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Operator: Greetings. Welcome to Kingstone Companies' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Joining us on today's call will be President and Chief Executive Officer, Meryl Golden; and Chief Financial Officer, Randy Patten. On behalf of the company, I would like to note that this conference call may include forward-looking statements, which involve known and unknown risks and uncertainties and other factors that may cause actual results to differ materially from projected results. Forward-looking statements speak only as of the date on which they are made, and Kingstone undertakes no obligation to update the information discussed. For more information, please refer to section entitled Risk Factors in Part 1 Item 1A of the company's latest Form 10-K. Additionally, today's remarks may include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to GAAP figures, please see the tables in the latest earnings release available on the company's website at www.kingstonecompanies.com. With that, it is my pleasure to turn the call over to Meryl Golden. Meryl? Meryl Golden: Thank you. Good morning, everyone, and thanks for joining us. We delivered one of the strongest quarters in our history with net income of $10.9 million, diluted earnings per share of $0.74, a GAAP combined ratio of 72.7% and an annualized return on equity of 43%. Direct written premium grew 14% and net investment income increased 52%. This was our second most profitable quarter in history and our eighth consecutive quarter of profitability, underscoring the consistency and enduring competitive advantages we have created. I want to emphasize what sets Kingstone apart. First, our select product does a great job matching rate to risk and with risk selection, which reduces claim frequency over time. Second, our producer relationships support high retention and consistent new business flow. Third, our efficient operations and low expense structure enhance margin durability; and last, our great team, all of whom act with an ownership mentality. The hard market conditions in our downstate New York footprint have not changed materially. While we've seen some competitors broaden their underwriting appetite, our overall volume remains strong. New business this quarter has moderated compared to last year's surge when we benefited from the market exits of Adirondack and Mountain Valley. But we've seen a month-over-month increase in new business since June, and that has continued into the fourth quarter. We've also begun writing policies under our renewal rights agreement with GUARD, which will meaningfully add to new business policy counts going forward. Growth of 14% for the quarter was driven primarily by an average premium increase of 13% and improved retention. Looking ahead, we expect retention, which represents over 80% of our premium base to continue trending higher as rate changes transition to high single digits from the high teens pace of the past 3 years. Policies in force increased 4.2% year-over-year and 1.4% sequentially, underscoring the stability and loyalty of our agent and customer base. Net earned premium growth continues to be a powerful tailwind, exceeding 40% for the third consecutive quarter. The increase is primarily due to our reduced quota share, which allows us to retain a greater share of premiums and underwriting profits. Additionally, the surge in new business written in the second half of last year continues to earn in, further fueling the growth in earned premiums. On underwriting, our underlying loss ratio was 44.1%, an increase of 4.9 percentage points versus the prior year quarter, driven by higher claim severity. Claim frequency, especially for non-weather water and fire, our largest perils, declined versus last year, a trend we have shared previously. We believe this is driven by a mix shift to more preferred risk in our Select products. The Select homeowners program now represents 54% of policies in force. And on an inception-to-date basis, Select homeowners claim frequency is 31% lower than our legacy product. During the quarter, large losses were modestly higher than the prior year's unusually favorable experience, but remained consistent with the prior 3 years otherwise. Year-to-date, our underlying loss ratio is up only 0.1 percentage point from the prior year. The variability in large losses is random and does not indicate a change in trend. Catastrophe losses contributed 0.2 percentage points to the loss ratio compared with 1.7 percentage points in the prior year quarter. While catastrophe activity was light, our strong results aren't solely driven by favorable weather. With a normalized third quarter catastrophe load, our combined ratio would have been in the low 80s. Our state expansion initiative is progressing, and we intend to present Kingstone's multiyear road map to you in the first half of next year. With 3 quarters behind us, we've updated our 2025 guidance to reflect our outstanding performance. We are raising guidance for our net combined ratio, EPS and ROE, while reaffirming direct-written premium growth for all states to range between 12% and 17%. With anticipated net earned premiums of $187 million, we expect a GAAP net combined ratio between 78% and 82%, basic earnings per share between $2.30 and $2.70, diluted earnings per share between $2.20 and $2.60 and return on equity between 35% and 39%. Relative to our prior guidance and on the same net earned premium base, we have improved our GAAP combined ratio range by 100 basis points at the midpoint, raised both basic and diluted EPS ranges by 9% and 12%, respectively, and increased our ROE target range by roughly 300 basis points at the midpoint. This increased guidance reflects strong underwriting performance, sustained investment income growth and lower expenses, while maintaining our disciplined posture on pricing and exposure management. With regard to fiscal '26 guidance, our baseline assumes normal seasonality and catastrophe activity. In both 2024 and 2025, we have very mild winters and low cat losses overall. Weather is unpredictable, and we assumed more reversion to the mean for our '26 guidance. We will refine our outlook as the year unfolds and moving forward, we'll announce subsequent years guidance in March, along with fourth quarter results. Now I'll turn the call over to Randy Patten, our Chief Financial Officer, who joined Kingstone in late August. Randy brings 3 decades of insurance experience, most recently serving as Chief Accounting Officer and Treasurer at Next Insurance. Randy? Randy Patten: Thank you, Meryl, and good morning again, everyone. Q3 was our most profitable third quarter on record and our eighth consecutive quarter of profitability. We generated net income of $10.9 million, diluted earnings per share of $0.74, a 72.7% combined ratio and an annualized return on equity of 43%. Year-to-date, net income was $26 million, more than double the prior year. Performance was driven by strong net earned premium growth as our reduced quota share in the second half of 2024 new business surge continued to earn in, combined with very low catastrophe losses, favorable frequency trends and lower expenses aided by an adjustment to the sliding scale ceding commissions. Our net investment income for the quarter jumped 52% to $2.5 million, up from $1.7 million last year. Year-to-date, we've seen a 39% increase, reaching $6.8 million. The momentum is due to robust cash generation from operations, which has enabled us to grow our portfolio and benefit from higher fixed income yields. We capitalized on attractive new money yields of 5.2% in the third quarter. While we remain conservative in our investment strategy, we are actively seeking opportunities to enhance our portfolio's yield and duration. As of September 30, 2025, our fixed income yield is 4.03% with an effective duration of 4.4 years, up from 3.39% and 3.7 years at September 30, 2024, an increase of 64 basis points and 0.7 years, respectively. During the quarter, we recognized an increase of $1.4 million in sliding scale contingent ceding commissions under our quota share treaty, reflecting low catastrophe losses, which contribute to the 4.6 percentage point decrease in the quarter's expense ratio. 2025 marks the first period in some time in which a significant portion of the quota share ceding commission is on a sliding scale basis. While sliding scale ceding commission for the attritional loss ratios look quarterly, sliding scale ceding commission for the catastrophe loss ratio cannot be reasonably estimated until after the peak of the hurricane season, so it was recognized this quarter. As a result of this adjustment, our year-to-date expense ratio is down 1.1 percentage points to 30.8% versus the same period in 2024, and we anticipate ending the year with an expense ratio for the full year 2025 lower than the prior year. I will conclude my portion of the call today discussing our capital position. Our capital position remains strong. We have no debt at our holding company, KINS, and shareholders' equity exceeded $107 million, an increase of 80% year-over-year. Year-to-date return on equity is 39.8%, an increase of 3 percentage points from the same period last year. Given this foundation and our outlook, we reinstated our quarterly dividend during the quarter and have ample capital to fund disciplined growth. With that, I'll open it up for questions. Operator? Operator: [Operator Instructions] Our first question is from Bob Farnam with Janney Montgomery Scott. Robert Farnam: So on your New York admitted basis, the Select product now is 54% of the policies in force. Will all accounts eventually move to Select, or some just renew on the legacy product indefinitely? Meryl Golden: Yes. So we are maintaining our legacy book because it's profitable. So any policy written in legacy will stay there. But clearly, when it gets to be small enough, we'll probably convert it to Select, but we don't want our customers to experience that dislocation because it's profitable. So we don't have any plan to do that in the near term. Robert Farnam: Okay. But all new business, is that put on the Select platform? Meryl Golden: Yes, all new business has been written in Select since the beginning of 2022. Robert Farnam: Right. Okay. So when you're getting into the new states on an excess and surplus lines basis, I'm assuming this is going to be a new product. So -- because it's E&S rather than admitted. So how is this product going to differ from Select? And how are you developing it? Meryl Golden: Yes. So we are certainly going to benefit from the Select product and the experience we've had. But depending on the states we enter, there may be new perils or new rating variables that we'll need to account for. And we're currently deep in the development of that product as we speak. And we've been working with an outside actuarial consulting firm, the same firm that helped us develop the Select product for New York. So again, we're deep into it and feel really good about how we'll -- what the outcome will be. Robert Farnam: And has the new E&S carrier been finally been approved yet? Meryl Golden: So we are filing -- we have filed for a new company in Connecticut. It has not yet been approved. And we will be writing on an E&S basis as in Kingstone Insurance Company as well in certain states. Robert Farnam: Okay, okay. A little change in direction. So I know it's only been 2 months, but the AmGUARD book, you started writing at the beginning of September. So how has that performed thus far relative to expectations? Not performed in terms of profitability, but in terms of having policies move over to Kingstone? Meryl Golden: Yes. So it's early on. We started writing business effective September 1st. But so far, it's right within our expectations. So I had indicated that we write between $25 million and $35 million of business over a 3-year period. And we're right on track. We're writing about a little bit less than $1 million a month so far. And what I can tell you is we're very happy with the mix that we're seeing. It's very similar to what we've achieved in Select. However, we're writing a bit more business in the boroughs, and that is giving us some geographic diversification. So we're happy with that. So far, everything is right on track. Robert Farnam: Okay. And one of the bigger questions I always get is just the competition in downstate New York. Now you said that some companies are expanding their target areas. How -- can you give us any more color as to how competitors are going into that environment? Meryl Golden: Yes. So we compete with mostly MGAs in New York. And last year at this time when there was this surge of business from Adirondack Mountain Valley, a lot of companies stopped writing business. And throughout this year, they've just been opening up and writing more classes of business than they've written in the past, but it's not stopping us. Our growth is very healthy. And as I mentioned, every month since June, we've seen a sequential increase in our new business. So again, the way they're expanding is, it's not always obvious to us, but our conversion rate remains really high. So we feel good about where we're at competitively. Operator: Our next question is from Gabriel McClure with private investor. Gabriel McClure: Congrats on a great quarter. And also, please thank whoever puts a PDF in place for us, that's very helpful. Meryl Golden: Great. Gabriel McClure: Yes. I had one question for you. I think maybe a couple of months ago at the Sidoti conference or somewhere, you mentioned that these states you're looking at expanding into, you kind of described it as there being more demand for our policies that we'd offer on a homeowners policy that we'd offer on an E&S basis than there was supply. And so just my question is a couple of months ago, is the market still that way? Has it changed? Whatever you could offer up? Meryl Golden: Sure. So the homeowners market, particularly catastrophe-exposed homeowners nationally is in a bit of a crisis and because companies are not making money. And so we do have an opportunity to expand geographically and be opportunistic so that we can have -- earn the same return that we are in New York. So nothing is really -- in a quarter, markets don't change much. So we have not seen a material change in the market and believe the opportunity still exists for us to expand successfully. Operator: There are no further questions at this time. I would like to turn the conference back over to Meryl for closing remarks. Meryl Golden: Excellent. Thank you for joining today. As we wrap up, I'd like to reemphasize what continues to set Kingstone apart, our Select product, our producer relationships, our low expense structure and our great team. This quarter's results reinforce the durability of our earnings power. We will continue to execute with discipline, advance our measured expansion road map and allocate capital prudently to support profitable growth. We appreciate your continued support and remain focused on delivering long-term shareholder value. Have a great day. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good morning, ladies and gentlemen, and welcome to the conference call to discuss Holley's third quarter 2025 earnings results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Holley. And as a reminder, this call is being recorded and will be made available for future playback. I would now like to introduce your host for today's call, Anthony Rozmus with Investor Relations. Please go ahead. Anthony Rozmus: Good morning, and welcome to Holley's Third Quarter 2025 Earnings Conference Call. On the call with me today are President and Chief Executive Officer, Matthew Stevenson; and Chief Financial Officer, Jesse Weaver. This webcast and presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the third quarter and discuss guidance for the full year 2025. At the conclusion of the prepared remarks, we will open the call up for questions. With that, I'll turn the call over to our CEO, Matthew Stevenson. Matthew Stevenson: Thank you, Anthony, and good morning to everyone joining us live on the call today. As we look back on the third quarter of 2025, I'm pleased to share that the positive momentum we have been building for more than 2 years continues to gain strength. This quarter marks another clear step forward in our transformation journey, a reflection of disciplined execution, sharp focus and a resilient team that keeps delivering results in a constantly changing consumer and macroeconomic environment. For the third consecutive quarter, our core business delivered strong growth. Just as a quick reminder, when I say core business, I'm referring to our results, excluding the operations we divested and the product lines we phased out as part of last year's strategic rationalization. This quarter, we made meaningful progress across the company with core growth in every division. It's especially encouraging to see continued momentum in both our direct-to-consumer and business-to-business channels, reinforcing the strength and balance of our omnichannel strategy. As we've said before, our omnichannel approach remains central to our core strategy as the leading consumer enthusiast platform in the automotive performance aftermarket. We're committed to serving customers wherever they choose to engage, whether that's through e-tailers, distributors, wholesalers, third-party marketplaces, installers, national retailers or our own e-commerce platform. The foundation we've built through our strategic framework continues to deliver from product innovation and digital capability to operational excellence and commercial capabilities. With these fundamentals in place, our focus remains on sustaining momentum and executing against our 3-year plan. We're also staying proactive in managing external factors like tariffs and supply chain costs. While these remain dynamic, our diversified sourcing strategies and pricing discipline have positioned us well to manage impacts and protect margins. Overall, it was an excellent quarter, one that reflects the hard work, focus and determination driving our organization forward. I couldn't be prouder of our team and the meaningful progress we continue to make together. Now let's turn to Slide 5. I'll walk you through a few of this quarter's standout highlights. We delivered strong results this quarter, achieving 6.4% growth in our core business. This performance reflects genuine volume-driven expansion, which continues to build momentum quarter-over-quarter. Year-to-date, our 5% core growth is composed of a 4% increase in volume and a modest 1% pricing tailwind. This performance showcases the strength of our business model designed to drive consistent growth and the deep commitment of our enthusiast consumer base for whom this is more than a hobby. It's a passion and it's a way of life. Importantly, our growth was broad-based across all channels, divisions and within 70 brands. That breadth speaks to the success of our transformation initiatives across the company and the strong execution behind our go-to-market strategy. In our B2B channel, we saw a 7.3% growth as we deepen engagement with key partners. Through strong joint planning, continued data integration and expanded sales enablement tools, we've enhanced collaboration and delivered more value to our channel partners. It's a great example of how our customer-first approach is driving strong relationships and measurable performance gains across the business. Our strategic initiatives also contributed meaningfully this quarter, generating about $26 million of revenue. Roughly $11.3 million came from new product innovation and portfolio management, including strategic pricing and channel margin optimization. These results underscore how well our commercial and operational teams are working together to drive sustainable, profitable growth. Even in what's typically our slowest quarter of the year, we generated $5.5 million of free cash flow, a $7.6 million improvement from last year. That improvement came from higher margin and disciplined capital management across the organization. We ended the quarter with net debt-to-EBITDA leverage at 3.9x, ahead of our year-end target of 4x. Now this is the first time we've been below 4x leverage since 2022, a clear marker in our transformation and a reflection of our stronger financial position. And after the quarter ended, we prepaid another $10 million in debt, bringing total prepayments to $100 million since September 2023. That's an important milestone for us and reinforces our commitment to strengthening the balance sheet, positioning us for continued long-term value creation. Let's move over to Slide 6 and take a look at some of the key quantitative highlights from the quarter. Net sales for Q3 was $138.4 million, which translated to core business growth of 6.4%. That marks our third consecutive quarter of year-over-year growth in the core business, and it underscores our outperformance in the market and the share gains we are seeing in key categories across the company. Gross margins came in at 43.2%, up more than 400 basis points from last year. That improvement reflects strong pricing discipline and operational improvements across the company while keeping our focus on quality and serving the customer. Adjusted EBITDA margin rose to 19.6%, an increase of over 300 basis points year-over-year. This strong performance highlights the operating leverage within the business and the benefits of maintaining cost discipline and execution focus, resulting in a significant $7.6 million improvement in free cash flow compared to the same quarter last year. On the right-hand side of the slide, you can see a few additional business highlights. Product innovation continues to be central to our philosophy, and this past quarter delivered a range of successful launches across our divisions, including digital dashes from our Holley EFI product suite, Big Claw heavy-duty brake kits from Baer, at-home BMW performance tuning solutions from Dinan and [ Club Sport ] racing seats from Simpson. We'll see the impact of these and many other recent product introductions when we review our strategic initiatives tracker in the upcoming slides. Operationally, we also continue to move the needle. In-stock rates for our top 2,500 products improved 2.2% year-over-year, giving customers better access to what they need. Efficiency was up more than $3 million and past due orders were down 20.7%. Those are strong signs of progress and a testament to the impactful additions we made to our operational leadership team across supply chain, manufacturing and quality. On the consumer side, we continue to see strong engagement from our enthusiast base. Direct-to-consumer sales were up 4.2% year-over-year, supported by a sharper promotional execution and stronger digital performance. The third quarter also represents the peak of our event season. And this year, engagement across our enthusiast community was strong. Attendance at our events was on track to break records, but a rainy weekend during our flagship LS Fest East did impact that momentum, leaving overall attendance roughly flat for our event season this year. Even so, the impact of these events extends well beyond in-person attendance. A key part of our event strategy is leveraging these experiences to grow and engage our digital audience. With more than 8 million followers growing steadily this quarter at 2% year-over-year, our brands continue to reach and inspire enthusiasts across platforms, keeping our community energized during marquee weekends like LS Fest. On Slide 7, we can see some standout examples of the core business growth driving our performance across divisions in Q3. Our Domestic Muscle division roared ahead with 6.2% year-over-year growth, powered by an unwavering enthusiast passion for our legendary brands. Multiple brands delivered standout high-single and double-digit gains across categories, reinforcing the vitality of this portfolio. The Modern Truck and Off-Road division accelerated with 5.2% growth, led by exceptional performance from Baer, Flowmaster and Range, each posting double-digit gains. DiabloSport also delivered robust high single-digit growth, further strengthening the division's overall performance. Meanwhile, our Euro & Import division continued its impressive trajectory, climbing 16.6%. Dinan and APR sustained remarkable growth throughout the year, driving strong segment performance. We've also shifted AEM to our Domestic Muscle portfolio, better aligning its fuel delivery and monitoring focus with that vertical. Going forward, the Euro & Import division will include only Dinan and APR, sharpening focus and alignment. In our safety division, distributors began ramping up ahead of the Snell 2025 certification changeover, which officially began on October 1. Simpson Motorsport, Motorcycle and Stilo all posted solid gains, signaling renewed momentum across the category. This acceleration follows the typical precertification cycle slowdown earlier in the year, and it positions the division for continued strength through the balance of 2025 and beyond. Together, these results highlight broad-based growth across our divisions, setting the stage for continued progress. Let's move next to our strategic initiative tracker to see how these efforts are fueling our long-term growth. But before that, just a quick reminder on Slide 8, where we revisit the 8 areas forming the foundation of our strategic framework centered around 3 core principles. First, fueling our teammates, making Holley great place to work, where team members are empowered, see clear paths for growth and thrive in an engaging and inclusive culture. Second, supercharging our customer relationships, delivering the premier consumer journey in our industry, strengthening B2B partnerships through shared growth and leading with innovation that defines performance excellence. And finally, accelerating profitable growth, expanding into new markets, pursuing transformational M&A and driving continuous operational improvement to enable reinvestment and long-term value creation. Together, these principles continue to guide our strategic initiatives and keep our teams aligned around Holley's long-term vision. Now on Slide 9, I'm pleased to share our third quarter highlights as captured in the updated strategic initiative tracker. Under our Trailblazer and trusted partner pillar focused on B2B growth, we delivered another strong quarter. Enhanced product data adoption at key retailers drove $1.7 million in new sales, bringing year-to-date gains to $83 million. Our smaller account segment also remained strong, growing $2.4 million year-over-year in Q3. The largest driver of growth in the quarter was continued share gains with our largest e-tailer and wholesale partners. Altogether, B2B initiatives generated $13.5 million in revenue this quarter. Turning to our premier consumer journey pillar. E-commerce and direct-to-consumer channels continue to perform well. Third-party marketplaces grew 28% year-to-date to $12.9 million, with our new Amazon program driving over 50% growth in the chemical product sales. Enthusiast events also fueled record merchandise sales and overall e-commerce sales were up 5% year-to-date. In total, this pillar contributed nearly $2 million year-over-year. New product launches across divisions, paired with continuous sales strength in tuning and exhaust for their new innovations delivered $2.5 million in year-over-year growth and set the stage for strong momentum heading into Q4. Within portfolio management, strategic pricing actions and distributor margin enhancements contributed an additional $7.7 million in sales during the quarter. Combined, this pillar contributed approximately $11.3 million in revenue during Q3. Our global expansion in new markets pillar also continues to gain traction. Mexico shipments reached 240,000 in September, our second straight month above 200,000, tracking toward a $2.5 million annual run rate. Powersports delivered record revenue of nearly $300,000 in September and $1.1 million year-to-date, keeping pace with a $1.8 million target. Together, these efforts generated $1.1 million in revenue for Q3. Under our Fund the Growth pillar, cost and efficiency initiatives yielded $6.2 million in total savings this quarter. In-stock rates for our top 2,500 products are near our 93% goal with significant reductions in past dues with decreased overall inventory levels. Finally, our Great Place to Work initiatives continue to build engagement and productivity. Employee engagement rose 4%, and we remain on track to achieve our revenue per employee goals by year-end. Altogether, execution of our strategic framework delivered about $27.8 million in revenue from key initiatives and $6.2 million in cost savings this quarter, clear proof of focus, discipline and consistent execution. Holley's third quarter showcased strong broad-based growth, margin expansion and disciplined execution across our business. We've strengthened our financial position, bringing net debt-to-EBITDA leverage below 4x for the first time since 2022, a major milestone in our transformation journey. These results reflect the hard work and focus of our team and position us well for continued momentum. With that, I'll turn it over to Jesse to walk through the financial highlights and refined guidance for the remainder of the year. After Jesse's remarks, we'll return for Q&A. Jesse? Jesse Weaver: Thank you, Matt, and good morning, everyone. I'd like to start by providing an update on our progress against our financial priorities, then discuss our third quarter '25 financial results before discussing our guidance updates. Moving to Slide 11. Turning to our financial priorities. Our focus remains on strengthening the fundamentals of the business by restoring historical profitability and optimizing working capital. We built on our progress with operating efficiency by generating $3.2 million in incremental savings during the quarter, achieved through ongoing improvements in logistics and the recovery process. These efforts have already pushed total '25 savings to $5 million with additional initiatives still underway. As of the end of the quarter, we remain within our target range and expect further savings through year-end as the team continues to execute on previously outlined initiatives moving steadily toward the midpoint of our annual goal. Turning to working capital. I'd like to take some time to discuss our inventory performance in the third quarter. Year-to-date, inventory reduction moderated from $9 million in Q2 to $5 million in Q3. This shift reflects operating decisions made during the quarter aimed at enhancing long-term visibility, control and operational efficiency, specifically around the consignment inventory and bonded warehouse. While these actions temporarily increased inventory on hand, they are foundational to our improvements in operations and delivering on our commitments to our customers. While these operational changes mean we are not currently on pace to reach the low end of the $10 million reduction target for the full year of '25, they are setting the stage for sustainable improvements in working capital management. We remain focused on refining our SIOP process to improve planning and forecasting, optimizing safety stock levels, all of which are expected to drive further gains in '26 as these initiatives mature. And on Slide 12, we'll walk through our key financial metrics for the third quarter. Net sales for the third quarter grew 3.2% to $138.4 million versus $134 million in the same period a year ago. It's important to note that this is the first time we achieved net sales growth on a GAAP reported basis in 2 years. On a core business basis, we achieved net sales growth of 6.4%, which is the third quarter in a row of core business growth. The increase was primarily related to a combination of improved pricing realization of $4.6 million and volume mix increase of 3.7. Core business growth once again came across all divisions as well as both channels and continues to be the result of our commercial transformation efforts with B2B and D2C. Gross profit was $59.8 million in the quarter, a growth of 14.4% compared to $52.3 million in the same period last year. Gross margin for the quarter was 43.2%, an increase of 422 basis points versus 39% in the prior year. This improvement was through a combination of pricing flow-through as well as operational initiatives highlighted earlier in the presentation across facilities efficiencies, reduced excess inventory write-downs and improvements in quality through reduced warranty claims. SG&A, including R&D expense for the third quarter was $38.2 million versus $34.7 million in the same period for the prior year. Primary drivers in SG&A are related to lapping reduced payroll expense in '24 from the furlough activity, reduced '24 incentive comp accrual and increased investments in '25 related stocks and tariff mitigation support. Net loss for the third quarter was negative $800,000, a $5.5 million improvement versus a net loss of $6.3 million in the third quarter of '24. Adjusted net income in the third quarter was $3.3 million, a $3.8 million improvement versus an adjusted net loss of $500,000 in the same period of last year. Adjusted EBITDA for the third quarter was $27.1 million versus $22.1 million in the prior year and driven by a combination of higher sales and improved gross margin. Adjusted EBITDA margin was 19.6%, a 309 basis point improvement versus 16.5% in the third quarter of 2024. On Slide 13, the third quarter was another strong quarter of free cash flow generation of $5.5 million compared to negative $2.1 million in free cash flow for the same quarter a year ago. This performance was driven by improved EBITDA, slightly offset by working capital investments, as previously noted in the presentation. And year-to-date, we have generated $30.3 million in free cash flow. On Slide 14, we reduced our covenant net leverage at the end of the third quarter to 3.9x versus 4.2x a quarter ago. In the third quarter, we prepaid an additional $15 million of debt, which helped drive our leverage down under 4x target we set for the end of '25. This marks the first time we are under 4x leverage in 12 quarters. In addition, at the end of October, we prepaid another $10 million of debt. And since September of '23, we have prepaid $100 million of debt, exercising our commitment to strengthening our balance sheet and enhancing our financial flexibility. And just as a reminder, our leverage remains well under the 5x covenant that is only in place when the revolver is drawn at the end of the quarter. There is no outstanding balance on our revolver, and we concluded the quarter with $51 million in cash with no expectation of drawing on the revolver in the near-term. As we look ahead to guidance on Slide 15, we've been closely monitoring the broader economic environment throughout the year. Conditions remain fluid as tariff developments continue to evolve and consumer trends adjust. While factors such as higher unemployment, persistent inflation and tariff uncertainty have influenced sentiment as reflected in the University of Michigan Consumer Index, U.S. households continue to navigate these challenges with measured caution. But even within this complex backdrop, Holley continues to deliver strong results. Our disciplined execution, focus on operational excellence and commitment to strategic priorities have driven growth that exceeded expectations through the first 9 months of '25. This performance highlights the resilience of our business model and our ability to perform in a dynamic environment. Given our results year-to-date and momentum we've built across our core operations, we are raising our full year guidance for revenue at the bottom end of our range on adjusted EBITDA. This update reflects both our confidence in the team's ability to execute and our disciplined approach to navigating an evolving macro environment. For '25 revenue, we now expect a range of $590 million to $605 million, which implies 3.8% growth at the midpoint over the core business base of roughly $575 million in '24. Additionally, for adjusted EBITDA, we now expect a range of $120 million to $127 million as we raised the bottom end of our guidance from $116 million. We look forward to closing the year on a strong note and roll this momentum into 2026. We remain focused on strengthening our balance sheet, enhancing free cash flow generation and maintaining disciplined capital allocation to position ourselves for long-term growth for years to come. This concludes our prepared remarks. We would now like to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Christian Carlino with JPMorgan. Christian Carlino: You had talked about taking high single-digit pricing, but price realization was only around 3% in the quarter. So could you talk about why that delta exists? What was same SKU inflation? And then is it simply a function of channel mix and more B2B sales versus D2C or is there some trade down or favoring smaller projects over larger ones? Jesse Weaver: Yes. Good question, Christian. I think it's -- from what we can tell, it's a combination of those things. Obviously, continued strong growth on B2B as it relates to the ASP, you're going to have a bit of a lower price realization on a comparable basis as well as we've got several of our customers who, from a contractual perspective, the pricing doesn't flow through immediately. It comes in later periods. And then there's just -- as it relates to some of the contractual prices on some of the other items that we do for our existing distribution partners that are not playing in there but it really is a combination of them. As it relates to some of the trade down piece, Christian, we're not necessarily seeing that as much. It's just the other items. Christian Carlino: Got it. That's helpful. And you're not tracking to above your gross margin and EBITDA margin targets for the year. So how should we think about the structural margin profile of the business? I guess, 2 parts there. One, is there anything unsustainable in the base right now? And then the flip side is that you've achieved this despite a subdued sales environment. So as sales growth returns to more normalized levels, is there room to expand margins further or will you generally look to reinvest upside back into the business? Jesse Weaver: On the first question, no structural change. I think, obviously, the pricing is certainly helping here and particularly at the lower volumes. But to your second question, yes, I mean, I think Matt and I continue to hold to -- while we're 2 years into the transformation, there's still things to be looked at as it relates to driving growth, particularly operations. And so we don't want to overcommit here in terms of just all of the growth flowing through. But obviously, we do keep an eye towards just driving continued margin acceleration, and our commitment is above 20%, but I wouldn't expect it to all flow through until we get to a much cleaner glide path, particularly on operations. Operator: Our next question comes from the line of Phillip Blee with William Blair. Phillip Blee: The question. The midpoint of your guidance implies a fairly big step down in organic sales growth in the fourth quarter it seems. So is that more just a function of conservatism in the current environment or is that driven by something more specific that you've seen quarter-to-date that warrants a bit more caution here? Jesse Weaver: Good question, Phillip. And it's a combination of the conservatism, like the current environment is a bit murky, and I think we're all reading the news every day. And so, Matt and I are really big on making sure that we don't overpromise on this. Plus, this time last year, we're lapping a marketing calendar event that we decided not to reengage in this year just from a margin profile perspective. So that's impacting the top line a bit. So those 2 things combined really account for the majority of it. Phillip Blee: Okay, great. And then given what you know about who your average customer is, how do you think about the potential benefits from the One Big Beautiful Bill between no tax on tips and overtime and the potential for a bigger tax refund season next year? Do you think that, that could have maybe a more meaningful impact on your business and underlying demand? Matthew Stevenson: Phillip, it's Matt. What I think the current environment shows our consumers are resilient, right? This is not just a hobby for them, it's a lifestyle. And as we've seen in the past, when there's times they get more discretionary income or tax refunds, that does generate increases in demand. So we'll see how that plays out over the next 6 months or so. Operator: Our next question comes from the line of Joe Altobello with Raymond James. Joseph Altobello: I guess, Matt, first question for you. You've talked about a lot of the changes at Holley over the last 2-plus years here, certainly making a lot of progress. As we start to think about 2026, where are your priorities for next year? Matthew Stevenson: Joe, I think if you reflect back on our strategic initiatives that we showcase each quarter on the progress there, that is part of our 3-year plan, and that's what we had the teams focused on. So there's a number of key growth areas there. Also, we still think it's pretty early relative to the operational roadmap we have for continued improvements there. So between those strategic initiatives around growth as well as operational improvements, that's where the team is focused. And again, still early innings in a number of areas that we continue to see opportunity. Joseph Altobello: Okay. Maybe a follow-up for Jesse. You mentioned inventories were a little heavier at least than I was looking for. Can you sort of explain a little bit better what drove that? Jesse Weaver: Yes, Joe. So in the quarter, there are a couple of things. One, operationally, we felt like there was a much stronger case for us to actually service our customers better by taking some product that we've been selling on consignment and bringing it into our system. It brings a lot more visibility into where the product is, how much of it we have on hand so we can make products and deliver on time to our customers. So that was about a $2 million to $3 million headwind in and of itself. And then in addition, we also decided to get out of the bonded warehouse, which was a strategy that was used to help mitigate tariffs in the beginning. It worked for that purpose. But as tariffs came down, it also was causing operational challenges. So as we started to bring in those products out of the bonded warehouse or directly from port and the port in particular, became less congested, you see a lot of inventory that came in, in Q3 that more than likely would have shown up in Q2. So it felt like a big change in Q3, but it's just more of some of the things that should have come in, in Q2 as well. Operator: Our next question comes from the line of Brian McNamara with Canaccord Genuity. Brian McNamara: Congrats on the strong results, I might add. So I'm curious, you guys did a 3.3% in Q1, 3.9% in Q2, a 6.4% in Q3, markedly getting better each quarter. Matt, I think like about a year ago, you kind of called your shot and you said we're going to return to growth in Q1. So kudos on that. I'm just curious how this year has played out relative to your expectations internally? Matthew Stevenson: Brian, thanks for the question. I think, Brian, when we look at -- when we set out at the end of last year, our plan for '25, I'd say the team is doing a great job executing. We have -- as we just talked about with Joe, our strategic initiative tracker. That's what the team is locked in on every day and continue to deliver on the critical few initiatives that are underneath that to either drive growth or operational improvement. So I would generally say it's as planned. Brian McNamara: And then with all the work you guys have done behind the scenes, do you think you have all the building blocks in place for this growth to be what I would, dare I call, sustainable from here on out, obviously, acknowledging that from quarter-to-quarter, there'll be unique challenges. Matthew Stevenson: Yes. I mean we spent a lot of time on foundational elements, whether it was on our direct-to-consumer business, continue to enhance relationships with our distributors. And these are the foundational building blocks for the long term. Brian, as you know, we just -- currently, SEMA is going on right now, and I had the opportunity to meet with a number of our great distribution partners and the journey we've been on within the last 2 years and the enhanced collaboration and the ways we're finding to grow together. And so again, all foundational elements that are there for the long term. Brian McNamara: And just last quick one, on SEMA, actually. It feels like you guys have refined your strategy with that event each year since you've been there, Matt. I'm curious how does SEMA today compare to maybe your first go at it in 2023 and obviously, acknowledging there was a high energy there last year given the election results. Matthew Stevenson: Yes. I'd say the energy this year, Brian, was -- it felt even greater. I mean our booth was just absolutely packed. Customer meetings were tremendous. And to your point, like how we've progressed, this is my third SEMA with the company. I would say we continue to execute a plan at the event. From last year, really focusing on our key 4 verticals and somewhat eye-opening to the market the amount of fantastic brands and products we have in our portfolio and showcasing them within our 4 verticals and then just continue to expand that execution, that strategy, engaging with major customers, having set meetings and times to connect and winning product awards and really showcasing the great innovations we have. The team does a great job really refining our strategy and taking that time to engage with customers to drive business. Operator: [Operator Instructions] Our next question comes from the line of Bret Jordan with Jefferies. Bret Jordan: Could you talk about the B2B and sort of what the white space you see there? I mean I think you talked about sort of doing more with some of the big parts retailers, traditional mechanical guys, but sort of good growth there, how do you see the run rate? Matthew Stevenson: Yes, Bret, on a strategic initiative tracker, we call out a number of things there. We think there's still a lot of runway in our existing relationships, of course, with whether it's e-tailers, wholesale distributors, but some of the areas you referenced, national retailers is something we're continuing to engage in strongly. We feel that, that channel is accretive in our omnichannel strategy that in-store impulse purchase being able to provide enthusiast products that they want, being able to just go in and pick up something from one of our brands. We also see continued opportunity in export markets, and you see some of the expansion that we're doing in Mexico and other areas. And we continue to work with OEMs on programs for their aftermarket, not OE production, but their aftermarket performance teams and providing them solutions for enthusiasts. So there are a number of ways we're continuing to drive the B2B growth for the long term. Bret Jordan: And I guess, you called out -- I think in the past, you've talked about the events generally being self-funding but you mentioned that LS Fest East was probably lower traffic. Were the events in the third quarter generally neutral to earnings or was there a headwind in the period? Matthew Stevenson: No, no, Bret. They're positive. I think just -- we get a lot of questions always on attendance and how they're trending, right? And as I mentioned on the prepared remarks, the engagement was great this year but of course, there's always weather, at our largest event, that can impact things. And when you have 40,000-plus people when you get a rainy Friday afternoon and a rainy Friday or Saturday morning, it affects things but no, the profitability was in line as expected. Operator: Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Joseph Feldman: I wanted to ask, go back to the guidance, I think somebody had asked this as well, but something similar. What would happen for you guys or have to happen to get to the high-end of the guide versus the low-end? Like is there a subtle difference or is it you would really need a couple of things to really go right to get to the high-end versus the low-end? Jesse Weaver: Yes. I mean, I think, Joe, to get to the high end, we're coming up on our holidays event and just having a really strong merchandising calendar and participation by our B2B partners with great sellout would really allow us to get to the high-end. I think on the other end, it's obviously that not hitting in conjunction with distribution partners potentially getting even more conservative on what their forecast is for the coming year because that does impact their in stocks that they hold. So there could be some destocking there in that low-end scenario. Joseph Feldman: Got it. Okay. That's helpful. And then I wanted to follow up. I think you guys -- you mentioned working with the B2B and having better sharing of data, and I think data product adoption is how you framed it in the prepared remarks. Can you just share any more color there as what's going on with that, how that's been accepted and what -- how the B2B partners are actually using that data? And it seems like it's working to help, but I'm just curious just to get a little more understanding of it. Matthew Stevenson: Yes, Joe, it's Matt. Happy to answer that. This has been a company-wide initiative for well over a year now. And when we say data, it's product data. So of course, in today's e-commerce world, whether it's going direct to consumer or one of our wholesale partners is selling it to an installer, what have you, it's about the product information they're able to display on -- through their merchandising efforts online. And so that is a very robust set of information that is required. It's photos, it's videos. Of course, it's dimensions in and out of the box, it's features advantage benefits, it's comparisons, compatible with this replaces that kind of thing. And it was something that previously, there wasn't an approach in place to be really proactive on offering the best-in-class product data. And I'd say that our teams have done a tremendous job increasing the quality of our data. We grade the data of every category, of every brand, and we continuously improve that weekly as the product teams continue to enhance the information. So ultimately, it makes the job of our B2B customers easier to merchandise the products to their customers. Operator: Our next question comes from the line of Mike Baker with D.A. Davidson. Michael Baker: Can I ask about just the overall spending environment in the consumer? It sounds like there's great energy at SEMA. So you took share clearly. Any idea or any metrics on the overall market? Is your growth just share gains or have you started to see any kind of recovery in spending in the consumer and all that kind of stuff? Jesse Weaver: It's a great question, Michael. I think as it relates to just the general industry, we -- it's a very difficult industry to get real-time information on. But in our discussions with distribution partners, I feel like out-the-door sales have been pretty strong throughout the year, obviously, on our products, but just consistently across their broader portfolio, they've seen a much better result for this year than they had expected coming into the year but obviously, we've continued to take share. And I think right now, in our guidance, we're assuming these trends continue. Michael Baker: So to that point, and that's my follow-up. When you say the trends continue, are you referring to your share gains or industry trends? And I guess what I'm getting at is for a lot of consumer type of names, we saw really strong sales results through July and August and then something seems to have changed in terms of spending September, October and even into November, for a lot of different macro government reasons. So I'm wondering if you can comment on that and any trend that you're seeing throughout the quarter and early into this year or this quarter? Matthew Stevenson: Yes, Mike, it's Matt. Generally speaking, how our industry has played out this year, the first quarter was pretty soft. And then the overall industry started to pick up through the balance of the year. And I think to Jesse's point, through that whole period, we've been taking share. Now I just sat down with no less than a dozen of our key partners over 2 days. And generally speaking, they're seeing the out-the-door trends be very consistent in demand. And so there are no indications coming from our key partners or, of course, from ourselves that anything has really changed at this point and to which it does in the future, who knows. Operator: Our final question this morning comes from the line of Mike Albanese with The Benchmark Company. Michael Albanese: Nice quarter. When I look at, I guess, what you've taken for price, where your volumes are and your ability to expand margins, it really seems like you've done a nice job at mitigating tariffs and managing supply chain. And I'm just wondering if you could provide some color on what you're seeing across the competitive landscape. And I know it's tough -- Jesse, you mentioned it's tough to get kind of incremental data. And we're talking about a lot of different brands and SKUs here, but I'm wondering essentially how much of the share gain is a result of the kind of current macro dynamics from, I guess, a cost standpoint and whether or not really your competitive positioning has improved as a result of that? Matthew Stevenson: Yes, Mike, I think you're meaning competitive position relative to pricing? Michael Albanese: Correct. Matthew Stevenson: Yes. Really, it's a category by category. There's no broad-based statement that covers it. Our job is to ensure we remain competitive, not only in our value proposition for the consumer, but to also make sure our distributors have healthy margins to be able to market and merchandise our products. But generally speaking, our share gains are -- whether you say outhustling, outperforming, increasing our capabilities, all the above throughout the year on both our D2C and B2B. And as I mentioned, some of the things, whether it's our product data or enhancing our relationships and the way we work with our key partners, those all have been big contributors to our share gains. Operator: Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Stevenson for any final comments. Matthew Stevenson: Okay. Thank you, Melissa. Slide 17 underscores the compelling investment story behind Holley Performance brands. This market, fueled by automotive enthusiasts goes far beyond a past time. It's a passion and it's a lifestyle for our customers. With an addressable market in the U.S. approaching $40 billion, Holley stands at the forefront, backed by a portfolio of iconic brands with a rich legacy of innovation. As we wrap up on today's discussion, I'd like to reflect on what this quarter signifies for Holley. The third quarter showcased broad-based strength across our operations with solid growth in every division and sustained momentum in both B2B and direct-to-consumer channels. Our disciplined execution, operational enhancements and commitment to innovation continue to deliver tangible results from margin expansion and efficiency gains to deeper engagement with our enthusiast community. We also achieved a key financial milestone this quarter, reducing net leverage below 4x for the first time since 2022 and generating positive free cash flow during what is typically a slower seasonal period. These achievements highlight the impact of our transformation and the dedication of our teams to building a stronger and more resilient Holley. Through our strategic framework, we remain focused on initiatives that matter most, advancing digital capabilities, driving product innovation, strengthening partnerships and laying the foundation for sustainable, profitable growth. Looking ahead, our outlook remains consistent. We are committed to delivering steady organic top line growth, maintaining gross margins above 40% and achieving adjusted EBITDA margins of 20%. Our goal is to generate sustainable free cash flow and continue creating value through strategic acquisitions that complement our portfolio. The combination of a vibrant automotive enthusiast marketplace and Holley's legendary brand family positions us as a unique investment opportunity in a passionate segment. In closing, I want to express my gratitude to our team members for their dedication and execution, to our consumers for their unwavering passion for performance and to our distribution partners, many of whom have stood with us for decades. Together, we're building a stronger, more innovative Holley for the future. I want to thank you for your attendance on our call today and wish you all a great morning. Thank you. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Fulgent Genetics Q3 2025 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Lauren Sloane, Investor Relations. Please go ahead, Lauren. Lauren Sloane: Good morning, and welcome to Fulgent's Third Quarter 2025 Financial Results Conference Call. On the call are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer. The company's press release discussing the financial results is available on the Investor Relations section of the company's website, ir.fulgentgenetics.com. A replay of this call will be available shortly after the call concludes on the Investor Relations section of the company's website. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views, expectations and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different than what is described in or implied by these forward-looking statements. Please review the more detailed discussion relating to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in the forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2024, and subsequently filed reports, which are available on the company's Investor Relations website. Management's prepared remarks, including discussion of profit, loss, margin, earnings and earnings per share, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but these measures should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the third quarter 2025 for more information, including the description of how the company calculates non-GAAP income loss, non-GAAP earnings loss per share, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating profit and loss and margin and adjusted EBITDA and the reconciliation of these financial measures to income and loss, earnings loss per share and operating margin, the most directly comparable GAAP financial measures. With that, I'd now like to turn it over to Ming. Please go ahead. Ming Hsieh: Thank you, Lauren. Good morning, and thank you for joining our call today. I will start with some comments on the third quarter of 2025 and our 2 business lines. Then Brandon will review our product and go-to-market updates for our laboratory services business. And Paul will conclude with the financials and guidance before we take your questions. We are pleased with our third quarter results and sustained momentum in the business, as we move through the year. Our results are testament to the progress we have made on our strategic objectives in both our laboratory services and therapeutic development business. We have shown both sequential and year-over-year growth and efficiency in laboratory services with our investment in AI and digital pathology solutions, while making strong pipeline progress on our clinical candidates as a result of momentum in our business. We are raising our outlook for the remainder of 2025. Our therapeutic development pipeline is on track and progressing well. Our first clinical candidate, FID-007, is progressing through a Phase II clinical trial in combination with Cetuximab in patients with recurrent or metastatic head and neck squamous cell carcinoma with 39 patients that have been randomized and 36 have received at least 1 dose of study treatment as of cutoff date of September 25, 2025. The preliminary data was presented at the ESMO Congress on October 20, 2025. FID-007 combined with Cetuximab demonstrated meaningful anticancer efficacy at both dose level for the first-line and second-line treatment of R/M HNSCC of 35 patients then evaluable for the efficacy at the time this preliminary data was reviewed. The objective response rate, or ORR for the 75 milligram per square meter arm and 125 milligram per square meter arm, were 44% and 59%, respectively, and 51% overall when both arms are combined. The median progression survival for the 75-milligram arm and 125-milligram arm were 9.2 months and 7.8 months, respectively. The overall PFS was 7.8 months compared to the historical 2.3 months of the standard of care therapies. FID-007 also exhibit manageable safety and tolerability profile, particularly no Grade 3 and above peripheral neuropathy has been reported to date. As of today, we have a total of 43 patients enrolled and expect to complete patient enrollment by end of 2025 with a full data readout in 2026. Our second candidate, FID-022, began a Phase I trial, and the first dose level has been successfully completed, while the second dose level will commence this month. FID-022 is a nanoencapsulated SN-38 for the treatment of solid tumors, including potentially colon, pancreatic, ovarian and bile duct cancers. I'm encouraged by the continued progress of our clinical pipelines and the potential for both FID-007 and FID-022. These drug candidates address heavily pretreated patients with very few options left. And I hope we were able to provide alternatives to better their lives. Overall, I'm pleased with the progress we have made this year in both our business areas. Our pharma R&D efforts are progressing faster, better and more cost effective than planned. Additionally, our laboratory services is greatly benefited from our investment in AI technology, which makes our services more efficient and more precise as Brandon will discuss shortly. I would like to thank our employees, partners and stakeholders for your hard work and your loyalty in the great quarter of our business. We look forward to further progress in the remainder of 2025. I will now turn over the call over to Brandon Perthuis, our Chief Commercial Officer, to talk more about our laboratory services business. Brandon? Brandon Perthuis: Thanks, Ming. It was again another excellent quarter, delivering nearly $84 million in laboratory services revenue. Breaking down our results by business area, Precision Diagnostics was up $3.4 million or 7.3% sequentially and was up $7.2 million or 16.4% year-over-year. Biopharma was up $1 million or 15.4% sequentially and was up $3.3 million or 83.4% year-over-year. Anatomic Pathology was down $2.1 million or 7.6% sequentially due to timing of collections, however, was up $1.8 million or 7.2% year-over-year. In the last quarter, we introduced an enhanced version of our whole genome sequencing that incorporates RNA analysis to improve diagnostic yield. This new offering has sparked strong interest from both existing and prospective clients. Building on that momentum, we're pleased to announce the launch of our ultrarapid whole genome sequencing service. This solution provides a preliminary report within 48 hours, followed by a comprehensive report within 5 days. The primary focus for this service is the neonatal intensive care unit, or the NICU, where studies have shown that whole genome sequencing can significantly improve patient outcomes and support more efficient health care delivery. The data suggests that implementing rapid genome sequencing as a first-line test in the NICU will change medical management for up to 87% of babies and reduce health care costs up to $15,000 per child. Our second exciting announcement centers around expansion of our Beacon carrier screening service. We've consistently pushed the boundaries to remain at the forefront of genetic screening, having been the first U.S. laboratory to offer a panel with over 700 genes, still the largest of its kind to the best of our knowledge. Now we're taking another major step forward with the launch of Beacon K, which expands our panel to 1,000 genes. This enhancement will further strengthen our ability to detect rare genetic conditions. Beacon has earned a strong reputation as a leading carrier screening solution. Powered by our proprietary platform and advanced informatics, Beacon consistently delivers high analytical detection rates, accurate differentiation of pseudogenes and reliable copy number variant calls. Additionally, our turnaround time remains exceptional, averaging just 8.8 days, roughly twice as fast as many other laboratories. We have mentioned on previous calls the significant investment we have made in digital pathology. This has allowed us to digitize our slides instead of the traditional method of microscopy. There are several advantages to digital pathology, but perhaps the most powerful one is our ability to utilize and develop AI to help make our pathologists faster and better. Until very recently, we were using a third-party image management system, or IMS, but it had limitations. However, we're excited to announce we have developed and launched our own proprietary IMS, which we are calling [ EZOPath ]. EZOPath was created to address the growing demand for custom features necessitated by our high daily case throughput to support all lines of business and to enable the deployment and integration of AI tools to assist our pathologists in their diagnosis. EZOPath provides a case management solution with possible integrations with laboratory information systems, or LISs, provides data storage for digital pathology images and metadata, enables collaboration by pathologists through sharing of annotations and comments and integrates best-in-class AI tools developed in-house and integrated from third parties. As an enterprise IMS, it enables rapid investigation of digital pathology slides and output from AI modules for expedited reporting. We are committed to creating the highest quality and most efficient pathology lab possible, and this is a big step in that direction. With a strengthened product portfolio, outstanding laboratory performance and an expanded sales team, we believe we are well positioned for continued growth, and we're pleased to once again raise our annual guidance. I want to sincerely thank our entire team for their hard work and dedication, and we look forward to finishing 2025 on a strong note. With that, I'll turn the call over to our Chief Financial Officer, Paul Kim. Paul? Paul Kim: Thank you, Brandon. Revenue in the third quarter of 2025 totaled $84.1 million compared to $81.8 million in the second quarter of 2025. Since revenue from COVID-19 testing is expected to continue to be negligible in 2025, we will no longer provide separate metrics on what we have previously referred to as core revenue, which we defined as total revenue, excluding COVID-19 testing. Separately, we have begun to see minimal revenue in our therapeutic development business from our acquisition of AMP in July, primarily related to IP licensing royalties. Gross margin on a non-GAAP basis was 44.3% and on a GAAP basis was 42.2%. Gross margins have improved year-over-year due to streamlined operations and enhanced efficiency as a result of our investments in scaling and centralizing lab operations. Now turning to operating expenses. Non-GAAP operating expenses totaled $40.7 million compared to $43.9 million in the previous quarter. Total GAAP operating expenses were $50.9 million for the third quarter, which decreased when compared to $54.1 million in the prior quarter. The decrease in operating expenses was partially driven by a reduction in advertising and marketing expenses and a favorable reduction in bad debt expense, reflecting improved collections from Precision Diagnostics. We remain committed to R&D spending to support both our laboratory testing services and our clinical studies and the sales and marketing spending to expand the sales team. Non-GAAP operating margin improved sequentially to minus 4.2%. Our GAAP loss in the current quarter was $6.6 million, an improvement from the prior quarter's GAAP loss of $19 million, which included a onetime noncash charge related to a $9.9 million impairment of a prior investment. Adjusted EBITDA for the third quarter was approximately $0.7 million compared to a loss of $3 million in Q2 2025. On a non-GAAP basis and excluding equity-based compensation expense, intangible asset amortization and acquisition-related costs, income for the quarter was approximately $4.5 million or $0.14 per share based on 31.3 million weighted average diluted shares outstanding. In the third quarter, we did not repurchase any shares under our stock repurchase program. Since the inception of the stock repurchase program in March 2022, a total of approximately $110.4 million has been spent with approximately $139.6 million remaining available for future repurchase of our common stock. Turning to the balance sheet. We ended the third quarter with approximately $787.7 million in cash, cash equivalents, restricted cash and marketable securities. The increase in cash from the previous quarter is driven by strong operating cash flows, partially offset by capital expenditures. There were no stock or income tax credits purchased during the third quarter. However, in October, we used $67.9 million for the purchase of income tax credits. As I mentioned earlier, given the minimal impact of COVID-19 testing revenue on our overall performance, we have transitioned to guiding total revenue. Reflecting on our current business momentum, we are revising our full year 2025 revenue outlook upward to $325 million for 2025, representing a growth of 15% year-over-year. We continue to expect non-GAAP gross margins for the full year to exceed 40%, continuing the strong momentum we've experienced in recent quarters. We expect non-GAAP operating margins to improve from minus 15% to minus 10% for the year, driven largely by increased revenue. Our strategy for success centers on the continuing to scale efficiently and driving innovation across our service offerings. We will continue to invest in business expansion, further advancing our laboratory operations and upgrading existing laboratory facilities, while remaining focused on managing our spending. We believe that our foundational technology platform supports a strong long-term margin profile. Using an average share count of 31 million, we expect an improvement to our full year 2025 non-GAAP EPS guidance from a loss of $0.35 per share to a positive $0.30 per share, excluding stock-based compensation, impairment loss, acquisition-related costs and amortization of intangible assets as well as any onetime charges. Reflecting the improvement in our operations, which is offset by the effect of the onetime noncash impairment adjustment, we are now revising our GAAP EPS guidance from a loss of $1.70 per share from $2.10 per share, excluding any future onetime charges using a 31 million average share count. Finally, our cash position remains strong. We focus on efficient capital allocation that allows us to reinvest in our business, fund key initiatives and support future growth. Excluding any future stock repurchases or other expenditures outside the ordinary course, which include M&A, we anticipate ending 2025 with approximately $800 million of cash, cash equivalents, restricted cash and investments in marketable securities. This number further assumes receipt of approximately $106 million in tax refunds prior to the end of 2025, which may be delayed as a result of the current government shutdown. Overall, we see strength in our core business, which has grown organically, and we see good momentum for the balance of 2025. Thank you for joining our call today. Operator, you may now open it up for questions. Operator: [Operator Instructions] Our first question is coming from Lu Li from UBS. Lu Li: First one on the margin. I appreciate the new disclosure on the margin by segment. It seems like the lab is turning positive margin in the quarter. I wonder, Paul, like how do you think about the going forward path in terms of like what will be the ultimate operating margin target that you're looking for? Paul Kim: Thank you for the question, Lu. We were really pleased with what we saw in the gross margins for this quarter. As you remember, we had high margins in Q3, but Q3, we had an impact, a favorable impact to the margins of about $1.6 million, $1.7 million that was due to our capitalization policy. But in this quarter, in the third quarter, even without that, our margins, they came in just as high at 44.3%, actually a little bit higher than what we achieved in Q2. And that's due to the overall efficiencies of the organization, continued automation that we have for the business and streamlining our policies. I'll turn it over to Ming, who can talk about what we see directionally for margins in our business without giving out specific numbers because there are particular technologies that we are beginning to utilize, which might enhance our margins going forward. Ming Hsieh: Yes. Thanks, Paul. And Lu, as you probably hear from Brandon, we started to develop the AI technology in-house, building our capability for the -- through our digitalization of the entire -- almost the entire pathology services. So we will continue to see the improvement in that area. In addition, we will be building a pretty rich database for us to be continue to benefit for us to get into the further margin and reimbursement improvement in that territory. Anything -- Brandon, you want to add? Brandon Perthuis: No, I think it's well said, Ming and Paul. Thank you. Lu Li: Second question on the AP. Brandon, I think you mentioned there are some timing issues in the quarter. I'm wondering if you can give a little bit more color and whether that will be a catch-up in Q4? And then I have a follow-up. Brandon Perthuis: Yes, certainly, thanks for the question. Yes, it was a timing issue. It was mostly related to the collections in the quarter, which did reduce the amount of revenue we could recognize. But already in this quarter, we're beginning to see an improvement in the collections, and we think that that's going to continue to improve in the next couple of quarters. So no material weakness in the business, just a timing issue around collections. Lu Li: Okay. And then on the Precision Diagnostics, you mentioned several new products, the rapid whole genome and then you talk about the expanding of the Beacon panel. I wonder how this like a new menu expansion kind of support the growth going forward. You seems like pretty confident in terms of like growing double digit forward. I wonder how should we think about the 2026? Brandon Perthuis: Well, we are really excited about launching both of those products. I think our R&D investment there was quite efficient. Our timing was quite efficient. We last quarter launched a new improved whole genome sequencing test that included RNA, which is a significant diagnostic yield increase. That's generally sold into pediatrics, development of pediatrician, geneticist. But if you want to help families in the NICU, which require rapid results, we needed a faster product. So the follow-on to our last quarter update is this new rapid -- ultrarapid whole genome sequencing test. So this is more or less the first time for us to launch a product directly targeted at the NICU. We believe our turnaround time, some of the features around the genome in terms of its variant calling ability, puts us in a strong position to penetrate that market. As we mentioned on the call, I mean, this is becoming a standard of care in the NICU for many patients. It's a favorable margin profile in terms of billing institutionally for the test. So we'll see how much it contributes to 2026. But at the end of the day, it's going to be a powerful product for clinicians to use in the NICU, and I'm excited the team was able to launch it so quickly. And it does dovetail right into what we've been talking about expanding our sales team. We have invested significantly in expanding the pediatric sales team. So this puts one more powerful tool in their bag to sell when they're visiting children's hospitals and academic medical centers. And regarding Beacon, we continue to push the envelope there. We believe, especially in the reproductive setting, there is a need to test for more. There's a desire to test for more conditions. I mean these conditions become rarer as we add more, but collectively, they're not rare. So we're going from 700 genes, which we've been offering now for about a year, to 1,000 genes, which should make us, as far as we know, the largest panel on the market. Our Beacon portfolio has performed incredibly well. I mentioned our turnaround time of 8.8, 9 days. That's exceptional. I mean we're dealing with patients where turnaround time is critically important, whether they're going through fertility treatments, whether they're already pregnant, there's a lot of anxiety there. So to be able to give results that quickly does give us a significant advantage in the marketplace. Operator: The next question is coming from David Westenberg from Piper Sandler. David Westenberg: Actually, I'm going to continue with some of those questions. So Brandon, with the KNOVA product, are you finding that physicians prefer to order kind of the bundle of tests versus just a single NIPT test or carrier microdeletions all in one? Is that favoring you? And can you give us a reminder on how those are reimbursed again if they're reimbursed kind of in a bundle, if they're reimbursed separately? Brandon Perthuis: Yes. Thanks for the question, David. I mean, certainly, in the OB/GYN and MFM market, NIPT and carrier screening is often ordered bundled together, not always, but very frequently. So I think we've established a really good brand for Beacon, our carrier screening product in the marketplace. I think we've become sort of the go-to laboratory for carrier screening, our turnaround time, our quality, the number of genes, the customization. We've really fired on all cylinders as it relates to carrier screening. And then not too long ago, we decided to launch KNOVA, a novel NIPT test. And the strategy there is to sell those together. But they are 2 independent tests, right? Testing for completely different things. You asked, is it bundled billing? No. I mean it's a separate orderable test. So we get an order for KNOVA, we bill for KNOVA. We get an order for Beacon, we bill for Beacon, not bundled together from a billing perspective, but clinically, they're very often ordered together. David Westenberg: Perfect. And then just continued reimbursement updates. I mean, I think that ACOG update on expanded carrier screening is taking a lot longer than I think the industry expected. If there's any update there or if insurance companies are just kind of seeing the value of expanded carrier screening already and maybe proactively reimbursing ahead of that. And same question for kind of microdeletions, which is another one where we kind of thought the George syndrome is already going to be covered by now. Brandon Perthuis: Yes. Good question. I mean, look, not everything hinges on that ACOG statement. There's a lot of other efforts going on behind the scenes. Actually, a lot of the companies are all working together, actually, the part of a coalition, to expand access to some of these tests. So certainly, the ACOG -- a new ACOG guideline would be beneficial to the industry. But we are seeing payers get ahead of that. And I think some of these other grassroot efforts that are happening, working directly with the payers to show them the value proposition, to show how it impacts clinical care. Some of these payers are getting ahead of that guideline. I think the guideline will just push it one step further. So we're continuing to see increased reimbursement for many of our tests, not just reproductive health. And again, I think it's really a result of working directly with the payers and showing them that clinical proposition. And hopefully, before too terribly long, we might get some positive news from ACOG to take it to the next level. David Westenberg: Got it. And then my next -- my last question is a combination for Ming Hsieh and Paul. It looks like you had some good data on FID-107 in Phase II. Are you going to have additional updates in Phase II before moving on to Phase III? What are the key milestones to look out for? And then, Paul, if you can maybe explain the additional expenses that would come for moving from Phase II to Phase III, what kind of increases in expenses you would expect? Ming Hsieh: All right. Thank you, David, for the questions. We expect to finish the enrollment by end of 2025. By the ASCO, which is in May of 2026, we would expect to do an oral presentation for the data we have, which we feel is very exciting. By that time, for all the patients enrolled in the database will be at least had 1 or 2 scans already. So that will further enhance the data we presented at ESMO in September this year. So this will give us a strong confidence to move the FID-007 into the Phase III clinical trial because we see a significant progression-free comparison with the standard of care. So in terms of what is the Phase III cost in terms of the moving forward, I think it depends on the final -- the statistician come out number and our Phase III design, we are in the process now. We estimate it's around 300 patients to be enrolled. So from that point of view, the clinical cost of Phase III is roughly around $60 million. Paul Kim: And then just to give you a full picture on the spending. So for 2025, we anticipated the cash spend for the therapeutics development would be about $25 million for the balance of the year. We believe that, that spending is going to be a little bit less than that for this year. I think the great news for the company, whether it be the therapeutics development or the laboratory services is the amount of science and the progress that we have seen so far for the therapeutic development. With spending a little bit less than what we have anticipated is something that makes us really pleased because it goes back to the efficiency of our spending. And then if you take a look at the laboratory services business, we've raised our guidance twice this year. All in the meanwhile, the cash forecast and our cash target, as you