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Operator: Good evening, and welcome to Universal Music Group's Third Quarter Earnings Call for the period ended September 30, 2025. My name is Alex, and I will be your conference operator today. Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Matt Ellis, Chief Financial Officer. They will be joined during Q&A by Michael Nash, Chief Digital Officer; and Boyd Muir, Chief Operating Officer. [Operator Instructions] As a reminder, this call is being recorded. Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section on UMG's 2024 Annual Report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. Thank you. Sir Lucian, you may begin your conference. Lucian Grainge: Thank you. Hello, and welcome to all of you for joining us today. I'm very pleased to report that for our third quarter, we once again continued to post strong financial results whilst also making significant advances on the implementation of our strategic plan. For the quarter, revenue grew 10% and adjusted EBITDA grew 12%, both in constant currency. Matt will go into greater detail on the numbers later. But before he takes the mic, I will focus my remarks today on 3 strategic areas. First, how we continue to propel our new and established artists' careers to new heights, including how we extend the value of their IP by bringing our artists' music and stories into areas such as feature films. Second, our work with partners to develop commercial and creative opportunities for artists, songwriters and fans, specifically in leveraging responsible GenAI technology. And third, our ever-growing presence in established and high-potential markets around the globe. I'll begin my remarks by highlighting just a few of the stunning successes our artists continue to rack up around the world. In the U.S., UMG had 7 of the top 10 albums for the third quarter, with Morgan Wallen, I'm the Problem at #1, and our publishing company had interest in 7 of the top 10 albums. And of course, there's Taylor Swift. What Taylor has achieved with her 12th studio album is literally breathtaking. The biggest first week in music history now belongs to The Life of a Showgirl, over 4 million U.S. and 5.5 million global album equivalent sales. The album shattered a slew of other records as well. By debuting at #1 on the U.S. Billboard album chart, Taylor now has the most #1 albums, 15 by any artist in the 21st century as well as the most #1 albums ever by a solo artist. I can't tell you how proud we are of her. The soundtrack for the animated film, KPop Demon Hunters on Republic continues its historic chart success, twice hitting #1 in the U.S. The lead single Golden has spent multiple weeks at #1 around the world, including 9 weeks in Australia and 8 weeks in both the U.K. and the U.S. It is also the first soundtrack album in U.S. history to have 4 of its singles in the top 10 of the US 100, all at the same time. Sabrina Carpenter's Man's Best Friend also debuted at #1 in the U.S., spent 2 weeks at #1 in the U.K. and hit #1 in 13 other countries as well. It's her second #1 album. And KPop Group Stray Kids album Karma is their seventh #1 album in the U.S., breaking the record for the most #1 albums by a group on the Billboard 200 chart this century. I'm excited about the progress I'm seeing that's happening in the U.K. market as well. Olivia Dean secured the #1 album spot and the #1 single, a feat that made her the first British female solo artist to claim both top spots simultaneously since Adele did in 2021. And also in the U.K., we're thrilled that Sam Fender was awarded the prestigious Mercury Music Prize for his third album, People Watching. That's the kind of artist development that we like. Something which means a great deal to us as a global company is we're thrilled to see several of our Japanese artists now beginning to gain traction globally. As you know, Japan is the world's second largest music market, but there's been a misconception that opportunities for local talent outside of Japan are limited. Well, I'm extremely proud to report that UMG is shattering that misconception in several ways. For example, BABYMETAL, the group released its first album after signing with Capitol in the U.S. in August. The album debuted at #9 on the Billboard 200, making them the first Japanese group ever, ever to reach the top 10 in the U.S. in partnership with our Japanese company. Here's another example, the recent tour by superstar Ado in 33 cities across Asia, Europe, the U.S. and Latin America, attracting 0.5 million fans, was also a historic first for a Japanese artist purely outside of Japan. And here is a third example of a Japanese artist gaining global traction. Fujii Kaze, his enormous success with his third album, released in September by Republic Records and next year, he's set to perform at Coachella. This is quite a major development. I've also believed that we can break more local talent from Japan around the world. I'm really thrilled to see this progress, and it's really, I think, what sets us out and defines as a creative company. Helping our artists reach new levels of success also means extending their IP in ways that deepen connections with their existing fan base whilst introducing their music to a new generation of fans. One way we do this is through film. For example, the documentary produced by UMG's Polygram Entertainment, offering an intimate look at the life and legacy of Mexican-American artist, Selena. The film was awarded at the Sundance Film Festival earlier this year and was acquired by Netflix, who has recently announced its November release. Amazon MGM Studios has picked up Man on the Run, another Polygram Entertainment documentary, exploring Paul McCartney's creative rebirth after The Beatles break up. Man on the Run will be released in select theaters and then hit Prime Video globally in February next year. It will coincide with tour dates across North America this fall as well as the release of his book, Wings: The Story of a Band on the Run. I've seen it. And it's special, thoughtful, dramatic and emotional. The last film I'll mention is Song Sung Blue from Focus Features. It stars Hugh Jackman and Kate Hudson as the Neil Diamond tribute band Lightning & Thunder. The film features performances from Neil Diamond's iconic songwriting catalog and opens in the U.S. theaters on Christmas Day. I'm not exaggerating when I say I could go on and on about many more of our other artists' stellar achievements and projects. But I'd like to shift gears and speak a bit about our strategic advances, starting with our work with partners to develop commercial and creative opportunities for our artists as well as their fans. First, I'm pleased to report that we have successfully concluded our third major Streaming 2.0 agreement, this one with YouTube, covering both recorded music and music publishing. The agreement includes all aspects of YouTube's various music services and platforms, embodies our artist-centric principles and drives greater monetization for artists and songwriters. And as part of our new YouTube deal, we've secured really important guardrails and protection for our artists and writers around GenAI content, which brings me to my second topic. We're seeing significant creative and commercial opportunities in GenAI technology, which is why UMG is playing a pioneering role in fostering its enormous potential in music. Our foundational belief is that artists, songwriters, music companies and technology companies, all working together will create a healthy and thriving commercial AI ecosystem in which all of us, including fans, can flourish. For several years now, we've been driving initiatives with our partners to put artists at the center of the conversation around GenAI. We struck artist-centric agreements, establishing foundations and parameters for innovation, new products -- sorry, innovative new products that will unlock the power of its revolutionary technology. And both creatively and commercially, our portfolio of AI partnerships continues to expand. You will have seen, I hope, yesterday's announcement that we have reached an industry-first strategic agreement with Udio, under which the companies settle copyright infringement litigation and will collaborate on an innovative new commercial music consumption, interaction and hyper-personalization streaming product. The new platform, which is expected to launch in 2026 will be powered by cutting-edge generative AI technology that will be ethically trained on authorized and licensed music and will provide further revenue opportunities for artists and songwriters and UMG. The new subscription service will transform the user engagement experience, creating a licensed and protected environment to customize stream, share and share music responsibly on the Udio platform. We also entered into an agreement and then a strategic alliance with Stability AI to codevelop professional AI music creation tools for creators of video, images and now music. The purpose of this agreement is to provide our artists and labels with an opportunity for direct feedback into the construction of professional studio music product that uses AI to generate music ideas and demos. As we've said all along, artists should be at the center of the AI conversation, and this agreement aligns closely with the objective. These advancements are made with both global and regional partners. For example, just last month, Universal Music Japan announced an agreement with KDDI, a leading Japanese telecommunications company that will establish a collaboration to use GenAI to develop new music experiences for fans and artists in that really important market. Even as we lead the way forward on creating commercial and creating opportunities with our new partners, we're also working closely with established partners on the AI front, which includes making sure that the safeguards are put in place to protect them and their work. Spotify recently announced critical steps they are taking to advance our artist-centric initiatives as they relate AI. We look forward to the products that will be introduced through this partnership. As I said, at the time of their announcement, it's essential that we work with strategic partners such as Spotify to enable GenAI products with a thriving commercial landscape in which artists, songwriters, fans, music companies and the technology companies can all flourish, as I've said. As we strike agreements with other companies, we will only consider AI products based on models that are trained responsibly. We're in discussions with numerous other like-minded companies, whose products provide accurate attributes and tools, which empower and compensate artists' products, both that protect music and enhance its monetization and the entire experience. Ensuring safeguards is also the reason we partnered with SoundPatrol, a company led by Stanford scientists. SoundPatrol deploys groundbreaking neural fingerprinting technologies for detecting copyright infringement in music, including in AI-generated works. Based on our experience with RAI Partners, and discussions underway with possible future partners, we can confidently say that AI has the potential to deliver creative tools that will connect our artists with their fans in groundbreaking ways and on a scale that we've never encountered. Further, I strongly believe that agentic AI will dynamically employ complex reasoning and adaptation, has the power to revolutionize the manner in which fans interact with and discover music. Imagine interacting with your favorite music through a sophisticated, highly personalized chatbot. We envisage that exciting possibility on the horizon. We see the bottom line like this. As we successfully navigate the challenges and seize the opportunities presented by new AI products and others yet to come, we will be creating new and significant sources of future revenue for UMG and our entire ecosystem artists and songwriters. Now I'd like to move on to another area in which we've recently made meaningful progress, and that is the expansion of our presence in established and high-potential markets. In Japan, we recently increased the majority stake we bought earlier this year in A-Sketch, the Japanese label and artist management business by acquiring from KDDI, its minority stake in the company. In August, we entered into a strategic partnership with Maddock Films, one of India's most prolific Hindi film production studios in its newly formed music label, Maddock Music. Under this partnership, Universal Music India is now Maddock Music's global strategic partner for future film tracks and other businesses and product offerings. The partnership deepens our presence in domestic film music, which is the largest music category in India. In Vietnam, Virgin Music Group formed a partnership with The Metub Company, Vietnam's leading digital entertainment and creator company. This innovative venture will focus on signing and servicing local talent and independent labels to help them grow their music, both domestically and internationally. In Ghana, for example, Virgin Music Group took another step in its ongoing mission to invest in Africa's music and creative scene by announcing a global distribution partnership with MiPROMO, one of Ghana's longest-serving creative media platforms. I'd also like to briefly mention a significant development for our business in China, Universal Music Greater China announced the appointment of Zhang Yadong, one of the most iconic producers in the Chinese music industry to the role of Chief Music Adviser at Universal Music China. Widely recognized as a visionary whose work had defined the sound of Mandarin pop for more than 3 decades, he's going to work along with UMG's worldwide infrastructure to introduce the next generation of Chinese artists to international audiences. We're extremely excited and committed about the moves that we've made in China. And we'll be investing and are investing in next-generation local talent. I'd like to close with this. The third quarter, whilst obviously just a snapshot, marked another great quarter where we delivered strong financial growth, drove exceptional success for our artists and songwriters, shape the future direction of our company with groundbreaking announcements and continue to expand our global footprint. The consistency of our performance, combined with the continued execution of the strategic plan demonstrates that with UMG's entrepreneurial energy, we'll continue to bring artistry and creativity of the world's most brilliant and beloved music makers that we have to every corner of the globe and at the same time, leaning into distribution and business models for the future in new and innovative ways. So on that, thank you, and I'd like to hand over to Matt. Matthew Ellis: Thank you, Lucian. I'm pleased to have joined a great business and team at such an exciting and promising time. And I'm equally pleased to be presenting our results for the first time this quarter. Q3 was another quarter of solid revenue and adjusted EBITDA growth at UMG as we continue to execute the strategy the company laid out a year ago at Capital Markets Day. On top of the continued strong predictable subscription growth we saw once again this quarter, our results also display our healthy breadth with multiple drivers of long-term growth as our strong physical and merchandising revenues reflect the opportunity to directly serve superfans. All of the growth figures I will discuss today will be in constant currency. UMG's revenue for the quarter of EUR 3.02 billion, grew 10.2% year-over-year while adjusted EBITDA of EUR 664 million grew 11.6%, with margin expanding 40 basis points to 22.0%. Recorded Music revenue grew 8.3% in the quarter with strong performances from the KPop Demon Hunters soundtrack, Mrs. GREEN APPLE, Taylor Swift, Sabrina Carpenter and Morgan Wallen, among many others. Within Recorded Music, our well-diversified subscription revenue grew 8.7% for the quarter. This result was driven largely by growth in subscribers. Within the top 10 markets, there was double-digit subscription revenue growth in China, Brazil and Mexico and high single-digit growth in the U.S. and we saw a double-digit or high single-digit revenue growth from 4 of our top 5 DSP partners. With healthy subscriber growth from a range of partners across both established and high potential markets and the monetization benefits of our Streaming 2.0 initiatives soon to follow, we remain encouraged by the trajectory of the subscription business. Turning to ad-supported streaming, revenue was largely flat against the prior year quarter. Growth continues to be challenged by the shift to short form consumption, which is not yet adequately monetized. We plan to continue addressing this through our deal negotiations. Physical revenue was better than anticipated, up 23%, driven by strength in Japan led by Mrs. GREEN APPLE and Fujii Kaze as well as initial shipments of Taylor Swift's latest album, The Life of a Showgirl. While physical revenue performance may be less predictable and have more seasonality than subscription revenue, it's important to note that over a longer time horizon, this is a growing business that reflects increasing demand by fans to own physical products, connecting them with the artists they love. Moving on to Music Publishing. Revenue grew 13.6% in the quarter with digital revenue growing 17%, driven by the strength of streaming and subscription, particularly in the U.S., U.K. and China. Performance income also grew 17%. Growth in both digital and performance revenue benefited from the inclusion of Chord and a major television studio business win in this year's results. In Merchandising and Other, revenue increased 15%, driven by the strength in the U.S. and U.K. This was a result of very healthy growth in touring merch revenue which was partially offset by a decline in D2C sales due to the timing of product releases. Our touring merch revenue strength this quarter was driven by the Weeknd, Morgan Wallen, Lady Gaga and Nine Inch Nails, amongst others. Now let me turn to adjusted EBITDA. As I mentioned at the beginning of my remarks, adjusted EBITDA of EUR 664 million grew 12%, and adjusted EBITDA margin expanded by 40 basis points to 22.0%, helped by revenue growth, operating leverage and cost savings from Phase 2 of our previously announced realignment plan. This was partially offset by the negative margin impact of the revenue mix, in particular, the strong physical sales and touring merch growth. We're very pleased with our results this quarter and excited by the momentum and opportunities that lie ahead. With improved Streaming 2.0 monetization just ahead of us and fans looking to engage with their favorite artists in new immersive ways, UMG is at the center of a healthy and growing industry. Thank you. Lucian, Boyd, Michael and I will now take your questions. Operator, please open the line for Q&A. Operator: [Operator Instructions] Thank you. Our first question for today comes from Peter Supino of Wolfe Research. Peter Supino: Matt, welcome, nice to work with you again. I wanted to start by asking you for your perspective on the physical business. Your comments stood out that you see it as potentially a growth business, and certainly, that's not the consensus among the investors. So I wonder if you could share any figures or thoughts that would help us extend that concept in our models? And then the second question, if you could just talk about the investment section of the cash flow statement. It's been elevated for the last couple of years, and we have some commentary from your Capital Markets Day that it will moderate in the next couple of years. Is that a good thing or a bad thing? Do you see that investment spend as high ROI or not more maintenance-oriented? Matthew Ellis: Yes. Let me start with the second question there around the investment section. And do I think that the investments in the business are good or bad thing? They are 100% a good thing. We have the business we have today because of the investments that the company has made across many, many years now. And the investments we're making are consistent with the strategy that we laid out, whether that's continuing to support our existing roster of artists or continuing to build out where we expand. Lucian spoke about our geographic expansion. We went into detail at Capital Markets Day about those plans, and you've seen us execute against that since then. So investments will continue to be an important part of the business as we execute on the strategy going forward. And I think you'll see that continue to be an important use of cash. And as we've discussed in the past, it is the first part of our capital allocation strategy is that investment in the business. In terms of perspective on the physical business, incredibly proud of the results that we've seen from our artists this quarter with the strength there. As you look at the fourth quarter, certainly, we expect to see good results. I would remind you that very strong comps from the fourth quarter in Japan a year ago and the prior year that we'll be coming up against. But that demonstrates that this continues to be a growing part of the business. And you ask if it's a good thing or not, absolutely is a good thing. What our fans are showing us is when they have opportunities to engage in many different ways with our artists, they want to do that and they will spend money doing that. So what the team has done is find ways to meet that demand that is inherently out there. So yes, you should expect to see continued growth in the physical business. Boyd, would you like to? Boyd Muir: Yes. Thanks, Matt. Maybe just to add a little bit about the -- what you're inferring in the question, I mean there's 2 pieces to this, the old-fashioned format transformation that's going on. The reality is the CD in most of the markets in the world is very much a declining format. But we're talking about something really quite different here. This is -- this business is morphing into how we connect the fan together with the artists through a physical product, the most -- 2 most significant examples of that so far is the growth in vinyl and the collectible aspect of that. As we've said before, 50% of vinyl that is sold is sold to people who do not own record players. So this is about a collectible. And clearly, the growth in merchandise is just another aspect of all of this is connecting the fan together with the artist. So it's that aspect that is growing. It's not a format evolution of the audio format in itself. And a very significant part of this is now coming through us directly connecting the fan with the artists through, say, calling a D2C business or a [ D2Fan ] business, where around that new release of these album products, we are seeing somewhere in the region of 2/3 to 75% of the total volume actually coming through our own managed stores in relation to this product. So we're having a direct relationship with the fan. So that's much more about the evolution of this going rather than just being a tired old format transformation. Lucian Grainge: I'd also add that it's the fans telling us that the belief that we have in the superfan and how we're able to provide products and services, both physically as well as what they look like digitally in the future, they're telling us about behavior and about connection. Operator: Our next question comes from Jason Bazinet of Citigroup. Jason Bazinet: I just had one question about superfan. It seems like going back to your Capital Markets Day, you guys are maybe more optimistic about this opportunity than some of the other labels. And I didn't know if that was a function of a different vision that you have about what superfan is going to be or if it's a function of maybe different agreements that you have with your artists that may allow you to participate in sort of superfan economics in a way that might be different than other record labels. Michael Nash: Jason, thank you for your question. And if I can infer that in part what you're asking about, goes to superpremium tiers on subscription services. I think that there is a component of it that is simply about the opportunity to monetize more valuable fans. And as we've stated before, if you look at the digital download era, the top quartile of consumers were spending 3x the average. So the propensity to spend is there. And we think about this in terms of direct-to-consumer and Matt and Boyd talked about vinyl and what that means in terms of monetizing super fandom. There are different components to the equation but we have strong conviction about that we have invested directly in. With respect to superpremium tiers, we're engaged with all of our partners, talking about the opportunity. There is technology change that's going to promote opportunities, I think, around innovation to introduce more sophisticated, higher value offers to consumers over time, and we're engaged in those discussions. We're encouraged to see executives at some of the platforms like Spotify talk about their excitement, their desire to get this right. Seeing great demand for different superfan segments. So it's not just Universal Music Group seeing that. We can't speak about the perception that other music companies have regarding the opportunity. We've made our perspective clear, but I think it's important to keep pointing out that one of the world's top 5 music subscription platforms, Tencent Music in China, has, over the course of the last year plus empirically demonstrated that a super VIP product, as I characterize it, priced at 5x the average price of subscription in that market, a market regarded as a challenging market to monetize music consumption. In that market, they've gained a very, very significant traction. They recently reported 15 million SVIP subs, 12% of their subscriber base growing at 50% year-over-year. And they said that, that resulted in a doubling of their revenue growth versus the rate of increase of subscriber growth in that reporting period. So we're seeing that in a market where you've got some innovation leadership. There's clear demonstration of the opportunity. We believe industrial logic prevails here where research clearly demonstrates that at least 20% of the subscriber base is the target market for a superpremium offer and you see a focus on innovation. And as Lucian said, we think that AI will be a significant component of the focus on innovation in terms of new digital products in the future. We think this is going to play out over time. That's the viewpoint that we have. We can't account for the viewpoint of other music companies. Operator: Our next question comes from Ed Young of Morgan Stanley. Edward Young: I'd love to add a little bit more color on the AI partnerships, particularly if it's launching in '26. You sound confident that you'll be able to sort of solve the artist-centric monetization challenge where requests are generic or by genre style versus them being by artist name. So I'd love to add a little bit more on that. And then second and related, you've spoken often as a management team about developing new business models and diversifying revenue streams. Do you think or do you see agentic AI companies as likely to join the distribution landscape? Michael Nash: Thank you for your question, Ed. I'm assuming that the first question relates to recent announcements and in particular, what we've announced with Udio. In terms of artist centricity, what's significant there is that the product vision is to focus on a superfan experience for customization, deep engagement, hyper-personalization of the experience for fans interacting through AI technology with the artists that they love. So if you think about this in terms of where the marketplace is, from our perspective, the economics of the music ecosystem are really driven by fans' desire to engage with artists and by fans' desire to participate in music culture. So we're envisioning products that deepen both of those things that enables deeper engagement that is very artist-centric and that enables the fans to participate in music culture. So I hope I'm answering the thrust of your question. Yes, the vision regarding the products that will be enabled by initiatives we're supporting and specifically the one that we announced with Udio will be very artist-centric. In terms of the question regarding agentic and new music models, we're very excited about what we see in terms of the evolution of the technology and as it relates to consumer interest. So we recently did some research in the U.S. market. And in that research, the readout was 50% of music consumers are very interested in AI in relationship to the music. But that's in relationship to their music experience. The thing that ranks the lowest is artist simulation, what we would call fake artists. And you're seeing there's a lack of traction around that other than the occasional novelty phenomenon that may capture some headlines. That's not what fans are interested in. What fans say that they're interested in is AI application that makes their music service better, that improves discovery, that enables them to better organize playlist to have a better recommendation system against their express preference. So the thing with respect to agentic AI that we see as a significant potential point of innovation, imagine a perfect seamless blending of lean forward and lean back, where the interface that you have for music consumption is in a position to understand not just your music preferences, but the films and television shows that you watch, the books that you read, the countries you travel to, the conversations that you're engaged in, really, really sophisticated management of recommendation and also an understanding of listening conduct, drive time versus dinner party versus workout. We believe that the application of technology to really enhance the consumer experience in relationship to music appreciation, music discovery and contextual listening, that suggests a possibility that makes music all the more valuable that increases the connection between artists and band, all of that we see has been very virtuous. Operator: Our next question comes from Adrien de Saint Hilaire of Bank of America. Adrien de Saint Hilaire: I've got a couple of questions, if that's okay. Given the price increases that were recently announced by Spotify and presumably your new wholesale deal kicking in next year with that platform, do you have enough visibility today to see subscription growth accelerates into 2026? And second question, I'm really, sorry, if I missed this in your prepared remarks, but are there any additional details that you can provide on the timing for your U.S. listing? Matthew Ellis: Yes. So thank you, Adrien. Regarding the U.S. listing, as you know, we announced in July that we had confidentially filed with the SEC. We're in the SEC review process right now. Obviously, the U.S. government shutdown makes everything there a little bit more complicated. So we're working against that backdrop. And we'll have an update of the market when we have additional news, and it's appropriate to do so. So I look forward to doing that at the right time. In terms of the price increases on Spotify, as you mentioned, glad to see those come through. Michael, you're closer to that than anyone. Michael Nash: Yes, happy to elaborate there, Matt. So with respect to -- and looking into your question to make sure I'm covering the gist of what you're interested in, the price increase impacts and the outlook for 2026. Of course, we don't provide quarterly or even annual guidance on metrics like that. In the fourth quarter, we're going to have a tough comp against some pricing changes, but we'll also see some benefit, small benefit from the Spotify price increases that were announced earlier this year. So those things pretty much trade off. We do foresee that in 2026, we are going to start to see the pricing benefits from our Streaming 2.0 agreement. Other than that, I would simply point to the guidance that we provided on Capital Markets Day a year ago with respect to 8% to 10% CAGR in the midterm. That's the way you should really be thinking about the impact of the price increases as they play out over time. Operator: Our next question comes from Silvia Cuneo of Deutsche Bank. Silvia Cuneo: A couple of questions from my side. The first one regarding AI, you announced 2 strategic agreements today. Could you elaborate on your expectations for future similar partnerships and how meaningful this could be in terms of financial benefits compared to, for example, social apps licensing? And specifically concerning Udio, could you help us understand the mechanics of these agreements, particularly whether there are variable revenue elements tied to Udio's growth? And then secondly, quickly, regarding your cost initiatives, could you please remind us of the key cost areas that Phase 2 of your strategic design is addressing and in comparison, especially to Phase 1? Lucian Grainge: I'd just like to frame some of the conversation before maybe Michael or Matt actually add some of the detail. Sequence is critical in all of this. Search, the power of possibility of what the technology is providing all of these businesses, and you're talking about AI and Udio and all the other companies that we anticipate or we will make deals with. I've got -- I think it's important to say this. I have exactly the same feeling about this progress that I did 15 to 16 years ago when we were looking at what was the transaction business and the really early fledgling what was perceived at the time of the disruption of the album into something called ad-funded streaming. And then ad-funded streaming became premium subscription. So we are in a sequence of how the technology and how the platforms with us, as a company and as an industry, integrate and learn together how to actually create products and to provide what artists want and consumers and fans want in an organized monetized way. So we are at the front, at the vanguard of a new era. And it's one of the reasons why we're positive, we're confident and why we continue to invest right across the board in all aspects of what we anticipate will be the growth and is the growth not only in the company but in the marketplace. So on that, maybe you guys like to add some more of the actual functional details of what the question was. Michael Nash: That's a great strategic framing, Lucian. So within the question regarding the new agreements and our outlook, let me start out at a more general level and then talk specifically about the 2 new agreements that we've announced in the last 24 hours. As Lucian said, we clearly established our position in this sector as being the industry leader, developing new business models, supporting new products, numerous agreements that we previously announced to enable entrepreneurs working with established platforms, and that goes back to 2023. So the most recent set of announcements and initiatives is building on that foundation of industry leadership. And you might have noted that Lucian sounded a call to action where we started to mobilize to prepare to be able to effectively execute and implement new deals and talked about the scope of ambition being up to a dozen different conversations in which we're engaged. We're very excited about the opportunity for innovation. With respect to commercial opportunity, as Lucian said, we believe the commercial opportunity is potentially very significant. These new products and services could constitute an important source of incremental additional new future revenue for artists and songwriters. Now we're just preparing the way for market entry of these new products. Some of the things we've announced are 2026 in terms of scheduling scope on product launches. So it's too soon to provide commentary on more specific in terms of opportunities scope, but we do believe this is potentially significant. In terms of product scope, the recent announcement, I think, provide a very clear indication of what we're thinking about in terms of new AI products targeting the superfan, deepening the relationship between artists and fans, enabling fans to more deeply participate in music culture and providing tools for our artists that are being responsibly developed to enable them to narrow the gap between imagination and creation of content to broaden the palette of options they have in terms of artistic tools to be able to create content. Specific to Udio, and let me just elaborate on Lucian's comments. We entered into an industry-first strategic agreement where we've settled copyright infringement litigation and we're collaborating on this innovative new product suite, new commercial music consumption, interaction, hyper-personalization, sophisticated curation, those are the elements that are going to define this product suite. The new platform, plan is to launch in 2026. It's going to be powered by Udio's cutting-edge generative AI technology, ethically trained, responsibly trained and authorized license music content, all those things very critical and obviously to the benefit of our artists, songwriters and to rights holders. The new service we see as potentially really transforming the user engagement experience within a walled garden, enabling this deep interaction with the content. And I just want to briefly highlight, in terms of artist tools the announcement with Stability AI, this is really a groundbreaking product development collaboration that we're announcing with Stability. Stability is organizing their effort to create new tools for professionals in a category of gaming with Electronic Arts, in terms of marketing, advertising with WPP, in terms of film production with their investor and Board member, James Cameron. So UMG joins that group of significant players in their categories as the leader in the music vertical, and that puts us in a position to directly engage in a very artist-centric way the conversation with our creative community around the evolution of these tools and puts us in a position where we're going to be able to provide the best opportunity for new creative potential out of AI responsibly trained for the ranks of artists and songwriters that we work. Lucian Grainge: This is happening. It's on, and we're on. Matthew Ellis: Silvia, on the cost question you had, obviously, as you said, we're in the second phase of the program. A lot of the activity that you've seen to date has been successful in both our U.S. and U.K. platforms. Boyd, you've lived this program for the past couple of years, so you could add a little bit more detail. Boyd Muir: Yes. Well, maybe just to take a step back to level for everyone. I mean the strategic alignment, which we announced, I guess, a couple of years ago now, it's a proactive initiative. It's not reactive. It's a proactive initiative. It's designed to achieve efficiencies and targeted cost areas, but at the same time, providing our labels with capabilities to deepen -- basically to deepen artist connections with new kind of areas of commerce, experiential and the like. We're focused very much in designing the label of the future, providing our labels with enhanced access to highest-performing internal teams and access to additional resources. And Lucian mentioned in his opening comments actually about the success that we're seeing in the U.S. and the U.K. And there's little doubt that this is as a result of the strategic alignment initiatives that we're pursuing. Operator: Our next question comes from Adam Berlin of UBS. Adam Berlin: I just got one question left, really, which is, you mentioned that Q3 physical benefited from early shipments of Taylor Swift's Life of a Showgirl. Can you talk about how much of the revenue that, that album will generate has already been captured in Q3? And is there still a lot more to come in Q4? Matthew Ellis: Yes. So Adam, thanks for the question. So yes, certainly, we did see some benefit, especially with getting the initial volume out to retail stores ahead of the October 3rd launch of the album. We've never broken out results by a particular artist or a particular piece of work. Not going to do that. Obviously, the initial shipments were significant. As Boyd said in his comments around our fan business, a significant number of vinyl sales is now in our D2C business, not going through retailers that we work with. And so those would have been on a different time line. So the vast, vast majority of the benefit from the physical sales of the album will be in fourth quarter, but we certainly did see some of the uplift, the 23% growth in physical year-over-year was due to those initial shipments, combined with the strength we saw in Japan that I mentioned. So we see this benefit, not just related to one artist. Our fans want to connect with all of our artists in geographies around the world. Operator: Our next question comes from Joe Thomas of HSBC. Joe Thomas: A couple of questions, please, on my side. Firstly, you were talking about the -- I think you were talking about new deal with YouTube and you've got protections across the whole gamut of what they provide. I'm just wondering if you could tie that into your comments on streaming and the difficulty of monetizing short-form video. Have you reached some sort of solution there? And what could we expect to come in the future? And then the second question is back to the cost savings. I realize there's costs coming out. There's also costs, sounds likely, going in as you invest in the capability of the business. What is the net cost saving over the quarter, please? Michael Nash: Joe, thank you for your question. In terms of the YouTube deal and the benefits of the new deal, the scope of it and then also how it relates to disruption of short form and monetization of that supported. So yes, we were very excited that we had an opportunity to complete this agreement with an important strategic partner. As Lucian said, our third Streaming 2.0 deal, we have a long-standing, very productive partnership with YouTube. With respect to the components of the deals related to monetization, obviously, every deal-making opportunity, we consider the unique attributes of potential licensee, circumstances or category, product plans, business strategy, that certainly applies to a major and uniquely diversified platform like YouTube. In talking about the new partnership in terms of Streaming 2.0 deal, we certainly are advancing important components of our core objectives here, taking into account these unique and multifaceted components of their platform and the foundational principles that we're carrying across in all of our negotiations with our partners. And as Lucian said, we secured key protections in the agreement on AI, which is a critical achievement in promoting interest of our artists on their platform. With respect to monetization of short form, improved monetization of short-form video is certainly an objective that we're actively advancing across multiple deal renewal discussions, including this one. Beyond that, I'm not going to comment on a specific component of a deal as it relates to an individual category. But our efforts to work on better monetization of short format to address the disruption the short format has brought to the ad-supported sector is a broad-based effort across multiple different deal renewal conversations. Lucian Grainge: Yes, I'd also add that we look at the rights as an overall category, and our strategic relationship and partnership with YouTube as an overall strategic partner on the music subscription, on short form, on long-form video and obviously, all the work that we're doing on AI. So it's an entire category with one strategic partner. And as the marketplace and as our products, their products, the technology grows and develops, it all blends and all sits together to actually create value for everybody. Matthew Ellis: With respect to the cost savings question, Joe, we don't really view it from the lens of the -- how you think about the net cost savings. We continue to invest in the business, whether or not we have a cost savings plan in place at a particular point in time. When you think about the margin expansion for the quarter, up 40 basis points again this quarter, you see the benefit of those investments driving the continued revenue growth, but also the operating leverage that then delivers and that again supplemented by the cost program. So we continue to look for ways to run the business more efficiently. As Boyd discussed, setting up -- continue to evolve the business as the industry evolves and what we do evolves so that we have the resources to continue to invest and provide the support to the business that we have. And I think you've seen the success of that. Operator: Our final question for today comes from Julien Roch of Barclays. Julien Roch: Coming back on the Udio deal you just signed. Could we have some indication of the payment mechanism. Will you get a share of their revenue? Will you get micro payments every time a song is created. So some color on how the money flow will work, without giving number detail. That's the first question. And then coming back on the deal you signed with Spotify, you gave one concrete example of what those products could be, Lucian did early on. I wonder whether we could get another couple of concrete examples of what those new AI products can be. Michael Nash: Julien, thank you for your questions. With respect to detail on the business models, you will probably not be shocked to hear that I can't go into granular detail. I will say this that obviously, the advent of AI with respect to new consumer products on new service categories on platforms, obviously introduces an opportunity for us to be creative and innovative in terms of the evolution of the business model and accounting for all aspects of the value that our content and artists bring to these platforms in terms of the establishment of the model's capability and in terms of the products themselves. We're obviously looking at all the components of the consumer experience and the value created and our participation in that value. So rest assured that we're working thoughtfully with new partners and certainly with Udio and reaching the agreement with them to be able to develop a sophisticated model that is going to deliver the value to our artists and songwriters and the rights holders that it should. In terms of more specific product concepts, with respect to how we envision the future, I think Lucian provided a great general sense of our outlook. But I would just encourage you to look at the specifics of the Udio announcement and the comments that have been made by their CEO and the comments that we've made, we now have a specific product development plan that has been set in motion by a new agreement for a service that's going to be launched next year. I think that what's being described there is the attributes of this customization, hyper-personalization, engagement with the artist content in a superfan experience in a walled garden on the platform gives you a good starting point for envisioning what the product scope is going to be. I think it's a good example of the kind of thing that's possible. We talked a little bit about on the horizon, things like agentic AI and obviously, that is to be constructed and developed in new conversations. So it's premature to go beyond a statement of kind of aspiration and outlook there. Operator: Thank you. That concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Operator: Good afternoon, everyone, and welcome to the webcast of ATEC's Third Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of these measures to U.S. GAAP can be found in the supplemental financial tables included in today's press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Leading today's call will be ATEC's Chairman and CEO, Pat Miles; and CFO, Todd Koning. Now I will turn the call over to Pat Miles. Patrick Miles: Thanks very much, Lacie. Appreciate it. Welcome to the Q3 ATEC financial results conference call. As usual, there will be some forward-looking statements, so please read that at your leisure. I want to take a moment and put into context what we are building here at ATEC. I will tell you, it's a very small number of public medtech companies, I believe, less than 10 that are over $500 million in revenue, meaningfully profitable and growing over 10%. Our results and guidance suggests that we are not only in that club, we are leading that club with top line growth of 30% while approaching a run rate of $800 million in revenue. My point is, is that we are becoming the company that we intended. And what I want to do is make sure that these things don't happen by happenstance, and they happen by a bunch of committed people. And so I wanted to thank those who supported and have been part of the mission and also remind everybody that we're just getting going. And so there is much to do. And so now I want to speak to why we are so uniquely positioned for a very long run. And I think the key is we're 100% spine focused. And we make decisions every day purely on spine. We are leading through proceduralization, which means that we're advancing lateral, which is reflected in convoyed sales, and we're applying that thesis across the board. From a deformity perspective, we're in the very infancy of our role or influence on that market space, really driven by EOS and EOS Insight. We have previously built an infrastructure that's going to last us a very long run. I look forward to describing more about that. And from this point forward, what you'll see is durable, profitable sales growth. And so just to share a couple of statistics from Q3, we grew at 30%. We had an adjusted EBITDA of $26 million, which is 13% of revenue. We improved by 840 basis points and turned in a free cash flow of $5 million. And so from a total perspective, that means that the total revenue was $197 million. The surgical revenue growth was 31%. Something that I'm totally excited about is the same-store sales, so revenue growth in established territories was 30%. It just tells you that there's demand in what we're doing. New surgeon users was 26% [Audio Gap] cash flow. We have plenty of access to cash and cash at $216 million. Our trailing 12 months adjusted EBITDA is $81 million, and we are flowing cash on a trailing 12-month basis, which feels great. And so what I'll do is I'll turn the detail over to Todd and be back with you after his comments. J. Koning: Well, thank you, Pat, and good afternoon, everyone. I'll begin today with the third quarter 2025 P&L highlights. Total revenue was $197 million, up $46 million and 30% compared to the prior year period and up $11 million sequentially from the second quarter of this year. The $197 million in revenue was comprised of $177 million in surgical revenue and $20 million of EOS revenue. Third quarter surgical revenue of $177 million grew 31% compared to the prior year period and was up sequentially by 5%. That represents $41 million in year-over-year growth. Procedural volume growth of 28% was driven by strong surgeon adoption, where we increased our net new surgeon users in the third quarter by 26%. Procedural volume growth reflects both an increased number of surgeons as well as earning a greater share of an existing surgeon's business. We see this happening as our procedures are used across the broader set of pathologies and as surgeons adopt more of our portfolio offerings like cervical or corpectomy. Since we first began reporting on new surgeon users in 2022, we have consistently added at least 19% net new surgeon users each quarter over the past 3 years. This surgeon adoption reflects both the attractiveness of our portfolio and the coordinated investments we're making in sales talent to meet that demand. Average revenue per procedure grew 2%, which was consistent with our expectations. Procedurally, we saw strong revenue contributions from our lateral and cervical solutions, and we are beginning to see measurable influence from our deformity offering. Same-store sales in the U.S. or sales that come from sales agents that have been in territory for a year or more grew 30% year-over-year, which demonstrates that we continue to grow significantly in the markets where we are already established. Our strong surgeon adoption, increased utilization and same-store sales growth results are testament to the durability and consistency of our revenue growth algorithm. EOS revenue increased to $20 million in the third quarter, up 29% compared to the prior year period. Demand in the U.S. market where we have a strong presence with our implant sales force continues to be strong and the biggest driver of growth in both deliveries and new orders. This in conjunction with a growing number of surgeons using EOS Insight positions us to see the benefit of the accompanying implant pull-through in the coming years. Turning to the remainder of the P&L. Third quarter non-GAAP gross margin was 70%, flat sequentially and up 80 basis points compared to the previous year, primarily driven by product mix and volume leverage. Non-GAAP R&D was $15 million in the third quarter. R&D investment was up year-over-year by more than $2 million and was up sequentially by $1 million. Non-GAAP R&D expense was approximately 8% of sales in the quarter, with top line growth driving 90 basis points of leverage year-over-year. The R&D is an area where we continue to see opportunities to invest in innovation that will drive future growth. Given the scale of our business, we can make these increased investments and generate EBITDA leverage without sacrificing the growth opportunities. Non-GAAP SG&A of $112 million was approximately 57% of sales in the third quarter compared to 67% of sales in the prior year period. SG&A grew by 11% year-over-year compared to our 30% increase in revenue, which drove 980 basis points of improvement. We continue to leverage the company's foundational infrastructure investments, improve our variable selling expenses and be very deliberate in new headcount additions. The combination of these factors accounts for about 2/3 of the improvement. We reported total non-GAAP operating expense of $127 million, which was approximately 65% of sales. Our operating expense investment reflects continued prioritization of strategic growth initiatives supporting sales expansion and new product development. While our foundational infrastructure is in place, we continue to expand the sales force, build out procedural solutions and integrate technology, data and information into the operating room experience. We continue to improve as an organization and the disciplined prioritization of these investments, along with our durable top line growth drove over 1,100 basis points of expansion in our operating margin year-over-year. I'll turn next to adjusted EBITDA, which was a record quarter for us at $26 million or 13% of sales in the third quarter, delivering 840 basis points of improvement compared to the prior year period. This quarter also marks our fourth consecutive period with over 40% drop-through on a year-over-year revenue growth to adjusted EBITDA. The discipline in how we look at headcount additions, the other types of investments we make has served us well and will continue to be foundational in how we drive profitable sales growth. You can see from the chart on this slide that the profit margin expansion that we are executing has been both significant and consistent. Our trailing 12 months of adjusted EBITDA now sits at $81 million and 11% of revenue. We are driving meaningful margin expansion that aligns with the priorities outlined in our long-range plan and as a result of disciplined execution. These deliberate results give us confidence in our ability to continue to deliver on our financial commitments and translate revenue growth into profit and cash flow. We are committed to driving profitable sales growth. Now turning to the balance sheet. We ended the third quarter with $156 million in cash on hand. Additionally, we had access to $60 million of available borrowing on our revolving credit line, which was undrawn at the quarter end, making our total cash and available cash $216 million. Our positive free cash flow of $5 million was again at the favorable end of the $1 million to $5 million range that we previously communicated. We generated $14 million in cash from operating activities, while we continue to invest in surgical instruments. Going into 2025, we had forward invested in instruments and inventory, the revenue-generating assets of the company. This year, you've seen how our revenue has grown and how we've become more asset efficient. We are growing more in absolute dollars than we ever have in our history, and we are doing it more efficiently. This efficiency is the result of the relentless execution of the plans we put in place by multiple teams across our company. The evidence of the company's inflection to cash flow generation is undeniable with our trailing 12 months of free cash flow turning positive for the first time in company history. The third quarter also marks our second consecutive quarter with positive free cash flow. Looking back at the past 4 quarters, we've now delivered positive free cash flow in 3 of the 4. With our consistent profitable growth and cash generation and a strong balance sheet, our financial position has never been better, and we foresee opportunities to begin to delevering our balance sheet in 2026. Given the momentum in the U.S. surgical business in the third quarter and healthy underlying spine market, we are raising our full year revenue guidance by $18 million to $760 million. Our revenue outlook for the full year 2025 expects adoption of our unique procedural approach to drive surgical revenue of approximately $684 million, and we expect EOS revenue of approximately $76 million. Our surgical revenue guidance raise is a result of overperformance in case volume, which we now expect to grow in the low 20% range year-over-year. We expect -- we continue to expect case ASP to grow in the low single digits year-over-year. As it relates to free cash flow, our third quarter and trailing 12-month performance further reinforces our confidence in delivering positive free cash flow for the full year 2025. We expect fourth quarter free cash flow to range from positive $6 million to positive $8 million. Turning to the outlook for the full year 2025 adjusted EBITDA. We expect sales growth to continue to leverage the infrastructure we have built, contributing to an adjusted EBITDA of $91 million, an $8 million increase versus our prior guidance of $83 million. Notably, our trailing 12 months of adjusted EBITDA of $81 million as of the third quarter speaks to our ability to deliver on our full year commitment of $91 million. As a reminder, our adjusted EBITDA guidance includes us absorbing the impact of expected tariffs in the second half of the year, and we continue to estimate the impact of tariffs on our cost of goods sold to be in the low single-digit millions of dollars for the full year. The chart on the slide depicts the consistency of the profitability progress we are making and the tremendous power of our business model to drive future profitability. Our adjusted EBITDA guidance of $91 million will generate an adjusted EBITDA margin of 12% for the full year. Notably, our current guide implies a 200 basis point improvement compared to the 10% adjusted EBITDA margin we guided to at the beginning of this year. Given the profitable revenue growth we've generated this year, we can now self-fund the investment in instruments and inventory to support our future revenue growth. We are well positioned to meet or exceed our 2027 financial commitments of $1 billion in revenue, 18% adjusted EBITDA and $65 million of free cash flow. The third quarter financial results are another step towards delivering on our commitments. We are delivering durable revenue growth, strong profitability improvement and seeing all of that translate into free cash flow. This team has made meaningful improvements in how we operate the business. You can see that clearly from the financial results. Most importantly, we are helping surgeons perform better surgery, and that is where we will remain laser-focused because it is the foundation for creating lasting value. With that, I'll turn the call back over to Pat. Patrick Miles: Well said, Todd. So I would tell you that our execution has been absolutely consistent across the strategy, and our strategy hasn't changed. It remains steadfast. We are creating value through creating clinical distinction, which compels surgeon adoption, and we continue to just get better from a field perspective. And so hugely exciting. So we like to say around here that the spine market needs ATEC. And I've never been a bigger believer in that view since I've started. And you got to realize the spine field is highly complex. And the type of revision rates or extensions of previous surgery is unacceptably high, which creates nothing but opportunity. And so the volume of variables that need to be addressed to drive success in spine has significantly increased due to a deeper understanding of the field. Historically speaking, investment has been overtly focused on flawed implant only, which is the currency of the business versus focusing on the requirements that ultimately drive outcome improvement. And so our view is that the industry needs a focal leader obsessed with mitigating variables in spine, and we are it. And so we've started down that road clearly through lateral. A key to variable mitigation is the architecture of spine procedures. That's what we call proceduralization. I think lateral surgery is a great example of that demonstrated success. However, the one thing to realize is we are absolutely in our infancy in terms of our footprint with lateral. There are multiple catalysts ahead. And so the first thing to talk about is just -- and Todd hit on it is the expanding of indications, which oftentimes is synonymous with new products. And so we have multiple new products forthcoming, including a mechanized arm. We have IdentiTi II. We just launched corpectomy. So not only expanding indications, but also increasing complexity, which oftentimes means more levels. And so we are able to address more pathology, and we just continue to be getting better in lateral. Another place that is a catalyst is the integration of technology that ultimately makes for more users. So it democratizes the technique to a wider audience. If you start to think about our informatic platform, EOS gives you the objective alignment measure and bone quality, Valence provides you where you are in space. So that's our navigation and robotic piece. And then SafeOp tells you not only the nerve location, but the nerve health. Having been at this for a long time, I would tell you, there is no one close to the level of sophistication in the most coveted element of the spine market, which is lateral. And so our next foray is into more data-driven decisions, and I will look forward to the day that we are informing the field of the best procedure for the respective pathology. And so there's still a lot to do on this front. Historically, whenever we talked about proceduralization, it was related to lateral. We have recently applied that same effort to our surgical portfolio with significant success. We used to always talk about the halo effect, meaning that we would create confidence with our lateral portfolio and people would ultimately use the least differentiated part of our portfolio in cervical. That is no longer the case. I will tell you that our cervical portfolio now stands on its own merit. Through the proceduralization effort, there is little we can't do in the cervical spine from elegant segmental surgery with our best-in-class access in IdentiTi II product through the most complex things such as corpectomy and revision surgery from the back. And so lastly, I'd hate to not shout out SafeOp. The type of information that it avails from an automated SSEP and MEP perspective and cervical spine has expanded the application of that product in this space. So our momentum really has just begun, and it's a very big deal. I would tell you another place that we are in our absolute infancy is accelerating deformity, our deformity inserts through the EOS integration. Much like lateral and cervical, our progress in deformity is just starting. So thanks to the influence through our EOS integration, we've launched AI-driven alignment for pre-op assessment. We're simulating surgery through our planning platform and providing patient-specific implants to correct deformity. Then the opportunity to confirm the plan postoperatively, meaning did I achieve what I intended to achieve. You have to realize the literature is abundantly clear. Surgeons are more likely to reflect the intended goals if they preplan. Our preplanning software is best-in-class, and the reflection of that is also best-in-class. So the EOS deformity opportunity literally creates another PTP like run just ahead. So I wanted to share a couple of things. Here's a great example of how our integrated product effort is advancing deformity. If you start on the top left picture and you look at the imaging, literally, we have the most coveted imaging. It is a biplanar low-dose standing image. It is what the surgeons want. Then we automate all the alignment measures and then create a 3-dimensional model. For a surgeon to have a 3-dimensional model in an idiopathic scoliosis is highly valuable for them to understand the rotational elements, and you'll see the top right photo is the blue, which shows the exact rotational deformity that the surgeon has to deal with and then to utilize our patient positioning efforts and straightening the spine prior to cutting or prior to the intervention is highly valuable. You can see the curve correction measured interoperatively, and you'll see it going from [ 40 to 6 ] using our best-in-class fixation. And so this is just an example of the type of sophistication that's assembled together to ultimately advance the field, and that's what we're doing with deformity. Another key catalyst forthcoming is Valence, which we expect to unlock further adoption. This truly democratizes the techniques and what we like to say is in the hands of the many. Valence is simple and most importantly, it's accessible and integrated. We don't look at technology as something unto itself. We look at how it ultimately influences the requirements of a spine procedure. And so procedurally integrated is such a key part of this. And so it's purpose-built for spine and compatible with all the 3D imaging systems out in the market. The footprint is very small. We're not taking a ton of room up in the operating room. It's not something that you spend millions of dollars on and wheel in. It has a very small footprint, which is highly valuable. And it's been demonstrated to be efficient. And so the first utility you will see with the Valence system will be in our proprietary PTP procedure and super excited for a Q4 for that to occur and expect its real influence in '26. And so I think what's so often kind of either underestimated or misunderstood about ATEC's ecosystem for which we previously invested is it is built for the long run. I genuinely believe there is currently a lack of will competitively to make such investments. That is why we love the prospects of the long run. It is the only end-to-end fully contemplated, fully integrated ecosystem. We fundamentally believe that spine surgery will be made better through data-driven decision-making, and that's what this avails to us. So as I look back over 8 years here, I would characterize our evolution into 3 distinct chapters. I would say the foundational investment years were 2018 to 2020. The infrastructure build was '21 to '23 and the profitable sales growth is '24 onward. And I just -- I remember back years ago when we assembled really the unbelievable team that exists here today and that we continue to grow. The portfolio was completely overhauled. We acquired SafeOp and evolved it, which is such a key to the type of informatic foundation that we are enjoying today, and we started to evolve our distribution. We got a bit of a hard time in the early days of our infrastructure build. So we acquired EOS and Valence, and those are key components of what we're doing today. We built a state-of-the-art headquarters to maximize the surgeon and sales training. We expanded our distribution footprint in Memphis. Something key that, again, I think that most people don't understand is we built scalable internal systems. We invested in valuable internal systems, and we made a focal international investment. What you're seeing today is a result of those efforts. And so we're levering the infrastructure investments. We're integrating data and informatic -- and our informatic platform into our surgical experience, expanding and elevating our procedural approach, and our international market is winning. And so what I thought I would do is end where we started, which is what makes us uniquely positioned is our 100% spine focus. Everything we think about every day is spine. And so we love it, and we're prospering in the space. We're leading in advancing proceduralization, which starts with lateral, but as I said, includes cervical and deformity. Our deformity leadership is in its infancy. EOS is huge. The people who are working on EOS are crushing it. We built an infrastructure for a very long run, and so can't be more excited about our capacity to scale off of that in a profitable way. So what you're going to see [ forth ] is durable, profitable sales growth, and that's what makes us the preferred destination. And so with that, I will turn it over for questions. Operator: [Operator Instructions] The first question comes from Vik Chopra with WF. Vikramjeet Chopra: Congrats on a nice quarter. A couple of questions for me. Maybe just first starting off on the cash flow. Just talk about how you see next year playing out from a cash flow perspective given the strength over the last 2 quarters? And then I had a follow-up, please. J. Koning: Yes. Thanks for your question, Vik. No, I think as we look at our long-range plan commitments, I think our cash flow expectations for next year are probably in that $20 million range on free cash flow. So on our path to $65 million of free cash flow next year. I think when you look at the amount of revenue growth that you might generate from a guidance standpoint and the drop-through on EBITDA, I think that gets you in that $20 million range. We're not at the point here where we're giving guidance, but I think as a construct, that's a good spot to be thinking about. Vikramjeet Chopra: Great. And then just on the -- your comments around LRP, Todd, or maybe even for Pat here. I mean, just given kind of how you performed this year, can we expect an update to your LRP next year given that you're tracking well ahead of your plan? J. Koning: Yes, Vik, I think as we're thinking about it, we're trying to contemplate when the right time to do that is. And we do think towards the end of next year would be a good time to do that as we enter 2027 and get 2026 mostly under our belt. And so we're thinking towards the end of next year, we'd come forward with an update to the long-range plan. Operator: Your next question comes from the line of Matt Miksic with Barclays. Matthew Miksic: Congrats on a really strong quarter. Wanted to get your thoughts on maybe the competitive landscape. And obviously, the changes -- the recent changes, and there's been a bunch have sort of, I'd say, consolidated. It looks like consolidated the major scale players in spine down to, I guess, 3, I want to say. So how do you expect that to potentially play in your favor? And perhaps like what other opportunities do you see for consolidation -- implications of consolidation, that sort of thing? And I have one follow-up. Patrick Miles: Yes. I'll jump on the first part. One of the things that is fascinating is that, first of all, we love market disruption. So if there's anything that you know that we could do to further that, let me know. And I'm kidding. The -- but the reality is these are multiyear dynamics. And it's like they never happen overnight. And so I even think J&J, the announcement was it's going to happen over a 2-year period. And so it's one of those things where it's like our focus is on just being us. We have so many catalysts that we need to focus on. We'll be opportunistic with regard to sales hires and the like, but it's just more disruption that candidly, we welcome. Matthew Miksic: That's great, Pat. And then just one on the lateral space and the role of Valence. I think you mentioned you're in the early innings. It seems like there's an opportunity, if you have 2 players kind of chasing this new approach, one of the potential differentiators and benefits to clinicians is to make that approach smoother and easier. And I don't know I've been hopping between calls here, so you may have already touched on this. But if you could talk a little bit about what kinds of benefits Valence could bring to that in terms of efficiency for surgeons already good at this and doing it regularly and what folks might benefit from and how this would benefit the expansion and adoption of [ prone lateral ] over time? Patrick Miles: Yes. The -- it's fascinating. It's like the whole PTP thing, I think, is so ripe for being a driver of procedures at 4, 5 and above. So anything at 4, 5 and above, just the ability to approach the spine and enjoy the benefits. And so the challenge always is how do you democratize it. There's always a bell curve of skill sets. And so the question always becomes is it's great to get a few doing the types of surgery that ultimately benefit a number of patients. But until you can democratize it, it's just -- it almost doesn't matter. And I think that when you look at navigation over the years and you look at even robotics, these things have been unidimensional. And so they've not been properly integrated into the workflow of a spine procedure. And so what's frustrating to us is what we want to do is apply all of the type of information that's going to drive greater precision to an experience in a methodical way. And so what we see as the opportunity for Valence is to architect just that. And I would tell you, on the team in Colorado and in San Diego, the Valence team has integrated this thing in a way that ultimately reflects the workflow that's desirous. And so my view is that these technological elements contribute to the predictability associated with the procedure. I will also say that it already -- we are leading in a huge way. Like SafeOp compared to anything else on the market is the father-son game. Our neurophysiology piece, the ability to ultimately identify where the nerve is, understand if it's degrading from a health perspective and then discern it with a motor evoked potential that's facilitated is not done by anyone. And so our retractor, our mechanized arm, it's -- again, I deem it to be a real competency of the company in just an absurd way. And so what we will continue to do is apply our learnings to things like the Patient Positioner where people don't have the will to invest, and we will continue to make things better. And so I just -- I think that the Valence element, I love it. It's one piece of it. It's one piece of the workflow of what we're building. And so anyway, clearly, I adore these things and have been at it a long time, but it's a great addition to the puzzle. J. Koning: And Matt, I think all the things that Pat said, I think, bring a level of efficiency to the experienced user, but also makes it more predictable and accessible to a broader set of users who might not be doing lateral but be doing something more traditional from a posterior approach. And so I think that's what gives us a level of excitement about what all this does in terms of expanding the lateral market. Operator: Your next question comes from the line of Young Li with Jefferies. Young Li: Congrats on a very strong quarter. So it looks like you had the biggest beat versus consensus in 3 years. It's also a seasonally slow quarter. Can you maybe just talk a little bit about what you're seeing in the market, the health of the spine market as well as some of the competitive dynamics? If you can comment on who you're taking excess share from during the quarter, that would be helpful. Patrick Miles: I'll start and provide Todd the ability to clean up what I mess up. The -- I think what's going on is a reflection of the foundation that we've built over the last several years. And I think you're starting to see some of the market disruption come through. I think the spine market is what it is. There's not a ton of change to that is my presumption. We're not seeing anything unique per se. I think the volume of surgeon users just continues to increase, and it's a proxy for a future business. And so when you start to see the volume of new surgeons added, you start to see the same-store sales, we so value the people who have been at this for a long time and watching them continue to be successful in their marketplace is a very big deal. And so I think more than anything, it's like, I think we're taking share from a lot of different companies. But I think what you're seeing is just kind of the -- we always say that there's an 18- to 24-month lag in this business. And so you're seeing kind of decisions that we made 18 to 24 months ago being reflected today. And I think in 18 to 24 months, you'll see decisions we made today reflect in the marketplace. And so I'll defer to Todd. J. Koning: Yes. I think the only thing I'd add there, Young, is from a market standpoint, I think the market has been healthy and has felt healthy. And so I think that's a good thing. I think that's a good thing for us. And we feel that when you look at our growth and you look at our size, clearly, I think you're taking share from all the major players. And I think when I look at the demographics of that and the locations and the surgeons, I think that holds true. And so you don't grow $40-plus million year-over-year without kind of touching all the competitors. Young Li: Okay. Can I ask a follow-up just on the balancing profitability versus growth. There's a bunch of companies been disrupted in spine. So you can theoretically grow them faster if you want to, but probably might have some -- some margins. You did mention durable profitable growth going forward. So can you maybe expand on that point a little bit more? How do you balance growth versus profitability? And then on that point, your average rep per case is much higher than the competition. Can you maybe talk about how you're able to achieve that, sustain that going forward? And how can that impact profitability and efficiency for your reps and instrument sets? Patrick Miles: That's far more than I could answer, so I'm going to turn it over to Todd. However, the one thing I did want to hit on is I'm not sure everybody appreciates the whole convoyed sales. When we talk about proceduralization, what happens is there's multiple products used. And candidly, they've been designed to work together to ultimately reflect in the predictability of a procedure. And so our enthusiasm is all about has the surgeon accepted our thesis surgically. And so if they do, then the likelihood for us to have a high ASP based upon the convoyed elements that ultimately get reflected within a spine procedure is high. And so that's why we're zealous to track products per surgery. We're zealots on the ASP front just because it's one of those things that's reflective of buying the thesis that we're putting forth. J. Koning: Yes. And I think I'd add in terms of how we balance and think about growth and profitability, obviously, we've got our landmark of the long-range plan out there in terms of what we've committed to from a profitability and a growth perspective. And so we have a plan to get there, and I think we've been executing to that plan. When we talk about priorities, our priorities are to grow and to invest in the innovation that will perpetuate future growth. And so that investment in growth is a combination of our investment in sets and inventory, which are the revenue-generating assets of the company. And I think we've got a solid construct in terms of how to think about that in terms of investing $0.75 on the growth dollar. And I made some comments in my prepared remarks about the size of our adjusted EBITDA now being able to be big enough that we can self-fund that growth. And so we feel confident that we've got the right amount of profitability dropping through so that we can continue to invest in the sets and the inventory of the business to perpetuate the future growth. And in combination with that, as we think about the leverage of the business, we are leveraging the overhead. And so we're certainly getting some improvement in our [ real berets ] as we've expected and as we planned. But fundamentally, we're seeing a lot of interest from surgeons to adopt the procedures. And as we grow, we can continue to drop profitability based on the fact that we've invested in the infrastructure of the business. Operator: Your next question comes from the line of Matthew O'Brien with Piper Sandler. Anna Runci: This is Anna on for Matt. I guess I wanted to ask another one on Valence. I mean you're getting pretty close to the full launch that's supposed to come later this year. And just wondering if you have any sense of what the funnel of orders looks like currently? And maybe if you could also provide some more context around the size of the ASC opportunity? Patrick Miles: Yes. The -- I was going to be a smart alec and give you a precise number. I'm kidding. What I would expect out of Valence is for us to end this year with a decent experience. As you know, the robotics side has been in Alpha for several months now. We're waiting on the navigation side to kick in. And so when that kicks in, we'll get an experience. We have a high degree of confidence in terms of what's going on there. But we don't expect any significant impact really until '26. And so clearly, there is demand for it out of the gate, which we're excited about. But my enthusiasm around the Valence system is the impact it will have on the democratization of surgery. And so we see these things as integrated tools for surgery. And so not as a big capital opportunity, capital sales opportunity, but our enthusiasm is clearly on the surgical side, which we think it will drive volume. J. Koning: And Anna, the only thing I'd add to that is I think we're clearly going to be deliberate about how we roll this out over the course of 2026, ensure we're getting good experiences and setting ourselves up for success for '26 and beyond. Anna Runci: Great. And then if I can just squeeze in one last one on international. I appreciate you're taking sort of a narrow and deep approach to your expansion there. And it looks like you're ahead of schedule against the LRP target. So I was just wondering what your outlook is on international, if that's changed, there's any upside there? Yes, just what are your thoughts? J. Koning: Yes. Thanks, Anna. I think you may be looking at the international breakout in our Q, which would also include EOS. And so when we built our long-range plan, we really talked about a global EOS, a surgical international and a surgical U.S. breakout of revenue. And so what I would tell you is I think we're kind of on plan in terms of our progress towards the long-range plan commitments that we had. So if you remember, $1 billion in 2027 was about $100 million of EOS revenue, $870 million of U.S. surgical and $30 million of international surgical revenue. So that was how that broke out, and I feel like we're on track towards that. Operator: Your next question comes from the line of Allen Gong with JPMorgan. K. Gong: Team, congrats on the good quarter. I just wanted to touch on the guidance and kind of build off of a question that was asked earlier. You had a really strong third quarter, kind of grew right through the normal seasonality we expect to see in the summer months. And when I look at your implied guide for the year, you still have a step-up into fourth quarter, but it's definitely a touch smaller than what we've seen in the past and what we've kind of expect from orthopedics more broadly. So I guess, why was this the right range to basically establish for fourth quarter? And then just to slip in my follow-up as well, when I think about the outlook for 2026, is that kind of the right run rate that we should be using the fourth quarter number as a run rate for 2026 as well? J. Koning: Yes. Fair question, Allen. And I think as we looked about it, we kind of thought that an $18 million lift off of the previous -- previous guidance was just a good place to be. I think it was a strong place. We clearly dropped the beat and raised and felt like that was appropriate. When you look, it implies a 20% year-over-year growth in our surgical revenue, about $30 million of year-over-year growth. To your point, it does imply a slower or less of a lift from Q3 to Q4. I think that's factually true. But ultimately, our guidance philosophy has kind of remained unchanged. We're going to put numbers out there that we believe we can achieve and have a reasonable opportunity to exceed. And so on the balance, we felt like it was just a prudent place to land. I think as you contemplate next year, and clearly, we're contemplating next year, that won't be a surprise to anybody. And your question is how should you think about it? And what I would tell you is we came into this year, we guided towards about $120 million of absolute growth. If you look at where we are today relative to $1 billion in 2027, that would be $120 million this year -- next year and $120 million of growth in 2027. Now then you'd also say in 2023 and in 2024, we grew $130 million each year in absolute revenue. And so I think as you contemplate it for us to kind of come out into 2026 and when we do give guidance, I think those are probably good data points to reference. The thing I'd point to in terms of what makes me optimistic about our future is you look at the growth that we've generated, especially in our surgical business. And you come to realize that when surgeons adopt our procedures, they use more in year 2 than they did in year 1, and they use more in year 3 than they did in year 2 and so on and so forth. And so the adoption continues. When you look at the dollar growth that we've generated here in 2025 in surgical revenue, the preponderance of that revenue growth has been driven by people who adopted the procedures before 2025. And so when you look at the amount of surgeon adoption we've seen thus far this year, it gives me optimism for the years to come. And so probably not giving you the exact answer you were looking for, but that time will come here in probably the next time we get on a phone call. So I appreciate the question. Operator: Your next question comes from the line of David Saxon with Needham. David Saxon: Congrats on another really strong quarter. I just had a quick follow-up on, Todd, your commentary to that prior question. So you were talking about $120 million worth of annual growth. It sounds like that could be conservative. But the question is that's kind of right around where consensus is. So it sounds like you guys are feeling pretty conservative. Is that the right takeaway? J. Koning: I think you're saying consensus today versus our current guide. Consensus -- [ 2026 ] consensus versus our current [indiscernible]? David Saxon: Yes. Yes. Yes. Sorry. J. Koning: That would be the math. That is correct. So I feel like that's -- I think of the 2 data points I laid out there, $120 million and $130 million like that feels like that would be on the low end of that range. David Saxon: All right. And then the real question I wanted to ask was just around deformity and that part of the portfolio. Would love to hear some of the traction you're seeing there. I guess, is that part of the portfolio and that offering at critical mass at this point? Or do you still have some product launches to go through before it gets there? Patrick Miles: Yes. I'll go ahead and take that one, David. We are in the absolute infancy of our influence of deformity. And I think that we've gone into it really with a -- trying to garner a better understanding through the EOS experience. And the volume of opportunity to create predictability in the deformity space is significant would be an understatement. And so from the different types of deformity being adult deformity, idiopathic and early onset, the focus is going to be idiopathic and adult for the most part. But we have several products that we're currently enjoying solid adoption on. We have multiple products in the design phase of that -- for that market space. And so I think we are as poised as we can be with regard to having influence based upon the foundation built around the EOS platform. And the EOS platform will be having an end-to-end solution that's been fully contemplated, it will be fully integrated in due time. Again, our opportunity to have a significant impact on that market space is very apparent. So anyway, I guess that's all I can comment on. David Saxon: Congrats again on the quarter. Operator: Your next question comes from the line of Caitlin Roberts with Canaccord Genuity. Caitlin Roberts: Congrats on a great quarter. You noted some discipline with sales team additions. If you could maybe provide some color on how you are being disciplined in those hires? And then also, do you plan to add to the capital sales team for the upcoming Valence launch? Patrick Miles: Yes. I'll go ahead and start, and I'll let, again, Todd to clean up what I mess up. The -- so the first part was the -- just the discipline around the sales hiring. I think we have a very good algorithm in place just in terms of minimizing the volume of time from hire to them being effectual. As you appreciate, as we talk about disruption taking time, these guys oftentimes have noncompetes and other issues that preclude the immediacy of our impact in a specific market. And we still have a number of marketplaces where we are an absolute nobody. And so it's nice that what we'll see is we'll see access granted first. We'll hire sales heads to initiate a utility. And then by the time the people are offered noncompete, their influence just becomes significantly greater. And so I would tell you that our access to hospitals is tremendous and are continuing to expand. And so I have several markets in mind that we are in our infancy and just kind of just getting going. And I would say a lot of them in the Northeast. And so that's kind of the thinking on the sales hires. Again, very -- trying to be as methodically and as thoughtful as we possibly can based upon, as Todd talked about, just a lag in terms of the influence. He talked about the surgeon engagement. And then 2025 is ultimately reflecting what we're doing or previous years are ultimately reflecting in what we're doing today. It's the same impact from a salesperson's perspective, clearly. From a Valence perspective, we're going to add some capital heads, not a ton of them. What we want to do is integrate the thing procedurally. It's -- this system is very simple, and it's simple enough to where our guys can run it who are on the ground. Making sure that we have proficient salespeople that ultimately can run the entire case is of significant importance to us. And so -- again, we'll have them where we do sell capital, we will have people in place to ultimately help facilitate that process, but our expectation from an execution perspective is the people in the room. Operator: Your next question comes from the line of Tom Stephan with Stifel. Thomas Stephan: I wanted to follow up on deformity. Todd, I believe you mentioned in the prepared remarks that being an early revenue driver. And Pat, I appreciate your comments on the portfolio kind of road map to an earlier question. But Pat or Todd, how should we be thinking about kind of the timing of when that opportunity really starts to take hold sort of as we think about, I guess, contributions to revenue growth? Patrick Miles: Let me start on the subjective, and I'll let Todd provide any objective he'd like to comment on. When the foundation of your strategy is based upon EOS and EOS Insight, what we want to see is the expansion of units and the expansion of availability of EOS and EOS Insight. And so where we have EOS units, we have a marked increase in market share. And so that's because of deformity. And so what we're seeing is just the opportunity to continue to further that expansion and that market share in places where we have systems placed. And so a big part of our effort and interest is to continue to push that. And so I would tell you that as I think about it, a big proxy for significant influence becomes the information that drives improved care. And so that's the whole clinical distinction element that we love to communicate about. And so there are product additions over the next 24 to 36 months that will continue to elevate the sophistication of not only the preoperative elements, but the interoperative elements and then the ability to assess and the ability to automate -- collect automated data. And so we think that those things will drive an outsized footprint of our influence on the deformity field. J. Koning: And Tom, the only thing I'd add to that is I think that feels like a reasonably linear experience over the next couple of years. Like as we continue to do the product innovations and deliver on the promise from an EOS Insight standpoint that Pat discussed, I think when you look at the hardware stuff, you think about adult deformity, much of what you -- what we have today is utilized very effectively there. The addition of EOS makes that all the much more available, sticky and higher demand. I think when you look at pediatric deformity, that's where we've really started to add like a hardware solution or a proceduralized solution is really the answer to that. And that's probably something that's really only, I'd say, started to be felt by us in the last, say, 6 months or so. And so I think we're at the very early stages of that. And I think there's more proceduralization there to come. Patrick Miles: And again, take this for what it's worth. I think what thrills us is we have a foundation of lateral. We see cervical starting to take off based upon its own merits. And then there's a deformity long-run opportunity, as Todd said, that's going to be linear, but it's going to -- again, just -- it provides catalysts for continued future growth. And as we look at the business over a long period of time, we've made foundational investments that will continue to evolve that ultimately reflect in a unique element of our portfolio. So it looks like it's an exciting time. Thomas Stephan: And then a quick follow-up just on surgeon adoption. New surgeon adoption growth really strong, has been for many years now. Can you just talk about, I guess, kind of the durability here moving forward, just as you look at where this growth has been coming from? And then maybe more importantly, kind of where the growth will come from moving forward? Patrick Miles: Yes, I'll go subjective and objective again. The -- I would tell you that I love the whole new surgeon adoption. It's not the same contributor in the immediate term that same-store sales is. And so the great part is, is all that does is provide a proxy for future engagement. And that's where it's like the enthusiasm from us is seeing the same-store sales continue to grow so that we're not completely reliant upon adding sales heads for growth. And so what you're seeing is you're seeing a very robust business within the context of established areas and just the proxy for future bullishness based upon the new surgeons. J. Koning: Yes. And maybe to add or to expand upon that, we've got many territories where we're established today. We can both get penetration of an existing surgeon's business in terms of more procedures and/or more case revenue within the procedure. And we are adding surgeons within that existing footprint. And we've seen that significantly here over the last probably 18 months. And -- but then to Pat's point as well, there are also areas where we have just entered, if you will, and we'll begin to see more surgeon adoption because we're -- just now essentially have proper representation. And so all that to be said, the opportunity is significant to continue to add surgeons because at the end of the day, we're a high single-digit market share player, which tells you that there's a lot of surgeons we don't do business with. Operator: Your final question comes from the line of Sean Lee with H.C. Wainwright. Xun Lee: Guys, congrats on the great quarter. I just want to touch up on the EOS a bit since I see the great revenues you guys had in third quarter, which is typically a slower quarter for hardware sales. I was wondering what are the primary drivers behind this? And do you think this will carry over into the next quarter or 2 as well? And maybe thinking a little bit on the longer-term outlook as well. I know that for the EOS, you guys were initially primarily focused on academic centers. Has that changed so far? Or are you moving on towards broadening the potential targets as well? Patrick Miles: Yes. Those are good questions, Sean. It's fascinating, right? It's one of those things where I would tell you that the thing that has, I think, inspired EOS sales is what's going on from an EOS Insight perspective. I think we were at the Scoliosis Research Society meeting, and it was a standing room dynamic. And it's a who's who that ultimately, I think, pushes forward a full body biplanar low-dose scan, which we're the only guys who have that. And so for us to be able to create informatics around that is really the driving force behind people's interest in what we're doing. And I would tell you it's both -- it's both an academic and candidly, a private interest. I think it probably has -- the initial interest is mostly around deformity. And I think it's going to extend way past there because there's a joke in the spine business that all surgeons are deformity surgeons. They either create them or fix them. And so even in short segment surgery, the value of EOS is highly valuable. And so what we're seeing right now is probably a predominance of academics, which, again, we love because now we're getting into being more relevant within the academic sector. We're seeing some privates. And then we're seeing some upgrades from previous pediatric institutions that start to see the software value that we're creating with EOS Insight. And so it is -- I would still say in the very early phase of the whole EOS experience, and I expect it will just get more robust. Operator: This concludes today's question-and-answer session. I would now like to turn the call back over to Pat for closing remarks. Patrick Miles: Thanks, Lacie. Just more than anything, I want to thank the team for their work. It's -- what a great quarter. I appreciate everybody's support in what we're doing. We have a long run ahead of us, but the foundation has been laid for future prosperity. So anyway, I appreciate everybody's work, and thanks for your interest. Operator: This concludes today's conference call. You may disconnect.
