction and mobilization of the initial 250-bed data center community. Target's strong business fundamentals and durable operating model supported robust cash conversion, resulting in over $68 million of cash flows from operations and $61 million of discretionary cash flow for the 9 months ended September 30, 2025. These fundamentals are reflected in the strength of our balance sheet and our ability to maintain significant financial flexibility through prudent capital management. We ended the quarter with $30 million in cash and 0 net debt resulting in total available liquidity of approximately $205 million. This strong liquidity position further enhances our financial flexibility and positions Target to continue executing its strategic growth initiatives. This momentum and positive operating environment support our reaffirmed 2025 outlook, which includes total revenue of $310 million to $320 million and adjusted EBITDA of $50 million to $60 million. Target is well positioned with a flexible operating model and an optimized balance sheet as we continue to evaluate a robust growth pipeline, which we believe offers the greatest opportunity to accelerate value creation for our shareholders. Most importantly, as we pursue these opportunities, we will remain focused on maintaining the strong financial profile we've built while maximizing margin contribution through our efficient operating structure. With that, I will hand it back to Brad for closing remarks. James Archer: Thanks, Jason. We continue to make significant progress on our strategic growth initiatives to expand and diversify our business portfolio. This year, we have announced long-term contracts within our existing segment and expanded our reach into new end markets, supporting the unprecedented surge in AI infrastructure and critical mineral investment. These achievements have led to over $455 million in new multiyear contracts in 2025. Additionally, we are in advanced discussions on other opportunities to further expand our contract portfolio, supporting AI infrastructure development. We remain focused on maintaining this momentum as we evaluate the strongest and most active growth pipeline we have ever seen, driven primarily by the extraordinary increase in data center and AI infrastructure investment. As market fundamentals and demand strengthen, we are actively exploring opportunities encompassing over 15,000 beds, underscoring the depth of demand in this end market. Target's unique capabilities position us to become an essential partner providing critical solutions vital to the success of this rapidly expanding marketplace. We are excited about these opportunities and believe they offer multiple ways to further our strategic goals and accelerate value creation for our shareholders. Thank you for joining us on the call today. And once again, we appreciate your interest in Target Hospitality. We will now open the call for questions. Operator: [Operator Instructions] And your first question comes from Scott Schneeberger from Oppenheimer. Scott Schneeberger: I guess, first question would be on repurposing of the Pecos, West Texas assets. Could you give us an update, please, on what you're hearing with government customers? And if there are other customers with whom you are speaking, please share perhaps some insight to the extent you would on the potential repurposing of those -- of that asset? James Archer: Scott, this is Brad. Yes, let me just touch quickly on the government and then give you some color around the assets kind of in West Texas. But really on the government, there's no new developments from our last call. We continue to have active dialogue with the government on the West Texas assets. Look, we believe these assets provide a solution aligned with the government's objective and their sentiments have not changed around the use of this equipment. With that said, let me touch on the Permian Basin, as you suggested, and really West Texas in general. As we are in discussions on several large data center projects as well as the large-scale power projects, that would energize them. Several projects in that area have been announced already, and we expect several more to make final investment decisions very soon with others in the pipeline that we're talking to. The capital spend in this area will be large. It's very big. And it will require many thousands of skilled workers coming into these areas. I say all of this to tell you, there is no other company in our industry, that is better positioned to take advantage of this unprecedented spend we're beginning to see in West Texas. The opportunity set in West Texas maximizes our chances to put underutilized or idle assets back on lease for long-term projects. And look, I would tell you, I have very little doubt. The majority of the growth you will see in West Texas will come from data centers in the large-scale power projects that are required to energize them. This doesn't mean that we will not try to take care of the government as well. But as you are well aware, and we've talked about this many times over the years, our assets can be repurposed across many industries. And fortunately, for us today, it's a good problem to have. There are multiple paths to maximizing our assets and utilization other than just the government, right? And that pipeline continues to build. And again, fortunately, a lot of this work sets right in the Permian basin. Scott Schneeberger: Great. I appreciate that. Following up on that, a question for you and then probably one for Jason, thematically on that segue. The Target Hyper/Scale brand, could you speak to what you're doing there as far as kind of putting a brand on your initiative there, how you're going forth with that marketing approach? And Brad, that would be for you. And then, Jason, just on that theme, could you please speak to -- just the revenue and EBITDA run rate in the third quarter, what's expected for fourth quarter on the data center contract and maybe how you think about that run rate in 2026? James Archer: Yes. So Scott, let me take the Target Hyper/Scale kind of question and why we did it. Look, the unprecedented capital spend in this industry just across the U.S. and not just Texas, we feel requires a more focused and dedicated approach. We spent 2 years really researching this opportunity, the markets. We've hired several new people that are dedicated to this effort, that have a background in the data center world. And just based on the scale of the opportunity that's in front of us and that we see really long term. We thought it was right to really have its own brand and focus there on the hyperscalers, the GCs that are there. This is a different group that are now being forced to move remote, right? A lot of these over the years have built in big cities. Most of them now are being built remote. So the education there takes time because they've never had to use facilities like us that they're being forced to look at today. So again, we think that branding fits within that and who you're dealing with is different than we've ever dealt with in the past. So we think that branding -- it's been well received by our customers and potential customers, and we think that will continue to be the case. Jason Vlacich: And I think on the second question regarding the -- I think you said the data center contract run rates and revenue and adjusted EBITDA. So we anticipate on that contract to recognize about $5 million of revenue this year. I would say from a run rate standpoint, it's more forward-looking beyond this year. Approximately, I would say, the balance of that contract, which is $43 million less than $5 million will be relatively evenly split between 2026 and 2027. The margin profile on that is very similar to Dilley because it's a lease and services agreement where we own the assets and we operate them, and it's exclusively for one customer. So as a matter of fact, a lot of the opportunities that we're looking at in our pipeline are very similar to that type of a margin profile that we're experiencing at Dilley. Now Dilley, from a run rate standpoint, you'll see will come to life in Q4. But essentially, it's approximately $50 million a year on the full 2,400-bed community at a margin profile very similar to the previous contract. Operator: And your next question comes from Greg Gibas. Gregory Gibas: Congrats on the results. I wanted to ask how maybe does your existing data center community contract compared to the other opportunities you're in advanced discussions with? From, I guess, a high level, how would you say it kind of stacks up to the relative scope and size of the opportunities that you're seeing? James Archer: Yes. And just to kind of across the board, I would tell you the scope of these are on an average well above 1,000 rooms that we're looking at if you're talking size, right? They go into these areas for 5, 6, 7, 8 years, they continue to scale up, it doesn't start like 1,000. It's very similar to how we're building this first contract. 250 and then we're looking to continually increase that. This next increase will -- we think, will be several hundred beds, right, followed on by more increases until they reach capacity on the construction side. And then it kind of levels out for quite a while on that. But that's very similar to the buildup. Now look, some of these are a little smaller, and some of them are much bigger. It just depends on what they're doing. What we're seeing today is a lot of the -- not only are we dealing with the data center piece, we're dealing with the power piece as well, which just adds more of a need for rooms, right? Gregory Gibas: Got it. That's helpful. I appreciate that. And maybe for Jason, to dive into kind of the implications of guidance. Could you maybe speak to the quarter-to-quarter dynamics or expectations implied there? You already mentioned the data center contract and $5 million expected this year. But anything else as I think about Q4 versus Q3 from a modeling perspective? Jason Vlacich: Yes. I think Q4, you're going to see the full ramp-up for the Dilley contract, right, which as I said, is annualized $50 million a year in revenue, approximately 40% to 50% margin is what you could anticipate there, divide it up in a quarterly amount for Q4. The item that you're not going to see recur is the $11.8 million that we recognized for the PCC closeout payment. That's kind of the biggest delta between Q3 and Q4 is going to be that combined with now we're fully ramped up on Dilley. And I think everything else will be relatively steady state. Gregory Gibas: Great. That's helpful. And if I could, I wanted to ask, given you were named on that $10 billion, WEXMAC DOD award. Wondering if there's anything you could share related to, I guess, how you could serve their efforts and then maybe what level of capacity you're positioned to provide? Jason Vlacich: Could you repeat that again? We didn't quite get all of that. Gregory Gibas: Yes, sorry. Just given you were named on that $10 billion WEXMAC DOD award, wondering if there's anything you could share related to how you can serve their efforts and maybe what level of capacity you're positioned to provide? Jason Vlacich: Yes. Look, first, we don't know exactly what's going to come out on those bids, but we're positioned there, right? We're on the contract vehicle, which was the first step. We'll see what comes out. And if it works for us, we'll definitely go after it, right? If we have available assets or we can structure it another way, we will take a look at that if it fits us. But we first wanted to get on the contract vehicle and then take a look at any bids that come from that. Operator: And your next question comes from [ Rajiv Sharma ]. Unknown Analyst: This is Raj. I wanted to ask about the workforce EBITDA. What can we -- how much of a shift in EBITDA can we see -- can we expect from this year to the next year? And also, could you talk about the community enhancements, the detail around that? Does that entail higher bed pricing or new service modules or client-funded CapEx? Jason Vlacich: Yes. So I'll take the first one right off the bat. So the community enhancements are not going to increase the number of expected beds. We're still going to be around 2,000 beds. So it doesn't impact any of the economics around the services piece that will largely kick in beginning next year. It's strictly related to the construction, the majority of that, we anticipate to be recognized this year as we hopefully have the construction substantially complete by the end of this year. I'll stop there and see if there's any other follow-up on that. Otherwise... Unknown Analyst: Go ahead. Yes, I'm sorry, go ahead. Yes. No, I wanted to understand the community enhancements, what does it entail? Jason Vlacich: Well, it doesn't entail building out more beds, and it certainly doesn't increase the economics on the services piece. The services piece, which is the balance of the contract that's roughly $75 million or so that will start to kick in next year through 2027. I would look at that as relatively evenly split between the 2 years at a margin profile closer to 30% on the services piece going forward as opposed to the construction piece where our margin profile is closer to 20% to 25%. Unknown Analyst: Got it. And then did I hear it right? So the Dilley facility is fully ramped now to 2,400 beds. Is that -- and the ramp of steady-state utilization, that is happening in Q4. Jason Vlacich: Yes. So we completed the ramp-up at the beginning of September, and you'll see the full quarterly economics on the 2,400 beds in Q4. Unknown Analyst: Right. And then just on the Pecos the PCC, any active RFPs or renewal discussions you are engaged in that could replace or supplement that? Jason Vlacich: Yes. As I mentioned earlier on the call, lots of activity in the Permian Basin, West Texas, right? So we have multiple paths there to utilize that equipment other than just the government on that for all of our equipment. And look, to be clear, we're already utilizing some of our existing assets for the first data center. And we expect to use more of those assets in the future. We've always been very good. Look first, we're going to utilize our existing assets, right? We want to drive utilization and put those back to work. So that's our first look all the time. And we've been very good about that, and we'll continue to do that. Unknown Analyst: Okay. Great. And then just lastly, can you elaborate on the Target, the Hyper/Scale? How does that differentiate from the core workforce? And what type of clients or geographies are you targeting first? James Archer: Yes. And again, lots of focus on the data center, right, huge spend. We brought in some, if you will, specialists, folks that have worked in the data center business for many years as well. So we built a team up around this. We thought it needed more focus starting to prove that. That's a good decision for us. It's been well received in the industry. When you talk about the client, a lot of the clients that we're talking to today have never been where they've needed -- where they work remote, if you will. And now they realize, hey, we're working remote. We need this. It's a bigger education process. It is a little bit different of a customer as well than, if you will, the oil and gas or your industrial customer or your mining customer. They've just never done this. So -- it's more about -- I wouldn't say a different type of quality, kind of that works across all industries, but it's definitely a bigger education process. And it is a little bit different customer set than we've ever dealt with in the past in a good way, right? They're very receptive. They want to take care of their employees like our other customers do. And the great thing is they've got great counterparties on the other side of these contracts that we're working on. And their goal is to get this done on time, right? So they don't mind, again, spending the money, getting the rooms close to location, and it's all about safety and kind of derisking their project for them. Mark Schuck: Yes. Raj, this is Mark. Just to kind of put a fine point. I think you asked, too, if there was any differentiation around the Hyper/Scale brand. And look, to be clear, it fits squarely in Target's core competencies, as Brad described, it is just really an intentional focus on the customers and the applications that Brad described. James Archer: Yes, buildings are the same, right? Like our same fleet that is being used for HFS can be used for the data centers as well, and we're doing that today. So that doesn't change to Mark's point. Unknown Analyst: Congratulations. Operator: [Operator Instructions] And your next question comes from Stephen Gengaro. Stephen Gengaro: So a couple for me, and I'm sorry if I missed any of this. I missed the beginning of the call. But I think going into next year, there's about 6,000 idle beds. I think that's roughly the right number. Can you -- can you talk about given what's going on with the government shutdown and the potential timing for new awards. Can you talk about any color on kind of the timing on some of these contracts, both within the government and outside the government and how they may come together as we start thinking about how '26 starts to unfold? Jason Vlacich: Well, I would just say on the beds, we have about 8,000 available beds going into next year, right? We've utilized some of those to build out the initial 250-bed data center community. In terms of timing, very difficult to nail down exact timing. But in terms of the data center opportunities, we're already in advanced discussions on expanding that contract. As a reminder, we said at the forefront of the call, and also in our announcement, the land base can accommodate up to 1,500 beds. That's obviously going to be driven by customer demand. But again, we're already in advanced discussions on increasing that bed count from 250 to several hundred more in terms of the opportunities. I would say the pipeline, and Brad can certainly elaborate. It's growing in the area of data centers, the government we talked about, the opportunity set there. There's still a high degree of interest. The West Texas assets are still on the acquisition list for the government, obviously, the administrative process is something you can't exactly nail down from a timing standpoint in terms of approvals and when a contract award might come. But we are keeping those assets in a ready state. We continue to incur the cost to do that of $2 million to $3 million a quarter, because there continues to be a high degree of interest, but the timing is a little difficult to nail down. James Archer: Yes. Stephen, if you missed the first part of the call, one thing I talked about on another question, was just -- there's multiple paths here for us to maximize our assets and utilization other than the government in the Permian Basin, while we still expect to take care of the government, and they're very interested in this facility, the demand, as you know, covering the Permian is increasing a lot, right, for data centers and the large-scale power projects. Several have been announced, several more in FID that we think gets announced. Some that we have NDAs signed with that haven't been announced that we think comes along as well. So we think we sit in a really good spot in the -- especially in the Permian and West Texas in general to increase utilization throughout our units that are sitting idle or underutilized. So again, it's not a one-legged stool here just on government. And I think fortunately for us, we sit in a really great position to act up on some of these projects. Stephen Gengaro: Is there -- so when we think about like the availability of your capacity and when we think about the data center growth and what's going on in some of the critical minerals side, and obviously the government, is there any urgency from any of those customer bases as it pertains to a concern about lack of capacity in -- if they don't contract assets in the near term? James Archer: 100%. When you look at how -- we'll just say the data centers are built, you'll see one large one being built and then pretty quickly behind that, they cluster around each other, right? So they definitely get -- there's a lack of qualified skills out there, whether that's electric or that's mechanical or whatever. And they're fighting a lot of times for that same person, right? So they get signing on equipment quicker than the next guy with -- because there's limited capacity out there, right? It can help derisk their project. But the answer is absolutely, yes. And look, that fear, if you will, is well founded on their part. There's not a lot of excess capacity out there. And every day, there's new projects that are being announced, which just continue to increase that. Stephen Gengaro: Yes. That's helpful because I hear clearly on the power gen side, and I was just curious if that urgency and sort of filtered down to take your business from at least part of the customer base. James Archer: Absolutely. Stephen Gengaro: Great. And then just the final question I had was the economics of the different pieces, it sounds like the data center side from our prior conversations is kind of in a pretty similar to Dilley, like should we expect kind of those similar type economics as other opportunities surface? Jason Vlacich: Yes. I mean I would say a lot of the opportunities we're looking at in our pipeline have economics from a margin profile standpoint, very similar to Dilley. A lot of these are take-or-pay assets that we own and will operate exclusively for the customer. So those economics will tend to be very similar to the Dilley economics. Stephen Gengaro: And actually on that -- I'm sorry, just one quick one. I think I know the answer to this, but on the longer-term deals, when you look at inflationary costs that we've seen, especially on things like food and labor, you are protected against a lot of that, I believe, in the contracts. Is that true? James Archer: It varies, right? In some on a go forward, we might have some type of cost increase across the years. And then some -- we're pretty limited on that, but we try to do that with the right type of rate -- operational efficiencies. And we've been very good about that. Operator: There are no further questions at this time. Brad Archer, you may continue. James Archer: Yes. Thanks to all of you for joining our call today and for your continued support of Target Hospitality. We look forward to speaking to all of you again in the New Year. Operator, that will conclude our call for today. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you very much for your participation. You may now disconnect. Have a great day.
Operator: Greetings, and welcome to the Xponential Fitness, Inc. Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patricia Nir. Thank you. You may begin. Patricia Nir: Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' Third Quarter 2025 Financial results. I am joined by Mike Nuzzo, Chief Executive Officer; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10-K for the year ended December 31, 2024, filed with the SEC and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about their operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call and in the investor presentation available on our website. Please note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a pro forma basis, meaning, for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended September 30, 2025, this includes BFT, Club Pilates, Pure Barre, StretchLab, and Yoga6. I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness. Michael Nuzzo: Thanks, Patricia, and good afternoon, everyone. First, I'd like to thank the entire Xponential family for welcoming me on board. As I said when I started, Xponential is uniquely positioned to thrive as a successful consumer business. Having completed my first 90 days, I've had the opportunity to deep dive into our business, connect with many of you and gain a clear understanding of both our strengths and the areas where we can improve. This period has reinforced my belief in the power of our brands and the dedication of our franchisees. I want to again highlight 3 foundational elements: First, Xponential is in a great space. Boutique fitness has substantial momentum and long-term growth potential as consumers continue to invest more in their health and wellness routines. Second, Xponential has strong studio brands, which are loved by members and led by passionate and committed franchisees. Third, Xponential has made progress in building a team and a supporting foundation to start driving stronger growth and financial returns. Importantly, given the 3 recent divestitures, we have a more optimized brand portfolio. With this, I am convinced we can provide better franchisee support with a more appropriate level of infrastructure consistent with our smaller brand portfolio. I'll discuss recent actions we have been taking to address this. Let me walk through these elements in more detail. First, the industry. It is estimated that a record 247 million Americans engage in an exercise routine in 2024, up by over 25 million from just 2019 and representing the 11th consecutive year of growth. Within the space, the global boutique fitness market is expected to reach $60 billion by 2030, fueled by a growing demand among all age groups for specialized community-focused experiences. The sector's emphasis on holistic health and strong engagement will likely continue to fuel growth that outpaces the overall fitness industry. These trends bode well for Xponential. Secondly, we have strong brands and an excellent network of franchisees. I have spent time with many of our franchisees over these past few months and their commitment to driving their local businesses, ultimately fueling our success is clear. Each of our brands has unique attributes that contribute to their performance. Club Pilates with over 1,200 locations across North America and over 150 locations internationally is our flagship brand and the scaled leader in the category. Club Pilates studios generate the strongest new unit economics I have ever seen. For example, our recent 2 vintages of Club Pilates openings, the 2023 and 2024 cohorts have shown record year 1 revenue ramps, exceeding the previous 3 vintages at month 12 by an average of 27%. This demonstrates the brand's continued popularity and significant growth opportunity ahead. Yoga6 and Pure Barre are complementary studio concepts that have a healthy owner-operator franchisee structure and continue to generate impressive sustained organic growth. They both also exhibit strong retention driven by an almost obsessive member base, which we love, of course. StretchLab and BFT have all the attributes to return to and exceed their historical levels of performance. BFT, born in Australia, has a compelling offering in the high-intensity interval training space. Currently, we have a cross-functional team focused on refining our go-to-market approach in the U.S. to drive better individual studio economics, member awareness and market density. StretchLab's assisted stretch model is a great complementary addition to a weekly workout routine. I've experienced the benefit firsthand. After exhibiting solid AUVs a few years ago, recent StretchLab revenue trends have been pressured as Medicare Advantage plans, a strong source of member flow, have scaled back on stretch as a covered benefit. Based on what I've learned, there are meaningful opportunities to improve every element that impacts member acquisition and retention. I expect us to make steady progress across both brands as we position for 2026. Importantly, following the recent divestitures of CycleBar, Rumble and Lindora, we now have a more streamlined brand portfolio, which brings me to my third key area of focus and probably the most significant opportunity for the company. While Xponential has a foundation in place to support franchisees and members, there is substantial opportunity to improve without adding additional cost. The 5 major areas of focus are: marketing, operations support, unit growth and licensing, innovation and efficiencies and cost savings. I have been dedicating significant time to strengthening each of these core functions within a more streamlined portfolio. This is not about adding additional cost. Rather, it's reallocating and refining how we operate to drive greater focus and efficiency. Let me walk you through each aspect of our tactical approach. First, in the area of marketing. Our new leadership team in marketing is enhancing our corporate capabilities in digital media, CRM, search and social to augment franchisee local marketing efforts. We have launched a pricing study focused first on Club Pilates, which will serve as a framework for our other concepts. All our corporate brand websites are being refreshed to improve our member journey from initial contact to conversion and retention. We are also addressing lead management system and process deficiencies to help strengthen our top-of-funnel KPIs across our portfolio. In the fourth quarter, we are making additional marketing fund investments to launch a national brand campaign for Club Pilates, expanding our reach through new performance channels like podcasts, YouTube TV and CTV. Overall, we are improving our corporate marketing engine with a clear focus to drive organic growth. These improvements are designed to help support our brands optimize performance and strengthen our connection with both prospective and existing members. Second, operations support. We launched our initial field support teams with a laser-focused mission to provide best practices to studios and franchisees on all the ways to enhance local studio financial performance. We are working closely with franchisees to gather feedback, improve processes, refine our approach and ensure these teams are effectively supporting our studios. On the retail front, the transition to the outsourced model is well underway. We expect the implementation to be largely complete by year-end, and we are looking forward to delivering a much more efficient retail experience for both our corporate teams and franchisees. In the area of unit growth and licensing, we've made swift progress in ramping up our improved real estate and license sales support capabilities. We are working closely with a leading outsourced partner in franchise real estate to implement best-in-class site selection practices, including leveraging the latest AI-powered market assessment tools. These improvements are designed to ensure we're making smart, data-driven decisions that support long-term success. In addition, we are taking steps to attract more established operators, along with private equity into the existing franchisee base, particularly for Club Pilates. I'm also excited to share that during Q3, we successfully completed the franchise disclosure documents registration process across brands and states. In international markets, we continue to add locations focused on Club Pilates and BFT, and I look forward to working with the team on ways to accelerate our growth within key strategic geographies in both Europe and Asia. On the innovation front, we are focused on generating new class content and member engagement within our current portfolio and see substantial upside within each of the brands. For example, in Club Pilates, we recently launched our first new class in several years, Circuit, which incorporates more intense athletic movements while still being accessible to even beginners. In Yoga6, we are refining our class offering menu for 2026. Both Circuit and new planned classes in Yoga6 will have appeal across age groups and feature strong social media attributes. This month, we also defined a new Club Pilates studio design, a big request from our franchisees. At a corporate level, we are making sure that our innovation and marketing teams are closely aligned, such that new content continuously fuels the marketing engine, driving engagement and retention. I believe we are just scratching the surface with our abilities to bring innovative leadership to the space. Finally, efficiencies and cost savings. One of my key learnings these past 90 days was that we needed to move quickly to rightsize our corporate organization, both as a result of the divestitures and in an effort to more broadly streamline the organization. As a result, in October, we executed a reduction in force across most of our corporate departments, which was a difficult but necessary task. This is expected to result in annualized SG&A savings of about $6 million. We will continue to identify ways to optimize our operations while upholding our commitment to providing the best service to our franchisees and members. I want to be clear that the initiatives here are clearly multifaceted. While we are acting with the requisite immediacy, the full impacts will unfold over the ensuing quarters. We intend to measure progress and adjust as needed, ensuring that the changes we implement are both effective and sustainable. With that, I'll turn the call over to John. John? John Meloun: Thank you, Mike. Good afternoon, everyone. We ended the quarter with 3,066 global open studios. This quarter, we opened 78 gross new studios, 57 in North America and 21 internationally. There were 32 global studio closures in the third quarter or about 1%, representing an annualized closure rate of 4%. In the third quarter, the company sold 49 licenses, of which 16 were in North America and 33 were international. Our base of licenses sold and contractually obligated to open is over 1,000 studios in North America, and we also have over 700 international master franchise obligations. Approximately 40% of our global licenses are over 12 months behind their applicable development schedules. Third quarter North America system-wide sales were $432.2 million, up 10% year-over-year. This was driven primarily by growth from net new studio openings. Notably, about 90% of system-wide sales growth came from a higher mix of actively paying members with the remainder driven by higher pricing and mix shifts. Same-store sales were down 0.8% for the quarter and up 5.4% on a 2-year stack basis. Same-store sales trends in Q3 were driven by a confluence of factors, and we are in the process of examining them in detail. At a high level, we've identified lead flow and member conversion issues across the portfolio that we are working to address, some of which were likely accentuated by our implementation of additional member privacy safeguards earlier this year. At a more granular level, StretchLab continues to be impacted in part by brand positioning challenges and the Medicare Advantage coverage reductions. Meanwhile, at Club Pilates, as you all know, we are benefiting from a stronger sales ramp in newer cohorts. While this is great for studio economics, it means that recent cohorts are already near capacity when they enter the same-store sales calculation, translating to lower same-store sales contributions. As Mike alluded to, we are reviewing all elements of corporate and studio-level operations to compete better and more profitably. Our North America run rate average unit volumes climbed to 668,000 in the third quarter, up 2% from $654,000 in the prior year period. The increase in AUVs was largely driven by a higher number of actively paying members and higher pricing for new members. Given the consistent level of demand for our brands and Club Pilates in particular, we believe there is an incremental opportunity to increase revenues through enhanced pricing methodologies, including new price tiers, disciplined cancellation policies and new package offerings. On a consolidated basis, revenue for the quarter was $78.8 million, down 2% or $1.7 million from $80.5 million in the prior year period. 73% of revenue for the quarter was recurring, which we define as including all revenue streams, except for franchise territory revenues and equipment revenues, given these materially occur upfront before the studio opens. Franchise revenue for the quarter rose 17% year-over-year or $7.4 million to $51.9 million, driven primarily by the catching up of franchise territory license terminations and by royalty revenues given a higher effective royalty rate driven by new studio openings. The company will continue to terminate licenses at elevated levels in the fourth quarter, noting terminations can take time given requirements around notification time lines. Equipment revenue was $7.5 million, down 49% year-over-year or $7.2 million, reflecting a 41% decline in global installation volume compared to the prior year period. Merchandise revenue of $4.8 million was down 27% year-over-year or $1.8 million, reflecting lower sales volumes. As a reminder, in Q4, we will begin the implementation of our outsourced retail strategy with FitCo, which is expected to contribute improved margin expansion in 2026 and further optimize non-core operations and reduce working capital commitments. Franchise marketing fund revenue was $8.8 million, an increase of 3% year-over-year or $0.3 million, primarily due to continued growth in system-wide sales in North America and increased average unit volumes from our installed base of studios. Lastly, other service revenue, which includes sales generated from rebates from processing studio system-wide sales, brand access partnerships, company-owned studios, XPASS and XPLUS amongst other items, was $5.9 million, down 6% or $0.4 million. The decrease was primarily due to lower brand access fees. Turning to our operating expenses for the quarter. Cost of product revenue were $10.2 million, down 41% or $7 million year-over-year. The decrease was primarily driven by the lower volume of equipment installations and merchandise sales during the period. Cost of franchise and service revenue were $7 million, up 45% or $2.2 million year-over-year. The increase was largely driven by the increased recognition of associated commission expenses from the catching up of franchise territory license terminations. Selling, general and administrative expenses were $24.7 million, down 47% or $21.5 million year-over-year. The decrease in SG&A was primarily lower due to a decrease in legal expenses driven by non-recurring insurance reimbursement and lower restructuring charges from lease liability settlements. During the quarter, we received $10 million in cash reimbursement from our professional insurance policies related to the SEC investigation that was concluded without action in July as well as other defense costs from other active inquiries. There was an additional $10 million insurance receivable recorded for SEC investigation and franchise matters as of the end of the quarter, noting that the receipt of these recovery payments in future periods will have no impact to GAAP earnings or EBITDA. At present, through the third quarter, we have entered into and paid lease settlement agreements of approximately $32.7 million. As of September 30, 2025, we have approximately $8.8 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of 2025. Depreciation and amortization expenses were $3.7 million, down 13% or $0.5 million compared to the prior year period. Marketing fund expenses were $9 million, up 40% or $2.6 million year-over-year, afforded by higher system-wide sales and associated marketing fund revenue contributions. Acquisition and transaction expenses were $3.1 million, down 16% or $0.6 million from the prior year period. This includes the contingent consideration activity, which is related to the Rumble acquisition earn-out and is driven by the share price at quarter end. We mark-to-market the earnout each quarter and adjust our accruals accordingly. Note that this earn-out will persist despite the recent divestiture of the brand. We recorded net loss of $6.7 million in the third quarter or a loss of $0.18 per basic share compared to a net loss of $18.1 million or a net loss of $0.29 per basic share in the prior year period. