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Operator: Good day, and thank you for standing by. Welcome to the Tripadvisor's Third Quarter 2025 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, Angela White, Vice President of Investor Relations. Angela, please go ahead. Angela White: Thank you so much, Felicia. Good morning, and welcome to Tripadvisor's Third Quarter 2025 Financial Results Call. Joining me today are Matt Goldberg, President and CEO; and Mike Noonan, CFO. Earlier this morning, we filed and made available our earnings release. In that release, you'll find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measure discussed on this call. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent management's views as of today, November 6, 2025. Tripadvisor disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to our earnings release as well as our filings with the SEC for information concerning factors that could cause actual results to differ materially from these forward-looking statements. With that, I'll turn the call over to Matt. Matthew Goldberg: Thanks, Angela, and good morning, everyone. In Q3, we delivered consolidated revenue growth of 4% to $553 million and adjusted EBITDA of $123 million or 22% of revenue. We were pleased with this performance, which beat our expectations on adjusted EBITDA and was within range for overall revenue growth. This week, we've initiated a set of changes that represent a fundamental shift in our operating model to support a more focused set of strategic priorities. These actions will sharpen our execution focus, which we expect to accelerate revenue growth, improve operating margins and create a more durable financial profile. To do so, we'll focus on three priorities. First, extending our leadership position in experiences to drive long-term growth by fully deploying our differentiated assets across Tripadvisor and Viator to win in this category. Second, leveraging our unique content, data and brand trust for an AI-enabled future by powering our marketplaces and positioning Tripadvisor at the center of an emerging AI ecosystem. And third, narrowing the focus at brand Tripadvisor to support experiences and our AI future while managing our legacy offerings for profitability. These priorities reflect a shift from optimizing individual brand strategies to speed our transformation into an experiences-led and AI-enabled company. We will direct our focus, talent and investments to what matters most, resulting in a simpler, leaner and faster-moving organization. Our plan is expected to drive significant operational efficiencies of at least $85 million of annualized gross cost savings, which Mike will discuss shortly. But this is not just a cost-cutting exercise. We are aligning ourselves to drive accelerated growth going forward. This is an important moment in the evolution of Tripadvisor Group. We're a very different company than we were 3 years ago with a portfolio mix now anchored in high-growth marketplaces, delivering more sustainable revenue and profit. In the past 12 months, Viator and TheFork accounted for almost 60% of group revenue, up from approximately 40% in the same period 3 years ago, representing a 27% CAGR over that period. In that time, these businesses contributed an incremental gain of more than $150 million of adjusted EBITDA and now comprise 30% of overall group profitability. Today, we are far less dependent on a legacy model built on SEO with its well-known structural headwinds. These trends have reshaped our financial composition, and we expect them to continue. Now let's walk through these priorities in more detail. Our first priority is extending our leadership position in experiences to drive long-term growth. Strategically, we're already well positioned to win in experiences. We've achieved scale and established a clear track record of growing the top line while expanding profitability from breakeven in 2023 and now approaching double-digit adjusted EBITDA margins. Earlier this year, we shared that Experiences is becoming the strategic and financial center of gravity for the group. Over the last 12 months, we've achieved $4.6 billion in GBV, driven by 17% items growth. And over that same period, for the first time, our total Experiences revenue has surpassed the revenue from our legacy business lines. Now experiences will become the unified focus of both Viator and Brand Tripadvisor. The global experiences TAM is expected to reach $350 billion in GBV by 2028, growing faster than any other category in travel. To date, we've been concentrating on the U.S. as our primary source market and focusing mostly on tours and activities. We believe we can accelerate our growth by addressing new geographic markets and expanding into new categories while benefiting from the tailwinds of growing demand and the offline to online shift. This is a dynamic, fast-growing category without a global digital brand leader. Going after this opportunity will be our primary objective as a Group. We believe that our strength to lead the experiences category lies in the differentiated assets across our brands that are hard to replicate. At Viator, we're leading in the world's biggest market with the largest global catalog of experiences. Our improved storefront is driving uplift in conversion, repeat and customer loyalty trends. Tripadvisor offers two key assets that we expect will drive growth and expansion in experiences, a trusted global brand and proprietary data on more trips and travelers than anyone else in the category. This combined reach, along with our third-party distribution creates unmatched value for operators. Together, we believe these capabilities give us a unique advantage for our experiences business that we have not yet fully realized. In order to accelerate the next phase of growth, we're unifying our Viator and Tripadvisor experiences operations, unlocking the power of all our resources to focus squarely on this opportunity. This is a significant shift in our operating model designed to drive meaningful outcomes with more efficiency. Our conviction to go all in on this opportunity is grounded in what we've learned from a period of increased coordination between the Viator and Tripadvisor teams across marketing, product and supply over the past several months. Here are a few examples. From a demand perspective, as I shared last quarter, we've been experimenting with how Tripadvisor and Viator can operate together in a more coordinated manner, not as two separate brands with different goals, one focused more on growth, the other focus more on profitability, but as a united team aimed at winning the Experiences category. We began coordinated testing in marketing and found that we could compete more effectively on a combined basis to deliver more efficient marketing spend overall, improving revenue while maintaining profitability. This is just one experiment, but it demonstrates the power of treating our brands as complementary levers working together rather than as separate independent P&Ls. We also believe there's an opportunity to lead with Tripadvisor to put our large global audience in service to Experiences in key international markets while leveraging our high brand awareness to acquire more customers more efficiently in paid channels. From a product perspective, we've increased our experiment velocity and coordinated learnings across points of sale. As a result, our conversion rate has continued to show improvement at both Viator and Tripadvisor. In this new formation, we will lean even harder into these dynamics, focusing on key conversion drivers like personalization, pricing and availability with more resources deployed to scale our optimizations seamlessly across our full Experiences offerings. From a supply perspective, we're expanding on our unmatched scale, over 400,000 experiences globally and growing. In the last year, we've seen healthy double-digit growth in active products and suppliers. We're broadening our supply coverage in new categories and strengthening our presence in secondary and emerging destinations while building industry-leading connectivity with our recently updated APIs, now enabling real-time and dynamic management of pricing and availability. And we're using Tripadvisor data to identify where new supply is most needed, all while optimizing how new supply performs, improving conversion, refining pricing and smoothing the experience for both travelers and operators. By unifying our teams behind experienced leadership, we'll build on our strong marketplace flywheel. Our product and supply optimizations accelerate our conversion wins to fuel more efficient and effective marketing, which in turn compounds the conversion gains, driving higher repeat rates and improved unit economics. And now we're unleashing the full power of the Tripadvisor brand and its unmatched global awareness in service of Experiences. Our second priority is leveraging our assets to position ourselves for an AI-enabled future. Tripadvisor is among the most trusted names in travel, built on decades of authentic contributions. Sitting at the privileged intersection of hundreds of millions of travelers and the operators who serve them, we have unique insights about how people make travel decisions, a proprietary knowledge graph across experiences, hotels and restaurants, which is unique in the industry and a powerful foundation for what comes next. AI is collapsing discovery, planning and booking into a single conversational moment. For travelers, it means less friction and faster decisions. For Tripadvisor Group, it plays directly to our strengths in the space we helped invent, helping people travel smarter. At a time when it's hard to know what information to trust for a highly considered purchase decision like travel, we believe our first-party data, user-generated content and decades of trust, combined with supplier connectivity, detailed pricing information and booking gives us a unique advantage to lead in the age of AI. Over the past several quarters, we've experimented with a broad set of efforts to learn how travelers use AI. We built data science and machine learning capabilities to drive conversation and conversion, and we've explored the role of our content in the AI ecosystem. Here are a few things we've learned. First, our content and data are unique and valuable. Internally, it's been the foundation of our product innovation and growing engagement. And Tripadvisor is already among the most cited sources by LLMs. According to a recent third-party study,Tripadvisor appeared as the #8 overall and the only travel company in the top 20. Second, travelers have a very specific problem. It's hard to make decisions. There are too many options and getting it wrong means wasting time and money. That friction is why travelers come to Tripadvisor to inform and validate their travel decisions. While LLMs do a good job of generating high-level trip plans, the opportunity lies in the underlying recommendations, their social validation and actionability, which we are uniquely positioned to deliver to help travelers make it happen. And finally, AI is raising customer expectations as they look to solve these problems. Customers are choosing AI-native products over legacy products with AI features. They want technology to remove friction. We will follow the consumer and shift our focus from AI-powered features to a fully AI-native approach. Based on these learnings, we've identified a few specific AI opportunities, each of which we believe has the potential to become the primary way travelers engage. The first opportunity is in the planning phase when travelers have a rough idea of an itinerary and are trying to decide what's right for them amidst the unlimited options. Tripadvisor's first-party data and insights position us to curate the most personalized recommendations validated by relevant travelers and make them as immediately actionable as possible. The second opportunity is during the trip itself. Travelers make a lot