Operator: Good afternoon, and welcome to Alignment Healthcare's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risk and uncertainties and reflect our current expectations based on our belief, assumptions and information currently available. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended December 31, 2024. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on our company's website and our Form 10-Q for the fiscal quarter ended September 30, 2025. I would now like to turn the call over to John. John, you may begin. John Kao: Hello, and thank you for joining us on our third quarter earnings conference call. For the third quarter 2025, we exceeded the high end of each of our guidance metrics. Health plan membership of 229,600 members represented growth of approximately 26% year-over-year. Strong health plan membership growth supported total revenue of $994 million, increasing approximately 44% year-over-year. Adjusted gross profit of $127 million increased by 58% year-over-year. This produced a consolidated MBR of 87.2%, an improvement of 120 basis points over the prior year. Finally, our adjusted SG&A ratio of 9.6% improved by 120 basis points year-over-year. Taken together, we delivered adjusted EBITDA of $32 million, solidly surpassing the high end of our adjusted EBITDA guidance. Our third quarter results now mark the third consecutive quarter in which we surpassed the high end of our adjusted gross profit and adjusted EBITDA guidance ranges and raised the full year guidance. These results were underpinned by inpatient admissions per 1,000 in the low 140s and demonstrate the power of our ability to manage risk in Medicare Advantage by placing care delivery at the center of our operations. As we've demonstrated in 2024 and through our year-to-date performance in 2025, our unique model has positioned us to succeed amidst a paradigm shift in the industry marked by lower reimbursement and higher star standards. We continue to make investments that will improve operations to back-office automation, clinical engagement, AVA AI clinical stratification and Stars durability. These investments will further separate us from our competitors. For the full year, we now expect to deliver $94 million of adjusted EBITDA at the midpoint of our guidance range in 2025 compared to our initial full year guidance of $47.5 million at the midpoint. Jim will expand further on guidance in his remarks. Moving to Stars results, 100% of our health plan members are in plans that will be rated 4 stars or above for rating year 2026, payment year 2027 compared to the national average of approximately 63%. We are once again demonstrating the consistency and replicability of our high-quality outcomes across each of our markets. For starters, our California HMO contract earned a 4-star rating. This is its ninth consecutive year rated 4 stars or higher. Meanwhile, our competitors in the state only have approximately 70% of members and plans rated 4 stars or higher for payment year 2027. Our ability to consistently earn high stars results from AVA's centralized data architecture that provides our organization and clinical resources with a cross-functional visibility to execute on each stars metric. In addition to our strong California performance, we now have 2 5-star contracts in North Carolina and Nevada. Furthermore, we earned 4.5 stars in Texas in its first rating year. Our results outside of California not only demonstrate our commitment to quality, but also underscore the replicability of our outcomes across geographies, demographics and provider relationships. Our latest results set us apart from our peers and create additional funding advantages in payment year 2027. Looking ahead, we believe the improvement we made to the raw star score of our California HMO plan in rating year 2026 sets a solid foundation for rating year 2027 and payment year 2028. Furthermore, we believe CMS' transition to the excellent health outcomes for all reward, formerly known as the Health Equity Index, will add cushion to our 4-star rating in California. This change rewards health plans that effectively serve the most vulnerable low-income seniors, including those who are duly eligible. Our model is particularly well suited to manage this population with the clinical expertise and high-touch care provided by our Care Anywhere teams. Most importantly, we believe the move toward a bonus factor that focuses on clinical outcomes furthers CMS' mission to create greater alignment between quality and reimbursement. Lastly, I'd like to share some early thoughts on the 2026 AEP. For the upcoming plan year, we are continuing to take a measured approach towards balancing membership growth and profitability objectives, consistent with our strategy in the past years. Our ability to deliver low cost through our care management capabilities is creating the capacity to keep benefits across our products generally stable to modestly down. We believe this disciplined approach supports our growth objectives while staying mindful of the third and final phase in of V28. Given continued disruption in the MA industry in 2026, we believe there will be an incremental opportunity to take share while growing adjusted EBITDA year-over-year. Based on the strength of our early AEP results, we are confident that we are on track to grow at least 20% year-over-year. Consistent with our approach in past years, our sales operations are focused on matching seniors with the right products that support their lifestyle and growing in markets where we have the strongest provider relationships. We're very encouraged by the early activity of this selling season and look forward to sharing our full results with investors after the conclusion of the 2026 AEP. Taken together, our core competency in care management, continuous improvement in member experience and ongoing investments in AVA AI are all positioning us for further improvements to quality and outcomes. We believe we were the best Medicare solution for seniors everywhere, and we look forward to serving even more seniors across our markets in 2026. Now I'll turn the call over to Jim to further discuss our financial results and outlook. Jim? James Head: Thanks, John. I'm pleased to share our results for the third quarter, which were underpinned by strong execution across the board. For the third quarter, health plan membership of 229,600 increased by 26% year-over-year. Revenue of $994 million increased by 44% over the prior year. Outperformance in our revenue growth was predominantly driven by continued momentum in our new member sales during the quarter. Third quarter adjusted gross profit of $127 million grew 58% compared to the prior year. This represented an MBR of 87.2% and improved by 120 basis points year-over-year. Outperformance of both adjusted gross profit and MBR was driven by a continuation of disciplined execution of our clinical activities. This drove inpatient admissions per 1,000 in the low 140s during the third quarter. Meanwhile, Part D modestly outperformed our expectations as growth in utilization trends moderated sequentially. Our Part D experience through the first 9 months of the year gives us confidence that all of the moving parts related to the IRA changes have been appropriately captured and that we are on pace to meet the Part D margin assumptions embedded within our guidance. Turning to our operating expenses. Adjusted SG&A in the third quarter was $95 million and declined as a percentage of revenue by 120 basis points year-over-year to 9.6%. The year-over-year improvement to our SG&A ratio was driven by the scalability of our operating platform. Additionally, we experienced a few million dollars of SG&A timing benefit in the third quarter that we expect to reverse in the fourth quarter, leaving our full year SG&A outlook roughly unchanged. Taken together, adjusted EBITDA of $32 million resulted in an adjusted EBITDA margin of 3.3% and represents 240 basis points of margin expansion compared to the third quarter of 2024. Moving to the balance sheet. We ended the third quarter with $644 million in cash, cash equivalents and investments. Cash in the quarter was favorably impacted by the timing of certain medical expense payments, which resulted in higher operating cash flow during the third quarter. This timing difference also increased our Q3 days claims payable, but we expect this timing difference to normalize in the coming quarters. Our reservings methodology remains consistent and excluding this timing effect, we estimate that total cash would have been modestly higher sequentially and days claims payable would have been flat to modestly higher year-over-year. Importantly, this had no impact on the P&L. Turning to our guidance. For the fourth quarter, we expect the following: health plan membership to be between 232,500 and 234,500 members, revenue to be in the range of $995 million to $1.01 billion; adjusted gross profit to be between $104 million and $113 million and adjusted EBITDA to be in the range of negative $9 million to negative $1 million. For the full year 2025, we expect the following: revenue to be in the range of $3.93 billion to $3.95 billion; adjusted gross profit to be between $474 million and $483 million and adjusted EBITDA to be in the range of $90 million to $98 million. Building upon the strength of our third quarter results, we once again increased the full year outlook for each of our guidance metrics. Given our year-to-date momentum on membership growth, we raised our year-end membership guidance by 2,000 members at the midpoint. Expectations for higher membership also drove our full year revenue outlook approximately $41 million higher at the midpoint, and we now expect to finish the year with nearly $4 billion of revenue for the full year 2025. Moving to our full year profitability expectations. Our updated adjusted gross profit guidance of $479 million at the midpoint increased by $18 million. This implies an MBR of 87.9% and reflects nearly 100 basis points of MBR improvement year-over-year. Similarly, we increased the midpoint of our adjusted EBITDA guidance by $18 million, flowing through the entirety of the increase to the midpoint of our adjusted gross profit outlook, while full year SG&A assumptions remain roughly unchanged. Our guidance assumes a portion of the strong year-to-date ADK performance persists through the fourth quarter. However, as a reminder, the final months of the year are expected to have higher utilization due to the seasonal impact of the flu. Meanwhile, we continue to take a prudent stance to our Part D assumptions given significant changes to the program this year. Lastly, on seasonality, we expect our MBR in the fourth quarter to be higher than the third quarter due to the typical seasonality of medical utilization. As a reminder, our MBR seasonality in 2025 is not comparable to 2024 due to changes to the Part D program and prior period reserve development in 2024. On SG&A, we expect an increase in expenses during the fourth quarter associated with growth-related costs, consistent with our past experience and the timing of certain expenses, which we expect to land in the fourth quarter. In closing, consistent execution of our core capabilities in care management is taking root in our financial results in 2025. Reiterating John's earlier remarks regarding 2026, we remain confident in our membership growth expectation of at least 20%, given our progress during the early weeks of the selling season. We believe our balanced approach to growth and profitability positions us well as we close out the remainder of the year and prepare for 2026. With that, let's open the call to questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: First question, and John, appreciate the sort of early insight into the growth on 2026 likely to meet or exceed your 20% growth target. And I know you're not giving guidance at this point, but just curious around the comment that you made around the market share opportunities from industry disruption. And clearly, we know there's a lot of that right now for MA. How would you frame that in terms of thinking about that in the context of California versus the non-California markets? John Kao: Scott, yes, I'd say very, very pleased with across-the-board growth in California and really leveraging the 5 stars in North Carolina and Nevada. So, we're very pleased about the geographic kind of composition of the growth. I'd say even more importantly is kind of the product mix and the kind of provider networks that we think are very high performing and where the growth is actually occurring. And so, I think for all those reasons, we're very, very pleased just we're only 2 weeks into this thing. So, I don't want to get too far ahead of ourselves, but 2 weeks in, we're really pleased with it. The other thing I would just remind everybody, I know there's a concern that we're going to grow too much and we're going to pick up a bunch of bad business, et cetera, et cetera. I'm less worried about that simply because we had a 60% growth year in 2024. And not only do we onboard it well, we manage the risk really, really well. And I think we're proving that we can scale the clinical model and we can actually manage the polychronic population really, really well. And so, it's just a core competency that we have that I'm not sure others can replicate at this point. So, for all those reasons, I'm very pleased as to where we are. Scott Fidel: Got it. And for my follow-up question, John, I know that at a recent industry conference, you had talked about considerations around potentially pursuing some M&A or sort of partnership opportunities on the vertical integration side to unlock the MLR opportunities, particularly associated with supplemental benefits. And just curious around how you think about weighing or balancing the opportunities that would be related to that, like improving the MLR versus the potential risks of sort of entering new markets that may have some different fundamental dynamics and then just maybe sort of moving away from sort of this sort of core strategy you've had that's clearly been working in terms of the focused strategy on MA. John Kao: Yes. No, good question, Scott. I'd say we're looking at a lot of different opportunities. And to your point, we're being very discerning. We're being very, very careful to the extent that there are tuck-in opportunities, I think we have to take those more seriously than others relative to, say, buying books of business in completely new markets. I think we're being very thoughtful about that. I would not worry about that part of it. What I said at a prior conference was around basically supplemental benefits and tuck-in acquisitions related to what we would call captives, ancillary captives. And when you talk about 4% to 5% of premium being really kind of applied to the supplemental business and supplemental products, it just makes sense for us to -- if we bought or started, say, some ancillary business, whether it'd be a dental PPO or a behavioral HMO or whatever it is, that we could seed it with 250,000 lives right off the bat kind of thing. And I think that there's going to be some margin improvement opportunity for us to do that. And I think we can do that with very little execution risk. Does that answer where you're going? Scott Fidel: Yes, it does. Obviously, it's going to be an evolving story, but I appreciate that insight. Operator: Our next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I want to follow-up on the 80,000 metric and the favorability on inpatient costs. I think last call, John, you talked about giving providers more tools and more data and also maybe moving some of the UM and inpatient risk back to Alignment's balance sheet. Can you just remind us where you are in terms of risk sharing with physicians in California? And how do you see that evolving during 2026 and beyond? John Kao: Yes. Matt, great question. We're about 65% to somewhere between 65% and 70% is in what we would refer to as our shared risk business. And what that represents is really where we're working with IPAs, particularly in parts of Southern California where we have shared risk arrangements where we're managing the inpatient -- we're at risk for the inpatient risk. And what we have done starting last year is really take on more of the UM component. And we've done that in a way that is resulting in better clinical outcomes and improved financial outcomes for our IPA partners. And so, it's kind of a win-win for everybody. And the other 1/3 of the business is still kind of globally capitated, but I think you're going to start seeing more and more of that shared risk business. I think it's more durable overall. I think there's going to be less kind of abrasion with kind of global cap kinds of entities as there's more and more shared -- it's more aligning longer term. I think outside of California, you're going to have more shared risk and/or just directly [Technical Difficulty] we really are the IPA. We are the network, and we are supporting the practices in terms of not only UM, but making sure that -- all the stars gaps are closed the way we want and the -- our risk adjustment gaps are closed the way we want. And frankly, that's what's caused us to get to 5 stars in North Carolina and Nevada. We have more visibility and control with the direct providers, PCP specialists and the hospital partners. And so, I think that's a trend that you're going to see more and more from us. And really, I think the team has done a very good job about kind of doing what we -- it's called de-delegation of UM. And we've done it in a win-win way, which is really important to us because we want to make sure that we're aligned with the providers and that collectively we can provide better clinical outcomes and better benefits for the beneficiaries. Matthew Gillmor: Got it. That's helpful. As a follow-up, Jim had mentioned some favorability with SG&A, but that's being reinvested. Can you dimension that a little bit, both in terms of the sizing and then also where that reinvestment is going? Should we think about Stars or other items there? James Head: Yes. Sure thing. The SG&A against the consensus guidance was a handful of million favorable in Q3. And as you noticed, we didn't adjust the full year expectations for SG&A. We kept those intact at around $385 million. So, what you're hearing from us is there was a little bit of timing issue with respect to the investments we're making. I would also say that we want to be well positioned for growth in 2026 and just make sure that we've got those resources ready. And so really, it's a timing issue. We kept our guidance intact and we outperformed a little bit in the third quarter. We think we'll kind of give it back in Q4. John Kao: The only addition to Jim's point is, it's kind of a part. The question you asked about where are we investing is what -- we're not talking a lot about yet, but we will just the continuous improvement that we're making to improve automation across the entire organization, improved AI logic in our Care Anywhere and AVA AI. And just even more, I would say, kind of productivity improvements and efficiency in a lot of our clinical programs. All of that's happening behind the scenes and that's where the dollars are being spent. And I think these investments that we're making now are really going to start paying out even more for '26 and '27. Operator: Our next question comes from the line of Michael Ha with Baird. Michael Ha: Thank you and thank you for commenting on the investor debate about doing too much growth. I want to quickly clarify first on the flip side. If you were to do less growth, I imagine that would only serve to further empower your EBITDA bridge since you have less lower-margin new members. Is that fair to say as well? And then my real question on Star ratings, and congrats on your Star rating results back in September and today, I know you mentioned your overall raw Star rating score increased year-to-year, well within 4 stars. If not, I think you mentioned very close to 4.5, but when I double-click into the contracts, 315, 3443, the summary rating for Part C and Part D seem to be 3.5, but the overall star rating, of course, is 4.0. I know that there are certain measures excluded that go into that rating ending up at 4. But I guess that face value imply your underlying ratings might have declined instead of improved. So I was wondering if you could help sort of reconcile your commentary on the raw star ratings improvement versus the summary ratings that what they appear to indicate. John Kao: Yes, hey, Michael, it's John. Yes. No, our overall raw score went up significantly from 3.7, whatever it was 5.2 or something like that to 4.05 or 4.06. So we're really happy about the raw score increases. I think we can probably have a sidebar conversation with you on the mechanics of it. But really, it's a data science, this kind of how you think about the Part C, how you think about the Part D and kind of all that goes into it. But the raw scores absolutely went up, and we're happy about that. Michael Ha: Okay. And then on G&A, sub-10%, incredibly powerful. I know you're aiming for some more improvement on G&A going forward. And I think you're now actually planning for the first time to invest into your brand. I think I saw on LinkedIn, there's a commercial video. So I was wondering how should we think about the brand investment going forward. It seems like you're implementing it starting this year. And I guess my main question is, how should we think about this new marketing effort in terms of evolving your member acquisition costs near term, long term? I imagine driving member growth through marketing and advertisement might present opportunities on the cost side versus broker commission costs. James Head: Yes. Michael, I'll take the first half, it's Jim here, and I'll let John talk about the brand. But as we continue to scale the business, there's going to be a natural decline in our SG&A ratio. But I think we're going to take a balanced approach to that in the sense that we want to continue investing in the business. And I would say it's not just brand, which John will talk about in a minute, but it's also making sure that we're reinvesting back in our clinical infrastructure and the other parts of the business so we can continue to evolve our model and step ahead of the competition. So I think as we think longer term, the SG&A trends will go down, but we got to be measured and balanced about it because we want to continue to invest. But John, over to you. John Kao: Yes. I think, Michael, we're just getting big enough that it's an opportunity for us to establish not only a brand for alignment, but really, it's an opportunity for us to demonstrate what is possible if you do Medicare Advantage the way it was designed to be operated, which is why we always talk about MA done right. And I think it's going to start really representing what was kind of reflected in that ad, which is it's all about serving seniors, actually changing the paradigm and the expectation, changing how people think about MA and all the good that we do and what all the good that MA can do. And so I think we're being very thoughtful about how to do that and what the brand is going to stand for. So stay tuned for that. Operator: Our next question comes from the line of Jessica Tassan with Piper Sandler. Jessica Tassan: Congrats on the really strong results. So, I wanted to follow up on AEP. Can you just maybe offer some perspective on retention versus gross new adds for '26? Just interested in the dynamic between, obviously, the competitor with really rich dental benefits versus some service area exits from another competitor. Just how should we think about the composition of that 20% net AEP growth between retained members and gross new adds? John Kao: Yes. We're happy with both, Jess. Gross adds are strong across the board and retention is actually better than we anticipated across the board. So, it's a both and situation, which is where we need to be. The investments we've made in member experience is paying off. It continues to pay off. So really happy with both. Jessica Tassan: Okay. Got it. That's helpful. And then just as we look at Planfinder, it seems like Alignment stands out from kind of a core benefits perspective, so really favorable on metrics like average medical move, average outpatient max cost sharing, but maybe a little less generous on supplemental benefit. Is this an appropriate conclusion? And can you just explain the rationale or kind of the decision to structure benefits in this way? And then just secondarily, interested to know how Alignment seems to be managing through Part D redesign despite having relatively low deductible and co-pay versus co-insurance in Tier 3. Obviously, that's working for you guys in '25, and it looks like it will continue next year. So just hoping for some comments on structure of benefits. John Kao: Yes. No, it's -- everything is designed around consistency for the beneficiary. Everything is year-to-year. We're very thoughtful market-by-market. We've shared that with you all in the past, market-by-market business plans, strategies and consistency for value creation for each beneficiary is really paramount. It's the first thing we think about. And so, you're absolutely right. We have taken the same kind of approach this past year as we have in the past, very disciplined and detailed product design strategies. In our markets in California, Part D is very competitive. So, we didn't make any material changes there. There is some shifts to coinsurance in a couple of different markets, but I think we're pretty stable across the board. James Head: John, I'd echo that. Stability is the name of the game. And as we said, we've done a really good job executing against Part D through 2025. And as we went into bids, last year's bids for this year, we were prudent and thoughtful about how we did it, but we were executing well through 2025. And so we're kind of felt good about the stability in our benefits. And so we think that sets up well for next year. John Kao: With respect to your supplemental question, a lot of our thinking around that has been also driven by not just the bid economics, but also by quality. Yes, so, we ensure our members that we provide the right quality of supplement benefits. And so that's just something we always think about in some cases, the answer is we pretty give ourselves [indiscernible] make sure we were absolutely providing like best experience not all. And so we were -- it was just something that was factored into some of our experience. Operator: Our next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: I guess on the guidance, I think you've raised the full year EBITDA guidance 4x over the last calendar year. I'm just trying to get an appreciation for what sort of levels you were thinking in your internal budgeting? Or was this really sort of a legitimate surprise? I appreciate the conservative guidance. Just wondering how this stacks up versus sort of where you had initially expected the year to shake out. James Head: Yes. This is the new person second call as CFO, but I would say the following. What's happened this year is we've just had a lot of good execution in a very difficult year, okay? So, I guess a couple of things coming into 2025 that, that were new to the Alignment in the industry, which is we continue to have the second step of V28 phase-in. We had a brand-new year of IRA, and we had a -- unique to Alignment was we had a very large cohort of new members. And so against that backdrop, and we weren't ready to bet on final suites from 2024. So, you had all those things swirling around as we set the year out. And what's happened throughout the course of the year is we've executed really well. And I would say executed across a whole variety of dimensions well, whether it's ADK and some of the moves that we've made with engaging with providers to manage utilization in a very constructive way. I think Part D executed well for us across the board. We got some favorability from the final suite from our new members. And so there's an aspect here of working through a pretty big change in the business and the model over the last year successfully. And I think that points well for the future for us. It's one of the reasons why I joined. Ryan Langston: Great. Just real quick. I appreciate the confidence in the 20% growth, but more just to industry growth. PMS is calling for basically flat year-over-year enrollment. I think the plan said they actually expected to decline. Just wondering if you have any view on overall MA market growth in 2026. John Kao: Yes, yes, California typically is lower than the industry, again, year-to-year. There is a lot of disruption out there. There's a lot of changes going on out there. And so again, we feel very well positioned on the growth side and the retention side. Operator: Our next question comes from the line of Craig Jones with Bank of America. Craig Jones: So, I was wondering, as we enter the final year of V28, do you have any thoughts on the likelihood of a potential V29 in the next few years? And if there is one, do you have any thoughts on the positive or negative implications to using more encounter data as part of the risk adjustment calculation? John Kao: Yes. Craig, good questions. I think you're going to see some changes. This is what we hypothesize some changes with respect to how CMS is going to deal with HRAs. I think there's going to be more, shall we call it, program integrity around ensuring there will be clinical validation around an HRA, same with kind of chart reviews. The encounter-based baselining was referred to in last year's advanced notice. I don't know if they're going to be implementing any of that in this advanced notice. I would be surprised actually. It's something that has been discussed. But in terms of how to operationalize it in a timely way, again, I'd be surprised if it was introduced to impact 2027. I think from a policy point of view, a lot of what we're hearing about really is around kind of MA program integrity, so to speak, making sure that trust in the program is high and kind of gaining is eliminated. I think that's what we see. And it's unclear that they did go to an encounter-based baseline methodology. It's kind of unclear as to what the net impact would be. It is one of the reasons why we don't think it's going to get implemented for '27. Craig Jones: Got it. And then just as a quick follow-up to a question earlier. I think you said your raw score for your primary plan was 4.05. And then you've talked about how that HealthEquity index next year will give you like a cushion. I think you said previously 0.25 as a tailwind, all else being equal. Is that still correct and that mean primary plan about 4.5 for next year? John Kao: Depending upon where the cut points end up, that's kind of what we mean by that. It does give us a little bit of cushion, but we just really aren't sure what's going to happen with the cut points. We thought -- I thought that they would not be as aggressive as they were this past year. They were aggressive. We're actually really happy with the fact that we still got the 4 stars for all of our members. And I think you've also heard me say in the past, I'm not going to be happy until we get to 5 stars for every one of our plans. We're making progress on that front. But your logic is right. What we don't know is where the cut points will end up. Operator: Our next question comes from the line of Andrew Mok with Barclays. Andrew Mok: I wanted to follow up on some of the seasonal flu comments in the context of what's going on with the broader policy guidance on vaccines. Are you seeing any behavioral changes from seniors or vaccine uptake this year? And if so, how are you managing that dynamic? James Head: Yes. It's a question that we've been looking at internally, and we follow our -- essentially our Part D cost, which is basically a lot of it is flu shots and literally tracking it daily, weekly. It seems to be trending pretty much in line with what we've seen in the past. I'd say a little bit softer in Q3, but picking up in October. So, I don't think we see a material change in the trajectory of that. And I think we're mindful in Q4 of just kind of flu as it impacts both the Part D costs, but also inpatient ADK. Q4 is typically a seasonal quarter where that impacts us a little bit more. So we are cautious about that, but it doesn't seem to be anomalous. Andrew Mok: Great. And as a follow-up, John, you made a number of comments today on continued investments in all things, operational, clinical, tech stars. Can you help us understand how much of that investment spend is already captured in current spend versus what's new or incremental? And it'd also be helpful to understand how much of that investment or that spend is directly earmarked for things like Stars, especially in the context of cut points moving higher? James Head: Well, I don't think it's any -- there's no leaps and bounds types of investment. What we're doing is we're being very smart in applying investment dollars. I'm talking about OpEx and CapEx across the enterprise. And that will be a little bit in the fourth quarter. What's really impacting the fourth quarter is more making sure we're prepared for growth as we typically are in Q4. But as we move forward, we're making sure that we have enough room to make the investments in the platform, in our capabilities, in our human capital, et cetera, as we go forward. But none of it is dramatic. It's just making sure that we find room as we scale to reinvest back in the business and do it smartly. And we're -- one of the things that I'm very focused on is making sure that we're really kind of underwriting that -- those investments smartly and making our choice as well. Operator: Our next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: John, do you know what percent of competing plans in your markets were commissionable last year and how that compares to this year? John Kao: I can't answer that question. I actually don't know the answer. I know I do have a couple of plans stopped paying commissions. But I actually don't know and [indiscernible]. Most are still paying, just to be clear. Benjamin Mayo: Yes. My follow-up was just on RADV. I was just wondering where we are on that, what the next steps are and how prepared do you think the organization is. James Head: Yes and there's a little bit of a pause in the action, as you know, given the fact that the Humana case, the courts overturned RADV procedures based on Procedures Act violations. But I think our internal point of view is that CMS still has a lot of ways to pursue this, and we don't think that is going to go away. So, our base case is that it's going to be here. It's just a question of timing. But having said all that, we think we're well positioned. Our compliance or documentation processes are really good. We feel good about the operations and how we've set that up. And especially, we've never been an organization that has really relied on risk adjustment as a revenue tool. So, we're just being prudent about that. But we do feel as the base case is that it's going to be there. Washington is not letting go of this topic just yet. Operator: Our next question comes from the line of Jonathan Yong with UBS. Jonathan Yong: Just in relation to kind of AEP again, just in terms of the live that are coming on to your books, how do they look? What's kind of the makeup in terms of, say, new to MA either and who might be switching on to your books from elsewhere? Just curious on that particular dynamic and if those members, given the volatility we've seen in the market kind of fit into the Alignment model? John Kao: Yes, it's consistent. It's still between 80% and 85% of switches. And really, it's across the board. It's not really concentrated with any particular payer that we're taking share from. It's kind of consistent across the board. And that's really in all geographies as well. Jonathan Yong: Okay. Great. And then just as we kind of just thinking forward a little bit here, but as we think about, say, next year, final year of V28, the pressures in the industry, generally speaking, should hopefully have abated at that point. How do you think about a potentially more competitive environment kind of looking in the medium term, particularly with respect to possibly expanding more beyond your current markets into other states or geographies? John Kao: Yes. Just remember, after V28 final third year phased in 2026, they're not going back to V24. So it's still going to be a tight reimbursement environment. Unclear what's going to happen on [ starters ]. But I think the way that you should think about us is our ability to manage the care for our beneficiaries allows us to control the costs. And in this new world of taking away, this is call the gaming associated with coding, the organizations that can provide the highest quality care at the lowest cost will ultimately be the winners, which is why you've seen us do so well in '24 and '25. And so when you kind of get it into '26, that's going to be even emphasized even more. So we feel really good about how we're positioned in '26 and beyond. And I think heading into '27, you need to start looking at what exactly are they going to do from a policy perspective. And I think we're all kind of waiting for that. I would just underscore program integrity, I think is paramount to where CMS is focused. Operator: Our next question comes from the line of Ryan Daniels with William Blair. Ryan Daniels: Yes. John, maybe one for you. I noticed during your prepared comments, you mentioned the term replicability several times in discussing your business model. And I think we're seeing that with the good Star ratings outside of California. So, number one, how is that also translating into MLR performance and overall margins in those newer markets? And then number two, given that you brought that up several times, it wasn't lost on me. Is that an indication of more willingness from you and the Board to move into additional markets going forward? John Kao: Yes, hey, Ryan, yes, absolutely. What I've stated in the past is we really wanted to fund that growth from cash flow from operations. And obviously, we're going to kind of fulfill that promise. We're being diligent in looking at both new markets within the existing state footprint that's going to be the most capital efficient, brand efficient as well, as well as looking at some new states for 2027. And so, I think you're going to see us take a much more systematic kind of best practice playbook approach toward replicating into these new markets. I think we've come a long way in the last few years with our confidence not only in how we deploy the care model, but how we ensure that our shared services can scale in terms of ingesting the members, onboarding the members and then caring for the members. And I think that's going to be good for seniors everywhere. So, we feel really comfortable about that. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: " Kristi Mussallem: " Jason Serrano: " Kristine Nario: " Nicholas Mah: " Bose George: " Keefe, Bruyette, & Woods, Inc., Research Division Jason Weaver: " JonesTrading Institutional Services, LLC, Research Division [":p id="A00"name="Unknown Analyst" type="A" />" Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Adamas Trust Third Quarter 2025 Results Conference Call. [Operator Instructions]. This conference is being recorded on Thursday, October 30, 2025. I would now like to turn the call over to Kristi Mussallem, Investor Relations. Please go ahead. Kristi Mussallem: Good morning, and welcome to the Third Quarter 2025 Earnings Call for Adamas Trust. A press release and supplemental financial presentation with Adamas Trust's Third Quarter 2025 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.adamasreit.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events and Presentations section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Adamas Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead. Jason Serrano: Good morning. Joining me today to describe our third quarter results are Nick Mah, President; and Kristine Nario, CFO. Christine will provide commentary on quarterly results, and Nick will follow with an update on the progress of our business plan. Before we begin, I want to thank you for being part of our first earnings call as Adamas Trust. our company rebranding reflects a broader strategic vision, moving beyond any geographic affiliation. The name Adamas, meaning firm, unbreakable and lasting, symbolizes a vision of strength and durability that guides our company's future. We fully embrace this theme as the third quarter marked a strategically significant period for Adamas. EDA rose to $0.24 per share for the quarter compared with $0.22 in Q2, marking our sixth consecutive quarterly increase. This consistent earnings growth supported a meaningful dividend increase to $0.23 per share, which highlights the strength of our capital rotation strategy into a period where the Fed restarted its easing cycle in September with a 25 basis points cut, its first rate reduction in 2025. As treasury yields declined in the quarter across the curve with a steepening bias as inflation moderated, -- we took a more aggressive path to increase exposure to the agency sector. In fact, the third quarter included the highest level of quarterly net investment activity in the company's history with an increase of $1.8 billion or 20%. The strong momentum led by disciplined and deliberate rotation of our capital from multifamily exposure into highly liquid Agency RMBS and other core residential credit strategies positioned our balance sheet for greater earnings durability and long-term shareholder value. We ended the quarter with Agency RMBS representing 57% of total capital, nearly tripling our capital allocation from a year earlier. This rotation was designed to enhance liquidity and drive higher earnings for distribution, attractive market spreads. We are pleased with the high-quality portfolio we have aggregated over the past 2 years. As announced on our previous earnings call, we also strengthened our position within the housing investment ecosystem in the third quarter by acquiring the remaining 50% interest in Constructive loans, a leading business purpose loan platform. With housing affordability near historical lows and supply constraints persisting, we expect the national homeownership rate to remain pressured, gradually reverting from the mid-60s percent range today towards the level last seen 3 decades ago. We view this dynamic as a long-term opportunity, creating a sustained tailwind for business purpose lending. Adamas is committed to realizing the constructive full potential and translating that growth into lasting value for our stockholders. We are encouraged by the strong results of the strategic pivot we made a couple of years ago to strengthen earnings stability, evident in the continued expansion of our Agency RMBS portfolio and the compelling growth trajectory of Constructive's origination business. We continue to believe Adamas equity represents a compelling value opportunity shares trade a meaningful discount of 30% of adjusted book value. And considering the adjusted book value of just Adamas' Agency RMBS position alone, our shares are still discounted by 17% to this holding. We believe this clearly highlights the depth and durability of value embedded within our platform. After a historically active quarter for Adamas, the momentum generated to further advance EAD in the fourth quarter is obtainable given a full quarter of interest income that we can generate. We look forward to further demonstrating Adamas' value with continued improvement to our recurring earnings. At this time, I'll pass the call over to Christine to provide our third quarter financial highlights. Kristine Nario: Thank you, Jason, and good morning, everyone. I'll cover the key factors behind our third quarter financial results. Overall, the third quarter marked another period of strong earnings growth and balance sheet expansion. As Jason noted, we increased our investment portfolio to $10.4 billion from $8.6 billion last quarter. This growth, along with continued rotation into interest-earning assets drove the 9% sequential increase in EAD per share. Adjusted net interest income per share rose 7% quarter-over-quarter and 47% year-over-year to $0.47, reflecting our continued investment in agency securities, partially offset by higher corporate debt interest expense from the senior unsecured notes issuance in July. Our net interest spread remained stable at 150 basis points, reflecting the offsetting impact of lower financing costs and a decline in asset yields. We improved our average financing cost by 15 basis points benefiting from lower base rates and more favorable securitization financing following the redemption of higher cost securitizations. Meanwhile, our yield on average interest-earning assets declined by 15 basis points, reflecting our continued emphasis on lower-yielding agency securities and BPL rental loans relative to shorter duration BPL bridge loans. During the quarter, we recorded $54.9 million in net unrealized gains, primarily driven by improved valuations in our Agency RMBS and residential loan portfolios. These gains were partially offset by $13 million of losses on derivative instruments, primarily interest rate swaps and $5.6 million of realized losses mainly related to conversions of residential loans into foreclosed properties that remain on our balance sheet as well as short payoffs on nonperforming BPL bridge loans. Importantly, the realized losses on the residential loans were fully offset by the reversal of previously recognized unrealized losses on the same assets, resulting in minimal total P&L impact. As Jason discussed earlier, we completed the acquisition of the remaining 50% interest in Constructive, giving us full ownership of this leading business purpose loan originator. For the quarter, Constructive generated $14.1 million in mortgage banking income related to origination and sale activity and incurred $3.8 million in direct loan origination costs and $8 million in direct G&A expenses, resulting in a $2.3 million return. On a consolidated basis, the Constructive segment reported a net loss of $3.8 million, reflecting the transitional integration costs and allocations that we expect to decline over time. As integration progresses and efficiencies are realized, we believe Constructive is positioned to become a meaningful driver of earnings growth. G&A expenses increased during the quarter from $23.3 million from $11.8 million, primarily due to the consolidation of Constructive and higher incentive compensation accrual. Portfolio operating expenses declined, reflecting lower servicing fees on our BPL bridge portfolio as balances continue to decline. We also incurred $7.9 million of nonrecurring costs related to the issuance of senior unsecured notes and 2 residential loan securitizations, which were fully expensed during the quarter due to our fair value election. GAAP and adjusted book value per share ended the quarter at $9.20 and $10.38, respectively, representing increases of 1% and 1.2% compared to June 30. Our recourse leverage ratio increased to 5x and portfolio recourse leverage to 4.7x. -- up from 3.8x and 3.6x, respectively, primarily reflecting financing activity to support Agency RMBS acquisitions, the consolidation of Constructive and the issuance of senior unsecured notes. Portfolio recourse leverage on our credit and other investments increased to 0.9x from 0.5x, driven by lower equity allocation. Overall, our strategic repositioning has strengthened our ability to generate consistent recurring income. With continued balance sheet growth and the integration of Constructive, we remain focused on delivering sustained earnings growth and stable returns for our stockholders. With that, I'll turn it over to Nick for a market and strategy update. Nicholas Mah: Thanks, Christine. This quarter, we achieved a record level of investment activity for the firm, surpassing the previous high reached in the first quarter. In total, we acquired $2.3 billion of residential investments, primarily concentrated in Agency RMBS and whole loans. Within our core strategies, we deployed $1.8 billion in Agency RMBS, $260 million in BPL Rental and $262 million in BPL Bridge. During the quarter, we had meaningful inflows of capital from multiple sources, which we channeled towards funding our elevated investment volume. Key sources of this capital include $115 million baby bond issuance in July, 2 securitizations executed at competitive advance rates and asset resolutions across both our core and noncore portfolios. Following the quarter's acquisitions, our overall investment portfolio has risen above $10 billion. Strong and sustained asset growth over the past few quarters have contributed to steadily increasing recurring earnings. This has culminated in a key milestone of raising our dividend. With a solid base of productive assets, our goal of continued portfolio expansion will power future earnings growth. Interest rate volatility has declined steadily since April, serving as a major tailwind for agency spreads. This was especially pronounced in the third quarter as current coupon agency spreads tightened by 20 basis points to 126 basis points. While agency spreads to treasuries have normalized over the quarter, agency spreads to swaps have tightened but still remain compelling by historical standards. After a record quarter of agency purchases, our agency portfolio currently stands at $6.7 billion. Despite the increased pace of investments, agency leverage has declined from 8.6x to 7.8x. In terms of portfolio construction, we have continued to target 5 and 5.5 coupon spec pools with lower pay-ups. Given the mix of current purchases, the average coupon of our agency portfolio declined slightly from 5.59% to 5.51% in the quarter. Going forward, we plan to target production coupons to maintain a modest carry and lower duration profile. In the third quarter, we surpassed our 50% target capital allocation to agencies. Since the first quarter of 2023, we strategically built and scaled our Agency RMBS portfolio, capitalizing on attractive spread levels while achieving broad diversification from our credit assets. Today, with spreads tighter and the portfolio more balanced between agencies and credit, we intend to take a more measured approach to agency allocation in the future. Our expectation is that while agency allocation will continue to grow in the near term, it will come at a more deliberate pace. Residential securitization markets were highly active in the third quarter with $57 billion worth of issuance. Strong investor appetite supported steady deal flow across the full spectrum of residential credit, tightening spreads and maintaining a well-functioning market throughout the quarter. Against this backdrop, Adamas successfully priced 2 securitizations. The first was a $370 million relevered securitization of reperforming and performing loans. And the second was a $275 million securitization of BPL rental loans. We achieved attractive pricing and structure for both deals. During the quarter, AAA spreads in BPL rental and in broader non-QM securitizations tightened by 10 to 20 basis points to around 130 basis points, providing a favorable environment of continued deal issuance for the rest of the year. This securitization market supports our expanding whole loan activity and strengthens the strategic fit of constructive to our business. BPL rental has grown to our largest concentration of residential credit exposure at $1.16 billion, reflecting a 24% quarter-over-quarter growth. This remains our core strategy with the greatest growth potential as Adamas sources the majority of its BPL rental loans from constructive. In aggregate, 98% of our BPL rental loans have prepayment penalties to help mitigate the negative convexity of the portfolio. We also prioritize acquiring loans with strong DSCR ratios, targeting property-related cash flow coverage as a buffer against credit deterioration. Our credit selection criteria remains restrictive on BPL rental loans with DSCRs less than 1, with only 1% of our BPL rental loan portfolio falling into that category. Overall, our BPL rental strategy continues to perform well with 60-plus days delinquencies hovering at 1.3%. We see the potential for this asset class to outperform across a range of economic outcomes. The BPL bridge market remains highly competitive. Robust securitization markets have enabled new market entrants and repeat issuers to access debt capital through revolving bond structures. This increased capital availability, coupled with increasing investor demand has intensified competition for assets within the BPL bridge market. This has, in turn, applied pressure to both purchase volumes and available pass-through rates. Maintaining our credit selection standards, we have intentionally reduced acquisition volumes ahead of our revolving securitizations exiting their reinvestment periods in 2026. In the quarter, the BPL bridge portfolio declined by 4% to $919 million. As the BPL bridge portfolio shrinks, we are actively working to reduce delinquent loan exposure while maintaining disciplined credit standards to exclude outlier risk profiles on our go-forward purchases. We expect that near-term BPL bridge allocations will continue to decline, and we will deploy recycled capital to Agency RMBS or BPL rental. We maintain flexibility to increase portfolio exposure if more favorable market conditions return. Within our multifamily segment, as Christine noted, we successfully completed the exit of our joint venture portfolio during the quarter. The full wind down of the JV equity book allows our multifamily team to focus exclusively on advancing the resolution of our mezzanine lending portfolio. Performance metrics remain strong with occupancy rates at 92% and only one asset in the portfolio that is nonperforming. The mezzanine portfolio generated a 32.4% payoff rate in the quarter, well above the historical average of 25.8%. We expect payoff activity to continue as the portfolio continues to season. Finally, we are pleased to announce the successful integration of Constructive into Adamas in the third quarter. The constructive business has not missed a step. Origination volumes remained strong through the transition, reaching $439 million in the third quarter, 9% higher than the prior quarter. Originations over the last 12 months were heavily weighted towards BPL rental loans, comprising 94% of total production with BPL Bridge accounting for the remaining share. Given the strength of the securitization market, competition for loans are more pronounced. Our near-term objectives are to continue prioritizing origination quality by enhancing underwriting standards and streamlining origination processes while maintaining a diversified distribution network. In the quarter, Adamas purchased less than half of Constructive's originations, demonstrating the continuation of Constructive's broad market access. We expect Constructive to play an increasingly important role in Adamas' profitability and strategic positioning in 2026 and beyond. I will now turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Doug Harter with UBS. [":p id="A00"name="Unknown Analyst" type="A" /> It's actually Melissa Lobo on for Doug today. I was hoping you could talk to us about how developments with the GSEs are impacting your thinking around capital allocation? And what are some of the regulatory factors that are impacting how you're positioned in the BPL space... Jason Serrano: Yes. Thank you for the question. So I think overall, there's been a lot of talk about GSE reform, what that could mean for the sector as a whole. I think every component of the mortgage sector, particularly in the non-QM space, has -- would create a massive tailwind for opportunities. However, I think that we're more balanced on what we think that opportunity would look like for the company, given that there's a lot needs to happen for a full removal of the guarantee and what that would do to credit availability to the mortgage sector and borrowers across the United States. We know the administration's goal is to reduce increase the housing affordability and reduce rates. And I think that will go in the opposite direction with a guarantee that has been removed. So I think overall, we're continuing to run our business without planning for that particular event to happen. However, we know if it does, there will be a tailwind, particularly in areas in the non-QM space. Constructive, we believe would be able to access many new channels in that situation. But again, that's not something that we see as being a primary opportunity for us at the moment. Color on... [":p id="A00"name="Unknown Analyst" type="A" /> And just if you could expand on the decision to buy the rest of the originate constructive and what that means for ongoing capital allocation. I think you mentioned a 50% target, right, to agency still. How does that -- how should we think about that going forward? Jason Serrano: Yes. So the opportunity for us was we first initially took the first 50% was to really understand the business. It was a slow approach to full acquisition, but we wanted to look at how the market was developing, and this was multiple years ago on the opportunity. So the advancement of the full acquisition of the company was a result of seeing some long-term tailwinds that would help constructive growth, particularly in homeownership rates and affordability, et cetera. The other side was to -- we really want to step in a position to control the outcomes of origination and product development. And so taking 100% of the business was a function of controlling some of the underwriting aspects as well as distribution. So in that end, we thought it would be necessary to take that. And also we saw a great opportunity in origination volume to increase, particularly with capitalizing the company through Adamas. So we think it's an excellent opportunity. We think there's lots of new development and products that could be offered through the company. We think we have an excellent management team, an experienced management team that's been looking at non-QM and BPL opportunities for over a decade. So we're excited to take the next step with Constructive. [":p id="A00"name="Unknown Analyst" type="A" /> Great. And if you could just provide an update for us on how book value is faring quarter-to-date? Jason Serrano: Sure. As of October 28, we see adjusted book value up somewhere between 2.5% to 3%. Operator: Our next question comes from Bose George with KBW. Bose George: Actually, just one follow-up on the book value question. Is the increase coming from both sides this quarter, the agencies and credit or more on one versus the other? Jason Serrano: It's coming from both sides. We have seen thus far as of October 28, that rates have come down generally. Spreads have -- on the agency side have come in. On the non-agency or whole loan side has come in, but not as much. But overall, positive trends on both sides. Bose George: Okay. Great. And then in terms of leverage, your leverage on the credit side remains low, but it went up to 0.9 from 0.5. What's an appropriate level of leverage for that piece? And then on the agency side, is the leverage kind of where the run rate there is kind of where it is this quarter? Jason Serrano: Yes. So the way we think about leverage is balancing it with the opportunity that we have. And as we mentioned, accessing the securitization market to us is important. So the leverage will ebb and flow based on the accessibility and our ramp with respect to our DSCR channels. And so you would see it bounce around a little bit due to the timing of those securitizations. We think below 1x is actually quite low for just a credit REIT in general. And we've looked to utilize securitization markets as a primary source of financing for our credit book over the long term. And you should expect us to continue doing -- utilizing that path. And so in that end, it's a pretty efficient model for us to finance and generate ROE on our home loan position. And what was the second part of your question? Bose George: On the agency side, the leverage should be expected to kind of remain roughly the same. Jason Serrano: Yes. The leverage on the agency side, we're looking to keep that around 8x. And so this is a comfortable level for us. Operator: The next question comes from Jason Weaver with Jones Trading. Jason Weaver: Given Nick's comments that capital allocated to agencies is above target and will be more measured ahead, what are you thinking as possible avenues for deployment for the capital coming back from the mezz and bridge investments? And would share repurchase become a bigger part of the strategy given the discount? Jason Serrano: Yes. So on the capital allocation side, we saw a tremendous opportunity in the quarter to advance our balance sheet with respect to the agency book. We were looking for certain events to happen for some spread tightening. We saw that there's still a death of supply in the Agency RMBS market against pretty robust demand in the market for the asset. So ROE still remained above 15%, which is accretive for many avenues of capital. And therefore, we took part of that story in the quarter with historic purchases for the company. Going forward, with agency spreads now below -- clearly below about 120 basis points, the opportunity is more balanced between what we see in the credit side and agency side. Again, we're looking to maximize ROE based on availability of the opportunity. We're not wedded to a certain ratio of agency versus credit on our balance sheet. It's very much opportunistic. To the extent that we see spreads continue to tighten in on the agency side, we will look to allocate more on the whole loan side of the equation. In particular, we're excited about the advancement of constructive and seeing higher origination volumes there, and we think there's avenues to increase it from here. So that's going to be a focal point for us as well. On the share repurchase side, in the last 2 quarters, we did access that and did look to take advantage of where our shares trade in the market at a discount. But I would say we think of it as an incremental investment strategy is like another avenue to allocate capital. We are very conscious about the equity shrinkage caused by the repurchase and not being able to produce long-term returns on that capital that's been used for repurchases. So we balance that with the opportunity. Again, last 2 quarters, first quarter and second quarter, we took advantage of that. In this quarter, third quarter, with our historic purchases in the market, we thought that the balance went to the asset portfolio. So it's something that's considered, but we do look at the long-term impact of taking our capital and removing it with the share repurchase versus the asset opportunity. Jason Weaver: Got it -- and then just to clarify, the size of the -- I think you said 32% paydown on the mezz and you expect that to remain elevated going forward. Is it a more muted pace? Or are we still looking at $25 or so million coming back every quarter? Jason Serrano: I think that the historical average is a good barometer. I think we may trend slightly higher as the seasoning of the portfolio starts to take hold and also the continued conversations that our team has with the various borrowers. But I think from a long term, I don't expect that the long-term average is going to be -- in the future, once everything is resolved, it's going to be too different. But for the next few quarters, it may be a little bit higher. Operator: I'm showing no further questions at this time. I'd like to turn it back to Jason Serrano for closing remarks. Jason Serrano: Yes. Thank you for joining us this morning. We look forward to discussing our fourth quarter results with you in February. Have a great day. Operator: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
Operator: Good afternoon. Thank you for attending today's iRhythm Technologies, Inc. Q3 2025 Earnings Conference Call. My name is Jemma, and I'll be your moderator for today. [Operator Instructions] At this time, I'd like to turn the conference over to our host, Stephanie Zhadkevich, the Senior Director of Investor Relations. Please proceed. Stephanie Zhadkevich: Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the third quarter ended September 30, 2025. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. These are based upon our current estimates and various assumptions and reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, filed with the Securities and Exchange Commission. Also during the call, we will discuss certain financial measures that have not been prepared in accordance with U.S. GAAP with respect to our non-GAAP and cash-based results, including adjusted EBITDA, adjusted operating expenses and adjusted net loss. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation of, as a substitute for or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10-Q for a reconciliation of these measures to their most directly comparable GAAP financial measures. Unless otherwise noted, all references to financial measures in this call other than revenue refer to non-GAAP results. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, October 30, 2025. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Quentin Blackford, iRhythm's President and CEO. Quentin Blackford: Thank you, Stephanie, and good afternoon, everyone. We appreciate you joining us today. Dan Wilson, our Chief Financial Officer, is with me on today's call. My remarks will focus on our business performance during the third quarter of 2025 and our outlook for the remainder of the year. I will then turn the call over to Dan to provide a detailed review of our financial results and updated guidance for the year. We're pleased to report another quarter of strong commercial momentum, reflecting our disciplined execution and differentiated platform technology. For the third quarter, revenue was $192.9 million, representing year-over-year growth of 31%. This result was driven by record performance in both Zio Monitor and Zio AT, continued success moving monitoring upstream through primary care expansion, penetrating further into innovative health channels and a record number of new EHR integrations that continue to deliver measurable impact. Our competitive differentiators, operational scalability, market access advancements, market expanding innovation, EHR investments and clinical evidence are resonating across the health care ecosystem. Together, these capabilities have enabled us to deliver meaningful impact for patients with iRhythm Services having generated nearly 12 million reports worldwide. Within our core U.S. business, account expansion and system-wide conversions remain robust. We continue to see strong adoption in both hospital and ambulatory settings, supported by our EHR integration strategy and a streamlined digital workflow that improves clinician efficiency. Larger integrated delivery networks are increasingly choosing iRhythm for enterprise-wide solutions, recognizing the clinical and operational value of our scalable platform, enabling full network conversions in a way not previously seen in our company history. Our EHR integration strategy continues to deliver meaningful value as 76 of our top 100 customers are now EHR integrated. We now have 30 systems live with Epic Aura with an additional 65 systems in active implementation or advanced discussions. Epic Aura integrated customers typically see an average increase of nearly 25% in monitoring volume within the first 6 months of going live, reflecting how digital connectivity directly enhances utilization and physician efficiency. We continue to make strong progress expanding into primary care, where upstream use of Zio as a rule-in or rule-out tool supports earlier intervention for improved patient outcomes. This approach helps alleviate specialist bottlenecks, improves physician network efficiency and can allow for more proactive and timely care for the benefit of patients. Clinical evidence remains at the core of our differentiation. At major conferences this year, including ADA, ACC and HRS, new real-world analysis underscores the importance of early detection and monitoring. We consistently see that arrhythmias often precede major cardiovascular events and that proactive monitoring strategies to identify patients earlier in their care pathway have demonstrated significant reductions in emergency visits, shorter hospital stays and lower overall cost of care for patients managed with proactive monitoring. Recent published data further validates our approach. For every 1,000 patients with certain comorbid conditions that are diagnosed with arrhythmias earlier in the care pathway, there is potential for over $10 million in downstream cost avoidance by preventing events that increase health care resource utilization, such as ER visits and hospitalizations. Real-world claims analysis indicates that arrhythmia patients are hospitalized more than twice as often as non-arrhythmia patients. With 2 to 5 extra days of length of stay and ER visit rates more than double compared to non-arrhythmia cohorts. These findings reinforce the strategic importance of proactive monitoring and AI-driven risk stratification, not only to reduce catastrophic events, but to lower the total cost of care. Additionally, the AVALON study published in the American Journal of Managed Care in August, once again confirmed the clinical superiority of Zio's long-term continuous monitoring service, this time in a significantly younger population. In a real-world analysis of more than 400,000 commercially insured patients with an average age of 46 years, Zio demonstrated higher diagnostic yield, faster time to diagnosis, fewer cardiovascular events and lower total health care costs compared to other monitoring approaches. These findings were consistent with the results from the earlier CAMELOT study, which analyzed over 300,000 Medicare patients, reinforcing the strength and reproducibility of our clinical evidence across large diverse populations. Despite this evidence, the fact remains that nearly 2 million short duration Holter and event monitors continue to be prescribed in the U.S. each year, representing a market opportunity of nearly $500 million. Our risk-bearing and innovative channel partnerships have continued to expand, reflecting the growing recognition of the value of proactive monitoring. We now have 18 active partner accounts with a healthy pipeline of additional partnerships currently under discussion. These partnerships enable population health programs generally targeting large undiagnosed arrhythmia populations, particularly individuals living with type 2 diabetes, COPD, chronic kidney disease, sleep disorders and heart failure. Through these programs, we have the potential to prove the value of proactive detection and demonstrating meaningful reductions in hospitalization rates and health care costs. As announced this past July, our partnership with Lucem Health continues to advance clinical AI capabilities by enabling the ability to look across the medical records of large patient data sets and identifying undiagnosed patients at highest risk of cardiac arrhythmias. Early results in pilot settings have been encouraging in terms of the ability to proactively identify with high degrees of accuracy where cardiac arrhythmias exist in these unaware populations, reinforcing the strength of our data-driven approach and our ability to deliver population health insights that improve outcomes for the more than 27 million patients in the U.S. that we believe are living with undiagnosed arrhythmias. As we further validate the accuracy of the predictive arrhythmia solution, we are gathering valuable insight into how to best engage and scale across health systems. We have a number of Tier 1 health systems in active discussions and believe this partnership represents an important step in our strategic evolution from a device-enabled service into a comprehensive digital health platform powered by data and artificial intelligence. The third quarter also set another record for Zio AT with year-over-year unit growth more than double our corporate average. We continue to expand within existing accounts but notably are launching more new accounts with both Zio Monitor and Zio AT from the outset with workflow integration through EHR systems acting as a key enabler to accelerate utilization and improve system-wide physician adoption. In September, we submitted our 510(k) filing for Zio MCT, our next-generation mobile cardiac telemetry solution featuring a smaller form factor, extended 21-day wear, advanced detection algorithms and an improved final wear report. We look forward to continuing to partner with the FDA throughout the review process. Also on the innovation front, we're advancing development of AI prediagnostic and diagnostic pathways for sleep apnea, a chronic condition associated with an increased risk of arrhythmia and cardiovascular disease, particularly amongst undiagnosed individuals. Our internal data suggests that many of existing iRhythm customers are already prescribing home sleep testing and their patients being diagnosed with sleep apnea. Clinical literature has suggested that up to half of patients with AFib have sleep apnea and that the prevalence of AFib increases fourfold in patients with severe sleep apnea. Further, the literature shows that sleep apnea adversely affects AFib treatment outcomes and that outcomes can be improved with treatment of both conditions as well as cardiovascular risk factor modification. Given the meaningful clinical overlap, sleep apnea represents a natural and highly complementary adjacency for our cardiac monitoring platform, reinforcing our ability to expand into adjacent markets that share meaningful clinical overlap. Importantly, by providing broader clinical insights, we can provide the tools to clinicians that have the potential to allow for a more efficient workflow, better patient experience and holistic approach to patient care. Outside of the United States, we continue to advance commercially to drive adoption of long-term continuous monitoring. In Japan, we now have 13 systems live, supported by positive physician feedback highlighting Zio's clear and comprehensive reports, rapid turnaround time and Zio's ability to find arrhythmias that might be missed with other solutions. We are also advancing evidence generation to support potentially differentiated reimbursement with retrospective and prospective studies underway that include head-to-head comparison of Zio versus local Japanese cardiac monitoring devices in local patient populations. With the Japanese Heart Rhythm Society recommendation and high medical needs designation, we are hopeful that this additional real-world evidence will strengthen our reimbursement positioning over time. In Europe, growth in the U.K. private market remains strong, and we continue to grow our presence in the 4 EU countries. Our focus on clinical evidence and key opinion leader engagement is building awareness and credibility across these new markets. The Oxford University led a multi-randomized trial of over 5,000 patients presented at this year's ESC Congress and published simultaneously in JAMA, demonstrated that a remote screening strategy with the Zio long-term cardiac monitoring service led to higher AFib detection rates and faster diagnosis versus usual care and in an older population with more comorbidities compared to prior screening trials, including mSToPS. The data show that just as we have proven in the U.S., primary care initiated home-based monitoring with Zio at scale is feasible and effective, reinforcing the potential for growth in primary care channels in the U.K. and beyond. Overall, our third quarter results demonstrate the operational and financial momentum across iRhythm. We are executing well on our strategic priorities with disciplined execution. While our commercial momentum continues to build, our focus on driving productivity gains and improving efficiencies are allowing us to meaningfully advance our profitability profile at the same time. Importantly, we are now generating positive free cash flow earlier than anticipated and expect this year to be free cash flow positive on an annual basis for the first time in our company's history, reflecting both the strength of our commercial model and the progress we've been making in building a scalable, sustainable and profitable business. With that, I'll turn it over to Dan to review our financial performance in more detail. Daniel Wilson: Thank you, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discuss today will be presented on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release and on our IR website. We delivered another quarter of strong profitable growth in the third quarter with revenue of $192.9 million, up 30.7% year-over-year, combined with an adjusted EBITDA margin of 11.2%. Volume growth was strong across both product lines, driven by continued execution in our core business, sustained Zio AT volume growth and contributions from innovative channel accounts. Pricing also came in slightly favorable due primarily to higher Zio AT product mix. New store growth with new stores defined as accounts that have been open for less than 12 months accounted for approximately 60% of our year-over-year volume growth. Home enrollment for Zio Services in the U.S. remained steady at approximately 23% of volume in the third quarter. Moving down the P&L. Gross margin for the third quarter was 71.1%, an improvement of 230 basis points compared to the third quarter of 2024. This improvement to gross margin was driven by volume leverage and continued benefit from operational efficiencies, offsetting the higher blended cost per unit from increased Zio AT product mix. Third quarter adjusted operating expenses were $141.4 million compared to $143.8 million in the third quarter of 2024. Recall that third quarter 2024 adjusted operating expenses included a $32.1 million charge associated with licensed technology that was recognized as acquired in-process research and development, or IPR&D expense. Excluding that charge, the increase in adjusted operating expenses in third quarter 2025 was primarily driven by volume-related costs to serve and investments to drive future growth. On a normalized basis, adjusted operating expenses as a percentage of revenue improved as a result of thoughtful and intentional initiatives that our teams have implemented to drive sustainable efficiencies while simultaneously investing in growth initiatives and infrastructure investments for future scale. Adjusted net loss in the third quarter of 2025 was $2 million, or an adjusted net loss of $0.06 per share compared to an adjusted net loss of $39.2 million, or an adjusted net loss of $1.26 per share in the third quarter of 2024. Adjusted EBITDA in the third quarter of 2025 was $21.6 million, or an adjusted EBITDA margin of 11.2% of revenue compared to an adjusted EBITDA margin of negative 13.5% in the third quarter of 2024. Excluding IPR&D expenses, adjusted EBITDA margin during the third quarter of 2024 would have been 8.3% versus 11.3% for the third quarter of 2025, an improvement of approximately 300 basis points. Given our strong performance year-to-date and our outlook for sustained growth, we are raising our revenue guidance for full year 2025 to $735 million to $740 million or 24% to 25% year-over-year growth. This outlook contemplates continued strong volume growth as well as a low single-digit pricing tailwind. We continue to anticipate a strong fourth quarter aligned with normal seasonality, but note that our year-over-year growth rate outlook includes a slight deceleration due to the unique strength of our business in the fourth quarter of 2024 as discussed previously. For gross margin, we continue to anticipate full year 2025 gross margin to slightly exceed full year 2024 gross margin as clinical operations and manufacturing efficiencies largely offset impacts from tariffs on global imports. We continue to anticipate approximately 50 basis points of negative impact to gross margin from tariffs for the full year. We are also raising our full year adjusted EBITDA margin guidance to 8.25% to 8.75% of revenues. As discussed in prior quarters, adjusted EBITDA continues to absorb acquired IPR&D expenses, tariff impacts and FDA remediation expense. Finally, we ended the third quarter in a strong financial position with $565.2 million in unrestricted cash and short-term investments. Free cash flow generation during the quarter was $20.0 million, which marks our third consecutive quarter of trailing 12-month positive free cash flow generation. We now expect to be slightly free cash flow positive for full year 2025. This significant company milestone represents our ability to drive sustainable efficiencies while also investing in infrastructure, growth initiatives for future success and next-generation technology platforms. In closing, we were very pleased with our financial results from the third quarter of 2025 and the sustained growth of our business. Our teams are executing at a high level, and we remain focused on delivering durable profitable growth. We see momentum across multiple growth vectors, and we are making appropriate investments in growth initiatives and infrastructure scalability while continuing to improve our profitability profile. We believe this sets us up well for continued profitable growth as we close out 2025 and look towards 2026 and beyond. With that, I will now turn the call back to Quentin for closing remarks. Quentin Blackford: Thanks, Dan, and thank you all for your continued support of iRhythm today. In closing, the continued progress we've made this quarter is a testament to our accelerating momentum. We're expanding adoption, forging new partnerships and delivering innovative solutions that are transforming cardiac care. Our clinically proven platform, advanced AI analytics and seamless digital integration are driving real impact for patients, providers and shareholders. With each milestone, we're building toward a future where early actionable cardiac insights are the standard, and iRhythm is leading the way. Operator, we're now ready for questions. Operator: [Operator Instructions] Our first question comes from Nathan Treybeck with the company, Wells Fargo. Nathan Treybeck: Congrats on a very strong quarter. Just to kick it off, Q3 growth accelerated versus the first half and guidance implies over 20% in Q4. You didn't see the expected seasonal step down. So your core Zio Monitor business has been accelerating for the past couple of quarters on record new account openings. I was hoping you could go into more detail on what specifically has been driving the new account openings and the volume growth? How much of it is share shift versus overall market growth? Quentin Blackford: Yes. I think -- Nathan, thanks for the question. It's good to be talking with you. I think there's a few things that are driving the growth in that core business. And I would point out, it was a record quarter for us in the monitor business, just like it was in the AT business, to be quite honest with you. And a lot of that is driven by new accounts onboarding. But one of the things that's unique about iRhythm in the last 12 months is we've developed the ability to scale and really absorb the entire network of these customers who are coming on board on day 1. And that's very appealing to these customers where historically, we might have to go in and convert an account at a time and work to ultimately convert the entire system over a period of time. Now we're able to do that out of the gate. The other thing that I would note in those new accounts is that we're seeing more than ever new accounts come into working with iRhythm, where they're bringing their entire long-term cardiac monitor business, so monitor, but also bringing their MCT business with AT as well, and that's fueling a lot of strength in the AT portfolio for us, which I think is just reflective of the value of that product line and these customers seeing that. So the quality of the new accounts has gotten stronger and stronger over the course of the year. The size of them has gotten stronger, and we're more bullish than ever on our ability to continue to take share, but also grow the overall market. There's no doubt that the move to primary care continues to expand. We're seeing it within the networks that we're already in. And of course, innovative channel partners continues to grow as well as it did from Q2 to Q3 and stepping up there. So quite a few drivers across the business, but I think it's a combination of market share shift as well as the overall market probably picking up a bit. Operator: Our next question comes from Joanne Wuensch with the company, Citigroup. Unknown Analyst: This is actually [ Anthony ] on for Joanne. Sort of just piggybacking off of Nathan's question. You raised the full year by more than a beat. I think it implies like a $4 million and change over consensus for the fourth quarter. Could you maybe just pick apart what is driving that outperformance you're expecting this quarter? Daniel Wilson: Yes. Thanks for the question, Anthony. This is Dan. I can start and Quentin can fill in with anything. So as Quentin just spoke to, really the beat in Q3 was primarily attributable to monitor in the core business, but also saw a really healthy contribution from AT, record growth for both AT and Monitor and then growing contribution continued from innovative channel. And as we think about the fourth quarter, it's a very similar setup. I would point out the raise for the guidance for Q4 really primarily tied to Zio Monitor, still expect nice healthy growth from both AT and innovative channel. Those are 2 that we've -- particularly with innovative channel have taken the approach to really leave outside of guidance for everything that we don't have really strong visibility to and high confidence. So very similar approach to Q4. Most of that raise is attributable to Monitor. But encouragingly, seeing really good contribution across the different businesses. Operator: Our next question comes from Richard Newitter with the company, Truist. Richard Newitter: Just wondering on AT, momentum seems to be holding strong. As we think about the launch of MCT next year or at least potential approval, I mean, how should we be thinking about growth cadence for MCT? Quentin Blackford: Yes. Thanks for the question. Look, we continue to be very encouraged by the performance in that AT business line. I think when you start to dissect it, what's really encouraging is that we're seeing it grow very well in our existing core monitor accounts that are now beginning to adopt AT, but also more than ever, the new accounts that are coming on board with us are coming on board using both Monitor and AT out of the gate. And I think that bodes well for our expectations into the future when we're seeing that these new accounts are willing to come on board with us using both product lines. In terms of MCT itself, I think that's a hard one for us to forecast exactly when it's going to ultimately make its way to the market. We're planning for that to be in the back half of next year. However, I think without clear visibility from an FDA perspective on what the timeline is from an approval perspective, you're probably going to see us set up expectations for 2026 that don't include MCT contribution until we have real clear line of sight into when that timeline is going to firm up for us. So I continue to be big believers in the AT business, super bullish on the opportunity to convert market share within that MCT category. I think we're probably around a 13% market share player today. I think there's a real path into 25%, 35%. But in terms of MCT itself, I think we want to see some clear line of sight to exactly when that approval might come before we start to really bake in expectations, at least for '26. Operator: Our next question comes from David Saxon with the company, Needham & Company. David Saxon: Congrats on the quarter. So I wanted to ask on the innovative partner channel. So I think it was last quarter, you talked about 100 potential partners in the U.S. I think in the script, you said you had 18 today. That's up 6 from last quarter, I believe. So can you just talk about the sales cycle there? Like how long does it typically take to onboard? And then what's a realistic penetration level for that channel over the next, call it, 1 to 2 years? And then can you also size that customer group at this point in terms of percentage of sales? Quentin Blackford: Yes. Maybe I'll hit that last point first. We continue to see that step up from where it was in Q2. We're not going to disclose it each and every quarter, but you can assume that it did continue to step up. And the overall dollar contribution from innovative channel partners was absolutely higher in Q3 than it was in Q2 as well. So we're seeing good progress there. To your point, we had 12 customers in Q2. We communicated in the prepared remarks, we're up to 18. I would say the size of those customers on average are about similar to what we saw in the initial 12, and we're excited about where that has the potential to go. In terms of the sales cycle, it's so different by customer right now. And I think that's a little bit of the hesitation that we have in putting forward specific expectations in our guidance. I could give you the example of Signify that took well over a year to sort of get to scale. Then I could give you an example of CenterWell that took about 90 days to get to scale. So it's just -- it's a different sales process. It's a different scaling process with each one of them. Some of these move very quickly when you can show the data that is coming together articulating the value of finding these arrhythmias, particularly in undiagnosed unaware populations and some of the economic data that's coming together that is quite compelling around the impact of finding these arrhythmias more proactively. So some move very quick, some take longer. I think as we get more experience here, we'll have more confidence to know exactly how to guide to it into the future. But for the time being, as Dan shared earlier, we're going to take a little bit of a wait-and-see approach on some of these without getting way ahead of ourselves. Operator: Our next question comes from Marie Thibault with the company, BTIG. Sam Eiber: This is Sam on for Marie. Maybe I can ask about the latest and any updates with the FDA on the remediation efforts for the warning letter and 483s? Quentin Blackford: No, it's a good question. There hasn't been a whole lot of communication through the shutdown with the FDA, particularly from a remediation perspective. As a matter of fact, I can share with you that the FDA has been clear with us that they've asked for that to more or less be put on hold and reengage with them on remediation after the shutdown is remediated or lifted, which I think is a good sign. Our understanding is through the shutdown, these folks are focused on the more critical sort of matters and the fact that we've been asked to pick it back up once the shutdown is through is encouraging. There's not been any communication with respect to MCT at this point in time. We are -- as we shared, we've submitted it. They have it, but there's been no communication around it, which is why I think for us, as we think about 2026, it's just prudent to think about that as a year where we'll wait for some more clarity around MCT before we would put it into any expectations out there in the new year. So that's where things sit at this point in time. Obviously, if things change with respect to any communication or feedback, we'll let you know. I think it's important to recognize we're not changing anything from our continued efforts to remediate our internal systems. As you might recall, we agreed and made the decision that we were going to go above and beyond what the FDA had asked us to remediate as part of the warning letter and the 483s. We've been doing that. All of those efforts will be complete here by the end of the year. The other thing we committed to, and this has already started, is we've launched the external review/audit of our quality systems by an independent third party that we were doing on our own. We communicated that to the FDA, and we've also communicated we'd be willing to share those things with the FDA. That's gotten started. It's off to a good start. It's early, but it's demonstrating the good progress we've made, and that will continue on through the remainder of the year. Operator: Our next question comes from Suraj Kalia with the company, Oppenheimer. Suraj Kalia: Quentin, can you hear me all right? Quentin Blackford: Yes, yes. Suraj Kalia: Perfect. Gentlemen, congrats on a fantastic quarter. Quentin, many calls going on. So forgive me if you've already touched on this. The innovative channels, the 100 or so, I thought I heard that, that you cited. Quentin, this question comes up with clients and maybe you can articulate it. What is the incremental patient pool you see in this cohort, the types of patients, symptomatic, asymptomatic, how should we think about it and the durability of this channel so that we can sort of size what is the incremental pull-through? Once again, gentlemen, congrats on a great quarter. Quentin Blackford: Thanks, Suraj. I appreciate it. One of the most encouraging things in this innovative channel effort has been the realization that these folks are monitoring more and more of the asymptomatic, undiagnosed, unaware population. There are a few partners who have targeted symptomatic patients, but we've even seen a few of those move from symptomatic into asymptomatic after recognizing the success that they're having with it. So that's encouraging, and I think it's a great data point that validates that the asymptomatic population is ultimately going to be monitored here. We believe there's roughly 27 million patients in the U.S. alone who are unaware, certainly undiagnosed, maybe confusing their symptoms with other comorbid disease states like type 2 diabetics, COPD or CKD. One of the things that's interesting that we're discovering in a lot of the data that we're capturing in the research we're doing is that just looking retrospectively over the last 5 to 6 years, nearly 90%, this is an incredible stat. Nearly 90% of patients who are either a type 2 diabetic, have COPD or CKD and ultimately get diagnosed with an arrhythmia. Nearly 90% of them were never monitored prior to that diagnosis, which just speaks to the incredible opportunity to get out there and proactively monitor these unaware, undiagnosed populations, maybe even asymptomatic populations. And what's encouraging is with the innovative channel partners is most of these programs are focused on these comorbid disease states. It also leads into sort of what we're doing around Lucem that we talked about last quarter in terms of developing these algorithmic capabilities to look across large data sets, particularly these comorbid data sets and looking through the medical records, finding these patients who are likely to have an arrhythmia, get a patch on them and then with a high degree of accuracy, certainly diagnose arrhythmias. And some of these early pilots that we've run, we've seen those yields 80% to 90% in terms of who we think has an arrhythmia, get a patch on them and find out that they do, in fact, have the arrhythmia. It's important once we diagnose them that now we help reduce the cost of caring for those patients. But the majority of the cost that these partners are saving is a reduction in ER visits, hospital visits, reduction in length of stay in the hospital. These are all things that these partners understand very, very well, and I think speaks to the durability of the channel itself as they see the benefits that are going to continue to accrue for them. Operator: Our next question comes from David Rescott with the company, Baird. David Rescott: Congrats on the really good quarter here. I wanted to ask on the margin front, the profitability front. Obviously, you had really great progress on are now expecting to hit free cash flow profitability this year, and my guess is that extends into 2026. But when you think about some of the moving pieces around Zio MCT the drag there on the gross margin line, maybe some pickup with the downgradable capabilities you have with MCT. I believe with MCT, you're going to be running on the same product manufacturing line, I believe, as what Monitor is. I recall that being talked about in the past. So I'm just trying to get a sense for how we should be thinking about this margin trajectory into -- toward that 15% goal that you called out for 2027. When you think about the pieces from MCT coming in and the scale benefits and this innovative channel partner business ramping as a percent of the business? Quentin Blackford: Yes, David, thanks for the question. So you're right, there are a number of moving pieces there. I think maybe breaking it down first starting with gross margin. We do feel -- continue to feel good about the guidance that we had previously for 2027, where we called out 72% to 73% gross margin in 2027. Obviously, we haven't provided '26 guidance yet. You heard the comments for 2025 being slightly above 2024, so call that low 70%. So feel really good about that path to 72% to 73% with all the different moving pieces, right? There's benefits from manufacturing automation as we scale the business, as we get Zio MCT on the same platform as Zio Monitor and then just continued efficiencies all around the business. So still feel good about that 72% to 73% gross margin. And similarly, with adjusted EBITDA, you've heard us talk about a cadence of, call it, 400 basis points of margin expansion year-to-year. We're set to deliver that this year relative to 2024 and feel good about that cadence continuing into next year and beyond. So absolutely still feel good about those targets that we provided for 2027. Operator: Our next question comes from Stephanie Piazzola with the company, Bank of America. Stephanie Piazzola: Congrats on a good quarter. You talked about the early work you're doing in sleep diagnostics. So I just wanted to follow up if there's any more color you can provide about how you're thinking about that opportunity, any potential economics of a multi-sensing platform and some of the next steps that you're taking there? Quentin Blackford: Yes. Stephanie, thanks for the question. Sleep is something that we certainly have a lot of excitement around. I think the overlap of just cardiac arrhythmia and sleep is a natural one. We see it in our customer channel already. We see it in our patients as well. And it's a great deal of overlap in the customers we're already serving that are ordering these home sleep tests. And so I think there's a natural opportunity for us to step in here and really disrupt that space, but at the same time, really improve the workflow and the efficiency for our physician customers, but also for the patient who many times has a pretty cumbersome experience. So we're excited to be able to do that. I think you're going to see us step into it in a couple of different ways, and I'm not going to get into the real specific efforts that are going underway from a competitive perspective, but I think there's ability to see even within our patient population today and the EKG data that we're capturing where there's a likelihood of sleep disease likely being present. I think that's good information to help our physicians understand and ultimately leads into testing opportunities. And then ultimately, we want to get to where we can have a diagnostic capability right off of the platform on the chest, and that's the multi-sensing effort or opportunity that you mentioned, and that's enabled by some of the BioIntelliSense’s licensed IP that we made last year. So those development efforts are going on as we speak. I think that's a couple of years away in terms of having a diagnostic product, but I think there are a lot of things that we can do ahead of time that can really create some nice opportunity for us within the sleep channel. As a matter of fact, we've got pilots that are beginning to launch in the back part of this year and will run over the course of next year that we'll continue to learn from and help us get even better in this space and excited with where it can take us. Operator: Our next question comes from Max Kruszeski with the company, William Blair. Max Kruszeski: Max on for Brandon. Congrats on a nice quarter here. Quentin, I think you had mentioned in your prepared remarks that 76 out of your top 100 customers have EHR integration and that these integrated accounts see an average increase in utilization of about 25% within the first 6 months. Can you just give us some color on, a, what's driving this? B, how durable is that 25% beyond the 6 months? And how is this 25% evolved compared to some of the earlier accounts you guys had EHR integration with? Quentin Blackford: Yes. Well, look, one of the things that's been unique with integrations is our announced relationship with Epic that we communicated a little over a year ago and really started to step into it in the first half of this year and is really hitting its stride now. And I think I mentioned we've got 30 accounts integrated, and there's another 65 that are in the pipeline that are specific to Epic itself. And when I made the comment around an increase of about 25% 6 months post integration, that's really around the Epic integrations. And so I want to be clear about that. But a lot of it comes down to workflow, making it as simple as the click of a button within their EMR system to be able to order a Zio to have the Zio report pushed right into that EMR system without having to manually upload or transfer files to have everything right there is incredibly important to our physician customers. One of the things that we love about the integration is that once it's integrated, the entire network of whether it's primary care, whether it's cardiology, whether it's EP, whether it's hospital, they see within their instance of Epic, Zio right there in the instance of it, right? So the workflow can become very easy across all channels within these IDNs. And it ultimately ends up enabling the push up into primary care to happen in an easy way. Sometimes the pushback we get with trying to move prescribing patterns up into primary care is that the primary care physician isn't comfortable reading the report and diagnosing. Well, within these integrated accounts, the primary care physician can prescribe the device, the device can be worn, the report can be put right into the integrated system. And then the cardiologist or the electrophysiologist can come into the system without ever seeing a patient read the report and diagnose whether they see an arrhythmia there or not. And then they can even make sort of workflow decisions of do I want to see that patient or do I not. That's a huge enabler when it comes to pushing care further up the care pathway. And that's a big part of why we see the EHR integrated accounts grow the way that they do and have the success that they do. And it's also why we spend a lot of time and effort working to integrate our accounts as we go. Very seldom. I'm not sure I could give you one example of where an integrated account once integrated has ever left working with iRhythm. And so this is very important to us and something you're going to see us continue to pour into. Operator: Our next question comes from Zachary Day with the company, Canaccord Genuity. Zachary Day: Congrats on the quarter. On Zio MCT, I know you're not guiding anything financially. But once you have the approval in hand, what is the launch strategy for it? Is it going to be mainly targeted to new accounts and you're going to carry the momentum of AT into those accounts? Maybe just how are you thinking about it? Quentin Blackford: Yes. Good question, and I appreciate it. As we think about sort of guidance, maybe let me just take a step back relative to that for a second. I'll tell you, we've never been more bullish around the business as we are right now. I think the structural growth drivers in the business are the strongest that we've ever seen. And I think it's demonstrated by the record quarter that we put up with Monitor with AT, innovative channels, even EHR integrated accounts. But when it comes to guidance, when it comes to next year, you're going to see us take an approach that, frankly, is very similar to the approach that we took this year. It's not going to be any different. I think that's one that is very thoughtful. It's going to be prudent. It's going to be calibrated and mindful of the tougher comps that come in, but also being mindful of those things that are really dependent on external timelines like MCT being dependent on the approval from the FDA. In that case, we're not going to put it into our expectations for 2026. And so we'll let that sort of play out as upside. I know where the Street is sitting at right now. I feel good with where the Street is sitting at 17%. I think you're probably going to see us come out and guide to 2026, probably somewhere around that 16% to 18% range that leaves upside with these external factors like MCT being dependent on FDA approval or innovative channels sort of making their decisions when they're going to adapt and when they're going to ultimately step into working together. So we're going to be thoughtful around guidance. We're going to not get ahead of ourselves here. We're going to be responsible and that's how we're going to set up the year. I have not been more excited heading into a new year than what I am right now as we look ahead to 2026. I think there are more drivers in the business, more new features that are going to be introduced into the commercial teams that are going to drive great momentum, but we're not going to get ahead of ourselves either as we head into the new year. Operator: Our next question comes from Daniel Downes with the company, Goldman Sachs. Daniel Downes: Just want to add to David's earlier question and how we should think about your reinvestment priorities as you transition to becoming a positive free cash flow business. Just noting your current cash position of almost $600 million. I guess as a follow-up to that, what level of investment do you expect will be required ahead of the Zio MCT launch once approved? Daniel Wilson: Yes. Thanks, Daniel. This is Dan. I can take that question, and Quentin could fill in anything he'd like. So really very similar to this year, we have been actively reinvesting back into the business. You just heard Quentin remark that next year is setting up really well from kind of an innovation standpoint, and that's through some of the investments that we've been making this year and we'll continue to make next year. Obviously, Zio MCT has been at kind of the forefront of that as we got to submission there with the FDA. We have the multi-vitals platform that we continue to work on and are excited about. And then as Quentin mentioned earlier, some of the initiatives around sleep. That's kind of on the innovation side. And then I'd also say we're making investments operationally as well, right? So AI has been important from a service delivery standpoint that will continue to be, but also starting to embed AI within the organization and really look for those opportunities to scale the business as efficiently as we can. And so that's really how we look at where to invest in the business. As you noted, certainly have the balance sheet to make those investments. And now that we're tipping into free cash flow positive, we have a lot of flexibility there. Operator: Our next question comes from Gene Mannheimer with the company, Freedom Capital Markets. Gene Mannheimer: Great quarter. I just wanted to follow up on the earlier point about your development in the sleep diagnostics. Just for my edification, are you suggesting that any new product for sleep would it be -- would it leverage the same or similar form factor as your Zio MCT today? Quentin Blackford: I think, Gene, thanks for the question. But I think, yes, you're thinking about that exactly the right way. The intent ultimately is for us to get to where we can identify, diagnose sleep right off of the exact same platform that we have today. And I think that provides with it a lot of economic benefit. You can almost imagine a future, if you will, where somebody might wear the cardiac -- or sorry, might wear the Zio for cardiac arrhythmia monitoring and then maybe we suspect sleep disease and they end up wearing that similar patch to diagnose sleep as well. The cost profile for us really doesn't change in that scenario, but the ability to diagnose multiple things could become quite interesting. And so ultimately, we want to serve the patient as well as we can and provide them with as much information as possible. We think that there's a lot of overlap with cardiac and sleep and that there's just natural synergy there. If we can do it off of the same platform, I think there's real financial synergy in that. And so that is the ultimate goal. Operator: Our next question comes from Nathan Treybeck with the company, Wells Fargo. Nathan Treybeck: I just had one follow-up on something that was mentioned on this call. So I think Zio MCT is going to be downgradable to an event monitor, correct me if I'm wrong. I just want to understand what percentage of your Zio AT scripts today are not reimbursed? And being able to downgrade that to an event monitor eventually, does that improve your mix of reimbursed scripts? And I guess, your outlook for the MCOT ASP going forward? Quentin Blackford: Yes, it's a great question, Nathan. Again, we're super excited with that MCT category. I think the biggest reason that we see folks choose not to work with iRhythm today is primarily around duration of report being 14 days and getting out to 21 days is going to be important for us, and I think it's going to close a lot of those gaps that the customers who are not working with us yet are requesting. There is the downgradable aspect. We're going to have that option. It's going to be at our option to enact that or not. How we commercialize that, I think, is something we're going to continue to work through. I'm not real certain yet exactly how we'll commercialize it. We don't have a lot of AT business that we're not capturing the revenue on, although we've been pretty intentional about not serving those customers that are looking to really downgrade the capability, but it does happen where MCT might get denied and then you're left with needing the downgrade or you just aren't able to recognize the revenue. So there is a little bit of that with us. We'll figure out how we're going to commercialize the downgrade aspect if we do, but the functionality will absolutely be there in what we submitted to the FDA, and it's going to be left to us in terms of how we decide to commercialize it. We're not certain just yet. Operator: At this time, there are no more questions registered in queue. I'd like to pass the conference back over to the management team for closing remarks. Quentin Blackford: Well, thanks again for joining us today. We couldn't be more proud of what the iRhythm team continues to accomplish. We're executing with discipline. We're driving innovation. We're delivering profitable growth, all while staying true to our mission of transforming patient care. We're entering the final quarter of the year with strong momentum and a great confidence in the road that sits ahead of us. The future of our company has never been brighter than what it is today. So thank you for your support. Thank you for joining us today, and we'll see you on the road. Operator: That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.