probably saw in the press release, has been raised to $800 million. So efficiency in running the operations, managing our cash and getting output for our business, whether it be increased revenues for the laboratory services or the science and the data that we're seeing the therapeutics development, we're very pleased with. Ming Hsieh: Yes. Dave, for the ESMO data, we published in September -- October this year, which the data cutoff on this in September is available online. You should see it's a pretty impressive data in terms of how -- about the efficacy of FID-007. So we are very pleased and very much encouraged. There is similar -- the transactions in the area. The market is a big, multibillion dollars market is addressable by our products. So we are very encouraged, and we believe that our investment will have a great return. In addition, this is not one drug. This is a platform performance. We have been using the same delivery platform. We had the second drug, FID-022. And that one in the Phase I for the dosing escalation exercise, it is going well, and we are also very much looking forward to provide the additional data by mid next year. Operator: Next question today is coming from Andrew Cooper from Raymond James. Andrew Cooper: Maybe just first, I want to dive in on the Anatomic Pathology collections dynamic. We're not necessarily seeing that in the receivables. So just if you could unpack a little bit more sort of what's going on there and what gives you the confidence that it is just collections timing, if there's any volume stats or anything like that, that you could share to help us get a little bit better understanding, that would be great. Brandon Perthuis: Andrew, it's Brandon. Thanks for the question. No, it really was a timing issue. So I mean, at a high level, we made a change in our billing software. It takes a little bit of time to implement the new software. Software has been implemented. Things are going well. We're seeing collections begin to improve. So it was just around changing a billing software. Paul Kim: And then in terms of the receivables, as you're very familiar with, Precision Diagnostics is the biggest part of our business, and we had very strong collections during the quarter for that area of the business. Andrew Cooper: Okay. Great. That's helpful. And is there any -- just so we're kind of prepared for it if it does come again, are the software changes in place kind of across Precision Diagnostics as well? Is there any kind of potential disruption in any other segment as we move forward, knowing that it may just be timing, but at least to keep us on the lookout? Brandon Perthuis: Mostly related to AP. Andrew Cooper: Okay. That is helpful. And then Pharma Services had a nice quarter. I just want to kind of dive in a little bit there on the strength. Was it -- knowing this can be big and lumpy, is this a single program and a timing dynamic that is better in the quarter? And obviously, had you raised the guide for the year? Or is this a little bit more kind of broad-based finding some traction? Just would love some understanding of what's letting you succeed there and sort of where the success is coming from. Brandon Perthuis: Yes. Thanks for the question. Look, I think it's mostly related to our capabilities expansion. I think we've mentioned before that pharma services at one point was pretty much just NGS. And that limited our market size there. There was a lot of RFPs that were being presented to us, that required additional technology that we didn't offer at the time. So we had a smaller addressable market when we were just an NGS shop. But since then, we've launched a lot of new tests in our Biopharma Services division, and that's allowed us to expand that addressable market and just blocking and tackling, allowing us to respond to more RFPs. So the business is -- it's still a bit lumpy. I mean this is just the nature of these wins. But the pipeline looks good. Again, our capabilities are strong. I think the feedback we're getting from our biopharma partners is incredibly strong. They do value the test that we're providing and the service we're providing. So it's an area we're going to continue to invest in. And we'll continue to see some lumpiness. But overall, we're quite pleased with the capabilities and the progress of that business. Andrew Cooper: Okay. Helpful. And then another good quarter, Precision Diagnostics. You were up $3.5 million or so sequentially, I think, like $7 million year-over-year. Can you just ring-fence for us kind of the growth contributions you're getting there? How much of that is Beacon versus KNOVA versus other parts of the portfolio to help at least kind of rank order or give some flavor for the traction there? Brandon Perthuis: Yes. I mean Beacon continues to be a really important test for the company, and it's continued to grow. We're winning new customers. We're moving into new markets. So really pleased with the progress of Beacon. And hopefully, launching Beacon K takes it to the next level and certainly keeping our turnaround times where they are has just been hugely important for the company. KNOVA is not yet a meaningful contributor to revenue. We're still trying to break into that OB/GYN marketplace. A lot of the Beacon business historically has been from the fertility side of things, REIs and fertility clinics. So Beacon continues to be quite important. We are seeing great momentum in our exomes and genomes as well. Our oncology business is doing well, especially on the heme side. So I think overall, I mean, you look at all the different sort of divisions of the company, they're all doing well, all firing on all cylinders, and we see great momentum. Operator: Thank you. We reached the end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Welcome to the Evolent Earnings Conference Call for the Third Quarter ended September 30, 2025. As a reminder, this conference call is being recorded. Your host for the call today from Evolent are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations. This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations website, ir.evolent.com and the Form 8-K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. And now, I will turn the call over to Evolent's CEO, Seth Blackley. Please go ahead. Seth Blackley: Good evening, and thanks for joining the call. On the call this evening, I'll take you through our results across the 3 areas of shareholder value creation. John will then provide details on the numbers, and I'll close with some additional thoughts before we take your questions. We're pleased to report financial results for Q3 that exceeded expectations on both the top and bottom line. These results, we believe, demonstrate that Evolent's products are resonating in what continues to be a very dynamic time in the industry. Let's start with updates on our 3 areas of shareholder value creation of one, organic growth; two, margins; and three, capital allocation. Starting with organic growth. Q3 revenue of $479.5 million was at the top of our guidance range. And we expect our revenue for the full year to be between $1.87 billion and $1.88 billion. We're announcing 2 new revenue arrangements today, one in the Performance suite and onein the technology and services suite. First, we have signed a contract with one of the largest Blue Cross plans in the country to launch our Performance suite for oncology across more than 650,000 MA and commercially fully insured members. At typical capitation rates, we expect this to contribute north of $500 million in revenue annually. This new partnership leverages our enhanced performance suite framework and includes retroactive adjustments for prevalence, case mix and the like as well as bidirectional risk corridors that significantly limit our downside while increasing value sharing to our partner, ensuring that our economics are closely tied to the value we're creating and mitigating Evolent's exposure to volatility that's outside of our control. We're honored to add this plan as a major new first-time partner for Evolent and look forward to doing excellent job supporting their members and accessing the very best oncology care while also balancing affordability for members in the plan. While the final implementation schedules may shift slightly in either direction, we are currently expecting a May 1, 2026 go live and therefore, expect the contract to contribute approximately $300 million in 2026 revenue. Finally, it's important to note the revenue estimates I just discussed are just for the fully insured commercial and Medicare Advantage lives. The commercial ASO and Medicaid membership at this plan would represent additional growth opportunities over time. And our second revenue arrangement we've announced is a large provider-sponsored health plan in the Southwest and they have signed a contract to deploy our oncology condition management, technology and services solution across their membership adding to their existing musculoskeletal solution. With these additional announcements, we have signed contracts for 2026 go-lives that will add more than $550 million in new 2026 revenue and annualized contract value of over $750 million. These new signings take total revenue under contract for 2026 to approximately $2.5 billion. Well of course, finalize our revenue outlook for 2026 in February once we have final membership and go-live dates. But this forecast of $2.5 billion in revenue takes into account our current expectations for revenue decreases in conjunction with membership reductions in the exchanges, Medicare Advantage and Medicaid. Additionally, we believe the expected contract launch timing in 2026 will position the company for strong bottom line growth in 2027 and even after today's announcement of more than $500 million in annual contract value, our probability weighted pipeline exceeds $650 million annually and continues to grow. On margin expansion, our Q3 adjusted EBITDA of $39 million was in the upper half of our expected range and represents 23% growth year-over-year. John will talk more about the drivers of our adjusted EBITDA performance and our outlook for this year. With today's announcement, we anticipate over 90% of our Performance Suite revenue in 2026 will be covered by our enhanced protections which update our pricing for disease prevalence, mix and other factors and include risk corridors that limit our downside, enhancing our ability to drive sustainable margin growth in the future. We continue to work towards our long-term goal to auto approve over 80% of our baseline authorization volume, delivering on faster authorizations at a lower cost. During the quarter, we began rolling out our artificial intelligence review or Copilot within auth intelligence into our musculoskeletal workflows, and we're beginning to realize the AI efficiency improvements we expected. On the capital allocation front, the sale of our primary care business, Evolent Care Partners is on track to close later this year. We plan to use the proceeds from that sale to pay down approximately $100 million of our senior term loan, lowering our cash interest burden by about $10 million annually. With the retirement of our 2025 convertible notes, we have no significant liabilities until the end of 2029 and we reiterate our commitment to use free cash generation from the business to delever. We believe our growth and the continued strength of our pipeline is driven by the unique value we deliver to all of our core stakeholders, health plans, providers and members. I want to provide an update now on our product development efforts as we continue to innovate. Our health plan partners turned to Evolent to address excessive specialty care costs, particularly in oncology, where we believe we provide a critical service in this environment, which is delivering savings while seeking to improve the patient and physician experience. As evidenced by our accelerating pipeline and new contract signings, we believe the current environment presents an opportunity to increase the penetration of our specialty care model at a time when demand for our offerings has never been higher. For example, in oncology, we believe we touch approximately 9% of all oncology cases in the United States today, about 8% in our technology and services model and only 1% in our Performance Suite model. As evidenced by today's announcements, we are seeing the differentiation relative to our competitors. We expect our enhanced Performance Suite model to grow over the coming years. We believe this market opportunity will provide our customers with significant value and importantly, provide Evolent with a strong and sustainable source of growth in the coming years. We also believe the enhanced protections in our modified contracts will provide a path to driving strong and disciplined adjusted EBITDA growth in the years to come. To give you a sense for the longer-term opportunity with the oncology Performance Suite, increasing our oncology risk penetration to 15% of the market represents an addressable growth opportunity of greater than $15 billion annually over time. On the provider front, we're excited to announce a strategic partnership with American Oncology Network, which strengthens our provider alignment model under our Oncology Care Partners brand. The model seeks to enable high-quality, more affordable and connecting cancer care, all without relying on utilization management, instead relying on EMR integration to drive decision-making at the point of care. The model should significantly lower the burden on oncologists, enabling them to focus on what matters most of caring for their patients on their cancer journey. Part of the partnership, physicians and patients will have access to Evolent's comprehensive cancer navigation program. The American Oncology Network is one of the nation's fastest-growing network of community oncologists and shares our dedication to innovation in cancer care. Finally, we're excited by the continued progress of our comprehensive cancer care navigation program. By combining Evolent's expertise in oncology services and care management with the Careology mobile application. This program has delivered exciting results this year that now extend into reducing inpatient costs, whereas our traditional Evolent oncology model focuses on outpatient costs and drug costs. For example, our navigation model is now live in multiple markets and has shown decreases of up to 40% in inpatient and emergency department utilization and match case studies. The program also has patient satisfaction scores exceeding 90%. Before I hand it over to John, let me make some quick comments on the policy environment and our outlook for 2026 and beyond. Across the last 24 months, we have seen 2 dynamics of work. One, we have been taking share, particularly in oncology, further penetrating the top health plans, winning important new logos while continuing to renew existing customers and updating our performance suite contracts demonstrating the long-term durability of our model. And two, membership in our core government-sponsored market has been going through a significant shift, shrinking in number and growing in acuity. We expect both of these trends will continue in 2026. Recall that our previous expectation for 7% to 9% membership growth in MA for 2026 was offsetting an expected contraction of approximately 20% in the exchange market for 2026. CMS' most recent forecast from the end of September now expects overall MA membership to contract by about 3%. In the exchanges, there remains a wide range of potential outcomes depending on how and when the federal government has reopened, with health plans over the last couple of weeks forecasting exchange membership declines of as little as 15% and to as much as 65%. While we expect to grow our customer footprint and revenue meaningfully next year and while we're on track to achieve our expected efficiency targets for 2025, our 2026 adjusted EBITDA outlook is more uncertain than usual for this point in the year, given the wide range of outcomes on our customers' membership in Medicaid, exchange and Medicare, based in particular, on the changes from the One Big Beautiful Bill. For example, if exchange membership declines are towards the higher end of that forecasted range and our customers' Medicare Advantage membership shrinks, it's unlikely we'll be able to deliver meaningful adjusted EBITDA growth in 2026, above our pro forma 25 baseline. If robust subsidies are reinstated as part of reopening the government, this headwind may be reduced. Likewise, the details of membership declines will matter. For example, while the MA market in aggregate may shrink by 3%, it's possible that our MA customers may gain market share. Regardless of membership dynamics, it's important to note that based on new contracts signed to date, we will exit 2026 with more than $750 million in newly launched annualized Performance Suite revenue. Consistent with our past commentary, we are expecting minimal adjusted EBITDA contribution from these new launches in 2026, but would expect them to generate adjusted EBITDA contribution of $75 million or more at target mature margins. These new contracts as well as others we expect to sign in the future quarters should provide a significant earnings tailwind in the years to come. We intend to use this moment of health plan P&L pressure to cement Evolent's position as a leading specialty solution. The pain felt by our customers, both on membership and utilization is creating a very significant growth opportunity for Evolent. We now have signed 13 new contracts in 2025, and we have contracts in place that should drive more than 30% top line growth in 2026, and we also anticipate continued strong growth into 2027 and 2028. It is our belief that capitalizing on this period of industry disruption with disciplined growth will create significant long-term value for all of our stakeholders. With that, let me turn it over to John to go through the numbers. John Johnson: Thanks, Seth. Q3 revenue of $480 million represented 8% sequential growth versus the second quarter, driven by new launches across both the Performance Suite and the technology and services suite. Sequential growth in our per member per month fees in both the Performance Suite and tech and services was driven principally by product mix with the Q3 launches at a higher-than-average fee as we continue to demonstrate pricing resilience in a dynamic end market. With these launches, we are currently tracking towards the upper end of our full year revenue guidance, and we have narrowed that range accordingly. Adjusted EBITDA of $39 million was modestly ahead of our expectations and represented growth from our technology and services business and the early success of our AI operational efficiency projects, offset by initial reserve building for our new Performance Suite launches. Our Specialty Performance Suite Care margin, which is the difference between our capitated revenue and claims expense was approximately 7%, consistent with our performance year-to-date. Normalized oncology trend continues to be just under 11% year-over-year. Note that during September and into October, we saw an increase in medical utilization in our exchange book, primarily in cardiology, consistent with industry-wide expectations of a benefit rush ahead of significant premium increases in 2026. Given this expectation, we have opted to maintain our conservative reserving posture consistent with our behavior during the first half of the year, and we have narrowed our adjusted EBITDA outlook accordingly. Note that we are not seeing this trend variability in Medicaid or Medicare, where cost trends remain stable versus our first half results. Turning to the balance sheet. We ended the quarter with $116.7 million of cash and equivalents and $47.5 million of revolver availability. Cash change versus our Q2 ending balance was driven by $15 million in cash flow from operations, offset by software development costs of $9 million and $40 million in net cash used in the August transaction, refinancing our 2025 convertible notes and buying back common stock. Cash from operations of $15 million was lower than expected, driven by timing of cash receipts, particularly from the Medicare shared savings program, which was paid in October instead of September. Our net debt of $910 million reflects the exchange of our $175 million in Series A preferred stock into second lien debt. Recall that this exchange included no changes in economic terms to Evolent, other than the interest now being tax deductible. Between cash generation and the divestiture of Evolent Care Partners, we expect to end the year with net debt of approximately $805 million to $840 million, which would represent a net leverage ratio of approximately 5.5x at the midpoint of our 2025 adjusted EBITDA guidance. With the retirement of our 2025 convertible notes, we have no maturities until the end of 2029, but delevering remains our primary capital allocation priority. As we near the end of the year, we are narrowing our guidance ranges for 2025 revenue and adjusted EBITDA to be between $1.87 billion and $1.88 billion and $144 million to $154 million, respectively. These ranges presume a 12/31 close for our ECP divestiture and would be slightly lower if the transaction closes earlier. The corresponding quarterly ranges are $462 million to $472 million in revenue and $30 million to $40 million in adjusted EBITDA. We are not assuming any new launches in our revenue outlook. The primary variable is changes in our customers enrolled membership. And as I mentioned earlier, this adjusted EBITDA range presumes a further decline in exchange margins from what we experienced in Q3. While this outlook is conservative, we believe that is the appropriate posture given the industry-wide commentary on this segment. With that, I'll turn the call back over to Seth. Seth Blackley: Thank you, John. I want to close by commenting on our CFO transition announced this afternoon. First, I want to thank John for his incredible contributions to Evolent as our CFO over the last 6 years. I look forward to continue working with him as he takes on the Chief Strategy Officer role for the company. The role will include supporting our rapid oncology growth in the time ahead and our work to drive our target oncology trend down in addition to the more traditional strategy functions. I also want to welcome Mario Ramos to Evolent. Mario was previously CFO of CVS Caremark, a division of CVS Health, in addition to holding other CFO roles at CVS. Most recently, Mario was CFO of WellBe Senior Medical, a risk-bearing value-based care provider. Based on his track record and reputation in the industry, I'm highly confident Mario will be an incredible addition to the team. Mario will join Evolent on November 17 and assume the CFO role on January 1. In addition, as our growth accelerates and AI becomes a more important factor in the operations of our business, we're making a number of other important organizational investments and adjustments that we noted in our press release. In closing, I remain incredibly confident in Evolent's future. We believe we have developed the leading specialty platform in the industry. I believe the exceptional renewal rates of our current customers, along with the validation of new customer contract signings under our enhanced Performance Suite model demonstrate the value and durability of our solution. While the industry is undergoing significant changes, Evolent is taking market share with a new disciplined contract structure, and I believe we are becoming a more critical part of a system that desperately needs higher value, higher satisfaction and lower cost solutions, particularly in high-cost areas like oncology. We have the right team in place to take advantage of the opportunity ahead and drive value for our customers, employees and our shareholders. With that, we will take your questions. Operator: [Operator Instructions] And the first question will be from Kevin Caliendo from UBS. Kevin Caliendo: I want to talk a little bit about the new contract wins. Obviously a huge number. I appreciate you giving us that it's not going to really contribute much next year. And I believe you said potentially $75 million when they hit peak margins. How should -- can you maybe break this down a little bit? Is 10% sort of the new -- the way we should be thinking about new business in terms of peak margins going forward? Is there something about the mix of these contracts that affects that? Just trying to understand sort of -- because the new contracts and the restructuring of your contracts going forward is a big question mark. And this is obviously a huge amount of new business that's won. And I'm just trying to think as we think longer term, is this how we should be thinking about new business? Or is there something unique about the mix of these contracts that get you to sort of 10%-ish peak margin? Seth Blackley: Yes. Great question, Kevin. So this is Seth. Let me make a couple of points. Number one, yes, this -- all of these contracts that are in that $750 million that we talked about are under the enhanced Performance Suite. That's the only way we're setting up new contracts going forward that has prevalence and case mix adjustments, but also has a narrower corridor model attached to it. So that's the contract structure. I think the second thing that I want to highlight, and I'll get to your question is between Aetna and this contract, and what we're seeing in the pipeline, I think we feel really good about our ability to use this contract structure as the standard going forward. It's also the standard that we have implemented backwards into all of our existing contracts or almost all of them at this point. So that's how you should think about it going forward. I think 10% is a reasonable mature margin to think about, yes. That is lower than historically we used to talk about, and that's intentional. The bell curve is narrower. So we have taken downside from our exposure, and we've also given a little bit back to our partners. And so I think you should think of the business, I think it's a reasonable mature margin target to your point. I think you should also think about lower volatility, more predictability. And that's the model that we believe in going forward. Does it leave some net present value, if you will, on the table? Perhaps it does, but I think more predictability, discipline with these contracts is the right trade-off to be making. Operator: And the next question will be from Daniel Grosslight from Citi. Daniel Grosslight: Congrats on a strong quarter. I'd like to focus on the puts and takes around 2026 EBITDA. Seth, it sounds like the big variable here is just what happens on the exchanges, but I was hoping maybe you could help quantify that impact of it maybe on the high end and low end? And then maybe on top of that, if you can layer on any additional investments you're making in 2026 other than what you've announced this year? And if you're still expecting to see that, I think it was a $20 million improvement in EBITDA from AI. I just want to make sure that you're still expecting to realize that next year. Seth Blackley: Sure. So I'll start, and then I think I'll pass it to John to add a little bit of color. So the big factors that set up '26 are number one, growth. We feel very good there. Number two is you asked about it, but our cost structure and the efficiencies baked into that. We feel good about that, and we're achieving the results that we want. And the third big one will be trend, right? And particularly in oncology, and we commented on that today, too. We feel good about where we are. It feels like our forecasts have been right and we feel like we're still set up in a good way. And the fourth one is membership. To your point, yes, that is the big one that's open. I think it's too early to tell with the width of the ranges that we're talking about. And it's also a little bit hard to give you an algorithm for, okay, plug in, this percent membership decrease, I give you that EBITDA change. I think that a lot of it depends on our cost structure. So the more membership comes down, the more we have to look at our cost structure, there's variable costs and there's fixed overhead. And we're going to have to look at fixed overhead, if membership comes down by a certain percentage, right? So it's hard to give you an algorithm is the short answer. I think the way we framed it in the script is probably the best we can do with the width of the ranges that are out there, which is -- could be tough to get meaningful growth or we have good path to EBITDA growth, depending on what happens with membership. Operator: The next question will be from John Stansel from JPMorgan. John Stansel: I wanted to dig in a little bit more on the MA growth assumptions for enrollment next year. I appreciate the commentary about CMS forecast and the idea that enrollment could decline by low single digits. But I think some of your large customers have taken different strategies, in particular, one of your largest customers is potentially positioned themselves for share gains. So I guess, can you talk about your different outcomes you think within MA enrollment and what that means for '26 and how you're thinking about your large payer customers performing into next year? John Johnson: Yes. It's a good observation, John. And I think that, well, we don't have a crystal ball on this, of course. We do think that if one or more of our current partners ends up as meaningful share gainers for MA membership next year, that would be a nice tailwind for us, in particular, in the technology and services suite. Operator: And the next question will be from Charles Rhyee from TD Cowen. Lucas Romanski: This is Lucas on for Charles. In terms of thinking about the HIC subsidies and whether they expire, can you help us understand, obviously, you're talking about a membership impact right now, but can you help us understand maybe the acuity shift that could come along with that and maybe compare it to the Medicaid redetermination acuity shift that you saw over the past 18 months and help us out with that piece. John Johnson: Yes, for sure. So just to put some numbers around it, right, revenue from the exchanges this year is around $360 million, about half in the Performance Suite, half in tech and service. So that's the top line in terms of the total capitation that we're talking about here. The second thing that I'd say there, Lucas, is recall that our contracts have these protections and automatic adjusters for changes in the population, prevalence, disease mix, et cetera, that go a long way towards protecting us against wild acuity shifts. And the last thing that I'd note is because this is such a -- such a topic, right, and a known item going into next year. We have very active discussions with our payer partners in the exchanges for next year around ensuring rate adequacy based on the population that they end up with next year. So we have a high degree of confidence in our pricing for '26 as it relates to our expected acuity shift. Operator: The next question is from Jailendra Singh with Truist Securities. Eduardo Ron: This is Eduardo Ron on for Jailendra. Just on the oncology trends, which appear to be still better than the 11% that you guys guided for the year. And can you perhaps give some color on how that's played out from Q1 and now through Q3? Has that trend improved as the year progressed? Has it gotten worse in any way? Just if you could flesh that out, that would be great. John Johnson: For sure, Eduardo, we're seeing it about flat across the year. With the -- want to tweak that over the last couple of months, we have seen a bit of that benefit rush in the exchanges. Most of that has been in cardiology, but we've seen a little bit of it in both. But in Medicaid and in Medicare Advantage, oncology trend across the year has been relatively stable. Operator: The next question is from Jeff Garro from Stephens. Jeffrey Garro: Maybe go back to the pipeline and great to hear the positive commentary there. I was hoping you could add to it in terms of the pacing of decisions and relatedly potential timing of go-lives, what's determining the pacing of remaining decisions? And as those prospects or existing clients make decisions, are we now looking at 2027 go-lives? Or are wins still possible that could translate to midyear 2026 go-lives? Seth Blackley: Sure, Jeff. Helpful. So look, I think that what I would say on the pipeline is it's generally about the same as it's always been. It's not sped up or slowed down. I think the overall demand is really significant, as I mentioned, and I think that's going to continue. Could we still have some things that go-live in 2026 that are new? Yes, we could. For sure. And so -- and we've got a lot in the pipeline that could convert over the coming months even. So I think the' '26 outlook is still open partly based on opportunities for additional revenue as well. And again, I'd just say the biggest factor, I think we're feeling right now, Jeff, is just really significant demand because of the pain that folks feel in the market trying to manage and balance great care, whether it's oncology or anything else with affordability and we're getting a lot of phone calls to get support on that issue. Operator: And our next question will be from Jessica Tassan from Piper Sandler. Jessica Tassan: I guess just maybe first, can you elaborate a little bit on the adversity that you're seeing in the exchanges? I guess, just because I don't necessarily think about oncology as being subject to induced utilization, but what are you seeing there? Is it just acuity mix into the end of the year because of like marketplace integrity efforts? And then just secondarily, I appreciate you guys addressing the '26 EBITDA guide. But can you maybe just give us a sense of what are the items we should be thinking about in terms of bridging from 2025 to '26, maybe starting with ECP and then going through the AI efficiencies, et cetera. John Johnson: Yes. So on the first one, Jess, the benefits, rush is really in cardiology, which as you point out, is a little bit more discretionary in terms of timing that is oncology. So that's really where we're seeing that uptick that we noted into the end of Q3 and into Q4 here. I'd just note on that one before I talk about '26, as I said in the script, we have assumed in our guide a provision for that trend accelerating. We haven't seen, but that seems like the right posture for us right now in the exchange line of business. So then talking about '26, let's just hit a couple of numbers. On the ECP divestiture, we expect that to be about $10 million of EBITDA associated with that divestiture. And so the -- think of the pro forma EBITDA this year as $10 million less than where we land as your launching point for next year, assuming we have it for the whole year. The second piece, you asked about the AI initiatives. I think $20 million is still our expectation for year-on-year improvement there. Of course, that's a unit cost number. So to the extent that there are significant shifts in membership, that number could move around a little bit. But we're quite pleased with the progress that we've made on the -- towards that $20 million number. The third thing that I would note is just on the Performance Suite margin maturation. Again, excited about what we've been able to drive this year. I feel confident about our pricing going into next year and ability to continue to drive value there. And the last question is really membership, as we noted earlier. Operator: The next question is from David Larsen with BTIG. David Larsen: With regards to the potential extension for the subsidies, I mean, what odds would you put that at what's happening? Since you're in Washington, I imagine you're pretty close to the hill. I mean, do you think there's a greater than 50% chance of subsidies being extended? Just any thoughts there would be helpful. Seth Blackley: David. So, I think it's a pretty reasonable chance. I want to put a number on it that subsidies are extended, whether it's for a year or 2 years, that kind of thing. I think the bigger question at [indiscernible] is really given how late in the year it is and given the specific mix of plans, how much does that really change some of the numbers on a given population. So I think it's a very complex thing to put numbers on right now, both because you got the federal government question that you asked, and then you have the downstream question of, okay, it's pretty late in the year, how does that then affect open enrollment and had plans already filed? What they are pricing around and the like. And so I think the odds of the extension are good, David, that translating that even if I had a very specific number into, okay, I know this is going to do that to membership. That second piece is quite difficult. And I think that's part of the reason for the broader ranges that you're hearing from the different payers in the market. Operator: And our next question will be from Matthew Shea with Needham. Matthew Shea: I wanted to talk much on the product development. It seems like there's a lot of excitement there. Maybe with the oncology navigation solution, it sounds like continuing to roll this out, I guess, first, have you scaled this beyond that initial 300,000 members? Or is that still the right way to think about this at this point? And then last 2 quarters, you've alluded to the Navigation Solutions potential to allow you to create risk-based offerings for Part A oncology spend. Would love to get an update on where you are in terms of a formal development of an offering there and whether we should view the partnership with American Oncology Network as sort of a stepping stone on that journey. Seth Blackley: Yes. So in terms of rollout, we were still in the two major markets. I think we are pretty close to adding a number of additional markets right now. And I think you'll have that happen live in 2026. If you think about the benefits of doing the work, to your point, most of it's on Part A. We mentioned some of the matched case studies around the significant reductions in ED and hospital utilization. So will we be beginning to take some management accountability on for Part A as we head into next year? Yes, we likely will. And that is a positive, obviously, for our partners because I think they are looking for answers everywhere they can find them and more integrated is better than not. So it is accelerating. I think is the right way to think about our navigation work. It's going to be included in more and more of our efforts. I think the American Oncology network partnership is related but a little bit different. So those oncologists across 20 states will have access to the navigation product that we just talked about, but there's a lot more to that partnership that goes beyond navigation. The bigger things, right, are completely gold carding and turning off utilization management and inserting the intellectual property of our oncology programs into the EMR at the point of care. And those fit really well with the navigation product. There are 2 parts to a coin, if you will, 2 sides to a coin, and they're both valuable and they're both part of the same dynamic, which is everything we're doing is trying to make care better for patients, which navigation does and point-of-care decision-making does and make them more affordable. And both of those things that we just talked about make care more affordable. So all of our product development efforts should have those two things in true north, better care for patients and easier to access for providers and more affordable. Operator: And the next question is from Matthew Gillmor with KeyBanc. Matthew Gillmor: I want to follow up on the American Oncology partnership. So just curious, sort of as you roll out, that doesn't sound like it's revenue-generating today, but how do you envision that sort of generating revenue for Evolent over time? Is that through the payers or through this relationship with the providers? And then has there been any early feedback on that gold card program from some of the big payers? Seth Blackley: Yes, great question. So on your first point, it really, to your point, is not about revenue primarily. The work with that partner and other oncology groups like it over time, is really about improving the quality, the experience and reducing the cost. And so if we're in a risk-bearing situation, having that in place in those markets where we have the enhanced performance suite in place, we think we can drive better outcomes. And you can make patients happier and provide better care for them. So that's going to be the primary way to choose. Might it also be something that payers love to see and therefore, pull us into a new market and it becomes sort of revenue generating as a knock-on effect. I think the answer is probably yes to that. But to your point, that's not the primary approach to it. And what we're really focused on is the ability to drive the quality and cost in the right direction. Operator: And ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back to Seth Blackley for any closing remarks. Seth Blackley: Great. As I close the call, I just want to thank John again as he moves on to his new role, but really also thank the 4,500 people at Evolent who wake up every day and run at our mission to support our patients, but also our shareholders. So thanks for the time tonight. We look forward to catching up offline. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Docebo Q3 2025 Earnings Call. [Operator Instructions] I'd now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike. Michael McCarthy: Thank you. Earlier this morning, Docebo issued its Q3 2025 results. The press release, which included a link to management's prepared remarks and our quarterly investor slide deck, were all posted to our Investor Relations website. This morning's call will allow participants to ask questions about our results and the written commentary that management provided this morning. Before we begin this morning's Q&A, Docebo would like to remind listeners that certain information discussed may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on risks, uncertainties and assumptions relating to forward-looking statements, please refer to Docebo's public filings, which are available on SEDAR and EDGAR. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars. Now I'd like to turn the call over to Docebo's CEO, Alessio Artuffo; and our CFO, Brandon Farber. Operator, we're now able to take questions. Operator: Our first question comes from George Sutton from Craig-Hallum. George Sutton: Nice results. So it all comes down to ARR. So I wondered if we could start there. It was up $2.5 million, sequentially. Can you just unpack the components? Alessio Artuffo: As you are suggesting, we are quite pleased with the results this quarter. The way we think about it is our business actually grew 14% year-over-year by excluding the Dayforce business. And I understand that we haven't disclosed this in the past. But I would add to that, that this is the second sequential quarter in which we've seen this growth happening, again, excluding Dayforce. And in a minute, we'll tee up why this matters. What I'm really pleased by is the fundamentals and the execution that led to this result, a trend that I continue to see in the future. First, we've seen our mid-market business exceeding performance and expectations. This has happened due to the changes and evolution brought in by our new leadership team, and changes that we had performed at leadership level in the quarters in the past. We're starting to reap the benefits of those improvements, not only in terms of people, but also framework, processes and improved pipeline processes. Secondly, we've seen, frankly, against seasonality -- and EMEA performance also exceeding expectations, something that has pleased us very much with the key logos, very material ones signed in EMEA during the quarter. And finally, not to be forgotten, our core business retention continues to improve. We also think this is a very important component and a part of the storytell. Notwithstanding all of the above, our turn with our -- with Dayforce accelerated faster than expected, and the results are just the reflection of that. George Sutton: Perfect. Just one other thing on FedRAMP. Obviously, impressive to see the wins pretty early. I'm curious if that's earlier than you had expected, or on track. And then we are sitting here in the U.S. with the government that's not effectively open. I'm just curious how that impacts the opportunity. Alessio Artuffo: Great. So we are very pleased to be achieving already 2 new federal customers shortly after our May dated FedRAMP listing. We believe that's an impressive outcome considering that originally, our thesis was to start winning federal business in fiscal 2026, and more backdated in the second half, because that is more aligned with our federal purchases. Not only we have expanded an account with the Department of Energy, which we were very pleased about, but also, we've been working closely with our partner, Deloitte, to secure the business of the Air Force Cyber Academy. In addition to that, outside of federal, which I understand is the headline, given the complexity of doing deals in federal in such a short time frame, we have continued to execute well also on the state and local side. And that trend is expected to continue. As it pertains to government shutdown, actually, we've been building pipeline at a very impressive pace, both in federal and SLED. Fortunately, if you will, the government shutdown did not affect the seasonal buying cycle that occurred with the deals that we disclosed. And I would say quarter 4 historically, for federal deals, is a very slow quarter because budgets get spent in quarter 3, our quarter 3. And in quarter 4, organizations, the federal organizations take a pause typically from purchases reigniting in our fiscal year 2026, by which time we expect the shutdowns have been addressed. I would also add and tee up by saying our progress in SLEDs is tied to our progress in federal. Why? Because we're seeing organizations in the state and local demand more and more frequently a barrier of interest called state RAM, which we do address via FedRAMP certification. So to tee it up, our investment in FedRAMP is playing a dual role here. Not only it's allowing us to increase TAM, but it's allowing us to win more in the SLED market, creating a great competitive differentiator for us for the future. Operator: Our next question comes from Kenneth Wong from Oppenheimer. Hoi-Fung Wong: Alessio, I wanted to maybe dive into the FedRAMP SLED dynamic a little more. As you think about the guidance that you guys put out there for 4Q, I realize it's a kind of seasonally low quarter. But any heightened conservatism in terms of what's coming in from the pipeline on the public sector side, just given that there is that shutdown? Alessio Artuffo: Like I said, I wouldn't say that we have seen a direct correlation between the pipeline outcomes and government shutdown. On our side, we're very, very focused on diversifying where we execute across state, local, and education. It's a big market. We're seeing more response and more, if you will, interest coming from civilian organizations. And the other thing I can say is that our technology favoring the use of Docebo, for both internal use cases but also external use cases, opens up to a new opportunity that in the market of government has been stark in terms of offering. So I believe that our continued pipeline execution is really the reflection of good timing, good execution, and great product market fit. Brandon Farber: Brandon here, I just want to add and great to have you on the call. If you think about it, we started down the government route of building the business from the ground zero, roughly 2 years ago. And part of that was building relationships with all various federal departments. And while we were building and looking to achieve FedRAMP authorization, we're able to demo and show our platform and have interest from various different federal departments. So while we see the cutdown temporarily impacting the ability to generate new pipeline, we are very confident in the relationships we've built over the past 2 years, and that will enable us to start winning material contracts in Q3 of 2026. Hoi-Fung Wong: Perfect. Then maybe we would love to get an update on the enterprise side. It looks like both customer counts and kind of ARR coming from large -- $100,000 customers is pretty strong. Would just love to get a sense of kind of how the pipeline was shaping up this quarter. What did sales cycles look like? Any extensions there as we head into the fourth quarter? And any thoughts on whether or not you might see some sort of a budget flush from customers going into Q4? Alessio Artuffo: Yes. So a few things on enterprise. Enterprise is a very critical area for us, and we continue to increase the customers over $100,000 sequentially, which is a strong sign of execution in our enterprise segment, but also in our mid-market segment that is able to sign customers with multiple use cases and multiple modules, and very healthy ACV. Additionally, on enterprise, I would say the following. In general, we continue to see deal elongation in the market. This is continuing to happen. But you're right, historically, quarter 4 is the strongest quarter within the enterprise segment for us, and we continue to expect that going into this quarter. A couple of notes that I would make on some enterprise wins notable in this quarter. I was very impressed with the ability to sign a multinational like Veolia. This kind of tees up not only the EMEA business, but also the capability of multi-use case -- and this is an organization with more than 200,000 employees headquartered in France -- and additionally, I would say our ability to expand upon Amazon, which is a customer of ours that we've had for a while. This is our third department that we're signing in the quarter is very significant. So both on the new logo side and expansion side, we're very, very happy about the results and expect a strong quarter 4. I would say important in the enterprise story is the system integrator story. We have invested heavily in partnership programs and system integrator programs to support that enterprise motion. And the large majority of the deals that we're doing in enterprise have a system integrator attached to it. And so that's the result of years of work. Operator: Our next question comes from Ryan MacDonald from Needham & Company. Ryan MacDonald: Congrats on a great quarter. Alessio, I very much appreciate that, obviously, the enterprise is really the driving force around growth moving forward. But can we get a bit more color on sort of the OEM wind down, the Dayforce wind down? Obviously, you mentioned it sort of occurred a bit faster than you expected in the quarter. But as we think about fourth quarter and into next year, can you just help us get a bit of a better understanding on the trajectory there and what opportunities you might have to sort of compete more directly within that base of customers? Brandon Farber: Ryan, it's Brandon. I'll take that question. So just taking a step back and just looking back, as a reminder, Dayforce started OEM and white labeling Docebo back in 2019. And they were very successful selling Docebo as an LMS, and got as big as roughly 9% to 10% of our total ARR at a specific point in time. Back in early 2024, Docebo acquired eloomi, which we all know. At that specific point in time, they were an LMS provider in Europe focused mainly on the SMB market. Subsequent to the acquisition, Docebo initiated legal action and was quickly resolved with Dayforce. Really, the goal of that lawsuit was 3 outcomes: number one, protecting our IP; number two, supporting the contributor of our revenue base; and number three, preserving our day-to-day relationship with Dayforce. How we're looking at it on a go-forward basis, we continue to expect economic benefits to flow to Docebo, and the contract to wind down over extended period of time. To provide a little bit more color, we anticipate Dayforce to represent approximately, 3.5% to 4.5% of our total revenues in 2026, 1% to 2% of our total revenues in 2027, and become immaterial thereafter. Just to leave on a positive note, it is important to note in the current quarter and since 2024, we've continued to grow. We've continued to diversify our revenue base away from Dayforce, and we're pleased with the ARR growth we had this quarter, excluding Dayforce of 14%. Ryan MacDonald: Maybe my second question, I wanted to talk on AI. As we've sort of spoken with companies and a number of companies rolling out AI strategies, it feels like there's sort of three buckets in which organizations are trying to sort of monetize AI efforts today. It first seems to be in improved customer retention and sort of, renewal rates. The second tends to be in sort of, building in higher annual price increases as you deliver more value with AI. And then the third tends to be sort of, separate SKUs or modules that are AI-specific modules that you can start to charge for. I'm just curious, as you think about the three buckets where you're seeing the benefits from AI. And at least in the shareholder letter, it seems like with these AI credits rolling out, it seems like you're getting a head start on that third bucket going into next year. So would love a little bit more color on that as well. Alessio Artuffo: Great breakdown of the 3, say, areas of return of AI. We very much agree with those 3 areas. I would say that having started with AI several years ago, our focus has certainly been more on the creating value and infusing AI in the product everywhere we can more lately. Originally, when we approached AI years ago, we were creating features that were supported by AI, mostly to provide a better customer experience, i.e., getting to the outcome faster. But at that time, monetization strategies were not a priority. As we have matured and are maturing every day at a really rapid pace, our posture on AI, I can say that your category #2 and category #3 are the ones that we think of very much. You are correct in saying that we've introduced recently an AI credit-based system that aimed at managing through this credit-based system, our AI pricing. The way it would work is for modules like AI Virtual Coach and AI Video Presenter, a consumption model whereby our customers using these modules consume credits that run against the packages they would buy upfront. We don't have a long history of doing this. We've recently started this, but we -- our thesis is to continue to roll in AI capabilities against this model to make it more meaningful from a monetization standpoint in the future. But then we also believe that continuing to provide AI capabilities will give us an edge against the competition, which will allow us and help us defend a premium of our product against the competition as a result. Finally, I would say retention is -- remains an evergreen goal that we have. So we infuse AI features everywhere. Every single product manager in the company is required to think AI first as they build new products and revise existing features, so that our customers have a better experience with the product. Operator: Our next question comes from Robert Young, from Canaccord Genuity. Robert Young: You said in the prepared remarks that you've seen the second consecutive quarter of improved retention. I assume that's with the OEM piece aside. So I was wondering if you could dig deeper into that. If you could update us on where churn is, where the elements of churn are, if that's improving? And then where you think that's going to go in '26? Brandon Farber: Rob, it's Brandon. As you know, we only disclose NRR on an annual basis, so we won't go into specific numbers. But you are right. We did see 2 consecutive quarters in a row of retention improvements, whether you look at it from a gross retention or net retention. This is actually very consistent with what we have been saying for the past 2 quarters. We knew in Q1, we had a large renewal base that would bring it down and we'd only go up from there. One thing that is important to mention is that we did lap the large Thomson Reuters downgrade that happened in Q3 of last year of roughly $2 million. So obviously, lapping that did result in improvement. And to be completely transparent, we do expect that metric to go down next quarter because of the AWS downgrade. So a couple of things that I'd say is we have a renewed focus on retention. We are putting together account mapping for every at-risk customer, and making sure we're proactive and not reactive. And we feel really good about the programs we have in place to continue strong retention metrics in the future. Robert Young: You noted the AWS Skill Builder roll-off. How is that handover progressing? Is there a potential for a subcontract, a support contract in 2026? Or is that going to disengage completely, as you expect? Brandon Farber: Rob, we expect that to completely disengage, December 31. Operator: Our next question comes from Josh Baer from Morgan Stanley. Josh Baer: Congrats on reaching 20% EBITDA margin early. That's something that you guys have been talking about for a long time. I wanted to just follow up with a couple more on the OEM. Just curious what that percentage was last quarter? Do you have that? Brandon Farber: Sorry, maybe if I could just rephrase, are you asking for what ARR growth was, excluding Dayforce? Josh Baer: No. The percentage of ARR, so 6.2% this quarter. Just wondering what it was last quarter. Brandon Farber: Instead of giving you that exact metric, what I can give you is what our ARR, excluding Dayforce was last quarter, which was roughly 13.9%. Josh Baer: For Q2 also? Brandon Farber: Correct. Josh Baer: I guess I'm just wondering why it was like a greater wind down than expected? Was it Dayforce-led? Was it customer-led? Any context there? And then I did want to just follow up, like is it a lot of smaller customers noticed like there was a big jump again in average contract value. So some really nice acceleration there. Wondering if it's related. I know you also had success more broadly in enterprise. But in part, I want to get a better sense of like does this average contract value continue accelerating? Or should we expect that to slow down? And then when we do get the total customer count at the end of the year, like should we expect that to move lower due to this Dayforce? Brandon Farber: Yes. A lot of what you just said is bag on. So our ACV this quarter did grow as a result of the Dayforce wind down. If you think about the customers that typically get attracted to an HRS system plus an LMS, they tend to be a customer who use it for 1 to 2 use cases, which is onboarding and compliance. And those average tickets tend to be materially lower than a customer that would sign directly with Docebo, for multiple different use cases. So you should expect and you should model that our ACV with Dayforce is materially lower than a customer that signs directly with Docebo. Regarding customer accounts, you should expect that our customer count overall will be down, and that is a result of the wind down of Dayforce. Operator: Our next question comes from Yifu Lie from Cantor Fitzgerald. Yi Lee: Congrats on the strong 3Q print and a busy week of earnings. So to start with you, Alessio, I want to go over the AI product vision. We understand from Inspire, Alessio, your model is to build a product that delivers value to customers first, and they will eventually pay Docebo and you can monetize it, right? So looking at the new product lineup, whether it be Harmony Search, support AI offering, Virtual Coaching, Copilot, et cetera. So which of these products, Alessio, would you say is closer to monetization potential? On the second part of this question, Alessio, in the end of your prepared remarks, you talked about redefining the future of learning. And I understand you like to solicit continuous feedback from your customers. What are the key things you've learned from your customer and stakeholders that you want to apply to your product road map for the end of this year and 2026? And I also have a follow-up with Brandon after this. Alessio Artuffo: Lovely question. Let's get started. start on the AI and product. First, let me share that you are correct. Our vision around our Harmony ecosystem is very ambitious, and we have executed. So far, Harmony Search from its recent launch has already powered about 0.5 million search with 0.5 million queries, which is a very positive result against our expectations. This is not only stopping with search. Search was just the beginning of a journey where we want to get Harmony to become the assistant of our customers. Harmony, in fact, was now evolved into a Copilot logic. The goal is to improve the productivity and the self-servicing of capabilities in the platform. So you can go in Docebo and ask Harmony to perform tasks for you and help you identify how to get things done in the product, and Harmony will either point you to it or do it for you. This is just the beginning of a journey towards full platform automation, which is a longer-term vision that we have that we're going to pursue. In terms of Creator, which you mentioned, I think your question was around which capability do I think will contribute the most to monetization. Creator is the engine behind the experience creation in Docebo, which includes, as part of it, our AI Virtual Coach, the ability to create simulations, and to simulate any scenario from customer service leadership and sales enablement, something that we have evolved this past month by releasing a new version of Creator, which -- sorry, of Virtual Coach, that initially was addressing only the sales enabling use case. Now that module is well rounded up and allows an organization to map simulation scenarios against any custom role play scenario they want to implement. So we do expect Creator and Virtual Coach to be great contributors to our monetization strategy in the future. No, I was just going to wrap up by saying our road map reflects our belief that a platform from a differentiated standpoint, you asked about the customers and what we are hearing. We are hearing customers saying they want more ability to create personalized experiences. They want to do less leaking and to be able to create content at a more rapid pace in automated way. That's what we're executing with Harmony and with Creator. Yi Lee: Alessio, I want to follow up on the -- obviously, you guys made on the customer wins, especially I want to focus on the industrial one, the 200,000 seat, right? Obviously, you're leaning more towards the system integrator channels similar to other Tier 1 SaaS software companies. I just wanted to get your sense on like what types of partnerships are you engaging? I know Deloitte is a big one, right? What's working and what needs to work on? Then I'll just ask a financial question as well, Brandon. On the financial side, I'm just looking at the KPIs for new logo ACV, 71k is flat year-over-year, but up 8% quarter-over-quarter. But in terms of the story, it seems like you guys are going upper enterprise, right? So why is that metric flat year-over-year? That's it for me. Brandon Farber: I'll kick it off on the last part of that question. So how we look at ACV is given the fact that we're seeing extremely strong success in mid-market, and this is 2 quarters in a row where we've seen that strength, and we're seeing leading indicators that that strength will continue into Q4. That is impacting obviously, the ACV, as we have larger concentration of customer accounts coming in at the mid-market. When you think about the enterprise space, you tend to have a lower number of customer wins, but at a larger ACV. So during the quarter, we actually did have really strong performance of units that had very healthy ACVs, upwards of, let's call it, $500,000 ACV. And seasonally, we do expect Q4 to be strong enterprise quarter, and we do expect that ACV to go up in Q4 as well. Alessio Artuffo: On the first part of the question, you asked about how we view the market of system integrators, and you mentioned the big logo that we mentioned earlier. I would say a few things. In the past calls, we've outlined how we made such great strides in partnering with the Accenture and Deloitte type of system integrators. That work continues, and we continue to advance our relationships with them and really formally progress our status as partner type within those organizations, which in turn, will only give us more penetration in their go-to-market efforts. But also remember, it's not only a matter of pipeline creation, it's also the ability for them to support us in complex implementations, which has an incredible amount of value with large enterprises. I would add a different type of color in this call by saying that not only we've been working with these very large system integrators, but also regionally, internationally, we've identified a number of system integrators that are leaders in their respective markets. And so when you think about wins like that, the State Administration School of Latvia, we would have not been able to do that with a critical regional partner that helped us become the de facto platform for the entire public sector of the country of Latvia. And so as we continue to expand with these regional and more focused system integrators, we expect deals like these to become more and more frequent. Operator: Our next question is from Erin Kyle from CIBC. Erin Kyle: I just had a question on how we should be thinking about the margin profile here into 2026, as you continue to expand the federal pipeline and opportunity here. Do you expect to see an increased spend in sales and marketing, or the 20% margin in Q4? I guess my question is, how sustainable is that you think going forward? Brandon Farber: The way we're thinking about EBITDA margin, and it is important to note, we do have a bit of seasonality in EBITDA where we do expect Q3 and Q4 to always be stronger than Q1 and Q2, given Q2, we have our big Inspire event in Q1, we tend to have seasonally higher payroll costs. How we're thinking about EBITDA going forward, we do think we're fairly staffed from a sales and marketing perspective. We've invested and spent money in government over the past 2 years, and we've staffed that team up for success. We do have pipeline targets, coverage ratios that once it exceeds those ratios, we will certainly accelerate hiring. But for now, the government team is fully staffed. How we're thinking about EBITDA margins going forward, we do post in our investor deck every quarter goals from a spend level. And one number to call out is we're at 20% EBITDA today. Our G&A as a percentage of revenue is roughly 15%, and our long-term or midterm goal is 9% to 11%. So if you think about incremental 5% leverage in G&A alone, that gets you to 25% margin over a mid-to long-term basis. And that's without sacrificing any investments we have to make in R&D and sales and marketing. Erin Kyle: Maybe I can just ask one more just on the professional services revenue in the quarter was a bit higher than we had expected. Is that related to the strength in the mid-market? And if that's the case, should we expect that to trend higher in Q4 and going forward as well as you see that mid-market strength continue? Brandon Farber: Yes, it's a great question. So what we're seeing is that the type of customers in mid-market that tend to be attracted to Docebo, are customers that have complex onboarding needs and complex use cases. And with complex use cases tend to lead to more hands-on onboarding experience. What I would say is that while we're pleased with the professional revenue growth, it's not a line item we're focused on. We're really focused on growing high-margin accretive subscription revenue, and we're very comfortable with handing off professional services revenues for our partners, such as Deloitte and Accenture. Operator: Our next question comes from Suthan Sukumar from Stifel. Suthan Sukumar: For my first question, I wanted to touch on the Amazon expansion. I thought that was a positive read on sort of, the state of that relationship. Can you speak a little bit about -- aside from the AWS contract, what use cases you are involved with Amazon, and how you expect that relationship to evolve going forward? Alessio Artuffo: Sure. So first, let me underscore the fact I'm very pleased with the fact that notwithstanding Amazon divesting from us on the Skills Builders initiative, we continue to attract the business of other Amazon companies who continue to entrust us with our products and services. I think that's a testament also to the great work that we've done over the years with Amazon Skills Builder. Because if we had done so, you would presume that the reference calls that would happen in order to sign with Docebo, would bring these Amazon companies to make different decisions. So I think that's a little bit of also in the retrospective to clear up any doubt remaining. I would say on the current win, we did sign Amazon Health, which is the health care division of Amazon. It's a very important win for us because not only it adds another Amazon logo to our customer base, but also it's a perfect fit for our products and services. They are going to be using Docebo for both customer experience, doing customer and partner education, effectively supporting health care professionals and technology partners and service teams. And then on the employee side, they're going to be using Docebo for sales enablement, onboarding, leadership development, professional development, and compliance. What we know is that organizations that use Docebo for more than 4, 5 use cases have the best metrics in terms of unit economics and retention. And so we love what we can bring in companies that effectively become so. And on the competition side, you guys usually ask that I want to know, unsurprisingly, we did overcome the other competitors, both on the mid-market and I would say, legacy enterprise side. Brandon Farber: One thing I'd add is that this new use case with Amazon, they were not interested in a short-term relationship with us. They did sign for 5-year contract, which just shows the strength of Docebo's relationship with Amazon. Suthan Sukumar: Great. My second question, I just wanted to kind of touch on the growth profile. You guys are -- ARR is now down 10% year-over-year. But when you exclude Dayforce, 14%, I think that does speak to the strong underlying growth momentum in the business. Can you remind us the impact with the AWS contract roll-off would be to ARR? And more broadly, what would need to happen for growth to continue reaccelerating from here? I'm just going to keep in mind that you guys have a new CRO in the seat. Just curious what sort of changes and priorities are playing out here to support that growth reacceleration. Brandon Farber: I'll start off and pass it off to Alessio. So the AWS impact consistent with last quarter is approximately $4 million hit to ARR, which will come out December 31. Alessio Artuffo: So on the question of reacceleration -- look, I think you were bang on in your observation. And I would underscore that our CRO and CMO, have been in seat for a relatively short time frame. In the past 90 days alone, though, I have seen them making a significant impact that Kyle and Mark, who hopefully are listening to us today. I'm going to say good things about their work. I've been very impressed with the level of sophistication that we've been able to already inject in our revenue architecture. There are a lot of practical details that are being improved from forecasting methodology to customer success methodology. We are investing significantly in optimizing our spend on the marketing side, becoming leaders in this AI referral traffic generation, which is a big aspect, and marketing -- digital marketing is changing a lot in the kind of post every single SEO era. So their execution has been start, and I'm seeing already the beginning of a trajectory that will continue in the years to come. In terms of reacceleration is achieved through a few things that we're pursuing. I would highlight four areas that we are particularly focused on. The first one is an evergreen, as I say, always improving our retention metrics. And that is not just improving our retention, but also improving our net dollar retention by strengthening our expansion engine. We're very focused on this, and we're seeing positive momentum in the pipeline in the business. The second one that I would mention is performance in the mid-market. As we mentioned, we are executing really well as a result of a mix of things, our people, and processes. And we expect this performance to continue in the quarters to come. The third one that I would mention is, again, government. We've only seen the beginning of a journey that started in May with federal, and will continue strong into 2026, alongside our continued execution in flat. And finally, we have been working on strengthening our enterprise momentum and pipeline. We're starting to see the results of that. We expect good signals in quarter 4, but we believe 2026 will be the year of enterprise at Docebo. Operator: Our next question comes from Richard Tse from National Bank Capital Markets. Richard Tse: I just want to go back to this AI product portfolio. Can you help us understand your assumptions around how your attach rates are going to scale with those products? And with that, how the revenue profile will lift alongside that? Brandon Farber: Richard, I'm going to wait to answer that question for Inspire, where we'll have an investor update and talk a little bit more about how we're envisioning AI credits to impact our overall business. The one thing that I would say is that we will have ARR that will lag a little bit in linearity with our typical nice ratable revenue as we'll recognize ARR credits as it's consumed. So the biggest impact is if we sign a new customer with -- that has an AI credit bundle, they won't start consuming until after onboarding. But we definitely see AI credits as a very strong way to lift our NRR, and have expansion within our existing customer base. Richard Tse: I guess the other question is around partnerships. You've been spending a lot of time talking today about SI partnerships. I think a few years ago at your conference, you showcased Microsoft from a technology partnership standpoint. So when you sort of look at those 2 types of partnerships, what's your sort of perspective on each in terms of driving lifetime value? I was under the impression that sort of the integration with Microsoft tends to make it stickier and potential to expand those offerings. And if that's the case, are you pursuing those type of partnerships as well in addition to these SIs? Alessio Artuffo: Our technology partnerships are an important part of our partnership thesis. On the Microsoft side, I believe you may be referring to our module called Microsoft Teams, which is a module that allows customers that use Teams, to connect Docebo to it. It's a module that we're seeing having success in organizations that are Microsoft add. In terms of our overall technology partnerships, what we're favoring and what we're leading with are capabilities that our customers can use to extend the value of the Docebo platform. To give you an example, we have integrated with Docebo tightly technologies like S'ABLE for Virtual Labs, or Honorlock for Proctoring. I would say our partnership focus remains more on the go-to-market side. And as far as the technology side, we will continue to invest to some extent with the integrations with the core platforms like Teams, Slack and others. Operator: We have no further questions. I would like to turn the call back over to Alessio Artuffo, for closing remarks. Alessio Artuffo: Thank you very much for attending and for helping us tell a story of another exciting quarter at Docebo. We look forward to seeing you at the end of February, for our Q4 results. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to Applied Optoelectronics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. I will now turn the call over to Lindsay Savarese, Investor Relations for Applied Optoelectronics. Ms. Savarese, you may begin. Lindsay Savarese: Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I'm pleased to welcome you to AOI's Third Quarter 2025 Financial Results Conference Call. After the market closed today, AOI issued a press release announcing its third quarter 2025 financial results and provided its outlook for the fourth quarter of 2025. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for 1 year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q3 results, and Stefan will provide financial details and the outlook for the fourth quarter of 2025. A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance or achievements of the company or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believe, forecast, anticipate, estimates, suggests, intends, predicts, expects, plans, may, should, could, would, will, potential or think or by the negative of those terms or other similar expressions that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of its products into new markets and customer responses to its innovations as well as statements regarding the company's outlook for the fourth quarter of 2025. Except as required by law, AOI assumes no obligation to update these forward-looking statements for any reason after the date of this earnings call to conform these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the Risk Factors section of AOI's reports on file with the SEC, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in the company's earnings press release that is available on AOI's website. Before moving to the financial results, I'd like to note that the date of AOI's fourth quarter and full year 2025 earnings call is currently scheduled for February 26, 2026. Now I would like to turn the call over to Dr. Thompson Lin, AOI's Founder, Chairman and CEO. Thompson? Chih-Hsiang Lin: Thank you, Lindsay, and thank you for joining our call today. We successfully deliver revenue, gross margin and non-GAAP loss per share in line with our expectations. In fact we recorded the highest quarterly revenue in our history, driven by strong demand in CATV market which also achieved record revenue in the third quarter. The strength we saw in our CATV business more than offset our datacenter revenue is trending a touch with our expectations, largely due to the timing of certain shipment at quarter end. In [indiscernible] we were approximately $6.6 million in shipping our of 400G transceiver to a large hyperscale customer, who was not able to return into revenue during the quarter due to various shipping and receiving delays and which we have took in Q4. Despite this delay, our financial results clearly highlight the range of having diversified revenue stream as a result of a revenue on a combined basis increased 15% sequentially and 82% year-over-year. Number three, we continue to make profits on customer colocation on our 800G. As we mentioned last quarter, we believe we are near the final stage of qualifications with several customers. We expect qualifications in the near-term based on conversations that we are having with our customers, and we continue to believe that we will produce meaningful shipment of AOI product in the fourth quarter. Total third quarter would be the revenue of $118.6 million which was in line with that kind of a range of $115 million to $127 million. We recorded non-GAAP gross margin of 31%. This was in line with our guidance range of 29.5% to 31%. And on net loss per share of $0.09 compared in line with our guided range or a loss of $0.10 to a loss of $0.13. Total revenue for our datacenter of $43.9 million increased 7% year-over-year, but was down sequentially. Revenue for our other products includes 32% year-over-year, while revenue for our 400G product was down 65% year-over-year or $7.1 million due to the timing of certain shipment this quarter end that I just mentioned. Total revenue in Q3 in our CATV segment was a record $70.6 million with more than triple year-over-year and was up 26% sequentially from a strong Q2. This increase is due to the continued ramp in orders for our 1.8GHz amplifier product for both existing as well as new customers. With that, I will turn the call over to Stefan to review the details of our Q3 performance and outlook for Q4. Stefan? Stefan Murry: Thank you, Thompson. As Thompson mentioned, we successfully delivered revenue, gross margin and a non-GAAP loss per share in line with our expectations. In fact, we recorded the highest quarterly revenue in our history, driven by strong demand in the CATV market, which also achieved record revenue in the third quarter. The strength that we saw in our CATV business more than offset our data center revenue, which came in a touch below our expectations, largely due to the timing of certain shipments at quarter end. In particular, we had approximately $6.6 million in shipments of 400G transceivers to a large hyperscale customer, which was not able to be turned into revenue during the quarter due to various shipping and receiving delays and which we have booked in Q4. Despite this delay, our financial results clearly highlight the advantage of having diversified revenue streams. As a result, our total revenue on a combined basis increased 15% sequentially and 82% year-over-year. In Q3, we delivered revenue of $118.6 million, which was in line with our guidance range of $115 million to $127 million. We recorded non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5% to 31%. Our non-GAAP loss per share of $0.09 was also in line with our guidance range of a loss of $0.10 to a loss of $0.03. We continue to make progress on customer qualifications on our 800G products. As we mentioned last quarter, we believe we are near the final stages of qualification with several customers. We expect qualification in the near term based on conversations that we are having with our customers, and we continue to believe that we will produce meaningful shipments of 800G products in the fourth quarter. For the third quarter in a row, we did record immaterial revenue for our 800G products related to deliveries for customer qualification activity. As we have mentioned before, our schedule on ramping up our production is largely constrained by our ability to build and qualify production capacity. On that front, we are pleased to report that we made good progress on getting our production ready during the third quarter and remain nearly on track to achieve the targets that we laid out at OFC. As a reminder, we expect this will culminate later this year with what we believe will be the largest domestic production capacity for 800G or 1.6 terabit transceivers, approximately 35,000 transceivers per month or roughly 35% of our overall capacity for these advanced optical transceivers. Notably, we will be able to accommodate this expansion in our current Texas facility footprint. Further, by mid-2026, we continue to expect to be able to produce over 200,000 pieces per month with the majority produced in Texas. As I just mentioned, we made solid headway towards these targets for next year. As you may have seen, we announced last week that we signed an agreement to lease an additional building in Sugar Land, Texas. We will begin construction on this new facility later this year and are confident in our ability to scale our production towards the middle to end of next year to achieve our 2026 targets. It's also important to note that AOI has had an in-house laser manufacturing capability for many years, and we have been expanding and improving this capability recently. While we have heard talks about laser shortages, having a laser production capability in-house gives us an advantage. And to date, we have not experienced a shortage of lasers that has affected our ability to deliver products according to our customers' requests. We've spent years developing our automated manufacturing capabilities, which gives us an advantage in the ability to do manufacturing virtually anywhere in the world that we would like to and makes building out another facility in a cost-effective way in Texas possible. The message from our customers is consistent. Many of them have a strong preference for production in North America. And so that's what we have been and are currently focused on. When we talk about adding capacity, the lead time for us to add new equipment and add machinery to our production process is typically less than the lead time it would take to hire and train the types of skilled operators that are needed to do the manual processes that are used by most of our competitors. Just to reiterate, we currently have 3 manufacturing sites, one here in Sugar Land, Texas, where our headquarters is and which will soon involve 2 facilities, 1 in Ningbo, China and 2 in Taipei, Taiwan with an additional one under construction. As you may have heard me say at OFC, we expect to increase the total production of 800G and 1.6 terabit products by 8.5x by the end of the year, and we are on track and dedicated to achieving this goal. During the third quarter, direct tariffs had a $1.1 million impact on our income statement. As it relates to tariffs, also, as I mentioned on our prior couple of earnings calls, while we do utilize some imported components in our transceivers, many key components like our laser chips are already manufactured in the U.S. Importantly, in our 800G and 1.6 terabit transceiver designs, less than 10% of the value of the components used is currently sourced from China, and we have a pathway as we scale production to further reducing this China content, ultimately to near 0. We are also in discussion with several key suppliers about onshoring their production to the U.S. to support a robust domestic supply chain. Turning to our third quarter results. Our total revenue was $118.6 million, which increased 82% year-over-year and increased 15% sequentially off a strong Q2 and was in line with our guidance range of $115 million to $127 million. During the third quarter, 60% of revenue was from CATV products, 37% was from data center products, with the remaining 3% from FTTH, telecom and other. In our datacenter business, Q3 revenue came in at $43.9 million, which was up 7% year-over-year and was down 2% sequentially. Sales of our 100G products increased 32% year-over-year, while sales for our 400G products decreased 65% year-over-year or $7.1 million, which was primarily driven by the timing of certain shipments at quarter end that I previously discussed. In the third quarter, 83% of datacenter revenue was from 100G products, 9% was from 200G and 400G transceiver products and 7% was from 10G and 40G transceiver products. Looking ahead to Q4, we expect a substantial sequential increase in our data center revenue, driven by growth in 400G revenue as well as layering in some increased 800G revenue. In our CATV business, we saw exceptionally strong demand in Q3. CATV revenue in the third quarter was a record $70.6 million, which more than tripled year-over-year and was up 26% sequentially from a strong Q2. This increase is due to the continued ramp in orders for our 1.8 gigahertz amplifier products. Similar to last quarter, we shipped a significant quantity of 1.8 gigahertz amplifiers to Charter in the quarter and demand continues to be robust. On our last earnings call, we had discussed how in addition to Charter, we had 6 other MSO customers who had already begun to order and deploy our 1.8 gigahertz products or are in various stages of qualification of these products. We were pleased to see continued momentum with these new customers and are excited to see the broad-based appeal of our amplifiers and QuantumLink software. During the quarter, we announced the addition of 4 new software modules to our QuantumLink HFC remote management solution which offers our customers actionable intelligence to optimize network performance, reduce operational costs and improve the broadband experience. The new suite of software modules are add-ons to our existing QuantumLink Central, providing telemetry, adding unified visibility, predictive diagnostics and automated controls to our remote amplifier management platform. Most software features will be available this quarter. The feedback we are hearing from our customers is very positive. In September, we attended the Society of Cable Telecommunications Engineering Expo. We had great interactions with customers and potential customers during the expo. And as I just mentioned, feedback from our customers continues to be very positive with many noting that our amplifiers are groundbreaking in terms of performance, ease of setup and control and monitoring capabilities. As cable operators prepare for substantial upgrades to their infrastructure to meet increased spectrum and bandwidth demand, it's clear that the deployment of next-generation amplifiers and related equipment has become essential. Looking ahead to Q4, we expect strength in our CATV business to continue, although we expect revenue in this business to moderate to between $50 million and $55 million next quarter, following this quarter's exceptionally strong results. Now turning to our Telecom segment. Revenue from our Telecom products of $3.7 million was up 34% year-over-year and 93% sequentially. As we have said before, we expect telecom sales to fluctuate from quarter-to-quarter. For the third quarter, our top 10 customers represented 97% of revenue, up from 96% in Q3 of last year. We had 2 greater than 10% customers, one in the CATV market, which contributed 66% of total revenue and one in the data center market, which contributed 24% of total revenue. In Q3, we generated non-GAAP gross margin of 31%, which was in line with our guidance range of 29.5% to 31%, and was up from 25% in Q3 2024 and compared to 30.4% in Q2 2025. The year-over-year increase in our gross margin was driven primarily by our favorable product mix. Looking ahead, we expect continued gradual improvement in gross margin although we expect that the revenue mix in data center in the next few quarters will be a slight headwind. We remain committed to our long-term goal of returning our non-GAAP gross margin to around 40%. The progress we have made so far demonstrates that we're on the right track, and we continue to believe that this goal is achievable. The revenue figures presented above are net of a contra revenue amount due to the accounting for warrants provided to customers. As a reminder, this amounts to approximately 2.5% of revenue derived from certain customers to whom AOI has provided warrants in exchange for future revenue. In Q3, the amount of this contra revenue was immaterial at about $50,000. Total non-GAAP operating expenses in the third quarter were $47.1 million or 40% of revenue, which compared to $27.9 million or 43% of revenue in Q3 of the prior year. While operating expenses increased this quarter and were a bit higher than our forecast, this rise was largely driven by increased shipping costs related to increased business activity in our CATV business this quarter. Looking ahead, we expect non-GAAP operating expenses to be in the range of $48 million to $50 million per quarter. Non-GAAP operating loss in the third quarter was $10.3 million compared to an operating loss of $11.7 million in Q3 of the prior year. GAAP net loss for Q3 was $17.9 million or a loss of $0.28 per basic share compared with a GAAP net loss of $17.8 million or a loss of $0.42 per basic share in Q3 of 2024. On a non-GAAP basis, net loss for Q3 was $5.4 million or $0.09 per share, which was in line with our guidance range of a loss of $5.9 million to a loss of $2 million or non-GAAP income per share in the range of a loss of $0.10 to a loss of $0.03. This compares to a non-GAAP net loss of $8.8 million or $0.21 per share in Q3 of the prior year. The basic shares outstanding used for computing the earnings per share in Q3 were $63.3 million. Turning now to the balance sheet. We ended the third quarter with $150.7 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $87.2 million at the end of the second quarter of 2025. We ended the third quarter with total debt, excluding convertible debt of $62 million compared to $54.3 million at the end of last quarter. As I mentioned on our prior earnings call, earlier this year, we announced a revolving loan facility with BOK Financial of $35 million, which we intend to use to meet some of our working capital needs going forward. As of September 30, we had $170.2 million in inventory, which compared to $138.9 million at the end of Q2. This increase in inventory is almost entirely due to purchases of raw materials to be used in production of our products over the next several months. During the quarter, we initiated a new ATM program. We completed this program during the quarter, raising $147 million net of commissions and fees, which we intend to use mainly for new equipment and machinery for production and research and development use, including the earlier mentioned production expansion in Texas. We made a total of $49.9 million in capital investments in the third quarter, which was mainly used for manufacturing capacity expansion for our 400G and 800G transceiver products. On our last few earnings calls, we have discussed our plans to make sizable CapEx investments over the next several quarters as we prepare for increased 400G, 800G and 1.6 terabit datacenter production in 2025. To date, this year, we have made a total of $124.9 million in capital investments and we are tracking at or above our CapEx projections we gave earlier this year of $120 million to $150 million in total CapEx. We have noted on our prior couple of earnings calls that these costs could be impacted from tariffs, but that given the evolving nature, it is difficult to predict what type of impact or by how much. In Q3, the direct tariff impact on capital equipment was $1.9 million or roughly 4%, but tariff rates and equipment import mix may cause future results to vary materially. We source equipment from all over the world, including both from domestic and international locations. We have and will continue to do our best to minimize any impacts. It's clear that U.S.-based production is a priority for our customers, and we remain fully committed to expanding our capacity to meet that demand. Moving now to our Q4 outlook. We expect Q4 revenue to be between $125 million and $140 million, accounting for a sequential decrease in CATV revenue as well as a more substantial sequential increase in our datacenter revenue. We expect non-GAAP gross margin to be in the range of 29% to 31%. Non-GAAP net income is expected to be in the range of a loss of $9 million to a loss of $2.8 million and non-GAAP earnings per share between a loss of $0.13 per share and a loss of $0.04 per share using a weighted average basic share count of approximately 70.3 million shares. With that, I will turn it back over to the operator for the Q&A session. Operator? Operator: [Operator Instructions] Our first question comes from Simon Leopold of Raymond James. Simon Leopold: I'm going to ask two and start with the cable TV side. So clearly, a strong blowout number here this quarter. So the moderation makes sense. And I guess where I'd like to go is to understand how you're thinking about the broader outlook for CATV in that I recall last quarter, we talked about the potential to do over $300 million in 2026. If we sort of run rate out what you're doing, you're certainly on that trajectory. But I want to assess this given the lumpy nature of cable TV. Stefan Murry: Yes, thanks for bringing that up. So yes, I mean, we do think $300 million plus in cable TV revenue is still achievable next year. As you pointed out, we're kind of approaching a run rate there in this quarter. What I think is significant to point out, though, and we pointed this out on the last earnings call as well, that a lot of that growth is going to come from new products that we've announced, and we discussed in our prepared remarks a few minutes ago about the great success that we had at the Society of Cable Telecommunications Engineering Show, showcasing some of our new products, including the software products that we highlighted. So yes, I think the $300 million plus mark is achievable next year. However, it's not likely to come just from the amplifier products, although again, we expect strong results in the amplifiers, but the additional revenue that we expect to see from those other products should get us up to that $300 million mark. Chih-Hsiang Lin: This is Thompson. As we said in the script, we expect the cable TV revenue in Q4 will be reduced to maybe $50 million to $55 million. So that means the datacenter growth should be a lot, okay? Since the revenue increased by about 10% compared to Q3. So revenue will increase by $25 million to $40 million in Q4. Because of... Simon Leopold: Thanks. And then... Chih-Hsiang Lin: Yes, sorry. Go ahead. Simon Leopold: Yes. No. So that's why I wanted to follow up on the data center, particularly around your comment about 400 and 800 gig being up, given 800 gig is teeny right now, I'd like to unpack that a little bit because I don't think you've announced certifications, qualifications on 800 gig yet. It sounds like that's somewhat imminent but I don't want to over interpret. So maybe just drill down specifically to how you think about 800 gig in that 4Q? And then, of course, how should we think about the timing of when to start thinking about 1.6T? I understand that's not in 4Q, but should we be thinking about that for next year? Stefan Murry: Yes. So 800 gig, we do expect meaningful shipments in the fourth quarter, as we said in our prepared remarks. Now the growth in Q4 is largely going to come from 400 gig, but we do expect meaningful revenue from 800 gig in this quarter. And as you pointed out, that would require product qualification to be pretty imminent, which is what we believe. With respect to 1.6 terabits, yes, we do think that we'll see revenue from 1.6 terabit later next year, but it's not going to be a factor in Q4, as you pointed on, and probably not in the first half of next year. Chih-Hsiang Lin: AOI CATV single mode especially [indiscernible]. The AOI CATV single mode transceiver in Q4 will not be around, I would say, maybe $4 million to $8 million. Most of the growth is from 400G single mode transceiver. The 1.6T single mode transceiver we have right now, I would say, around 4 customer. So we are working very hard. I would deliver the sample either by end of this year early next year. The volume manufacture will be more like I would say, June, July next year for 1.6T. And we have several, I would say 4,5 different products for 1.6T single mode transceiver and we will announced pretty soon in short term. Stefan Murry: Also, Simon, I just want to reiterate something that we've mentioned repeatedly and talked about a little bit on the call. But just for clarity, the factory that we're building both here as well as the increased capacity that we've been adding in Taiwan is capable of manufacturing both 800G and 1.6 terabit on the same production line. The only difference really is in the final testing in terms of the type of equipment that we need. Operator: The next question comes from George Notter of Wolfe Research. George Notter: I was just curious if you could tell us more about the shipping and receiving delay at the end of the quarter. I'm just wondering what that was. And can you confirm that it was a single customer? Was it multiple customers? Any insights there would be great. And I've got a follow-up, too. Stefan Murry: Sure. It was a single customer, a single hyperscale customer, which is a relatively new customer addition for us. And as a result of that, some of the shipments at the end of the quarter -- I can't go into too many details because it's obviously nondisclosure agreements and such. But let's just say that not all the systems that were -- all the inventory management systems and all that have been properly configured at that point to be able to receive those goods in time for us to book them as revenue in the third quarter. So we resolved that in the first few days of the fourth quarter and have booked that revenue since then. So it wasn't anything that we expect to recur or anything like that. It was just kind of unique to this, I would say, sort of start-up business, if you will, with this particular large hyperscale customer. George Notter: Got it. Okay. I'm sorry. So the products were delivered to the customer, but it sounds like ownership couldn't transition because it hadn't been through their inventory management system. Is that the right view? Stefan Murry: Yes, basically. I mean there's a system integrator that's involved, again, without going into too many details, but it essentially comes down to just a timing issue with the computer systems on all sides that need to be synced up. George Notter: Okay. Got it. And then can you give us an update on the capital spend? I mean you said you're tracking ahead of the $120 million to $150 million for the year. What does that look like now when you layer in Q4? And then how about 2026? Do you have an initial view on what CapEx would look like next year? Stefan Murry: Yes. So we don't have -- a lot of the Q4 guidance comes down to sort of timing on when we're going to receive a lot of the equipment. So we're still looking at that. It's probably going to be ahead of that $150 million top end that we said before, but it's unclear at this point exactly how much of that equipment will really be able to be delivered in this quarter. So we'll get back to you on that. Similarly, for 2026, we're still working on the CapEx plans for 2026. So I would expect it to be above what we're seeing in 2025, but I don't have a precise number yet on that. We're still going through this time. Operator: [Operator Instructions] And our next question comes from Michael Genovese of Rosenblatt Securities. Michael Genovese: I guess for 400G with that customer becoming a run rate business. And if I'm not mistaken, I was thinking about 100,000 units per month. So maybe you could update on that. But is that the right way to think about it? And is it getting there in the fourth quarter? And then we should think about that customer being at the same level of 400G per quarter all year in 2026. Am I thinking about that the right way? Stefan Murry: So it is approaching -- I mean, it is on track to becoming sort of a run rate business, as you mentioned, that is -- when I hear the term run rate business, so I'm assuming you mean is sort of capacity limited, right? That is we can -- we'll be selling a relatively consistent amount every quarter based on our capacity. So it's on -- it is moving in that direction. We will not be fully at capacity in Q4, not to mention the fact that we're continuing to add some capacity, especially in Taiwan, like we talked about earlier. So it won't reach its maximum potential in Q4 by any means, but it will be a meaningful contributor to revenue. As Thompson mentioned earlier, if you think about the guidance that we gave, right, cable TV has an implied decline of, let's just say, $15 million roughly, give or take, while the overall revenue is going to be up roughly $15 million, again, give or take, within the ranges that we specified. And so the rest of that growth is going to come from datacenter. And most of that is going to come from 400G as we discuss earlier. A little bit of 800G, but not a lot. Most of it is going to come from 400G. Chih-Hsiang Lin: Basically it is limited our capacity. So right now, for 400G single mode transceiver in Q4, we can maybe close to 60,000 per month. Then Q2, I think our target go to 110,000 to 120,000 per month. So it depends on our capacity. That is why we spend our CapEx. We spend the CapEx in Taiwan and U.S. The other is, for sure, very important, is the laser capacity. It's very important as you know, it's a shorter laser. Good news, we have laser capacity. That's why AOI right now is doing 3-inch, we'll go to 4-inch next year. At the same time our targets go to maybe -- not to mention the other laser our 25G, 50G high power CW laser for the single photonics, we are talking about our target by December next year is at least more than 2 million per month. That's where we spend all the CapEx, [indiscernible] wafer, all kind of stuff. And for sure, we are working on 6-inch wafer, but it will be more like a two-year project. But I think 4-inch probably is ongoing and it's pretty smooth. Michael Genovese: Okay. Great. And then it sounds like you've got pretty high confidence of an 800G qualification coming soon if you're putting some in the fourth quarter guidance. So I just want to double click on that confidence. But then also if we just back up 3 months ago, is this process going the way you expected? I know matter of a couple of weeks on either side of no big deal, but did you think you have it by now? Or is this kind of going the way you thought it would go? Chih-Hsiang Lin: I think we should get order pretty soon. We will send several batch for qualification for DIL and [ 2xFR4 ]. So we believe we should get some volume order in maybe, I would say, 3, 4 weeks or even sooner. Let me say that we have delivered thousands of samples, okay? That’s just four batches of samples, okay, to several customers. So finally, they get into volume, but really not so big volume because the big volume is talking maybe 150,000 per month or even 250,000 a month. But now we are talking about maybe 10,000, 20,000. So it's not -- It's volume away from, quite away from. That's why I say end of December we should have 100,000 per month. By end of June next year we have 20,000 per month. We spend money is based on customer commitment, okay? It's not based on our wish list, let me say that, okay? And don't forget especially in U.S. [indiscernible] space, the capacity, the equipment, it's a lot of money. We spend that money based on customer very strong commitment The reorder, the fourth volume order, we should receive pretty soon, within a few weeks. Stefan Murry: I might directly answer your question about relative to expectations. I think we said that we expected the qualifications to be coming in, in the late Q3 or early Q4. And so we're still in that range, but I would consider what we expected and we're basically still on track for that schedule. Michael Genovese: Okay. If I can ask another, what should 100G be doing in '26 versus '25? And just when you compare the ASP of 100G to 800G are we at an 8x multiple? Or is it even higher than that for the ASP of 800 versus 100? Stefan Murry: It's not an 8x multiple. It's less than that. With respect to what 800G -- or sorry, what 100G will do next year, I think it's going to be pretty consistent. I don't see a big falloff for sure. It could even go up a little bit. There continue to be new deployments of 100G. So -- but I think the best scenario that I would model in is sort of a flat 100G business next year. Michael Genovese: Okay. If I could just ask one more. How are you guys feeling about the -- with the CapEx plans and the expansion plans, you've gone to the market a few times this year. Are you at a good place for your spending next year? Or do you think you're going to have to do more fundraising? Stefan Murry: I think we're going to continue to raise the capital that we need to fund the CapEx. I mean our plans continue to expand. What we're hearing from our customers is more and more bullish in terms of the volume that they need and particularly the volume that they'd like to have out of U.S.-based factories, which we don't have yet. I mean we just announced the lease a week or 2 ago of the new facility, which still has yet to be built out. So that's basically a 2026 event. So we're going to continue to add capacity as we see that demand coming from our customers, and it's very strong right now. Chih-Hsiang Lin: But let me just report on one. We have some discussion with 1 or 2 major customers especially for the U.S. capacity. I think maybe customers will invest AOI maybe $200 million under discussion. Number two, we are working very close with Texas State for some fund raising, some support, including the U.S. government [indiscernible]. So I think maybe we can get some good money from both Texas and the U.S. government. But number three, don't forget next year, we should be profitable quite a lot. I would say no surprise, our net profit should be more than $150 million next year or even higher. So some of the expansion can be paid by our profit. Operator: The next question comes from Ryan Koontz of Needham & Co. Ryan Koontz: On the follow-up on the transceiver products here and it sounds like you guys are doing well in silicon photonics. I wanted to ask your view on kind of the macro of SiPho versus EML versus VCSELs and what you're hearing from your customers about their interest as the data rates move up here to 800 to 1.6? Stefan Murry: Well, I would say, first of all, what we're hearing from our customers may just be a function of where they view us in terms of our technological capabilities and what they need. So that is to say, I'm not saying that, for example, when I tell you that our customers like SiPho, they like our SiPho solution for sure. That's not to imply that they're going to switch all their products over to SiPho. They have other vendors that are working with EMLs, for example. So -- but all that being said, I think broadly speaking, I think SiPho is seen as a technology that has more scalability in terms of its ability to go to higher data rates in the future. I think we're at the early stages of implementing silicon photonics in terms of volume manufacturing and all that. So it's going to take some time for them to become sort of comfortable and let that technology ramp up, but it certainly has more legs in terms of higher data rate than EMLS do. Chih-Hsiang Lin: Especially you need less laser for SiPho. Right now you know there's a very serious problem shortage of lasers, especially for EML, okay? Not to mention 200G even 100G EML. So for example the 800G DIL, if you use EML, you need, I would say, 8 EML. If you’ are using silicon photonics, you only need two high-power CW lasers. That is a very good reason to use SiPho, you know? Yep. Because you can get enough EML. What you can do, you got all the order, you got everything, but no laser. You can make no way you can make in the 800G or 1.6T transceiver. Ryan Koontz: Great. And maybe shifting gears to cable. How are you feeling about share there at your larger customers? Do you feel like the uptick in demand here for cable is this share gain? Is this higher deployment rates? Any view on how you feel about share versus customer spend? Stefan Murry: I would say it's share gain primarily. We the customers' plans continue to evolve. But as I mentioned, we've had some very, very successful interaction with our major customers, including the larger MSOs like we talked about with Charter and others, but also with a number of smaller operators. The Society of Cable Telecommunications Engineers show that we were at was really very, very positive for us. So I think we're taking slacks that could have potentially gone somewhere else and gaining that share. Chih-Hsiang Lin: So besides Charter, we have 6 other customers, and we sized order from 2 of them. So total, we have 7 customers right now for cable TV, 1.8 gigahertz, okay, not including 1.2 gigahertz. But next year, we're talking about another 10. So that means by end of next year total we have 17 customers in cable TV in North America, Latin, Australia, even Asia. So not only 1 customer. I need to emphasize that. Ryan Koontz: Great. And when you talked about the new products coming in cable, are you referring to nodes or the software products for the amps that you mentioned earlier? Chih-Hsiang Lin: Both. Both. Yes. Don't forget software is pretty good. That's very important. QuantumLink and Quantum Bridge customers really like a lot of problem of the customer. They solve a lot of issues. They can take a lot of operating expense, and that's why they like it. That's why AOI would say, become the #1 supplier in cable TV. It's only hardware, but integration of hardware and software and the management system. Operator: [Operator Instructions] Our next question will come from Tim Savageaux of Northland Capital Markets. Timothy Savageaux: A couple of questions, but I want to start with what we've been hearing pretty much all week here is about a pretty dramatic kind of step function increase and really across a lot of the different areas in AI optical, including inside the datacenter for modules. Focused on 1.6 to some degree, but pretty broad-based seeing. My first question is, are you seeing that in terms of your conversations with customers about overall levels of transceiver demand, just I don't know, in the last 4 to 6 weeks. Stefan Murry: Just look at our -- I'm sorry, I cut you off there. I didn't hear the first part of your question. Timothy Savageaux: No, all good. Go ahead. Sorry. Stefan Murry: Yes. So yes, I mean, we're seeing very strong increase in demand. If you look at our guidance, again, just kind of go back to the segment guidance that we gave, it implies a dramatic ramp in data center revenue in the fourth quarter. And we didn't give annual guidance for next year, but we certainly believe that's the beginning of a sustained ramp. So I think we're exactly in sync with what you described. We're seeing that ramp first at 800 gig. But as we talked about later next year, we expect 1.6 to be a strong contributor as well. Does that answer your question, Tim? Timothy Savageaux: Yes. And I wanted to follow up on your capacity targets exiting the year I think at 100,000 units a month. And Thompson had mentioned before commitments from customers, I guess. And I want to kind of dig into that a little bit more, which is would you be in a position to ship that full -- given there's -- we're running out a year a little bit here, but would you be in a position to ship that full capacity in the first quarter? And do you have either orders on hand, commitments, however you want to describe it to kind of cover those type of volumes starting in Q1 next year? Chih-Hsiang Lin: I would say more like Q2. Don't forget the Chinese New Year and the major cycle time is 1.5 months. So we got all equipment ready, we are doing the pilot right now, both in Taiwan and U.S. And so even if the customer gives us order because of major cycle time, I would say you're going to see maybe 90,000 to 100,000 pieces per month of revenue, more like Q2. And to answer your first question, right now customers give us crazy number, okay? Just AOI share, not total demand. A total more than 300,000 of 800G plus 1.6T single mode transceiver, just AOI share. So for sure, we spend money until we got the commitment. So yes, it's true. Right now, all the hyperscale datacenter customers are really serious. It’s not bubble, let me say that. It’s not a bubble. It’s a real demand, okay? For all of them. Stefan Murry: Tim, I just wanted to touch on one thing that your question asked earlier. I want to make sure we're on the same page. So you mentioned the capacity of 100,000 per month. That is our 800 gig or 1.6 terabit, but again, 800 gig primarily this year capacity. In addition to that, we also have capacity for 400 gig. Those are not shared, right? So the 400-gig capacity, as Thompson mentioned, should be 120,000 pieces or more early next year. And we do have customer commitments that would cover that. Operator: At this time, we have no further questions, and I will turn the call back over to Dr. Thompson Lin for closing remarks. Chih-Hsiang Lin: Again, thank you for joining us today. As always, we want to extend a thank you to our investors, customers and employees for your continued support. We continue to believe the fundamental driver of long-term demand for our business remain robust, and we are unique position to drive value from these opportunities. We look forward to welcome some of you to our Texas factory tour next week and seeing many of you at the upcoming investor conference. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the LFL Group Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Jonathan Ross, Investor Relations for LFL Group. Please go ahead. Jonathan Ross: Thank you. Good day, everyone. And welcome to LFL Group's third quarter 2025 conference call and webcast. LFL's Q3 2025 financial results were released yesterday. The press release, financial statements and management's discussion and analysis are available on SEDAR+ and on our website at lflgroup.ca. Joining me on the call today are Mike Walsh, President and Chief Executive Officer; and Victor Diab, Chief Financial Officer. Today's discussion includes forward-looking statements. These statements are based on management's current assumptions and beliefs and are subject to risks, uncertainties and other factors that could cause actual results to differ materially. We encourage listeners to refer to the risk factors outlined in our management's discussion and analysis and annual information form, which provide additional detail on the risks and uncertainties that could affect future results. This call also includes non-IFRS financial measures. Definitions, reconciliations and related disclosures for these measures can be found in the management's discussion and analysis and press release issued yesterday. Forward-looking statements made during this call are current as of today and LFL Group disclaims any intention or obligation to update or revise them, except as required by applicable law. All financial figures discussed today are in Canadian dollars unless otherwise noted. With that, I'll now turn the call over to Mike Walsh to discuss our third quarter results. Michael Walsh: Good morning, everyone, and thank you for joining us. This is our first quarterly call, and we appreciate you being here. We're looking forward to using this format to provide more regular insight into our performance, our strategy and how we're thinking about the business going forward. So let's get right into the quarter. We delivered strong top line performance in the third quarter with system-wide and same-store sales up 3.7% and 3.9%, respectively. I am particularly pleased with our continued performance given the broader backdrop. Consumer discretionary spending remains pressured and the retail environment continues to be highly promotional. Canadians are looking for value from retailers they trust and our strategy is built to outperform when value matters most, and we're seeing that play out in the numbers. Even more importantly, we continue to translate our top line momentum into profitability growth. Adjusted diluted earnings per share grew 20.4% year-over-year, reflecting not just sales strength, but disciplined execution across sourcing, category management, promotional optimization and cost control. Underpinning our third quarter performance is the consistency of our execution and the strength of our platform. Our scale enables us to negotiate directly with suppliers and secure advantaged pricing. Our banners are trusted by Canadians coast-to-coast. And our integrated logistics network, including one of the largest final mile delivery systems in the country, gives us a level of service differentiation that's difficult for others to replicate. These are durable strengths that position us to win across cycles and help us continue to take share. Furniture was once again the standout category in Q3, supported by our focused assortment strategy. We've narrowed the range, gone deeper in our best sellers and leaned into categories where we can offer real value. This laser focus on solidifying our leadership in this most important category continues to deliver results. Furniture is our largest and highest margin category and in the current environment represented the most effective opportunity to gain share. Our performance in furniture is a result of the deliberate and disciplined execution of our strategy, prioritizing areas of our business with the greatest near-term opportunity, while continuing to advance our broader categories. While industry-wide traffic headwinds have continued, we maintained our focus on maximizing every customer interaction. Both average transaction value and conversion rate strengthened during the quarter. In our stores, we're seeing more purposeful visits translate directly into purchase activity. Our omnichannel infrastructure is instrumental here. We're strategically utilizing our digital ecosystem, not only as a revenue channel, but as a qualification funnel that delivers customers with clear purchase intent. Once in the stores, our highly trained sales associates and attractive financing offers work together to drive a stronger average transaction size and higher total ticket profitability. Our overall appliance business was also strong in the quarter led by the commercial channel, as has been the case for the past several quarters. We continue to deliver on projects booked over the past couple of years. And while we're mindful that builder pipelines are slowing across the board as we approach 2026, our team is laser-focused on continuing to gain traction in the replacement market, especially with property managers. That's a segment we believe can be a more meaningful contributor over time. And our warranty and insurance businesses remain a key part of our value proposition. These are profitable, capital-light businesses that support the core and extend our relationship with the customer. We also continue to see strong attachment rates and growth in these business lines and we believe there's more opportunity to grow these platforms, both inside and outside the LFL ecosystem. From a capital allocation standpoint, our priorities remain consistent. We're focused on maintaining a strong balance sheet and reinvesting in the business where we see attractive returns. We remain attuned to potential acquisition opportunities that could enhance the long-term value of the company and we continue to grow our regular dividend over time. Our retail store count remained consistent from last quarter at 300 stores, including 201 corporate stores and 99 franchise stores. As we continue to optimize our footprint, it's worth reiterating that our strategy is not about maximizing store count. Our stores are designed to be destinations with larger catchment areas and a focus on delivering a full-service experience that drives meaningful returns. We evaluate every investment through the lens of a 4-wall profitability and long-term value creation. That discipline is reflected in how we approach new locations, renovations and reopenings. It's also why we're comfortable growing selectively rather than chasing unit expansion for its own sake. Now looking ahead to the fourth quarter and into early 2026, we expect consumer confidence and discretionary spending to remain selective. Consumers are being careful with their dollars, but they are spending. The environment remains dynamic. Similar to last year, the Canada Post disruption is creating near-term headwinds during a very important promotional period. While this does affect all retailers that rely on flyer distribution, we remain competitively well positioned. We faced a similar situation late in the fourth quarter of 2024. And while the disruption began earlier this year, we're drawing on last year's experience to adjust quickly. That said, if the strike continues through year-end, we do expect some impact to key promotional events in the quarter. Before I hand it over to Victor, I truly want to thank our associates across banners and regions from our warehouses to our sales floors to our drivers on the road and the customer service folks manning the phone lines. Their execution in the quarter was outstanding. Victor will take you through the financial details and provide some additional context on the quarter. I'll come back with a few closing thoughts before we open it up for questions. Victor, over to you. Victor Diab: Thanks, Mike, and good morning, everyone. As Mike mentioned, we delivered strong top line growth in Q3 with system-wide sales up 3.7%, revenue up 4.1% and same-store sales up 3.9%. From a category standpoint, furniture was a key contributor. We also saw continued strength in appliances, led by our commercial channel, which added to growth this quarter. That strength was driven by the delivery of previously booked projects, particularly in multiunit residential as we continue to fulfill orders tied to developments moving through to completion, despite a softer new construction market. We expect revenue from developers, in particular, to begin moderating as we move into 2026 and we're certainly seeing that across the market. Our team is actively working to increase our share of the replacement business where we're seeing good traction with property managers. But it will take time for that portion of the business to catch up with the new build market, which is lumpier, but can be meaningful as we have seen this year as builders finish up projects. Gross profit margin expanded by 79 basis points year-over-year to 44.6%. This improvement reflects both the impact of higher-margin furniture sales and our continued focus on strengthening sourcing and vendor relationships. We've deepened relationships with our top vendors and increased purchasing penetration through our First Ocean subsidiary, driving improved cost efficiencies and supply consistency. At the same time, disciplined promotional activity and optimized pricing strategies have supported margin performance across categories. As we move into the end of the year and early 2026, gross margin will continue to be influenced by category mix, promotional intensity and our ongoing sourcing work. We're always looking for opportunities to drive improvement, but we also take a balanced and dynamic approach. We'll make the investments necessary to drive traffic and market share when it makes sense to do so. That's just part of how we manage the business. SG&A rate was 35.51% of revenue, an improvement of 14 basis points year-over-year. This improvement was driven by lower retail financing fees due to declining interest rates. This helped offset expected increases in advertising costs due to event timing shifts as well as higher occupancy expenses from the Edmonton D.C. lease commencement and other facility renewals. Adjusted diluted EPS came in at $0.65, up 20.4% compared to last year. We're also pleased with where inventory levels sit today. Freight disruptions that impacted the start of the year are now behind us and our written-to-delivered sales relationship has normalized with a focus on going deeper on certain SKUs, enabling us to improve written-to-delivered timelines. We're in a healthy in-stock position heading into the back half of the year with good availability across key categories, and no material constraints on flow. From a capital allocation standpoint, I'll build on Mike's comments. Our approach remains disciplined and consistent. We prioritize reinvestment in the business where we see attractive returns, maintain a strong balance sheet and return capital to shareholders over time, primarily through growth in our regular dividend. Annual maintenance CapEx is running in the range of approximately $35 million to $40 million annually, which supports our ability to continue generating strong free cash flow. On the balance sheet, we ended the quarter with $549.6 million in unrestricted liquidity, including cash, marketable securities and our undrawn revolver. That level of flexibility is a strategic asset in this environment. It enables us to stay agile, pursue opportunities as they arise and continue investing in the business without compromising our financial strength. Given our 100-plus year track record of navigating cycles and making the right long-term investments, we're comfortable maintaining the financial flexibility. We will continue to be opportunistic in our approach to buybacks, taking advantage of volatility where it aligns with our long-term strategy. We did not repurchase any shares under our existing NCIB during the quarter. Overall, we remain confident in our ability to deliver consistent financial performance in the context of the market and versus the industry. Our scale, disciplined sourcing and promotional strategies and solid balance sheet provide the foundation to continue driving profitable growth and shareholder value over the long-term. Before handing it back to Mike, I'd like to briefly address the previously announced initiatives to create a real estate investment trust. This remains an important strategic priority for us. The timing will be driven by market conditions and regulatory approvals, and we'll share additional updates when appropriate. That's the only update we can provide on today's call. With that, I'll turn it back to Mike for closing remarks before we open the line for questions. Michael Walsh: Thanks, Victor. To wrap up, we're really pleased with how the business performed for the first 9 months of the year. Over that period, we have delivered total system-wide sales growth of 3.5% and adjusted diluted EPS growth of 28.7% in a dynamic consumer and industry environment. What's just as important is how we're delivering that performance. We're seeing stronger conversion in our stores, more consistency in execution across banners and better alignment between what customers want and what we're delivering. That's the outcome of deliberate long-term choices, not quick wins, and it's showing in both our results and how resilient the business has become. We're not immune to the macro, but we are well positioned to navigate it and continue delivering value for our customers and our shareholders. Thanks again for joining us today. With that, I'll pass it back to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Nevan Yochim with BMO Capital Markets. Nevan Yochim: Congratulations on a solid quarter and your first conference call. Hoping we could start on the top line here. Are you able to provide an update on quarter-to-date trends? Have you seen the Q3 momentum continue, as well as any detail on your positioning as we move into the important sales and holiday season? Michael Walsh: Thanks very much, Nevan. It's great to talk to you and you're the first person asking us a question on the live webcast. So congratulations. Just a little bit on the third quarter. So the consumer still remains very price conscious Value continues to be a key focus area for us and that's how we think we're winning. The Canadian consumer is still looking for a retailer that they know and trust and is going to be around for after sales service. The trend from the second and third quarter, we're seeing a lot of traffic going to our website and traffic being more like flattish going into the stores. So more qualified customers coming into our stores, allowing our sales associates to spend more time selling the value-added services. We're seeing the attach rates for warranty insurance products are also improving. And so we feel like we're well positioned going into the fourth quarter. There's still some macro headwinds. You've got the coastal strike affected last year starting around November 15th. This year started near the end of September. So we're feeling good about that. It kind of levels the playing field with all retailers but we learned a lot going through the fourth quarter of last year that we're applying this year. Nevan Yochim: And maybe just a little bit more on that Canada Post strike. Are you able to parse out what the impact was last year, maybe just a magnitude? And then, how does that flow through the P&L? Is that solely a revenue impact or are there margin pressures there as well? Michael Walsh: Great question. I don't think there's margin impact to it. But it's definitely very difficult to quantify what the impact is because last year we were having challenges with inventory position as well. So how much of it was a flyer impact, how much of it was the inventory impact. So really difficult to tell. And then as you pivot going to more ,of a digital way, how much of that did you get a pickup on. So really difficult to quantify the impact of the flyers. But for sure, there is an impact to all retailers, especially when you're a high-low retailer and the consumer is looking for the flyer. It definitely impacts the traffic that's coming to your stores. Nevan Yochim: Got it. Maybe just one more for me, maybe for Victor. It's nice to see the SG&A leverage again this quarter. You called out lower POS financing fees. As we've seen the Bank of Canada cut rates as recent as just 1 week ago, does that imply you expect this tailwind to continue into the second half of next year? Victor Diab: Great question. Yes, every time the Bank of Canada cuts rates, there's a bit of a delay in terms of when it translates to our numbers, but we'll get a bit more leverage off of that next year. Obviously, most of the cuts happened over the last year and we've benefited from that this year, and we'll see a little bit more of that next year if rates continue to be cut. Operator: Your next question comes from the line of Martin Landry with Stifel. Martin Landry: It's super helpful. I know it's a little bit more work on your end, but for us, it's very much appreciated. My first question, I'd like to understand a little bit how the quarter has evolved. There‘re some retailers that have talked about a strong July and August and a slower September. I was wondering if you've seen any of that dynamic? Michael Walsh: I would say we were very happy with the quarter as a whole. I think July and August were super strong. September was a little bit weaker, whether that's due to the postal strike, but definitely, we saw some weakness in September. Martin Landry: And that weakness, is it -- have you seen differences per regions? Has it been Canada-wide or more located in the Central Canada where the manufacturing base is? Michael Walsh: Yes. I'd say that the trend continues. Ontario has been softer. And again, the flyer distribution in Ontario is really soft and BC has been soft. Martin Landry: Okay. And then maybe lastly, my last question. I know you mentioned that -- in your opening remarks that the story is not about store openings. But I was just wondering, do you have any plans to increase your network across your banners in the next 12 months? Michael Walsh: I would say we don't have anything pending, Martin, but we do have a focus for Leon's in BC. The challenge has been inventory of retail sites. And to be honest with you, it's the leasing cost in BC. There's just no inventory. The Brick continues to focus on the East Coast, but we don't have anything pending. We've got the one store in Welland that we're building. We're probably going to open that in the spring of 2027. Victor Diab: And Martin, just to build on Mike's comments. We've seen a lot of good success with a couple of the new renovations with The Brick opening up in Richmond, we released the release in Kelowna, and we're seeing a lot of good success with some of those renovations. So we're keeping a close eye on that and it's something that we'll look to do more of. Michael Walsh: I think the last thing on that is we're really excited because we opened up a store within a store in Richmond, BC with Appliance Canada taking up about 10,000 to 12,000 square feet of Leon store, and we're seeing some good success there. And because Appliance Canada is generally in Ontario, they've got a lot of commercial customers in the East and West. And so we're going to do that as a bit of a test and it may be something that we can do on a broader scale. Martin Landry: Okay. That's helpful. And just to be clear, how many renovations have you done year-to-date? Victor Diab: I would say we've done about 3 major renos year-to-date. Operator: Your next question comes from the line of Jim Byrne with Acumen. Jim Byrne: Just maybe on gross margin side. I appreciate the color, Victor. Margins were up about [ 80 ] basis points this quarter and kind of averaged about [ 80 ] so far this year, up over last year. Is that a number that you would kind of expect to continue for the fourth quarter and kind of foreseeable future? Or are there moving parts there that might put some pressure on those margins in the coming quarters? Victor Diab: Jim, thanks for the question for sure. We're very happy with the margin performance year-to-date. A function of 2 things, really very strong furniture mix, that being our highest margin category. When you sell more furniture, you're also selling more furniture warranties, which tends to be accretive to margin as well. And the teams have done a really good job on the rate front from focusing assortment, getting us better leverage with our suppliers, flowing goods, slightly lower freight rates year-over-year. So there's a lot to that. We don't really comment on a quarter-to-quarter basis. We tend to be very disciplined historically around managing within a certain range. So that's a focus for us. We think we're going to end the year strong overall holistically. There may be puts and takes in terms of investing some margin back into certain categories. But over the full year, we expect to hold on to some of those gains for sure. And going into next year, again, it's about continuing to edge our margin rate forward. But there will be -- it's never going to be a linear -- just a straight line, there will be ebbs and flows in terms of when we choose to invest that back into the categories. Jim Byrne: Okay. That's great. Maybe if you could give any updates on kind of the warehouse initiatives and some of the optimization that you've been working on? Michael Walsh: We're still continuing to test and tune and learn. As we spoke about in the previous quarter, we migrated the Mississauga warehouse to surrounding stores and we're still measuring the KPIs on that from customer experience to the time between written-to-delivered. So still going down that path and analyzing that and we may end up doing another test in the first or second quarter of '26. So stay tuned. But definitely, it's not going to be a short-term project. It's going to be something that's more long-term figuring out how many warehouse stores do we still need to keep and what that looks like. So stay tuned on that. Jim Byrne: Okay. And then maybe just, Victor, you kind of mentioned the maintenance cap at $35 million. It looks like you're kind of tracking towards that for this year. It doesn't sound like next year will be much different given the lack of new stores, et cetera. Is that fair to say for 2026? Victor Diab: I think that's fair from like the core CapEx target in line around $35 million to $40 million. I think any strategic initiatives that we do end up moving forward with may be over and above, but we'll keep you posted on that. But I think that's a good target to have in mind for now. Operator: Your next question comes from the line of Ahmed Abdullha with National Bank Capital Markets. Ahmed Abdullah: Q4 seems like an easier comp given the inventory dynamic that took place last year. Are you better prepared from an inventory standpoint to drive sequentially improving growth in 4Q? Victor Diab: Ahmed, I appreciate the question. Thanks. A couple of things that we planned going into Q4, and we thought about, obviously. One , being in a much stronger inventory position, which we are and the teams have done a really good job there, and it's paying off for us. And two, we were hopeful that 1 year later, the Canada Post challenges would be behind us, right? So that unfortunately has kind of been a storyline early into the quarter. Now we will comp being -- having a Canada Post strike later in the quarter but that's certainly going to be an impact there as well. So I think there's different puts and takes. That being said, we feel really well positioned to continue competing for value in the space, but there's a couple of considerations there for you in Q4. Ahmed Abdullah: Okay. That's fair. And just -- I know you've mentioned the customer traffic and basket sizes and conversion rates have improved, but I would like just you to touch a bit more on that. Can you give us some sort of magnitude of how much of this quarter's results was driven by perhaps pricing versus volume or, any more specific color around these factors would be appreciated? Victor Diab: Yes. I think you would have seen sort of our furniture performance was really strong in the quarter. I think that's just really driven off of volume and just being really well positioned for value. I think we've got scale advantages there and we've done a really good job around focusing our assortment and being sharp on pricing and promo optimization. So I just think it's more around our go-to-market strategy. To Mike's point, in-store traffic is softer, but we're seeing really good traffic to and engagement on our websites that are ultimately leading more qualified shoppers into our stores and allowing our folks to drive higher closing ratios. And then, of course, the ancillary businesses along with that, like I mentioned, you're selling more furniture, you're selling more furniture warranty and our attachment rates are going up inside our stores. So it's a function of a bunch of different factors. It's not really on price. We're very focused on being sharp on price and being sharp on our promo strategy, Ahmed. But that's the extent of what I could provide there. Ahmed Abdullah: Okay. That's fair. And one last one for me. Your comments of growth rates like moderating in 2026. Are you still budgeting some revenue growth or more of a flat to down next year? Victor Diab: Yes. Like I think -- it's a interesting question, Ahmed. Like as you think about 2026, right, we never go into a year thinking we're not going to grow. Our mindset is always to grow. But we do think about it more along the lines of a 3 to 5-year horizon, have we sustainably grown the business from a top line and bottom line perspective over that period. And that's what we go -- that's our primary goal is to continue to win share. We still feel really well positioned to compete for value. That being said, a couple of considerations as you think about 2026. We mentioned our commercial business has been on a tremendous run. That's going to normalize a little bit just given the challenges with the development community. So that's something that we're being mindful of. And obviously, at this stage, we're probably going to comp some pretty strong furniture numbers as well. So it's another consideration. But do we believe going into the year we can drive growth? That's always our mindset. But of course, we have to be realistic around some of the considerations I just mentioned. Operator: Your next question comes from the line of Ty Collin with CIBC. Ty Collin: Great to hear from you guys in this format. So just for my first question, can you kind of speak to the different competitive dynamics within your key product categories? It seems like, obviously, mattress and electronics were more promotional, but maybe furniture a bit less so. Can you just help us understand what's going on there? And is the promotional activity being driven by any specific subset of competitors worth noting? Victor Diab: Yes. I mean it's a great question. Look, like we -- over the last couple of years, we've had a really strong focus on the furniture category and being able to position ourselves for value, right? And then -- and we've been seeing really good traction there. I think as it relates to the other categories, we have to be balanced in our approach. So in some cases, it is highly promotional, for example, in retail appliances across the board. More people are doing buy more, save more and things of that nature. That's always been done. It's just being done at a greater magnitude in terms of our observations. And then, as it relates to mattress, the mattress category, again, very promotional, more promotional than we've seen in the past, and you've got a lot more online players as well in that category. So we're being selective in terms of, in some cases, whether we want to participate in being more highly promotional. In some cases we're choosing not to, to protect margin. And just given how our overall business is performing, we're kind of -- we're satisfied not doing that. And in some other cases, we've identified opportunities where we can better position ourselves moving forward. So I think it's a combination of those things, Ty. Michael Walsh: Yes. And I think just to build on that, because there's no other comp we can really look at in Canada, we think we're winning share in the furniture space, although it's a very fragmented -- the competitors are very fragmented. But definitely, we feel like we're winning share there. Ty Collin: Okay. Got it. Yes. I appreciate that color. And then shifting to the commercial business. So yes, I appreciate that you're trying to diversify that business into the replacement channel. But as you alluded to, condo completions really are kind of expected to fall off a cliff after 2026, should probably be a headwind for you guys, which you mentioned. But I guess I'm just wondering, at what point do you think you might be able to sort of fully offset the lower new build business with replacement business? Or should we kind of expect the commercial business to ultimately take a step back after next year? Michael Walsh: Yes, there'll be softening, especially in the Toronto market as it relates to condo, but we still do a lot of housing. We do things other than just condo. And I think we started the thing about 12 months ago migrating to more of the property manager, and we're seeing success at both MidNorthern as well as Appliance Canada. And that's the other reason why we did the store within a store of Appliance Canada. They've got customers in Ontario that are also out West and in the East. And we're feeling pretty strong that they can build on the commercial business as well. So not sure if I can answer the question on timing, but definitely, we started this some time ago. And we think it will be soft in '26 and '27 and then building back up in '28. But definitely, we've been exploring options about how to compensate for any shortfall in the commercial business. Ty Collin: Okay. Got it. And maybe if I could just sneak in one more and kind of press you guys a little bit on capital allocation. So, I mean, the net cash balance does continue to climb up. I know you've talked about the need to hold on to some of that for maybe potential real estate-related investments and just to remain opportunistic. But given that the time line on some of those more opportunistic investments are ultimately unclear. I mean, at what point would you get more comfortable looking at stepping up, returning some of that capital to shareholders either through a special dividend or buyback activity? Victor Diab: No, I appreciate the question. And yes, you kind of hit it on the nail, right? So we really like our cash and liquidity position right now. It is, by design, building up this year to help us navigate any volatility in the market, but also to be opportunistic. And when we say opportunistic, like we're actively exploring what that could mean for us. So we typically go through our capital allocation funnel around, obviously, first and foremost, investing in our core business, evaluating strategic opportunities, whether that relates to the core of our business or potential M&A opportunities. And then we go down the funnel around returning capital to shareholders. In Q2, we increased our dividend by 20%. And we have these conversations with -- as a management team and with our Board all the time. And when we built that -- look, we're sitting on too much liquidity and there isn't something imminent. We're not afraid to return capital to shareholders. We've been very consistent with that strategy over many years. So it's just continuing to go through that decision process. At this stage, we feel good about where we are, but we'll keep you posted otherwise. Operator: Your next question comes from the line of Ryland Conrad with RBC. Ryland Conrad: Congrats on the first conference call. So maybe just continuing that conversation on M&A with the balance sheet in a really healthy spot. Can you maybe just provide an update on the criteria you're looking for and target? Michael Walsh: Yes. I would say that we've been reviewing any M&A opportunity for some time. I think our criteria that we look at is, we look at a company that has strong management team, runway for growth, and then lastly, being able to dovetail part of our ecosystem, meaning warranty and insurance into that business. So that's kind of the criteria we're running with. And again, we're very opportunistic. So we're not just going to do something for the sake of doing it. We're going to do it because it's in the best interest of growing our business. Ryland Conrad: Okay. Great. And then just on the Canada Post strikes, given they're on more of a rotating schedule this year, I believe, are the impacts that you're seeing on flyer distribution, I guess, less meaningful compared to last year? Victor Diab: I -- Yes -- Not -- I would say it's very tough to kind of say because it's just as impactful in terms of being able to get our flyers out. We have to -- when this strike hits, we have to think about alternative routes, right? So whether it's a full strike or a rotating strike, we have to think about, okay, what are different ways we can either get the flyer out or reallocate some of our marketing funds. So, it's a similar impact this year versus last year in terms of just our ability to get the flyer out. Last year, there was a lot of noise just given the core of the holiday season, our inventory position at that point in time. But like we commented last year, we definitely saw traffic to our stores moderate over that period of time and pockets within our network and regions be more impacted than others depending on our ability to get flyers out. Now we're obviously not just sitting on our hands and the teams are working really hard to try and reallocate those marketing funds. It's just -- it's not going to be as high of an ROI relative to the flyer channel, because each channel has its kind of own unique ROI. So if you put an extra dollar in TV, for example, it's not going to do as much for you as $1 in a flyer just given there's diminishing returns with each of the channels. So that's the dynamic that we're competing with. Ryland Conrad: Okay. Very helpful. And then I guess just last for me. Can you talk a bit to your insurance business and just how conversion rates have been trending following the expansion into new categories earlier this year? Victor Diab: Yes. I mean if you -- our insurance business has done really well this year. I think if you look at our year-to-date growth for the insurance business, it's up double-digits. We feel really good about our attachment rates in stores, and frankly, just the traction we've gained growing that business outside of our own ecosystem. The team continues to work really hard to increase penetration of products with some of our existing partners. For example, you'll start off on a typical -- putting insurance on a typical loan product, then you'll talk to some of our partners around putting an insurance product on a mortgage, et cetera, et cetera. So we're deepening some of those relationships with some of our partners and we continue to explore new partnerships. So we feel really good about the attachment in store and what we've seen this year and our ability to grow it outside our network. Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good day, and welcome to Cherry Hill Mortgage Investment Corporation's Third Quarter 2025 Conference Call. [indiscernible] I would now like to turn the call over to Garrett Edson of ICR. Please go ahead. Garrett Edson: We'd like to thank you for joining us today for Cherry Hill Mortgage Investment Corporation's Third Quarter 2025 Conference Call. In advance of this call, we issued a press release that was distributed earlier this afternoon. That press release and our third quarter 2025 investor presentation have been posted to the Investor Relations section of our website at www.chmireit.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to interest income, financial guidance, IRRs, future expected cash flows as well as prepayment and recapture rates, delinquencies and non-GAAP financial measures such as earnings available for distribution or EAD and comprehensive income. Forward-looking statements represent management's current estimates, and Cherry Hill assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC and the definitions contained in the financial presentations available on the company's website. Today's conference call is hosted by Jay Lown, President and CEO; Julian Evans, the Chief Investment Officer; and Apeksha Patel, the Chief Financial Officer. Now I will turn the call over to Jay. Jeffrey Lown: Thanks, Garrett, and welcome to our third quarter 2025 earnings call. The third quarter saw a continued reduction in overall macro volatility as we moved into the fall with tariff concerns mostly fading into the background and investors accepting the new normal. As the quarter progressed, it became clear that the Fed would proceed with rate cuts given economic indicators, and they did exactly that in both September and last week. Rates were mostly contained quarter-over-quarter with the 10-year yield ending marginally lower at 4.15%. Specific to Cherry Hill, portfolio components such as mortgages, swaps, futures and MSRs performed well in the quarter, though lower coupon mortgages outperformed higher coupons due to lower rates and investors' growing demand for duration. With the Fed in easing mode, leading to higher prepayment speed expectations for high coupon mortgages, we shifted our RMBS portfolio in the quarter to benefit from the lower interest rate environment and stand positioned to benefit from lower funding costs and improved portfolio performance. Our MSR portfolio has a weighted average note rate of 3.5%, well below current mortgage rates and continues to perform well. For the third quarter, we generated GAAP net income applicable to common stockholders of $0.05 per diluted share. Book value per common share finished the quarter at $3.36 compared to $3.34 on June 30. On an NAV basis, which includes preferred stock and prior to any ATM capital raised in the quarter, NAV was up approximately $1.1 million or 0.5% relative to June 30. Financial leverage at the end of the quarter remained consistent at 5.3x as we continue to stay prudently levered. We ended the quarter with $55 million of unrestricted cash, maintaining a solid liquidity profile. In September, our Board of Directors made the strategic decision to adjust our dividend to $0.10 per share. We believe the realignment is more sustainable and in line with the company's earnings power. As we mentioned on our last call, we entered into a strategic partnership and investment with Real Genius LLC, a Florida-based digital mortgage technology company earlier this year. As a reminder, Real Genius has developed a proprietary direct-to-consumer platform, offering an efficient fully online mortgage experience, including instant prequalification, automated document process and real-time loan tracking, all of which is supported by their custom-built point-of-sale system. We are seeing positive momentum from that partnership as Real Genius' growth trajectory and stabilization progresses in line with our expectations. With 30-year mortgage rates hovering around 6%, we are optimistic that the reduction in mortgage rates may facilitate an acceleration in Real Genius' growth as more homebuyers and homeowners look to purchase homes or refinance. Looking ahead, we will continue to seek out investment opportunities we believe would be accretive to our business. We are monitoring the economic environment closely and are focused on thoughtfully growing the company while maintaining strong liquidity and prudent leverage. With that, I'll turn the call over to Julian, who will cover more details regarding our investment portfolio and its performance over the third quarter. Julian Evans: Thank you, Jay. Mortgage spread tightening drove performance in the third quarter. Reduced tariff rhetoric, a few announced preliminary tariff deals as well as declining rate volatility and the assumption that the Fed would initiate and continue easing monetary policy based upon weaker employment data helped to define mortgage performance over the quarter. As the market grew more comfortable with the potential Fed easing, mortgage spreads ground tighter. And as dollar prices rose, the expectations for faster prepayment speeds grew for higher coupon mortgages, limiting their performance. Higher coupon dollar prices became capped as interest rates moved lower and spreads tightened. As a result, investors' desire for lower coupon mortgages and duration needs became apparent. Investors were chasing the par coupon mortgage as interest rates moved lower. Throughout the quarter, we adjusted our portfolio positioning to benefit from ongoing spread tightening and declining interest rates. At quarter end, our MSR portfolio had a UPB of $16.2 billion and a market value of approximately $219 million. The MSR and related net assets represented approximately 41% of our equity capital and approximately 22% of our investable assets, excluding cash at quarter end. Meanwhile, our RMBS portfolio accounted for approximately 39% of our equity capital. As a percentage of investable assets, the RMBS portfolio represented approximately 78%, excluding cash at quarter end. Our MSR portfolio's net CPR averaged approximately 5.9% for the third quarter, pretty much comparable with the previous quarter. The portfolio's recapture rate remained de minimis as the incentive to refinance continues to be minimal for this portfolio given the portfolio's loan rate. We continue to expect a low recapture rate and a relatively low net CPR in the near term given our MSR portfolio's characteristics. Like the MSR, the RMBS portfolio prepayment speeds held steady at 6.1% CPR for the 3-month period ended September. We do expect agency prepayment speeds to increase with current mortgage rates ranging between 5.75% and 6.25%, especially for higher coupon mortgages. Our portfolio is not comprised of a large portion of higher coupon specified pools. Most of the higher coupon positioning is represented by TBA positioning. The larger spec pool positioning starts at the 5.5% coupon where the underlying collateral typically has a 650 loan rate, which will be impacted by the recent lower mortgage rates. The initial impact should be limited as the mortgage universe is only approximately 19% refinanceable at the current mortgage rate levels. But as the Fed continues to ease monetary policy, we are monitoring a mortgage rate of 5.5%. At 5.5% mortgage rate, the refinanceable universe increases to approximately 30%. As of September 30, the RMBS portfolio inclusive of TBAs stood at approximately $782 million compared to $756 million at the previous quarter end as we modestly shifted our RMBS positioning towards lower middle of the coupon stack mortgages versus higher coupon mortgages. For the third quarter, our RMBS net interest spread was approximately 2.87%, higher than the previous quarter as increased asset purchases more than offset higher interest expenses. Overall, our hedge strategy remains largely intact. We will continue to use a combination of swaps, TBA securities and treasury futures to hedge the portfolio. During the quarter, the hedge portfolio changed marginally because more positioning changes were made to the RMBS portfolio. As we close out the year, we will continue to proactively manage our portfolio and adjust our overall capital structure to add value for shareholders through improved performance and earnings. I will now turn the call over to Apeksha for a third quarter financial discussion. Apeksha Patel: Thank you, Julian. GAAP net income applicable to common stockholders for the third quarter was $2 million or $0.05 per weighted average diluted share outstanding during the quarter, while comprehensive income attributable to common stockholders, which includes the mark-to-market of our available-for-sale RMBS, was $4.5 million or $0.12 per weighted average diluted share. Our earnings available for distribution or EAD attributable to common stockholders were $3.3 million or $0.09 per share. Our book value per common share as of September 30, 2025, was $3.36 compared to book value of $3.34 as of June 30, 2025. We used a variety of derivative instruments to mitigate the effects of increases in interest rates on a portion of our future repurchase borrowings. At the end of the third quarter, we held interest rate swaps, TBAs and treasury futures, all of which had a combined notional amount of approximately $435 million. You can see more details regarding our hedging strategy in our 10-Q as well as our third quarter presentation. For GAAP purposes, we have not elected to apply hedge accounting for our interest rate derivatives. And as a result, we record the change in estimated fair value as a component of the net gain or loss on interest rate derivatives. Operating expenses were $3.8 million for the quarter. On September 15, 2025, our Board of Directors declared a dividend of $0.10 per common share for the third quarter of 2025, which was paid in cash on October 31, 2025. We also declared a dividend of $0.5125 per share on our 8.2% Series A cumulative redeemable preferred stock and a dividend of $0.6523 on our 8.25% Series B fixed to floating rate cumulative redeemable preferred stock, both of which were paid on October 15, 2025. At this time, we will open up the call for questions. Operator? Operator: And our first question comes from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Just one quick question for me. Regarding the Real Genius acquisition -- or partnership, sorry, was that more opportunistic? Or could we see more partnerships like that in the future? Jeffrey Lown: So I'm not really prepared to forecast, but to the extent that we see things that are interesting that are accretive, sure, we'll look at them. This was a long time in the making for this investment. And broadly speaking, we're really happy with how it's progressing. But to the extent that we find opportunities that fit within the skill set of people here, we'll absolutely look at them. Operator: Our next question comes from Mikhail Goberman with Citizens. Mikhail Goberman: If I could pick your brain about just your thoughts on expenses going forward. I'm looking at G&A plus comp. It looks like it was about a 12.5% sequential rise. Is there a sort of run rate that you guys are targeting going forward? Is there a seasonality to that combined number? Apeksha Patel: Mikhail, it's Apeksha Yes, their G&A and comp and benefits were both up this quarter, and that is mostly due to changes in personnel that we had during the second quarter and the third quarter of the year as well as professional fees that related to those changes. Going forward, we do anticipate those costs going down, especially with having a new in-house GC now. As of this point, though, it's difficult for us to quantify exactly what that would be, but we are anticipating them going down. Mikhail Goberman: Great. And the sequential rise in servicing costs, what was driving that there? Jeffrey Lown: That was essentially part of the deboarding fee that got reimbursed in Q2. So it's not a typical ongoing expense. And that was something that in Q2 lowered the expense. Q3, we didn't have it, of course, because we didn't have the deboarding again. And so you saw that quarter-over-quarter change, but Q3 is more similar to our ongoing run rate. Mikhail Goberman: Great. And if I can get one more in there. I think you know what it's going to be. Any update on the current book value? Jeffrey Lown: The usual. I turn it over to Apeksha. Apeksha Patel: We're seeing our October 31 book value per share up about 1.2% from September 30. And obviously, that's before any fourth quarter dividend accrual as the Board has not yet met to approve it. Operator: I'm showing no further questions. At this time, I'd like to turn the call back over to Jay Lown for closing remarks. Jeffrey Lown: Thank you. Thanks for attending our third quarter 2025 earnings call, and we look forward to updating you on our year-end results in the first quarter of 2026. Have a good evening. Operator: This does conclude the call. You may now disconnect. Good day.