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income and loss to adjusted net income and loss is provided in our earnings press release. Adjusted net income for the third quarter was $19.3 million or adjusted net income of $0.36 per basic share on a share count of 35.1 million shares of Class A common stock. Adjusted EBITDA was $33.5 million in the third quarter, up 9% or $2.7 million compared to $30.8 million in the prior year period, primarily driven by increased margin from license terminations and increased royalties in our franchise revenues. Adjusted EBITDA margin was 42% in the quarter, up from 38% in the prior year period. Turning to the balance sheet. As of September 30, 2025, cash, cash equivalents and restricted cash were $41.5 million, up from $32.7 million as of December 31, 2024. For the 9 months ended September 30, 2025, net cash provided by operating activities was $17.6 million, which includes $2.8 million in lease settlements. Net cash used in investing activities was $2.3 million with $4.3 million used to purchase property and equipment and intangible assets, offset by $2 million in proceeds from disposition of brands. Net cash used in financing activities was $6.6 million, which primarily includes $5.9 million in net borrowings on long-term debt, $5.7 million in payments on preferred stock dividends, $3.4 million payments on promissory note liability and $2.3 million in payments for taxes related to net share settlement of restricted stock units. Total long-term debt was $376.4 million as of September 30, 2025, compared to $352.4 million as of December 31, 2024. The net increase in total long-term debt is largely due to the company drawing additional debt in the first quarter of 2025 for general working capital purposes and associated fees, offset by quarterly principal payments. As previously communicated, the company is actively exploring multiple work streams to refinance our term loan in advance of its coming current in May of 2026. Let's now turn to our outlook for 2025. We are reiterating guidance for net new studio openings, revenue and adjusted EBITDA. We are taking a more conservative approach to North American system-wide sales given current business conditions and to account for the divestiture of Lindora. Note that guidance and year-over-year comparisons for system-wide sales and net new studio openings exclude CycleBar, Lindora and Rumble in both periods for comparability. We now project North America system-wide sales to range from $1.73 billion to $1.75 billion, representing a 12% increase at the midpoint. We continue to expect 2025 global net new studio openings, which is net of closures, to be in the range of 170 to 190, representing a 37% decrease at the midpoint from the prior year. We expect the number of closures to be approximately 5% of the global system this year as a percentage of total open studios. Total 2025 revenue is expected to be between $300 million and $310 million, unchanged from previous guidance and representing a 5% year-over-year decrease at the midpoint of our guided range. Adjusted EBITDA is expected to range from $106 million to $111 million, unchanged from the previous guidance and representing a 7% year-over-year decrease at the midpoint of our guided range. This range translates into a 35.6% adjusted EBITDA margin at the midpoint. We continue to expect total SG&A to range from $130 million to $140 million. When further excluding the one-time lease restructuring charges, brand divestitures and regulatory legal defense expenses, we are expecting SG&A of $110 million to $115 million and a range of $95 million to $100 million when further excluding stock-based costs. As a reminder, in the fourth quarter, the company hosts its annual franchise conference, which has a net $3.7 million expense in the period. Regarding marketing fund, in the fourth quarter, we expect to see marketing fund spend exceed marketing fund revenue by approximately $5 million, largely driven by the nationwide branding campaign for Club Pilates. In terms of capital expenditure, we now anticipate approximately $6 million to $8 million for the year or approximately 2% of revenue at the midpoint. This compares to previous guidance of $10 million to $12 million or approximately 4% of revenue at the midpoint. For the full year, we continue to expect our tax rate to be mid- to high single digits, share count for purposes of earnings per share calculation to be 34.8 million and $1.9 million in quarterly cash dividends related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the end of our earnings press release as well as our corporate structure and capitalization FAQ on our investor website. We continue to anticipate our unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditure to grow the business. We continue to expect that our anticipated interest expense in 2025 will be approximately $49 million, tax expenses to now be approximately $5 million, including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members and approximately $8 million in cash dividend related to our convertible preferred stock, resulting in levered adjusted EBITDA cash flow conversion of approximately 35%. This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Chris O'Cull with Stifel. Christopher O'Cull: John, I know Club Pilates comps had moderated last quarter, I think, to the mid-single-digit range. Can you provide an update on how that played out in the third quarter and then maybe current trends you're seeing in Club Pilates specifically? John Meloun: Thanks, Chris. Yes. In Q2 of 2025, it moderated closer to the mid-single digit, which we said was around 5%. In Q3, we did see it come into the low single digit or about 1% in the third quarter. As we explained on the call, what we're really seeing is your installed base of studios now getting to what we believe is a full maturity given the current operating structure and number of members and pricing that they have, which is around about $1 million AUV. As we add new units, what we're seeing is these new units are coming on pretty efficiently and getting up to that kind of, let's call it, $900,000 to $1 million AUV very early in the first 12 months of operation, which means as they move into the 13-plus month, they're not really comping like they used to because now the whole system is almost at that $1 million AUV. That's one of the phenomenons that we're talking about is just the efficiencies of the ramp in Club Pilates. Because they're at full capacity, they're not really comping beyond the $1 million. Michael Nuzzo: Yes, Chris, and I'll add a couple of points as well. Yes, it's a great brand. Obviously, strong AUVs and a great ramp, high productivity. We should still expect to grow organically. Obviously, we're happy with where we were in the first half of the year. I would say that in an increasingly competitive space, we have to do better at helping our franchisees compete better. In the script, we talked about a lot of the areas that we're focused on. John and I also called out some of the deficiencies in our lead generation and member conversion capabilities, and we're focused on addressing those. Beyond that, we've got to up our game in marketing and studio ops support. I think the team is galvanized around that, and we're excited to support what is a really great brand. Christopher O'Cull: That leads to my follow-up question though is given that Club Pilates is at record high utilization, I guess, and that you're looking into this enhanced, I think you call it enhanced pricing strategies to drive revenue. I guess my question is 2 parts. First, how do you balance the push for higher prices with the risk of alienating members in a more unpredictable, let's say, macro environment? Then secondly, instead of focusing on pricing, how much opportunity is there to drive growth to fill the significant off-peak capacity hours that exist, I guess, outside of the morning and evening rush? John Meloun: Yes. I think you're hitting on a couple of really important topics. I think the quick answer is the best way to do it is to bring in an expert who has done pricing analyses and work and support for brands across the country. That's exactly what we kicked off in the quarter. I've worked with this group in the past. I think what they do a really good job of is really digging into the data in a way where we're getting into deep analysis around the members and the usage and the packages and the pricing structure. It's a very multifaceted approach. It's just not saying, take our tiers and increase them by a specific fixed amount. We're really getting into the science of this. We're also getting some great feedback from our franchisees, and taking their observations and their learnings at the local studio level. I expect we'll come out with a really thoughtful approach to pricing and packages and intro promotions to maximizing the use of our studios. I'm excited about this work, and I think it's definitely something that will help us in 2026. Operator: Our next question comes from the line of Randy Konik with Jefferies. Randal Konik: Mike, can you expand upon -- I think you said some sort of comment about private equity entering more into the franchisee base. Can you just give us some perspective on what that would entail, what brands, what geographies? What are you trying to -- what do you kind of envision for that? Then I know this -- you talked a little bit about in response to another question around this pricing kind of looking into it. What work is being done around density and thinking through what is the appropriate distance to have Club Pilates from another Club Pilates, specific to Club Pilates, I should say, because it just seems like there's just a lot more ground that can be covered with more units per se, maybe not just or instead of kind of tweaking some of the pricing because it sounds like, obviously, these boxes are very productive. Maybe they are reaching maturity, but that would just argue for more units to be put in closer proximity to other units. Just give us your thoughts on how you're thinking about those 2 areas, the private equity and the density question. Michael Nuzzo: Yes. Thanks, Randy. You're hitting on the 2 topics that occupy the unit growth part of our strategy and the team. As far as PE, I would say that specifically in Club Pilates, we've had some really great experiences with larger scale operators and I think in general, we are looking to grow with the operators we have and potentially look at opportunities to bring in larger scale operators to other geographies in the U.S. Private equity has done very well in this space, and so we're having really good productive conversations with them. I'm happy with what the team is doing on that front. There may still also be opportunities with the other brands around larger scale operators, and we certainly are looking into that as well. On the real estate side, this is what I was specifically referencing when it comes to partnering with an experienced third-party real estate partner and the use of pretty sophisticated location selection technologies so that we can feel good about being able to place studios in proximity to other studios, but still not having the negative impact of meaningful cannibalization. You're probably familiar, there are a lot of great systems out there. We feel like we've got one that will work really well for us and be able to allow us to maximize our network of studios within specific geographies. Randal Konik: Then last question, just give us your philosophy on portfolio construction. I think, look, investors that I speak to generally welcome the paring back of the portfolio, skinning down the number of concepts and modalities that the company has. Do you feel like this is the right set of concepts? Do you think about potential more pardowns in the future? Just kind of what -- give us your kind of sense on where we are with the portfolio and any changes that need to be made or not made. John Meloun: Yes. I won't speak to any future considerations. I'm obviously still learning about each of the brands. I do agree that having a smaller portfolio like we have today and the divestitures that we've done have helped us and will help us. It will allow us to be more focused as we ramp up a lot of the business capabilities that I was talking about. I also see a lot of complementary aspects to the portfolio that we have. I see a lot of opportunities around leveraging best-in-class things that are happening in one brand and applying them to another brand. I think pricing is a good example of that. I'm happy with the portfolio we have. I think we've done some really good work around the divestiture side, and I'm excited to dive in with each of the brands to drive growth into 2026. Operator: Our next question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: Mike, when you guys talk with franchisees about the Club Pilates economic model, is the assumption still sort of the old ramp as opposed to this ramp quickly to $1 million AUV? Because obviously, if that's true, in theory, I guess, you could go into -- you could pay more rent, you could absorb more cost, but there'd be no guarantee that you stay at $1 million AUV. How has the sort of the model changed or it's not, if this ramp holds, it's upside to ROI? Michael Nuzzo: Well, I think that the ramping that we've seen is a function of the brand and the strength of the brand. It's a function of having really, really strong franchisee presale activity that we have developed and refined and improved over years, right? As a scaled business, we're just -- we're getting a lot of things right on the execution around new studio build. I think that's great. I think that it's all relative, right, based upon the studio where you open it. I feel like we can show improvement with each new class of studio openings. From a modeling standpoint, the work that the real estate team is doing, especially around the new systems that we're putting in place, are adjusting accordingly and making changes to the ramp that help us make more intelligent decisions on site locations. We'll continue to refine it, and we'll continue to just get better-and-better. I still think there's opportunity around how we do our launch marketing, for example. I think -- but it's a good problem to have, right, when you have to modify your model for obviously a better start-up. John Heinbockel: Maybe as a follow-up on the retail ops field consultants. Where are you with that ramp? Then now that you've whittled down to 5 brands, obviously, they can concentrate on fewer brands, fewer issues, but where do you see -- and I guess it wouldn't be Club Pilates, but where do you see the biggest opportunity to fix execution gaps probably across brands? John Meloun: Yes. The field team right now is about 20, and we'll be doing a few more over the next couple of months. They are going to be working directly with our franchisees and our studios around a system called ProfitKeeper. The focus of that is how to improve studio level economics. I know when you start out with something, it always morphs into something that's a little different and a little better and a little evolved. I anticipate this doing the same thing. I also think there's an opportunity, and I've seen this in other retail settings and studio settings, and you've probably seen it, too, where you can identify opportunity, in this case, opportunity studios and you can focus their attention, of course, supporting all of the brands and all of the units, but around a very defined group of studios that you know has the potential to perform better and create some analysis, some feedback, even some friendly competition that makes a system like that work pretty well. Operator: Our next question comes from the line of Joe Altobello with Raymond James. Joseph Altobello: I guess first question on Club Pilates. What's the purpose of the national ad campaign? I ask that because normally, you're looking to build brand awareness, right? You've already got pretty high brand awareness, I would think, and you already have record high utilization. Do you guys see more upside to that utilization rate? Michael Nuzzo: This was talked about when I first started, and I dug in with the team, and we've modified the approach a little bit. Most of what will be hitting on the brand campaign will take place over Q4. The way I would think about it is it is us putting incremental dollars to certainly a creative part of it, but around new channels that we typically do not use in performance marketing. We identified some of those channels. Some of them are traditional media, some of them are new media, CTV, YouTube, podcasts, so what I really like about it, and I think this is going to help us as we get into 2026, is we'll be able to understand the efficacy of each of these investments in these new channels, and then what it provides for us is new ways as we get into the year, if we want to put more dollars behind a particular brand, we know the channels that have the best chance to perform. I think that's what we're really getting as a huge benefit from this work. Joseph Altobello: Just to clarify, so there are benefits to other brands. This is testing around marketing concepts behind Club Pilates, but it could have benefits for StretchLab, etc.? Michael Nuzzo: Well, this particular campaign is solely for Club Pilates. I think what I was trying to communicate was it will be testing out channels and the efficiency and the effectiveness of new channels that we currently haven't done much work in. That learning will help us if we want to apply this investment or apply these channels to other brands as we get into 2026. Joseph Altobello: Just to follow-up on that. John, earlier, you mentioned 40% or so of your backlog is still 12 months behind on a development schedule. How does the accounting work for that in the fourth quarter? Because if I look at your EBITDA guide, obviously, you're calling for a pretty sharp decline year-over-year in the fourth quarter. How should we think about that accounting impact? John Meloun: Yes. When you do a termination -- well, first, when you sell a license, the full balance of the license sale, the price goes on to the balance sheet as deferred revenue. If you pay any commissions, the commissions get deferred as a cost as well. When you terminate the license, what that does is it immediately accelerates the full amount of the license that has been deferred from a revenue perspective and commission to the P&L. In the third quarter, there was a large margin impact or margin benefit, I should say, related to the accelerated termination of licenses. As you move into the fourth quarter, the steep decline based off of the guide is really being contributed by a couple of factors. One is, there will not be a repeat level of terminations in the fourth quarter that there was in the third quarter, and that will be -- that's around about a $4 million, I guess, you can call it headwind into the fourth quarter. In addition to that, as a reminder, we have about a $4 million expense impact in the fourth quarter related to our franchise conference as spend that we do to hold that event. Then as Mike mentioned, the marketing fund dollars, which is about $5 million for the Club Pilates brand awareness, that is also a headwind into the fourth quarter. The convention in the marketing fund, you can probably consider one-time within the sequential quarters. That's about an $8 million number. As you kind of think of a $33 million adjusted EBITDA number in the third quarter, and you can kind of get to where the guide is by adding an additional $8 million of convention costs and marketing fund spend in the fourth quarter. There will be heightened elevations again -- or terminations again in the fourth quarter, but not to the magnitude that we saw in Q3. Operator: Our next question comes from the line of Jonathan Komp with Baird. Jonathan Komp: John, if I could just follow-up on the last point. I think I heard it, was it $4 million of benefit from terminations in Q3? Then if 40% are still non-current, that seems like a pretty high number, maybe like $900 million or so. Could you share any insight on sort of the outlook for those? Can you get any of those back to current? Any view of why the 40% hasn't come down? I think that's been a consistent number as you have been terminating some. John Meloun: Yes. Thanks, Jon, for that. Yes. I mean when you look at the delinquency of the backlog, one of the things that occurred during COVID was pretty much everything went delinquent, right? Because there was any licenses that was sold prior to COVID, there was about a 2-year period where franchisees were kind of waiting on the sidelines with signing new leases and such because of the fact that there was a shutdown of studios. There was a natural kind of delinquency in our backlog. Earlier this year, we stopped terminating licenses while our new COO came in and did a full assessment of franchisees by brand, where they stand. The terminations we have done are an output of that work where we have gone through with franchisees and identified which ones are not moving forward and made those terminations. When you compare the sold but not open backlog from Q2 to the ending Q3, we have significantly reduced the number of licenses that were delinquent, but the percentage that is still delinquent within the brands we still own is still around 40%. When you think about the brands where -- or the composition of the delinquent, let's call it -- the total remaining backlog is about 1,800. About 44% of that backlog is Club Pilates. We feel very strongly that those franchisees are going to move forward. The other 20% is in StretchLab. Yoga6 is about 12%, Pure Barre is about 5 and then your BFT is about 20%. We have seen a lot of growth in Club Pilates. We do believe those units will be online. They're just delinquent from the development schedule when they originally bought the license. The StretchLab is a function of AUV performance as well. As we can continue to get the AUV up in StretchLab, we should start seeing those franchisees move forward. One thing you have to remember, too, John, is we did pro forma the licenses. It is comparable with the brands that we own to the prior year, but -- or the prior period. I do believe that the backlog in addition, when we look at it at Q4, that the backlog, you'll see that there will be some more licenses terminated and that percentage over time will start to come down through terminations, but also with franchisees moving forward. Long answer, but by kind of just organic default around COVID, the backlog naturally just kind of got put into a delinquent state, but it doesn't mean that the licenses won't get open at some point. It's just that they're moving forward on a delinquent schedule. Jonathan Komp: Then maybe to follow-up, John, for the fourth quarter, any help you can give in terms of just bridging comps, system sales and revenue that you're expecting? There's still a fairly wide range on those? Then just, Mike, bigger picture, could you maybe talk about some of the key metrics that you're targeting to watch the progress initially here? Any further detail on when you would expect to start to see some progress around the key initiatives you're watching? John Meloun: Yes. As far as system-wide sales is concerned, I mean, we still guided to the $1.73 billion to $1.75 billion for system-wide sales. You can assume that the system-wide sales sequentially will be up from Q3. One of the benefits with system-wide sales in the fourth quarter is we do run promotional Black Friday marketing programs to drive package sales to drive new memberships in the fourth quarter. You will sequentially see system-wide sales up. As far as comp is concerned, with Q3 being a negative 1% comp, we are expecting to see 0 to low single digit from a comp perspective. It all depends on the successfulness of the marketing programs in the fourth quarter and how they play themselves out. As far as revenue is concerned from Q3 to Q4, there's a couple of things at play. One is, you will sequentially see overall revenue down from Q3 to Q4. The reason why, again, is the fact that you won't have the benefit of the heightened terminations in the third quarter or fourth quarter that you had in the third quarter. That's going to be the main driving force for overall revenue being down. We do expect to see royalty production up in the fourth quarter, but it's just the one-time terminations that are going to drive down revenue in Q4, but year-over-year, we do expect revenue to be up. We did about $44.5 million -- excuse me, $80 million in Q3 of '24. We're relatively in line with that for Q4 of this year. Michael Nuzzo: Yes. On the KPI question, the good news about a business like this is it's got some pretty straightforward KPIs. Weekly, we're looking at leads, new members, classes, retail sales, cancellations, average studio sales on a year-over-year basis each week, and we look at it compared to the previous 4 weeks and 8 weeks. We're getting a sense for momentum and where we stand. We're in a pretty good rhythm when it comes to measuring the business and addressing it. John Meloun: John, let me correct what I just said too. The revenue in Q3 of 2024 is around $80 million. Adjusted for the terminations, you're probably going to be down sequentially from Q3 of '24 to Q4 of '25. Operator: Our next question comes from the line of Ryan Mayers with Lake Street Capital. Ryan Meyers: First one for me, just kind of on the topic of innovation that you guys are looking to drive at some of the concepts. Is this a concept-wide nationwide thing? Is it more so just specific franchisees at certain locations maybe need help driving member growth? Just kind of walk us through some of the innovation there and how we should be thinking about that? Michael Nuzzo: Yes, Ryan, good question. When it comes to class content, we approach it from a nationwide rollout standpoint. Again, we'll test and we'll perfect and we'll get it to the point where we're ready to launch it, but we will launch it on a nationwide basis, understanding that some franchisees may not be able to implement it right at the time that we launch it. The other thing that we'll increasingly do is have that innovation work feed our marketing and driving awareness around new class content is a great way to do it. This is something that I think all the brands will benefit from, and we'll put together a schedule for each of them to dive into it next year. Ryan Meyers: Then just on the topic of pricing, I mean, how should we think about what the membership churn currently is and maybe more specifically at Club Pilates, where you guys are looking to drive price and then maybe just kind of the concept as a whole, just so we can think about sort of the membership base that potentially is turning out there? Is it elevated? Or what's kind of that historical level there? John Meloun: Ryan, I'll take that one. As far as Club Pilates is concerned, we haven't seen a shift in cancellations or churn within the brand. It's a trend that's remained fairly stable. I think what you're starting to see is just the actual total member per studio. It is up when you look at it compared to prior -- the same quarter prior year, but it's just kind of getting to that capacity where we're not adding at the same rate that we did historically. Churn overall has remained stable. Even when you look at memberships where they've been temporarily frozen, haven't seen any real shift in that either. It's more of a top of the funnel kind of just, I guess, signal that is the rate of growth has kind of slowed down a little bit. Overall members per studio has remained fairly constant. Operator: Our next question comes from the line of Richard Magnusen with B. Riley Securities. Richard Magnusen: This is regarding StretchLab. Could you provide maybe more details on your efforts to replace the loss of Medicare visitors, the money that they brought in? What has worked so far to replace that lost revenue? Then you earlier call -- earlier in the year, you mentioned looking at ways to reduce the ratio of stretch instructors to visitors because it tends to be very heavy in that particular metric. I wonder what you've done there and what success you've had? Then finally, have you looked at maybe other ways of including that modality with other modalities to maybe reduce overhead or get more people interested in it? Michael Nuzzo: Yes, Richard, good question. Yes, you're right. We touched on the Medicare Advantage issue. I would just say that we have to drive an expanded membership mix. As we looked at the current membership base, I think there's a lot of opportunity to drive younger member across more athletic pursuits, new partnerships. All these are areas where the offering as it stands today should really resonate. Also, there's a chance to -- or there's an opportunity to drive business from folks who just want to purchase individual stretches but not a full membership. I think there's an opportunity there. Then also from just overall supporting the brand better, we're looking at pricing intro packages, performance marketing, the online journey, which I think needs some work and local activation. There are a lot of things we're doing around membership expansion in that concept. From an operation standpoint, we're also testing a few operational adjustments that will lighten the demand on the labor side within the box. Not in a position to give any specific results of that work, but we are diving in for sure. Operator: Our next question comes from the line of Owen Rickert with Northland Capital Markets. Owen Rickert: Quickly, what are you hearing from franchisees about potential pressures in areas like labor, occupancy or instructor availability? If you are hearing anything from them, how are you helping them mitigate these challenges? Michael Nuzzo: I don't think we're hearing a lot more necessarily. I think that it's a constant challenge just to doing business. Most of our franchisees, I think, do a really great job of addressing it and balancing it. The availability of instructors is something that I think we've heard on an ongoing basis. One of the things that I think we do really well, especially within the Club Pilates system is we've got a pretty extensive instructor training program that helps to obviously feed our studios, which is great. We're looking for ways to potentially expand that in the future, which is really good. I also think that having the field people engage with the studios around this ProfitKeeper system, I think, can help, especially on the cost side and the profitability side. I mean, I think we'll be helping them to address it, but nothing of note that's been raised more so recently. Operator: We have reached the end of the question-and-answer session. I would like to turn the floor back over to Mike Nuzzo for closing remarks. Michael Nuzzo: Well, thanks, everybody, for joining today's call. We look forward to connecting with many of our franchisees. We have our annual convention in Las Vegas in the next couple of weeks, and we look for more opportunities to give you insight on the business. Thanks a lot. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremex Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Thursday, November 6, 2025. I will now turn the call over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead. Martin Goulet: Thank you, and good morning, ladies and gentlemen. Thanks for joining this discussion of Supremex' financial and operating results for the third quarter ended September 30, 2025. The press release reporting these results was published earlier this morning via the Globe Newswire News services. It can also be found in the Investors section of the company's website at www.supremex.com, along with the MD&A and financial statements. These documents are available on SEDAR+ as well. A presentation supporting this conference call has also been posted on the website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Presenting today will be Stewart Emerson, President and CEO of Supmax; as well as Norm Macaulay, CFO. With that, I invite you to turn to Slide 37 of the presentation for an overview of the third quarter, and I turn the call over to Stewart. Stewart Emerson: Thank you, Martin, and good morning, everyone. I'm joined today by Norm Macaulay, Supremex' new Chief Financial Officer. Norm joined us mid-September and brings more than 20 years of experience as a financial executive with large private and public companies. We're very pleased to have him on board as the company will benefit from his leadership, skills and expertise in all matters related to corporate finance, M&A, process optimization. Welcome aboard, Norm. While the results may not have been where we wanted them to be, largely due to external forces, we have been under -- we have been uber active in building the business, returning value to shareholders and positioning ourselves to execute on our plan and long-term success. First, I want to draw you to -- draw your attention to our financial position, which is as strong as it has ever been. As you know, during the quarter, we completed the sale leaseback of two owned properties in a transaction that grossed $53 million. This transaction unlocks significant value for our shareholders who were rewarded with a $0.50 per share special dividend on top of the regular $0.05 quarterly payout. We also repaid a substantial amount of debt, leaving us with net debt of only $89 million at the end of Q3, which provides us with excellent flexibility to carry out our business strategy. Norm will discuss the net debt position in more detail shortly. Now let's look more closely at operations, beginning with the Envelope business. While revenue decreased 5% year-over-year, it was up 3% sequentially from Q2 as we battle significant headwinds. To provide color on those headwinds first, obviously, the Canada Post uncertainty continues to affect volumes, primarily in the high value-added direct mail and fundraising space. I wish I could give you an exact number, but it's difficult. However, looking at the DM-centric accounts and anecdotally, it's clear that the uncertainty of when a time-sensitive piece will arrive in the mailbox has taken its toll on volumes. Second, if you recall from last quarter, we highlighted a substantial volume decline with an important U.S. direct mail client, and that situation affected Q3 results considerably. More on that later in the commentary. Finally, economic uncertainty, instability and a slowing economy, both in Canada and the U.S. is not helpful to volumes, particularly in the direct mail and fundraising segment. Frankly, being minus 5% versus last year and up 3% sequentially can be viewed as a good outcome through our prism. We worked hard to manage costs effectively, augment our position in the Canadian market with a tuck-in acquisition of Canada's third largest producer. And while nothing is in the bucket, our relationship with the aforementioned U.S. direct mail account is solid. We continue to do work for them, and we are optimistic about 2026. I understand quarter-to-quarter is an important measure. And as I said a moment ago, we view a 5% decline in revenue as a pretty good outcome given the challenges. But to me, year-over-year is a better measure. And in that case, despite the headwinds created by Canada Post, which has persisted virtually all year and the slowing economies, that single U.S. customer reduction has accounted for more than 100% of the revenue decline year-to-year. In fact, net of the impact of one customer, U.S. units and revenue are up mid- to high single-digit percentages. And across the entire Supremex Envelope segment globally, units are down less than 1%, revenue is flat and average selling price is up year-over-year. Our team has done a tremendous job, both operationally and on the sales side to mitigate the effects in a tough environment on both sides of the border. A few moments ago, I mentioned the acquisition of the third largest envelope manufacturer in Canada, and I wanted to provide a little more context. In July, we acquired the assets of Enveloppe Laurentide in Saint Laurent, Québec, a suburb of a mere kilometers from our LaSalle envelope facility. Laurentide manufactured and brokered envelopes primarily in Eastern Canada. As planned, we ceased production at their facility on August 15 and integrated both the manufactured and brokered volume within our existing network in Canada. This highly accretive acquisition will improve absorption and will deliver meaningful synergies going forward. In a nutshell, while on the surface Enveloppe performance may not have been where we wanted or expected them to be, the team has done a good job navigating very choppy waters. Our underlying fundamentals are solid, and we have confidence in our ability to drive volume to maintain high levels of utilization and absorption across our highly efficient network. Turning to packaging. Although revenue was down, we sustained our momentum with double-digit growth in both folding carton and e-commerce solutions, while Paragraph's commercial printing activities largely for the direct mail market, not surprisingly, had a difficult quarter. In folding carton, double-digit growth both in the quarter and year-to-date was driven by continued strong performance in the health and beauty and over-the-counter pharmaceutical segments, new business wins from current and reactivated customers and revenue from the newly acquired Trans-Graphique folding carton business, which supports our strategic plan to enhance our presence in the food-grade packaging, where we see solid growth prospects. While the Enveloppe Laurentide transaction closed on July 14 and ceased production a month later, in this highly accretive transaction, we closed Trans-Graphique a week earlier on July 7 and ceased production 14 days later. As planned, most of Trans-Graphique's activities have been transferred to the Lachine facility, which will allow us to grow in the food packaging space, improve efficiency and absorption as well as achieve meaningful synergies. It should be noted that we exited both facilities by the end of October. In e-commerce and Specialty Packaging, momentum created by new customer wins and greater volume from existing customers produced well into double-digit revenue growth for yet another quarter and year-to-date. While the core of the packaging business continues to perform admirably both in terms of revenue and profitability, unfortunately, the less core commercial print business continues to have its challenges. We haven't really spoken about Paragraph's customer and product base in the past. However, like envelope, this business has meaningful reliance on Canada Post, direct mail and fundraising with respect to the inner components and couponing. Not surprisingly, these revenues have been materially impacted by Canada Post uncertainty, delivery of time-sensitive offers and promotions. And while we are focused, we just haven't been able to offset the precipitous drop in volume and revenue in the relatively small Québec market. As for profitability in the segment, the drop in Paragraph revenue took the wind out of our sale after an encouraging first half and strong revenue performance of 2 of the 3 legs of the business in Q3. This quarter's adjusted EBITDA margin of 10.5% is clearly not acceptable. The stark lack of volume and contribution from Paragraph has shaved off approximately 300 basis points of packaging margin on a year-to-date basis. I reiterate what I've said for several quarters now. We have high-quality assets, available capacity, deliver quality products and service, have a premium diversified customer base on both sides of the border as well as the right leadership in the right seats. Volume is magic in terms of absorption, and we continue to look for profitable revenue growth, but there's also more to capture within our network in terms of efficiencies and synergies. This is our priority. With that, I turn the call over to Norm for a review of the financial results. Normand Macaulay: Thank you, Stewart. Good morning, everyone. I'm very pleased to join Supremex, a dynamic, well-managed and financially disciplined company. Please turn to Slide 38 of the presentation. Q3 total revenue came in at $65.7 million compared to $69.4 million last year. Envelope revenue was $45.1 million, down from $47.5 million last year, but up sequentially from $43.8 million in the second quarter. The year-over-year variation reflects a 4.2% decrease in average selling prices, mainly due to a less favorable customer and product mix between the U.S. and Canada. Meanwhile, volume decreased 0.8%. And as Stewart mentioned, volume in Canada increased due to the Enveloppe Laurentide acquisition, while the U.S. decline was essentially related to one customer. Packaging and Specialty Products revenue was $20.6 million versus $21.9 million last year. The decrease is mostly attributable to lower revenue from commercial printing activities. This was offset by higher folding carton revenue, driven by greater demand from sectors more closely correlated to economic conditions, new business wins from existing customers and the contribution from Trans-Graphique, which was acquired in July. Revenue from e-commerce-related packaging solutions also increased driven by higher demand from existing customers and new customer wins. Moving to Slide 39. Adjusted EBITDA totaled $6.2 million or 9.4% of sales compared to $7.9 million or 11.4% of sales in last year's third quarter, but up sequentially from $5.8 million or 8.8% of sales in the second quarter of 2025. Envelope adjusted EBITDA was $5.3 million or 11.8% of sales versus $7.9 million or 16.7% of sales last year. The decrease reflects lower selling prices and the effect of lower volume on the absorption of fixed costs. These factors were partially offset by benefits from optimization measures in the Toronto area and procurement optimization initiatives. Packaging and Specialty Products adjusted EBITDA was $2.2 million or 10.5% of sales