of last-minute decisions around what to do, see and eat, but availability, pricing and logistics are tricky, especially in Experiences. So we'll leverage our assets to help travelers experience the destination better while traveling. This presents an opportunity to deploy geo-aware recommendation algorithms and deliver proactive offers with single tap booking and access to real-time customer support. We're advancing rapidly on these opportunities and expect to launch an AI-native MVP for the planning phase in the coming weeks in Q4. From there, we'll intend to build a strong foundation to scale and continuously iterate and enhance the customer experience. Of course, we're also exploring how Tripadvisor can deliver value to travelers as a deeply embedded partner with broader AI platforms. As part of our learning agenda, we're directly integrating our Tripadvisor and TheFork brands into ChatGPT through first-of-their-kind apps with a differentiated approach from others. We expect these to be live over the next few weeks. We've signed valuable licensing deals with the majority of the leading AI companies, and we're experimenting with use cases like Agentic and multimodal AI. Ultimately, whether we scale AI value creation through on-platform innovation or off-platform partnerships will be decided by our customers. We believe that by focusing on where we are uniquely positioned to serve travelers, maximizing speed of execution and continuing to fuel the content flywheel that is our most differentiated asset, we can position Tripadvisor at the center of the AI ecosystem in travel. Our final priority is narrowing Brand Tripadvisor's focus. Beyond experiences in AI, we'll optimize Brand Tripadvisor's portfolio to enhance profitability. Over the last few years, we've invested incrementally in Tripadvisor's broad engagement strategy designed to fuel new monetization paths and stabilize our legacy offerings. However, we recognize that the pace of impact from these investments has not been enough to offset increasing pressure from the shifting SEO landscape. So in our most mature legacy categories, we'll focus strictly on optimizing for profitability. We'll deprioritize the areas that we expect to be in secular decline in favor of shifting resources towards our marketplace growth opportunities while driving efficiency across areas that are more exposed to ongoing headwinds. Operationally, this will reduce our headcount and better align costs with revenue expectations. Let me be clear. Taken together, these actions are not a deprioritization of the Tripadvisor brand. In fact, we believe Tripadvisor will play an even larger role in Group level value creation moving forward. Hotels and restaurants will continue to be an important part of planning a trip and the hundreds of millions of travelers coming to Tripadvisor each month will still enjoy those features. Our partners will continue to benefit from access to these audiences. While this functionality isn't going away, we'll shift Tripadvisor's focus and resourcing to areas where we believe we can deliver the most value to customers, leverage the brand and traffic to drive experiences growth, position our content and data at the center of the AI ecosystem and enhance profit from the legacy portfolio. In addition to this set of priorities, TheFork will continue to execute on a financially disciplined growth strategy. This quarter, the segment continued its strong performance with growth of 28% and a 22% adjusted EBITDA margin, nearly double what it was last year at this time. We will continue to build on our position as the leader in European dining and prioritize the diversification in revenue across B2B and B2C while increasing profitability. We're also excited about the team's innovation agenda, which includes an AI-powered booking assistant that's driving an uplift in conversion and a social feed that allows diners to discover restaurants based on reviews and contributions from their contacts. In summary, we believe that the priorities we shared today position us well for the future to drive value for shareholders. As part of this ongoing program of work, we will also take additional steps to review our group portfolio as we determine where we'll invest and where we'll simplify further through partnership or divestment. We are building a stronger Tripadvisor Group focused on faster-growing categories with large TAMs, durable transactional economics and strong supply. We're prioritizing areas where we have a proven track record and the capabilities to win. We'll do fewer things better, move faster and optimize the lines of business where our scale or competitive position can't lead the market. We believe that our actions will strengthen our financial profile by reducing costs, accelerating revenue growth and growing profitability, both in the experiences category and for the group as a whole. With that, I'll turn the call over to Mike. Mike Noonan: Thanks, Matt, and good morning. I'll start with a review of our financial performance, and later, we'll provide more information on the cost savings program, what our operating model changes will mean for how we report our segments and some thoughts on Q4. As a reminder, all growth rates are relative to the comparable period in 2024, unless noted otherwise. Q3 consolidated revenue was in line with our expectations of $553 million or 4% growth and consolidated adjusted EBITDA exceeded our expectations at $123 million or 22% of revenue. In the Viator segment, the number of experiences booked grew 18%. Growth improved sequentially in both the Tripadvisor and Viator points of sale, while growth in third-party points of sale continued to outpace the overall segment. Importantly, the number of experiences booked through the Tripadvisor point of sale returned to growth this quarter. In North America, our largest source market, we saw bookings growth accelerate sequentially across both points of sale, which we believe is reflective of the strength of both of our brands as we scale our coordinated marketing efforts. Gross booking value, or GBV, grew 15% to approximately $1.3 billion and revenue grew 9% to $294 million. Changes in FX positively impacted GBV revenue growth by approximately 3 percentage points. The difference between the growth in the number of experiences booked and growth in revenue continues to be driven by the high growth of our third-party merchant bookings relative to 2024. As a reminder, merchant bookings generally have a lower average booking value, which impacts GBV growth relative to volume growth. They also carry a lower implied take rate, which impacts revenue growth relative to GBV growth. While the implied take rate is lower than our owned and operated points of sale, third-party merchant bookings are both financially and strategically valuable. From a financial perspective, these bookings carry an attractive profitability profile. Strategically, these bookings are largely sourced from regions outside of our core markets, which enable us to reach incremental traveler demand as we continue to scale our new and repeat booker cohorts globally. Viator adjusted EBITDA was $50 million or 17% of revenue, a margin improvement of 550 basis points, driven primarily by a more efficient marketing channel mix. We continue to see outsized growth in our direct channels and in repeat bookings, each contributing to our profitable growth profile as repeat bookings cohorts continue to scale. In addition, growth in third-party merchant bookings, which come with no marketing spend contributed to the segment's total marketing leverage. Lower marketing costs more than offset modest increases in personnel costs related to targeted investments in technology, product and supply. Altogether, these trends continue to reinforce our belief in the long-term margin opportunity for this business at scale. At Brand Tripadvisor, Q3 revenue was $235 million, a decline of 8%, which was below our expectations. We experienced stronger-than-anticipated traffic headwinds that accelerated throughout the quarter, negatively affecting both free and paid channels. In branded hotels, revenue was $143 million, a decline of 5%. In hotel meta, strong pricing in both free and paid channels was more than offset by accelerating traffic volume headwinds. Regionally, single-digit growth in U.S. hotel meta revenue was more than offset by declines in Europe and APAC. As a reminder, we will continue to manage our branded hotels business for margin stability and not chase low-margin revenue in this category. We remain focused on improving the quality of our hotels offering and delivering highly qualified incremental demand to our partners, and we believe that success is evident by the sustained pricing growth we continue to witness. Media and advertising revenue declined 11% to $36 million, primarily due to the aforementioned traffic headwinds we incurred in the quarter. Experiences and Dining revenue was $47 million, a decline of 9%. Growth in Brand Tripadvisor's Experiences revenue lags unit volume growth, which returned to growth in the quarter, as I mentioned earlier. Experiences revenue performance was largely stable sequentially. And going forward, we expect Experience revenue growth on the Tripadvisor point of sale to accelerate as a result of our new operating model. Brand Tripadvisor adjusted EBITDA was $59 million and 25% of revenue, which exceeded our expectations. Despite accelerating traffic headwinds in the quarter, placing additional pressure on revenue, the team did a good job managing the growing reliance on paid channels with fixed cost prudence to exceed margin expectations despite pressure on adjusted EBITDA. At TheFork, Q3 revenue was $63 million or 28% growth and 20% growth in constant currency. B2C bookings volume grew 11% across all channels and 13% on TheFork's branded direct channel. The strength of B2B subscription revenue growth continues to be driven by restaurants adopting higher-priced premium plans, ongoing evidence of the strength of the feature set and overall value proposition we deliver to restaurants. While still a minority of TheFork's total revenue, B2B subscription revenue is contributing an increasingly share of the overall revenue mix, which we expect to continue in the future as the team executes on its business model diversification strategy. Adjusted EBITDA at TheFork was $14 million or 22% of revenue, representing a margin improvement of approximately 10 percentage points, driven primarily by leverage in personnel costs. Turning to consolidated expenses for the quarter. Cost of revenue was 7% of revenue, an improvement of 10 basis points. Marketing costs were 41% of revenue, higher by 150 basis points. Modest leverage at Viator was offset by deleverage at Brand Tripadvisor due to the aforementioned traffic headwinds. Personnel costs as a percent of revenue improved by 100 basis points. Investment in Viator personnel offset lower personnel costs at BrandTripadvisor. Absent share-based compensation, personnel costs were approximately flat as a percent of revenue. Technology costs at under 5% of revenue were approximately flat with last year. G&A as a percent of revenue improved by approximately 70 basis points, driven primarily by lower real estate costs. Now turning to cash and liquidity. Q3 operating cash flow was $45 million and free cash flow was $26 million. On an LTM basis, operating cash flow was $347 million and free cash flow was $261 million, which represents significant improvement from last year due to a more favorable working capital and onetime cash tax settlement charges in the comparable period last year. Total cash and cash equivalents at September 30 were approximately $1.2 billion. Our cash balance includes approximately $350 million in Term Loan B proceeds raised in the first quarter of 2025, which we plan to use to pay our outstanding convertible notes due in April 2026. After taking into account deferred merchant payables of approximately $393 million and the $350 million term loan, our