Operator: Welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year ended September 30, 2025. Hello. My name is Sachi, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin. Selene Oh: Good morning and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. With that, I'll turn the call over to Jenny Johnson, Chief Executive Officer. Jennifer Johnson: Thank you, Selene. Welcome, everyone, and thank you for joining us to discuss Franklin Templeton's Fourth Quarter and Fiscal Year 2025 results. I'm here with Matt Nicholls, our Co-President and CFO. Joining us is Adam Spector. This is Adam's final quarterly call as he has transitioned to a new role as CEO of Fiduciary Trust International. Adam has played a vital role in our success with clients over the past 5 years, and his expertise and leadership will be invaluable to Fiduciary. I'd like to also welcome Daniel Gamba to our earnings call for the first time. Daniel joined Franklin Templeton in mid-October as Chief Commercial Officer and also assumes the role of Co-President alongside Matt and Terrence Murphy, Head of Public Market Investments. A respected industry leader, Daniel brings extensive experience across public and private markets globally. On today's call, as outlined in our investor presentation, I'll share the progress we made in year 1 of our 5-year plan, which was marked by strong momentum and tangible results. I'll also touch on highlights from our fourth quarter and fiscal 2025. After that, Matt will review our financial results and quarterly guidance, then we'll be happy to answer your questions. In recent years, Franklin Templeton has continued to build on our strong foundation, advancing our mission to help clients achieve the most important milestones of their lives. As one of the world's most comprehensive asset managers, we combine deep expertise across public and private markets with a client reach spanning over 150 countries. Today, clients look to Franklin Templeton as their trusted partner for what's ahead, one firm offering the reach and resilience of a global platform together with the distinct expertise of our specialist investment teams. As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles and regions, we believe our business is poised to meet that demand. In recognition, just last week, Money Management in Barron's named Franklin Templeton as its 2025 Asset Manager of the Year in the $500 billion plus AUM category. The award recognizes firms leading through innovation and excellence in investment advisory solutions. Our position today reflects years of deliberate strategic planning and the strength of a global brand that's earned the trust of investors around the world. This year was another important step forward as we continue to deepen client partnerships, broaden our investment capabilities and strengthen our diversified model. Fiscal 2025 marked the first year of our 5-year plan, and we've made great strides across a number of key focus areas for the company. We are ahead of our plan for alternatives, ETFs and Canvas and on track in the other areas. Let's now turn to the investor presentation beginning on Slide 8 to review our progress report. Starting with Investment Management, we continue to offer a broad spectrum of investment capabilities across public and private assets, helping clients achieve a wide range of financial goals. In public markets, focus remained on strengthening investment performance while optimizing our product lineup. Performance continues to improve with over 50% of our mutual funds, ETFs and composites outperforming peers and benchmarks across all standard time periods. This underscores our disciplined investment process and commitment to delivering consistent results for clients. This year, we also simplified our investment management structure to strengthen talent development and enhance the way we manage investments across public markets. These changes are fostering greater collaboration and alignment across teams, positioning us to operate with greater agility and scale. At the same time, we refined our investment offerings to focus on scalable, high-demand strategies where we can deliver the greatest value for clients. That involved thoughtfully retiring certain brands and integrating investment capabilities where it makes sense, steps that make our platform more efficient, scalable and strategically positioned for future growth. Turning to private markets. Franklin Templeton is a leading manager of alternative assets with $270 billion in alternative AUM with the closing of Apera. We have a broad range of strategies, including alternative credit, secondary private equity, real estate, hedge funds and venture capital. On October 1, we further strengthened our private debt platform through the acquisition of Apera Asset Management, bringing our private credit AUM to $95 billion and enhancing our reach across European markets. The acquisition complements Benefit Street Partners and Alcentra and expands our direct lending capabilities across Europe's growing lower middle market. This year, we fundraised $22.9 billion in private markets, keeping us ahead of pace toward our 5-year $100 billion fundraising goal. The strong momentum reflects both the depth of our alternative's platform and the growing demand for diversified outcome-oriented solutions. In fiscal 2026, we anticipate an increase to private market fundraising to between $25 billion and $30 billion. We remain committed to the democratization of private assets, bringing institutional quality opportunities to a broader range of investors. Franklin Templeton Private Markets, our wealth management offering, continues to gain traction, contributing more than 20% of our private market fundraising this year, underscoring the strength of our global distribution partnerships and client reach. We expect this to grow to between 25% to 30% in the next few years. Our perpetual secondary private equity funds, the Franklin Lexington Private Markets Funds have raised $2.7 billion since their launch in January. In addition, our 2 other primary alternative managers, Benefit Street Partners and Clarion Partners, each have perpetual funds with scale. These are semi-liquid perpetual vehicles open to ongoing subscriptions, giving investors efficient access to long-term private market exposure. This year, we announced an infrastructure partnership with 3 leading firms, Actis, DigitalBridge and Copenhagen Infrastructure Partners, expanding our expertise in one of the most dynamic areas of private investing. Infrastructure is a significant opportunity with an estimated $94 trillion in global funding need by 2040. We're excited to develop a diversified perpetual infrastructure solution for the wealth channel, investing across all subsectors and positioning Franklin Templeton to capture opportunities in this fast-growing market. In addition, we are in the process of launching new products to bring to market. Industry tailwinds for private markets remain strong. According to Boston Consulting Group, alternatives are projected to represent roughly half of industry revenues by 2029, driven largely by the democratization of alternatives. Goldman Sachs projects the retail alternatives market alone will expand from $1 trillion to $5 trillion over that same period. Franklin Templeton is well positioned to capture our share of this growth leveraging our scale, partnerships and innovation to lead in the next era of alternative investing. Alternatives and retirement represent one of the most exciting opportunities ahead. This year, we announced a partnership with Empower, one of the largest U.S. retirement service providers with over $1.8 trillion in assets under administration. Together, we're paving the way for private market investments to be included in defined contribution plans, an important step toward broadening access for millions of retirement savers. While still early days, the long-term opportunity is significant. In U.S. defined contribution plans alone, allocations to alternatives are projected to create a $3 trillion addressable market over the next decade. With $125 billion in defined contribution assets and $440 billion in total retirement assets and a compelling range of alternative strategies, Franklin Templeton is well positioned as demand continues to accelerate. Turning now to distribution. As one of the most comprehensive global investment managers with clients in over 150 countries, we offer our clients a full range of investment strategies in vehicles of their choice. We saw growth across vehicles, driven by record positive net flows in retail SMAs, ETFs and Canvas, contributing to AUM growth from the prior year of 13%, 56% and 71%, respectively. We are a leader in retail SMAs with AUM of $165 billion across more than 200 high-quality strategies. Our SMA business has grown at a 21% compound annual rate since 2023, reflecting the growing demand for personalized investment solutions. As the market continues to evolve, retail SMAs now about $4 trillion are expected to double by 2030 according to Cerulli. Against that backdrop, we're positioned to capture this growth supported by powerful trends driving investor behavior, greater customization, direct ownership and tax efficiency. Within the retail SMA segment, custom and direct indexing continue to be the fastest-growing areas. According to Cerulli, direct indexing assets have reached $1 trillion, growing more than 35% from the prior year. We're seeing that strong momentum in our own business. AUM on our Canvas platform has more than tripled since 2023, an 82% compound annual growth rate. Our partnership network is expanding quickly, growing from 67 partner firms in 2023 to more than 150 today. And over that time, our financial adviser base has increased fivefold from just over 200 to more than 1,100 advisers now using Canvas to deliver customized portfolios at scale. We're exceeding our growth goals driven by continued adoption of personalized investing and the expanding reach of our Canvas platform. Our ETF business also continues to scale rapidly and ahead of plan, driven by strong global demand across fundamental active, systematic active and thematic country strategies. Active ETFs are now mainstream, representing about 10% of industry AUM, yet capturing 37% of flows and probably nearing 25% of revenues in the first half of 2025 according to McKinsey. At Franklin Templeton, our ETF AUM has grown at a 75% compound annual rate since 2023, with 16 consecutive quarters of net inflows and 14 ETFs now exceeding $1 billion in AUM. Importantly, active ETFs account for 42% of our ETF assets, but more than 50% of flows in fiscal 2025, underscoring the strength of our active ETF positioning, and we're just getting started. In our first year with approximately $50 billion in ETF AUM, we're already halfway to achieving our 5-year goal, a clear sign of the strength, momentum and scalability of our platform. Franklin Templeton Investment Solutions is another key driver of our growth strategy, leveraging our capabilities across public and private asset classes to deliver customized solutions for clients. Investment Solutions AUM grew 11% to $98 billion, in line with industry growth, supported by a strong pipeline. In July, we welcomed Rich Nuzum, former Executive Director of Investments at Mercer, to lead the expansion of our OCIO business, a major priority for us as asset owners increasingly seek strategic advice on objectives, governance and strategic asset allocation. With Rich's leadership and the strength of our investment platform, we are optimistic about this growing opportunity. This year, our focus on strategic partnerships delivered strong results, including $15.7 billion in multiple insurance sub-advisory fundings, a reflection of our growing position as a trusted partner to leading insurance companies. Beyond insurance, we also expanded multibillion-dollar relationships with clients in each of our regions. For example, the company was appointed trustee and manager of the $1.68 billion National Investment Fund of the Republic of Uzbekistan, further extending our strong track record in managing strategic investment mandates across emerging markets. These achievements reflect the strength of our partnerships and the trust we've built globally. In this context, we were delighted that the Central Banking named Franklin Templeton its 2025 Asset Manager of the Year, highlighting our expertise and enduring relationships with central banks around the world. Turning to Slide 9. Two additional important growth areas are private wealth management and digital and technology. Fiduciary Trust International, our Private Wealth Management business is positioned to benefit from major demographic trends, including the $84 trillion intergenerational wealth transfer expected through 2045. As a fully integrated wealth platform offering investment advisory, trust and state, tax and custody services, fiduciary continues to stand out with a client retention rate of about 98%. Global financial wealth is projected to grow at a 6% CAGR through 2029 according to the Boston Consulting Group. Non-depository trust companies like Fiduciary Trust International have historically grown at a faster rate. In fiscal year 2025, Fiduciary's AUM stood at $43 billion, supported by a strong pipeline of new business. As mentioned earlier, we also strengthened Fiduciary's leadership team with the appointment of Adam Spector as CEO of Fiduciary. Adam has been instrumental in the success of Franklin Templeton's global advisory services and his leadership will help accelerate Fiduciary's next phase of growth. Fiduciary is a leading independent wealth management business, and we will continue to invest both organically and through targeted acquisitions to position the business for sustained long-term growth. Our goal is to double Fiduciary's AUM by 2029. Turning to innovation. The pace of change in our industry continues to accelerate and Franklin Templeton is leading the way. According to Boston Consulting Group, the market for tokenized real-world assets is projected to grow from about $600 billion today to nearly $19 trillion by 2033, a transformative opportunity that we were early to recognize in the development of our digital assets group. Fiscal year 2025 was a defining year for our digital asset business. We expanded our product lineup, and our tokenized and digital AUM now stands at $1.7 billion, up 75% from the beginning of the year. As the only global asset manager offering digitally native on-chain mutual fund tokenization, we introduced first-of-the-kind features for registered money market funds using our proprietary blockchain-based tokenization and transfer agent platform, including intraday yield calculation and daily yield payouts, 365 days a year. During the year, we also completed launching new tokenized funds in UCITS, VCC and private fund wrapper to supplement our 40 Act offering, supporting a broader range of tokenized fund types across multiple jurisdictions and building a strong foundation for the next wave of innovation. And we deepened our global partnerships, embedded our tokenized money market funds into the crypto collateral process and partnering with Binance, the world's largest crypto exchange to develop new products for its global wallet platform. Today, Franklin Templeton stands as the only global asset manager delivering native on-chain mutual fund tokenization. We remain focused on investing in innovation and technology to harness blockchain's potential, redefining how investors access opportunities and shaping the future of asset management. Over the past year, we've taken a major step forward in our AI journey. What began as hundreds of isolated use cases has evolved into a large-scale end-to-end transformation across 4 core areas: investment management, operations, sales and marketing. This shift is accelerating our scale in agentic AI. Through strategic partnerships, including our collaboration with Microsoft announced last summer, we're building integrated scalable AI platforms that are already driving measurable results tied to clear business outcomes and commercial impact. As these initiatives deliver results, greater value will be unlocked across the firm. And importantly, I'm pleased to see that AI adoption continues to grow across our workforce. Today, the majority of employees are using approved AI tools to drive productivity, efficiency and better outcomes for our clients. We continue to advance our efforts in capital management, operational integration and expense discipline, strengthening the foundation for future growth. Matt will cover our progress and next steps in these areas in just a moment. Fiscal 2025 was a pivotal first year of our 5-year plan, one that set a strong foundation for growth, innovation and scale. We executed on our long-term priorities, delivering growth across both public and private markets as clients increasingly look to Franklin Templeton as a trusted partner for comprehensive investment solutions. With that strong foundation in place, we're entering fiscal 2026 with clear momentum and excitement about the opportunities ahead. Now turning to market performance. Fiscal 2025 brought strong public equity gains despite a complex geopolitical and macro backdrop. After a long period of narrow mega cap leadership, market breadth returned, a welcome shift for active managers. Equities rose across regions, supported by easing monetary policy, steady growth and improved earnings. While markets briefly wavered early in the year amid China's DeepSeek AI debut and U.S. tariff proposals, they rebounded quickly with the S&P 500 and MSCI Emerging Markets both up over 30% from April lows. AI remains a key driver of market direction, fueling innovation and differentiation across industries. In fixed income, returns were positive even amid policy uncertainty, a government shutdown and shifting rate expectations. The Fed's 50 basis point rate cuts in September and October helped support growth, while inflation has held near 3%, yields remain attractive, though volatility is likely to persist. Our overall view of private markets remains constructive. Activity has been more selective, but we continue to see opportunities. Secondaries offer compelling risk-adjusted profiles and in private credit, areas such as asset-based finance and commercial real estate debt are benefiting from reduced bank lending. Real estate capital markets remain muted overall, but industrial, multifamily and self-storage sectors are leading performance due to strong and sustainable long-term fundamentals. This is an environment that rewards selectivity, discipline and active management. Market breadth, dispersion and dislocation are creating opportunities across public and private markets where active managers can add meaningful value for clients. These market dynamics set the stage for another strong year at Franklin Templeton. Let's now move to fourth quarter and fiscal 2025 results, beginning on Slide 15. In terms of investment performance, as mentioned earlier, over half of our mutual fund ETF AUM outperformed peers and over half of composite AUM outperformed their benchmarks in all periods. Turning to flows on Page 17. Long-term flows increased 7.8% to $343.9 billion from the prior year. Excluding Western Asset Management, we had $44.5 billion in long-term net inflows, marking our eighth consecutive quarter of positive flows, excluding Western and reflecting client demand in key strategic areas. Our institutional pipeline of won but unfunded mandates remain healthy at $20.4 billion following record fundings in the quarter. The pipeline remains diversified by asset class and across our specialist investment managers. Internationally, Franklin Templeton manages nearly $500 billion in assets. And excluding Western Asset Management, we achieved $10.7 billion in positive long-term net flows in markets outside the U.S. That momentum highlights the strength of our global platform and the diversity of our growth across vehicles, regions and client segments. From an asset class perspective, turning to Slide 18. Equity net outflows improved to approximately $400 million for fiscal year 2025. We saw positive net flows into large-cap value, smart beta, infrastructure, equity income, custom solutions and mid-cap growth strategies. Fixed income net outflows were $122.7 billion. Franklin Templeton Fixed Income more than doubled net inflows from the prior year. With approximately $240 billion in AUM, Franklin Templeton Fixed Income has expertise in every sector and is active in all corners of the global bond market. Excluding Western, fixed income net inflows were $17.3 billion for the year. We experienced positive net flows into Munis and Stable Value strategies. Excluding Western, fixed income generated positive net flows for 7 consecutive quarters. Let's move to Slide 19. Finally, as I mentioned before, broad-based client demand drove sustained organic growth in alternatives and multi-asset, which together generated $25.7 billion in net flows for the year. This week, we reported preliminary October AUM and flows. Western's long-term net outflows were $4 billion for the month of October and had ending AUM of $231 billion. Excluding Western, long-term net inflows continue to be positive and were $2 billion. We continue to see positive net flows in alternatives, ETFs, Canvas and digital assets. The past year has presented significant challenges for Western Asset, and we remain committed to supporting them. As part of that commitment, we integrated select corporate functions to drive efficiency and give access to broader resources. Western's client service team joined Franklin Templeton in order to better serve the needs of our clients. These enhancements have been seamless for clients. Western's leading investment team continues its investment autonomy and performance has rebounded strongly with 92%, 98%, 88% and 99% of Western's composite AUM outperforming the benchmark for the 1-, 3-, 5- and 10-year periods. To wrap up, we take great pride in the efforts we've made over the past year to further grow and diversify our business. As we enter fiscal year 2026, Franklin Templeton stands stronger than ever, anchored by broad investment expertise, global scale and reach and commitment to innovation. We have strengthened our competitive position across public and private markets, expanded our partnerships globally and continued to innovate in technology, AI and digital assets. These achievements reflect not only our ability to navigate dynamic markets, but also our long-term focus on creating sustainable value for our clients and shareholders. Before I close, I want to thank our employees around the world for all their efforts this past year. Their dedication, expertise and unwavering focus on our clients are the foundation of everything we accomplish. Now I'd like to turn the call over to our Co-President, CFO and COO, Matt Nicholls, who will review our financial results and quarterly guidance. Matt? Matthew Nicholls: Thank you, Jenny. I will briefly cover our fiscal fourth quarter and full year 2025 results, followed by fiscal first quarter 2026 guidance. So for the fiscal fourth quarter, ending AUM reached $1.66 trillion, reflecting an increase of 3.1% from the prior quarter, and average AUM was $1.63 trillion, a 4.4% increase from the prior quarter. Adjusted operating revenues increased by 13.9% to $1.82 billion from the prior quarter due to elevated performance fees and higher average AUM. Adjusted performance fees were $177.9 million compared to $58.5 million in the prior quarter. This quarter's adjusted effective fee rate, which excludes performance fees, stayed flat at 37.5 basis points compared to the same rate in the prior quarter. Our adjusted operating expenses were $1.34 billion, an increase of 10.5% from the prior quarter, primarily due to higher incentive compensation on higher revenues, higher performance fee incentive compensation and performance fee-related third-party expenses, higher professional fees, partially offset by higher realization of cost savings. As a result, adjusted operating income increased 25% from the prior quarter to $472.4 million, and adjusted operating margin increased to 26% from 23.7%. Fourth quarter adjusted net income and adjusted diluted earnings per share increased by 35.7% and 36.7% from the prior quarter to $357.5 million and $0.67, respectively, primarily due to higher adjusted operating income and adjusted other income and a lower tax rate. As of September 30, we impaired an indefinite-lived tangible (sic) [ intangible ] asset related to certain mutual fund contracts managed by Western Asset and recognized a $200 million noncash charge in our GAAP results. Turning to fiscal year 2025, ending AUM was $1.66 trillion, reflecting a decrease of 1% from the prior year, while average AUM increased 2.6% to $1.61 trillion. Adjusted operating revenues of $6.7 billion increased by 2.1% from the prior year, primarily due to an additional quarter of Putnam, higher average AUM and elevated performance fees, partially offset by the impact of Western outflows. Adjusted performance fees of $364.6 million increased from $293.4 million in the prior year. The adjusted effective fee rate, which excludes performance fees, was 37.5 basis points compared to 38.3 basis points in the prior year. The decline is primarily driven by strong growth into lower fee categories such as ETFs, Canvas and multi-asset solutions, mitigated by lower fee Western outflows and increasing flows into higher fee alternative asset strategies. Our adjusted operating expenses were $5.06 billion, an increase of 4.3% from the prior year, primarily due to an additional quarter of Putnam, higher incentive compensation on higher revenues and sales and higher spend on strategic initiatives, partially offset by the realization of cost-saving initiatives. Importantly, as previously guided, adjusted for an additional quarter of Putnam and excluding incentive fee compensation, our fiscal year expenses were substantially similar to fiscal year 2024, less than 1% difference. This led to fiscal year adjusted operating income of $1.64 billion, a decrease of 4.3% from the prior year. Adjusted operating margin was 24.5% compared to 26.1% in the prior year, reflecting our support of Western. Compared to prior year, fiscal year adjusted net income declined by 6.3% to $1.2 billion, and adjusted diluted earnings per share was $2.22, a decline of 7.5%. The decreases were primarily due to lower adjusted operating income and lower adjusted other income. On other topics, we continue to focus on capital management and operational integration to drive efficiency and long-term value. As stated on Slide 9 in the investor presentation, from a capital management perspective, we returned $930 million to shareholders through dividends and share repurchases, funded the majority of the remaining acquisition-related payments and repaid $400 million senior notes due March 2025 in the current year. Our dividend, which has increased every year since 1981, has grown at a compound annual growth rate of approximately 4%. Our balance sheet provides flexibility to invest in the business organically and inorganically. We have co-investments and seed capital of $2.8 billion, an increase from $2.4 billion from prior year to develop and scale new investment strategies. In addition, while continuing to invest in long-term growth initiatives, we also continue to strengthen the foundation of our business through disciplined expense management and operational efficiencies, especially given the ongoing evolution of our industry. Our plan to further simplify our firm-wide operations, including the unification of our investment management technology on a single platform across our public market specialist investment managers remains on track, both from a cost and implementation perspective. We have also integrated functions of certain specialist investment managers to simplify investment operations and increase collaboration across the firm. Before presenting our fiscal first quarter 2026 guidance, I just wanted to reiterate an important point on our fiscal year 2025 expenses. As mentioned earlier, when adjusting for an additional quarter of Putnam and excluding incentive fee compensation, our fiscal year expenses were substantially similar to fiscal year 2024, less than 1% difference. This is notwithstanding markets being significantly higher in the year and the relatively modest difference is fully attributed to higher sales commissions and higher valuation of mutual fund units linked to deferred compensation. All other investments across the company, including additional resources tied to alternative assets, ETFs, Canvas, multi-asset solutions, investment management technology and operations have been directly funded through savings initiatives. Turning to fiscal year 2026 first quarter guidance. As a reminder, guidance assumes flat markets and is based on our best estimates as of today. We expect our EFR to remain at mid-37 basis points for the quarter. We anticipate the EFR to be stable as higher growth in lower fee categories are partially offset by higher fee alternative asset flows. In future periods, episodic catch-up fees may move the EFR temporarily higher. We expect compensation and benefits to be approximately $880 million. This assumes $50 million of performance fees at a 55% payout and also includes approximately $45 million to $50 million of annual accelerated deferred compensation for retirement-eligible employees, flat from the first quarter of 2025. For IS&T, we're guiding to $155 million, consistent with the prior quarter. We also expect occupancy to be flat at approximately $70 million. G&A expense is expected to return to previous guide levels in the $190 million to $195 million range and includes elevated professional fees. In terms of our tax rate, we expect fiscal 2026 to be in the range of 26% to 28% due to a high proportion of U.S. income and the effect of increased tax rates globally. We're 1 month into the 2026 fiscal year, and it's obviously early, but consistent with our plans discussed earlier in fiscal 2025, we begin the year knowing that we have approximately $200 million of gross expense efficiencies for fiscal 2026, but the net amount of those efficiencies will ultimately depend on market and our performance during the year, both of which are up to start with as we go into the new fiscal year. Similar to fiscal 2025, these savings will also fund ongoing investments across the business, absorb increased fundraising expenses and $30 million of expenses added from the Apera acquisition. However, all else remaining equal from this point, we expect to end fiscal 2026 at or below adjusted expenses versus fiscal 2025 and at a higher operating margin. And now we would like to open the call for questions. Operator? Operator: [Operator Instructions] The first question is from Alex Blostein from Goldman Sachs. Alexander Blostein: Thanks for all the detail and some of the updated targets as you think about some of the growth areas for the firm. Super helpful. I wanted to start with a question around alts. When you talk about the fundraising target for 20 -- fiscal 2026, I think you said 25 to 30. Can you just unpack how much you assume for Lexington's flagship fund? And then within that, how you're expanding their retail alts lineup as well? Jennifer Johnson: So as you said, we think the 2026 target is between $25 billion and $30 billion. And just, Alex, you remember, last year, we said $13 billion to $20 billion, and we thought the $20 billion would be contingent on the first close of Lexington. That didn't actually happen, and we still blew away that number at, I think, $22.7 billion. So this year, the $25 billion to $30 billion will be a mix of Lexington. There will be contributions from Clarion on the real estate, BSP and Alcentra as well as Venture. Lexington could be half of that, but the others are intended to contribute significantly. And we think 2026 is going to be a real well-routed year as far as all of the alts managers contributing. Alexander Blostein: Got you. And then, Matt, one for you on expenses. So I heard you kind of try to bridge exiting fiscal 2026 all-in expenses, same or better or lower, I should say, expense run rate. Can you just help us think maybe through the cadence of that over the course of the year or maybe asked another way, your just total expense guide for 2026 in totality? Matthew Nicholls: Yes. As I said in the prepared remarks, we guided earlier on in the year when markets were a lot lower that we'd be targeting $200 million of cost savings for 2026, which will be spread out through the year, and we're confident that we've achieved that. It's now a matter of determining the net amount that we can achieve. And there's a lot going on, as mentioned by Jenny on this call and as I referenced. We're confident that we can self-fund many of these things from the $200 million. We can absorb the increased fundraising that I mentioned when I talked about the $200 million earlier in the year, I caveated that with the increased fundraising that we expect this year and the addition of Apera. And also, we've mentioned in the past, the absorption of the Aladdin project expenses. So all those things, taking all those into account and beginning the year with the market up 15%, 20%, depending on what market you're talking about, we're still confident that we end the year at least -- I want to say, at least in line with where we were in 2025 with the full expenses, excluding performance fees from both years. And what I mean by at least is there's a very good shot that we are below that amount. It's very early on, Alex, obviously, for the year. So that's all I can give right now. The second thing I'll say, though, is that we do expect the results as we move into the year, except the first quarter where the margin would be a little bit lower because the accelerated deferred comp probably represents about 2% of margin. But if you take that out every quarter as we model our way through the year, all else remaining equal, we'd expect the margin to tick up. Second, third, fourth quarter, we expect the margin to get increasingly higher towards our target of 30%, as we've also referenced in the past. Operator: [Operator Instructions] The next question is from Ben Budish from Barclays. Benjamin Budish: Jenny, you talked about your ambitions on the infrastructure side in your prepared remarks. Curious if you can unpack that a little bit more. You mentioned some wealth products coming to market, a number of partnerships. What's sort of in the pipeline for the near term in terms of new funds? And maybe talk a little bit about what your current exposure is today? Jennifer Johnson: So -- sorry, let me just get a clarification. Are you talking infrastructure, meaning like the stuff we're doing on tokenization and blockchain or infrastructure, meaning the alternative products infrastructure? Benjamin Budish: The latter. Jennifer Johnson: Okay. So we announced like we think that the infrastructure category is just massive. There's -- as we all know, you guys have heard the statistics as far as the number of projects that are needed to be funded out there. And so the relationship that we created, the partnerships with DigitalBridge, which DigitalBridge is known for their sort of data centers, cell towers, fiber networks kind of thing. Copenhagen Infrastructure Partners are really greenfield energy manager and then Actis is sustainable kind of infrastructure. Infrastructure requires massive scale. And so none of these players play particularly -- have really any penetration in the wealth channel. And so we're able to -- what we're going to do is be able to build a fund around participating in their deals that will then distribute in the wealth channel. Now that doesn't prohibit us from being able to do some M&A if the appropriate opportunity comes. But infrastructure is an asset class that is particularly desired by people who are looking for income because these tend to be long-term PPA products and others that kick off a lot of income. So we felt that we needed that category to fill out our alternative's capability. We didn't find something that was of scale that we wanted to acquire at the time and this -- and they needed to get into the wealth channel, or they had a desire. So it's a good match. Operator: The next question is from Bill Katz from TD Cowen. William Katz: I appreciate all the guidance and commentary. Jenny, I'm very interested in what you guys are doing on the AI and the tokenization side. You do seem to be way ahead of most of your peers as our conversations are going. Can you talk a little bit about how you sort of see maybe the opportunity in particular for tokenization, how that might impact the ability to drive performance, what it might mean for operating costs and ultimately, how it might redefine distribution opportunities? Jennifer Johnson: Sure. So again, it's really important to just think about digital assets and tokenization is blockchain, it's just a programming language. It's a programming language that does certain things really efficiently and then it's going to open up new opportunities. So we are the only ones who have -- and we built a transfer agency system and a wallet-based system because they didn't exist in the market. Starting in 2018, we had approved -- I think it was in 2021, the SEC approved our tokenized money market fund. And to give you an idea of the opportunities, because it's significantly cheaper to run and there's -- we're able to offer our money market fund with an initial investment of $20. Our traditional money market fund is you have to have $500. And the second thing that technology enables us to do is we can -- with this money market fund, we actually calculate the yield every second, and we pay it in your account every day, 365 days a year. So this is important for people who are, say, a hedge fund who are wanting to leverage -- use the money market fund for collateral and they only own it for partial part of the day, they can get 4 hours, 32 minutes and 22 seconds worth of yield that is paid in their account even for a partial day ownership. So it's just going to create new capabilities, less expensive new capabilities. And then on distribution, you saw that we had an announcement with Binance. So Binance is a crypto exchange, 270 million wallets. They're interested in bringing traditional, we're actually talking to a lot of different exchanges. They're interested in bringing additional products to traditional products that are tokenized because we built this capability, and we're the only asset manager that has this capability that I'm aware of, we can take like ETF and other products and tokenize them and list them on some of these exchanges. So it opens up a new distribution capability. But I think the future, all mutual funds, all ETFs, all will be tokenized merely because the technology is tremendously efficient. And so we're excited to be leaders in this space. Operator: The next question is from Brennan Hawken from BMO Capital Markets. Brennan Hawken: Can we get an update on your expectations for the latest Lexington flagship? Maybe what caused the timing for the first close to slip? What are your updated expectations for size? And do you have any updated expectations for timing for any of the -- either the first or the final close? Jennifer Johnson: The -- so first of all, just to be clear, it was always a stretch if there was a first close. We just felt like it was important to list it as a possibility. I do think that everybody would say that the fundraising environment is more difficult than it's been historically. But again, if you're in the secondary space, there's so much opportunity in the secondary space because the real issue is the clogging of so many of the LPs with private equity that is not moving. Private equity is distributing at about half the cash flow that they've done historically. And so as these guys are needing liquidity, whether it's because they just need it in their funds or because they want to participate in a new round of private equity, they're turning to firms like Lexington. And size really matters. Scale matters in the secondary space. And so there's only a few firms like Lexington that have that kind of scale that gives them a real advantage to play in the bigger deals. I think their target is -- I'm trying to find my notes; I think it's about $25 billion for this fund. And I think the first close, they expect in the first half of 2026, calendar 2026. Operator: The next question is from Patrick Davitt from Autonomous Research. Patrick Davitt: Madam, you mentioned elevated distribution fees, and there's reporting this week that Schwab is planning to add a 15% platform fee on all of its third-party ETFs. ETFs obviously a big growth story for you this year. So curious if you can give us an idea of how much of your ETF growth has come from Schwab, if at all? And then more broadly, any thoughts on to what extent you're seeing a more pervasive push from all of your distribution partners to increase revenue shares like this? Jennifer Johnson: Well, that is not a dynamic that has changed. It's probably just changed as ETFs have taken off. They're trying to -- more of them are trying to push for that. But as you know, that is something that we always deal with in this business, who's actually responsible for the distribution? Is it the platform? Is it the individual? And so there's probably capability in the active ETFs to be able to do some amount of that. There are already players that have it. We have not been particularly big on the ETF portion with Schwab. So it probably impacts us less immediately. But obviously, as we desire to grow there, it will be something that we will have to work with. I think that it's going to be difficult on these platform fees on passive ETFs because they're obviously cheaply priced. But as the world is moving to more active ETFs, 43% of our ETFs are in the active space above the industry. We'll have to deal with those kind of revenue share type programs. Matthew Nicholls: And Patrick, just to tie your question back to that, I think you were tying it also to the G&A remark that I made on increased placement fees. That's really to do with alternative asset placement fees, not the ETFs and mutual fund type fees that you're referring to. So when I talked about G&A-related expense item around distribution, I meant placement fees related to alternative assets. Operator: Next question is from Craig Siegenthaler from Bank of America. Craig Siegenthaler: My question is on your tax efficient suite. You have a pretty big offering here, and you're seeing good flows across munis, especially the SMA wrapper and also in Canvas with direct indexing. Do you think flows here could get even better given rising adoption and allocations among high net worth investors? And I don't think you have anything in the hedge fund space where you can generate even more tax alpha and flows there just started taking off this year. Is that a gap that you can fill in at some point? Jennifer Johnson: We have a product called MOST. It's an options overlay product. So actually, we do have capabilities in that space. It's just now really starting to get traction. Look, we think that the direct indexing and the overlay space is going to just continue to grow. a lot of reason is the dynamics of fee-based advisory where they prefer that, and they can show the client that they've had tax efficiency. So we do have that capability with an acquisition we did, and we're really just growing it on the -- we continue to add more and more platforms. I think we have 175 sponsors now that we're now selling our SMAs to. Canvas continues to add more and more platforms every month. And once you get on a platform, the flows just continue to come on. And -- I don't know, Adam, you want to add anything else to that? Adam Spector: Yes. I would only say that a real power comes from being able to combine these different capabilities. So we're growing well in munis. We're growing well in ETFs, Canvas as well as 1/30/30 and option-based strategy. So to be able to do them all through a Canvas platform, which we're building towards is where the real power is. And I think we're one of the few firms that can offer all of those things in the combined suite. Operator: The next question is from Brian Bedell from Deutsche Bank. Brian Bedell: Thanks for all the great today on the outlook. Maybe my question is on the credit alternative business and the direct lending strategy, 2-part question. One is just on your views on credit quality in direct lending. If you can comment on whether you have any exposure to any of the problem, credits that have been out there and maybe just a view on whether you think that's -- do you think these are idiosyncratic? And then on the growth side of that, it sounds like you're increasing your traction in Europe with the most recent Apera acquisition, bolted on with Alcentra. So maybe your view on expanding direct lending and growth of this business in Europe over time? Is that an additional growth lever for you? Jennifer Johnson: Yes. So first on kind of the opportunity in private, we're not seeing a deterioration in credit. And we tend to -- our view on the economy is that its still very strong, consumer is strong and you're just not -- while you'll hear about the banks talking about a slight uptick in subprime, it's really coming back to kind of more normal levels. As you could see, the fixed income market is really priced for perfection. Nobody is expecting great deterioration. We had very, very teeny exposure at ESP to one of those 2. And the truth is that was really looking like fraud. So it's not something that's systemic from a credit standpoint. So we still remain very optimistic in the credit market, again, especially because of the strength of the economy, which we still think is very strong. And then, yes, we're excited about direct lending. We think you -- if you're in the private credit space, the ability to move between different types of credit is important because sometimes something gets squeezed and it's trading very tightly, and you want to be able to pivot. But the Apera acquisition brought direct lending capabilities, particularly in the lower middle market, which is -- it's not a particularly crowded space there. So we're very optimistic about it, and we think it rounds out the private credit capabilities that we have. Operator: The next question is from Dan Fannon from Jefferies. Daniel Fannon: Matt, I wanted to follow up on your comments around the fee rate and the outlook for next quarter as well as the year, given continued growth within alternatives, obviously, beta has been quite strong, and you've had declining fixed income. So trying to understand the mix a little bit better. And I believe there is a fund that's going to start kicking in from Lexington for fees starting, I believe, October 1. So curious as to why you're not seeing a bit more of a step-up in that fee rate sequentially. Matthew Nicholls: Yes. I think when you factor in a Lexington fundraise over the year, as I mentioned in my prepared remarks, we will see an increase or we are very likely to see an increase in the EFR to -- into the higher 37s, 38s, even something like this. But I'm trying to make sure we communicate that, we expect that to be a temporary increase and then for it to come back down to reflect the very strong growth we have in ETFs, Canvas, multi-asset solutions. And remembering as well, Putnam has been very, very strong in terms of flows and Putnam's effective fee rate is 34 basis points in average across the franchise. That's getting offset. Those lower fees are getting offset by a steady and becoming more predictable alternative asset set of strategies and flows at much higher EFRs. So that positions the company to have a very stable EFR with upside as and when we raise larger flagship funds, so that's the way I would sort of describe it. Stable EFR with upside during different periods based on flagship fundraisings. And the reason why we're stable is because you've got the offset of the higher fee, more predictable alternative asset raises away from the flagship funds combined with strong, larger flows on average into the lower fee categories of ETFs, campus and multi-asset solutions. Operator: The next question is from Ken Worthington from JPMorgan Chase & Company. Kenneth Worthington: A little one for me. Shareholder servicing fees really jumped sequentially, about a $20 million pop. So anything unusual here? Or is it just sort of some mix changes, maybe some seasonality? It just seems like the jump is much bigger than we typically see in the fiscal fourth quarter. Jennifer Johnson: Matt, do you want to take that? Matthew Nicholls: Yes, that's to do with our -- it's a little bit seasonal, but also to do with the arrangements we have with our outsourcing providers around the TA. So you'll see that normalize. Jennifer Johnson: Yes, higher transaction fees. There's also a little bit of trust and estate planning fees in there, but it's seasonal. Operator: The next question is from Michael Cyprys from Morgan Stanley. Michael Cyprys: I wanted to ask about agentic AI and the Wand AI partnership. I was hoping you could elaborate a bit on the partnership, your goals, ambitions there, why partner with Wand versus other vendors. It sounds like you've been running a pilot program with them for the past year. I was hoping you could speak to some of the learnings from that, how it's informed your approach? And how might you quantify the sort of savings or reduced expense growth over time? Jennifer Johnson: Yes. So we've announced a couple of different partnerships in the AI space, Microsoft, AWS, Writer AI. In each of these cases, I think we've done a good job that has excited the AI providers that we're not just going in and fixing one little thing. We're going in it from a platform approach. And so for example, Microsoft has helped us on distribution, which uses multiple agents and then integrates them. And so what Wand has been working on, for example, is an ESG agent with the Franklin Equity team and our solutions team where it goes out and gets internal data and external data, brings it back and runs it through their kind of a scoring on ESG. What's interesting with Wand is they really enable us to -- and by the way, these partnerships mean they're co-developing. They're going to provide resources because they want the learnings of what's happening in your environment so they can take the domain knowledge and be able to go, extend it to other people and build their business that way. So they provide us free resources. What's interesting with Wand is we're able to connect these multiple agents in our investment groups. And then we can actually take those agents and go across other investment teams and be able to customize them to say, just take the ESG example to specifically however that team uses their ESG screen. And just a little bit on Wand. I mean, they are backed by leading AI venture firms. So Thiel Capital, Peter Thiel's Fund, Fusion Fund, [indiscernible]. These are all big AI firms or AI venture capital firms, and they're terrific, and they've been a great partner with us. And like I said, we have multiple partnerships with different AI development companies. Operator: This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's Chief Executive Officer, for final comments. Jennifer Johnson: I'd just like to thank everybody for joining us on today's call. And once again, I want to thank our employees for their continued hard work and dedication, and we look forward to speaking with you again next quarter. Thanks, everybody. Operator: Thank you. This concludes today's conference call. You may disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Westrock Coffee Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Robert Mounger, Vice President of Investor Relations. Please go ahead. Robert Mounger: Thank you, and welcome to Westrock Coffee Company's Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. With us are Mr. Scott Ford, Co-Founder and Chief Executive Officer; and Mr. Chris Pledger, Chief Financial Officer. By now, you should have access to the company's third quarter earnings release issued earlier today. This information is available on the Investor Relations section of Westrock Coffee Company's website at investors.westrockcoffee.com. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other SEC filings for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements made today. All discussions during the call will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. And with that, it's my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer. Scott Ford: Thank you, Robert. Good afternoon, everyone. Thanks for joining us. We're pleased to announce today that for the second quarter in a row, we produced record-breaking quarterly results, driven by continued new customer volume additions and cost management execution. We believe these results reflect the strength of our customer-centered model and the value to our customers of the strategic investments we have made in both the physical expansion of our facility and the systems that allow us to manage them more effectively. We remain on track toward our goal of becoming the premier integrated, strategic supplier to the pre-eminent coffee, tea and energy beverage brands globally. And now due to great customer interest, we're excited to be adding a new body of work focused on ultra-filtered milk-based, high-protein products as well. We ended the third quarter with the combination of our Beverage Solutions and SS&T Adjusted EBITDA of $26.2 million, up 14% over the second quarter and up 84% over the same quarter last year. These results bring the combined Segment Adjusted EBITDA of our first 3 quarters of '25 to $60.7 million, up 55% over the same period in the prior year, leaving us on target within our original full year guidance range for the year 2025. The growing volumes at both our new single-serve cup and extract to RTD plants in Conway, Arkansas, combined with cost controls across our core business units derived from process, data intelligence and risk mitigation insights via our ongoing relationship with Palantir continued once again this quarter to be the key drivers of this quarter's earnings beat. Importantly, on key packaging lines in Conway, we have already reached production levels nearing 80% of our original planned capacity, and we have added significant water and tank farm capacity to the plant to enable future lines to be quickly added. We also completed the installation of our second can line, which should start commercial production in Q1 of next year. You may recall that last quarter, we gave you some initial data on our second single-serve cup manufacturing facility located in the Conway complex, the start-up of which went seamlessly. The cup volume produced through these new lines was a key contributor to our profitability this quarter. Chris will have an important word on this topic in just a few moments. We remain convinced that by becoming the lead innovation and development partner, dependable and sustainable sourcing resource and low-cost processing and packaging outsourcer for the world's leading beverage brand, we enable them to capitalize on their brand equity position in step with the movements of their consumers. Our record quarterly results demonstrate growth brought about from our delivery as this leading integrated platform in the category, delivery that enhances the value of our services to our customers, contributes to the growth of the careers of our teammates, manifests as pricing fairness on the ground for smallholder farmers in the developing world and rewards our shareholders. These continue to be important things worthy of our greatest efforts. I believe that our customers and our competitors are keenly aware of the market share shifts that we are beginning to cause as these new plants scale operationally. We have been successful at winning our customers' trust because we have spent 3 years over $350 million in capital and the time of 1,400 highly skilled development and manufacturing professionals to provide them a set of products and services that they can count on for quality, convenience, innovation and price. That said, I also believe that historically high coffee prices and major tariffs on coffee imports, coupled with the 2 extra quarters it took us to reach scale production levels in our Conway plant has given some investors pause. Therefore, I am thrilled to share with you today the news of a new $30 million infusion of capital into our business from our traditional core shareholder group, which coupled with the realignment of our debt covenants with our growth in Conway clears the way for us to completely focus all of our resources on operational delivery and driving results for our customers and stockholders. My thanks to the entire Westrock team who steadfastly go the extra mile to ensure our customers are positioned to win in their markets daily. Our Board and core shareholders who are simply relentless in their support of our mission and to our bank syndicate members led by Wells Fargo, Bank of America, Rabobank, Truist and others who have been the consummate engaged and encouraging professionals throughout the entire build-out and start-up phases of what is now the largest and I believe, best facility of its type anywhere in the world. I'm now going to turn the call over to Chris Pledger, our CFO, who will explain all of these developments and more in greater detail. Chris? Thomas Pledger: Thank you, Scott, and good afternoon, everyone. Before I go into the details of the capital markets activity we announced today, I'll first cover the results of our third quarter. As Scott mentioned, we delivered an exceptional quarter, highlighted by year-over-year volume growth in our roast and ground, single-serve and flavors, extracts and ingredients platforms and continued supply chain optimization and disciplined expense management. Our Sustainable Sourcing & Traceability segment also posted another strong quarter. On a consolidated basis, net sales increased 61% compared to the third quarter of 2024. Our reported net loss of $19.1 million reflects our continued investment in the Conway extract and RTD facility through its scale-up phase. Our Consolidated Adjusted EBITDA was $23.2 million, representing 125% growth over the third quarter of 2024. In our Beverage Solutions segment, net sales increased 60% year-over-year and Segment Adjusted EBITDA grew 74% to $20.4 million in the third quarter. This growth was driven by a 4% increase in core roast and ground coffee volumes, an 85% volume increase in single-serve cup and continued supply chain optimization and disciplined expense management. Year-over-year increases in commodity coffee prices and tariffs, which we passed through to our customers, also contributed to top line growth. Our SS&T segment continues to outperform our expectations with net sales growth of 62% over the third quarter of 2024, driven by volume growth, margin capture and higher coffee prices. Segment Adjusted EBITDA was $5.8 million, up from $2.5 million in the prior year quarter. As I mentioned last quarter, our SS&T results reflect the scalability and resilience of this business segment. Capital expenditures totaled approximately $18 million in the quarter, primarily related to the Conway extract and RTD facility. We have $15 million of CapEx remaining on our original build-out of the Conway extract and RTD facility, and we expect to spend that over the next 2 quarters. As of quarter end, we had approximately $52 million in unrestricted cash and available liquidity under our $200 million revolving credit facility. This is before taking into account the $30 million capital raise we announced today. Our leverage metrics remain within expectations and in full compliance with the covenants under our credit agreement. We have talked a lot on our last few calls about the working capital impact of historically high coffee prices and tariffs on coffee imports and their potential impact on consumer demand. Both topics continue to be front and center for Westrock Coffee and other U.S.-based coffee roasters. To help mitigate the working capital impact of higher coffee prices and tariffs, we raised approximately $12 million in the third quarter via sales of common stock under our ATM program. In addition, today, we announced the issuance of $30 million of convertible notes and a credit agreement amendment. The capital raise strengthens our balance sheet and provides additional liquidity to support the working capital needs resulting from elevated coffee prices and tariffs, while the credit agreement amendment realigns our financial covenants with the ongoing scale-up of our Conway facility. While it's impossible to predict how macroeconomic influences might impact our business, we believe we now have the working capital and credit capacity needed to navigate the continued elevated coffee prices and tariffs, and we do not anticipate any additional capital markets activity in response to these headwinds. Turning to our outlook. For 2025, we're updating our guidance to reflect our current expectation for the fiscal year. We now estimate that Consolidated Adjusted EBITDA will be between $60 million and $65 million, which is consistent with the guidance we provided at the beginning of the year. Beverage Solutions Segment Adjusted EBITDA for fiscal 2025 is expected to be between $63 million and $68 million and SS&T Segment Adjusted EBITDA is expected to be between $14 million and $16 million. Finally, our Beverage Solutions credit agreement secured net leverage ratio is expected to be 4.5x, a 40 basis point beat to our prior guidance. Turning to 2026 guidance. Earlier this year, we shared our expectations for 2026 Consolidated Adjusted EBITDA, our expected annualized run rate for Consolidated Adjusted EBITDA as we exit 2026 and our expected year-end Beverage Solutions credit agreement secured net leverage ratio. While we believe it would be premature to update our 2026 guidance, we also believe it's important to call out that one of our key customers is involved in a large M&A transaction within the coffee category. This is creating uncertainty for us related to their single-serve cup volume commitment for 2026. In addition, continued elevated coffee prices and tariff costs are creating uncertainty regarding how consumers will respond to higher coffee prices across restaurants, convenience stores and on retail shelves. We expect to have greater clarity, particularly regarding the M&A transaction ahead of our fourth quarter call, and we'll update our 2026 outlook, if necessary, when we report fiscal 2025 results. It's important to note that for purposes of resetting our credit covenants as part of our amendment, we have conservatively assumed that all single-serve cup volume related to the impacted customer will be off our platform by the end of this year, thereby assuring we don't need to seek additional relief if this scenario plays out. And even if it does, we're confident that over time, we'll be able to replace any lost volume on our single-serve cup platform with expanded volume from existing customers and new customer wins. With that, we'd be happy to open the line for questions. Operator: [Operator Instructions] Our first question comes from Eric Des Lauriers of Craig-Hallum Capital Group. Eric Des Lauriers: First question is just kind of checking in on the progress of some of the production lines after the delays reported last quarter. So on the Q2 call, you expected main production line to be up fourfold in Q3 and that you expect to be fully caught up to the delays by the end of the year. It sounds like you're about 80% there as of Q3. So just looking for an update on both of those and seeing how those trended in Q3? Scott Ford: Eric, this is Scott. We are -- at this juncture, we've run 80% to 125% kind of the standard volumes we would have expected off the line on the main can line. We've got all of our customers caught up at this juncture and the glass line is at this juncture, making commercial product for sale starting in the month of December. Eric Des Lauriers: Congrats on that progress. I suppose I'd like to focus my next question on this newly announced -- I don't know if it's a product line or just a product type, but including this ultra-filtered high-protein milk. Can you just expand on any timing and I suppose, size or scale commentary on this product? I mean, it certainly seems like this is an area where a lot of consumers are focused, looking to get more protein. So it seems like this could be quite a successful product for you and your partners. So just looking to get a little bit more info on there, whatever you're able to share. Scott Ford: Sure. It's early days, but it has been -- there is a tremendous amount of interest from a number of people, a number of different businesses. The core issue is as ultra-filtered milk products, high protein, if you will, start to move into cans and not just aseptic plastic bottles. There's a demand for aluminum cans over those bottles. The only plants that can run those are big major retort plants. We own and operate the largest retort lines in the country. And we have just installed a second line that is coming on for commercial production in January. So the whole product development cycle is probably a 12-month process. But as you're probably aware, the demand from these ultra-filtered milk products that are moving into cans are competing with the traditional coffee, ready-to-drink bottle -- I mean, can lines that we've been serving. And so a lot of the same customers are saying we want to do product extensions out into that platform and so we love doing product development work. We have small-scale lines that they can set up and run on. And I don't know that it will turn into anything, but the demand and the forecasted numbers that people are talking about, I wouldn't be surprised that it's not as big as our ready-to-drink coffee business over the next 2 to 4 years. Operator: Our next question comes from Sarang Vora of TAG. Sarang Vora: So I'll just follow up on the protein -- ultra-processed protein line. So do you have to make incremental investment to build this line? It seems like it's a great opportunity for the future, but do you have to -- or will you be able to leverage the existing production line to cater to this segment? Scott Ford: Yes. So we could, if someone delivered the product to us, we could run it through our production facilities today. We have probably $5 million or $6 million of capital that we or our distribution milk partner would have to put up to fully enable that, but that's the kind of thing that as we moved into production contract levels, we could easily put in place. That's really all we have to do, the can lines themselves, the product development, the labs through which we do all the testing, that's all completely interchangeable with the products that we make for people today. Sarang Vora: My second question is about the coffee sourcing and stuff. Coffee prices are high. There's tariffs on top of the coffee prices. How are you managing that? Like are you changing the sourcing between like markets? I know you were able to pass, but there is a pressure on gross margin right now. So how are you managing the whole dynamics on the coffee price increase? And how -- and what is your outlook when you look out for next year on coffee? Thomas Pledger: Sarang, this is Chris. I think the short answer is that with 60% of our coffee coming from Brazil and Brazil having the highest tariff, it's hard to produce product in the coffee space without using Brazil coffee. But we look at ways in order to be able to optimize the coffee that we use and the blend that we make. We'll continue to do that. And my guess is the longer the coffee prices stay high, the more innovation people will have around that, including us. The capital raise that we completed and announced today was really in order to ensure that coffee prices can stay as high as they are, tariffs can stay exactly where they are, and we've got the balance sheet in order to be able to make it through it. And so from our perspective, we feel like we're good as we move forward in whatever the market environment entails. Operator: Our next question comes from Todd Brooks of Benchmark, StoneX. Todd Brooks: First question, Scott, just thinking through the single-serve customer who we may be losing some M&A transaction friction. Were they existing customers on the platform? Or were these prospective customers that were contemplated when you gave the original 2026 EBITDA guidance? Scott Ford: They were coming on in the '25 year, and we're going to be at full ramp by early '26. And so they were incorporated in our original '26 guidance. Todd Brooks: And then the one I wanted to explore more in depth, you talked about really having the financing in a place that from a go-forward standpoint, you could start to play a little bit more offense again. You talked about, obviously, the high protein ultra-filtered. But other areas where maybe you haven't been able to play offense that the balance sheet might let you to go attack here in '26? Scott Ford: Yes. It's a good question, Todd. I think for me, when I look at the last multiple months as we worked through with our bank syndicate and with our core shareholders the right and best path forward, I kind of take really 2 or 3 things away from it. The first one is that immediately this year, our performance and the capital raise is going to allow us to be at 4.5x debt to EBITDA by the end of this year. Well, I don't think anybody thought Westrock Coffee was ever going to get back to 4.5x debt-to-EBITDA. But the team has delivered a great set of EBITDA numbers and the core shareholder groups coming in. Frankly, we've managed our cash extremely closely as the Conway plant has neared completion and out of kind of the helter-skelter fast mode. The second thing, and this is probably more important, as Conway turns on the new lines that are being commissioned and are coming up right now, and we get into the first half of next year, both Conway will be EBITDA profitable with no add-backs or any of that, just straight up old school, old-fashioned EBITDA profit and free cash flow positive and the entire business should move into free cash flow positive after debt service. So I've talked to people that have us going free cash flow positive in 5 years. We're going to go free cash flow positive after debt service in the next, I think, 4 or 5 months. So what that allows is simply what we're going to do is very conservatively, just chip away at each incremental opportunity. But to just show you how wild it is out there, I just came out of a meeting while we're talking about losing a single-serve customer. I just came out of a meeting where we need CapEx to meet the demand that is trying to line up and come into that plant over the next 12 to 18 months. Now I would have never guessed that. And while we were in the middle of building Conway, we wouldn't have had any capacity to deal with that other than to say we have to go to the market at this juncture. If that's what happens, we could do that ourselves. So it's a level of freedom we haven't had since we decided to go build the world's largest RTD factory, but I've missed it, and I'm glad to have it back. Operator: Our next question comes from Bill Chappell of Truist Securities. Unknown Analyst: It's Davis on for Bill. Can you hear me okay? So just on the expanded single-serve capacity that you all brought on recently and the consolidating customer leaving the platform. You mentioned being pretty confident that you're going to be able to fill the capacity. So I guess I was just wondering is there currently a backlog of customer demand that's ready to go ahead and step in? Or is that just kind of based on the way things have worked for the facility up until now, that just gives you the confidence. Scott Ford: Yes. Davis, this is Scott. So we don't really know. And I think the words that pleasure you is to talk about the fact that it is an uncertain period of time for us. We haven't changed our guidance from what -- for '25 or '26 from what we said in the beginning of '25. We haven't changed the thing. The one thing that's different is one of our large single-serve customers is in the middle of an M&A acquisition transaction, and we don't know how that will play out. And the last thing we're going to do is start to guess at how that plays out. So we will know more by the end of the year, and we will update you with whatever we know at that point. And we're trying to be very careful about staying on the line of what we know and what we don't. But nothing has happened in the business other than that transaction to make us change a single number we laid out for '25, '26. That said, the specific transaction that is causing us to have to put you on notice that we have a large customer in the single-serve space that is potentially involved in an M&A transaction, the same transaction that is possibly going to pull that customer away has called a multiple of other customers with multiples of their volume to get interested in coming to our facility and moving off of whatever platform they're on and into this one. How that will play out is completely unknown to me. But if it plays out the way we think it will play out over the next 2 to 3 years, which is, I know for eternity for your average 90-day hold stockholder. But if that plays out the way I think -- it plays out over the next -- we're trading at 4x EBITDA on what we think we can turn this business into over the next couple of years. So I've had high stock prices in a bad business forecast, and I'll take the low stock price and a great forecast. And we'll just play the cards from here. And that's about all we really know. Unknown Analyst: And I guess like you've mentioned a lot of -- kind of uncertainty around how the consumer is going to be actually engaging with coffee across channel next year. So I mean, I guess, kind of to connect just some past themes, are there any -- I guess, are your contracts still holding with customers? Have there been any shakeups in that area? I mean, obviously, you've mentioned having a long line of customers just wanting to get into the facility, but has there been any sort of customers falling out, new ones coming in that you haven't been expecting or haven't mentioned in the past? Scott Ford: Sure. We are every day battling in a very competitive like the RTD market and the roast and ground market is ultra-competitive. And we battle and we win some every quarter and we lose some every quarter. And we win SKUs and lose them. And we will win a brand customer, and we will lose one every now and then. So that battle day-to-day has been going on. In the single-serve space, I don't think we've ever lost a customer until maybe the one that's currently going through the transaction and then how that plays out is, like I said, we're going to stay out of the guessing game until we see exactly how that [indiscernible]. Operator: This concludes the question-and-answer session. I would now like to turn it back over to the Chief Executive Officer, Scott Ford, for closing remarks. Scott Ford: Well, thank you all for hopping on. I appreciate it. We were, as you can probably imagine, looking at being up 85% from last year. We were thrilled with the quarter. We're very optimistic about what lies in front of us, as you can tell. We're not going to try to get ahead of ourselves in terms of how it all lands. But we have recapitalized the business from mostly the same set of shareholders that have been backing us for years now. We have much more information about where we stand in Conway. Those lines are all now up, running, producing and making sellable product. We have new lines on that are just starting out on the incline for their production volumes and profits. And I really like where we've landed with our balance sheet. We have handled the cash crunch, if you will, that was caused by 50% tariffs on Brazil. It was a painful solve, but we have been able to solve it and I think, in good order. And we're very actually optimistic about our current business, about new business that we're working on, about new cost ideas that we're working on. And the only caveat, and it's fair to call it out, the caveat is we don't know exactly where one customer is going to land that is currently being purchased or at least set to be purchased by one of our competitors. And so I think that's all we know. That's full disclosures, and we will see you in another 90 days, and we'll give you an update as we know more. Thank you very much for your support, and we will see you soon. Operator: Thank you…