Operator: Ladies and gentlemen, welcome to the Lufthansa Group Q3 2025 Results Conference Call. I'm Moritz, your Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marc-Dominic Nettesheim, Head of Investor Relations. Please go ahead, sir. Marc-Dominic Nettesheim: Thank you, and welcome, ladies and gentlemen, from our side to the presentation of our third quarter results 2025. With me on the call today are our CEO, Carsten Spohr; and our CFO, Till Streichert, and both will present our results for this third quarter and discuss the commercial outlook for the remaining 3 months of the year. Afterwards, you will have the opportunity to ask questions. And as always please limit yourself to 2 questions so that everybody else has a chance to participate in Q&A. Thank you very much. And with that, Carsten, now over to you. Carsten Spohr: Yes. Thank you, Marc. And to all of you, a warm welcome also from my side. It's just a few weeks since we met many of you at our Capital Markets Day in September. And today, then following this, I'm pleased to share our third quarter figures with you together, of course, with Till Streichert on my right here. As you have read from the figures published this morning, we can report rather positive developments for the quarter with quite a few aspects and KPIs showing improvements. The most important one for sure, we are well on track in terms of regularity and punctuality of our flight operations, which serves in the end as the basis for all other improvements we'll be talking about later today. So let me nevertheless, start with a macro view of the whole industry. The global aviation sector continues to boom. And over the next 20 years, at least according to IATA forecast, the global passenger numbers will once again double. I think there are very few industries in the world, at least in the real economy that can count on such a reliable and long-term upward trend in demand. And in the current aviation landscape, strong demand growth meets limited supply very likely for many years to come. And this combination obviously generally works in our favor, even though, of course, there are downsides on the operational side with delayed aircraft. We'll also be touching on this in a minute. But overall, as by now the fourth largest airline group in the world and as #1 in Europe, our passenger airlines are globally well positioned to benefit from this global high demand, especially premium classes. We'll come to that as well. And on top of that, the supply constraints also provide enormous momentum for the MRO sector, worldwide aging fleets ultimately drive higher maintenance demand and that ensures stable and recurring revenues for Lufthansa Technik even though we had some setbacks this quarter due to tariffs, Till will elaborate on that. And this balanced portfolio provides stability in macroeconomic turbulence times. And on top of it, of course, we have Lufthansa Cargo, where we also own a business that can benefit from these current global uncertainties. Our industry has become more resilient and so have we in the Lufthansa Group. Through collective efforts and focus, we have regained network stability that sets the foundation for our future profitable growth. The core, as mentioned before, of our whole business model remains a stable flight operation. In this regard, the summer '25 clearly marked a turning point, especially if you compare it to the 3 summers before. And this came not for free. We had massively invested into stabilizing the system. We have, for example, extended scheduled flight times. We have brought up the share of aircraft reserves. We have increased connecting times in our hubs, but all this was well worth it. Stabilization came. And on top, of course, significant reduction in IRREG cost allowed us to also have a positive impact on our financial numbers. And now, of course, looking into the future, starting in '26, there will be efficiency enhancements that we will have on the top of our agenda. This fortunately goes hand-in-hand with the biggest fleet renewal of our company's history. Just 3 weeks ago, our first Dreamliner with a new Allegris Cabin on board took off to Toronto, and we will get further 787s almost by the week, actually more than by the week, we get 2 this week alone and will bring the number up to 34 total very soon. Until the end of the year, we will have received at least 8 brand-new Dreamliners, at least according to the updated information from Boeing. And on top of that, on behalf of Airbus, we were able to get and receive the first 350-900 for Swiss with a new product SWISS Senses on board also just 2 weeks ago. So now our premium long-haul product, Allegris is not only available in Munich, but also in Frankfurt and in Zurich. Ladies and gentlemen, let me take a look at the numbers. In Q3, we were able to further expand our capacities and that particularly on the North Atlantic. And despite the somewhat cautious booking situation in spring caused by the tariff announcement around Easter, we, in the end, experienced a well-booked summer. Globally, we have seen moderate capacity growth of 3.2% compared to the previous year. By that -- or partly by this, total revenue has increased by almost EUR 300 million to EUR 11.2 billion -- sorry, by EUR 500 million, reaching EUR 11.2 billion. Our adjusted EBIT for the third quarter remained stable at EUR 1.3 billion, more or less on par with last year. And year-to-date, though, we can report an improvement of already EUR 300 million versus '24, showing some nice progress on this promise of significantly improved results for the whole year. Key driver of our financial success, again, is and has been the stabilization of our flight operations. Regularity in Q3 was at 99%. Departure punctuality improved by more than 10 percentage points compared to last year. This brings me to our capacity allocation. Year-to-date, we have mainly grown on our European -- domestic European routes and on our North Atlantic routes. And while the third quarter indeed showed some but anticipated yield softness in these regions, the North Atlantic was still our most important profit pool. Of course, as you well know, supported by our successful joint venture with United and Air Canada. But it's worth to note that the yield softness is, of course, also partly currency driven. Excluding currency effects, our RASK actually remained stable versus the prior year. Looking ahead, we plan continued growth on the North Atlantic, in line with the market and also given that capacity-wise, we are still somewhat lagging behind our peers compared to pre-pandemic levels. Growth on the continental network, nevertheless, will be more limited, more or less stable, less than 2% with capacity discipline translating for sure into improved booking outlooks in terms of load factor and yields. In Asia, we remain cautious regarding growth given our unfortunately continued structural disadvantage due to the closure of the Russian airspace. However, increased demand to Japan, South Korea and India give us confidence. In the winter schedule this year, we offer 43 weekly flights to Japan and South Korea and even 64 weekly flights to India. As a matter of fact, Frankfurt, Tokyo has become our best-selling route in terms of revenue. Going forward, we are also optimistic again for the Middle East. Already now, we are seeing a significant recovery on our important route to Tel Aviv. We're also happy to reopen [ Tehran ] again, which is also contributing to our commercial success in this part of the world. But not only the Middle East services are picking up, bookings across all traffic regions reflect a positive trend not only for the coming months in '25, but also for the first visible weeks in '26. Up until January, the booked load factor is consistently above last year's level and balanced capacity growth is helping, as mentioned, to stabilize yields. Compared to the third quarter, yield decline clearly slows down in the months ahead despite ongoing headwinds from a weaker U.S. dollar. So combined with a favorable seat load factor development, that means our revenue -- revenue -- sorry, unit revenues are stabilizing also on the North Atlantic again. And we, like others and our American peers already communicated on this as well, we are benefiting in our industry from an extending and extending and extending summer season. I recall that a few years ago, I called it the endless summer, but even then, I didn't realize that one day summer will last until Christmas. That's more or less what we see right now, very nice bookings to leisure destinations all the way through the late fall. But even more important, especially for Lufthansa and our business model is the fact that premium bookings remain above last year's levels. And also finally, corporate sales are gaining some further traction. Summarizing, our booking outlook is robust, and we are well positioned to capture further upside as demand continues to recover more and more. And with that, I hand over to Till, who will now guide you through the detailed figures of the third quarter. Thank you. Till, over to you. Till Streichert: Yes. Thank you, Carsten, and a warm welcome also from my side. Thank you for joining us today to discuss our Q3 results and also the financial outlook for the rest of the year. So let me get started. In the third quarter, revenues increased by 4% compared to prior year, driven by a 3% capacity increase as well as robust growth in both our cargo and MRO division. This reflects the resilience of our core business, and you can see also the ongoing high demand for air travel, air cargo and MRO services. In the passenger airline business, notably, ancillary revenues rose by an impressive 13% compared to the previous year. And this growth is a strong proof point of the effectiveness of our evolving offering structure and you can see also the success of our digital initiatives across the airlines, which continue to drive new revenue potential on top of the classic ticket sales. On the cost side, we benefited from lower fuel costs with a positive impact of EUR 170 million in the third quarter compared to prior year. At the same time, we continue to observe rising costs in other line items, many of which affect the sector, the entire industry as a whole. Fees and charges increased by 9% year-over-year with ATC costs alone rising by 17%. Airport-related passenger charges and handling charges also saw double-digit increases, mainly in our home market in Germany. In the end, the anticipated head and tailwinds offset each other, and that resulted into a third quarter adjusted EBIT of EUR 1.3 billion, pretty much on par with last year. The adjusted EBIT margin is 11.9%, which is slightly 0.6 percentage points below the previous year's level. Now when looking at EBIT, the Q3 development included a substantial one-off effect on the tax side, where we recorded an increase by EUR 121 million net. This increase is largely driven by the so-called German tax booster announced earlier this year. And while the initiative to gradually reduce German corporate tax rates in the future will eventually have a positive impact, it initially led to a revaluation of our deferred tax assets, resulting in a higher tax burden in the quarter. At the same time, our financial result increased by around EUR 128 million compared to the previous year, and that's mainly due to currency translation and market valuation effects. And as a result, net income decreased by approximately EUR 130 million. Let's now take a closer look at the results of our Passenger Airline business. Revenues rose by 1% to EUR 8.9 billion in the third quarter, and the adjusted EBIT amounted to EUR 1.2 billion, which is in line with last year's result, which is a solid achievement given the market environment in the third quarter. We increased capacity by 3.2% compared to prior year with a strategic focus on our key markets. And as anticipated, unit revenues declined by 2.2% during the quarter and the positive revenue effect from higher seat load factors, increasing ancillary revenues and less IRREG events mitigated but did not fully compensate the negative effect from lower yields. There were 2 primary drivers behind the yield softness, a highly competitive environment in the [indiscernible] business and the anticipated temporary slowdown in North Atlantic demand, which was intensified by a weak U.S. dollar exchange rate. Adjusted for the currency effects, unit revenues were largely on par with previous year's level. While unit revenues in the third quarter showed the expected dip, we kept our unit cost position firmly under control. As a result, ex-fuel unit cost only increased by 0.5% despite the previously mentioned cost pressures. A flat ASK at Lufthansa Airlines contributed significantly. And that is, for me, a reflection of early proof points of our transformation success, resulting in an improved operating result for Lufthansa Airlines despite the challenging trading environment. And this underscores as well our unwavering focus on executing on the turnaround program, and that remains a crucial catalyst for driving as well profitability in the quarters and years to come. So let's have a closer look at the positive effects of the turnaround program on our 2025 results. And here, it is worth highlighting the progress that we've made. The program is delivering tangible and measurable results with a positive effect on adjusted EBIT of around EUR 500 million until year-end. So that's the full year figure. And that is also delivering on our target that we've set for ourselves. As mentioned before, this rapid progress already had a positive effect on our unit cost, resulting in year-to-date unit cost reduction of 1.4 percentage points at Lufthansa Airlines. For Q3, unit cost of Lufthansa Airlines increased by just 0.1%, so almost flat. This shows that the effect from the turnaround program materialized in the second half of the year as expected. Key drivers for the cost improvement revolve around reestablished operational stability, laying the foundation also for further -- for future optimization. And in addition, structural adjustments such as the successful renegotiation of several MRO contracts as well as our commitment to focus growth on more cost-efficient AOCs are starting to pay off. City Airlines has grown to 11 aircraft by the end of September, and we recently announced the allocation of 4 of our A350s to Discover. In addition to the cost benefits already realized, the program has also achieved meaningful progress on the revenue side. Measures include the realization of pricing uplifts through new tools and the continuous rollout of our new cabin product, Allegris, clearly one of the key drivers of the increase in ancillary revenues per passenger. And with many additional measures in implementation for the years to come, the effects of our turnaround will enable profitable growth for Lufthansa Airlines in the years to come. Let us now move to one of our other strong pillars, Lufthansa Cargo. And this year's positive trend remains unabated. The adjusted EBIT reached EUR 49 million in the third quarter, an increase of EUR 11 million compared to the previous year. With that, our year-to-date operating result stands at EUR 184 million, which is an impressive increase of EUR 132 million or 250% compared to last year. So a very strong first 9 months in comparison to last year. This result was primarily volume-driven with chargeable weight up by 11% in Q3 compared to the previous year, compensating for slightly softer base yields. And the volume increase was a result of -- or was also a result of higher capacity due to additional new 777 freighter and the marketing of IATA belly capacities, which started during summer this year. Our points of sale in Europe and the Asia Pacific region have shown particular strength. The Asian e-commerce business remains our most important growth driver here and frequent charter flights to and from China built at preset rates ensure regular revenue streams and provide also a degree of predictability in what is normally a business model that is known for its high short-term dynamics. Proactive cost management also shown positive results at Lufthansa Cargo. Ex-fuel unit cost decreased by 6% versus prior year, and that was driven by a reduction in mainly IT cost and also higher crew productivity. Looking ahead, the fourth quarter is expected to deliver this year's strongest result, in line with the usual seasonality of airfreight. And all in all, Lufthansa Cargo, there remains well on track to deliver a full year result significantly above last year's level. Let me now provide you with an update on our MRO segment's performance and outlook as well. Lufthansa Technik's positive top line outlook was once again confirmed by a growing market and a strong customer order book. Revenue grew by 10% in the third quarter, driven by a strong 28% growth of third-party business, which is particularly encouraging. At the same time, adjusted EBIT amounted to EUR 130 million, a decline of EUR 31 million compared to the previous year. This negative result and this margin development was driven by ramp-up efforts in new facilities such as Portugal and Calgary and substantial external headwinds, including supply chain disruptions, currency effects and mainly tariffs. At EUR 13 million, this impact of tariffs alone makes up more than 40% of the adjusted EBIT decline in the third quarter. So that is just for the third quarter. Lufthansa Technik has already started implementing countermeasures to limit the impact of tariffs on their results going forward, for example, through the redirection of production flows. And as an example, material from customer locations in Canada or South America is no longer shipped via our logistics hub in the U.S. And including these measures, we expect to limit the full year net effect of the tariffs to about EUR 50 million and to mitigate the impact in the upcoming years as well. Looking ahead, we expect a more positive development for Q4, particular, the output growth in the Engine segment is encouraging, which will be a key driver for future profitable growth. And please keep in mind here, despite the tariffs that we are facing this year, keep in mind that the MRO business is a marathon, not a sprint. And what matters is that the demand environment overall is healthy and intact and our Ambition 2030 strategy remains firmly on track. Let's now turn back to the group level, and let's have a look at our cash flow. In the first 9 months of the year, the operating cash flow amounted to EUR 3.9 billion, an increase of EUR 600 million compared to the previous year, and the improvement was primarily driven by a stronger operating result as well as tax repayments with each of these 2 items contributing roughly EUR 300 million. Moreover, net capital expenditure were EUR 200 million lower than last year. And one of the reasons was a decrease in gross CapEx of EUR 100 million due to the delays of our Dreamliner deliveries. All of these effects improved our adjusted free cash flow, which amounted to EUR 1.8 billion at the end of September. And until year-end, we still expect to take delivery of between 7 to 10 Dreamliners, some of which were delayed from previous quarters and resulted there was also in the shift of CapEx and some of it will come through -- this will come through, obviously, in the fourth quarter. For the full year 2025, we therewith stick to our guidance and expect adjusted free cash flow to be broadly stable versus 2024. Our balance sheet strengthened further. Our strong liquidity position currently at EUR 11.9 billion ensures that we are well positioned for the upcoming aircraft deliveries and debt maturities as well. And at the end of September, net debt amounted to EUR 5.1 billion, which represents a decline of EUR 600 million compared to prior year, and this improvement is mainly attributable to the strong cash flow generation. The key highlight in September was the successful issuance of a new EUR 600 million convertible bond at an annual 0% coupon rate. And at the same time, as you know, we took the opportunity to buy back half of our existing convertible bond. And these actions further optimized our capital structure and also demonstrate our proactive approach to financial management. Net pension obligations decreased by roughly EUR 500 million to EUR 2.1 billion, primarily driven by an increase in the discount rate. And our leverage ratio at the end of the third quarter was 1.6x, reflecting a continuous downward trend since the end of last year. Now moving over to fuel cost. Since the start of this year, our fuel costs have developed in a highly favorable way, and I'm pleased to confirm that this positive trend persists. And our Q3 fuel bill of EUR 1.7 billion was in line with our expectations, and there was also substantially below prior year. And for the full year 2025, we expect fuel cost to amount to about EUR 7.3 billion, roughly in line with our previous guidance. And thereof EUR 7.1 billion relate to fossil fuel only representing a reduction of EUR 700 million compared to last year, and the remaining EUR 200 million relate to additional cost for sustainable aviation fuel. Given the favorable fuel price during the first half of October, we also decided to execute additional hedges for the remainder of 2025, even going beyond our regular target hedge ratio of 85%. For 2026, we have already hedged our Passenger Airlines business at a rate of 71%, ensuring continued protection against fuel price volatility next year. Let me now close by commenting on our financial outlook. Taking into consideration our year-to-date result improvement of EUR 300 million and our positive outlook for the rest of the year, we again confirm our 2025 adjusted EBIT guidance for the group achieving a result significantly above prior year's level. Let me give you some more details on our outlook for Q4 to underline our positive expectations for the rest of the year. On capacity, we will continue our focused and disciplined growth path with an envisaged ASK growth of about 4%. On unit revenues, we see a more positive demand environment in Q4 than the one we experienced in Q3, and we do expect RASK to be flat compared to last year's level. On unit cost, I mentioned before that the Lufthansa Airlines turnaround program is proving successful. And for the first 9 months of this year, we've seen a unit cost increase across the group of 2.5%. So that's for the entire passenger airlines. And for the last quarter, we expect the CASK increase to be below this figure, so to be below what we had year-to-date incurred. For Lufthansa Technik, we expect a stable Q4 adjusted EBIT compared to last year. And given the negative external factors, mainly tariffs and currency movements, this means that Lufthansa Technik will most likely not be able to achieve a clear increase in profits this year. And as described before, we've taken action to mitigate those effects going forward, and we stick to our midterm outlook of EUR 1 billion adjusted EBIT in 2030. As every year, we will provide you with guidance on 2026 alongside our full year 2025 communication in March next year. However, I can already provide you with a direction of what we plan for next year. Regarding capacity growth, we will focus on long haul as described during our Capital Markets Day. And next year, we are planning long-haul growth in the mid- to high single-digit region, while we expect almost no short-haul growth. And in total, we want to continue this year's disciplined growth with about a 4% year-over-year increase in ASK. Also, I expect to see progress in the modernization of our fleet. We expect that this will lead to a reduction of reserve aircraft on the ground, which will improve aircraft productivity, our clear goal of asset utilization -- improved asset utilization and hence, also our profitability next year. This will be enabled by new aircraft delivery, which Carsten will comment on in more detail in a few minutes. However, I can already tell you that we expect the delivery of twice as much long-haul aircraft in 2026 and this year. And finally, let me reiterate that for 2026, we continue to believe that the Lufthansa Airlines turnaround program will achieve a gross EBIT impact of EUR 1.5 billion, and we will achieve an adjusted free cash flow. This is now for the group of broadly on the same level as 2025. To summarize, we keep delivering with a confirmed and a refined full year guidance for this year. And we deliver -- we have delivered there with tangible proof points also on the main value levers mentioned at our Capital Markets Day. And for the upcoming months, we do see a more positive demand environment, which already today gives us reason to also believe in a good start into 2026. And with that, let me hand back to Carsten, who will provide you with some more thoughts on the strategic outlook, including insights on fleet and customer development. Carsten Spohr: Yes, Till, thank you very much. And indeed, part of the optimism we are portraying here today and one of the facts why we are convinced to be in a good path today is driven by our comprehensive fleet modernization and harmonization. After years of waiting was added on by COVID, we have finally reached a point where we take delivery of a new aircraft more or less every week. Out of the total 230 next-generation aircraft in our order book, we anticipate more than 50 deliveries until the end of next year. And obviously, all these aircraft freighters aside are equipped with our premium products, which delights customers, which also excites our flight crews and obviously will also add to the excitement of our shareholders when it turns into additional profits. Flights with the premium cabin, Allegris and SWISS Senses, now, as mentioned before, in my opening takeoff from our biggest hubs, Munich, Frankfurt and Zurich. And on the high-yield routes or the highest yield routes, these include selling our exclusive new first-class suites. When you talk about business class, we don't only receive outstanding passenger feedback, but we also see above expectations, I must say, a high willingness to pay extra for the first-time individualized seating options we offer. Our most profitable compartment continues to be premium economy. This will grow by 50% by the end of the decade. And as you also know, we will also equip existing Lufthansa and Swiss subfleets, including our flagship 748, 747-8 and the 777 at SWISS with the new products. In total, the new product will already be available on 1/3 of the wide-body fleet by the end of the coming year. By '27, this applies to roughly 70%. And then by the end of the decade, every long-haul aircraft of Lufthansa and Swiss will fly with our new premium products. On the Capital Markets Day, we presented how we enhance and harmonize our offers and products. And our aim is, as expressed there, to further integrate all activities across our group and realize even more synergies. For example, our increasingly popular airline app, which already serves all group airlines or at least group hub airlines and is hosted to one single group-wide -- by one single group-wide IT platform. To further enhance the physical travel experience, we have invested EUR 70 million in onboard improvements just at our core brand, Lufthansa alone. For our loyal Miles & More customers, we are offering new opportunities to earn and redeem. And together, for example, with the Marriott Group or also in partnership with Deutsche Bank, where we're just launching a new credit card. If you put all these initiatives together, they contribute to significantly improved customer satisfaction, which has increased by an unheard of 8 percentage points in the third quarter compared to the year before, but not only on customer satisfaction, but in all dimensions, we want to continue, obviously, our successful development. So looking ahead, we want and must make our group, especially our core airline, also more profitable again. The fundamentals of our business for this have never been stronger. We are also, as mentioned in the opening, operating in a favorable market environment characterized by resilient and rising travel demand on the one hand and supply constraints persisting on the other hand. This supports a continuing capacity discipline across the industry and therefore, supports strong yields across all our markets. Over the past decades, we have transformed from a national flag carrier of Germany into Europe's leading multi-hub airline network. And this group, as you know, is built on 4 strong strategic pillars, integrated network airlines with now 6 hubs, complemented by a strong point-to-point carrier, world-leading MRO business and very flexible cargo operations, each of them contributing to our resilience and value creation. We're, therefore, confident to achieve a full year '25 result significantly above prior year's levels, the targets which we are reaffirming today. Also midterm, we will significantly further increase our profitability level, targeting an adjusted EBIT margin of 8% to 10% between '28 and 2030. We're proud to say that we deliver on our promises, and we look forward to providing you with further and tangible proof points soon. For now, though, we're looking forward to your questions. Thank you. Operator: [Operator Instructions] And the first question comes from Jaime Rowbotham from Deutsche Bank. Jaime Rowbotham: Two areas I wanted to explore. The first is on the Q4 unit revenue comment. Perhaps you clarify if the flat RASK guide for Q4 includes what you currently see on currency, i.e., we should compare it to the 2.2% decline in Q3 as opposed to the 0.4% decline, which excluded FX. And in terms of the stabilization of the intra-European trend coming from growing ASKs at less than 1% compared to 5.5% in Q3. I can understand how this helps the yields, but it must hamper a bit the narrow-body aircraft utilization, which we saw at the CMD was running low. So just keen to understand how you balance that. Second area was cargo. Till, you mentioned visibility is low in cargo given the short-cycle nature of the business. I just wondered if you'd be willing to say what might be a sensible range of profit outcomes for Q4 relative to the circa EUR 200 million of operating profit delivered last year. I'm just conscious that, that figure could half and you'd still have about 30% year-on-year growth, so significant growth in full year EBIT. Till Streichert: Jamie, let me start with the second question first, just on cargo. So you're quite right. We had last year an exceptionally strong year where actually out of the EUR 250 million profit, we made EUR 200 million just in the last quarter. So we don't even need that in this quarter to already achieve comfortably our target of significantly above. Look, can I be more specific in terms of what I do expect for cargo? Difficult to say without now kind of specifying really our guidance, which we stayed away from. But just leave -- I'd like to leave it with that. We have seen, obviously, year-to-date very good performance. And you can see also in the third quarter, the strong volume demand, which we are quite positive about even after airfreight traffic streams or air freight streams have kind of reorganized a bit globally post the so-called Liberation Day, and we are participating in that. And drivers of this volume is really the belly capacity, the added ETA commercialization of belly capacity and the freighter added capacity. So this makes me positive. But of course, we now need to see how the last 2 months we're going to come out. But all in all, clear and I would say, optimistic confirmation of our significantly above 4 cargo. RASK guidance, your first question in terms of FX. So you're quite right. The comment in terms of improving RASK guidance and stabilization there in terms of year-over-year is basically a like-for-like. So there's no FX assumption that changes that changes in there. And let me remind you as well that we have seen already during the third quarter between July, August and into September, September was already a month that was notably better in terms of RASK evolution. Operator: And the next question would come from James Hollins from BNP Paribas. James Hollins: First of all, probably for Carsten. Just on that corporate strength, it's not something we've seen for a while. It's certainly something the U.S. names were flagging. I was wondering if you could sort of run us through if that's sort of a big acceleration as we've come into the autumn, where it's particularly strong? Is it U.S. inbound to Europe? Is it maybe in Germany, first time in a long time, maybe signs of this fiscal stimulus working. So just run us through on the corporate side there. And then secondly, I hate to be that person in the room, but maybe get your view on the likelihood of a strike sort of take us behind the scenes of weather. Obviously, the media have got their views on what's going on, but just get your views on likelihood of strike, would be great. Carsten Spohr: Yes. James, I think we've missed one question from before utilization of our [indiscernible] fleet, if it would go down further, it's the opposite, we are probably looking at 2% growth on [indiscernible] with the same fleet size. So take that as a thumb rules, you see an increase in productivity by at least 2% more production of the same fleet. James, proper strength, indeed, the U.S. carriers and also our people, of course, leaving the shutdown aside. Don't forget our largest customer is the U.S. government. So recent weeks put aside, we see some development from the U.S. Also, Germany is at least not aggressively growing, but somewhat growing on volumes. Tech industry is strong. For example, consulting is strong. Finance industry is strong. So it's not crazy the growth, but compared to what we have seen now for quite a few years, it was worth mentioning it. Likelihood of the strike by the pilots in the end, the union has to answer. But as we already said before, we have done our yearly staff survey and the biggest improvement in satisfaction comes from the pilots. And the pilots also expressed not worries about their pensions, which are already quite high, but rather expressed worries about their future and future growth and future careers. As we always allocate strike cost is personnel cost, of course, any strike would increase the cost disadvantage of the mainline and decrease perspectives and careers even further. So putting all that together, I think there's room as our Head of HR offered to talk about future perspectives rather than additional pensions. We just cannot afford and not willing to raise further also in terms of fairness to the pilots in the other airlines. I think that's about what I can say about that today. James Hollins: Can I just come back on the U.S. government shutdown? Maybe just give us your thoughts on what you're seeing very near term? I assume U.S. inbound corporate, given that your largest customer has taken a hit and maybe whether you sense there's a feeling that there's a bit of reticence from some Europeans going to the U.S. because there might be delays or whatever. Just it would be great. Carsten Spohr: Well, I think there was a very special event -- not event, effect, sorry, from my language. Coming out of the Easter tariff announcement, the so-called Liberation Day Till referred to, that was the time around Easter when German booked their late summer holidays. And surely, we saw some softness out of Europe, especially Germany, Austria, Switzerland and Denmark [ flying off ] to the U.S. We never saw that coming out of the U.S. There, of course, the yield was impacted by the currency. So I think that what people have been seeing a little bit in Q3, and we forecasted that in Q1 and Q2, if you recall, is already softening and/or the effect is softening. So we will see a more positive outlook on Q4 and also in the first weeks of '26. The shutdown in general is, of course, affecting U.S. carriers a lot more than it affects us because the main travel from the U.S. government is domestic U.S., but also us with our joint venture partner, United, enjoying some nice business from the U.S. government, which, of course, is slow now. But I don't think the shutdown will eventually last too much longer either. Operator: And the next question comes from Harry Gowers from JPMorgan. Harry Gowers: First question, can I just ask on your -- you've got this slide, I think, Slide 6, which kind of shows the bookings outlook and kind of the RASK development into Q4. So first question, I think October is missing from that chart. So could you give any commentary on what you've seen in the bookings for October? And then is your flat RASK guide for Q4, is that just what you see in the books at the moment? Or have you made any further assumptions on how bookings and pricing will actually evolve over November and December? And then Till, maybe one for you. Could you just clarify or kind of narrow down the range a little bit on ex-fuel CASK for Q4? Because I think you said the guidance would be below the 2.5% you've seen year-to-date. But are you going to see an ex-fuel CASK, which is higher than the 0.5% that you saw in Q3? And what exactly would be driving that? Till Streichert: Thanks, Harry. I'll start with the second question, and then we'll work backwards to the first one. On CASK, so as I said, we've got year-to-date 2.5% CASK growth. Remember, the quarterly trajectory was basically we had 3% and 4% CASK growth in the first and second quarter, now 3.5%. Pretty pleased with that. And for the fourth quarter, I expect something which is below the 2.5%. Now being even more specific, look, hard to say what's the driver of the movement from the 0.5% in the third quarter up to something which is below the 2.5%. It's -- I expect that MRO will going to be one of the drivers, which goes up in the last quarter a bit. And then we've got the usual drivers as well on additional cost evolution from ATC, from fees and charges, et cetera, et cetera. But again, with that for me, what we said at the -- throughout the year, this half 1 versus half 2 is starting to materialize where CASK is coming down. And that for me, if you just say I look at half 1 and half 2, clearly an effect of the materialization of the Lufthansa Airlines turnaround and look in the same way also for the other airlines that are all running their efficiency drives. So that's on CASK. On RASK, so what we've shown there is basically Page 6 is really what we've got on the books. So there are no -- that's what we see in terms of seats sold at the seat load factor that we've got right now. Your question, October, October was with -- I mean, we've almost closed, it was good. And there was for the third quarter, what we said is clearly better trading environment and resulting into this positive evolution from the third quarter where we obviously saw that as a dip. And here again, the comment that throughout the quarter, September was already notably better than July and August. Operator: And the next question comes from Jarrod from UBS. Jarrod Castle: You're still talking about a material increase in adjusted EBIT. Consensus is EUR 1.9 billion, give or take, versus the EUR 1.6 billion, give or take, last year. From where you stand today, do you see risk on the upside or the downside? Or are you comfortable with kind of where consensus is? Just any broad color. I know you've still got 2 months left of the year. And then secondly, the balance sheet continues to degear. So just thinking about the dividend payout ratio. Are you or the Board thinking more towards the top end of the 20% to 40% of net income guidance for this year? Or again, is it a little bit too soon? Till Streichert: Look, in terms of -- let me not comment specifically on the consensus. We've given a bit of color, of course, on the fourth quarter with RASK, CASK, also a bit of explanation on what I expect to happen on Lufthansa Technik and Cargo. So I don't want to be specific on that. We've given the elements. I think you get to a good picture with that. And I would probably leave it more or less with that element or with that answer. But if you would see us uncomfortable, obviously, then we would have said something. Let me put it like that. And finally, on the dividend policy, which we did reconfirm at the Capital Markets Day of 20% to 40% in place, this is a healthy dividend and the exact payout ratio within that range. We will obviously detail further down the line when we've got the full year results. But you can imagine, and that is what I also highlighted at the CMD. Of course, I want that our dividend per share continues to grow, driven by the improving operating performance as a key driver of it, okay? And the strength of the balance sheet as a backdrop and the lower leverage is helpful. I'm very happy with that. But also here, let me just highlight the fourth quarter, I do expect still to have aircraft deliveries and CapEx outflow. And with that, I did reconfirm that I expect free cash flow to be broadly stable versus prior year. And with that, you've got the key elements put together. Operator: Then the next question comes from Muneeba Kayani from Bank of America. Muneeba Kayani: Just going back to Slide 6, and thank you for that. It's very helpful. The bookings number, just to clarify the dark blue in there, is that kind of comparing to bookings at the same time last year in terms of the year-on-year increase? And then just kind of when you're seeing that yield improvement, is there any specific region that is driving that? Or is it across the board? You point out premium yields above previous year for every month. What are you seeing on the main cabin, please? And then on the unit cost side, so in your 2026 guidance, you're talking about fleet productivity. Till, you've talked about unit costs getting -- trends getting better in the second half of the year. I know you're not giving guidance specifically on next year. But broadly, how are you thinking about unit costs on a passenger airline in '26? Till Streichert: So that was 3 questions. So the first one, just quickly, yes, you are right. That's a year-over-year comparison. So nothing else, the dark blue bookings number on Slide 6. The second question on yield evolution. So we have, in fact, seen an improvement in all traffic regions, albeit I would actually also highlight that intercont is probably -- is improving more. I expect it to improve more than cont. And in terms of cabin class, premium, so this is the same theme that we've seen also before. Premium continues to be doing better than basically economy class. And your third question in terms of CASK evolution, I'll answer it from 2 angles. One is what I said also at the CMD, longer term, I do expect that our CASK growth, we are able to clearly beat inflation on CASK. And when we now talk about 2026 specifically, please bear in mind that we will be giving guidance and further details closer to the time beginning of March. But for now, all of the drivers that you highlighted, asset utilization, productivity gains, turnaround improvement playing into it, you can almost roll forward a bit also from what we've started to do and seen in 2025 as proof points. So -- and again, the flat CASK at Lufthansa Airlines in the third quarter, and again, bear with me, I'm not saying that this will be now flat for the next quarters to come. There will always be a bit of volatility, but a 0.1% CASK increase at Lufthansa Airlines only in Q3 is a big success. Operator: And the next question comes from Conor Dwyer from Citi. Conor Dwyer: The first was on basically your comments around next year on long haul. You talked about mid- to high single-digit capacity growth. And I said that obviously, that will have good implications on the unit cost side. But how are you thinking about the risks there from a unit revenue perspective that a lot of that just gets eaten up by some of the pricing pressure that, that may bring? And then secondly is on Technik. So as you said, very strong revenue growth with third parties, but quite a bit of a pullback on the internal revenue side. So I'm just wondering what exactly is that reflecting? Is that basically the need to fly planes because you're tied on capacity slow deliveries or anything else that might not have thought of? Till Streichert: Conor, it was a little hard to really understand. I'll start and you please just repeat where we don't answer your question fully, okay? I'll go with Technik first because there, I think I got it. So to repeat, 10% revenue growth, that was good. Indeed, the third-party business over-indexed, 28% growth, which for me is actually extremely good because there [indiscernible] obviously take it from the market. In terms of internal business, I think you were questioning, is that a problem that we are scaling back there? I'm not aware. I mean, obviously, mathematically, there's a little bit of a shift. But again, what matters is the external revenue because that's where you are usually in long-term contracts -- going into long-term contracts and building basically business. I hope that answers the Technik question. Conor Dwyer: I was really just wondering, basically, is that weaker internal revenue reflecting basically the need to fly the planes and that some maintenance actually internally is going to be coming more so through the winter in that regard. Till Streichert: Sorry, I struggled. Can you just repeat it again? Conor Dwyer: Yes. So the question was more so around with the internal revenue being a bit, let's say, less in the peak summer, is that reflecting the need to fly the planes currently and do the work through the winter because you're kind of tight on capacity at the moment? Till Streichert: The need to fly... Conor Dwyer: So you're basically charging less internal revenue on the maintenance business. Is that basically reflecting the fact that at the moment, you basically need the planes flying and more work is to come, i.e., on the internal revenue side through winter? Till Streichert: Look, this is math -- I would actually think this is more mathematical what's happening here. I wouldn't read too much into the internal revenue generation or whether there are shifts in terms of business. I mean, obviously, this is also driven by just what's happened in terms of MRO that we use internally with Lufthansa Technik. Conor Dwyer: That's fine. Then the other question was simply basically around the risk of medium to high capacity digit capacity growth into next year in long haul. What the risks are basically around unit revenue there, even though there is obviously some unit cost benefits from doing that? Carsten Spohr: Well, I think the major effect on long-haul growth next year is North Atlantic. And there, we are still lagging behind our peers compared to pre-COVID. So if you draw a line from 2019 to where we are in North Atlantic capacity, we have a little catch-up to do, and '26 is going to be another catch-up year. So we don't see a risk on the yield side because we're basically catching up to demand overhead. They can also get new airplanes. Don't forget the new airplanes we'll be using to a large degree on the North Atlantic as well. Operator: And the next question comes from Antoine Madre from Bernstein. Antoine Madre: Two questions, please. First is that the free cash flow guide for 2026 more on the safe side with the current turnaround and the current fuel price level. So maybe you could give some color on the '26 CapEx? And second, we saw that the 777X is now expected for 2027. Does that further delay fleet simplification initiative? Till Streichert: Antoine, let me start with the free cash flow guide. Look, I mean, we'll technically speak about that when we speak in March next year. But let me say -- let me reiterate what I also guided at the Capital Markets Day. I do expect that 2026 free cash flow should be broadly on the same level as 2025 and there was also 2024. And as a reminder, I do expect progression in terms of earnings improvement. This will improve as well operating cash flow. But we do have, and we've given you also the schedule on the fleet renewal. The next 2 to 3 years will be the years where we've got elevated fleet renewal and there was also elevated gross CapEx. And there with -- in combination with utilizing also more sale and leasebacks, we have arrived at the conclusion of a broad free cash flow target -- broadly stable free cash flow target for 2026, but further details to come when we speak in March. Carsten Spohr: Yes. On the delays or additional delays on the 777X, we never expected the airplane to be in operation commercially in '26. So we are scheduling the aircraft earliest summer '27. So there's no need yet to make any changes to our plans so far, and we'll see where it goes from here. Operator: Then the next question comes from Andrew Lobbenberg from Barclays. Andrew Lobbenberg: Can I just carry on from the 777 question and go to the 78 question. I think there have been stuff in the press about how the approval of the seats might be challenged by the U.S. government slowdown. So how confident are you on the timing of the approval of the Allegris seats other than the front row in the 787? And does that impact your willingness or enthusiasm to take delivery of the 7 or 8 aircraft to come in the balance of Q4? And then my second question would come down to the RASK because obviously, we've been dancing between the flat RASK, excluding FX and the 2% negative RASK, which I think is your headline number. But in your regional RASK, down in the appendix, which I think is just the pure airline tickets, that number is negative 5% for Q3. So could you perhaps explain to us a little bit about the difference between the regional RASK number and the headline RASK number? And how should we think about that -- the differences and how those differences evolve in terms of irregularity or ancillaries or whatever? Carsten Spohr: Andrew, I'll start with the first one. So far, the shutdown has an impact on some delays by days of the deliveries of the aircraft. I'll come to the certification in a minute. So therefore, we don't expect 10 aircraft anymore this year, but rather probably around 8; 6, we have scheduled to fly. That's a minimum which we would need to achieve to not have any changes in our published schedules, and we're pretty optimistic to be above 6. As I said, 8 probably the most likely shot as of today. We do not yet see delays due to the shutdown in the certification part. This is basically all paperwork, which has to be done. So we're still confident to get that done by the end of the year. But we all have learned there's always question marks when it comes to the triangle between Boeing, Collins and the FAA. So I can only say what we know as of today. And again, that the confidence of my team on the ground in the U.S. still tells us end of the year is feasible. And then maybe even the last aircraft would already arrive with unblocked seats, but also quickly afterwards, we can unblock the seats of the aircraft, which are already across the pond in Europe. Till Streichert: Andrew, I'll take the question on RASK. So the figure of minus 2% that we are referring to here for the third quarter in terms of RASK evolution includes ancillaries, cargo revenues and also the revenue benefit from less Iraq events. And what you are referring to in terms of the regional RASK in the appendix is excluding exactly those 3 line items. So there's no ancillaries in, no cargo belly, no benefit from irregularities. And therewith, in terms of dynamics going forward, look, I still do expect that we will going to improve further on [indiscernible]. So you should see that basically helping. I do expect that on the cargo belly over time, also contribution continues to evolve positively. And ancillaries, as you can see right now, is growing strongly. And with Allegris, rolling -- with Allegris rollout taking pace, gaining pace, you should see actually even on that one, a stronger contribution. It's just important to distinguish between what we show as a regional RASK, which is RASK 1A and the one that is basically RASK 3, including everything. Andrew Lobbenberg: So when we think of the numbers in compute and do our modeling, is there some double count of your RASK with the belly compared to what's in the cargo business? Till Streichert: No, there's no double counting. So this you see -- this is strictly or this is kind of mutually exclusive and collectively exhaustive allocated in the reporting. Operator: And the next question comes from Stephen Furlong from Davy. Stephen Furlong: You talked about Boeing. Can you just ask about Airbus? They announced a slowdown in the production rate of the A220. Is that something that worries you or not? I think it's gone from 14 to 12. And then the other question, I just want to ask about cargo, which is performing very well. In general, it tends to be, I guess, a division or product that is very -- even more volatile, let's say, than the passenger business. But maybe you could just talk about some of the structural things that are happening that maybe would suggest that the cargo business and profitability be more enduring than perhaps the volatility in the past, not just with Lufthansa, but the industry. Carsten Spohr: Stephen, no, so far on the 220, we don't expect any delays. Actually, we just met with the Airbus management last week. So we're still confident that our 40 220s we have ordered for Lufthansa City Airlines will be starting to be delivered end of next year and will come on time. On cargo, 2 thoughts. First of all, it's still a volatile business. But one wave seems to more or less compensate the other. So there are so many trends now in the industry compared to the old days when there was only 1 or 2 mega trends that I think you see one wave on top of the other. And like I know if you're a sailer, that happens in the harbor in the end, then there is kind of... Stephen Furlong: I [ know ]... Carsten Spohr: Then you know, it's kind of zeroing out. That's one element. But I think more important is another one. As you well know, Stephen, we talked about this before, cargo has 2 elements. There's the so-called planned air cargo, Think about pharmaceuticals, think about valuables, think about consumer e-commerce. And then there is an unplanned cargo, which is mainly B2B spare parts to keep factories around the world going and so on. And you see clearly a shift at least in Lufthansa cargo, which tends to be more high-end cargo, we see more and more shift towards the valuables, pharmaceuticals and especially to e-commerce. And e-commerce is always what you call planned air cargo. You always send your fashion products from China by cargo and not only when something goes wrong in the supply chain, which happens on the more B2B-driven cargo providing factory. So I think that could be a reason why things become a little bit less volatile. But I would still call cargo volatile, but it just, as I said before, has worked in our favor over the last years because the predictability of supply chains has come down. And therefore, even the unpredictable high volatile cargo has helped us to support our profitability. So that's -- I wouldn't want to be a forecaster here on this, but this is where how we look at things, and that's why the optimism for cargo is going on. And an argument which is not new, but which proves to be right even more, remember, I always -- when I see you in London, I say, I wish I had a home base of London, how nice must it be to run an airline in Heathrow. But that's true for passengers. When it comes to cargo, Frankfurt is, I think, for cargo, what London is for passengers. Amazon has just announced to shift additional cargo streams via Frankfurt. So here, surely, our biggest hub is a major advantage why on the passenger side, things probably look more fun in Paris or London. Operator: Then the next question comes from Antonio Duarte from Goodbody. Antonio Duarte: As you have seen the reallocation of assets to more efficient routes talking about summer next year and into the future, could you give us some colors on which airlines you're planning to expand the most considering different EBIT margins between these? And following on this topic as well, we have seen a year-on-year improvement in your Lufthansa Airlines EBIT margin this quarter. Could you also talk us a bit about any targets you have going into Q4 and maybe into next year? Carsten Spohr: Antonio, I hope I got your first question right. But since some time, and I would definitely say since coming out of COVID, beyond operational requirements, we really allocate aircraft and growth according to ROCE principle. So where do we return investments highest? And that means currently, those airlines which have a favorable cost position, think about Discover, think about Edelweiss, think about Lufthansa City Airlines, but also ITA, we're looking at additional growth due to their cost position and due to their market opportunities to somewhat underserved home market roam. So that's what we do. That ROCE principle also internally clearly communicated to unions, to our staff, I think will help us to make sure that the right airlines grow. And I think on Lufthansa Airlines, I want to repeat what I said. First, we had to stabilize operations. We did. Now customer satisfaction had to be stabilized. It is going on while we speak. Allegris plays a role, also [indiscernible] plays a role, also the EUR 70 million of improvements we invested on board. And therefore, I think as Till pointed out, we are optimistic to perform on track with our Lufthansa Airlines turnaround program. Operator: Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Marc-Dominic Nettesheim for any closing remarks. Marc-Dominic Nettesheim: Thanks to all of you. Thanks to you, Carsten and Till, for your answers, and thanks to all of the interested participants for your questions. We're looking forward from the Investor Relations team to continue our dialogue. And for now, we wish you a great afternoon. Talk to you soon. Bye-bye from Frankfurt. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your line. Goodbye.
Operator: " Renee Aguiar-Lucander: " Monika Tornsen: " Richard Philipson: " C. Ballantyne: " Farzin Haque: " Jefferies LLC, Research Division Sushila Hernandez: " Richard Ramirez: " Matthew Phipps: " William Blair & Company L.L.C., Research Division Operator: Good day, and welcome to the Hansa Biopharma Quarter 3 2025 Results Conference Call. Please note this event is being recorded. [Operator Instructions]. I would now like to turn the conference over to Hansa Biopharma's CEO, Renée Aguiar-Lucander. Please go ahead. Renee Aguiar-Lucander: Thank you very much, Operator. Good afternoon, good morning. Welcome to the Hansa Biopharma conference call to review Q3 and results for the first 9 months of 2025. I'm Renee Aguiar-Lucander, CEO for Hansa Biopharma. And joining me today is Evan Ballantyne, CFO; Richard Philipson, Chief Medical Officer; and Maria Tornsen, Chief Operating Officer and President of the U.S. Please turn to Slide 2. Please allow me to just quickly draw your attention to the fact that we will be making forward-looking statements during the presentation, and you should therefore apply appropriate caution. Please turn to Page 3, and today's agenda. Today, we'll discuss the progress we've made in the 9 months of 2025 and review the quarterly performance. I'll also share my reflections and insights based on my first 6 months in the role. The presentation itself should take roughly 20 minutes, after which there will be an opportunity to ask questions during a Q&A session. Please turn to Page 4. Over the past several months, Hansa has been through quite a transformation, including a significant reshaping of the capital structure involving debt restructuring and significant strengthening of the cash position through 2 successful equity raises. In addition, the reporting structure of the company has been changed to provide for enhanced accountability and transparency as well as result in a simpler and leaner organization. We have in parallel added key competencies to the senior team, which are crucial for a successful BLA filing review and prelaunch preparations as well as the requirement for a successful product launch subject to approval in the U.S. I believe that the market opportunity in the U.S. is very substantial, and this brings me to the last but ultimately most important point and key event of this quarter, the successful outcome of the Phase 3 ConfIdeS trial. This trial randomized patients between 2022 and 2024 with a 12-month follow-up period, and we're truly delighted that we could report at such a strong p-value of 0.0001, which I believe reflects the unmet medical need for these highly sensitized patients. And we're now looking forward to submitting the BLA filing before the end of the year. Moving to Europe. This summer quarter reflected lower-than-expected transplant rates, further impacted by the absence of transplants in Germany due to the situation flagged already in Q2 as well as continued challenges related to local reimbursement. I'll comment further on this shortly. Regarding pipeline developments, we were excited to report the very first clinical data from the gene therapy area, which clearly showed imlifidase's ability to successfully reduce antibodies related to AAV vectors by over 95% reduction from baseline and thus enable dosing of patients who otherwise would have been excluded. These data, in conjunction with further clinical data obtained from our collaboration with Généthon, bolsters our view that gene therapy could become a significant future market opportunity for Hansa. Please turn to Page 5. As I already stated in my Q2 address, I was expecting Q3 to be a weak quarter for reasons which should not be a surprise to anyone who's actually tried to obtain a hospital appointment during the summer in many European countries. This actually ranges from difficult to close to impossible, except for reasonably acute situations in many regions. However, this was exacerbated by a variety of country-specific factors already mentioned. As we've now had the opportunity to review the situation in Europe somewhat in more detail over the last couple of months, our conviction regarding the significant growth opportunity has not been diminished, but we do believe that there are several areas which can be improved and strengthened to enhance both performance and predictability. We have identified several of these and intend to start rolling them out in this quarter. However, as a backdrop to these initiatives, I'd like to review some of the key situational facts of the kind of European market. So, as I've already kind of stated previously, at the time of launch in Europe, there was limited clinical data available. There were only 2 sites that were actually in Europe, which participated in the Phase 2 trial. So very few KOLs had any experience of this procedure in Europe at the time of launch. There was also obviously need for drafting and implementation of guidelines. And as we know, Europe has a long and complex reimbursement process to deal with. Due to the fragmentation of the market, obviously, there are different national organ allocation systems, and they do not all kind of operate in the same way. And obviously, at the same time, as the company was really challenged with the kind of limited KOL support and experience and clinical data, there was also a large clinical study initiated at 23 of the European sites, many of them very large academic institutions to recruit 50 patients in a transplant trial. There's also been the strategic decision earlier to go very broad in Europe rather than have a more focused approach. So, what we are going to do since we do believe that there is an extremely large growth potential based on where we are today, is to really review the organizational structure overall. We're looking for accountability, focus and efficiencies, and we've identified some areas that we think would benefit to be strengthened. We're also going to invest in Europe in terms of systems, clarifying KPIs, reporting lines and provide additional education and training. We will obviously focus on dissemination of the clinical data that we now have in terms of the Phase 3, I do think that this kind of Phase 3 trial and the clinical data that stems from that will become extremely important in conversations with European KOLs and transplant surgeons. And we'll focus on all of that in terms of best practice and peer-to-peer interactions. So, in summary, we will be refining and implementing these activities over the next 3 months, and we'll keep you updated as we move through this process. Please turn to the next page. Following the strong Phase 3 data, I just wanted to provide a brief overview of the U.S. market opportunity, where there are several key differentiating factors from Europe, which we believe will impact both the potential size of the overall opportunity as well as the adoption rate compared to what we've experienced in Europe. So, a large, a significant differential is obviously that we have a large and robust clinical trial that just read out with data that's going to be available to the community prelaunch. As part of that, we also have a lot of KOL engagement and experience as part of the very large trial that's being conducted in the U.S. In terms of pricing, if we look at kind of reimbursement, obviously, the price that can be managed by the company will be based on research and the clinical and payer studies. There is a national organ allocation system which is centralized with clear guidelines for how these matches are being made and with also a specific kind of focus on highly sensitized patients. In terms of this we are going to focus on the 25 sites we were part of the Phase 3, which represent about 25% of all transplants in the U.S., where these transplant surgeons will be familiar with the procedure, and we'll have a subsequent rollout plan with an initial target of about 100 clinics. In addition, the data that will read out from the European-based PAES study will also be available; as will real-world data from Europe, which we hope will also in the near future, we will see in form of some publications. We have a well-researched, externally validated and structured launch plan, and we have very strong market analytics capabilities internally. There is an active patient advocacy in the U.S., strong kidney organizations and a clear physician demand for the product. So, in conclusion, we're extremely excited about the upcoming regulatory process and look forward to engaging with the FDA with a purpose and focus of bringing imlifidase to patients in the U.S. With that, I'll hand over to Maria, who will provide some more details on these topics. Monika Tornsen: Thank you very much, Renee. Next slide, please. Our Q3 performance was, as Renee mentioned just earlier, impacted by the seasonality and the pause of the German prioritized program for highly sensitized patients. As mentioned in our Q2 report, Germany paused participation in the Eurotransplant prioritized program earlier in the year. And as a result, we did not recognize any sales in Germany in Q3. The prioritized program continues in the other smaller countries in the Eurotransplant zone. While German physicians can still use IDEFIRIX in the normal ETKAS program, it will require publication and adaptation of new guidelines for broad adoption. And we, therefore, expect this to continue to have a negative impact in the near to midterm on our sales performance in Germany. We continue to work with physicians to understand the timing of these new guidelines, and we have also initiated various public affairs efforts to better understand how and when the prioritized program can be reinstated in Germany. In addition to Germany, our sales were also negatively impacted by regional dynamics in the Spanish market where the lack of transplant protocols in the region of Andalusia is limiting usage of IDEFIRIX. From a market access perspective, we have been very successful in gaining national reimbursement in 21 European and international markets. Over 90% of the European population are covered by national reimbursement. However, in some European markets, we also need regional reimbursement to enable IDEFIRIX usage. We still have some key regions in Europe where this reimbursement is lacking. And one such example is the Catalonia region in Spain, where the overall health care budget has been blocked at the regional level, impacting IDEFIRIX negatively. As Catalonia and Andalusia are two of the largest regions in Spain, our Spanish sales were lower than expected in Q3. Despite some of these market challenges, we have a strong support in many European and international markets with one example being France, a country where there are clear guidelines for IDEFIRIX usage, strong support from key opinion leaders, significant positive clinical experience over several years and a clear path to reimbursement. We are building on these positive experiences as we look at how we can optimize performance across Europe. As Renee mentioned earlier, Europe represents a significant growth opportunity and as such, we are implementing multiple activities to address the European performance. We are reinforcing our peer-to-peer education on guidelines and delisting practices, and we are arranging multiple educational events with one example being a large scientific event in November with around 80 European key opinion leaders. We're also, as mentioned earlier, reinforcing our public affairs efforts to address some of the systemic barriers we are observing in some key regions and markets. And finally, our market access team are working on addressing the regional access challenges mentioned earlier. Please turn to Slide 9. Let's now turn our focus to the U.S. market, which represents a significant opportunity for Hansa. As Renee mentioned, a few weeks ago, we presented positive top line data from ConfIdeS, our Phase 3 trial in highly sensitized kidney transplant patients. When we look at the U.S. market, it is important to remember that these highly sensitized patients have no approved desensitization therapy available today and the unmet need is therefore significant. There are approximately 15,000 highly sensitized patients with a cPRA over 80% in the U.S. today and more than 7,000 with a cPRA over 98% and 3,500 patients in the most sensitized group with a cPRA at 99.9% or above. In total, 100,000 patients are in the U.S. transplant waitlist. And each year, 45,000 patients are added to the waitlist with highly sensitized patients representing 20%. Unfortunately, due to the long wait list, each year, there are 10,000 patients who pass away or become too sick to transplant while waiting for an organ and the median wait time for an organ for these highly sensitized patients is seven years. Please turn to the next slide. With the recent announcement of the positive Phase 3 ConfIdeS data, our U.S. organization is focused on preparing for a potential launch in the second half of 2026, subject to FDA approval. As mentioned, the U.S. market represents a significant opportunity. And while there are important learnings from the European launch, there are also obvious reasons why the U.S. launch will be different. The market opportunity is significantly larger than in Europe. As you saw on the previous slide, there are today 15,000 highly sensitized patients in the U.S. wait list, and this list is growing each year. Unfortunately, 2,500 highly sensitized patients pass away while waiting for a matching organ or they become too sick to transplant each year. If we look strictly at the ConfIdeS criteria, cPRA over 99.9%, there are today 3,500 patients on this waitlist. Half of them have waited over seven years for a suitable organ, which is a sign of the tremendous unmet need that exists for these patients. The burden of being on dialysis should also not be underestimated. These patients need to undergo dialysis for several hours, multiple times a week, and the cost for Medicare is approximately $100,000 per patient per year for dialysis. For those patients who are fortunate to find a matching transplant, they will have a significantly better outcome, with more than 80% being alive after 5 years, compared to 40% on dialysis. The recent patient preference study also shows that these patients are waiting for an approved desensitization therapy, with 61% of U.S. patients today practically discussing this with their physician. While our European launch has been impacted by the regional market dynamics described earlier, the U.S. market is vastly different, and we should, therefore, expect a stronger launch. In the U.S., there is a national organ allocation system where highly sensitized patients are prioritized. As you heard earlier, this is one of the challenges we're facing in some European markets. There is also significant efforts from the current U.S. administration to improve transplant care and ensure better outcomes for patients and better usage of organs. From a market access perspective, we know that kidney transplants are covered by Medicare. Our market access team will work with various stakeholders to ensure adequate reimbursement through both outlier payments and NTAP, New Technology Add-On Payment. It is also worth noting that Hansa will enter the U.S. market with significantly more clinical experience and data compared to the situation we're launching in Europe. The ConfIdeS centers are collectively responsible for 25% of all transplants taking place in the U.S. each year. This puts us in a much better situation compared to the European launch, as these centers already have clinical experience using imlifidase and have seen the benefit of desensitizing their highly sensitized patients with imlifidase. As the U.S. market is highly concentrated, with 200 adult kidney transplant centers and 100 of these representing 80% of the transplant volume, this is a launch we can manage successfully ourselves with a small footprint. We expect to hire around 20 field-based key account managers who will be responsible for the sales of imlifidase. Finally, already today, we have a very experienced team leading this exciting launch. Current team members all bring significant therapeutic area experience and launch experience. Over the coming 12 months, we will also add to this team to ensure we are ready to launch Imlifidase successfully, assuming FDA approval. And with that, I would like to hand it over to our Chief Medical Officer, Richard Philipson, to discuss our pipeline. Richard? Richard Philipson: Thanks, Maria. So, I'm going to start by presenting a short summary of the efficacy and safety outcomes of the ConfIdeS study, which is a Phase 3 open-label randomized controlled study evaluating kidney function at 12 months as measured by estimated Glomerular Filtration Rate, or eGFR, in highly sensitized kidney transplant patients treated with imlifidase prior to transplantation compared to a control group. I'll begin with a brief summary of the study design. Patients considered potential candidates for the study were consented and entered the prescreening period. One or more unacceptable antigens were delisted from the patient's HLA profile to increase the likelihood of the patient receiving an organ offer. When an organ offer was received, patients entered screening and underwent a final evaluation of eligibility. Eligible patients were then randomized to the imlifidase arm or the control arm in a 1:1 ratio. The period of follow-up in the study was 12 months from the time of randomization. Patients randomized to the imlifidase arm accepted the organ offer and were treated with imlifidase. If treatment resulted in crossmatch conversion from positive to negative, and patients were transplanted and entered follow-up. Patients randomized to the control arm either accepted the organ offer, were treated with non-approved desensitization and then proceeded to transplant, or the organ offer was rejected and the patient waited for a more compatible organ offer or offers later in the 12-month follow-up period. Next slide. A total of 64 patients were randomized in equal numbers to either treatment with imlifidase or the control arm. So, there were 32 patients in each arm of the study. Two patients randomized to the imlifidase arm did not proceed to treatment. In one case, the organ offer was refused. In the other case, the patient withdrew consent to be treated with imlifidase. The overall rate of completion of the study was excellent; a total of 58 patients, or just over 90% in the study completed the 12-month follow-up period. The treatment groups were balanced with respect to sex and age. Overall, there are almost equal numbers of males and females in the study and the mean age of the study population was 45.3 years. The treatment groups were also balanced with respect to race and ethnicity and representative of our highly sensitized kidney transplant waitlist population. So with respect to the primary efficacy outcome at 12 months, mean eGFR was 51.5 mls per minute in the imlifidase arm compared to 19.3 mls per minute in the control arm, with a statistically significant and clinically meaningful difference between the 2 groups of patients of 32.2 mls per minute with a p-value less than 0.0001. This outcome reflects the excellent graft survival that was observed in the imlifidase treatment arm. So, looking at of the supportive analyses of the primary endpoint, these provide outcomes consistent with the primary analysis. So, when we performed an analysis of 12-month eGFR using a nonparametric test, which doesn't assume normally distributed data, the outcome remains statistically significant. Similarly, when we look at 12-month eGFR in patients transplanted based on organ offer randomization, again, the outcome remains statistically significant. These supportive analyses of the primary endpoint give us additional confidence in the robustness of the primary outcome. Also of note, a key secondary endpoint of dialysis [Break] significant with a p-value of 0.0007 in favor of imlifidase. Turning to safety. The tolerability of imlifidase was good. It was a low instance of infusion reactions and no infusions were interrupted due to infusion reactions. Infections observed in imlifidase-treated patients were typically not related to treatment. And the AE and serious adverse event profile of imlifidase reflected a population of patients undergoing kidney transplantation, and most serious adverse events were considered unrelated to imlifidase treatment. So in conclusion, with respect to the outcomes of the ConfIdeS study, the treatment arms were well balanced at baseline, and the demographic characteristics reflected a highly sensitized dialysis-dependent population waitlisted for transplantation. Retention in the study was excellent. Just over 90% of patients completed the study. The primary endpoint was statistically significant and showed a clinically relevant difference, where at 12 months, mean eGFR was 51.5 ml per minute in the imlifidase arm versus 19.3 ml per minute in the control arm. The tolerability of imlifidase was good and the safety profile was consistent with previous clinical trial experience, reflecting a population of patients undergoing kidney transplantation. Next slide. I want to turn now to our Phase 3 clinical trial in patients with anti-Glomerular Basement Membrane disease, also known as Goodpasture syndrome or Goodpasture disease. Hereafter, I'll call the condition anti-GBM. We have previously conducted an investigator-sponsored single-arm Phase 2a clinical trial in Europe in which a single dose of 0.25 milligrams per kilogram of imlifidase was given to 15 adults with circulating anti-GBM antibodies and an eGFR less than 15 ml per minute. All patients received standard of care treatment with cyclophosphamide and corticosteroids, but plasma exchange was only administered if anti-GBM autoantibodies rebounded. The primary outcomes in this study were safety and dialysis independency at 6 months. The study population comprised 9 men and 6 women with a median age of 61 years who were enrolled at sites in 5 countries in Europe. At the time of enrollment, 10 patients needed dialysis with 5 of these patients being anuric or oliguric. The remaining 5 patients had eGFR levels between 7 and 14 mls per minute at the time of enrollment. At 6 months, 67% of patients were dialysis independent, which is significantly higher when compared with an outcome of 18% at the corresponding endpoint in a historical control cohort. So based on the outcomes of this previously conducted Phase 2a study, we have now conducted a randomized open-label Phase 3 trial in 50 patients with anti-GBM in the U.S., U.K. and Europe, in which the primary endpoint is eGFR at 6 months, and the key secondary endpoint is the proportion of patients with functioning kidneys at 6 months. Patients randomized to the imlifidase arm received this treatment on top of standard of care, which is compared to a control arm of Standard of Care alone. In this study, Standard of Care comprises a combination of immunosuppressives, glucocorticoids and plasma exchange. We expect top line data from this study by the end of this quarter. So I'd now like to hand over to our Chief Financial Officer, Evan Ballantyne. C. Ballantyne: Thank you very much, Richard. Let's walk through the company's financial performance for Q3 and the year-to-date 2025 results. Next slide. Total revenue for Q3 2025 was SEK 31 million and was SEK 17.9 million or 37% below the same period a year ago of SEK 48.7 million. Contract revenues from Sarepta, which have been fully recognized, totaled approximately SEK 8 million in 2024 and accounted for a portion of this difference. IDEFIRIX product sales for Q3 2025 were SEK 30.1 million, which is 24% below Q3 2024 of SEK 39.8 million. Year-to-date, Q3 2025 product sales totaled SEK 143.6 million reflecting a 25% increase compared to the same period a year ago of SEK 114.5 million. As Maria mentioned, sales were negatively impacted in Germany by regional dynamics and in Spain by the lack of transplant protocols. Quarterly volatility reflects the unpredictability of the organ allocation market in Europe. We expect quarterly fluctuations to diminish over time once the post-approval efficacy study is completed and Hansa expands its market footprint. Next slide, Slide 21. For Q3 2025, SG&A expenses totaled approximately SEK 88.4 million, which is SEK 12.6 million or SEK 16.6 million unfavorable compared to Q3 2024. R&D expenses in Q3 2025 totaled approximately SEK 7.2 million and were SEK 9.4 million or 11.8% favorable compared to Q3 2025, '24. The Q3 2025 quarter-over-quarter changes in financial income and expense net compared to the same period a year ago were immaterial. Year-to-date, changes in financial income expense compared to the same period a year ago were primarily driven by favorable changes in the U.S. dollar exchange rate against the Swedish krona of SEK 141.6 million, noncash interest expense related to the NovaQuest note and a SEK 59.4 million charge taken by the company to reflect the NovaQuest loan restructuring modification. The company's Q3 2025 operating loss was approximately SEK 147.6 million and was SEK 30.7 million or 20.8% unfavorable compared to Q3 2024 of SEK 116.9 million. The year-to-date Q3 2025 operating loss of SEK 395.8 million was 17% favorable compared to the same period a year ago. On a year-to-date basis, Hansa's cost of sales was approximately SEK 10 million favorable compared to the same period a year ago. The company's gross margin for the 9 months ended September 30, 2025, was 60% compared to 50% for the same period in 2024. Slide 22, please. On a year-to-date basis, cash used in operations at Q3 2025 totaled approximately SEK 353.3 million, an improvement of SEK 173.8 million compared to the same period a year ago. For the period ended September 30, 2025, cash and cash equivalents totaled SEK 252.1 million. However, on a pro forma basis, cash and cash equivalents, including net proceeds from the October 1 capital raise amounted to SEK 888 million. Headcount at Q3 2025 totaled 133 employees. On a pro forma basis, headcount is 116, including 17 FTEs currently serving notice periods related to the Q2 restructuring actions. And now I'd like to turn the presentation back to Renee for closing remarks and Q&A. Renee Aguiar-Lucander: Thank you, Evan. Please turn the page. So, in summary, the business is in significantly better shape than it was 6 months ago with a strong balance sheet, clear organizational structure and focus, excellent Phase 3 data from ConfideS supporting a BLA filing with the FDA and an exceptionally strong and experienced senior team. Everybody on the team that you see on this slide has done this before. And that, in my view, is crucial for any successful execution in a complex environment. The European commercial business was continuing to show healthy growth on an annual basis, will fluctuate quarterly. However, based on the recent Phase 3 clinical data and the readout of the PAES study in combination with some key areas of investment improvement, we strongly believe that 2026 will provide improved visibility, performance and start to reflect the innate potential of the European opportunity. Finally, I just want to remind you all that we will host a KOL event on the 12th of November with 2 highly distinguished U.S. transplant surgeons, namely Professor Montgomery and Professor Cooper, who will share their view of the top line data of the Phase 3 and provide insights into clinical practice and the medical needs of highly sensitized patients in the U.S. That concludes the presentation, and we can open up for questions. Operator: [Operator Instructions] The first question comes from Farzin Haque with Jefferies. Farzin Haque: So what are your expectations for the U.S. FDA review process? You noted that you will request priority review, but do you expect an AdCom? I mean the data is pretty robust, but are there specific areas where FDA may be more focused on? Renee Aguiar-Lucander: So, we are not expecting an AdCom, but we are expecting to ask for priority review. The issues, obviously, with the FDA at this point in time are a little bit inscrutable, more than usual because obviously, as we know, there is a government shutdown in the U.S. And so it is unclear, obviously, when the FDA will reopen and what the backlog at that point in time will look like. However, I completely agree with you with all of the kind of strong data, the unmet medical need, the fact that it's an orphan indication, we have Fast Track designation. I believe that I had high hopes of the fact that we should get priority review. However, with the existing situation in the FDA, there's obviously nothing that we can see as a guarantee. So, we obviously also have to assume that there is a chance for us to get standard review. Farzin Haque: Got it. And quickly, where are you at with the CMC aspects for the U.S. launch? Renee Aguiar-Lucander: I'm sorry, can you repeat that? Farzin Haque: For the CMC aspects for the U.S. launch? the status of that. Renee Aguiar-Lucander: Yes. So, there's not going to be any change in terms of our CMC setup or manufacturing setup for the U.S. launch compared to the European commercial production. So from a manufacturing perspective, we're going to stay with the same providers. And those providers are at the moment, both located in Europe. We do not have a U.S.-based manufacturing site at this point, but we are as confident as we can be with regards to being able to kind of get through kind of also on the CMC and manufacturing side. But I'm sure there will be review issues. There always are review issues with regards to CMC, but we feel reasonably confident with where we are. Operator: The next question comes from Sushila Hernandez with Van Lanschot Kempen. Sushila Hernandez: So on the challenging situation in Germany, do you foresee that this could have an impact on the rest of Europe? Are other countries revising their prioritized kidney allocation system? And do you already have visibility on when the situation in Spain could be improving? Renee Aguiar-Lucander: Maria, do you want to take this? Monika Tornsen: Yes, happy to take the question. So, when it comes to Germany, this is a very local issue in Germany. The highly sensitized program that we're talking about was implemented a few years ago across the Eurotransplant zone. Germany have recently looked at that program and really sort of asked the question, is this providing health equity for all patients independent of their CPRA score. So, it's more of a health equity sort of moral ethical question in the German health care system. There is no whatsoever spillover to the Eurotransplant zone or to other countries at all. So, it's very specific to Germany. And as I mentioned, we have, I would say, strong support from the key opinion leaders who are looking at revising guidelines to enable transplants for these patients through the typical ETKAS program. And we're also initiating some public affairs initiatives to really see what we can do from a corporate perspective in terms of raising the unmet need for these highly sensitized patients and see if there's anything we can do to impact so that this program gets implemented again. And I think your second question relates to Spain. And I think what is worth noting for Spain is that Spain is compromised of many regions. And in these regions, you have various numbers of hospitals. And the challenge in Spain relates to regional reimbursement in Catalonia, where the health care budget as a whole is, I guess, stuck at the regional level. So it's not unique to Imlifidase at all. But obviously, it impacts the hospital's ability to get paid. So, we need to have sort of some funds released from that regional budget. So that's the Catalonia situation. Andalusia is somewhat different because they have a local allocation system for organs. So, you need some guidelines to be implemented in that region to enable the reimbursement and enable the physicians to order Imlifidase for their patients. I would say that in Spain, we have also very strong support from the key opinion leaders. So that is worth noting. So, these are sort of structural policy issues that we're dealing with in Spain. Sushila Hernandez: Okay. And then just one more question, if I may. What kind of top line data will you be releasing from the NT-GBM study later this quarter? Richard Philipson: Yes, sure. So, as I think I mentioned in the presentation, the primary endpoint is eGFR at 6 months. and we'll be looking at dialysis dependency. And then beyond that, there's a whole range of secondary endpoints relating to outcomes relating to anti-GBM antibody levels, eGFR at other time points, et cetera. And then, of course, there is, there will be safety. But I imagine what we will talk about when we release results at the end of the year will really be focused on the primary outcome, the key secondary outcome and comments on safety. Operator: The next question comes from Richard Ramirez with Fidelity. Please go ahead. [Audio Gap] Richard Ramirez: Yes. So, I think they said the wrong name. My name is Richard Ramis, and I'm calling from Redeye. Never mind. I have a few questions. Let's start with a financial one. Could you specify what cost of revenues made up if there are any fixed parts? And also what you would expect for a long-term gross margin? Renee Aguiar-Lucander: Evan? C. Ballantyne: Yes. So cost of revenues at the current time are obviously made up of drug substance, drug product and finished product. However, currently, we have manufacturing agreements that require us to manufacture more product than we actually sell. As we bring additional markets online and as the U.S. comes online, we expect our gross margin to increase because we won't have to write off unused or excess product into cost of goods sold. So I think gross margins will improve significantly. Richard Ramirez: Yes, that's what I expected. And I have a market question on European sales. Could you discuss a bit which countries in Europe have generated most of your revenue thus far? And where do you see growth in 2026? Renee Aguiar-Lucander: Maria? Monika Tornsen: Sure. So we don't specify our sales per country. But what I can say is we noted that our Q3 performance was impacted by Germany. We had 0 sales in Germany, and this is related to this highly sensitized program being paused, as I mentioned. When it comes to growth potential, I mean, we have looked for the last several months at the business, and we see significant growth potential. I mean there's been a lot of work done in Europe in terms of getting guidelines in place, getting reimbursement at national level, working on the regional reimbursement, getting physicians and their teams ready to use imlifidase. And we have many centers that have significant experience and very positive experience. So, we think that all of these things have set us up for future growth in Europe. And when it comes to where that will come from, I mean, it is a typical market. I mean the big 5 markets bring the majority of sales that's where you have the most patients and the most transplant centers. So, I hope that answers your questions. But I think in general, we're very optimistic about the potential in Europe despite sort of these structural barriers that we are dealing with currently. Richard Ramirez: Yes, sure. Then I wanted to ask you about the, any potential future clinical studies with imlifidase in the U.S. after the U.S. approval. And also if there are any, rather what are the further studies you need to do in gene therapy before you can start selling the product? Renee Aguiar-Lucander: So in terms of imlifidase clinical trials, I don't think that we have any kind of real plans for additional clinical trials with imlifidase in the U.S. market. So obviously, that will then hopefully obviously be an approved product and commercially available. In terms of additional or other kind of clinical trials, that is something that we would potentially undertake with our second enzyme. And that is with regards to any kind of thoughts with regards to clinical trial development with 5487, that is something that we've done a fair amount of work on internally and externally to arrive at an answer, and we should be in a position to announce that later this quarter. But at this point in time, there's still some pieces missing in order for me to kind of announce that on this call. And with that, maybe if you go back in the queue, and we can allow someone else also to ask some questions. Thank you. Richard Ramirez: Yeah sure. Thanks. Operator: [Operator Instructions] The next question comes from Matt Phipps with William Blair. Please go ahead. Matthew Phipps: This is Madeline on for Matt Phipps. Do you have any updated thoughts on the next steps for development in GBS, potentially any details on study design for a potential Phase 3 study? Thanks for taking the question. Renee Aguiar-Lucander: Yes, I think that's kind of all part of the review that we have been conducting over the last several months. I include that in the kind of overall pipeline assessment that we've been doing both externally and internally. And so we will comment on that as well in the next couple of weeks or so, hopefully, when we have these kind of last bits and pieces in place. So it's a very timely question, unfortunately. It will be a little bit longer until I can be addressing that as well. Matthew Phipps: Thanks Operator: We have a follow-up from Richard Ramirez. Please go ahead. Richard Ramirez: I also wanted to ask about the antibody-mediated rejection - AMR indication. What are your plans there? Renee Aguiar-Lucander: I think at this point in time, we don't have any further plans for AMR. I think that, again, this is something that we're going to have to, we can discuss or kind of take into account potentially when the product is commercially available. There may obviously be investigator-led interest in terms of studying this in a variety of different indications, but we will probably deal with that within the context of the medical affairs and the investigator-led request that we might get once the product is on the market. So that is probably how we're going to be dealing with any kind of related or other kind of transplant-related potential kind of unmet medical needs that relates to imlifidase use. Richard Ramirez: Thanks. That's all from me. Renee Aguiar-Lucander: Great. Thank you. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Renee Aguiar-Lucander for any closing remarks. Renee Aguiar-Lucander: Thank you for listening to this quarterly report. We hope that you will join our KOL event on the 12th of November or catch us at some of the upcoming November investor conferences in either New York, London or Stockholm. I look forward to speaking to you again to review our Q4 and full year results. Thank you. [Audio Gap] Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation Third Quarter 2025 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to the Director of Corporate Development and Investor Relations at Methanex, Ms. Jessica Wood-Rupp. Please go ahead, Ms. Wood-Rupp. Jessica Wood-Rupp: Good morning, everyone. Welcome to our third quarter 2025 results conference call. Our 2025 third quarter earnings release, management's discussion and analysis, and financial statements can be accessed from the Financial Reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward-looking information. Please refer to our third quarter 2025 MD&A and to our 2024 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, our 50% interest in the Natgasoline facility, and our 60% interest in Waterfront Shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's President and CEO, Mr. Rich Sumner, for his comments and a question-and-answer period. Rich Sumner: Good morning, everyone. We appreciate you joining us today to discuss our third quarter 2025 results. Our third quarter average realized price of $345 per tonne and produced methanol sales of approximately 1.9 million tonnes generated adjusted EBITDA of $191 million and adjusted net income of $0.06 per share. Adjusted EBITDA was higher compared to the second quarter of 2025, primarily due to higher sales of produced products, offset by our lower average realized price. I'll start by providing an update on our newly acquired assets and integration activities. During the third quarter, both the fully owned Beaumont plants as well as the 50% owned Natgasoline plant operated at high rates, produced a combined 482,000 tonnes of methanol and 92,000 tonnes of ammonia. We have a structured 18-month integration plan across all functions of the business to ensure we fully realize the expected benefits of this highly strategic transaction. We've begun executing on our integration plan and working with our new team members at these manufacturing sites on asset and safety reviews. On the supply chain side, we've integrated the new logistics operations into our business to ensure we meet customer needs while focused on planned synergies. Given normal inventory flows, the high rates of third quarter production from these new assets will not fully flow through earnings until the fourth quarter of 2025. Now turning to methanol market conditions. Global methanol demand was relatively flat in the third quarter compared to the second quarter across all downstream derivatives. Demand for methanol-to-olefins in China operated at high rates, consistent with the second quarter and increased to approximately 90% by the end of the quarter, supported by an increasing amount of import supply availability from Iran, which we estimate operated at close to 70% rates through the quarter. This increased supply from Iran, along with relatively high operating rates across the industry, led to an inventory build, particularly in coastal markets in China. Looking ahead to the third quarter, we estimate the methanol affordability into MTO and the marginal cost of production in China to be approximately $260 to $280 per tonne. We continue to see spot and realized methanol prices in all other major regions at premiums to these pricing levels. We posted our fourth quarter European quarterly price at EUR 535 per tonne, representing a EUR 5 increase from the third quarter. Our North America, Asia Pacific, and China prices for November were posted at $802, $360, and $340 per tonne, respectively. We estimate that based on these posted prices, our October and November average realized price range is between $335 and $345 per tonne. Now turning to our operations. Methanex production in the third quarter was higher compared to the second quarter with the full contribution from the new assets and higher production from Geismar, Medicine Hat, and New Zealand, which all experienced planned or unplanned outages in the second quarter. In Geismar, production was higher in the third quarter after the site experienced unplanned outages late in the second quarter. All plants returned to production in early July. As previously noted, both the Beaumont and the Natgasoline facilities operated at high rates during the third quarter. In Chile, we operated the Chile I plant at full capacity throughout the quarter, marking the first time we've had one plant operating at full capacity throughout the Southern Hemisphere winter months for more than 10 years. During the quarter, the Chile IV plant successfully completed a planned turnaround and restarted at the beginning of October. We expect both plants to operate at full rates through to April 2026. In New Zealand, we had higher production in the third quarter as the plant restarted in early July after a temporary idling of the operations to redirect contracted natural gas to the New Zealand electricity market. Gas supply availability in New Zealand continues to be challenged, and we're working with our gas suppliers and the government to sustain our operations in the country. In Egypt, we operated at approximately 80% of capacity during the third quarter as gas availability during peak summer demand remains constrained. There has been stabilization of gas balances in the country, but some continued limitations on supply to industrial plants are expected going forward, particularly during the summer months. The plant is currently operating at full rates. Our expected production -- equity production guidance for 2025 is approximately 8 million tonnes, which is made up of 7.8 million equity tonnes of methanol and 0.2 million tonnes of ammonia. Actual production may vary by quarter based on timing of turnarounds, gas availability, unplanned outages, and unanticipated events. Now turning to our current financial position and outlook. In late June, we closed the OCI acquisition, consistent with our financing strategy, using proceeds from the bond issued in 2024 and borrowing $550 million under the Term Loan A facility. During the third quarter, we repaid $125 million of the Term Loan A facility with our cash flow from operations and ended the third quarter in a strong cash position with $413 million on the balance sheet. Our priorities for the rest of 2025 are to safely and reliably operate our business and continue to execute on our integration plan. Our capital allocation priority is to direct all free cash flow to deleveraging in the near term through the repayment of the Term Loan A facility. We do not anticipate significant growth capital over the next few years and remain focused on maintaining a strong balance sheet and ensuring we have financial flexibility. Based on our fourth quarter European posted price, along with our October and November posted prices in North America, China, and Asia Pacific, our October and November average realized price is forecasted to be between $335 and $345 per tonne. Based on a slightly lower forecasted average realized price coupled with produced sales levels much closer to our run rate equity production, including the newly acquired assets, we expect meaningfully higher adjusted EBITDA in the fourth quarter of 2025 compared to the third quarter. We'd now be happy to answer your questions. Operator: [Operator Instructions] Our first question comes from the line of Ben Isaacson with Scotiabank. Ben Isaacson: Rich, can we talk about Trinidad? You saw Nutrien closure, and I'm not asking you to comment on their issue, but I believe you're next door. And so my questions are, what's your relationship with the NEC? Are they asking you for retroactive port fees or is that a risk? And then if Nutrien is down, which it is, does that mean more gas allocated to you? Rich Sumner: Thanks, Ben. Yes, we have a contract with the NEC for port fees or port arrangements, that's not -- we're not in a similar situation there. As it relates to gas and gas availability, we're in a similar situation as we've been talking about in Trinidad, which is gas markets are tight. A lot of the downstream contracts come up at the end of -- most of them come up at the end of this year. Ours runs until September 2026. So we're in discussions with the NGC about gas. When we look at the gas outlook, we think that in the near term anyways that tightness remains. There are activities happening in Trinidad that over the next few years could mean some slight uptick on supply there. But we don't see a meaningful change to the situation we're in, which is a one plant operation. And right now, we're operating one plant at full gas supply. So even if there were more gas available today, certainly, we wouldn't expect that a restart of Atlas or anything like that would make sense. There just isn't enough gas to go around today for all the downstream. So our situation will be focused on the next round of discussions for the current gas supply. We don't have a turnaround for Titan for some time. So that's our main focus and we're in discussions with the NGC. Ben Isaacson: And if I can just do a quick follow-up. Rich, you talked about kind of recontracting some of the OCI book. Can you just talk about that? What was the existing OCI book like and why does there need to be some recontracting now? Rich Sumner: Yes. I think one thing to note is we did increase our sales. So you would have seen from Q2 to Q3, we increased sales by about 350,000 tonnes, which is about 1.4 million tonnes on an annualized basis. The assets are running extremely well. And so when you've got the production there, there could be some recontracting that we need to do for next year, certainly, we're in those discussions. In the near term, we'll take that into our supply chain. We'll actually flex as much as we can within our existing sales contracts. So we have flexibility to increase sales there. And then we'll be working if we had to do short-term contracts to the end of the year, we don't see that being significant. What you should expect though is in the fourth quarter, we will have higher sales than we did in the third quarter. And you should expect next year, the quarterly average sales to be higher than they were in the third quarter as well as we recontract for next year. Operator: Our next question comes from the line of Joel Jackson with BMO Capital Markets. Joel Jackson: I'm going to ask 2, but I'll do one by one. Can you maybe give us an idea, could you quantify like if -- I mean, accounting you're able to -- if you do the Q4 accounting in Q3, what would have been the EBITDA like boost in Q3? Basically, how much is earnings hit by the accounting treatment the first month-and-a-half of Beaumont? Rich Sumner: I think -- thanks, Joel. I think the way to think about it is that we had 1.9 million tonnes of equity production coming through sales. When we look at our production in the third quarter as well as into the fourth quarter, we now are at a point where we've got the asset base with the newly acquired assets closer to what we would say is our run rate with our new strengthened asset portfolio, which we think is really something that is going to -- we're working on is consistently demonstrating this performance. So when we think what is that run rate number, if we gave, when we introduced the OCI transaction, is about $9.5 million, a little bit more than that per annum of equity tonnes, including ammonia. So what should be coming through is about 2.4 million to 2.5 million tonnes. That's a delta of 500,000 to 600,000 tonnes versus Q3. So that's where the main earnings difference is coming from, which is a meaningful -- that's a meaningful increase in EBITDA. And that's what we're expecting when we get into the fourth quarter is that sales of produced product is going to look more like our equity run rate. So that's why we're kind of guiding to a meaningful uplift as we move into the fourth quarter. We're not at $350 per tonne, but we're close. So it should be setting up to be a strong quarter. Joel Jackson: Second question, just first, there were some news this week that maybe Natgas, the plant lost some gas or it was down. Tackle that for a second. And then I know you talked about before about turnarounds, maybe being able to do turnarounds maybe a year later than usual, looking at some of the [indiscernible] you have. Can you speak about that? And then I imagine Beaumont, Natgas, G3 wouldn't have to have turnarounds anytime soon. Also [indiscernible] Beaumont and Natgas probably wouldn't? Rich Sumner: Yes. First on the Natgas point. I think there may be some interpretation from gas monitoring around the operations in Natgasoline. We don't really comment on kind of daily gas reports where I think where this has been picked up. Nothing should be read into that, that there's any significant issues happening at Natgasoline based on any of that information. So probably I'll end it there on that one. But on the turnarounds, we have guided to about $150 million in CapEx per year, and that's 2 to 3 turnarounds a year. I think that's good guidance. We're always looking at ways that we can optimize around maintenance without sacrificing safety and reliability. And that's something that our team is consistently looking at. Within the $150 million, there's a good -- there's a meaningful amount of capital for the new assets, that's something we're looking at closer. But we're going to -- we would stick with the guidance of around $150 million on average and something we're always looking to further optimize. Operator: Our next question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: You ran Beaumont and Natgasoline at high rates, you expect to run them at high rates. Where is the methanol going? Are these going to North American customers or offshore customers? And if they're going to offshore customers, what kinds of customers are they? What products are they making? Rich Sumner: Yes. I mean when we -- so when we introduced the OCI acquisition, what we had said was a large percentage of the contracted business we would expect would be in North America and Europe, and that's largely where we're selling the product. Obviously, the assets are running really well. And so there's some small uncontracted tonnes, which then we will increase the flexibility in our existing assets, our existing customer base as well as having to place some of those tonnes. That's a short-term basis. What our commercial -- global commercial team is working on now is looking at 2026 recontracting. And I think you can -- we give guidance about what our regional allocations look like on a percentage basis, and we would say those are the regional allocations to think about our global portfolio for next year. In terms of which applications we sell into, we sell into -- we have diversified set of customers. So you can think of our sales portfolio as almost a representation of the breakdown of global methanol markets. And that's pretty much what it will look like next year, a well-diversified sales portfolio into different derivatives with a similar global allocation that we guide to in our investor deck. Jeffrey Zekauskas: Just maybe if I could try it one more time. Global methanol demand isn't really growing very much, if it's growing at all, and you've got extra production. So whose tonnes are you squeezing out? Rich Sumner: Well, these tonnes were existent before we had them. So we're not squeezing out any tonnes. There is some incremental production over what we might have modeled. So we're talking about 200,000 tonnes in a 100 million tonne market, which isn't meaningful. So we're not worried about placing those tonnes. And methanol markets year-over-year, we would say, are growing -- it's growing about 2% to 3%. 