remaining excess cash balance is approximately $475 million. During the third quarter, we did not repurchase shares given the operating model changes and cost savings programs we were contemplating. However, we expect to restart our open market repurchases this quarter aligned with our previously communicated programmatic approach, subject to a stable macro environment. Today, we have approximately $160 million remaining in our authorization. We believe that our current cash profile and net leverage levels reflect a strong capital structure with appropriate cash for operating needs. Turning to the gross cost savings program Matt mentioned in his prepared remarks. At the group level, we are sharpening our strategic focus in order to accelerate our ambition in the areas where we believe we have differentiated assets and that can drive meaningful shareholder value. We believe that realigning our strategy, our resources and our brand and data assets across Viator and Brand Tripadvisor into a new operating model provides an attractive opportunity to accelerate growth and innovation. This operating model change will result in a greatly simplified organization and allow us to operate more efficiently. We will be launching an annualized gross cost savings program of $85 million in Q4 that we intend to execute throughout 2026 and expect to fully realize by 2027. This savings program will primarily include reductions in headcount spanning Brand Tripadvisor, corporate G&A and Viator by approximately 20%, but will also include other operating expenses -- expense efficiencies as a result of our operating model change. In 2026, the net impact of our savings program is expected to be lower than $85 million due to the timing of these actions. For example, we expect approximately $10 million of the savings to be recognized in Q4 of this year. And as I mentioned earlier, our plan to invest behind reaccelerating experience growth in 2026 may offset a portion of the savings impact. While it's too early to provide detailed guidance for next year, our preliminary estimate today on this program's impact to fiscal '26 would be an improvement of approximately 100 basis points to consolidated adjusted EBITDA margin. We will provide another update next quarter, given we're still finalizing the '26 plan. Next quarter, we also intend to update our reportable segments to align with our updated operating model and resource allocation strategy. We expect to maintain three segments, which we anticipate will be Experiences, Hotels and Other and TheFork. We believe updating our reportable segments will provide investors with a clearer understanding of the growth and margin performance and future opportunity of our entire Experiences business as well as more clearly highlight how we'll manage our legacy businesses. Let me take a moment to quickly explain the major changes that bridge our existing segment structure to our planned updates. In the Experiences segment, the definition and disclosure of unit volume, GBV and revenue will be consistent and unchanged from the way the Viator segment reports today. However, the cost profile will change to include all fixed and variable expenses related to both brands for Experiences, which have been split between the Brand Tripadvisor and Viator segments. By doing this, there will no longer be a need for intersegment eliminations related to experiences, which today is recognized as an affiliate marketing expense in the Viator segment and intercompany revenue for brand Tripadvisor. The Hotels and Other segment will effectively be the current Brand Tripadvisor segment, but without experiences-related revenue and expenses. Finally, TheFork segment will remain unchanged from today's disclosure. Given these changes are still in process, I will provide guidance for the fourth quarter and full year consistent with our existing segment structure. Turning to our outlook for Q4. Our expectations for the quarter include the benefit of approximately $10 million to adjusted EBITDA from our aforementioned cost savings program impacting both brand Tripadvisor and Viator, but do not assume any revenue benefits from our new organizational structure, which we are implementing this quarter and expect to drive benefits throughout 2026. For Q4, we expect consolidated revenue to be approximately flat to last year and consolidated adjusted EBITDA margin of approximately 11% to 13%, which implies the following for each brand. At Viator, we expect total bookings growth in Q4 of approximately 16% to 18%, driven by an acceleration at the Viator and Tripadvisor points of sale. We expect some sequential pressure in GBV growth due to the impact of promotions and a higher mix of lower-priced tickets to average booking value. We expect revenue growth to be in line to a slight acceleration with Q3 growth. Adjusted EBITDA margin is expected to be approximately 100 basis points lower due to a nonrecurring indirect tax credit incurred last year. Absent that onetime benefit, we would expect Viator's adjusted EBITDA margin to increase by approximately 200 basis points. At Brand Tripadvisor, our current expectation is for revenue to decline in the low teens, which assumes Q3 traffic headwinds persist. Adjusted EBITDA margin is expected to decline approximately 900 basis points, driven primarily by pressure in the hotel meta free channels as well as planned marketing spend resulting from ongoing coordinated efforts in experiences. At TheFork, we expect revenue growth in the mid-teens, which reflects a currency benefit of approximately 10 percentage points. The sequential step down in growth is expected as we are now lapping the scaled growth initiatives in B2B and partnerships we began realizing in Q4 of last year. Adjusted EBITDA is expected to be approximately flat year-over-year. Given our Q4 outlook, we now expect full year consolidated revenue growth of 3% to 4%. However, our adjusted EBITDA margin expectations remain unchanged at 16% to 18%. We are excited about our strategic direction as we finish the year and believe that the operating model changes and cost savings actions will sharpen our focus and allow us to grow consolidated revenue and adjusted EBITDA and improve adjusted EBITDA margin in fiscal year 2026. In Experiences, our targeted investments will unlock a larger TAM and position us to accelerate revenue growth and grow adjusted EBITDA. At TheFork, we will continue to execute a financially disciplined growth strategy, and we expect to optimize our legacy offerings and deliver cost savings to maximize profitability in the face of structural headwinds. Over the past few years, we've made notable progress driving a deliberate business model diversification strategy to grow the mix of revenue and adjusted EBITDA from our marketplace businesses. As Matt stated earlier, this year, revenue from Viator and TheFork, our marketplace businesses are expected to represent 60% of total consolidated revenue and 30% of total adjusted EBITDA in our current segment reporting. Under our new operating model and segment reporting structure, we expect this revenue mix shift to steadily continue and the mix of adjusted EBITDA to surpass 50% consolidated EBITDA in fiscal 2026, which we believe reflects our strength as an experiences and AI-enabled company and our overall marketplace mix. We look forward to sharing more detail with you on our Q4 earnings call next year. I'll pass the call back over to Matt briefly. Matthew Goldberg: Thanks, Mike. Before we start Q&A, I wanted to take a moment and welcome Alex Dichter to our Board of Directors. Alex joins us with many years of experience as an adviser and operator with deep travel industry knowledge and an extensive background working with organizations across multiple travel verticals to transform and scale their businesses. This is the first step to bringing on fresh perspectives from independent directors, and we're excited to have Alex join the Board. He joins us as Greg O'Hara departs, and I want to thank Greg for his contributions and leadership over the years. With that, I'd like to turn the call back to the operator for Q&A. Operator: [Operator Instructions] The first question comes from the line of Richard Clarke of Bernstein. Richard Clarke: I'd just maybe like to ask a question on your revenue growth assumptions going forward. I think you said you think you can accelerate growth. I'm just wondering what the shape of that will be. If you're investing even less in the sort of meta and Brand Tripadvisor product, is the revenue growth -- can you still stabilize better than the mid-teens guide you set out for Q4? And with the new organizational structure, would you expect your Experiences segment to be able to grow faster than the 9% sort of high single digits that Viator is doing at the moment? What's the kind of shape of revenue growth going forward? Mike Noonan: Yes. Richard, it's Mike. I'll take this. In terms of thinking about the longer-term shape of revenue and as reflective of our overall operating model, I'll say a few things as we set ourselves up. In Experiences, we do think the operating model and how we're allocating investment to Experiences, we are expecting our Experiences in our new segment to reaccelerate next year, right? And that is both a focus on two things: one, geo TAM expansion, looking at new source markets to acquire bookers, very important in that equation and category expansion as we think about other opportunities to bring other types of things to commercialize in the storefront, think of attractions, right, for example. So those are two important things as we think about that reacceleration statement next year. We also then, I think, as we think about our hotels and other category, which would be our other second new segment, I think we're taking a very pragmatic view of what this looks like. We are -- when you think about the traffic headwinds we've seen, particularly accelerating in the free channels and then you take that with how we will be investing in growth, meaning we're not going to be prioritizing growth necessarily in the paid channels just for growth. We're going to really divert those resources to Experiences. We would expect continued revenue headwinds next year. And then in TheFork, just to round out in terms of the growth, we are continuing to expect that TheFork is going to grow nicely with continued margin evolution. So when you take that all in, when we think about where we sit today, and to be clear, we will be refining our plans as we move through the next 3 months. From a consolidated perspective, we would expect that we would grow both revenue and EBITDA next year. When we take into consideration the cost savings program that we've enacted that really stop the growth of fixed costs in both the Viator and Brand TA segments, which we'd deliver about -- we said about 1 point of margin improvement to the consolidated financial profile next year. So again, important moves we're making today that we believe are important for growth in margin for next year, but not just next year. It's really how we set ourselves up for the next several years and driving the experiences opportunity we have in front of us. Operator: The next question comes from the line of Naved Khan of B. Riley Securities. Naved Khan: A lot to digest here and I think some of the steps here that you described, Matt, do make sense. I'm just wondering, as you look to reaccelerate growth in the Viator business or the Experiences business, is it possible to kind of get kind of closer to your closest competitor? I think they recently disclosed around 30%. And also, you have kind of expanded margins very nicely in this segment. Is it possible to remain on this margin expansion trajectory as you accelerate growth? How -- give us your thoughts on how we think between the trade-off between growth reacceleration versus margins? Matthew Goldberg: Thanks, Naved. And I think you've hit right at the core of why we are so enthusiastic about this fundamental shift to our operating model