compared to $2.5 million or 11.3% of sales last year. The decrease is due to a less favorable revenue mix, partially offset by procurement optimization initiatives. Finally, corporate and unallocated costs totaled $1.3 million versus $2.5 million last year. The decrease is attributable to a foreign exchange gain this quarter as opposed to last year and to lower professional fees. Turning to Slide 40. During the quarter, Supremex recorded a $6.1 million gain on the sale-leaseback transaction, transaction, which resulted in increased right-of-use assets and lease liabilities, created a deferred tax asset, which gave rise to an income tax recovery of $3.1 million in Q3 2025. As a result, Supremex concluded the third quarter with net earnings of $9.1 million or $0.37 per share versus a net loss of $23 million or a loss of $0.92 per share in last year's third quarter in which an asset impairment charge of $23 million was incurred. Adjusted net earnings were $4.7 million or $0.19 per share in Q3 2025, up from $1 million or $0.05 per share a year ago. Moving to cash flow on Slide 41. Net cash flows from operating activities were negative $0.6 million compared to positive $7.6 million last year, mainly due to a lower working capital release this year compared to last. Turning to Slide 42. Net debt stood at $8.9 million as at September 30, 2025, down significantly from $38.4 million 3 months ago, reflecting a long-term debt repayment of $31.5 million using proceeds from the sale leaseback. Further, we used $13.5 million of the proceeds from the sale leasebacks to pay both the regular dividend and special dividend and $7.9 million to acquire both Enveloppe Laurentide and Trans-Graphique during the quarter. Our ratio of net debt to adjusted EBITDA was 0.3x versus 1.1x 3 months ago, well within our comfort zone of keeping our leverage ratio below 2x net debt to adjusted EBITDA. Our strong financial position leaves us with significant flexibility to finance our operations and future investments, including acquisitions as well as to return funds to shareholders. In this regard, following the launch of a normal course issuer bid program in August, we repurchased approximately 44,000 shares in Q3 for a consideration of $0.2 million. Subsequent to period end, we repurchased an additional 38,864 shares for consideration of $0.1 million. The NCIB program allows Supremex to purchase for cancellation more than 1.5 million shares, representing 10% of our public float until August 10, 2026. Finally, the Board of Directors declared a quarterly dividend of $0.05 per common share payable on December 19, 2025, to shareholders of record at the close of business on December 4, 2025. I now turn the call back to Stewart for the outlook. Stewart Emerson: Great. Thanks, Norm. Although our results were short of our potential, we're buoyed by the significant important improvements in our core business. Materially improved operations and the benefits of the tuck-ins completed partway through the quarter as we continue to methodically build the business for the long term. As I've said previously, we can't control the economy and the trade environment, but we will focus on making our envelope and packaging networks more productive and efficient while actively driving sales and seeking additional revenue opportunities. We have a solid foundation ready to be further built on. Our balance sheet is very strong, which provides us with the flexibility to execute our business strategy and sustain long-term profitable growth. We will also utilize our available capital and strong cash flow judiciously. First, by looking for acquisition targets that we can rapidly and efficiently tuck into our existing footprint to enhance absorption to drive profitability or towards transactions that grow reach in our principal markets while enhancing absorption to drive profitability. And second, we are committed to returning value to shareholders via share repurchase and a fair yet conservative regular quarterly dividend payout that reflects our confidence in the ability to sustain free cash flow growth. This concludes our prepared remarks. We're now ready to answer your questions. Operator? Operator: [Operator Instructions] The first question comes from Donangelo Volpe with Beacon Securities. Donangelo Volpe: Just looking at the two acquisitions, just shy of $8 million spent. Just curious on what was the split between the two on a revenue basis and kind of what their trailing 12-month revenue and EBITDA profiles look like? Stewart Emerson: Well, so the Enveloppe, Don -- sorry, the Enveloppe acquisition was a little north of $10 million and the folding carton was somewhere around just shy of $3 million. So these are splits there. Normand Macaulay: Those are on a TTM basis. Stewart Emerson: On a TTM basis, yes. And both businesses were profitable, but with the synergies of the tuck-in, highly accretive for Supremex in a very short period. Donangelo Volpe: Okay. Perfect. And then just pivoting over to the packaging side. Can you just provide a little bit more color on the underperformance from the commercial printing? Just curious how big this drag was and kind of what your outlook is over the coming quarters? Because how I'm looking at this is the folding carton and e-commerce packaging revenues are tracking above expectations. Stewart Emerson: Yes. So I mean, obviously, it was a significant drag with reference at both e-com and folding carton, both double-digit percentages, significant increases, but were more than offset by the decline in the commercial print operations. And I wish I had talked a little bit more about what's inside that commercial print business. As you can imagine, anything in direct mail and fundraising has internal components that go in it. And there's a fair bit of couponing. And that work is largely done by commercial printers and Paragraph was no exception to the rule. So if there's no direct mail going out, there's no post cards showing up in your mailbox or significantly reduced numbers, it has a drag on the commercial print sector and Paragraph's top two customers are direct mail customers. And it just overshadowed significant growth on sort of the core piece of the business, if you will. As Canada Post stabilizes and get this thing behind us and under our belt, that revenue should come back or a large chunk of it should come back. We're actively addressing the cost side of the business to align with the changes in revenue. Donangelo Volpe: Okay. Perfect. And then just pivoting over to, I guess, the geographic revenues. We were impressed with the revenues in Canada. It's relatively flat year-over-year. The decline was mostly attributable to the U.S. operations. I'm assuming it's through that one customer. So I'm just -- can you talk to some of the dynamics you're seeing throughout the start of Q4 so far? Has there been any positive commentary from that one customer? Or do we kind of expect the continued year-over-year declines over the next couple of quarters from the U.S. predominantly driven through that -- through the one customer? Stewart Emerson: There is a lot of questions wrapped up in that question there, Don. Donangelo Volpe: I'm going to be asking a million questions. Stewart Emerson: Yes. I was writing them down, but I presume you're talking envelope predominantly. But before I forget, I will reference packaging just a little bit. Both folding carton and e-commerce, they continue on a bit of a tear on the revenue side. While we don't provide guidance specifically, both of them got out of the gate in Q4 and the backlogs are really good. So we're excited there. On the envelope side, yes. So Canada envelope, I mean, it's a little engine that could. There's not a lot of direct mail envelope in Canada. So the postal strike doesn't sort of affect as much as a lot of people would expect. But the Canadian envelope business just chugs along. It got a little growth in average selling price, and it was buoyed by the 2.5 months, 2.25 months of Laurentide in the foundation, a little bit offset by some increased costs early in the acquisition that you sort of have to absorb, but the revenue of Laurentide certainly helped. And it contributed exactly on pace of what we would have expected given their TTM revenue. On the U.S. side, the team has done a heck of a job trying to offset and getting growth to try and offset, call it, customer pay, if you will, just to make it easier. And they've done a good job sort of offsetting it and the conversations with customer A are very encouraging. And as I said in my comments, it's not like we lost the customer. That's an important consideration. The customer changed some buying habits. Our share of the customer weren't at the same level that they've been previously. But we continue to do business for them. We continue to execute on their behalf. We're an important supplier to them, and we continue to be an important supplier. We think we're going to be an even more important supplier next year. Did I catch them all? Donangelo Volpe: You got them all. I appreciate that. And then, final one for me, if I may. Just like with the cleaned up balance sheet post sale leaseback, can you just talk a little bit on the M&A pipeline at the moment? Obviously, I understand that the focus is on the Packaging segment. I'm just curious on priority is Canadian focused or U.S. focused or if it's -- if you're kind of indifferent between the two? Stewart Emerson: Yes. So our stated strategy has been we'll look for tuck-in acquisitions either in envelope or packaging, which we did in Q3. We're not -- we're good at envelope. We're not afraid of envelope. And if we can shore up absorption in a particular geographic market, we're excited to do that. And we're in and out 3 months bang we're gone. So they're highly accretive very quickly. So with the balance sheet, we'll continue to look at some good tuck-ins. It doesn't really matter. It can be envelope for packaging. And on the packaging side, our stated strategy is predominantly Canada in folding carton, and that persists, then we've got a good solid pipeline. Operator: [Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Stewart Emerson for any closing remarks. Stewart Emerson: Thank you, operator. Thanks very much for joining us this morning, folks. We really appreciate you taking time out, and we look forward to speaking to you again at our next quarterly call. Have a great day. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the OneStream's Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Now I would like to introduce your host for today's program, Anne Leschin, Vice President of Investor Relations and Strategic Finance. You may begin. Anne Leschin: Thank you, operator. Good afternoon, everyone, and welcome to OneStream's third quarter 2025 earnings conference call. Joining me on the call today is our Co-Founder and CEO and President, Tom Shae; and our CFO, Bill Koefoed. The press release announcing our third quarter 2025 results issued earlier today is posted on our Investor Relations website at investor.onestream.com, along with an earnings highlights presentation. Now let me remind everyone that some of the statements on today's call are forward-looking, including statements related to guidance for the fourth quarter and year ending December 31, 2025. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors. Some of these risks are described in greater detail in the documents we file with the SEC from time-to-time, including our quarterly report on Form 10-Q for the quarter ended September 30, 2025, that we filed today. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During our call today, we will also reference certain non-GAAP financial measures. There are limitations to our non-GAAP measures, and they may not be comparable to similarly titled measures of other companies. The non-GAAP measures referenced on today's call should not be considered in isolation from or as a substitute for their most directly comparable GAAP measures. Management believes that our non-GAAP measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses that may not be indicative of our ongoing core operating performance. Reconciliations of our historical non-GAAP measures to the most directly comparable GAAP measures can be found in this afternoon's press release and the earnings highlights presentation posted on our Investor Relations website. We are not able to provide reconciliations for forward-looking non-GAAP measures without unreasonable effort because certain adjustments cannot be predicted with reasonable certainty and could be significant, particularly related to equity-based compensation and employee stock transactions and the related tax effects. Now I'll turn the call over to Tom. Tom? Thomas Shea: Thank you for joining us this afternoon. Third quarter was a story of focused execution. Facing headwinds and contract rationalization in our U.S. Federal business, the team exceeded expectations with strong billings growth in the quarter. More recently, at our sold-out Splash EMEA user conference, I was incredibly energized by the enthusiasm we received for our purpose-built finance AI. As we usher in the finance AI era, we remain one of the most innovative vendors in the CPM space, and we're not stopping there. We are constantly pushing forward and anticipating the growing demands of the office of the CFO. Let me start with some highlights of our third quarter performance. Year-over-year subscription revenue grew 27% and billings grew 20%. International revenue grew 37% year-over-year, particularly due to strong legacy replacement momentum in Europe. In the federal business, we renewed all of our Q3 agency customers with only one exception at a discontinued agency. We added one new federal customer and began multiple SaaS conversions, including one at our largest agency customer. CPM Express and our SensibleAI portfolio continue to show early momentum with customers. We are attracting new and existing customers by leveraging the proven customer ROI from SensibleAI Forecast. Additionally, OneStream was recognized as the exemplary leader in the 2025 Record to Report Buyers Guide by ISG Research, covering financial close, consolidation and overall record to report, achieving the highest scores in both customer and product experience. With AI at the forefront across all facets of business today, the drivers of our industry have never been more important for the office of the CFO. Number one, finance is in the initial phase of its transformation. Legacy financial systems often more than 20 years old, simply do not have the agility required for today's CFOs to effectively steer their businesses, never mind to maximize the value of AI. Finance organizations continue to look to modernize by unifying corporate data and moving core financial operations to the cloud. Number two, the role of the CFO is evolving and expanding. CFOs are being asked to do more than ever by becoming a strategic partner for the business. An integral part of that is helping them proactively look around corners, to anticipate challenges and opportunities and produce more timely and accurate forecasts. Number three, the use of AI is enabling finance teams to drive more business performance, not only measure it. In many cases, CFOs are the executive leaders taking responsibility for the AI evolution at their companies. They are being tasked with identifying key functions that can leverage these AI tools for productivity improvements and cost efficiencies. We believe platforms that provide purpose-built applied AI solutions will win the AI battle given the need for a single consistent data model and security framework. At OneStream, we have always challenged ourselves to raise the bar. Our approach to AI has been both forward thinking and deliberate. Since we began this journey a decade ago, we have gained a foundational understanding of what AI can bring to the office of the CFO by combining powerful quantitative, generative and agentic capabilities throughout our SensibleAI portfolio. We understood early on that AI for finance must run on clean data, provide context and solve specific use cases because 80% accurate is 0% useful for finance. Ultimately, we believe OneStream provides the key that unlocks the value of AI for finance through unified, secure, transparent and most importantly, contextualized information. Through our many AI announcements this year, customers are beginning to realize the growing power of our platform to drive better and faster decision-making and enhance their productivity. By modernizing the financial close process, customers are now able to, number one, unify their data on a common platform. And number two, interrogate that data using financially intelligent embedded AI; and number three, enhance and optimize the close process, enabling finance teams to focus on strategic high-value priorities such as integrated planning and forecasting. Just a few weeks ago at Splash EMEA, we again pushed the boundaries of applied AI for finance. We showed real package solutions designed specifically for finance, which we expect to deliver significant value for our customers. Let me recap some of our exciting product announcements. Since we introduced SensibleAI Studio in May, we have roughly doubled the number of algorithms currently available to 60. As you recall, Studio enables customers to quickly access a library of algorithms and routines and apply them to their own workflows. We showcased an example of this power and flexibility at Splash EMEA. Just 1 month after Studio's launch, our forward deployed engineers rapidly built our AI-powered benchmarking and outlier detection routine based on real-time customer specifications. Studio allows us to meet customers where they are in their AI journey, and we believe we are just scratching the surface of Studio's potential. We also took a big step with our SensibleAI agents, moving them out of private preview and into limited availability. So now our customers can begin to take advantage of them. Our agents are unique because they do not act alone. What's important is that they have financial context. They are embedded into solutions within OneStream, giving them direct access to all the customers' secured data stored on the platform. This allows finance teams to do tasks like ask questions in natural language, generate dynamic visualizations, query financial models and analyze contract data. Agents provide the ability to help automate repetitive work, reveal insights and help every analyst operate more like a strategic partner. We also unveiled AI-powered ESG. This enhanced solution is the culmination of our 3 strategic pillars. Core finance, operational analytics and finance AI. With AI-powered ESG, finance teams are able to link ESG reporting back to the core platform using real-time operational drivers, while automating quantitative forecasting by using SensibleAI Forecast. Further, we plan to embed our SensibleAI agents throughout the workflow to assist with data interrogation and reporting. Lastly, we continue to advance our best-in-class core finance capabilities by expanding our rapid deployment CPM Express with IFRS compliance and management. This includes a number of confirmation and validation rules adhering to IFRS Accounting Standards for our international customers. This is but one example of how we plan to expand our Express offer. Leveraging our plug-and-play architecture to bring a variety of rapid deployment productized use cases to our customers. Both at Splash EMEA and during the quarter, we had several noteworthy examples of how customers are seeing increased value from our strong and growing product line. Continuing the trend in recent quarters, OneStream is quickly becoming the CPM vendor of choice for companies transitioning from legacy systems nearing their end of life. One of the largest deals this quarter came from a Swiss multinational healthcare leader and a global leader in cancer treatments. A long-time customer of a competitive legacy CPM solution, the organization moved to OneStream to better unify financial consolidation, reporting and tax processes. They chose OneStream for our extensibility and flexibility. This significant legacy replacement marks our first big pharma win, highlighting how leading enterprises are modernizing with our unified platform. Additionally, with CPM Express, commercial customers are gaining access to the full power of OneStream with rapid deployment and best practice templates, workflows and frameworks all built in. Today, companies that are earlier in their financial journeys are starting to recognize just how valuable it can be to access our single unified platform with a preconfigured offering that can be implemented in as little as 8 to 12 weeks. One significant CPM Express win this quarter was with a leading residential real estate services company. Having recently centralized its finance and other core functions under a shared services model, the company needed greater visibility, agility and standardization across the business. Facing a legacy system infrastructure across their environment, we leveraged CPM Express to give the customer confidence in a faster, best practice-driven implementation with rapid time to value. Ultimately, they chose OneStream for our superior data integration, flexibility and finance own architecture. This empowered the finance team to streamline and modernize account reconciliations and transaction matching, all while reducing their dependency on IT. Lastly, we wanted to provide an update on a few major multinational customers that have gone live with SensibleAI Forecast and the remarkable ROI that they are realizing with the product. One of the great stories comes from the domestic healthcare division of a leading global logistics provider. They implemented SensibleAI Forecast across their U.S. operations to enhance financial forecasting as the company is developing an AI-powered approach, they reported that OneStream's SensibleAI Forecast is delivering measurable results. Gross revenue forecast accuracy has improved by 5 percentage points. Payroll forecast accuracy has improved by 8 percentage points. Forecast generation time has been reduced by 94%, freeing up more than 13,000 labor hours annually and eliminating the need for third-party specialized tools and staff augmentation. With these strong results, the organization is now expanding its use of SensibleAI Forecast to the healthcare division's international operations. Another long-time U.S. customer that builds systems and technology solutions deployed SensibleAI Forecast earlier this year. The customer was looking to transform its forecasting process for key financial metrics, including revenue, margin and SG&A using OneStream's single unified data model. SensibleAI Forecast has taken their forecasting and planning cycles from 20 days to less than 2 days, a 90% plus reduction. Additionally, the customer saw a noticeable improvement in forecast accuracy. One of the key features that led to the selection of SensibleAI Forecast was its ability to provide clear insights into how internal and external factors drive forecast outcomes. It is this level of transparency that is strengthening their trust in OneStream across its finance organization. In summary, the overarching drivers of the office of the CFO remains front and center today. OneStream has always looked to the future to anticipate and invest in what our customers will need and want to run their businesses more effectively. We have consistently been ahead in recognizing industry trends and emerging technologies as we have demonstrated with AI. Today, our customers are realizing the value that a unified and infinitely extensible platform delivers. Our SensibleAI provides insights and actions that are quantifiable and supercharged because of the high-quality and contextualized data controlled in OneStream. Our comprehensive platform has positioned us to lead the finance AI era and become the operating system for modern finance. Together with our exceptional team, we believe we have built a solid foundation to grow and scale the business. This gives me confidence in our ability to deliver unparalleled value for our customers, partners and shareholders over the long-term. I will now turn the call over to Bill to provide details on Q3 financials and our financial guidance. William Koefoed: Thanks, Tom. Good afternoon, everyone, and thank you for joining today's call. We are pleased to discuss the results of our third quarter, which proved stronger than expected as the team executed well, particularly in EMEA, while managing through a tough federal government environment in the U.S. Subscription revenue increased 27% year-over-year to $141 million, while total revenue grew 19% year-over-year to $154 million. License revenue of $4 million declined 64% compared with last year due to contract rationalization and our success in driving SaaS conversions, including at our largest federal agency customer. Professional services and other revenue was $9 million, up 38% year-over-year due to demand for our consulting services. Our international business had another strong quarter with revenue growth of 37% year-over-year, representing 34% of total revenue. Billings increased 20% year-over-year to $178 million and 21% on a trailing 12-month basis, which we believe is the best indicator of our billings momentum. This included roughly $4 million of accelerated billings from Q4 due to early renewals and add-ons. Free cash flow for the third quarter was $5 million and exceeded our expectations. We ended the quarter with 1,739 customers, up 13% year-over-year. We saw exceptional new business growth in EMEA, while in the U.S., we had particularly strong add-on business, partially offsetting the federal new business weakness and illustrating the value of our multiproduct strategy. For the first 9 months of the year, subscription revenue has increased 29% year-over-year to $400 million. Total revenue grew 23% year-over-year to $438 million. AI bookings were up 60% year-over-year, and our free cash flow for the first 9 months of the year was $70 million, up 107% over last year. Our 12-month cRPO was up 29% year-over-year and total RPO was up 24% year-over-year to $1.2 billion. Non-GAAP gross margin for the third quarter was 69% compared to 71% last year, and our non-GAAP software gross margin for the third quarter was 75% compared with 78% last year, primarily due to lower license revenue in the third quarter. Non-GAAP operating income for the third quarter was $9.3 million or 6% of revenue and increased significantly by $3.8 million or 69% compared with the prior year. This increase was due to a combination of strong revenue growth and the scaling of our operating expenses. Non-GAAP net income of $15.2 million in the third quarter increased $3.9 million from the prior year and non-GAAP earnings per share was $0.08, flat with last year. Total equity-based compensation expense for the third quarter was $25 million. We ended the quarter with $654 million in cash and cash equivalents. Now let me turn to guidance. Given our Q3 outperformance, we are raising our 2025 growth and profitability outlook. Together with our strong pipeline, we entered Q4 with a growing and more differentiated product portfolio than ever. With that, we are offering the following outlook, including an update to a onetime measure that we gave last quarter. In Q4, we expect total revenue to be between $156 million to $158 million. We expect non-GAAP operating margin to be between 4% to 6%. We expect non-GAAP net income per share to be between $0.04 to $0.07. We expect stock-based compensation expense to be approximately $25 million. Taking into account the roughly $4 million of accelerated billings in Q3, we expect billings growth of roughly 20% for the fourth quarter. For full year 2025, we expect total revenue to be between $594 million to $596 million. We expect non-GAAP operating margin to be between 2% to 3%. We expect non-GAAP net income per share to be between $0.15 to $0.19. We expect stock-based compensation expense to be between $115 million to $120 million. While we plan to give formal 2026 guidance in February, the combination of our Q3 outperformance, strong pipeline and innovative product portfolio make us comfortable with current Wall Street consensus for full year 2026 revenue and non-GAAP operating income. In conclusion, Q3 was a strong quarter. Our results underscore the power of the OneStream platform to bring the office of finance into the AI era. Now let's turn it over to the operator for Q&A. Operator: [Operator Instructions] And our first question comes from the line of John DiFucci with Guggenheim Securities. John DiFucci: Listen, on the federal dynamics this quarter, first, I want to say we really appreciate your transparency here, both last quarter and this quarter. In fact, we factored it into guidance. But your overall results really didn't skip a beat, and it's great to see subscription still growing at a really healthy clip here. It sounds like you only lost one federal contract because that agency was discontinued, but you also added a new federal customer. But I'd really like to better understand the remaining account, the renewals. And Bill, you mentioned the license rationalization. Anything you can add to help us better understand renewals in the September quarter and what this means for the future? It would be great. We're just trying to better understand the federal opportunity going forward within the context of the overall beat and raise this quarter. William Koefoed: Yes. Thanks for that, John. I'll take that and appreciate the commentary on the transparency. That's certainly something that we aspire to do and appreciate the comments. Look, the federal government, obviously, there were a lot of moving pieces as we went into the third quarter. We had SaaS conversions at a couple of our biggest agencies, and that obviously impacted license revenue, but obviously will flow through our subscription revenue in future quarters. And as you noted, we only lost one federal agency that actually doesn't exist anymore. It actually got merged into another agency. And obviously, we added a new one, as you noted. So we're really optimistic about our federal government opportunity as we turn the corner into 2026 now that I think we've gotten through this quarter, and we'll hopefully execute on that as we enter the year. Operator: Our next question comes from the line of Chris Quintero with Morgan Stanley. Christopher Quintero: Tom and Bill, congrats on a solid quarter here. I want to ask about AI. We've seen some data points that suggest that finance and accounting is actually one of the top areas that organizations are looking to deploy their AI budget dollars over the next 12 months. So I'm curious, like is that aligning with kind of what you're hearing from your customer base? And what are some of those kind of initial most important use cases that you're seeing them deploy some of your technology into? Thomas Shea: Thanks, Chris. Yes, I'll take that. As I mentioned in the remarks, we really feel great about our position in AI. We feel we're primed to lead the finance AI era. And what I mean by that is there is a lot of opportunity in finance, especially when you have a platform like OneStream that has this highly contextualized high-value information. So the use cases that you can think of -- you've heard us talk about SensibleAI Forecast, that's clearly predicting the quantitative outcomes for a business in those key line items that you heard, whether that's demand, whether that's multiple cost line items, that has a profound and direct impact on how you can manage your business. But that's just the beginning. With the comprehensive AI platform that we have, and you heard me talk about Studio as well, that opens up all kinds of additional use cases, outlier and sort of benchmarking analysis, giving companies the ability to do and measure their business in ways that they haven't been able to in the past and take immediate action. And then ultimately, agents, right? The autonomous financially intelligent coworkers that were -- we've built into the platform, that is very, very high interest in our customers because of the potential to actually interpret all this information, help take action and do repetitive work. So we feel finance is definitely embracing this opportunity. And again, our understanding of the deterministic nature of AI required for finance puts us in a great position to answer that need and interest for the customer base. Operator: Next question comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: I think you made the comment, Bill, about being comfortable with Street estimates for '26. And I think what's notable about that is there's less of a deceleration baked into numbers for '26 relative to '25. And so you're exuding some confidence and some growth stabilization. So if you could just maybe rank order for us qualitatively what the big drivers are there that helpful. William Koefoed: Yes. Let me talk about just about the overall performance of our business, and I think that will answer your question. And we saw this this last quarter. EMEA really performed super well this quarter. As Tom mentioned, some pretty big lighthouse wins that we had there. Obviously, considerable strong growth, strong momentum, and we're really optimistic about the opportunity that we see in EMEA. Asia Pacific continues to be a small but growing area of our business, and we expect that momentum to continue. And in the U.S., certainly, Tom's talked about CPM Express and the opportunity that we see in the commercial business. That is just getting started, as Tom mentioned, and we see strong opportunity there, particularly as we get into more verticals. Actually, I didn't mention it in EMEA, but we just released IFRS Express, which is a really awesome opportunity for us there. And then on the enterprise side here in the U.S., obviously, Q4 is our biggest quarter. And we -- as I mentioned in my commentary, we feel great about the pipeline. The team is working to execute. We actually signed a really nice big deal today, which we're excited about against 2 very strong competitors, and that all gives us optimism about 2026. Operator: Next question comes from the line of Koji Ikeda with Bank of America. Koji Ikeda: I wanted to double-click on the 2026 guide and really about pipeline assumptions and conversion assumptions in the fourth quarter guide and heading into 2026. How are you thinking about those assumptions? I guess, more specifically around conversions? Is it more conservative heading into 2026? Is it the same? I mean I just wanted to understand what is giving you the confidence to level set 2026, but also kind of expressed a lot of confidence there at the same time. William Koefoed: Yes. No, I'll take that. I mean, look, every quarter, every year as we start our forecast for the quarter and as we start our budgeting process for the next year, we look at 2 things, right? We look at our pipeline, which is arguably kind of the biggest driver of growth. And the second characteristic of that is obviously our conversion rate. And it obviously varies a little bit by quarter, but we certainly look at that as we enter the quarter and as we enter the year. In addition to the fact that we have our core business, as Tom mentioned, we're really enthusiastic about our new products. Tom's talked about our Agile Financial Analytics, which we see customers really excited about. We have our SensibleAI Forecast, which is showing some very strong growth. As I mentioned in my remarks, it's up 60% year-over-year, and we continue to see very strong pipeline as customers are seeing the results like Tom talked about in the script of better forecast accuracy, improved speed to forecast and just the benefits that we see there. Obviously, AI Studio is something Tom has talked about. And again, candidly, that new customer that I mentioned earlier has -- that's part of the solution that they've acquired. And then obviously, agents, which are just being released, we just announced limited availability when we're in Splash a few weeks ago. So look, as I mentioned in my closing remarks, we have our best product portfolio we've ever had going into any year. We have a very strong pipeline, and that gives us the confidence to obviously give our outlook for 2026. And again, I would just say like we'll give you more formal numbers when we get into February, but we just kind of wanted to give you a little bit of an update like I did. Operator: Next question comes from the line of Alex Zukin with Wolfe Research. Aleksandr Zukin: I appreciate that incremental color about the pipeline. I guess to that point, it sounds like, Bill, billings growth is going to accelerate if you take the fact that you pulled in or you had some early in Q3 and yet you're still kind of calling for really strong billings numbers in Q4. So maybe just comment on the demand environment as you kind of sit here in October? And also a metric that we haven't talked about at length previously, but like as you continue to see a lot of expansion opportunities from Sensible as well as moving into other parts of the finance workflow or outside of the core finance workflow, how should we think about NRR trends from here kind of moving forward as well? William Koefoed: So Alex, let me start with the last part of your question. I know you and I spent a lot of time talking about NRR. But we had this last quarter, as I mentioned, I think in my remarks was a really great add-on quarter. And it ended up being part of the upside that we saw in our numbers was -- were the add-ons. And candidly, it's just an illustration that our multiproduct strategy is working. A couple of years ago, we didn't have all these kind of new products that we've been introducing. And as Tom mentioned in his remarks, I think we're just getting started in our innovation around our products. Look, on the billing side, I would just tell you, again, we outperformed this quarter. We did have a bit, as I mentioned in my commentary, we saw some early renewals because -- back to your NRR point because our customers wanted to add on new products. And so we saw a bit of that in the third quarter. But obviously, in the guidance that I gave you for Q4 and as I think I mentioned that I don't expect to guide billings every quarter, but I thought it was important as we kind of went through Q3 to Q4 that we gave you that color. And obviously, we're enthusiastic about the quarter ahead. Operator: Next question comes from the line of Terry Tillman with Truist Securities. Terrell Tillman: Bill, it's always nice to hear about a deal closing, an important deal closing like in real time. William Koefoed: Terry, it's pretty exciting when we have a deal close on the day of earnings. I have to tell you, Tom and I were high-fiving at each other. Terrell Tillman: Well, if one closes before the end of the call, we'd appreciate another update. William Koefoed: We'll keep our eyes out. Terrell Tillman: My one question relates to EMEA. It does sound like you're firing on all cylinders there, and there's a lot more where it came from. What I'm curious about is there something going on with this replacement cycle. We know there's a lot of technical debt in these 20-year-old systems. Is there something that seems like it's accelerating in that cycle of replacement? And part of this is also -- but your field sales coverage is probably expanding, so maybe it's becoming more productive or maybe it's partners. But just maybe you could kind of stack rank some of the drivers that's driving that momentum. Thomas Shea: Thanks, Terry. I'll take that. And you pretty much hit on it. It's the fact that we're getting more scale in the region. So we are seeing that ability to have more coverage across the different countries. Secondarily, there is the opportunity of legacy applications that are coming up. And just to remind everybody, as I've mentioned in other calls, the foundation of getting access or being trusted to take those legacy replacements is that we've had prior success. And so when we think about that and we think about that opportunity, we're building on those foundational wins in that segment and some of those transformations that are happening. And then ultimately, when we look at the product portfolio and we look at the enthusiasm for our product, that is sort of the third component that I see driving it. But I definitely want to call out the execution of the team over there and the growth that we're seeing, and there's a lot of excitement. Operator: Next question comes from the line of Steve Enders with Citi. Steven Enders: I guess I want to follow-up on the AI side of it. I think the bookings growth you called out there, I would say it was 60%. But I guess what are you seeing maybe in the pipeline? Like are you starting to see incremental builds there from the sales build-out that you've been talking about for the past year or so? And then just how do you kind of