2% to 3% is really being driven by China and Asia, where it represents 70% to 80% of global methanol demand. That's on the back of export manufacturing and strength in those markets as well as energy derivatives mainly in China. So the market is not growing at strong rates. The Atlantic and other markets generally flat. But we don't think that the market is in retreat and supply continues to be constrained, right? So we have a constrained methanol market with -- when we look at gas being either in mature gas basins or gas being redirected into LNG. Existing supply continues to be tight. So we're not concerned about having higher operating rates. Quite frankly, it's the opposite. We've got our assets in low-cost basins and it's highly profitable to have this production in our system. Operator: Your next question comes from the line of Nelson Ng with RBC Capital Markets. Nelson Ng: First question just relates to capital allocation. I think, Rich, you talked about paying down the Term Loan A gradually. So from your perspective, would the balance sheet be in the right place after you fully repay the Term Loan A and obviously have a reasonable cash buffer on -- in place in your balance sheet? Would that be -- would you be done deleveraging at that point? Rich Sumner: No, we won't be done deleveraging. But we do think the focus doesn't need to be entirely to deleveraging. We are -- our main focus in the near term is paying down the initial tranche, like you said. And if you look at the Term Loan A facility balance that we have, also consider that we've got excess cash on hand. We think we've got about $350 million left to go there, which is our primary focus. And really, our primary focus is we continuing to deliver what we're doing right now and what we've done through the third quarter and really focusing on conversion to cash for shareholders. Beyond the $350 million, we -- our debt target gets us back to our 3x debt to EBITDA. Our target has always been 2.5x to 3x, and we've got a debt tranche coming due -- a bond coming due in '27, which we wouldn't want to fully refinance. Having said that, we believe we've got a really strong asset base with competitively -- stronger, more competitive asset base. And so the strength of the free cash flows is there that we can continue to deleverage and focus on the balance sheet. We don't have a significant growth capital, and there could be some room there as well for shareholder returns. But that's what we want to -- first, we want to get there and the focus on that is the $350 million that's in front of us. And it's really -- that's the primary focus today. Nelson Ng: My next question is just in terms of, you talked about how you've started on the 18-month integration strategy. And obviously, it's still early days. But do you -- in terms of the -- I think it's roughly $30 million of anticipated synergies that you expect to realize. Can you give a bit more color in terms of where most of those benefits will come from? Rich Sumner: Yes. So the $30 million is primarily IT-related, insurance related, logistics, which means terminals and other optimization around logistics. So it's -- those are relatively hard synergies, and we plan to be realizing those on an 18 -- it's more like almost a year period now, but 18 month -- 12- to 18-month period. Some of those are easier to get at in the near term than others. IT will take a little longer. The other elements of the deal, I think, is that we're really focused on is getting above deal value results. And when we look at that, we focus on the assets. We model these assets at a certain operating rate as well as annual capital and maintenance capital. And I think today, we're achieving above those results. So our goal is to replicate that. And obviously, we're still early, and we're really focused on working with the teams, understanding the assets, how they operate the safe and reliable assets and be able to deliver and replicate this going forward. So that's the primary focus. Operator: Your next question comes from the line of Josh Spector with UBS. James Cannon: This is James Cannon on for Josh. I wanted to ask on New Zealand because I think last quarter, you guided to about 400 kt out of that unit this year. It seems you're tracking decently above that, but you held the overall guide relatively stable. Is there anywhere else in the portfolio you're seeing maybe weaker-than-expected results? Rich Sumner: Yes. I mean, I guess I'll kind of caution around New Zealand. Right now, we've got the asset running at 60% to 70% rates through the third quarter on the one Motunui plant. That gas balance is, we're really tight on gas. The country is tight on gas and our gas allocation is allowing us to operate at minimum operating rates today. So it's still something we're really focused on. The 400,000 tonne sort of assumes that for part of the year, we would be shut in. But at the end of the day, we're really focused on how we maintain that 400,000 tonne based on gas supply today. So we're working closely with gas suppliers. When you look at the other assets in the portfolio, everything is pretty much on the guidance. Egypt today, we're at full rates. We've come off the summer where we were at 80%, which is actually a very good result relative to the -- a lot of the -- that's usually where the demands on the grid are the highest. So today, Egypt is probably above. We've got 2 plants operating in Chile. So that run rate assumes the average for the year. So we're a bit above there. And then the other assets, we're pretty close. So things are going well right now. I think we need to think about that backdrop against how our newly acquired assets are running. And it sets up really well for us to demonstrate the strong free cash flow generation that we expect from the investments we've made, have P3 fully operating and really, I would say, the strength of the portfolio enhancement we've made with these assets. So that's our focus right now is continue to replicate that and focus on free cash flow conversion for shareholders. Operator: [Operator Instructions] And your next question comes from the line of Laurence Alexander with Jefferies. Laurence Alexander: So can you give a sense for what's going on in terms of the global industry utilization rate and what you're seeing in terms of demand, in particular in Asia for DME and MTO applications? And then secondly, can you speak to how the IMO decision to defer the flex fuel mandate might affect the cadence of demand for methanol over the next couple of years? Rich Sumner: Thanks, Laurence. Yes, from industry operating rates, Q2 and Q3 period tend to be the highest. And I would say across the industry, we've operated high. And what do I mean by that is if you look -- these are round numbers, but the Atlantic is operating at 80% operating rates. The Pacific, ex-China, is operating at 75% rates, and China is operating at 70% rates. Those may not seem high. But if you back out capacity that's permanently idled or gas feedstock that has been redirected or issues around, geopolitical issues that's constraining supply, the effective utilization is much higher than that. So we would say that we're at very high operating rates and there's not a lot of latent capacity, especially when Iran is operating at 70% rates, which is seasonally high there. So notwithstanding that, we did see some build during the quarter in coastal markets in China. But as that built up, we've now seen MTO operating rates moving up above 90% and that meant that inventories are now moderating in the coastal markets in China. So I think everything there tells us that even when everything is working, the market actually is relatively in balance. And then when we move into the Q4, Q1 period, supply gets restricted. And there actually isn't enough supply to meet all demand today, which is -- we would say this is a constructive market from that perspective. When you ask about MTO and DME demand, DME has been -- that demand is relatively flat. There's no -- it does go up or down a bit between 3.5 million and 4 million tonnes based on operating rates, but it's not really a move around the demand side. MTO moves up or down based on availability in the market as well as affordability there. And we've seen MTO continuing to operate now at high rates as we move into the fourth quarter. We would expect that might come under pressure as Iran gets restricted and there's less import supply availability. So hopefully, that answers the first question. On the IMO, we -- first, on the marine side, that is the big upside for methanol and a new application. Obviously, 400 ships should be in the water between -- dual fuel vessels between now and the end of the decade, represents a big demand potential. The IMO, obviously, we were watching closely what the IMO would do around the adoption of the net zero framework. Really what that would have done if it were adopted and some of the guidelines that they were proposing were adopted, it would have enhanced the competitiveness of low-carbon methanol as a fuel to meet those regulations. So the deferral by -- it has been deferred by 1 year. It came up against meaningful political opposition. We think that 1 year deferral allows the IMO to line out their guidelines and spell those out more, which was a big pushback during the meeting, but the opposition is a big hurdle. So that's something we're going to closely watch. The marine industry continues to support the net zero framework. There's been a lot of invested capital by shipping companies on investing incremental capital on dual fuel ships to meet low carbon regulations in the future. So something we're going to continue to watch. Our Low Carbon Solutions team will be working really closely with the marine sector on how that goes forward. Operator: Our final question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: How have you fared in buying gas forward for your new assets that you've acquired? And that gas prices have been pretty low from the time you bought it, but they've moved up. Are you hedged yet or do you have more to go? Or where do you stand? Rich Sumner: Thanks for the question. The gas situation, when we acquired the assets, the OCI assets came to us largely unhedged. We already had our North American exposure. At least in the near term, we were hedged at around a 70% level on our existing book of assets. Where that puts us today is, I'll start, in the near term, we have hedged a little bit up. So we're closer to the 70% level to the end of the year across our total North American exposure. Into '26 and '27, the number gets closer to 50% to 60% hedged. We opportunistically enter the market if there's attractive pricing. Today, we wouldn't be looking to hedge at today's price. We will be seeking if the pricing drops below $3.50 as an example, we'll look to put in more. Today, we're comfortable with that open exposure and we'll opportunistically enter the market to layer more in when the pricing allows for that. Interestingly, the near end of the curve isn't priced that way, but the longer end of the curve actually is priced lower, and we did some contracts below $3.50 on a nominal basis out beyond 2030 recently, not big contracts, but -- so we're always looking to seek competitively priced gas for us that's really favorable for our North American exposure. Jeffrey Zekauskas: So in terms of hedging near term, it might be that you wait until the spring before you really try to lift your purchases again. Is that a base case? Rich Sumner: I mean it will be market determined. Of course, if we see the forward curve drop off for any reason and it's attractive, then we'll enter the market. I understand what you mean. Typically, we'll see some softening when inventories start to build so much as the gas market trades off of how inventories are trading. But we'll wait and see. And obviously, we've got a team that's reviewing these things daily and managing our exposure for us. Operator: And with no further questions in the queue, I will now turn the call over to Mr. Rich Sumner. Rich Sumner: Okay. Thanks again for joining the call this morning and for your questions and interest in our company. We hope you'll join us on November 13th for our Investor Day presentations and Q&A. Operator: Thank you for your questions. And this concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to Essex Property Trust Third Quarter 2025 Earnings Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Ms. Kleiman, you may begin. Angela Kleiman: Welcome to Essex's third quarter earnings call. Barb Pak will follow with prepared remarks and Rylan Burns is here for Q&A. We are pleased to report solid results for the third quarter, highlighted by a $0.03 FFO performance and an increase to our Core FFO full year guidance. Today, I will cover key takeaways from the quarter, a high-level outlook for 2026 and provide an update on the transaction market. Starting with operations. Our portfolio performed well amid a backdrop of muted job growth across the U.S. and heightened policy uncertainty. Year-to-date, through the third quarter, we generated a blended lease rate growth of 3% on all leases and 2.7% on like-term leases. This is a proven example of the competitive advantage of our low supply markets. As expected, Northern California is our best-performing region and the fundamental backdrop remains favorable with forward-looking supply continuing to decline comparable to a level in the years following the great financial crisis. Within the Bay Area, San Francisco and Santa Clara counties are generating the highest rent growth year-to-date, reflecting attractive rent to income ratios, demand benefiting from AI-related start-ups and above historical average migration trends. Our Seattle region remains healthy, but is trending at the low-end of our full year expectations, driven by a combination of challenging year-over-year comparison, soft demand and pockets of supply temporarily limiting pricing power in certain submarkets. Finally, on Southern California. This region is generally performing in line with our expectations. As we have discussed Los Angeles has lagged primarily attributed to delinquency recovery, muted job conditions similar to the U.S. and pockets of supply on the West Side and Downtown L.A. With supply expected to drop in 2026, the infrastructure spending earmarked for Los Angeles and market occupancy improving, we see a path to pricing power. Given the soft economic environment and policy uncertainty, we are not surprised the hiring and investment decisions have been delayed across the U.S. But we are pleased to see the West Coast once again outperforming the U.S. average, a trend we anticipate continuing. Looking to 2026, our portfolio is well positioned relative to other U.S. markets, supported by lower levels of housing supply, attractive affordability and demand catalysts from the technology sector. Directionally, we assume Northern California to continue outperforming and to rank among the top U.S. markets as job growth in Northern California gradually gains momentum, which is supported by announcements of significant office expansions. Next in the ranking would be the Seattle region. With total housing supply deliveries declining by almost 40% next year, we are optimistic about the market's outlook. For Southern California, we expect stable economic conditions with Los Angeles fundamentals to improve. Moving on to early building blocks. We forecast our blended lease rates for the second half of the year to land at a similar level to last year. As such, we anticipate another year of stable growth with 2026 earn-in between 80 to 100 basis points. Lastly, on our investment activity in the transaction market. Page S-16.1 of the supplemental demonstrates the value created from our capital allocation strategy since 2024. We have focused our investments in the highest growth submarkets in Northern California, acquiring almost $1 billion of assets in this region while achieving accretion relative to dispositions and improving overall age of the portfolio. As for the transaction in that market, year-to-date volume on the West Coast is slightly above 2024, but remain below average historical levels. We continue to see a competitive bidding environment for high-quality properties in our markets, and cap rates are generally in the mid-4% range, with most of the Bay Area transactions in the low 4%. Although cap rates have compressed in Northern California, we will continue to enhance value from our operating platform and drive FFO and NAV per share growth for our shareholders. With that, I'll turn the call over to Barb. Barb Pak: Thanks, Angela. I'll begin with a recap of our third quarter results, followed by comments on investments and the balance sheet. Beginning with our third quarter results. We achieved a solid quarter with Core FFO per share exceeding the midpoint of our guidance range by $0.03, attributed to lower G&A and interest expense. As a result of the third quarter beat, we are pleased to raise the midpoint for Core FFO per share to $15.94. As for operations, we remain on plan and are reaffirming the full year midpoint for same-property revenue, expense and NOI growth. Turning to the structured finance portfolio. Year-to-date, we have received $118 million in redemptions and anticipate $200 million in total proceeds for the full year. As you may recall, over the past 2 years, we have made the strategic decision to redeploy the redemption proceeds into acquisitions at better-than-market rate yields and in markets with the highest near-term rent growth potential. This strategy has resulted in better NAV growth, improved cash flow for reinvestment and higher quality of FFO earnings. Looking ahead to 2026, we are pleased that we are in the final year of the redemption-related headwinds and the realignment of this business will be behind us. Overall, we expect roughly $175 million in additional redemptions next year. Given heavy redemptions in 2025 and expected in 2026, we anticipate this will reduce our 2026 Core FFO growth, net of reinvestment by approximately 150 basis points depending on timing of redemptions. As we look further out to 2027 and beyond, we expect that FFO volatility from this business will abate as the size of our structured finance book will have decreased from the peak of $700 million in 2021 to around $250 million in total investments. Lastly, a few comments on capital markets and the balance sheet. Throughout 2025, we executed several financings to further strengthen our balance sheet, increase our liquidity, diversify our capital sources and proactively address near-term maturities at attractive rates in the current market environment. With manageable maturities over the next 12 months, healthy net debt to EBITDA of 5.5x and over $1.5 billion in available liquidity, our balance sheet is strong heading into 2026. I will now turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question come from the line of Nick Yulico with Scotiabank. Nicholas Yulico: I wanted to see if there was any way you could break out the blended rate growth a bit in the third quarter, just for some perspective on how much L.A. and Orange County might have been a drag on those numbers? Angela Kleiman: Nick, it's Angela here, thanks for your question. As expected, you called it. L.A. has been a drag, but that's not a surprise to anybody. In terms of our blended for the third quarter, Southern California came in at around 1.2% and Northern California close to 4% and Seattle right in the middle at about 2%. And to call out L.A., specifically, LA is below the 1.2% average for Southern California. L.A. is really 1%. So that gives you the range and the magnitude, but on the high end, when we're looking at Northern California, San Francisco and San Mateo, they're in kind of that 6%, 5% range, in terms of the blended. So hopefully, that kind of gives you the bookends of the -- of our portfolio. It's a pretty wide range. Nicholas Yulico: Okay. Great. And then I guess my follow-up question is just in terms of in Northern California, whether you've seen any like real pickup in demand from -- I mean, if we see again from some of the job announcements of new company formations or some of the activity on the office side in San Francisco or the broader Bay Area, just anything more you can share on how that's actually translating into demand on the ground? Angela Kleiman: Yes, that's a good question. We certainly are seeing a steady strength in the Northern region. And when we look at the top 20 tech postings, the postings have remained steady with September a slight uptick in California, mostly benefiting from the Northern region, the San Francisco, San Mateo and, of course, the Santa Clara counties. It's tough to get exact numbers because they don't show up, the BLS numbers, as we talked about, has been challenging. What we are seeing is that, we're seeing more start-ups than we've ever seen in the past. And you could -- anecdotally, what we're seeing is that office space less than 10,000 square feet are in hot demand. And that is a new phenomenon that we've not seen in the past. Operator: Our next question comes from the line of Eric Wolfe with Citi. Nicholas Joseph: It's Nick Joseph here with Eric. You mentioned the '26 earn-in of estimated to be 80 to 100 basis points. I was hoping you could break that down between Northern California, Southern California and Seattle? Angela Kleiman: Nick, I don't have the exact breakdown in front of me. I will just point to you that we, of course, we're assuming that Northern California will lead and Southern California will rank third in terms of the major 3 regions with Seattle in the middle. But I think a helpful data point could be that if you look at our blended lease rates in the third quarter, it's comparable to the same -- to what we achieved last year -- a little bit lower than what we achieved last year. However, what we're seeing in the fourth quarter is we're on track for fourth quarter to do better than last year. So year-over-year for the second half, we're assuming that we're going to land in the same zone, somewhere in the low 2%, and that gives us the 80 to 100 basis points earn-in. Nicholas Joseph: Appreciate that. And then just on the preferred book, I think you said 150 basis points headwind. What's the sensitivity around the timing of the potential redemptions for next year? Barb Pak: Nick, it's Barb. I mean there's a couple that are maturing in the first quarter. And if they may need an extension for 1 month or 2, that's really the sensitivity that I'm talking about. But the maturities are very much in the first half of the year. And so, what we've guided to and what I provided was assuming that they're fully redeemed at maturity. If they get extended, it might be a little bit lower. Operator: Our next question comes from the line of Jeff Spector with Bank of America. Jeffrey Spector: Great. Just a follow-up on the first question or Nick had asked, I think, is a follow-up question on jobs. I mean, it does seem like we're seeing mixed signals between AI hiring, tech layoffs. I mean, how are you thinking about this into next year, maybe even medium-term? What are you hearing from, let's say, your -- any peers, any executives that you talk to in terms of the job outlook in your region? Angela Kleiman: Yes. Jeff, that is a great question because it really goes to the heart of where is AI taking us, right, on more of a broad conversation from that perspective. So a lot of things are happening right now, which is noisy, and we are seeing recent layoff announcements, but keep in mind that large tech companies, they get most of the headlines. Broadly across the U.S. layoffs -- layoffs are occurring. So for example, UPS in Atlanta is cutting 48,000 jobs. From what we're seeing on the ground here is that this is a normal part of the business cycle. In an environment where the macro environment is soft, business are and they should be focusing on efficiency. And so I don't think, from what we're seeing that they are AI-driven job losses. But in terms of what we think is going to happen with the conversation about AI displacing jobs and being -- becoming -- or is viewed to be a disruptor, we do think that's going to happen at some point. AI capabilities, it's growing rapidly, and we're seeing research suggesting that most companies are experimenting with AI. So that experimentation level is very high. But the adoption, the level is low because the return on investment is still unclear. So for example, Essex where we see AI benefiting data analytics and certain repetitive tasks, but it is still in early developmental stages, and we need additional technology to interface with AI applications for utilization. Essex have not had significant workforce reduction using AI. And so what we do expect is that the pace of disruption or job displacement will be more gradual because on the flip side, what we're seeing is, as I mentioned earlier, an unprecedented number of start-ups, small companies that because of AI, can form businesses. And that is not being picked up by BLS. But certainly, it's being picked up by the demand that we're seeing in Northern California. Does that make sense? Jeffrey Spector: Yes. That's helpful. And maybe could you talk a little bit more about San Francisco specifically, let's say, downtown and we're seeing all these great articles on downtown, the city versus your suburbs. How is your portfolio benefiting from all of this? . Angela Kleiman: Well, I think interestingly, downtown, we view Northern California generally is still in a recovery phase and giving more rents are relative to pre-COVID levels. And the suburban started recovering last year. Downtown is recovering starting this year. But when we look at relative blended rates for our markets, if I break out San Francisco, for example, year-to-date blended rate growth is 5.2%, where San Mateo is 6% and San Jose in that 4% range. And so the relativity isn't -- the dispersion isn't huge, and they're all quite strong. And when we look at announcements of new office space, it's just as concentrated in the suburban area as it is in downtown. Operator: Our next question comes from the line of Steve Sakwa with Evercore ISI. Sanketkumar Agrawal: This is Sanket on for Steve. Switching a bit. You guys have been very active on transaction front this year, and we just wanted to understand what are the cap rates are used on acquisitions and exclusions for those assets? And how deep is the investor pool within that market? Rylan Burns: This is Rylan here. I'd point you to S-16.1 where we've tried to break out specifically the cap rates that we've been targeting and been successful at acquiring over the past 1.5 years, and also point you to the Essex yield, which is 40 basis points higher, which is as a result in something we've talked about, our operating platform, given our asset collection models in these markets, we're able to pull out a significant amount of controllable expense by putting them onto our platform. So that's been one of the driving factors in our acquisition strategy. So, as Angela mentioned, cap rates have compressed. There's been a significant sentiment change as it relates to Northern California over the last year. I'd say we've been relatively early and been able to acquire significant, almost $1 billion of assets in these submarkets at that 4.8% market rate and a 5.2% yield to Essex. So we're pleased with what we've accomplished, and we're hoping to continue. Sanketkumar Agrawal: And as a follow-up to that, like are you guys evaluating share repurchases? Given where the stock price has been like -- it's been a common theme across your peers. Angela Kleiman: Sanket, that's a good question. And I think you've seen that we have a very solid track history of buying back stocks and assessing all the relative value leading to that decision. And if you look at where we are today, where we're trading today, it's much more compelling from a stock buyback perspective than it was in the third quarter. But I do want to highlight that our transaction in the third quarter was around a 5% cap rate, and you add growth to that. It's quite compelling because stock back then was trading in kind of that low- to mid-5% range. So once again, you will see us being very disciplined in making sure that we're going to maximize the yield depending on our cost of capital and investment instrument available to us. Operator: Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: So going back to the lease rate growth during the quarter versus the back half projections, I think, was around 2.7% as of last quarter. Was Southern California lower than projected? Or was it Seattle? I think as you mentioned in the prepared remarks that drove maybe pricing being a little bit softer than you had -- had you thought last quarter? And then just wondering if you think the Seattle softness, is it kind of a temporary phenomenon or could persist into 2026? Angela Kleiman: Austin, I think you make -- it's really driven by Seattle. And what we're seeing in Seattle is that the demand has coming softer. And we had expected that demand to moderate throughout the year, on a national level. And keep in mind, Seattle does not have the benefit of the AI start-ups that Northern California does. Northern California has 80% of the AI business. So Seattle is going to be more in line with the U.S. average at the current cycle. But I do want to know that the -- some of the headline news like Amazon laying off corporate employees, they have multiple locations. So it's not a Seattle-specific issue. And when our team dug into the WARN notices, it's less than 10% of the layoffs is Seattle-specific. So this leads us to believe that this is not a market that we're seeing red flags. It's a market that's stable. It's still performing well. Certainly, it's not reaching above average CAGR growth that we had hoped, but it's still a good market. And with next year, supply going down by almost 40%, it's going to do just fine. Austin Wurschmidt: Appreciate the thoughts. And then just the 4% growth in blended lease rates in Northern California coupled with some of the office leasing you've referenced across the Bay Area, do you think that the region can sustain that level of growth in 2026? Or was there any specific phenomenon like back to office, that may provide a little bit of an incremental lift that maybe is less sustainable to the extent job growth remains more muted, more of a broader comment than specific to the area. Angela Kleiman: Yes. Austin, I think there are different -- in every cycle, there are different influences that drive job growth. And currently, what will happen -- what we're seeing in the Bay Area is really more of a recovery story. We're not -- we have not begun the growth story yet. And because if you look at the top 20 tech hiring companies, the postings, is still going to add and slightly below the long-term average. And so what we're seeing, that 4% forecasted is a catch-up, if you will. And this market still has a lot of legs. Operator: Our next question comes from the line of Jamie Feldman with Wells Fargo. Unknown Analyst: This is Connor on with Jamie. Can we talk about your fourth quarter leasing strategy. Where are you seeing renewals go out for the quarter? And if you have any insight on new lease growth quarter-to-date? Angela Kleiman: Connor, yes. Our general strategy for the third quarter at the beginning, as we approach the seasonal peak is to push rents and in the Northern California and Seattle region. And then in Southern California, we toggle between rents and occupancy, subject to market conditions. And as we wrap up the third quarter we pivot to more of an occupancy or more defensive focus, especially as we saw strength early on, which, of course, taper off. And that's a normal seasonal cycle. In terms of the renewal growth, what we're seeing is that it's been quite sticky. So in the third quarter, we sent renewals out around mid-4s, say, around 4.6% and we landed for the quarter around 4.3%. So only 30 basis points of negotiations, which is quite good. Currently, for November, December, we're sending renewals out around mid-5%. And so with negotiation, we probably will land at maybe high 4s. So this is another reason that gives us conviction that fourth quarter blended rates will be better this year than last year. And in terms of the -- what was the third question? New lease rates? Connor, what was your third question? Unknown Analyst: Yes, it is on the new lease rates. Angela Kleiman: So new lease rates for October for the same-store, it's pretty much flat, and that's expected. Especially for this time of the season. I think a good data point I'll point you to is loss to lease because we talked about that in the past is a good gauge of the portfolio. And where we're sitting today in October, we have a gain to lease of 1.6%. So that's not exciting. But having said that, it's also nothing alarming. So just to give you some context, pre-COVID 2019, so it gives you a sense, more of a historical range, our gain to lease was worse, it was at 2.3%. So this is so far playing out to be a normal seasonal cycle in a soft macro economy. So we're quite pleased with how the portfolio is performing. Unknown Analyst: That's super helpful. And then maybe on the preferred book. It looks like there was a $21 million commitment this quarter. Is there anything we should read into that as a way to maybe selectively offset some of the redemptions going forward? Just trying to kind of think about use of proceeds here beyond acquisitions? Rylan Burns: Connor, Rylan here. As we've said, we are not getting out of this business. This is a good business, and there are interesting opportunities where we believe we'll get a premium yield to what we can buy in the fee simple side. In general, the strategy is just to make this a more manageable size relative to our total business. But if we see good opportunities, in this case, with partners that we know very well, and we're really comfortable with our position in the stack, we will continue to make investments in this book. So we're not getting out of it. It's really just trying to control the size of it and just pick the best opportunities for our shareholders. Operator: Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: I just want to circle back to the debt preferred equity book. I know, Barb, you've articulated this for a while to trim the book given it has gotten too big as a percent of FFO. But in the current environment where acquisition yields are in the 4s, which is well inside of where your stock is trading and the DPE, you guys have a long successful track record with and provides better returns, and you've been good at that, would you guys consider reassessing the decision to dramatically shrink it? Maybe 10% of FFO was too much, but it just seems like it's a good tool that you guys have to be competitive in a low cap rate world. And unfortunately, it seems to be relegated back to the -- almost up to the attic, if you will. Barb Pak: Alex, it's Barb. Rylan just made a good point that we're not getting out of the business. We're just being more selective. And given the redemptions are very heavy, it is shrinking. There's been a lot of capital raise that's chasing this business. And so yields have compressed. It's not risk-adjusted like we would like, and we're not going to go and do all the deals out there just to backfill this book. And so this business will ebb and flow. And right now, based off of what we know and where the environment is, it is shrinking. But it could change over time, and we -- it has evolved over time. So this is just where we are in the cycle today. Alexander Goldfarb: Okay. And then Angela, the New York Mayor election certainly has gotten a lot of buzz, but Seattle has got an interesting election coming up next week, with the Mayor and City Attorney that are both being challenged from the progressive side. So can you just give some thoughts on how the apartments are looking and what the consequences of both the progressives win? What that means for apartments in Seattle? And then if you think that as a result, that means divesting more Seattle, buying more on the East side? Just want to understand better the ramifications of what folks can expect from next week. Angela Kleiman: Alex, that's a good question. And we've been -- as you know, following the legislative environment as closely as possible. It is hard to predict what will happen. But this is what we know. Washington did enact rent control early this year. It was effective around May. And what was enacted was very similar to California. It was CPI plus 7%, max of 10%. So in this environment, that signals to us that this is a -- the legislators understand the need to protect tenants from price gouging, but at the same time, they also understand that regulation -- heavy regulation is going to be counterproductive. It's going to reduce housing production and community investment, which ultimately results in higher costs all around. So given that they recently enacted rent control, we would expect naturally that this will play out for some period of time before any further changes are made. Alexander Goldfarb: Okay. But what about on the Mayor -- like if the Mayor of the City, Attorney changes? Do you see any negative consequence to apartments or not really? Angela Kleiman: Hard to say, we haven't heard anything that's being proposed that would give us great concern and from the ultra progressive side. And once again, my example to you is, we've got enacted, had a lot of input from all parties. So it's hard to predict, but so far, I don't -- we don't see a meaningful change right away. Operator: Our next question comes from the line of Adam Kramer with Morgan Stanley. Derrick Metzler: This is Derrick Metzler on for Adam Kramer. I was wondering if you could share your thoughts on SB 79. And does this impact your South San Francisco development at all? Or any other potential developments that you might have in the pipeline? And just kind of generally, do you see an impact on future development opportunities from this and kind of in combination with the recent changes to [ Sica ]? Rylan Burns: Derrick, Rylan here. It's a good question. At a high level, we view this in several of the recent legislative changes that have occurred at the state level is good for California. We need more housing. The SB 79 specifically says that if you're within a half-mile radius of a transit stop in markets where there's greater than 15 rail stations, you can establish the ability to get higher density. So as an illustrative example, if you go to a city and get entitlements that allow, say, 80 units to an acre, now you'd be able to get 120 units to the acre. So this should be beneficial. It's not going to benefit ourselves San Francisco deal as we're already through the entitlement period and under construction there. When we think bigger picture of what this could do to the supply landscape in California, it should help on the margin, create some more opportunities. But some mitigating factors to keep in mind. Transit-orient development has been a focus of the state and cities for the past 20 years. The majority of our city's arena plans are concentrated along transit sites. So in other words, zoning has already become more favorable in these locations. Secondly, I think the real gating issue today on increased development are just for the returns. The majority of deals that we've underwritten last year have in-place yields around 5%, many of them sub that. So in summary, it's a long-term beneficial to California, but I don't see it taking a dramatic change in the supply outlook for our markets. Operator: Our next question comes from the line of Haendel St. Juste with Mizuho Securities. Haendel St. Juste: A couple of quick ones for me. First, I was hoping you could comment on the use of concessions across the portfolio where it is today versus maybe a year ago and how it compares across the key regions, SoCal, NorCal, Seattle? And are you offering concessions on renewals? Angela Kleiman: Haendel, from concession perspective, let's see. Right now, our concession levels are comparable to the same period last year, about 1 week. And that's pretty typical for this time of the year. In terms of the breakdown across the region, Northern California is right at a week -- actually, everybody is right around a week and not a whole lot different. But keep in mind, concession is also more driven by competitive supply nearby. And so that's going to probably be more of an influence than what's happening with the macro economy. As far as -- we'll see concessions. On renewals, no, we don't -- it's de minimis, negligible on renewals. It's mostly on new leases. Haendel St. Juste: Got you. Got you. Appreciate the color. And then my second question, I guess, it's on L.A. and the new versus renewal spreads you're seeing there. I think you mentioned the blends in L.A. were around 1%. So assuming renewals are low single-digit positive, that would imply new leases are negative and a pretty decent spread there. So again, I'm curious on if you could set some color on what that spread is on the new versus renewals in L.A.? And if that's a sustainable spread and if you think that maybe perhaps renewals could come under pressure? Angela Kleiman: Yes. So renewals are negative. Once again, but that's not unusual for this time of the year. So they say -- we're about, say, 100 basis points in the negative for Southern California. I'm sorry, I said -- I mean new leases. New leases are negative. Yes. And L.A. is much wider in that. L.A. is closer to 1.8%, so closer to say, negative 2% on new leases. Renewal, they're sitting around mid-3% in September for Southern California and L.A. is in the low-3% range. So not too different. Renewals are pretty consistent across the board, generally speaking. New lease, it's hard to say whether it's going to come under pressure. I mean it's, of course, going to follow our market rents ultimately end of next year. And that has a lot of factors. It's job growth, that's where supply is going to be. And what we're seeing right now with supply decreasing and occupancy stabilizing in L.A., we wouldn't expect more pressure on new leases next year versus this year. And so just to give you an example, occupancy, net of delinquency right now sitting at above 94%, which is great. In September, it was still below 94%. It was 93.9%. So it's been steadily increasing. So that tells us that this market is stable. And there is underlying fundamentals to support the stability and potentially growth. Operator: Our next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: In Seattle, you talked about the fact that Seattle doesn't really benefit from the AI tailwinds the way SF does. But I was wondering, do you think it could actually end up being a relative loser within the tech markets if investment in talent within tech sort of continues to flow towards AI. Do you see any impact from that? Angela Kleiman: Well, I think the Seattle economy has a good stable group of industries anchoring it. And so I don't see that AI being ultimately a negative to not just Seattle, but any other economy, because you can make the same argument for parts of Southern California or other areas outside of California where there's AI presence. We do view that AI will be net additive and the economy in Seattle will continue to grow. You've got Amazon there, which is huge. Microsoft is very solid and quite a few other ones. So we don't see AI as a net negative for Seattle. Julien Blouin: Got it. And then maybe just a quick one on Contra Costa where occupancy fell about 60 bps sequentially in the third quarter. Can you just give us a sense of what you're seeing in that market? Angela Kleiman: Yes. Contra Costa, I mean, that market is going to ebb and flow, and it's been digesting a huge amount of supply over the past 2 years. And so we've -- we pushed rents because we saw some strength there. And then, of course, ultimately, sometimes that comes in at the expense of occupancy, but we did see sequential revenue growth there, which was a good indicator that the market is doing fine. Operator: Our next question comes from the line of Robin Hanlin with BMO Capital Markets. Robin Haneland: [ You leaned into ] Santa Clara acquisitions as of late. Can you elaborate on the long-term potential in these markets versus buying back your stock today? And also curious is rebalancing your exposure to the city of San Francisco is on the horizon? Rylan Burns: Robin, Rylan here. I mean if you look at that 16.1% and where we've been able to source deals in that initial yield layered in with what we think the micro market supply outlook and the potential for rent growth there. As Angela mentioned earlier this year, we think that was definitely the highest risk-adjusted return opportunity available to us. As we've said in recent days with the stock falling off, that math is being reevaluated. But we feel really confident and excited about the acquisitions that we have been able to acquire in there. And again, the micro market fundamentals in terms of the supply outlook for the foreseeable future. I think your second part of your question was San Francisco. We have underwritten every institutional deal that's come to market in San Francisco. There have not been a lot of them. And what we generally found is that the cap rates there have been even more aggressive, the competitive bidding has been made the relative value opportunity for us to create value on the buy in San Francisco is really not emerged relative to what we -- where we were able to purchase along the Peninsula with similar fundamental outlook. So we will continue to underwrite everything in Northern California and step in if we see a unique opportunity. Robin Haneland: And then we noticed that San Diego and Oakland, seeing decelerating same-store revenue. Can you maybe supplement us with new lease rates in the markets? And then color on how demand is trending in those two? Angela Kleiman: Yes. So San Diego, we've had supply concentration in pockets of North City and North Coast submarkets that directly competes with our portfolio, although that is starting to abate. So that's good. And of course, it's San Diego is influenced by a general soft demand in Southern California and the U.S., and that's -- those are the key drivers of the weakness. Similarly, on Contra Costa as well, we've had much heavier supply in Contra Costa for several years. But that market has been recovering. Although we don't have -- we actually have sequential improvements in revenues for Contra Costa. So it's just San Diego where we don't have sequential growth in gross revenues. Operator: Our next question comes from the line of Rich Anderson with Cantor Fitzgerald. Richard Anderson: So Jeff Spector asked a question about jobs and he said he understood the answer, and I didn't. So let me see if I can sort of ask it a different way. What is your view when you think of West Coast jobs in 2026 versus national jobs in 2026? When you keep in mind perhaps a blessing and curse impact on jobs from AI, entertainment in L.A., Seattle kind of being somewhere in the middle with Amazon. Do you think that your markets from a job growth perspective alone will outperform the nation, in line with the nation, maybe below the nation? What is your view on jobs going into 2026, if you have one right now? Angela Kleiman: Rich, our view with respect to jobs is that we should outperform the U.S. average. The question here is magnitude. And that as we would all expect, is going to be influenced by the macro economy. But what we're seeing is Northern California has of course the AI benefit that is a catalyst, it's also in a recovery phase. And so we are seeing positive immigration, which is not the historical norm. So that's going to benefit Northern California. Seattle is anchored by the broad tech economy and which has gone through its massive pivoting and lay off about 1.5 years ago. So it's stable with upside. And in Southern California is going to perform similar to the U.S., albeit with more professional services, it should do better. But more importantly, fundamentals in L.A., we see has troughed or near the bottom. And so while we don't know how long it's going to take to recover, we do see that there should be more upside than downside in that market. So hopefully, that gives you a better breakdown that you're looking for. Richard Anderson: That's great. I appreciate that. Second question, thinking about perhaps moving some of your investment incrementally more from Southern California to Northern California. Obviously, much talked about with the Olympics coming to L.A. perhaps housing for athletes. I wonder if there'll be an opportunity to sell in front of the Olympics now? I'm thinking -- I'm thinking in 1996 in Atlanta when there was sort of this wave of housing and then there was a hangover effect after the Olympics. That was a little disruptive. Atlanta obviously became a great market eventually. But do you want to be there for a year after the Olympics in bulk? I'm wondering if you're thinking about your business as an option for the Olympic Committee, as a mechanism to move more product, maybe a little bit quicker out of that area and into other areas of your portfolio? Rylan Burns: Rich, Rylan here. Interesting question. As we mentioned, we are fundamentally a little bit more positive on the L.A. market going into next year as the supply is coming down. And we do see some near-term catalysts as it relates to the Olympics. We do not plan to convert any of our existing leases into short-term rentals to take advantage to the extent that, that was your question, that's pretty difficult to do with existing tenants hoping to stay in and be able to enjoy the Olympics and the World Cup in our units. Just speaking broadly on the transaction market, outside of downtown L.A. and the West side, the tri-cities to the north, these are still well bid markets with lots of transactions occurring in that 4.5% or 4.75% type range. We saw a deal closed last quarter, Marina del Rey, that was a sub-4.5% cap rate. So there is still a lot of capital interest in the broader L.A. market, with downtown being a notable exception, as it's still challenged with the operating performance. I think we'll see more transaction opportunities in downtown L.A in the next year. And as we do with all of our markets, we're underwriting everything and looking to take advantage of any mispriced opportunities. Operator: [Operator Instructions] Our next question comes from the line of Linda Tsai with Jefferies. Linda Yu Tsai: It hasn't really come up on the call, but are you hearing of any impact on employment outlook as it relates to the higher cost of HB1 (sic) [ H-1B ] visas going forward? Angela Kleiman: Linda, we actually -- what we're hearing is that it potentially could be a net positive because the intention of this legislation is really to minimize the middleman, some of these H-1B, consulting firms like Deloitte for example. And what this will allow the large companies that can actually pay the fee, to just go direct instead of having to pay a consulting fee and then still having -- incurring other costs. And potentially, what we're hearing is that they can actually get a better or increased allocation, which would ultimately be good. So we don't expect a meaningful impact to Essex and it may actually become a net benefit. Operator: Our next question comes from the line of Alex Kim with Zelman & Associates. Alex Kim: Just a quick one for me. Could you walk through the decline in year-over-year repair and maintenance costs and -- can that be attributed to the continued decrease of same-store turnover? And is it sustainable into Q4 and 2026 and beyond? Barb Pak: Yes. This is Barb. Repair and maintenance is lumpy and it does vary from quarter-to-quarter and even from year-to-year. I think we have done a good job on trying to control our costs via our procurement programs. We are seeing a little bit lower turnover and the delinquency turnover that we had incurred the last few years has been much more stable this year. So it's a combination of a variety of things. Too early to talk about 2026. We're still in the midst of our budget process, so more to follow. What I would say, though, overall controllable expenses. We've done a good job keeping those around 3% for many years. And I don't see anything on the horizon that's going to change that heading into 2026. Operator: And this does conclude today's question-and-answer session. And also, this does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.
Operator: Greetings, and welcome to the Antero Resources Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Dan Katzenberg, Director of Investor Relations. Thank you. You may begin. Dan Katzenberg: Thank you for joining us for Antero's Third Quarter 2025 Investor Conference Call. We'll spend a few minutes going through the financial and operating highlights, and then we'll open it up for Q&A. I would also like to direct you to the homepage of our website at www.anteroresources.com, where we have provided a separate earnings call presentation that will be reviewed during today's call. Today's call may contain certain non-GAAP financial measures. Please refer to our earnings press release for important disclosures regarding such measures. Joining me on the call today are Michael Kennedy, CEO and President; Brendan Krueger, CFO; Dave Cannelongo, Senior Vice President of Liquids Marketing and Transportation; and Justin Fowler, Senior Vice President of Natural Gas Marketing. I will now turn the call over to Mike. Michael Kennedy: Thank you, Dan, and good morning, everyone. I'd like to start on Slide #3 titled Antero's Strategic Initiatives. We are entering an exciting time period for the natural gas market. Rarely have we witnessed such a visible step change in demand. The significant demand growth is driven by increasing U.S. LNG exports, combined with a surge in natural gas power generation that is accelerating from the build-out of new data centers. Antero is poised to benefit from these structural demand changes through our long-term vision and recent strategic initiatives, which includes adding to our core Marcellus position in West Virginia. We accomplished this through both bolt-on transactions and continuing our organic leasing program to increase our position in the West Virginia Marcellus fairway. Returning to West Virginia dry gas development to highlight our ability to quickly respond to the regional demand that is beginning to show up in Appalachia. We can either supply directly into future demand projects or grow into the local market if the local basis tightens. Also use hedging as a tool to lock in attractive free cash flow yields to support our dry and lean gas development program and our efforts to be countercyclical in transactions and share repurchases. We believe the execution of these strategic initiatives will enhance our ability to capitalize on the significant demand increases that are expected for natural gas over the long term. Now let's turn to Slide #4, which highlights our third quarter operating results. Continuing our trend of improving our drilling and completion results, the third quarter was our most impressive operating performance to date. We set numerous company records and achieved significant progress. The right-hand side of the slide highlights the various company records [indiscernible] 5,000 feet. On the completion side, our completion stages per day continues to climb higher, averaging another quarterly record at 14.5 stages per day or 2,900 feet per day. And as Patterson-UTI highlighted on their call last week, we set what we believe to be a world record for continuous pumping hours [indiscernible] 15 days of nonstop pumping hours, a truly remarkable feat. Next, let's turn to Slide #5, titled Marcellus Core Fairway Expansion. Our additional land investment is driven by the ongoing success we are seeing from our development plan and on the ground from our organic leasing effort. Strong well performance continues to expand our view of where the Marcellus core boundaries extend. The map on the left of this slide depicts what we believe to be the Marcellus core at the time of our IPO in 2013. As you can see, we built our position focused on Doddridge and Harrison counties, which we believe will deliver the best drilling results. However, over the past decade, as our development focus shifted into the neighboring counties and our well performance continued to strengthen. These results have driven an increased organic leasing program into those counties. Antero's organic leasing efforts have been a tremendous success over the years. We continue to acquire acreage at attractive levels per location with the incremental locations more than offsetting our annual turn-in-lines. Further, this program allows us to maintain our development focus in close proximity to our current footprint, reducing geologic risk while leveraging the benefits of Antero Midstream. Now to touch on the current liquids and NGL fundamentals. I'm going to turn it over to our Senior Vice President of Liquids Marketing and Transportation, Dave Cannelongo, for his comments. David Cannelongo: Thanks, Mike. Several market trends are pointing to improving NGL fundamentals and higher prices in the coming quarters. Following several years of substantial year-over-year supply increases, multiple third-party data providers are forecasting a slowing of NGL production growth across the U.S. due to the current low oil price environment and sharp reduction in oil-directed rig counts. Subdued drilling activity in oil basins will have an impact on associated rich gas and NGL production, particularly in the Permian Basin, which accounts for more than half of total U.S. C3+ supply. As shown on Slide #6 titled U.S. C3+ Supply Growth slows, the chart on the left shows projected NGL supply growth in the Permian slowing down dramatically in 2026 compared to previous years. At the same time, the chart on the right shows total U.S. C3+ production growth in 2026 is nearly flat with only 11,000 barrels a day of incremental supply expected. This indicates that while the Permian should continue to rise, albeit at a slower rate, this increase is being offset by even slower growth or outright declines in less economic Tier 2 producing regions, including the Bakken, Rockies and Mid-Continent. The declining expectations for C3+ supply growth comes at a time when exports from the U.S. are now able to ramp up, aided by a debottlenecking of terminal capacity. Year-to-date, propane exports have increased by over 120,000 barrels a day, averaging 1.85 million barrels a day compared to 1.72 million barrels a day for the same period last year. This increase occurred despite current global trade uncertainty, illustrating the continued call on U.S. barrels. At the same time, LPG export terminal expansions have started to come online beginning this summer and ample export capacity will be available for the foreseeable future, as shown on Slide #7 titled New Capacity to ramp up Exports. Going forward, unconstrained dock capacity will allow U.S. barrels to efficiently clear the market and bring Mont Belvieu prices as close as possible to premium international LPG prices. In the past, Antero has often benefited during times of U.S. Gulf Coast terminal constraints with our ability to export barrels out of markets so it can capture high dock premiums. The ability to execute this strategy has served as a differentiator for Antero versus almost all other NGL producers in the U.S. However, it is important to remember that Antero benefits more from higher Mont Belvieu prices than from high dock premiums. This is because higher Mont Belvieu prices lift both our export sales and all of our domestic sales, the latter of which are exclusively priced on a Mont Belvieu index. Antero on average exports less than 45% of its gross C3+ production and sells the remainder of its C3+ volumes in the domestic market. Therefore, an uplift in domestic sales prices is much more impactful for Antero's NGL realizations. In conclusion, the key challenges of 2025 all trend in our favor moving forward as reduced producer activity, combined with higher export capacity and international demand pull is expected to bring propane storage inventories from the top of the 5-year range to near the 5-year average by early 2026. These fundamentals will support Mont Belvieu prices in 2026 and strengthen C3+ prices as a percentage of WTI. With that, I'll now turn it over to our Senior Vice President of Natural Gas Marketing, Justin Fowler, to discuss the natural gas market. Justin B. Fowler: Thanks, Dave. As we approach winter, we see seasonal and overall positive fundamental demand trends coming for natural gas. I'll start on Slide #8 titled TGP 500L Basis Strength. LNG export demand is expected to increase by 4.5 Bcf from the beginning of 2025 to exit 2025. This increase is almost entirely due to the successful and quick ramp-up of the Plaquemines LNG facility. This week, the facility achieved a new daily record for feed gas at approximately 3.9 Bcf per day. With the first 18 trains now complete, Venture Global will begin Plaquemines 2, which will increase the capacity by an incremental 2.4 Bcf per day with the first phase in 2026, followed by the second phase in 2027. The significant demand pull for this LNG facility has led to higher demand along our TGP 500L firm transport path and has driven a higher premium at that delivery point relative to Henry Hub. Looking ahead to the winter, this premium to Henry Hub has increased to nearly $0.80. And in 2026, the premium is now at $0.64 for the full calendar year, the highest level seen to date. As a reminder, approximately 25% of Antero's gross natural gas is sold at the TGP 500 pricing hub. Our exposure to TGP 500L is expected to lead to higher natural gas realizations. Slide #9 takes a closer look at the significant natural gas demand surge that is coming over the next 24 months from the new LNG capacity additions. Over this short period, LNG demand is expected to increase by another 10 Bcf per day, driven by the start-up of Plaquemines 2, Golden Pass, Corpus Christi 3 and Calcasieu Pass 2. These new LNG facilities are expected to continue to drive higher price premiums along the LNG fairway hubs, where we sell 75% of our natural gas. In addition to the substantial LNG demand growth, power demand is also expected to increase significantly over the next 5 years. The map on Slide #10 illustrates all of the competition for natural gas supply in our development region and down our firm transportation corridor. Based on announcements that have been made to date, regional demand is expected to increase by 8 Bcf per day. As Mike has discussed in the past, Antero has 1,000 gross dry gas locations that we could accelerate activity on if there is a regional call for higher supply. Along our firm transportation fairway, there has been more than 3 Bcf of power demand projects announced to date. Additionally, there is an incremental 13 Bcf per day of expected demand between LNG facilities and power projects announced along the LNG Gulf Coast fairway. All of these projects will be competing for natural gas supply that could face supply challenges in that short time frame. Antero is uniquely positioned to participate in each of these 3 regions with our ability to increase dry gas activity for local demand or use our firm transportation portfolio to access increasing demand all the way down to the LNG fairway. With that, I will turn it over to Brendan Krueger, CFO of Antero Resources. Brendan Krueger: Thanks, Justin. Our capital-efficient program that Mike highlighted resulted in attractive free cash flow of over $90 million during the quarter. Year-to-date, we have generated almost $600 million of free cash flow. Slide 11 highlights the uses of our 2025 free cash flow. Year-to-date, we have paid down debt by approximately $180 million, purchased $163 million of stock and invested $242 million in asset acquisitions. We believe this portfolio approach to uses of free cash flow will drive attractive shareholder value creation as we continue to compound this effort going forward. As we've proven historically, we will be disciplined in our transactions. The transactions we completed during the third quarter were accretive to the key metrics that we prioritize, including free cash flow and net asset value per share. Importantly, we were able to fund this activity entirely with our free cash flow in 2025 and therefore, did not have to issue equity at today's levels in our financing efforts. Now let's turn to Slide 12 to discuss our updated hedge program. During the quarter, we added natural gas swaps for the fourth quarter of 2025 and full years 2026 and 2027. We also restructured our wide natural gas collars for 2026, raising the floor price. As Mike touched on during his comments, these hedges support our strategic initiatives. We have now hedged 24% of our expected natural gas volumes in 2026 with swaps at $3.82 per MMBtu and 20% with wide collars between $3.22 and $5.83 per MMBtu. Our hedge book allows us to protect the downside by locking in a portion of our free cash flow yield. This is illustrated on Slide #13, titled Reduced Cash flow volatility. Our hedges have locked in base level free cash flow yields of 6% to 9% at natural gas prices between $2 and $3, while at the same time, we maintain significant exposure to rising natural gas prices. Further, these hedges result in a 2026 free cash flow breakeven at just $1.75 per Mcf, assuming year-to-date NGL prices. Looking forward, our return of capital and transaction strategy is anchored by our low absolute debt position that provides us with substantial flexibility to pivot between accretive transactions in our core Marcellus West Virginia footprint, debt reduction and share repurchases. We will continue to evaluate accretive opportunities to increase our net production and core inventory while importantly waiting to increase gross volumes until the broader natural gas market calls for it. While we continue to target maintenance capital, we are well positioned with substantial dry gas inventory for future growth opportunities from the regional demand increases that are expected. With that, I will now turn the call over to the operator for questions. Operator: [Operator Instructions] And your first question comes from Arun Jayaram with JPMorgan. Arun Jayaram: Gentlemen, I wanted to maybe start with the decision to commence D&C operations on the gas side in Harrison County. I just wanted to know if you could talk about what the catalyst was for that kind of decision? And did data centers, power deals down the road, did that play into kind of the calculus about doing something you hadn't done in 10 years or so? Michael Kennedy: Yes, Arun, that's exactly kind of the catalyst. We've been active in those discussions and it became clear to us all those discussions really related to kind of the eastern portion of our acreage position and where those opportunities would be located, also where the local demand is. And so we thought looking at our position, we have 100,000 acres. We have significant historical activity there. We have the midstream infrastructure. So we have a proof-of-concept pad. It's already a pad that exists with wells going south. So if it's drilled north, and it will be very low-cost wells and highly productive, and we're excited to get back at it in the Harrison County area. Arun Jayaram: Got it. And then maybe my follow-up, just given, Mike, this -- doing a little bit more kind of gas drilling, thoughts on how you're thinking about a 2026 program at Antero. And obviously, historically, around this time, you have decided to do a, call it, a drilling partnership, which has defrayed some of the costs. But how are you -- what is your thinking around 2026 at this point? Understanding it's still probably early in the budgeting process. Michael Kennedy: Yes, it's still early, but we're still at maintenance capital, Arun. This is just one pad. Really, the fourth quarter production level, we're in the [ 3.25 to 3.5 ] range. That's the level we'll hold generally in '26. So we're still there. This is just more of a proof-of-concept pad. On the drilling JV, that's still to be determined. We'll see where kind of the market is related to that, and we could have -- we could continue that in '26, but we haven't made that decision yet. Operator: Your next question comes from John Freeman with Raymond James. John Freeman: Just a follow-up on Arun's question with the -- following the acquisitions and the higher production level now that you cited that you're going to have in 4Q. Just kind of how does that impact kind of the prior commentary about maintenance CapEx? I just think previously, you've kind of talked about kind of flattish CapEx to maintain production. Just wondering if this has an impact. Michael Kennedy: It is at the same ratio that increased -- the production increased by 3%. So it's logical to expect a 3% increase in your maintenance capital. So that's like an incremental $20 million from that $675 million level. John Freeman: Got it. And then looking at the acquisitions, the $260 million of acquisitions in the quarter, just trying to get a better feel for if this is now kind of a bigger focus of the company? Or was this sort of kind of one-off in nature and just you happen to have all these sort of transactions domino during the quarter? Just kind of how to think about that going forward? Michael Kennedy: Yes. I don't know if it's a bigger focus. I just think with our position in the West Virginia Marcellus, these type of transactions come to us and are available to us if they make sense at the time. When you look at our acreage position and contiguous nature of it, we are the liquids developer in West Virginia. And so we get opportunities from time to time. And so we evaluate them and these ones make sense. Operator: Your next question comes from David Deckelbaum with TD Cowen. David Deckelbaum: Mike, I guess, as we get into '26, obviously, you guys just drilled a record lateral length, and we saw the impacts to the average lateral length in the quarter. I guess just given some of the land spends that you have this year, how do you see that progressing on average into '26, given that you guys have had some pretty significant efficiency gains to date? Michael Kennedy: Yes. No, it actually goes up. It's a good -- I think it goes up to 14,000. I think we're generally around this year in the low 13,000. Next year is up 1,000, but you highlighted the very efficient nature of our leasing program, David, that's exactly what it's doing, is trying to optimize those lateral lengths and also expand our position. So next year is up about 1,000 foot per well. David Deckelbaum: Yes. I guess -- I appreciate that color, Mike. My follow-up is just we saw, obviously, the acquisition this quarter. It looked like it was an increase in existing working interest, which I guess is -- I don't know if you would view that as aberrational or if you view this as a trend that likely continues perhaps into next year? Michael Kennedy: I don't know if we'll have those opportunities. It was 3 separate transactions, all with working interest, another one is royalty interest, another one with more acreage based. So hopefully, they continue into next year, but it's hard to forecast. But like I mentioned, we have such a dominant position in this area of the Marcellus. These type of transactions tend to be available to us if they are -- if they make sense and if they're accretive. Operator: Your next question comes from Kevin MacCurdy with Pickering Energy Partners. Kevin MacCurdy: The hedges you added this quarter were unlike past quarters and that you aggressively hedged the next quarter or fourth quarter in this instance, and you opted for swaps for next year instead of the wide collars before. Has your strategy on hedging changed? Or was this just opportunistic? And should we expect you to have a certain hedge level heading forward from here? Michael Kennedy: I think it's probably both. If we could replicate what we have next year where it's these are approximate numbers a quarter with wide collars protecting at $3.25 with exposure up to 6 and a quarter in that high $3, $4 range and then 50% unhedged. That's actually a good model for us. I don't know if that will be available going forward. But that's a good level for us. When we looked at the program, as Brendan mentioned in his comments, the ability to lock in above 5% free cash flow yields. I think it's 6% to 9% in the $2 to $3 range, but then expose ourselves completely to the upside up to a 20% free cash flow yield. That feels like a prudent way to manage the business. Kevin MacCurdy: I appreciate the color there. And then as a follow-up, ethane volumes significantly outperformed on price and volume this quarter. Was that just due to sales timing? Or is there any sustainability to that beat? David Cannelongo: Yes, Kevin, this is Dave Cannelongo. Really just a function of customers and when they're up and running and taking full volumes and then also -- or the spreads into the Gulf Coast on ATEX have been improving here in the back half of the year. So just taking advantage of our capacity on that system. Operator: Your next question comes from Phillip Jungwirth with BMO Capital Markets. Phillip Jungwirth: On the dry gas acreage in Harrison County, there's been a lot of operational improvements and advancements in drilling and completion technology since you last drilled here. So I was wondering if you could talk to your expectations as to how much of an uplift you'd expect versus kind of the historical type curves from the wells that you had drilled here previously. Michael Kennedy: Yes, we expect about a 50% improvement. The old wells in that area was more like 1.3 Bcf per day, but with today, after 12 years, we've gotten a lot better at it. And I think we have approximately 1,500 wells now, and those are one of our first. So we're excited about optimizing the completion of those wells. And so it was 1.3 Bcf per day, expectation is 2 Bcf -- I mean, 2 Bcf per 1,000 foot now. Phillip Jungwirth: Okay. Great. And then I wanted to come back to something you referenced last quarter. But with your water systems, I was wondering if you could expand upon the data center cooling opportunity for Antero Resources and Antero Midstream. Just what would this look like? And how would you look to play a role? Brendan Krueger: Yes. I think just to build on what we said last quarter, we think we are well positioned and uniquely positioned having that upstream, midstream integration being fifth largest gas producer in Appalachia. We've invested about $600 million or so in the water system. So that provides Appalachia in West Virginia, in particular, with an advantage, I think, relative to other areas. The terrain is a bit more difficult in West Virginia, but we think the advantages of being close to fuel supply, being close to water having the upstream, midstream integration really do position Antero well. So having a lot of discussions there, nothing to announce at this time, but continue to have quite a bit of discussions there. And then I think in terms of -- as we look at just the regional demand overall, I think we view this as -- it could take a few different forms. You've got either behind-the-meter power for data centers. There's been quite a few announcements just on natural gas-fired power generation, both in West Virginia and the region at large. And then I think just local prices tightening to the extent you have regional demand and local prices tightening, as Mike had mentioned, we've got that significant dry gas inventory to take advantage of all those various opportunities. The other thing I would just note is we are intentionally being a bit patient on this as well. I mean I think as you look at our LNG portfolio, for example, we had many opportunities on Plaquemines, for example, to do long-term deals at certain prices with Plaquemines that were much lower than what we're seeing basis trade at as that LNG facility is ramped up. So we do think patience is a bit of a key here. And as you let this play out and the scarcity of supply continues to build, we think the ability to do margin-enhancing deals will become greater for Antero. So having a lot of discussions, but also taking a patient approach, and we want to do the right thing versus just coming out with an announcement just for the sake of coming out with an announcement. Operator: Your next question comes from Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: Mike, I wonder if I could pick up on this topic of not ceding market share, if you like, in the basin. What's your decision point for growth? And I guess I'd kind of frame the question like what are the conditions you need to see? Do you need to see basis improve? Or is it just about local demand increasing before you decide to step into dry gas growth in your backyard? Michael Kennedy: Yes, Doug, interesting question. We've been talking about that. Obviously, this is a proof of concept, so we'll see the results on this, but we're highly encouraged currently. So you mentioned ceding the basin, and we are the dominant producer in West Virginia. I think we produce over 40% of the state's natural gas. We have the dominant acreage position. We have the midstream. We have the acreage HBP. We have investment-grade balance sheet. I mean, everything you'd want for developing it. So why shouldn't we develop it? So it's proof of concept. We'll prove out the resource. And then when you look local demand, absolutely would encourage us to grow into that. Also, if you kind of look out the curve, if you get $4 NYMEX natural gas and you could hedge basis in the future years, that may be something we would entertain as well. So a lot of kind of different decision points there. But like I said, we're uniquely positioned for this, and we're very encouraged, and we look forward to this pad. Douglas George Blyth Leggate: I appreciate that. And of course, given the depth of the inventory you have, you've got a lot of optionality, but it does raise the question, and you got to forgive me for this one, about the rest of your portfolio and the potential for asset sales and you know where I'm going with this in Ohio. Can you offer any color, confirmatory or otherwise as to where you are in that process? Michael Kennedy: Yes. We're just in the middle of that process, Doug. We're highly encouraged there as well. As you can imagine, I mean, that's a highly desirable or coveted asset with the contiguous acreage position, all the midstreams in place, the ability to access the firm transport to price it outside of the basin. The liquids portion, the dry gas portion, it's kind of a ready-made asset for companies. So also all the data centers over in Ohio as well and all the power demand over there. So it's highly coveted. So that's kind of why we wanted to do a market check. We're just in the middle of it, but we are encouraged. Operator: Your next question comes from Betty Jiang with Barclays. Wei Jiang: I want to go back to the data center proof of concept. It seems to me that you don't need to prove to the market that you can grow dry gas and grow it very cost effectively. And so this proof of concept is really for the customers and people you're speaking to on the other hand. So my question is, these customers and entities, what are they looking to derisk with your proof-of-concept pad? Is it the speed of which you can deliver volume? Is it the capacity of resources that you can deliver to? And once that pad is online, could that catalyze the conversation that you're having on the power and data center side? Michael Kennedy: I think the proof of concept is twofold for us, and then I'll let Brendan talk about his discussions with the counterparties. But for us, it's one, what's the EURs, what's the deliverability -- just so we know, we haven't drilled a well over here in 12 years. So is it the 2 Bcf? Is it higher than that? Is it lower? So we'll see and how to optimize that development. But also in the midstream, lot of midstream capacity over there, showing that we can flow it into these local kind of sites where these data centers are potentially being located, just the ease of our ability to deliver gas straight to the actual facility. But I'll let Brendan talk about other -- the customers. Brendan Krueger: Yes. I think just to add on top of that, I think from the standpoint, we haven't drilled a well over here in 10 years. It just shows we've got the inventory over here. It will give them good perspective on the ability to quickly ramp up. And I think having the ability to have that residue gas, not only at the processing facilities in the Eastern -- I'm sorry, in the Western part of our play, but also on the eastern part of the play where you're seeing some announcements out there on gas-fired generation, it provides just more flexibility in discussions -- like as I mentioned, we're having multiple discussions. And so the ability to have flexibility around these discussions and what could be best for Antero as it relates to kind of margin enhancement. This just gives us more flexibility having different parts of the play producing in larger ways. Wei Jiang: Got it. That's helpful. My follow-up is on the land budget. You have increased it for 2025. But I'm wondering if the land budget would just be higher for longer given you have expanded the scope or the boundaries of what you define as core. And can you just speak to the attractiveness of the organic leasing initiative versus potentially what you see in the private space in that area? Michael Kennedy: Yes. We generally go -- so our kind of base organic leasing is always kind of looking out the next 24 months and trying to enhance those -- the working interest or the lateral lengths like we discussed earlier. And that's generally up to the $50 million to $75 million level. And then above that is the expansion and what do we see in a particular year. So we go in generally in the year in that $75 million to $100 million range, and that's where we've been in the last 3 years. This year, we've just seen a lot of opportunities because our wells continue to strengthen in these areas that we're developing, and there's more acreage in those areas than there have been kind of in the middle of the field. So our opportunity set continues to grow as our wells and our -- continue to support that. So right now, it'd probably go into next year, and I think most people's models has about $100 million. But if we continue to see opportunities throughout next year, that could be higher kind of in the back half of '26 if this level of activity continues. Operator: Your next question comes from Jacob Roberts with TPH. Jacob Roberts: I wanted to ask about cash taxes. I think on the last update you gave the market, it was a 2028 time frame at those commodity prices. Just wondering if that math has changed at all given where we sit today? Brendan Krueger: No, no change there. No material cash taxes through 2027. So 2028 would be that first year we expect to pay some. Jacob Roberts: Okay. Perfect. And then circling back to the dry gas activity. This 6-well pad or the activity going on currently to get to that 50% uplift relative to a decade ago, should we be expecting some iterative completion design? Or is this ready to go into manufacturing mode? Michael Kennedy: Ready you go. I mean, like I mentioned, I think we've, since that time, drilled over 1,000 wells. So it was primitive back in 2013 when you look at it. So it would just be doing our typical 36 barrels of water per foot, 200-foot stages and the spacing on it is like 830-foot spacing. So lateral -- between the laterals. So just our typical design in the liquids, but just applying it to the dry gas for the first time in 12 years. Operator: Your next question comes from Nitin Kumar with Mizuho Securities. Nitin Kumar: I want to start on the hedging. You addressed earlier, it's a little bit more prudent sort of financial management, and I agree. As you've kind of put a floor on your free cash flow yield, what are your thoughts on the cash return profile? You've kind of not done a dividend like some of your peers as you're stabilizing your cash flow, is that part of the discussion going forward? Michael Kennedy: I don't think a dividend, but I think we can be very countercyclical on share repurchases with locking that in, also evaluating transactions even in a low commodity price environment. We always want to be countercyclical, and we have really no debt, very low debt, no maturities for years and years. So we want to be countercyclical, but if you don't have the hedges in place when the countercyclicality happens in low commodity prices, the free cash flow is not there as well. So we wanted to lock in a baseline of free cash flow and then be able to use it for share repurchases or transactions is where we're thinking. Nitin Kumar: Great. Great. I appreciate that. And then the topic of M&A has been covered quite a bit, but you confirmed earlier that you're marketing the Ohio assets. Just curious, as you mentioned, you don't have a lot of near-term debt or a big balance sheet. What do you think would be the use of proceeds if you were successful in getting the price you want? Michael Kennedy: Yes. No, it's a good question, and that's why it's a high bar for us because the most likely case, I would still say it's the hold case, but we'll see where that -- the marketing goes. But the use of proceeds right now is, like you mentioned, we're at $1.3 billion of debt. We have $300 million on our credit facility, and we have, I think, $400 million on a '29. That's kind of callable at par. So we really only have $700 million of prepayable debt. The other $600 million is a 2030 maturity, I think, [indiscernible]. So that's a good piece of paper. So that -- but then you also look at where our equity trades and the type of valuations that you're going to see for the Utica is well in excess of where our equity trades. So that could be a use of proceeds as well. It wouldn't be a bad trade if you sell your Utica for well in excess of where your equity trades and you use that to buy the shares. Operator: Your next question comes from Leo Mariani with ROTH MKM. Leo Mariani: Just wanted to follow up a bit more on this concept of growing net volumes without growing sort of gross in the near term. Obviously, you talked about M&A. It sounds like you're undecided on the drilling partnership here. But just in terms of the M&A strategy other than undeveloped acreage, are there opportunities to continue to pick up minerals, working interest? Are you generally trying to do this kind of ahead of the drill bit over the next kind of 12 to 24 months? I mean you said that these 3 deals kind of came up recently. Are you seeing just kind of more deals in the basin? Just want to get a little bit more color around some specifics on kind of the M&A strategy here and kind of growing the net without growing the gross. Michael Kennedy: Yes. I think you hit on it. These are all small bolt-on transactions increasing interest. When we talk about gross versus net, all of our processing is full. I think we're at 106% of processing capacity. All the FT is full. So on the liquids side, it's a challenge to grow gross because all the facilities are full. So in order to grow that the net, you have to look to the working interest and the royalty and all of these are highly free cash flow accretive. So that's where our heads at. So as they come up, we assess them and see if it makes sense based on that. And then like we've been talking about a lot on this call, the ability to grow the dry gas is really dependent on regional demand on a local basis. And so that is an opportunity for growth there, but really just trying to grow the net and maintain the gross volumes. Leo Mariani: Okay. That's helpful. And then you obviously highlighted a number of kind of operational records on the quarter with some very strong improvements in terms of frac stages and cycle times and everything. Can you just give us any thoughts on whether or not you think there's a decent amount kind of more improvement to come here? Or do you think you're starting to kind of maybe bump up on some of the limits, I guess, 15 days in a row without stopping on the frac side. It seems like maybe hard to do a lot better than that. Michael Kennedy: Yes, if we continue that. So when you get those days, you're doing 16, 17, 18 stages a day, and we averaged 14.5 during the quarter. So we get more continuous pumping throughout, which is our goal. I think you could see that go a bit higher. But right now, I think if we had a pad and had this type of performance, you think it average on the 15 stages kind of per day. So a little bit of improvement, but the 14.5 stages is really high. Operator: And your next question comes from Kalei Akamine with Bank of America. Kaleinoheaokealaula Akamine: Maybe to start, I'd like you to talk to Slide #5 and the one that illustrates the expansion of what you consider to be core in the Marcellus. So activity in the East in areas like Wetzel and Tyler, that's been robust for quite a while, and it's easy to see how that is now core. But activity to the South and the East has been a little bit less frequent. What gives you confidence that the core is expanding to those areas? Michael Kennedy: Our recent well performance is -- we've Tyler and Wetzel, but it's also been in the kind of in the eastern portion of Ritchie and northern part of Gilmer and you look at some other competitors, and they've had good results down in the Gilmer Lewis area. So you've seen that. And then like we talked about on the dry gas, that's in Harrison County. Kaleinoheaokealaula Akamine: Got it, Mike. I appreciate that. For the second question, I will go to Slide #10 here. So gas demand has expanded across that pipeline fairway. So 2 questions. Pipes in that direction are quite full. Do you guys have visibility on maybe new FT opportunities to push more gas into that region? And then it feels like given the demand pull, there's increased competition in the Gulf to lock these volumes down. Do you see any direct-to-consumer opportunities along this route that you could participate in? Michael Kennedy: Yes. I think Justin can correct me, I think we had 2.1 Bcf a day going down into the Gulf. And we've intentionally been floating like Brendan's comments suggested, we've carried this for quite some time. We're going to see where the actual basis goes. And when you look at these type of opportunities and demand growth, 25 Bcf a day, 17 of it being in the Gulf Coast or along that path, we think there'll be a lot of opportunities, but I can let Justin expand on that. Justin B. Fowler: This is Justin Fowler. So the way we think about this on Mike and Brendan's previous comments, the local demand, if all these projects go forward, it's going to be there. So that's going to drain gas out of various local pipes, various local pools. And then to Mike's point, when you think about the Antero 2.1 or so Bcf of Southbound, there was approximately 10 Bcf reversed over the years since the shale revolution took off. So right there, we're about 20% of that volume heading south. And then when you really zoom in on some of our pipelines, which we're calling mid-path, Antero owns rights past those potential projects as well. So we are evaluating different projects in Kentucky, Tennessee, Mississippi, where we cross. And then to your point on just the LNG market, yes, the LNG groups are going to have to potentially start to lock in supply just as there will be scarcity across the summer season, winter season, et cetera, that could cause peak situation. So we have been talking to a lot of those groups as well. But to Brendan's point, patience is key at the moment, and there's a lot still to be developed. If I understood your first part of your question correctly, in terms of new capacity being added southbound, it's just such high cost. And any of those projects are going to be toward the end of the decade. So Antero is in a good situation here to continue to watch the basis locally and just that behavior locally and then also just working with these various groups in the mid-path delivery points that those projects move forward. Brendan Krueger: And the only thing I would add just on the point about end users, there has seemed to be a bit of a shift in terms of the demand pull side of things. When the basin took off, it was more of a producer push. There has been a lot more significant interest from a demand pull perspective and folks wanting to get the actual supply due to some of that scarcity of supply that I think is starting to take hold in the market. Operator: Your next question comes from Neil Mehta with Goldman Sachs. Neil Mehta: And Mike, congratulations on stepping into the CEO role. I'd just love your perspective early on. It's been a couple of months now of just observations as you step into this new role and the business has done very well over the last couple of years, particularly coming out of COVID. But what do you think the next frontiers are from a strategy perspective as you look to the next end of this decade? Michael Kennedy: Yes. I think you saw that in the strategic initiatives, Neil, we have such a terrific asset and best rock, some of the best rock in North America, definitely the best rock for liquids development and midstream access, midstream capacity, balance sheet, investment grade. So it kind of ticks all the boxes. And now the strategic initiatives going forward, just trying to enhance that, doing bolt-on acquisitions in West Virginia, trying to enhance our exposure there, some dry gas development like we've talked about. That's a good opportunity for us and then using hedging as a tool. That's one thing that, like I mentioned, we want to be countercyclical and the only way to do that is to have some sort of certainty of cash flow during low commodity price times. So that's kind of the next frontier that we're looking at, but we're excited about it. And like I mentioned, we have the dominant position in West Virginia, so we should expand upon that. Neil Mehta: Very clear, Mike. And then I just wanted to go to the macro on NGLs. And as we watch your pricing sheet, it's a tougher environment right now. I guess not so bad when you look at it as a percentage of WTI, but on an absolute basis, it's pretty challenging. So just talk about the path for recovery in '26. Do you think that recovery is going to be more supply driven or demand driven? On the supply side, I saw you put out some interesting numbers in terms of volume growth. It's probably below where I think consensus is for volume growth in the Permian for NGLs next year. So is that out of consensus view that you guys have that we can offset sort of the prevailing view that even if black oil is flat, that NGLs will still be growing significantly? David Cannelongo: Yes, Neil, this is Dave Cannelongo. I'll take that one. So I guess to your first question on looking forward to 2026, Certainly, oil prices do play a key role in what happens with NGL pricing. And as you alluded to, as a percentage of WTI, it's been improving here in 2025 despite some of the market headwinds that were out there. So if you kind of look back at 2024, through the first 9 months of the year, a little less than 54% WTI, 60% WTI here in 2025. So that really kind of speaks to the value for NGLs is still there, driven by res/com in elasticity and petchem demand. Looking forward to '26, obviously, we're very optimistic about the trade uncertainties getting resolved here. Obviously, some announcements here this morning that we think will certainly some of that. If you look back to what was being exported in particular to China prior to the tariff announcements in early April was around 600,000 barrels a day or 1/3 of U.S. LPG exports headed that direction or propane exports. In June, it was a little less than 100,000 barrels a day and since rebounded to about 300,000. So certainly, some following there, but we'd like to see that continue to improve. That will help with efficiencies on freight pricing, which will also drive Mont Belvieu higher. So those are kind of the key things we're looking to. I don't know how long the world can sustain at a $50-something per barrel WTI as well. So we're -- you expect at some point, that's going to resolve itself and also become a tailwind for NGL prices on an absolute basis. Coming back to the supply picture and your questions on that, that view is a third-party view that we put in our presentation. I think there's a lot of different groups that are out there. There's been some consolidation in the third-party analytical groups. So there aren't as many people out there providing views. It seems to be a belief around gas oil ratios increasing, and that really seems to be what's behind some of the higher NGL supply growth views. But undoubtedly, I don't think anybody is disputing in this oil price environment and lower rig count environment that NGL supply growth is going to be as strong as it was if you're looking at the chart in the prior years. Operator: And your next question comes from Paul Diamond with Citi. Paul Diamond: Just wanted to touch quickly on kind of capital allocation given current conditions. With your hedge book, you guys put out a pretty decent your free cash flow next year and have used kind of evenly between stock repurchases, debt repayment and acquisitions. I guess in kind of a bull scenario, how much cash would you be willing to build if you want to really maintain countercyclicality, assuming that you have limited debt to really buy back now? And if your stock starts to run, what level of cash is comfortable? Michael Kennedy: Yes, that will be a good problem to have. But I think I mentioned earlier, we have $700 million of debt that we can pay down. Of course, we'd be buying shares all along that way as well. So in a real bull case scenario where you get into a couple of billion of free cash flow a year, you would start to build some cash. But I think you'd be -- unless you didn't really have any other transaction opportunities, I think you'd kind of be where we're at right now, where it's kind of like 1/3 repay debt, 1/3 equity purchases and 1/3 in transactions. Paul Diamond: Got it. And just kind of switching to the other side of that coin, some of your peers have really started to do production management, whether it be curtailments or choking or anything along those lines. Given your FT, I know it's less of an opportunity for you, but just wanted to see if you saw how Antero would play in that on the margins. Is that something you haven't looked into or. Michael Kennedy: Well, when we do it, we just don't talk about it. It's already built into kind of our guidance, and it's really kind of they may say it's curtailment practices, but I think it's really economics based and the gas prices are low in the basin. So it wouldn't make economic sense to flow to that whenever that occurs, which is rare, like you mentioned, with the FT and the liquids, we don't really have that much local basis exposure. But we do have it from time to time, but we always build that in the risking of our guidance. Operator: And ladies and gentlemen, there are no further questions at this time. So I'll turn the floor back to Dan Katzenberg for closing remarks. Thank you. Dan Katzenberg: Thank you, and thanks, everyone, for joining the call today. Please feel free to reach out with any questions that you have. Have a good day. Operator: This concludes today's call. All parties may disconnect. Have a good day.