because we believe it allows us to do just that, reaccelerate growth while we continue to expand margins. And we are already really leading the category today. You can look at it in many different ways and make judgments about who's got the best profile. But let me tell you what I'm excited about our profile. We believe we're in a real position to shape what comes next as the global brand leader in this category. Together with Tripadvisor, it's the category's largest, most trusted and most profitable platform, and we are building it for sustained growth. Why do I say largest? It's largest because of our scale and reach. We're the global leader in scale with unmatched supply and reach, 400,000 experiences, 65,000 operators. And of course, we can more fully tap the hundreds of millions of travelers using Tripadvisor monthly, giving that supply more visibility and more demand that really no competitor can replicate. And the proof points in my mind are the last 12 months GBV of $4.6 billion and 17% items growth. and we believe we can accelerate off that. Being trusted has an advantage. We've got this global reputation of trust, and it's a foundation to grow Experiences globally. A very good percentage of our audience from Tripadvisor is coming outside the U.S., even though Viator has primarily focused on U.S. source market. So that gives us immediate credibility to expand experiences into new markets. We think there'll be lower barriers to adoption in those source markets where travelers already know and use Tripadvisor. And we think that it signals sort of a reliability, which is critical for the emerging category. And in Europe alone, we have 70% brand awareness and it's relatively unmonetized today. So by focusing Tripadvisor on Experiences, we have many, many times more visitors to go take advantage of than others. And finally, profitability. We are driving this performance with financial discipline. And what we've shown is that the category can scale profitably. And we're the only ones who have shown that. And we're doing it efficiency and with discipline and performance. And so Viator was profitable since 2023. Last year, we delivered a mid-single-digit margin. The last 12 months, we have a high single-digit margin, and we are approaching double-digit margins. And as we move from regional strength to building a global platform, we think that, that leadership is within our capability, and we're going to go after it. So thanks for the question. We're super enthusiastic about reaccelerating growth and expanding margins. Mike Noonan: And I'll just add to the second point of your question. Yes, sorry. And just to underscore a few points that Matt said, we are really pleased with the unit growth. And I think I want to make sure that we all focus on the most important metric, we think, is that because it's a statement of real customer conversion and it's a statement of you have the ability to bring back customers on a repeat basis, and that's super important. And so we'll continue to really focus on driving that scale and that unit volume growth. And on the margin, I would say we -- this model, as we continue our disciplined new user acquisition is really around growing margins. And I think we will continue to think about, particularly as we're excited about reaccelerating next year into new geos, there'll be some modest investment into that. But all in all, I expect to continue to see the model produce margin enhancement. Operator: The next question comes from the line of Ronald Josey of Citi. Unknown Analyst: This is Robert on for Ron. Can you maybe give us a sense of new user trends at Viator and as you continue to expand into the secondary and tertiary markets and into newer categories, help us understand your approach to growing supply in each of these newer markets. Mike Noonan: Yes, Rob, I'll take that real quick, and Matt can chime in. Great question because it does tie directly of how we're thinking about the reacceleration point. In the U.S. and North America as our core market, we continue to see very high repeat revenue growth rate from our repeat customers, very important, because that is long-term customers and they generally -- the more times they come to us, the less reliant they are on paid channels. It's part of our core flywheel. On new users, we are very disciplined, right? And it does explain some of the overall growth profile because we are looking at new user acquisition in light of do those ROIs make sense and do they contribute to our long-term margin targets. So we're very disciplined in terms of that new user acquisition. We do believe that a core tenet of the geo expansion and Matt mentioned some of this around where we would think to go would be, hey, where is our brand Tripadvisor, for example, well known, a lot of traffic volumes, which is in Europe, gives us the opportunity to grow that new user base at attractive ROIs, and we're excited about that. And again, is a key principle of how we're thinking about that reacceleration comment? Matthew Goldberg: Yes. And look, I just want to add, Rob, that the marketplace flywheel that we have working between how we generate demand across both of our brands and do that with an ROI-driven acquisition strategy, the way we expand geographically, bring those new users into our store and give them a better experience where we're leveraging AI to do personalization and matching and our sort to be far more relevant for them and then making sure that we have the right supply in those secondary, tertiary markets in new categories. All of that works together to attract new users, get them coming in, converting and then being more loyal, so you get the new and repeat working really well together. And we think that our marketing tests and the tests we've done on our product and with our supply across the two brands allow us to do that with more efficiency than we've ever been able to do it before, and we're going to scale that. Unknown Analyst: Got it. That's great. And then as a quick follow-up, Matt, you had mentioned a few months ago that AI was already making a difference financially across the business today. So can you maybe elaborate on how AI is driving cost efficiencies across the business? And then given your focus on AI going forward, help us understand how you're thinking about the potential revenue opportunities and licensing deals ahead. Matthew Goldberg: Yes. Thanks, Rob. So we're deploying AI fully across the organization in every part of our organization. And from an efficiency and productivity perspective, we've done it in a lot of enterprise use cases across customer service, where we're making major strides in our content moderation and fraud detection, the way we localize, the way we think about driving our marketing teams. It's giving us a lot of advantage. And we will continue to roll that out in every area of the business. In fact, as we're planning for next year, one of the things we want to do is really measure that very clearly so that we can see not only the pilots making sense, but the way we scale that making sense. And I think our -- we've rolled out the tools to do that, and we're excited about how that will continue. More importantly, right, is the way that we are using it in our product to drive innovation. And we've learned a lot over the last couple of years. We've built the AI infrastructure, and we've leveraged it for our product enhancements. And we've shown in succession how we can work with trips and planning and itineraries to the way that we summarize and synthesize our content through to a travel assistant, which we recently learned. And these were all efforts that are leading us to a place where we can go fully AI native and really serve the customer however and wherever they want to engage with that. So we're building on those learnings from our AI innovation. And we are setting ourselves up to put a deep focus on that and not get distracted by trying to chase other things that might not make as much sense at the expense of being able to do it. And that's why we're going to launch an AI native MVP in the coming weeks, and we're excited to continue that. I will say I also believe that the way that we are doing partnerships has been differentiated, and we're learning. We're seeing good value exchange. And we believe that going forward, we can really scale that opportunity. So we're always having conversations to do that. So feeling real good about the AI future. Operator: The next question comes from the line of Doug Anmuth of JPMorgan. Dae Lee: This is Dae Lee on for Doug. I have two. Firstly, on -- with the reset to an experience-led strategy, will the consumer experience on Tripadvisor change? And how do you expect Tripadvisor and Viator brand to be positioned for consumers shopping for experience going forward? Matthew Goldberg: Yes. So thanks for that. Absolutely, the user experience will change because we are going to primarily be focused on how the Experiences category can play on Tripadvisor. We will continue to offer the features that we've had in the past, but our primary focus as we allocate resources, as we set goals with all of our KPIs is going to be driving that experiences future. And we do believe that bringing it together under one team, which we've already proved that we can do with our product, all of the work we're doing in the store to optimize the funnel to take friction out, all the myriad of little things we do to drive conversion and loyalty and repeat will benefit both brands, both points of sale, which will come together in a more seamless fashion so that consumers can engage with us wherever it makes the most sense for them. And I think that will drive that flywheel that we were talking about, which once you get it going, really has a lot of potential to accelerate our revenue. Mike Noonan: I'd just add a few things on to that, Dae, which is this work has -- this is not a cold start. We've been doing this work. And you've seen us talk about the coordinated bidding as an example of this. And the learnings we've gotten from that has enabled us to lean in and actually gain increasing confidence around what we can do in the Tripadvisor points of sale. So we're very excited and it's a key point of -- as we think about experiences reacceleration. Dae Lee: Got it. And as a follow-up to that, what's been driving the acceleration in volume growth at Viator? And then for your guide for 4Q, what will drive acceleration, especially given the tough 4Q comps? Are there any specific channels, products or regions that's driving the acceleration? Mike Noonan: Yes. On the unit side, it's -- on the unit side, it's really been the 3P mixing higher, and that's been growing very fast, albeit on a much smaller base, but growing very fast. I think we've consistently said it around the other channels, Viator, which is by far the largest channel and TA and Viator are the vast majority of that. Viator has been generally growing around the average, and Viator has been growing lower than the average. And earlier in the year is actually -- it was declining year-over-year. But that has been improving largely because of the efforts around product that Matt just mentioned, largely because of the efforts around coordinated bidding. And this quarter, we just mentioned that both channels accelerated in the quarter. The TA point of sale actually turned to positive growth in the quarter, again, reflective -- and these are all on unit basis to be clear, all reflective of that. And so as we move forward, we are very excited about our merchant 3P business for all the reasons we've talked historically, and we'll continue to work with our partners to advance that. But the work very much continues on our owned and operated channels at both Viator and Tripadvisor point of sale, and we're going to continue to work on those. And we expect embedded in our Q4 guide would be expectations of both the TA and Viator channels to have modest acceleration again. Matthew Goldberg: Yes. And just remember, Tripadvisor Experiences