Operator: Good day, and welcome to the Kingsway Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. With me on the call are JT Fitzgerald, Chief Executive Officer; and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results of trends could materially differ from those contemplated by those forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see the risk factors detailed in the company's annual report on Form 10-Ks and subsequent Forms 10-Q and Form 8-Ks filed with the Securities and Exchange Commission. Please note also that today's call may include the use of non-GAAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP metrics to the most comparable GAAP measures is available in the most recent press release as well as in the company's periodic filings with the SEC. Now I would like to hand the call over to JT Fitzgerald, CEO of Kingsway. JT, please proceed. John Fitzgerald: Thank you, Morgan. Good afternoon, everyone, and welcome to the Kingsway Earnings Call for Q3 2025. Let me start by saying that to our knowledge, Kingsway is the only publicly traded U.S. company employing the Search Fund model to acquire and build great businesses. We own and operate a diversified collection of high-quality services companies that are asset-light, profitable, growing and that generate recurring revenue. Our goal is to compound long-term shareholder value on a per share basis. And we believe our business can scale due to our decentralized management model and our talented team of operator CEOs. We also continue to benefit from significant tax assets that enhance our returns. In short, Kingsway is uniquely positioned to capitalize on the Search Fund model at scale within a tax-efficient public company framework. I'm pleased to report an excellent third quarter for Kingsway. Revenues were up 37% year-over-year, and the company reached an important milestone as our high-growth KSX segment represented the majority of our revenue for the first time. Our KSX segment achieved stellar results with revenue growth of 104% and adjusted EBITDA growth of 90%. Our stable cash-generating Extended Warranty segment also performed well in the quarter, producing top line growth of 2% with robust cash flow and resilient modified cash EBITDA. While these headline numbers are impressive, there is reason to believe our underlying operating performance may have been even better than the reported figures show. First, in the quarter, there were 2 onetime expenses in our KSX segment that were mostly noncash and should not repeat. Late last year, a hospital system filed for bankruptcy that was a client of our SNS nurse staffing business. Based on new information received in the quarter, we fully reserved the remaining $325,000 receivable from that client, which ran through our P&L as a noncash item. In addition, we had roughly $180,000 of mostly noncash expenses recorded in our Kingsway Skilled Trades segment as we converted recent acquisitions from cash accounting to accrual accounting. Had we excluded these expenses from our adjusted EBITDA calculation, KSX adjusted EBITDA would have been roughly $500,000 higher in the quarter or $3.2 million instead of $2.7 million. Second, we made 4 acquisitions during the quarter with 3 completed mid-quarter. We look forward to having a full quarter of benefit from all of these businesses beginning in Q4. Third, we are seeing tangible business and financial momentum in a number of our operating subsidiaries. Roundhouse and Kingsway Skilled Trades have performed well since day 1 and are ahead of our underwriting case. Just in the month of September, Roundhouse achieved EBITDA of roughly $500,000, and the Roundhouse team is actively recruiting for open roles to meet strong customer demand. Image Solutions saw EBITDA grow sequentially by $100,000 from Q1 to Q2 and another $150,000 from Q2 to Q3. DDI also saw a notable improvement in EBITDA from Q2 to Q3. The impressive performance at Roundhouse and Kingsway Skilled Trades and the clear evidence that Image Solutions and DDI may be exiting their J-curves provide confidence that organic growth is likely to play an increasingly key role in driving Kingsway's success going forward. In short, we are seeing real business momentum across our portfolio that sets us up well as we go into Q4 and 2026. Turning now to some of the strategic developments in the quarter. On our last earnings call, we discussed our acquisitions of Roundhouse, Advanced Plumbing and Drain and the HR team. And we're excited to welcome all 3 to the KSX segment and to the Kingsway family. On August 14, we completed our 12th KSX acquisition with the purchase of Southside Plumbing for a purchase price of $5.625 million, plus a potential earn-out of up to $1.125 million for a total maximum purchase price of $6.75 million. At the time of acquisition, Southside Plumbing's unaudited pro forma annual revenue was $4 million and its unaudited pro forma annual adjusted EBITDA was $900,000. Based in Omaha, Nebraska, Southside Plumbing is a leading provider of commercial and residential plumbing services. This transaction, which was sourced and led by Rob Casper, President of Kingsway Skilled Trades, marks the third addition under our Kingsway Skilled Trades platform in 2025. We believe that Southside Plumbing has significant potential to accelerate growth through expanded marketing efforts and new service lines and to increase the proportion of sales that are recurring or reoccurring given the strong momentum in its service and repair operations. The Southside team has earned an exceptional reputation in its market for quality and service, driving consistently robust growth in its core business. We are thrilled to partner with Josh Gruhn, who is remaining with the company as President and maintaining an economic interest, ensuring an alignment of incentives and continuity of leadership. We look forward to supporting Josh and his team and upholding Southside Plumbing's long-standing legacy of excellence and reliability. Subsequent to quarter end, on October 20, we welcomed Colter Hanson as our newest Operator-in-Residence, or OIR. His combination of military leadership, strategic consulting experience and a passion for entrepreneurship make him an exceptional fit for our platform. Colter will conduct his search out of Minneapolis, where he intends to pursue an acquisition in the testing, inspection and certification sector with a focus on the Midwest. Year-to-date, we have now acquired 6 high-quality asset-light services businesses, exceeding our target of 3 to 5 per year. While that range remains an important benchmark, it is worth noting that it serves as a target, not a cap. Our primary objective is to remain disciplined investors, focused on quality opportunities that meet our strict acquisition criteria, and we continue to see a robust pipeline of attractive opportunities. With the addition of Colter, we currently have 3 OIRs actively searching for our next platform acquisitions in addition to our other KSX businesses, which are, in many cases, evaluating potential tuck-ins and inorganic growth opportunities themselves. We are energized by the pace and quality of acquisition activity. Finally, as of quarter end, our trailing 12-month adjusted run rate EBITDA for the businesses we own stands at approximately $20.5 million to $22.5 million. This metric provides a view of how the company would have performed over the last 12 months if Kingsway had owned all of our current businesses for that entire time. GAAP results in contrast only capture the performance of acquired businesses from their respective close dates onward. We believe this metric is particularly relevant during periods of high M&A activity like the past few years and better reflects the run rate earnings power of our current portfolio of businesses. It's important to call out that in calculating this metric, we are not using modified cash EBITDA for our Extended Warranty businesses. As we have discussed in previous earnings calls, many in the Extended Warranty industry, including our management team here at Kingsway, prefer to use a metric called modified cash EBITDA when assessing and valuing Extended Warranty businesses. This is because under GAAP accounting, growing Extended Warranty businesses often see their EBITDA penalized, while shrinking Extended Warranty businesses often see their EBITDA boosted due to timing differences in how revenue and expenses are recognized. Kingsway's Extended Warranty businesses are in growth mode. Cash sales in our Extended Warranty businesses accelerated from up 9.2% year-over-year in Q2 to up 14.2% year-over-year in Q3. However, due to these timing differences, a gap has opened up between adjusted EBITDA and modified cash EBITDA, which widened further in the third quarter. This can be seen in the company's financial statements where deferred service fees from Extended Warranty are up $2.8 million year-over-year. In addition, hundreds of thousands of dollars of commission expenses associated with issuing new warranty contracts have been booked upfront. Over time, these timing differences even out and adjusted EBITDA and modified cash EBITDA converged. We expect the same to occur for Kingsway. Our management team at Kingsway assesses the company's earnings power by looking at adjusted EBITDA for our KSX segment and modified cash EBITDA for our Extended Warranty segment. Using this framework, Kingsway today has the highest earnings power from its operations during my tenure as CEO. It's a remarkable place to be, though in many ways, it feels like we're just getting started in our journey. To conclude, this was an excellent quarter for Kingsway. We grew overall revenue by 37%. Our KSX segment roughly doubled its revenue and adjusted EBITDA relative to last year, and our Extended Warranty segment once again performed well with resilient cash flow and accelerating cash sales. We remain focused on disciplined execution, scaling our KSX portfolio and supporting our operator CEOs to deliver sustainable long-term growth. With that, I'll turn the call over to Kent for a closer look at our third quarter financial performance. Kent, over to you. Kent Hansen: Thank you, JT, and good afternoon, everyone. For the third quarter, consolidated revenue was $37.2 million, an increase of 37% compared to $27.1 million in the prior year. Adjusted consolidated EBITDA was $2.1 million for the 3 months ended September 30, 2025, compared to $3 million in the prior quarter. In our KSX segment, revenue increased by 104% to $19 million in Q3, up from $9.3 million in the same quarter a year ago. Adjusted EBITDA for KSX increased 90% to $2.7 million compared to $1.4 million in the year ago quarter. Moving to our Extended Warranty segment. Revenue increased by 2% to $18.2 million in the quarter, up from $17.8 million in the prior year period. Adjusted EBITDA for Extended Warranty was $800,000 in the current quarter compared to $2.1 million a year ago. As JT discussed earlier, however, the Extended Warranty segment's modified cash EBITDA, a key industry metric that more closely reflects the cash flow dynamics of warranty businesses, was resilient as our Extended Warranty businesses continue to perform well. The improvement in cash sales in our Extended Warranty segment reinforces our confidence that GAAP earnings will recover over time as deferred revenue from our recent cash sales was recognized. Overall, the Extended Warranty segment remains cash generative and well positioned for continued success. Turning now to the balance sheet and the capital structure. As of September 30, 2025, the company had $9.3 million in cash and cash equivalents, up from $5.5 million at year-end 2024. Total debt was $70.7 million at quarter end compared to $57.5 million as of December 30, 2024. Our September 30 debt is comprised of $55.8 million in bank loans, $1 million in notes payable and $13.1 million in subordinated debt. Net debt or debt minus cash at quarter end was $61.4 million, up from $52 million at year-end 2024. The increase in net debt is primarily related to additional borrowings related to the recent acquisitions of Roundhouse and Southside Plumbing. I'll now turn the call over to JT for a few final thoughts before we open the line for questions. JT? John Fitzgerald: Thanks, Kent. To close, I'd like to express my thanks and appreciation to Kingsway's employees, partners and shareholders. We have an amazing team, a wonderful set of operating businesses and both KSX and Extended Warranty are performing well. This really was an exceptional quarter. The business and financial momentum is tangible, and we are positioned to finish the year strong. I'll now turn the call back over to the operator to open the line for questions. Morgan? Operator: [Operator Instructions] Your first question comes from Mitch Weiman with Sumner Financial. Mitchell Weiman: JT, congrats on a great quarter. So a question for you. With the current environment with all the uncertainty regarding Medicare and reimbursements and everything, how is that going to affect secure nursing and digital diagnostics? Because you hear a lot of anecdotal evidence that hospitals are going to be having some issues going forward here. John Fitzgerald: Yes, I think we've seen that. Certainly at SNS, we mentioned that customer bankruptcy at the end of last year. I think some of that has to do with the pressure that they're feeling from kind of reimbursement pressure. And so I think it's kind of looking at each one of those businesses independently, if you start with SNS. I think a real focus on the types of hospitals where we're placing nurses, right? So I think that the most sensitive would obviously be where the predominant number of your patients are Medicare, Medicaid. And I think that, that's even more acute in some of the more rural hospital settings. I think we feel pretty good about our hospital mix at SNS in terms of both the payer mix and sort of geography and the type of profile of the people that are coming in and their balance sheets and budgets. And a lot of that stuff is publicly available. I think that these hospitals have to file their financials. And so Charles, when he's thinking about new hospital relationships or existing relationships is sort of acutely aware of that and checking the financial positions of his hospital customers. So certainly something to monitor. But I think, yes, I think hospitals are under quite a bit of pressure. With DDI, I think these are outpatient rehab and long-term acute care hospitals. I think a little bit less exposure to Medicare and Medicaid and certainly something after the experience at SNS, something that Peter is very focused on as well in terms of customer selection and credit extension, right? So it's something we'll continue to keep an eye on. Operator: [Operator Instructions] Your next question comes from Scott Miller with Greenhaven Road Capital. Scott Miller: JT, congratulations on all the progress. Basically, it seems like the key to this business is buying at reasonable multiples, doing it repeatedly and then driving organic growth. And the first 2 pieces, you've been buying at reasonable multiples. You've I think done 7 deals this year. So the repetition seems plausible. The organic growth, you called it out, I think, in the press release. Can you talk a little bit about kind of the type of organic growth you're seeing, what you think is possible, how it might differ across businesses? John Fitzgerald: Yes, great question. Certainly, organic growth is a key component of the flywheel, right, that you grow -- the cash flows of the businesses you own organically and then redeploy that capital to do more acquisitions, either at that business or in some of our activities. And I think that you touched on. I would add that your ability to attract talent is a key part of the equation as well. But... Scott Miller: And by the way your latest guy is -- I mean, whatever, yes. John Fitzgerald: Yes. And so organic growth is a key part of the thesis, and it goes into our underwriting as we go into these things, trying to buy businesses in industries where there is long-term secular trends and wind at your back. And we also recognize that you're buying small businesses that need to be professionalized. They need to come into a public company context and filing and all of those things. And so for the first many quarters, there is a significant investment in operating expense and those kinds of things to bring the talent, the systems, the technology into those companies to build a platform to support organic growth, right? A lot of times, these things -- these businesses are operating on the margin and aren't scalable effectively because they don't have the robust systems and processes and people in place to allow that to happen without making mistakes, right? And so we go in, and this is that whole J-curve concept, right, that we bring in an inexperienced operator, they have to get up their own experience curve, and we invest in these businesses, bring in new people, invest in the companies and their accounting and their HR and their technology systems, in sales and marketing, et cetera, depending on the business to prepare them to grow. And so as we mentioned with DDI and Image Solutions, like they've been on that journey and now are starting to emerge and accelerate growth. And I think that we would expect to see that pattern play out in every instance. I think in terms of individual company sort of potential, I think it depends on the industry and kind of underlying industry dynamics. But I would say that we would -- we ought to be targeting high single-digit organic growth potential at all of the businesses we acquire. Scott Miller: Got it. That's very helpful. And can you talk a little bit about Image Solutions and what's driving the progress there? And yes. John Fitzgerald: Yes, sure. I mean, obviously, Image Solutions had a very steep early J-curve because in addition to all of the things that I talked about, they had to weather a pretty significant hurricane and the disruption to the business across all of Western North Carolina and things. But Davide has done an awesome job. He got in there, got his hands around that, built real trust and support with the team, has added to the team, brought in some exceptional people to really professionalize their IT MSP platform, new technology, et cetera, and is now investing in sales leadership to drive new account, recurring revenue accounts in the IT MSP and get that business growing. And so we kind of got through business disruption, onboarded some great people, built an operating plan, assigned accountability to the various people to execute that plan and you're starting to see the benefits of that coming through the business now. And so he's sort of exiting his J-curve and in growth mode. Scott Miller: And how big could a business like that be? Are there any like -- what's the ceiling on something like that? John Fitzgerald: Sorry, you broke up kind of halfway through. I got that... Scott Miller: How big could a business like that be? Like what's the ceiling on a business like Image Solutions? John Fitzgerald: Well, look, I mean, I think that one of the things in each one of these businesses, each also has the potential to be their own grower inorganically as well, right? And so IT MSP, very large industry in North America, growing at high single-digit secular growth rate, but also very fragmented. And so as Davide has gotten through his J-curve, he's been delevering and building cash. And so I think in addition to just organic growth that there will be a potential there to do additional capital allocation things like inorganic growth and buying tuck-ins and really scaling that business. And so I think there's a big opportunity, but we want to do it in a very equity capital-efficient way. Scott Miller: Got it. I think my last question is actually in vertical market software. Can you talk a little bit about the acquisition you guys made there? It seemed like it was an interesting setup in terms of -- there aren't a lot of players in the industry. I think you just took one out. I think you bought well. Can you talk a little bit about like kind of how that deal came to be and what you think it looks like going forward? John Fitzgerald: Yes. So the original acquisition, so it's run by a young guy named Drew, and Drew acquired the business from the widow of the founder, built a relationship with her and we were able to buy a great business with a long history and super loyal customers, mission-critical software kind of operating system of record for their customers and was able to structure a deal that was attractive for us and attractive for the sellers as well, continuity and continued legacy, et cetera. And then more recently, he did a small tuck-in acquisition of a small competitor in Australia, which gave him access to that region and some customers. And so Drew is pulling on all of the levers, right? He's improving the application layer and the technology. He has rolled out a couple of significant upgrades to the core software product and is investing in sales and marketing for new customer acquisition to continue to grow ARR. So he's done a really nice job growing that business and ARR and did one small tuck-in acquisition, and he's really focused on sort of the organic execution, but also becoming a solid operator in vertical market software with like a longer-term view that, that could be a platform to do other interesting niche VMS acquisitions. Operator: Your next question is a follow-up from Mitch Weiman with Sumner Financial. Mitchell Weiman: Two more quick questions. On the OIRs, with the current infrastructure, what is the ideal number in your mind to have on board searching? John Fitzgerald: Yes. I mean, I think we're trying to balance being super selective with respect to the attributes and background of the people, right? And I think we can be. Our ability to support them to run an effective search and our capital constraints to deploy capital, right, and pacing. And so I would suspect that with this kind of talent flywheel that we're building here, as we continue to demonstrate success, we will have access to even more and higher quality OIRs over time. And concurrently, we're building those systems to support more and the cash flow generation of the businesses hopefully will grow and we can deploy even more capital. So right now, we'd like to say 3 to 5 at any given time, but I would expect that we could scale that over time as well. Mitchell Weiman: Okay. And then one last question. On the skilled trades platform, we've come out of the gates pretty quick here and made 3 acquisitions. How do we look at that going forward? Is it going to be -- it's safe to assume a couple a year? Am I low in assuming that? John Fitzgerald: I don't want to give any guidance on like -- how many acquisitions we're going to do. But I would say, Mitch, I'm not trying to be cute or dodge the question, but I would say in Rob, we have like high attribute OIR qualities, coupled with like deep industry experience. And so we're comfortable really leaning in and doing acquisitions at maybe a faster pace than we would with an Operator-turned President who's getting up the experience curve. And so I think the pacing is just a little faster there. I think kind of all of those things coupled with what we see as like a really interesting and exciting opportunity set. Yes, I think we'll go a little faster than we otherwise would. Operator: This concludes the audio question-and-answer portion. I'd like to turn the call over to James for further questions. James Carbonara: Thank you, operator, for the e-mailed questions that came in. We'll try to move past ones that may have already been asked. Seeing one that says, can you please discuss how Roundhouse and the plumbing businesses are doing in the first quarter or 2 since acquiring them? John Fitzgerald: Yes. I mean, I think I spoke to that a little bit in the prepared remarks, but it's early days, but both of them are doing great, right? I think they're both operating at or above our underwriting plan. We've got really talented young guys in there running the business, Roundhouse Miles plus the management team that was there. So we're really excited about the combination of Miles plus Lee, who stayed and rolled equity in the business and that -- their ability to continue to truck right along without a J-curve because Miles has the support of Lee, who's been an owner and an operator in that business for a long time. And then obviously, with Kingsway Skilled Trades, I just was talking about that with Mitch. We've got a very experienced operator. We think we bought great businesses. He's got his playbook and benchmarks, and he gets right to work. There's no kind of learning curve there. So yes, so early days, but certainly at or above our original underwriting plan, which makes us happy. James Carbonara: Great. And the next one is cash sales are up a lot in Extended Warranty. Can you speak to what is leading to this growth? John Fitzgerald: Yes. I mean sort of 3 different businesses and maybe just kind of take them in order. I'll start with Trinity. I would say that Trinity is up modestly, but has higher growth within its ESA segment, which is the warranty segment. So that's encouraging. Peter has invested in a new sales team on the national account side, the vendor managed service side. And he had some large customers that are going through -- one of their largest customers is Leslie's Pools. I think many of you probably know what's going on there. So he's been working hard to replace that. And so to still have modest growth in light of some of that sort of customer turnover is great. And he's got a great team, and they're out executing and adding new customers and new accounts and the underlying warranty business is starting to really truck along as well. So doing great there. The next is IWS. That's our credit union-focused business. IWS is doing great. It's a really good business. Six consecutive quarters of growth in cash sales. I think that's a combination of both units and pricing. And the unit -- the kind of the unit driver is they've been adding new credit union partners ticking over every month. They're adding new credit union partners and then they onboard them and get more opportunities to sell extended warranty at those credit unions when their credit unions are doing direct loans. So just really nicely chugging along. Great team, been at that business for a long time, have a lot of deep industry expertise and knowledge. And like I said, 6 consecutive quarters of growth in cash sales after coming off of the pandemic high in 2022, bottomed out probably kind of mid-'23 and then been chugging along ever since. And then finally, PWI and Geminus, which has seen some significant growth in the third quarter. As many may recall, we transitioned management in -- at the end of the first quarter and brought in Robbie Humble, who is -- he is a search accelerator-type President, but also has extensive auto warranty experience. So kind of a 2 for sort of a Rob Casper, but for auto warranty. And that business had been declining even in Q1 and almost immediately with Robbie's energy, enthusiasm, he brought some great new people to the team that he had relationships prior to coming over to Kingsway. And that business inflected quickly in Q1 and that cash sales growth actually accelerated pretty significantly in Q2 and Q3. So yes, I think 3 different stories there to get all the way back to the original question, but you add all of those up, and we're seeing really nice sales growth. James Carbonara: Excellent. And the next one is Kingsway has an interesting structure. Why do you think search works in a public vehicle? And what are the advantages versus traditional search? John Fitzgerald: Okay. Kind of a 2-parter here. Why does search work in a public vehicle? I think that there are a lot of -- maybe not a lot, but there are certainly several public companies that you would describe as serial or programmatic acquirers. I think that our model shares a lot of the DNA of other programmatic acquirers, a focus on buying small businesses at reasonable valuations and those businesses have sort of enduring profitability. I think that marrying that model with search is super compelling. One, it sort of gives you access to a very long runway to redeploy capital using this model. I think some of that's demographic. I think -- but a lot of it is this exceptional talent that can go and source opportunities, right, really taking advantage of our OIRs as sourcing engines themselves. And then like I was talking about with Scott, many of these searcher-led acquisitions themselves become platforms to do their own organic growth. So flywheel within a flywheel type concept. So I think it's very compelling. I think it has -- programmatic acquisitions have worked. It shares a lot of that sort of common DNA with the added benefit of this talent flywheel concept that I was mentioning when I'm talking to Scott. So I absolutely think it works. Second part -- with the advantages of -- versus traditional search, I think advantage -- differentiations, I think, than traditional search where searcher raises capital from LPs. I think one is -- and sort of breaking it into the different phases of search. So you've got the sourcing, the diligence and closing and then the operating. I think the first would be just sort of trust and track record and that builds like significant credibility for an OIR when they're talking to business owners who might be sellers. I think it builds tremendous credibility with lender partners during the deal phase to get attractive debt terms and capital. And I think that track record and trust builds a lot of credibility in our ability to attract new OIRs to the platform as well. So talent selection. And then we combine that with like really great sourcing tools. That's not unique to being in a public company. It's more like incubated. But in traditional search, you kind of have to start from scratch and build all of this stuff from the ground up. And we have great sourcing engine and a tech stack to support that. We've got due diligence and lending relationships and lawyers and all of those things that help in the closing and so speed the time to search and close. And then obviously, we're very proud of how we support our operators once they become the President of the business, the operating scaffolding, if you will, of the Kingsway Business System plus our advisory board. And then this expanding peer network of presidents who are all going through these -- the same thing together and sharing best practices across the group. And then finally, I think the permanence of the capital is super unique vis-a-vis traditional search. There's no kind of forced exit for fund life or liquidity motivations. We can own these businesses and compound capital for a very long time. And that's like a unique distinction, I think. James Carbonara: Excellent. Next one is you mentioned Roundhouse and Kingsway Skilled Trades have performed well since day 1 and are ahead of budget. What do you attribute that to? And is there a key learning that can be applied to the M&A process going forward? John Fitzgerald: Yes, sure. There's learnings and everything. I usually take most of -- maybe my learnings from failure. But it's good to learn from the good ones, too. First of all, I'd say it's early days, right? But I think that kind of the unique differentiator of these businesses relative to the other businesses that we've acquired is the operator doesn't have to get up the experience curve. These are -- Rob, we've talked about that, like he's done this before. And so he can get in and start moving day 1. There's not this 100-day learning campaign and a little bit of trial and error and a few mistakes, like he can get in and start making an impact immediately. And I think that same concept holds at Roundhouse, where Lee stayed on. He was the VP of Ops and President, and he's staying on to help and support Miles. So Miles is just truly additive there. And so I think that, that kind of not having to go through the experienced J-curve is a big part of it. I think those are somewhat unique. I don't think that, that's a requirement for ETA or search to work. In fact, it's kind of rare, but it certainly helps. And to the extent that we can partner with OIRs who have deep industry experience and a thesis around buying a business in that industry, we'll definitely do that. And I think that it will -- as we think about industries that we're interested in, we're also looking at that as we're talking to potential OIRs to try to match experience with industries we're interested in. James Carbonara: Excellent. Next one is if Image Solutions and DDI are exiting their J-curves, how do you manage that positive scenario, let them continue to perform, look for tuck-in M&A, increase the investment for organic expansion? John Fitzgerald: Yes. I mean they're 2 totally different businesses, right? I talked about Image Solutions with Scott. I think that as Image Solutions has gone through its J-curve and is exiting, Davide, the company has been delevering and building cash. They're in a fragmented market. I would expect that a big part of that story in the coming quarters will be the opportunity for tuck-in M&A, just a function of the dynamics of the industry. DDI is different. I think that J-curve was around like this high-growth business that needed to be stabilized and professionalized in order to then go invest in sales and marketing to grow organically. It's kind of a one of one in their industry and a large addressable market that has really barely been penetrated. So no other -- it's not fragmented. It's kind of a one-on-one and there's a huge organic growth opportunity and that J-curve was just around stabilize, professionalize and prepare for scale. James Carbonara: Great. And I see just 2 more. The first one is, can you speak to the testing, inspection and certification sector that Colter will be pursuing? Any market sizing and dynamics that you can share? And in success, do you envision that being a platform or non-platform-based strategy? John Fitzgerald: Yes. So TIC, large and fragmented with a long tail, probably growing mid- to high single digits as an industry, lots of little niches in subsectors. And that growth supported by really nice secular trends, aging infrastructure, regulation. And then there's an element of criticality. These are mission-critical, nondiscretionary testing inspection certification requirements that are often required by law or insurance. And it's also like a small thing into a big thing, right? Low cost of the service relative to high consequence of failure of the asset. And so that is all a very nice setup. And I think certainly, the industry has the hallmarks for this -- for anything that we do there to be a platform. But ultimately, it would depend on the target we identify and the niche that it's in. I think we go into these things being open to the idea that they become platforms, but you need the operator to find the right opportunity, build the operating muscle and then delever a bit so that we can be equity capital efficient and then explore that. But yes, I think we would be open to it. James Carbonara: Excellent. And the last one is related, and you may have just answered it, is how do you view KSX's search strategy moving ahead to pursue more aggressively platform opportunities or non-platform opportunities? Or do you even view them all as platforms? John Fitzgerald: Yes. I mean, I think with the exception of KST, which we went in with a very specific thesis around platform and pacing of acquisitions, we have always looked first at the industry dynamics and the business quality, right, to buy a great business, but also with the view that they could become platforms to do inorganic growth. And so if you look at what we've done at vertical market software, we've done a tuck-in acquisition there and potential to do more. IT MSP, as we've talked about with Image Solutions, potential to be a platform. And then Timi, obviously, with outsourced accounting and HR, has done a couple of tuck-in acquisitions and then there's an opportunity there. So coming all the way back, like first underwrite to like great industry dynamics and a great business with the optionality of it becoming a platform over time. James Carbonara: Excellent. I don't see any more questions. JT, I'll throw it back to you. John Fitzgerald: All right, James. Thank you. Well, thanks, everyone. I really appreciate it. Great third quarter, and I appreciate you being with us here this afternoon and this evening. That's it for me. Operator: This concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.
Operator: Greetings, and welcome to the Willdan Group Third Quarter Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Al Kaschalk. Please go ahead, Al. Al Kaschalk: Thank you, Kevin. Good afternoon, everyone, and welcome to Willdan Group's Third Quarter 2025 Earnings Call. Joining our call today are: Mike Bieber, President and Chief Executive Officer; and Kim Early, Executive Vice President and Chief Financial Officer. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides, all of which are available on our website. Please note that year-over-year commentary or variances on revenue, adjusted EBITDA and adjusted EPS discussed during our prepared remarks are on an actual basis. We will make forward-looking statements about our performance. These statements are based on how we see things today. While we may elect to update these forward-looking statements at some point in the future, we do not undertake any obligation to do so. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I hand the call over to Mike, who will begin on Slide 2. Michael Bieber: Thanks, Al, and good afternoon. The third quarter of 2025 marks another milestone in Willdan's growth. In the third quarter, we continued to execute very well, delivering results that exceeded the Street expectations and our own forecasts across all key metrics. Against a strong Q3 last year, net revenue grew by 26% year-over-year, driven by an outstanding 20% organic growth rate. 2025 will mark the fourth consecutive year that we've produced double-digit organic growth. Margins also continued to expand in Q3, concurrently with significant investments for our future, with electric load growth expected to increase over the next decade, driven by data centers and electrification. Willdan's unique capabilities and execution position us well to sustain long-term growth. As a result, we are again raising our full year financial targets, which Kim will present a little later. Turning to Slide 3. Willdan delivers a broad range of energy and infrastructure solutions to utilities, commercial customers and state and local governments. On the left side of the slide, the Energy segment makes up about 85% of our revenue, while our Engineering and Consulting work makes up about 15%. On the right side, demand remains healthy across all customer groups. The 15% of work for commercial customers is mostly centered around electricity usage at data centers, where AI-driven load growth is creating significant demand. Willdan is helping technology clients navigate energy constraints, optimize infrastructure and meet aggressive power requirements. Our Utility business makes up about 41% of revenue and continues to perform well. Most of our utility contracts are 3 to 5 years in duration, funded by rate payer fees and continue to provide a strong foundation of recurring revenue. The size of our long-term utility programs is generally increasing across the country as energy efficiency can be viewed as a power resource. Work for state and local governments makes up 44% of revenue and continues to grow organically at a double-digit pace. Demand from our government customers remains solid, and the outlook is positive. Most of our government work is funded through user fees and municipal bonds, which have remained healthy. On Slide 4. Our upfront policy, forecasting and data analytics work informs our strategy and helps us navigate market change. In our upfront work, we see particular demand for studies on the impacts of electricity load growth, and that work is growing at about 50% organically year-over-year. Those market changes led us to the APG acquisition that provides Power Engineering solutions to data center clients, hyperscalers and other commercial customers. I'm pleased to report that APG is collaborating very effectively with the rest of Willdan and has already won record backlog that we expect will propel more than 50% growth by APG in 2026. In other parts of Engineering, we saw strong execution and growth with both commercial and municipal customers. In Program Management, we performed above our plan on utility programs and building energy programs for cities. Demonstrating this model in an example, we are hired by technology hyperscalers to identify the optimal sites for data centers. We then provide clients, consulting, engineering and project management to supply the electricity that powers those centers. The new generation of data centers usually requires high-voltage power, often hundreds of megawatts with a dedicated utility scale substation and utility interconnect. After a data center is built, Willdan provides energy optimization inside the data center as we have done for many years. Each step with the customer informs the next step. This model extends across all of our service lines. On Slide 5. We have a strong pipeline of opportunities that we are converting into contracts, and the pipeline remains solid heading into 2026. Here are just a few examples we converted since our last conference call. For Alameda County, California, we won a 2-year $97 million project to design and implement energy and infrastructure upgrades at county infrastructure throughout San Francisco's East Bay. For a confidential client, we won 2 substations for solar storage projects worth a combined $21.7 million in Oregon and Georgia. For a confidential client in Texas, we won a $14 million substation project for a solar energy storage system and a $7.8 million greenfield substation project. In Utah, we won a $3.6 million project to expand an existing substation. And I'll note that projects 2 through 5 on the table were all led by our recent APG acquisition. They're doing very well. On Slide 6. In early October, Willdan's E3 subsidiary published new research on electricity load growth. This research forecasts between 0.7 terawatt hours and 1.2 terawatt hours of U.S. electricity load growth over the next 10 years. The drivers are broad-based and extend well beyond the data center load growth now often talked about to include new industrial demand, electric vehicles and the electrification of building systems. The colors on the bar chart depict the relative proportions of load growth drivers. This load growth is transforming electricity markets from a one static landscape into a dynamic long-term growth market. On Slide 7. Looking globally, this map demonstrates that current data center electricity load expressed in gigawatts is by far the greatest in the United States right here. The map also puts into perspective just how large Northern Virginia data center electricity load is compared to anywhere else in the world. We've previously talked about our landmark study for Virginia on the impacts of this load, which has led to several more similar studies for data center developers and utilities. Willdan is in the right market at the right time and is building the right set of capabilities to help clients navigate electricity load growth. Utilities are also investing to enhance reliability and flexibility as more distributed resources come online, requiring significant modernization of aging infrastructure. Together, these forces are driving one of the largest infrastructure investment cycles in decades, and Willdan is well positioned to help utilities and communities navigate this transformation. I'm very pleased with the way our team is performing. Now Kim, over to you. Creighton Early: Thanks, Mike, and good afternoon, everyone. Our Q3 results reflect another quarter of significant year-over-year improvement, continuing a trend that began in early 2022. Turning to Slide 8. For the third quarter of 2025, contract revenue increased 15% year-over-year to $182 million, while net revenue grew 26% to $95 million. The recent acquisitions brought 6% of that growth, yielding an organic growth rate of 20% for the quarter. Growth was broad-based across both segments, led by continued strength in utility programs and double-digit gains in planning and construction management as well as continuing municipal demand, geographic expansion and new contract wins. Gross profit for the quarter grew 30% to $67.1 million, up from $51.6 million last year, driven by the revenue growth and solid project execution. Altogether, higher revenues, favorable gross margin and effective cost control drove a 91% increase in pretax income to a record $14.3 million for the quarter. We reported a 4% income tax rate for the quarter compared to 2% for the same period last year. So net income thus rose to $13.7 million, up 87% from the $7.3 million we reported in Q3 of 2024. Adjusted EBITDA reached another new quarterly record of $23.1 million or an adjusted EBITDA margin of 24% of net revenue and up 53% from what was an excellent performance in the quarter a year ago. GAAP diluted earnings per share increased 77% to $0.90 per share while adjusted earnings per share was up 66% to $1.21 for the quarter compared to $0.73 a year ago. Broad-based growth and excellent execution drove a record quarter. Now to Slide 9. For the 9 months of 2025, contract revenue was up 20% year-over-year to $508 million, while net revenue increased 27% to $275 million. $14 million of the net revenue growth came from acquisitions over the past year, yielding organic net revenue growth of 21% year-to-date. Gross profit increased 31% to $193 million, up from $148 million last year. Pretax income grew 77% to $29.7 million. The discrete tax benefits from stock option exercises and 179D energy efficiency deductions allowed for a $4.2 million tax benefit year-to-date and thus a net income of $33.9 million or $2.26 per diluted share through the 9 months. Adjusted EBITDA rose 52% from $39.1 million in 2024 to $59.5 million or an adjusted EBITDA margin of 21.6% of net revenue, and adjusted earnings per share nearly doubled to $3.34 per share. All are record numbers for a 9-month period. We are on track to exceed our goal of 20% adjusted EBITDA margin in 2025. Slide 10 outlines our balance sheet and cash flow metrics. We ended the quarter with only $16 million in net debt after deploying $33.4 million cash for the recent acquisitions. This brings our trailing 12-month leverage ratio down to 0.2x adjusted EBITDA compared to 0.3x at year-end 2024. Free cash flow for the first 9 months was $34 million, consistent with the $33 million generated for the same period in 2024. On a trailing 12-month basis, our free cash flow was $65 million or an impressive $4.34 per share. We had all $100 million available to draw under our revolving credit facility and an available but undrawn $50 million delayed draw term loan plus $33 million in cash on the balance sheet, giving us $183 million in total available liquidity at quarter end. Our healthy balance sheet, expanded credit facility and consistent operating performance provide us with the financial flexibility to pursue targeted acquisitions and expand capabilities in strategic markets, all while maintaining prudent leverage. Turning to Slide 11. This slide reflects the 20-plus-percent compound annual growth in revenue we've been able to achieve over the past 15 quarters and the even more enviable growth in the adjusted EBITDA over the same period. The lines reflect the ebbs and flows of our diversified portfolio of projects across sequential quarters, but the clear trend across the nearly 4-year period is up and to the right. This record of sustained improvements has been enabled by the strong execution by our management team in a growing market. We've been able to grow and diversify our service offerings to satisfy the increasing demand from utilities, governments and commercial clients to adapt to the new environment. On Slide 12, building on this multiyear record of performance improvements, we're raising our financial targets for 2025. Net revenue for the full year 2025 is now expected to be between $360 million and $365 million, and adjusted EBITDA is now expected in the range of $77 million to $78 million. Adjusted diluted earnings per share is projected to be between $4.10 and $4.20 per share based on an estimated tax benefit of 10% and 15.2 million shares outstanding. These targets do not include the impact of any future acquisitions. Wrapping up on Slide 13. We're proud of the results we've been able to deliver, and we're excited about the potential for the future as we continue to win new contracts and expand existing ones. Organic net revenue growth of 20% for the third quarter, the successful completion of recent acquisitions and excellent free cash flow conversion attest to the record-setting performance for the quarter and the year-to-date. Our performance and confidence in the future support raising our 2025 financial targets. With low leverage and an experienced and motivated management team, we are well positioned in dynamic and growing markets, and we have an active pipeline of strategic acquisition opportunities. Operator, we're now ready to take questions. Operator: [Operator Instructions] Our first question is coming from Craig Irwin from ROTH Capital Partners. Craig Irwin: So I should start by saying congratulations, another really just amazing quarter. Mike, in the last few quarters, you've been growing close to double the targeted growth rate that you've had for the last several years. I wanted to ask if you could maybe talk a little bit about what's lifting this customer demand. How do you plan for the capacity to serve these opportunities? And the profitability is clearly there. Do you get more picky or more choosy about how you service these customers? Or do you see this as something that can maybe be an opportunity for you to continue over the next number of quarters? Michael Bieber: That's a big question, Craig. Thanks. Well, first, the market is good. You know that. Electricity prices are rising. Demand for electricity is increasing. So the market is good. But there's something else going on. Our own performance within that marketplace has improved pretty substantially over the last couple of years, as you mentioned. We're more effective at cross-selling, especially with new acquisitions that we bring in than we ever have been before, and that has led to tens of millions of dollars of new revenue that we had never seen before in our cross-selling evolution, I'll put it. Culturally, we've become much better at that. And APG and the list of their wins sort of epitomizes that. They've been excellent collaborators. We've got a great pipeline. And they're hoping to accelerate and catalyze our growth into 2026. You saw that on the new wins. So that's what's going on. I can't provide you a detailed forecast for 2026. We won't do that until March of this year, but we have been -- we normally guided the Street towards high single-digit organic growth rates. And you're right, we've been about double that now for a little while. We're going to do our best to make it as reasonably high as we can. You mentioned becoming selective. And in certain instances, we have become selective with those projects. We can afford to do so at this point, especially in our commercial work for data centers, where we're choosing to work with certain mid-tier developers that we have very close relationships with, we're working effectively with and it's a good business environment. It's not competitive. It's directly negotiated work, and we are becoming more selective in that area. Craig Irwin: Understood. And I'm guessing that you might be referring to APG, which bridges into my next question. So the work that APG is executing the work they're winning -- the data center work is some of the most exciting projects that Willdan is completing right now. Can you maybe talk about the ability for other areas of Willdan to supplement the capabilities at APG and the execution capacity there? And is this something that is improving employee utilization and just general resource utilization for the company? Michael Bieber: Yes, sure, Craig. Well, first, our upfront consulting work that we do, particularly for the hyperscalers is feeding into our information that we know where the new data centers are going into. That's useful. And on the back end of that, the work that we had been doing to make energy efficient or make data centers more energy efficient, we've been doing that work for a long time is useful in our knowledge of working around that environment. So all of those groups are collaborating pretty well. We're also even getting our civil engineering group involved in certain projects. So that's sort of what the landscape looks like right now. Craig Irwin: Okay. And then last question, if I may. Other companies in the service sector are talking about difficulty sourcing employees. Can you talk about the Willdan workforce? How flexible is the workforce that you've assembled over the last several years? Are you able to develop people up to fill these needs, these opportunities? And do you see this as an impediment to your growth? Michael Bieber: We don't see it as an impediment to growth. Actually, we see ourselves as the employer of choice. We have not had major impediments in hiring employees. And I just saw today that our employee count for the first time has reached over 1,800. We're hiring. And I think we're doing a very effective job of hiring and retaining key employees. I'll note that we [ have ] had 0 turnover in our senior management team over the last more than 2 years. We haven't lost a single person. So no, it's not a major impediment. Look at our website if you're interested. Craig Irwin: Well, congrats again on another really solid quarter. Operator: [Operator Instructions] Our next question is coming from Tim Moore from Clear Street. Timothy Michael Moore: Mike and Kim, congratulations on the continued execution and optimizing your funnel to really cross-sell and benefit from this low-power secular theme. So my first question is really more about risk management and balancing that. It's a good problem to have to be growing organically as fast as you have in the last few quarters and seemingly for next year. So can you maybe just give us a little color on -- we know you hired a lot more consultants this year. We know the employee count is up a lot. You're getting inbound inquiries also through your project managers. But just wondering how you kind of think about accepting larger projects and program management and just making sure that you're staffed without maybe having to pay overtime or on-site costs or actual travel and hotels for maybe a project that if you're jumping around. Just -- can you give us some color on that to really keep the margin up there? Michael Bieber: Sure. Great question. We don't often get it from investors, but it's what we spend most of our time on day in and day out, Kim and I, on this risk management idea. You're right that you need to look -- when you're growing organically at 20-plus-percent, you need to look at the leading indicators to make sure that you're delivering effectively for those clients. And we look at everything from quality to health and safety to other factors, and we review them every week with every operating unit. The leading indicators look good, and we're not seeing issues that might say that we're taking on too much risk or growing too quickly. But we are growing quickly, and we're keeping our eye on that and keeping our eyes wide open. That's how I would describe it. Kim, do you have anything to add? Creighton Early: Yes. The only thing I would add to that, Tim, is that these larger scale projects take a while to develop. And it's not necessarily a big surprise to us when we finally get awarded a project. It's not like we're waiting for some envelope to be opened at the end of a process, and we don't know what's going to happen there. We are working on these -- developing these projects for quite a long period of time, and we can see them coming and we can get a pretty good feel from these clients that we may be in position to win. So we're able to look ahead and plan effectively as well as to what those risks are and how can we get those staffed and how can we make sure we're prepared to execute when the project finally does get awarded. Michael Bieber: Yes. Kim is right and points out correctly that a lot of these start out as T&M consulting projects. We're developing the project for months in advance. We're doing all of the engineering, and we may, with the client decide to, convert it to a fixed price or fixed unit price contract later on, but we're mitigating our risks significantly by working closely with the client upfront in planning. Timothy Michael Moore: That's terrific color. I'd realize that a big renewal like the Los Angeles Water and Power Department won, it's pretty well planned out. Just curious about the new first-time ones, and that's really helpful. My only other question is, as you cross-sell APG more that's early innings, E3 software, civil engineering cross-selling, I'm just wondering, does your team -- and maybe Kim you can speak to this, do you prefer smaller bolt-on acquisitions? Or can you really tackle something that's maybe $100 million-plus target and integrate it well and still be able to cross-sell it well without maybe taking some staff power off of the cross-selling team that's in the rest of the business as you kind of really look at commercial electrical engineering or maybe interconnection? Creighton Early: Yes. I think we've got a pretty effective systems and communication devices, I guess, that we use for the cross-selling activity. And so it's pretty efficient for us as we bring in these bolt-on acquisitions to establish that kind of cross collaboration. But we're definitely prepared to be able to handle $100 million kind of size group. Just culturally, we fit that way. Our tools are kind of designed to make sure that we'll be able to cross-collaborate without significant barriers on those projects. So we definitely keep our eye open for those kinds of opportunities, and we plan for that kind of potential acquisition as well. And whenever you make acquisitions of those size, the leadership on both sides of the fence, our side and the company that's being acquired, the management teams are usually pretty anxious to get to know each other and to find out what the others are doing and how can we work together on that. And that's probably the most exciting piece to most of our team. So we're prepared to do that for sure. Operator: Our next question today is coming from Richard Eisenberg, a private investor. Richard Eisenberg: Yes. Congratulations on a great quarter. On the last call, you talked about a potential $100 million contract with the State of New York. Is that still in negotiation phase? Do you expect to close that? Michael Bieber: We have several large contracts in New York that we're pursuing. And yes, we remain very optimistic that we're going to be successful on one, if not several of those opportunities. And I think they're going to help drive 2026 growth. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Michael Bieber: Well, thank you all for attending, and we look forward to speaking with you soon. Thank you. Operator: Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and welcome to the Cidara Therapeutics Q3 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brian Ritchie with LifeSci. Please go ahead. Brian Ritchie: Thank you, operator, and good afternoon, everyone. With me today on the phone from Cidara Therapeutics is Dr. Jeff Stein, President and Chief Executive Officer. Following Dr. Stein's prepared remarks, we will be joined by Mr. Frank Karbe, Chief Financial Officer; Dr. Nicole Davarpanah, Chief Medical Officer; Dr. Les Tari, Chief Scientific Officer; and Mr. Jim Beitel, Chief Business Officer. To participate in a Q&A session. Earlier this afternoon, Cidara released financial results and a business update for the third quarter ended September 30, 2025. Both the press release is available on the company's website. Please note that certain information discussed on the call today is covered under the safe harbor provision of the Private Securities Litigation Reform Act. Management will be making forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially. These statements are qualified by the cautionary notes in today's press release and the company's SEC filings. This call contains time-sensitive information accurate only as of today, November 6, 2025. Cidara undertakes no obligation to revise or update any forward-looking statements. With that, I'd like to turn the call over to Jeff Stein. Jeff? Jeffrey Stein: Thank you, Brian, and thank you all for joining us. We are pleased to report another very productive quarter at Cidara. Our lead candidate, CD388 has advanced into Phase III development on an accelerated time line in addition to other notable achievements, including the expansion of the patient population for our Phase III trial, receipt of breakthrough therapy designation from the FDA and securing funding from BARDA for this program. As with prior calls, we will focus our remarks on clinical and corporate updates. As a non-revenue-generating company, we will not have a dedicated section to review our quarterly financial results on this call, but instead refer you to today's press release and 10-Q filing. Cidara's proprietary Cloudbreak platform has been developed as a fundamentally new approach to treat and prevent serious diseases through the development of novel drug-Fc conjugates or DFCs, a new class of therapeutic that combines the precision of small molecules with the durability of antibodies. Our lead candidate, CD388 is a highly potent, long-acting antiviral designed to deliver universal once-per-season prevention of seasonal and pandemic influenza by directly inhibiting viral proliferation. Its enhanced antiviral potency and durability make it a potentially transformational non-vaccine preventative of influenza that overcomes the limitations of existing vaccines and antivirals. A key accomplishment during the third quarter was the start of our Phase III ANCHOR trial six months earlier than originally planned. This trial will evaluate the safety and efficacy of CD388 in populations at high risk for complications from influenza. Based on feedback from the FDA in our end of Phase II meeting, we believe that the ANCHOR trial, if successful, may support potential BLA approval of CD388 in the study populations examined in both the Phase IIb NAVIGATE study as well as the Phase III ANCHOR study. The ANCHOR trial was started in late September following a constructive end of Phase II meeting with the FDA at the end of August. Initiation of the study triggered a $45 million milestone payment to J&J, which was booked in Q3, but will be paid in Q4. Originally, we plan to enroll participants aged 12 years of age and older with moderate to severe comorbidities as well as subjects who are immunocompromised. However, based on FDA feedback, we expanded enrollment to include healthy adults over 65, a large and growing group that is poorly protected by current influenza vaccines due to age-related declines in immune function. This change has two important implications. First, it more than doubles the initial number of patients who would potentially be eligible to receive CD388 from 50 million to well over 100 million people in the U.S. Second, it has helped facilitate faster enrollment. The study began in the Northern Hemisphere in late September. The primary endpoint is based on laboratory-confirmed influenza, body temperature of 37.2 degrees centigrade or 99 degrees Fahrenheit or greater and new or worsening of either two respiratory symptoms or one respiratory symptom and one new systemic symptom. We plan to enroll 6,000 participants in 150 sites, nearly 3x the number of sites we used in the Phase IIb NAVIGATE study. All sites are now active and the study is over 50% enrolled, on track to achieve target enrollment in the Northern Hemisphere by December. An interim analysis, most likely in late Q1 2026, will assess the trial size, powering assumptions and event rate to determine if it is necessary to enroll participants in the Southern Hemisphere in the spring of 2026. CD388's progression into Phase III is supported by the strength of the compelling data from our Phase IIb NAVIGATE study, which met its primary endpoint, demonstrating statistically significant prevention of efficacy and a benign safety profile in all three doses tested. Importantly, the NAVIGATE study showed that a single 450-milligram dose of CD388 provided 76.1% protective efficacy that extended through the entire flu season. We shared additional NAVIGATE data at key scientific meetings this fall. The data presented continues to reinforce CD388's differentiated profile as a long-acting broad-spectrum antiviral for influenza prophylaxis. The pharmacokinetic data for the 450-milligram dose demonstrated sustained serum concentrations well above the targeted therapeutic threshold, supporting protection through the full flu season with a single 450-milligram dose in both influenza A and B strains, paired with a clean safety and tolerability profile, including low rates of injection site reactions, which further differentiates CD388 from vaccines. These results validate our dose selection for Phase III. Taken together, these findings strengthen our conviction that CD388 can offer clinically meaningful protection in populations at high risk for flu complications, independent of host immune status, setting it apart from both vaccines and currently approved antivirals. In early October, the FDA granted CD388 breakthrough therapy designation, recognizing preliminary clinical evidence of substantial improvement over existing options. The advantages to Cidara will be enhanced access to the FDA, including more frequent guidance, rolling data review and eligibility for priority review, all of which may accelerate development and regulatory time lines. CD388 also holds fast track status, and this latest recognition affirms the quality and promise of the clinical data we have generated. Also in October, we received an award valued up to $339 million from the Biomedical Advanced Research and Development Authority, or BARDA, to support expanded manufacturing and clinical development of CD388. The multiyear agreement is structured to include a base period and additional option periods. The base period valued at $58 million over the first 24 months will fund the onshoring of manufacturing to the United States, expanding our initial commercial supply chain. It will also support several important development activities, including a clinical trial to demonstrate comparability for a higher concentration formulation and alternative product presentations, nonclinical studies to further characterize CD388's activity against pandemic influenza strains and early work on clinical trial protocols for expanded populations. The option periods could provide up to an additional $281 million in funding to support further clinical and nonclinical studies of CD388 in targeted patient groups and broader population settings. Thanks to our successful financing in June, we remain in a strong financial position. With approximately $476 million in cash at September 30, our Phase III development program is fully funded through completion in all scenarios, including potentially expanding the study to the Southern Hemisphere if needed. Before closing, I want to highlight that we plan to host a virtual R&D Day for the investment community on December 15. We'll provide a detailed update on the CD388 program, including enrollment progress, and we'll share insights from recent market research on the commercial opportunity for CD388. Further details will be announced shortly, and we look forward to your participation in this event. With that, I will turn it back to the operator to take your questions. Operator? Operator: [Operator Instructions] Our first question comes from Anupam Rama with JPMorgan. Unknown Analyst: This is Priyanka on for Anupam. At the interim analysis, how will the external statistician decide how many additional patients are needed to enroll? Jeffrey Stein: Yes. Great question, Priyanka. Let me turn that question over to Dr. Davarpanah, our Chief Medical Officer. Nicole? Nicole Davarpanah: Thank you, Jeff. Priyanka, thanks for the question. So as you know, the purpose of the interim analysis is to look at data at an early time point prespecified at the end of the Northern Hemisphere, approximately end of Q1 of next year to look at the events and to tell us essentially if the powering assumptions, the desired power target for the study was met. So there is a kind of a complex algorithm that has been created for this by our statistician. Importantly, this is a statistician independent to the study, and they will be able to see this data, but will not share any of it with us, and so Cidara and the study team will not be informed. We will only be told if the powering assumptions have been met and whether we need to -- we are able to keep the sample size that we have with 6,000 or we need to add additional participants. Operator: Our next question comes from Maxwell Skor with Morgan Stanley. Maxwell Skor: Just a follow-up on the first question. Should we not expect at the interim analysis to see any sort of efficacy data across the cohorts? And also, I was wondering at the Investor Day, will you begin to introduce efficacy thresholds across cohorts that we can expect in the Phase III trial? And the last question, is there a chance you could potentially include mild patients on the label if everything is positive in the Phase III trial? Jeffrey Stein: Good questions, Max. Again, I'll turn that over to Nicole. Nicole Davarpanah: Thanks, Jeff. Max, thank you for the question. So I think the initial question is, will we know any kind of efficacy data from the interim? And the answer is no. So this is essentially only the blinded status -- unblinded excuse me, statistician will see this information and will not share it with us. But I think one thing that maybe you're alluding to as well is we may end up enrolling the entire trial in the Northern Hemisphere. And at that time, there may be no need to actually even move into the Southern Hemisphere, and we will make a decision at that time if it's appropriate to kind of call that the efficacy analysis. However, we will not be informed by the interim analysis if we decide to do this. I appreciate the question as well about the different kind of subgroups in the trial and what we will be able to show. So we won't be able to show kind of any efficacy estimates for our December Investor Day. We will be able to share a little bit more about the population subgroups that we have enrolled. And I think that will be kind of very enlightening for all of us about the real-world high-risk and 65-plus populations as well as IC populations that you can enroll in a trial like this. And you have to remind me of your third question. Maxwell Skor: Sorry, just one last one around mild patients who are immunocompromised and comorbid. Is there a potential for them to be included in the label? Nicole Davarpanah: That's an excellent question. So in our discussions with the FDA, as you know, they have asked us to expand the trial eligibility to anyone who's 65 plus. So that means 65 is healthy or those with low or mild comorbidities. And as you can imagine, we are going to enroll a lot of those participants with lower mild comorbidities. So I believe that there's an opportunity for that, but it will require further discussion with FDA. Jeffrey Stein: And just to add to Nicole's comments, the high-risk populations are focused on the moderate to severe comorbidities. Operator: Our next question comes from Seamus Fernandez with Guggenheim Securities. Seamus Fernandez: So, two from my side. First, we've heard a lot of updates from some of the flu vaccine manufacturers that flu vaccination rates are down. Wondering if you have a sense of the sort of flu vaccination rates in your study. I think previously, you'd anticipated 65% of the adults potentially having flu vaccination and then having CD388 on top of it. Just wondering how you're thinking about the impact of that and if that 65% is still consistent with your expectations? And then just my second question is on manufacturing and how manufacturing scale-up is progressing and what the needs are from a manufacturing scale up, whether it be with the three-dose or sorry, the three-needle regimen as it stands today? And then what it would take to bring us forward to the sort of vial formulation, which is more consistent with how flu vaccines are delivered today. Jeffrey Stein: Great. Thanks, Seamus. Yes, clearly, you got it right. Our estimate of the flu vaccination rate in the ANCHOR study, which was based on prior clinical studies in the prior years, was 65%, given the fact that we are enrolling subjects with moderate to severe comorbidities, immunocompromised and more recently, over 65, all three populations, which tend to have high vaccination rates. And clearly, that has an impact on our -- the powering of the study. We also noted in the Southern Hemisphere, however, this past flu season, that the vaccination rates have trended much lower than that 65% overall. And we also noted some of the vaccine manufacturers who have made similar observations. Because this is an ongoing study, we won't be sharing the vaccination rate because that can change over the course of the season up until the point where we complete enrollment. But let me turn it over to Nicole to see if she has any additional comments on that. Nicole Davarpanah: Thank you very much, Jeff. Yes, I think you stated it very nicely that we had predicted a kind of a historical vaccination rate of around 60%. But really, our goal was to have vaccination be optional, which is in the trial and to really capture the real-world kind of incidence of vaccination. As we know this therapy will work well, particularly in participants who are unvaccinated, but we expect it to work well vaccinated as well. And so we will continue to follow this, and we are pleased with how enrollment is going so far. I also want to add that if we do end up seeing kind of a lower vaccination rate than expected, we -- this may end up actually kind of favoring the results of the trial, as you can imagine, because there may be a higher kind of event rate in the placebo arm based on capturing symptoms. So we are prepared for whatever comes, but it's an interesting time certainly to be doing an anti-influenza study. Jeffrey Stein: And then, Seamus, to answer the second part of your question regarding manufacturing scale-up, I'll turn that question over to Shane Ward, our COO. Shane Ward: Thanks, Jeff. I think we have talked quite a bit about the work we're doing with our partner, WuXi, who has worked with us on manufacturing since the initial stages of clinical development, has supported our clinical trials and will be the site of manufacturing for our BLA submission and planned commercialization. At WuXi, the process characterization and PPQ activities necessary for BLA readiness are progressing well towards our target dates and that provides us more than adequate capacity for launching given our expectations of potential market demand given the population as we now understand it. The bigger question is how do we meet the potentially much greater demand during the life cycle of the product. And we have separate activities underway for further scale up. The first one of those is expanding to a parallel U.S. supply chain. We've talked about our recent receipt of BARDA funding and the primary purpose of that funding is to support standing up a full U.S. commercial supply chain for all nodes of manufacturing. And the tech transfer kickoffs have already begun for those, and we have a time frame that provides that additional capacity to come online shortly after our anticipated approval. And then the third piece is that we are looking at potential larger capacity global manufacturers who could come online a couple of years after that combined U.S. and WuXi supply chain to add the final bit of capacity that we would need for expansion into the largest possible population. Operator: Next question comes from Eric Schmidt with Cantor. Eric Schmidt: Another CMC question, if I could. What is the scale at WuXi currently that you hope to launch with? And I know you've said that CMC is rate limiting to a BLA filing. What exactly within CMC is the rate-limiting effect? And then if I can squeeze another one in for Les on the data that you were presenting a couple of weeks back. Do we have any sense of resistance to CD388 and for those patients who weren't protected, why they weren't protected? Jeffrey Stein: Great questions, Eric. First part, obviously, we'll turn that over to Shane Ward. Shane? Shane Ward: Right. Thank you. Yes, the capacity at WuXi based on our initial scale that we are validating will provide for around production of 5 million doses per year at the 450-milligram dose level. There's some variability to that, and we may be able to scale up further. WuXi certainly has further capacity, but that is the expectation in terms of the initial supply chain, which then we will add the U.S. supply chain to shortly thereafter. In terms of your question about CMC being rate limiting, that's really all of the qualification requirements as we move forward to BLA readiness. So as was referenced earlier, we are transitioning from the clinical trial formulation or clinical trial configuration, which is three injections using prefilled syringes to a commercial configuration that will be a single vial containing the full dose. So we are transitioning to the vial configuration, scaling up, doing full process characterization and then final qualification. And those steps are really why it's rate limiting and why we are gating in terms of the company's timing for filing the BLA. But we have an aggressive time line for all of those pieces, and WuXi has worked closely with us in developing an integrated plan for each of the nodes to be qualified on an accelerated schedule, which gives us the ability for that 2027 filing time. Jeffrey Stein: And Eric, could you repeat the second part of your question for Les? Eric Schmidt: Yes, that was just on anything we may have learned about resistance or why the product wasn't fully protected for those patients who did get breakthrough infections. Jeffrey Stein: Yes, go ahead, Les. Les Tari: Eric, that's a great question. So at IDWeek, we presented our updated Phase IIb data, which included breakdowns of the timing of influenza cases in all the trial arms across the parallel at the European working group and Valencia, we presented comprehensive PK/PD and exposure response modeling analyses. And I think the PK/PD and exposure response modeling analyses get to the heart of your question that there isn't a red line, a concentration threshold where you're going to get 100% protection with a neuraminidase inhibitor. There will be breakthrough infections if there's potentially a high inoculum, it's called an inoculum effect where you could see infections. And so the fact that we saw infections doesn't mean that there was resistance. So we haven't seen evidence nonclinically that this should be a molecule that's susceptible to resistance, but we are conducting the virology next-generation sequencing on the infections that were observed in the placebo and in the treatment arms, and we will report that data in due course once we have the analyses completed. Operator: The next question comes from Brian Abrams with RBC Capital Markets. Brian Abrahams: Congrats on all the progress. I was wondering if you could talk a little bit more about how the inclusion of healthy individuals over 65 impacts your assumptions for vaccine rates, event rates and powering? And then secondarily, also trying to understand the implications of a potential December enrollment completion. I guess I'm curious what was the median time on study during flu season that your event rate projections had assumed and whether December completion potentiates average accrual of either greater or fewer potential influenza events than you had maybe originally assumed in your powering. Jeffrey Stein: Great, Brian. Nicole, do you want to take those questions? Nicole Davarpanah: Absolutely. Brian, thanks for the questions. For your first question, so the addition of 65 plus is really kind of a fascinating addition to the trial because 65-plus is a broad group, as you know. So it's 65 healthy and it's 65 mild to moderate kind of a mild comorbidities, so to speak. In fact, we think in a lot of ways, it helps the study. So this is a much easier population to enroll, as you can imagine, and we would probably expedite enrollment, which it seems to have just done so far for us as well. In terms of kind of background attack rate in this population, this is a population that tends to see more flu events in trials. And I think that's because there isn't as much protection in cocooning. These are our own relatives and people who are going out seeing their grandchildren and out and about and not protecting themselves as much as a traditional kind of high-risk or immunocompromised participant might. And so when we did all the math and put these populations together, we realized that our placebo attack rate didn't really change very much. It was still right around 1.5%. I think we expect this 65-plus population to have a higher background vaccination rate, about 65% or more. So far, we're still monitoring that. But in general, I think it helped us to have this population in the trial and did not affect our sample size or powering assumptions in any negative way. As to your second question, for the December analysis, so what we mean by that is we will enroll everybody by December. Of course, the endpoint of the trial is still a six-month follow-up. That's the 24-weeks influenza rate or event rate. And so all those participants would still be followed for -- to the flu season, if that helps. So it would be similar to our Phase IIb study, where we looked at that at the end of flu season and had results in June. Jeffrey Stein: And I would add to Nicole's remarks that so far, we have not seen any early signs of influenza in North America. That's important. We want to fully enroll this study before we see the first peak or a peak of influenza this year. So far, it is resembling last year when we're enrolling the 5,000 participant Phase IIb NAVIGATE study. where we fully enrolled it about 1.5 weeks, 2 weeks before the first peak of the flu season. So, so far, fingers crossed, we're tracking to a similar time line here. Operator: Our next question comes from Joseph Stringer with Needham & Company. Joseph Stringer: Just wondering if you could give us a sense for how you're thinking about potential real-world uptake or penetration of CD388 within the individual patient segments. I think at a previous R&D Day, you had some initial survey work that you've done on this. But just given the potential for subsequent developments here for a larger addressable patient population, how should we think about that? Maybe as a representative example, what would be the realistic uptake in, say, a severe immunocompromised patient versus an otherwise healthy 50-year-old with a mild comorbidity? Jeffrey Stein: Yes. These are important questions, Joey, and we'll be addressing those in detail at our R&D Day event on December 15. But let me turn it over to Jim Beitel to address those to the extent we can now. Jim? Jim Beitel: Yes. Sure, Jeff. Thanks for the question. Certainly an important one. The scope of the approved label is expected to be quite broad. And so certainly, commercial reach will factor into the adoption and sort of how fast we get to peak sales over time. But I also want to point you to some interesting data in our current corporate deck, I think it's Slide 20, where we described the data from our primary market research showing that prescribers have interest in this product in terms of their perception of the burden of flu and the importance of preventing it in subjects with moderate to severe comorbidities, but also these mild forms of comorbidities. And so there's a very broad market opportunity here with strong physician interest across the scope of the populations included in the Phase III study. Operator: [Operator Instructions] Our next question comes from Sara Nik with H.C. Wainwright. Sara Nik: Again, congrats on all the progress. My question is more actually looking for opportunities beyond even the seasonal flu. As you've highlighted previously, CD388 universal activity against all flu strains, including H5N1. So just wondering beyond the BARDA funding at this point, what specific clinical or preclinical work is planned to formally establish its utility in the pandemic setting? And do you think this could create a separate regulatory pathway or government stockpiling opportunity distinct from the seasonal flu? Jeffrey Stein: Yes. Thanks, Sara. Les, do you want to take that question about any other studies we might be performing to evaluate CD388 in pandemic strains? Les Tari: Yes. So we're working closely with Richard Webby's lab at St. Jude's Hospital. And thus far, we -- at a meeting earlier this summer, we presented data against the pandemic H5N1 strains in ferrets, where we demonstrated robust efficacy with H5N1 at exposures that are consistent with the exposures at the high dose in human subjects. We're going to continue to work with them on other pandemic strains as well as mutant strains that are resistant to neuraminidase inhibitors -- thus far, all of the strains that we've tested that have resistance against neuraminidase inhibitors, we retain activity against those without a shift. So we're going to do in vitro studies that will follow up on the ferrets efficacy study that we ran with Webby's lab at St. Jude. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Jeff Stein for any closing remarks. Jeffrey Stein: Well, thank you all for joining us today. We greatly appreciate your interest in Cidara and hope that you enjoy your evening. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to Diodes Incorporated Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, November 6, 2025. I'd now like to turn the call over to Leanne Sievers of the Shelton Group Investor Relations. Leanne, please go ahead. Leanne Sievers: Good afternoon, and welcome to Diodes Third Quarter 2025 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today are Diodes' President and CEO, Gary Yu; CFO, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; and Vice President of Marketing and Investor Relations, Gurmeet Dhaliwal. I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files its Form 10-Q for its quarter ended September 30, 2025. In addition, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today, November 6, 2025. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change, except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now I'll turn the call over to Diodes' President and CEO, Gary Yu. Gary, please go ahead. Gary Yu: Welcome, everyone, and thank you for joining us on today's conference call. As announced in our press release earlier today, revenue in the quarter increased 7% sequentially and 12% year-over-year, driven by strong demand across the general computing market, including for AI-related server applications as well as data center and agent computing. Our global point of sales increased the strongest in Asia, followed by North America. Additionally, our channel inventory is at a healthy level, decreasing again this quarter in terms of dollars and weeks with overall inventory dollar decreasing over 25% from peak levels. Even though the rate of recovery in the automotive and industrial market continues to be slower than expected, revenue increased both sequentially and year-over-year in both of these end markets. When coupled with the computing market growing the strongest along with the consumer also increasing sequentially, product mix unfavorably weighted on the gross margin during the quarter. Future margin expansion will be driven by ongoing improvement in the product mix as the pace of recovery accelerate in our higher-margin automotive and industrial end markets, combined with increased new product introductions in our target markets as well as improved loading across our manufacturing facilities. At the midpoint of our fourth quarter guidance, we expect to achieve approximately 12% growth for the full year. Looking forward, we are gaining increasing confidence in broader demand improvement in the automotive and industrial market. Diodes is gaining increasing market share in the automotive market with new programs scheduled to launch early next year. Combined with increasing content in industrial applications like AI robotic, power management, medical and factory automation. With that, let me now turn the call over to Brett to discuss our third quarter 2025 financial results as well as our fourth quarter guidance in more detail. Brett Whitmire: Thanks, Gary, and good afternoon, everyone. Revenue for the third quarter 2025 was $392.2 million, an increase of 12% over $350.1 million in the third quarter 2024 and a 7.1% increase over $366.2 million in the second quarter 2025. Gross profit for the third quarter was $120.5 million or 30.7% of revenue compared to $118 million or 33.7% of revenue in the prior year quarter and $115.3 million or 31.5% of revenue in the prior quarter. GAAP operating expenses for the third quarter were $108.9 million or 27.8% of revenue and on a non-GAAP basis were $103.1 million or 26.3% of revenue, which excludes $5.9 million amortization of acquisition-related intangible asset costs. This compares to GAAP operating expenses in the third quarter 2024 of $96.1 million or 27.5% of revenue and $105.9 million or 28.9% of revenue in the prior quarter. Non-GAAP operating expenses in the prior quarter were $99.8 million or 27.3% of revenue. Total other income amounted to approximately $7.5 million for the quarter, consisting of $8.5 million of interest income, $2.4 million in unrealized gains from investments, $0.4 million in other income, $3.3 million in foreign currency losses and $0.5 million in interest expense. Income before taxes and noncontrolling interest in the third quarter 2025 was $19 million compared to income of $18.8 million in the prior year period and $53.2 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the third quarter was approximately 18.7%. We continue to expect the tax rate for the full year to be approximately 18%, plus or minus 3%. GAAP net income for the third quarter was $14.3 million or $0.31 per diluted share compared to net income of $13.7 million or $0.30 per diluted share in the prior year quarter and net income of $46.1 million or $0.99 per diluted share last quarter. The share count used to compute GAAP income per share for the third quarter of 2025 was 46.4 million shares. Non-GAAP adjusted net income in the third quarter was $17.2 million or $0.37 per diluted share, which excluded net of tax $4.8 million of acquisition-related intangible asset costs and $1.9 million of unrealized gain on investments. This compares to non-GAAP adjusted net income of $20.1 million or $0.43 per diluted share in the third quarter of 2024 and $15 million or $0.32 per diluted share in the prior quarter. Excluding noncash share-based compensation expense of $5.4 million for the third quarter, net of tax, both GAAP net income and non-GAAP adjusted net income would have increased by $0.12 per share. EBITDA for the third quarter was $46.6 million or 11.9% of revenue compared to $46.9 million or 13.4% of revenue in the prior year period and $84.5 million or 23.1% of revenue in the prior quarter. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow provided by operations was $79.1 million for the third quarter. Free cash flow was $62.8 million, which included $16.3 million of capital expenditures. Net cash flow was a positive $59.3 million. Free cash flow per share was $1.35 for the quarter and $4.02 per share for the trailing 12 months, approaching the historical high of $4.34 per share in 2021. Turning to the balance sheet. At the end of third quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $392 million. Working capital was approximately $890 million and total debt, including long term and short term, was approximately $58 million. In terms of inventory, at the end of the third quarter, total inventory days were approximately 162 as compared to 173 last quarter, down approximately 11 days sequentially. Finished goods inventory days were 62, a decrease of 9 days from the 71 days last quarter. Total inventory dollars decreased $11.8 million from the prior quarter to $470.9 million, consisting of a $17.3 million decrease in finished goods and a $1 million decrease in work in process and a $6.5 million increase in raw materials. Capital expenditures on a cash basis were $16.3 million for the third quarter or 4.2% of revenue, which was below our targeted annualized range of 5% to 9% of revenue. Now turning to our outlook. For the fourth quarter of 2025, we expect revenue to be approximately $380 million, plus or minus 3%. At the midpoint, this is better than typical seasonality from third quarter and represents a 12% increase over the prior year period and will be the fifth consecutive quarter of year-over-year growth. GAAP gross margin is expected to be 31%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 27% of revenue, plus or minus 1%. We expect net interest income to be approximately $1 million. Our income tax rate is expected to be 18.5%, plus or minus 3%, and shares used to calculate EPS for the fourth quarter are anticipated to be approximately 46.4 million shares. Not included in these non-GAAP estimates is amortization of $4.8 million after tax for previous acquisitions. With that said, I now turn the call over to Emily Yang. Emily Yang: Thank you, Brad, and good afternoon. Revenue in the third quarter was up 7.1% sequentially and at the midpoint of our guidance, mainly driven by strong demand in Asia, especially in Taiwan for the AI computing applications. Our global point of sales increased in Asia, followed by North America and our channel inventory decreased both in dollars and in weeks. During the quarter, we continued to drive our new product initiative with approximately 180 new part numbers, of which 60 were for automotive applications. Looking at the global sales in the third quarter, Asia represented 78% of the revenue; Europe, 12%; and North America, 10%. In terms of our end markets, industrial was 22% of Diodes product revenue; automotive, 19%; computing, 28%; consumer, 18%; and communications, 13% of the product revenue. Our automotive industrial revenue combined was 41%, which was 1 percentage point lower compared to the last quarter. Even though automotive industrial revenue increased quarter-over-quarter, the computing end market experienced stronger growth than the 7% of the company average for the quarter and the industrial market grew at a lower rate than the average. Now let me review the end markets in greater details. Starting with automotive. Revenue in the quarter grew 8.5% sequentially and 18.5% in the first 3 quarters over last year, even though as a percentage of the total product revenue was flat to the last quarter due to the growth in the other markets. The revenue increase during the quarter serves as a further evidence that the inventory situation continued to improve even though the overall demand remained dynamic and the pace of recovery is slower than expected. The other positive news is that we are starting to see more new programs scheduled to ramp early next year. Our controllers and MOSFET combination from the low-voltage MOSFET product line has established a strong presence in the automotive DC source applications. Our newly released 50A and 650-volt automotive-grade Silicon Carbide Schottky Barrier Diodes are specifically seeing traction in energy storage systems. And our small signal bipolar junction transistors devices packaged in DFM are proving to be valuable for general-purpose signal switching, offering flexibility and compactness for various electronic designs. Additionally, our latest NPN and PNP bipolar junction transistor products feature industrial-leading low saturated voltage, making them ideal for a range of automotive applications. These products are ideally suited for voltage regulation, DC-DC converters, motors as well as LED lighting, engine control units, power management and linear controllers. Diodes TVS products are being designed into battery management system applications, providing robust search and overvoltage protection for reliable automotive battery performance. In addition to our TVS products, our switching diodes, Zener diodes and SBR products have design wins in autonomous driving, telematics and infotainment applications. And our USB 2, signal booster devices are being adopted for in-car charging solutions and other cockpit electronics, enabling stable signal transmission in long cable environments. We have also seen strong demand for our low quiescent current LDO operating at 40 to 60 volt, driven by increased production of MCU power supply systems. Our automotive Hall effect sensors, including latch and Omnipolar switch variant have experienced double-digit growth, driven by new design wins in DC motors, window and tailgate lifters, cooling fans and glass ball sensors. This momentum is expected to continue as automotive design become increasingly more sophisticated. And lastly, our LED driver are seeing solid demand supporting a diverse range of applications such as gear shift control indicators, interior cabin lighting and mood lighting. Turning to industrial market. Similar to the automotive market, the inventory situation continues to improve gradually with revenue in this market grew almost 4% sequentially and 13% for the first 9 months. We continue to expect the overall inventory situation will begin to normalize next year. We are seeing applications such as AI robotics, medical and factory automation gaining strong demand momentum. With the increasing power consumption by new systems, the importance of power supply and backup power solutions for AI servers is becoming increasingly critical. Next-generation server power supply systems are transitioning from the current 48-volt system to 400-volt and 800-volt systems and adopting a stand-alone power rack design. Diodes SBR products, Silicon Carbide MOSFET, ideal diode controllers are gaining traction in this innovative applications are increasingly being adopted by a range of power supply customers. Additionally, our portfolio of 50M 1,200-volt Silicon Carbide Schottky Barrier Diodes products are achieving success in energy storage applications, delivering efficient and reliable performance. And our silicon carbide MOSFETs are also seeing increasing adoption, especially for applications such as EV chargers and power supply for AI surfers and data center applications. Also in the industrial, Diodes TVS products are being integrated into power adapters to provide robust ESD and search protection, enhancing device reliability and our high-voltage sensors, low dropout regulators and voltage reference solutions are demonstrating strong momentum in a variety of industrial applications, including fan motors, household appliances, power tools and e-meters. In the computing market, we saw the strongest growth this quarter, increasing almost 17% sequentially and 22% in the first 9 months compared to last year. The highlight continues to be the strong demand momentum for AI-related applications. With the chipset refresh cycle underway, we are gaining strong traction and market share across our connectivity and timing product line with particular strength in PCI Express 5.0 and 6.0 clock solutions. This growth is fueled by increasing demand within AI, data center and edge computing applications. Our level shifter products are also seeing notable expansion, especially in server applications with major customers. Additionally, our signal integrity and high-speed switch portfolio, including USB4 and PCIe 5 and 6 has gained significant traction. These products are being widely adopted in key applications such as AI cars for server and solid-state drivers. Our ESD protection devices are also increasingly being integrated into SSD applications, showing a positive ramp-up. We also continue to secure design wins for our PCI Express 4.0 and 5.0 redriver solutions and are now entering solid production phase in both notebook and SSD applications. And our power switches are in high demand for the data center SSDs, while USB-C source switch are being utilized in power ports for the desktop and docking stations. Our linear LED drivers are also seeing increased deployment in servers. In the consumer market, revenue also increased 8.5% sequentially and 7% for the first 9 months, even though flat as a percentage of the total product revenue. Diodes bridge rectifiers are being designed into multiple power adapters that are ramping up, fueled by increased demand in the gaming systems. The adoption of DP 2.0 redrivers is on the rise in high-resolution gaming monitors, supporting enhanced image quality and faster refresh rates. Additionally, adoption of our MIPI switches and redrivers is also ramping up as they are being incorporated into augmented reality glasses, signaling rapid growth opportunities in wearable display technologies. Lastly, in the communication market, overall growth was relatively flat sequentially and a slight decrease for the first 9 months. We are, however, seeing pockets of growth driven by the AI and high-speed interconnect applications. This demand is being driven diodes introduction of new crystal oscillators that offer significant lower jitter less than 60 femtoseconds and also support higher frequency, now reaching 312.5 megahertz in addition to the previous 156.25 megahertz. These advanced oscillators are gaining adoption in the optical transceiver modules, which are integral to the high-speed 800G and 1.6T optical communications within data center and the auto directional level shifter and the low dropout regulators experienced strong demand driven by the growth of AI-enabled smartphone applications. In summary, our continued year-over-year growth momentum is a result of our past design wins and content expansion initiatives across our target end markets. Additionally, our continuous investment in new product introduction in our high-margin end markets of automotive industrial position us well for a return to strong growth in those markets as the recovery accelerates. And with a return to more healthy inventory level and shipments more closely reflecting true end demand, we expect to see increased loading at our manufacturing facilities and improving margin over the coming quarters. With that, we now open the floor to questions. Operator? Operator: [Operator Instructions] We'll take our first question today from the line of David Williams at Benchmark. David Williams: Congrats on the solid results here. I guess maybe first question, Emily, you kind of touched on this at the end on the increased loadings. But as you kind of think about the gross margin for the year and what those loadings could look like, can you kind of give us a sense of what your expectations are for growth and maybe how those loadings should look as we move through next year? Emily Yang: Yes. So I think if you look at the gross margin, right, there's a couple of areas that we believe is going to improve over time, right? So number one, we do expect the product mix will continue to improve throughout the quarters, right? With a lot of pipeline, we have a lot of success in the automotive with the key focus introducing a lot of new products, we are actually confident that the combination of the product mix will continue, right? And then if we look at the Pericom product family, we continue to focus on the AI areas. We believe that will continue to help us from the product mix. On top of that, we have new product introduced throughout the quarters, especially focus in automotive area and some other areas. So again, right, that's part of the product mix. For the longer term, 2026, we do expect the revenue to be a growth year, right? So naturally, when we grow the revenue, that will increase the loading of our factories, right? -- we're also aggressively porting our product into our factories from outside to inside and balance overall the loading as well. So gradually, that will show some improvement, right? I think going down to manufacturing efficiency, I think overall, Gary and the company is driving very aggressively for cost down and continue improving on that area. So I would say if you add all these things together, that's actually the reason that we believe. And then on top of that, right, I also talked about it, if we look at the channel inventory, we believe the ship in, the ship out is going to be more balanced moving forward. We have been depleting quite a lot for the last few quarters, and that's actually going to get more stabilized. So I would say that's another angle to think about it. David Williams: Okay. Great. And then maybe on the tariff side, it seems like some of your peers have had a challenging time kind of sidestepping some of the earlier in the year pull-ins, but that doesn't seem to have impacted you, and we're not seeing it here in the fourth quarter. Maybe talk about that, how you're able to navigate that. But are you seeing that impact? Or could you potentially see that as we move into next year? Is there anything, I guess, from that perspective that we should be thinking about? Emily Yang: So David, I want to make sure you are talking about the tariff importing into U.S? David Williams: Yes. Just the general demand trends as we saw with the tariffs that were driving some earlier loadings for production to come to the U.S., just that -- just the demand dynamics around that and that channel inventory associated with it. Emily Yang: I would say, overall, we didn't really see the big spike or change overall for the demand point of view. I think tariff is not new just for last quarter. It has been in place for quite some time. I think we are working aggressively leverage our flexible manufacturing site and moving things around to minimize the tariff overall impact for U.S. revenue. I think on top of it, right, majority or there's quite a lot of revenue within North America is actually importing into Mexico or Canada. So that's actually also a different story. I would say, all in all, if you look at the overall percentage of the business for North America is still a very small percentage. So that's the reason that we are working different angles, but the overall impact is relatively small for Diodes. Gary Yu: But -- and I would like to add a comment on that. The market is very dynamic, especially like country to country, this kind of geopolitical issue. So at Diodesn we always want to keep our flexibility to support customer anywhere they want it. David Williams: Okay. All right. Very good. Certainly appreciate that. And maybe just lastly for me is on the automotive side. You've talked about things getting better there, inventory is better. How do you see maybe your position given your content growth and these programs that are ramping next year? How do you think we should look at the revenue growth trajectory for automotive specifically as we get into next year? Emily Yang: Yes. So current percentage for automotive for us based on the Q3 result is 19%, right? We definitely expect our automotive percentage will continue to improve in 2026, especially with the market share gain and the content expansion that you just mentioned. Operator: Next, we will hear from the line of Tristan Gerra at Baird. Tristan Gerra: You mentioned in-sourcing as a gross margin catalyst for '26. How should we look at the gross margin benefit for an analog product currently outsourced in Korea or in Japan versus once it moved internally? And is it fair to say that the qualification process for your South Portland, Maine fab is ongoing, and it sounds that perhaps it's more of a second half of next year dynamic given that industrial and automotive are still somewhat in recovery mode? Gary Yu: Okay. Tristan, this is Gary. Let me help to answer this question for you, right? And by moving external to external, definitely going to benefit Diodes a lot, right? For example, if I subcon to my wafer to our subcon partner, they're definitely going to earn some premium from Diodes and then we can save the premium and by loading internally with our like kind of very, very effective cost this kind of model on that. So definitely, we can enjoy the benefit of moving external to internal. As for the analog part, we continue loading or qualify the process new product into our SP fab. And we do see a very, very good progress so far, and we do have our new product or requalified product from this wafer fab being qualified in our key customer side. And we do see the PO coming in just recently from the previous couple of quarters. So to offset our OEM customer under load issue or continue to drive the demand, we do significantly improve our loading in those particular SP fab to offset this kind of under loading issue in the cost. So for year 2026, I do believe loading will be improved and the GP coming from this wafer fab will improve, too. Tristan Gerra: Great. That's very useful. And then you mentioned AI as a key driver of computing, but you also mentioned computing being a negative on mix. What percentage of your computing revenue right now is data center? And then any way to quantify how much of the growth is coming from AI-related products? Emily Yang: Yes, Tristan, this is Emily. We're sorry, right now, we actually don't have the breakdown information. But if you look at our Q3 result, right, computing is the strongest growth market segment for us -- we actually achieved 70% -- 17% sequentially and 22% just compare the first 3 quarters, right? A majority of this growth is driven by AI. So I think the other thing I want to point it out, right, AI is not just in the computer segments, right? We're also, for example, seeing AI related in the industrial power supply or some other edge AI applications that's driving some of the refresh cycle. That's actually the reason we haven't been able to break it out. I think on top of that, if you really think about our product, it's really fitted for a lot of applications, not just limited to AI, right? But I would say, all in all, it's really positive. We're actually excited to see the performance and the growth, especially in the computing market segment. Gary Yu: Yes. And just like Emily said, no matter AI in compute or industrial, we do see this kind of market segment will continue to grow next year and even the year after next year. And at the same time, we continue to introduce a new product into this segment. And this new product, usually, we can enjoy much better GP on that. So that's really we're going to put our R&D focus on that but continue to grow our GP percent in the future. Tristan Gerra: Okay. Great. And just one quick last one. Do you see yourself as a benefit from the disruptions around Nexperia? Because my understanding is that it's a lot of discrete product. And are you second sourcing some of that? Is that a tailwind for next year? Emily Yang: Yes. Tristan, we're definitely aware of the situation. Discrete, Diodes, rectifiers, MOSFETs, logic, definitely part of our broad portfolio, and it does cross over to some of our peers like Nexperia, right? Like I mentioned before, any time there's a change of supply situation, strategic decision, whether change price or supply or low-margin focus, it always creates opportunity for Diodes, and we always utilize this type of opportunities to really expand and build a stronger relationship with our strategic customers and also the focus in automotive market segment, right? We do review all this business very carefully and engage in the areas that fit into our overall long-term strategy and focus. So our goal at the end is really better serve the customers overall. Operator: [Operator Instructions] We'll hear next from William Stein at Truist. Paul Smith: This is Elliott on for Will. You mentioned 2026 being a growth year, and it looks like recent top line growth is holding in around plus 10% year-over-year. Is that a reasonable level for us to expect through 2026? And I'm wondering if you could give us some examples of end markets or products or applications that could maybe trigger a more robust recovery than, say, plus 10%? Gary Yu: All right. This is Gary. Let me try to help answer this question. Yes, the answer to you is yes, for sure. We do believe the year 2026 will be another good year for Diodes. Not only the revenue growth like a double digit, I want to drive on that way, but also I want to make sure our profitability also grows aligned with our revenue growth. That's our commitment to the shareholders. And as for which segment we are looking for the most aggressive growth, one is AI, as Emily mentioned that about in the previous answer. Another one will be automotive plus industrial because we do see the automotive and industrial in the near future, not only the segment increase, but also we do have a newer product and introduced into this segment and been designing since the past couple of quarters. So we do see the revenue is going to be significant growth in these two segments. Emily Yang: Yes. I think on top of that, right, we went through a period of inventory adjustment. We believe that by 2026, even with few customers' inventory situation will continue to improve, and that naturally is going to drive some of the demand as well. Gary Yu: Exactly. Paul Smith: Okay. And one more, if I can, on -- we've talked previously about a 20% operating margin target. I'm wondering if you could give us some color and maybe be a little more prescriptive in terms of the different variables you gave earlier about margins improving of how you can get to potentially that 20% range again from the -- call it, mid-single digits today. What's the lion's share? Anything like that you can provide? Gary Yu: Okay. Let me try to give you a very high-level direction I want to drive on that. The first, we want to drive top line means like revenue is going to be growth, right? And along with the GP and GP percent improvement on that direction on the growth mode. At the same time, and I really want to keep our SG&A flat or less percentage while the revenue growth, but I really want to put more focus on R&D expenditure along with the revenue growth. With that, I do believe we can improve more on our bottom line. So let me emphasize again, revenue growth and along with the GP percent GPM growth, we keep SG&A percentage flat or reduced. And at the same time, I want to focus on -- invest more on R&D. Brett Whitmire: Yes. A couple of things I would add to that. This is Brett. Is that when you think about that 20% margin, the building blocks to that are principally two things. Our gross margin continuing to improve and working its way back to 40-plus percent. And you basically got the OpEx that we have -- that we've shown that at the higher revenue levels will be around 20%. And as Gary mentioned, the goal is to -- and what you can see in our investment is leaning heavier into the R&D piece than we are on the SG&A. And so I think that's -- those are the two main components. And the big one we spend the time on is on the gross margin and the real drivers to that and building on the differentiated, more quality products across our portfolio while then in addition, not adding to our manufacturing footprint while we do that, but getting the entitlement of it as -- that's in place. So those things together, it will accelerate the margin improvement and will basically transition back to margin that we saw a few years ago. Operator: And now we'll take a follow-up from Mr. David Williams at Benchmark. David Williams: On the AI side, is there a way to kind of parse out the demand or new demand that you're seeing relative to maybe the content expansion? And the reason I'm just trying to understand, are you driving -- and I get that you're probably driving both, but what is the bigger one? Is it just increased demand all around? Or are you just able to sell more products into each one of these solutions? Emily Yang: I think it's really a combination of both, right? I think it's important that we continue to drive new product introductions. Like I mentioned, there's a lot of change even with the AI data center with some shifting of transitioning from 48-volt to 400-volt and 800-volt, which also means that there's a new set of requirements that need to be fitted into the application. So I think it's important for Diodes continue to focus on the technology, continue to focus on new product introduction that will be well fitted into the new application, right? At the same time, the volume will continue to grow. When you combine those two together, it's going to get the best result overall. Gary Yu: Yes. Another important information I'd like to share is like Diodes and Vantage has a very good relationship with those like Tier 1 customers, no matter any company or other company, right? And that's why we understand from their architecture, from our system point of view, we know what they want 3 years or 5 years from now. That's why we cooperate with them to develop the product they wanted. David Williams: Okay. Okay. That's great color there. And then maybe just on the inventory side, do you get a sense that some of your customers have started to replenish if you look across your inventory levels? And is that something that's helped here? Or do you think that is still in front of us, just kind of given where inventory levels are today? Emily Yang: I believe a lot of customers' inventory situation changed a lot. There are still some pockets of customers, especially, I would say, in the industrial market segment that's still going through some corrections, but we also expect situation should be improved or completed by the beginning of next year. Brett Whitmire: Yes. So David, one way to think about that, too, is that you've seen the last 2 quarters, the internal inventory as well as, as we've described, our channel inventory continue to come down. And as long as that is happening in that way, you're not getting the full entitlement of the market on our margins. And so I think going forward, we feel a more balanced basically ship in and ship out and then the ability to have the entitlement of the full demand coming through our margin. And as Emily said, we think we'll -- you'll start to see that as we transition into probably second quarter next year, especially as we start to see the strength. Operator: And we have no further questions from our audience today. I'm happy to turn the floor back to Mr. Gary Yu for any additional or closing remarks. Gary Yu: Thank you, everyone, for participating on today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect. Operator: Ladies and gentlemen, thank you for joining today. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Grindr's Third Quarter 2025 Earnings Call. My name is Janine, and I will be your lead operator for today. [Operator Instructions] I would now like to turn the call over to Tolu Adeofe, Grindr's Head of Investor Relations. Please go ahead. Tolu Adeofe: Thank you, moderator. Hello, and welcome to the Grindr Earnings Call for the Third Quarter 2025. Today's call will be led by Grindr's CEO, George Arison; and CFO, John North. They will make a few brief remarks, and then we'll open it up for questions. Please note, Grindr released its shareholder letter this afternoon, and this is available on the SEC's website and Grindr's Investor page at investors.grindr.com. Before we begin, I will remind everyone that during this call, we may discuss our outlook, future performance and future prospects. You should not rely on forward-looking statements as predictions of future events. These forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of the risks that could cause our actual results to differ from views expressed in our forward-looking statements have been set forth in our earnings release and our periodic reports filed with the SEC, including our annual report on Form 10-K for the year ended December 31, 2024, or any subsequently filed quarterly reports. During today's call, we will also present both GAAP and non-GAAP financial measures. Additional disclosures regarding non-GAAP measures, including a reconciliation of these non-GAAP financial measures to their most closely comparable GAAP financial measures are included in the earnings release we issued today, which has been posted on the Investor Relations page of Grindr's website and in Grindr's filings with the SEC. With that, I'll turn it over to George. George Arison: Thanks, Tolu, and hello, everyone. The Grindr team delivered another awesome quarter with revenue up 30% year-over-year and adjusted EBITDA margin of 47%. The results put us in a great position as we finish the year. Today, we are increasing our expectation for full year 2025 adjusted EBITDA to a range of between $191 million and $193 million, implying a margin of greater than 43%, and we are reaffirming our revenue growth outlook of 26% or greater. Our new CFO, John North, will walk you through the results in a moment. We're thrilled to have him join Grindr. He's led high-performing finance teams at Fortune 500 and S&P 500 companies and served as a public company CEO. He's already become an invaluable partner to [indiscernible] as we execute on our long-term vision. Over the past 3 years, we focused on expanding Grindr's product service area, delivering more capabilities and high-quality experiences for free and paid users alike. On Page 4 in my shareholder letter, you will see a chart showing that our product expansion has been tremendous, creating enormous value for users and driving higher conversion, more revenue capture and an increased revenue per pair. Grindr now offers a richer, more effective experience powered by strong technology and a broader feature set. Users endure products like Albums, Boost, Travel Boost, Viewed Me and Right Now. Through Gen AI, we are giving users access to powerful features like chat summary, discovery and profile recommendations. All in, we've made the Grindr app more magical, dynamic and rewarding than it was just a few years ago, and we're only getting started. Expanding both our product surface area and the value we've created for paying users has put us in a strong position to test subscription price changes for the first time since 2018. We asked new subscribers in a large set of test markets to pay slightly more and experienced a de minimis impact on our paying user base with retention exceeding even our most optimistic projections. We're deeply grateful for our paying users' vote of confidence in our direction, demonstrated by their willingness to invest more for the new value and capabilities we've built. Over the next few months, we'll continue gathering data and prepare for a global rollout early next year. Concurrently, in one country, we've begun offer testing a new AI-powered premium tier designed for power users for one of the most advanced and magical experiences. Think of it as a flagship first-class cabin of Grindr with features that simply weren't possible 2 or 3 years ago before Gen AI. This tier targets a smaller segment interested in higher-value products, offering distinctive user benefits and a meaningful revenue opportunity beginning in late 2026 and accelerating in 2027. Our rich, free experience remains central to Grindr's power, fueling the unmatched scale and vitality of our network. Capturing revenue through exceptional value-added features enable us to continue bolstering an already rich, free experience and to maintain the open conversational architecture that makes Grindr unique among any gay or straight platform that will always remain our top priority. A defining strength of Grindr is its ability to renew itself with new users. Every year, Gay and bi men all over the world join as they become adults. Grindr is often the first place they learn about the engage, explore gay culture and find all types of connections from casual dates and hookups to love, to workout mates to friendships. This generational influx keeps the platform vibrant, relevant and ever growing with younger cohorts driving engagement across the network and older ones driving monetization. To help illustrate this characteristic, which is very unique to our platform, we've included a onetime demographic disclosure with our shareholder letter. It highlights why Grindr's strong, consistent engagement, especially among users aged 18 to 29, who make up a majority of our global user base, positions us for durable long-term growth. We recognize that many of our investors are Grindr users and hope these insights make our user dynamics and community more tangible to you. Overall, the products and business are performing exceptionally well, and the team remains laser-focused on delivering more value and more success to our users every day. Before I wrap up, I'm sure everyone has seen the filings from 2 of our large shareholders, Ray Zage and James Lu proposing to take Grindr private. The Board has formed a special committee of independent disinterested directors to evaluate the proposal. The committee is working with its own independent financial and legal advisers. From the company standpoint, that process will run its course. Our team remains unwavering focused on execution. We are fortunate to work every day on things we love that bring happiness to millions of people and make a world that is more free, equal and just. Grindr has enormous potential to create value while continuing to deliver a product of deep importance to its users, and our job is to keep driving towards that. That's all we'll say on this matter at this time, and we won't be taking any questions about it on today's call. Thank you to the Grindr team for delivering outstanding results we are reporting today. We're proud of what we've achieved, excited for a strong finish to the year, setting the stage for another standout year in 2026. Now here's John to cover the results. John North: Thank you, George, and it's great to be here with all of you. I look forward to meeting many of you in the near future. I'm excited to be a part of Grindr and what the incredibly talented team is building. I've known and respected George for a long time, and the Grindr business model is among the most powerful I've ever seen. I see my role as further strengthening the finance organization, expanding our capital markets relationships and ensuring the company scales efficiently and profitably as we deliver on our vision. As George highlighted, we had a phenomenal Q3. Total revenue was up 30% year-over-year to $116 million. Adjusted EBITDA of $55 million was up 37% year-over-year, resulting in 2 points of margin improvement to 47%, a record for Grindr. Our direct revenue grew 25% year-over-year, while indirect revenue was up 56%. Our ads business was the primary driver of outperformance in the quarter as we saw strong results from international third-party advertising partners. In the core app, revenue growth was driven by our strength in our unlimited tier, which this year saw the introduction of additional duration options and feature updates alongside the ongoing success of our weeklies product across subscription tiers. Our user KPIs were strong with an average of 1.3 million paying users in the quarter for an improved penetration rate of 8.6%. Average MAU totaled $15.1 million and ARPU was $24.70. Our adjusted EBITDA margin performance reflected the strong flow-through of our revenue outperformance to the bottom line as well as higher capitalized product development costs. Operating expenses, excluding cost of revenue, were up 9% year-over-year, largely related to people costs as we execute on our innovation road map, including our AI initiatives. Grindr's net income for Q3 was $31 million or $0.16 per diluted share compared with $25 million or $0.09 per share a year ago. We generated approximately $51 million in free cash flow in the third quarter. Year-to-date, we've repurchased 25.1 million shares of our common stock for approximately $450 million, leaving us with $50 million remaining under our current authorization as of September 30. Our Board regularly reviews capital allocation plans, including options for returning excess cash. Turning now to our guidance. Our strong Q3 results give us increased confidence in our 2025 outlook. And as George mentioned, we now expect our full year 2025 adjusted EBITDA will be between $191 million and $193 million, implying a margin greater than 43%, and we are reaffirming our revenue growth outlook of 26% or greater. As I noted in the P&L review, our 30% total revenue growth in Q3 was largely driven by outperformance in our ads business, which we do not expect to repeat in Q4. Recall that in our 2024 fourth quarter, we benefited from a large onetime brand campaign. In conclusion, Q3 was a very strong quarter that reinforces Grindr's powerful business model. We're in a great position to deliver on our annual guidance, which we increased earlier this year and are revising upward today. And with that, we'll open the call up for some questions. Operator: [Operator Instructions] Our first question comes from the line of Andrew Marok from Raymond James. Andrew Marok: I wanted to talk quickly on pricing first. So I think you've mentioned in the past and your payer conversion rate kind of points to this that given that Grindr had a little bit farther to go in terms of product breadth that getting users to pay at all was one of the biggest milestones that you would make as a user. So I guess in light of that, how do you balance that philosophy of raising prices versus getting people to pay at all? Like is the increased price a potential higher barrier to make that first purchase? George Arison: Andrew, good to talk to you. We are obviously excited for users to pay if they've not paid before, but we also believe it's important for users who are getting a lot more product in the paid tiers and a lot more value to pay a little bit more for that value. And the price changes are, I think, fairly minor in the large scheme of things, given the amount of value that we've added to the product. We have seen significant growth in our number of paying users. The change over the last 3 years has been pretty significant. As you know, I think we went from something like 6.5% to 8.5%. And that, I think, speaks for a lot, especially given that MAU has also grown dramatically in that time period. And secondly, we want to maintain a very robust free offering. I think one of the things you'll see in the shareholder letter in the disclosure that younger users who constitute a vast majority of our user base worldwide and nearly a majority of our user base in the United States and the U.K. tend to pay at a much lower rate than slightly older users. So on Page 8 of the letter, you'll see that 18- to 22-year-olds have the lowest penetration and then that kind of increases dramatically as they go to 30, 39 or 40, 40, 49, et cetera. And so we kind of have a 2-parted strategy, right? On the one hand, we want as many young users coming into the product and having a really awesome experience through a very robust free offering where they can use all the features that we offer, including being able to talk to anybody for free with no limits. We're the only product of our kind that has that, whether gay or straight. And then from there, we want people to be able to pay for the value-added services that we offer them. And what we are learning is that people who -- as they age and get older, they end up getting more value from the features that we offer in paid tiers, and they're willing to pay for those. What we've seen in our price testing as prices have changed is that we have had very little to de minimis change in our conversion rates when you compare new prices versus old, which is really great and it speaks to the fact that people value the products they're getting in those paid tiers. And then a couple of more things on that. Number one is we do monetize our free users through ads. Obviously, we had a significant increase in our ad revenue over the last 3 years as well, and we continue to do very well there. And I think that's an important component of that equation as well. We have thought about whether we should offer a cheaper tier as well for users who might want to not have ads at all, but are not quite ready to pay for XTRA because they don't need the value that XTRA includes in terms of features and products. And that's something we're still thinking about. I don't want to promise either way that we'll do that, but that's certainly a possibility as a way to get more people to potentially be payers. But if you do that, you actually won't have that big of a revenue impact because the price point on that would be fairly low. And then lastly, I think the important thing for us is by creating a lot more product value, we are now asking people to pay a little bit more for that. This isn't just a price raise for the sake of a price raise or because we want to make more money. It's to ensure that users who are enjoying a lot more value in the experiences because the XTRA and the Unlimited tiers are way more robust today than they were 3 years ago as a result of a lot more product area that we've created in those tiers are actually paying for the value they're getting from those tiers. Andrew Marok: Got it. Really appreciate that. And then maybe if you could just give us a quick update on how some of the newer products, especially thinking of something like Right Now is trending in terms of things like engagement metrics and to the extent that you can measure them, things like user satisfaction or outcomes. George Arison: I don't really have much new to say on that beyond what we've said before, which I'll be happy to repeat. I think the way we tend to think of our products is launch a lot of product surface area. Some will be free, some will be paid. We want to have a robust free offering and some things that are more special might be offered to paying users only. With Right Now, our objective was to dramatically increase the surface of a free product. So everybody who is on Grindr, whether paid or free can utilize Right Now and enjoy it. Somewhere between 20% and 25% of our users post in Right Now, at least once a week. And over 75% of our users look at Right Now postings within -- once people are in Right Now, which I think shows really high engagement, and we are very happy about that. But obviously, there is a lot more that you can do with Right Now. I was in New York a couple of weeks ago, where we have the mapping feature in Right Now on as well. I'll be totally honest. I was not sold on the idea of mapping in Right Now when the team first went after it. But when you're in New York and are seeing the product kind of in your hands, it's a really incredible magical experience and looks really, really nice. And I think people really like that. And so we're really happy with where the product is trending. And normally, we don't really share a lot of product metrics, but I do want to call out, again, in the shareholder letter, we did share a very extensive disclosure on our user base and kind of how that is split out. The fact that we have -- in the U.S., for example, 15% of our users are ages 18 to 22, 31% of our users are ages 23 to 29 that 46% of all Grindr profiles are kind of in that age range of 18 to 29. And that to me is something that kind of speaks to the uniqueness of Grindr as a business and a product and the fact that users -- the younger generation really likes what they're getting in the product, and it's very much working for them. So as long as our products are accomplishing the idea of bringing young people into the product as they become adults as a right of passage like it has for the last 15 years, I think we're in a very strong position. Operator: Our next question comes from the line of John Blackledge from TD Cowen. Logan Whalley: It's Logan Whalley on for John. So just looking at top of funnel, MAUs grew nicely again in 3Q. Could you discuss any trends which drove the top of funnel users higher in the quarter? And then also in 2Q, you called out some significant removal of bad actors in a certain region. Could you just update us on any similar efforts globally in 3Q and then looking forward just based on health of the platform? George Arison: Thanks for the questions. So first, let's start with what it is that we actually report. We report monthly active devices, not users and not profiles. A lot of Grindr users have more than 1 profile, and those are pretty hard to debug in terms of are they 1 individual or 2. That happens for many different reasons. Some people might have a profile that is more friendship focused and then they might have a profile that is more casual dating focused, and they have different information on those profiles, and we definitely don't discourage that and are happy with users having more than 1 profile. So the best way for us to debug what we report is monthly active device, not user. And I think it's really important for people to understand, especially when I try to compare it to external data, which, as we have spoken before, tends to be perpetually wrong about Grindr information. I think in part because people don't pay attention to what it is that Grindr actually reports. Secondly, our ecosystem is really -- the health of the ecosystem is really important to us. And so as we see bad actors come into the ecosystem, whether those are stammers or other types of bad actors, we take actions to remove them. Over the last 2 to 3 years, I think all social networking companies would validate this. Scammers have become more sophisticated with Gen AI, and that means that you have to become more sophisticated in fighting them. And as we do that, it can impact MAU. In Q2, in the first half of the year, there were a significant impact on MAU, and we've spoken about that. It doesn't always impact MAU when we go after bad actors because some bad actors have profiles that don't have a device ID associated with them. They do that by spoofing Android devices. That's a known kind of flaw with the Android ecosystem that you can do. And so when we remove actors that are bad, that don't have a monthly active device, they don't get associated with MAU one way or the other because they were never in our MAU in any way. But when we remove bad actors that do have devices, they do. Thirdly, we have never really done much to drive MAU growth. Our MAU grows almost completely organically through word of mouth. As I said earlier, Grindr is a rider passage for people as they turn 18. And if they are gay, they come to Grindr as a way to figure out who they are, what it's like to be to start meeting people for any number of types of connections. And so organically, our MAU tends to grow really nicely. We are very happy with our MAU growth. And frankly, the numbers that you're seeing in terms of growth are very much in line with our long-term guidance assumptions that we shared at Investor Day 1.5 years ago. And then lastly, I'll call out again the disclosure towards of our user demographics. You couldn't have the demographics that we have in our profile set that we share on Page 7 and 8 unless you're attracting a lot of new users. It would be impossible to have 50% of the user base be 18 to 22 in the United States when only 9% of the U.S. adult male population is in that age cohort unless you're constantly attracting people who are young and attracting them at very high rates. And that's even more true internationally in places like India and Philippines, et cetera, where older users are still stigmatized and might not so comfortable being a [indiscernible] while younger users are coming out and more comfortable. So in those places, our user base is even more heavily young. And a lot of our focus is ensuring that we continue doing that through the right product initiatives so that we serve this younger adult male cohort as well as we possibly can. Logan Whalley: Great. Maybe one other question just on the premium tier. You mentioned that would be designed for power users. Like could you give us any kind of an idea of what how many power users are on the Grindr platform? Like what percentage of overall users might kind of fall into the bucket that you're designing the subscription for? George Arison: Yes. So the premium tier was a significant component of what we envisioned in terms of the long-term strategy that we shared at Investor Day because we knew that a lot of our investments would be around AI features, which are really magical and previously were not possible to build. We are building those and making them available. And we just think that the amount of value that we will be generating through those features and products for people, we will see -- I think people need to be prepared to pay for the value they'll be getting from that. That tier is meant for our power users and for a very select set of people. We don't expect a huge number of people going into that, but it will be priced appropriately for that. We have something like, I think, 350,000 Unlimited subscribers. So if you imagine that 20% of those subscribers switched over to Unlimited, I think you'd have -- sorry, to the premium tier, you'd have a very nice kind of growth in our revenue because it's a significant dollar amount at the price points that we are thinking about. And I would call that like a good home run. If 30% or 40% or 50% of our Unlimited users switch to the premium tier, then you'd have like a grand slam because it'd be like an incredible result. I don't know which one of those is going to happen. That's why we need a few quarters of testing and learning to understand what happens. But I do know that the kinds of features that we offer in this new premium tier are pretty magical. And I think a lot of people will be very happy with them. But at no point have we thought about as something that a very large percentage of our overall user base will utilize. This is very much meant for our power users who can benefit from the unique features that will be put into that tier or that have already been put in that tier. And quite frankly, I think 1 of -- maybe 5 people in the United States who is in the beta because the beta is starting somewhere else. And when you use Grindr with these features, it is a very, very different experience. We were entering a fairly senior product candidate about 2 weeks ago and kind of walked them through what it's like on the app and he's like, wow, that's really, really special. And I really very much hope that everybody else feels the same way as this tier kind of expand more broadly to be available to more people. But I would not expect to have a global rollout until at the earliest sometime in H2 of next year. John North: Yes. And maybe, George, if I can just jump in and add on to that. The one thing I want to triangulate back to is that we are looking at continued investment in these enhancements that are going to bring new and exciting features and differentiation as we move forward. And that's been contemplated in the 3-year plan that we put out in the summer of 2024. We're going to finish the year at better than a 43% EBITDA margin, but I want to make sure we remind everyone that in that plan, we anticipated many of these investments. And so we still think triangulating to the EBITDA margin range we gave at the time of 39% to 42% as you think about years '26 and 2027 is an important point to keep in mind and that you can't just roll forward what we may finish this year at as you think about next year and beyond. Operator: Our question will come from the line of Andrew Boone from Citizens Bank. Andrew Boone: Three for me, if I could. I would love to get an update in terms of international. Just how did that trend in the quarter? And then any new initiatives you guys may have in terms of localization or anything else we should think about there? gAI, George, can you just talk about the bigger opportunity with that product in the quarter? And kind of what's your vision in terms of bringing more AI tools in terms of incorporating AI into the Gayborhood? And then lastly, just on advertising. Can you guys just help us understand, it sounds like it was very strong in the quarter. What was the driver of that growth? Is there anything to call out? And then how do we think about that going forward? George Arison: Great. Thank you for all that. I wrote it down, but hopefully, I don't forget, if I do, please remind me, I'm not ignoring any of the questions. They're all fun things to talk about. So on international, what we said at Investor Day is that international is a very large opportunity for Grindr. And I'll walk you through kind of how we think about that. But first to kind of preface, I think one of the main jobs of the CEO is twofold, right? Number one is to paraphrase another very prominent CFO, CEO whom I really admire is to amp things up, meaning to put pressure for things to happen as fast as possible and as many things to get done as possible. And I think everyone who knows me knows that I'm costly amping it up on the team. But concurrently with that, another really critical place is to prioritize things properly. If you try to do everything, you'll get nothing done well and finding the right prioritization on things is really important. There was a lot to do at Grindr when we got started 3 years ago, and we've been prioritizing things based on what we thought was most critical. And in total fairness, I think going after our international opportunity was not as top of a priority as some other things have been so far because those were more important even for the user base or from a perspective of what we wanted to achieve over the long term, which still means that international is a huge opportunity and is something that should be viewed as upside when you think about it from the long-term modeling perspective rather than something that we assumed would be the case in our 3-year plan that we shared June 2024. The way we think of international is in 3 buckets. So first, in countries where we already have a pretty significant presence and those countries are economically advanced, we believe that there is opportunity to continue driving more users to become paying customers and to pay for the extra value they're seeing from the added new features that we're building. So we -- our payer penetration in Europe, for example, is lower than our payer penetration is in the United States. And we'd love to do things that would help us drive payer penetration to be more akin to the U.S. in Mainland Europe, which we think is possible. Obviously, U.S. will continue to grow as well. I'm not saying U.S. is going to just stop growing. But if we could get them closer to U.S. levels of payer penetration or even the U.K.'s levels of payer penetration, that would be a really big win. So that is one bucket of focus for international is Europe and countries like Europe in terms of their economic development, get them to have more payers. Number two is countries where we have very large sets of users and do okay on payers, but we believe that there is still opportunity for people to learn that we exist and to use us, have a ton of user growth opportunity. Places like that are Brazil, Philippines, rest of Latin America, Mexico, Colombia, Chile, et cetera. And Asian countries like Thailand, Vietnam, potentially Cambodia. In many of these places, we know from research that a very large number of people in our user cohort know that we exist and those that know about us, use us. But then there are a bunch of others that don't know about us and because our brand recognition is not as high in those countries as it is in the United States or the U.K. And so as they learn about us, we believe there will be opportunity for them to start using us, which we think will be very valuable. And then the third bucket is India, which should be called out separately because of its size. 10 years ago, it was illegal to be gay in India. So obviously, there's a ton of social stigma attached with being gay. It is changing for young users, as you can see from the data that we shared. But we want to be present there as the social transition changes, or happens and as more and more people become comfortable with who they are, and kind of continue to be the primary product for gay people in India like we already are as many more of them become comfortable using our product. And so that's the kind of opportunity. A lot of what we need to do internationally is around localization of the product. That might be simple things like how we show up in a specific language in a given country. We don't use a lot of slang in how we describe ourselves in a lot of these places in our translations, and we probably should and kind of what -- how people communicate in those languages to what kind of imagery we show you in each of these countries. And then on a more advanced level, what kind of products do we build? If you go to New Delhi, for example, and you open up Grindr, the grid will look very, very different from what the grid looks like in New York. Everywhere, there are a lot of people who are discrete and who might not show their face. or might not have a picture at all. But in India, vast majority of people don't show their face in a picture at all because it's still really hard to be gay. And so maybe in a place like India, the grid should actually look a little bit different. Maybe we should allow people to have AI-generated photos that they can post. I'm not saying that's what we would do, but like you can imagine through product solving the problem of discreetness in India differently than you deal with it in other places because they have unique needs in that country. And those are all things that we can do to help grow our presence. And obviously, through marketing, we can do a lot as well. We've spoken the shareholder about the fact that we have now launched our Spanish-speaking social media channels. We've also launched our first social show in Spanish. And those are the kinds of things we'll be doing in other languages as well, such as Portuguese and for specific countries like India as well. So that's on international. When it comes to gAI, we believe that AI, and I detailed this quite a bit in the document we shared last quarter about AI incumbent companies with a lot of data can benefit significantly if they start taking advantage of AI early before potential challenges are able to catch up with data because AI is better with data. And if you are kind of at the forefront, you can make your product be very, very different from a technology point of view with AI. And we do want our product to be turned into an AI-native product. And that's very much what we've been striving to do by retraining models to be able to speak gay, and I think we're doing a pretty good job at that. And then being able to use those models inside our product to do specific new experiences that previously did not exist. To start with, a lot of those experiences will go into the premium tier that I spoke about in the previous question in the shareholder letter. And there will be things like insights where we will actually provide users with detailed information about people that might be talking to that we can infer based on people's behaviors or conversations. Obviously, that will only be done with permission, meaning only people who agree to be part of our AI features will be able to see those features and we'll have those features or the information available about them in the app. Another kind of product that we've built through AI is called A-list, which goes through all your messages and creates a short list of people that we believe you should keep talking to and gives you summaries of conversations that you have with those people, brings together all the photos that you've exchanged with those people, all in a really nice summarized folder that makes it much easier for you to navigate the product. You can envision that as the next step of that, we will add a little button that will be the gAI button, and you can start asking gAI questions about that specific user that you were previously talking to. So it's something that you discussed previously does not appear in the chat summary, you can say, hey, I believe we talked about XYZ, can you get that information back to me to remind me what it is that we exactly talked about. So very similar to what Grok is doing inside X, where you can actually get information about a specific post with a lot more detail that would be quite kind of -- that's quite beneficial. So those are the kinds of features that we are working on. I don't know of a lot of consumer-facing products that are doing the kind of stuff that we're doing yet. But the same way that Grindr invented the use of mobile in the way it is used today, I think we'll be at the forefront of using AI in the consumer experiences in the future. And for advertising, I'll switch over to John to speak about that. John North: Yes. Thanks, George. We did have a good quarter in terms of our advertising growth. That's been an area of focus both through the TPA and then the direct piece. It's also a very nice contribution margin because it doesn't have the cost of sales associated with the subscriptions do come in through the app stores. So that tends to be more accretive to EBITDA, and we did see some benefit in that in the third quarter, you're right to call it out. But more importantly, I wanted to focus and just remember -- remind everyone that last year, we had a pretty significant direct advertising boost in the fourth quarter that we don't expect to continue this year. And so that's contemplated in the range of guidance that we gave. And certainly, we think this is an area that can continue to be a focus for us and that it should give us opportunity for potential additional growth in the future. There is much more we can do here, and we've had good success with Brian and the advertising team, but we're going to continue to look for ways to grow that in 2026 and beyond. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call -- we have a question, by the way, from John Blackledge from TD Cowen. Logan Whalley: It's Logan on for John again. Just -- maybe one follow-up on the user base breakdown. It's really interesting. Could you talk maybe about any trends you've seen over time or since you've come on board, George, in usage amongst different age groups? Like have you seen any trends among older age groups or younger age groups like more engagement or less engagement over time? And do you think there -- like you may have any initiatives in place in the future to kind of boost engagement amongst specific age demos like maybe older people, for example? George Arison: Yes. Great question. Thank you for that. We debated whether we should put in more, but we thought for competitive reasons, probably kind of what we shared made sense because we do have obviously data on the things you're asking. So I'll try to speak to it directionally without being too specific because I thought that for competitive reasons, releasing more of that would be potentially risky. What we know are the following things. One is our young adults, meaning people in the 18 to 35 age range, tend to do a lot of communication with each other, but they also get messaged a lot by older users, and they respond to older users as well, whereas the younger adult cohorts such as 18 to 30 don't actually initiate a lot of conversations with older users themselves. Since we know that they actually do respond to people who are older when they get messages, that is something that you could probably solve the product, right? Because I think what happens is a lot of younger adults, such as 18- to 30-year-olds, might feel uncomfortable messaging somebody who is older because they think, hey, this older person might want to talk to me. And that's why they're not messaging out to them, but they're getting messages from them and then they're willing to respond. And so that is something that we could solve through product by saying -- by having product features that kind of facilitate that a little better. We also do know from our older users kind of in that 50-plus age demo, and I'm approaching that cohort soon. So I'm kind of learning about that more, is that sometimes they don't always feel as welcome in the app as they did before, meaning they all have Grindr accounts. But as they age, their priorities tend to change. And as a result, sometimes they don't quite feel as at home. And we definitely can do things, I think, through a product to make that experience be better for them. That is part of the thinking behind the premium tier and the AI features with insights, right? Because part of what we can do with insights is tell a user, yes, this person is likely to engage really well with you based on what we know about you. And that I think would be very helpful for users who are older who might feel a little bit uncomfortable with the app because their priorities today might be different, right? If you are a 45-year-old or 50-year-old guy with kids living in the suburbs, your priorities are probably different than what they were when you were in your 20s and frequent circuit party. So I think those are the kinds of things that insights can really help solve, and that's something that we are envisioning. Obviously, older users do have more disposable income as well. And so I think the alignment there is quite interesting in terms of offering them better functionality that is unique through AI that is also creates a lot more value for them and so it is more expensive at the same time. Does that answer the question or any follow-ups on that? Before we close, unless there are more questions, I just do want to add one other thing. Grindr is an 18-plus product only. We do not allow people who are not 18 on the product. You cannot download the product if you are not 18 on either Android or iOS, and you cannot log into Grindr by creating an account on the web. We only allow you to create accounts through the app stores. And so whenever I refer to younger users, I'm referring to people 18 and older, nobody below 18. Operator: Thank you. This ends the conference call for today. You may now disconnect.
Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmus Filtration Technologies' Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Todd Chirillo, Executive Director of Investor Relations. Please go ahead. Todd Chirillo: Thank you, Eric. Good morning, everyone, and welcome to the Atmus Filtration Technologies' Third Quarter 2025 Earnings Call. On the call today, we have Steph Disher, Chief Executive Officer; and Jack Kienzler, Chief Financial Officer. Certain information presented today will be forward-looking and involve risks and uncertainties that could materially affect expected results. Please refer to the slides on our website for the disclosure of the risks that could affect our results and for a reconciliation of any non-GAAP measures referred to on our call. For additional information, please see our SEC filings and the Investor Relations pages available on our website at atmus.com. Now I'll turn the call over to Steph. Stephanie Disher: Thank you, Todd, and good morning, everyone. On the call today, I will provide an update on our third quarter results, our progress executing on our 4-pillar growth strategy and the outlook for the remainder of 2025. Jack will then provide further details on our financial results. During the third quarter, we completed our full operational separation from our former parent, Cummins. The separation has been a multiyear journey and marks a significant milestone for our company. I want to recognize this outstanding accomplishment, which is the result of the collective effort of all Atmusonians. We are now focused on unlocking the growth potential of Atmus. Completing the separation enables us to redeploy resources, time and energy to focus on growth. We have a clear vision and strategy and a highly capable organization who are energized to realize our full potential. Now let's turn to our capital allocation strategy. We continue to deploy capital to create long-term shareholder value. We further accelerated our share repurchase program in the third quarter, repurchasing $30 million of stock, bringing our year-to-date total to $61 million. Since the announcement of our share repurchase program last year, we have repurchased a total of $81 million of stock. We also increased our quarterly dividend by 10% last quarter, reinforcing our commitment to consistent long-term capital return to shareholders. We remain committed to investing for organic growth and executing our inorganic industrial filtration strategy. We will continue to keep you updated on our M&A activity. The framing of M&A investment choices continues to be guided by our strategy, long-term value creation and the balance of growth and shareholder returns. We expect share repurchases to remain an important component of our capital allocation strategy and anticipate our full year repurchases will be in a range of approximately 1.5% to 3% of our current market capitalization. I would like to now take a moment to share some insights on the strong culture we are building at Atmus. We have established what we call the Atmus Way. The Atmus Way incorporates our purpose, our values and our strategy. It also includes what we call mindset shifts, which reflects specific areas where we want to intentionally shift the culture of our company. One example I would like to share today is our commitment to safety. We set a vision to be the safest company. In October, we achieved 2 years without a serious injury in our business. This is a result of disciplined focus on risk reduction and the engagement of employees at all levels of our organization. This is just one example of the Atmus culture in action. It reflects what we stand for and it demonstrates what we can do when we set a bold vision and work together to bring change. Let's now turn to our 4-pillar growth strategy and the progress we have made during the third quarter. Our first pillar is to grow share in first-fit. As a fully independent company, we are expanding our first-fit customer reach to leading regional OEMs across a broad range of applications with dedicated sales and technical resources. We are winning with these customers by providing our industry-leading filtration products that deliver superior protection for our customers' equipment. Additionally, we continue to win with the winners by growing our long-term partnerships with global OEMs. Our second pillar is focused on accelerating profitable growth in the aftermarket. We are expanding our market presence in independent and retail channels with new distributors. This allows us to provide broader channel coverage of our industry-leading Fleetguard products and deliver to our customers when and where they need the product. We are also partnered with leading global OEMs who are expanding their own aftermarket businesses and growing market share. We work collaboratively with these industry leaders, allowing us to expand our business while simultaneously fueling growth for our partners. Furthermore, we are growing our brand awareness with our We Protect campaign launched earlier this year. This campaign highlights who Atmus is and the dedicated employees committed to creating a better future for our customers, communities and planet. Our third pillar is focused on transforming our supply chain. As a fully operationally independent company, we have completely transitioned to the global Atmus distribution network. This allows us to directly control our customer experience. Additionally, our network is designed to optimize and grow our aftermarket business. We continue to increase the on-shelf availability of products to ensure we have the right products for our customers when and where they need them. Our fourth pillar is to expand into industrial filtration markets. Our strategy is unchanged and remains focused on growth into industrial filtration, primarily through inorganic acquisitions. We are broadly looking at 3 verticals: industrial air; industrial liquids, excluding water; and industrial water. We have seen increased activity in the M&A markets, and we continue to review a robust pipeline of opportunities for inorganic expansion. We remain focused on executing a disciplined approach to develop opportunities which deliver long-term shareholder value. Now let's discuss our third quarter financial results. Our team delivered another strong quarter. Sales were $448 million compared to $404 million during the same period last year, an increase of 10.9%. Significant outperformance drove higher sales despite continued challenging conditions in most of our global markets. We also benefited from increased pricing and favorable foreign exchange. Adjusted EBITDA was $92 million or 20.4% compared to $79 million or 19.6% in the prior period. Adjusted earnings per share was $0.69 in the third quarter of 2025, and adjusted free cash flow was $72 million. Now let's turn to our market outlook for 2025. Starting with market guidance for aftermarket. We expect freight activity to generally continue at current levels and be flattish year-over-year. Our team has done a great job executing our growth strategy, especially in the face of elongated challenges in global markets. We are increasing our expected outperformance and now project share gains to add 3% of revenue growth. Overall pricing is expected to provide approximately 3% revenue growth. Pricing is inclusive of both base pricing actions to offset certain input costs and tariff pricing. This reflects known tariffs as of November 1 and assumes the USMCA exemption for our products will continue. The U.S. dollar continues to weaken from the strength we saw early in the year. We anticipate the full year impact of a strong U.S. dollar to be an approximate 0.5% revenue headwind. Let's now turn to our first-fit markets. In the U.S., the industry was recently provided with some guidance on Section 232 tariffs for medium and heavy-duty trucks. We will continue to monitor ongoing developments and adapt accordingly. We are still awaiting clarity on the upcoming 2027 emissions requirements. This continues to drive uncertainty in the market. Our expectations for both the heavy and medium-duty markets in the U.S. is to be down 20% to 25%. We expect demand for trucks in India to grow, which could be further bolstered by government infrastructure spending. In China, the markets we serve have continued to grow through the third quarter. Our exposure in China is weighted towards first-fit on-highway applications, and we remain cautious in our outlook. Overall, we have raised our expectations for total company revenue to be in a range of $1.72 billion to $1.745 billion, an increase of 3% to 4.5% compared to the prior year. Our team continues to quickly adapt to challenging market conditions to deliver strong operational performance. We expect this performance to continue, and we are raising our expectations for adjusted EBITDA margin to be in a range of 19.5% to 20%. Lastly, adjusted EPS is expected to be in a range of $2.50 to $2.65. Now I will turn the call over to Jack, who will discuss our financial results in more detail. Jack Kienzler: Thank you, Steph, and good morning, everyone. Our team delivered another quarter of strong financial performance despite continuing uncertain market conditions. Sales were $448 million compared to $404 million during the same period last year, an increase of 10.9%. The increase in sales was primarily driven by higher volumes of 6%, pricing of 4% and favorable foreign exchange of 1%. Gross margin for the third quarter was $129 million compared to $111 million in the third quarter of 2024. The increase was primarily due to the benefits of higher pricing and volumes, partially offset by higher logistics costs. Selling, administrative and research expenses for the third quarter were $56 million, flat to the same period in the prior year. Joint venture income was $8 million in the third quarter, in line with our 2024 performance. This resulted in adjusted EBITDA in the third quarter of $92 million or 20.4% compared to $79 million or 19.6% in the prior period. Adjusted EBITDA for the quarter excludes $4 million of onetime stand-alone costs. Adjusted earnings per share was $0.69 in the third quarter of 2025 compared to $0.61 last year. Adjusted free cash flow was $72 million this quarter compared to $65 million in the prior year. Free cash flow has been adjusted by $3 million for capital expenditures related to our separation from Cummins. As Steph mentioned earlier in the call, we have completed our separation activities from Cummins in the third quarter. We do not anticipate incurring any additional onetime costs associated with separation activities in the fourth quarter. The effective tax rate for the third quarter of 2025 was 23.6% compared to 18.4% last year. The higher effective tax rate was driven by both the change in the mix of earnings amongst tax jurisdictions along with changes in recently enacted U.S. tax legislation. Now let's turn to our balance sheet and the operational flexibility it provides us to execute on our growth and capital allocation strategy. We ended the quarter with $218 million of cash on hand. Combined with the full availability of our $400 million revolving credit facility, we have $618 million of available liquidity. Our strong liquidity provides us with operational flexibility in the current dynamic market to effectively manage our business and execute on our growth opportunities. Our cash position and continued strong performance in 2025 has resulted in a net debt to adjusted EBITDA ratio of 1.0x for the trailing 12 months ended September 30. In closing, I want to thank the global Atmus team for their continued dedication and flexibility to deliver another strong performance in the quarter. Now we will take your questions. Operator: [Operator Instructions] Your first question comes from the line of Rob Mason with Baird. Robert Mason: Nice work on the third quarter for sure. I wanted to see if you could dig in just a little bit deeper. It was stronger than your typical seasonality might suggest. And there was the thought maybe there was some pull forward coming out of the second quarter, whether you think that was actually the case. And then you took the share gain perspective or number up for the full year. I'm just curious how those are layering in. Is there any lumpiness around the share gains that may have come through in the third quarter? Stephanie Disher: Rob, thanks for the comments. Firstly, a strong quarter, really pleased with the overall performance. And if I just start to break down really the top line is where it's all happening. So I'll talk about that in terms of our revenue performance. As Jack spoke to volumes of 6%, pricing of 4% and foreign exchange of 1%. Pricing was around where we expected, probably slightly better, but volume is where I'll spend my time. So if I break down that 6% performance for you, broadly, I would put it into what we would call share gains of 8% and market headwinds of around 2%. The market, obviously, we