Operator: Good afternoon, and thank you for joining the Third Quarter 2025 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are Chief Executive Officer, Rich Steinmeier; and President and Chief Financial Officer, Matt Audette. Rich and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Steinmeier. Richard Steinmeier: Thanks, operator, and thank you to everyone for joining our call. It's a pleasure to speak with you again. It is hard to believe, but it's been a little over a year since I became the CEO of LPL Financial. In that time, we've advanced the firm, extending our privileged competitive position in the adviser-mediated marketplace while driving efficiency in the business. So I'd like to spend some time today sharing an update on the progress against the key initiatives I outlined on my first earnings call. But first, let's hit our Q3 results. In the quarter, total assets increased to a record $2.3 trillion, driven by our acquisition of Commonwealth and complemented by solid organic growth and higher equity markets. We attracted organic net new assets of $33 billion, representing a 7% annualized growth rate. Our third quarter business results led to strong financial performance with record adjusted EPS of $5.20, an increase of 25% from a year ago. With that as context, let's review a few highlights of our business growth. In the third quarter, recruited assets were $33 billion, bringing our total for the trailing 12 months to a record $168 billion. In our traditional independent market, we added approximately $12 billion in assets during Q3, where despite depressed industry-wide adviser movement, we maintained our industry-leading capture rates of advisers in motion while also expanding the breadth and depth of our pipeline. With respect to our expanded affiliation models, strategic wealth, independent employee and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $3 billion in assets. Our third quarter adviser recruiting underscores the evolution of our business and the appeal of our flexible affiliation models. During the quarter, we attracted 4 separate $1 billion-plus practices, which joined us from a range of firms, including regional broker-dealers, insurance companies and wirehouses. Our recruiting results this quarter underscore the extensibility of our offering across the entire adviser-mediated marketplace, where we have created the flexibility to serve any adviser where they are in the evolution of their practice. This breadth of affiliation models is key to the sustainability of our growth as we look ahead. We also continue to make progress with large institutions, onboarding the wealth management business of First Horizon. It's only been a couple of months, but there are already signs that the integrated experience and enhanced capabilities we are delivering are improving the efficiency of their adviser practices. Turning to overall asset retention. Prior to previously disclosed misaligned OSJ assets that offboarded during the quarter, it was 98% for Q3 and over the last 12 months. This is a testament to our continued efforts to enhance the adviser experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As a complement to our organic growth, we closed our acquisition of Commonwealth Financial Network, welcoming their approximately 3,000 advisers and home office staff to the LPL family. The transaction is progressing well, and we continue to track towards our 90% retention target. Thus far, advisers representing nearly 80% of assets have signed to stay with Commonwealth and LPL. From an operational standpoint, following the close, we commenced work on the capability build and onboarding planning. To give you a sense of the scope of this work, we are ushering in a foundational shift in our adviser workstation ClientWorks, establishing a householding-based architecture compared to our historically account-based orientation further bolstering this relationship-based logic with a single relationship agreement to vastly improve the client onboarding experience and simplify ease of movement between account types and launching a mobile version of our ClientWorks workstation for ease of access for advisers on the go. These are key capabilities that not only enable commonwealth conversion, but also accelerate the delivery of core functionality for the benefit of all LPL advisers. Next, let's turn to our strategic plan. Our vision is clear. We aspire to be the best firm in wealth management. To connect this back to my first earnings call a year ago, in service of this goal, we've amplified our focus in 3 key areas: one, maintaining the client centricity the firm was built on; two, empowering our employees to deliver exceptionally for our advisers and their clients; and three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. In terms of our clients, we have been laser-focused on preparing for a seamless onboarding of Commonwealth, including the delivery of capabilities and implementation of systems and practices, which will benefit all LPL advisers, new and existing. Separately, we continue to look for opportunities to strengthen our value proposition in the market while ensuring that we are pricing our services aligned with the value that we deliver. Earlier this year, we made adjustments to our production bonus as well as within our Business Solutions group. And looking ahead, we plan to make additional adjustments as we evolve our offering streamlining our services portfolio to focus on high-demand, high-impact services that deliver the greatest value to advisers while simplifying pricing across our advisory platforms. And to ensure we maintain our competitive position, we're making a few targeted offsetting fee adjustments where we've been priced below the market. As for our employees, we've been focused on elevating our benefits and better distributing decision-making authority to the teammates closest to our advisers. During the quarter, we also welcomed Emily Field, our new Chief People Officer, to help guide this critical work. And just last week, she kicked off our revamped manager learning program aimed at giving managers the necessary skills to build empowered teams and deliver exceptional employee and client experiences. Finally, regarding our efforts to drive improved operating leverage, we've made meaningful progress reducing our cost to serve, and Matt will share some additional detail on that in a moment. To summarize, we are pleased with the third quarter results, and we feel great about our position as a critical partner to our advisers and institutions while we continue to create long-term value for our shareholders. With that, I'll turn the call over to Matt. But before I do, I just wanted to preempt that first question that we're hearing from so many of you. You wanted an update on our favorite Halloween candy. Well, mine is 100 Grand Bar and Matt's is actually Muscle Milk. So with that, Matt, take it away. Matthew Audette: It's not on the script, Rich, you're very funny. I do like me a good protein shake. That's not my favorite candy like I do have a favorite candy. And I didn't want to tell you, I figured it would be too triggering given your high school football nickname, butter fingers. I loved it. Now, I can eat them. All right. Well, thank you for that intro. And I'm glad to speak with everyone on today's call. It was another productive quarter as we advanced several strategic priorities, including another quarter of industry-leading organic growth, the onboarding of the wealth management business of First Horizon, closing of our acquisition of Commonwealth and the continued advancement of our cost efficiency work, which is driving sustainable improvement in our margin. Now turning to a few highlights from our Q3 business results. Total advisory and brokerage assets were $2.3 trillion, up 21% from Q2 as continued organic growth and higher equity markets were complemented by our acquisition of Commonwealth, which added $275 billion of assets in Q3. Total organic net new assets were $33 billion, an approximately 7% annualized growth rate, a strong result both on an absolute and relative basis. On the recruiting front, Q3 recruited assets were $33 billion, contributing to a record $168 billion over the trailing 12 months. With respect to large institutions, we successfully onboarded First Horizon with $18 billion of AUM, of which $17 billion transitioned onto our platform in Q3. Looking at Q3 financial results. The combination of organic growth and expense discipline led to an adjusted pretax margin of approximately 38% and record adjusted EPS of $5.20. Gross profit was $1.479 billion, up $175 million sequentially. As for the key drivers, commission and advisory fees net of payout were $426 million, up $77 million from Q2. Our payout rate was 87.5%, up approximately 14 basis points from Q2, driven by the typical seasonal build in the production as well as our acquisition of Commonwealth. With respect to client cash revenue, it was $442 million, up $28 million from Q2. Overall client cash balances ended the quarter at $56 billion, up $5 billion, which included approximately $4 billion from Commonwealth. The remaining $1 billion of cash balance growth was a result of the organic growth of our business. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%, near the midpoint of our target range of 50% to 75%. Looking more closely at our ICA yield was 351 basis points in Q3, up 9 basis points from Q2, driven by benefits from the Atria conversion and our acquisition of Commonwealth. As we look ahead to Q4, based on where client cash balances and interest rates are today, we expect our ICA yield to decrease to roughly 345 basis points, driven by the impact of recent rate cuts. As for service and fee revenue, it was $175 million in Q3, up $23 million from Q2, primarily driven by revenues from our annual focus comps as well as our acquisition of Commonwealth. Looking ahead to Q4, we expect service and fee revenue to be roughly flat sequentially as a full quarter of revenue from Commonwealth is offset by lower conference revenue and seasonally lower IRA fees. Moving on to Q3 transaction revenue. It was $67 million, up $7 million sequentially, primarily driven by Commonwealth. As we look ahead to Q4, based on activity levels to date, we expect transaction revenue to be roughly $70 million. With respect to the monetization initiatives Rich mentioned earlier, we regularly evaluate how effectively we're delivering services, pricing and an overall experience that aligns with adviser needs. Starting next year, we will streamline our business solutions portfolio to focus on those that deliver the greatest value to advisers, further reduce pricing across our advisory platforms and make targeted offsetting fee increases where we've been priced below the market. These actions are designed to strengthen our competitive position while ensuring we have the resources to continue investing in platforms, tools and services that enable advisers to grow and succeed. To help frame the financial impact to our 2026 results, we estimate that these changes would increase our trailing 12-month adjusted pretax margin by approximately 1 percentage point. Now let's move on to our recent acquisitions, starting with Commonwealth. Overall, the transaction is progressing well, and we are on track to onboard Commonwealth in the fourth quarter of 2026. We continue to track towards our 90% retention target with advisers representing nearly 80% of assets already signed. In addition, factoring in current asset levels, our run rate EBITDA expectation has increased to approximately $425 million once fully integrated. As for Atria, the onboarding is complete. And considering current assets, we are increasing our expected run rate EBITDA to approximately $155 million. Now let's turn to expenses, starting with core G&A. It was $477 million in Q3, below our outlook range for the quarter as we continue to make progress driving incremental operating leverage in the business. To give you a sense of the work, we're automating manual processes in our operations and services, increasing straight-through processing and reducing friction in our services. In addition, these initiatives have the added benefit of improving the client experience. With that as context, looking at the full year 2025, given our cost initiatives are tracking ahead of schedule, we are lowering our 2025 outlook to a range of $1.86 billion to $1.88 billion. Moving on to Q3 promotional expense. It was $202 million, up $38 million from Q2, primarily driven by conference spend as we hosted our annual Focus conference in August as well as transition assistance related to comp. Turning to depreciation and amortization. It was $100 million in Q3, up $3 million sequentially. Looking ahead to Q4, we expect depreciation and amortization to increase by roughly $5 million. As for interest expense, it was $106 million in Q3, up $4 million sequentially, driven by increased usage of our revolver following the close of the Commonwealth transaction. Looking ahead to Q4, given current debt balances and interest rates, we expect interest expense to increase by approximately $5 million from Q3. Turning to capital management. We ended Q3 with corporate cash of $568 million, down $3 billion from Q2 as we deployed the proceeds from our capital raises to fund the acquisition of Commonwealth. While the majority of transition assistance was deployed in Q3, we expect a couple of hundred million of additional payments in the fourth quarter, which will return corporate cash to more normalized levels. As a result, we anticipate Q4 interest income to decline to approximately $30 million. As for our leverage ratio, it was 2.04x at the end of Q3, below our initial expectations for roughly 2.25x following the close of Commonwealth. Moving on to capital deployment. Our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders. In Q3, the majority of our capital deployment was focused on supporting organic growth and M&A, where we closed Commonwealth and continue to allocate capital to our liquidity and succession solution. To uphold our commitment to maintaining a strong and flexible capital position, share repurchases remain paused, which we will revisit once we onboard Commonwealth. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage and create long-term shareholder value. With that, operator, please open the call for questions. Operator: [Operator Instructions] Our first question coming from the line of Alex Blostein with Goldman Sachs. Alexander Blostein: Thank you for all the detail, including the snack preferences. Just maybe starting with Commonwealth. Obviously, it's a big topic, helpful update with the 80%. Maybe help us frame how that's tracking at this point of integration relative to your original plan? And given that 80% is already quite sizable number, at what point do you find that your recruiting teams could start to focus more externally again to reaccelerate the pace of net organic growth? Richard Steinmeier: Good question, Alex. I appreciate you asking. So let me start out. So it's been around 6 months since we signed the deal and 3 months since we closed. And as we mentioned, the transaction continues to progress as planned. It's really been an ongoing engagement with Commonwealth Advisers and home office staff, and it is incredibly productive as we jointly chart this course ahead together. And as we've said previously, the Commonwealth advisers are really thoughtful, and they are a very diligent community, which really doesn't surprise us given that they include many of the best advisers in the industry. And so it stands for reason that they have been extremely thorough in their diligence. And we have been dedicated to making sure that we can give them all the information they need to make their very best decision. And that includes thousands of interactions since the announcement to ensure the advisers understand the benefits of the combination. Most recently, last week, there were over 1,000 CFN advisers at their national conference in Washington, D.C. We had sessions from main stage breakouts as well as a number of individual sessions across both the Commonwealth leadership as well as the LPL leadership. And as well, we know that we have scheduled many more in-person home office visits and virtual meetings for the next coming months. And so as we said earlier, we're at that kind of nearly percent -- nearly 80% of assets having signed their agreements to stay with Commonwealth on track for the 90% and putting all of that retention aside, we feel over the moon with this transaction. The cultural alignment and complementary capabilities are creating a combined firm that is far stronger than the sum of the parts. We feel great about the value that this will deliver to Commonwealth advisers, existing LPL advisers and shareholders. And the work that we're doing here significantly advances our progress on creating the best firm in wealth management. One last thing you did mention, as we begin to continue to progress towards higher and higher percentages of the advisers who have decisioned to stay with Commonwealth, that does present us the opportunity to bring back some of the recruiting and retention specialists that we had ring-fenced and allocated into educating Commonwealth advisers. And that's beginning throughout the second half of this year and will continue. But Matt, is there more you'd like to add? Matthew Audette: Sure. I mean I think maybe just to underscore what you said, I mean, I think we feel great about the transaction. We feel great about Commonwealth as a firm, high-quality advisers they have, high-quality leadership team, home office team, culture. So just all around from an acquisition standpoint before we even get to the economics, which I'll give a little more color on, we feel really great about. I think since there's been, let's just say, a little bit of focus on the retention targets and how those have been progressing, I think, Alex, to your question, it's always hard to predict exactly how things will trend. But I think as a general point, we are on track to where we thought we would be. But if you just look at where we are right now at nearly 80% retention and the economics that come with that where we are right now, I mean, you're just under a 9x multiple, right? So I think for a property of the quality that Commonwealth is, I think we'd be very happy with that. And to Rich's point, as we progress to 90% retention, just to give a little bit of the sensitivities. Every incremental percentage of retention that we have is about a reduction of 1/10 of a turn on the multiple or an increase of $5 million in run rate EBITDA. Just so you have kind of the sensitivities on how that would work. But I think as you pull back up, I mean, we're incredibly excited to have the opportunity to engage with them, sign the transaction, to close the transaction. And now that we're much, much closer and involved with the teams, as Rich said, we're over the moon. We're really, really happy. Operator: Our next question coming from the line of Steven Chubak with Wolfe Research. Steven Chubak: Rich and Matt, so maybe to start, I was hoping to dive a bit deeper into the pricing changes you mentioned in the prepared remarks. It's certainly encouraging to hear the net impact will be 100 bps benefit to the margin. But I wanted to clarify whether the 100 bps net benefit contemplates both efficiency in addition to pricing changes and how these pricing adjustments could enhance the value prop, maybe drive some better organic growth outcomes going forward? Matthew Audette: Sure, Steven. So I think the 100 bps improvement was solely from the pricing changes. So any additional improvements on the cost side would be in addition to that. I think to your second part of your question, I think when you look at the areas where the pricing changes are being made in the core area where our advisers are bringing in assets on the advisory side. And I think our pricing there has been competitive, and we're lowering the pricing there as to make it even more competitive. So if you think about where advice is being delivered and where the flows are, I think that helps enhance our opportunity to grow. And on the other side, on the brokerage side, as we looked at the market, we were priced below the market. So I think what you see us doing on the brokerage side is bringing fees up into line where the market is currently. So broadly, brokerage in line, and I think we positioned advisory to be a place that can grow even further. Operator: Our next question coming from the line of Craig Siegenthaler with Bank of America. Craig Siegenthaler: So I have another follow-up on Commonwealth, and congrats on getting to the 80% retention. That fell faster than expected. But on the 90% target, is the time line there the 4Q '26 onboarding target? Or could that actually be sooner? Matthew Audette: Well, I'd say, Craig, I mean maybe it's -- the answer could be yes to both. I think when you look at when we will finalize where -- what the retention is, is when they're onboarded. So that's when you snap the chalk. But whether we get from 80% to 90% before that certainly can occur. But ultimately, it's when they are onboarded is when we'll measure that. And our estimate is that, that's the estimate of $425 million when we'll start to begin to recognize synergies and building up to that $425 million is when onboarding happens as well. So all a little bit over a year from now. Operator: Our next question coming from the line of Brennan Hawken with BMO Capital Markets. Brennan Hawken: Rich and Matt, so I know Commonwealth brings new capabilities to you. You've also been steadily investing in building out the service offering, particularly for high net worth investors, really with the goal of pursuing larger teams and targeting some more wirehouse advisers. Could you speak to how that's progressing and what your updated expectations are on that front? Richard Steinmeier: Yes. Thanks, Brennan. And I would thank you for painting within the lines on that question. So I appreciate your sticking to the knitting there. So let me try to hit it. So first off, you're right. I mean we have been pursuing a multiyear journey to become increasingly more relevant to wirehouse advisers. I think Commonwealth adds a tremendous amount, not only of capabilities, of brand credibility, capabilities and a service orientation that is second to none in the independent channel that is very attractive to wirehouse breakaways as well. But when you take a couple of steps back and think about the way we've built towards methodically serving this market more expansively, it started with expanding our affiliation models several years ago, specifically as you think about our independent adviser channel around our W-2 channel we call Linsco, as well as our strategic wealth supported independent channel and progress with our introduction of a private wealth channel. The 3 of those offerings plus a continued investment in capabilities around degrading the difference between ourselves and the wires, certainly now on alternative investments, high net worth capabilities, specifically advanced tax planning, long-term planning, investment solutions as well and our ability to upgrade our service experience with the introduction of our field management organization oriented towards the success of those larger advisers. Taken together with our pool of existing high net worth oriented advisers, you have a community that is building in capabilities. And kind of the capstone to those investments for us over the last year has been the introduction of an enhancement of the LPL brand in the marketplace. All of those things taken together have expanded consideration for us in that wirehouse W-2 market. And I believe now have begun to expand our consideration for those high net worth wirehouse advisers that represent an additional $5 trillion market opportunity. So we continue to run into that space. We continue to build capabilities. We continue to build credible capabilities, and we've enhanced consideration. Taken together, I would expect that, that would continue to advance our capture of flow and movement out of the wires and the regionals across our affiliation models in a way that we have methodically seen, I would expect it to continue at pace. Operator: Our next question coming from the line of Devin Ryan with Citizens Bank. Devin Ryan: I want to ask a question just on expenses. Obviously, good to see the improvement on the 2025 G&A guide. So just trying to think about bigger picture, there's been a lot of moving parts on expenses just with a couple of big acquisitions coming into the system here in recent quarters. At the same time, you guys are taking actions to become more efficient. So I love to just think about, I guess, first off, some of the drivers that improved the guidance for the year. How much of that is structural carries into 2026? And then just more broadly, how you're feeling about the expense trajectory of the firm as you're probably finding more efficiencies with these transactions at the same time, still plenty of growth investment to do and some business inflation. So just trying to think about the guidance, but then also the trajectory. Matthew Audette: Yes, Devin. So I think when you look at the things that we're doing that are driving the savings, I mean, they are -- to the point of your question, there are things that are ongoing, right? There are things where we're making investments to automate things in our service areas and our operations groups. There are process improvements, capability deployments. We're starting to use AI in a way that is practical and delivering. And you think about where and how that shows up as you're able to improve those things, you start to have lower NIGO rates, which are things that have to be reworked back and forth between us and our clients, which is a frustration from a client standpoint and it also incurs costs on our side. Our advisers and their staff have to call us less, right, because there's less to call about. And we have less folks that spend time answering those calls. We have increased use of our digital tools, right? It just -- it goes on and on. And I think those are the things that really led to the improvements this year. And those are the things that I think we're going to continue to focus on from here going forward. Now I think we do get into some things, even if you just look at next year, we'll give some -- we'll give our guidance for next year on the next call like we normally do. But to your point on some of the other deals coming on board, I just -- maybe there are 2 things I would highlight that are in addition to the efficiencies that we are driving. One is maybe obvious, but just keeping in mind, you're going to have a full year impact of Commonwealth's expenses next year. And as they onboard towards the end of the year, the synergies on the expense side largely won't show up until 2027. So I just want to keep that in mind. And then second is a little bit building on what Rich was talking about earlier with respect to recruiting capacity. Another big driver of our expenses is the level of organic growth, right? So as recruiting frees up from Commonwealth, pivots back to the marketplace in general, to the extent that drives up organic growth, you would naturally have some incremental expenses coming on the core G&A side. Now at a more efficient level, given all the automation that we've done, but that's something that could drive it as well, which I think we'd all put in the category of a high-class problem on an expense side. So I hope that helps frame it. But I think I just -- the headline I'd hit is I think we feel really good about what we're able to drive on the automation side, how that's dropping to the bottom line, but also how it improves our client experience and improves our employee experience. I mean the things that we are removing are rote monotonous things that allow people to focus on things that are more interesting. So I think it's exciting. The entire management team is aligned on it. And hopefully, the results show that we're able to deliver here. Operator: Our next question coming from the line of Jeff Schmitt with William Blair. Jeffrey Schmitt: You had talked about how adviser movements are still depressed for the industry, I believe. And I was curious, how is your share of those movements trending? And do you still expect that to be kind of a temporary phenomenon and ultimately lead to higher organic growth in future quarters? Richard Steinmeier: Yes. Thanks for the question. We have seen that, that movement continues to stay a little bit artificially low. The truth is that when you look at movement in the industry, you see overall movement, but then you often see times where there are events in the marketplace that drive adviser churn. And those two events that we're seeing right now in the marketplace that would drive churn are: one, the adviser compensation changes at the wirehouse. They just continue to get further and further away from market competitive. And so you see more and more advisers in increasing numbers picking up their heads to consider their alternatives. And so I think that actually is a good trend for the independent segment where you could see continued movement and may move us back towards historical norms. The other side of that is actually our Commonwealth acquisition as well, which drove activity in the marketplace, certainly from competitors and drove more, I would say, even elevated TA rates that have extended more broadly, not only just at Commonwealth opportunities, but I think more broadly across the industry. How do we think about that extending in time, I think we would be hopeful that we would return to historical norms as well as for how our capture has been trending, our capture has stayed consistent. We are the #1 capturer of advisers in movement and in motion in the marketplace. That has persisted at historical levels. And in time, over the last 5 years, we have seen that we have continued to grow share capture of advisers in motion, and we would hope to believe that, that would continue in time as well. So as we head back towards more stable times, I think we would expect to see ourselves continue to participate in the way that we have in the marketplace. We feel as convicted, if not more convicted that our relative value proposition is absolutely the strongest in the marketplace in support of advisers. And so I think we feel good at the forward-looking outlook. Operator: Our next question coming from the line of Michael Cyprys with Morgan Stanley. Michael Cyprys: I wanted to ask about alternatives. I was hoping you could update us on the progress in building out your alternative investment capabilities, how that stands today, steps you're looking to take over the next 12, 24 months? And if you could also touch upon digital assets, speaking of alts generally, what sort of access do your customers have today? How is that evolving? What sort of demand are you seeing? And how might both of these enhance your appeal to advisers in the marketplace as you build this out? And how might it also support revenue ROCA monetization? Richard Steinmeier: Yes. I'll hit the developments of the -- that's like a quadruple embedded question, which is pretty awesome. Thanks, Michael. So on alternative investments, we have -- and we've shared a couple of times on earnings, we've been on a multiyear journey to delivering a very compelling alternative investment offering. And I would tell you, by the end of this calendar year, I think we're on par with any player in the marketplace around the breadth and quality of our offerings. And so that journey was for us, one, building a core technology platform, which we have largely implemented. Two was expanding the offering. And so those selling agreements across a broad set of alts that we've done diligence on, and we're making really good progress there and expect to be -- our alternatives improved for sale have more than doubled to 80 by the end of -- that was from the end of 2024, and we're moving towards 120 alts available for sale by the end of this year, which I think puts us toe to toe with anybody in the industry. And then the third thing for us is beginning to educate advisers and assisting them in how alternatives can help the needs of their clients. And so we've done a couple of things there, not only introduced an alts Connect last year, which is our e-signature and digital sign and simplifying the subscription process, but we also launched the Learning Hub in Q1, which is a one-stop shopping for educational resources designed to empower advisers with the knowledge and tools necessary to incorporate alts into their investment -- into their practices. And so I think on alts, I think I can reflect and say we have made tremendous progress over the last 18 months. I'm incredibly proud of the team and the work that they've done. And I think we feel really good about not only the technology platform because in addition to those for which we have selling agreements, we've actually enhanced our custodial and operational capabilities so that we can actually convert over 2,500 products that are held away to be brought onto our custodial platform. And so the ability to move advisers, move those holdings, sell forward, give them a really good operating environment with technology, I think we feel strong about our position to compete in the marketplace. You asked about digital assets. As for crypto, we'll always prioritize solutions that align with our advisers' needs. Today, we have 5 cryptocurrency ETFs on the platform, and we're hearing from advisers and making available the products they need to manage their business in a control environment that is responsible, not only for the advisers and the risk, but also for end investors. And so while we don't currently facilitate crypto trading, we are closely monitoring the competitive landscape, and so we'll keep you updated on that continued progress. All in all, I think we feel good about continuing to extend those offerings. They make us more competitive in the marketplace. They make us an available landing spot for more sophisticated advisers, and they allow our advisers to have a range of offerings that are second to none in the industry. Operator: Our next question coming from the line of Ben Budish with Barclays. Benjamin Budish: Matt, a few questions ago, you were talking about how the slowdown in advisers in Motion has resulted in some elevated TA rates, not just that are impacting Commonwealth but across the industry more broadly. I'm curious, you guys have talked in the past about these sort of slowdowns being temporary. Given where rates are, I think you've explained in the past that TA rates rose as this is somewhat reflecting a reinvestment of higher rates on cash balances. What would your expectation be? Or how do you think about the progression of TA rates from here as rates come down? Would it be natural to expect that if advisers in motion or the turnover picks up that rates come back down? Or what would your expectation be there? How should we be thinking about that over, say, the next 12 months? Matthew Audette: Yes. I mean I think if history is a guide, right, the overall returns are going to guide where TA rates go, right? So as interest rates have gone up, you saw TA rates go up. And as it comes down, you would expect them to come down. I think the other dynamic you have or a couple of dynamics to your point of less advisers moving, so there's more demand for that. And when you have transactions in the marketplace like we are currently engaging with Commonwealth, folks will bring more money to the table from a TA standpoint. And I think that's what we're seeing right now. I think for us, which you've heard us talk about before, I mean, we always underwrite to returns with a consistent framework and return hurdle, which for us is usually deploying capital in the 3 to 4x EBITDA range. And I think when you have an environment like this, we'll just hedge towards the upper end of that, right? So being closer to 4x than 3x, but still going back to what really, really matters, which is really the environment that an adviser is going to land on, meaning the capabilities, technology, service and their ongoing economics. So that's really what's going to carry the day. TA, of course, is important. I think where it trends over time it's hard to predict, but it's going to be driven by the factors that you highlighted, the number of advisers moving, what's happening in the marketplace and where rates are going. But I think from our standpoint, we've operated in all those environments. And ultimately, what matters is the value that we're bringing to the table is going to carry the day. And I think that's why to what Rich was just talking about, when advisers do decide to change firms, we're the #1 place they come. Operator: And we have a follow-up question from Steven Chubak from Wolfe Research. Steven Chubak: Given the NNA trajectory has been impacted by the repurposing of resources to support better or higher Commonwealth retention, has anything changed about your long-term NNA expectations? And I was also hoping you can give an update, Matt, on October cash and NNA trends as well. Matthew Audette: Sure. I'll start with October, and then I think Richard can jump in on the NNA. So I think October has been a good month, similar to September. So if you look at client cash balances, reminders that you know well, Steven, but I'll hit in many ways, advisory fees primarily hit in the first month of the quarter. And now just given our size, right, including with Commonwealth at $2.3 trillion of AUM, those fees get bigger and bigger. So for October, they were at $2.4 billion. Outside of that, though, client cash balances continue to grow. And they're up so far $700 million in the month. So you kind of net that out, down at $1.7 billion or just over $54 billion of cash. So I think a good month on the cash. On the organic growth side, those advisory fees hit there as well. So the first month of the quarter is typically lower. And then factoring in that adviser movement still remains low. When you factor in those two factors, I think October has looked good. We're -- where we sit today, we're around 4% organic growth for the month. Keeping in mind that's prior to the around $1 billion of AUM left to go on those large OSAs that are offboarding that we would expect to come out sometime in the fourth quarter. So overall, I think it's a good start to the quarter. Richard Steinmeier: Steven, it's Rich. So on that NNA trajectory, I think what we've seen would say that you should not think that our NNA trajectory is changing because of this. This is a temporary really ring-fencing of many of our most sophisticated recruiting and/or retention resources to move them over to help educate Commonwealth advisers, some of which they've already been in discussions with. And as such, our feeling has been quite good. It's the progression in the pipeline that was going to be most impacted as that team only has so many hours in the day. So as they begin to move back in to having -- enhancing the share of their time that's spent on external advisers to this firm, I think you would expect to see that we would continue to have the successes we've had in the past. Operator: Our next question coming from the line of Bill Katz with TD Cowen. William Katz: Congrats on the 1 year, Rich, can't believe how quick it's been. Maybe a 2-part question, just embedded, a little bit disparate in nature, so I apologize for that. Can you give us a sense of where you might stand on the enterprise side now that you're getting -- working your way through CFN and how you might be able to sort of multitask maybe some larger platforms to the extent that, that pipeline is building? And then on the net new money that's coming in the door, can you tell us what kind of cash allocation that is relative to roughly 2.5% that's the legacy book right now? Matthew Audette: Do you want to take institutional first? Richard Steinmeier: Well, I was going to say thank you to Bill first because he said something really nice to me. Why don't you hit the last part and then I'll come back on institutional. Matthew Audette: Yes, sure. So Bill, make sure I just jump in. When you say the cash sweep that's coming in, when you say allocation, are you talking about the percent per account on the incremental versus the overall? I want to make sure about the question. William Katz: Yes. I apologize for coughing on the call. Yes, like the cash allocation as a percentage of net new assets compared to roughly a 2.5% that's the average for the quarter or at the end of the quarter. Matthew Audette: Yes, I think the cash that's coming in, it's around -- it's not a material difference than where things are overall, if that's where you're getting. So pretty similar. Richard Steinmeier: Okay. So then on that institutional side, Bill, maybe I should acknowledge for us, getting Commonwealth right is the singular #1 job right now. And so we're focusing a lot of our resources on delivering a seamless experience for the new advisers joining the platform while ensuring to continue -- we deliver a great experience for our existing advisers. So we framed this a couple of times, but I'd just reiterate, I wouldn't expect too much by the way of other large announcements for the time being. But that being said, maybe in some broader context, we have been targeting historically large banks. And I think especially as you think about this market environment for large banks, we see the ability for the banks that we work with to be winners and net consolidators in the consolidation of that retail banking industry. And so feel really good about our ability to be a counterparty to large banks as they acquire in that market. And historically, we've had some fantastic partners like M&T, BMO and where we've seen them be net acquirers and us help them with their wealth management business on some of those transactions. As well, we continue to be in conversations around insurance broker-dealers and product manufacturers and as an aside, those markets are similar size, bank outsourced model opportunity sits around $1.5 trillion in the market. And in that insurance broker-dealers and product manufacturers, there's another $1.5 trillion in market opportunity. And post that onboarding of Prudential that we feel really good about, and we've seen great successes with -- in partnership with them. I think that is a very validating event in the marketplace. But as we've said before, those are some long lead time conversations. And just to reiterate, at this moment in time, we are focusing all of our resources on ensuring that we get Commonwealth right and landed and still progressing conversations, but I would expect less in the way of announcements to come in that large institutional segment. Operator: I'm showing there are no further questions in the queue at this time. I will now turn the call back over to Mr. Steinmeier for any closing remarks. Richard Steinmeier: Well, thank you, operator, and thank you to everyone for joining us tonight. We look forward to speaking -- we look forward to speaking with you all again in January. Have a great evening. Thanks. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: " Alan Edrick: " Ajay Mehra: " Jeff Martin: " ROTH Capital Partners, LLC, Research Division Lawrence Solow: " CJS Securities, Inc. Mariana Perez Mora: " BofA Securities, Research Division Josh Nichols: " B. Riley Securities, Inc., Research Division Seth Seifman: " JPMorgan Chase & Co, Research Division Operator: Good day, and thank you for standing by. Welcome to the OSI Systems, Inc. First Quarter 2026 Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer. Please go ahead. Alan Edrick: Thank you. Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I'm here today with Ajay Mehra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 First Quarter Conference Call. We are pleased that you can join us as we review our financial and our operational results. Earlier today, we issued a press release announcing our fiscal '26 first quarter financial results. Before we discuss these results, I would like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise. During today's call, we will be discussing the company's results using both GAAP and non-GAAP financial measures. For more details on these non-GAAP measures, their comparable GAAP measures and a quantitative reconciliation of the two, please refer to today's earnings release. I will begin with a high-level summary of our financial performance for the first quarter of fiscal '26 and then turn the call over to Ajay for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of our increased guidance for fiscal year '26. We delivered strong first quarter financial results, setting multiple Q1 records across key metrics, and we are excited by the momentum across our businesses. Now for the high-level summary of our Q1 results. First, revenues increased 12% year-over-year to a Q1 record of $385 million. Each of our 3 divisions achieved double-digit top line growth, highlighted by a 13% increase in revenues in the Security division. This top line performance is especially noteworthy given that the prior year Q1 included substantial revenue from major security programs in Mexico. Excluding contributions from those Mexico contracts and revenues generated by businesses acquired in fiscal '25, our underlying consolidated revenues grew roughly 26% in Q1, highlighting robust organic demand across our core businesses. Second, the solid revenue growth led to record Q1 non-GAAP adjusted EPS of $1.42. And third, Q1 bookings were strong. And with a book-to-bill ratio of approximately 1.1 in the quarter, we finished with a record Q1 backlog approaching $1.9 billion. This backlog, coupled with a robust pipeline of opportunities, provides good visibility as we continue into Q2. Before diving more deeply into our financial results and discussing our outlook for fiscal '26, I will turn the call over to Ajay. Ajay Mehra: Thank you, Alan. Good afternoon, everyone. I want to start by recognizing the outstanding performance of our global OSI team in delivering a record-breaking first quarter. Our results this quarter reflect the strength of our diversified business model and our relentless focus on innovation, operational excellence and customer satisfaction. As Alan mentioned, we achieved 12% revenue growth with solid earnings. Furthermore, our service revenues grew 23% during the quarter as many of our product installations over the last few years are now generating recurring revenue from ongoing service and support. We closed the quarter with a record Q1 backlog and feel confident about the future outlook. Let's jump into the performance and key highlights across our 3 divisions for the first quarter, starting with our Security division. Q1 revenues in this division were $254 million, a solid 13% year-over-year growth. Bookings were strong, resulting in a record Q1 security backlog, setting a strong foundation for continued growth. During the quarter, we continued to successfully perform on our port and border security contracts with Mexico. However, as Alan will elaborate shortly, the impact of these contracts on our overall business has moderated. It has been more than offset by robust growth across other areas of our diverse security portfolio. This dynamic was evident in Q1, where revenues from our aviation, cargo and RF detection offerings, including service, drove double-digit overall growth. Our customers have witnessed our proven expertise in system integration, maintenance, operator training and long-term support, all of which optimize the performance of our inspection equipment during its life cycle. We've also effectively built our turnkey offerings to strengthen our position in global equipment tenders for ports, borders and airport security. As I noted earlier, our bookings remained robust with a book-to-bill ratio of 1.1 in the Security division, supported by several significant wins, some of which we announced recently. We announced approximately $75 million in nonintrusive inspection product and integration orders and more than $60 million in RF product orders that we received during Q1. These orders reflect our growing momentum in critical areas such as cargo and vehicle inspection and advanced RF detection technologies. More importantly, they reinforce the stability and depth of our relationships with our customers. Driven by factors like geopolitical conflicts, terrorism and crime, governments worldwide are investing heavily in advanced systems to enhance detection, deterrence and response capabilities. These escalating global threats are being addressed by increasing focus on technology innovation and in turn, shifting policy priorities supported by targeted funding. During the quarter, we also announced an award of a 5-year contract from CBP for its NII Common Integration Platform program, also referred to as SIP. The SIP program is designed to enhance national border security by enabling sufficient screening and strengthening collaboration among CBP, the Department of Homeland Security and other stakeholders. We are providing our CertScan platform to support CVP's strategic goals by modernizing its inspection capabilities. Therefore, as part of the SIP program, we will support various integration efforts, not only on our platforms, but also with inspection technologies and solutions from other providers. This SaaS-based offering is expected to increase annual recurring revenues over time. We're also gaining significant traction in our RF product line and anticipate further momentum from opportunities tied to Golden dome-related expenditures highlighted in the one big beautiful bill. Once the government resumes full operations, we anticipate heightened demand for a number of our core offerings. The successes in Q1 instill great confidence in our robust growth prospects as we advance through the remainder of fiscal 2026 and beyond. Turning now to our Optoelectronics and Manufacturing division. Opto delivered record Q1 revenues, including intercompany sales, while achieving strong profitability. We experienced notable strength and expansion across our product lines in North America, where many of our customers are leading OEMs in their industries. Our operations in Mexico continue to play an important role amid ongoing global tariff uncertainties. We fielded numerous inquiries from both existing and prospective OEMs seeking to realign their supply chains toward the U.S. and nearshore options. Our robust global manufacturing footprint spanning North America, Europe and Southeast Asia positions us as a compelling alternative for capitalizing on this potential supply chain shift. Finally, turning to our Healthcare division. Q1 sales rose a solid 10% year-over-year. As we've discussed on prior calls, we're executing on the improvement plans we put in place under a new leadership team and beginning to see tangible benefits in both sales and operations. That said, while this Q1 performance reinforces that we are on a good path, we still have considerable way to go before meeting our high performance standards. Looking ahead, we'll continue to drive product innovation in health care with continued R&D investments while advancing operational efficiencies to enhance profitability. In summary, OSI Systems has tremendous momentum. We are a thriving business, diverse and substantial backlog and a robust balance sheet that supports both organic growth and strategic investments. We remain disciplined in managing our cost structure. We expect to generate strong cash flow this year, which combined with our ample credit capacity affords us significant flexibility in capital allocation. I want to thank our employees, customers and shareholders for their continued support. With a strong foundation and expanding opportunities, we are well positioned to deliver long-term value. With that, I will turn the call over to Alan to discuss our financial performance and updated guidance in more detail before opening the call for questions. Thank you. Alan Edrick: Thank you, Ajay. Now I will review in greater detail the financial results for the first quarter and then discuss our increased fiscal '26 guidance. As mentioned, our Q1 revenues were up 12% compared to the first quarter of the prior fiscal year with strength across the 3 segments. Security division revenues in Q1 were $254 million, an increase of 13% year-over-year. This growth was driven by higher service revenues, robust sales of aviation and checkpoint products and increased revenues from the RF business acquired in Q1 of fiscal '25. As expected and directionally similar to last quarter's trend, revenues related to our large Mexico security contracts decreased to $25 million in Q1 of fiscal '26 from $70 million in Q1 of the prior fiscal year. Excluding acquisition-related growth and the Mexico contracts, Securities revenues surged 39% year-over-year, clearly reflecting healthy demand across the broader security portfolio. Meanwhile, our Optoelectronics and Manufacturing division had another excellent quarter. Opto sales, including intercompany, increased 12% year-over-year to $110 million, which is a new Q1 record for this division. This was driven by growth across our diversified product and customer portfolio. And following a difficult Q4, Healthcare division sales driven primarily by international revenue activity bounced back, posting 10% year-over-year growth. Our Q1 gross margin was 32%. This was down from the same quarter in the prior year as a less favorable revenue mix on product sales outweighed an increase in gross margin from higher service revenues. Our margins can fluctuate based on the product and service mix, volume, supply chain cost, FX, tariffs, among other factors. Moving on to operating expenses. Selling, general and administrative expenses in the 2026 first fiscal quarter were $67 million or 17.4% of sales compared to $72.2 million or 21% of sales in Q1 last year. The reduction was aided by more favorable FX in Q1 this year compared to Q1 in the prior year. We continue to work diligently across all divisions to manage our SG&A cost structure efficiently as we grow. R&D expenses in Q1 were above -- slightly above $20 million or 5.3% of revenues, up from $17.8 million or 5.2% of revenues in the same quarter last year. This increase reflects our decision to invest in innovation, yielding market-leading products, particularly in security and positioning OSI well for the future. We expect to continue this heightened focus on R&D to advance key projects through the remainder of fiscal '26. Even with these investments, our combined SG&A and R&D expenses as a percentage of sales have decreased annually for each of the past 8 years, and this trend is anticipated to continue for fiscal '26, underscoring our ability to drive operating efficiencies while still funding growth initiatives. Now moving below the operating line. Net interest and other expense in Q1 was $7.4 million, similar to the amount in the same quarter of the prior year. Our effective tax rate under GAAP was 19.9% in Q1 of fiscal '26 versus 21.9% in Q1 of last year. Excluding discrete tax items, our normalized effective tax rate, which is used in calculating non-GAAP EPS was approximately 23.3% this quarter compared to 24.0% in the prior year quarter. On a non-GAAP basis, our Q1 fiscal '26 adjusted operating margin of 10.3% was consistent with that of the same quarter last year. The securities adjusted -- Security division's adjusted operating margin was 13.5% in Q1 compared to 14.4% a year ago. Strong growth in high-margin security service revenues was offset by a less favorable mix of product sales and growth in R&D. While Opto's adjusted operating margin of 11.9% was similar to the 12.0% in last year's Q1, we anticipate efficiencies in our newest manufacturing facility to contribute to expanding margins in the second half of the fiscal year. Lastly, the adjusted operating margin of our Healthcare division improved 260 basis points, driven in part by revenue growth. Moving to cash flow and the balance sheet. Our year-over-year operating cash flow improved in Q1. That being said, there was opportunity for it to be notably larger. We received partial payments from a significant Security division customer in Mexico during the quarter, marking encouraging progress. We continue to expect substantial cash inflows in fiscal '26 as we continue to collect those remaining receivables, which should lead to sizable operating cash flow this fiscal year and very strong free cash flow conversion. CapEx in the 2026 first fiscal quarter was $7 million, while depreciation and amortization expense was $10.3 million. Our balance sheet remains solid. At the end of the quarter, our net leverage was approximately 1.9x as calculated under our credit agreement. We amended our credit facility during Q1 to, among other things, extend the maturity date to July 2030 and increase the borrowing capacity to $825 million. This expanded facility increases our liquidity and financial flexibility. Now turning to our updated guidance. We are raising our fiscal '26 guidance for both revenues and adjusted earnings per share. We now anticipate year-over-year revenue of $1.825 billion to $1.867 billion, representing a growth rate of 6.5% to 9.0%, up from the previous growth range of 5.4% to 8%. This updated outlook factors in an approximate 60% headwind from a reduction of revenues from our Mexico contracts in fiscal '26 in our Security division. We are also raising our non-GAAP adjusted earnings per diluted share guidance from a range of $10.11 to $10.39 to a range of $10.20 to $10.48, which represents 9% to 12% year-over-year growth. We note that this fiscal '26 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring and other charges, amortization of acquired intangible assets and their associated tax effects and discrete tax and other nonrecurring items. We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues, new bookings, timing of cash collections, tariffs and the government shutdown, among other factors, is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. In summary, we are committed to operational excellence as we continue to grow our businesses and provide innovative products and solutions to our customers. We are excited about the solid start to fiscal '26 and anticipate building momentum throughout the year. We expect to generate strong cash flow and have the financial strength to invest in key strategic areas that will drive long-term value for our shareholders. Once again, and as A.J. mentioned, we thank the entire global OSI team for their dedication to supporting our customers and partners. Their efforts are what make these results possible. And at this time, we'd like to open the call to questions. Operator: [Operator Instructions] Our first question comes from Josh Nichols with B. Riley. Josh Nichols: Good to see the guidance bump. I know fiscal 1Q is usually a little bit slower for the security business, but bucking the trend with a healthy book-to-bill ratio. I was wondering, could you provide just a little bit more granularity on what products and markets or geographies are really driving that strength, particularly since 1Q is usually a little bit slower, particularly in Europe? Alan Edrick: Sure, Josh. Great question. Thank you. Yes, we were really pleased with the performance in our Security business, both on the revenue side and the bookings side and operational as well. We really saw really quite diversified broad growth. We saw both on the revenues and the bookings side throughout the regions when we were looking at the EMEA region, looking at the Americas and even Asia Pac, strength, whether it be in revenues or bookings across the board. Service revenues, of course, were exceptionally strong for us. It's nice. We're receiving this new era of much higher recurring revenues at higher margin on the service side. We had the contribution for a full quarter worth of the RF products versus a partial quarter in the prior fiscal year. And we saw our aviation products doing quite well as well. So all that contributed to really a great quarter for the Security division. Josh Nichols: And then just one follow-up question. I mean you mentioned that you now had several quarters, right, the services revenue growth north of 20% here again. When you look at the guidance, the top line guidance for this year, you're guiding to around 8% growth. But I would assume that the services revenue growth would be significantly higher than that. Any kind of additional detail you could provide around that to help us kind of model the growth rate that you may be expecting for that piece of the business this year? Alan Edrick: Yes, Josh, when it comes to our guidance, you're correct, though we don't provide guidance on service versus product specifically, directionally, you're absolutely right. We're expecting faster growth than our recurring service revenue in this particular year. Product revenues will be quite strong as well. But remember, we're coming off of a very difficult comp with heavy Mexico product revenues in fiscal '25. So we expect to see very solid revenue growth, both on product and service, but at a more accelerated rate on the service side in this fiscal year. Josh Nichols: Just last follow-up for me, and I'll pass it to since you mentioned it. tough comp for Mexico, but the business is still growing very healthy. And just thinking about longer term and next year, the comps are going to get easier against Mexico. I think you might have mentioned it before, but revenue contribution for this year for Mexico, should that be around $100 million type level? Or what are you targeting for this year? Alan Edrick: That's a good estimate, probably just slightly below that. Operator: Our next question comes from Jeff Martin with ROTH Capital Partners. Jeff Martin: Great to see the results. Congratulations. I wondered if you could follow up with additional detail on your comment about governments worldwide are investing heavily. Has that been in your sights for quite some time now? I know you've talked about a robust and expanding pipeline for quite a while. But is this a newer phenomenon? Because I don't think you've really phrased it that way in the past. Ajay Mehra: I think -- this is Ajay. We've seen the growth in the past, but it's definitely -- we see a lot more acceleration going on. I think with the big beautiful bill we've all talked about, with the opportunities in the Golden Dome. I think our service business has accelerated and not just on the service side, but we're able to go in and offer what I would say, integration services with our CertScan that we just announced with CVP. We're in almost 20 different countries, and we see the capabilities there and the government sees the capabilities, not just of integrating the NII platforms, but integrating various different technologies and turning that data into real information. And frankly, with all the trade issues going on, they're able to integrate that if they want with U.S. CVP with their data coming through and making them a lot more efficient, making the tariffs less painful in terms of declarations. And obviously, the rest of it as far as security is concerned, -- the geopolitical environment with Ukraine, Gaza, others continues to provide us opportunities. So yes, we think that there's uptick, but we feel very good about it in terms of what opportunities there are, not just in the U.S. but internationally. Jeff Martin: Great. And then nice to see the uptick in the guidance even in light of the federal government shutdown here. I was wondering if you could touch on what you're seeing to date in terms of affected activities from the government shutdown. Ajay Mehra: So from our standpoint, we've had very limited impact. I mean we are in industries such as with CBP, others where it's considered essential. We have to provide our systems, service, keep the borders, the airports open. So I think one of the things maybe things get delayed a little bit in terms of some of the orders coming in. But really, it's not going to affect us in '26. So from our standpoint, so far, so good. It's really not a big deal. Jeff Martin: Okay. And then I have two clarifications, if I could. The reference to the 26% growth, excluding acquisitions in Mexico, that was to total company revenue. And then on the security side, it was 39%. Did I hear those correctly? Alan Edrick: Jeff, this is Alan. Yes, you've interpreted it exactly right. Jeff Martin: Okay. And then you said there's a headwind of 60% from Mexico. I assume you mean $60 million year-over-year. Alan Edrick: Effectively, a 60% reduction in revenues of Mexico revenues in fiscal '25 versus fiscal '26. Ajay Mehra: I think just to comment on that, I would look at that as a positive because we've been more than able to cover those headwinds with the tailwinds we've got in the rest of the product lines. Operator: Our next question comes from Mariana Perez Mora with Bank of America. Mariana Perez Mora: So my first question is on Mexico. You mentioned some partial payments and improvement there and also a significant reduction on the revenue side. How should we think about the level of unbilled receivables so far? And how are those unbilled receivables progressing? What are the key milestones we should be looking at when we think about the timing of those payments along the next 9 months of the fiscal year? Alan Edrick: Mariana, good question. Really some good progress on the unbilled receivables. We've seen the unbilled receivables in Mexico at September 30 come down nicely from June 30, and we expect to see that continued progress throughout the fiscal year. And the nice part is, of course, as it moves from unbilled into billed, we can then start collecting the cash. So as we look at fiscal '26, we expect some very significant cash flow from Mexico specifically, but from overall business more generally as well, which will lead to very strong free cash flow conversion. Mariana Perez Mora: And then when you think about free cash flow and the position you'll have, you have a lot of, I don't know, a deeper pocket to pursue different capital deployment activities. How is the M&A pipeline? What are you looking at when you look at that, especially after the radio frequency product line has been performing so strongly? How is that pipeline? And what type of capabilities are you looking at? Ajay Mehra: So this is Ajay. We're always looking at expanding our capabilities, not just on the recurring revenue service side, but also on the technology side, complementary technologies that can get us deeper into the government and other customers where we were offering them certain products. Now we can offer them. I've always said this a solution. We're playing in a bigger pond as we go forward. And obviously, and I've said this before, that any acquisition that we look at is going to be carefully looked at. We don't -- we're going to see this 1 plus 1 equal 3 or 4. And obviously, the rest of it to pay any cash we collect to pay down debt, obviously, look at stock buybacks. So we're looking at all 3. And the good news is that we're in a very good position to evaluate what we want to do and look at the right acquisitions as they become available. Mariana Perez Mora: And last one from me on the government shutdown. Are you waiting for any meaningful awards that have been delayed by the extended government shutdown? And how do you think about the risk as you think about the rest of the year from that? Alan Edrick: So I think that we're working with the agencies during the government shutdown. Like I mentioned in my remarks, we're not as concerned about '26. Really some of the orders we're looking at are for beyond '26. You might have a little bit of delay here or there, but it's more on getting some orders in. It's really nothing significant that should affect our fiscal year. Operator: Our next question comes from Seth Seifman with JPMorgan. Seth Seifman: I wanted to ask about the profitability, especially in Security since some of the mix items you talked about offset the increase in the services mix. And so margin was down year-on-year. At what point do you see margin being able to expand again in the security business and kind of reset itself as the Mexico revenue kind of gets to a level where it's stable? Alan Edrick: Yes, Seth, this is Alan. Good question. And really the final quarter of the difficult Mexico comps when it comes to a margin perspective, particularly is this upcoming quarter, the December quarter, which is, of course, built into our guidance and much more akin to what we've been seeing in the last couple of quarters. So as we get past the end of this calendar year and move into January, the comps get much more normalized from a Mexico perspective. And we believe that there's ample opportunity to start showing margin expansion again. There'll be quarters where it's very robust and quarters where there might be a different mix going the opposite direction as well. But really, as we move into the next calendar year and beyond, we should be in good shape to start focus on margin expansion again. Seth Seifman: Okay. Excellent. Excellent. And one follow-up, I guess, on the funding that's in the reconciliation bill. I mean one of the things we've noticed on the defense side is that, that money has been a little bit slow in flowing out and not -- some of that at this point might have to do with the shutdown, but even just because it comes out of the reconciliation process and tapping into it might be a little bit different for the customers. I was just wondering what your experience has been thus far in terms of discussions about those contracts. Ajay Mehra: So this is Ajay. I think I mentioned this last time as well. We're expecting that funding to come in probably towards the second half of our fiscal year. And we're still expecting that. I mean, on the other side, could it have come in maybe in December? Maybe. But really, from our standpoint, that's when we're expecting, that's what we're planning on it. And as far as the funding itself, I mean, you got to look at it. It's a big bill and their priorities. And I think from our standpoint, there's -- one of the biggest priorities is really border funding, and we think that's not going to get delayed. I think that's going to come in as we expect it to come in. Anything can happen, but we feel very good about it right now. And so that's kind of the best way to look at it. Operator: [Operator Instructions] Our next question comes from Larry Solow with CJS Securities. Lawrence Solow: Just a couple of follow-ups. Most of my questions have been answered. Can you just give us, Al, the specific number that the RF sensor business contributed in the quarter? I think it was $17 million last Q1 last year on a partial. So if you can give us that number. And then just more from a higher level, just thoughts on the Golden Dome, just time lines from a higher level, not specific, but when we might see that? Is that like quarters? Or is that years away? And how big of an opportunity could it potentially be for this business? Alan Edrick: Larry, I'll take the first part of the question, and I think Ajay, the second part. In terms of the RF, we bought that business in September of 2024. So we had 3 or 4 weeks of operations last year. So last year, we did about $4 million in revenues from that business. And this past quarter, we did about $19 million of revenues. It is, generally speaking, a little bit of a seasonally slower quarter, and we expect that to pick up over the balance of the year. Ajay Mehra: Yes. So the question on the golden dome, obviously, with our RF technologies, especially in this case, over the horizon radar, we feel that we're well positioned. Everybody is talking about the program being in the billions and billions or tens of billions of dollars. We think we have a pie in there. What it's going to be and how it's going to come across because it's not just the prevention, but it's obviously looking at missiles and missiles and other things. So I think we'll know in the next 2, 3 quarters, like I said before, but we feel good about where we are in the process. Lawrence Solow: Okay. Great. Question on just on the gross margin, Alan, in Security, I know you mentioned, obviously, mix -- product mix moves around a lot. But this quarter, gross margin on the products was significantly lower than I've seen it going back several years. Was there anything unusual beyond just the mix? Or was it just a really lower margin mix this quarter? Alan Edrick: It really did come down to just being a lower margin mix this quarter on the product side, not necessarily reflective of what we would anticipate going forward. It just happened to be the mix of product sales in this particular quarter. Nice part was we made it up on volume to still have very, very nice profitability, but we would expect that that product margin to be better in the future. Lawrence Solow: And then just lastly on the cash flow, the free cash flow, I know you get this question a lot, but it sounds like you remain confident in a good year. And I guess my question would be Mexico has kind of been the biggest impact. And now that your revenues from Mexico are very modest. As we look out over the next few quarters, assuming even if they're a little bit late, I got to imagine by the end of this year, a lot of that, hopefully, Mexico delayed payment and AR specifically should come down a lot, almost normalized. So I mean, is it possible that we have a free cash flow drop-through conversion rate close to net income this year? Alan Edrick: Good question. Yes, we would expect the Mexico cash flows to be very strong over the next few quarters and will position us extremely well. In terms of looking at free cash flow to net income, I think you're right. You might even be conservative. I believe we can exceed 100% of net income and possibly by a significant amount. So it could be a very, very nice free cash flow year for us. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back to Ajay for any further comments. Ajay Mehra: Okay. Well, I want to thank those in attendance for joining our call. We're excited about the opportunities ahead and look forward to speaking with all of you at our next call. Thank you very much. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 SPX Technologies Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today. Mark Carano: Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. A press release containing our third quarter results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude amortization expense, acquisition-related costs, nonservice pension items, mark-to-market changes and other items. And with that, I'll turn the call over to Gene. Eugene Lowe: Thanks, Mark. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the third quarter of 2025 as well as an update on our outlook for the remainder of the year. Our Q3 performance was strong. We grew third quarter adjusted EPS by 32% and drove significant profit and margin growth in both segments. To reflect our strong performance in Q3 with the outlook for the fourth quarter, we are raising our full year guidance range. We now anticipate adjusted EBITDA to exceed $500 million at the midpoint of our updated range, implying approximately 20% growth year-over-year. During Q3, we raised additional capital through an equity offering and increased the capacity of our revolving credit facility. These actions provide us with more than $1 billion of additional liquidity to support our organic and inorganic value creation initiatives and do not have a dilutive effect on our 2025 EPS. We also continue to progress on several key organic initiatives, including the expansion plans for our engineered air movement businesses and launch of the Olympus Max product, a new large-scale cooling solution. Inorganically, our M&A pipeline remains robust with several attractive opportunities. Turning to our high-level results. In the third quarter, we grew revenue by 23%, driven by strong organic growth in both segments and the benefit of recent acquisitions. Adjusted EBITDA increased by approximately 31% year-over-year, with 150 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. Over the past quarter, we've continued to gain traction on our growth and new product initiatives. We're making meaningful progress on expansion plans for our engineered air movement businesses where we see significant demand in excess of our current production capacity. We closed on a lease facility in Tennessee for U.S. production of our TAMCO actuated dampers. We expect production in this facility to begin in the latter half of next quarter. We're also progressing on our expansion plans to produce Ingénia custom air handling units in the U.S. We are currently targeting a location in the Southeast and we'll provide more detail next quarter. On new product front, our Olympus Max product, a dry and adiabatic cooling solution focused on the large-scale needs of data center customers, continues to receive excellent feedback and engagement from customers. We are on track to achieve our objective of booking $50 million of Olympus Max orders in 2025 for revenue in 2026. Now I'll turn the call back to Mark to review our financial results. Mark Carano: Thanks, Gene. Our third quarter results were strong. Year-over-year, adjusted EPS grew by 32% to $1.84. For the quarter, total company revenue increased 23% year-over-year, primarily driven by higher project sales in Detection & Measurement as well as inorganic growth from the acquisitions of KTS and Sigma & Omega. Consolidated segment income grew by $32 million or 28% to $146 million, while consolidated segment margin increased 110 basis points. In our HVAC segment, revenue grew by 15.5% year-over-year, with 6.7% inorganic growth and a nominal FX impact. On an organic basis, revenue increased 9%, with solid growth from both cooling and heating. Segment income grew by $14 million or 18%, while segment margin increased 50 basis points. The increases in segment income and margin were largely driven by higher volume and associated operating leverage. Segment backlog at quarter-end was $579 million, up 7% sequentially from Q2, all organic. In our Detection & Measurement segment, revenue increased 38.4% year-over-year, with strong organic growth of 26.5%. The KTS acquisition accounted for an increase of 11.6% and FX was a modest tailwind. The increase in organic revenue was predominantly driven by higher CommTech project volumes. Segment income grew by $18 million or 53% and margin increased by 240 basis points. The increases in segment income and margin were primarily driven by operating leverage on higher organic sales and the KTS acquisition. Segment backlog at quarter-end was $366 million, flat sequentially. Turning now to our financial position at the end of the quarter. During the third quarter, we accessed the capital markets to further strengthen our balance sheet and support our growth strategy. We completed a $575 million offering of our common stock. A portion of the net proceeds from this offering was used to repay the outstanding amounts under our revolving credit facility. As a result, there is no dilutive impact to 2025 EPS. We also amended our credit agreement to increase the capacity of our revolving credit facility by $500 million to $1.5 billion and extended the maturity of our credit facilities to 2030. Following these actions, our liquidity increased by more than $1 billion and our available capacity now exceeds $1.6 billion. We ended Q3 with cash of approximately $232 million and total debt of $502 million. Our leverage ratio as calculated under our bank credit agreement was approximately 0.5x at quarter-end. Q3 adjusted free cash flow was approximately $91 million. As is typical, we anticipate Q4 to be our highest cash flow generating quarter of the year. Moving on to our full year 2025 guidance. We are updating adjusted EPS to a range of $6.65 to $6.80, reflecting our strong Q3 results and Q4 forecast. This represents an increase from our previous range of $6.35 to $6.65 and reflects year-over-year growth of approximately 21% at the midpoint. For our HVAC segment, we are maintaining revenue and margin guidance and remain confident in the fourth quarter forecast. In Detection & Measurement, we are increasing full year margin guidance to a range of 23.25% to 23.75%, raising the midpoint to 23.5%. This represents year-over-year growth of 140 basis points. We expect Q4 revenue for the D&M segment to be modestly lower sequentially due to the timing of project deliveries between Q3 and Q4. As always, you will find modeling considerations in the appendix to our presentation. And with that, I'll turn the call back over to Gene. Eugene Lowe: Thanks, Mark. Market conditions support our increased full year outlook for 2025. Within our HVAC segment, we continue to see solid demand in key end markets. Our strong backlog of highly engineered solutions and efforts to increase production capacity further reinforce our confidence in HVAC's growth opportunities. In our Detection & Measurement segment, we are seeing steady run rate demand. For our project-oriented businesses, we have a strong backlog and feel confident in our forecast for the fourth quarter. Looking to next year, front-log activity remains steady. However, as we highlighted last quarter, approximately $20 million of project sales shifted from early 2026 into 2025, creating a modest headwind for next year. In summary, I'm pleased with our strong Q3 performance, including significant profit growth in both segments, an equity offering, an expansion of our revolving credit facility, which together provides more than $1 billion of additional liquidity with no dilution to 2025 EPS, and the continued progress on our U.S. capacity expansion and new product initiatives. We are well positioned to achieve our increased full year guidance, which implies 20% growth in adjusted EBITDA and adjusted EPS at the midpoint. We also see multiple opportunities to continue growing our businesses both organically and through our robust M&A pipeline. Looking ahead, I remain excited about our future. With a proven strategy and a highly capable, experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come. With that, I'll turn the call back to Mark. Mark Carano: Thanks, Gene. Operator, we will now go to questions. Operator: [Operator Instructions] The first question today will be coming from the line of Bryan Blair of Oppenheimer. Bryan Blair: Another very solid quarter. Given you're almost in November and you have supportive backlog in both segments, maybe speak to your team's visibility into 2026 and which platforms or across which end markets you're most confident in sustained growth? And to balance that, where there may be some watch items as you look to the new year? Eugene Lowe: [Technical Difficulty] Okay. Can you guys -- like I'll assume you can hear us now? Bryan Blair: We can hear you now, yes. Eugene Lowe: Okay. Thanks for your question, Bryan. So yes, I think if you step back and you look ahead to 2026, overall, we feel very good. If you look across our HVAC businesses, we do have a diversity of product lines. And frankly, we're feeling pretty positive across all of our business areas. If you look at the markets that we see the most strength, those really haven't changed from what we've talked about in the past couple of quarters. We're seeing really a sustained strength in data centers. We feel like we have some nice momentum there. Same in health care, institutional, we're also seeing a lot of activity. I'd say in the industrial markets, we're seeing a little bit -- those have been kind of flattish. We're seeing some modest growth there, which I think is a positive. And we're seeing more power activity in terms of some bidding and so forth, which could yield some opportunities. Some of the markets that have been relatively lower are also some of the more commercial buildings, more hotels, things like that. But net-net, we feel very good about the markets. And then when I look at the markets, I feel good. But then I think about our initiatives on top of that. Probably the biggest one we've talked about is the Olympus Max. That's our new data center cooling solution that's either dry or adiabatic. Very good product, feel very good about that. That's a whole new market for us that we have not served. So we see the opportunity, as we've said, targeting $50 million of bookings this year, which is really revenue next year. We believe we're on track for that. We also have some capacity expansions for some businesses that there's just a lot more demand for our products, notably TAMCO, Ingénia and Marley. So when I look at HVAC, I feel very good about the end markets and then our initiatives to drive further growth. I think if you look at some of the third-party people who track markets, they would predict for the non-resi market probably mid-single digit. We would believe that we would target to be higher than that with our initiative-driven growth that I just highlighted. On D&M, I would say overall run rate is steady. We're seeing some modest growth there. And it is a little bit of very different geographically where the U.S. remains stronger, and we are anticipating that into '26. See some good pockets and some areas that are really going nicely there. And then I'd say more flattish ex U.S., talking about Continental Europe. We are seeing an uptick in U.K. in some areas. But overall, I would say, steady, modest growth in our run rate. And then our projects, we have very good activity. We did, and Mark can tie this out, we did some of that, which we had in '26, it actually accelerated into '25. And then we have a very high backlog. Now some of that backlog is more -- it's not only '26, but we actually are having a lot more multiyear projects, which is really good, but we have to make sure we understand what falls into the forward year of '26. But overall, I would expect growth in D&M as well. So I think the backdrop for what we see is positive. Mark, what color would you like to add overall on D&M? Mark Carano: Yes. I think I might just add across really both segments, right, we're in very strong backlog positions there kind of -- for both segments really, both at or near all-time highs. So really good position from that perspective. As I look into '26 and I think about how much of that backlog is scheduled to deliver in 2026, it's about 40%, and that's similar across both segments. So we're in a nice position as we sit today looking out into next year. Gene did mention this one handful of projects that were originally in our '26 backlog, they actually delivered in Q3 in our D&M segment. I think we referenced that in our Q2 call. But they ultimately were delivered and the revenue was recognized in Q3. Bryan Blair: Understood. I appreciate the walk-through. Encouraging trends overall. Maybe offer a quick update on KTS and Sigma & Omega integration. How are those assets performing relative to deal model? And then given your now quite significant balance sheet capacity, that would be great to hear more about your M&A pipeline by platform. Where do you see the most attractive opportunities? And of the -- I believe you mentioned several attractive targets, any that are potentially actionable over the near term? Eugene Lowe: Yes. I would say we feel very good about both KTS and Sigma & Omega. Sigma & Omega is a little bit newer, so we haven't -- it's at an earlier stage. KTS is already -- it's really kind of built in and operating, to me, operating as one with our CommTech business. A couple of points there. We're actually seeing some nice wins. They have gotten a few new things, proclamations from the government where they are becoming the basis of design and the standard. They've expanded into some different areas. So KTS, we feel very positive about. We love their technology. I believe we mentioned in our last call, we're launching a joint product with KTS and then the legacy TCI business in Q4, in this quarter. I think there's a lot of excitement around that. So KTS, I would say, we're feeling very positive about. And then Sigma & Omega similarly, really good team, really nice win rate. The way that we think about that market is really multilevel applications, hospitals, or could be hotels or it could be condos, things like that, and there's typically a boiler and there's typically a cooling tower. And so a key part of our thesis there was we -- they're very strong in Canada. We think we can help them grow more in the States where we have an established channel, particularly our Marley channel is very strong and then our Patterson-Kelley channel, that's our commercial boiler line. So we have already signed up, I don't have the latest numbers in front of me, but I know of 3 or 4 that have already picked up and are very excited about Sigma & Omega. And not only are we expanding geographically, but they've launched some new products with coil and then within their self-contained units. So they have some good innovation going on. So yes, I think that that fits very nicely within our hydronics business. The teams are working well. And I will say with both of those, really good leaders and really good teams and really good cultural fit. So it's still early, but off to a very positive start. The second question you had, on M&A, I would say, and I know we've said this, it is very -- we have a very high level of activity. We have a number of processes underway. And I would say as we look into 2026, we feel very good about strategic capital deployment. We're going to remain disciplined, but there is a very attractive set of opportunities. On the HVAC side, I would say we've talked about engineered air movement as well as electric heat. In each of these areas, we see several opportunities that are very attractive opportunities. And then also on Detection & Measurement, we see some very interesting opportunities. I'd say a smaller number. We still see -- have, I'd say, right now, a more active pipeline on the HVAC side. But some very good opportunities. So we feel very good as we think about moving into '26. And as Mark alluded to on the call, I mean, we really -- we got basically $1 billion almost for free. There's no EPS dilution. So it's kind of a really unique circumstance where you can expand your balance sheet so much and have the same level of earnings. And so that gives us the opportunity to invest in growth opportunities. And we're also going to be investing in some organic opportunities as well. So yes, overall, I would say, feeling very good about the pipeline and the opportunity set we have in front of us. Operator: And the next question will be coming from the line of Damian Karas of UBS. Damian Karas: I wanted to ask you first about the capacity expansion plans. Gene, you talked a little bit earlier about the TAMCO production going to be coming online later this year in Tennessee and you're looking for a spot in the Southeast for Ingénia. Could you just maybe give us a sense for initial production capacity, how to think about that, how much you're planning to bring online? And then just in terms of the equity raise that you guys just did, like how much kind of investment outlay for these expansion plans are you expecting? Eugene Lowe: Yes, I'll give a little bit of color, and then I think some of it we're not prepared to talk to. I think the TAMCO one is basically done. We've signed the lease. We're actually very excited about this. That is a 150,000 square foot facility, very similar to our existing facility. We actually think we can ramp this up over time. So we're very excited about that. And as we said, we're targeting to get some of the equipment commissioned and to start. It takes a while to ramp up. But by the end of Q1, we should get going there. But very good opportunity. That's in Tennessee. And we actually think that that will really give us the opportunity to grow quite a bit. That's very capital light. I actually think most of the capital is -- has already been deployed there. Mark Carano: Some of it will be this year and then some into next year. Eugene Lowe: A little bit next year. The bigger one will be the expansion of Ingénia. That's going to be a much larger site, probably in the neighborhood of -- it could be 3x as high. But again, we're making great progress there, but we're not at the point at which we can really say anything. What we are anticipating is by the end of -- by our next earnings report, we should be able to kind of lay out very specifically what the investments as well as the revenue expansion capacity is for all of those. And Mark, would you like more color there? Mark Carano: Yes. I think we're just working through the finer details of the site. And when that ultimately -- we actually acquire that facility, yes, it's going to drive a little bit of the timing and the timing of the capital spend. So as Gene mentioned, we're going to be prepared to provide more color to you in -- at our Q4 call, and we'll really walk people through kind of the step function of what our plan is there. Obviously, it's a much larger facility. So the capital... Eugene Lowe: Therefore, it's more capital in there, for those of you who've... Mark Carano: Know Ingénia. Eugene Lowe: Yes, who went to Ingénia. Think of an Ingénia now, and you'll see the lasers, the punches, the night train, the robotics. So it would be a similar level of capital equipment. Damian Karas: Okay. Got you. That makes sense. We look forward to getting that update in another few months. And then I wanted to ask you about the opportunity in nuclear. I think I asked you guys about that maybe a little over a year ago, but we've had a lot of developments in the market since then. So I was curious if you maybe started seeing some of those opportunities come the way of your HVAC business. What do you think your entitlement is in that specific market? Really appreciate any thoughts on just nuclear. Eugene Lowe: So nuclear, if you kind of take the existing nuclear market, rough order of magnitude, there's about 100 nukes in the U.S. About half of them have cooling towers, the other half would have what's called once-through cooling. That's where you use a lake or an ocean or something to provide your cooling. Of those that have cooling towers, we have a very high percentage of those units. You could see natural draft towers. Those are the big towers people think of when you think of nuclear power plants. They could be mechanical draft. There's a variety of technologies, but we have a very strong position there. So how does that affect us? As people want to keep power, is it's a scarce resource right now and there's a lot of demands on power. So upgrading your cooling towers, oftentimes, you can get an extra 50 or 80 megawatts out of your power plant very quickly. And so that could provide some opportunities for us in the existing infrastructure. Could be nuclear, it could be gas, could be coal. We're seeing some of those types of opportunities. As it pertains to new nuclear, I would say that we haven't seen -- we see a lot of combined-cycle power plants. There's a very active -- there's a lot of combined cycles going all across the U.S. That seems to be the go-to -- really if you want baseload power within the next few years, it looks like that's really your only option. So you're seeing a lot of activity there, sometimes paired with data centers. And we do have an opportunity to go after the cooling towers there. Combined cycles tend to be a little smaller. But yes, we see it as an opportunity. But the brand-new nuclear, I don't think we see anything in our planning horizon, I would say, over the next 2 or 3 years. Operator: The next question will be coming from the line of Andrew Obin of Bank of America. Andrew Obin: So first question, I guess, some of your -- well, I don't know if they're competitors per se, but some of the HVAC players have been talking about pushout of large projects related to data centers. I would imagine it was because the industry is sort of out of capacity across the value chain. Any comments if you see any pushouts on large projects that you guys observe? Eugene Lowe: Andrew, not that we have seen -- and we have a number of large accounts in U.S. and Asia and Europe. I think when you get into some of the large projects, they tend to be imperfect in terms of planning. So you could take a large power project or a large automotive project or a large semiconductor. And I would put data centers in that same capacity. So there's always a little bit of uncertainty on timing, but I haven't seen anything out of the ordinary. What I would say is there's a very high demand from our key customers. They're very open with us about the demand profile and they're very much pushing us to make sure that we can meet their time lines. So to answer your question specifically, there's always a little bit of pushouts here and there, but I would say nothing out of the ordinary. Andrew Obin: Got you. And then just I know you have residential exposure, and what we've seen is some pressure on consumer this summer. Are you observing any headwinds related to consumer and HVAC? And yes, I'll just leave it at that. Eugene Lowe: Andrew, if you look at where we play in residential, it's a pretty small part of our HVAC segment, and it's really the Weil-McLain boilers. And that is a very high percentage of replacement demand. If anything, we're actually seeing nice growth there. That's predominantly replacement demand. We think any given year, it could be 80% to 90% replacement for the residential portion. I would say the commercial portion has a higher percentage of new. But yes, we have not seen any slowdown or impact from the customer. I think it's early in the heat season. But even -- I spoke to our hydronics leader this morning, I believe we're a little bit ahead of bookings plan. So we're actually feeling on target. Anything else, Mark, you'd like to add? Mark Carano: No, I mean, it's really that business, I think, as many of you know, is largely driven, because it's largely replacement, by the weather cycle, for good or bad. And last year was a tough year for that business. But this year is different; it started off in a much better place. Eugene Lowe: Yes, I think we have a little bit of an easy comp versus last year, that's fair to say. Mark Carano: Exactly. Andrew Obin: Well, we're super excited to be onboard, and thank you so much. Operator: And the next question is coming from the line of Ross Sparenblek of William Blair. Ross Sparenblek: Maybe just give a little more color on kind of your adoption expectations within the new Olympus product. What are you hearing from customers? You're targeting $50 million this year, but what's kind of the run rate maybe base case for 2026? Eugene Lowe: Yes. I think we would target to get $50 million into next year for the product. I would say the -- when I think about this, I actually have conviction on our value prop and our product. I think we have a very unique product in the dry and the adiabatic. I think it leverages a lot of our kind of core Marley strengths where we tend to be known for our engineering, our industrial-grade products. I think it transfers very well. Having said that, what I would say is there's 4 kind of big kahunas for the hyperscalers. They all have different philosophies on how they design their data centers. Do they want wet or dry? There's many different variations. So it does take some time to break in there. But what I would say is we're on track and we feel very good about this brand-new product hitting $50 million. And I would expect it to kind of grow from there. And if we're successful, it could grow very rapidly into '27 and '28. But we're off to a nice start. There's a lot of bidding activity and there's a lot of discussions going on. There is in some of these markets, as we discussed in an earlier question, some of there's a lot of also budget bidding where people are trying to get a site and trying to get funding. So you get a lot of what you'll typically see on these larger projects, some of the lumpiness and the timing changing. But what I would say is there's a very good set of opportunities in front of us, and I think we have the right product set. So yes, we're very encouraged and excited to go into next year with our Olympus Max. Ross Sparenblek: That's really helpful. So it sounds like it's kind of some big game hunting with the hyperscalers. Do you guys feel that you have a good seat at the table in that design phase? Eugene Lowe: Yes. And as you know, the hyperscalers typically have confidentiality. So we can't get into some of those. But what I would say is, yes, I do think we have a number of data center customers that we've been very proven with. As you know, there's some customers, they say, "We only want cooling towers." And then you try to do that. Some only want dry coolers. And I think what is going on at a macro level is you're seeing a movement towards higher heat loads, which tends to mean the easiest and the simplest is air-cooled chillers. If there's an air-cooled chiller, that doesn't really provide an opportunity for us, because it's an all-integrated unit. As it goes to water-cooled chillers, we could either do the dry, the adiabatic or the cooling tower on that. And everything we're hearing and seeing sees a trend moving towards that water-cooled chiller solution because you really can reject more heat, frankly. So yes. I think that's a trend that I think is favorable. It doesn't happen overnight, but it should be shifting over the next couple of years, which I think what it basically means for us is it can open up more addressable opportunity. Ross Sparenblek: That's great color. One last question here, just to put a finer point on the KTS acquisition. I thought the expectations there previously was more second half weighted, but it looks like it might have been down sequentially in the quarter. Is there anything to call out from a modeling perspective? Mark Carano: Yes. I don't think so, Ross. No. It is second half weighted, no doubt. And I think the fourth quarter will be its largest quarter. But we can chat about that offline just to sync up what you're [ seeing ]. Operator: And the next question will be coming from the line of Joe O'Dea of Wells Fargo. Joseph O'Dea: Can you just touch a little bit more on Detection & Measurement in the quarter? I think you're heading into the quarter anticipating that margin could have been down. Clearly, strong revenue, strong margin. I think this is an environment where we hear a little bit more about the potential for pushouts. It sounds like things came in. So just to elaborate a little bit more on what you saw over the course of the quarter, maybe why you saw it come forward a little faster than anticipated. Mark Carano: Yes, Joe, let me touch on that. And first of all, I think we're really pleased with the initiatives and the success and progress we've had on driving margins in our across our D&M platform. But really, I would sort of break it down into 3 buckets. When you look at year-over-year, sort of 240 basis points of margin improvement at the segment income line. A part of that, probably 40, 50 basis points of it really related to KTS. That business is performing at a higher margin level than we had originally forecasted. So that business is performing nicely. We saw very nice operating leverage in the quarter on the revenue. And this is sort of net of a less favorable mix that we had signaled in the back half of this year, particularly relative to last year. Now remember, we had $20 million of this project move up from 2026, that sort of added to the volume story here, that wasn't originally in there. So that really drove very nice operating leverage. Those contracts actually executed at a higher level than we thought. And then lastly, we did have some initiatives within D&M related to some NPI and a couple of other initiatives that have actually shifted out of the year. They're kind of shifting into 2026. And that's really largely, I think, just prioritization of where the management team is spending their time and resources right now. I think we probably had more slated than we could really accomplish during the year. So those are still projects that are going to continue. Those costs will be there, but they're going to slip out into 2026, that cost. So the latter 2, I didn't give you that, it's about, of the balance, call it, 200 basis points, it splits about 50-50. Joseph O'Dea: That's helpful color. And then I wanted to ask on the HVAC backlog up 7% sequentially. It seems like seasonally from year-to-year, maybe it tends to be flat or could even move down. And so not sure if you would observe that as a little bit better than normal seasonal trend there. And anything that you would point to that's contributing to that? Mark Carano: Yes. I think -- I mean, on the backlog, a couple of things. One, when you look at it kind of year-over-year, right, it's up 32%. Organically, represents about 2/3 of that. So nice year-over-year. Sequentially, you have a couple of things going on there. You obviously -- we typically see backlog reduction at this time of the year related to our hydronics business. So as we work through what we call kind of the preseason buy that takes place, that will -- that happens at this time of the year. And then you'll see it again in Q4 as we relieve inventory related to that. So that's a little bit what's driving it. As I look to the end of the year, what I would tell you is I think backlog overall from where we are today will likely be higher. Operator: And the next question will be coming from the line of Brad Hewitt of Wolfe Research. Bradley Hewitt: So I guess on the M&A side, curious whether the $1 billion of additional balance sheet capacity that you've secured in recent months would indicate that perhaps M&A funnel is more actionable than it had been in recent months? And would it be fair to say your appetite for a larger deal has perhaps increased? Eugene Lowe: Brad, I'd say this is probably the #1 question we got in the equity raise and I think from some investors. It's a good question. But the truth is nothing has really changed. Our strategy is the same. I would say, to your point, we do have a very robust pipeline of opportunities. I think that really what predicated the raise was our EBITDA, we've kind of outgrown our revolver. We've gotten so -- we've grown our EBITDA so much that we actually saw some opportunities that would have been challenging for us to be able to execute on. We didn't want to get caught in that situation. So we actually feel like we're in a very strong situation now. But yes, very good activity and -- but no, no change in strategy. As you know, we -- for us, we've typically said a smaller deal might be in the range of a $50 million enterprise value, a larger deal might be in the neighborhood of $500 million. And that's really where the bulk of our opportunities lie. I would say 90% plus fall in that range. And there are a couple of smaller, there are a couple of larger. But yes, that's where we sit today. Bradley Hewitt: Okay. That's helpful. And then curious what your latest thinking is around Ingénia capacity exiting the year. I think the previous expectation was around $140 million. And then when you mentioned the planned Ingénia facility in the Southeast U.S., is that incremental to the $300 million of ultimate run rate capacity that you had previously cited? Eugene Lowe: Yes. No, I think that we're still on track for hitting a $140 million run rate in this quarter, in Q4. But if you look at it, our revenue is going to be materially lower than that, right? We're kind of ramping up. And that's really in our Mirabel facility. But no. And then previously, when it was talked about the $300 million run rate, which we're really talking about is that run rate being Q4 of 2027, that is both facilities. That is both Mirabel up in Canada, outside of Montreal, and then the new facility, which we're pretty close on and we should be able to announce here in our next earnings call. So yes, it'd be both those put together. Operator: The next question will be coming from the line of Jamie Cook of Truist Securities. Jamie Cook: Nice quarter. I guess just 2 questions. One is following up on Joe's question about the profitability in D&M. Obviously, it was strong in the quarter and there were some favorable items in the third quarter. But even if I look at the run rate of what's implied in the fourth quarter, like just the run rate on D&M operating income is quite a bit higher than what we've seen in the first half of the year. So just wondering if that's like a good cadence to think about like the back half times 2 for base for 2026 just given what you're seeing on the top line and in the margins? And then I guess my second question, just any updated thoughts on your 2027, 2028 sort of EBITDA goals just given, again, where we should end up this year and given how much EBITDA has grown per year since you've put that out? It just seems like that could get pulled forward or potentially it's conservative. Mark Carano: Yes, Jamie, I'll start on the D&M topic. So you really have to kind of look back to our increase in our guide for the year, which was largely driven by D&M, the majority of it was, and kind of understand what's driving that as you look out to kind of what's implied in Q4. And there's really 3 things that we -- that are similar to Q3, they're connected to it. One is KTS margin improvement. We saw a little bit of that in Q3; you're going to see more of it in Q4. These initiatives that I talked about, that impacts both Q3 and a little bit in Q4, less so. And then the better leverage was really a Q3 element. So you think about KTS and the margin benefit from that given that will be the largest quarter for the -- did we lose someone? Okay. For that business performing this year. Does that clear it up for you? Jamie Cook: Yes, that's helpful. And then on the 2027, 2028 EBITDA targets? Eugene Lowe: Yes. I mean I think -- why don't I start there and then you can dive in? When we had our Investor Day in early 2024, so we kind of looked at 2023, which our EBITDA was $320 million. Is that right? Yes, so... Mark Carano: It was $310 million. Eugene Lowe: 310, okay. $310 million. And we said we think we can double this within the medium term, which would be 4 to 5 years. To your point, I think we're tracking very, very favorably on that. So we went from $310 million to $421 million last year. I think we're $505 million at the midpoint this year. We're seeing nice growth dynamics, particularly on our HVAC side, as well as some good inorganic opportunities. So yes. If I were to kind of say that was 4 to 5 years, I would say I'd be disappointed if we weren't -- the 5 feels too long. I do think we're ahead of plan here. And Mark, I don't know if you have any other comments you'd like to add to that. Mark Carano: No. I mean I feel good about where we sit. I mean particularly as I look out into -- at our end markets that are in some of the longer-term megatrends that are driving the business. Eugene Lowe: As we very clearly say, we want 15% growth every year. This year, we're penciling in around 20%. Last year, we were at 29%. We think our model is tracking as we expected. So yes, we'd expect, assuming we stay on plan, we would exceed that well before the 5 years. Operator: The next question will be coming from the line of Jeff Van Sinderen of B. Riley Securities. Jeff Van Sinderen: Let me add my congratulations. Just as a follow-up to the last question, as you plan for 2026, what are your thoughts on building incremental P&L leverage for the enterprise as a whole? And maybe thoughts on potential for EBITDA margin expansion just for next year. Are there any anomalous things that we need to keep in mind that might skew that either way? Mark Carano: Yes, I'll start, Jeff. I mean I want to be careful, we're not in a position where we're going to share 2026 guidance today. But I don't think of anything anomalous. I'm just sort of thinking through a couple of things. I mean when I think about our corporate structure that we have here in Charlotte, I mean, we're scaled, I think, appropriately today and really not a need to continue to really add to that as we scale the business. So clearly, I think next year, we are going to have some start-up costs related to HVAC. We've got a little bit of that in this year, with respect to some of the initiatives we have underway regarding the data center development of some of the new technologies there, the new plants that will be coming online. So that's -- while the first was kind of a positive, that's something that has potential to be a bit of a potential drag. But it shouldn't be a material number really when I think about the margin profile for next year. I mean what I would say is I feel very good about what we've done over the last few years, whether it's kind of driving the margin profile of the HVAC business up to where it is, and similarly, returning the D&M business to the margin profile that it once was a number of years ago. So as I look forward, you think about, as you continue to grow the top line, we should get operating leverage there. Jeff Van Sinderen: Okay. Great. And then you've touched on potential pushouts in the data center market. Given the nature of that data center beast, on the flip side, are you seeing any pull forwards in demand from any projects there? Eugene Lowe: Yes. I would say it's a it's a very fast-moving, fluid environment where, yes, there are some things that accelerate and can move, yes, can definitely move up well earlier than planned. In some cases, you have some of these colos that will get a facility and they'll set up a location and then they want to get a customer or a major tenant. And once they get it, all of a sudden, they're moving 90 miles an hour. And so yes, we do see things moving in both directions there. It is a very fast-moving market, with a lot of activity and a lot of -- it's a very dynamic market, as you might expect, with the amount of growth that's going on in that market. But yes, we have seen it move forward as well as seeing some of the normal project delays. Jeff Van Sinderen: Thanks for taking my question, and continued success. Operator: And the next question will be coming from the line of Steve Ferazani of Sidoti. Steve Ferazani: It's been a long call, so I'll try to ask you a couple of easy ones. Very strong free cash flow in 3Q. I know you had already tipped off the fact that all the cash -- the remaining cash costs related to the long-ago discontinued ops were taken last year. Nevertheless, much stronger cash flow this quarter. You've got the balance sheet in great shape now. But I'm looking at my model, in 4Q, if you get the typical working capital reversal that you usually get, you're looking at significant cash flow in 4Q given that you've already cleaned up that balance sheet. You're looking at a number, and I'm sure you -- my number is not far off of yours, how are you thinking about using that 4Q cash? Mark Carano: Yes. I think your -- well, I don't know your number, your presumption is correct. Steve Ferazani: I don't want to give it, but it's sizable. Mark Carano: Yes. Listen, I mean, it comes back to the M&A pipeline that we have in front of us, right? I mean we feel really good about the opportunities ahead of us. And that's just part of the pool of capital that will be available to us to drive the value creation. And obviously, we've got the plant expansion. We haven't sized that yet, but we'll certainly -- that will be part of the overall deployment of capital. Steve Ferazani: Okay. And Gene, let me follow up a question that was asked earlier because, obviously, you are getting asked about M&A opportunities and size. And I know you've talked previously and we've discussed this, that if you go larger, typical the multiples get higher. I mean so much of your success over the last few years has been paying very reasonable multiples for acquisitions. And I think investors want to hear that you're going to maintain that kind of discipline around businesses you know really well and paying that 10 to 12x. Given the balance sheet is so much cleaned up given your access to capital, is there an itch to go higher to find the right deals? Or do you expect to maintain that kind of discipline? Eugene Lowe: No, I think if you look at -- I mean, it's a great question. I think that our model has really worked. And I think our average multiple has been in the neighborhood of 11x. We typically get 1.5, 2 turns. So you kind of get it under your roof at 9x, which is a really good value, when you think of our average EBITDA that we've acquired is 20% and these have also been accretive on growth rates. Not to mention the most important point, the whole purpose of how we do M&A is to really strengthen our competitive position and to be able to expand. So yes, I think I don't see any deviation from our strategy. Typically, if you see a smaller deal, in the $50 million range, something like that, it will be a turn or 2 lower. If you see a larger deal that has more established management teams, more established IT systems, products, channels, is lower risk, you typically see is always going to be a turn or 2 higher. But the flip side of that is you can typically get some more leverage and some more synergy when you have a larger organization like that. So yes, I think that our model has not changed. We do see deals that -- and this is probably more in the Detection & Measurement side, you can see deals going for 19x, 20x. That's just not us. That's just not -- that's not who we are. We really do focus on cash returns. And yes, I would -- our model is going to stay. We're executing the same strategy that we did a year ago, Steve. Operator: That concludes today's Q&A session. I would now like to turn the call back over to management for closing remarks. Please go ahead. Mark Carano: Thanks, operator. Operator: That concludes today's conference call. You may all disconnect.