has previously been a drag on growth. That's going to shift, and it will no longer be a drag on growth, and we'll get these things working really well. We have marketing products, supply, data plans to do that. Operator: The next question comes from the line of Jed Kelly of Oppenheimer & Co. Jed Kelly: Just two. Will you market -- will the go-to-market strategy for your Experiences, will that be built more around the Viator brand or the Tripadvisor brand? And then can you talk about how you think potentially expanding into other experiences into other regions, particularly Western Europe? Matthew Goldberg: Yes. So the go-to-market strategy is something that we can continue to work on, and we think that it will be where we believe we have the strongest ability to go. Now both brands can exist in both markets because they do different things. They are different products, right? Viator is a very focused vertical when you kind of already know I want an experience and I want the best way to book it. Tripadvisor still is a broad planning and recommendation platform across multiple categories. And that's not going to necessarily change where we'll put our focus and energy is in making sure that if you come to find your hotel, we're also doing a really good job to cross-market experiences to you in a fundamental way. If you're thinking about where you want to eat, there's probably a really interesting tour around that restaurant that we want to make sure you know about and book. So it will depend category by category in experiences and market by market, how we go to market. We think both brands can be there. We may choose to lead with one or the other depending on the market. Mike Noonan: Yes. And I'll follow up on that point, which is your second question on geo expansion. So we are excited about geo expansion, particularly as we think about accelerating growth in new users. When we look at the geos, obviously, we want to look for a large addressable TAM and look for areas we actually have a competitive advantage and Europe clearly is that when we think about the large TAM size, but we also think about -- and this is where it's so critical about the operating model change. The traffic and brand awareness of Tripadvisor is very large there. And so our ability to really enhance and tighten our focus around experiences, leveraging the Tripadvisor brand is going to be very important to how we think about that expansion. And that doesn't mean -- and Viator will always play a point, and we have two brands to think about how we want to grow in the new market. So a lot of work underway as we're working on this, but we're very excited about that expansion opportunity. Operator: The next question comes from the line of Nafeesa Gupta of Bank of America. Nafeesa Gupta: So my first question is on Metasearch. How are you thinking about the legacy business now that you are consolidating both the experiences in Viator and Tripadvisor? Will that business still have investments that you were planning for the last couple of quarters? And the second one is on Fork. There are reports going around regarding exploring sale of TheFork. Any thoughts on that? And how should we think about TheFork revenue growth in 2026 given the B2B lapping? Matthew Goldberg: Well, thanks for those questions. First of all, on our meta business and our hotel business, the hotel product continues to provide real value for both travelers and partners. We have the best advice, the most photos, and we're trusted really over everyone else in the space. And we recognize that with Google taking more and more share of the search traffic for themselves, we're just not going to be able to grow that business at the level of profitability that we'd like. So we know that it's an important part of the journey that travelers find value and price compare, and we're able to send our partners really good quality leads. And we've done some really good product work there to drive conversion rates higher. And we're -- I think we're still focused on that. But what we won't do is we're not going to continue to invest incrementally. You can think of it as an add-on or incremental product to our primary focus that we will make sure maintains the quality for both travelers and partners. Now as it relates to your question about TheFork. TheFork is a great business that is performing really well. We are excited about the path of sustainable growth and the improving profitability profile that really benefits the Group. But of course, we consistently evaluate all options to unlock value in all of our assets, and that includes TheFork. And our primary focus is what's going to drive the most shareholder value ahead. Nothing is off the table. We see it's a leader in core European markets. We have a good and mix of B2C and with growing B2B, and that's giving us advantage. And as a leading European dining platform, we know it's a valuable asset, both for global and regional travelers. It is run separately. There's optionality there. And we recognize there have been precedent transactions out there that suggest TheFork is a highly valuable asset, especially given its unique scale position in Europe. So optionality, and we are focused on it. We love what the team is doing there. Nafeesa Gupta: Just on the revenue growth for Fork, how should we think about that going ahead? I know this last couple of quarters, there was a lot of FX tailwind as well. And how should we think about next year? Mike Noonan: Yes, sorry about that. Yes, listen, I think a couple of things important to understand the growth profile. Big picture, one, but we still expect nice growth and profit improvement next year for sure. We are -- we will have a bit harder comp next year because we're comping and we're seeing some of this before. We're comping some very strong growth in B2B as well as some of the partnership initiatives we've put in place. So we would expect a step down in growth year-over-year, but we still believe we're very excited about the revenue diversification strategy. We're very excited about the B2B business and the ability to continue to grow into our existing restaurant base, new restaurant base, more and more premium plans. Those all offer a very, very nice upside as well as we continue to see very healthy growth -- volume growth in our B2C business, particularly in our proprietary Fork network. So I think, yes, there'll probably -- there will be -- we expect a step down in growth from what we saw this year, but still very healthy as we move into next year. Operator: This concludes the question-and-answer session. I would now like to turn it back to Matt Goldberg for closing remarks. Matthew Goldberg: Thank you all for joining us on this morning's call. The changes we walked through today represent a meaningful shift in our strategic focus and how we'll deliver value for shareholders ahead. We're excited to move into this new phase of our growth for the group. Before I close out, I also want to take a moment to acknowledge the impact these decisions have on our teams. We're grateful for their continued hard work and dedication. We look forward to updating you on our progress and plans for 2026 on the next call. Thanks, everyone. Operator: Goodbye.
Asli Demirel: Ladies and gentlemen, welcome to Anadolu Efes' Third Quarter 2025 Financial Results Conference Call and Webcast. Our presenters today, our CEO, Mr. Onur Alturk; and our CFO, Mr. Gokce Yanasmayan. [Operator Instructions] Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with TAS 29. Just to remind you, this conference call is being recorded, and the link will be available online. Before we start, I would kindly request you to refer to our notes in our presentation regarding forward-looking statements. Now I'm leaving the ground to Mr. Onur Alturk, Anadolu Efes' CEO. Sir? Onur Alturk: Good morning, and good afternoon, everyone, and welcome to Anadolu Efes Third Quarter 2025 Conference Call. Thank you for joining us today. As you may recall, due to the continued uncertainties around our operations in Russia, we have classified these operations as financial investments on our balance sheet at the beginning of the year. And accordingly, they are no longer consolidated in our income statement until there is more clarity. However, we separately disclosed the financial results of these operations in our earnings releases for the last 2 quarters. And starting from quarter 3, we decided to stop providing separate disclosure for Russia. And this is primarily because of the information flow has not been as stable, as consistent as before. We will reassess this approach as the situation evolves. And looking at the third quarter, it was a mixed set of results where the profitability was solid. However, the volume momentum came with its own set of challenges. Even so, our broad market presence and agile execution helped us to preserve overall stability as growth in several markets balance softer demands in others. So we maintained our growth trajectory from the second quarter with consolidated volumes reaching 31 million hectoliters, up by 7% on a pro forma basis compared to the same quarter last year. The volume growth was driven by our Soft Drinks operations particularly supported by robust performance in international operations, while Beer group volume performance was softer, mainly impacted by domestic markets. Strong volumes supported top line growth, but the revenue per hectoliter was pressurized due to the ongoing focus on affordability and increased discount rates. On top of strong top line results through gross profit improvement and strict management of operational expenses, we are able to record an expansion in EBITDA margin. Additionally, we successfully generated positive cash flow amounting at TRY 9.4 billion, which was mainly driven by strong operational profitability. As of September 30, 2025, our consolidated net debt-to-EBITDA ratio stood at level of 1.5x. As we shared before, as part of our Vision 2035, one of the key pillars of our growth strategy was geographical and categorical expansion. In this regard, I'm truly pleased to share two important milestones today we achieved during the quarter. Firstly, we have recently started the distribution of Mercan raki spirits in the final days of October, while the discussions regarding the acquisition of 60% of the company are still ongoing. And secondly, we have signed a licensing agreement with Salyan Food Products, which will enable us to produce, sell, distribute and marketing of Efes and Efes Draft brands in Azerbaijan. Turning to Beer group performance. During the third quarter, our consolidated Beer volumes declined by around 5% year-on-year on a pro forma basis. This was mainly driven by a slowdown in Turkiye, where volumes were down by 8.4%. In our international Beer operations, volumes were down low single digits on average. As expected, Moldova reflected a slowdown following the last year's high base. Georgia was temporarily affected by export-related business. On the positive side, Kazakhstan delivered solid growth, supported by strong portfolio execution. And Ukraine also contributed positively by growing low single digit, thanks to ongoing recovery and the low comparison base. Let me discuss Turkiye in more detail. Beer volumes declined by 8.4% in the third quarter. And as mentioned earlier, this was mainly driven by affordability pressures stemming from persistent inflation and weakening of consumer purchasing power. In the second half of the year, the absence of midyear minimum wage adjustments further deepened the pressure on consumer purchasing power and making its impact increasingly evident in the market. In addition, the price adjustments we implemented in early July had a temporary impact on demand, while the slowdown in tourism also weighed on overall volumes, particularly in on-trade and HoReCa channels. And this quarter marked a period of strengthening our portfolio and ensuring it remains well aligned with the customer expectations and market trends. We launched