view the future pipeline opportunity as we kind of go into '26? Thomas Shea: So we look at the current pipeline as a great validation of the momentum that we're building, first and foremost, is the way that I would talk about. So as we think about the product strategy that we have in AI, our AI portfolio consists of the first product SensibleAI Forecast, which is driving that adoption through the validation that I shared in my remarks. And so as we look going forward, what we're seeing is, again, early days, but excitement around AI Studio. It just opens up so many additional use cases. And the way that you want to think about AI Studio is AI everywhere in our platform. That's why we invented that product so that we can drive AI into meaningful workflows across our customers' set of use cases that they're enjoying on the platform. And then ultimately, we are very, very excited about what we're -- the feedback that we've been getting and the partnering, frankly, that we've had with our customers in the agentic space because, again, this is all -- this is a building process for us. It was quantitative, generative and agentic working together on a contextualized platform. And so as we look to 2026 and continuing the rollout of our limited availability of the agents, we're very excited about that opportunity and bringing that to our customers and again, building on that same momentum that we're seeing from SensibleAI Forecast. Operator: Next question comes from the line of Scott Berg with Needham. Scott Berg: Really nice quarter here. Tom or Bill, I just wanted to see if you could maybe comment on what you're seeing early with the revenue opportunity for the agents. I know they're not fully released in general availability yet. But I think a key question we've all kind of had is, as you release those, I guess, what's the uplift there? And does it impact any of your seat-based model at all? Thomas Shea: Sure. I'll take that. And as we look at agents, we're still in the early days in terms of the -- going from private preview to limited availability. So pricing, you can expect to be more of a usage-based pricing the way we price the other AI services products. And we think we have a strong applied approach, which is key here, and that is demonstrated value of our finance analyst agent. What we see this is a -- as I mentioned in one of my remarks, it's an autonomous coworker. It's the ability to help the customer get more value, do work efficiently and then let their team members do more high-value work is quite frankly, what we see. So, we see this as incremental revenue rather than sort of a replacement or displacement of seats. And I think that's largely what you're going to see in the financial space. There's certainly optimizations. But as we've highlighted in some of the studies that we've done, the 2035 finance, like you have -- finance teams are generally overworked, overstressed. It's not that there are always way too many people, right? They want to have those people working on the most important areas of the business, to be a true partner of the business. And we think that we're an unlock for that, giving them efficiency to do the things they have to do and help them be more of a business partner. Operator: Next question comes from the line of Mark Murphy with JPMorgan. Mark Murphy: Can you comment on traction in some of the emerging applications that sit outside of the core, maybe shed some light on where you see the strongest growth vectors? For instance, noticing you have account reconciliations now that are driven by SensibleAI. And then the supplier analysis, I'm wondering if there's any more interest there in the wake of the tariffs? And any brief mention on the big pharma win? Congrats on that. Just wondering if you see that as a linchpin to going a little deeper in a new vertical? Thomas Shea: Thanks, Mark. Yes, there's always -- if I can just orient everybody on our platform and our platform message. And I think this is critical to helping you -- to help everybody kind of baseline this. We think of the platform as having 3 key components: core; operational; and AI, kind of think of it as a triangle. Core is the stuff everybody has to do. Every big business has to do this, the things you have to get right. We need to help our customers become as efficient as possible. And to your point, Mark, the thing they want to do, though, is they want to help -- they want to start turning that fast-changing operational data, those operational use cases into a signal that they can take action on. So we have always seen a lot of interest in that particular space. And the fact that with our AFA or what we call Agile Financial Analytics, our ability to do more real-time analytics, no ETL, directly on top of operational sources and have our agents be able to interact with that data as well is an area that we're continuing to push into. And those are, again, some of the key innovative areas that are underpinning our excitement in the business and the opportunity that we see ahead. And so -- and when you think about these operational use cases, whether that's -- you mentioned AI-powered account reconciliations. We have that under an umbrella that we call the modern financial close. That's an opportunity for us to, again, to double down and address certain personas and make sure that they understand that we're delivering the key capabilities and technologies if you're a controller, to help you not only do your financial planning, your financial reporting, but also deliver on those and become more efficient at your closing. So any and all of those opportunities are what lie in front of us. And you'll see us continue to develop more and more productized use cases in those areas, as you mentioned, supplier analytics, and these are all areas that are part of our ongoing verticalization strategy and intention to focus in these areas. Operator: Next question comes from the line of Jake Roberge with William Blair. Jacob Roberge: I just wanted to follow-up on the new agentic offerings entering limited availability. Could you talk a little bit more about the feedback you've gotten from customers and if there are any specific agents that you're seeing drive outsized interest for the platform right now? Thomas Shea: Sure. So let me first just talk about the agent set that we have in play, just to level set for everyone. So we have our finance analyst agent. You can think of that as a structured kind of data analyst that understands the OneStream data architecture, data repository, highly contextualized data and can help with analytics, can help with reporting, answer questions that can help with education because individuals that don't understand some of the data models that customers have built now have access to that information. So it's broadly applicable. And that's a very high interest agent within our customer base. The other couple of agents that are also getting a lot of interest are our search agent and our deep analysis agent. These complement and contextualize and synthesize with our finance analyst agent. So meaning if you have an interesting set of analytics that are coming out from finance analysts, but you require additional information to provide context such as contract-based analysis, our agents, we've developed an agentic workflow. So the thing that has come out of the interaction with customers is more than -- these aren't just chat-oriented interactions. We've built an entire workflow-based interaction which will allow us to truly assign tasks that can be done on a repetitive basis. And this is some of the feedback loop and the processing that our AI engineering team has been working with to rapidly innovate that and make sure that we're iterating and delivering in real-time what the customer is looking for out of these agents. Operator: Next question comes from the line of Siti Panigrahi with Mizuho. Unknown Analyst: This is Phil on for Siti. Can you talk about what you're seeing in terms of competitive displacements like Hyperion and SAP? And how important are these legacy displacements in achieving the preliminary FY '26 growth targets? Thomas Shea: So when we look at the historical legacy replacement, it's a consistent and a large opportunity that we're continuing to focus on. And so it's obviously an important part of our numbers. It's an important part of our selling [ motion ]. But the thing I do want to make sure that we all focus on is any business -- as I mentioned, the core pillars of our platform. Any business that develops any degree of complexity in their own financial operations has a very high need for OneStream's platform. And that's, again, why we tend to focus on CPM Express and the productized approach because we view all companies that have those needs as our customers. So we want to continue to focus heavily on the replacement of legacy systems and help those customers that have been in the CPM world for a number of years, but also make sure that we're extending and onboarding any company that has that growing need for a full CPM solution. So I just want to make sure that I share the way that I see this expansive opportunity consisting of both legacy and evolving companies. Operator: Next question comes from the line of Brian Peterson with Raymond James. Unknown Analyst: This is John on for Brian. Maybe following up a bit on that earlier question on sales pipeline and as we think about customer sizes. You mentioned an acceleration in legacy CPM replacement, but then CPM Express also accelerating adoption in the commercial side of the equation there. So how have those been tracking in 2025? And as we look towards 2026, realizing that both might be the answer here, what are you most excited about? And what opportunity do you see creating the most potential upside in 2026? William Koefoed: Yes, I'll take this. It's Bill. I would go back a little bit to some of the commentary that I made earlier. We're really excited about EMEA's growth and continued trajectory. Again, I think Tom mentioned CPM Express. I mentioned IFRS Express specifically for EMEA on the commercial side, and we see that as being a really big opportunity. We see EMEA enterprise as well as a big opportunity, obviously, with the legacy replacement opportunity there. And again, there's a lot of change going on, on the ERP stack there, too, which is actually tailwind in our favor. I mentioned Asia Pacific. And in the U.S., they've been our biggest driver of AI sales so far. I think that will continue to extend to other geographies. And then as Tom mentioned, just the whole opportunity that we have to continue to grow the core, to continue to offer capabilities around Agile Financial Analytics and then as I mentioned earlier, our AI portfolio. So it's hard to choose your favorite child. We love them all, and we think they're all great opportunities for us to grow. Operator: Next question comes from the line of Brett Huff with Stephens Inc. Brett Huff: On a nice quarter. I wanted to follow-up on the Agentic AI comments you made. But first, given the market is still anxious on how long it will take enterprise AI to get ROIs, congrats on those really good proof points in the forecasting business. I thought those are notable. But the follow-up question is talking more about how your agents will or won't or how they'll interact with agents from other software firms. Do you view a world where there'll be kind of Uber software or Uber agents that coordinate things across workflows? Do you aspire to have that particular position? Or is this a battle or more of a cooperation as you look beyond the 4 walls of just your data architecture? Thomas Shea: Thanks. I'll take that. It's something that I think about a lot and my evolving thought on this is OneStream has the right to be, if not the best, one of the best agents in the financial realm, meaning, because of the highly contextualized data, we want to be the best, most reliable, understanding, again, that if you're a CFO and you're trying to use a generic non-financially aware type of agent that doesn't have high context, you're going to get inaccurate results, 80%, 50%, you name it, whatever, which will become 0% useful for the CFO. And so we really feel that we have the right to be that -- in that domain, the agent set of choice. Now to your point, with agent-to-agent protocol, multi-agent orchestration, we're not naive to think that other vendors that have platforms, that have other highly contextualized information also have a right to have agents that are highly attuned and aware of that highly contextualized information. We will -- those eventually -- my -- I'm being a futurist now. My view is that we will see those of us that have platforms and highly contextualized information, our agents will work in coordination with some sort of multi-agent protocol at a higher level. And that's where I do think there will be a battle maybe by hyperscaler or there will be a real battle in terms of who wants to own that masterful entry point into the agent ecosystem and then pick the right agent for the right question and do that synthesis. So as this plays out, we're really focused at the moment on making sure that we have the right protocols in place to play in agent-to-agent communication and multi-agent orchestration. But more importantly, at this moment is delivering the ultimate value that our customers want from our agent set within the context of the CFO. Operator: Next question comes from the line of Derrick Wood with TD Cowen. James Wood: Bill, can you give us a sense how you've handicapped some of the risks around the government shutdown as you guided for Q4? And then looking beyond just with FedRAMP High authorization with DOGE behind us, just how are you feeling about building -- rebuilding momentum in the U.S. Fed? Do you think they'll have kind of a bigger appetite to come back and spend or modernize? Or how do you feel about the visibility there? William Koefoed: Yes. No, great question. I'm going to answer your second one first. Look, this Q3 was a challenge, obviously, as all software companies were kind of coming up to the end of the government's fiscal year-end. And again, I think we executed -- we were really happy to have SaaS conversions because obviously, that's the genesis of our business. And so that was something that we were certainly hoping for, and it's nice to have that behind us for sure. As we look forward, as you mentioned, we're the only kind of cloud CPM vendor that is FedRAMP High, and that gives us the opportunity to serve agencies within the government that require that level of security, and we feel exceptionally well positioned to be able to take advantage of that opportunity. And so we're definitely taking advantage of that as well as we're working to get AI FedRAMP High certified as well because the government has actually asked us and has strong demand for AI capabilities that, again, no one else has similar capabilities that we do in that arena. Look, as it relates to the government shutdown, I think we all hope the government shutdown ends quickly. We're obviously working with our customers to kind of navigate through it. And I think all of us on this call probably have our fingers crossed that it ends quickly. Operator: Next question comes from the line of Andrew DeGasperi with BNP Paribas. Andrew DeGasperi: I just wanted to ask without getting a guide for next year, like in terms of the balance of license and services and subscription, would you say that the license revenue sort of decline, is it going to be reflective of what happened this year? Or are you expecting a more muted kind of deceleration there? And I have a follow-up. William Koefoed: Yes. Well, you're our last call -- so we'll let you do the follow-up. Although I think the operator might have cut you off. But anyway, look, this was a big year, particularly this last Q3 for a transformation from license to SaaS, arguably our biggest year. You should expect to see overall SaaS migration over the next couple of years, and at which point we likely won't have very much license revenue remaining. And as I said before, on the PS&O side, I think you'll see that be some slight growth, but we certainly -- it was a big growth quarter this year. But if you recall from last year, we had a tough Q3 last year. So -- but I think on a run rate basis, our PS&O business is probably in pretty good shape where it's at. Operator: And our last question comes from the line of Mark Schappel with Loop Capital Markets. Mark Schappel: I have a question around the sales team. Just a question around the sales team, which has been obviously executing very well here. Could you just comment on any changes or fine tuning to the sales and marketing strategy that maybe we could expect in the coming quarter or 2? And also where maybe you plan to just prioritize additional sales investments? Thomas Shea: Sure. So as we've talked about, selling the -- I'll kind of go back to my overview of the opportunity that we have in front of us, right? We're selling the -- we have the legacy market that our sales team is geared towards, understands and knows and we've been selling for years and years. We also are introducing the steady pipeline of products. So what you can expect to see from us is a more concentrated effort on scaling across those different product lines, while we maintain a strong focus on our core business that we've been talking about. So the way that I view the investments in the sales and marketing team is in that scale-based approach to make sure that we're properly positioning all the AI innovation, the CPM Express. The good news is it's that straightforward to sell a more productized solution is contained, and we're excited because you get to really scope in and meet the customer in a use case-oriented fashion. Operator: That concludes the question-and-answer session. I would like to turn the call back over to the management team for closing remarks. William Koefoed: Yes. I'd just like to say thanks, everybody, for joining us. We look forward to seeing you at upcoming events, and hope you have a great rest of your day. Thomas Shea: Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir. Tahmin Clarke: Thank you, operator. Good afternoon, and welcome to Arlo Technologies Third Quarter 2025 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Kurt Binder, COO and CFO. If you have not received a copy of today's release, please visit Arlo's Investor Relations website at investor.arlo.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding our potential future business, operating results and financial condition, including descriptions of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin. ARR, Rule of 40 and other KPIs, guidance for the fourth quarter of 2025, the long-range plan targets, the rate and timing of paid subscriber growth, the commercial launch and momentum of new products and services, the timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth, partnerships with various market leaders and strategic collaborators, continued new product and service differentiation and the impact of general macroeconomic conditions on our business, operating results and financial conditions. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including our annual report on Form 10-K and our most recent quarterly report on Form 10-Q filed earlier today. Any forward-looking statements that we make on this call are based on assumptions as of today, and Arlo undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website. At this time, I would now like to turn the call over to Matt. Matthew McRae: Thank you, Tahmin, and thank you, everyone, for joining us today on Arlo's Third Quarter 2025 Earnings Call. Q3 was another record-breaking quarter for Arlo across numerous performance and financial metrics. I'll start by highlighting our outstanding SaaS business, which continues to grow and propel Arlo to new heights. We added 281,000 paid accounts during the quarter, well above our target range of 190,000 to 230,000 and which drove our total paid accounts to 5.4 million. This performance was driven by net additions in our retail and direct channel, coupled with stronger performance from our partner, Verisure. I'd like to take a moment to congratulate Verisure on their recent acquisition of ADT Mexico and their successful initial public offering last month. Their success is so well deserved, and we look forward to continuing to be a part of their growth and outstanding execution across their expanding footprint. Arlo Secure 6, our latest AI-based security platform, is also driving our performance with users finding substantial value in the features and capabilities. In our retail and direct channel, average revenue per user was over $15 per month, and the lifetime value of each user grew to over $870, a new record for Arlo. These metrics helped propel Arlo's annual recurring revenue to $323 million, up 34% year-over-year and another record for the company, while service gross margin expanded 770 basis points to more than 85%. In addition to this impressive service performance, Arlo also executed the largest product launch in company history during the quarter, comprised of new platforms and products across our Essential, Pro and Ultra product tiers. These platforms not only bring a 20% to 35% reduction in BOM costs and new form factors such as pan, tilt, zoom, they also contributed to a nearly 30% year-over-year unit sales growth in Q3. These new products are receiving high ratings from both professional and user reviews, which call out the ease of setup, high performance and new capabilities across the lineup. The execution of this product launch and transition was nearly flawless. Arlo launched over 100 SKUs simultaneously across channels on time despite several shipping and weather disruptions, all while managing the [ ex-ramp ] of inventory for a smooth transition. This is extraordinarily difficult to achieve, and a huge congratulations and thank you to the Arlo cross-functional teams on this exceptional outcome. There are very few companies in the world that have successfully developed world-class capabilities in both the Software Service segment and the hardware device segment. This quarter is a great illustration that Arlo is one of those rare companies that can not only excel in both areas, but also bring these segments together to create compelling user experiences and drive real shareholder value. And that could not be more obvious based on our full Q3 results and profitability. Adjusted EBITDA was up 50% year-over-year and reached $17 million. GAAP earnings per share was $0.07 in the quarter, a new record for Arlo. And year-to-date, we reported a massive $0.35 improvement compared to the first 9 months over last year. And looking at our services business in a Rule of 40 context, Arlo achieved a result of 46, which underscores the elite performance against all peers in the SaaS space. Looking ahead to Q4, Arlo is exceptionally well positioned in a competitive market with our new product launch, and we expect to see 20% to 30% unit growth year-over-year, which sets us up well for service revenue growth heading into 2026. And we continue to see great progress across our strategic accounts, including Verisure driving growth via their IPO, Allstate deploying kits to home insurance customers and ADT testing units in the field ahead of next year's market launch. Expect more announcements in this area over the coming quarters. Given this performance, it is clear that Arlo is making excellent progress against our long-range plan targets of 10 million paid accounts, $700 million in ARR and an operating income of over 25%. Now I'll turn it over to Kurt for a more detailed review of our Q3 results and our outlook ahead. Kurt Binder: Thank you, Matt, and thank you, everyone, for joining us today. During the quarter, we again delivered outstanding financial results driven by our commitment to our services-first strategy. Every decision that we make as an organization is centered around delivering an innovative and value-added smart home security experience that drives annual recurring revenue, and these efforts are yielding strong results. As Matt mentioned, the LTV generated by our paid accounts is at an all-time high and ensuring that we continue to fill the acquisition funnel and drive our subscriptions and services revenue is paramount to delivering best-in-class SaaS metrics and achieving our long-term financial goals. Now on to the results for the quarter. Subscriptions and services revenue was $79.9 million, up 29% year-over-year, driven by a significant increase in ARPU and a great pace of paid account adds over that same period. This strong performance is largely due to the introduction of our new AI-driven Arlo Secure 6 rate plan offerings. Additionally, our intense focus on enhancing customer journeys and delivering a differentiated value proposition drove new paid accounts to select our premium rate plans and existing customers to upgrade to higher rate plans. Paid accounts continued their strong growth trajectory as we generated 281,000 paid subscribers in Q3. We exited the quarter with a base of 5.4 million paid accounts, an increase of 27% year-over-year. Improving ARPU trends and the growth in our retail paid account base reflects our ability to guide customers to our higher-value AI-enhanced service levels and in turn, drove our annual recurring revenue to $323 million, up 34% over the same period last year. Total revenue for the third quarter came in at $139.5 million, up slightly from the prior year period, with our subscriptions and services revenue comprising 57% of total revenue, up from 45% in the same period last year. This level of predictable and recurring service revenue is the key driver of our substantial improvement in profitability and our ability to deliver best-in-class SaaS metrics, including ARR growth. Product revenue for the period was $59.6 million, down $16.2 million or 21% when compared to the prior year and as a result of the industry-wide decline in ASPs as well as the frequency and depth of promotional campaigns, especially in Q3 as we promoted our end-of-life or EOL products to make way for the sell-in of our broader next-generation product portfolio. We continue to drive new household formation by optimally pricing our products to increase POS volume and utilize the devices as a subscriber acquisition vehicle. The refresh of our product portfolio offers a considerable reduction in BOM costs, enhancing our competitiveness across various price tiers while also helping to offset some of the tariff impact. And with the upcoming holiday season, we are leveraging this portfolio to help accelerate the growth trajectory of our subscriptions and services revenue. Given the outstanding subscriptions and services gross margin and expanding profitability with each new paid account, our decision to sacrifice product gross margin for durable, highly profitable subscriptions and services revenue is an easy one. We view a modest decline in product gross margin as part of our cost of customer acquisition. And even after considering the incremental investment, we are still delivering a best-in-class LTV to CAC ratio in the range of 3x. Our goal to drive solid POS volume and gain access to additional households in Q3 occurred as planned, and we expect a similar outcome in the fourth quarter. We believe the strategy insulates us from certain external market factors and drive shareholder value, and we will continue to lean into this approach during this Q4 holiday selling season. In Q3, international customers generated $58 million or 42% of our total revenue, down from $66 million or 48% in the prior year period related to the increased level of subscription and services revenue from our U.S. retail business and the successful launch of our new products. Verisure continues to be an important partner for us in Europe, and we thank them for their continued collaboration and expect them to remain a solid growth driver in the future. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP subscriptions and services gross margin was 85%, again, a new record and up 770 bps year-over-year. The significant growth in services gross margins is attributable to enhanced ARPU, coupled with a reduction in the cost to serve our customers, including lower storage and compute costs. Product gross margins were negative, representing a modest decline when compared to the same period last year. The decline in product gross margin is related to the full quarter impact of tariffs approximating $5 million, coupled with industry-wide ASP declines and planned promotional spend on EOL products to optimize inventory levels ahead of our recent product launch. Even withstanding these items, we reported consolidated non-GAAP gross margin of 41%, up 540 bps year-over-year. Our continued improvement in profitability in a period where the full impact of tariffs was experienced underscores the significant ancillary benefits that the shift to our services enterprise provides us. Total non-GAAP operating expenses for the third quarter were $41.1 million, up 6% from $38.7 million in the same period last year. The year-over-year increase is primarily driven by app store fees and an increase in personnel to support R&D investment as we launch our new innovative product offerings and Arlo Secure 6 this year. Our leveraged go-to-market approach has enabled us to maintain our operating expenses at roughly $40 million per quarter or less since 2022, while growing ARR at a 37% CAGR during that period, which is truly remarkable. For the third quarter, adjusted EBITDA was $17.1 million or an adjusted EBITDA margin of 12.2%. The growth in adjusted EBITDA represents a 50% increase year-over-year and a powerful testament to the operating leverage created by scaling our subscriptions and services business. Further, we generated non-GAAP net income of $18.1 million for the third quarter and $53.3 million for the 9-month period ended September 30, which was up an impressive 68% when compared to the same period last year. Regarding our balance sheet and liquidity position, we ended the quarter with $165.5 million in cash, cash equivalents and short-term investments. This balance is up about $19 million since September of 2024, even withstanding certain strategic investments and our ongoing share repurchase program. We generated record free cash flow of $49 million during the first 9 months of the year, representing a free cash flow margin of almost 13%. Our Q3 accounts receivable balance was $76.7 million at quarter end, with DSOs at 50 days, up from 45 days in the same period last year. Our Q3 inventory balance was $44.4 million, down from the $52 million level in September of last year and a testament to the amazing job that our supply chain team has done with optimizing inventory levels ahead of our portfolio refresh. Inventory turns were 6.4x, up from 5.8x last year as we sold in inventory for one of our largest product launches in history. Now turning to our outlook. Even with the full impact of tariffs during the period, our business generated outstanding financial results driven by the resilience of our subscriptions and services business. The recent launch of our innovative product portfolio gives us dry powder to remain competitive given the solid reduction in BOM cost. We will leverage our new products and competitive ASPs to drive strong POS volume and accelerate paid subscription growth. As a result, we expect our Q4 consolidated revenue outlook to be in the range of $131 million to $141 million. Additionally, we expect non-GAAP net income per diluted share for Q4 to be in the range of $0.13 to $0.19. And now I'll open it up for questions. Operator: [Operator Instructions] The first question comes from Adam Tindle with Raymond James. Adam Tindle: I just wanted to start maybe on margins, obviously, acknowledging that gross and operating margin overall is quite healthy here. But when we look at the components, you had your largest launch with a 20% to 30% BOM cost reduction that you talked about, but product gross margin is still pressured. I understand there's a number of moving parts driving that. Maybe the question would be, if you could just remind us the accounting method for inventory and wondering if that BOM cost reduction is maybe not fully reflected in the Q3 results that we're seeing. And secondly, there's an inventory clear out that you mentioned. I wonder if you could, Kurt, just help us quantify that. Is that something that was -- what did it do to impact in the quarter? And does it carry into future quarters from here? Kurt Binder: Yes. Adam, let me just start by saying, as we've discussed in the past, we are very much focused on our consolidated gross margins, and we were extremely pleased by the fact that if you look at the third quarter consolidated gross margins relative to last year, we were up about 540 bps. If you look at that margin on a year-to-date basis, we're up about 640 bps. So as we've mentioned before, we hold ourselves accountable to continue to grow consolidated gross margin, and we'll continue to do that here in the upcoming future. As it relates to the product gross margin you're referencing, Adam, we were at -- on a non-GAAP basis at about 17% -- negative 17.3%. What's embedded within that number is a number of things. So first and foremost, obviously, we had the first full quarter of tariffs. If you actually look at it closely and you strip out tariffs, that margin actually would decline to about a negative 8%. So small -- or I would say, a pretty significant shift from the 17% and in that range of, say, high single digits. Additionally, we did have a fair amount of EOL investment that was necessary to make sure that all of the inventory in the channel was at the right levels, which would enable us to load in the right amount of inventory on the next-generation platform of products that we just rolled out. So there was a fair amount of upfront spending to encourage promotional activity to move that inventory through. That inventory has now been moved through, and we feel really good about where we stand right now as we go into the fourth quarter. So I have to say that we're extremely pleased with the fact that if you look across all of our operating metrics, especially our profitability targets, whether it's adjusted EBITDA, non-GAAP operating income, gross margins, they are all moving up and to the right, and we're extremely pleased with the overall performance of the team in this area. That's helpful. Adam Tindle: Yes. And it provides obviously a platform for future growth in margin when some of these temporary items rebound as well. So it makes sense. Maybe a follow-up, Matt. There's a number of growth drivers in the future as well for the business. I know you addressed some of the partnership in particular in your prepared remarks. So I want to ask a question on 2 of those. First is on Verisure. You mentioned the ADT Mexico piece of this. I wonder if that's maybe a broader opportunity for Arlo to expand more in Latin America in general. Would that need to be sort of a separate RFP process for you to win? Or do you have sort of visibility into that as an opportunity? How big could that be? And then secondly, on ADT itself, you mentioned they're testing units ahead of the market launch. Just wonder -- I understand you're probably going to be a little bit limited on what you can say here, but any framework that you can get as you get closer to this in setting investor expectations on the magnitude of that partnership? Matthew McRae: Yes. Great question. And when you talk about growth drivers, Adam, you're 100% right when we're focused on a couple of areas. One is, as Kurt was just mentioning, the growth in our normal channels like retail channels, and that's going really well. We mentioned on the call that units were up year-over-year by nearly 30% from a POS perspective, and we expect somewhere between 20% and 30% growth there. One of the other areas is exactly what you're talking about, what we call strategic accounts or our more B2B plays. There's a couple, and you mentioned some of them. So the ADT Mexico acquisition by Verisure, I believe, actually closed yesterday. in European time. And we've been actually working with them, as you probably could guess, behind the scenes for months, if not actually quarters, preparing and actually certifying all of our products for Mexico. So there's no incremental business to win. As you know, we are, at this time, the exclusive provider of some of the back-end service for them. We do a lot of camera development for them, both on Arlo product for those certain regions, but also some custom products that we've developed for them. So our expectation is that ADT Mexico acquisition by Verisure is kind of the first area they're focused on with potentially a more bigger expansion across Latin America. So it is a new region, I think, for the partnership to expand into over time and drive a lot of growth for both companies. So we're excited -- really excited about that. Then you look at EDT, I can't say a lot about EDT beyond what I said on the call, except that from an Arlo execution perspective in conjunction with that partner that we hit all the timelines we needed to hit, and there's actually product in the field. And from a user experience perspective, it's stellar. So we're really excited about talking more about that in the future, and we'll leave that to the date that, that actually goes live. And then I mentioned on the call that this is an area that we're excited about, and you should expect some more information over time. There are several other partnerships that we're in discussion with. And I expect between now and probably the end of Q1 or maybe going slightly into Q2, we'll have a couple of more sizable name brand accounts in the partnership space that we'll be talking about that could have a material impact on us going forward. So if you -- if I pull back and talk about how we get to our long-range targets that we talked about on the call, the 10 million subscribers, the $700 million in ARR and increasing that operating income over 25%. Kurt and I on previous calls, have said we think about 60% of that incremental growth over where we are today is going to come from strategic accounts. And I would tell you, based on recent activities and some of the things we can talk about and some of the things that are coming soon, I absolutely believe that's the case that we'll see 60% of that incremental growth come from strategic. And that's saying a lot because we think the traditional channels, retail and direct are growing really nicely, and we think there's a lot of growth there. So hopefully, that gives you a little bit more color on those specific accounts and where we think this part of our business is headed over the next couple of quarters. Operator: [Operator Instructions] The following comes from Jacob Stephan with Lake Street Capital Markets. Jacob Stephan: Nice quarter. Just wanted to ask, you guys made some comments last call, gross shipments in Q3 will be higher than you had originally expected. And you also kind of mentioned 20% to 30% unit growth as we look at the second half of the year here in Q4 specifically. But maybe you could help us kind of think through -- we saw higher negative margin in the products segment, but products actually -- product revenue was actually higher than we kind of had anticipated. And I understand that tariffs are part of the impact there. But maybe help us kind of contrast that with where you expect -- because it seems like you guys are a little bit above plan in Q3. And maybe I'm wondering if there's any kind of pull forward into Q3 versus what's going to be in Q4? Kurt Binder: Yes. There's no pull-in. I mean it was a very strong quarter. And to kind of break that down a little bit, the growth ship number is obviously strong because of the ex-ramp and the load-in of all of our new products. We always have a little conservativeness built in when we do the forecast for the quarter because there's a lot of things you can just run into from a supply chain logistics perspective. And I kind of mentioned on the call, we had a -- there was a container ship that caught fire in Korea. There was containers dropping in the ocean in Long Beach, none of ours, by the way. There were 2 typhoons. I mean, so there's always some things going on. And again, the team here executed exceptionally well around all of that, and we landed all the product where we needed to on time. And so I would say is that little bit of buffer we leave in for supply chain issues maybe during the quarter, we didn't need. And so you saw a pretty strong quarter on gross ship. The 20% to 30% or the inside the quarter, the 29% growth on year-over-year units, that's actually our forecast and results on POS. So how many units actually sold through the channel. And we like to talk about the growth that we're seeing there, 29% in Q3 and the 20% to 30% we're anticipating in Q4 because, as you know, shipments out really then become household formation, which then becomes service revenue, which is what's obviously driving the outstanding performance of the company and the expansion of profitability over time. So that's -- the gross ship number, Q3 is always strong because of seasonality. I think it was exceptionally strong because of the execution of the team and the load-in of so many new products. But the 29% in Q3 and the 20% to 30%, that's actually commentary on POS, which actually leads to future service revenue. Jacob Stephan: Yes. Understood. I know you guys run a tight ship on the logistics team. But maybe kind of help me think through some of the more important partners then as we enter kind of the back half of the year here. Obviously, you guys have bigger shelf share at Best Buy. You're kind of growing into a longer-term partner -- a bigger partnership with Walmart. Help me think through some of these strategic kind of retail partners? Kurt Binder: Yes, absolutely. I mean I think just commenting on Q4 in general, we know it was going to be a very competitive quarter. We're seeing great demand in the channel. So that's a good sign as we roll forward on Q4, but we knew it was going to be a competitive quarter, and you can see us preparing the entire company to actually be really successful inside of a competitive environment. So the product launch with 20% to 35% COGS declines as an example of that. A lot of the promotional activity we've got lined up with our biggest partners. Some of those are obviously Amazon, which is a big part of the market. We're actually gaining some share there week by week, and so we're happy about that. You mentioned Walmart. I mean, Walmart is part of our thesis around this product segment going more mass market. And we're seeing a wider population actually enter the space as the awareness over the product category and people feeling less safe in general is starting to drive. And we've been proven right over the last couple of holiday seasons. So we're expecting a strong holiday season with Walmart as well. And that's the channel as we've launched in our new product line, we've gone from 4 SKUs or 5 SKUs to closer to 9 SKUs at Walmart, so almost a doubling of shelf share there. And that's partially what's driving some of the unit velocity year-over-year from a quarter basis and why we feel like we're going to be exceptionally positioned with this product line going throughout 2026. So from a partnership perspective or where we think some of the growth is coming, it's across the board. I think we'll see strength in our strategic accounts. And then a lot of our big retail partners were set up, I think, very well for what will be a competitive quarter, but something we completely anticipated with our product launch and our promotional activity. And for us, as you know, it's really about driving that household formation to see that service revenue grow through the end of the year and actually tip over into a strong service quarter in Q1. Jacob Stephan: Got it. And maybe just kind of continuing on the service revenue growth question and comments. When we look at paid sub adds of 281,000, maybe you could kind of help us piece out the timing of those subs in the quarter, obviously, keeping in mind your $310 million service revenue guidance for the full year. Matthew McRae: Yes. I think it was pretty much through the quarter. There are some that kind of came a little bit later as we promoted the older product through the channel that Kurt was talking about, some of the EOL product towards the end of the quarter as the new product came in. So it might be a little bit more backloaded than you would expect over maybe a traditional just very linear trajectory through the quarter. But that 281,000 was really driven by 2 things. One, Verisure performed very well, and I think that was part and parcel of their IPO and going to market there and just really leaning into sales and executing extraordinarily well in Europe. But we're seeing strength in our retail and direct channel. as well, which is great. And so you see a more balanced revenue line when Kurt was talking about the split between Europe and the United States. So you're seeing some strength across our traditional channels. Another indicator of that is what I was saying before around seeing nearly 30% unit growth in the quarter. Now if you remember, when we guided the year on service revenue, we guided close to $300 million in service revenue. And on our last call, already seeing what was happening in Q3, we took that up to closer to $310 million. And so that's the confidence we're seeing. We are already seeing some of that sell-through happen in Q3 on the previous call and why we were willing to kind of bring up that guidance to demonstrate how strong not only the lift and the growth in the market of unit sales going through to the end user, but that it is resulting in higher than originally expected service revenue, which obviously leads to greater profitability. Operator: Thank you. This concludes today's conference call. You may now disconnect.