Operator: Greetings, and welcome to the Edwards Lifesciences' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mark Wilterding, Senior Vice President, Global Finance. Thank you. You may begin. Mark Wilterding: Thank you, Diego, and thank you, everyone, for joining us this afternoon. With me on today's call is our CEO, Bernard Zovighian; and our CFO, Scott Ullem. Also joining us for the Q&A portion of the call will be Dan Lippis, our global leader of TAVR and Daveen Chopra, who has global responsibility for TMTT and Surgical. Just after the close of regular trading, Edwards Lifesciences released third quarter 2025 financial results. During this call, management will discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q&A. Please note that management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements speak only as of the date of which they were made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences can be found in today's press release and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. Unless otherwise noted, our commentary on sales growth refers to constant currency sales growth which is defined in the quarterly press release issued earlier today. Reconciliations between GAAP and non-GAAP numbers mentioned during the call are also included in today's press release. Quarterly and full year growth rates refer to continuing operations. With that, I'd like to turn the call over to Bernard for his comments. Bernard Zovighian: Thank you, Mark and welcome everyone. Thank you for joining us today. We are pleased with the year-to-date performance of the company, including the most recent third quarter, our focus on structural heart has positioned us to execute our growth strategy with agility this year and also give us confidence in 2026 and beyond. This strong Q3 results represent another quarter of double-digit sales growth. Sales in the quarter grew 12.6% to $1.55 billion driven by our comprehensive portfolio across multiple therapeutic areas, aortic, pulmonic, mitral and tricuspid as well and -- as well as an established presence in countries around the world. We were pleased with the better-than-expected results reflecting the performance of our talented employees. Based on our strong performance in Q3, we are raising full year sales growth guidance to the high end of a previous 9% to 10% range and are also raising our EPS guidance range to between $2.56 and $2.62. As we look ahead to '26 and beyond, the company is in a good position with multiple growth drivers to deliver sustainable top line growth. While the composition and contribution from product lines and region could vary, you could expect Edwards to grow sales and profitability in line with our commitment from last year. We look forward to talking more about this at the upcoming investor conference in December. This week was an important week for Edwards. And this quarterly call comes on the heels of TCT, where I was pleased to see many of you at the conference, physicians feature a significant amount of compelling data on Edwards' groundbreaking transcatheter therapies, including SAPIEN, EVOQUE and SAPIEN M3. Our unique leadership commitment to high-quality evidence was once again showcased by the multiple late-breaking clinical trials as well as concurrent publication in the New England Journal of Medicine and Lancet. On Monday, at TCT, physicians presented 7-year data for the PARTNER III pivotal trial, which represents the most extensive clinical follow-up to date for low-risk TAVR and surgical patients. The results confirm that rates of all-cause mortality for TAVR remain low and comparable to the surgical control arm. Additionally, SAPIEN performance and durability indicators were excellent and comparable to SAVR. Also, during the TCT conference 10 years a follow-up on multiple generation of SAPIEN was featured. Long-term data from the PARTNER IIa and the PARTNER II S3i studies demonstrated sustainable performance, excellent durability and consistent clinical outcomes of Edwards' TAVR matching the performance of SAVR. So overall, when taken together, the SAPIEN platform has been the most steadied valve with more than 15 years of world-class clinical trials involving over 10,000 patients, 10 New England Journal of Medicine publication and 1.2 million patients treated around the world. It is clear, but in addition to offering an early clinical benefit with superiority at 1 year for low-risk patients. The excellent performance of TAVR with SAPIEN 3 is now proven at 7 years. This impressive durability is further supported by the 10-year results of the PARTNER II trials. At the end of the day, this groundbreaking evidence sets a new global benchmark, one that is exceptionally reassuring for both patients and physicians, and sets the stage for continued long-term adoption of SAPIEN to treat patients suffering from aortic stenosis. TCT also featured multiple important studies focus on Edwards' portfolio of mitral and tricuspid replacement therapies, including the largest real-world registry data on EVOQUE and the 1-year result of the first ever pivotal trial for any transfemoral mitral replacement therapy via ENCIRCLE trial for SAPIEN M3. Just over 2 years ago, TRISCEND II 6-month data was presented at TCT 2023. To date, more than 5,000 patients have benefited from this novel therapy solving the large unmet patient needs. And the 1,000-plus patients, the real-world data presented at this year TCT demonstrates that the clinical community is embracing this technology broadly across many centers and is excelling at caring for these patient with consistent procedure times and high-quality results for both safety and efficacy. The TVT data on 30 days shows consistent TR elimination in 19% of patients, a very low major life-threatening bleeding rate of 1.3%, a new pacemaker rate of 15%. To put this EVOQUE pacemaker rate into perspective. It is now competitive to the pacemaker rate seen today in self-expanding TAVR valves available in major regions. It is inspiring to see the practice of medicine progressing for improved patient care. Turning to mitral replacement. We know that there are many patients who cannot be treated with by today's existing technology, including TEER and at TCT the ENCIRCLE study demonstrated meaningful early benefits for these patients, on all important measures like mortality, quality of life and reinforce the growth potential of this therapy in the years ahead. The introduction of SAPIEN M3 marks the beginning of increased physician awareness and referrals to the heart team to support treatment for this many patients in need. Over the past decade, we built a comprehensive portfolio of TMTT technologies. These ensure physicians have an opportunity to select the optimal treatment for their mitral and tricuspid patients, whether replacement or TEER, this is creating compounding value across the care continuum for all stakeholders, especially patients. And in terms of the impact to Edwards, while the contribution to growth from our portfolio of repair and replacement therapy could vary by quarter or year, we know PASCAL, EVOQUE and M3 will be key contributors as TMTT grows to an estimated $2 billion by 2030. I am proud of the Edwards team and our physician partners for advancing each of these important clinical trials. Edwards is the world's only company to provide physicians with a complete portfolio of therapies addressing aortic, mitral, pulmonic and tricuspid valve diseases, built on the foundation of our unique strategy and an unprecedented body of evidence. Leveraging our 65 years of deep expertise, we are also extending into heart failure and aortic regurgitation which are next-generation contributors to patient impact and growth. We have aligned our internal resources to support growth across these multiple therapeutic areas. This focus on structural heart has positioned the company for agile execution of our strategy and provide a foundation for sustainable multiyear growth. When I reflect on all of this, I am proud of our impact when Edwards leads, everyone benefits, physicians, providers, payers and most importantly, patients who can enjoy restored quality of life and live longer. Now I'd like to provide an overview of the third quarter sales performance by product group. In TAVR, our third quarter global sales of $1.15 billion increase 10.6% over the prior year. TAVR growth in the quarter was better than expected as clinicians demonstrated a renewed focus on prioritizing treatment for patients suffering from aortic stenosis. During the quarter, sales growth increased in multiple regions. Supported by new evidence, guideline updates and expanded education. Growth was comparable in the U.S. and OUS. On a global basis, Edwards' pricing and competitive position remain largely stable. We are pleased that aortic stenosis management is experiencing significant transformation. Supported by the combination of evidence of superiority in low-risk patients in 1 year, unprecedented data and long-term value performance and durability, expanded asymptomatic indication, and updated ESC/EACTS guidelines, combined with the global expert consensus publication. These guidelines for valvular heart disease establish a simplified care pathway for severe AS patients and enable a proactive approach to disease management. They underscore that timely intervention should be considered for all severe aortic stenosis patients regardless of symptoms and heart function, which is a meaningful step forward from the prior practice of watchful waiting. In the U.S., strong third quarter procedure growth was driven by a continued focus within the clinical community on the importance of timely intervention and streamlining the management of patients with severe AS. We were encouraged by the release of the updated American Society of Echocardiography guidelines which categorize severe AS, as a critical finding that should be communicated with urgency and encourage echocardiologists to actively participate in patient management. The evolution of policy and guideline changes together with the potential of a new U.S. NCD will provide important catalysts, resulting in a multiyear growth opportunity for U.S. TAVR. Outside of the U.S., we continue to focus on increasing therapy adoption. Especially in areas where many patients go without care. In Europe, Edwards sales growth was driven by the broad-based adoption of our SAPIEN platform in addition to the exit of a competitor, which resulted in a rebalancing of the market and a modest contribution to our sales. In Japan, TAVR sales growth continued to improve, reflecting a gradual recovery in market growth. Rest of the World, growth remains strong. In summary, due to our strong Q3 results, we are raising our full year TAVR guidance to 7% to 8% from our previous 6% to 7% range. Longer term, we continue to expect mid- to high single-digit growth in TAVR, supported by proven long-term evidence, new indication, further guideline and policy changes and finally, the potential to serve patients with moderate AS. Now let's turn to our TMTT product group. Our differentiated PASCAL mitral and tricuspid repair system and our unique replacement portfolio of EVOQUE and SAPIEN M3 delivered another strong quarter of growth. Third quarter sales of $144 million increased 53% year-over-year, fueled by the strong performance of both PASCAL and EVOQUE. Globally, we observed a continued trajectory of double-digit global procedure growth for mitral and significantly higher growth for tricuspid. The new ESC/EACTS guidelines released in the third quarter also included updates related to the management of patients with mitral and tricuspid diseases which further supports increased global use of transcatheter therapies for these patients. Continued global adoption of PASCAL and EVOQUE in new and existing centers fueled additional substantial growth. We've upsell physician excitement and support of a differentiation of PASCAL and the strong predictable outcome of EVOQUE, including consistent tricuspid regurgitation elimination. Over the last quarter, we released several new groundbreaking clinical evidence updates presented at the ESC Congress pricing to outcomes now show a hard endpoint benefit of EVOQUE versus optimal medical therapy. The data show that the most severe TR patients experienced a combined reduction in mortality and heart failure hospitalization, which is a meaningful advancement. In addition, as previously mentioned, at TCT, we were pleased to share the largest real-world data set of EVOQUE early commercial experience from the STS, ACC, TVT Registry. The data showed excellent outcome with consistent elimination of TR and a positive safety profile. We also presented additional TRISCEND I and TRISCEND II sub analysis TCT. And the totality of this new evidence strengthen confidence in tricuspid replacement therapy with EVOQUE and the impact it can have on this greatly underserved patient population. Moving to SAPIEN 3, M3, our early introduction in Europe is off to a great start, providing exceptional clinical outcome to patient in need and supported by our dedicated field team. The 1-year results from the ENCIRCLE pivotal trial, studying SAPIEN M3 showed excellent outcome for this first approved transseptal mitral valves. The data showed that in critically sick group of patients who were unsuitable for TEER and surgery now had an option to eliminate their MR, while drastically improving their quality of life with a high survival rate. We now expect U.S. approval by early 2026. In closing with PASCAL, EVOQUE and our SAPIEN M3, we are advancing our vision to meet the complex needs of underserved patients with mitral and tricuspid disease, with a differentiated portfolio comprised of repair and replacement technology. We are pleased with our year-to-date performance in TMTT and remain on track to achieve our full year sales guidance of $530 million to $550 million. In our Surgical product group, third quarter global sales of $258 million increased 5.6% over the prior year. Growth was driven by continued adoption of our RESILIA therapy in addition to positive procedure growth for the many patients best treated surgically. Our RESILIA portfolio achieved double-digit growth with contribution from INSPIRIS, KONECT and MITRIS therapies. We continue to generate dividends on the RESILIA portfolio and expand access globally. We see market approval for KONECT in Europe, at the end of the second quarter, we have been able to expand this therapy to patients across European countries during the third quarter. I think it is also important to highlight the strong Edwards surgical valve performance in the recent PARTNER III 7-year data. The majority of patients in the control arm were treated with Edwards' surgical virus and the results were comparable to TAVR at 7 years. This performance reflects over 65 years of valve leadership and innovation. In summary, we continue to expect that our full year 2025 surgical global sales will be in the mid-single digits, driven by RESILIA portfolio adoption across our key markets and growth in heart valve procedures for patients best treated surgically. And now Scott will cover the details of the company financial performance. Scott Ullem: Thanks a lot, Bernard. As Bernard mentioned, we are encouraged with our stronger-than-expected third quarter performance and the progress we made during the quarter, advancing our strategic initiatives. Our double-digit sales growth drove adjusted earnings per share of $0.67, well above our expectations, driven by both stronger-than-expected top line performance and certain spending delayed to Q4. Our GAAP earnings per share for the quarter was $0.50. A full reconciliation between our GAAP and adjusted EPS for this and other items is included with today's release. I'll now cover additional details of our P&L. For the third quarter, our adjusted gross profit margin was 77.9%, in line with our expectations compared to 80.7% in the same period last year. This year-over-year change was primarily driven by foreign exchange and operational expenses. We continue to expect our full year 2025 adjusted gross profit margin to be within our original guidance range of 78% and 79%. Our guidance continues to assume some pressure from the weakening dollar. Selling, general and administrative expense in the third quarter was $515 million or 33.1% of sales compared to $420 million -- $421 million in the prior year. We continue to expect increased SG&A spending this period due to deferral of certain first half spending and investments expected in the fourth quarter to advance our strategy. R&D expense was $281 million in the third quarter or 18.1% of sales compared to $253 million or 18.7% of sales in the same period last year. This increase in spending and decrease in R&D as a percentage of sales reflects our intentional strategic prioritization of investments in our expanding structural heart portfolio. Third quarter adjusted operating profit margin of 27.5% benefited from our better-than-expected sales performance and the deferral of certain spending to the fourth quarter. As mentioned on our Q1 and Q2 earnings calls, we continue to expect lower second half operating margin levels compared to the first half driven by the timing of key investments. We continue to anticipate full year 2025 operating margin of 27% to 28%, implying a Q4 operating margin in the mid-20s, consistent with prior guidance. We remain committed to annual constant currency operating profit margin expansion over the full year 2025 level in 2026 and beyond consistent with our guidance at last year's investor conference. Turning to taxes. Our reported tax rate this quarter was 16.1% or 16.9%, excluding the impact of special items, in line with our expectations for the quarter. We continue to expect our 2025 tax rate, excluding special items, to be between 15% and 18%. Turning to the balance sheet. We continue to maintain a strong and flexible balance sheet with approximately $3 billion in cash and cash equivalents as of the end of the quarter. The Board of Directors has increased the company's repurchase authorization, resulting in approximately $2 billion remaining under the current authorization. Average diluted shares outstanding during the quarter were 586 million. Based on year-to-date share repurchases of over $800 million, including the previously announced accelerated share repurchase of $500 million, we now expect lower full year shares outstanding to be between 585 million to 590 million versus original guidance of 585 million to 595 million. Foreign exchange rates increased third quarter reported sales growth by 210 basis points or $24 million compared to the prior year. FX rates negatively impacted our third quarter gross profit margin by 110 basis points compared to the prior year. As a reminder, our program is designed to mitigate the foreign exchange impact on earnings per share compared to our initial guidance for the year. At current rates, we continue to expect FX to have an approximately $30 million upside to full year 2025 sales compared to the prior year. I'll finish with comments related to sales and earnings per share guidance. As Bernard mentioned, we are increasing our underlying growth rate guidance for TAVR to 7% to 8%, with sales of $4.4 billion to $4.5 billion and our total company sales growth guidance to now be at the high end of 9% to 10%. For the fourth quarter, we're projecting total company sales of $1.51 billion to $1.59 billion and adjusted earnings per share of $0.58 to $0.64, bridging to our full year earnings per share range of $2.56 and to $2.62. We're looking forward to providing more forward-looking commentary at our investor conference on December 4. We remain confident in delivering the long-term financial goals for the company and each business unit that we provided at last year's investor conference. And I do have 1 additional piece of personal news. After 12 years at Edwards, I'm going to be transitioning out of the CFO role by mid-2026. The company has initiated a process to select a successor. We have considered this transition and a CFO succession plan carefully, and I'm confident we'll have a smooth transition. I look forward to serving as a strategic adviser to Edwards after a new CFO is in place. And now is a good time to pass the baton. The company is in a strong strategic and financial position, and I have confidence that Edwards will continue to perform at a high level in the years ahead. I care deeply about Edwards and know what a special company it is, and it has been an honor and a privilege to serve as CFO for almost half of the company's history as a publicly traded company, and I'm committed to a smooth transition next year. So with that, back to you, Bernard. Bernard Zovighian: Thank you, Scott. You have been a valued and key partner to me for over 10 years. first, as colleagues on the executive leadership team through the CEO transition 2 years ago. And now in this last 2.5 years since I became CEO. We have worked closely to find the right time for you personally and also for Edwards for the CFO transition and why we will be saving you in your current role, I am pleased that you will continue in the CFO role until the transition occurs by mid-2026, and remain at Edwards as a strategic adviser beyond the transition period. So I am confident that we will have a smooth hand off during this transition, and we are initiating a process to identify the successor. In closing, after more than 20 years of innovation that has benefited more than 1 million patient lives. And this week's 7-year PARTNER III results. Edwards TAVR is positioned for strong sustainable growth as many patients remain undiagnosed and untreated. Moreover, we are achieving many significant milestone in TMTT that give us confidence about treating the many mitral and tricuspid patients in need. And surgical is positioned for durable long-term growth, driven by a portfolio of differentiated technology. In addition, we are leveraging our structural heart expertise and extending into heart failure and AR, which are next generation contributors to patient impact. Altogether, we are convinced of a tremendous opportunity to drive success in the future through our patient focus, breakthrough technologies and leadership. With that, back to you, Mark. Mark Wilterding: Thank you very much, Bernard. Before we open it up for questions, I'd like to remind you about our 2025 investor conference on Thursday, December 4 at our headquarters here in Irvine. This event will include updates on our latest technologies, views on the longer-term market potential, as well as our outlook for 2026. More information and a registration form are available on our website. With that, we're ready to take your questions. [Operator Instructions] Diego, over to you. Operator: [Operator Instructions] Our first question comes from Travis Steed with Bank of America. Travis Steed: Congrats on a good quarter. Maybe to start with the TAVR growth in this quarter, the 10.6%. It sounded like just a modest contribution from the Boston exit. So if you can just maybe talk about some of your underlying trends and what was the strength this quarter? And is this kind of full year TAVR 7% to 8%, and if you exclude the Boston exit, is that kind of the right way to think about sustainable TAVR growth kind of longer term? Bernard Zovighian: No. Thanks, Travis. Yes, we are very pleased about the quarter. We had a strong quarter, better than expected. There are a number of things that contributed to this great performance in Q3. The first one is we didn't have so much evidence, so much news on TAVR and SAPIEN for a long time. Remember, the early TAVR, then you know the ESC guidelines on asymptomatic patients, the global consensus document and then all of them at each congresses, physicians, we are talking about it presenting a sub-analysis. So this created a halo where TAVR now is at the center of a conversation for most of the heart team in the U.S., but also outside of the U.S. So that's clearly a big catalyst. Also, what we didn't experience that usually we experienced during Q3 the summer usually the summer seasonality usually is very pronounced. And this year, we didn't experience it. So we had a higher Q3 and we have a lower impact from the summer seasonality. So all of that together basically contributed to the great quarter. We -- if you ask us about Q4 and the rest, we will talk about next year maybe late year. But for Q4 -- we expect a good Q4, better than we originally thought, but I will not take the Q3 results as the new normal for TAVR. Travis Steed: Great. That's helpful. And then since we were just at TCT a couple of days ago and you had a 7-year and 10-year data there, maybe just talk about now that you've had a few days to talk to doctors kind of what you're hearing from customers and the physician community and kind of the importance of that data and how it could or might not change practice. Bernard Zovighian: Yes. So maybe I ask, Dan, our new leader of the TAVR franchise, he was at TCT. He talked to so many customers. He was the architect behind all of the symposium that you attended. So maybe I asked Dan to comment on that. Daniel Lippis: Yes, Travis. Thanks for the question. Obviously, important meeting for us and more importantly, very, very important data that was presented there answering probably the last of the unanswered questions on TAVR, which is what are these TAVR valves look like at the critical window of vulnerability, which is this 5- to 7-year period. And it's nice, it's reassuring to be able to now answer that definitively, at least with the SAPIEN 3 platform. And as you can imagine, physicians were very, very positive. Obviously, the conversations kind of sort of stand with like it's a shame that a lot of people were maybe betting against, it was no surprise to me. Congratulations. And I think overall, everyone is super positive. I think it gives physicians and patients just again, reassurance to treat earlier in the disease progression pathway and maybe younger, and that's the direction of TAVR that we see. Also, with the guideline evolution, et cetera, that's the way that it's going. We now see clinical benefit for treating earlier in the disease pathway. But also new evidence that's come out, Bernard mentioned so much new data coming out just consistently over the last 12 months, but a lot of new evidence to suggest that there's economic consequence if you treat later in the process. And all this is driving just a renewed focus both domestically and internationally on TAVR programs. So that's probably the best way to sum up TCT. Travis Steed: Congrats on a good quarter. Operator: Your next question comes from Larry Biegelsen with Wells Fargo. Larry Biegelsen: And Scott, congratulations on all the success at Edwards, I know you'll be around for a couple more quarters, but I enjoyed working with you and we'll miss working with you when you leave. So for my question, Bernard, it sounds like you're comfortable with the 10% plus organic growth and 50 to 100 basis points margin expansion next year. What's giving you the confidence this early and Scott, as of today, would FX positively or negatively impact margins next year? And I had 1 follow-up. Bernard Zovighian: Yes, no, thanks, Larry. To be fair, when I look back, we always -- that I always had confidence. And let me give you a context on why I am seeing that. We have been studying this platform, SAPIEN for 20 years. We have been iterating this platform for 20 years. We know what this platform is delivering for patients, more than 1 million patients receive in this platform. So when we gave you the guidance last year about TAVR for the foreseeable future, basically mid- to high single digit. And the company, on average, 10% with leverage EPS, we knew that. And when I say that, we knew that because all what we do is rational, is science-based, you don't have surprises. So it's like the 7 years maybe was a surprise to some, but for us, it was a confirmation about what we knew here. So no change to the guidance we gave you last year in December, Larry. Scott Ullem: Yes, Larry, I'll just add to that. First of all, thanks for nice comments, appreciate it. Just to reiterate what Bernard said, last year, we said on average, 10% over the year's constant currency. And we think that 10% growth on the top line for Edwards in 2026, will be within the range that we provided at the investor conference. But remember, now with the third quarter results and the momentum that we see in the business going into the end of the year, we now have a higher bar that we'd need to clear when we're calculating that year-over-year growth rate. As it relates to your question on FX, I thought you might ask the question, we're just going to have to hold off for 5 weeks until we get to December 4. We're still running all the numbers, and we'll take you through when we take you through our guidance, we'll take you through the impact of FX on guidance. Larry Biegelsen: All right. Fair enough. And just for my follow-up, Bernard, as you approach the scheduled trial for the JenaValve deal, what's your level of confidence you could overturn the FTC block? And just remind us of where SAPIEN X4 stands and when we'll see the pivotal data. Bernard Zovighian: These are important questions. So let me take the first one and maybe Dan take the second one. We continue to pursue this regulatory approval for JenaValve for a very simple reason. You know us. We have identified these large unmet needs. These patients have no solutions. And we know that when we come into a space. We bring our leadership, our innovation power, our commitment. We make a big difference, patient benefits. So we believe here we have great facts. At the same time, we will know in Q1. So before Q1, I can tell you, Larry. But I really hope that we are going -- we will have a favorable ruling at the end because, again, these patients are waiting. Daniel Lippis: Just regarding X4. First of all, very excited about our pipeline. X4 has the real potential to be a game changer in TAVR. And that trial, the ALLIANCE trial completed at the end of 2024. Right now, the patients are in follow-up phase, right? And so until that the patients have gone through that period and the trial is complete and the data is analyzed, we don't have a whole lot more to say about X4. Operator: Your next question comes from David Roman with Goldman Sachs. David Roman: And Scott, I'll add my congratulations on moving on. I finally remember your first analyst meeting in 2013, I think Edwards was a small-cap growth stock at $4 billion. So I think you're certainly leaving the company in a good position, although we'll miss working with you. Two questions for me. One, just starting on the TAVR side. When you look at the PREVUE-VALVE study that was presented at TCT and think about the early TAVR study in context, can you maybe just help us look forward and I know we're all focused on like indication expansion and asymptomatic patients. But to what extent is there an opportunity here to see broader diagnostic rates for AS increase that would not only trickle through to your TAVR business, but also be a tailwind to the surgical valve business as well? Bernard Zovighian: That's a good question. And we have not talked about it when we were at TCT together. So this study was an investigator-initiated study. And if you look at it in a big picture, it validates our assumption on the size of AS market potential, the number of patients, but also it is validating basically the incidence and prevalence of all valvular heart disease. So at the high level, it's positive. There is more to learn from, but we look at this one as a positive one for the next years to look at. Dan, do you want to add anything to that? Daniel Lippis: Yes. David, I think a very, very important study and one that I anticipate is going to be referenced a lot, right? And it looks at the prevalence from a unique lens, right? Typically, when we try to establish incidence prevalence and market opportunity, it's coming starting from the basis point of who's actually got an echo. And what this study was trying to do is to take a look at the prevalence, if you like, of the disease from a out of system population or nondiagnosed population. And so it kind of brings a completely different lens and a very novel way of doing it to help our understanding of the disease. As Bernard said, when you look at the data that we've had available from an aortic stenosis perspective, it kind of validates kind of some of the assumptions that we had maybe even suggesting that the disease is larger than what we thought. But it's pretty much in that ballpark. What I would say about what is the opportunity here. As you see, whether it's this evidence, whether it's early TAVR, whether it's the sub-analyses of early TAVR, whether it's the PARTNER III and the new standard now we have for TAVR with long-term durability, all of this is going to get disseminated. It's going to be part of an education process. It's going to be democratized in the community and it's going to lead to greater awareness and greater referral and greater adoption. And I think that that's part of our strategy, part of the plan, why we are investing so heavily. And so confident about the impact, but it all helps. So thanks for the question. David Roman: And maybe on the TMTT side, I think you said M3 approval coming in early 2026. Can you maybe help us think through how to compare and contrast the M3 launch with EVOQUE? And I think Dr. Sharma at your analyst meeting on Monday kind of describe tricuspid valves as they once forgotten valve, that's starting to gain attention from the clinical community with the now treatment solutions that are out there. But I think mitral valve procedure volumes are low, is a much more mainstream and well-understood disease states. So help us think about how -- what are the factors influencing the M3 launch and whether using the EVOQUE launch is a good template or not? Daveen Chopra: No. Thanks so much for the question, Dave. It's Daveen here. Yes, we did say that we expect U.S. approval in early 2026. And if you look at the SAPIEN M3 launch, we now have a couple of months of the launch in Europe. And in Europe, what we're seeing is that we have a kind of continuing limited control launch. And we're really focusing on the high-value model. We've got really important physician training, Edwards' people really working very closely with physicians to make sure we've got great outcomes in every case. And what we're seeing from physicians is that they're actually pretty excited about this technology. As you said, they treat mitral patients today, and the SAPIEN M3 product is specifically focused on patients who are unsuitable for both TEER as well as surgery. So for them, I think that we do see patients in the system who are unsuitable and so their excitement is getting to see great results for these patients with M2. However, to your point about comparison to the EVOQUE thing, I think I wouldn't get ahead of ourself in saying that with us, it's kind of this control launch, high training and making sure that we go one center at a time, to kind of ensure that we get the best possible outcomes and results. Operator: And your next question comes from Vijay Kumar with Evercore ISI. Vijay Kumar: Congrats on nice sprint here, Scott. Congratulations to you as well, and wishing you the best of your transition. Maybe my first question on this TAVR performance in 3Q, why isn't this performance a reflection of asymptomatic approval? I'm curious why you think the strength wouldn't sustain? Bernard Zovighian: Yes. Maybe, Dan, you want to take. Daniel Lippis: Yes. Vijay, I think your question is, is the Q3 performance a reflection of asymptomatic approval. And I'm not sure if you specifically mean adoption or treatment of asymptomatic patients. But certainly, it is the asymptomatic approval, the indication, the evidence is reflected in what we're seeing here as along with -- I mean, I really can't recall over my 15 years, a period of 12 months where the scientific and academic podiums have just been so focused on TAVR with so much new evidence, so much new discussion, subanalyses, et cetera. So for sure, the asymptomatic evidence and indication is playing a part here. But as we've also seen in other indication approvals where a new indication shines the light on a previous indication and you see a renewed focus on that. And we're seeing that here, for sure, because there's also new data. There's also new data to say that timely and urgent intervention brings both clinical and economic benefit for symptomatic severe aortic stenosis, which is part of the analysis of that data. Regarding is asymptomatic patients entering into the treatment pathway in Q3, and is that driving the current performance, we don't see any specific evidence of that. It has to be caveated by the fact that there isn't coverage for the asymptomatic indication, right, at the moment. So it's hard to see that encoded CMS data. But we do have ways of looking at upstream patient populations to see what's coming through the funnel. And right now, we don't see any significant evidence that the growth is being driven by referral and treatment of asymptomatic patients. So I think that, that's an opportunity to come. Bernard Zovighian: And this is probably what is most exciting, Vijay, that we have seen this momentum in Q3 just by having a renewed focus, given all of this data, all this positive data. Also, we benefited from the seasonality of the summer. But it is -- so the big catalysts are still in front of us. And this is what we have been saying. We are very confident about this multiyear opportunity for TAVR. This is what made us confident again that this is just in my mind, when I say always to the team, it is just the beginning. Vijay Kumar: Understood. That's helpful. And Scott, maybe 1 quick 1 for you. there was a litigation charge. And it was non-GAAP, could you just remind us on what the charge was? Scott Ullem: Yes. Thanks for the question, Vijay. There's a lot that happens behind the scenes with just ins and outs of running our business. As you know, in medical technology, there is -- it's not uncommon to have litigation activities underway. And so we take reserves periodically based upon what we think that exposure looks like and you'll see that reflected in today's GAAP P&L. Operator: Your next question comes from Matt Taylor with Jefferies. Matthew Taylor: I wanted to circle back on TCT. You had a really nice showing kind of across the board. And I think maybe stuff the most to us was how positive the real-world tricuspid data was. And you talked about having a toolbox there, and you'll have that in mitral next year. So my question is really, after this tricuspid data and having the toolbox there. Do you expect some acceleration in the tricuspid adoption could we also see that in mitral next year? Maybe you could just talk about that in general and the pace of acceleration we might see. Daveen Chopra: Yes. Thanks, Matt, for the question. Obviously, we were very excited to see the EVOQUE data coming from TCT. And I think what we saw from EVOQUE is that we see this continued trend of a great real-world outcome. First, starting at ESC a couple of months ago where we saw these hard endpoints for the most severe TR patients, and now we see with the TCT data, the improved safety, both in bleeding and conduction versus what we saw in the randomized trial. And I think what we're seeing is that we're seeing how the elimination of TR is leading to just change in patient's life. And I think what we're also seeing from Europe where we have both repair and replacement for tricuspid is that you really need both technologies to really get -- treat the maximum number of patients with the best possible outcomes. And so I think with that, as we get to your point, is having the full portfolio even on tricuspid and now then coming with mitral, you start seeing this compounding effect where when you have multiple treatment options each patient is getting the best possible outcome, you could treat the maximum possible number of patients. And with that, you see this continued strength and growth. And so in the words of seeing you were asking about specific of the acceleration of TR, I think what we're seeing is very, very strong growth in TR. I mean, this year, you see overall that our overall business is growing at over 50%. And so I think we're going to see this continued growth in TR and these provide nice tailwinds. Nice real-time examples to help continuously support the strong growth in TR to really treat an awesome number of patients in the years to come. Operator: Your next question comes from Robbie Marcus with JPMorgan. Robert Marcus: Great. Congrats on a good quarter. And Scott, wish you all the best, we'll miss working with you. Two quick ones for me. First one, I know you've been working a lot in the past couple of years to try and improve efficiency in the cath lab, and you have some AI initiatives and educational initiatives and just wondering how that's going, what you're doing exactly and how much efficiency and extra capacity you've been able to help drive such good TAVR volumes? Daniel Lippis: Yes. Thanks, Robbie. Maybe I'll take that question for you. Like, we've got a number of programs in flight, if you like, whether it be at an early pilot stage or various stages of ramp. Specifically, as it relates to capacity building or efficiencies, one of the big programs that we have is Benchmark. And that has been in development and being -- and all about improving efficiencies for better patient outcomes in the hospitals. It couldn't be a better time to be applying that right now with the renewed focus on TAVR as the timely treatment and more urgent treatment of these patients is in the spotlight. But at a high level, we've got programs that we execute on the ground, right, with our field team. We are in just about every single case. And these are either targeted towards improving the efficiencies in the cath labs or in the program itself or with referral activity and education of evidence and guidelines and new data, et cetera. We have also partnerships with tech companies and AI-based companies that look at echo screening and upstream identification of patients and workflow solutions so that, that can be done economically. And so we're working on that. We have very sophisticated marketing programs, looking at targeting direct-to-patient activity through social media, et cetera. And then just the partnerships that we have with societies and others with GCs, with patients, et cetera, around dissemination and education and clinical evidence. So all of this comes together and kind of helps us sort of run the process of moving the needle of patient activation. And I hope that gives you some idea of what we're doing on the ground with our physician and hospital partners. Bernard Zovighian: And so Dan, you gave here a full picture on all of what we do on the TAVR side. Maybe Daveen, a couple of things on TMTT? Daveen Chopra: Yes, a couple of quick things. If you think about, right Dan, for a more established procedure like TAVR went through a lot of great examples there. On TMTT, when you're creating a brand-new therapy, right, you can imagine there's so many things to quickly help improve their time in the cath lab, their time to go home, their time for pre-having a patient before you even have a procedure. So what we see is actually with things like replacement technology, both mitral tricuspid and even to some extent with TEER as we establish and grow these new therapies, we are constantly improving efficiencies across the board in almost all aspects. So I think for us, that just comes with the therapy development that happens, it helps really line you up for long-term success. Bernard Zovighian: Thanks. So we do a lot here, and I'm glad we were able to share some of what we do, but we do much more than that. Robert Marcus: Maybe if I could just ask a quick follow-up for Scott on -- we had really good margin expansion. I think you've committed to 50 to 100 basis points, and I don't want to steal any thunder from the Analyst Day, but you're one of the biggest spenders in R&D at $1.1 billion, and it's clearly given you a great product pipeline and portfolio with a lot of big trials wrapping up, how do you think about R&D and what's the right level of spend over the forward horizon? How are you thinking about that? Scott Ullem: Thanks for the question. Look, we think about R&D as an investment in the top line. And the most important thing that we do here is innovate to drive sustainable organic top line sales growth. We've also said though, at last year's investor conference, and you'll hear it again at this year's investor conference that top line growth will outpace R&D spending growth. And you saw it in the third quarter, where we went from nearly 19% R&D as a percentage of sales last third quarter to 18.1% of sales this quarter. And so that gives you a sense of how R&D as a percentage of sales is going to trend. Again, it's still the most important driver of our strategy, of our innovation strategy and of our sustainable top line growth expectations. But it's also something we're going to be pretty disciplined about prioritizing where we're investing those R&D dollars. Operator: And ladies and gentlemen, that's all the time we have for questions today. So I'll now turn it back to Bernard Zovighian for closing remarks. Bernard Zovighian: Okay, everyone. Thanks for your continued interest in Edwards. Scott, Mark and I welcome any additional questions by telephone. And I wish you a great day. Thank you, everyone. Operator: Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.
Francoise Dixon: Good morning, everyone, and welcome to the Mach7 Q1 FY '26 Results Briefing. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Teri Thomas; and our new CFO, Daniel Lee, will provide an overview of our Q1 FY '26 results. We will then open it up for questions. [Operator Instructions] I'll now hand over to Teri. Teri Thomas: Happy Halloween. One of my favorite holidays, and I'll just start off by addressing the scary stuff. So this was my first quarter as Mach7's CEO, and it was a reset quarter. We've made some tough but necessary choices to strengthen the business with a goal of long-term profitability, but also operational excellence. And we have more changes to work through going ahead. It's been a good start in transforming this business, and I'll review some of the key changes later, but one key change is appointing a new CFO, Daniel Lee, who has a nick name, D Lee, which I love because I expect a lot of new logo deals to happen under D Lee. So I want you to know Mach7 is a desirable place to work. We had over 500 applicants for the CFO job in just two days. And from that large pool, Daniel stood out for his deep experience and financial discipline, but also his willing engagement to partner on strategy. He's already proving to be a great partner to me as we unite financial rigor with business and commercial innovation. So, love to introduce you to Dan. Dan, why don't you share a little bit about yourself? Daniel Lee: Thank you for that lovely introduction, Teri. I really am loving this opportunity with Mach7. This is a very important time in the company's journey, and there are very significant opportunities and potential ahead of us. Over the past several weeks, I spent quite a bit of time getting to know our team, our customers and our financial and operational foundations and processes. What I can say is that we have great strength in our technology, very loyal customers, and we're very well positioned to capitalize on all of these opportunities. As CFO, my ultimate goal really is to be a true and close strategic partner to Teri as well as our new sales leader and the rest of the team so we can drive growth, strengthen our revenue engine and accelerate our path to profitability, and I'm 100% on board to do that. Teri Thomas: That is fantastic. Thank you so much. I'm really glad that you're on board. And now on to our presentation. So this particular slide describes for those of you who are unfamiliar with us, I love that I get to work in an industry that has some real meaning that impacts patients' lives. So this is what Mach7 does. We provide mission-critical software. To say it quite simply, we get the right images to the right people in the right places at the right time, diagnostic quality and fast. And I'll be talking more about it later, but to give you a sense of how important this is, our tech is being used in areas like telestroke, where accessing the image quickly often is the factor determining if someone lives or dies or if they recover or they don't recover. So speed in our technology is absolutely critical. And in my calls with our customers, I'm reminded by them regularly how the work we do is extremely important. Speaking of customers, we had one major customer milestone this quarter, the initial go-live of the U.S. Veterans Health Administration's National Teleradiology Program. This first step in a phased go-live is addressing the needs of two unique departments that are very different from traditional general radiology. As I just mentioned, telestroke is all about critical decision-making. Images determine the path to treatment thrombolysis or thrombectomy, every piece of this program hinges on speed and instant access to images from anywhere. Our unique capabilities with zero footprint deployment, real-time image ingestion, low latency retrieval and intelligent routing are absolutely critical for telestroke. The other area that NTP is using our software is mammography, which is now live. It's a service I know well, known for its unique technical and operational challenges compared to general radiology, very high image quality needs and management of extremely large file sizes, especially digital breast tomosynthesis and then also integration with third-party systems because it's a more regulated part of imaging are really critical to the success of this service for the United States veterans. This go-live, though was far more involved than a typical go-live, not just because of those two initial departments, but also it included an arduous process of individual staff needing security screening and credentialing. This included background investigations, travel to specific locations to file paperwork. And the security work was necessary to be able to provide system access and on-site training as well as support and access to the broader deployment within the VA. So this large effort, much more engagement needed than a typical go-live. However, we now have the credentials and the infrastructure in place to support the anticipated rollout to other departments starting in the next few weeks and even to be able to expand to other visions in Phase 2 in the future. Now I covered that first bullet. Dan, why don't I hand it over to you to go through a little bit more about our financials this quarter. Daniel Lee: Thanks, Teri. That sounds good. Yes, let's talk some numbers. So, from a financial perspective, the first quarter represented a very solid foundation for the reset that we've just been discussing. Our annual recurring revenue run rate increased slightly to $23.5 million. This is highlighting the durability of our subscription and maintenance streams, which is really a core strength of the Mach7 model. Our contracted annual recurring revenue or CARR closed at $29.6 million, broadly consistent with June levels from last quarter. Sales orders totaled $2.6 million, an improvement of 17% over the same period last year. That growth reflects continued customer engagement and confidence as we realign our commercial approach. Now we did see a decline in operating cash flow over the quarter. Receipts from customers were $4.6 million, a 27% decline over the same period last year. Now the drop was mainly because of receipts timing, not underlying demand as we had two delayed renewals. These two transactions alone represented roughly 80% of the total discrepancy in cash, but both have since been invoiced post quarter. Normalizing for these timing issues, our pro forma operating cash flow would have broadly been in line with expectations compared to the same period last year. On the expense side, this quarter, the total payments were $8.3 million, which was a 16% decrease when compared to the same quarter last year. Now admin and corporate costs, which is a part of the total payments rose to $2 million, which was up 24% year-over-year. Now this was primarily driven by two one-off items. We had our annual insurance payment, which is normally paid in the fourth quarter of every fiscal year, but it shifted into Q1 this year with an expanded coverage. This item alone represented approximately $600,000. And we also had a payment related to regulatory and MDR technical reviews. These two one-off items combined represent roughly half of the entire admin and corporate costs for the quarter. We ended the quarter with $18.9 million in cash, zero debt, and we maintain a very strong balance sheet. And we're very well positioned to execute on our strategy now. Fundamentals remain very sound, and we are committed to operating very efficiently, and we had a significant reduction in our staff costs. And now I'll actually pass it back to Teri to talk a little bit more about that. Teri Thomas: Thank you very much, Dan, D Lee. Good transition point as I start to turn into our strategy, key elements of which are already in motion. At a high level, we've begun driving some greater operational efficiency across the business. Staff costs are down 18% year-on-year with most of that progress achieved this quarter. We've streamlined our leadership structure, bringing services and support together under a single customer-focused leader. We're evolving our talent model to attract and grow builders, people who are humble, hungry and smart, eager to advance their careers and make a real impact. And as our organization continues to mature, we're creating more opportunities for internal growth while keeping our cost base disciplined and sustainable. We expect to continue to develop more operational efficiency by hiring in lower-cost hubs, at least when we can and also increasing the diversity of our workforce. And now I'm going to give you a sneak peek into our strategy, which we'll be outlining in more detail at the AGM alongside some new product announcements at RSNA in November. I'll also be meeting with several investors in Australia just after RSNA for a broader set of discussions. And I'm very much looking forward to seeing some of you in Aussie in person. Do bear with me, though, I'm going to keep this pretty high level. I can talk about it all day. I do believe strategy isn't a single moment in time. It's a way of operating, and we've already begun executing several elements of our strategy, while others will unfold over time. So our strategic theme overall and product positioning is from archive to architecture, and this slide summarizes the overall picture. First point sets the context. Our industry is undergoing rapid change. Costs are rising, talent is scarce, data continues to fragment, and it creates a significant opportunity for companies that can deliver efficiency and also interoperability and connections. Second point represents our evolution. We're building a strong base while leaning deeply into customer needs and industry trends. We believe that truly understanding our customer and aligning with them is the best path to winning in this market. Now the third point speaks to advancing our mission, connecting images, people and insights to create a stronger, more intelligent future for health care, and I'll share more about that in a minute. And finally, the fourth point, execution, embedding a dynamic operating model that aligns strategy, structure, technology and talent, driving accountability, driving agility and ultimately driving results. That's the last part of our strategy, and I'll expand briefly on each of these points. Next slide. All right. A little bit on market opportunity. We are in a very resilient industry and our tailwinds are strong. The enterprise imaging market is projected to almost double, reaching about $4.1 billion by 2030, growing at roughly 12% annually. And in order to take advantage of AI and modernized software to address rising cybersecurity concerns, hospitals and health systems are updating and consolidating multiple imaging systems into unified interoperable platforms. This is precisely the space that Mach7 plays in, helping organizations replace fragmented vendor locked systems with open scalable architectures. AI and medical imaging is the fastest-growing part of our market. AI is moving rapidly from experimentation to operational integration and success increasingly depends on having the right data infrastructure, being AI ready. Mach7's architecture enables that by ensuring imaging data from multiple sources is clean, structured and accessible for clinical use as well as creating AI models. At the same time, health care data volumes are exploding and about 3/4 of that data is in the form of some type of imaging, whether it's radiology, video, ultrasound, CT scans and more heavily siloed across many departments and many modalities. A vendor can provide a strong radiology-only system, but patients and clinicians need more than X-rays and more than traditional radiology platforms to tell the entire patient story. So customers are looking for unified data management that simplifies workflows, reduces costs. And this third point has been validated over and over in my calls with customers as well as prospects and even class. They need strong tools to improve coordination of care. They need completion of the EMR with all of the right imaging. So we see rapid growth across high-volume specialties, not just radiology, but cardiology, oncology, teleradiology has been growing, and it's increasingly referred to now as tele-imaging because it does go way beyond radiology. Distributed reading, remote collaborations, AI-assisted diagnostics are becoming the norm. And these shifts play directly to Mach7's strengths, interoperability, hybrid cloud delivery and scalability. So the opportunity in front of us is not just about participating in a growing market. It's about defining how imaging data is managed and monetized in the next decade. The market is transforming. And in a shift as profound as the move from film to digital a couple of decades ago, that first wave redefined access speed and storage. The wave we're in now is about intelligence, activating imaging data through agentic AI and enterprise-wide interoperability, again, going way beyond just radiology. And that brings us to how we are innovating to meet this opportunity through our product and technology road map, which is designed to take Mach7 from archive to architecture. Next slide. So this isn't simply a technical upgrade. It's actually a response to a clear need, open, vendor-neutral platforms that unify a very broad set of data, automating workflows and enabling AI-driven decision-making. That's the foundation of archive to architecture as our strategy, transforming imaging from static storage into an active intelligent ecosystem. We will announce a new architecture launch at RSNA, an intelligent data platform built to enable agentic AI through an expanded array of open APIs and unified orchestration. It's designed to enhance integration and empower providers to deploy and manage their own AI models. We will also expand our eUnity viewer. It's fast, it's user-friendly. It's great for the enterprise. And we're moving this into a broader tele-imaging platform. We can unite radiology, advanced visualization, which is needed for a number of those growing specialties and then adding new areas like digital pathology into one coordinated viewing space. We'll release 3D visualization and distributed diagnostics while maintaining Mach7 zero footprint simplicity and interoperability. And then finally, we'll integrate system performance and workflow analytics tools to enable continuous optimization in areas like safer and intelligent migration to the cloud, something that our customers are keenly interested in, especially given the recent AWS outage as well as Azure outages in the last days and weeks. And this will be a key part of our offering. So together across these three areas, we will provide a connected AI-ready ecosystem, transforming Mach7 from a VNA and a viewer into a leader in intelligent imaging architecture. This is how we position ourselves to lead in the next decade of health care data innovation. Now how are we going to do that? Asia. To execute on our innovation road map and new product launches, we are expanding, but we're doing it in a cost-effective way. Our development teams in Canada and the U.S. will be complemented by a new lower-cost innovation hub in Asia to scale engineering capacity and accelerate product development with lower overhead. It also positions us closer to some high-growth markets in Asia and the Middle East, where we're seeing some strong demand for enterprise imaging and interoperability and where our upcoming CE Mark opens up new possibilities for enterprise and government sector opportunities. We do expect our CE Mark in the coming months, which is critical for Europe, but it's also quite important for large opportunities in the Middle East. This hub will serve as a strategic beachhead for AI readiness and platform innovation as well. Now I gave my first boom right, welcome back gift. For key contributions from our past, we do a pile of those behind me as we welcome back innovators that we worked with in the past as well as those that are new. And one of these, the first went to Ravi Krishnan. He is one of our original founders, and he brings absolute product evangelism, deep regional insights and strong customer relationships in Asia and the Middle East. He was very engaged in key large customers joining Mach7 in years past, and we really look forward to his energy and his support in once again engaging strategically and closely with some of our very largest customers, growing sales, driving innovation that is well aligned with the needs of the market. So, Asia will not remain a quiet outpost for Mach7. This strategy involves transforming our existing Asia office into a growth engine, driving innovation, efficiency and expansion. So speaking of transformation, many strategies look good on paper, but they don't move the needle. So why will our strategy work? Underneath our vision and our road map is a solid operating model and one that we've begun to execute. I like the McKinsey performance framework because it connects the dots from strategy to transformation, helping us align across 12 key dimensions of the business with our strategy. The most impactful for us right now, what you see in the upper left-hand corner is the value agenda. That drives most of what's behind the core of our strategy moving from archive to architecture. However, it also goes into our structure, our leadership, our technology levers. And a lot of those levers are already moved into position. However, we're designing through the next layers, process improvement, talent acquisition, leveraging our unique global footprint, metrics, rewards. Our purpose, it fuels our work. Our value agenda drives the Mach7 loop, connecting customer engagement through our flight crew to marketing, referral-based sales, customer-driven innovation. Our structure is evolving to support all of this with leadership alignment and accountability designed for faster and more focused execution. Our leaders all adopt a customer to ensure that we have knowledge of the customers' needs, driving decisions throughout our business. And technology is an important enabler. So we're bringing in more automation. We're leveraging AI and making data-driven decision-making as part of our work. So the model is not static. It's a system we are building and refining as we learn. But it's what allows our strategy to move from intent into action. Next slide. So building on that operating model, we've executed a full commercial transformation, one that reshapes how we engage with our customers, how we deliver value and how we grow. We've overhauled the sales organization, and we brought in Todd Stallard, Todd Stallard as our new VP of Sales to lead a refreshed sales team. He is a proven commercial leader with deep expertise in partnerships and complex global deals. But most importantly, he's a former football player whose middle name is drive. He has a healthy dose of get up and go, which I absolutely appreciate. And as I mentioned before, Ravi has joined us to help accelerate innovation and engage in some major enterprise and government opportunities. And we've refocused on well-aligned enterprise opportunities that emphasize long-term partnerships in markets where interoperability and AI readiness are top priorities. We've also added a Chief Innovation Officer to unite product and engineering under one leader to accelerate delivery, strengthen alignment and drive faster innovation cycles in connection with that team in Asia. Now speaking of in connection with teams, our flight crew. A key part of our commercial transformation is how we engage with our customers. This truly is the cornerstone of everything that we're doing. So that's where the flight crew model, which we introduced in August, comes in. Each customer has a dedicated cross-functional team led by the ACE, the advocate for customer experience. This creates a single point of accountability, and it ensures faster, consistent support across every stage of a customer relationship. The flight crew model delivers a unified Mach7 experience, improving response times, most importantly, though, deepening relationships, two way. Our staff get to know our customers. They care deeply. They're not just a ticket, and the customers feel that. connecting them directly with our product and innovation teams will also accelerate our ability to do relevant innovation that we know customers are clamoring for and ready to use. And it empowers us in what we call the Mach7 loop, a continuous cycle of feedback and innovation that ensures customer insights directly shape what we build, provide fuel for our marketing, happy customer references, drive and support sales success. So the way we engage with our customers, the way we innovate and the way we execute is all grounded in how we show up as a team, our values, our mindset and our shared accountability, which brings me to our new culture code, clients. Underpinning all of the strategy is culture. It is the execution engine for our strategy. So the mindset that we are building, it starts and ends with the customer. Customer first, everything starts with understanding who we're serving, learning and growing. We are a learning organization. Curiosity and development fuel our innovation. You can't work in technology if you don't have a growth mindset. Innovating for impact, ensuring that everything we do creates measurable value. A couple of things specific to us. M, minimizing complexity so we can move quickly and scale efficiently, I believe, is critical to our profitability. We need to make things as complex as they need to be, but no more, and we need to be nimble and scrappy. So, M, is all about moving, moving quickly and minimizing complexity. And then B, building, build with ownership, empowering our teams to take accountability, but we are making stuff. And then finally, I said it starts and ends with the customer. Sell, selling and growing together, aligning commercial success with customer success. Everyone we engage with as a prospective customer is simply a future customer that doesn't know it yet. So we will focus on our conversion rates. We will bring new customers in. And these aren't just our values. This is how we execute as an organization. This culture code, it tells people what to do when nobody is there to tell them what to do. Last slide, closing outlook. As we look ahead, Mach7 is very well positioned to execute on the strategy that we've outlined today, supported by a refreshed leadership team, a clear focus on commercials, also cultural and operational excellence. We understand our responsibility as a public company. So shareholders are also important in our decision-making. We seek to reshape how imaging data powers health care, translating that innovation into financial performance and creation of long-term value. So financial discipline will remain very important to us. Dan and I believe in maintaining a strong balance sheet, managing our cash flow carefully and accelerating towards sustainable profitability. We've paused activity in our on-market share buyback program while we complete the strategic review, ensuring that every decision aligns with our growth priorities and capital discipline. We'll share more detail on our growth strategy and our fiscal year '26 outlook at the upcoming AGM. So I'm going to close by saying I'm very confident in where we're headed. I'm very proud of the progress that we've made. And I'm quite energized by the opportunity that Mach7 has ahead of us. We're evolving, and I firmly believe it's changing for the better. Dan, would you like to say any closing words before we move to questions? Daniel Lee: Sure. Thank you, Teri. So fiscal year 2026 is a reset year, but it's also a turning point. From a financial perspective, our focus is extremely clear, disciplined execution and profitable growth. We are going to focus on operating within our means. And as I mentioned, we have a very strong balance sheet with no debt. And now really, it's just about applying capital precisely where it drives the most impact. As we move through fiscal year 2026, we expect to maintain continued emphasis on operational efficiency. and improved cash conversion and sustainable profitability, all while supporting the innovation that defines Mach7's next chapter. It's a solid foundation for the growth ahead, and we're executing with confidence and focus. Thank you. Francoise Dixon: All right. Thank you both. I think we'll open up now for questions. Francoise Dixon: We received one question in advance from Luca. And his question was, has Mach7 lost any customers during the quarter? Teri Thomas: So, yes, Mach7 has lost a customer. And it's a little bit of a lemons, lemonade situation. So we had one small customer. It was less than $100,000 ARR who was a joint venture that -- the joint venture has been dissolved. So that customer doesn't exist anymore. There's nothing we could have done about it. However, where I said lemons to Lemonade, a number of those radiologists who really enjoyed using our software have moved to a larger IDN in their area, and they have reached out and engaged with our sales team. And we have a great lead to what could become a much bigger customer. So while, yes, we lost a customer, we expect that this may transform into something far bigger in the future. Francoise Dixon: Thanks, Teri. We've received a couple of questions from Peter Cooper. So I'll deal with each one at a time. The first one is, what is the timing and process for being extended into Phase 2 of the VA contract? Teri Thomas: I cannot give you a lot on timing as we are in the middle and very focused on Phase 1 right now. The wording of it is it is something that can be executed in the future, but it's up to each visit in terms of when they would want to go forward. And I forget there is some sort of a backstop. I cannot remember what it is, but I could follow up with that later. Process-wise, though, the good thing is once we get this Phase 1 rollout process done, and we've got active activities happening with that, I feel optimistic about it. We have created a government affairs part of the business to engage with the other visits. And one thing about doing government work is it's far less paperwork for them to be able to go forward with an existing vendor that has this infrastructure in place. So we anticipate that as soon as RSNA will start engaging more with some of the visits. We've had some conversations with a few of them already. So we -- I can't comment about when these things might happen, but I can comment that we are starting to think about that. But our top priority right now is getting fully rolled out in Phase 1. Francoise Dixon: Thanks, Teri. Our second question from Peter Cooper is, what has Mach7 learned from the loss of Trinity? Teri Thomas: First of all, let me share that Trinity does remain a customer of ours. They've scaled back their engagement with us. However, they've got multiple contracts with us. They're still using us in some areas, but it's a smaller engagement than initially. One of the first customers I visited was Trinity, and I went in with a very open mind and listening ears, and I think there was a lot to learn. Some of the changes that we made to the customer part of our business, overhauling and removing silos, creating a designated team, the whole flight crew that I laid out just now, a lot of that was in direct response to the feedback from Trinity. So the one thing they shared, they said it wasn't about the software. It was about the engagement model, and we've completely changed our engagement model. Francoise Dixon: Thanks, Teri. Our next question comes from Wei Sim. Teri, what are your thoughts on GTM for VNA versus Viewer and the niche which Mach7 is looking to focus at? Teri Thomas: I'm going to ask if we can postpone an in-depth answer to that question as it is fairly complicated because the strategy that we share -- I deliberately didn't put a ton in about product and go-to-market in this preview because there are certain things we're going to release at RSNA. So I'm going to ask if I could postpone that question until we do our in-depth strategy discussion around AGM right before and/or the roadshow right after RSNA. Francoise Dixon: Our next couple of questions come from Stephen Bailey. The first one is, how is Mach7 planning to utilize its cash pile? Teri Thomas: I'm going to... Daniel Lee: I would say that... Teri Thomas: Give you a chance on that one. Daniel Lee: I would say bluntly that we don't have a plan per se to use our "cash pile". We are going to be very strategic in how we deploy our capital. One of the things that we are going to make sure is that any dollar that we do invest is going to be accretive to shareholder value. Teri Thomas: Yes. Dan and I have a very strong focus on ROI. And the -- we do not have a specific plan of something that we plan to allocate that cash towards. So my goal right now is we maintain it so that we have it at the ready if we need it, but we focus on operational excellence and a very, very careful look at any investment that we do that we have visibility to a positive return. Francoise Dixon: Our next question from Stephen Bailey is, will the company recommence the buyback given the low share price? Teri Thomas: Right now, the buyback remains on foot, pending the finish of our strategic review. So that's something that, again, I'm going to postpone addressing until our AGM. Francoise Dixon: Our next question is from Wei Sim. When and why did Ravi leave at the time? Teri Thomas: Woo-hoo. Hard for me to answer that for him. But my understanding is he left a little over a year ago. I'm probably speculating here, somewhere in one to two years ago. And I can tell you that he's very excited to be energized and back with the business, and he and I have a really strong alignment related to realizing the potential for the business. I think that commenting beyond that is probably not appropriate in a public forum. But what I can say is that we welcome him back, and he's very enthusiastic about helping support the growth of Mach7. Francoise Dixon: We have another few questions from Stephen Bailey. The first one is, is the company looking at making any acquisitions? Teri Thomas: While I'm not allergic to acquisitions, I'm always looking for a strategic growth lever, we are not currently evaluating acquisitions. Francoise Dixon: And similar question from Stephen. Is the company being looked at by any other companies with a view to them acquiring Mach7? Is the company actively seeking takeover offers? Teri Thomas: We are not actively seeking takeover offers right now. Of course, as a public company, people can look at us all the time. However, we do have a defense strategy in place, and my focus is driving operational excellence and driving that share price up. Francoise Dixon: Thank you, Teri. And the final question we have here from Stephen Bailey is, given the company's business in North America and the general lack of enthusiasm for tech companies on the ASX, is the company willing to consider a listing on a U.S. exchange? Teri Thomas: My opinion is that we're a little bit too small for a U.S. exchange right now, but I could imagine that at some point in the future when we've achieved some great success from our strategy and grown to a larger revenue base. Francoise Dixon: And we have a question from Andrew Hewitt. Have you seen any improvement in the class ratings? Teri Thomas: We have. Now it takes some time to get all of the changes that we've done coming through, class calls, organizations at periodic intervals. However, we get -- we do analyze the comments regularly and look at our scores. and they have been generally trending in the right direction. I also have the CEO's phone number and he has mine to alert me if he sees something not going in the right direction, and he has not called. And in fact, we've gotten positive feedback. I've also called -- one thing we want to do is not just rely on class. We want to know. So our ACE exec program is proactive. So we're reaching out to our customers to make sure that we understand how they're feeling about the engagement, how satisfied they are. We're putting some structures in place to assess their overall technical health, but also how are they feeling about the company broadly. I've joined a number of these calls and gotten to know several of our customers. I'm happy to report 100% of them said -- has said to me, very positive move to the flight crew. So I'm learning in real time, things are pretty positive, and I fully expect this to be pulling our class numbers up gradually over time, but it will take up to a year for all of that to come through their process. Francoise Dixon: Thanks, Teri. Our next question comes from Chris Martin. What is the sales pipeline like? For the last two years, Mike has said there is a large pipeline that zero new contracts were signed. Is there any update on sales? Teri Thomas: Yes. My opinion on the pipeline is, first of all, not as big as I would like. It's just not where I wanted to be entirely. We've got a lot of work to do. There are certain elements of our strategy that we're going to kick off at RSNA. And I expect that RSNA will be a great, great injection of energy and actual activity into our pipeline based on how we're going to show up and some of the things that we're going to do to better engage with people in the industry and frankly, get noticed. That said, we've really had good progress in the last couple of months. And it would seem strange when I mentioned the sales reset. Our commission-carrying salespeople are no longer with us. We've got a new sales leader, and we've changed a couple of people around so that we've got a completely refreshed sales team. However, we've lost no sales during this process. And I'm directly involved in most of our active sales. I do get to know those prospects well. I'm partnering with Todd in getting sales over the line. I enjoy it. And I'm happy to tell you, we've got three prospects that either have selected us or have us in the top two that expect to be finishing out their processes between now and January. So I feel good about improving our conversion rate on our not great pipeline, but I have a plan to improve the size of our pipeline and get a lot more engagements in place at RSNA when I expect I'll also have some more team members in place to make sure that we can do a really, really good job being incredibly responsive and very customer-focused even with prospective customers who don't know their customers yet. Francoise Dixon: Thanks, Teri. We don't have any further questions on the chat, but I'll just give it a couple of seconds and see if any pop up. We do have one. Our next question comes from Shuo Yang. How does today's announcement regarding limited go-live with VA impact the recognition of the $11.7 million TCV over three years? Teri Thomas: I'm going to give that one to you, D Lee for at least... Daniel Lee: Yes. To directly answer that question, we have not made any changes to our outlook for that contract. Francoise Dixon: Thanks, Dan. We have no further questions at this time. So I'll hand back to Teri. Teri Thomas: All right. Thank you very much, Francoise. And thanks, everybody, for your thoughtful questions and your continued engagement. Before we close, I just want to extend a sincere thank you to our Board of Directors for your guidance, your support through this transition quarter. And your engagement is really valued as we've done a reset on a lot of our business and strengthened our foundation for long-term growth. I also want to express my appreciation to our investors, many of whom have been with Mach7 for a long time. Thanks for your confidence and your patience as I work hard alongside our refreshed leadership team to transform Mach7 into a stronger and more focused as well as consistently growing company. And through all of this, I do believe in having some fun along the way. So we work hard, we play hard, and we're committed to making a positive impact. That's for our customers, for our team, but also for you, our shareholders. So other elements of our strategy are set to unfold at RSNA, including changes in our marketing and a new fun element that we're going to pull in. So the Mach7 of the future will look different from the Mach7 of the past, but I firmly believe it's changing for the better. We are building and we are building something meaningful, something we can be proud of, and I absolutely believe the best is yet to come. So thanks for your continued support and your belief in Mach7, and I do look forward to giving you a fuller update at the AGM. Thanks, everybody.