Jupiler 0.0%, a non-alc beer in Turkish markets, which marks an important step in expanding our product range. Although it's very early and it's very small, we expect these launches to be a new strategic pillar for growth for future. And about our CIS operations, starting with Kazakhstan, we delivered low single-digit volume growth, supported by strong brand activations and robust export performance. Our premium segment continued to perform well, driven by effective brand activations like strategic pricing and new can designs that further enhanced brand visibility in the market. And during the quarter, in line with our KEG focus, draft focus, we also launched successfully the Pegas brand SKU, Khmelnoy Los. In Georgia, volumes declined by low to mid-single digits, in line with expectations, actually, mainly due to the restructuring of our export business, which had no impact on profitability right now. And additionally, introduction of Lowenbrau-Oktoberfest Limited Edition helped us to maintain our market presence and customer engagements. In Moldova, volumes contracted in low single digits as expected, reflecting last year's high base. And moreover, year-on-year volume decline was affected from calendarization impacts. Let's briefly review our Soft Drinks operations, too. In the second quarter of the year, CCI's consolidated volumes increased by 8.9%, driven by positive contribution of all international markets. Turkiye volume declined by 1.7%, mainly impacted by weakening consumer purchasing power and deteriorating weather conditions during September, whereas international volumes demonstrated a remarkable growth, posting a 16.1% increase, mainly supported by Central Asia and Iraq. And in Pakistan, volumes increased by 0.7% year-over-year despite severe floods and ongoing political sensitivities. Kazakhstan and Uzbekistan delivered robust growth with 24.2% and 36.5% growth, respectively. And lastly, Iraq volumes up by 7.8%, marking 10th consecutive quarter of growth. When we move on to our operational results. In the third quarter, we continued our solid volume generation on a consolidation basis, although effective portfolio management and price adjustments made in certain markets helped to ease the impact of discounting and affordability focus and revenue per hectoliter decreased by 3%. With improved gross profitability margin and limited increase in operating expenses, EBITDA increased around 8%. As a result, margin also expanded, which was supported with contribution from international operations in both Beer and Soft Drinks businesses. And our consolidated net income was recorded around TRY 5 billion. Although operational profitability remained solid, higher financial expense and lower monetary gains weighed on earnings in the third quarter. Beer group delivered a year-on-year decline in earnings as a result of higher financial expense and a softer operational profitability amid challenging environment. Following a softer quarter 2 performance, we delivered strong free cash flow generation at the consolidated level, driven by our Soft Drink business. On top of the strong operational profitability, we benefited from improving working capital, lower CapEx spendings and tax expenses compared to same period of last year. In the current environment, as I emphasized in our previous conference calls as well, there is no doubt that strengthening free cash flow remains a top business priority, of course, in Beer group, and Gokce will share more details about this. And consequently, our consolidated net debt-to-EBITDA ratio stood at level of 1.5x as of September 30, 2025. And now Gokce will give details on financial metrics. Gokce, please. Gökçe Yanasmayan: Thank you, Onur. Good morning, good afternoon to everyone. Onur covered, as usual, Anadolu Efes' consolidated results. So I will provide an update on the Beer group's performance for the third quarter. But before I start again, I want to remind once more that disclosed figures in my presentation are on a pro forma basis, meaning that they exclude the financial results of Russian operations as of January 1, 2024, to ensure comparability. So in the third quarter, Beer group sales revenue declined by 6.9% on a pro forma basis to TRY 15.7 billion. Even if volume performance and revenue in local currencies were high, international Beer operations sales revenue was recorded at TRY 5.9 billion with a 4.5% decline. Like previous quarters, the decline in sales revenue was driven by TAS 29 implementation as inflation in Turkiye exceeded the depreciation of Turkish lira against local currencies of international Beer operations. So excluding TAS 29, international Beer operations revenue was up 24% on a pro forma basis, again, reaching TRY 6.7 billion. Turkey Beer operations generated a revenue of TRY 9.6 billion in the third quarter, representing an 8.7% decline despite price adjustments during the quarter, revenue per hectoliter decreased due to lower volumes alongside more controlled yet still elevated discount level in line with the market dynamics we have in the country. Thus, on a pro forma basis, Beer group revenue decreased 5.3% to TRY 41.4 billion in 9 months of 2025. And Beer group gross profit declined 11.1% on a pro forma basis again to TRY 7.8 billion in the third quarter, and that came with a margin contraction of 236 bps, though gross profit margin remains at a remarkably good level of close to 50% still. And the decline in the gross margin stem from softer volume performance and higher COGS per hectoliter, driven by increased material costs across our operations and higher hedge levels in packaging costs, especially in this period of the year for Turkey. So in the next slide, I'm going to present the EBITDA. So with an EBITDA of TRY 3.4 billion, Beer group had a 22% margin in third quarter, indicating only a 57 bps decrease. The decline in the top line performance and gross profit in the group -- Beer group was actually partially limited through disciplined operating expense management this quarter, particularly in Turkey operations. On the international front, CIS region on average continues to deliver above 30% margin performance. However, profitability was moderated in this period due to high base of last year. Consequently, Beer group EBITDA in 9 months was TRY 6.4 billion with a 15.4% margin. Again, in the third quarter, Beer group generated unfortunately, a negative free cash flow of TRY 1.3 billion. Softer profitability that we mentioned, together with a temporary deterioration in working capital and lower monetary gain collectively weighted on cash generation despite an absolute reduction in capital expenditures year-on-year. Next slide, please. So for again, information purpose, I'm going to show you the financial statements without -- excluding the impact of TAS 29. However, I have to again say that Anadolu Efes' financial statements are prepared in accordance with TAS, the standard for financial reporting in hyperinflationary economies and the numbers that you are seeing here are just presented for analysis purposes. And excluding the impact of TAS 29, Beer group revenue was TRY 40.5 billion with a growth of 27%. And again, excluding the impact of TAS 29, Beer group EBITDA would increase by 21% to TRY 8.8 billion and net income was reported as TRY 1.8 billion, excluding the CTA impact coming from the scope change in consolidation of Russian operation. About cash and debt management. So as of September 30, 2025, we had 63% of our cash in hard currency denominated in the Beer group and 61% in the consolidated Anadolu Efes level, which is pretty much in line with our previous practices. And the net debt ratio for the period was 1.7x (sic) [ 1.5x ] for Anadolu Efes and 3.9x for Beer Group. And about the risk management, so the key figures to update them, actually no new news for 2025, we are almost done with the year. As for 2026, we have already started hedging aluminum and 16% of our exposure of next year -- sorry, 14% of our exposure of next year for Turkiye and CIS countries has already been hedged. And for the FX of next year, actually as usual practice, we are going to start hedging towards the end of the year for next year. So that basically ends my part of the presentation, and I hand over to Onur. Thank you. Onur Alturk: Well, Asli, let's check the Q&A. Do we have any questions on this one? Asli Demirel: There are a couple of questions from [indiscernible]. Let me start with the first one. Thank you for your presentation. Could you please provide more color on Azerbaijan? When will you start production sales in the country? What are the potential sales volumes and EBITDA contribution and also CapEx? Let me address this to Onur bey, and then there are a few questions more, then I'll address them to Gokce bey. Onur Alturk: Let's briefly discuss Azerbaijan. Azerbaijan is a promising market actually, and CCI already has a strong footprint in the markets. Population is around 10 million, with per capita beer consumption is around, again, 7 liters. And in quarter 3 '25, a license agreement was signed with Salyan Food Products in Azerbaijan for the production, sales, distribution and marketing of Efes and Efes Draft brands. So we already started production of Efes in Azerbaijan. We see it as a strategic step expanding our regional operational footprint. And of course, we want to strengthen our local presence in the market. No CapEx is used for that because it's a [ toll ] fill, third-party manufacturing. And if we see more potential in the markets, there will be an M&A. So we are evaluating this. And also, let me mention a little bit about Uzbekistan, just like because these are the two potential markets for us. And Uzbekistan is even more promising markets where, again, CCI already has a strong footprint. And the population is around 36 million and adding up 1 million every year. And the per cap beer consumption is around 12 liters. So that's a more favorable tax environment is expected in '26. It used to be 3x compared to the local ones. Now it's 2.5. And at the end of '26, we are expecting to the equalization of local and import tax. So if the gap is fully closed, there will be a huge potential. And imports from Kazakhstan has already started in July. Our legal entity and on-site team has been established in Uzbekistan. And our business development team is closely analyzing the market dynamics and potential opportunities like [ toll ] filling, and we are so close to start [ toll ] filling in Uzbekistan as well. And again, we are chasing M&A opportunities with very small investments in this country as well. But the reward seems to be, I mean, very promising in these two geographies. Asli Demirel: The next question from [indiscernible]. Could you please also provide more color on the working capital more at the Beer group level? And what are the initiatives you undertake to improve it? Gokce bey? Gökçe Yanasmayan: Sure. Sure. I mean, overall, as Onur rightly mentioned in his presentation, one of the key focus for us is the cash flow generation on the Beer group side and to turn our free cash flow generation into positive in the coming year. And a very important component of that is working capital, one of the important components of that. On the group level, we can say that our working capital on average is mid-single digit. However, there are certain countries hitting double-digit numbers, some countries close to 0. So on the average, we end up at mid-single digit. And for those who have double-digit or higher working capital, we have started a clear focus project this year and very clearly working on targets for next year to improve the numbers and at the same time, where we want to focus in every other country that we have these high numbers. Therefore, that's especially critical for Turkiye because this working capital financing requirement is being financed with high interest rates. So all the efforts are focused now, especially in Turkiye to decrease this number and the interest payment of next year. Asli Demirel: Thank you