saw first-fit sharply decline, particularly in North America. And we saw actually an impact of about down 27% sequentially in heavy-duty and medium-duty truck markets. And we continue to see flattish conditions in aftermarket. So all told, that's sort of adding up to a 2% headwind. So if I then take the share gains and try to give you some visibility into what's happening there, we have changed -- revised our full year guidance upwards from 2% in share gain to 3%, really driven by our conviction and the outstanding performance of the team to deliver better than what we intended on our growth strategy. And that's arising from things like additional content in first-fit applications, increases in share in the aftermarket, particularly in North America. So all told, that's about 3% sort of share gains. The big thing I want to point out in the third quarter that is a dimension of timing, as I would describe it, and a major driver of volume growth is related to the Stellantis Model Year '25 Ram product, which was launched earlier this year. We have -- we are on that product, both on the engine and we support the aftermarket. And during the quarter, we saw additional stocking for that new product launch on both the first-fit through our sales to Cummins and in the aftermarket delivery with Stellantis. And so we do not expect that to repeat in future quarters. Obviously, we'll continue to support that product, but the stocking up for the product launch was what we saw higher than expected in the third quarter. Robert Mason: I see. That's helpful, Steph. Maybe I'll just keep the line of questioning around the share gains. You also talked about winning some programs, it sounds like on regional OEMs on the first-fit side. Could you provide a little color in terms of those are contributing yet? And do those -- are those buys to on-highway or off-highway? Stephanie Disher: Yes, it's a great question. And I always try to think about how can I give you some color around this while obviously maintaining the commercial sensitivity. We have been very deliberate in our growth focus to build our business development capability. We've been doing that for several years now is the way I would describe it. We've built the sales force, the business development team. We've increased our bid rate. And we had identified these regional players as really a target for us that we had not pursued previously. And it's broad-based. I would say it's both across on-highway and off-highway. And I'd think about that equally right now. And we're starting to see the benefits of that. We're winning the business. We're getting the confirmation of those wins, and we're starting to see those benefits come through in our results. And I expect that to continue as part of our growth strategy within our core business. Operator: Your next question comes from the line of Joe O'Dea with Wells Fargo. Joseph O'Dea: Just a clarification on the details you gave around the volume growth. Just any sizing of the impact that Stellantis had within the quarter that you don't expect to repeat? And then just bigger picture as you think about aftermarket and sort of end market pacing kind of flattish in aftermarket, for how much longer do you think something like that can persist just as we think about wear on parts and some of the replacement that presumably is being pushed out here? Stephanie Disher: Thanks for the questions. Let me just start with your question on Stellantis. Look, difficult to quantify this specifically. And I think how I would have you think about it is there's certainly -- the 3% I talk about in share gains in the quarter are really attributable to clear wins that we can identify, that we can see them coming through, slight outperformance, as I described, and therefore, gives us confidence to really put that share gain into the -- increase that share gain from 2% to 3% in our full year guide. As it relates to the timing of the new product development, there's a win for us in that product development. There's content increase and then there's timing, right? So we -- in the public domain, I think we've seen that it's in the third quarter year-over-year, it was a 44% increase in that Ram volumes in the quarter. And so it was a significant increase for this product. And we think our full year guide -- we believe our full year guide really reflects how we see the year is going to go with the 3% market share reflected. On the aftermarket side, if I -- yes, on the aftermarket side, if I just take that question, I think we've been talking about 3 years of freight recession now. And we even have been asking ourselves is are the freight indicators still the right indicators for our business, given that length of time, right? And so I think that's a difficult set of questions. The outlook at the moment from the industry and those that we're talking to really suggest that we can't see that turning inside the first half of 2026 yet. There's no real signs that suggest that it has turned, if you like. So we expect it to persist through quarter 4 and at this stage, to stay at those levels through the first half of '26 is how we're thinking about it right now. Joseph O'Dea: And then I just wanted to touch on the full operational control and having sort of reached that transition now and how you're thinking about the nearest-term opportunities that presents for you? Stephanie Disher: Yes. We spoke about this in our opening remarks. And I'm most excited about this allowing us to focus our full organizational resources, energy and effort towards growth. When you undertake a separation of the size and scale that we have, I think there's over 300 projects. We've been doing it for 3 years now, 7 distribution centers, over 280, I think it is IT projects. That just takes a lot of organizational bandwidth. And so to have that completed for us to be standing on our own platform, really controlling our own destiny in terms of being able to use the processes and systems to enable our growth strategy is very exciting, And so I -- really, it is focused around our growth strategy and accelerating our progress on that, which is what -- and I talked about the 4-pillar growth strategy, which is what I'm most excited about. Jack might just talk to the separation specifically, where we're at on that and bring some more color to that piece. Jack Kienzler: Yes. Thanks, Steph, and thanks, Joe, for the question. First off, I would just say really proud of the entire Atmus team for their unwavering commitment to bring the separation to a close. As Steph highlighted, multiple projects, a multiyear journey from beginning to end. And the team really delivered, which I think further underpins the reliability we've been able to establish across many fronts as a business. As we noted, the TSAs have concluded effective end of the third quarter. And therefore, we no longer intend to add back separation costs in Q4 and beyond. The one thing I would highlight is that we are still incurring some elevated costs driven by hyper care, if you will, primarily in the IT space until we reach full stabilization. We expect those to be incurred here in the fourth quarter. And that, in part, is leading to some of our margin outlook as we think about the implied Q4 guide here. Again, highlighting some of those inefficiencies to help you understand why that may be showing up as a little bit of a pullback in the fourth quarter, still feel really strongly about the full year outlook here, both across the top line and the bottom line in really challenging market conditions. And again, I can't thank the team enough for what they've been able to deliver. Operator: Your next question comes from the line of Tami Zakaria with JPMorgan. Tami Zakaria: Excellent quarter. My first question is with Section 232, the tariff-related regulations now out for trucks, did you take any intra-quarter pricing? And if so, how should we think about the rollover effect of that over the next few quarters? And then in that case, are you also still planning to do a typical beginning of the year price increase that you usually do? Stephanie Disher: Thanks, Tami. So we do have some clarity from Section 232, but I would say there's still a lot of unknowns that we're waiting for. And we still expect that will take some time to be able to fully understand the implications and to be able to calculate it, frankly. And so that's just the first thing I would highlight. Right now, we are anticipating that our USMCA exemption still applies in the context of Section 232. And then there are a number of other mechanisms playing out that we will continue to work through to understand as clarity comes and work in partnership with our customers. We've said from the outset that our intent on tariffs is to be price/cost neutral, and we'll do that through a variety of mechanisms. Obviously, we'll look to avail ourselves of every possible reduction that we can make, exemptions or resourcing product or foreign -- we put a foreign trade zone into our distribution center in the U.S. this quarter, for example. So we're certainly availing ourselves of all of those. And in our guide this year, full year pricing is set at 3%. So we think that guide fully includes the pricing for the year. Not issuing guidance for 2026 at this point, but we would expect that we would continue with the pricing actions in January and so forth that we've seen in the past as our practice. But it continues to be an evolving landscape with tariffs, and our team have really done a tremendous job in partnership with our customers to navigate that landscape. Tami Zakaria: Understood. That's very helpful. And my second question is, there's been a lot of encouraging comments and data points in the industry around the acceleration in capacity expansion for large engines to provide backup power to data centers. How are you positioning yourself to capitalize on that besides, of course, your exposure through your large customer, Cummins? Are you actively working to win share with some of those other players that have announced capacity expansions for large engines in the U.S. and also Europe. So any comments on that? Stephanie Disher: Yes, absolutely. Certainly a very favorable trend in data centers that we do expect to continue for several years here, and that's how we're thinking about it to start with. We have a very strong position and partnership with Cummins. Our filters are on those gen sets. And so we certainly have the opportunity to continue to grow as our partners grow. And we are targeting new business development, as I talked about in both aftermarket and first-fit applications with customers that we haven't operated with so much in the past, right? And so we're investing to grow with those new customers. In terms of -- I just would highlight in terms of the aftermarket, we don't see a significant aftermarket benefit related to those gen sets. They are usually installed for backup power, and so it doesn't quite have the same profile as some of our other applications. But certainly, we are seeking to partner with new customers and continue to support our existing customers that will benefit from that growth. Operator: Your next question comes from the line of Andrew Obin with Bank of America. David Ridley-Lane: Yes. This is David Ridley-Lane on for Andrew. I'll ask a bit of an interesting one for you here. First Brands declared bankruptcy in late September. They own the FRAM and the Luber-finer brands filtration subsidiaries there. If this is a disorderly process, could Atmus be a beneficiary? And are you already sort of reaching out to maybe the retailers about taking over some space on the shelves? Stephanie Disher: Thanks for the question, David. Certainly, we are aware of that. And look, broadly speaking, I would say we're absolutely looking to expand our aftermarket coverage. That's how I'd have you think about that. We're doing it through a number of channels, and we're being really successful. We are winning and gaining share. So the first path that we see an opportunity to do that is with our existing partners. And we are growing with our existing partners as they grow their share in OEMs, for example. And then we are intentionally increasing our coverage through new aftermarket channels, both through independent and through retail channels. And so that will give us greater access and coverage across aftermarket. We see the opportunity really in expanding our coverage to be able to avail ourselves of getting our product to more customers. And that would be the way that we would potentially be the beneficiary of gaining greater share from some of the examples and the changes in the marketplace that you just described. David Ridley-Lane: Got it. And then maybe one for Jack. Look, a lot of the tariffs were announced kind of suddenly. You had, I'm sure, 6 months of fun. As you look over the next 6 months, is all of these levers that you're pulling, supply chain optimization, et cetera, could you be saving a couple of million dollars or more from those efforts next 6 months relative to the last 6 months. Jack Kienzler: Yes. I think -- first of all, David, thanks for the question. I think, as you know, it's certainly been a big resource strain on ourselves and likely many of our peers in broader industries to navigate what is an ever-changing environment. And so I think everyone is looking for some clarity to ease the ability to plan for the future. Look, I would just kind of harken back to what Steph said before, which is our principle as we deal with this broader environment, and that is to, first and foremost, to remain price/cost neutral. We are trying to do that in a way which mitigates the impacts for our customers in every way that we can, things like availing ourselves of exemptions, looking at our broader supply chain to identify ways to mitigate costs and therefore, mitigate the need to take any pricing actions. And we fully expect to continue to do that for as long as it takes to reach a point of clarity here. Operator: Your next question comes from the line of Bobby Brooks with Northland Capital Markets. Robert Brooks: So I was just hoping to dive a little bit deeper. The 11% year-over-year revenue growth, fantastic. That's the best rate that you've seen since going public by like 600 bps. I know you listed the pricing and volume dynamics, but just kind of curious to hear from the perspective of how much do you think was driven by the better availability of your products via now your whole distribution footprint being wholly owned? Or maybe any other internally controlled pieces that you'd point out that helped drive the growth aside from pricing? Stephanie Disher: Yes. Bobby, thanks. Great question. And there certainly was some benefits of increased availability in the quarter. We continue to improve our availability across the global network, and we still see some runway to further improve that in at least fourth quarter and beyond. And so I would say I don't know if I had to -- it'd be about 1% maybe of that is maybe the availability improvement, if I had to give you a number. The broader benefits of us improving our availability are even more significant in my view. This is about how we build reliability as a company. We've continued to try to do that with investors and shareholders and we do it with our customers. And so really, what availability is about, it certainly is about share gain and getting the product where your customers need it. But it is about building that reliability with our customers, our current customers and our new customers, and that will create a flywheel effect of growth for our business. Robert Brooks: Super helpful color. And then just turning to maybe expansion outside of your current end markets. Just curious if we could get an update of any progress there? I know you've done some organic launches into kind of industrial filtration. Just curious to hear any color on that. Stephanie Disher: So our strategy remains unchanged. We are expanding into industrial filtration markets is our strategy. We're pursuing 3 primary market focus areas. And we do see our primary path to that through acquisitions. And our team have been doing a fantastic job. We have a great team working on this, and they are reviewing regularly a robust pipeline of targets. And obviously, as and when I have an outcome to share, I will certainly be sharing that. So I'm pleased with the muscle building for growth that we are doing as a team. And I'm also pleased with the disciplined approach we're taking to creating long-term shareholder value. On the organic side, we have certainly launched products that can be utilized in applications in industrial filtration markets. We are learning from those launches, and we are learning from working through new channels. I would say that is a small -- very small portion of our revenue, and it will -- it has the potential to accelerate on the back of us making an acquisition is how I would have you think about it. Operator: There are no further questions at this time. I would now like to turn the call back over to Todd Chirillo for closing remarks. Please go ahead. Todd Chirillo: That concludes our teleconference for the day. Thank you all for participating and for your continued interest. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good morning. Welcome to Trisura Group Limited's Third Quarter 2025 Earnings Conference Call. On the call today are David Clare, Chief Executive Officer, and David Scotland, Chief Financial Officer. David Clare will begin by providing a business and strategic update, followed by David Scotland, who will discuss financial results for the period. Following formal comments, lines will be open for analyst questions. I'd like to remind participants that in today's comments, including in responding to questions and in discussing new initiatives related to financial and operating performance, forward-looking statements may be made, including forward-looking statements within the meaning of applicable Canadian and U.S. securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, and future events and results may differ materially from such statements. For further information on these risks and their potential impacts, please see Trisura's filings with securities regulators. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you. I'll now turn the call over to David Clare. David Clare: Thank you, operator. Good morning, everyone, and welcome. Q3 was another strong quarter for Trisura, underscoring our consistency and the growing opportunities across our platform. Our high teens operating ROE and mid-80s combined ratio reflect continued underwriting discipline. Book value per share rose to $18.90, up more than 20% year-over-year, supported by both profitability and strong investment returns. Primary lines, our surety warranty, and corporate insurance lines remain the foundation of our business, growing net insurance revenue 16% this quarter. Surety delivered another exceptional quarter with net insurance revenue up 25% year-over-year. Although premiums declined relative to Q3 2024 due to timing nuances of premium onboarding in the U.S., growth year-to-date is 22%, and we expect to return to mid-teens growth in Surety in Q4 of this year. Activity tied to infrastructure investment, manufacturing expansion, and data center construction across North America continues to accelerate. These sectors are expected to provide multiyear tailwinds for contract bonding demand. Our contractor business is strong, and our U.S. platform continues to grow in scale and credibility with national brokers while expanding licensing with the recent addition of Texas in October. Warranty growth has been significant, with 38% growth in written premium, driven by strong relationships with program partners and sustained demand in auto sales. We have been successful in expanding our share with our partners, driving a step-up in our market presence. Although we expect growth to return to the mid-teens level in the future, our platform has scaled meaningfully. Corporate Insurance was able to grow at a measured pace despite competitive pressure, with our selective underwriting and pricing discipline preserving margins. We continue to invest in our expansion into the U.S., which impacted net underwriting income in the quarter by almost $2 million. This phase of build-out is expected to yield a practice of comparable size to our Canadian business in time, a precedent established by our successful build-out in U.S. surety. Canadian Fronting saw an expected decline in premiums due to continued competition, though underwriting income improved through lower claims and enhanced efficiency. We expect the same in Q4 and are evaluating a strong pipeline of opportunities for 2026. U.S. programs returned to growth with gross written premiums up 18% in the quarter and admitted business reaching a record $179 million, a 22% increase. Increased capacity has improved reinsurance appetite and terms, setting up a constructive environment for growth. The quarter was particularly strong with several new programs contributing to growth, and we anticipate continued growth in Q4, albeit in the mid-single digits. Investment income continues to be a key driver of earnings growth. Our portfolio and investment income reached new records with $1.8 billion in assets and $20 million of investment income, up 24% year-over-year. That reflects portfolio expansion as well as prudent active management. Higher interest income, combined with disciplined duration and credit positioning, leaves us well placed in today's environment. Investment contribution will continue to support earnings and book value growth into 2026. Conditions remain supportive for our strategy. Our focus on niche specialty lines experiences market trends differently than broad or commoditized lines. Reinsurance capacity has improved, and this is a tailwind for our programs business as partners seek access to stable and strategic capacity. The potential for large-scale investment in infrastructure, clean energy, and data center construction across North America continues to expand the addressable market for surety. These trends, combined with the depth of our underwriting talent and expanding broker relationships, position Trisura to benefit from secular growth. At the same time, we remain focused on cost discipline and operating leverage. Our expense ratio reflects both a shift towards primary lines, which have higher commissions, and the investment phase we're in. We expect efficiencies to emerge as our platform continues to mature. This has been demonstrated through the build-out of our U.S. surety platform, which contributes meaningfully to the top and bottom line. Year-to-date, U.S. surety is over 40% of our surety premiums and operates at a combined ratio approaching our Canadian business. Q3 reinforces our ability to execute profitably while positioning for growth. Primary lines continue to drive our performance, and U.S. programs are benefiting from improved market conditions. Investment income remains a significant contributor to earnings quality and book value growth. As we look ahead, Trisura is well-positioned to compound book value through underwriting discipline, balanced capital deployment, and continued expansion in markets where we have proven expertise. With that, I'll turn it over to David Scotland for a detailed review of our financials. David Scotland: Thanks, David. I'll now provide a walk-through of our financial results for the quarter. Operating EPS, which reflects our core performance from the business, was $0.71 per share for the quarter, reflecting growth of 4.4% over the prior year. This contributed to operating ROE on a rolling 12-month basis of 18% at Q3 2025, which exceeded our mid-teens target. Gross premiums written were $853 million for the quarter, an 11% increase year-over-year, reflecting continued growth across the portfolio. U.S. programs returned to growth in the quarter, posting an 18% increase in gross premiums written. Net insurance revenue, which approximates net premiums earned, was $197 million for the quarter, reflecting growth of 6.4% over the prior year. Growth was driven by continued expansion in our primary lines, which increased by 16%. The combined ratio for the group was 86% for the quarter, which was slightly higher than the prior year. The loss ratio for the quarter was slightly higher in Trisura Specialty and slightly lower in U.S. programs than the prior year. Both remained within our range of expectations. On a consolidated basis, the expense ratio was slightly higher than the prior year, primarily as a result of the shift in the mix of business towards Trisura Specialty, which has a higher expense ratio than our U.S. programs business, but a lower loss ratio. Underwriting income in the quarter was modestly lower than the prior year as a result of a slightly higher combined ratio offset by growth in the business. Net investment income of $20 million increased by 23.8% for the quarter as a result of an increase in the size of the investment portfolio, driven by new cash deployment even as the broader interest rate environment continued to trend lower. Our operating effective tax rate was 24.3% for the quarter, reflecting the composition of taxable income between Canada and the U.S. and consistent with previous quarters. Overall, operating net income was $34.4 million for the quarter, which was greater than the prior year as a result of consistently profitable underwriting and growing net investment income. Nonoperating results in the quarter and prior year consisted primarily of net gains associated with unrealized gains on the investment portfolio. Exit lines had an immaterial impact on net income in the quarter. Strong EPS contributed to a 15% increase in book value for the year-to-date period, resulting in a book value per share of $18.90 at September 30, 2025. Book value per share also increased as a result of unrealized gains through other comprehensive income due to favorable movement in our fixed income portfolio. This was partly offset for the year-to-date period by FX movement associated with the weakening U.S. dollar against the Canadian currency. Book value has grown at an average rate of 26% over the past 5 years, ending the third quarter with over $900 million of equity. We are well on track to achieve our book value target of $1 billion by the end of 2027. Earlier this year, we drew down on our revolving credit facility to further capitalize our growing U.S. surety balance sheet. This increased our debt-to-capital ratio to 13% as of September 30, 2025, which was higher than December 31, 2024, but still well under our conservative leverage target of 20%. The company remains well capitalized, and we expect to have sufficient capital to meet our regulatory capital requirements and continue to support our robust organic growth. David, I'll now turn things back over to you. David Clare: Thanks, David. Operator, we would now take questions. Operator: [Operator Instructions] Our first question comes from Bart Dziarski with RBC Capital Markets. Bart Dziarski: I wanted to ask, David, about your commentary on the data center build-out, the infrastructure announcement. We had the Canadian budget recently passed as well. So would love to get your thoughts on how meaningful this opportunity could be for your surety business on both sides of the border. David Clare: Thanks, Bart. At this stage, it's tough to size these opportunities. What we do know is these types of commitments, if we talk about Canada first, for nation-building projects for large-scale infrastructure generally fit the types of projects that require bonding. That bonding needs to the extent it's significant, would benefit the entire surety industry. And we've made a concerted effort over the past, I'll say, a year to expand our practice into some of that larger limit bonding space. So at this stage, we're very happy to see the commitments, although the rubber is going to hit the road when we start seeing what those commitments actually mean for projects. In the U.S., I think everyone has seen the level of commitment and activity around both manufacturing, data centers, and infrastructure spending as well. I think all of those things are positive for demand at a high level for the surety industry. It's worth noting for us as Trisura, it's unlikely we'll be participating with the large general contractors who would navigate those projects. But we do participate in the subcontractor space. And so, to the extent these types of projects lift that demand, we would be expected to participate in those types of activities. Bart Dziarski: And then just on the investment income, I mean, it was strong this quarter, up 24% year-over-year. But even year-to-date, it's still pretty strong at 14% over the year. And so how should we be thinking about that in terms of the durability of that and its contribution to book value growth as we go into '26 and '27? I'm sensing there's a bit of a shift there in terms of its growth power, but I wanted to understand that a bit better. David Clare: Yes. I appreciate you pointing this out, Bart. It's something that we're excited about, and it's a very natural consequence of the proportion of our growth coming from these primary lines. As you think about the big drivers of our growth, given the magnitude of expansion in lines like net premium earned, there's a faster recycling or a more significant contribution from those lines of growth into the investment portfolio. So something we track very closely is obviously the level of net premiums earned growth in the organization. That translates relatively quickly into a contribution to the investment portfolio. And given the nature of our portfolio as a majority investment-grade bond portfolio, we have fairly high confidence that, that is a very durable contribution and a new base for investment income going forward. So for us, we always like to see predictable earnings, and that portfolio's significant growth over the last 3 or 4 years has just positioned us in a lot better spot than we've been previously. Operator: Our next question comes from Doug Young with Desjardins Capital Markets. Doug Young: Just sticking, David, with the investment income side. Obviously, a good quarter from that line. As you mentioned, you tend to be more conservative in the investments that you make. Any plans to push a little bit more for yield duration, take on a little bit more risk within the portfolio? Or is it just steady under the current strategy? David Clare: Our priority in the investment portfolio is both capital preservation and optimizing for yield. We try to do that opportunistically, Doug. So what you've seen around the edges is some active management around both duration and credit quality. So for us, the focus here is not changing materially the composition of the portfolio, but reflecting opportunities, for example, if there's a better term premium than there has been historically. So you're not going to see us meaningfully change the composition of the portfolio. But around the edges, if we can add yield through an expansion of duration appetite or shifting asset allocations between investment-grade credit, we'll likely do that. What we haven't done year-to-date, and we haven't done really recently in the last couple of years, is meaningfully change things like equity allocations. So the portfolio gives us a lot of confidence in its durability, and the team has done a good job of defending yields as we've seen what I'd call a transitioning environment. Doug Young: And then Lots of discussions, some having lots of discussions around the softening of the P&C insurance cycle. I know you and I have talked a bit about this, and I think you talked a little bit about it in your prepared remarks. But to the extent that reinsurance pricing or the cycle does pull back, can you elaborate, maybe a little bit on how that impacts Trisura, and maybe just actually how it could potentially benefit you if reinsurance pricing in of itself does pull back a bit? David Clare: Yes. This is a question we get a lot, and it's worth level setting before we get into the discussion that, given our niche and specialty focus, the broad themes that people talk about and reference around cycle trends generally hit our business or impact our business differently than more commoditized lines. So, surety, for example, would be outside of typical market cycles. We've talked a little bit in the past about corporate insurance, which is, I'll say, a competitive environment right now. But the team is doing a great job of growing that business in that environment and maintaining the types of margins we expect. I think your comment around the program's business and the impact of reinsurance is likely underappreciated at Trisura. We tend to benefit when reinsurance markets are more available and when reinsurance market capacity increases. That makes it a better operating environment for an entity that consumes a significant amount of reinsurance. And our U.S. programs division is an entity that utilizes a lot of reinsurance. You saw this quarter that we were able to grow more meaningfully in that line than we have in other quarters. Part of that is lapping sort of that exited lines period, but part of that is our ability to launch new programs this year that fit our risk appetite. And a good component of that is the return of capacity to those reinsurance markets. So at a high level, it's at Trisura something that can be a benefit in that market cycle. And then in those specialty lines, it's something that we generally expect to have a less direct impact than more commoditized lines. Doug Young: And then just lastly, in the U.S. program business, as you said, gross written premiums grew this quarter and were above us. I mean, can you just kind of walk through how many new programs were added this quarter? I don't think they're all producing premiums yet. So I think there'll be a bit of a layering in of that, maybe correct me if I'm wrong, and retention rates, if you can paint the picture for us, how all of those things should impact gross written premium, net premium earned over the year or 2 years or so? David Clare: Yes. I can provide the program number on a year-to-date basis. We've added 8 or 9 new programs in that space this year. A few of those programs started producing premium in Q3, which has helped us step up a little bit. As you're thinking about modeling the business, I think the best way to think about it is that the retention component will likely be in the low teens range. It's going to bounce around by quarter, as you've seen this year. Your loss ratio is likely in the low 70s on a full-year basis. And then your expense is anywhere between 10% to 11%. So the combined ratio of that business, you should think about in the low 80s on a full-year basis. That trend in that business, what we see going forward, likely in Q4, is growth, but probably at a lower rate than what we saw this quarter, and then a good opportunity to continue expanding in 2026. Operator: [Operator Instructions] Our next question comes from Jaeme Gloyn with National Bank of Canada. Jaeme Gloyn: Just on the surety side, I was wondering if you could, and I apologize if I missed this, if you could break down the performance of Surety Canada versus Surety U.S. David Clare: Yes. Jaeme, the combined ratios of these 2 are pretty comparable. So, on a profitability perspective, I think you should expect, and to the extent you model this, those businesses are contributing relatively equally on a profitability standpoint. Premium-wise, year-to-date, the U.S. business has contributed, I'll say, just over 40% of the premiums for our surety platform across North America. So it's becoming more significant, but our Canadian business is still larger. Jaeme Gloyn: Okay. And the trends in that premium growth? David Clare: I would say on a percentage basis, our U.S. business is growing faster right now, although we do have some great momentum in the contract space in Canada. So the market opportunity for both is compelling, although the absolute size of the U.S. market is still quite a bit larger than the Canadian market. Jaeme Gloyn: Yes, of course. And then in terms of looking into the upcoming quarter, do you have any visibility on how that has performed? David Clare: The surety platform? Jaeme Gloyn: Yes, please. David Clare: Yes. I would say you should expect a return to growth in the surety platform in Q4. So certainly, we would expect something in the mid-teens level of growth from a top-line perspective. It highlights the nuances of Q3 just on a comparative basis, but we've got confidence that returns to growth in Q4. From a loss ratio perspective, I think you should model this as per usual. So think about kind of a 20% or low 20s percent loss ratio for that business. Jaeme Gloyn: Shifting elsewhere in Specialty, maybe you can sprinkle these comments around the other lines. But I noticed clearly an uptick in loss ratios or combined ratios across corporate insurance and warranty. Could you talk about maybe some of those drivers that are leading to that uptick? Is it something that we're at a higher level here, looking forward? Or is there something a little bit more unique in the quarter? David Clare: Yes. The quarter had a few nuances that are worth highlighting. So I appreciate the question. Warranty as a platform, you should think about running about a 90% combined ratio. And the big difference quarter-over-quarter this year is really that Q3 of 2024 was a significantly low quarter from a combined ratio perspective. However, if you look year-to-date for warranty in both 2024 and 2025, you're pretty comparable. You're pretty close between those 2, which is generally the level that we expect this to run in the long term. I think the growth in warranty is something we referenced a bit in our opening remarks. It's been spectacular. And so we have to congratulate the team and our partners on their success there. We do expect that growth comes from these high 30s levels, likely down to the mid-teens levels in the near term, but it's a great new base level for the business. Corporate insurance, I think you should model this business on a loss ratio basis in the low 30s. That's generally what we expect in the long term. We had a very strong quarter last year in corporate insurance. You had something in the high 20s from a loss ratio standpoint. But I think more importantly, this quarter in driving what I'll call net underwriting income or profitability, there's a pretty significant investment in the expansion into our U.S. business. That impact on NUI for corporate insurance is probably approaching $2 million in the quarter. So if you back out that type of investment, the results look pretty comparable to our long-term expectations for that corporate insurance line. Jaeme Gloyn: And sorry, just to dig in on that corporate insurance loss ratio, low 30s, historical trend here has been maybe more like high 20s. So is the U.S. platform driving some of that shift? Or is there something else? David Clare: No, low 30s is pretty normal. I mean, we had some very strong years recently as we are expanding the Canadian business. The U.S. is not material enough at this stage to really move around loss ratios. So I think what you're seeing here is just a return to long-term averages in Canada. Jaeme Gloyn: And then the last one for me. Just on the warranty growth side of it, I believe it's coming from new merchant wins as opposed to, let's say, like auto sales growth, which has been somewhat tepid. Perhaps you can outline some of the factors that are leading to those wins and broader distribution. David Clare: You're absolutely right, Jaeme. I wouldn't qualify the growth in warranty as a result of a booming auto sales environment. This is a win or expansion of relationships within our partnerships. I would say the factors here, or the drivers of this expansion, are candidly just strong relationships. So we've had a number of these partners for a long time in the last 12 to 18 months, and we've been successful in moving some business from competitors to our own platform, which you're seeing the uplift of through the year as we onboard those programs. It's candidly just a testament to the length of time we've been in the business and the strength of those relationships. So nothing spectacular, no change in risk appetite, no change in real product offering, just a consistent focus in the business on building with people that we know. Operator: Our next question comes from Tom MacKinnon with BMO Capital. Tom MacKinnon: A bit more of a broader question, just with respect to the program's business, thoughts as to where you want to see better growth. Do you see better growth in specialty versus programs? And then keeping with programs, is this something that you -- or what do you think would be the bigger growth driver of Trisura overall? And then just with respect to programs, what are you seeing in terms of retention here, maybe fees as a percentage of ceding commissions, just trends generally in that marketplace that you might want to view as being positive or negative, or opportunities to capitalize on? David Clare: Thanks, Tom. I think from a growth perspective, there's quite a lot of opportunity right now in the primary lines. You're seeing more significant growth in those lines as we candidly expand into the U.S. So you're coming off a lower base in some of these lines to drive a higher percentage growth in things like U.S. surety. We would expect, in time, U.S. corporate insurance to add to that. We do still have quite a strong expectation for growth in our Canadian platform, although the maturity of those lines makes that percentage look a bit different than the U.S. I think there is an expectation for continued growth in our U.S. programs business. That's likely on a percentage basis, not as significant as growth in some of our primary lines. And I would make that comment for the Canadian fronting business as well. There's clearly some competitive factors there that are limiting top-line expansion. But it means that we expect a relatively consistent and attractive contribution from both of those lines. In U.S. programs, retention should be thought about at a low teen level. It's going to bounce around by quarter, but modeling it over the full year at 12-ish percent should be fair. Fronting fees or fees as a percentage of ceded premium, about that 5% range, maybe high 4s should be pretty consistent with what we've done in the past and will be consistent with what we're seeing both on new programs and existing programs. Tom MacKinnon: And what opportunities do you see in programs overall? What particular programs are you seeing better growth in? And which ones would you not be as excited about? David Clare: Right now, we see continued excitement around the MGA industry in the U.S. So most groups, be they single MGAs or groups of larger MGAs, are continuing to exhibit very entrepreneurial behavior, more sophisticated platforms, and strong abilities to retain and attract good people. It means that there's quite a bit of opportunity expected to continue in that market. I would say for us, we try to target a mix of portfolio businesses. It's about 70% casualty and 30% property. The difference this year, I would say, is that we see a more supportive reinsurance environment, especially in property. So the opportunities that we've onboarded this year have been a mix of both property and casualty. But it's the first time in a couple of years that we've had both appetite and the types of support we expect to lean back into that property space. So the mix of business is, I'll say, pretty consistent with our overall segmentation of business, and the backdrop for both E&S, MGA demand, and supporting the reinsurance seems to be either consistent or improving. Operator: [Operator Instructions] Our next question comes from Stephen Boland with Raymond James. Stephen Boland: Just one question. In the MD&A, it does talk about a higher expense ratio in the U.S. that you're investing in the business. I'm just wondering if you can give a little bit more specifics on that? And that will be ongoing this quarter and even into 2026? David Clare: Stephen, we haven't made a lot of, I'll call it, de novo or new investments specifically this quarter in the U.S., but we made a number of them at the end of last year and the beginning of this year. You're seeing some of those investments just play through the year. So I wouldn't expect a significant change in that line or that expectation going forward. We're simply building the business and preparing that platform for growth, candidly in both programs and primary lines. So you shouldn't expect a meaningful change in the absolute dollar figures there. The trajectory likely flattens out over the next year or so. But we've made a number of investments that we talked about a lot in Q4 of last year and maybe referenced in Q1 of this year that we just think help us set up for a durable platform in the long term. Stephen Boland: Actually, I'll sneak in one. You're comfortable with the capital position in the U.S. I mean, you have to move some capital down there, do you think, over the next 12 months? Or you're set for the next little while? David Clare: No, we're very comfortable with our capital position across the organization. So despite having a bit of growth this quarter that was maybe ahead of expectation in programs, we're very well funded there. I think the area to think about us injecting capital in time will continue to be that surety balance sheet in the U.S. So as we continue to see momentum in that platform, we want to continue to get bigger there. Operator: That concludes today's question-and-answer session. I'd like to turn the call back to David Clarr for closing remarks. David Clare: Thank you very much, everyone, for joining today. And as always, don't hesitate to reach out if you'd like to speak through anything further. Thank you, operator, and thank you, everyone. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Strawberry Fields REIT Q3 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Bajtner, Chief Investment Officer. Sir, please begin. Jeffrey Bajtner: Thank you, and welcome to Strawberry Fields REIT's Q3 2025 Earnings Call. I am the Chief Investment Officer, and joining me today on the call are Moishe Gubin, our Chairman and CEO; and Greg Flamion, our CFO. Yesterday evening, the company issued its Q3 2025 earnings results, which are available on the company's Investor Relations website. Participants should be aware that this call is being recorded, and listeners are advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about Strawberry Fields REIT's business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and may or may not reference other matters affecting the company's business or the businesses of its tenants, including factors that are beyond its control. Additionally, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the non-GAAP measure reconciliation page in our investor presentation. Now on to discussing Strawberry Fields REIT and our Q3 2025 performance. I want to start by sharing some key highlights. During the quarter, the company collected 100% of its contractual rents. As we discussed in last quarter's conference call, on July 1, 2025, the company completed the acquisition of 9 skilled nursing facilities comprised of 686 beds, located in Missouri. The acquisition was for $59 million. On August 5, 2025, the company completed the acquisition for a skilled nursing facility with 80 licensed beds near McLoud, Oklahoma. The acquisition was for $4.25 million. The company funded the acquisition utilizing working capital. The initial annual base rents are $425,000 and are subject to 3% annual rent increases. On August 29, the company completed the acquisition for a health care facility comprised of 108 skilled nursing beds and 16 assisted living beds near Poplar Bluff, Missouri. The acquisition was for $5.3 million. The company funded the acquisition utilizing working capital and the initial annual base rents are $530,000 and subject to 3% annual rent increases. A couple of other items I wanted to mention. During Q3, the Board of Directors approved increasing the dividend to $0.16 a share. This increase represented a 14% increase over previous quarters. Yesterday, the Board of Directors approved the Q4 2024 dividend, which will also be $0.16 a share and will be paid on December 30, to shareholders of record on December 16. On the acquisition front, we continue to see deals coming from around the country. As we have discussed in previous investor presentations, we are a big fan of the master lease structure and currently, 89% of our facilities are in master leases. With our disciplined approach, if there is a deal in an existing state, our current operators are looking to grow, and we can simply add the new facility to an existing master lease. If we were to enter and grow in a new state, we would be looking to acquire a sizable portfolio of at least 500 beds. As a final point, I'd like to point out that Strawberry Fields REIT is currently the closest pure-play skilled nursing REIT in the market with 91.5% of our facilities being skilled nursing facilities. I would now like to have Greg Flamion, our Chief Financial Officer, discuss the quarter end financials. Greg Flamion: Thank you, Jeff, and welcome, everyone, to Strawberry Fields REIT Third Quarter 2025 Earnings Call. Let's begin with the balance sheet. Total assets reached $880 million, which is a 33.1% increase compared to Q3 of 2024. This growth is primarily driven by our acquisition strategy and the successful retenanting of specific leasing. On the liabilities and equity side, we saw increases aligned with our financing activities and some foreign currency exchange losses, which impacted other comprehensive income. Overall, the balance sheet reflects our continued investment in long-term growth. Turning to our income statement. Year-to-date revenue through September was $114.9 million, up $28.3 million versus September of last year. This increase is largely due to the timing and integration of properties acquired over the past year, as well as the retenanting activity that began in January. While revenue is up, we've also seen higher expenses, mostly driven by depreciation, amortization and interest. These higher expenses are a result of the acquisitions discussed earlier in the presentation. Net income year-to-date is $24.5 million or $0.44 a share compared to $19.9 million or $0.40 a share last year. Looking at our quarterly performance, the drivers are similar to our year-to-date results. Revenue increased by $10.2 million, again, due to the acquisitions and lease transitions. Expenses rose as well, driven by higher depreciation, amortization and interest from new assets. Net income for the quarter was $8.8 million or $0.16 a share, up from $6.9 million or $0.14 per share in Q3 2024. To close, I'd like to highlight some key financial metrics. Projected AFFO for 2025 is $72.7 million, a 28.2% increase over the last year with a compound annual growth rate or CAGR of 13.3% since 2020. Adjusted EBITDA is projected at $126.1 million, up 38.9% year-over-year with a 13.6% CAGR. Our net debt-to-asset ratio was 49.2%, maintaining a balanced capital structure. As of September 30, our dividend was $0.16 a share, representing a 5.2% yield. With an AFFO payout ratio of 46.8%, we're delivering strong results while preserving capital for future growth. These results reflect our disciplined execution and commitment to long-term shareholder value. With that, I'll turn it back over to Jeff Bajtner, who will walk us through the portfolio highlights. Jeffrey Bajtner: Thank you, Greg. I'd now like to point out some of the Strawberry Fields REIT's portfolio highlights as of September 30. Currently, the company has 142 facilities. This is comprised of 130 skilled nursing facilities, 10 assisted living facilities and 2 long-term acute care hospitals. These facilities are in 10 states. And as you'll see later on in the presentation, we've got a map showing their locations. In these facilities, we've got 15,542 licensed beds. The company's total asset value at acquisition or its historical cost is $1.1 billion. I would like to point out that this amount reflects facilities which have been bought over the past 20 years. If you were to look at the company's fair market value of these facilities or the portfolio, it would be in excess of this amount. Currently, our portfolio has 17 consultants who advise operators. Our weighted average lease term is 7.3 years. Our tenants continue to do well, which is reflected by the EBITDARM rent coverage of 2.01x. Our net debt to adjusted EBITDA ratio is 5.7x. As I mentioned earlier, we're pleased that we continue to collect 100% of our rent. And as I mentioned earlier in my prepared remarks, the company continues to have a strong pipeline. We're seeing deals from across the country. And at this time, our acquisition pipeline is in excess of $250 million. With that, I'd like to have Moishe Gubin, our Chairman and CEO, continue with the presentation. Moishe Gubin: All right. Thank you, Jeff, and thank you, Greg. Staying on this slide, I would just reiterate what Jeff has said. We've continued to grow, as we'll talk about in a future slide with almost 15,500 -- well, the actual number, 15,542. Of course, we're going to keep growing. On the assets, total assets, we feel that our total assets real true market value is probably closer to $1.6 billion. I would stress potential investors not to really spend time looking at our balance sheet for our equity or our assets because they are net of depreciation, which we rely on, of course, to have the surplus cash that we use to buy more assets. I would move on to the next slide and show you all our growth, super proud. As we said on the previous slides, 13.3% growth rate. It was only 5 years ago that we made $38 million of AFFO, and now we are close to double that in 5 years. That's a good growth rate, what to be proud of. We'll hopefully break $73 million and next year, do even better. On the next slide, this is one that I don't usually really spend too much time on. It's the base rent growth. Obviously, that's going to keep growing as we continue to buy. We're in the business of buying and leasing. We do not give options. So everything you see in looking at straight-line rent should continue to be the same or better going forward. It's very rare that we sell something, even though in third quarter, we actually did sell something. That being said, we'll go on to Slide #8. On Slide #8, this is something that we actually ended the quarter okay, within range of last year. Obviously, with the increased AFFO, we should be trading a lot higher than last year. We're continuously working for the shareholders going to events. This week, we were in Arizona, meeting with new tenants and looking at deals. And like Jeff said, we have a very strong pipeline. Again, our bogey that we're trying to break is 150 million to 160 million in dollar spent a year. As we get bigger, we want to spend more, obviously, but we do our deals exactly the same way. And like we've talked about quarter in, quarter out, year in, year out, we are so disciplined on how we buy things that has to fit or we don't buy it. On Page 9, you see our growth rate. We try to educate the marketplace on -- you take the AFFO share growth of 11.3%, you add that to the dividend yield, and we're steadily bringing a return of 16% to 18% a year. That's going to continue to grow. We've maintained the payout ratio to be below 50%, and we've not been erratic at all with how we've done our dividend. In fact, we've raised our dividend, I think, now already 5x, 6x. And we will continue to do exactly what we're doing, paying out what we're paying, which this quarter, which we just announced, is 100% of our net income. And that leaves us $40 million or so from depreciation of surplus cash to go use to buy more assets. So that's just funding our future growth. I love this. I love this slide. Slide 10. You can see our stock is undervalued. Our AFFO trading multiples on the right side, we are the lowest by far. And I believe our profitability is better than most, if not all, of our peers. That being said, we're going to keep working it. We're going to keep meeting investors. We're going to keep doing what we can. We're going to manage the marketplace, continue. We're going to be doing a capital raise at some point. And when we do that, hopefully, that will help bring in more institutional investors and bring more liquidity to the stock price. On the next slide, Page 11, you can see our payout ratio, like I said, we're at 46.8%. Everybody else is in the 70s or higher. Our dividend yield is middle of the road at 5.2%. I would expect as our profitability grows, that dividend yield will grow. And because every time we raise a $0.01, right, if we're at $0.16, we go to $0.17, that's 1/16. That's close to 10% growth, and that puts the dividend yield at a nicer number, and that should happen. On Slide 12, again, this reflects Jeff's comments about us being the closest pure-play REIT. You see we're still 92% -- almost 92%, and our peers are actually decreasing in percentage. And so again, this is a marketplace, which we never have investor calls, we'd like to say it's relatively bulletproof where the clientele that comes to us, they have to come to -- they have to go to our tenant because they need to be cared for a certain way. And with the baby boomers pushing, which we'll talk about in a future slide, the reality is, is that we think that we're in a good spot because it's a business that's government paid for. So it doesn't -- inflation really doesn't affect it. And we keep going out to giving the story. We feel that the investor public should be happy with us and things should pick up. On Slide 13, you see what our AFFO share growth, the growth rate over the last 5 years. We're at 11.3% as our growth rate. There's only 2 other of our peers that are positive. The other 3 are negative, which basically tells you that what do they do? They don't have enough AFFO to cover their dividends, and they have to sell equity to use the cash to be able to pay dividends. In our case, we're paying dividends, we have twice the amount of money so we can go use to buy more deals so that we break the -- so that we can make the AFFO per share grow because we're not increasing the amount of shares outstanding, but yet we're increasing the amount of money we're making. EBITDARM coverage, we're above 2x is acceptable at any level. And I'm happy with where it is, but it's going to continue to go higher. Now because our investment is formulaic, every time we do a new deal and every deal is priced to 1.25x, we're fighting that EBITDARM coverage because of that, because we're our worst end. We want to grow and everything we bring in is 1.25x, which lowers our EBITDARM coverage. So if we would stop buying, which nobody wants us to do, and we're not going to. But let's say, if we did stop growing, then that EBITDARM coverage would go a lot higher because everybody -- we give it to them and everybody is always trying to improve and succeed. Again, we're only leasing out to seasoned operators that know their marketplaces that are local, and they continue to thrive and do better, and that's why the EBITDARM coverage would go up. Again, the fact that we grow, it makes it go down. Anyway, Slide 14. This used to be one of my favorite slides, not so much anymore. Our debt is below 50% leverage, like we said. And our debt has turned into basically 1/3, 1/3, 1/3 between HUD debt, bond debt, and bank debt. Interesting to note really that out of all of that debt, there's only -- it's the bank debt, which is basically 23% of the debt. That's the only debt that's variable rate. Everything else is with balloons that are at fixed rates. Like we talked about last quarter, the Israeli public on the last raise and there's a lot of demand they -- they wanted to give us. We were oversubscribed by twice 2x, we could have taken even more. So going forward, we have a lot of arrows in our quiver, whatever the word is. We have a lot of different choice on what to do to raise debt. If we need debt, I'd like to see the stock price go up, so that we could also sell equity at some point. But I think debt is cheaper than equity at this point. Next slide, Slide 15. This has become my favorite slide. This is as diversified as we've ever been, and we continue to get diversified where not a single state or a single tenant is over 25%. And in our case, the 25% is the best state, which is Indiana. So we're in 10 states, like Jeff said earlier, and God willing, and like Jeff said earlier, we're only willing to go to new states if it's a sizable portfolio, as we are a fan of the master lease, like he said as well. And so we're looking at other states now, and we're looking to grow our relationships. All of our tenant relationships today are good. Like you said earlier, we're getting 100% of our rents and our relationships with the tenants are good where they're doing well. They're paying the rent. Things seem to be -- the building is being taken care of. So we have the ability to grow in other places, and we're going to try to do that. Slide 16 shows the map. And you could see how we're finding our way left and right. We really like the idea of Southeast, Mississippi, Alabama, Georgia. These are all places we'd like to go. Deals are hard to come by over there. Georgia seems to be picking up that we'll be able to find something in Georgia. Again, pure play, you look at the pie graph on the bottom, you see 91.5% SNF, and that's what we do. So with that, I'd like to turn it over to the operator for questions and comments from our analysts and for those on the call. Operator: [Operator Instructions] Our first question or comment comes from the line of Rob Stevenson from Janney Montgomery Scott. Robert Stevenson: Did I hear correctly that you guys sold something in the third quarter? Moishe Gubin: Yes. We had an outlier in our portfolio, one facility in Michigan, that we owned for over 10 years. So we basically doubled our money on the property to begin with. And it was an outlier. We were never able to grow that region. We wanted -- this is really an asset that's been with us a long, long, long time. And we were never able to grow into a normal master lease where this could have fit into and grow the region. We haven't had good luck buying in Michigan. So we had an opportunity to get out of the asset, the tenant that was there ended up, the math worked itself out where we raised rent elsewhere. So we stayed budget neutral as far as rent being collected or rent being collected and the inverse of that is getting cash out of 10 cap for the portion of rent we're not getting. So yes, so we pared down. That's why we went down from 11 states to 10 states. And we feel good about that transaction. We're usually never a seller. We don't give options to anybody, but this was an asset that really -- we should have moved this asset a long time ago. The operator that was operating it, they were sending in a nurse consultant from Indiana. They were sending in a marketing team from Illinois, and they were really struggling with on the ground. And the facility had good care. I mean the survey results were fine, but they just weren't able to move that building forward, and they were always marginally making like maybe a one coverage, maybe even drop lower. And so finally got an ability to sell it, and they're happy, we're happy. But that's a one-off kind of deal for us, Rob. Robert Stevenson: What were the proceeds from that? How meaningful was that? Moishe Gubin: It's immaterial. We sold it for, I think, $2.6 million or so, and we gave them a note or we took a note at 10% interest, which is our 10% cap. So it's -- and so they have a couple of years to pay it off with a balloon, and they're actually operating well there already. And we're good with this transaction. Robert Stevenson: What do your acquisition pipeline look like today? How are you guys thinking about the end of the year and into '26 at this point? Moishe Gubin: So end of the year at this point, we had a couple of hot deals that would have been great to end the year. We would have to do a capital raise. It would have been a beautiful ending to the year. And now it seems like there's going to be -- we should have some good volume in the first quarter '26. And if '26 will be like '25 and '24, hopefully, we break the $150 million, $200 million mark for next year for growth. Robert Stevenson: The comments around the dividend increase, were you guys at sort of your minimum payout? And was the increase from $0.14 to $0.16 basically something that you had to do? Or is that something that the Board wanted to do at this point in time? Moishe Gubin: Yes, that's a great question. So like we sit here at the Board meeting and we lay out -- I act as -- I'm the CEO. So I sit there and I basically lay out here's the deal for us to stay in REIT compliance to distribute 90%, for us to not be erratic with our dividend, for us to satisfy to move our dividend yield up a little bit and for us to keep the investors happy. We debate the topic. I mean we have the capacity to distribute a lot more, as you know, because our payout ratio is so low. The $0.16 is exactly 100% of our net income for the quarter. The year-end number, when we end the year, there will be an adjustment somewhere that will include a little bit of capital gains, which you have to do 100% of. So when it all comes down to it, the -- they don't get a K-1 to the investors. I forgot the actual tax form that they get. There will be a portion of this that will be like -- that will be a return of capital, which is not taxable actually. Greg Flamion: 1099. Moishe Gubin: It's 1099, but it's not a regular 1099, I don't think, I don't exactly what the form is. But regardless, this -- the conversation in the room is we want to -- we know we're going to move every year because the way our model is, it's status quo and going higher. It's never -- we don't have the choppiness of going up and down. It's flat or higher. So we know that we're going to have at least one raise of a dividend a year, at least that's what we expect. And so we had just raised last quarter to $0.16. We could have made this one $0.17, but we left it at $0.16 for now. We'll see what fourth quarter brings and then either -- and most probably the next bump will probably be either -- probably not be the fourth quarter, probably the first quarter of 2026. But yes, that's basically the conversations that we have in the boardroom about the -- we have a few Board members that want us to distribute more. And I'm basically arguing that we have this 13% -- this 11% to 13% growth rate of AFFO because we're able to take this and spend it and do good with the money and continue the model and grow the model. And so right now, that's the prevailing argument in the boardroom to keep the dividend higher than the requirements and constantly growing annually, at least once a year to go up. And that's basically all the color on that topic, Rob. Robert Stevenson: Can you remind me when the Series D bond matures? I think that's by far and away, your highest cost of debt and when you basically get an opportunity there to refinance that? Moishe Gubin: Yes. We have our bond debt expiring September of '26. On this topic, I guess most people wouldn't air their dirty laundry, but I'm an honest straight-up guy. So one of the flaws of the bond, which we're fixing going forward is that there's a prepayment penalty all the way to the last day of the bond maturity. So we're holding out because the prepayment penalty today because the bond is traded at such a premium because it's such a high coupon, it would cost us way too much money to refinance today. But come September time, there will be a nice savings because we know that our -- we know that we're going to get repriced out probably 3 points lower, maybe give or take, a little higher, a little lower, but we'll save a ton of money going forward, and that reprices in September of '26. Robert Stevenson: So at this point, you think that if you had to access the debt markets today, you're probably pricing somewhere plus or minus around the sub-6%? Moishe Gubin: Yes. Yes, 100%. We know it. It's not even a question. If I want to take the money today, I think it would be maybe sub-6%. It's traded today at -- it was like 5% above par. So they love us. I mean, it's the actual yield. The yield on Series D today is in the 5s. So in theory, if we did a bond to replace it, the pricing would be a little bit higher because we would take 5-year money and because everyone is expecting rates to go down to lock in 5 years, they want to get a little bit of a premium. Actually, I think maybe -- I think what I just told you is right, but I have to think it has to give you the right exact thought, but duration plays a role in the pricing up and down. So this is a short duration today, and that's why its rates a little bit. It's as low as it is. So I guess, yes, that's the story there. The market there loves us. I love the market there. I do still really want to investigate doing similar to like a GMRE, like what their financing look like with BMO and lead and a couple of other guys. And so we're talking to our IPs to see what we can do here. But we're definitely going to keep a bunch of our debt staying in Israel. Operator: Our next question or comment comes from the line of Barry Oxford from Colliers International. Barry Oxford: Just to build on Rob's question regarding the pipeline. It was at $300 million, I think you indicated last quarter, now at $250 million. Is that just more a function of how you define your pipeline, but not necessarily a commentary on what's available out there in the marketplace? Moishe Gubin: Yes. Our -- it's a moving target. Our pipeline -- I mean, I don't know if our competitors or peers use pipeline and stuff that's inked already the deals that are going to close. Our pipeline, we have a high, medium and low on probability of deals getting done. And so we're giving you the overall total pipeline. Again, we're very disciplined in how we buy, as you know. And so for us to -- when we make a deal, that deal almost always closes. So we have to put in there the mix of the stuff that we've given LOIs, as well as things that are in contract. I don't know if that answer. I think that... Greg Flamion: I'd add to that. I mean, it's almost like living and breathing. Every week, it changes. We're constantly going to conferences. We've got people reaching out. And I mean $250 million represents deals that make sense for us, not just deals that are sitting -- I mean, in our e-mails. I mean, what's going into our pipeline is ultimately deals that we believe that if we can get the LOI in and we can get it, I mean, locked up, we could close it. Barry Oxford: Given that your property type is doing very well, it seems to be attracting investor interest. Are you seeing more people showing up at the bidding process? And also, we've seen some REITs trying to add more to their skilled nursing? Moishe Gubin: First of all, I don't know if I agree with you, Barry. The REITs -- I was just with David Sedgwick on Tuesday, who I love, by the way. But they're not -- and a lot of the other guys, they're buying less SNF portfolios today. And it seems like the assisted living product is still the -- for some reason, that's the product of choice by a lot of the peers of ours. I don't like it at all. But no, we're -- it's the same competition that we've had. And for us, like again, our sweet spot -- first of all, people are still willing to make a deal with us because they know we're going to close a deal. And I guess that's the same with our competitors. But the difference between us and the competitors, you don't see the competitors doing these small deals. Like we look at big deals, we look at small deals. On the huge deals, right, CareTrust, Omega and the others are always going to beat us by pricing. It's not even close because they're willing to go 8%, 8.5% cap and we stay at the 10%. And then you have small deals like we've talked about before in the past, like we have an owner-operator kind of deal, and they're willing to overpay because for them, they're going to be the administrator there, their wife could be the dean, right, or it could be their children with them. It's like -- so for them, they don't have they have a different setup on how they operate and where their money is coming from. And if they get a less of a return on their capital, that's okay for them. It becomes a family or a legacy asset. And for us, we have the shareholders to think about, and we just stay within our model. With that, again, we -- that soft spot between -- or that sweet spot for us between, I'd say, $20 million to $50 million deals, that's where we have a good shot at getting those deals. And then we also have these smaller deals that people come to us and just -- they don't even market it. And so that's where our deals come from. Like the last few deals we did, these were all deals that, that they came to us. They didn't put it through a broker per se, and they said, this is a deal we -- that's for you guys and you want it. And we've done it, includes a couple of deals in Oklahoma and a couple of deals in Texas. And with those same sellers, we have other deals that we know we're going to end up buying from them. So it's going to -- they're creating part of our pipeline. They're happy with the way we close a deal and the way we do business that they want to do business again with us and bring us another deal. Barry Oxford: Perfect. Then just kind of switching gears real quick. The G&A was lower by about $500,000 or $600,000, which is a good thing. But is that a good run rate? Or will we see it move back up closer to the $2 million level? Moishe Gubin: Greg, do you know the answer to that? I think he's on mute. Greg Flamion: I haven't really looked at the run rate for next quarter. I mean, to be honest with you, we -- Q4, I would expect this to kind of tick up a little bit more. So I guess if you want to answer right now, I'd say that we'll probably be closer to the $2 million. But I can give you a better answer, I guess, after the call, if you wish. Moishe Gubin: I could just -- just from a practical thought, we haven't added a new employee since I think maybe the first quarter when we added an asset manager, I think that was first quarter. We did hire a new lawyer, but we replaced a lawyer that was leaving after 14 years with us, and we brought in a new lawyer and it was relatively budget neutral. So from that, we talked about in the past, my personal compensation that hasn't changed. And as far as Board fees goes, that stayed exactly the same. We haven't raised Board fees in 3 years or 4 years. So that's, I guess, another positive about us. Only other thing that's out there that may be some -- that could be some G&A is legal, and that could be based on deals and financing and some other things that maybe makes one period more wonky. Doing -- having an ATM, which we haven't been using because the stock price isn't good, we still have to pay for comfort letters and all this and some of the work that needs to go for the ATM for the accounts and law professional fees. But at this point, it's the same quarter-over-quarter. It's not -- we're not doing something new that's going to have a bunch of fees associated with it. So I would bet you that it stays relatively flat to what you see, give or take, put yourself plus/minus a small margin percentage difference. But because there are payroll differences, some quarters have an extra payroll and others don't. So that should be the answer. Operator: Our next question or comment comes from the line of Mark Smith from Lake Street. Mark Smith: You've talked a bit about kind of liquidity and ability to finance additional acquisitions. I'm curious kind of your ability or thoughts around using stock more in future deals? Moishe Gubin: I love this question. One thing that gets lost in the investor public is that -- and I'm going different than what your question is, and I'm going to try to remember what your question is when I answer it. But is that one thing that gets forgotten is when we issue a bond series in Israel, the bond series has capacity for a couple of hundred million dollars more than we closed. So when we ever needed cash, if there was ever -- there's an investor public out there that might think, well, we might need cash and we're not going to be able to get the cash. In our case, because we have an approved bond series that's a lot higher than what our bonds are than what we actually took, we have availability of money at the original -- and a private placement would be at the trading price, not at the coupon price. So in theory, if it's trading higher, then we're getting paid a premium to issue more bond debt under a series that already exists in the past. That being said, as far as equity goes, I would love to sell equity. I would love to get more shares out in the public. I would like to get more liquidity in the stock. I would love to have more institutions be able to trade at larger volumes of stock. We've done a bunch of deals so far where we paid -- where we've been able to do stock. The last deal was the Missouri deal, where I think they took $2 million in stock or $3 million in stock. And they're actually happy with it. We had an investor call with them and walk them through their return, and they were happy with the stock. And I don't know if they're accumulating more at this point, but they're still holding it and they're happy to hold it. We need our stock to move. I don't know what the catalyst is at this point. Maybe we get into a really big deal and then we do a roadshow and sell a bunch of stock at a decent price and then maybe that will be the catalyst to make more trading happen and get more -- get the volume up. I mean our AFFO is at this point, it's going to be a run rate of like $1.30, $1.40 for the year. Based on an average of 13% or 14% AFFO multiple, I mean, our stock is trading at a 40% discount or something like that. I mean it's ridiculous. So I don't want to sell stock and dilute. The reality is our NAV is still probably at or around what -- where the stock is trading. It's not a metric we use for anything other than me being conscientious thinking about my shareholders and not wanting to dilute anybody. And that could be maybe a holdup that I shouldn't have, but I kindly use that to -- I'm looking out for the shareholders that they shouldn't be diluted. I know my peers don't care about that, and that's why like one of the slides, if you look at the deck, sees where they have a negative AFFO growth, and that's because they had to sell equities so they could pay a dividend. And that ends up hurting the shareholders. But I don't know, Mark, I don't know if I answered you, but that's my take on it. I would love it if somehow our stock got to be in a normal range where I could just go then do an offering so that all my IBs can make a little money and we can bring in institutions and we could be off to the races. And that's what I'm hoping that happens at some point soon. Mark Smith: I did also want to ask just if there's any impact on you or your operators here with the government shutdown. Moishe Gubin: Zero. The only impact that we have at Strawberry is we have stuff stuck in the HUD queue that they're not working. And without the HUD folks being able to process changes, we have a little bit of limbo on certain things, but money makes the world go around. And in our world, thinking about it from that point of view, business is good. We're collecting all our rents. We're meeting all our obligations. And so it doesn't have a real impact. But reality is I have a bunch of the loose ends that we'd love to tie up that aren't necessarily financial things. They're just things that have to get tied up so that we -- everything is tucked in so we can go to sleep at night. So that's really the only thing that affects us, my tenants. I don't -- I hear a little bit of noise regarding surveys because if they're not paying for that, there's not people that could go out there and survey them. We had that problem maybe 6, 7, 8 years ago, and it ended up becoming a disaster because by certain regulations require the regulators to -- anytime they hear a complaint or this or that, they actually have to visit the property and inspect, investigate the complaint. And if they're not working and you have a buildup of 6 months' worth of complaints because they don't act on a day 1 when they were working, right? So it takes some time. It ends up being they show up in a year from now, but something that happened a year ago, and then they say you did something wrong a year ago. And they say, well, but as of now, we already fixed everything. It's not -- they didn't do anything wrong today. And then they say, well, we have to give you a fine retroactively back there. And so there could be some kind of exposure there. But again, I've argued over the years, the operators are seasoned people that know what they're doing. And even more importantly is they're nimble enough to recognize that there's ups and downs in business, especially in the nursing home business. Corona is the exception of being the craziest thing that any of us have seen, right? But like in a regular world, you have ups and downs, labor disputes being one example that happens, unfortunately, time from time and reimbursement being down and then up and down, that just happens. So like the guys that know this business and are really in it because they really care about residential, but they also want to make a living. They are a business in the end. So they recognize that there's going to be ups and downs. So if there's something that is a little negative that comes out of this, so be it. It will be okay. Operator: [Operator Instructions] Our next question or comment comes from the line of Viacheslav Obodnikov from Freedom Broker. Viacheslav Obodnikov: Can you hear me clearly? Moishe Gubin: Yes. Viacheslav Obodnikov: Great. And yes, my question is on capital allocation strategy in the context of the current market. As you said, there is a very huge discount, implying about 16% to 18% annually. And maybe could you walk us through how the Board weighs the immediate and certain accretion from a share buyback against the returns from a new property acquisition? And at what point does the valuation gap become so compelling that maybe buybacks would take precedence over even a good acquisition? Moishe Gubin: Jeff, if you understood that, you can answer that. Jeffrey Bajtner: He was asking -- I believe he was asking if we plan on doing a share buyback program to help get our stock price. Viacheslav Obodnikov: I can rephrase actually. like there is a kind of huge discount and it implying a huge for investors about 16% to 18%, right? And there is like another decision to invest into new interesting opportunities in the market. And maybe you could walk us through how the Board thinks about those 2 decisions, like buyback against new acquisitions? Moishe Gubin: So that's a really good question. The pluses and minuses of that dialogue are we recognize the need for more shares in the marketplace, not less shares in the marketplace, counterbalanced by the fact that we can buy back shares at a discount. That's true. And we've utilized it when like the stock really egregiously linked at $10 a share. We've used the buyback program that we have on file. We've used that a little bit to prop up the stock, small. It hasn't been anything big. We still feel that -- and this is not something that comes up a lot. This comes up conversationally randomly, and it hasn't come up so recently because the stock was at more -- it was over $12 again. But our model, if we continue doing exactly what we're doing and we ignore for this conversation, we ignore the stock price and we keep returning the collective AFFO growth plus dividend yield of a 17% return, we feel at some point that should be recognized by the investor public. And if we take the cash that we're producing and we use that cash to be able to continue the growth the way we're growing, that meets our objective as a company to keep growing with a disciplined approach and making the high double-digit returns and building a portfolio that will continue to pay and doing it the right way, meaning we're not squeezing our tenants like a lot of other people. We have that set model and how it works, which I think is fair that we put capital out there, we take risk because this is -- it's not the simplest business to be in. And we take the risk. And for that risk, we're getting a 10% return, which we compound by doing what we do by adding debt and this and that, 10% return, I think, is fair. So -- but what you're asking is a good question because in reality is we could go and do that and then bring the stock price up. But then if there's less shareholders, there's less liquidity. And then inevitably, if somebody sells, it will kill the stock price again at some point. So I don't know. At some point, if our model stops working because the stock is just not found favorable, we'll have to do something. And I don't know if that is a fix, but it will be something that we look at. Viacheslav Obodnikov: Just a quick follow-up about the last call. There was a discussion about Illinois remains a laggard from a reimbursement perspective. Could you please kind of contrast the regulatory and reimbursement environments in kind of newer states where you're starting to invest much more against the legacy markets? Moishe Gubin: Yes. So again, to reiterate what we said in the past, right, there's two basic types of reimbursement in the country for Medicaid. There's price-based and there's cost based. The cost base is simply put, you get reimbursed for what you spend. And in those states are typically red states. And in those red states, you don't have any labor issues because you're able to pay people more because you get reimbursed more. It's almost every dollar you spend on a nurse or CNA, you get it back from the government. So you might as well take care of your staff easier because you have the money. Illinois is price-based. And that's basically the government gives you an allowance and says live within your means. But at the same token, in that case, I'm using labor as an example just because -- in that case, you have the employees that need to make more money because things are costing more money. And it's like an impasse because you want to give them more money, but the state doesn't give you more money to give them, and it's tough. So our portfolio in Illinois is performing. It's just -- you have some that are doing amazing and you have a bunch that are -- an amazing I'm talking about is rent coverage. I'm not talking about anything else in that example. Collectively, they're positive and everyone is paying rent. But you have laggards. And what's going on for our portfolio, the biggest tenant in Illinois for about almost half the portfolio is stuff that I personally have an ownership interest in. And we've announced that it's known where if we have an opportunity, we will start divesting out of not the company, but the tenant, which is related to the tenant. We will stop being in operations in some of these buildings because a mom-and-pop operator can do a better job because they don't have a corporate overhead of managing a bunch of homes. So our Illinois portfolio as the landlord, hopefully, I didn't confuse anybody here by mixing landlord tenant kind of deal. But on the landlord side of things, we're getting our rent. The rent coverage is sufficient. It's over 1. I don't know exactly the number for Illinois, but it's something. And it's still a laggard. Illinois is the biggest laggard. And that's because -- and that's really because the state has to catch up with the costs, and they will. At some point, they always do. And in fact, the union in Illinois actually is a help because they recognize -- for the most part, they recognize that the government has to raise the money, and they were out there lobbying and trying to push for their members, they're pushing to try to get that the reimbursement should go up so that there's more money to pay their employees -- to pay their members. So I think I answered your question. At the end of the day, Illinois, any price-based state, which really Illinois is the only one in this example that we have is the laggard and it's always going to be a laggard because the only way that it improves is that the state legislature has to be the ones who vote to increase rates because there's no set methodology that says, okay, you spend X and therefore, we'll give you back X. We'll reimburse you that X in year 2 or year 3, whenever they do it like the other states. And in this example, they just -- the legislature has to say, okay, the nursing homes are allowed X amount of millions -- billions a year, and we have to give them more money because they have to cover their expenses and it has to happen that way. So I think I answered your question. Operator: I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Jeff Bajtner for any closing remarks. Jeffrey Bajtner: Thank you so much, and I'd like to thank everybody for joining us today. On behalf of myself, Greg and Moishe and the team here, we continue to work hard on behalf of our shareholders, making disciplined acquisitions and ultimately working on getting our stock price up. So if you have any questions on all our presentations in the back, there's both my e-mail address and Moishe's e-mail address, we're always available while connecting with our shareholders and investors. Have a great weekend. Thank you. Moishe Gubin: Thank you, everybody. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