Operator: Good day, everyone, and thank you for joining this Farmland Partners Inc. Q3 2025 Earnings Call. My name is Jim, and I'll be your operator for today's session. [Operator Instructions] Also a reminder, today's session is being recorded. It is now my pleasure to turn the floor over to our host, President and CEO, Mr. Luca Fabbri. Please go ahead, sir. Luca Fabbri: Thank you, Jim. Good morning, and welcome to Farmland Partners third quarter 2025 earnings conference call and webcast. We truly appreciate you taking the time to join us for this call because we see them as a very important opportunity to share with you our thinking, our strategy in a format less formal and more interactive than public filings and press releases. I will now turn over the call to our General Counsel, Christine Garrison, for some customary preliminary remarks. Christine? Christine Garrison: Thank you, Luca, and thank you to everyone on the call. The press release announcing our third quarter earnings was distributed after market closed yesterday. The supplemental package has been posted to the Investor Relations section of our website under the sub-header Events and Presentations. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, October 30, 2025, and will not be updated subsequent to this call. During this call, we will make forward-looking statements, including statements related to the future performance of our portfolio, our identified and potential acquisitions and dispositions, impact of acquisitions, dispositions and financing activities, business development opportunities as well as comments on our outlook for our business fronts and the broader agricultural markets. We will also discuss certain non-GAAP financial measures, including net operating income, FFO, adjusted FFO, EBITDAre and adjusted EBITDAre. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company's press release announcing third quarter 2025 earnings, which is available on our website, farmlandpartners.com, and is furnished as an exhibit to our current report on Form 8-K dated October 29, 2025. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release distributed yesterday and in documents we have filed with or furnished to the SEC. I would now like to turn the call to our Executive Chairman, Paul Pittman. Paul? Paul Pittman: Thank you, Christine. Good morning, everyone. This is, again, a very strong quarter for us from the standpoint of AFFO performance. I'll let the rest of the team make some more specific comments about that. I want to make a couple of comments, though. As you all read overnight, appears to be some sort of a China trade deal involving agriculture commodities. I think that, that's obviously going to be beneficial for American farmers. It's a little unclear. It looks like maybe a 1-year deal and quite a bit of soybean sales. I tried to find this morning in the news more detail. There doesn't seem to be much. My sense is if you look back to the last time the Chinese were really aggressive in terms of soybean buying, which was, I think, the ’21 year -- the 2021 year. This will be a material bump in the exports of soybeans from the U.S. to China over the next few months. I don't think it's sort of earth-shattering in terms of positive for farmers. It's certainly good news. But since it's only a 1-year deal, it's hard to see whether it will have a real impact on long-term rents or land values. Land values continue to go up despite the fact it's been a somewhat tough farm economy for operating farmers this year. The other comment I would like to make about this year's AFFO, while we are thrilled with how strong it is, it is based on some very positive operating events that occurred during the year on some of these farms and also the expansion of our loan program with some sort of opportunistic lending. The caution I want to give everyone is while we're thrilled with this year, it's based on some onetime events. So frankly, I think next year, we'll start out next year with kind of the same place we started this year, which is a sort of more modest AFFO than what we're actually ending up with. We'll do our best to find the onetime events next year that bump that number, but you can't promise them since they are onetime events. With that, I'm going to turn it over to you, Luca, to go through things in more detail. Luca Fabbri: Thank you, Paul. I will, of course, echo Paul's both kind of celebration of a very strong financial performance for the quarter and for the year as well as a little bit of a caution note regarding performance next year as we always strive to do our best to build on top of a very strong bedrock of operating performance, good things every year, but you never know whether we can pull that off. A couple of things that I wanted to highlight for this quarter is number one, the sale of our brokerage and third-party farm management subsidiary, Murray Wise Associates. I think this is a very good outcome for our shareholders in terms of getting a good price for this subsidiary, for this business as well as simplifying significantly our operations. And this is very much in line with our strategy of simplification that we've been pursuing now for several years. This is also a very strong outcome for another set of very important stakeholders in the company, which is the employees. I think that this sale gives the team at MWA a very strong platform to continue their professional growth, while maintaining our access to their collective knowledge and experience and our relationship with them because we plan to continue using their services in the future. The second is a transaction I want to highlight is that we exchanged $31 million worth of our Series A preferred units for a set of properties in Illinois that were actually originally part of the transaction that kind of led to the issuance of the Series A preferred. And I want to highlight that the properties were sold at a much appreciated value compared to the value of 10 years ago, appreciated by about 56%. This, again, is a very tangible proof of the appreciation potential in this asset class that we continue to prove to the market that -- and to deliver -- our efforts to deliver that value to our shareholders. In that vein, we are also announcing that we are planning to issue a special dividend for this year, very much in line with what we did 2 years ago and last year. This year, we are targeting a range of between $0.18 and $0.22 per share to be issued in January 2026 alongside with the regular dividend. Again, this is very much in line with our commitment to deliver value to our shareholders. And with that, I will turn over the call to our CFO, Susan Landi, for her overview of the company's financial performance. Susan? Susan Landi: Thank you, Luca. I'm going to cover a few items today, which includes a summary of the 3 and 9 months ended September 30, 2025, a review of our capital structure, a comparison of year-to-date revenue and updated guidance for 2025. I'll be referring to the supplemental package, which is available in the Investor Relations section of our website under the subheader Events and Presentations. First, I will share a few financial metrics that appear on Page 2. For the 3 months ended September 30, 2025, net income was $0.5 million or $0 per share available to common shareholders, which was lower than the same period for 2024, largely due to the recognition of deferred gains from 2023 property dispositions of $2 million versus the current period dispositions resulting in a loss of $0.5 million. Note that the decrease in disposal gains is partially offset by interest savings associated with our lower average debt balance. AFFO was $2.9 million or $0.07 per weighted average share, which was higher than the same period for 2024. AFFO was positively impacted by significantly lower interest expense as a result of debt reductions, lower property operating costs and increased interest income due to a higher average balance on loans under the FPI loan program. For the 9 months ended September 30, 2025, net income was $10.4 million or $0.18 per share available to common shareholders, which was higher than the same period for 2024, largely due to net gains on dispositions of 35 properties that occurred in the current year, significant debt reductions resulting in interest savings, as well as increased interest income due to the higher balance under -- on loans under the FPI loan program. AFFO was $6.5 million or $0.14 per weighted average share, which was higher than the same period for 2024. AFFO was positively impacted by lower property taxes, lower general and administrative expenses and lower interest expense as a result of significant debt reductions. Next, we'll review some of the operating expenses and other items shown on Page 5. Gain on disposition of assets was higher during the 9 months ended September 30, 2025, than the same period in 2024 due to the dispositions of 35 properties in 2025 with aggregate consideration of $85.5 million, which resulted in a net gain on sale of $24.5 million compared to a gain of $1.9 million in 2024. The net loss on disposition of assets during the 3 months ended September 30, 2025, was due to the sale of a West Coast property. As a result of significant reductions in debt that have occurred since October of 2024, interest expense decreased $3.2 million for the 3 months ended September 30, 2025, and $8.4 million for the 9 months ended September 30, 2025. In addition, the dispositions resulted in lower property operating expenses and depreciation expense. General and administrative expenses decreased $0.4 million for the 3 months ended September 30, 2025, primarily due to the accelerated stock compensation that was recognized during the prior year period. General and administrative expenses decreased $1.7 million for the 9 months ended September 30, 2025, compared to the same period in the prior year due to a onetime severance expense of $1.4 million plus the accelerated stock-based compensation that was recorded in the prior year. Next, moving on to Page 12. There are a few capital structure items to point out. Having repaid our lines of credit in full with repayments totaling $23 million in July, we had full undrawn capacity on the lines of credit of approximately $159 million at the end of Q3 2025. We have no debt subject to interest rate resets in 2025 and as a result of our swap, no exposure to variable interest rates. Page 14 breaks down different revenue categories with comments at the bottom to describe the differences between periods. A few points that I'd like to highlight include fixed farm rent decreased as expected because of the dispositions in Q4 of 2024 and thus far in 2025. Solar, wind and recreation increased primarily due to proceeds from a solar revenue sharing arrangement with the tenant in the first quarter of 2025, but that was also partially offset by dispositions. Management fees and interest income increased primarily due to the increase in loan issuances under the FPI loan program. And finally, direct ops, which is a combination of crop sales, crop insurance and cost of goods sold. Crop sales did increase as a result of higher prices and yield on citrus and avocados as well as sales occurring earlier in 2025 than in 2024, while the cost of goods sold increased due to higher maintenance costs. This increase in cost of goods sold was partially offset by lower impairment on inventory. Page 15 has our updated outlook for 2025. You can find the assumptions listed at the bottom of the page. On the revenue side, changes from the July guidance include an increase in management fees and interest income as a result of the higher loan balance under the FPI loan program. Increases in variable payments, crop sales and crop insurance as a result of updated outlook on properties with variable rent and properties that we directly operate. The decrease in other items is primarily due to less auction and brokerage revenues as a result of the upcoming sale of Murray Wise & Associates. On the expense side, changes from the July guidance include an increase in impairment related to the current period, impairment expense for certain properties on the West Coast as a result of updated market information, and this was primarily offset by a decrease in property operating and depreciation expenses related to property dispositions. The forecasted range of AFFO is $14.5 million to $16.6 million or $0.32 to $0.36 per share, which is an increase from the prior quarter on both the high and low end of the range. This summarizes where we stand today. We will keep you updated as we progress through the year. This wraps up our comments this morning. Thank you all for participating. Operator, you can now begin the Q&A session. Operator: [Operator Instructions] We'll hear first from Rob Stevenson at Janney Montgomery Scott. Robert Stevenson: When does the '23 farm sale and the retirement of the preferred units close? Is that sometime sooner rather than later in the fourth quarter? Does that extend into early first quarter? How should we be thinking about timing there? Paul Pittman: Luca, why don't you handle that question, and I'll comment as necessary. Christine, I think you have the date. Christine Garrison: That transaction will close December 10. Paul Pittman: Yes. The important additional fact there is that we -- in that negotiation, we were able to agree with the party that we're making the exchange with that we will not have to pay the dividends on that preferred from, I believe it was from August 1, maybe September 1, but we got a little... Luca Fabbri: August 1. Paul Pittman: August 1. So we have a little benefit there in terms of not having to pay the dividend as well. Robert Stevenson: That's great. And then any additional sales that you guys are expecting to complete in the fourth quarter? Are you basically done with sales for this year with this 23 Farm disposition? Paul Pittman: We -- the 23 Farm disposition luckily did not count as our 1 of 7 under the tax law because we're limited to 7 transactions a year under most cases. So it didn't count because of the way it's done as an exchange. So we -- I think we've done maybe 5 or 6 transactions so far. We've got a few other small ones in the hopper. Hopefully, something else happens between now and the end of the year, but not likely to be on the scale of that 23 Farm deal. It will be single-digit million kind of transactions if something else happens. Robert Stevenson: And would that -- at this point, given that it's small, is that still within -- would be within the special dividend, the range that you guys gave in the... Paul Pittman: Yes, we're likely to stick with that range at this point without regard to what happens with one additional acquisition. I mean there is discussion on that. Robert Stevenson: And then what are you guys planning on doing with the MetLife Term Loan that matures in March? Paul Pittman: Luca, do you want to handle that? Luca Fabbri: Yes. We are planning to renew it probably with MetLife themselves or with one of our other lenders. Robert Stevenson: And where does pricing today look for you guys relative to the 555 that is currently costing you? Luca Fabbri: We're still -- kind of interest rates are kind of moving a little bit and that renewal is not in the cards for another couple of months at least. We are expecting spreads to stay fundamentally consistent. Robert Stevenson: Okay. That's helpful. And then you guys raised the guidance, but I think in the commentary, talked about the guidance decrease for the other items from the sale of Murray Wise. Is that running at somewhere close to $1 million a quarter? How should we be thinking about how we should be looking at that on a quarterly run rate going forward as we adjust our models removing Murray Wise from the expense and revenue lines? Paul Pittman: Luca, please handle that, and it may be more detailed than you can do on this call, and we could follow up later. But... Luca Fabbri: Yes, I'm looking at Susan. She is pulling up some numbers. Susan Landi: Yes. So Murray, so the revenues are somewhat lumpy. So there's not really a good answer for that. I mean it's the nature of auction and brokerage, right? It's not going to be a consistent thing. Usually, that's going to be more of a Q4, Q1 type of activity. So looking at -- so I don't know that it's going to have a significant impact on our bottom line overall with that removal. We haven't -- as far as like more specifics, I'm not sure that I... Luca Fabbri: Yes. And so let me add to that. In terms of the remainder of this year, it's going to be a little noisy, but truly de minimis given that this transaction is expected to close in November 15. As far as next year is concerned, the -- we were always very cautious in projecting the performance of that business. So with typically revenues only slightly ahead of costs. So overall, the impact of that transaction is going to be, relatively speaking, negligible in the context of the overall P&L in 2026. Robert Stevenson: Okay. And then last one for me. In the detailed assumptions on the outlook, you guys increased legal and accounting due to increased litigation spend. Is that more stuff off the short and distort stuff? Or is that something else that you guys are litigating at this point? How should we be thinking about that? Paul Pittman: Yes, we have -- we continue to have some legal costs related to the short and distort but they're frankly modest, certainly compared to where they used to be. And I think we're hopefully getting closer to winning, so to speak, in that regard. Then, we've also got an ongoing legal dispute in Louisiana on one of the farms that has -- it's local counsel, so it's not extremely high numbers, but it's a number we hadn't budgeted for that we're spending defending that situation. Just a small uptick, but a negative surprise, so it wasn't really budgeted for. Operator: [Operator Instructions] We'll hear next from the line of Craig Kucera at Lucid Capital Markets. Craig Kucera: I wanted to follow up and get a little more color on the Series A transaction. I know they can convert the remaining preferreds into common OP units in the first quarter. In their discussions with them, have they indicated they're looking to convert? I mean, I'm just trying to figure out from a share count and preferred dividends perspective from a model perspective next year. Paul Pittman: They -- it's not that they have the right to convert. It's that we have the right to pay them off or convert them. We will -- I won't say 100%, but I'll say 99% probability that we just pay that off and it does not get converted because I believe the stock price that would get converted at, is below intrinsic value. So that's on the upcoming conversion, Craig. As far as the transaction itself, this is a gentleman that we -- very successful in agriculture, but also other industries, a guy from Illinois that we bought these farms from, it’s been 10 years ago now, basically. And we've maintained a very good relationship with him. He was for a time, a decent sized common shareholder and then certainly has owned his preferred, and he's been a good long-term partner. He, for his own sort of family wealth planning, what he wanted to buy back were the farms closest to his traditional family home because 10 years later, I think he decided he could frankly afford to re-own them and pass them on to his children. And so he did that. And that's where the $31 million of farms came from. And as Luca said earlier, a great transaction for us. We got a 5% to 6% a year kind of appreciation during the hold period. And fundamentally, a lot of that transaction was financed with a 3% coupon preferred, which we're now trading him back for those farms. So a huge win for shareholder value in the transaction. Luca Fabbri: Just as a follow-up, Craig, of course, we've known that this was coming for a long, long time in terms of the expiration, if you will, of the Series A preferred. So we are very well prepared with our liquidity access to our lines of credit to pay down the -- to extinguish the Series A preferred in cash. Of course, that will have an impact on the P&L, at least for a while because we are trading at 3% preferred with the borrowing on lines of credit and now call it at a blended in the mid-5s, but we're prepared to manage that as well. Craig Kucera: Okay. I appreciate that color. That's helpful. Changing gears. There was a mention there, obviously, crop sales were significantly better than we were looking for. And then the footnote it references the sale of a walnut property, which accelerated some recognition of revenue and expenses. Can you give us some color on how much that impacted crop sales revenue and the cost of goods this quarter? Paul Pittman: Susan, do you want to handle that one? Susan Landi: Yes. Bear with me for a minute while I pull the figures. Paul Pittman: While she's pulling the figures, I'll make a general comment. Basically, when you sell off a farm like that, that has inventory on the tree, you do a transaction related to that inventory. And so it gets done more quickly than it would have been if it had actually waited around to pick the walnuts. I mean that's the big picture on the ground reason it was accelerated. Susan, you can make the financial comments as appropriate. Susan Landi: So we recognized about $0.2 million on the sale of the Blue Heron, our property in California, the walnut property. Craig Kucera: Okay. So not that material? Susan Landi: It's accelerated – it’s for the accelerated portion. Craig Kucera: Yes. Okay. That's helpful. And just one more for me. Looking at the guidance, one of the main increases in revenue was related to management fees and interest income. It doesn't look like you funded any loans on a net basis here in the third quarter. Does that imply you were seeing a pickup in the loan pipeline expected to close in the fourth quarter or maybe something that you thought was going to pay off, didn't pay off? Just some color there would be helpful. Paul Pittman: Yes. It's really the second thing that you said. Somebody came to us and said we'd like to continue to extend this loan subject to us having a strong security position and being comfortable with the loan. We're almost always willing to do that because we are a high-cost lender. And as long as we're comfortable with the security position, we're happy to keep making the money. So we extended somebody out, and that led to the move of the projections. Operator: [Operator Instructions] We'll move forward to John Massocca at B. Riley Securities. John Massocca: Maybe kind of continuing with the line of questions about the loan portfolio. Are you expecting or are there significant kind of maturities upcoming in kind of the loan receivables in 2026? Paul Pittman: Well, we -- as we have -- we've mentioned this in the prior conference calls, so I'll mention it again. We are gradually shrinking the portfolio because it's -- we're arbitraging private market value to -- against public market discount and through stock buybacks or special dividends, distributing that cash back to our shareholders or that profit back to our shareholders. So in that process, obviously, we're shrinking the revenue line of the company. And so we've focused on expanding this loan program a little bit because it's high current yield, right? You don't get the appreciation, but you get quite a bit of high current yield from doing that. And so we've done that intentionally, and we'll kind of continue to do it because as we shrink portfolio size, we still have to frankly cover the overheads. And that loan program helps us do that. So that's -- so we're pretty intentional about actually expanding that loan program gradually as time moves on. We don't want to take on too much risk, of course, but with loans with good assets underneath them, happy to do it. John Massocca: Okay. And maybe switching gears a little bit, like bigger picture, what's the exposure in the portfolio either by acreage or rent or however you want to measure it to soybean farms and farmers? Paul Pittman: Well, that -- so when you look in the corn belt, which is now with the exception of California the overwhelming majority of what we own, meaning Illinois, mostly, a little bit in Missouri. Those farms are, generally speaking, on an every other year rotation between corn and soybeans. So the quick answer would be approximately 50%. Now corn is -- for the farmer, corn is a consistently more profitable crop. And so it's really not 50-50. It's probably more like 60% corn in any given year, 40% soybeans because corn -- most of those row crops, corn, soybean farmers will occasionally do corn on corn to increase the percentage of corn acres they have. It just -- it's an overall revenue and profitability, a slightly more profitable crop in 9 out of 10 years. So if they can get away with it, they'll do corn 2 years in a row in some fields. So it shifts that -- it shifts it from the 50-50 to something slightly more weighted to corn. Luca Fabbri: John, I know you're very familiar with the concept I'm about to explain. So I'm saying this more for the benefit of other listeners. The -- I think the 100% of our row crop leases with farmers that would farm soybeans are fixed cash rents. So our exposure to soybean and especially trade wars and so on and so forth is very much indirect. It's not through crop shares and so on and so forth. It is through the overall financial health and strength of the farmers, which is, in any case, backed by crop insurance. John Massocca: Okay. But as we think about kind of maybe the exposure to any distress in that space or any kind of recovery in that space, it really touches on pretty much everything from a commodity crop basis in your row crop portfolio just because they are potentially rotating that planting in a given year... Paul Pittman: Yes, it's actually -- so what Luca said is an incredibly important point. We have no direct exposure to speak of to soybean prices. But we have significant indirect exposure to farmer profitability and soybean prices are a piece of that. So -- but it's not really a story about soybeans. It's a story about farmer profitability. And so, if the Chinese reenter the market and the Chinese are the world's largest consumer of soybeans, that will be good for U.S. farmers. Now it's not as good as you might think, however, and I've said this earlier in other conference calls. If the Chinese are buying all their soybeans from Brazil, somebody else used to be buying from Brazil that shifted to buying from the U.S. So the negative impacts of what China does vis-a-vis the U.S. share of our exports, it mutes it because other buyers come back into the market to replace the soybeans that got pushed out. And then the flip side is also true. If they start buying here, it will modestly elevate pricing. but it's going to shift to -- they're just not -- there's a kind of a defined universe of soybeans in the world, and you're really kind of moving the shelves around on the board, not fundamentally making massive changes in overall demand. On the margin, don't get me wrong. When the Chinese stop buying from the U.S., that is marginally bad. And when they start buying from the U.S., it is marginally good because there's such a power in the marketplace. But it's not massive dramatic shift. The other thing is, and that's why I said it's about profitability, not about soybeans per se. If soybeans become more profitable to farm, the corn market through the Chicago Board of Trade basically has to buy corn acres by increasing the profitability of corn farming. It's Econ 101. And so because it's -- those 2 crops are competing for the land base in the Midwest. And so soybean prices go up, it will move corn prices up. Corn prices go up and move soybean prices up. So again, this is all a good thing. But the story for us and our company is always this global food demand just keeps gradually increasing and global demand for the commodity, for the products made from corn and soybeans in particular, just keeps increasing, whether it's ethanol or food. And there is a scarce and gradually declining land base of the really high-quality soils, and we own a lot of it. And that's why you see back to the transaction we did with the preferred, that's why you see this kind of 5% to 6% per annum appreciation of those farms. And it kind of goes on no matter what because it's not connected to soybean prices. It's connected to long-term farmer profitability. And you cannot turn the world's bread basket to negative margin for very long. Don't believe everything you read in the press. There's not much farmer bankruptcy, by the way, as an example. There just isn't. John Massocca: Appreciate all the detail on that. Just one last one. Apologies if maybe I missed it earlier in the call. On the buyback, I understand it's not in the updated guidance, but any more runway for buyback in 4Q and maybe even heading into 2026 just off the back of kind of capital raise and dispositions done earlier in the year? Paul Pittman: Luke, I'll let you handle that. Luca Fabbri: Yes. So we -- our decisions on buybacks is something that we do on an ongoing basis, if you will. We still see the current stock price and the discount to NAV as being a very, very strong proposition for buybacks. It's our own stock as we unfortunately joke is the cheapest farmland we can buy. But with the expiration of the Series A preferred and rolling that into the lines of credit, we are increasing our interest expense. So that also comes into the equation. Fundamentally, our buyback activity going forward will be driven as usual by potential additional dispositions and therefore, proceeds from those dispositions. And if we -- we're knocking on wood. I mean we are working to increase our stock price, of course, but if we were to see the stock price dip, we would definitely jump in and probably and use our further access to lines of credit to harvest the opportunity. Paul Pittman: Yes. Let me just add one thing to that. I mean if you think about this as really distribution of cash to shareholders, I mean, that's what a buyback fundamentally is. And obviously, we try to manage it against low stock price versus higher stock price. With the idea that an upcoming special dividend coming, we're going to trade probably at a slightly elevated basis for the next few months. So, it sort of lessens the probability of buybacks and the flip -- and in addition to that, during this time of year, our methodology of getting money that's out to shareholders based on the profit that we've made from sales, the way to do that is a special dividend. When you get out in the rest of the year, the way to do that is the buyback. And so, at this particular time and for all the reasons Luca said, plus that sort of general view that we’re not likely to be doing a lot of buybacks right on top of the special dividend. I don't think there'll be a lot of that in the next quarter. But as Luca said, if you saw the stock price decline substantially, we'd probably step into the market. Operator: Our next question today will come from the line of Tousley Hyde at Raymond James. Tousley Hyde: Thanks for taking my question. I just got a quick one here. In the past, you mentioned that the long-term average rate increase is somewhere around 3% to 4%. I was just kind of curious, as you pare down the portfolio, how that average might skew going forward, if at all? Paul Pittman: It will stay consistent. These averages are largely -- the nationwide averages are largely dominated, frankly, by row crop Midwest. because that's the biggest piece of the farmland economy overall. California specialty crop and total economic impact to the nation is probably somewhat similar, but much lumpier because it's different crops and every crop has its own cycle. So the -- as our portfolio gets more and more weighted to the Midwest, it probably sticks closer to those kinds of averages rather than further apart. Tousley Hyde: And do you have any updates you can share on the renewable progress for this year? Paul Pittman: Yes. This is a year in which these renewals are largely done by now because you're prepping the soils in many cases for next year's crop already. So the renewals are kind of pretty much behind us or being finished as we speak. It looks to us like in the row crop region of the country where we have rollovers, it will be more or less flat with last year, which is the last few years, we've been getting great big rent increases. We won't get those this year. What we do, though, when we're in a cycle where you're negotiating those rents in a somewhat tough economic cycle for the farmers, we just -- we cut the negotiations of the new rent -- new lease to a 1-year extension. That way, what we're not doing is signing up in a difficult economic negotiating cycle for another 3-year lease. We just extended out 1 year. And then this China news, for example, probably is going to make the negotiation cycle that starts late next summer easier than it was this year, easier, meaning higher rents are possible. Operator: That was our final question in the queue today. Mr. Fabbri, I'm happy to turn it back to you, sir, for any additional or closing remarks. Luca Fabbri: Thank you, Jim. We appreciate your interest in our company and look forward to updating you on our activities and results in the coming quarters. Have a great rest of your day. Operator: This does conclude today's Farmland Partners Inc. conference call. We thank you all for your participation, and you may now disconnect your lines.
Christie Masoner: Welcome to GoDaddy's Third Quarter 2025 Earnings Call. Thank you for joining us. I'm Christie Masoner, VP of Investor Relations. And with me today are Aman Bhutani, Chief Executive Officer; and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. [Operator Instructions] On today's call, we will be referencing both GAAP and non-GAAP financial measures and other operating and business metrics. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations site at investors.godaddy.net or in today's earnings release on our Form 8-K furnished with the SEC. Growth rates represent year-over-year comparisons unless otherwise noted. The matters we'll be discussing today include forward-looking statements such as those related to future financial results and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, October 30, 2025, and except to the extent required by law, we undertake no obligation to update these statements because of new information or future events. With that, I'm happy to introduce, Aman. Amanpal Bhutani: Good afternoon, and thank you all for joining us today. At GoDaddy, our mission is to empower entrepreneurs and make opportunity more inclusive for all. We draw inspiration from our customers, millions of micro business owners bringing ideas to life every day. They are resilient, creative and determined even as technology and the world around them rapidly change. Our mission is to make that journey simpler, supporting their growth and success with tools that cut through the complexity and make running their businesses easier backed by human guidance. In the third quarter, we delivered strong financial results, achieving 10% growth in total revenue while also delivering A&C bookings growth acceleration to 14% on strengthening customer cohort dynamics. We also delivered normalized EBITDA margin of 32% and increased our AI investment and capabilities with new products ready for launch. Reflecting on our strong performance, we are raising our full-year 2025 revenue guidance to 8% growth, the top end of our 3-year range of 6% to 8%. At GoDaddy, we are energized by the Agentic Open Internet, our vision for an open, trusted and accessible web with AI agents helping us with our tasks. For more than 30 years, the Open Internet has enabled entrepreneurs to bring their ideas to life, and GoDaddy has been a foundational partner in that journey. The next leap forward is the Agentic Open Internet, where AI-powered agents collaborate and complete end-to-end tasks with speed and precision. These unlocks will help small businesses thrive in the years ahead. And as we meet the moment and build towards this next era, GoDaddy itself is transforming in 3 ways: First, our Airo platform evolution from Generative AI to Agentic AI; second, agents transforming how work gets done internally; and third, by building on the foundation of being the world's largest domain registrar and putting the infrastructure in place to make the Agentic Open Internet safe and accessible for all. The first part of the GoDaddy transformation is the evolution of the Airo experience from a Generative AI platform to an Agentic AI platform. Over the last few days, we launched 5 new Airo agents that handle fundamental customer jobs to be done like finding and buying domain names, building websites and applications, creating logos and compliance documents. This is just the beginning. Our pipeline includes many more agents ready for launch over the next few days and weeks. The interactive design of these agents reflects our unique ethos of guidance, a core differentiator for GoDaddy. Agents are learning to anticipate next steps across multiple jobs, proactively guiding a customer through each interaction with clarity and confidence. Live for both new and existing GoDaddy customers, they deliver tailored support by instantly understanding each customer's unique business context. These new capabilities are available through the beta launch of Airo.ai, a new website built on the GoDaddy software platform. We can test new agents on Airo.ai quickly and maintain a seamless path back to GoDaddy.com. Look out for new agents on Airo.ai every week over the next few weeks, and we will direct targeted traffic to it soon. With this release, Airo Plus was shift from a Generative AI tool set to an Agentic AI tool set. Airo Plus will serve as a direct monetization vehicle on airo.ai and on GoDaddy.com. Staying true to the needs of our micro business customer and our culture of experimentation, Airo.ai includes 2 different vibe coding experiences. Both experiences use an Agentic AI chat interface to build websites and both allow seamless publishing. The difference is that one lands the customer in the websites plus marketing editor, while the other introduces the editor in line with the chat interface. As customers use these experiences, we are excited to add more functionality to these tools. The second part of the AI transformation at GoDaddy is the impact Agentic AI is having on how we operate. Teams across the company are reimagining their roles in an Agentic world and identifying the shifts required to solidify gains in velocity and efficiency. From experimentation to care, to engineering, to corporate functions, we are evolving beyond the value of Generative AI and shifting focus on measurable improvements driven by agents. Our evolution in software development provides a good example. In Q2, we set a company-wide goal to reach 70% of AI-generated code by year-end. We are making great progress towards this goal. This month, more than 45% of code written at GoDaddy was generated by AI. And for new applications, this number is significantly higher. With that momentum, we are now shifting our focus from measuring code generation to measuring reduction in product cycle time. The expected net result is faster velocity, which allows us to build more capabilities without incremental investment. The impact is already visible. A small team used AI to build the Airo App Builder and launched it in short order on Airo.ai. The pace of iteration on this product is high, and it positions us to move fast on emerging shifts like Agentic browsers. Another example comes from our aftermarket team, which used AI tools to build a new portal for ultra-premium domain names. In the past, this type of work was hard to prioritize. Now a small team experimented, built and delivered it end-to-end within weeks. For both the Airo App Builder and the ultra-premium marketplace, our internal measurement tools show that nearly 90% of the code was AI generated. The third part of GoDaddy's AI transformation builds on our foundation as the world's largest domain registrar. Our vision for an Agentic Open Internet imagine today's open web, enhanced by agents that can operate independently, collaborate across systems and automate customer journeys. These agents can discover one another, validate identity and establish trust across domains, creating an open space for agents to collaborate. Working back from that vision, we launched GoDaddy's Agent Name Service or ANS. Built on DNS infrastructure and proposed as an open standard. GoDaddy's ANS provides verifiable identities for AI agents. By registering agents with ANS, value is immediately created for publishers by providing their agents with a verifiable identity. Value is also created for consumers of ANS since they can securely discover and validate agents across the open web. While many companies are beginning to explore this idea, we are excited to be leading the way. GoDaddy is launching ANS with its own agents to showcase registration, discovery and validation, and we are now inviting partners to join this open ecosystem. We have a bold vision for the Agentic Open Internet for our customers, and we look forward to showcasing this vision at our Investor dinner in December. Before I pass it to Mark, as always, I'd like to share some updates on our 2025 strategic growth initiatives. The first is pricing and bundling, which continues to deliver strong results across both segments of our business. This work remains centered on giving customers greater value and choice through tailored bundles that simplify their decision-making and deepen engagement across our platform. Execution remains on track for 2025, and we are focused on launching the 2026 bundles, further extending our reach and impact. Our next initiative, seamless experience, creates frictionless journeys that support our customers from their first search to purchase and renewal. This large-scale experimentation engine continues to deliver improvements in conversion, attach and renewal rates. In Q3, we expanded our optimization work to include more end-to-end flows across the customer journey using AI to personalize recommendations and refine design in real time. This initiative is meaningfully contributing to bookings growth with continued momentum into next year. Turning to commerce. Growth in our payment solution remains solid, driven by continued conversion within our existing customer base. We also drove solid adoption of our high-margin subscriptions, including GoDaddy Capital, Rate Saver and faster payouts, all of which are helping entrepreneurs simplify their operations and improve cash flow. These capabilities strengthen our commerce ecosystem, deepening relationships with merchants and positioning us to capture more of their business as they scale. And last but not least, GoDaddy Airo continues to be our primary customer engagement engine and key catalysts for our strategic growth initiatives, driving value as it powers better attach, higher average order size and improved retention. Our history shows that customers who adopt more products stay longer with us, generating higher lifetime value. The success metrics we track make it clear that Airo is creating a more valuable and durable customer cohort than our strongest historical benchmarks. In closing, I am proud of the progress our teams achieved this quarter, advancing our AI vision with Airo.ai, pioneering trust and security in the Agentic Open Internet through ANS and our experimentation culture that is accelerating innovation across the company. GoDaddy is evolving rapidly with the moment. And as AI reshapes what is possible, we are leading with the solutions we develop and helping entrepreneurs everywhere take the next leap forward with confidence, simplicity and world-class care. With that, here's Mark. Mark McCaffrey: Thanks, Aman. Good afternoon, everyone, and thank you for joining us. We are pleased with our strong execution, which led to favorable results and exceeded our top line guidance. As a result, we are raising our full-year revenue guide to 8% at the midpoint to reflect the continued strength across the business. We delivered A&C revenue growth of 14% and grew free cash flow 21% to an impressive $440 million. We continue to demonstrate our commitment to shareholder returns, repurchasing 9 million shares for a total of $1.4 billion year-to-date. Taken together, we are on track to exceed our Investor Day North Star commitment of a 20% CAGR. How are we getting there? As Aman mentioned, our strategy that elevates GoDaddy Airo as our primary customer engagement engine is hitting its stride. High-intent customers are adopting more products, spending more and generating higher lifetime value. Our $500-plus customer cohort now represents approximately 10% of our base, and this cohort has higher attach and near perfect retention, boosting our ARPU up 10% to $237. In the third quarter, total revenue grew 10% to $1.3 billion, surpassing the high end of our guided range. Growth was broad-based, driven by continued strength in both the primary and secondary domain markets as more ideas come online and by the momentum in A&C, we're rising attach rates or expanding customer lifetime value and deepening engagement across our ecosystem. Retention rates remained at 85%, and our total customers grew sequentially to $20.4 million, underscoring the durability of our model and GoDaddy's central role in bringing entrepreneurs to the Open Internet. Additionally, international revenue grew 14%, primarily driven by the strength in the primary and secondary domain markets as we continue to expand our reach globally. For our high-margin A&C segment, we drove 14% growth in revenue to $481 million on the ongoing solid adoption and attach of our subscription solutions. Our Core Platform segment delivered elevated revenue growth of 8% to $784 million on 28% growth in aftermarket and 7% growth in primary domains. Moving to profitability. Normalized EBITDA grew 11% to $409 million, delivering a margin of 32%. This reflects leverage gains across the P&L from AI-driven efficiencies and continued operational discipline, partially offset by gross margin pressure from product mix and continued investment in our AI initiatives. Total bookings grew 9% to $1.4 billion. Within that, A&C bookings grew 14% and core platform bookings grew 6%. As a reminder, bookings primarily represent cash collected during the period. Free cash flow grew an impressive 21% to $440 million on our bookings growth, powered by continued strengthening of our customer cohorts and the greater than 1:1 conversion of normalized EBITDA to free cash flow. On the balance sheet, we exited the quarter with $924 million in cash and total liquidity of $1.9 billion. Net debt was $2.9 billion, representing a net leverage of 1.7x on a trailing 12-month basis. We maintained our disciplined approach to capital allocation, repurchasing 4.1 million shares during the quarter, totaling approximately $600 million. As of the end of the quarter, our fully diluted shares outstanding were 137 million. Pivoting to our outlook. For the full-year, we are raising our 2025 revenue guide to a range of $4.93 billion to $4.95 billion, representing growth of approximately 8% at the midpoint. We expect total bookings growth, absent FX impacts to be in line with total revenue growth and A&C bookings growth to continue its momentum. For the full year, we expect A&C revenue growth in the mid-teens and Core Platform growth in the mid-single digits. For the fourth quarter, we expect revenue to be in the range of $1.255 billion to $1.275 billion, representing 6% growth at the midpoint. This range reflects a more difficult A&C revenue comparison, the expected impact from the .CO registry contract expiration and our consistent approach of excluding high-value aftermarket transactions from our guidance. For Q4, we expect A&C growth in the low to mid-teens and core platform growth in the low single digits. For the full year, we expect a normalized EBITDA margin of approximately 32%. And for the fourth quarter, we are projecting 33% normalized EBITDA as we continue to balance operational efficiency with investments in AI innovation. We expect normalized EBITDA to maintain greater than a 1:1 conversion to free cash flow for the full-year and reaffirm our free cash flow target of approximately $1.6 billion, representing growth of over 18%. On capital allocation, our approach remains unchanged, and we will continue to evaluate all opportunities to maximize long-term shareholder value. In closing, GoDaddy is delivering solid profitable growth driven by durable revenue performance and continued operational discipline. Our strategy around Airo is working. We are ahead of our target of our Investor Day North Star, reflecting consistent execution across the business. Our expanding AI-powered innovation and efficient operating model position us to drive long-term value creation for customers and shareholders. We look forward to hosting many of you at our Investor Dinner in Tempe on December 2, where we will showcase the innovation setting the pace for GoDaddy's sustained success. I will now turn the call over to our VP of Investor Relations, Christie Masoner, to open up the line for Q&A. Thank you. Christie Masoner: [Operator Instructions] Our first question comes from the line of Vikram Kesavabhotla from Baird. Vikram Kesavabhotla: Can you hear me okay? My first one is a little more conceptual in nature and really a follow-up to some of Aman's comments regarding the changes taking place across the Internet. And specifically, when you think about a lot of the AI and Agentic services that are emerging across the board and changing the way that consumers find information, discover products and make decisions, how do you think all of this will ultimately impact the importance of domains and websites going forward and the demand for those products? And then my second question is on the customer base. It looks like your total customer count was up slightly on a sequential basis. But Mark, curious if you could offer any thoughts on how we should see that metric progress through the balance of the year and going forward. And beyond just the total customer count, what are some of the underlying metrics that you're following to measure the health of your customer base right now? Amanpal Bhutani: Yes, Vik. Let's start with -- I've been a sort of proponent of AI and been super bullish on AI for a long time. I fundamentally believe that AI and Agentic AI is going to automate journeys for our customers and for their customers, allowing our customers to sort of serve their customers in a manner that we could only imagine a couple of years ago. And it's super exciting to be GoDaddy and meeting this moment and with all the innovation that's happening internally in the company, too. I think we're experiencing this moment where there's a symbiotic relationship between more websites and better models that consume those websites, and it's getting easier to build websites, and that's going to lead to more websites being created. And I think that symbiotic relationship is a positive. It's a positive for GoDaddy. If I have 10 ideas that I wanted to bring to the world, but it was hard to do. And if it's easier to do, I can just do it much faster. I can do it with the help of tools, but I can do it faster. That's fantastic. To me, that means there should be more domain in the world. And in fact, there should be more agents in the world. And that's what we're trying to showcase at GoDaddy. With Airo.ai launching, we're demonstrating how just starting with a few agents, but over the next few weeks, we're going to put dozens of agents on Airo.ai. So people can start to get a feel for what it's like as a customer sort of progresses between these agents and build whatever idea they have. And of course, while AI is continuing to make us better in terms of our internal velocity and our efficiency, what we're really looking at is how agents can transform how we work internally and then how agents can exist in the outside world. And that's where agent named service is just a fantastic innovation that we're bringing in terms of an open standard. And our goal there is to allow the world to register agents to discover agents that can work across domains that can work across companies. And all of that agent infrastructure is also based on DNS. It's based on the domain infrastructure that we're the largest player in the world for. So I think these things are coming well together and ultimately, making it easier for our customers is what we are focused on. That's the tool set we're building. We're bringing our scale and strength of products and the variety of products that we have to that customer built for that customer. And the more agents do for our customers, I think the better it's going to be for us. Mark McCaffrey: Yes. And Vik, on the customer question that you had, yes, we turned positive this quarter. But remember, our strategy is around high-intent customers. We're looking at that cohort of $500 plus, why? That is the cohort that's buying more, attaching more, has a higher average order size. We're seeing great momentum as that is contributing meaningfully to our bookings number going forward. And that will continue to be our strategy. We will -- that is what is driving our ARPU number and is adding to that 10% ARPU growth that we had this quarter. So again, no change there. We will continue to focus on that high-intent customer. Christie Masoner: Our next question comes from the line of Ygal Arounian from Citi. Ygal Arounian: Definitely a lot of interesting stuff with Airo and Agentic and GenAI in general. So maybe on the rollout of Airo.ai, and I know we'll learn a lot more about this in the coming weeks at your Investor event. But can you just maybe set the stage a little bit for how this is rolling out, how it works with the current Airo product. You mentioned the monetization on Airo Plus. You'll have things like the vibe coding tool, it looks like we'll have to play around that a little bit, how that compares to the kind of current web builder and how these things sort of integrate and how that contributes. And then second question, which I'm sure ties into the first one. But just on the comments around the strengthening customer cohort dynamics, I know a lot of that is driven by the higher-value customers and that cohort growing faster. Can you talk a little bit more about the drivers of that and what you're seeing there, particularly around conversion from Airo would be helpful to hear. Amanpal Bhutani: Yes. Let me start with how Airo is sort of evolving and how Airo.ai is going to be launched. Now it's important to mention that Airo.ai is built on the GoDaddy software platform. What that means is that anything you see on Airo.ai is not a separate experience. It actually links in very well into the GoDaddy experience. If you go to Airo.ai as an existing GoDaddy customer, it already knows everything GoDaddy knows about you, and it gives you a different experience because it knows that you're a customer. What we'd like to do with Airo.ai is to bring targeted traffic to it and test agents very, very quickly. And then whatever is more successful, bring it back into the GoDaddy experience where we have a ton of traffic already. In terms of monetization, as I shared, Airo Plus will be the monetization vehicle on Airo.ai and GoDaddy.com for all of these agents. And Airo Plus is already ready to do that. With the launch of Airo.ai, which it is still in beta, but we'll sort of make it full release over the next few weeks. With this launch, Airo Plus is going to offer paywalls on Airo.ai as well. So we'll be able to test that experience to see -- to add some friction to convert new customers. And we're super excited about being able to move very, very fast. I know you've mentioned wanting to try it out, and I'm super excited. I'd love for you to try the App Builder, and you'll find it, I think, pretty interesting. But what you don't see, and I'm really excited about is the changes to the App Builder coming next week and the week after, where new capabilities are coming every 5, 7 days into that product and the other agents as well. And as I look at them, I'm sort of more and more excited about what's going to be available just over the next couple of months. And I'll turn it to Mark. Mark McCaffrey: Yes. And we're excited about our ability to get to the high-intent customers. And what we're seeing from that cohort is that they are attaching to a second product at a much higher rate than previous cohorts. We're seeing near perfect retention rates now that we've had experience with these cohorts since we launched Airo in and of itself over 12 months ago. And it's becoming more and more of a driver of not only our bookings and our revenue, but our ARPU as we continue to grow into the year. So these customers are coming in with the idea of doing something with their domain, doing something with their idea, getting to monetization on their end, and we're seeing those strong results start to become a tailwind as we go into future years. Amanpal Bhutani: I think -- sorry, Ygal, it's important to mention that Airo is our primary vehicle for driving engagement and attach, right? And what Mark is really talking about is the better attach, the better renewal, the more one-stop shop, better exposure for our customers for the breadth of our products that creates this 500-plus cohort. And like Mark said, with the near perfect retention, we're super excited about expanding that more and more now getting to 10% of our base. Christie Masoner: Our next question comes from the line of Trevor Young from Barclays. Trevor Young: Aman, I'll start with a bigger picture one for you. You mentioned more AI-generated code, reduced production cycles, overall faster velocity of innovation. I think I heard you use the phrase experimentation culture a few times in your remarks. Is there a bit of a shift here where you're going to have more of that experimentation going forward, more small groups going out to create new features quickly and just see how it works. You put that on Airo.ai. And then if it works, you kind of bring it back to core GoDaddy. Amanpal Bhutani: That's exactly right, Trevor. I think it's very common for people to think about teams as, let's say, 7 to 10 or groups of 7 to 10 going out building things over multiple weeks and multiple sprints. Now what we're seeing is teams of 3 to 5 that are using AI in the new products, 90% of the code ultimately is being written by AI. So the inefficiencies are really less and less in writing the code part and it's everything else around it. And that's where agents can make a much bigger difference as we automate the full cycle, right? And what we're finding is that smaller team is able to release much faster and Airo.ai gives us a surface where we can have many, many releases every week without worrying about our big funnel, our conversion that we have to do on GoDaddy.com, surface it to a large enough group of people that we get data very quickly on Airo.ai that it's working and then introduce it to our customers where the big funnels are. Mark McCaffrey: Yes. And just with that, this culture just didn't start this quarter. This has been evolving for years for us. This is now getting to a great pace that it's getting faster and better and the ability to innovate and launch is becoming quicker and to get results that drive meaning in our financial model. It's fantastic. Trevor Young: Great. And then a quick second question. Just in aftermarket, really strong acceleration there. Was that at the higher end, the above $10,000 domains that tend to be more lumpy and tougher to predict? Or did something fundamentally change in kind of the lower-priced domains that's driving that stronger growth? Mark McCaffrey: Trevor, no doubt, we saw a return to high-value transactions this quarter. It was very strong at the higher end level, which, yes, those are the lumpy ones that are difficult to predict. Now we did also see continued strength at the lower levels. Again, no change in momentum there. It's still a great secondary market, but we definitely saw a pickup in the higher-value transactions. Christie Masoner: Our next question comes from the line of Josh Beck from Raymond James. Josh Beck: I wanted to ask a little bit about kind of how to think about maybe the TAM for Airo.ai. Obviously, your existing business is very closely related to the -- certainly the SMB environment and certainly new business formation. Are you getting into a new area where it's maybe beyond just the website? Just kind of curious on maybe if we should be thinking about a different TAM. And then on the like custom app piece of it, should we think of this being competitive with Lovable or Base44, those kind of players? Amanpal Bhutani: Yes. Look, as you'll see on Airo.ai, even for website building, we're offering 2 experiences. One is very tuned to our micro business customer. As you interact with it, you'll find that it's learning and more and more instead of the customer asking for something, it prompts the customer says kind of buy this next, right? Or here are 3 options, pick one of them. Because that's what we found in our testing that our customers don't necessarily want to keep prompting to do something. They want AI to sort of guide them through the process. And you know how sort of important guidance is to our culture in care. So we're taking like our transcripts and our care guides help people build website, and we're training our agents on that, which is very particular to GoDaddy, right? It's very much our secret sauce. It's very much something that we focus on the sort of ethos of guidance. But as we do that, obviously, the models and the tools we have are much more capable. And we do have a big set of customers that are designers and developers that are in our core business, typically our hosting business. And those customers are more interested in going deeper and being able to give more complicated prompts and letting the AI generate something for them, right? The next thing actually, you'll see very, very quickly on Airo.ai. Today, the tool does similar to other tools, it can create it and can host it for you and you can go look at it. But what you'll see pretty soon is that, that same model will start to create WordPress sites. And that's, again, going back to we're a very large WordPress host. We have a large base of customers that work with us on WordPress. And we think Agentic AI can do a fantastic job for our customers to help them. But the way that, that tool works is a little bit different than the tool that we optimize for our micro business customers. That one is really for that customer base. Hopefully, that gives you some context of how we're approaching it. We're not looking at this as we're going to a different customer. We're looking at this as we have a breadth of customers, and we have a set of AI capabilities, and we're expressing them in different ways depending on how the -- which customer is approaching us. Mark McCaffrey: Yes. And another way to look at it, Josh, is as more ideas come online, and people are spending money to get those ideas online and create that opportunity. We're getting more of the wallet share upfront from that high-intent customer that is propelling above $500. So the combination of the 2 is a great tailwind for our business, and we remain laser-focused on that customer, the micro business and the person who's getting that ID online. Christie Masoner: Our next question comes from the line of Ken Wong from Oppenheimer. Hoi-Fung Wong: Aman, I wanted to ask about the Agent Name Service. I think a very fascinating concept here. We think back to the past, it was clear you guys had a right to win in SSL, given that the website journey starts with the domain, starts with GoDaddy. Help us understand what the rationale might be for why GoDaddy can serve a similar purpose in the Agentic Internet? Amanpal Bhutani: Yes, I love that question. So if we go back, and we'll take your analogy. If we go back and we say when the Internet came along, what solved the identity problem? And it wasn't websites. It was actually domains and DNS that was sort of first to the identity problem, right? And if you think about agents needing to be registered where 2 different companies or 2 different domains or 2 different systems have to be able to trust and validate that an agent is saying what it is, right? You have to be able to validate it. That's the service that Agent Name Service provides. And by attaching it to the DNS infrastructure, which is one of the largest things on the Internet and is what makes the Internet possible for us to navigate, right? By attaching it to the DNS infrastructure, we are really reusing the fundamentals of the Internet, right? And what that -- what the Agent Name Service can do is, it can do a bit more than DNS where not only can it register, it can have the certificates embedded in it, and GoDaddy is also a certificate authority. So those certificates get embedded into it, and it can also provide a way for companies to discover those agents. And you'll see all of these as we launch Agent Name Service with our own agents, you'll be able to see how each of those steps work and how much easier it makes for different companies or different domains to be able to tap into agents. This is based on a fundamental belief that different companies and different individuals are going to create agents that are very, very good at different things. And we will -- because different groups of people specialize in different things, those agents will do certain tasks very well. And another agent will want to tap into that capability. When it does tap into that capability, it wants it to be validated, it wants it to be trusted, and that's what ANS provides. And it provides it at the foundational layer of the Internet. Hoi-Fung Wong: Got it. I really appreciate the context and looking forward to seeing how that evolves. Mark, one for you. Great to see the higher guide for the year. I guess I'm just trying to unpack what maybe the primary drivers are. I think right off the bat, we can see that aftermarket was really strong. But how should we think about maybe the primary market, the A&C piece contributing to that raise? Or was this largely just a byproduct of that step-up in aftermarket? Mark McCaffrey: We're seeing strength across the business. And even if you took the aftermarket beat out, and we definitely had an elevated aftermarket beat this quarter, we are still growing at a very high rate. And I think if you take out the aftermarket, we're at around an 8% growth, which really reflects the underlying strength that not only in the domains market, primary and secondary, but also in A&C in and of itself because we're seeing those customers come in with that intent. We're seeing that cohort we talked about driving towards that second product, increasing the average order size. We see it through multiple different products in our portfolio. So I would say it's overall momentum. And on top of that, we had a really good aftermarket with a high transactions returning. Amanpal Bhutani: If I could just add and take us back to our 3-year model, which I know Mark mentioned already, but it is important to highlight that we are at the top end or ahead in each of the metrics in our 3-year model. And that beat that Mark is talking about goes down to normalized EBITDA, it goes down to free cash flow. And by maintaining the margins on those lower metrics, we really as a company producing much more dollars on those bottom line metrics. And that's fantastic for our company because it is being driven by the growth on the top line. Mark McCaffrey: Yes. And thank you, Aman. And remember, our North Star, we look at free cash flow. But when everything is working together, that number, combined with our share buyback gets us to that North Star. And we are ahead of schedule on that -- delivering that number or that CAGR we talk about. Hoi-Fung Wong: Appreciate the reminder. We always have such short-term memory over on the -- in Wall Street. Christie Masoner: Our next question comes from the line of Arjun Bhatia from William Blair. Willow Miller: I'm Willow Miller on for Arjun Bhatia. Thinking about the balance of investing in AI and supporting profitability, is it fair to say your investments in AI can be offset by the efficiencies gained from internal use cases of AI? And then as a follow-up, can you comment on internal use cases of GenAI and Agentic AI in the customer care org -- could guide headcount come down over time? Amanpal Bhutani: I think we have already demonstrated that. It's not that our investment in AI can be offset by efficiency. We've actually demonstrated that we are actively and have been for the last over a year plus. We're offsetting our investment with creating efficiencies in other areas. That's one of the reasons I shared how much AI-generated code is happening at GoDaddy and how quickly the new products are moving and coming to market. So I'm very, very bullish about that and very, very happy with the progress that the team is making. In that role, sort of Generative AI so far has had the biggest impact where you're using AI to generate content, whether it's code or other things across different functions. Now with Agentic AI, our focus is shifting to the broader cycle time, like if there is a product life cycle or a life cycle of a corporate process, what we're finding is that by using agents, we can go after efficiencies in other areas. And that's our new focus, and that's got us excited as well. In terms of the care guys, we have leveraged on the [indiscernible] item. I want to say for the last 6 years I have been here, and we've been very disciplined and shown many, many moments of efficiency with care while providing better and better service. And that's been our model. We want to provide higher and better service for a lower price. And there's no sort of doubt in my mind that we'll continue to deliver that, that our care offering will get better and better with AI, and we'll be able to do it more and more efficiently over time. Mark, I don't know what you'd add. Mark McCaffrey: Yes. No, I think you hit it right. We've been on this journey for several years now, and we've been creating the operating leverage within the model. And now we're seeing the evolution of that as we're able to produce more efficient, whether it's engineering, whether it's care, whether it's in our corporate functions. That efficiency allows us to free up hours and times, and now we can reinvest those in what I would say is exciting things like the AI functionality we've talked about today. But it's -- this has been a journey, and we've set it up so we can get those efficiencies continue hitting our normalized EBITDA marks that we put out there. We're very comfortable with the 33% we put out for next year, and that's because it gives us the balance of the efficiency plus the ability to reinvest in innovation going forward so that we can carry the LTV for GoDaddy well into the future. Christie Masoner: Our next question comes from the line of Mark Zgutowicz from The Benchmark Company. Mark Zgutowicz: Guys, just thinking about ongoing A&C bookings variables, is the forward acceleration more dependent today on new product adoption versus pricing and bundling, which I think supported your guidance at the beginning of the year. That's question number one. Question number two, it looked like there was a little bit of deleverage in A&C adjusted EBITDA year-over-year. I was just curious what that might be attributable to? Is that AI investments in product or marketing and sort of what that looks like over the next couple of quarters? Mark McCaffrey: Yes. And I'll start with the latter and then go into the -- well, I'll start with the first part. Let's go there. The strategy is working, Mark. And we continue to focus on the high-intent customer, the $500-plus cohort we talk about because the average order size goes on, they attach more -- and that's all the accumulation of what you're seeing in the strength in A&C right now. Obviously, our pipeline is strong, and Aman talked about the agents that will be coming back, which will help propel us well into the future. But what you're seeing today is what we've been doing for the last few years through Airo, going after those customers, focusing on those stronger customers, focusing on that cohort, and that is rolling out as we get -- finish up '25 and go into 2026. On the leverage, product mix. We just had some shifts in product mix in the segment normalized EBITDA. Nothing to call out. It should stay in a similar range, give or take a few points as we go forward, just dependent on that product mix. Mark Zgutowicz: Got it. And maybe if I could squeeze one more in. Just in terms of incremental token costs perhaps as it relates to vibe coding. Is there any considerations we should have there in terms of how that may or may not impact gross margin? Amanpal Bhutani: Yes, we're keeping a very close eye on our AI costs, and we have for a very long time, right? We've used -- Airo use Generative AI for almost 2 years now. So we keep a very close eye on it. We do have alternate model capabilities, models that we host internally, which we can use to offset the cost. But what you're really going to see is us testing with different models, us sort of striking the right balance of that objective function of producing revenue, giving customers an amazing experience and managing the cost. So we're looking at that full equation, and we feel comfortable that we have the expertise to manage it and still hit the 33% margin before Mark jumps in with that... Christie Masoner: Our next question comes from the line of Naved Khan from B. Riley. Ryan James Powell: This is Ryan Powell on for Naved. So we were wondering, you introduced some AI upgrades to manage WordPress earlier this year, and we're hoping if you could talk about any uptake you've seen by the pros since rollout. And then secondly, on international growth outpacing overall, if there are any specific markets to call out? Amanpal Bhutani: Yes. The WordPress updates have gone really well. Designers, developers that work with us are using the tool. We measure how quickly they are able to get up the site running. We see improvements in that cycle time, and we're happy about that. The bullishness from what we tested with the WordPress upgrade is what is bringing the agent to Airo.ai very, very soon, where we'll be able to offer a fully Agentic ad interface that works with the other agents and allows the customer to create a WordPress site, skipping many, many, many, many steps. So we feel very good. We recently actually won a couple of awards for best WordPress for small businesses. So word is starting to get out, but GoDaddy has a new WordPress platform that we're putting AI tools around it and the capabilities are new and different. We do have a small amount of effort around tapping into agencies and sort of new markets on that. And that's still very early, but the early feedback that we've received has been good. Of course, they want to see more, and we're excited to sort of give them more AI capabilities and sort of continue the testing. Mark McCaffrey: And Ryan, on international, nothing to call out. We saw strength similar to what we saw in the domestic market in both primary and secondary. And we saw some large aftermarket transactions land in the international geographies, but nothing specific to call out. Christie Masoner: Our next question comes from the line of Ella Smith on for Alexei Gogolev at JPMorgan. Eleanor Smith: So first, I was hoping to ask about the state of SMBs since it's become more opaque under the government shutdown. What are you hearing from your customers? Amanpal Bhutani: Yes, Ella, what our survey shows is that our customers, they continue to be more bullish about their businesses than they are about the economy, but their overall view of the economy has not changed too much in the last several quarters. Now obviously, when we engage with them, they have a lot on their mind right now. But what we've seen in the past is that this is a very resilient group of people, and they have a high propensity to believe in themselves and believe in their businesses. And we don't find any sort of pullback in terms of their engagement or sort of entrepreneurship in general. And if we get down sort of to the specific metrics, then broadly, when we look across all of GoDaddy, we're seeing higher 2-plus attach, so more customers taking 2 and more products. We're seeing higher average order size. We're seeing the 500-plus cohort growing in the business. We're seeing customers try many more products, even though sort of they're buying more, but they're trying even more products. So we still see a lot of positive signals for engagement for conversion and renewals have continued to be better. Now of course, renewals are going to be better given our focus on high-intent customers. But we think some of that renewal goodness is also indicating that while folks have stuff on their mind, our services tend to be essential to their success. So we're not seeing any weakness in the renewals for them. Mark McCaffrey: Yes. And I would just focus on the word they continue to be a very optimistic group about their ability to be successful. And that hasn't changed, and we haven't seen that showing up or heard it showing up anyway. Eleanor Smith: Great. That's very helpful. And if I could squeeze one more in. We're really curious about the perception of domains and AI. So it seems like Airo has been positive for domain sales. Are you seeing your customer -- are your customer funnel composition change at all? Or even are you seeing customers adopt new type of TLDs that weren't as common before? Amanpal Bhutani: We have seen over the last year or 2 more, for example, .ai domain usage, right? And as any of those sort of TLDs becomes more popular, you see some demand shifts. But if I take a long -- a little bit longer time period and look at it very broadly, we don't see massive shifts in preferences for our customers. We see a steady amount of traffic and pipeline. We see improving conversion rates over time. Now again, that's a focus of our marketing and our strategy of high-intent customers working there, too. But we see pretty consistent demand and usage from our customers when it comes to domain. And again, I'm just very bullish on AI. I think it will do amazing things for us, for our customer. And as it gets easier to create content, as it gets easier to build website, I think there's a symbiotic relationship where LLMs are using websites to gain content, creating tools that make it easier to have websites, and that's a symbiotic relationship that should sell more and more domains. And frankly, I'm even more excited about a world where that domains infrastructure powers agents across the world. And I went on about it already a little bit, so I want to repeat myself. But I'm just super excited about a world where -- which we call the Agentic Open Web, where agents use the ANS infrastructure and open standard to sort of work with each other. And it just bothers the mind on how exciting that world is going to be for our customers, like they'll be able to do things they couldn't even imagine 2, 3 years ago. Mark McCaffrey: And just one thing to call out, Ella, nothing on the TLD specific, but we did see a return to large transactions in the aftermarket, the secondary market, not calling that a trend just yet, but it was increased activity, and we'll continue to monitor as we go forward. Amanpal Bhutani: Yes. That usually means -- while it's not a perfect correlation, it usually means bullishness on behalf of people buying those domains because they go after sort of these high-value names. Christie Masoner: Our next question comes from the line of Brent Thill from Jefferies. Sang-Jin Byun: Can you hear me okay now? This is actually John Byun for Brent Thill. Two questions. One, just on industry trend. There's a lot of talk about the MCP servers and exposing some of the features and functionality to the outside and maybe to partners. Wondering how you're thinking about that in terms of exposing functionality and letting integration into some of what you provide? And then I have a follow-up after that. Amanpal Bhutani: Yes. We're all on board with MCP and A2A. And you will find like GoDaddy with ANS supports both protocols. So when you register an agent, you actually tell it they want to use MCP or A2A. And we're looking at the best ways of offering all our customers the ability to surface their content or functionality, let's say, it's a commerce offering, all using MCP or maybe ACP in the future. So all of that is very much in the wheelhouse for us. We're excited about being able to offer our customers all of this capability or something like an MCP capability wrapped in an agent, right, wrapped in a manner that they can trust that they feel good about and it represents them in the best way possible and builds on the content or functionality they already own. Sang-Jin Byun: So make it easy to consume for SMBs, makes sense. And then the other question, the A&C growth, it's been growing kind of like mid-teens. You've been guiding to mid-teens for quite a while now, maybe the last several quarters. And you have a couple more quarters of maybe tougher comps in the 16% level, I guess, through the March quarter. But how should we think about that going forward in general? I mean, is it kind of now going back to low to mid-teens or low teens in general as we kind of anniversary that as you get bigger and bigger? Mark McCaffrey: Yes. So John, just a couple of highlights there. We were talking about revenue for Q4 that we have a tough comp for revenue. So we called that out. As we go into 2026, and obviously, we'll talk about '26 as we close out the year, we feel really good about the momentum we're seeing, and that's why we're calling out that cohort that is attaching faster, greater AOS, higher retention. A lot of that shows up in the A&C bookings and then obviously becomes A&C revenue. And we feel really good about how we're going into the second half of this year and what that will mean for '26 and what that will mean for the long term. Christie Masoner: Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Elizabeth Elliott: Great. We've talked a lot about Agentic, and I wanted to ask a little bit more specifically as it relates to commerce, where we've seen examples like OpenAI, Instant Checkout. And so the question is, as customers increasingly shift towards conversational or some of these AI-driven interfaces that may be sitting just outside of the traditional website real estate, how are you expecting the role of the traditional website to evolve within that ecosystem? And what are some of the investments that you're making in the product portfolio to capitalize on this potential shift and interfaces for engagement? Amanpal Bhutani: Yes. I mean, I'm sure since you're asking the question how early we are in this AI life cycle. And when we look at commerce with AI or with the large LLMs, we're even earlier when it comes to commerce. Now everything we've seen, and we're engaged with sort of the big players out there and keeping up to speed and how things are evolving and changing. Ultimately, our customers do need a place where all their content is available, where all the different functions that have to be executed are available. And the investments we are making is to prepare ourselves to be able to surface our customers' content and data and actions across the LLMs, across Agentic browsers, across whatever new AI technology comes along. And secondarily, making sure that our customers surface in those LLMs in a manner that makes sense for them and is accretive for them. So those are the 2 areas where we're putting in the most energy, but it's just very, very early. And I mean, none of us have really a crystal ball and how this is evolving. But what we try to do is stay very much up to speed with it and look forward 3 to 6 months and say, look, we're here now, what do we expect next and move very quickly towards that. Elizabeth Elliott: Great. And then just as a follow-up, Mark, I wanted to follow up on your most recent kind of comments around that strengthening customer cohort dynamics kind of showing up in A&C. So could you provide a little bit more color on what exactly you're seeing as it relates to the strengthening dynamics? Is this incrementally more users or more of just the better ARPU? And how should we think about the skew between gross new customers driving the strengthening versus more going back to the installed base of existing customers and that being the bigger driver? Mark McCaffrey: Yes, absolutely. And thanks, Elizabeth. A good way to look at it is and if you want to look at what is being driven by quantity, you look at stronger renewal rates, better attach and new customers coming in for the first time and getting to all 3, right? And then you have the pricing and the bundling on the other side that as we provide more value, we can start to charge. Both of them are contributing about equal to our funnel right now, which is, again, going to the initiatives around pricing and bundling and seamless experience contributing both equally as we go forward. So it's a good way to look at it. We're seeing strength across the board, and that's why we feel really good about our momentum going into 2026. Christie Masoner: Thank you. That concludes our call. I'll hand the call back over to Aman for closing remarks. Amanpal Bhutani: Well, thank you all for joining. A shout out to all GoDaddy employees for a fantastic quarter, and I look forward to welcoming all our investors at our Investor Dinner in December. Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the SECURE Waste Infrastructure Corp. Q3 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. And I would now like to turn the conference over to Ms. Alison Prokop. Thank you. Please go ahead. Alison Prokop: Thank you, and good morning to everyone who is listening to the call. Welcome to SECURE's conference call for the third quarter of 2025. Joining me on the call today is Allen Gransch, our President and Chief Executive Officer; Chad Magus, our Chief Financial Officer; and Corey Higham, our Chief Operating Officer. We will be making forward-looking statements during this call. These statements reflect current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially. We will also refer to certain non-GAAP financial measures, which may not be directly comparable to similar measures disclosed by other companies. Please refer to our continuous disclosure documents on SEDAR+ for more information on risk factors and definitions. Today, we will review our financial and operational results for the 3 and 9 months ended September 30, 2025. I'll now turn the call over to Allen. Allen Gransch: Good morning, and thank you for joining today's call. SECURE delivered another strong quarter, demonstrating the resilience of our infrastructure-backed business. Our core waste and energy infrastructure network performed largely in line with expectations, and it continues to highlight the strength and the stability of our cash flows even amid lower oil prices and disciplined producer spending. Adjusted EBITDA for the third quarter was $135 million, up 6% year-over-year or 17% higher on a per share basis. Canadian producers continue to approach the current environment with caution, maintaining discipline and spending -- maintain disciplined spending and stable production. Our business directly benefits from their ongoing need to reliable waste management and energy infrastructure solutions. Approximately 80% of our adjusted EBITDA is derived from reoccurring production and industrial activity, while only 20% is linked to drilling and completions, underscoring our ability to generate stable cash flows across lower market cycles. This resiliency combined with disciplined execution gives us confidence in our ability to maintain strong free cash flow and balance sheet flexibility. We did, however, experience continued weakness in our metal recycling business, particularly with the ferrous market. Conditions remain challenging due to soft Canadian demand driven by tariffs on finished steel sold into the U.S. Foreign oversupply and broader macroeconomic caution that is limiting new steel production. These factors have reduced domestic sales and led to a buildup of ferrous inventory. We have now redirected 95% of our shipments to stronger U.S. markets where scrap metal remains exempt from tariffs, though the full financial benefit may be realized into 2026 as our inventory turns per month improve with our rail capacity expansion in Q4. As a result of lower drilling and completion activity stemming from weakening of the benchmark oil prices, together with the near-term headwinds in metal recycling, we are revising our 2025 adjusted EBITDA guidance to approximately $500 million. This reflects a 2% reduction from the low end of our prior range. Compared to the initial guidance provided last December, this decrease reflects the delayed ferrous metal sales as described, the weaker macro environment as well as the decision not to proceed with a small acquisition originally anticipated to contribute roughly $6 million of EBITDA this year. Importantly, our revised 2025 adjusted EBITDA guidance represents approximately 5% growth over pro forma 2024 adjusted EBITDA. This demonstrates continued year-over-year improvement despite a softer macroeconomic environment and it highlights the strength and resilience of the business. Looking ahead, we expect to enter 2026 with strong operational momentum and the benefit of several long-cycle projects nearing completion. Our infrastructure growth program remains on track with $97 million of our $125 million capital budget deployed in the first 9 months of the year. The 2 major projects we've advanced this year, both pipeline connected produced water disposal facilities in the Alberta Montney region are progressing on schedule. Each project is backed by 10-year commercial agreements with strong counterparties. The first facility is expected to be operational before year-end and the second in early 2026. These developments will add meaningful capacity in one of the most active basins in North America and generate stable reoccurring cash flow for years to come. We've also increased the project scope associated with our Industrial Heartland waste processing facility, which will expand our ability to manage industrial waste in an underserviced region. This facility is now expected to be operational later in Q2. In total, over 70% of our 2025 organic growth capital is directed towards long-cycle contract-backed infrastructure projects that perform across commodity cycles. As these assets come online, together with an expected recovery in metals recycling and continued strength across our core network, we anticipate delivering solid adjusted EBITDA growth in 2026. Our balance sheet remains strong with total debt-to-EBITDA of 2.1x or 1.8x, excluding leases, providing ample flexibility to support our capital priorities. Through the first 9 months of the year, we've returned $335 million or nearly $1.50 per share to shareholders through dividends and share repurchases, reducing our outstanding shares by approximately 8%. We remain committed to opportunistic buybacks under our Normal Course Issuer Bid and maintaining our quarterly dividend of $0.10 per share, supported by our strong free cash flow and balance sheet flexibility. Our strategy remains unchanged to build long life, high barriers to entry infrastructure backed by contracts and reoccurring volumes to operate safely and efficiently and to continue to return meaningful capital to shareholders. With that, I'll turn it over to Chad to walk through our Q3 financial results in more detail. Chad Magus: Thanks, Allen, and good morning, everyone. From a financial standpoint, the third quarter again demonstrated the strength and stability of our cash flow profile. Revenue, excluding oil purchase and resale, was $365 million, down 2% from Q3 2024, primarily due to lower specialty chemical sales and volumes tied to reduced drilling and completions. This decrease was partially offset by contributions from the Edmonton metals recycling acquisition completed earlier this year. Net income was $1 million compared to $94 million in the same period last year. The decline reflects a noncash $55 million provision in the current quarter as well as the absence of a onetime tax recovery that benefited the prior year results. Excluding these nonrecurring items, underlying profitability remained stable. The provision relates to an arrangement for crude oil storage capacity at a major oil hub in Western Canada. Following the start-up of the Trans Mountain pipeline expansion last year and the resulting increase in market egress, the near-term prospects for profitable use or subleasing of the storage tanks have decreased. In accordance with accounting standards, SECURE recognized a provision for the present value of the remaining fixed monthly payments associated with the contract. Adjusted EBITDA was $135 million, up 6% from the prior year as contributions from the Edmonton metals recycling acquisition and proactive G&A cost reductions more than offset the impact of lower drilling and completion activity and continued weakness in the ferrous metals market. Funds flow from operations was $96 million and discretionary free cash flow was $68 million, providing ongoing capacity to support dividends, growth and share buybacks. We invested $54 million of growth capital in the quarter, bringing the year-to-date total to $97 million, primarily for the Montney water projects, incremental railcars and optimization projects. Our sustaining capital spend was $24 million in the quarter and $59 million year-to-date, consistent with our expectations. We continue to forecast we'll spend $85 million on sustaining CapEx this year. With respect to capital returns, we repurchased 1.7 million shares at an average price of $15.77 for a total of $27 million in Q3, bringing year-to-date repurchases to 18.1 million shares for $268 million, including the Substantial Issuer Bid completed earlier this year. We maintained our quarterly dividend of $0.10 per share for an annualized yield of approximately 2%. Our leverage ratio of 2.1x total debt-to-EBITDA and 1.8x excluding leases, reflects continued balance sheet strength and liquidity of over $300 million, comprised of cash on hand and capacity on our credit facility. With a strong free cash flow outlook and disciplined spending, we have significant flexibility to continue returning capital while funding high-return projects and potential bolt-on acquisitions. For the fourth quarter, we expect adjusted EBITDA to remain broadly consistent with Q3 levels, supported by stable production and industrial activity as well as incremental contributions from new infrastructure as projects begin to come online. While our outlook assumes steady operating conditions, results could be influenced by several seasonal and market factors, including the severity of December weather, the extent of typical year-end holiday slowdowns, significant movements in commodity prices and the timing of metals inventory drawdowns. I'll now pass it on to Corey for some operational detail. Corey Higham: Thanks, Chad. Operationally, our team executed very well throughout the quarter, maintaining high reliability and safety performance across our network. At our waste processing facilities, we safely processed on average 91,000 barrels per day of produced water and 36,000 barrels per day of slurry and emulsion. We also recovered 220,000 barrels of oil from waste streams, reinforcing the value we create. 