very much. Another question is regarding 2026 about the Beer group outlook for volumes and profitability. It's a bit early to comment on this. So let's postpone this to... Gökçe Yanasmayan: Yes, we are at the beginning of our budgeting cycle now. I mean -- and we are changing the numbers very frequently as the assumptions are changing. So we would prefer to give better color towards the end of the year or next year, beginning of next year. Asli Demirel: Exactly. But there is a question from [indiscernible]. Do you expect cost pressure in Turkey after rising food inflation, which may impact wheat and barley prices due to weather conditions? Or have you hedged this cost? Gökçe Yanasmayan: I can give a very, very general color here, maybe just to help you think about it. Recently, our cost base were acting very in line with the inflation in the country. Therefore, for next year to come, initial expectations, again, I mean, we have to work on them towards the end of the year more precisely. Initial indications show currently a slow decline as inflation will decline in the country. So that gets reflected into COGS per hectoliter as well for the next year. Asli Demirel: Another question from [indiscernible]. Can you give more information about Turkey gross margin and EBITDA margin in the third quarter? Gökçe Yanasmayan: Well, I mean, very roughly, we can say that the numbers are in the gross profit in the range of 50s, let's say, EBITDA margins in the third quarter are 20s, we can say so. And those numbers in gross profit margin level, we have seen more contraction as we have discussed in the presentations, but that has been compensated to a great extent with OpEx management. Therefore, the contraction in EBITDA is less than 100 basis points overall. Asli Demirel: Thank you very much. There seems to be no more questions. Let me remind once again, if there are any questions, we can wait a few seconds. And if there are none, we can close the question [ part ]. Okay. There seems to be no more questions. Thank you, everyone, for joining. Onur Alturk: Thank you.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Seadrill's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Kevin Smith, Vice President of Corporate Finance and Investor Relations. Sir, please go ahead. Kevin Smith: Welcome to Seadrill's Third Quarter 2025 Earnings Call. I'm Kevin Smith, Vice President of Corporate Finance and Investor Relations. And I'm joined today by Simon Johnson, President and Chief Executive Officer; Samir Ali, Executive Vice President and Chief Commercial Officer; and Grant Creed, Executive Vice President and Chief Financial Officer. Our call will include forward-looking statements that involve risks and uncertainty. Actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or year, and we assume no obligation to update them, except as required by securities laws. Our filings with the U.S. Securities and Exchange Commission provide a more detailed discussion of our forward-looking statements and the risk factors affecting our business. During the call, we will also reference non-GAAP measures. Our earnings release furnished to the SEC and available on our website includes reconciliations with the nearest corresponding GAAP measures. Our use of the term EBITDA on today's call corresponds with the term adjusted EBITDA as defined in our earnings release. I'll now turn the call over to Simon. Simon Johnson: Thanks, Kevin. Hello, and thank you for joining us for today's call. I'll begin with some highlights from this quarter, which demonstrate Seadrill's continued execution of our strategy to build backlog coverage through 2026, maximize utilization of our high-specification fleet and deliver the operational excellence that drives continuity and long-lasting relationships built on trust and performance. Following my remarks, Samir will provide detail on our contract awards and market outlook. Grant will then review third quarter financial results and provide updated guidance for 2025. As we navigate a period of fluctuating demand, one aspect of our commercial strategy remains clear: Maximize shareholder value by minimizing costly gaps between contracts. Since our last update, we've added over $300 million to our backlog, securing new contracts across 5 rigs. In what is a very competitive market, our collaborative approach with customers and the exceptional performance by our crews have enabled us to maintain our competitive edge. In Angola, securing work for the 3 rigs in the Sonadrill joint venture was a key strategic priority, enhancing the longevity of the partnership and reaffirming our position as the #1 drillship operator in Angola. The Sonangol Libongos commenced its new program in August, keeping the rig committed into early 2027 and extending the relationship with our client into its eighth year. This show of faith by the customer reflects the results delivered by our offshore crews and onshore teams day after day. The Libongos has been recognized as the Seadrill rig of the quarter 8x more than any other drillship in our fleet. The Sonangol Quenguela, which has worked for TotalEnergies since its maiden contract in 2022, has also won further work on a direct continuation basis and began its new program in early October. The Quenguela was awarded TotalEnergies Rig of the Year for 2024 and has sustained its exceptional operational performance through 2025. Finally, the Seadrill owned West Gemini recently completed its special periodic survey and is expected to commence a well-based contract with Sonangol E&P in the next few months. All 3 rigs operated through the Sonadrill joint venture have delivered exceptional performance year-to-date, each achieving near perfect technical uptime in excess of 99.7%. This accomplishment reflects our unwavering commitment to deliver industry-leading operational performance. We sincerely thank our joint venture partner and valued customers for entrusting Seadrill with the management and technical delivery of Sonadrill's operations. Our teams have demonstrated a commitment to developing local talent, world-class performance, and crucially staying at the top of the performance curve. We are proud to contribute to the prosperity of Angola, its communities and stakeholders, building a lasting legacy of responsible development and shared success. In the U.S. Gulf, the West Vela and Sevan Louisiana each secured new programs in direct continuation, adding a combined firm term of 195 days. The West Vela was awarded a 1-well contract with Walter Oil & Gas, which we anticipate will commence in March 2026. The rig will then return to work for Talos to drill an appraisal well following the discovery drilled by West Vela in August this year. The West Vela demonstrates our ability to leverage team expertise and performance excellence. 25% of the crew have been with the rig since it left the shipyard in 2013, and it was among the first rigs in our fleet to be equipped with managed pressure drilling. A decade of shared experience in technology development allows us to drill and complete wells that were previously considered too challenging. The West Vela remains one of, if not the best performing rig in the U.S. Gulf, routinely executing programs well ahead of schedule and under budget. The Sevan Louisiana has secured a new contract with Walter Oil & Gas, which is expected to keep the rig working for over 2 months following the completion of its current assignment with Murphy Oil. We're grateful to Walter Oil & Gas for their continued partnership and confidence in our crews and assets. These new contracts reflect the strong collaboration we've built over time. Also worth noting, the Sevan Louisiana is expected to finish its current campaign with Murphy Oil ahead of schedule. We appreciate the faith Murphy has placed in Seadrill as a new customer and look forward to building on our partnership as we support their operations going forward. We continue to set the standard in collaboration and innovation. Our recent partnership with Trendsetter on well intervention activities in the U.S. Gulf is our most recent example. We're preparing to install Trendsetter's equipment on the Sevan Louisiana, making an already distinctive rig in both design and function even more capable. This upgrade gives the rig flexible operating modes across both shallow and deepwater environments, opening new markets and enhancing its commercial appeal. Staying in the U.S. Gulf, the West Neptune commenced its first well with its newly installed MPD system in October with LLOG. The rig system includes the state-of-the-art Integrated Riser Joint that is set to be the new standard in safer, more efficient and more reliable MPD operations. The West Polaris is also equipped with this system and has successfully delivered 2 MPD wells for Petrobras so far this year. By executing wells safely, ahead of schedule, and under budget, we built a reputation as a trusted offshore partner in the Golden Triangle and in key markets around the world. Additionally, we continue to actively increase the capabilities of our rigs through time with the addition of advanced technologies such as MPD. Turning to the market. We continue to see a constructive pace of contracting and an uptick in global tendering activity, building momentum for a market recovery as we move from 2026 into 2027. Seadrill has consistently highlighted the industry's underinvestment in offshore and the need for renewed sustained spending to offset production declines and meet future energy demand. Our view has been validated. Oil majors are calling for renewed focus on exploration and investment to avoid a future supply crunch, and there is a growing consensus that U.S. shale production has plateaued. At a recent conference, ConocoPhillips emphasized the need to return to large-scale projects and exploration. Notwithstanding the recent increases in production, Saudi Aramco warned of a looming global oil shortage due to a decade of underinvestment, calling for renewed spending on exploration and production. The Norwegian Continental Shelf, Equinor plans to drill 175 exploration wells by 2030. Var Energi is targeting an average 15 exploration wells annually over the next 4 years, and Aker BP intends to drill 10 to 15 exploration wells per year going forward. We agree with Oxy CEO, Vicki Hollub, who said, "When you have the best discovery that has been made in the past couple of decades, i.e., Guyana, producing only enough to cover 1/3 of the demand in 1 year, that is a big issue". The renewed focus on deepwater is becoming clear as the industry faces the realities of prolonged underinvestment and the constraints of short-cycle supply. Capital is flowing back into offshore projects with a steady pace of new FIDs while exploration activity is gaining pace across many geographies and geologies. At the same time, natural gas demand continues to climb, driven by emerging uses such as data centers and the need to support an overstretched power grid. Deepwater is once again at the center of meeting the world's energy needs. With that, I'll turn the call over to Samir. Samir Ali: Thanks, Simon, and good day, everyone. To recap, since our last earnings release, we've added over $300 million in backlog, bringing Seadrill's total contracted backlog to approximately $2.5 billion. We made strong commercial progress, securing new work across 5 rigs, eliminating idle time while focusing on cash generation. Starting with Angola, all 3 rigs in the Sonadrill joint venture have been extended. The Sonangol Quenguela has been awarded a 210-day program with TotalEnergies, which will keep the rig working into mid-2026. We remain confident that the rig will secure more work in the near future. The Sonangol Libongos began a 525-day program in August, filling its schedule into 2027. The West Gemini will start a 280-day contract in the next 1 to 2 months, following the completion of its special periodic survey during the third quarter. Combined, these 3 awards solidify our leading position in Angola. In the U.S. Gulf, 