Operator: Good day, everyone, and welcome to the EOG Resources Third Quarter 2025 Earnings Results Conference Call. As a reminder, this call is being recorded. For opening remarks and introductions, I will turn the call over to EOG Resources Vice President of Investor Relations, Mr. Pearce Hammond. Please go ahead, sir. Pearce Hammond: Thank you, Betsy. Good morning, and thank you for joining us for the EOG Resources Third Quarter 2025 Earnings Conference Call. An updated investor presentation has been posted to the Investor Relations section of our website, and we will reference certain slides during today's discussion. A replay of this call will be available on our website beginning later today. As a reminder, this conference call includes forward-looking statements. Factors that could cause our actual results to differ materially from those in our forward-looking statements have been outlined in the earnings release and EOG's SEC filings. This conference call may also contain certain historical and forward-looking non-GAAP financial measures. Definitions and reconciliation schedules for these non-GAAP measures and related discussion can be found on the Investor Relations section of EOG's website. In addition, any reserve estimates on this conference call may include estimated potential reserves as well as estimated resource potential not necessarily calculated in accordance with the SEC's reserve reporting guidelines. Participating on the call this morning are Ezra Yacob, Chairman and Chief Executive Officer; Jeff Leitzell, Chief Operating Officer; Ann Janssen, Chief Financial Officer; and Keith Trasco, Senior Vice President, Exploration and Production. Here's Ezra. Ezra Yacob: Thanks, Pearce. Good morning, and thank you for joining us. It's been a significant quarter for EOG, one that marks both a pivotal strategic milestone and a disciplined continuation of our financial framework. As you know, we have successfully closed the acquisition of Encino in early August. This transaction strengthens our portfolio, cementing a third high-return foundational asset, diversing our production base and accelerating our free cash flow generation potential even during a more dynamic commodity environment. This acquisition was part of an exceptional quarter where EOG once again delivered outstanding operational performance that has translated directly into strong financial results. For the third quarter 2025, oil, natural gas and NGL volumes exceeded the midpoints of our guidance, while capital expenditures, cash operating costs and DD&A all came in below guidance midpoints, resulting in $1.4 billion of free cash flow, $1.5 billion in net income and $1 billion of cash returned to shareholders through our regular dividend and share repurchases. Through the first 3 quarters of this year, we have committed to return nearly 90% of our estimated 2025 free cash flow, including $2.2 billion in regular dividends and $1.8 billion of share repurchases. In today's dynamic energy equity environment, share repurchases are especially compelling, and we expect to remain active in our buyback program, further enhancing returns to shareholders through the cycles. EOG's value proposition is guided by our strategic priorities of capital discipline, operational excellence, sustainability and culture. Our continued outperformance this quarter and throughout the year demonstrates consistent execution of our value proposition by teams across EOG's premier multi-basin portfolio, while our cash return performance highlights our unwavering commitment to disciplined value creation for our shareholders through industry cycles. I want to highlight 4 key differentiators that set us apart and position EOG to deliver value to our shareholders in a dynamic market. First, our diverse high-return portfolio with a deep inventory of opportunities. We invest at a pace that generates high returns while optimizing both short- and long-term free cash flow generation. Our foundational assets in the Delaware Basin, Eagle Ford and Utica continue to underpin our activity, driving strong full cycle returns, while our emerging plays, Dorado and the Powder River Basin are making tremendous progress on improving well performance and lowering costs. And our consistent focus on exploration, both domestically and internationally, gives us confidence in our ability to continue improving one of the industry's highest quality portfolios. We are especially excited about the potential for international unconventional development through our entry into the UAE and Bahrain. Our differentiated exposure to both North American liquids and natural gas as well as international unconventionals positions EOG to benefit from medium- and long-term growth in all 3 areas, creating multiple avenues for future value creation. Second, our focus on lowering breakeven costs. Each year, EOG utilizes data and technology to drive continuous operational improvements, capturing incremental efficiency gains and identifying opportunities to reduce our cost structure. In addition, at times, we make strategic infrastructure investments that further lower costs. In the past year, we've brought online the Janus gas processing plant in the Delaware Basin and the Verde natural gas pipeline connecting Dorado to the Agua Dulce hub. These high-return strategic infrastructure projects helped further reduce our breakeven costs by enhancing reliability, lowering operating expenses and improving price realizations. Operational execution and investment focused on improving our broader asset base not only strengthens our resilience in a lower price environment, but also improves margins and returns for shareholders through industry cycles. Third, our commitment to generating sustainable free cash flow. Our low-cost structure drives robust, sustainable free cash flow generation, supporting EOG's regular dividend as well as additional cash return to shareholders. EOG has generated annual free cash flow every year since 2016 and has never cut nor suspended its dividend in 27 years, a remarkable track record that is a testament to our resilient business model and represents a key differentiator versus peers. And fourth, EOG's financial strength. Our pristine balance sheet is anchored by a leverage target of less than 1x total debt-to-EBITDA at bottom cycle prices of $45 WTI, $2.50 Henry Hub. With nearly $5.5 billion in total liquidity, we have tremendous capacity and flexibility to invest through the cycle, ensuring EOG emerges from any downturn an even stronger company than when it entered. On commodity fundamentals, the impact of spare capacity returning to the oil market is slowly becoming evident. We expect inventories to continue to build as it will take a few quarters for growing demand to absorb spare capacity barrels reentering the market. Beyond near-term oversupply, evolving geopolitical risk, the rapid decline in spare capacity, reduced investment in new supply and further demand growth will remain key drivers of the oil price. Looking past the few -- the next few quarters, we see constructive support for oil prices. And turning to natural gas. Our outlook remains positive. U.S. natural gas enjoys 2 structural bullish drivers, record levels of LNG feed gas demand and growing electricity demand, which should provide price support. Our investments to build a premier gas business has EOG poised to deliver supply into these growing markets. Looking to 2026, it's too early to provide specifics on activity and capital spending. Our capital allocation remains driven by returns-focused investments, our view on the outlook for supply-demand fundamentals and a reinvestment pace that supports continuous improvement across our multi-basin portfolio. This disciplined approach allows for optimal development of our assets while balancing both short- and long-term free cash flows to drive higher cash returns to shareholders. 2025 has truly been a transformative year for EOG with the successful acquisition of Encino as well as our strategic entries into the UAE and Bahrain. And moving into 2026, EOG is better positioned than ever to execute on our value proposition and create shareholder value. Now here's Ann with a detailed review of our financial performance. Ann Janssen: Thank you, Ezra. As Ezra mentioned, the closing of the Encino acquisition in early August is a significant event for EOG. The acquisition enhances the foundation of our value proposition, sustainable value creation through industry cycles, and our financial strategy remains unchanged, a pristine balance sheet to support a sustainable growing regular dividend, disciplined investment in high-return inventory and significant cash return to shareholders. The third quarter is an excellent example of this strategy at work. We generated adjusted earnings per share of $2.71 and adjusted cash flow from operations per share of $5.57. In the third quarter, free cash flow totaled $1.4 billion and through the first 3 quarters of this year, EOG has generated $3.7 billion in free cash flow. Regarding our balance sheet, following the funding of the Encino acquisition, we ended the quarter with a robust cash position of $3.5 billion and $7.7 billion in long-term debt. Our balance sheet continues to serve as a pillar of our financial strength. Our leverage target of total debt at less than 1x EBITDA at bottom cycle prices remains one of the most stringent in the energy sector, and we continue to view our pristine balance sheet as a competitive advantage, providing both protection in volatile markets and the ability to strategically invest through the cycles. During the third quarter, we continued our history of significant cash returns to shareholders, anchored by our robust regular dividend of nearly $550 million and supplemented by nearly $450 million in share repurchases demonstrating our commitment to both sustainable and opportunistic cash returns. For calendar year 2025, we have paid regular dividends of $3.95 per share, representing an 8% increase over calendar year 2024. On October 31, we paid our latest regular dividend, which was $1.02 per share, equating to an annualized rate of $4.08 per share or a 3.9% dividend yield at the current share price. This dividend yield significantly exceeds the S&P 500. Our sustainable and growing regular dividend forms the foundation of our cash return strategy. We also have other incremental levers such as share repurchases, providing an avenue for further cash return through industry cycles. Since initiating buybacks in 2023, we have repurchased nearly 50 million shares or approximately 9% of shares outstanding. We have ample flexibility for additional share buybacks with $4 billion remaining under our current buyback authorization. In the past 5 years, we have returned over $20 billion to investors through a mix of dividends and share repurchases. For the full year 2025, we are forecasting a $4.5 billion in free cash flow, a $200 million increase in annual free cash flow versus our previous forecast at the midpoint of guidance. This increase is driven by outstanding performance through the first 3 quarters of 2025 and strong fourth quarter guidance that leaves us well positioned entering 2026. In summary, EOG delivered another outstanding quarter. We strengthened our portfolio, maintained the robustness of our balance sheet and position the company for sustainable value creation through commodity cycles. As we look forward to next year, we remain focused on what we can control, operational excellence, cost discipline and capital returns. With that, I'll turn it over to Jeff for an update on operating results. Jeffrey Leitzell: Thanks, Ann. First, I want to recognize the exceptional dedication of the entire EOG team. Consistent outstanding execution across every part of the organization is what enables us to convert our operational strengths into value for shareholders. We had another strong quarter of execution across the business. Our teams continue to deliver consistent results, meeting or exceeding expectations on nearly every operational metric. Production volumes outperformed, largely driven by stronger-than-expected base production performance in our Utica asset, while capital expenditures were below target, supporting strong free cash flow while keeping us on track for full year guidance. Cash operating costs also came in under target, dominantly driven by reductions in lease operating expenses and GP&T across our foundational assets. These strong quarterly results reflect the quality of our assets and the continued discipline of our operating culture. In the Utica, the Encino integration is progressing exceptionally well. I want to thank all of our employees, including new employees from Encino for their efforts in efficiently integrating this asset and fast tracking the execution of high-return development. We have excellent line of sight to realize our $150 million of synergies target within the first year and lower well costs being the primary driver. We are extending EOG's culture and multi-basin portfolio of learnings, innovation and technology transfer to the acquired assets with excellent outcomes thus far. By applying EOG's drilling and completions technical expertise across the acquired Encino acreage, we have already realized strong efficiency gains. As a result, we can maintain the same targeted 65 net well completions for 2025 while reducing our Utica rig count from 5 rigs down to 4 for the remainder of the year. With respect to production, over 80% of the applicable Encino wells have been placed on artificial lift optimization. Moving forward, we anticipate continued efficiency gains and strong field performance as we implement EOG's operational best practices and our suite of proprietary software applications. During the third quarter, EOG brought online our first well in the Utica gas window. [ The Bakken ] wells each had an average 30-day IP of 35 million cubic feet per day. This was a 3-well package with average lateral lengths of just under 20,000 feet. Our focus in the Utica will remain on the volatile oil window, but we are extremely pleased with the potential upside from the Utica gas window over time. Turning to the Delaware Basin. We are pleased with our recent well results, which are on forecast and in line with our development strategy. Our teams continue to drive operational improvements that are helping us to unlock additional value from this already prolific asset. Over the last several years, innovations like our EOG motor program, super zipper operations, high-intensity completions and production optimizers have allowed us to lower cost and improve returns across our acreage. Throughout our core areas, we have built out our surface locations, facilities and gathering systems, and we'll be able to take advantage of this infrastructure when we return to these areas to continue development. Another major driver in well cost reductions has been longer laterals, where we have increased our average lateral length by over 20% in 2025 alone. Overall, we have lowered well costs more than 15% over the last 2 years. Due to this positive step change in capital efficiency, we continue to evolve our development approach to balance returns with resource recovery. This has enabled our team to unlock additional distinct landing zones that now meet or exceed our stringent economic hurdle rates and increase our total recovery per section. We see outstanding economics on these new targets with payback periods of less than 1 year and direct well level rates of return across both shallow and deep targets in excess of 100% at current prices. In the Eagle Ford, economics continue to improve even after 15-plus years of development. For our 2025 program, we have reduced our breakeven price by 10% due to extended lateral lengths and reductions in both well costs and operating costs. Moving forward, we will continue to leverage technology and efficiency gains to drive strong returns and margin enhancement across the Eagle Ford play. In Trinidad, we have completed the first wells of our Mento program and are extremely pleased with the initial results. For 2026, we plan to commence installation of the coconut platform, reflecting further investment in our high-return Trinidad program. Finally, we are advancing the Barrel oil discovery towards FID with our partners and look forward to giving you an update in the near future. In the Gulf States, our exploration programs are moving forward, and we are pleased with our progress. We drilled our initial wells in Bahrain in the third quarter and will spud our first well in the UAE this quarter. We are excited about these opportunities that allow us to leverage our technical expertise and extensive data set from drilling thousands of unconventional wells across a wide variety of plays. The opportunities in the UAE and Bahrain are just another example of EOG's focus on exploration as we continue to look for organic ways to improve and expand our inventory. Regarding service costs, as industry activity has decreased in the second half of 2025, we are seeing some softening in the market. The majority of these decreases have been associated with non-high-spec equipment since these are the first to be released and become available. For the high-spec services that EOG utilizes, we have observed much more resilient pricing with utilization remaining high. We have just recently started seeing a low single-digit reduction in spot rates for high-spec equipment, but this has largely been offset by the impact from tariffs, primarily on non-casing steel products. As we look to the future, we currently have around 45% of our service costs locked in for 2026, and we'll look for opportunities throughout the next few quarters to take advantage of any additional softening in the market. Regardless of how service costs shake out, we remain focused on delivering sustainable efficiency gains year in and year out. After an outstanding third quarter, we are poised to finish 2025 strong and enter next year with tremendous momentum. Now I'll hand it back to Ezra to wrap up. Ezra Yacob: Thanks, Jeff. In closing, let me highlight a few key messages. First, this has been an exceptional quarter for EOG. We strengthened our portfolio with the successful completion of the Encino acquisition, maintained a robust balance sheet and further position the company for long-term value creation. Second, today's dynamic market environment is exactly what EOG is built to excel in. Our diversified portfolio enables ongoing investment in high-return projects, while our low breakeven costs drive strong free cash flow that supports both our regular dividend and additional shareholder returns. Our industry-leading balance sheet remains the cornerstone of our financial strategy, ensuring value creation through every phase of the cycle. Third, EOG holds a distinctive position in the upstream sector with access to a deep inventory of growth opportunities spanning North American liquids, North American natural gas and international conventional and unconventional plays. Our continuous data collection and development of proprietary technology reinforce EOG's culture of innovation and exploration, keeping us at the forefront of industry advancement. And finally, this quarter's results highlight the enduring strength of EOG's value proposition, anchored in capital discipline, operational excellence, sustainability and a high-performing culture. Thank you for your continued interest in EOG. We will now open the line for questions. Operator: [Operator Instructions] The first question today comes from Neil Mehta with Goldman Sachs. Neil Mehta: Appreciate One macro, one micro question. So the macro, Ezra, you guys do really good macro work, especially given the analytical department that you set up a couple of years ago. And it sounds like on oil, you guys got a pretty cautious near-term view, but a more constructive medium-term view. And on gas as well, you had some comp. So can you just unpack it and maybe put some numbers behind your viewpoint because I know everything you say is backed up by some analytics here. Ezra Yacob: Yes, Neil, this is Ezra Yacob. That's a great question. I like how you phrased that, cautious near-term constructive medium and long term. I think broadly, even in spite of a lot of rather daily or weekly volatility, I don't know if that much has changed in our broad view since we discussed it last quarter. We continue to see fairly consistent and what I would call moderate demand growth for 2025 and continuing into 2026. The volatility earlier this year with uncertainty around potential tariffs has generally eased as that policy -- as those policies have become a bit more transparent. And what we see, as I spoke to in the opening remarks, driving near-term fundamentals is the spare capacity return to the market, rather -- the spare capacity return to the market is really causing concern more so than investment in significant new supply. And that's an important distinction because what we forecast with continued growth in demand is while the near term looks to be oversupplied, like you mentioned, we have a potential where you could rapidly see us move from an undersupplied environment to -- from an oversupplied environment in the near term to an undersupplied environment really in the medium term. And it actually sets up for us that we end up being quite bullish when we look out longer term on the supply-demand balances for liquids in light of the reduction in spare capacity and the reduction in investment that you see right now in combination with there's always going to be ongoing geopolitical risks. And then we also see a continued long runway for demand growth to continue. That's on the oil side. On the natural gas side, as I mentioned in the opening remarks, again, we see 2025 as being kind of that inflection point, and it's playing out that way. While you do have storage approaching the 5-year -- really about 5%, I think, above the 5-year average, we are seeing the increase from LNG demand for feed gas, and we're really starting to see the increase in electrical demand continue. Our forecast has always been that kind of the back half of the decade we'll end up seeing somewhere around a 4% to 6% compound annual growth rate. And I think you're starting to see a number of forecasts actually even exceed that range for North American gas demand. Neil Mehta: Good perspective as always. And then the follow-up is a little bit more micro. We recognize well data can be super noisy, but we've got -- there have been a lot of attention on the Delaware, in particular, and some of the third parties around productivity data coming in a little bit softer. And that times up well with people getting concerned about Permian maturity around some of the wells. And so I wanted to give you an opportunity to address that directly and help potentially comfort the market around that risk. Jeffrey Leitzell: Yes, Neil, this is Jeff. And as we just talked about in our opening remarks, our Delaware Basin wells, they're performing just as we have them designed. And it's really just a continued evolution of our development strategy out there, which ultimately, our team is fully focused on taking that asset and maximizing the value. The first thing that I'd tell you, the team's focus on is they're always looking to balance returns with maximizing NPV per acre and the overall recovery of the acreage. And what we've really seen over the last handful of years just through innovation and efficiency gains is we've really lowered the cost there in the Delaware and seen a pretty big step change in our capital efficiency of the play. A couple of examples of that is we've increased our lateral length this year alone 20%, which has really helped cost. And when you look at that cost reduction, we've had about 15% reduction over the last 2 years. And then on top of that, through all of our core areas, we've been able to build out our infrastructure. And whenever we return to these sections, we're able to use that infrastructure for a benefit. So when you take all this and you add it all up, what we've been able to do is unlock additional unique landing zones there in the Delaware that they're meeting right now our stringent economic hurdle rates at bottom cycle pricing. And what I'd say about these zones is they really vary all the way up and down the stratigraphic column. and they kind of vary from area to area. But really, if you look at this kind of development progression, it's very similar to what we've done in other plays. I mean, take the Eagle Ford, for example, we lowered well costs there. We applied new completion technology, and we were really able to unlock additional resource in that play. And you're seeing the same thing out here in the Delaware. And then the important thing to really take away with this is that these new targets have just outstanding economics. With payback periods, they're less than a year. And then at the direct well level rates of return, I mean, they're greater than 100% at current prices right now. So I'd say our teams are really excited about the progress they're making with the program, and they're going to continue to look for innovative ways to drive down cost, keep improving well performance and unlock as much resource as we can out there in the Delaware. Operator: The next question comes from Steve Richardson with Evercore. Stephen Richardson: Ezra, I was wondering if we could talk a little bit about '26. I know you said explicitly, it's too early to talk about '26. But I was wondering maybe you could -- if we take fourth quarter CapEx, which is a number you just guided to and annualize that, I know there's a whole bunch of problems with that framework. But I was wondering if you could kind of talk about activity levels today and what that may look like as you roll forward or even just some of the considerations up, down international, Utica after you've had it under your belt for 3 months. So just wondering if you could just kind of go around the portfolio and maybe just give us a sense of how you're thinking about things with the macro backdrop you just outlined. Ezra Yacob: Yes, Steve, thanks for the question. I know usually, there is a lot of pushback on using a fourth quarter number as a run rate. I actually think in our case right now with where we see the macro environment, under the current macro environment, which I appreciate you prefacing with that, I actually think the Q4 run rate is probably a pretty good spot for everyone to start with, to be honest, because as you said, some of the puts and takes. Now again, it is a dynamic market. So you've got a lot of potential for things that can change. But as we see the market going forward on the oil side being likely oversupplied for the next couple of quarters, maybe that turns over pretty quickly next year, maybe it pushes out a little bit further. But really, on the oil side, we see next year, as we sit here today, is really probably being no to low oil growth and low oil growth would really mean that in the next few months, we're seeing maybe the potential for some oil supply to increase in the back half of the year. But right now, it's pretty difficult to see the market asking for increased supply in the front half of the year. So I think no to low oil growth. We obviously are going to continue to invest in our gas play, as we've talked about at Dorado, as we've talked about trying to build a premier gas company basically inside of EOG. We're ramping up our LNG commitments over the next few years. We continue to see, as I talked about at the beginning, kind of 2025 being an inflection point for North American gas demand. So I think continued investment in Dorado. And then we have continued investment in the international at a pretty similar pace to what we're doing today. We do have another platform under construction there in Trinidad, but we've had an active drilling campaign there for this year. And then with the Q4 number, we've actually started investing in both the UAE and Bahrain, and we'll have some consistent activity going there as well. I think, again, with the purview of the asterisk that it is a dynamic environment. I think those are kind of the puts and takes, Steve, that I'd be looking at. And I think, like I said, the Q4 run rate is probably a pretty good starting point. Stephen Richardson: That's great. We won't hold you to it, but that's a really good starting point, fourth quarter times 4, it is. Maybe one a little bit more on the asset side on the Utica, but I was wondering if you could talk about how you're thinking about oil gathering and market access there. The movement in what the asset has done to your corporate differentials is meaningful. And I know you've got a number of ways to solve that either third party or like you've done yourself in other instances. So I was wondering if you could talk about that and the time line at which we could see something there. Jeffrey Leitzell: Yes, Steve, this is Jeff. When we think about the oil markets up there, first off, there's plenty of market for the molecules. That's not the issue. Really, what we focus on up there is going to be the differentials. And as you actually alluded to, our premium oil differentials, they did narrow slightly since the Encino differentials were a little bit wider. And that's to be expected. Encino on that acreage, we were really active in the volatile oil window, and they were a little bit more active to the east of us, which tends to be a little bit more condensate related. So that's really where you're seeing the difference. And the way I look at it is with any play, over time and maturity, we'll be able to improve those oil differentials there, especially with the added scale from the overall acquisition. Operator: The next question comes from Josh Silverstein with UBS. Joshua Silverstein: Pretty big drop in the overall cost guidance this quarter, $0.25 here. Can you just talk about the drivers of this? Was it a function of adding the Encino assets and how we should kind of think about the costs looking forward into next year? Jeffrey Leitzell: Yes, Josh, this is Jeff. Yes, it's kind of right across the whole board with our operating expenses. We're seeing really good performance. So on the LOE side, we had about a $0.10 beat from midpoint, and that was primarily driven by lower-than-expected workover costs and compression costs across the whole company in most of our assets. And then also, we did see a little bit lower offshore LOE in Trinidad than what we had forecasted. On the GP&T side, we were about $0.20 below midpoint. And what that had to do with was our natural gas gathering and processing fees in the Eagle Ford and the powder came in a little bit lower than expected, which was good. And then also with us only having about a week under our belts before the last call, we had a slight forecast variance in the Utica due to the Encino acquisition. So that came in a little bit less on GP&T. And then also, everything else was looking pretty good. G&A was about $0.08 below midpoint. That was somewhat tied to the Encino acquisition there coming in under. And then DD&A also came in under, which primarily is related to a little bit better performance across the portfolio from an overall reserve standpoint and really good costs flowing through there to the pools. Joshua Silverstein: Got it. And then just going to the balance sheet and shareholder return profile. Now that you're post the Encino acquisition, how should we start thinking about the free cash flow allocation going into next year? Do you want to start trimming away at the debt that you guys have taken on? Do you want to build the cash balance up to that kind of $5 billion, $6 billion level? And then should we still be thinking maybe of that 70% plus of the free cash flow to shareholders? Ezra Yacob: Josh, this is Ezra. Yes, I think maybe I'll start with the last point there, that 70% commitment. Don't forget, that is a minimum commitment. The reason we came out with that 70% commitment of free cash flow return to shareholders that it's durable throughout the cycle. But as you know, you've seen we've basically exceeded that in the last few years, been closer to about 90%, I think low -- maybe 92% of free cash flow return to shareholders. Going forward, we love where our balance sheet is right now. Our total debt is right at our target of total debt versus EBITDA at bottom cycle prices at about 1x. And I think we're in a great spot with our cash position. As we talked about in the opening remarks with $5.5 billion of liquidity, it gives us a lot of opportunities to continue to invest throughout the cycle or look for small bolt-ons or other opportunities to build value for the shareholders. I wouldn't say that it's a priority to continue to build that cash balance at all. I think as Ann mentioned in the opening remarks, right now, we actually see continued return of cash to shareholders through stock buybacks as being a pretty opportunistic avenue that we have in front of us, not only for EOG, but really for the entire sector right now. Operator: The next question comes from Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: Ezra, I wonder if I could try and hit the inventory question. I know you haven't given a lot of updates today on that or sustaining capital for 2026. But my question is really more philosophical about how you think about managing the business. There's been a lot of focus, for example, on what is the Delaware inventory depth. You've already addressed that. But it kind of -- it's almost like folks are looking at, well, that means you can't sustain the production. So my question is, are you looking -- are you running the business to optimize production at basin levels? Or are you running the business to sustain portfolio free cash flow? And in other words, the interplay of the different basins? That's my first question. My follow-up is a quick one on exploration because obviously, you've stepped out into the international arena in certain areas. But our understanding is that EOG may be starting to build a position in Alaska. And my question is, what is your view of business development? Is Alaska part of your portfolio? What are your plans there in terms of incremental spending? And how should we think about that going forward? Ezra Yacob: Thanks, Doug. Yes, this is Ezra. I appreciate that you can get on. I know you're traveling a little bit. But listen, to start with the kind of the total portfolio and how I think about the business, multi-basin operations has always been a strategic advantage for us. We've got flexibility, diversity of rock types. We continue to collect data and learn about different reservoirs. It also puts us in -- gives us diversity of product mix and direct diverse access to different markets. And we've been able, as a first mover to really put together a high-return inventory of over 12 billion barrels of equivalents as we've talked about. And so I think with that, combined with our low-cost structure, really gives us a significant runway to continuing generating free cash flow in a very sustainable manner. As I mentioned in the opening remarks, we've actually generated free cash flow 10 years in a row now through a couple of different cycles. And I think it also demonstrates not only the sustainability of that inventory, but also our consistent focus on ultimately capital discipline, the company's commitment to capital discipline. Resource depth by play is part of what you're asking, and I'd say that's a really dynamic question. And Jeff addressed that with specifics to the Delaware Basin and the Eagle Ford example because as we continue to build infrastructure, lower well costs, we lower operating costs, and we continue to actually learn about the reservoir, the normal life cycle of any of these unconventional plays is that you'll unlock additional resources. We've seen it in the Bakken, the Eagle Ford, the Permian to a certain extent in the Powder River Basin. So as far as assigning a static number, the Permian, obviously, with its stacked play potential and the high level of landing zones is probably our top resource base. Utica and Eagle Ford based on sheer size, obviously, are very strong as well. And that said, we do have a slide in our deck that highlights the payout, the returns, the costs of all 3 of those foundational assets. And that slide actually does take into consideration the current differentials as well between the Utica, the Delaware and the Eagle Ford. And what you see is really all the economics are quite similar at the basin level in terms of the economics, which directionally points to the free cash flow generation of the potential of all 3 basins being pretty similar. And again, it's why we see a long runway for sustainable free cash flow generation of the current inventory. The way we think about the business is investing in each asset at the right pace at the right time. Part of that is a function of our learnings. Part of it is a function of our infrastructure and part of it is a function of generating free cash flow, Doug. So we really think about the individual basins individually, and then we roll them up to the company level. And at the company level, of course, we end up viewing the macro environment and then are, like I said, committed to capital discipline and generating free cash flow. Now on the second part of your question, Doug, as far as exploration, you know as well as anyone that exploration is really nothing new for EOG. It's long been a, I'd say, a cornerstone of our strategy is to use data and technology like I just talked about to continue to unlock reserves that are typically overlooked. We're not necessarily frontier basin type of a company. We've really built the majority of our inventory with the strategy of using data and technology to look for bypass reserves. And in fact, we've done that. We've invested in exploration in the last few years at times when really it's been a little bit unpopular, but we continue to see that as the best way to improve the quality of our asset base. And we think it's key to our high full cycle returns and our lower breakevens. So I think the takeaway really should be that we do have a pretty strong pipeline of projects that span the spectrum of -- from initial ideas to leasing to initial wells to maybe delineation wells. And so we feel very good about our exploration efforts. That being said, in the last 12 months, we have expanded our inventory pretty dramatically with the Utica acquisition. And I think our near-term focus really is continuing to integrate that asset, continuing to drive down our breakevens across all of our plays, especially in the Utica, continuing to invest in growing our Dorado asset. And then, of course, our investment in unlocking the potential that we see internationally in both the UAE and Bahrain. Douglas George Blyth Leggate: And you confirm the Alaska position? Ezra Yacob: No, Doug, as you know, you've been following us for a number of years, Doug, and it would be a first if we actually start talking about individual exploration plays. So we'll just leave that one for some time in the future. Operator: The next question comes from Leo Mariani with ROTH. Leo Mariani: I appreciate you all's comments on '26. certainly helpful here. Clearly, it sounds like on oil, a little concerned near term makes sense. On gas, obviously, there, it seems like you're quite bullish as we roll into 2026. So just curious there, do you view '26 as maybe the year where you can step up the Dorado activity a little bit to take advantage of that bullish outlook? Ezra Yacob: Yes, Leo, it's Ezra again. It's a good question. I will -- so we are bullish on gas. And part of the reason is because we have captured some markets to grow into. We see the electrical -- electricity demand has continued to grow. We're taking advantage of that right now really with our -- especially our capacity along Transco that delivers our gas into the Southeast power demand pool. But also, obviously, our commitments on the LNG side are increasing. The biggest thing with gas, though, as we saw last year, if we just look at the last 12 months, I might be off on this just a little bit, but we really exited last year's injection season right around the 5-year high. And then within about 6 or 7 weeks, we were at a 5-year low on the 5-year range with respect to storage levels due to a pretty cold winter, but I wouldn't say anything exceptionally out of the ordinary. And I think it shows the volatility of gas because here we sit today with storage levels, again, about 5% above that 5-year inventory level. a little bit of background, Leo, on the ultimate answer where I'd say our pace for Dorado, kind of like I just finished up with Doug, is ultimately going to be governed by keeping our full cycle returns high, which means continuing to develop that at an appropriate pace where we can keep our costs very, very low. I've talked about before how there are a couple of step changes for costs in any of these unconventional plays. The first is when you can really command a rig full time. The second is when you can get to a frac spread full time. And yes, '26 will probably get pretty close to that. But like I said, there is a little bit of flexibility still in the plan that we've baked in. Let's see how it plays out. Let's see where winter goes and really see how the LNG demand continues to increase. And that will kind of determine again our investment rate at Dorado. -- growth, again, ends up being an output of our ability to kind of invest in these plays, each of these plays at the right pace to drive those returns. Leo Mariani: Okay. I appreciate that. And then just wanted to jump over to Bahrain here. So it looks like you guys showed in your results a little bit of international gas production outside of Trinidad on the quarter. I know you drilled some wells in Bahrain in 3Q, like you said. So it sounds like there's some production on those wells. Just any kind of early time kind of read? Are those wells kind of hitting or beating expectations at this point? What are you guys seeing there in Bahrain? Keith Trasko: This is Keith. We're very excited about the positive momentum we have in the Gulf States. In Bahrain, we have a full team operating there. We've been granted that exploration concession in the partnership with BAPCO. That did allow us to take over a handful of legacy producing wells. That's the gas volumes that you see reported here in the quarter. As far as the expectations for those or the production on those, those are the same wells that led us to want to get into the concession in the first place. So they are a little bit older wells. They were part of the robust data set that we had before entering the country. So they're a little bit older. We have drilled our first few wells, first few new wells and we're going to look to starting completing them on this quarter. So we'll say we're gaining a better understanding on both the geology and the operations side in Bahrain. It's early days, but we're very excited about the opportunity here. Operator: The next question comes from Scott Hanold with RBC Capital Markets. Scott Hanold: Ezra, you were clear that you'd be willing to obviously extend above 70% of shareholder returns, especially at the attractive valuation right now. Looking -- obviously, it looks like you've already done about 1 million, at least 1 million shares of buybacks in the fourth quarter to date. What's your temperature on at this valuation to potentially push to 100% or even more this year? I mean, how compelling is valuation today versus, say, a year or 2 ago when you were closer to 100%. Ezra Yacob: Yes, Scott, thanks for the question. We've definitely got the flexibility and the strength of the balance sheet that would support going to higher levels than the 70% minimum and really going to the higher levels of the 92% that we've done in the past. Like I said, I think it's very compelling, not just for EOG, but really for all the sector. I think currently, energy's weighting is around 3% of the S&P 500. And so we see a large dislocation in valuations. And we see a large dislocation in valuation of EOG. And so I think it's a fantastic opportunity for us here when you look at the near term where it looks like there's the potential for continued oversupply, spare capacity entering the market. We're focused on capital discipline and continuing to generate free cash flow. And at this point, like I said, building cash is not -- on the balance sheet is not a priority for us. Our balance sheet is in a very pristine state where we like it. And so there is opportunities to return close to 100%. Scott Hanold: Okay. That's clear. And my follow-up, I think, is for you, Jeff. You mentioned obviously better base production performance in the Utica. Can you give us a little color on that? Was it some of the artificial lift efforts you did? Or was it just better performance of the reservoir as you all got into the Encino assets? Jeffrey Leitzell: Yes, Scott, thanks for the question. And it's really kind of a magnitude of the whole integration. And really, we've -- over just a few months, we've realized significant operational momentum just by putting all of our drilling completion and production expertise out there into the asset. So we've talked about the efficiency gains we saw on the drilling side. So we're actually dropping down 1 rig going from 5 to 4. So we're seeing really good performance on the efficiency side there. And then over on the production side, I think we've implemented the high-intensity completion design there now with scale. So we're starting to see some benefit from all of that. And then as you alluded to, too, as far as some of the legacy wells, we've moved over the full 1,100 wells to the EOG suite of proprietary applications. and that includes 80% of them that are the applicable wells. We've got them on the EOG artificial lift optimizers. So we're starting to see the uplift benefits from that. And as you alluded to, that's part of the reason that we see the beat there in Q3 out of the Utica. So still have a long ways to go, though. There's still technologies that we can unveil. There's still things from the efficiency aspect, but we're doing really well there in the Utica, and we're realizing a lot of the synergies and the production uplift that we expected. Operator: The next question comes from David Deckelbaum with TD Cowen. David Deckelbaum: I wanted to ask a little bit more about the optimization and lower operating costs. I think you cited lower workover expense for this year. And I'm curious, is that really just specific to the integration that you're seeing in the Utica? Or is this broad-based around, I guess, just better reservoir productivity? Or are you just seeing better responses from reservoir performance across your assets that requires less workover intervention? Jeffrey Leitzell: Yes, David, this is Jeff. What I'd say is it's really across the whole portfolio. We're really seeing improvement where we're focusing on where major failures are. So a lot of it's going to be with our data and our analytics, understanding where failures are in each one of these wellbores and the different artificial lift systems and how to go ahead and alleviate those failures out of the front end. And then some of the additional technologies we actually talked about on our last call with some of these HiFi sensors where we're able to put it on subsurface and surface equipment we're able to monitor vibrations and other data real time to understand when failures may happen or even understand prior to failures, so we're able to catch them and be able to minimize the overall expense. So I really think it's just a credit to all of our teams out there that they're not leaving any stone unturned. We're making sure we take all of our data and apply it to all of our wells that are producing to make sure that we're minimizing the downtime and really maximizing the overall production across the portfolio. David Deckelbaum: Appreciate that. And Ezra, just given some of the commentary, particularly around spare capacity dwindling in the ensuing years ahead, how do you put that in the context of your appetite for just expanding in the areas where you're at? Or overall, I guess, your appetite for trying to hoard as much resource as you can sort of in the next, call it, 12 to 24 months period, either through M&A or just trying to organically focus on expanding resource? Ezra Yacob: Yes, David, it's a great question. And downturns are a fantastic time to explore because typically, a lot of companies -- if companies are exploring in a downturn, that's one of the things that's typically easy. That's a program that's easy for them to pull back on and reduce. As far as the inorganic, I think at this point, small bolt-ons are really some of the more fundamental blocking and tackling of trades to continue to shore up our acreage position is what you should be expecting from us. The Encino acquisition was very reminiscent of the Yates acquisition, which we did 10 years ago now, it was a bit of a unicorn that came along in an emerging asset with hand-in-glove acreage positions and fit. It's a very, very high return prospect for us, and we got it at a price because it was really an emerging asset that made it very, very compelling. Typically, in these emerging assets, you don't really have the opportunity to do something like that because as competition starts to see your well results, those price -- those entry points, the price points really start to increase. And for us, we look at any of these opportunities, inorganic or organic through a returns-focused lens. And so what I mean by that is any of our exploration opportunities really need to compete, and this calls back a little bit to Doug's question. It really needs to compete with the existing portfolio. We aren't really interested in just grabbing more inventory, quite frankly, we're continuing to have interest in expanding the quality of our inventory and continuing to improve the returns, really the full cycle returns that we can deliver to our shareholders. Operator: The next question comes from Betty Jones with Barclays. Wei Jiang: I wanted to ask about technology. EOG has always been on the forefront of integrating technology and big data. We're hearing a lot about AI models. So just want to get your take on the materiality of AI integration on your operations and exploration efforts and whatnot. And do you still see advantage of building these -- your capabilities in-house? Ezra Yacob: Yes, Betty, this is Ezra. AI at EOG, yes, we definitely see advantages and advantages, significant advantages to building a lot of our proprietary apps and software developments in-house, typically because we couple them directly with the field operations, things like Jeff has talked about, I think, on the last call with regard to our high-fidelity sensors, some of our downhole tools that we've got real-time measurement that's really making a big impact on the way that we operate and driving down costs. I'd say, broadly speaking, AI, and you've heard it throughout this earnings season, everybody mentioned something on their call. So I think it's clear that AI really is transforming the entire industry, the oil and gas industry. And it really is happening, I'd say, at every stage of operation from, as you pointed out, exploration throughout the field, including safety. And as you know, our journey has been maybe a little bit longer in the tooth than others. We started with smart technology really prior to COVID. And that's some of the technology that we put out on our centralized gas lift systems. I mean, we're coming up on almost 10 years of utilizing that really, which really manages and optimizes the amount of injection gas versus the production that you're seeing out of it. And we've, since that time, developed machine learning algorithms now that we utilize for not only that production optimization, but for other aspects of our operations as well. And it's just recently that we've started to develop some of the deep learning tools where you're really collecting, organizing and using significantly more types of data, including human observation and experiences, really experiential learning. And so while we're not quite to true agentic intelligence, we are using quite a bit of generative AI, not only to organized geologic data and attempt to uncover hidden trends, but we've got real-time drilling optimization. We're improving efficiency and equipment reliability. We've got predictive maintenance, process optimization, really some autonomous operations going on in the field. And then like I said, maybe I'll just finish up on the safety side. Safety is crucial in oil and gas, and AI is definitely helping our efforts in that regard as well, helping to detect anomalies, both on the emissions, spills and safety side throughout our different operation disciplines. Wei Jiang: Great. That's very helpful color. A follow-up probably for Jeff. Just curious on the dry gas Utica well drilled. What was the impetus to drill that well? And clearly, I see that more as a dry gas option in the portfolio. So what would it take, whether market or price related to trigger that option? Jeffrey Leitzell: Yes, Betty, this is Jeff. Yes, we're extremely excited about those Bakken wells. As we said, they came on, each one had individual 30-day IPs of around 30 million a day. So very, very strong. And they actually -- those were wells that we acquired. So we just completed those wells and brought them on production. So they were already drilled when we acquired them. But what I'd say is we're excited about those results, but we also know we've got a multi-basin portfolio all around the country. So we have a lot of flexibility to take advantage of all the different markets and be very strategic in how we're maximizing our price realizations and netbacks. And in the Utica, as in-basin demand continues to increase and we get some additional pipeline capacities in there and built out, we feel like we'll be well positioned to take advantage of it. But ultimately, I mean, when we're talking about gas growth within the company, we have Dorado, which is the lowest cost gas in the U.S. It's located right next to the Gulf Coast market center. There's a growing LNG market, as you know, and increasing demand growth. We've got a 21 Tcf resource down there, and we're just excited about the opportunities that gives us in the market. So realistically, up in the Utica, as we said, we're going to focus on the volatile oil window. We have opportunities to grow the gas in the future there. But really with gas growth, I'd say our focus is on Dorado. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Yacob for any closing remarks. Ezra Yacob: Yes. We appreciate everyone's time this morning and want to thank our shareholders for your continued support. And a special thanks to all of our employees and partners for delivering another outstanding quarter. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Karat Packaging Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Roger Pondel. Please go ahead, sir. Roger Pondel: Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging's 2025 Third Quarter Conference Call. I'm Roger Pondel with PondelWilkinson, Karat Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and its Chief Financial Officer, Jian Guo. Before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10-K as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements, except as required by law. Please also note that during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share and free cash flow, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website. And with that, I will turn the call over to CEO, Alan Yu. Alan? Alan Yu: Thank you, Roger. Good afternoon, everyone. Despite ongoing trade volatility, Karat achieved another quarter of record net sales, up over 10% year-over-year, fueled by solid volume expansion, a favorable product mix and effective pricing initiatives. We've experienced double-digit growth across all major markets, especially in Texas and California. Even with significant higher import costs due to increased duties and tariffs, we successfully sustained a gross margin of 34.5% for the third quarter. We remain committed to our sourcing diversification strategy, and our nimble and flexible operating model continues to enable us to effectively manage ongoing supply chain challenges. During the third quarter, we increased domestic sourcing to approximately 20% from about 15% in the second quarter, and we reduced imports from Taiwan to approximately 42% from 58%. We continue to closely monitor tariff developments and are ready to quickly adjust our sourcing strategy accordingly as we have done in the past to maintain Karat's competitive advantage. Additionally, foreign currency exchange rate between the U.S. dollar and the new Taiwan dollar have shown increased stability since August, which is expected to help improve our operating performance for the current quarter. Earlier this year, we secured a major add-on of business to supply paper bag, a new product category for Karat to one of our largest national chain accounts. Initial shipments to select distribution centers started in the third quarter, and we expect the volume to accelerate in the fourth quarter. With fulfillment expected during Q1 of 2026, this new category of business with this chain account is for a 2-year term and expected to contribute approximately $20 million in additional annual revenue. Over the next 2 to 3 years, we aim to scale our paper bag business to more than $100 million in additional annual revenue. The anticipated growth from this new category is being driven by national and regional restaurant chains that are transitioning to paper bags from plastic bags. This shift is influenced by evolving state and municipal regulations as well as a growing emphasis on enhancing customer experience and brand images. We expect continued market share growth in this segment, further solidifying our position as a leader in providing sustainable, eco-friendly disposable food service products. In late May and June this year, we implemented broad pricing increases across most product lines to offset rising import costs. Heading into the fourth quarter and 2026, business trends remain strong. We continue to make disciplined pricing approach and partner with our customers while focusing on operating efficiencies. We are actively integrating several meaningful new customer accounts and focusing on increasing online marketing, which will strengthen our 2026 pipeline, building a strong foundation for what we expect to be another record-setting year in sales. Karat announced a first-ever stock repurchase program this week. In addition to the regular quarterly dividend, the announcement underscores our Board confidence in the company's future growth prospects and financial strength. And I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company's financial results in greater detail. Jian? Jian Guo: Thank you, Alan. I'll begin with a summary of our Q3 performance, followed by an update on our guidance. Net sales for the 2025 third quarter were $124.5 million, up 10.4% from $112.8 million in the prior year quarter. The increase was primarily driven by an increase of $9.4 million in volume and a $3.5 million favorable impact from product mix, partially offset by a $0.7 million unfavorable year-over-year pricing comparison. Sales to chain accounts and distributors were up by 13.7%. Online sales increased 3.1% over the prior year quarter and sales to the retail channel were down 12.5% over the prior year quarter, reflecting the softness of the overall retail sector. Cost of goods sold for the 2025 third quarter increased 17.8% to $81.6 million from $69.3 million in the prior year quarter. Product costs increased $5.0 million due to sales growth, partially offset by more favorable vendor pricing and product mix. Additionally, import costs increased $8.2 million due to higher import duty and tariffs, coupled with a 21.0% increase in import volume as we purchased more inventory ahead of expected business expansion, partially offset by a 13.4% decrease in average freight container rates. Gross profit for the 2025 third quarter was $42.9 million compared with $43.5 million in the prior year quarter. Gross margin for the 2025 third quarter was 34.5% compared with 38.6% in the prior year quarter. Gross margin was negatively impacted by higher import costs, which as a percentage of net sales increased to 14.4% compared with 8.6% in the prior year quarter. The decrease in margin was partially offset by a decrease in product costs as a percentage of net sales due to more favorable vendor pricing and product mix as well as a reduction in inventory write-offs and adjustments as a percentage of net sales. Operating expenses in the 2025 third quarter were $34.3 million compared with $32.2 million in the prior year quarter. The increase was mainly driven by $2.1 million of higher shipping costs due to higher sales volume, $0.7 million of higher rent expense due to a higher rate on our Chino, California facility lease extension plus the opening of a new Chino distribution center and $0.6 million of higher salaries and benefit expenses. These increases were partially offset by a $1.4 million reduction in online platform fees. Operating income in the 2025 third quarter was $8.6 million versus $11.3 million in the prior year quarter. Total other income net was $1.3 million for the 2025 third quarter compared with $0.6 million in the prior year quarter. The increase was primarily from foreign currency transaction gain of $0.7 million, driven by the strengthening of the United States dollar against the new Taiwan dollar during the 2025 third quarter compared with a loss of $0.3 million on foreign currency transactions during the 2024 third quarter. Net income for the 2025 third quarter was $7.6 million compared with $9.3 million for the prior year quarter. Net income margin was 6.1% in the 2025 third quarter compared with 8.2% in the prior year quarter. Net income attributable to Karat for the 2025 third quarter was $7.3 million, $0.36 per diluted share compared with $9.1 million or $0.45 per diluted share in the prior year quarter. Adjusted EBITDA for the 2025 third quarter was $13.1 million compared with $14.7 million for the prior year quarter. Adjusted EBITDA margin was 10.5% of net sales for the 2025 third quarter compared with 13.0% for the prior year quarter. Adjusted diluted earnings per common share was $0.37 for the 2025 third quarter compared with $0.47 for the prior year quarter. We generated operating cash flow of $1.0 million in the third quarter compared with $19.5 million in the prior year quarter. Duty and tariff payments as well as the inventory purchase payments increased. However, such increases were offset by strong collections and as you will see described in the Form 10-Q filed tomorrow. Despite the significant cash outlays for operations and a $3.5 million early loan repayment on one of our consolidated variable interest entities term loans, we ended the quarter with $91.1 million in working capital. As of September 30, 2025, we maintained financial liquidity of $34.7 million with another $19.9 million in short-term investments. As of September 30, 2025, we reclassified one of our consolidated variable interest entities term loans into current liabilities as the maturity is within 12 months, totaling $20.4 million. We intend to pay down the loan upon maturity with our cash on hand. On November 4, 2025, our Board of Directors approved the quarterly dividend of $0.45 per share payable November 28, 2025, to stockholders of record as of November 21, 2025. Additionally, our Board of Directors approved our first-ever share repurchase program of up to $15.0 million, under which Karat is authorized to repurchase shares of its outstanding common stock from time to time through open market purchases. Looking ahead to the 2025 fourth quarter, we expect net sales to increase by approximately 10% to 14% over the prior year quarter with gross margin projected to be within 33% to 35% and adjusted EBITDA margin to be within 8% to 10%. As Alan mentioned earlier, our new business pipeline for 2026 is robust, supported by the new paper bag category offering and the addition of several key customer accounts. We remain focused on accelerating top line growth with disciplined pricing while continuing to enhance operational efficiency and cost management. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator. Operator: [Operator Instructions] And the first question will come from Michael Francis with William Blair. Michael Francis: Alan and Jian, it's Mike on for Ryan. Nice quarter. I wanted to start on paper bags. Did I hear you right that you aim to scale that to $100 million over the next 2 years? Alan Yu: Yes, that is correct. Michael Francis: And what gives you confidence in that number? Alan Yu: It's because there's a lot of chains are moving away from plastic bag into paper bag. And this is a segment that we're seeing that it's -- as one of the large chains in the U.S. move towards this area, more and more similar chain will follow through that. And there -- basically, that -- we feel that there is an organic growth in that segment. And also at the same time, it is not just the paper bag was handled, there's different type of bag. There's SOS bag, which every fast food restaurant will need. And I mean with the growth of the fast food chain that is growing, the number of stores that is growing, we feel that we're competitive -- we can be competitive enough to gain market share in that segment as more and more people looking toward that area. And also, there's other bakery bag as well. There's just too many items in that segment, that make us feel that we can grow immediately. I mean, as we mentioned in our announcement that one chain, the annual sales of that number will be $20 million to $25 million per year just for one chain. And we do have 2 or 3 other chains already working in testing our paper bag and SOS bag. That's why it's -- we feel confident that this will grow quickly into an annual sales of additional $100 million a year. Michael Francis: That's all good to hear. And then I wanted to ask on gross margins, went lower, I think, as we were expecting and 4Q is a little lower than we were expecting. Would like to know longer term, do you think that there's an opportunity for you to get back into that high 30% range on the gross margin number? Or is that going to be difficult while tariffs are in the market? Alan Yu: Well, we're trying to be conservative right now at this point because there's still uncertainty. But the good thing is we feel there's a tailwind. One of the things that -- one of the issues that reduces our gross margin drastically in the second quarter was the sudden drop in the Taiwanese -- sudden increase in the Taiwanese dollar versus the U.S. dollar that it was a drop of 11% in just 3 days alone. And that 11% has come back to just about an increase of 4.5%, 5%. So basically, it's more of a stabilization in the U.S. dollars against Asian currencies. And this is actually enabling us to go back to our vendors to negotiate a better pricing this past 2 months basically. So we're seeing that there's more tailwind in terms of the gross margin. But we do want to be conservative in terms of how we look at in terms of the numbers in September and giving us the number that we see in October, we already see some improvement in October versus September. September was better than August. So we want to see more of the positive trend before we can issue a -- increase our gross margin numbers basically. Michael Francis: Okay. And lastly for me, it's good to see the share buybacks. Would love to get an update on your capital allocation priorities between debt paydown, buybacks and the dividend and any potential M&A. Alan Yu: Well, we -- our strategy is that if we have more than $20 million in short-term deposit that we can allocate it to the dividend, special dividend, regular dividend or use it for other investment. At this point, even with the increase in tariff, increase in -- inventory-wise in the second quarter, our deposit amount is still the same, remains the same. So we're still strong in cash. And lately, we're seeing that we're bringing -- we have been bringing down our inventory to reduce our cost in terms of the tariff as well as implication costs. So we're seeing cash flowing back into our accounts. And that's why we feel like it's good for us to do some type of a share repurchase. While our stock is kind of low right now, I think it's a value to repurchase share back. At the same time, we are still looking to merger and acquisition. We do have a few in the pipeline, investment, partnership, joint venture and also acquisition. We don't feel that this will deter us in terms of moving towards this direction. Operator: The next question will come from George Staphos with Bank of America. George Staphos: Can you hear me okay, Alan? Alan Yu: Yes, I can, George. George Staphos: So listen, maybe just piggybacking on the question on capital allocation. I want to take it from a different approach. I mean your dividend basically represents the majority of your earnings per share. Why would you consider or contemplate doing more buyback in light of that? Would you consider borrowing to buy back more stock? It would seem like deleveraging and taking care of your incoming debt paydown needs would be probably more prudent. But how do you think about that? Alan Yu: Well, here's the thing. The debt -- we don't have any debt on our book right now at this point. The debt that you're seeing VIE, that's on the real estate [ side -- part ] of the ventures. George Staphos: That $20 million, that current liability, you said you're going to pay that down in the upcoming year? Alan Yu: We can pay it down. We can pay either with our current CD that we have in our short-term deposit, to utilize some of the cash on that. And at the same time, we can have third party -- we can also continue to borrow with different banks. It depends on how -- what the cash flow situation is, if there's a need to do that because right now, like I said, we don't have any debt in our Lollicup or Karat Packaging book right now. So we're -- this is one of the things that we still have time to think what we want to do, allocate our capital. If there's other things that we can do better, then we will do that. But at this currently, the rate of CD income is dropping as the interest rate reduces. So we have to figure out which is better. If we were to pay down the debt, we actually will be making -- generating additional income. It will be an interdepartment -- intercompany loan to the VIE company in paying down that debt. So it won't be like really just paying, it will be paying down the debt for the VIE company, but at the same time, for Lollicup, it will be income -- additional income. Instead of [indiscernible] us for deposits from -- yes, deposits from the banks, there will be actually more income from the VIE company. Jian Guo: And George, this is Jian. I just wanted to add on to what Alan was talking about to answer your question. The main purpose really is to have one additional tool in our toolbox to further enhance our shareholder return while we continue to focus on growing the company either organically or inorganically. As we previously announced, as you probably saw yesterday in the announcement, the total amount of the Board approved of the share repurchase program is $15 million. So it is a fairly small program at management's total discretionary. So this will be something that management will continue to evaluate in terms of a lot of the different factors, right, the pricing, the performance, the liquidity, the strength of the balance sheet, quite a few factors, just another tool in our toolbox to further enhance our shareholder return. You're right. I mean, obviously, our dividend yield is already pretty rich. So that definitely is something that we consider as we move forward with the potential execution under this program as well. George Staphos: Okay. I appreciate the thoughts on that, and thanks for the reminder on the VIE. One question, back to the question, I think Mike teed up on the bag business. So let's assume you have perfect accuracy on the revenue side on bags, and that's $100 million in whatever time period you said. What kind of margin do you think you're going to get on that business? And you're already starting to see some of that show up in the fourth quarter, you said, correct? So 2 questions there. Alan Yu: It will be a mix -- more of a mix margin. The higher volume will be in the -- could be in the high teens on margin side, and the SOS bag could be in the high 30s. So it depends on the product line. There's also bakery bag that could be in the high 50s. So -- and also at the same time, we are selling online on these new bags that we're bringing in. The online will be even in a higher margin range. So it will be more of a balancing mixture of each, just like as we are doing right now. So -- and also, we are actually working heavily toward in terms of getting our bags to manufacture more efficiently to increase margin from there, better sourcing of raw material from our vendors and also moving -- shifting the manufacturing site locations, potentially moving some into domestic U.S. production, that might save some costs, even enhancing more margin. So this is -- these are the things that we can do once -- as the volume increase in the next 12 months. George Staphos: All right. So 2 quickies for me, and I'll turn it over to Alan. So with that being the case, and we're already in November, so almost halfway through the quarter, the range on revenue growth, the range on margin is fairly wide. And I realize you're trying to be prudent. I realize there are a lot of vagaries in the market, especially with tariffs and sourcing. But I find the range is maybe a little bit wider than I would expect at this juncture in the year. What's giving you pause in terms of maybe perhaps having a little bit narrower both growth rate range and margin range for the quarter? And then did I hear you say -- and my last question, I'll turn it over. Did you say there was an inventory write-off? I apologize, I'm on the road right now, so I don't have your materials in front of me. Alan Yu: I wasn't -- I'm not sure what the inventory write-off was, but I know that we're reducing inventory at this currently for the year-end. Actually, our sales have been very robust. As you said that we are in the middle of the fourth quarter already. So we're seeing our sales almost in the mid-teen range, but we just want to be conservative. And basically, at the mid-teen range, this is a sales increase organically that we haven't seen for actually for the past 3 years. That's where -- we're seeing that 12% to 14%, but we are seeing numbers very close to the mid-teens. But we just want to be prudent in terms of 12% to 14%, that's where we're trying to -- this is where we're being conservative, but we're seeing in the mid-teens right now in the growth of numbers -- actually, the sales numbers. And basically, in our industry, this is kind of very good numbers in terms of -- well above our industry right now. Operator: And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Alan Yu, CEO, for any closing remarks. Please go ahead. Alan Yu: Thank you. Thank you, everyone, for joining our third quarter Karat Packaging earnings conference call. I'd like to say thank you again, and have a nice day. Goodbye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.