941,000 tons of solid waste were also safely contained across our landfill network. Overall, volumes declined from the third quarter of 2024, driven by a combination of lower activity levels, maintenance program and remediation project deferrals. Specifically, our produced water volumes were down 3% on a quarter-over-quarter basis, although up 1% on a trailing 12-month basis. In addition to lower field activity, the scheduled maintenance and shutdown of a third-party gas plant temporarily impacted produced water volumes in the Montney/Wapiti area. Both upstream volumes were fully restored by mid-Q3. Processing volumes were down 16% quarter-over-quarter as discretionary work related to customer integrity management programs, facility turnarounds and some remediation program postponement. Additionally, as part of SECURE's preventive maintenance programs and taking advantage of lower field activity levels during the quarter, we had a number of our facilities undergo onetime maintenance work impacting further -- further impacting processing volumes. All of those facilities are back to 100% operational. As a result of the produced water and processing volumes, our recovered oil volumes decreased by 26%. Landfill volumes were down 23% quarter-over-quarter due to a combination of postponed remediation projects and field activities from our customers. Of note, the comparative Q3 2024 was a record quarter for SECURE's landfill segment, magnifying the decrease in the current year period. While our volumes were lower compared to the third quarter of 2024, there was minimal impact to waste processing facility and landfill margin contributions due to price increases implemented at the beginning of 2025. Our metals recycling business continues to benefit from the scale and efficiencies of the Edmonton acquisition. We are proactively managing through near-term challenges in the ferrous market by expanding our rail fleet with 50 new cars in 2025 and adding 50 cars on short-term lease to improve efficiency and access to U.S. markets. At present, we have approximately 220 railcars shipping ferrous scrap to the U.S. Prior to the tariffs being enacted, we were able to accept process and ship our inventory at a minimum of 1 inventory turn per month. Since the tariffs were put in place, our inventory turns have decreased where it takes us on average 45 days to turn our inventory, causing our inventory to build. This is a result of shipping our product further into the U.S. versus our domestic mills with shorter railcar turnaround times. As we move into the fourth quarter, the addition of the new railcars will allow us to catch up on our inventory shipments, though the full financial benefit may be realized into 2026 as we continue to manage logistics, our average turns per month and expand our rail capacity, a key competitive advantage that provides greater flexibility and cost efficiency in serving multiple markets. We are also continuing to prioritize nonferrous metals with stronger fundamentals and maintaining disciplined purchasing and feedstock pricing to protect margins. We expect performance to improve as 3 key factors normalize: rail throughput increases and logistics efficiencies take effect, North American steel demand recovers supported by infrastructure and manufacturing investment and import pressure eases as global steel production moderates. In our Specialty Chemicals business, reduced drilling and completions activity has affected our drilling fluids business. However, our production chemicals business continues to grow. We've invested in people, equipment and product development to expand our product offering to help customers address complex operational and production challenges. In our Energy Infrastructure segment, pipeline and terminaling volumes averaged approximately 135,000 barrels per day, up modestly from last year, driven by increased throughput at our Clearwater terminal following the Phase 3 expansion. These assets continue to operate under long-term commercial agreements, providing stable fee-based cash flows and a platform for future growth. Our talented staff continue to drive cost efficiencies and throughput optimization across our operations. Overall, our infrastructure continues to perform as designed, providing safe, reliable and environmentally responsible solutions to our customers. With that, I'll turn the call back to Allen for closing remarks. Allen Gransch: Thanks, Corey. To summarize, SECURE delivered another solid quarter in what remains a volatile environment. Our infrastructure-backed network continues to generate stable, high-quality cash flow supported by reoccurring production and industrial volumes, regulatory-driven demand, strong customer relationships and operational excellence. Operationally, our teams continue to perform exceptionally well, executing projects that strengthened our network and laid the groundwork for higher EBITDA in 2026. In metals recycling, we've acted quickly to address market conditions through targeted strategies that protect margins and reposition sales to stronger markets. Looking ahead to 2026, we expect to build momentum as new infrastructure comes online and metal recycling synergies and U.S. transportation logistics are streamlined. These initiatives, combined with supportive long-term industrial fundamentals provides a strong foundation for sustained growth. The start-up of the Trans Mountain expansion and the commissioning of LNG Canada are improving market access and narrowing price differentials, supporting incremental production and associated waste volumes. Additional LNG export capacity, data center developments and ongoing government programs focused on the liability reduction and are expected to reinforce these structural tailwinds in the years ahead. With more than 80 strategically located high barrier to entry facilities across Western Canada and North Dakota, SECURE is well positioned to meet growing demand for waste and energy infrastructure. Our network offers both expansion capacity and stability across market cycles, underpinning consistent volume and earnings growth through 2026 and beyond. Thank you for joining us today and your continued support of SECURE. We'd like to highlight that we expect to provide 2026 adjusted EBITDA guidance and capital investment guidance in February of 2026, along the release of our fourth quarter and full year 2025 results. This is a change from prior years but aligns more closely with industry practice amongst our peers. Operator, we'd now like to open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Konark Gupta from Scotiabank. Konark Gupta: Just to begin with on the volume side of things. I think you guys pointed out, obviously, there's a bunch of issues in the quarter because of which the Waste Management segment volumes declined. I'm just wondering, is it possible to kind of parse out how much of the volume decline was directly associated with drilling and completion as opposed to the turnaround and other issues with production? Corey Higham: Konark, it's Corey. Good question. And when you look at the rig count dropping [ 15% ] quarter-over-quarter, it certainly made up a big chunk of the decline. And when producers -- the knock-on effect producers will tighten their budgets, they'll drill less wells, they'll complete less wells. And when they complete less wells, there's less waste to process, there's less drilling waste to dispose of. So there's just this knock-on effect where you're getting lower volumes. But when you look into the quarter, July was very similar to Q2 levels. And as you move through July, August and September, there was just a general incremental increase month-over-month, and we're seeing that into October. So it was a tougher quarter from a volume perspective, but the assets operated the way they're supposed to, and our teams are chasing and hunting every barrel and cubic meter of waste that's out there. Allen Gransch: I think too, Konark, to add to what Corey is saying, I think with a softer commodity, and I think we've been hovering in the high 50s, low 60s here, it just -- and we've said this in our outlook, it makes producers pause a little bit. They're thinking more on if they want to pause a turnaround or if they want to slow certain things down. As we're kind of looking into this quarter here, this last quarter of the year, it seems like most of them are kind of driving towards spending their budgets for the year. But you can understand with the softer commodity why activity levels generally would slow down a bit and relatively hung in there as well. So it wasn't really a surprise to us. It's just you kind of saw it come to fruition as we got through Q3. Konark Gupta: Okay. Fair comment. On the guidance then, so I mean you're expecting now I think $500-ish million for full year on EBITDA basis. And I think it's not like down a lot from the low end of what you guys said before. But is that like incrementally -- you pointed out, obviously, the M&A that didn't happen. But is there an incremental pressure you would say from the metal recycling side or from the drilling and completion side versus where you guys were thinking 3 months ago perhaps? I mean, I'm just trying to understand like what drove this push down toward the $500 million. Is it more the metals or the drilling? Allen Gransch: Good question, Konark. I would say there's a bit of balance on both. I think it's a bit of carryover on just general activity levels with the softer commodity price. And as I said, producers are kind of driving towards completing their budgets. December now becomes the period at which things slow down here in Western Canada. You used to have a bit of a breakup in the second quarter. But with all the pad drilling going on, they really just go hard all throughout the year. And so giving their own guys a break is typically now the Christmas break. And so depending on weather in December and how close they get to their budgets, we know that there's going to be some softer volumes coming through in that month. So there's a -- part of it is associated with that. Part of it is associated with metals. It took us throughout the entire Q3 to get into some of these new U.S. markets. And so we were successful now transitioning 95%. I mean it's a huge competitive advantage for our facilities here in Western Canada to have not only the mega shredder in Edmonton and being able to process more efficiently, but also to have these railcars and move in the market into the U.S. And so a huge advantage for us to shift entirely all of our scrap into the U.S. I think I talked about it in Q2, just maybe we could get an agreement with the U.S. on, on tariffs on steel, and that didn't happen. So we've effectively transitioned now 95% of the U.S. market. So for us, it's -- now that we have the market, it's all around the logistics and being able to get the turnaround time on the trains. Typically, when it's closer in Canada or relatively close from the border, you're looking at 21 days turning around your cars and getting them back and filled up again. As you think about further into the U.S., we're moving more into the 40, 45 days to get those same cars back. And so that logistics and that turnaround time is really the delta here. And we've seen our inventory start to build here in through October. And it's going to be how efficient we can get the logistics nailed down here to the fourth quarter here, but there could be some amount that spills in. So it's really just a shift to profit as we think about our logistics. We've got an additional 50 cars that we've just leased that's going to add on to our fleet. So we're sitting around 270 railcars right now. And so we're going to run with that, make sure we can optimize our logistics. And yes, so those would be the 2 main factors for pinning it down on approximately $500 million. Konark Gupta: Okay. And I just want to wrap up on the metal recycling side. I think you laid out a lot of factors there and numbers there. So I just want to understand, is that shift to the U.S. 95%, I mean that's obviously significantly higher than what you typically did before. Is that more like a temporary phenomenon? And I mean when you get more cars in next year, a, do you plan to return the lease cars? And b, do you expect the 40, 45-day inventory -- sorry, the car turnaround time to get back to closer to like 21 days or could still be higher because of the U.S.? Allen Gransch: Yes. I mean, logistically, it is further to transport the cars. So I think the average days, maybe we get it down into that, call it, 40 days range. The lease cars that we brought on, that's, I think, another 3-year lease or 5-year lease for those cars. So they're in our fleet and it will be able to allow us to manage into the U.S. market for quite some time. We don't anticipate coming back into the Canadian market for quite some time. So we're really in developing these relationships with the mills in the U.S. and just optimizing our turnaround time. So if we need a few more lease cars if we find that, that is the optimal level that we need, and that's what we're going to run. So we'll get it figured out here. It's what I call it a 3 to 6 months bringing out the logistics. But it just puts us such an advantage to our competition to be able to have these markets and to be able to price into the U.S. So again, coming up with this whole hub-and-spoke model, getting these other locations to feed into Edmonton to not only process it more efficiently, but then get it on the cars and get it down to these markets is great for us. So yes, we'll navigate that through Q4 and Q1, but after that, it should be just smooth running. Corey Higham: Yes, Konark, once the Canadian mills get some demand back and whether that's tariff relief or it's part of our federal government's Build Canada Better program, even if you have some Canadian mills resume, you saw we -- we've built some really good relationships with these mills, and there's certainly demand that we're seeing into Q1. So we don't have any issues in this current environment in being able to get rid of this inventory. If Canada does get in a much better position, we just have more outlets for our product, which is a good news all around. Operator: And your next question comes from the line of Michael Doumet from National Bank. Michael Doumet: I know it's 10% of your business, but I do want to touch on it a little bit more. So on the metals business, is there any way you can quantify how much of the 2025 EBITDA guidance was attributable to the metals? And the reason why I'm asking is because I feel like that's part of the business that can bounce back relatively easily in 2026. And just the latter part of that question. When you guys think about the metals business recovering in 2026, I would think that feedstock prices have to decline to offset the higher logistic costs. So I'm just wondering if you're seeing that already. Allen Gransch: Yes, great question. So when we look at our guidance for 2025, we've talked about metals being about 10% of that overall guidance. So call it in the ballpark of around $50 million. And I commented there's a couple of things that have happened. Number one, when we acquired [ GRI ] in February, we knew that there was going to take -- there was going to be a time frame here, call it, 12 to 18 months to realize synergies. And what our synergies were? The first synergy we wanted to achieve was operational synergies. So this was getting our other locations that we call the feeder locations set up in a manner in which we can transfer that scrap efficiently into the Edmonton market and then process it. So we get the operational synergies. Our shredder was running around 50% utilization. Our goal is to get it above 65%, and we're well on track to getting higher utilization, which is a more efficient way to process the scrap. So we knew there was going to be operational synergies. We knew there was going to be transportation synergies, and that's really from these new cars where they can hold 30% more scrap than these old leased cars that we have. And that transportation synergy, you pay by the car, you don't pay by the size that it can hold. And so we knew we would gain transportation synergies as well. And then we had some system integrations we wanted to do as well. A lot of these mom-and-pops run very archaic systems. We wanted to get it all up to a new operating system where we could use a lot of data management to make our inventory turns and our annual or monthly processing very, very efficient. And so those synergies were going to take time. So we're going to get synergies into 2026 once we have all of that figured out. But when we think about the, let's call it, the $50 million or so associated with metal, switching into the U.S. market, there was a time that we're sending kind of smaller loads where they're getting test loads and we're getting relationships complete with some mills that we haven't done business with in quite some time. So there was a bit of a -- and I think I said in Q2 and Q3, you're calling like a $3 million to $5 million kind of impact to get that all established. So now we're moving into really can we turn the inventory. I wanted to turn the inventory every 30 days so that you're not taking any sort of commodity risk. That's ultimately the way we're going to set up the business. We don't want the volatility. We just want the spread between what's coming across the scale to what we can sell to in the U.S. market. And so to your point is the price coming down to offset the logistics expense, the answer is yes. We have to factor in what we would be willing to pay on the scale versus the cost to transport to get to the U.S. market. So that just takes time to figure out. So there is more upside as we think about 2026 metals, all of this logistically figured out and optimized, but also get those synergies realized. So there will be upside in 2026. And Q4 really is just a matter of what is our inventory build and how many cars do we need to make this as optimal as possible. Michael Doumet: Allen, just on the $3 million to $5 million that you talked about there, was that the Q2, Q3 impact or potentially the full year impact? Allen Gransch: That's right. That's the Q2, Q3 impact. So now I'm moving more into just the logistics aspect in Q4 on the inventory build and how much I can transfer out. Michael Doumet: And maybe changing topics here. On the buybacks, what are your thoughts on share repurchases at these higher levels? I mean, do you or maybe the Board, do you have a preference for opportunistic buybacks? Or is there a view that maybe a more regular pro rata purchase makes more sense here? Chad Magus: Michael, it's Chad here. We've always said we're going to be opportunistic, and we reevaluate it every quarter along with our Board and just kind of set parameters as to how much we're going to buy. And obviously, we want to be in the market buying at levels that we think are attractive at that period of time. Now things have been transitioning nicely for us and that the multiple has been expanding and continue to reevaluate. We kept the wording on purpose that we're going to continue to be opportunistic buyers of our own stock. Operator: [Operator Instructions] And your next question comes from the line of Arthur Nagorny from RBC Capital Markets. Arthur Nagorny: Just on the Specialty Chemicals business, correct me if I'm wrong, but I think you previously called out that drilling and completion is about 50% of that business with the rest being more tied to production. So I guess, would it be fair to say that drilling and completion activity or revenue was down meaningfully more than that 12% for that business? Or are there any other moving pieces that we should be keeping in mind there? Chad Magus: Arthur, it's Chad here. Yes, within Specialty Chemicals, about half is drilling fluids, so really tied to the rig count and then the other half is Specialty Chemicals. And so yes, I'd say the revenue decline there is fairly close to what we saw with rig activity decline in the quarter. Arthur Nagorny: And then on the metals recycling business, it seems like the Edmonton facility generated [ $28 ] million of revenue in the quarter, which is only modestly lower than the $30 million in Q2, and that's, I guess, despite all the headwinds. But can you maybe talk about how things are progressing with that acquisition? And maybe what the revenue-generating capacity of that business could be like in a steadier operating environment? Allen Gransch: Yes, I mean the -- I would say when you think about having a macro challenge like finished steel tariffs in Canada, it has an impact on the market. This is pretty unprecedented and it's why not only with the tariffs, but also just general kind of slowdown in activity from an industrial standpoint. We knew we had to deal with that kind of more challenging backdrop. But the business and the acquisition that we've acquired, we're very happy with. It is performing very well. We're super happy with the utilization of that shredder and how the shredder is operating the yard, how we're integrating all of our facilities. So we know there is substantial upside as we think about '26 and '27 with this asset. You kind of bought it in the low part of the cycle, and we're currently optimizing at the same time. And so managing like I said, the logistics piece, once we get that figured out, this thing is going to be running very, very smoothly. And our goal will be to turn this inventory every month. And I think it gives you that, again, that competitive advantage to have multiple markets to be able to send your product to and that creates that advantage for us, specifically when we're attracting scrap into the Edmonton facility from that industrial market. So yes, so there is, I would consider what you see this year as being our low part of what metals can do, and there's definitely going to be upside. And we'll -- I think I mentioned it in the call, we're going to put 2026 guidance out with our 2025 annual Q4 release kind of end of February. That's when most of our waste peers put out guidance. So at that point, I'll give you more clarity on where I think metals could go for the 2026 year. It just gives me a few more months to get through some of these, the areas I spoke about. Arthur Nagorny: And then I guess in the Energy Infrastructure segment, you called out lower contribution from more mature areas. Is that just a function of, I guess, decline curves on producing wells? And do we need to see an uptick in drilling and completion activity for this to maybe reverse? Corey Higham: Yes. I think it's a bit of both of those, Arthur. You do have mature areas and when they stop drilling in some of those areas, the production does come down, but again, offset with the contributions from our Nipisi business. So we're pretty comfortable and confident in this business and market growth. So… Allen Gransch: Yes. I think when you look at the price of oil, as I said kind of high 50s, if you look at the basin here, the reservoirs in Canada, you're kind of in that breakeven at $50 WTI. And so yes, they're going to slow down when you're into the 50s. But when you look at the play, they're very, I would say, from a netback perspective ahead of where maybe some of the U.S. production would be. And so all of this, you see that a little bit of a pause and it's to be expected given we're in the third year where WTI seems to be soft. But it just shows you though, even with that little bit of decline on the drilling aspect, production still was very flat and kind of came into where we expected. So it's a good signal for us. And obviously, we're more bullish as we think about activity development in 2026. Arthur Nagorny: And last one for me. The adjusted EBITDA margins were notably strong in the quarter, particularly in light of the revenue declines across your segments. Is there anything in there that you would call out as maybe being more onetime in nature? Or can we expect margins to be more in this range going forward, I guess, with keeping seasonality in mind? Chad Magus: Yes, I think when you look at the last couple of years of where the margin percentage has been, it has fluctuated. It is -- with all our different service lines, they all do have, in some instances, fairly significantly different margin profile. And so it really is the mix in the quarter. And so this quarter, I think the biggest drivers were Specialty Chemicals being a lower percentage of the overall EBITDA. They are at a lower margin. And so that helped, I guess, [ void ] the margin to higher than where we've seen on average. And then also probably lower than normal G&A this quarter as well, just helped to get to that 37%. But I think year-to-date, we're about 34%. And I think that's probably when you look at what we forecast going forward, we'd expect to be in the mid-30s, but it will be somewhat variable quarter-over-quarter. Operator: There are no further questions at this time. Mr. Gransch, please proceed. Allen Gransch: Thank you for your time today. We look forward to presenting at the Baird Industrial Conference in Chicago in a couple of weeks, followed by Scotiabank Transportation and Industrials Conference in Toronto mid-November. As mentioned, we expect to release our fourth quarter and 2025 annual results along with 2026 guidance at the end of February. Thank you all for your continued support. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Thank you for standing by. Welcome to the NorthWestern Energy Third Quarter 2025 Financial Results Webinar. [Operator Instructions] I would now like to turn the conference over to Travis Meyer, Director of Corporate Development and Investor Relations Officer. You may begin. Travis Meyer: Thank you, Perella, and good afternoon, and thank you again for joining NorthWestern Energy Group's financial results webcast for the quarter ended September 30, 2025. Joining us on the call today are Brian Bird, President and Chief Executive Officer; and Crystal Lail, Chief Financial Officer. They will walk you through our financial results and provide an overall update on the progress this quarter. NorthWestern's results have been released, and our release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning. Please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I'll direct you to the disclosures contained within our SEC filings and safe harbor provisions included on the second slide of this presentation. Also note that this presentation includes non-GAAP financial measures and information regarding the pending merger transaction. Please see the non-GAAP disclosures, definitions, reconciliations and merger-related disclosures included in the appendix of the presentation. Webcast is being recorded. The archived replay will be available today shortly after the event and remain active for 1 year. Please visit the financial results section of our website to access the replay. With those formalities behind us, I'll hand the presentation over to Brian Bird for his opening remarks. Brian Bird: Thank you, Travis. On our recent highlights, we reported GAAP diluted EPS of $0.62 per share, non-GAAP diluted EPS of $0.79 per share for the quarter. We are affirming our 2025 earnings guidance range of $3.53 to $3.65. We -- during the quarter, we integrated our Energy West acquisition of the natural gas assets. We've also integrated the customers and employees, and we've really tucked that business in seamlessly. Very, very excited about that opportunity. I'll tell you what, something we've been a bit more excited about is the announcement of our agreement with Black Hills Corporation for an all-stock merger of equals. Even though we did that announcement in mid-August, we have already filed our joint applications for the transaction approval with the regulatory commissions in Montana, Nebraska and South Dakota. In addition, during the quarter, we filed a tariff waiver request with the MPSC for recovery of our operating costs associated with the Avista Colstrip interest. And recently, we submitted a 131-megawatt natural gas generation project in the Southwest Power Pool expedited resource adequacy study. And that project if we move forward, we'll be approximately a $300 million project, which is currently not included in our 5-year CapEx plan. And lastly, dividend declared during the quarter, 66% -- $0.66 per share payable December 31, 2025, to shareholders of record of December 15, 2025. Moving forward to the Northwestern value proposition with a dividend yield between 4% to 5%, add that to a base capital plan providing a 4% to 6% EPS growth, gives us a total return of 8% to 11% total return. And if you think about that CapEx plan, the vast majority of that is in a T&D investment throughout our total system on both the gas and electric side of our business, obviously, necessary to serve our customers. If you consider the incremental opportunities we have, certainly with data centers and large load customers, FERC regional transmission and any incremental generating capacity, some of which I just spoke to, you could see the dividend yield plus that greater than 6% EPS growth, giving a total return even greater than 11%. And with that, I'm going to turn it over to Crystal to talk about the third quarter financial review. Crystal Lail: Thank you, Brian, and good afternoon, everyone. We are coming to you from beautiful Butte America today following a Board meeting here. And based off those highlights, it feels like we might have had a little bit of a busy quarter. I will cover and update you on our third quarter results and outlook for closing out the year and then turn it back to Brian for some really exciting strategic updates and where we're at otherwise with the business. We are pleased to deliver a solid quarter in line with our expectations here for the third quarter of '25 and are on track to deliver on our earnings guidance and financial targets for the year. For the quarter, earnings were $0.62 on a GAAP basis compared to $0.76 in the prior period. On an adjusted basis, we delivered $0.79 as compared with $0.65. In the upcoming slides, I'll dig in a bit on the details of those drivers, but I would note and highlight what you just caught, which is comparability year-over-year. There's a couple of items I would just highlight that are impacting that. That includes the merger-related costs that are included in third quarter of '25 and also remind you that in the third quarter of 2024, we had a tax benefit. Moving to Slide 9. From a year-to-date perspective, that leaves us at $2.22 from a GAAP basis compared to $2.34 last year. Again, on an adjusted basis, that's $2.41 in 2025 year-to-date compared to $2.27 in 2024. Slide 10 shows you the third quarter drivers of EPS compared to that same period in 2024. I would note that despite mild weather, margin improvement drove $0.52, which was offset in some regards by higher operating costs, again, including those $0.12 of merger-related costs I referred to, higher depreciation and interest and inclusion again in the prior year of an $0.11 tax benefit. Moving to Slide 11. For further detail on the margin, again, I highlighted that, that was $0.52 of improvement. Of that $0.52, rate drove $0.35 of margin improvement. As a reminder, we worked really hard on that regulatory execution to be able to recover our costs and close that gap on earning returns. That $0.35 is certainly key to that, and we are currently awaiting our outcome in our Montana rate review, and I'll address that in a little bit later. Also, customer usage provided $0.08 of improvement and electric and gas transmission and transportation provided another $0.05. These are offset by a couple of things we had highlighted previously of trends for 2025, and that includes the market sales impact in our PCCAM, and that is a detriment during the quarter as well as the effects of Montana property tax legislation that are also a detriment to us in the quarter, reducing some of that favorability in the margin line. Moving to Slide 12, I'll discuss again those adjusted items to hopefully make the quarter make a bit more sense for third quarter '25 versus third quarter of '24. Again, mild weather in this third quarter impacted us by about $0.05, and that's compared to, again, an add-back of $0.05 and add-back of $0.01 in the third quarter of 2024. Also in 2025, we've incurred $0.12 of merger-related costs. And then as I mentioned earlier, the 2024 results included an $0.11 tax benefit related to prior year gas repairs once that final guidance came out. All of that gets us to, if you look at the adjusted columns, $0.79 of earnings in the third quarter of 2025 compared with $0.65 in 2024. Moving to Slide 13. You've heard our commitment to credit quality and maintaining that we've largely executed on our financing plans, and those remain unchanged as we continue to focus on making sure we're keeping that FFO to debt number where it needs to be and expect to see a bit of improvement even on that as we close out the year for 2025. Moving to Slide 14. Our financial performance year-to-date reinforces our confidence in delivering on the financial commitments that we've made, and we expect a final outcome in our Montana REIT review, as I alluded to earlier, during the fourth quarter. And as such, we continue to maintain a wider range of $0.15 as we look to close out 2025. We also expect to provide our 2026 outlook during our year-end call in February, so you can all look forward to that. Moving to Slide 16. You'll see that we -- our capital investment slide and forecast here remains unchanged from what you've seen from us before. Brian mentioned the opportunities, and we've talked many times about what might be incremental to our current plan, but the opportunity for incremental generation investment in South Dakota under the SPP Expedited resource adequacy study, that is not reflected in these amounts. And as I just alluded to with our '26 earnings outlook, we expect to roll forward and update our capital plan also on the Q4 call in February. So with that, I will turn it back to Brian. Brian Bird: Thanks, Crystal. On 18, we talk about our merger with Black Hills update in August 18 seems like a long time ago, but it was about 2 months ago. And in that short period of time, we, with our Black Hills friends have worked collectively to make 3 filings with each of the 3 states that we needed to make filings in. We filed with the MPSC and the North Dakota Public Service Commission, the South Dakota PUC. Those filings are made, and we continue to work on other filings necessary for the transaction. Continue to work on the S-4 and joint proxy statement and expect to release that in Q1 of 2026. In terms of shareholder meetings, sometimes in Q2 or Q3, our respective companies would have hold shareholder meetings on a vote on the transaction. And then developing transition integration implementation plans, what I'd say there is we collectively are talking to independent integration consultants, hope to make a decision relatively soon there. And just really in early planning stages. things will really get going here, I'd argue in the December, January timetable as we continue planning moving forward. And lastly, receiving approvals and closing the merger, I'd like to think that can happen sometime in the second half of 2026. Moving on to the next page regarding large load customers. Off to the right, I think all of you are well aware of the 3 LOIs that we currently have with SEBI, Atlas and Quantica. I'll mention the development agreement with SEBI here shortly. But on the left-hand side of the page, just a quick focus on Montana and South Dakota. We do anticipate making a filing with the MPSC to propose a large load tariff in the fourth quarter of 2025, and we'd like to do that in conjunction with an ESA with SEBI. So going in arm in arm, making sure that we're protecting customers in essence, but also providing what we need to move forward with data centers in the state. In South Dakota, there continues to be significant indications of interest. And any new large load customers require incremental capacity. And in South Dakota, PUC already has an established process for large load customers. The other thing I'd just say in South Dakota, we and certainly other utilities in the state have seen good progress in between legislative sessions on a sales tax exemption bill. You just saw a draft of one here shortly, not too long ago. And so I'm excited about that opportunity. And hopefully, we can deal with that issue in the next legislative session, and so we can have a better means to attract data centers in the state of South Dakota. So I think really good progress in both states. Regarding that process on Slide 20, we continue to lay out for you kind of left to right the process. And we have seen good progress here. From a data center request, we've moved 3 of those parties into a high-level assessment. As a matter of fact, of the LOIs, what we've done here recently of our 3 LOI parties, we've entered into a development agreement. What's that? We notice we show those kind of hand-in-hand here, maybe an incremental step of the LOI portion if you will. But the development agreement is primarily to make sure that we have a commitment in essence, to fund the studies and we've received development deposits along the way to fund those studies necessary, impact studies, facility studies. And that's an important step we anticipate. The other 2 LOIs, we could see development agreements with those other 2 LOIs before the end of the year as well, all with the hopes of getting to energy service agreements as quickly as we can. Moving forward, Colstrip transaction overview. I just on the far right, I think I need to provide a bit of a history lesson for folks. Back in January of 2023, we acquired the Avista piece. And you may recall that our IRP talked about the necessity of incremental 200-plus megawatts of capacity. And that Avista portion provided resource adequacy for us in Montana. And it also brought our ownership interest in the Colstrip facility from 15% to 30%. Unfortunately, 30% interest wasn't going to be high enough, if you will, to protect ourselves from other owners of the plant for various reasons, their states didn't necessarily want them to own coal-fired generation. And thus, there could have been an incentive for them to actually close down the Colstrip facility for us to protect our existing interest, 222 megawatts and the Avista interest in Colstrip. In July of 2024, we acquired Puget's 370 megawatts. What that did is it allowed us to move from a 30% ownership to 55% ownership, providing us a clear advantage to provide the direction for where Colstrip is going to go on a going forward basis and protecting ourselves and our customers from a capacity standpoint. And so we're excited that January 1, 2026, is not too far away. I think we'll sleep better, knowing we have those resources to serve our customers on the coldest days of the year. Those combined interests of course, will deliver substantial benefits to our existing customers, communities and investors, but also support now the integration of some large load customers. And primarily, that would be the Puget issue. So one we think -- 2 things we did to protect ourselves starting on 1/1/26 as quickly as we can here. For the Avista portion, we filed a temporary PCCAM tariff waiver request with the MPSC. We did that in August that'll provide a near-term cost recovery mechanism that is expected to largely offset the $18 million of incremental incremental annual operating costs resulting from the transfer expected on that the first quarter of 2026. I think it's clear you understand with the historic test year in Montana, if we've not done this we would be at risk of not recovering our operating costs of that units, if you will, those incremental 222 megawatts until our next rate review. And so this is a prudent means to try to make sure we protect their financial integrity and hopefully, we'll see a good outcome from the Montana Commission. I think they will respect the concept that we are buying incremental capacity to serve our customers at a 0 upfront cost. And all we're asking here is to get recovery of our operating costs and to a point where offsetting, if you will, sales from that unit to offset those at least to help those sales cover our operating costs before we actually move into the 90-10 sharing mechanism. I think it's a very reasonable ask. And hopefully, the Montana Public Service Commission will see that as well and has hopefully see it as quickly as we get into 2026. On the Puget piece, we anticipate signing a contract in Q4 2025 to sell electricity through late 2027. The revenue from that contract is expected to largely offset the $30 million of incremental operating costs from that transfer. We've already filed with FERC for cost base rates in October 2025 for that portion and expect approval during the fourth quarter of 2025. I want to spend a little bit more time on Puget. I think the question could be asked, why FERC regulated and not MPSC regulated for that 370 megawatts, the Puget portion. While we've received comments through the MPSC that it provides uncertainty around how we will or can serve large load customers in Montana. And clearly, the 370 megawatts were not identified in our IRP as needed for resource adequacy on 1/1/26. And so that's a reason enough to move things from a FERC-regulated -- to a FERC-regulated perspective. And I think the other question you might have is why would you plan to enter into a PPA with another party for the full 370-megawatt output of the Puget portion. Well, first and foremost, that really avoids any affiliate issues that we'd have with our regulated business. Secondly, having a FERC-regulated fully contracted output with an investment-grade counterparty, not only reduces market risk, but it allows us to largely offset our operating costs at the facility. And lastly, the term of that agreement would be through Q3 of 2027 in order to have 370 megawatts available for large load customers in Q4 2027. And ideally, this 370 megawatts, we will ultimately like to move that into our MPSC-regulated business sometime in 2027 and beyond -- or beyond, but we certainly need to persuade the MPSC that is in the best interest of not only all of the customers in Montana, but make sure also for their existing customers in Montana. So with that, I'll conclude just by saying I want to thank all of your interest. As Crystal pointed out here earlier, we've been extremely busy. And I just want to point out, I'm pretty proud of this company for our ability to not only handle our day-to-day jobs to not only run this business, but work with our friends at Black Hills to we think, put together a company that will be better together, certainly much larger, much more financially strong, have the scale, if you will, to better serve not only our shareholders, but equally important, our customers and our employees as well. And with that, Meyer to handle Q&A. Travis Meyer: Thank you, Brian. That was a good update. Prella, we'll open the lines for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Aidan Kelly with JPMorgan. Aidan Kelly: Yes. I just want to hone in on the data center front first. It looks like there was some activity in the request and high-level assessment stages. Could you just clarify if this was a simple pull forward of some of the request stage into the high-level assessment and then maybe one just got added to the request stage? And then just on top of that, what sort of time line you might be able to kind of convert the high-level assessments into incremental LOIs? Brian Bird: They're great questions. I think the data center requests, the queue count there went up 1. But more importantly, we've -- net-net, we've increased the queue count in the high-level assessment by 3. I'll tell you that I can't give you a specific time. One thing I've learned through this process, it takes two to tango in essence to when things move to that next level. But I do think there are at least one of those that could show up in that box here relatively soon, that LOI box, if you will, or directly to a development agreement. Aidan Kelly: That's helpful to know. And then maybe just pivoting to South Dakota. I am also curious on time line there for getting approval of the gas plant. And then ultimately, how should we think about that kind of flowing into CapEx in the rate base? Crystal Lail: I'll take that one. I think both MISO and SPP put out this summer an expedited resource adequacy study window. We submitted based off that study, a facility that would get us to resource adequate and meet the requirements by 2030. We've received feedback -- initial feedback from SPP that our -- what we've submitted meets their initial requirements, and we expect to hear on the transmission piece in early 2026. As such, we will wait to put it into our capital plan until we roll forward that refresh here in probably the fourth quarter call in the February time frame. Operator: [Operator Instructions] And I'm showing no further questions at this time. I would like to turn it back to Brian Bird for closing remarks. Brian Bird: Well, thank you so much. I just -- again, I want to reiterate the tremendous support we've had certainly since the announcement, and I think the feedback we've received, and I know our friends at Black Hills have received tremendous support for the merger. I will just tell you that we both collectively seem to be working really well together to make things happen here and continue to move this process along and both endeavor and understand the importance of this merger, and we'll work really, really hard to make sure it happens. And like I said, hopefully, as soon as the second half of 2026. And so with that, again, thank you for your participation today. Operator: Thank you. And this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Greetings. Welcome to Shake Shack's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Alison Sternberg, Head of Investor Relations. Thank you. You may begin. Alison Sternberg: Thank you, operator, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Rob Lynch; and CFO, Katie Fogertey. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the financial details section of our shareholder letter. Some of today's statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 21, 2025, and our other SEC filings. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our third quarter 2025 shareholder letter which can be found at investor.shakeshack.com in the Quarterly Results section, or as an exhibit to our 8-K for the quarter. I will now turn the call over to Rob. Robert Lynch: Thanks, Alison, and good morning, everyone. We are extremely proud of our third quarter results, which showcase the important foundational work we've been doing to position ourselves for growth in the achievement of our long-term goals. Despite the strength of the outstanding quarter, we will not be complacent. Our focus remains to build a resilient long-term business, one that's not defined by any single quarter. We are making the necessary strategic investments today that set us up for long-term success. This means continuing to prioritize initiatives that strengthen our foundation and support sustainable growth. We have been executing with purpose against the deliberate strategy inspired by our mission to deliver enlightened hospitality to our team members and guests. Collectively, our efforts have resulted in stronger team retention, better guest service, operational improvements and productivity, a steady cadence of culinary innovation and the foundation of a brand marketing model. The engine behind our success in the heart of our brand is our team. We have assembled an incredible group of talent who bring a wealth of experience from both inside and outside the company. Our external hires come from well-established multiunit organizations where they have learned how to implement best practices that can help us as we continue to scale. And we are equipping our managers with tools to develop high-performing teams from within that are building a culture of hospitality, productivity and excellence. It's no surprise to us that we are seeing a reduction in turnover, leading to more tenured, higher-skilled hourly team members, which, in turn, is having a direct impact on the productivity of our labor in our Shacks. We're also building a brand marketing model. We recently announced that we appointed Michael Fanuele as Chief Brand Officer. In this role, he will oversee advertising, paid media and insights and analytics, working in close collaboration with the broader team to advance our marketing strategy and steward our brand in the marketplace. Michael has been supporting our team as a consultant since earlier this year, where he played a pivotal role in helping to build our strategic brand positioning and in making the selection of our new creative agency partner. We're extremely excited to take this next step in evolving our marketing model, which we believe is a critical component for us to build an enduring and powerful comp engine for growth. Michael's creativity, experience and leadership will help us continue to build demand for our culinary innovation, optimize our media investments and strengthen the Shake Shack brand. Over the past year, we have made important strides in improving operations, and I want to spend some time walking everyone through what we are seeing. I'm incredibly thankful to our operations team and our support center for all the work that they have done to advance our business. This year has been an important year across our operations as we establish new practices that will help us scale our business with hospitality, efficiency and excellence. While we do not report this way, we recognize that many in the industry analyze our cost trends on a per operating week basis. We are aware of the fact that we are currently operating with fewer labor hours than we used to, and that our labor costs on an absolute dollar basis per operating week are down, however, still high relative to the fast casual industry. Our historical labor model and the execution of that model was not well positioned to achieve the operating excellence that we need to deliver on our aspirations. In fact, the reduction in hours necessary to operate our Shacks with excellence has improved our ability to serve our guests because we are using those hours in a more productive way. We will continue to optimize our operations and get even more efficient in areas where we're simply overstaffed, while at the same time focusing on and delivering on better hospitality. As we have discussed over the course of 2025, we implemented a new labor model that is an activity-based labor model moving off of the sales-based labor model. We also took a hard look at how we were deploying the hours that our Shacks were allocated and streamlined a lot in the service of the guest experience. We have built a disciplined approach and our Shack leaders are showing real accountability and using the tools and processes provided to attain our labor goals. I am pleased to share with you that nearly all of our Shacks met or beat labor targets in the third quarter. This is a meaningful improvement versus last year where approximately half of our Shacks met their labor targets. We are doing a better job of supporting our managers with strong above store leadership, data and analytics, and recruiting and training tools as they work to optimize the operations of their restaurants and deliver on their goals. But our work is not done. Team members are at the heart of everything we do and the lifeblood of our company. One of the things that I'm most proud of is how much longer we are seeing our team members stay with us. We believe this improvement reflects our ongoing focus on creating an environment where team members can grow and succeed. We have included retention as a key metric on our operator scorecard, and our leaders are focused on training and development to help build a more tenured team. We are seeing improved throughput across all dayparts, including peak, from our team members that have more experience and tenure. This is not surprising as we make many items fresh from scratch and there's a natural and longer learning curve to our process versus traditional fast food. Simply put, the more experience our team has the better they can execute against our operational model. Our top priority is guest satisfaction. We will continue to seek out ways to help our team members become more productive, that it won't come at the expense of guest and team member satisfaction. The evidence of that commitment can be found in our improvement in operating metrics, which we measure as a way to hold ourselves accountable for our North Star, our guests. At Shake Shack, we cook our food to order. That is a big part of why it tastes so good. I am proud that our speed of service has improved from approximately 7 minutes in 2023, to now approximately 5 minutes and 50 seconds. We are going to continue to get even better here. Our guest satisfaction scores across meal taste, cleanliness of our Shacks and likelihood to return has all improved. And finally, with our optimized deployment, we are seeing higher throughput in all dayparts versus last year. In addition to our work in operations, we're also driving improvements across our supply chain, and we are just starting to see the benefits from this. We have identified a long runway of opportunities ahead including, firstly, we are diversifying our supplier base, making sure that we have the right partners and enough partners to mitigate business risk and optimize costs. Second, we are diversifying our supplier footprint and optimizing logistics. Our supplier geography needs to grow as we grow. We're doing a lot of work to reduce time and miles from our suppliers to our distributors and to our Shacks. Lastly, we continue to invest in technologies that support our supply chain department in the critical functions as we scale. As we continue to improve our supply chain, we will also continue to prioritize product quality and innovation, as we have onboarded additional suppliers across several key categories we're making sure that we can continue to procure high-quality ingredients. The work we are doing today in our operations and supply chain is also critical to helping us address a volatile beef market as we expect to face mid-teens beef inflation in the second half of 2025. Going forward, planned savings in our supply chain and continued improvements in operations afford us the opportunity to offset a meaningful part of beef inflation without having to take outsized price and still expanding our restaurant margins. This hasn't been the case historically for Shake Shack. Another exciting part of our evolution is on the equipment side, where we are actively testing multiple solutions designed to make our Shacks easier to operate with an emphasis on improving product quality, consistency and speed. We plan to roll out the first of these solutions towards the end of the year, starting with new fry holding equipment that will allow us to serve crispier hotter fries every day. There is a lot more to come over the course of 2026 and beyond. We are also investing heavily in our technology infrastructure, particularly our kiosk and digital channels, which will continue to be critical parts of our comp sales growth. In our kiosks and our digital platforms, we are driving positive check growth from improved merchandising of our core menu. As I've stated in the past, we are focused on delivering enlightened hospitality to our guests. Big part of that long-term commitment will be a strong loyalty platform, which we are working to deliver in 2026. As we build this best-in-class loyalty platform, we are currently leveraging our app with value and frequency offers. We have seen success from these initiatives and are tracking of approximately 50% more app downloads this year than last. This is important to our long-term growth as our app guests have higher frequency and lifetime value than our nondigital guests. At the end of the day, we know what really excites our guests is our culinary innovation. Our made-to-order model affords us the ability to deliver food that other QSRs and even fast casual concepts cannot easily replicate. Culinary innovation has always been a part of our fine dining heritage and DNA, but the cadence of innovation in place now is unprecedented for us. Our Dubai Chocolate Shake was a powerful illustration. Dubai was highly incremental and drove a positive impact on all key brand measures with the largest brand perception gains on ingredient quality and innovation. Beverage is obviously an important and growing segment within our industry. We have always offered high-quality, innovative teas and lemonades alongside of our world-famous custard shakes. Our goal is to significantly grow our beverage business across soft drinks, teas and lemonades, and to simply own the shake innovation space. With inspiration drawn from global recipes, seasonal occasions, unique textural elements and flavor trends. Following on the success of our Dubai Shake, we've established a shake innovation pipeline with exciting crackable shake offerings as a plus up to our typical Shake LTO lineup. We're also continuing to fuel our pipeline of new sizes with fried pickles and onion rings and we are seeing strong attachment rate. But our crinkle cut fries continue to be the crown jewel of our sides platform. And alongside our new hot holding equipment, we are about to launch new procedures that will make them crispier, hotter and more consistently seasoned, making them the best we've ever served. We are also going to continue to innovate across burgers and sandwiches. This includes our summer barbecue menu, which we launched in mid-Q2, and our limited time French Onion Soup Burger that launched in September. We're pushing the envelope and currently have a French dip Angus steak sandwich and a baby back rib sandwich in test markets. These innovations are part of our ongoing strategy to balance premium sandwich offerings with value platform so that we can continue to drive traffic growth. Once again, our made-to-order model affords us the culinary flexibility to make things that no one else can deliver with the type of premium quality that our guests have come to expect from Shake Shack. While we're focused on developing traffic-driving LTO innovation, we're also continuing to invest in our core menu. These include fry improvements mentioned earlier, new chicken bites, which deliver a more consistent guest experience, and rolling out an improved cheese sauce for our fries that increases cheese coverage and has performed much better in test than our current offering. Our culinary innovation, as well as improvements to our core menu and operations are enabling us to serve our guests better and has prepared us to amplify our brand through new advertising and paid media. In the third quarter, we invested in paid media at scale for the first time. We shared with you last quarter that we were starting to make some investments in that capability, and I'm happy to report that we are delivering results while learning a lot. We invested media behind Dubai Chocolate Shake as well as our dollar soda and app-only promotion, and these investments are a reason why we are delivering the sales growth that we shared with you today. Our brand positioning work is now complete, and we will launch new advertising starting later this quarter. We are working with one of the most awarded creative agencies in the world to bring our brand story to life through advertising throughout 2026. Turning to development. We have significant white space to open new Shacks in the U.S. and around the world, and we are doing so at lower costs in spite of inflation. As part of our development work, we are also focused on new kitchen prototypes and equipment that could have a significant impact on improving our throughput and quality. This year, we are on track to open our largest class of company-operated Shacks. And next year, we expect to open at least 55 to 60 Shacks as we accelerate our rate of new Shack growth, and continue to build our strong pipeline of Shacks to come. Turning to our licensing business. With 23 new store openings as of Q3, we are well on our way to 35 to 40 openings this year, and we plan on opening 40 to 45 more in 2026. This business is healthy and growing. Our existing markets are performing better than expected despite global macro headwinds with strength coming from new openings in the U.S., Canada, Israel and Turkey. This year, we have announced 4 new license partnerships, most recently with Union Mak in Hawaii to bring the Shake Shack experience to the Aloha state. We are building great momentum in the license business, and there is much more to come. As we reflect on the most recent quarter and what is to come, Q3 was an example of our sales model at work. Multiple great LTOs in Dubai Chocolate Shake and summer barbecue and an in-app value message with support from advertising and media complemented by a healthy digital business that collectively drove strong traffic in a tough environment. Now going to October. Our sales trends, although positive, were not consistent with what we saw in the third quarter. Macro headwinds to the industry did intensify and we are lapping one of the most iconic LTOs in our history, Black Truffle. We continue to invest in advertising and media to support the business. However, our French Onion Burger LTO, while loved by the media, has not been as accretive to traffic or check as was the case for our LTOs in Q3. After 3 weeks of analyzing the data, we pivoted and shifted support to our in-app value platforms. Over the last week, our in-app traffic is up 85%, and our overall traffic has seen over a 400 basis point change. Looking ahead, we will need to deliver newsworthy LTOs complemented by a strong value platform and a healthy app and loyalty platform, as well as a strong delivery business. That is exactly what we expect from the balance of Q4 and our plan for 2026. We will also need to mitigate the continued traffic declines in the DC and New York Metro, which we believe to be macro in nature with outpaced growth in other regions. I am really proud of the progress the team has made on the plan that we laid out at the beginning of 2025. And the quarterly results show that we are focused on the right strategic priorities moving forward despite the macro challenges. We have a long way to go to realize our full potential, but the progress is certainly heartening, and will allow us the opportunity to continue to gain share against the challenging industry backdrop. And with that, I'll turn it to Katie for more details on the quarter. Katherine Fogertey: Thank you, Rob, and good morning, everyone. We are pleased with the results of our third quarter that marks the 19th consecutive quarter of positive same-Shack sales growth, along with strong restaurant level and adjusted EBITDA margins, and double-digit adjusted EBITDA growth. Considering the macro environment, we feel especially proud of our results that reflect solid momentum and execution across both our company-operated and licensed businesses. We grew total revenue by 15.9% year-over-year to $367.4 million, led by strong new Shack openings and growth in our comp Shack base. We grew licensing revenue by 21.1% year-over-year to approximately $14.6 million, and license sales by 15% to $218.7 million. As we opened 7 licensed Shacks in the quarter and saw broad-based strength across most of our regions. In our company-operated business, we grew Shack sales by 15.7% year-over-year to $352.8 million. We opened 13 new Shacks in the quarter, bringing the total as of the end of the third quarter to 30 openings, well on our way to opening our largest class on record, and we have plans to open 55 to 60 new Shacks in 2026. We grew average weekly sales by 2.6% year-over-year to $78,000. We delivered 4.9% positive same-Shack sales growth that represents a 390 basis point improvement from our first half 2025 run rate. This acceleration was led by improved traffic from initiatives that Rob described earlier in his remarks. We grew traffic by positive 1.3% in the quarter and all months saw positive traffic growth. We had positive comps in traffic in nearly all of our regions. However, we continue to see macro pressures in New York Metro and Washington, D.C. that are weighing on our overall results. New York Metro and D.C. represent over 1/4 of our sales, and we have been experiencing a higher degree of macro pressures in these regions than many industry peers given our footprint today. So a challenging macro backdrop here continues to have an outsized impact on our overall performance. But in spite of those pressures in a few of our markets, we still delivered nearly 5% in same-Shack sales growth with positive traffic. And that's really a testament to our strong success in other markets we're actively growing our footprint and scaling. In fact, we drove 7% to 8% comps in the South, West and the Midwest, with double-digit comps in San Francisco, Orlando, Dallas and Denver among a lot of other major metros. As our development pipeline has significant tilt away from growing in New York City and D.C., I am optimistic that over time, we can lessen the impact that 1 or 2 markets with specific pressures can have on our overall trends. And Shack menu price was up approximately 2% and blended across all channels up approximately 4%. We took approximately 2% in menu price in the quarter to help offset the cost pressures from the mid-teens percent price increase in the beef market, and rolled off last year's nearly 2% price increase in October. With this, we will exit the year with approximately 3% menu price. We drove 1.4% of positive mix, led by kiosk merchandising efforts. Items per Shack declined 1.6%, consistent with our trends last quarter. Turning to restaurant-level profitability. We generated $80.6 million of restaurant-level profit, reaching 22.8% of Shack sales, a 180 basis point improvement over last year. Overall, the strong performance by our operators and the advancement of our strategic initiatives underscores the momentum we've built and our commitment to sustainable margin expansion over time, all while delivering on better guest metrics that Rob outlined earlier. Food and paper costs were $103.5 million, or 29.3% of Shack sales, up 110 basis points versus last year. The increase was primarily driven by mid-teens inflation in premium beef, which remains the largest part of our commodity basket. Historic low supply and sustained demand are contributing to a volatility in this category, and we expect elevated beef costs to persist through year-end and into next year. In the third quarter, our blended food and paper inflation after factoring in our cost savings was in the mid-single digits range. As we shared in our shareholder letter, while we are planning for these costs to still be up mid-teens percent year-over-year in the fourth quarter, we anticipate only a low single-digit net impact on food and paper costs. This is an improvement from the levels we showed in the third quarter, and this is due to the positive impact from our ongoing supply chain strategies. We expect cost savings from our supply chain to grow and be even more impactful in 2026. Labor and related expenses were $88 million or 24.9% of Shack sales, down 310 basis points year-over-year, reflecting continued operational efficiencies, improved retention and gains in our throughput. Other operating expenses came in at $53.8 million, or 15.2% of Shack sales, up 30 basis points year-over-year. This increase was primarily driven by higher digital sales. Occupancy and related expenses were $27 million or 7.7% of Shack sales, flat year-over-year. G&A was $44.4 million, or 12.1% of total revenue, and up 24.3% year-over-year as we made incremental marketing and people investments to support our growth. Equity-based compensation was $4.4 million, up 6.4% year-over-year, with $3.9 million in G&A. Preopening costs were $4.6 million, up 26.3% year-over-year as we opened 13 new Shacks and prepare for a strong opening schedule in the fourth quarter and into next year. We have approximately 30 Shacks under construction today. We grew adjusted EBITDA by 18.2% year-over-year to $54.1 million, or 14.7% of total revenue, a 30 basis point improvement compared to last year. Depreciation and amortization expense was $27.1 million. Net income attributable to Shake Shack, Inc. was $12.5 million or $0.30 per diluted share. Adjusted pro forma net income was $15.9 million or $0.36 per fully exchanged and diluted share. Our GAAP tax rate was 35.2%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 25.1%. Our balance sheet remains strong with $357.8 million in cash and cash equivalents at the end of the quarter. This is up approximately $47 million year-over-year, and $21 million sequentially. We grew operating cash flow by 50% year-over-year to $63 million. We invested $39 million in CapEx to support the strong opening calendar, and are on track to deliver another approximate 10% reduction in our build cost this year. I'm going to now provide our guidance for the fourth quarter and the implications for our fiscal 2025 guidance. Our outlook assumes no major changes to the macro or geopolitical environment. Additionally, our fiscal 2025 includes a 53rd week. Due to the calendar impact from the 53rd week, the Christmas holiday closure falls outside of our comp measurement period this year, resulting in an extra sales day in our fourth quarter and full year comps. Our fourth quarter 2025 guidance, we expect system-wide unit openings of 27 to 37, with 15 to 20 company-operated and 12 to 17 licensed. Total revenue of $406 million to $412 million with same-Shack sales up low single digits year-over-year, and license revenue of $15.4 million to $15.7 million. Restaurant level profit margin of 23.3% to 23.8%. For the full year 2025, we expect total revenue of approximately $1.45 billion, up approximately 16% year-over-year, with same-Shack sales up low single digits year-over-year and license revenue of $54.1 million to $54.5 million. Restaurant level profit margin of approximately 22.7% to 23%, G&A to be approximately 12.3% to 12.5% of total revenue, equity-based compensation expense of $20 million, preopening costs of $19 million, net income of $50 million to $60 million, and adjusted EBITDA of $210 million to $215 million, reflecting the impact from the macro headwinds and increased marketing investment. Please see our shareholder letter for the full details on our fiscal 2025 guidance. Additionally, as a housekeeping note, next year, we are moving to a guidance framework that better conforms with general industry practice, and we look forward to sharing this with you when we provide our fiscal 2026 outlook. Thank you for your time. And with that, I'll turn it back to Rob. Robert Lynch: Thank you, Katie. I want to thank our team again for their hard work and passion for Shake Shack, which is the engine behind our strong third quarter performance and our ability to achieve our long-term goals. Thank you to everyone on the call today and for your interest in our company. And with that, operator, please open up the call for questions. Operator: [Operator Instructions] Our first question is from Christine Cho with Goldman Sachs. Hyun Jin Cho: Congrats on the strong quarter, and I appreciate all the color. I'd like to better understand your supply chain initiatives as a key driver of the margin expansion going forward. So first, how do you size the opportunity in the midterm? And two, how do you really plan to track and respond to consumer feedback regarding some of these product modifications that may arise due to your supplier changes, and to ensure kind of consistent quality across regions and stores? Robert Lynch: Katie, maybe I'll answer the second question first and then you come back to the expectations. Christine, so there will not be any spec or product modifications. We are committed to delivering the same quality that we have delivered. And it has made Shake Shack's reputation for culinary excellence what it is. So when we're looking at bringing on new suppliers, we go through a very thorough testing and validation process to make sure they can deliver the specs that meet our standards and that the quality is consistent or better than what we have used in the past. And that's across every component of the supply chain, whether it's the beef that we're using, the buns that we're using, our custard that goes to our shakes, our fries, everything has to meet our standards or else we will not add that supply to our system. Katherine Fogertey: Christine. So how we would think about the savings potential here? We started to roll out some more material cost savings in the fourth quarter. We're expecting that to build into next year. We've talked about -- as you saw in the third quarter, we had a pretty big step up in our food and paper costs as a percentage of sales. That was largely led by the mid-teens inflation in the beef market. And what we're seeing now with being able to mitigate some of that cost pressure through negotiations with our current suppliers and some additional supply chain strategies is that next quarter we're anticipating that food and paper as a percentage of our sales will moderate to more normalized levels with this low single-digit inflation. This is really powerful for us, and we expect that these benefits will grow into next year, especially considering historically, when we've had big swings in the beef market, our main lever has been to pull price to help offset that and protect margins. Now we just have a much bigger aperture of tools that we can use to help navigate these waters. And part of it is for -- to help optimize our cost structure. But also, as Rob talked about, we need to add more suppliers. We need to have multiple sources of supply on our critical items. And we need to make sure that we're really pushing ourselves to make sure that we have the right suppliers. And so I believe all of that work is underway here. It's really exciting to see that also translate into an ability to help navigate what is likely to be a challenging market for the foreseeable future on beef and still have net overall pretty muted inflation in our business. Hyun Jin Cho: And I think we've heard about kind of that broad deceleration in the macro intra-quarter and also softening trends into October. Could you kind of provide us with some thoughts on how you think about that setup in the fourth quarter? I know you pointed to D.C., New York travel pressures. But have you seen any pressures on the spending of the younger consumers under age 35 et cetera, that you would call out? Robert Lynch: Yes. I mean I would just say that I think it's pretty broadly understood that there's definitely some pressure on the lower income consumers. And I think there's also been some commentary about the unemployment rates of younger populations as well, which obviously impacts our industry. But we have taken those challenges and incorporated them into our strategy. I called out in the commentary that we launched French Onion LTO at the beginning of October. And we weren't delivering the incremental growth that we had anticipated in what we were seeing in Q3. And so we did a lot of analytics to understand what was happening and what the challenges were. And everyone knows, and it's everyone's talking about it, there's obviously a push to value in this industry. And so we leverage something that worked really well for us in Q3. Over the last week, 1.5 weeks, we went back to our in-app value platform and shifted our media, and shifted our awareness building to that platform. And we have seen dramatic change in the trajectory of our business over that time. We've seen over 80% growth in our app traffic -- traffic sales. So it's been really transformational for us. And that's a big part of our plan moving forward. We need to have a balanced approach. We are the premium player in the burger market and we will continue to offer a great culinary innovation that plays in that premium space, but we need to have a balanced approach where we also have a value offering that can be very attractive to our guests, but also be accretive to us both on top and bottom line. And by leveraging our -- which represents a relatively small portion of our business, the traffic that we're driving and the check that we have to give up to drive that traffic is much less cannibalistic of our holistic business. So it's really driving the performance that we're seeing right now in Q4 and what we anticipate will help us deliver strong results again in Q4. Operator: Our next question is from Michael Tamas with Oppenheimer & Company. Michael Tamas: Actually, Rob, I wanted to follow up on that last point a little bit. You talked about how French Onion Burger didn't perform up to what you thought it was going to. So maybe what surprised you relative to what you thought was going to happen? And how does that change the way that maybe you're testing, or that innovation calendar? Because the message has been pretty clear that you're excited about the innovation calendar going forward. And so is there anything about what you're doing that might need to change to drive that innovation going forward? Robert Lynch: Yes. Great question. What I would say is that French Onion was another flavored burger. And it's not that there's not room for flavored burgers in our innovation calendar. But it's -- that is kind of our standard based form of innovation. Moving forward, including another big idea that we have coming this quarter, it's much more of innovation that we haven't done before. Ideas that bring a new story, not just a new flavor to the ticket. And so we're focused on trying to bring things we've never done before, complemented by some of our historic LTOs that have been our biggest winners. So Truffle was a huge success for us. You're going to see Truffle again. For the Korean menu, a huge success for us, you're going to see that again. And we'll continue to innovate on our burgers. But right now, we're really focused on -- if we're going to be advertising and marketing a premium price point, it needs to be something that can generate, earn media, be newsworthy outside of just the launch a couple of days, a couple of articles written about it. We want our guests talking about our premium innovation similar to Dubai Shake, things that really create virality around the ideas that we're bringing. So that's the premium part. The other innovation that we're delivering, I just mentioned, is on the -- in our digital platforms, particularly in our app. Like we have never seen the kind of growth that we're seeing right now in our app. We both in the form of downloads as well as actual sales. And it's driving traffic growth on our business. And so that is going to be a focal point for us. We're going to continue to double down there. We just launched our new platform, which is our 1, 3, 5 platform $1 drinks, $3 fries and $5 shakes. And I think that this is a transformational thing for Shake Shack. It shows -- and we really built this and we talked about it, is how we show empathy to our guests during some challenging times. And I think that's resonated and that's going to -- that balance is going to be the holistic innovative way we approach the marketplace. It's not just about the premium offerings. It's about having a balanced approach, particularly in this time where we need to make sure that we're delivering value to our guests. Michael Tamas: And it's sort of like you knew my next question was going to be about value. Do you think that the 1, 3, 5 on the drinks, the fries and the shakes, do you think that's powerful enough for the consumer to recognize the value while you're still running premium burgers and sandwiches? Or do you think you need to sort of pivot a little bit on more of those like center-of-the-plate entree items to really give the consumer a little bit more value? Robert Lynch: Well, I can tell you, I have 10 days of data that would suggest it's extremely impactful. So I'm really excited about what we think this can do for us through the balance of the quarter and heading into 2026. And I can't wait to share those results with you next year when we're reporting on Q4. Operator: Our next question is from Brian Vaccaro with Raymond James. Brian Vaccaro: I wanted to ask about operations and sort of the guest experience and really appreciate the color you provided on average ticket times now below 6 minutes. I was wondering if you could elaborate just on what you're seeing in terms of other guest satisfaction metrics? Obviously, speed is very important, but it does sound like you're seeing improvements in the experience, quality, maybe taste metrics, that sort of thing. Are there any other metrics worth highlighting? Robert Lynch: Brian, I had a call with Stephanie last night at like 9:00 after she wrapped up. She's in Atlanta with our entire senior operations leadership team. We built this Atlanta center to bring our teams from all over the United States and be able to collaborate and plan and train and develop our teams. And it's amazing everybody is using this space right out of the gate, our operators, our development teams. But she had our operations team there over the last couple of days, and they are doing their quarterly business planning. And they are building plans to close the year really strong and they're also building plans to make sure that we have a pipeline of talent to be able to open up 60 Shacks next year. So our operations have really never been at this level. And every time I think we can't get better, we get better. And it's as much about the mindset and the culture as it is about the specific components of the plan. We -- our team, our operators right now are not talking about the macros. They're not talking about the challenges. They're talking about how we can serve our guests better. They're talking about how we can get faster. They're talking about how we can get better at deploying our labor where it needs to be. They're talking about how now we can extend hours to better service our guests in the Shacks where it makes sense. So -- and they're doing that with excitement and pride. And winning begets winning. And these guys have knocked it out of the park for the last year and have gotten better every month. And we've had some turnover and brought in some external leaders that have really brought great perspective to kind of the middle to higher end of our operations team. But it's also the folks who have been here for a long time and have been a part of Shake Shack for a long time. Sometimes when you bring in change and you try to transform something in 12 months there's resistance. And my discussion with Stephanie last night is like, look, everybody is on board. Everybody is full go. They're not talking about how tough it is. They're talking about how great we're doing. And that gives me the confidence that we're going to be able to continue to improve on our speed, accuracy, particularly in the delivery channels is a big core focus for us. We want to make sure that we're getting those orders right because those guests aren't in our dining rooms. They're not able to bring up something if it's not right. So we're focused on accuracy. We're focused on speed. And something that Katie talked about, and I talked a little bit about in the comments, we are significantly increasing the tenure and retention of our team members. You would think as we hold our teams more accountable, that, that might create an environment where people don't want to be a part of it. It's just the opposite. They're seeing success. They're seeing opportunities for them to advance their careers and they're staying longer. And that tenure builds experience, which makes them more productive and makes us a better operating units. So all of those things are moving in the right direction. On the guest sat -- yes, I mean get satisfaction across restaurant cleanliness, friendliness, all of the things that you measure have all moved in the right direction despite less labor hours. So we're just getting better. We're not ripping out labor to just drive savings. We're building models that optimize our labor pool, and that's delivering better guest satisfaction. Brian Vaccaro: All right. That's very helpful. And just a follow-up, if I could. Just Katie, a question on the G&A guidance. I think if we did our math right, it implies maybe a $10 million increase in the quarterly spend versus what we saw in Q3. And I understand you've added a lot of new talent to the organization. But could you just elaborate on what's driving the uptick in the fourth quarter? Katherine Fogertey: Yes. Yes. So as Rob talked about, we are making some meaningful investments here in marketing and media to drive the business. We're really excited about the stuff that we have lined up. We started kind of marketing this 1, 3, 5 platform that you talked about on the value side and seeing extremely strong results on the back of it. And we also have some exciting steps planned for later this year. These investments that we're making are all really geared at driving traffic, driving sales which, in turn, we expect to drive profitability at the restaurant level and beyond. So we're really excited about that. For those who haven't followed us as closely last quarter, we did talk about kind of embarking on this new strategy, new for us, kind of common place for the industry. But new for us of investing into paid media to better expand and grow the awareness and our message, and our ability to drive traffic at our restaurants. The results that we showed in the third quarter with 130 basis points of positive traffic growth and some really strong comps, especially relative to a challenged industry give us the confidence that this is indeed the model that we should be doing, and we're excited to make these investments here today. Operator: Our next question is from Sharon Zackfia with William Blair. Sharon Zackfia: I wanted to delve in a little bit more on that improvement you've seen in speed. And 5 minutes and 50 seconds is obviously a big improvement, but I'm curious what that bell curve looks like when you look across the Shacks, and what you would view like an ideal speed over time for the company to get to? Robert Lynch: That's a great question. And I think when you think about speed of service, averages can be very -- even though that's what we shared. Averages can be a little bit vague. I mean, what we are focused on right now is mitigating the tickets over 7 minutes. We want to make sure that we are not executing in a way that frustrates our guests. People don't get real upset about 5 minutes and 30 seconds versus 5 minutes and 50 seconds. They get upset when it's 8 minutes to get their food. So our plan to continue to drive down the average ticket time is to minimize our exceedingly long tickets. And that usually happens in rush when we've got super busy Shacks. Obviously, we do high-volume hours. And so some of the ways we're going to mitigate that is through some of the equipment technology that we talked about. One of the things that holds us up is we're making fries to order. And that takes a lot of time. And it's not like we can't hold fries. It's what everybody does. It will make them hotter, and it will give us better access to those fries. And so like fry holding is a simple way for us to make sure that, that doesn't become a bottleneck while still delivering the same or better quality. So there's equipment solutions that we can impart. There's also labor deployment. We used to -- part of what we're doing and how we're driving labor savings is we used to have like standard deployment schedules where when we opened, we always had in every Shack 5 or 6 people show up. We don't need 5 or 6 people every minute of opening. We're staggering the approach. We're bringing people in when we need them. What that does is it frees up some labor for us to deploy during the peak hours. So as we move underutilized labor off the shoulders and into the peaks, we're going to be able to get faster and be better. So there's equipment solutions, there's labor deployment optimization that are all going to drive improvement. But I think if we're in that 5-minute zone, 5 to 6 minutes like we're making our customers happy. They know it takes longer. We're cooking to order but we can't have the 8 minutes to 10 minute orders. That's where -- that's the danger zone. Sharon Zackfia: I also wanted to ask a follow-up on the menu innovation. Clearly, I think a lot of it has been on the premium end, and it sounds like French dip and ribs might be there as well. Is the idea that you can keep kind of your base price at a very affordable kind of hurdle for the consumer and allow them to self-select into these kind of higher price points and drive check that way? I'm just curious how you're thinking about kind of balancing premium versus value? Robert Lynch: I mean, you absolutely nailed it. We have pricing power. I want to make it really clear that if there is some significant inflation, we could execute price increases to mitigate that inflation. We are approaching pricing in a very disciplined way and challenging ourselves to not take pricing, especially in this environment. So we will continue to utilize pricing in the most productive way. But we want to hold -- we want to keep our core menu prices as low as we can possibly keep them. And the way to do that, is to get more efficient in our supply chain, more efficient in our operations, and to bring this innovation that allows us to have people, like you said, self-select into more premium price points and drive check growth. But I will tell you, we're also being very judicious on how we price those premium innovations. We have a big innovations coming here in the next couple of weeks that we're really excited about. And we are being very aggressive on the price point for what we're offering. And we're doing that because right now in this environment is the time to take share. Right now, when there's a challenging environment, that's the time when great companies get better. And we are focused on taking share. We are focused on making investments. We're not -- excuses and results are negatively correlated. Like we are not blaming macros. They are out there. We'll acknowledge them. It'd be naive not to do so. But we're building plans to address them. And we are focused on delivering value at every price point, whether it's our premium innovation, our core menu or the value offerings that we're putting into our app. Operator: Our next question is from Jake Bartlett with Truist Securities. Jake Bartlett: My first is on COGS and the impact of, obviously, beef inflation. You expect it to go into -- continue into '26. My question is that you've had some nice offsets this year, even aside from the supply chain savings, but you've seen some lower costs on the other items. So I guess if you can kind of give us a base case or roughly what we should and what you're thinking about for overall inflation -- food cost inflation in '26, including the items outside of beef, that would be helpful? And I have a follow-up. Katherine Fogertey: Jake. So how we're thinking about next year, we have this long-term guidance that we're going to be able to continue to expand our restaurant margins that's consistent with our 3-year outlook. We've reiterated that today, calling for 50 basis points a year in restaurant margin expansion. How we get there, and as we've talked about, we're expecting a lot of that next year to come from supply chain and through kind of the natural leverage from growing the business. We are embarking on kind of an accelerating path of supply chain savings. And also, as you've called out, there are some items that are moving more favorable as well in the commodity basket. We are planning for beef prices to still be a pressure though, next year. And we are working with our suppliers to help navigate through that environment, still meeting our objectives and our guidance for continued margin expansion next year without having to lean on a significant amount of price to offset the beef markets. I will share all of the details on how 2026 will -- how we're expecting that to shape up when we give our annual guidance in January. Jake Bartlett: Great. And then I had another question about the labor savings that you've been realizing. You're going to be lapping some right about now the labor deployment and then in January that the new scorecard. So the question is how much more you have kind of in the tank for labor efficiency? I know the message is you're kind of switching much more to the supply chain to drive the margin expansion. But is there any opportunity still to drive efficiencies with labor into '26 and beyond? Robert Lynch: So one of the big opportunity, untapped opportunities is on equipment. So we have built essentially an equipment innovation center in Atlanta. And our teams are doing work that we've never done before at Shake Shack to bring a standardized kitchen model that leverages equipment, that is really all about making our teams more efficient through increasing the ease to execute our model and delivering higher-quality hotter items faster. And we just had our global team come into Atlanta last week, and we shared some of these ideas with them, and they were blown away. And their remark was all the kitchen innovation used to come from our licensees internationally because they were going out and doing things that Shake Shack wasn't necessarily exploring. And now we are bringing the ideas to our restaurants, but also bringing them to our license partners so that they can operate their kitchens more efficiently, drive higher margins and build more Shacks at a more rapid rate globally. So equipment is a big untapped opportunity for us to be able to continue to drive operational efficiency and increase our speed. Operator: Our next question is from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Just wanted to build on the marketing discussion. I know you mentioned building a foundation of a brand marketing model. I'm just wondering what new do you think we'll see into '26? I mean it sounds like a ramping on the paid media, which just began and wondering how that will tie in with the new loyalty program being rolled out in '26? How you think the interplay on those will drive incremental traffic? And then I had one follow-up. Robert Lynch: Yes. I mean our product innovation supported -- our product innovation and our value platforms, supported by media are what we are focused on delivering new guests, creating awareness and traffic, right? Our loyalty platform should increase frequency. And right now, what we are doing with 1, 3, 5 and the amount of adoption and downloads. And the -- all of that increased application user base is going to transfer directly into our loyalty platform. So we will launch our loyalty with a built-in user base and we will be able to leverage that loyalty platform to drive frequency with our most valuable guests. So both of those work in a symbiotic way together. We're going to advertise and bring people in with exciting new innovation and value platforms. They come in into our -- over the next 6 to 9 months as we build out our loyalty platform. They transition into the loyalty platform, and we leverage that to drive frequency. And that's the model that we're going to employ next year and moving forward. Jeffrey Bernstein: Understood. It does seem like there's confidence around the comp trajectory and initiatives there. And obviously, the unit growth that is accelerating in terms of openings and the restaurant margin, Katie, you just mentioned, kind of margin expansion. I guess it's the G&A that's therefore getting a lot of the attention and hopefully, that gets a good return. But because of the significant uptick in the full year spend this year, I know you said paid media starting in the fourth quarter. Should we therefore assume that, that uptick is sustained in 2026, presumably more like the fourth quarter of '25? Is it a good run rate to assume for that? How should we think about the -- at least directionally, that G&A spend, which seems to be the only area that's maybe working counter to all the other things that have that positive trajectory? Robert Lynch: Yes. No, it's a great question. I mean, we will obviously be providing guidance on 2026 in January. So I'm not going to necessarily speak to what we're forecasting in sales. But what I can tell you is the G&A is the fuel that's going to drive the comps. And obviously, we are going to make investments that we believe we're going to get returns from. And so this, as I said earlier, this environment, where we're seeing a lot of competitors be challenged and lose traffic. This is our opportunity. This is our opportunity to take share. This is our opportunity to gain customers at a disproportionate rate. So we are all in. We are -- we believe ourselves to be a hyper growth company, right? And now we have the operations excellence to have 100% confidence that when we're sending new guests, or infrequent guests who may have had a bad experience in the past, back to our Shacks, they are going to have a balanced options in terms of value and premium. They're going to have the highest quality that we've ever delivered, and it's all going to be served fast and accurately. So that creates lifetime value. So yes, I mean, we're investing G&A because that's the fuel. And over time, we should be able to scale that investment. We should be able to grow our revenue faster than we grow the rate at which we invest marketing and G&A, and that's going to create margin expansion. So this is a first in time we've invested at scale on paid media. And so yes, right now, it isn't scaled. It isn't necessarily at the point where we're able to decrease our G&A as a function of revenue, but that's the plan. And so it's either that or we kind of batten down the hatches. And we're not prepared to like issue a dividend anytime soon. This is a growth company. We're going to invest in growth. We believe that we have the right model in place. Operator: Our next question is from Andy Barish with Jefferies. Andrew Barish: Rob, just a question kind of from your background in QSR and sort of taking a higher-level approach to what's been sort of an unrelenting discounting promotional environment, both below you guys as well as above. How do you kind of see that playing out in '26? And is that informing any of your decisions on driving the Shake Shack business? Or do you guys think you can do what you can do if you execute on the plans you've given us today? Robert Lynch: Yes. I mean we're in the thick of it right now. I mean, everybody is pushing value. You've got $5 meals. You've got $11 casual dining meals where you sit down and get waited on, like there's value of plenty. And we are executing our model in the thick of that and delivering, I think, outpaced results. We're not optimized yet. We are going to continue to learn. We're going to continue to get better. Some of our things we're doing have better results than other things we're doing. But we are very well prepared to deliver a balanced growth engine into 2026. And we -- like I said, are continuing to identify what works, what doesn't, what price points make sense, how to execute things, which target audiences to go after? All of that is feeding our plan moving forward. And I'll just tell you, it never feels good to get on a call and say, hey, we ran something for 3 weeks, and it didn't work, but -- as well as we wanted it to. But what I want everyone to take away from that is that we have an agile business model. We are going to evaluate everything in real time with data and analytics. And when we see an opportunity to improve our results, we can shift into something that we believe will give us higher returns and deliver better outcomes. So we have our plan already in place for 2026. We know what we're launching. We know when we're launching it, we know how we're doing it. We'll continue to assess the environment, the competitive environment as well as the results that we see and optimize on an ongoing basis. Operator: We have reached the end of our question-and-answer session. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.