John Andersen: Good morning, everyone. My name is John Andersen. I'm the Chairman of the Board of Norsk Titanium, and welcome to this third quarter operational update. I know that you are all eager to hear from our new CEO, Fabrizio Ponte. But since Fabrizio joined us only 4 weeks ago on October 6, we thought it was appropriate that I make some introduction on our performance in the third quarter before leaving the floor to him. We also have online our CFO, Ashar Ashary. Ashar is unfortunately unable to travel due to a back injury, but he will be able to participate in the Q&A session. So just a quick reminder of our position in the additive manufacturing space. Norsk Titanium has a proprietary technology validated by the OEMs with large installed capacity. This is our starting point. We have a significant value proposition, and we do have manufacturing capacity installed and ready to serve our customers. We operate in what we would describe as a large market. As of today, we estimate the addressable market to be at USD 7 billion. Now you might argue that, that's quite a bit to work with in itself. But clearly, this market will continue to grow over time for 2 reasons. First of all, we see increasing build rate in our core markets, first and foremost, aerospace, defense, and then on the other hand, we continue to expand on our capabilities, so we will be able to serve a growing proportion of the market as we continue to expand on these capabilities, both in part size and into new metals. And finally, we have an established customer base. We have frame agreements with the leading OEMs. And our focus now is really to make sure that we can grow the business under these framework agreements, the existing ones and the ones to come. So this is really our starting point, a qualified technology, a certified technology, installed capacity, it's all about commercial execution, and you will hear more about that later in the presentation. What happened in the third quarter? Well, first and foremost, we did transition 2 additional industrial parts into serial production. I openly admit that this was less than we expected and less than we hoped for. It doesn't mean that opportunities have disappeared. But as you have seen before, it do take time to convert these opportunities into serial production. So what happened in addition? First of all, we continued to progress our discussions with Airbus. These are discussions in the short term about the third production order that we know many are following closely and waiting for. These discussions continue to progress with a wide range of stakeholders in Airbus, and Fabrizio will speak in somewhat more detail about that later. In addition, we also work with Airbus under a longer-term road map. And when Fabrizio talks about that later, please have a look at how the interaction between Airbus and ourselves map to the road map that Airbus has announced publicly about how they intend to expand the utilization of additive manufacturing. Then we had strong -- then we see strong momentum in defense, which is no surprise, I think, to -- for people following that sector today. Governments increased their spending in defense and time is of essence for obvious reasons. We have an ongoing discussion with ICAM, which is the Innovation Capability and Modernization Office under the Department of Defense. They have named our technology a key enabler to be able to drive increased capacity for defense products across a number of domains in the U.S. So we are hopeful that this will increase our revenues short term because these are paid development activities. And at the end of this development time line, 18 months, there will be increased serial production. And this is a good illustration of what defense offers, right? They offer funded development activities as well as significant parts manufacturing opportunities. Then we continue to expand in industrial markets. This is also something that Fabrizio will talk a bit more about later. But of course, the 2 parts that I mentioned is targeted in those specific markets. We did raise $22 million to strengthen our balance sheet and to strengthen our financial position first in a private placement and then in a repair issue closely thereafter. Under the same heading, we have also, after having made initial investments in the first half to make sure that we have the capabilities needed to convince our customers, we have also then taken a more careful approach to our cash burn in the third quarter, and you should expect those activities also to continue to make sure that our costs are aligned with our revenue development. Clearly, as I started with, our #1 challenge, our #1 priority is to convert our technology position, our industrial position into the commercial opportunities. And that's an excellent segue into my introduction of Fabrizio Ponte. Why did we feel that it -- that he had the right profile to lead this company forward? It's about commercial execution. It's about operational readiness. It's about financial discipline. And you will hear now from Fabrizio in his own words, how he feels that his background makes him very well equipped to take on this challenge going forward. So with that, Fabrizio, please. Fabrizio Ponte: Thank you, John. All Right. So maybe I take control. Can you hear me okay? So good morning, everybody. I'm Fabrizio Ponte. I'm the new CEO of Norsk Titanium. And I can tell you, I'm really excited to be here in Oslo and to have joined Norsk Titanium. A little bit about my background. I've been -- I spent the last 30 years replacing metal with very special polymers, okay? And now I made a jump on the dark side, joining a very special company in very special processes, making very special metal parts, replacing forgers, okay? So I know the drill. I know what it takes to get from point A to point B and push it across the tipping point. Why am I excited about Norsk Titanium? I mean, first and foremost is the technology. I mean, it's a game changer. From the outside, before joining, I studied a lot. I saw the potential for this technology. But then as soon as I joined, I started to hear about the pull that we have from the market, aerospace structures, defense and many other industries. And this gives me really, really a lot of confidence for the future of Norsk Titanium. What do I bring to the table? As I said, I've been working on replacing metal. So I know how to set up operation, scale operation and work with the markets, multiple markets in order to make technological changes. And this is very, very exciting to me. I think this is what I bring to Norsk. And I think with all the expertise that we have and the commercial expertise that I bring, we are going to be very, very successful in the coming years. As a leader of Norsk Titanium, I mean, I'd like to share a little bit what I believe. And first of all, quality and safety for me are nonnegotiable cultural traits. It is important that especially when you operate in aerospace and when you operate in defense, quality is nonnegotiable, okay? So you need to make sure that everything you do meets the standards of your customers. So this is going to -- I think it is, but it will remain a very important feature of Norsk Titanium. The second most important thing that is always in my head are customers. I have, I say, customer obsession. I really believe on working and everything has to be done with the customer in mind. I mean we exist because we have customers. So we need to serve our customers and working with them, gaining their trust and developing partnership is very important, especially in markets like this, where it takes time to develop and you need to have working in partnership together because together, you're going to cross the finish line. I believe on accountability. I believe in team play, but at the same time, I believe in accountability. So we are going to set clear targets that we're going to work very hard to deliver. I really believe that we have the right expertise in place. I saw that in my first month in the job. And this gives me also a lot of confidence. All right. So that's a little bit about me and a little bit about why am -- I joined Norsk Titanium and what I believe in. What is going to happen -- what has happened in the first 30 days? What is going to happen in the next 60 days? We had a plan for my first 3 months. No questions about it. There is a lot that I need to learn. As I said, I come from a very similar background, specialty products, replacing technologies and making advances in the market and scaling operation. But at the same time, titanium and special alloys are different than polymers. So of course, I need to learn. And the first -- and I'm really trying to be a sponge. I've been working very hard in the first 30 days internally. I'll continue to do that in the coming months. I mean, I believe I will learn from my colleagues and my team at Norsk, but I also will learn from customers. And I can tell you, as soon as I'm finished here in Norway, next week, my tour with customers will start with a number of very important discussion already lineup. This will help me to understand where we are, what we do and what our customers think of Norsk Titanium and what is in the future. Now what is the plan here? The plan is laid out across 3 different dimensions. Number one is commercial execution. I'm lucky enough to have joined Norsk Titanium with a rich pipeline of work. So it's not that I'm starting from scratch. So Norsk has been around for quite some time and advanced the technology and the customer relationship quite a bit. So I take advantage of all that. But I'm really trying to understand and digest what really our status is and what is going to take in order to really go across the finish line from the commercial standpoint. To me, that's my priority #1 in the first 3 months. In parallel, I'm working with operation. We want to be ready when we will need to serve large volumes with our operation. And scaling is always a big challenge. You never know what is going to happen. I mean -- but you need to be prepared, you need to get to a certain level. And then when it's going to hit, you need to know what the plan is and what to do. So I'm working with my operation to understand the strong points, the weak points and work towards making sure that we are ready when we need to be ready, which is going to happen very, very soon. Last but not least is financial discipline, okay? We have a finite funds available, and we know that we need to work with that in mind. So it is important that the entire company is aware of that and it works with the right discipline from the financial and the cash standpoint. So this is critical, and I'm positive we are in the right direction here. All right. So let's jump into the business. And I'll do my best to provide you an update. Please -- and I know that I can use this excuse only once, so I'm using it today. So -- but I've been with the company for 30 days now. It's actually the 6th. I mean, it's 1 month today, okay? So it's my birthday today, 1 month with the company. But I'll do my best to provide you an update of what happened in quarter 3 and a little bit of an outlook for the future. And -- okay, I'd like to say that quite a bit happened, okay? So of course, we continue to deliver parts to Boeing and Airbus. It's not huge, as you saw from the numbers. But nevertheless, we are making parts that are currently flying on different airplanes. So that's a very good starting point. But what I think made a difference in this quarter is really the ongoing discussion that we had with Airbus. This is really I'd like to think, a partnership between Norsk Titanium and Airbus. Airbus is focused on implementing additive manufacturing within their processes. They see additive manufacturing as a key enabler to the next-generation airplane. And they know that in order to get there, they need to translate parts now in order to be ready. And this is where Norsk Titanium comes into play. So Norsk Titanium is one of the key players in the technology at Airbus. We have -- you can see here the road map that Airbus has developed, and you can recognize some of our parts already there. So this is very comforting. You can see our position with Airbus. I don't have to explain that to you. Very -- I think we've been very active and with a lot of intense discussion, you understand that commercial aerospace is a very regulated market. You need to go through the steps and the steps are controlled by the OEM. Our job is to support them, help them, push them sometimes to stay at target. But these discussions are ongoing on a daily basis, okay? So next week, one of my first stop is going to be exactly with these guys. And because I look at Airbus as a very strategic and relevant customer and opportunity, which is going to really unlock the potential for us. What is even more remarkable is, as I said, the Airbus is looking into using additive manufacturing as a pivotal technology for the future. There are a lot of discussion on how Norsk Titanium can support Airbus to do that. This really goes beyond the third production order that John referenced. So of course, the third production order is the step that is going to take us over there. But even more exciting to me for the future is the fact that they want to work with us in order to define the standards of additive manufacturing. So that's very comforting and very exciting for me as a CEO and for Norsk Titanium as a whole. Last but not least, also to help you to understand how we work in the industry and what we need to do in order to really cross the finish line. I think this was a couple of months ago, we organized a very strategically important meeting with all the regulators, North American and European and Airbus. And altogether around the table, we discussed how to sort everything out and how to make progress towards part manufacturing with our technology and in additive manufacturing. So I think this is very unique when a company is able to bring around the table the key stakeholders that are going to make the decisions and define plans with key milestones in order to move forward is really a remarkable thing. I'm very excited about commercial aircraft. I think I'm excited about structures. I'm excited about other application we are working on like in engines and other parts in the aerospace. It's very, very good, okay? Second, defense. Defense is changing. It's a new industry. I mean it used to be as conservative and as regulated as aerospace. Now the situation is, because of geopolitical drivers, is a little bit different. So the industry is trying to acquire speed. The industry understands the need to change the way it makes parts and develops technologies that will make parts faster, stronger and in a much larger scale. We are an enabler to that, okay? And as John mentioned, we've been selected by ICAM, so the Innovation Capability and Modernization Program within DoD on 18 months program to validate our technology. So they're going to work in order to qualify us and validate us. When they qualify the technology, then to go and make parts, it becomes much, much easier, okay? So we are going to work very hard in order to succeed in these 18 months. And when we are at the end of the program -- and by the way, we are going to work with a number of primes there. We're not just there by ourselves. Then we're going to go and start to enable part manufacturing in a number of, let's say, sectors within the defense, air, land, sea, these are all targets that we're going to go for. And I think this is going to provide quite a bit of surprise -- positive surprises to us. Number three is all the industrial part. So we have a good starting point. We are already in semiconductor. I've been operating in semiconductor in a previous life. This is an important part. It is a wafer carrier. It goes to one of the -- if not, is one of the most important OEMs in the semiconductor industry. I'm very excited about this. They had a slowdown. Now things are picking up again. I'm going to be meeting these guys next week, too. And I think semiconductor is going to be also an opportunity. It's the first, let's say, industrial application that we are in production and gives me comfort that our technology has a play outside of just pure aerospace. As you read from the summary, we also converted other 2 parts in 2 other industrial applications. So all this tells me that we are on the right track. We -- before my time, so I will enjoy that, too, we set up -- we have started to set up a commercial team. We have dedicated and focused sales and [ biz ] development managers working in industrial. We mapped the entire industry. We understand what the priorities are. And we have a number of focused discussion with key OEMs in a number of industries, energy, again, semiconductor, oil and gas and a few others. So this will bring quite a bit of diversification. As I said, we've been all in aerospace, which is heavily regulated with a long development cycle for quite some time. All these markets are less regulated than that. There are going to be faster cycle, and I think they're going to bring opportunities in a shorter period of time and make up to the delays that oftentimes we have to bear within the aerospace industry. So to conclude, okay? So I'm the new CEO in Norsk Titanium. I'm very excited to be here. I like to believe I'm really the right person for this very moment in Norsk Titanium. I come exactly in the time where we need to go across -- we need to push it a little bit, go across the tipping point and then really start to scale it, and I know how to do that. So I'm very excited about this. I think I worked in the last 30 years to get to this opportunity. So I really think that my background helped me to be here, and I'm really energized to go after this challenge and take Norsk Titanium to the next level. I see this as the opportunity of my lifetime. We are really focused across 3 different work streams, okay? Commercial, operation and financial. Commercial to me, I always say starts first, we need to make sure that we secure our revenues, profitable revenues. So we need to -- in the next months and years, we need to work with our customers in order to secure our revenues and make the jump that Norsk Titanium needs to make. This is the priority #1. Everything else follows, okay? Operation, being ready in an efficient way, but also being able to scale it. And in additive manufacturing, it's slightly different than in other industries. So you scale in a different way that, for instance, you scale in the polymer industry, okay? But you need to be sure that you do that ahead of time. You cannot be caught off guard when you are there. And then financial discipline, very important across the entire industry. Finally, obviously, modest near-term revenue. I mean you saw that this year as certainly we cannot claim a victory and -- but having said that, we made solid steps towards success. I'm very positive about that. I mean when people ask me, what you see. And what I see is I'm very confident about the future and the outlook. I have no doubts about that. So I always say it's not a matter of if, but it's a matter of when. My job is to make sure that this when comes as fast as possible, and I will work diligently and with a lot of energy in order to make sure that, that happens. Thank you for today. I really hope this was informative. I hope you know me a little bit better. You started to know me a little bit better. I think in the coming quarters, this will continue, and we're going to get to know each other and work together for the future and to make Norsk Titanium very successful. Thank you, everybody. Unknown Executive: Thank you, Fabrizio and John. I think we'll move over to the Q&A section. So we'll start with the audience here in Oslo. Please raise your hand if you have any questions. And please state your name before you ask the question. Unknown Attendee: [ Preben Rasch-Olsen ]. I have actually 3 questions. I hope that's okay. A few of them should be pretty easy. First, on the outlook, no mentioning of any revenue targets next year or 3 years from now. Are you finally done with that stupid guidance? Fabrizio Ponte: I may take this one. So okay. You say it's a stupid guidance, so I accept your constructive feedback. I've been here for 4 weeks, okay? So I'm working to understand exactly what we have in place, what our customers are saying and expecting from us. So very difficult for me to give you a firm feedback on this. I mean I'll work another couple of months. So in the next review, which is going to happen early next year, I mean, we're going to talk about that. But yes, I mean, it's -- maybe we will stop the stupid guidance... Unknown Attendee: I think that's smart. What you could guide on and would be interesting to hear is a realistic cash burn in the first half of '26. What sort of the level you can reach and should reach? Fabrizio Ponte: So also here, I mean, we are -- okay, we're already reducing this. I mean we were successful at going from $2.9 million to $2.4 million. Now we want to go at USD $2 million. But certainly, before the end of the year, I want to be in the position to set a target that we can absolutely achieve, which is not going to go up, but it's going to go down. What is achievable? I cannot tell you right now. But what I can tell you that I'm committed to define a very clear target that we're going to work on and deliver on an average for next year. But this is absolutely, as I said here, one of our targets. I mean we know that we need to reduce our cash burn rate, and we're going to do it, okay, one way or another one. Unknown Attendee: And last one is really on the aerospace. My understanding was that you sort of was done with all the approvals from the regulators. But you were saying you're sitting down with Airbus and the regulator... Fabrizio Ponte: Okay. I hear too. And you can correct me if I say something stupid, okay, [ Preben ]. So okay, It's -- okay, first of all, you know that there is a government shutdown in the U.S. This is impacting us a little bit. So right now, actually, everything is blocked and standing still until they reopen, the government. I mean they cannot progress. Aligning the FAA and EASA is not easy work, and they need to be aligned for us to be approved to go forward. So everything is done. We need to complete the paperwork. And this did not happen for multiple reasons. Hence, we decided to take the bull from the horn. We brought everybody around the table to do exactly that. This also says that, hey, we are not sitting and waiting hoping that it's going to happen. We are actively trying our best to influence and progress, which is not easy work, believe me. John Andersen: So if I may add to what Fabrizio said because this is also a legacy issue, right? So you're absolutely right, [ Preben ]. The fundamental approvals, the fundamental certification is obviously there. But if you look at Airbus road map and what they want to do going forward, we cannot continue to work in the same way. We cannot continue to approve additive manufacturing parts with a forging legacy. And the regulators agree, and Airbus agrees. So this was more about how can we streamline processes going forward, how can we ensure information flow, how can we have an approach that actually is based on the fundamentals of additive manufacturing, right, not to reopen the certification process, but to make things more efficient going forward. Because if you look at the road map that Airbus has been quite vocal about, it requires a change also on the regulator side. And it's a bit unusual, right, that both the regulators sit down, as Fabrizio said, with a company like ours to actually talk about -- I mean, it's like the regulators would actually accept that we are really the point of gravity in the additive manufacturing space. We have gone through this cycle. There are no other additive manufacturing companies that have gone through this cycle. So we put them together in the same room, which they don't do often. And then we can talk about how to make this efficient going forward because otherwise, there is a risk that we will have stumbling blocks as we try to help Airbus implement their road map. That's how to think about it. Unknown Executive: Any more questions in the audience? Okay. We'll move over to the web. With delay in revenues, what operational changes have been made to ensure better execution as revenue scales? John Andersen: So maybe I can start because this is a bit of legacy. So -- and this ties in with what we discussed earlier about burn rate, right? So we did make certain investments, which we also described in our third quarter update. We did make certain investments to be ready in the first half and hence, the slightly higher burn rate. Now we are in a position where we can manage that more carefully. So it goes to a number -- it goes to capacity, it goes to inventory. It goes to securing downstream capacity, not only in-house capacity. It goes to how we approach testing. I mean it's a wide range of operational issues that we can fine-tune and therefore, on the one hand, still be a credible supplier because that's important, right? We don't want to do anything which would give our customers the possibility to escape, if you like. On the other hand, we also need to be mindful and disciplined in how we allocate capital. Fabrizio Ponte: And on the other hand, I mean, we put a lot of efforts also of creating a commercial force, which is now dedicated to bring home revenues. So go out, hunt, bring them back. And I think that's really also a big change, and we're going to continue down the line to become better and better at going out and bring back opportunities that we can serve, okay? So that's a very big change. Unknown Executive: Good. And following up on the cash burn topic. Are you self-funded with your current cash balance? John Andersen: Well, I don't think that we will change the messaging because this refers back to what we did in the first half report. And I think we have no other message at this point in time. You have heard Fabrizio and his plans for the next 60 days. I'm sure that we will look for ways to accelerate. We will look for ways to be more disciplined and not go back to any specific guidance different from what we have already given the market at this point in time. Unknown Executive: How is the diversification progressing? And what are your strategic priorities going forward? Fabrizio Ponte: So I think it's progressing well. I mean we mapped -- we spent, I think, a month together with a consulting firm to put together a thorough map of the opportunities, matching our technology with the different industries. We were able to identify 3, 4 key industries. And now we are focusing on those industries, and we have a go-to-market strategy in every single one of them. We have a single point of accountability for every single industry, and we are now working already with customers on projects and on parts. So they bring back their ideas, their blueprints and we come back with the pricing. And so it's, I think, progressing well, and I'm very, very happy on the execution that we have. We're going to take this now forward in a step up in the coming months. John Andersen: And if I may add to that, we have talked about this also historically. Our value proposition in aerospace and in aerostructures is pretty clear. I mean, the customers are complicated to navigate, as Fabrizio talked about, but our value proposition is pretty clear and our customers value the properties of the parts. In the industrial segment, it's a little bit different. So you need to be more selective in how you identify parts, right? Because our value proposition could be a bit different from industry to industry and from customers to customers. So of course, the Hittech part, it's not like Hittech and the end customer necessarily need aerospace quality for the strength of the material, right? It's really our ability to reuse material consumption. That is the key value proposition that we offer on those particular products, right? So you have to be a bit more mindful about how you approach customer and therefore, this more deliberate approach that Fabrizio just described. Fabrizio Ponte: Yes. And then the positive thing is that, okay, in aerospace, the tailwinds are very clear, okay? So they need to increase their build rates. They need to change their production processes in order to meet those build rates, okay? This is very clear. I can tell you that we see tailwinds also in all those markets. I mean if you can be out there with a technology that is faster, that is more efficient, both from the raw material standpoint and the power consumption and you can work with customer in a nimble and quick way, then you have a very strong value proposition. And we see that across multiple industries, and I'm positive we'll be able to identify the areas where we can be successful fairly quickly because these are, as I said, not as regulated as aerospace. So technically, the development cycle should be much faster. So still technical because we are not in the business, I always say, of potatoes and tomatoes. We are business on selling very technical parts that make a difference and oftentimes are structural. So you need to go through the steps, which is normal for specialty products. But then these are much faster than aerospace, where you have agencies that you need to convince OEMs that you need to align and so on and so forth. Unknown Executive: Good. You began the year with an annual recurring revenue of $12 million. Year-to-date, you have revenue of $2.6 million. And then assuming Hittech represents just a small portion of the annual recurring revenue, what explains this deviation? And maybe also remind people on your definition of annual recurring revenue. John Andersen: And maybe this is a question -- if Ashar is still online, maybe this is a question that you would like to address, Ashar? Ashar Ashary: Yes. Thank you. So yes, so the -- so let's start with the definition of annual recurring revenue. As you can see from this report in Q3 that we are not guiding to an annual recurring number anymore. Hittech is actually not a small portion of that $12.8 million number that we reported. It is actually quite a significant portion of that number because of 2 things. Volumes in 2024 were quite high. And it's a fairly large part as most of you have seen, and the dollar value of that large part was significant. So out of the $12.8 million, it was -- it was a significant -- it's a significant amount -- it was a significant amount of revenue. In 2025, as we have explained in the first half report, that purchase order was dwindled down because of the demand that Hittech was seeing. We do intend to bring that -- we have a purchase order for later this -- in Q4 to deliver parts to Hittech, but it is not at the same level as we were delivering in 2024. John Andersen: And then I think it's fair to say that we will continue to -- reflecting on the essence of the question, right, we will obviously continue to consider also in light of [ Preben's ] previously -- previous advice, what is the best way to guide forward and whether ARR is, in essence, a relevant concept for the industrial segment. I would still argue quite strongly that it's probably a relevant concept for the commercial aerospace segment. But as Fabrizio alluded to earlier, the industrial segment is more transactional in nature. So I think that, that is something that we need to consider in order to provide the best possible guidance to the market. Unknown Executive: And then we have received quite a few questions regarding Boeing and the status of your current relationship and the outlook, I guess. Fabrizio Ponte: I can start. We are delivering parts to Boeing. We are working on a number of development, helping them to learn and improve their knowledge on additive manufacturing. We are going to increase our discussions with Boeing. I've been working with them for a long period of time in another technology. So I will -- I'm bringing that along. I'm positive that there is opportunity there to go beyond the parts that we are already supplying and with all the developments that we have in place to have line of sight to part manufacturing, okay? So no doubt about it. Airbus is our current front-runner. Boeing is there, and I think there is opportunity to be -- to establish our presence very similarly to the one we have at Airbus. Unknown Executive: And then we have received some questions regarding Q4 and maybe order intake. So could you comment on how sales will look in Q4 and maybe comment on budget flush within your defense customers? Fabrizio Ponte: So I think Q4 is going to be also along the line of Q3. We are working very diligently and very actively to bring things home and to make sure that we are prepared for 2026. Defense, as you know, we are delivering parts also in the defense industry to a number of primes. But the development here, this is not here, but the one I discussed before, it's a game changer, not only because they're going to work and validate our technology, but also from the revenue standpoint, as John said, is an important number for us for next year. So it's a multimillion dollar contract that is going to unlock opportunities for parts. So we are extremely excited about this. John Andersen: And just to clarify, it's a multimillion dollar development contract, right, to establish the basis for parts manufacturing. So we don't know exactly how big that platform will be eventually. But I think it shows the commitment of the defense -- of the Department of Defense when they invest a few million dollars in developing this. And that makes us hopeful, as Fabrizio touched upon earlier about the potential there. That's not going to move the needle production-wise in the fourth quarter, just to make sure that we are on the same page. Fabrizio Ponte: But revenue-wise is relevant and... John Andersen: But revenue-wise, it's relevant. Unknown Executive: Then we have a question from [indiscernible]. Can you comment on the Airbus time line? And how do you expect the different steps from here to serial production and revenue recognition? Fabrizio Ponte: So -- okay. Again, difficult for me to provide point of contacts. I'm starting my customer journey at the end of the week. So I wish this question came a month from now. But I can tell you that there are very clear milestones that we know we need to hit, and we know how to get there. It's a matter now to work with Airbus to sort everything out and meet every single milestone in the next weeks/months, okay? So that's -- this is what is happening and where we are currently active. Ashar Ashary: Yes. And I would like to add to that. We are currently delivering Airbus parts that are in serial production. There are 12 part numbers that are in serial production with Airbus that we are delivering consistently right now and recognizing revenue. Unknown Executive: What sales advantages does the September MMPDS provide? John Andersen: First of all, right, this has been in the making for a while. And as you have seen throughout various updates, we have gone through qualification cycles with a number of OEMs, right? And the OEMs, they would typically have their own specification and their own framework and their own process to reach a qualified process or a qualified technology. With this particular standard, to simplify it, right, because MMPDS is a mouthful. But with this particular standard, that allows companies that do not have their own specification, that do not have their own design process for approval to basically use the properties that are in this standard, documented by our technology. So we are the first additive manufacturing technology to go -- that will go into the standard. And this is the go-to book for a number of engineering environments that are looking to bring new technologies into their various industries. So I would say that this is probably particularly important in industrials and also to some extent, in defense. But it really... Fabrizio Ponte: I think also aerospace is critical. I'm personally very excited about this. I mean the MMPDS is the handbook when it comes to metal parts. So as John said, I think this is coming out officially in December. So in December, we are going to be listed officially. We know it's going to happen, but officially is going to come in December. And you're going to read a lot about that because I think we need to give a lot of visibility and make sure that the industry understand how relevant that is. As John said, imagine, I mean, you are an engineer and now you're going to go to the handbook, the MMPDS, where you see that this technology is listed, validated, now you can make parts. And mechanical properties are in there, safety standards are in there. So it's really a game changer from my point of view. And then I think we need to make sure that we leverage that to expand our reach and make sure that engineers start to write specifications based on the standard we're going to have in this handbook. Unknown Executive: Is it possible to leverage this before it gets released in December? Fabrizio Ponte: So it's November 6. So I think we have another 25 days to do that. But what I can tell you is that in anticipation of the release, we are going to work on really a communication campaign to make sure that this is highly visible. And this will be used in the future to make sure that everybody understands that we are listed in the handbook and this can be used to make parts. So it is a game changer also for our [ biz ] development people, okay, so that they can go along with this. Unknown Executive: Okay. Last question from the web. With industrial market set to account for almost 50% of your, I guess, '26 target -- revenue target, what is the anticipated split among the different industrial segments like oil and gas, semiconductor and so on? Fabrizio Ponte: Yes. I think semiconductor will play an important part next year. This is already business that we have, and we are working to expand. We have 2 new parts which are in energy infrastructure. But I think the dominant part will be the semiconductor part. Unknown Executive: Okay. Do we have any last questions from the audience? No? I think that concludes today's presentation. So I would like to thank Fabrizio and John and of course, everyone watching in and being here in person as well. Fabrizio Ponte: Thank you. Thank you very much. John Andersen: Likewise, thank you.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the KLX Energy Services Third Quarter Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ken Dennard. Thank you. You may begin. Ken Dennard: Good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review third quarter 2025 results. With me today are Chris Baker, President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide commentary on its quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call and it will be available by webcast by going to the company's website at klx.com. There'll also be a telephonic recorded replay available until November 20, 2025. For more information on how to access these replay features go to yesterday's earnings release. Please note that information reported on this call speaks only as of today, November 6, 2025. And therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX's management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX website. And now with that behind me, I'd like to turn the call over to Chris Baker. Chris? Christopher Baker: Thank you, Ken, and good morning, everyone. Thank you for joining us today. The third quarter represents the strongest quarter of the year, overcoming continued market headwinds, including commodity price volatility and a softer OFS activity environment. Tax generated revenue of $167 million, up 5% from Q2 and adjusted EBITDA of $21 million, up 14% from Q2, ahead of our prior guidance. Adjusted EBITDA margin improved materially by 100 basis points sequentially to 13% despite the average U.S. land rig count declining 6% average frac spread count being down 12% over the same time period. Our results were driven by a 29% revenue increase in our Northeast Mid-Con segment which more than offset softer activity in the Rockies and Southwest segment. KLX outperformed the industry trend once again by strategically allocating its assets across our broad footprint focusing on field execution and efficiencies and tight cost controls. Operationally, our completion-oriented product lines in the Mid-Con Northeast, along with a rebound in our accommodations and flowback businesses contributed meaningfully to this quarter's top line strength. KLX's third quarter results are a testament to our team's agility, dedication and collaboration effectively managing white space in a difficult market, all while controlling costs. The operating environment remains challenging, shaped by OPEC+ supply growth and depressed rig counts across all major basins. We believe that our diversified asset base premium customer alignment and diverse geographic footprint will continue to support consistent performance. Third quarter revenue and adjusted EBITDA per rig were $318,000 and $40,000, respectively, 20% and 227% above the levels from the fourth quarter of 2021, the last time industry activity was at similar levels. This underscores the progress we've made in strengthening our competitive standing and driving operational and organizational cost efficiencies over the past several years. Simply put, KLX is significantly more efficient today than we've been in prior cycles. Now let's look at our segment results. The Southwest represented 34% of Q3 revenue, down from 37% in Q2. Northeast Mid-Con was 36%, up from 29% in the prior quarter, and the Rockies was 30%, down from 34% in Q2. The Rockies experienced reduced completion activity in our tech services, frac rentals and coiled tubing product service lines. In the Southwest, weaker demand in directional drilling, flowback and rentals driven by the overall reduction in Permian activity and white space associated with customer M&A integration initiatives resulted in a softer top line with revenue declining 4%, albeit still outperforming the segment's average rig count decline of 9%. The Northeast Mid-Con segment was a standout in Q3 with our completions-oriented product lines delivering sequential growth for both revenues and margins, demonstrating our ability to capture incremental activity by basin, focusing on crew and equipment allocation throughout the KLX footprint and we expect continued momentum into Q4. By end market, drilling, completion and production intervention services contributed approximately 15%, 60% 25% of Q3 revenue, respectively. Based on current customer calendars, we expect a healthy Q4 despite typical seasonality and budget exhaustion. This reflects recent market share gains, the solid execution of our strategy and a steady focus on long-term value creation, all of which positions KLX for increased activity anticipated in 2026. I'll now turn the call over to Keefer to review our financial results in greater detail, and I will return later to discuss our outlook. Keefer? Keefer Lehner: Thanks, Chris. Good morning, everyone. As Chris mentioned, Q3 2025 revenue was $167 million, a 5% sequential increase but 12% lower than Q3 2024. Average rig count was down 6% over this period and frac spread count was down 12% over the same period. Our Q3 sequential results were driven largely by strong growth in the MidCon, Northeast segment, which saw a 20% -- 29% quarter-over-quarter top line increase. The outperformance was complemented by disciplined management of fixed costs, resulting in consolidated adjusted EBITDA margin expansion to 12.7% from 11.6% in Q2 and was in line with last quarter's guidance and approaching Q3 2024 margin levels of 15% despite a market environment measured by rig count that is down 7% over the same period. Total SG&A expense for the quarter was $15.6 million. Excluding nonrecurring items, adjusted SG&A expense came to $14.8 million representing a 30% reduction from the same period last year and an 18% improvement sequentially. These reductions reflect the full impact of the cost structure initiatives implemented in 2024 supported by incremental efficiency gains realized throughout 2025, reduced third-party spend and settlement of a legal claim. Looking ahead, adjusted SG&A is expected to remain in the 9% to 10% of revenue range for the year. Moving to our segment results. The Rockies segment had Q3 revenue of $50.8 million and adjusted EBITDA of $8.1 million. Sequential revenue and adjusted EBITDA decreased 6% and 22%, respectively, mainly due to a slowdown in completions activity due to discrete customer scheduling, particularly in tech services, frac rental and coiled tubing. As we move into Q4, we've seen some choppiness to customer schedules and expect typical holiday slowdowns. In the Southwest segment, revenue and adjusted EBITDA were $56.6 million and $5.1 million, respectively. On a quarterly basis, Q3 revenue decreased 4% sequentially, with EBITDA down 29%. As expected, given the 9% decline in Southwest rig count, an 18% decline in permanent frac spread count, the Southwest experienced lower activity across directional drilling, flowback and rentals which drove a corresponding downward pressure on margins during the period. For the Northeast Mid-Con segment, revenue was $59.3 million and adjusted EBITDA was $14.5 million. The sequential increases in revenue of 29% and adjusted EBITDA of 101% were largely driven by higher utilization across our completions portfolio, reduced white space in our calendar and targeted expense management across our various PSLs operating within this segment. At corporate, our operating loss and adjusted EBITDA loss for Q3 were $8 million and $6.6 million, respectively, with our operating loss improving 11% from last quarter, and our adjusted EBITDA loss was within $300,000 of Q2 2025. Turning to our balance sheet, cash flow and capitalization. We ended the third quarter with approximately $65 million in liquidity, in line with Q2, including $8.3 million of cash and cash equivalents, and $56.9 million of availability on our revolving credit facility which includes $5.3 million on an undrawn FILO facility. Total debt as of September 30 was $259.2 million, including $219.2 million in notes and $40 million in ABL borrowings and is also largely in line with Q2 levels. We remain in compliance with our debt covenants. Our bonds require a 2% annual mandatory redemption paid quarterly. We've continued to make these payments, but we did PIK $6 million of interest in Q3, and we will evaluate future PIK versus cash decisions based on market conditions and company leverage and liquidity. It's worth noting that our most recent PIK election was 100% cash paid interest. Moving to working capital. As of September 30, we had $50.1 million of net working capital and our DSO held steady at a normalized level of 61 days and our DPO increased slightly to approximately 50 days, both roughly in line with long-term historical averages. We remain focused on disciplined and proactive management of working capital to ensure flexibility and resilience in the current market environment. Our capital expenditures for the quarter were $12 million, and $7.8 million net of asset sales, down 6% from Q2, and we expect a further decline in Q4, in line with our focus on further capital efficiency. Year-to-date, capital spending trends suggest a full year gross CapEx of $43 million to $48 million with net CapEx of $30 million to $35 million when you include asset sales. As activity declined, head count was reduced approximately 2% sequentially, supporting overhead control and increased operating leverage. Also, we completed the sale of facility in Q3 expect additional asset sales to close in Q4. We continue to monitor and respond to asset performance, and our finance leases are beginning to transition as older vehicles roll off in Q4. We contributing to increased operational agility into 2026, and our portfolio of finance leased coiled tubing units will be owned outright in late 2026, which will drive a meaningful improvement and free cash flow profile going forward. I'll now hand the call back to Chris for his concluding remarks and more color on our outlook. Christopher Baker: Thanks, Keefer. While the broader market conditions remain mixed and near-term visibility is limited, we are encouraged by recent signs of stabilization and rig activity and the emergence of sustained and incremental activity in the natural gas basins. We continue to emphasize operational discipline, margin optimization and proactive capital stewardship sustained by close coordination across our operating regions to weather current market volatility. With improved overhead efficiency, a disciplined cost structure and a flexible balance sheet, we are confident in our ability to navigate the remainder of 2025 successfully and capture upside as the market strengthens. As we look ahead, we anticipate typical seasonality and budget exhaustion to moderate activity through the fourth quarter, yielding a mid-single-digit revenue decline from Q3 to Q4. This signals a less pronounced Q4 reduction than in years past. Importantly, we expect continued stable adjusted EBITDA margins, aided by ongoing cost discipline, year-end accrual dynamics vehicle turnover and regional activity mix. Our fourth quarter guidance reflects steady demand across our core product service lines, supported by new project awards from key accounts. Operationally, our diversified portfolio, prudent capital discipline and proven operating leverage continue to drive strong execution, helping to offset macro volatility in commodity noise. In addition, KLX stands to benefit as natural gas demand accelerates, underpinned by new LNG export capacity and increased data center activity. On a quarter-over-quarter basis, dry gas revenue rose 15%, building on the 25% increase we saw in Q2. Haynesville activity rebounded by 6 rigs in Q3, and we continue to monitor demand drivers on the board. with close to 11 Bcf per day of new LNG export projects scheduled to come online over the next 5 years, including key capacity additions along the Gulf Coast. The U.S. is well positioned to strengthen its role as a global energy supplier. Our internal planning highlights continued relative stability in completion-focused service lines along with a modest Q4 bounce back in drilling activity. Combined with incremental benefits from strategic cost controls already underway, these strengths reinforce our confidence in delivering profitable growth in 2026. Our strategic capital stewardship ensures we remain ready for both measured top line expansion and sustained margin strength. In summary, unused fleet capacity and minimal white space have allowed us to adapt operations efficiently and support margin expansion even in periods of softer activity. KLX is now better situated from an overhead efficiency standpoint than at any time in our post-COVID history, empowering us to strategically capitalize on future opportunities. KLX has significant operating leverage to a rebound in market activity. And similar to prior cycles, we will ensure we are best positioned from a personnel asset and technology standpoint to maximize our upside in future periods. We appreciate the ongoing dedication and commitment of our team members, the partnership of our customers and the support of our stakeholders, empowering us to deliver value and drive KLX forward. With that, we will now take your questions. Operator? Operator: [Operator Instructions] Our first question is from Steve Ferazani with Sidoti & Company. Steve Ferazani: I got to start with the Northeast MidCon, which we expected it to trend higher for you. But those numbers were way past our expectations. That your Northeast Mid-Con margin was the highest it's been in 3 years and 3 years ago, natural gas prices were over $8. Can you indicate the performance because it's impressive? Christopher Baker: No. Look, I appreciate that. Our Northeast -- if you really dig into it, our Northeast business within the Northeast Mid-Con remained relatively stable, predominantly driven by rentals and fishing. You dig into the Haynesville, we were able to capture revenue increases and accommodations and flowback specifically. And I think perhaps most importantly, we saw less white space overall in our Mid-Con PSL. And so when you think about the positive operating leverage and just being base loaded, you see a lot of margin expansion. And so I wish we were back in a market where we were at $8 gas price, we're not. I don't expect to go there anytime soon. I do think a macro theme though is KLX as a whole is just more efficient today than we were in the period you referenced. And I think that shined through in our Northeast Mid-Con performance. Steve Ferazani: Is it also fair to say you're gaining market share? Christopher Baker: Well, look, I think rig count was up, what, 6 rigs quarter-over-quarter on average in the Haynesville. So you can think about that on a percentage basis where once again, we drove quarter-over-quarter revenue just from a dry gas perspective of 15%, 25% in the prior quarter, if you recall, our Q2 discussion. And so I think within certain product lines, yes, we've gained market share. Steve Ferazani: And then flipping to the other side, which was the Rockies, we know that drilling and completions are trending down, but you did outperform our estimates. Was there anything specific going on in that market in 3Q beyond the general macro? Christopher Baker: I think specific in nature, look, rig count to your point, was really flat in the Rockies quarter-over-quarter. There were puts and takes in the various basins within the Rockies, but overall Rockies was generally flat. However, what we did see was some very episodic completion programs with an overall decline in kind of refrac activity. And we saw a lot of refrac activity in '23 and continuing into parts of '24. And so I think the episodic nature of those completion programs is back to the point with the Mid-Con, it really highlights the negative operating leverage when your cost structure is relatively fixed in the short term and at current market pricing levels. And so when you get a last-minute delay in a completion program that pushes revenue out of the schedule or maybe out for a month, it's really hard to adjust your cost structure in the short term. And so the negative operating leverage really impacts margin. Steve Ferazani: That's helpful. When you're indicating the slower year-end slowdown, you're certainly not the first company to say that during earnings season. What is it you're hearing from operators? And how does that make us think about next year when, obviously, a lot of folks are concerned about oil oversupply and pressure on WTI? Christopher Baker: Yes. I think there's really 2 questions there. First, Q4, we stated a mid-single-digit revenue decline on a percentage basis. That's materially below the 13% quarter-over-quarter decline we saw last year. The decline is largely going to be driven by holiday slowdowns. I think, less pronounced budget exhaustion versus prior periods. I would note that on a monthly basis, our October revenue was flat to September whereas if you look at 2024, we saw a 7% decline October versus September in the same period. And so we're already off to kind of, on a relative basis, a better start. On the margin side, we expect margins to hold up despite declining revenue really just due to cost controls. We've got our typical Q4 accrual unwinds relative to PTO and other accruals. And we also talked about the fleet turnover in our prepared remarks that typically occurs in Q4. And so that's how we're set up on Q4 as we sit here today. Steve Ferazani: And then...go ahead. Christopher Baker: Yes, I was going to say on next year, look, it's still too early to give firm guidance from a 2026 perspective. we've seen puts and takes with operators saying their CapEx budget for next year is going to be to slightly down. I think we're set up where the gas market is going to be very consistent, and everybody is projecting a full year-over-year increase in activity, and we would expect that to hold true for us. We continue to see consolidation. We saw a major consolidation transaction earlier this week. We know these transactions can lead to episodic white space and growing pains as they integrate their portfolios. Net-net, we are typically the beneficiaries as we talked about before of consolidation, but it still can create some puts and takes. I will say we've received some recent wins from an RFQ perspective on the award front, which we think are supportive of both Q1 and 2026 overall. And then lastly, I think the last part of your question, the EIA just posted a report earlier this week saying, and I think it was on Tuesday, saying we're going to have to ramp up U.S. activity to sustain U.S. crude production. And so it's very circular. I think it's if and when production declines take over, that is supportive of commodity prices and higher commodity prices is supportive of activity. And so it feels like it's a question of when, not if activity rebounds in the oil basins. I think there's some optimism building around the second half of '26 into '27. We'll just have to see how it plays out. Steve Ferazani: Fair enough. That's very helpful. I do want to touch on the balance sheet. $65 million in available liquidity. 4Q tends to be a strong cash flow quarter, but then Q1 is the working capital builds again more dramatically. I'm just trying to think about your flexibility. You haven't used the PIK option yet, you have that at your disposal, which can help depending on how the first part of next year plays out. Generally speaking, and you've been selling some equipment, I think you talked about some facility sales. Can you just give us a general overview about -- and you've done a great job trying to protect the balance sheet during this downturn. Just generally, how you're thinking about that without knowing exactly how activity plays out first part of next year? Keefer Lehner: Yes. Good question and lots of moving pieces, obviously, in there from a free cash flow perspective. First, on the PIK, so we did PIK a portion of our Q3 interest. We picked about $6 million of interest in the third quarter. But in the prepared remarks, we did say that our most recent cash PIK election that we submitted last week, we did do 100% cash pay there, but we will continue to evaluate PIK versus cash decisions through the wins of managing the balance sheet from a leverage and liquidity standpoint. So nothing is going to change there. As it relates to free cash flow, you're spot on that Q4 is typically a strong free cash flow quarter for us. We had $11 million or so of unlevered free cash flow in Q3. We did guide Q4 down on a mid-single-digit percentage basis. With that said, working capital should unwind. Given that decline, Q4 does not also have the extra payroll that we have in the third quarter. So those 2 things combined should lead to improved kind of free cash flow generation in the quarter largely due to working capital trends. DSO has been holding in pretty consistently around 60, 61 days. I would expect that to hold going forward. On the DPO side, we've been kind of trending in the low 50s. Again, I would expect that to hold going forward. As you think about CapEx and its impact on free cash flow, we're guiding to a much lower kind of minimal net CapEx spend in Q4. Obviously, kind of gross spending will be down, but that will be offset by some of the asset sales that we mentioned and you alluded to in your question. So I think all those things combined to Q4 being a strong quarter, and that's why we continue to reiterate that we expect liquidity to continue to improve as we navigate the remainder of this year. As you turn into 2026, I think the quarterly trends there, as you point out, will continue to play out to some extent. I will say that I expect Q1 2026 to be less burdensome from a working capital investment standpoint compared to the '24 to '25 transition just given what we know today. Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Chris Baker for closing remarks. Christopher Baker: Thank you, operator. Thank you once again for joining us on the call today and your continued interest in KLX. We look forward to speaking with you again next quarter. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the Pacira BioSciences Third Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susan Mesco. Please go ahead. Susan Mesco: Thank you. Good afternoon, everyone. Welcome to today's conference call to discuss our third quarter 2025 financial results. Joining me are Frank Lee, Chief Executive Officer; Brendan Teehan, Chief Commercial Officer; and Shawn Cross, Chief Financial Officer. Jonathan Slonin, our Chief Medical Officer, is also here for our question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Pacira website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee. Frank Lee: Thank you, Susan, and good afternoon to everyone joining today's call. We're pleased to report another successful quarter of strong execution across our corporate, clinical and commercial initiatives. We're seeing top line growth accelerate with year-over-year revenues increasing by 6%, driven by a strong quarter for EXPAREL and iovera. We continue to make important progress advancing our 5x30 path to growth and value creation. To remind you, this plan supports 2 broad strategic initiatives: first, growing our best-in-class commercial-based business; and second, advancing an innovative pipeline of potentially transformative assets such as PCRX-201. Notable third quarter highlights include increasing EXPAREL demand with year-over-year volumes up approximately 9%. This is the highest quarterly growth we've seen in over 3 years and underscores the value of our commercial investments, improving manufacturing efficiencies and favorable gross margin supporting our second increase in full year guidance, significant cash flows and a strong balance sheet, enabling investments in new growth initiatives, meaningfully expanding our clinical pipeline with the in-licensing of AMT-143. This complementary long-acting non-opioid directly aligns with our 5x30 strategy and has the potential to provide longer pain relief versus currently available local analgesics. Disciplined and strategic capital deployment, including share repurchases of another $50 million. And finally, solidifying our exclusivity runway with the listing of our 21st EXPAREL patent. This now appears in the FDA's Orange Book and additional patents are forthcoming. I'll begin with a high-level overview of our commercial portfolio, where we're seeing improving trends for each of our products. For our flagship product, EXPAREL, momentum is on the rise as a result of strong execution, expanding market access, awareness and utilization. On the market access front, we continue to make important strides improving patient access to opioid-sparing pain therapies. To that end, our GPO partnerships and performance-based contracting are delivering and growing our EXPAREL user base. We continue to secure key wins with additional national and regional commercial payers now providing separate EXPAREL reimbursement. We remain ahead of plan and expect to surpass our full year goal of 100 million covered lives across commercial and government payers. Turning to Zilretta, new initiatives to better support this promotionally responsive product are underway. We're confident the foundation is in place for a return to growth. Our colleagues at Johnson & Johnson MedTech are now trained and active in the field. This partnership is a great example of 5x30 in action. We have tripled our commercial footprint, which we believe will provide a meaningful incremental growth. Lastly, iovera had a strong third quarter as a result of its dedicated sales force and other commercial investments. On the manufacturing front, the team continues to make important progress with third quarter gross margins supporting another increase in guidance. Switching gears to the pipeline. Here, we're focused on becoming the therapeutic area leader in musculoskeletal pain and adjacencies. These are large markets with high unmet need. Our clinical initiatives center around advancing an innovative pipeline along with life cycle management for our commercial base. For new product development, we're prioritizing complementary mid to late-stage derisked opportunities spanning the patient journey. PCRX-201 is a great example that's advancing in a Phase II study for osteoarthritis of the knee. Interest in this study has been high, and we recently concluded enrollment for Part A ahead of plan, placing us on track for 12-month data next year. The data continue to underscore PCR-201's potential to revolutionize OA treatment landscape and be at the forefront of local gene therapy for the masses. Last month, we presented 3-year follow-up data from the Phase I study at the American College of Rheumatology Convergence. These data demonstrated sustained efficacy with improvements in pain, stiffness and function for over 3 years. Importantly, efficacy was observed across all structural severity subgroups, including the most severe. Investigators also highlighted that pre-existing neutralizing antibodies did not affect PCR-201’s efficacy or safety at all 3 doses. Natural immune responses are a major obstacle for gene therapies, and these preliminary data indicate the potential for redosing. We also expanded our pipeline with the recent in-licensing of AMT-143, a novel long-acting formulation of bupivacaine. This asset sits squarely in our wheelhouse, given our deep expertise in long-acting locally administered pain therapeutics. This franchise-enhancing asset is highly complementary to EXPAREL and will allow us to serve a broader range of patients and health care professionals. Its innovative hydrogel technology is a proprietary combination of 2 polymers. It's easy to administer, requiring only installation into the surgical site with minimal reliance on specialized technique. The hydrogel rapidly forms a slow-release depot as it warms to body temperature. In a Phase I study, AMT-143 demonstrated sustained analgesic release through 14 days. This supports its potential for several days of pain control, which would be the longest duration among currently available local analgesics. These data, along with bupivacaine's validated mechanism of action provide an attractive development risk and differentiated product profile. We expect to initiate a Phase II program next year, which places on track for commercialization to begin within our 5x30 time frame. Given its strong commercial synergies, we expect it to be meaningfully accretive to cash flows and earnings. With respect to our HCAd-based preclinical portfolio, we prioritized 3 programs, all with disease-modifying potential in painful conditions of high unmet need. PCRX-1003 for degenerative disease, addressing a major cause of chronic back pain with few currently available effective therapies. PCRX-1002 for dry eye disease, a widespread condition where current treatments offer only temporary relief and PCRX-1001 for canine osteoarthritis, which has strong out-licensing potential for a large market lacking durable solutions. Switching gears to life cycle management. Here, we're highlighting the value of our products with real-world data. Last month, we presented 3 health economics and outcome studies at the AMCP Nexus. The use of EXPAREL was associated with reduced opioid use, lower costs and improved recovery outcomes. Our comprehensive real-world IGOR registry now has more than 3,000 OA patients enrolled. As you know, OA is a unique condition that patients live with for decades and receive a myriad of pain treatments as their disease progresses. IGOR is positioned to provide in-depth insights into the patient journey. We're capturing clinical and economic data as well as patient-reported outcomes for all 3 of our products. Its potential for meaningful evidence is better than any known OA registry of its kind. And to round out the pipeline discussion, our 2 registrational studies for Zilretta in the shoulder OA and iovera in spasticity are progressing. We expect to have interim data readouts from both studies next year. The last item I'll touch upon are the recent Paragraph IV notifications. And as you know, generic attempts are common for successful products like EXPAREL. A great deal has changed since the first genetic filer, where we had one patent at the time. Our current EXPAREL patent estate is stronger than it's ever been, and the team continues to innovate to further solidify our runway. Bottom line, any [ ANDA ] filer has a very high series of hurdles they will need to overcome to be commercially successful. We intend to vigorously protect our intellectual property and have an expert team focused on advancing our legal strategy. As for the rest of us, we're sharply focused on driving growth and remain confident EXPAREL will be a key growth driver of our success for the foreseeable future. With that, I'd like to turn the call over to Bren to share more details on our commercial performance in the third quarter. Bren? Brendan Teehan: Thank you, Frank, and good afternoon to all joining us today. I'm excited to share highlights of the terrific progress we've made over the past few months on the commercial front. Building on our first half trends, we further increased our revenue growth rate in the third quarter, driven by improving EXPAREL volume growth of roughly 9%. This is nearly 3x the first quarter volume growth rate of 3% and significantly higher than our second quarter volume growth rate of 6%. As Frank mentioned, this underscores the value of our commercial investments and positions us for significant and sustainable revenues going forward. We're seeing continued momentum from leading indicators as we head into year-end. These data reinforce our confidence that EXPAREL will be a key driver of our 5x30 objective of 5-year double-digit CAGR for revenue. I'll start with market access, where we continue to reshape the value story for our customers. In addition to clinical value, our accounts consider market access for their specific patient population when making treatment decisions. Here, we're using real-world evidence to highlight EXPAREL's clinical and economic value to national, regional and local commercial plans. We're excited to report that we continue to track ahead of plan and are maintaining an accelerated pace, expanding our commercial coverage map with NOPAIN like policies covering EXPAREL outside of the surgical bundle. We currently estimate that approximately 60 million commercial lives now have access to EXPAREL via the separate reimbursement mechanism. This places us ahead of plan with a total covered population of nearly 90 million lives across both commercial and government payers. As we build this critical mass of coverage, we're communicating these advances to our customers and are very encouraged to see them expanding EXPAREL utilization as evidenced by our growth. Our access efforts continue to be strategic, focusing on key markets with high procedural volumes. We have prioritized our top 5 states, which collectively account for approximately 40% of EXPAREL volumes, where we are steadily expanding coverage. Access here is increasing utilization with third quarter volumes up more than 10% collectively in these markets. Coupled with this progress, we continue to see strong and growing utilization of the EXPAREL J-code for both commercial and Medicare claims. We're also expanding access through compelling strategic pricing programs. Through these preferential pricing programs, health care systems for the opportunity to be at the forefront of opioid-sparing pain management. Our pricing strategy is having a positive impact with our contracted business delivering year-over-year volume growth in the low teens. We expect volumes to improve over time with only a modest impact on net sales dollars. On the GPO front, our third partnership went live in June and is off to an excellent start. Since launch, we have seen significant growth in volumes from accounts within this network, exceeding our forecast. With our 3 GPO networks and individual agreements with health care systems, more than 90% of our EXPAREL business has contracted pricing. Importantly, these are performance-based and designed to maintain and grow both volumes and revenues. In addition to providing our customers with favorable pricing, we are assisting patients in new ways with our recently launched patient assistant programs to further support best practice patient care. Our support specialists are helping qualified patients overcome financial and administrative barriers, minimizing patient out-of-pocket costs. All of these programs have created market access that is more favorable than it has ever been with more key milestones on the horizon for all 3 of our products. Given our strong progress on the market access front, we believe the time is right to mobilize patients to ask for EXPAREL to be part of their treatment plan for postsurgical pain. We rolled out several targeted digital pilot programs in the first half of the year to advance patient and physician awareness and engagement. We're seeing encouraging early signs from these campaigns. Since launch, overall EXPAREL website traffic is up more than 70% across both consumer and health care provider platforms. This is an excellent indicator that our refreshed marketing approach is resonating. Importantly, patient and caregiver awareness, coupled with improved access is translating into real-world volume growth for EXPAREL. Looking at the sites of care, we continue to see strong adoption in ambulatory surgery centers with this setting delivering third quarter volumes up more than 25% over last year. As you know, decision-making in these settings is more streamlined, enabling faster adoption to take advantage of the new reimbursement policies. In the hospital setting, year-over-year volume growth has improved from mid-single digit to a high single-digit percentage. As expected, faster adoption is taking place within community hospitals, where we saw third quarter volume growth in the low teens. Switching gears to our other commercial products. For Zilretta, we're currently expanding our reach through our new partnership with J&J MedTech. In addition, we've rolled out key programs to expand utilization, including our new patient support hub and co-pay assistance programs as well as performance-based agreements with our top customers. We believe these will help meaningfully overcome barriers to Zilretta utilization. For iovera, our sales force realignment is kicking in, and we are seeing a small but growing uplift from the [ MEDEO ] branch launch and improving reimbursement from NOPAIN. We are also ramping up reimbursement training and launching additional customer-facing materials around our new patient services hub. In summary, we believe we are well positioned for a strong finish to 2025 with improving growth ahead. I will turn the call over to Shawn for his review of the financials. Shawn Cross: Thank you, Bren. I'll start with an update on sales and margin trends. Third quarter EXPAREL sales increased to $139.9 million versus $132.0 million in 2024. Volume growth of 9% was partially offset by a shift in vial mix and discounting from our third GPO going live with each having a roughly equal impact. As Bren mentioned, third quarter volumes within this network were ahead of plan, which resulted in a slightly higher-than-expected single-digit year-over-year impact to our net selling price. As we move forward into 2026, we expect volume growth and revenue growth to converge over time as we anniversary these 3-year agreements. Third quarter Zilretta sales were $29.0 million versus $28.4 million in 2024. Looking ahead with our new partnership with J&J and other commercial investments, we believe the stage is set for improving growth. For iovera, third quarter sales grew to $6.5 million versus $5.7 million in 2024. Turning to gross margins. On a consolidated basis, our third quarter non-GAAP gross margin improved to 82% versus 78% last year. Gross margins continue to benefit from the improved cost and efficiencies of our large-scale EXPAREL manufacturing suites. For non-GAAP R&D expense, the third quarter increased to $22.5 million from $17.3 million reported last year. This increase relates to strong enrollment in Part A of our Phase II study, PCRX-201 as well as expenses associated with the Zilretta and iovera registrational studies. Non-GAAP SG&A expense came in at $81.7 million for the third quarter, which is up from $65 million last year. This increase is largely due to investments in our commercial, medical and market access organization, targeted marketing initiatives and field force expansion. All of this resulted in another quarter of significant adjusted EBITDA of $49.4 million for the third quarter. As for the balance sheet, we continue to operate from a position of strength. We ended the quarter with cash and investments of approximately $246 million. With a business that is producing significant operating cash flow, we are well equipped to advance our 5x30 strategy and create shareholder value. We continue to take a disciplined approach to capital allocation where we're focusing on 3 areas: first, accelerating growth of our best-in-class base business; second, advancing an innovative pipeline and becoming the leader in musculoskeletal pain and adjacencies; and third, opportunistically returning capital to shareholders. During the third quarter, we executed an additional $50 million in share repurchases and retired approximately 2 million shares of common stock. To remind you, we have approximately $200 million remaining under our current share buyback authorization, which runs through the end of 2026. We will continue to be opportunistic with stock repurchases given what we believe is a significant disconnect in our market valuation. As we execute 5x30, we expect to prioritize accretive opportunities that benefit operating margins to enhance shareholder value. That brings us to our full year P&L guidance for 2025. Today, we are increasing our guidance for non-GAAP gross margins to 80% to 82% from our previous range of 78% to 80%. 2025 margins benefited from increased manufacturing efficiencies, favorable production volumes and the elimination of our EXPAREL royalty obligation. For all other guidance, we are narrowing our full year ranges as follows: revenues of $725 million to $735 million. While EXPAREL and iovera had a strong uptick in the third quarter as expected, Zilretta's acceleration has been slower than anticipated. Non-GAAP R&D expense of $95 million to $105 million, non-GAAP SG&A expense of $310 million to $320 million, stock-based compensation of $56 million to $59 million. And lastly, for those modeling adjusted EBITDA, we expect our full year 2025 depreciation and amortization expense to be approximately $30 million. Looking ahead, we expect sustainable and significant earnings driven by improving sales, enhanced gross margins and stabilizing operating expenses. In addition, opportunistic stock repurchases and reduction in share count will further enhance EPS. So with that, I'll turn the call back to Frank. Frank Lee: Thank you, Shawn. In closing, I want to thank our entire team for their strong execution, advancing our 5x30 strategy and dedication to the patients we serve. I'm proud of the significant strides we've made this year across our corporate, clinical and commercial objectives. Looking ahead, we believe we're well positioned for sustainable success and significant value creation. Thank you again for joining us today and for your continued support of our important mission. With that, we're ready to open up the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Les Sulewski from Truist. Leszek Sulewski: So in the prepared remarks, you commented that the GPO had a higher volume than expected, which pulled down the ASP. How much of that total volume growth was tied to that GPO? And then second, was there anything noteworthy about the difference in the number of selling days in the quarter? And could you share any metrics around average volumes per day? And then I have a follow-up. Frank Lee: Les, this is Frank. Thanks for the question. Yes, we had strong uptake from the GPO that we signed in June. That's a favorable thing. And so as we anniversary that, that will flow through the system in Shawn mentioned the gap between volume is very strong, as you heard, 9% and sales will start to close as we get into next year. So Shawn, I don't know if you want to say anything more. Shawn Cross: I completely agree. We anticipate them narrowing over time, and we're feeling good about the volume trajectory. Frank Lee: Les, you had another question, remind me the second question? Leszek Sulewski: Yes. The second day was around the selling days in the quarter, any potential impact from that and metrics around average volumes per day. Frank Lee: [ No ] So let's just come back to -- it's an important point overall about as we now think about, as you heard, the volume growth of EXPAREL going from 3% to 6% to 9% and as we get into next year and flow through these GPO agreements. And of course, there will be -- we'll take price at some point. This will all add up into dollar sales that are running more at double digits as we had talked about. So we're encouraged that the second half is starting to turn out the way we start to articulate that at the beginning of the year in terms of growth accelerating in the second half. Leszek Sulewski: Okay. Okay. That's helpful. And just one last one for me, and I'll jump in the queue. What's the rationale [ between ] the AMT-143 program? And then how do you think about the trial design, specifically which pain indications would you pursue? And how do you envision the label ultimately to look like? Will it be indication specific or broad based on your design? And then thoughts around the IP protection around this technology given the compound is generic. Frank Lee: That's a good question. So I'm going to come back to our thinking around how we think about building our pipeline in a disciplined manner. We are certainly well, I would say, from a capability standpoint, well versed in developing products like this. We think there's a place in the market for a product that has longer durability and ease of use, that is installation as opposed to any other method that requires technique and so that's the rationale behind it. We think there's a place in the market. We think it's complementary to EXPAREL. And of course, we have the infrastructure in place, so it will be highly synergistic. When it comes to our development programs, it's early to say, Les, we need to work through this. But my sense of it is that we'll be very consistent with the way that we've built other programs in the past, and we'll provide more light on in terms of specific trial design as we get into next year. So that's broadly what it is. In terms of IP, I believe you can speak to that, AMT-143. Brendan Teehan: Sure. The IP goes out to [ 2042 ]. They have a solid state, and we're going to look to expand upon that. Frank Lee: Yes. Jonathan, anything more on your end? Jonathan Slonin: I agree with you, Frank. opportunity here to provide another non-opioid pain solution. And so we're excited about the potential of this asset. Operator: The next question comes from the line of Gary Nachman with Raymond James. Gary Nachman: So where are you in terms of improving awareness of NOPAIN with the bigger hospitals? Where are you seeing the bigger challenges in getting faster adoption there? And when will that accelerate? Will it be next year potentially? And then what was the overall market growth for elective procedures in the third quarter? And maybe what you're seeing, how that's trending in the fourth quarter so far? Frank Lee: Yes. Thanks for the question, Gary. Let me say a few words, and I'll turn it over to Bren for any of his comments. Just to set the stage, I think we've been very consistent in saying that we've seen a good growth uptake when it comes to the smaller hospitals and ASCs. And these bigger institutions will take more time because it's obviously more decision-makers and of course, they have to implement this into their overall system. So it will take some more time. There's clearly an effort behind it. But let me turn it over to Bren for any additional thoughts here. Bren? Brendan Teehan: Yes, for sure. Thanks for the question. I think we are seeing increased awareness for NOPAIN. And I would reference a couple of our prepared comments. Obviously, where there are fewer decision-makers in ASCs and community hospitals, that's where we have our fastest growth. But we've also seen improvement in the larger and broader hospital segment. And despite the fact that there are more decision-makers, we are seeing formulary and P&T decisions in favor of EXPAREL that would be reflective of an audience that's not only taking into account NOPAIN, but are starting to see the significant commercial wins that we have along the way. And it is one of our key commercial initiatives to make sure that we're engaging more of those economic stakeholders, particularly pharmacists and the C-suite, so they have a broader understanding of not only the reimbursement that's being generated, but the potential for EXPAREL, not just clinically but from a profitability standpoint to be of value to the IDN. Frank Lee: And Gary, you had asked about procedures overall, the market-- and from what we've seen, maybe, Brendan, you can comment on that a little bit. Brendan Teehan: For sure. The first half of the year, elective procedures were sluggish, even a little bit down. Having looked at the data in the third quarter, I would say there are modest improvements, but not monumental. And certainly, I think EXPAREL's performance in terms of continuing to drive increased volumes are despite what I would consider to be sluggish or somewhat headwinds in that space. Fourth quarter to be determined, but I would say that fourth quarter, we tend to see more elective procedures simply as a function of seasonality. Gary Nachman: Okay. Great. And then just a couple more quick ones. Just any early indicators for how the J&J partnership is helping Zilretta so far? When do you expect to see somewhat of an inflection there in sales? I know it's still early days and probably didn't see much of an impact in the third quarter, but could it be as early as 4Q or it's going to take more time? And then just on the gross margin, should that continue to improve next year from the 80% to 82% level that you're at right now? Frank Lee: Gary, with regard to Zilretta, I'll just say a few words here and turn it over to Bren. Just a big picture, as Shawn mentioned, we're very pleased with the way that now EXPAREL has grown and also now iovera with this new dedicated field force it's taken a little bit more time to get Zilretta where it needs to be. And when you take a look at our numbers, that's really what was flat instead of growing. So with that said, let me turn it over to Bren for any other thoughts here about how we're going to maximize J&J MedTech partnership. Brendan Teehan: Yes. Thanks, and thanks for the question. I would say 2 things have been important changes in the third quarter. Obviously, we have a dedicated Zilretta sales force. In doing so, they have an expanded footprint and are engaging a number of customers that for that singular group will be first-time customers. And I think that's just a little bit of disruption you would have expected in the third quarter. Also, the J&J MedTech team was fully trained in the third quarter, but that's a good way to describe it, trained and not yet fully out there to see the entire footprint that we have an opportunity to address. So I expect us to begin to see further momentum in the fourth quarter and then significant progress in 2026 as we see a larger audience multiple times with our message. And I would say that Zilretta fits very nicely into the J&J story of the osteoarthritis of the knee treatment journey, and there are a lot of market dynamics that would help us to incorporate Zilretta logically into that treatment journey. Frank Lee: Thanks, Bren. And for the question, Gary, about gross margin, certainly, we're very pleased with the progress we've made. And I think your question was how we see that going forward. And so let me turn it over to Shawn here. Shawn Cross: Yes. Thanks, Gary. So maybe just a step back from a big picture, the guidance we put out for goals we put out from a long-range plan perspective are in our 5x30, which is the 5 percentage point improvement over the 2024 margin. And just as a reminder, the non-GAAP was 76%. So that's the big picture. So just with regard to the performance we've seen this year, first of all, terrific execution by the team and better-than-expected yields from both the 200-liter facilities. So these higher volumes, simple math have resulted in lower per unit costs that have benefited the margins this year. So inventory target is 6 months. We're a little bit ahead of that. We're selling through the lower cost inventory. And so going forward, as the production volumes normalize, we expect to be back on track for our 5x30 plan for a 5% point steady improvement in gross margins over 2024, 76%. Gary Nachman: Okay. That sounds great. So you should at least be in that level looking out into next year, it sounds like. Frank Lee: Bottom line, inventory levels are higher this year, Gary. And so per unit, the margin is better. Next year, as we work it down, it will be slightly less favorable, but then we'll come back to that favorability probably in the second half of the year as we work through the inventory. Operator: The next question comes from Dennis Ding with Jefferies. Dennis Ding: I have 2, if I may. Number one is on BD. Should we expect more deals like [ Amicathera ], i.e., things that seem fairly early? Or do you plan to do more of these types of Phase I deals or can you be more opportunistic and bring something that's in Phase III or even commercial? And then number two, just on PCRX-201, I know you referenced docs who are excited about 201. But what about feedback from docs who aren't as excited? What's the major barrier there? Is it just data? Or do you think there's broader skepticism around gene therapy, especially in the ortho community who may be unfamiliar with the modality? Frank Lee: Thanks for the question, Dennis. First on BD and then on 201, I'll say a few words and turn it over to Jonathan. BD, as we've talked about, we're going to take a very, very disciplined approach to BD. And so that means that these are things that fit into the broadly defined musculoskeletal pain and adjacencies. And certainly, AMT-143 fits into that. As we look at assets, certainly, we favor those assets that are further along in the clinic that have validated mechanisms of action. And so we're not going to take target risk. And so those are some of the guideposts, so to speak, as we think about bringing things into the pipeline. And so we remain open to those kind of opportunities, and we're going to look at those very, very carefully in a disciplined way and bring in those things where we can really add value to those programs. With respect to 201, what I'd say there is, overall, I believe we've seen very good enthusiasm for PCRX-201. And so let me turn it over to Jonathan to have his thoughts. He's been the recent meetings, et cetera. Jonathan Slonin: Yes. All the feedback has been extremely positive and exciting. To your point, I think we continue as we do education and address some of the misnomers around what our platform is compared to current gene therapy. And we explain the benefits around the safety, the cost, the flexibility because of the payload size, it becomes very favorable, not just over current treatment options, which we see lasting maybe 3 to 6 months. And our research shows that patients just aren't happy, and that's all they have. So once we explain to them the benefits of 201 in that we're not giving you a drug produced in a factory, but we're just helping your body cells become that factory and the safety that we've seen so far in our clinical trials, the first question is usually like when can I get this? So we are very optimistic moving forward with 201 and excited that Part A of Phase II enrolled ahead of schedule for us. Frank Lee: Yes. Thanks, Jonathan. Look, I'd summarize it as this is gene therapy for the masses. And so when we come from that line of thinking, that opens up people's minds this opportunity because the way we do that is by, as you know, a local approach as opposed to systemic and that has obviously favorability when it comes to safety and cost of goods and all the things that Jonathan talked about. So we remain optimistic. We're running the Part B and manufacturing process will -- from a commercially viable standpoint is well underway. And so we've got good momentum on this one. Operator: The next question comes from the line of Serge Belanger with Needham & Co. John Gionco: This is John on for Serge today. Just a couple from us. First, I wanted to touch on the shift in bio mix and discounting associated with the latest GPO that came on board in June. Curious if you could provide any color on the level of discounting that you've seen thus far and when you'd expect pricing to stabilize? And then second, on the in-licensing from for AMT-143. Just curious how you view 143's profile in comparison to EXPAREL? And with the potential of [ bohooan ] being on the market down the line, how would you view the future commercial dynamics between the two. Frank Lee: Yes. So thanks for the question, John. Let me answer the AMT-143 a little bit more, and then I'll turn it over to Shawn to talk about [ volume mix ] and GPOs and [ anniversarying ] that last one. What I'd say is that when we take a look at the marketplace, of course, currently available therapies and analgesics are in the range of what we provide for EXPAREL, 3 or 4 days, et cetera. Now we think there is a place in the market for longer durability of effect. And also in those situations where there might not be an ability to bring in other specialists that the surgeon himself can instill this particular product. And so we think it's complementary to what we have. And so that's how we think about it. Certainly, we've got a little ways to go to get this program to market, and we'll be starting our Phase II program as we talk about next year. But there's clearly a market need for something like this. So let me turn it over to Shawn here to talk about [ volume mix ] GPO. Shawn Cross: Great. John, thanks for the call. So just to reiterate from the prepared remarks, we saw the 9% encouraging volume growth for EXPAREL with a 6% growth on the revenue side. And that 3% delta, as mentioned, was roughly 50-50 split between the volume mix towards the 10 ml and then the impact of the GPO discounting. So we can't talk about specific discounts with regard to the GPOs. But as we move forward, we would expect the fourth quarter to be somewhat similar. But then encouragingly, and we'll talk more about this when we put out 2026 guidance. But as we move forward into '26 and beyond, we do expect volume and revenue growth to converge over time. And there's a couple of key things just to remember. Let's just assume we continue to drive volume at the current levels or even a bit higher, if all goes as planned, January price increase. And then once we do lap the third GPO agreement, which is performing quite well in mid next year, that's when we expect the convergence to sort of hit its stride. Operator: I'm showing no further questions at this time. I would now like to turn it back to Susan Mesco for closing remarks. Susan Mesco: Thank you, Jill, and thanks to all on the call for your questions and time today. We're energized by the opportunities ahead and remain focused on executing our 5x30 growth strategy with discipline and purpose. As we close out the year, we are confident in our ability to build on our momentum and position Pacira for long-term success. Thank you again for your continued support and be well. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Third Quarter 2025 Watts Water Technologies' Earnings Call. [Operator Instructions] I'd now like to turn the call over to Diane McClintock, Senior Vice President of Investor Relations. Diane? Diane McClintock: Thank you, and good morning, everyone. Welcome to our third quarter earnings conference call. Joining me today are Bob Pagano, President and CEO; and Ryan Lada, our CFO. During today's call, Bob will provide an overview of the third quarter, a business update and an update on our outlook for 2025. Ryan will discuss the details of our third quarter performance and provide our outlook for the fourth quarter and for the full year. Following our remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We will reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to the presentation. I'd like to remind everyone that during this call, we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see Watts' publicly available filings with the SEC. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I will turn the call over to Bob. Robert Pagano: Thank you, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the quarter. We are pleased with our strong third quarter results, which exceeded expectations. Watts' multiyear track record of success would not be possible without the dedication, collaboration and support of our team members and business partners, and I'd like to express my sincere gratitude. Organic sales increased 9% in the quarter, with favorable price in the Americas, volume and pull-forward demand more than offsetting the decline in Europe. We also benefited from incremental sales from our I-CON and EasyWater acquisitions and favorable foreign exchange movements. Adjusted operating margin of 18.5% was better than anticipated due to favorable price, volume leverage, productivity and mix. Year-to-date free cash flow continues to be solid, and we expect to generate seasonally strong free cash flow through year-end. The balance sheet remains healthy, and we have ample flexibility to support our disciplined capital allocation strategy. On that note, we're excited to have acquired Haws Corporation, a leading global brand providing emergency, safety and hydration solutions for use in industrial, institutional and nonresidential end markets for more than 120 years. The addition of Haws' innovative specified product portfolio enhances our value proposition and broadens our capabilities. Haws has annual sales of approximately $60 million and is expected to be modestly dilutive to margins for the first year while we integrate and realize the benefits of synergies leveraging the One Watts performance system. I'm also pleased with the integrations of Bradley, Josam, I-CON and EasyWater, which are progressing well and synergy realization is tracking ahead of our original estimates. We continue to proactively manage tariff-related challenges through strategic pricing and supply chain optimization. The tariff environment remains uncertain, but based on tariffs in effect as of today, our global direct tariff impact in 2025 is estimated to be $40 million, consistent with our guidance at the last earnings call. We have successfully handled the cost impact so far in 2025 and plan to continue doing so. Now an update on our outlook for the remainder of the year. Due to our strong third quarter performance and our expectations for the fourth quarter, we are increasing our full year sales and margin outlook. Tariff-related price increases, foreign exchange movements, strong data center sales and the acquisition of Haws, are all favorable relative to the sales outlook we provided in August. However, there's ongoing uncertainty around the impact of supply chain disruptions and tariffs including the effect on new construction and global GDP, as well as around the impact of the U.S. government shutdown. As a reminder, GDP is a proxy for our repair and replacement business, which represents approximately 60% of total revenue. With that, let me turn the call over to Ryan, who will address our third quarter results and our fourth quarter and full year outlook in more detail. Ryan? Ryan Lada: Thank you, Bob, and good morning, everyone. Please turn to Slide 4, which highlights our third quarter results. Sales reached $612 million, setting a third quarter record for Watts. This reflects growth of 13% on a reported basis and 9% on an organic basis. Strong organic growth in the Americas more than offset a decline in Europe and a flat quarter in APMEA. In the Americas, reported sales were up 16% and organic sales were up 13%, exceeding expectations. Growth was driven by favorable price, volume and approximately $11 million of pull-forward demand. Sales from the I-CON and EasyWater acquisitions added another $11 million or 3 points to America's reported growth. Europe reported sales were up 4%, while organic sales were down 2% as market weakness more than offset price. Reported sales in Europe benefited from favorable foreign exchange. APMEA sales decreased 1% on a reported basis and were flat on an organic basis. Growth in Australia and the Middle East was offset by declines in China and New Zealand. Compared to prior year, adjusted EBITDA of $128 million increased 21% and adjusted EBITDA margin of 20.9% increased 140 basis points. Adjusted operating income of $113 million increased 22% and adjusted operating margin of 18.5% was up 140 basis points. Adjusted EBITDA and operating income were supported by favorable price, leverage in the Americas and productivity. These benefits more than offset inflation, volume deleverage in Europe, tariffs and investments. Our Americas segment margin increased 180 basis points to 23.7%. Europe segment margin increased 160 basis points to 12.2%, and APMEA segment margin increased 90 basis points to 19.4%. Adjusted earnings per share of $2.50 were up 23% compared to the prior year with contributions from operations, acquisitions, foreign exchange and reduced interest expense. The adjusted effective tax rate in the quarter was 25.8%, an increase of 60 basis points relative to the third quarter of 2024. This increase was primarily due to the recent changes in U.S. tax regulations related to the One Big Beautiful Bill act. For GAAP purposes, we incurred $1.9 million of pretax restructuring charges related to the exit of a facility in France and other actions within Europe. Our free cash flow year-to-date through the third quarter was $216 million compared to $204 million last year. The cash flow increase was driven by higher net income and lower tax payments resulting from the change in U.S. tax regulations, which more than offset inventory investment and increased CapEx. We expect seasonally strong free cash flow in the fourth quarter and are on track to achieve our full year goal of free cash flow conversion greater than or equal to 100% of net income. The balance sheet remains strong. Our quarter end net debt to capitalization ratio was negative 15% and our net leverage is negative 0.5x. Our solid cash flow and healthy balance sheet continue to give us capital allocation optionality. Now on Slide 5, let's review our assumptions about our fourth quarter and full year outlook. As Bob mentioned, we are raising our full year sales and margin outlook. This is driven by a strong third quarter, incremental price, favorable foreign exchange and strong sales in data centers. We are also benefiting from incremental sales of approximately $10 million related to the acquisition of Haws Corporation, which will be included in our Americas segment. We now anticipate organic sales growth of 4% to 5%, a 3-point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 7% to 8%, a 4-point increase from our previous outlook. This reflects incremental revenue from the Haws acquisition and favorable foreign exchange impacts detailed by region in the appendix. Regionally, we anticipate stronger sales growth in the Americas and Europe while APMEA is projected to be slightly below our previous outlook. We are raising our full year adjusted EBITDA margin outlook to a range of 140 to 150 basis points, an increase of 55 basis points from the midpoint of our previous outlook. We are also raising our full year adjusted operating margin expansion to a range of up 140 to 150 basis points, an increase of 65 basis points from the midpoint of our previous outlook. Our updated outlook includes 10 basis points of dilution from the Haws acquisition. It also assumes $40 million in estimated direct tariff costs, consistent with our previous guidance. This is based on tariffs in effect as of today. Our free cash flow expectation remains in line with our previous outlook. We expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2025. Next, a few items to consider for the fourth quarter. On an organic basis, we expect sales growth of 4% to 8%. Regionally, we expect high single-digit growth in the Americas, low single-digit growth in APMEA and slight declines in Europe. The sequential slowdown in the Americas reflects the pull forward demand discussed earlier. We expect approximately $20 million in incremental sales in the Americas from the I-CON, EasyWater and Haws acquisitions. Additionally, we estimate a foreign exchange tailwind of approximately $10 million in the quarter. Regional assumptions are detailed in the appendix. Fourth quarter adjusted EBITDA margin is expected to be in the range of 19.6% to 20.1%, an increase of 30 to 80 basis points. Adjusted operating margin is projected to be between 17% and 17.5% or up 20 to 70 basis points. Price and volume leverage in the Americas should more than offset volume deleverage in Europe and dilution from the Haws acquisition. The sequential margin decline reflects normal seasonality and the impact of the Haws acquisition. Other key inputs for the fourth quarter and full year can become in the appendix. And with that, I'll turn the call back over to Bob before we move to Q&A. Bob? Robert Pagano: Thanks, Ryan. On Slide 6, I'd like to summarize our comments before we address your questions. Our third quarter performance was better than anticipated with record third quarter sales, operating income and earnings per share, driven by strong performance in our Americas region and better-than-expected results in Europe. We continue to execute well amid an uncertain trade environment, and we expect that price and our global supply chain strategy will enable us to continue navigating effectively. As a result of our strong third quarter performance and fourth quarter expectations, we are increasing our full year sales and margin outlook. We successfully closed on the acquisition of Haws Corporation earlier this week and look forward to welcoming them to the Watts family of brands. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. I'm confident in the resilience of our business and our team's ability to execute despite the uncertain environment as we continue to create durable, long-term value for our shareholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] It looks like our first question today comes from the line of Nathan Jones with Stifel. Nathan Jones: Maybe just starting on the $11 million of demand pull forward into the third quarter. I assume that's probably ahead of price increases related to the increase in copper tariffs. And so that would then lead me to the question of, can you talk about what the price contribution was in 3Q? And then I assume the price contribution in Americas in 4Q will be somewhat higher due to those tariffs? Robert Pagano: Correct, it was $11 million, as you said -- as we talked about, and about 6% was our price. Nathan Jones: That's in 3Q. Do you have an expectation for 4Q? I assume there's been more price to cover that tariffs. Robert Pagano: Slightly higher than that. Nathan Jones: Okay. Fair enough. I guess the second question I wanted to ask was on this Haws acquisition. Obviously, the questions are going to be around the drinking water business. It's been pretty robust growth, been seen by one of your competitors in that business, but they do have very high market share in that. And based on Haws revenue, pretty low market share for them. How do you go about competing with the LK business in -- specifically in that drinking water business and look to grow the market share for that business? Robert Pagano: Well, Nathan, as we talked about it, Haws is a $60 million sales company, about 20% of its business is in the hydration market. Look it's a company that's been around a long time, 120 years, great brand, known for their quality and customer service. So they're niche in their hydration area, mainly on the West Coast. So we'll be evaluating that, but we primarily bought that business for their safety product, which complements our Bradley business. Nathan Jones: Maybe then just as a final question, you could talk about how it complements the Bradley business. I did notice that and whether or not you can kind of marry those two together to generate revenue synergies out of those businesses. Robert Pagano: Yes. Yes, so they make bigger sizes of safety showers and equipment and other products that we don't have. So it's complementary with some of the gaps that we have and gives us the full portfolio to leverage in our portfolio. So we believe it's a nice growing market and something we can leverage going forward. Operator: And our next question comes from the line of Mike Halloran with R.W. Baird. Michael Halloran: Could you just dig into how you're looking at the end markets here today and how you're thinking about the trajectory next year? I think primary focus for the question would be on the non-res, res pieces and how you see those playing out over to next year in North America as well as maybe generic comment on Europe as well? Robert Pagano: Yes. So let's look at Q3, we basically saw similar markets that we saw in Q2. So we'll be watching, I think, in general, multifamily, residential, which -- single family, again, slow growth. We're seeing probably similar to that going into next year. It's too early to talk about next year at this point in time. But I think we're all looking at ABI, Dodge Momentum, all the leading indicators. So 2026 is probably going to be a slow growth market similar to 2025 at this point in time. On the question on Europe, it was nice to see Europe finally getting close to bottom like we were projecting, minus 2% organically for us against easier compares, but something -- it's nice to see we're finally getting to the bottom of this. I don't think you'll see new construction growth really grow significantly in Europe, until this war -- the war in Ukraine subsides and each one of the government's understanding how much they have to fund that. So again, continued slow growth assumptions in Europe. Michael Halloran: And then secondary question, just maybe the puts and takes that drove the sequential margin improvement in Europe, but if you look at the guide for Europe margins up substantially. I guess the primary question, though is, is that the right run rate to think about sort of going into next year? The EBITDA margin implied for the European segment for the fourth quarter. In other words, are you back at the previous run rate now that you've gotten a chunk of that restructuring done and hopefully, a little bit more normal mix? Robert Pagano: Yes, that's the goal, Mike. I mean certainly, the team has been doing a great job of getting through the restructuring and closing of the site. We're now complete, adjusting their cost structure to the current market environment. And the team is doubling down and relooking on an 80-20 basis, the markets because they've shifted so much over the last couple of years. So team's really looking at that. We'll provide a little more guidance as we move into 2026. Operator: And our next question comes from the line of Jeff Hammond with KeyBanc. Jeffrey Hammond: You talked about kind of pricing through Q4. I'm just wondering, as we look forward into '26, what you think carryover prices at least into the first half? And then as you contemplate your normal course pricing for '26, is that a more normal kind of view? Or does it continue to be elevated with inflation, tariffs, et cetera? Robert Pagano: Well, Jeff, I mean, most of the price increases happened in the -- starting in April, et cetera. So there will be some carryover because we've had multiple price increases during the year. With the adjustments of tariffs, with all tariffs, there's a fluid thing, as we all know. So we'll be adjusting and looking at tariffs as we go forward into next year right now. So again, we're watching it very closely. We should have some favorable price certainly in the first quarter as we continue to roll off of some of those and you know, we had both prebuy in Q2 and Q3 now of this year. So again, we'll be providing more information in 2026, but there'll be some carryover into next year. Jeffrey Hammond: Okay. And then we talk more and more about data center, obviously, booming. Just wondering if you can, I guess, size that business for 2025 year, what you think -- for this year. What you think it can be in a few years? And I think most of your exposure historically was Asia, a lot of the demand is happening in the U.S., and I'm just wondering about your success bringing that over to the North American market. Robert Pagano: Yes, Jeff. I would say our North America team is going to surpass Asia Pacific this year. We've been growing very quickly in North America. We'll size it at the end of this year, but I can say that it's growing high double digits, and it's one of our fastest-growing markets in North America and in Asia Pacific. So we'll continue to double down on that. It's offsetting some of the softness in the residential side of our markets and it's nice, complementary to what we're doing, and you're seeing it come through our results in Q3. Jeffrey Hammond: Okay. And then just last one, multifamily, just update there. It seems like maybe some bottoming and things getting better. And I guess it depends on where you are in the build process, but just an update there. Robert Pagano: Yes. On the multifamilies, again, it's been a soft market. Like you said, there's various regions of the country that are still booming. But certainly, when you look at the single housing crisis where there's not enough homes and unaffordability, we are seeing projects in the multifamily, but it's not -- and there's shovel-ready projects ready to go. People are finishing what they've started. I think they're waiting for some certainty on the tariff front and making sure that comes down as well as waiting for some lower interest rates. So we think it's close to bottoming out, and we'll watch carefully through there, but it's not been a robust market. But we're hopeful that it will begin getting better as interest rates start coming down next year. Operator: [Operator Instructions] And our next question comes from the line of Ryan Connors with Northcoast Research. Ryan Connors: Most of my questions have been answered. You've been pretty comprehensive here. But I did pick up there, Bob, through the phone on your tone around tariffs and the increased uncertainty there. I think you're kind of alluding to the SCOTUS case, which I don't follow these things too closely, but apparently, it didn't go all that well and there's a chance that maybe the whole thing could be just disallowed. So obviously, that would be a very disruptive outcome given the -- all the price you've taken related to tariffs. So without getting too detailed, I mean just conceptually, if we were to hypothetically assume tariffs just go away and SCOTUS says no go. What does that conceptually look like? Do you keep the price that you've gotten? Do you give that back? Just curious how -- conceptually how you would look at that kind of a scenario? Robert Pagano: Yes, Ryan, that's a great question. Fundamentally, I have a hard time believing that the government is going to give anything back to any of us and even if they lose the case, it will be interesting to see the appeals and the potential adjustments. So we're watching it carefully. It would be very complicated, as you can imagine, because our pricing has not just been because of tariffs. Copper prices have been up double digits, general inflation has been high, labor, et cetera. So it's a very complicated item, and we're watching this very closely and we'll adjust based on what the market does at this point in time. But it's very complicated, as you said. And I think a lot of people are trying to figure this out, and we'll just have to wait and see how it plays out. Ryan Connors: Yes. I mean just as a follow-up to that, would it be crazy to think that, okay, the price you put in the market has been accepted in the market. It's been -- it's kind of there and you can sort of keep that and even if you don't get any retroactive credits that maybe that scenario could actually be a margin positive going forward? I mean, is that -- am I way off base there? Robert Pagano: Yes. That's -- it's such a difficult question, Ryan. And it's just -- there's so many different variables from that point of view. I think we're all going to have to wait and see and have many different scenarios to understand what's market pricing and what's happening on this. So again, stay tuned. I think we're all watching carefully. Operator: And our next question comes from the line of Joe Giordano -- sorry, Giordano with TD Cowen. Unknown Analyst: This is Chris on for Joe. You had mentioned the uncertainty surrounding the government shutdown. Just wondering if you could elaborate on what parts of the business that you are seeing or expect to potentially see impact from that shutdown? Robert Pagano: It's primarily on the residential side, right? Any time there's uncertainty, people withhold and slow down things. So I think it's just one of those things. Just an added variable, we're watching very carefully. Nothing big to report on at this point in time, but something that's certainly out there, and it's just normal process, people pull back when they're uncertain. And we'll see how that goes through. Hopefully, they'll get that resolved very soon. Unknown Analyst: Great. And with Haws, is there any difference in how they go to market versus your predominant channels and any opportunity to sell through your existing channels? Robert Pagano: It's very similar to our current process through wholesalers and distributions. And so yes, no, it's very similar. We can leverage our channels. The nice thing about Haws is they have more international exposure than we have, so that's an opportunity for us to leverage. Operator: [Operator Instructions] And our next question is from the line of Andrew Krill with Deutsche Bank. Andrew Krill: Want to ask another one on Haws. Just can you provide like any sense of the historical growth rates there? What do you expect looking forward? And then on margins for the business, and I guess, if we do the math on the dilution, is it correct, it's around like 10% EBIT margins initially as you integrate the business? And then like over time, any reason this can't be a lot to average or better margin business? Robert Pagano: Yes. So in general, I would say they're similar to the institutional growth, which is above, let's call it, growth of our traditional portfolio that includes residential. I would say their EBITDA is in the mid- to high single digits right now. And we certainly believe over the next several years, we'll be able to get them to the Watts' overall margin. So teams are on it really early at this point. Team, we're making out, great brand, great quality and great people. So we're excited to leverage that going forward. Andrew Krill: Great. And then switching back to Europe. I know the margin improvement is encouraging, a pretty nice inflection. More medium term, I think the prior high watermark was about 16% EBIT margin. So just -- like can you get there, do you think that volumes remain sluggish around where they are just with the new initiatives you have in place? Or I think we're getting back to that? Like, one, is it possible like and do you need volume leverage to get there? Robert Pagano: Well, certainly, volume leverage would help. And certainly, we're taking cost structure. I think the team is relooking, as I said earlier, at the 80-20 because the markets have changed significantly since we did a very detailed 80-20 on that. We're reshuffling that, and we'll provide more guidance, but that should help our margins going forward, but it takes a while to unravel some of the contracts we have with customers. But team's on it. We're looking at it. I would say, our aspirations are to get back up to those levels. But as you know, I'm always cautious on Europe at this point in time given the market dynamics and given the uncertainty with the conflict in Ukraine that's having an impact on local incentives, et cetera. So watching it very closely. The team's on it, but it's nice to see. I think we're starting to hit that bottoming out at this point in time. Operator: And there are no further questions at this time, so I will now turn the call back over to Bob Pagano for closing remarks. Bob? Robert Pagano: Thank you for taking the time to join us today. We appreciate your continued interest in Watts and look forward to speaking with you again during our fourth quarter earnings call in early February. Have a good day, and stay safe. Operator: Thank you. And this concludes today's conference call. You may now disconnect. Have a great day, everyone.
Emanuel Hilario: [Audio Gap] New premium holiday menu focused on Wagyu and premium seafood, aligning with today's selective diners who are more intentional about what they choose to dine. At Kona Grill, we are strategically expanding our menu to reduce reliance on categories facing current market pressures. The brand has historically been centered around seafood, sushi, and our distinctive bar experience, but we are seeing headwinds across those core areas. Our menu diversification introduces broader culinary options that appeal to more frequent dining occasions and are less sensitive to economic fluctuations. Our Friends with Benefits loyalty program continues to gain momentum with over 6.5 million members. During the quarter, we added over 200,000 new members. Newly enrolled guests are showing the most repeat participation in the program. We are focused on growing a best-in-class program that fuels long-term business growth. Our key objectives with the Friends with Benefits loyalty program are: one, maximize membership size by converting members from other TOG marketing programs; number two, drive organic sign-ups through increased awareness and engagement; and number three, increase member engagement within the program to strengthen brand connection and repeat visits. We have also upgraded our brand websites, Benihana, STK, Kona Grill, and RA Sushi now feature fresh, mobile-optimized designs that are increasing both traffic and conversion rates. These digital enhancements, combined with our loyalty platform, position us to compete effectively as national chains ramp up promotional activity. Priority 2, capital-efficient growth. The newly redesigned Benihana location we opened in San Mateo, California, early this year has become the top-performing restaurant opening in the brand's 60-year history. This outstanding start validates the effectiveness of our redesigned restaurant format. In this redesign, we made several meaningful changes to the Benihana footprint. We relocated the sushi station to the back of the house to create more Techniaki table capacity, expanded the bar seating area, modernized the interior with a brighter, more contemporary look, and created a dedicated takeout station that improves overall restaurant flow. We are now implementing this learning system-wide, adding 2 to 3 Techniaki tables per restaurant to create meaningful capacity increases that directly boost revenue potential. This success gives us confidence that future locations can achieve $8 million in annual sales with a restaurant-level profit margin in the mid-20% range. Franchise momentum continues to accelerate. We opened our second Benihana Express location in Miami in the second quarter, with more in development. The Express format offers the full menu without Techniaki tables, generating strong franchise interest while enabling asset-light expansion. Over time, we expect franchise licenses and managed locations to represent over 60% of our total footprint. We are also expanding Benihana into more nontraditional venues. We currently operate in 3 professional sports stadiums, generating 9 million fan impressions annually, with additional airport and arena opportunities under discussion. Across our portfolio, we have opened 4 company-owned venues and 1 franchise location year-to-date, with additional fourth quarter openings planned, bringing our total 2025 openings to 5 to 7 new venues. In the fourth quarter, we already opened an STK in Scottsdale, Arizona, and plan to open a company-owned STK in Oak, Illinois, and our Kona Grill San Antonio relocation. Relocations remain a key strategy to unlock strong returns in existing markets. By prioritizing nearby high-quality real estate opportunities in areas that already embrace our brands, we can increase capacity, optimize traffic, and better position our brands for long-term success. For example, our recently relocated Westwood STK has delivered margin improvement over the previous location. Remodels are also showing promise and success. During the third quarter, we remodeled our dated Tampa Bay Kona Grill. With modest capital investment, it has delivered a significant turnaround in same-store sales performance. Priority 3, portfolio optimization. We have taken decisive action to strengthen our portfolio quality through strategic location optimization. After conducting a thorough evaluation of our Grill concepts portfolio, we closed 6 underperforming locations in the second quarter and 1 additional location in the third quarter within challenging trade areas. These were primarily older units, which would have required substantial capital investment. Looking ahead, we have identified up to 9 additional Grill locations to convert to either Benihana or STK formats through the end of 2026. These conversions represent an excellent capital allocation opportunity. They require about $1 million in capital investments, and the average STK generates over $1 million in annual EBITDA. Our first conversion of a RA Sushi location to an STK location has already happened in Scottsdale, Arizona, which opened at the end of October. After completing all planned conversions, we will operate all profitable locations that we expect to generate approximately $10 million in restaurant-level EBITDA and over $100 million in revenue, with all units maintaining positive cash flow. Priority 4, balance sheet strength. With approximately $45 million in liquidity, we have the means to invest in growth while maintaining discipline. Our Board authorized a $5 million share repurchase program last year, and we view our stock as an attractive investment. Additionally, we expect to further reduce discretionary capital expenditures in the coming year across all of our brands, allowing us to strengthen our balance sheet while enhancing financial flexibility. Finally, I'm optimistic about our fourth quarter. This is historically our strongest period, and we are better positioned than ever to capitalize on that strength. 2024 marked our first holiday season with Benihana in the portfolio, and we set records across every holiday with exceptional demand. This year, we have made targeted investments to capture even greater holiday demand. Our enhanced reservation technology, streamlined operational flow, and comprehensive team training initiatives position us to execute flawlessly during our busiest periods. A key operational focus is optimizing Benihana table efficiency. We are targeting a reduction from 120 minutes to 90 minutes table turns throughout the fourth quarter, which will significantly expand our capacity to serve more guests during the busy dinner periods. The items that I have outlined today are fundamentally execution-driven and within our direct control. We are not relying on macroeconomic recovery or waiting for consumer sentiment shifts. Instead, we are focused on strategic initiatives that position us to deliver strong results regardless of broader economic trends. Before I turn it over to Nicole for the financial details, I want to thank our teammates. Every day, they live our mission of creating great guest memories by operating the best restaurants in every market that we operate by delivering exceptional and unforgettable guest experiences to every guest every time. They are at the foundation of everything we do. With that, I'll turn it over to Nicole. Nicole Thaung: Thank you, Manny. As a reminder, beginning this year, we are reporting financial information on a fiscal quarter basis using 4 13-week quarters with the addition of the 53rd week when necessary. For 2025, our fiscal calendar began on January 1, 2025, and will end on December 28, 2025, and our third quarter contained 91 days. Let me start by discussing our third-quarter financials in greater detail before updating our outlook for 2025. Total consolidated GAAP revenues were $180.2 million, decreasing 7.1% from $194 million for the same quarter last year. Included in total revenues were our company-owned restaurants' net revenue of $177.4 million, which decreased 6.9% from $190.6 million for the prior year quarter. The decrease was primarily due to a 5.9% reduction in consolidated comparable sales and the closure of underperforming restaurants from the prior year period. Management license, franchise, and incentive fee revenues decreased to $2.8 million from $3.4 million in the prior year. The decrease is attributed to lower management license and incentive fee revenue at our managed STK restaurants in North America and reduced franchisee revenues due to exiting 2 license agreements. It is important to note that our sales at our managed STK in Las Vegas have notably improved quarter-to-date. Additionally, we exited our management deal with STK Scottsdale and converted a former RA Sushi to a company-owned STK. Now turning to expenses. We continue to implement targeted cost management initiatives, including strategic adjustments to our protein sourcing to reduce costs and a temporary hiring freeze that will optimize our labor structure. Company-owned restaurant's cost of sales as a percentage of the company-owned restaurant's net revenue increased slightly to 21.1% from 20.9%. This was primarily due to sales deleveraging, coupled with higher-than-anticipated inflation in certain commodity costs. This was partially offset by additional integration synergies from our Benihana acquisition. Company-owned restaurant operating expenses as a percentage of company-owned restaurant net revenue increased 140 basis points to 67.6% from 66.2% in the prior year quarter. This was primarily due to investments in marketing, general cost inflation, and fixed cost deleveraging driven by a decrease in same-store sales. Restaurant operating profit decreased to $20.1 million or 11.3% of owned restaurant net revenue compared to $24.5 million or 12.8% in the prior year quarter. On a total reported basis, general and administration costs increased $0.5 million to $13.3 million from $12.8 million in the same quarter prior year, driven by increased marketing expenses. When adjusting for stock-based compensation of $1.2 million, adjusted general and administrative expenses were $12 million compared to $11.2 million in the third quarter of 2024. As a percentage of revenues, when adjusting for stock-based compensation, adjusted general and administrative costs were 6.7% compared to 5.8% in the prior year. Depreciation and amortization expenses were $11.5 million compared to $9.4 million in the prior year quarter. The increase was primarily related to depreciation and amortization of new venues and capital expenditures to maintain and enhance the guest experience in our restaurants. During the quarter, we completed our regular assessment of the recoverability of the net book value of our fixed assets. A noncash loss on impairment may be necessary when the net book value exceeds the future expected cash flows of the restaurant, and can happen due to economic factors, end of lease, or restaurant performance. As a result of this assessment, we identified 5 restaurants that required impairment charges that totaled $3.4 million, mostly related to grills that we plan not to extend the leases on. Preopening expenses were approximately $700,000, primarily related to the preopening rent for restaurants under development and payroll costs associated with the preopening training team as we prepare restaurants scheduled to open in the fourth quarter of 2025. Preopening expenses decreased $1.4 million compared to the prior year period. Operating loss was $7.9 million compared to an operating loss of $3.6 million in the third quarter of 2024, mostly impacted by the $3.4 million in noncash loss on impairment. Interest expense was $10.5 million compared to $10.7 million in the prior year quarter. Provision for income taxes was $59.1 million compared to a benefit of $4.9 million in the prior year quarter. The increase in income tax expense is primarily the result of the establishment of a full valuation allowance against our deferred tax assets during the third quarter. This is a noncash income tax expense item that was recorded because of management's assessment of the future usability of our deferred tax assets and liabilities. Net loss attributable to Wes Hospitality was $76.7 million compared to a net loss of $9.3 million in the third quarter of 2024. The 2025 loss was primarily driven by the noncash loss on impairment and the noncash recognition of the valuation allowance. Net loss available to common shareholders was $85.3 million or $2.75 net loss per share, compared to $16.4 million in the third quarter of 2024 or $0.53 net loss per share. The previously discussed noncash loss on impairment and establishment of the deferred tax asset valuation allowance represent $2.02 of the third quarter 2025 net loss per share. Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. was $10.6 million compared to $14.9 million in the prior year, a decrease of 28.9%. We finished the quarter with $6 million in cash and cash equivalents and restricted cash. We have $28.7 million available under our revolving credit facility. And as of quarter end, we had $5.5 million outstanding on our revolving credit facility. Under current conditions, our term loan does not have a financial covenant. Now I would like to provide some forward-looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We remind our investors that the actual number and timing of new restaurant openings for any given period are subject to factors outside of the company's control, including macroeconomic conditions, weather, and factors under the control of landlords, contractors, licensees, and regulatory and licensing authorities. Based on the information available now and our expectations as of today, we are updating the following financial targets for fiscal year 2025. Please note, this does not include the potential impact of tariffs on broader economic conditions. We project total GAAP revenues of between $820 million and $825 million, which reflects our anticipation of consolidated comparable sales of negative 3% to negative 2%. Managed franchise and license fee revenues are expected to be between $14 million and $15 million. Total company-owned operating expenses as a percentage of company-owned restaurant net revenue of approximately 83.5%. Total G&A, excluding stock-based compensation of approximately $46 million, adjusted EBITDA of between $95 million and $100 million, restaurant preopening expenses of between $5 million and $6 million; an effective income tax rate of between 1% and 4% when excluding the valuation allowance and the items subject to valuation allowance. Total capital expenditures, net of allowances received from landlords, of between $45 million and $50 million. And finally, we plan to open 5 to 7 new venues. I will now turn the call back to Manny. Emanuel Hilario: Thank you, Nicole. Before we open it up for questions, I want to emphasize how excited we are about the future of our business. Although the current environment is challenging, our future looks bright. With our strengthened portfolio and our expanded franchise capabilities, we are well-positioned to capture the significant opportunities ahead of us. We thank you for your continued support and look forward to sharing our progress in the quarters ahead. Nicole and I look forward to your questions. Operator? Operator: [Operator Instructions] We'll take our first question from Joe Gomes with NOBLE Capital. Joseph Gomes: So I want to start out the last couple of quarters, you talked about Benihana having 2 quarters in a row of same-store sales growth, in STK 3 quarters in a row of positive traffic. And I might have missed it, but I didn't hear that discussion today. I was wondering if you could give us a little update on those. Emanuel Hilario: I mean, I think probably the best thing to do is talk about maybe our traffic overall as a company. I think if I look at the third quarter, 2025, I think that's been our best quarter in traffic, actually, for the whole year. As a consolidated company, I think we were down 6.9% in traffic for the third quarter, whereas in the second quarter, we were down 7.5%. And in Q1, we're down 7.8%. So the third quarter this year was by far our best or better traffic quarter. The big difference for us in the third quarter, though, is that until the end of the second quarter, beginning of the third quarter, we had about 7% effective pricing in there. So that offset part of the traffic experience that we were having. And then, going into the middle of the third quarter around August, we began lapping some pricing from last year. And we just saw a lot of noise in the middle of August in traffic. So we decided to just hold off on the pricing. And so our pricing in the third quarter was only plus 4% for the quarter. So we effectively lost about 3 points of pricing in the third quarter. So I would say from my perspective or our perspective, we made significant or we're doing improvements on traffic, which is one of the reasons why going into the fourth quarter, and we put some pricing in effect right at the beginning of November, I think that we've basically put the pricing back on. And with the sequential improvement in traffic, I think we feel pretty good about the sales position going into the fourth quarter. Joseph Gomes: And what do you think is driving the traffic improvement in the fourth quarter so far? Emanuel Hilario: On the third quarter, I'd say the sequential improvement in the third quarter, I think, is really a testament to the value of the proposition and the marketing that we've been doing. We also, as I mentioned in my prepared statements, we do have some macro forces that haven't really supported sales. For instance, if you look at our across of our portfolio, our concentrations of restaurants are in California, Arizona, Florida, and Texas, and then we have the other, which is about 50% of our concentration of sales. And if I just look in the third quarter alone, I think there was a lot of macro pressures, for instance, in our California sales sequential between the second and third quarter actually got negative by 7 points. So there's some geographical pressures that came in that quarter since the third quarter. We've seen some of that loosen up a little bit, but certainly in September, we saw a lot more pressure in our traffic in California, which is, by the way, one of the reasons why we put the pause on our pricing actions, just because we saw the traffic in there. So again, I think that the combination of the sequential improvement in traffic in the quarters, and now I feel as if California is getting slightly better. And last but not least, as I mentioned also in my prepared statement, in the month of December, taking the turn times at Benihana from 120 minutes to 90 minutes creates a significant lift in availability and tables, and capacity to take more business. Joseph Gomes: And then one more for me, if I could sneak one in. Maybe just can you give us a little color on your efforts on the Benihana franchising side. I know that's something that you're hoping to see a little faster growth. So just want to get an update there. Emanuel Hilario: Yes. So I mean, we did open one in the second quarter in Florida. And then our activities on the franchising side have also yielded. We now have a deal that's almost done for some Benihana Express-type operations in California. We also have a potential franchise deal for the Bay Area that's also shaping up. So we've made significant improvements on the pipeline. So now our team is out there working with these potential individuals and closing these deals down. We've also made some improvements to our pipeline for license sites for STK. So we do have both the franchising move forward on the pipeline for Benihana and also STK, as we've gotten some more leads and are actually getting very close to announcing some additional license deals for STK. Operator: We'll take our next question from Anthony Lebiedzinski with Sidoti. Anthony Lebiedzinski: So Manny, I think also last quarter, you called out Las Vegas as being a market where you saw some, I think, softness. Can you comment on that? Did you see that as well? And have you seen any improvements fourth quarter to date? Emanuel Hilario: Yes. So I will caveat my response on Vegas on the fact that it's our experience. We only have, let's call it, 3 or 4 restaurants in that market, actually 4 in total. But our experience right now with STK is that it's actually improving for STK. So we've seen an improvement in our business on that side. Again, as I mentioned earlier, part of that has to do with the shifting in the conference and convention schedule. I think if you follow Vegas, you probably are aware that there was a shift in the convention calendar. So that's definitely benefiting us in the fourth quarter, having a more robust conference schedule. I think the other restaurants, though, I would say that it's more of a little bit of a mixed bag. So I haven't seen the same improvement that I've seen on the STK business. Anthony Lebiedzinski: And then you gave us some numbers on the loyalty program, which looks like it's doing well in terms of sign-ups. Can you give us maybe some details, as far as like what the average ticket or frequency or anything else, can you share about the loyalty members versus non-loyalty members? What do you see in terms of behavior from them? Emanuel Hilario: Yes, great question. So we have about 6.5 million people who are in the program. A lot of those members came through our conversion of memberships from other programs. So we have Benihana on the programs. We had Kona Grill Rock. And that's the case. So we brought everybody into the same common program, if you will, into that loyalty program. And since then, we've done about 200,000 sign-ups of new members coming into the program. We're early. So I'm going to give you what I've seen so far because of all the brands we have, Kona Grill is the one that has been on the loyalty program much longer than anyone else because we were already utilizing Konivor, which was the legacy program from Kona. And for that particular brand, it's actually been helpful. So we've seen a frequency increase in the use of the program. So we feel the early returns are very promising because we have members in that program who've been around for longer. And I think the new program and new activations that we're doing with it have driven a little bit more interest. But again, as I said earlier, it's early. I think we rolled it out only earlier this year. I think that we will continue to pick up momentum with it going forward. But again, I think that as I look at the overall story for the quarter, I think that the third quarter being our best traffic quarter for the company, I think it bodes well for all the initiatives and the actions that we're taking with marketing and everywhere else. Anthony Lebiedzinski: And then I guess my last question before I pass it on to others. In terms of recent price increases, I know it's still early on, but any early read on the reaction to the price increases? Have you seen any customer pushback to those higher prices? Or do you think that you'll be able to successfully pass those along? Emanuel Hilario: Yes. I mean, I think we start rolling out those price increases in late October in some places. And so we're really, really early on it. But, again, I think the way that we did our pricing increase this time is that we really tried to wait until we think the timing is a little better. I think this has actually started our seasonally better months, weeks, whatever you want to call it, actually, for the next 36 weeks is really our high season period for us. So I think putting the price right at the beginning of the high season is actually a good strategy for us. Have we seen any noise in terms of feedback? The answer is not. We follow it obviously through all our listening tools and social media, and everything. So we have not seen anything above and beyond what we usually see on the pricing. Operator: We'll take our next question from Mark Smith with Lake Street Capital Markets. Mark Smith: I wanted to dig in a little bit more into Benihana comps here in the quarter. They came down more than we've seen here recently. Can you just talk about traffic and tickets at Benihana? Emanuel Hilario: Yes. I think for the quarter for Benihana, as I mentioned earlier, that we had pricing coming off. Benihana was the one that had 5 points of pricing might have actually been a little higher than 5 points that we did not replace in the quarter. So if I look at their differential in same-store sales year-to-date to what we performed in the third quarter, I would attribute it mostly to the pricing, not taking the pricing action. And again, I want to reiterate this, if I look at our same-store sales by geography, California was by far the most impacted of all markets in our portfolio, and the Benihana portfolio does have a bit of weight in the California market, some of our higher-volume restaurants. So again, I think that I would say that the 2 items on the Benihana would be not replacing the 5 points in pricing that we came off and then the additional pressure in the California market. Mark Smith: And then just on the impairment that you took in the quarter, was all of that on Grill Concepts? Or was there anything on any of the other brands? Emanuel Hilario: Yes. I think the majority of the impact was on Kona Grill. And then we did have a very minor amount coming out of our STK in downtown New York just because that lease is up. We're in the last year of that lease, and we're moving the restaurants, actually relocating the restaurant around the corner. So that will be a reload. But right now, we just have some additional amounts in the books that we have to accelerate. And by the way, there were assets that we couldn't move over to the new location because a lot of the assets may move to the new location. Mark Smith: And then just talking about changing locations here. Can you just walk us through a little bit more on your, maybe the economics of the conversions? I think you said $1 million maybe on spend, but just the economics there and then, maybe your outlook on these that you plan on converting, how many maybe to STK, how many to Benihana. And I'm curious, sorry to throw a lot on you here. Do these come with a new lease signing? Or do you typically keep the lease terms that you currently have? Emanuel Hilario: Well, so a very good question. So the first one we did is Scottsdale. It was a RA Sushi restaurant. And in that one, we converted to an STK. It took us, I think, from beginning to end, somewhere between 6 and 8 weeks, to do the full conversion. The cost of the conversion, I'm putting it at about $1 million in a round number. And it was a very effective refurbishing of the restaurant, and we kept the majority of all the infrastructure. So it was very cost-effective in that. And the question on the lease is that one, actually, we actually got an extension on the lease by choice. So we got another 5-year option just because we like the real estate. When you go to that property, you'll notice that it's in an A plus, I'm going to call it A, I'm not going to give it A+, but let's call it A real estate with very good lease terms and a good presence there. And we've already reopened it. I would say that we just opened the door. We didn't really do much marketing. We're actually starting the marketing push in the next couple of weeks. And I've been so far been very happy with what it's happened there. Obviously, as you know, our model for STK, brand-new STK, is about $8 million in volume with margins around 20%. So I would expect that STK to be in that range of value. It's in a market that we've already been in. So we have pretty good experience there. So I feel pretty good about that one. Now we have other, I think, up to 9 other sites that we're looking at converting and the cost should be around that same $1 million type tag, if you will, price tag and the conversion cycle should be relatively fast, and we'll do the same thing in terms of taking advantage of existing infrastructure in electrical, HVAC, kitchen, plumbing, et cetera. So we think those will be very effective. Again, what really drives that decision is the quality of the real estate. That's one of the things that we're really happy about, The ONE Group is we have great real estate, and that's one of the things that having multi-brands like we do gives us a lot of flexibility and gives us an opportunity to really leverage the strength in the real estate. Mark Smith: Would there be much of a difference in the cost or maybe return metrics on converting to Benihana versus STK? Emanuel Hilario: I mean, again, another great question. I think the difference between Benihana and STK conversion is actually the mechanical cost because with the tables in the dining room, we have to do more upgrading on the exhaust system, and sometimes electrical systems if we add electrical tables. So it's a little bit more on the mechanical side. And it may take a little bit more time because we actually have a lot more engineering and architectural work into it. So it's a little bit different from a process. But our view on it is that the cost will still be around $1 million in either one. And so we don't foresee a lot of cost incrementality in there. Again, I mean, we have a lot of real estate in malls and other places that make a lot more sense for Benihana than STK. So that's part of our decision on Benihana is that Benihana is a great concept for mall-type locations. Operator: We'll take our next question from Jim Sanderson with Northcoast Research. James Sanderson: I wanted to go back to the issue of pricing. I think you mentioned you exited the third quarter with a global price of about 4 percentage points and that you took a price in November. What should we expect as far as the impact of menu price on fourth-quarter same-store sales? Emanuel Hilario: So I think the bigger part of that increase was Benihana around slightly above 5 points on pricing. So that will weigh in heavily. And then STK and the other brands, we had about 2 to 3 points on pricing. So the other ones are very modest. I would call that just cleanup pricing. So I would say, overall, somewhere around 4.5% to 5.5% on a weighted basis would be the impact of the new pricing layer. James Sanderson: And that probably will last for the next 36 weeks, give or take. Is that the right way to look at that? Emanuel Hilario: That's right. James Sanderson: Could you talk a little bit more about bookings? I think you mentioned in the press release that you were optimistic given the level of holiday bookings. Maybe you can tell us any comparison with respect to last year at this time? Emanuel Hilario: Yes. I mean, we actually just reviewed the books this morning. Nicole and I did a review of our bookings to progress right now. Frankly, since COVID, if I look at the month of November, looking into December has been one of the months where I've actually seen a significant amount of progress on the number of bookings that we've seen in events. Obviously, that also reflects a little bit of the fact that we have a very experienced. We have a very good sales team. So that team has become very good at working in the current environment of sales. And again, the convention business and a lot of the stuff that used to happen in the third quarter last year also got moved into the fourth quarter this year. So definitely, that helps bring up the books into the fourth quarter. James Sanderson: And can you remind us what share of the fourth quarter is related to holiday bookings or special events, that type of thing? Emanuel Hilario: I would say about 15% of our business comes from the group event business in the fourth quarter. James Sanderson: Also wanted to shift gears on Benihana. You mentioned a lot of changes taking place in the design of the store that you're going to be implementing. Can you give us a sense of when that change will be implemented across all Benihana stores? And any feedback on helping us understand how to quantify the increased capacity, how that potentially could benefit AUVs? Emanuel Hilario: So our planning for that is we typically say that our CapEx is about 1.5% to 2.5% of sales on existing stores. So we're not putting together a special allocation of capital for that. We will do that revamp within our typical allocated basket, if you will, of CapEx. And so it will take a little bit of time to do that. But our changes will be more around our priority, one is getting rid of the smoke in the dining room. So we do have some things that can help with that. So we're working on that right now for a lot of our restaurants. HVAC. I think I've mentioned HVAC in previous calls. And then the third priority is adding tables because on Fridays and Saturdays, we can really use more tables in the restaurants. So we'll be upping those tables as we go. And then I'd say the next level of priority, things like the artwork, is pretty compelling. The new artwork that we put in the San Mateo location, which we've defined for the brand, is actually very cool. So we really want to start working on that. And then over time, it's just the key with Benihana is to continue a very strong maintenance program, which we do have in place. We have a very high-quality facilities team that keeps these things maintained. But as time goes on, with our typical basket of capital, we'll try to take care of that. As you probably picked up on my prepared statements and on the press release, we're also tightening down and keeping down the amount of CapEx that we're using because we want to work on the balance sheet. So it's all about balancing all those things, and that's where we'll fund the capital B from our regular CapEx basket. James Sanderson: A bit of a follow-up question, just to make sure I understood the lower CapEx in 2026 that you mentioned. So, how should we put that into perspective based on the plan you have in place this year? How is that CapEx number going to change. Emanuel Hilario: Yes, very good question. So we're focusing our capital on the conversions, which are about $1 million per restaurant. And then on new brand restaurants of the world, we're only focusing on restaurants that we can do for $1.5 million or less on the whole cost of the restaurant. So we're really working our low-cost real estate inventory. And also the other thing, too, is we're not doing any new leases right now because we have a pipeline of about 12 leases. So we stopped doing leasing, and we're going to work through the existing pipeline of leases. James Sanderson: And last question for me. I just wanted to better understand the Benihana Express. I think you mentioned that it could eventually become a sizable portion of your portfolio. Can you describe any changes to what the AUVs are store margins and how that's different from, let's say, a larger Benihana? Emanuel Hilario: Yes. I mean, the box will be much smaller. So we're trying to keep the restaurant -- let's just hypothetically right now, keep it around 1,000 square feet. So the economics are different from a top-line perspective just because of size. And then there will be no tips on tables in the property. All the food will be ordered and picked up, and taken away. And then we'll have some tables in the property and chairs, but there will be very limited seating. And so it will be a much smaller compact box. And so expect revenues. Right now, Nicole and I talked about somewhere around $1 million to $1.5 million, but a very, very low cost of build-out because there's nothing really to put in there. So we'll probably build that for around $500,000 to $600,000 in cost. So it will be a very effective box. Think of it most as a fast casual grab-and-go, take your food back home, or you may choose to eat there, but it will be a more casual environment. James Sanderson: Just to follow up on that. How do we look at the cash return or the cash-on-cash return to franchisees with be reviewing? Emanuel Hilario: Yes. I mean, we think that because of the lower cost of goods and the fact that we'll be able to be effective labor in that box, it will be a very high ROI. I think the store level margins, even after royalties, can be in the 15% to 20% range. So it will be a very good return vehicle for potential franchisees. The ones that we're talking to are super excited about it, and we look forward to testing that model out. Operator: We have reached our allotted time for questions. I will now turn the call back over to Manny Hilario. Please go ahead. Emanuel Hilario: All right. Thank you very much, Brittany. As I always close my call here. I want to thank the team once again. I'm very impressed and very pleased as to how the team put above and beyond effort and really showed progress in the third quarter, as our traffic numbers show. So I appreciate that. And we look forward to a great fourth quarter in terms of traffic and sales. And as always, I appreciate your support of The ONE Group, and I look forward to seeing you out in one of our restaurants. Everybody, have a great day. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.