2 of our 3 rigs secured new contracts in direct continuation of existing operations. The West Vela was awarded a contract with Walter Oil & Gas. Drilling is expected to commence in March 2026 with an estimated duration of 65 days and a total contract value of $28 million, excluding MPD. Following this program, the rig will return to work for Talos to drill an appraisal well. The Sevan Louisiana has secured a short program also with Walter Oil & Gas, expected to last around 70 days, starting immediately after it concludes the current work with Murphy. Collectively, these awards contribute over 3 years of backlog, reinforcing the effectiveness of our contracting strategy and the robustness of our customer relationships. Our track record demonstrates an ability to attract new clients while consistently securing additional work with existing partners. Turning to the market and to build on Simon's remarks, we continue to see constructive contracting momentum and an uptick in global tendering activity, supporting a broad-based recovery. These dynamics lead us to believe that there will be an increase in contracted utilization and meaningful day rate progression as we move from 2026 into 2027. The International Energy Agency's latest report reinforces what we're hearing in customer discussions. It highlights that nearly 90% of upstream investment since 2019 has gone towards offsetting production declines rather than adding new capacity. Conventional oilfields now account for only 77% of global oil output, down from 97% in 2000, emphasizing the need for new offshore projects. At the same time, the IEA has halved its forecast for U.S. renewable energy growth by 2030, which signals that hydrocarbons will remain a central part of global energy supply for longer than previously expected. Combined with plateaued shale production, we believe the stage is set for a renewed investment in deepwater development. We're seeing this recognition translate into real investment. Operators are sanctioning major offshore projects with attractive economics and robust breakeven profiles. Recent final investment decisions include ExxonMobil's $6.8 billion Hammerhead development in Guyana, supporting continued drillship demand in that basin, BP's $5 billion Tiber-Guadalupe project in the U.S. Gulf with 6 development wells and additional phases under review, Eni's $7.2 billion Coral Norte development and TotalEnergies' recently lifting force majeure on its $20 billion greenfield LNG project, both in Mozambique. Beyond development activity, exploration momentum is also building. In Brazil, Petrobras secured approval for its first equatorial margin well since 2013, part of a plan for 15 wells and $3 billion investment through 2029. Also in Brazil, Equinor has expanded its pre-salt position through its acquisition of 2 new blocks, highlighting its continued commitment to the pre-salt sector and renewed global interest in Brazil's offshore resources, spurred by BP's recent Bumerangue discovery. In Indonesia, Eni and PETRONAS have created a JV that plans to drill 15 exploration wells and invest over $15 billion in the region over the next 5 years. Earlier this week, Shell finalized an agreement to return to Angola following a 25-year absence, securing exploration rights for 4 new deepwater blocks and investing $1 billion in the project. More generally, Africa and Asia remain the leading sources of incremental demand. Multiple tenders continue to progress, and we remain optimistic that these will translate into rig commitments in late 2026 and 2027. In addition to activity elsewhere, it is our view that Africa and Asia will be the key geographies, which dictate the balance of supply and demand over the next 18 months. In summary, the offshore industry is at an inflection point. After nearly a decade of underinvestment, the market is refocusing on offshore as a critical source of future supply, and Seadrill is strategically positioned to capture value from that momentum. With that, I'll hand it over to Grant. Grant Creed: Thanks, Samir. I'll now walk through our third quarter financial results before providing an update on the remainder of the calendar year. Total operating revenues for the third quarter were $363 million, representing a sequential decrease of $14 million. Contract drilling revenues declined $8 million to $280 million. The decrease is attributable to fewer operating days for West Vela and Sevan Louisiana and lower economic utilization compared to the prior quarter. Management contract revenues decreased $2 million quarter-on-quarter to $63 million as the prior quarter included a retrospective catch-up for year-to-date inflationary increases to the daily management fee Seadrill earns for providing management, operational and technical support to Sonadrill. Reimbursable revenues decreased $5 million to $11 million, offset by a corresponding decrease in reimbursable expenses. Total operating expenses for the third quarter were $337 million, down 9% from the prior quarter. The decrease mostly relates to a $44 million reduction in management contract expenses as the prior quarter included an accrual for historic fees payable pertaining to the Sonadrill joint venture. This was partially offset by an $11 million increase in vessel and rig operating expenses, largely driven by the timing of repairs and maintenance spend. Adjusted EBITDA was $86 million, a sequential decrease of $20 million from the prior quarter. Moving to the balance sheet and cash flow statement. We continue to maintain a robust balance sheet with total liquidity of approximately $600 million. At the end of the third quarter, gross principal debt remained at $625 million with maturities extending through 2030. Total cash increased by $9 million to $428 million, including $26 million of restricted cash. Net cash flow from operations during the third quarter was $28 million and includes $69 million in additions to long-term maintenance. Payments for capital additions captured within investing activities were $19 million. As mentioned earlier, the West Gemini completed its SPS in September with the associated cash outflows taking place in the third quarter. Moving on to our outlook for the remainder of the current year. We are narrowing the adjusted EBITDA range to $330 million to $360 million, and that's based on an updated range for operating revenues of $1.36 billion to $1.39 billion, and that excludes $50 million of reimbursable revenues. Adjusted EBITDA guidance includes a noncash net expense of $33 million related to the amortization of mobilization costs and revenues, of which $24 million has been recognized through September 30. Full year capital expenditure guidance range is narrowed to $280 million to $300 million, and we expect capital expenditure and long-term maintenance to trend lower in 2026. I'll now hand the call back to Simon for his closing remarks. Simon Johnson: Thank you, Grant. In summary, we continue to execute our commercial strategy to build backlog coverage through 2026 and minimize our exposure to contract gaps. We're encouraged by signs that a market recovery is coming into view. We have consistently highlighted the industry's failure to replace deepwater reserves, a view that E&P supermajors are now acknowledging. A shift in capital allocated towards offshore drilling is well underway with a steady progression of contract awards and an increase in final investment decisions on major offshore projects. At the same time, a renewed focus on energy security amid geopolitical instability further reinforces the strategic importance of offshore resources. Seadrill is exceptionally well positioned to support long-term demand for energy services and create sustainable shareholder value. We believe that Seadrill represents compelling value, a view supported by the sell-side analyst community. Seadrill holds the highest proportion of buyer recommendations among the 4 largest U.S. listed offshore drillers, reflecting broad confidence in our long-term value creation potential. I'll now hand the call over for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Eddie Kim from Barclays. Edward Kim: Just wanted to ask about what you're seeing in terms of leading-edge day rates within the Golden Triangle. The 2 short-term contracts you just announced for the Vela suggest pricing is fairly resilient in that region. But you previously highlighted an expectation of some lower data points in West Africa. And I think investors are sort of bracing for maybe some other negative data points in Brazil here on some upcoming contract announcements. So first, do you expect maybe some negative data points coming out of Brazil? And second, is that sort of a fair characterization of how you're seeing things right now, so maybe some softness in West Africa and Brazil, but resilient in the U.S. Gulf. Any thoughts there would be great. Samir Ali: Sure. So Eddie, I'd say it depends what market you're in. I'd say in the U.S. Gulf, you've seen what we think we can get, and we've shown that we're able to price at those levels. And you can do the math on the Vela contracts. It gets us in a pretty good spot. If I go to the other places of the Golden Triangle, I think in the near term, there is potentially some weakness, but it's not dramatic, right? So you're going to see things in those high 3s, low 4s, I think kind of it's generally where we're tracking across the Golden Triangle, but it's really hard to pin down exactly where. But I think for us, we've tried to be very conscious about filling those gaps and focusing on getting near-term work, and we've shown an ability to get those at pretty good rates here in the U.S. Gulf. Edward Kim: And then my follow-up is just on your medium- to longer-term outlook, which is very constructive. One of the things you said in prepared remarks was that you expect Africa and Asia to be the leading sources of incremental demand. We've heard from some of your peers about incremental demand in Africa, of course, but less so about Asia. So could you maybe talk about which countries or which operators you're most excited about in Asia as we look forward over the next 12 to 18 months? Samir Ali: Sure. So in Asia, I'd say, you've got programs in India, Malaysia, Indonesia that are all starting to kind of bubble up to the surface right now. The operators are E&I, ONDC, PTTEP. So you've got to a -- it's not just one operator in one geography. It is kind of spread across different parts of Asia. So for us, we are very optimistic about that market in the near term. And candidly, for us, we've got the West Capella sitting out there that's a dual activity MPD capable rig. So we think it's very well positioned in that market. Operator: Our next question comes from the line of Fredrik Stene from Clarksons Securities. Fredrik Stene: Congratulations on the new contracts. I wanted to touch specifically on the Capella and the Carina. And Samir, you mentioned it briefly now in the end there for the Capella. But clearly, Capella idle already. Carina is rolling off early 2026. What are your current thoughts about potential downtime, et cetera, next year for those 2 rigs specifically? Simon Johnson: Well, perhaps I can kick off first, Fredrik, and then I'll pass to Samir for a bit of color. But I think as Samir foreshadowed in the previous question, this team has done a really good job in incrementally adding term through time. And we do, in fact, have these 3 rigs that have first half exposure, but we are continuing to make progress on the contracting front. And when we have news on that, we can share that with you. But it's really the first half of next year, I think, where we have concern, and we expect that the market will start tightening in the second half. And we've done a good job, we believe, minimizing our exposure to that weak period of the market. But Samir, perhaps you can add some color. Samir Ali: Sure. So back to -- if I look at the South Asia region, the Carina or the Capella, beg your pardon is well placed within there to MPD dual activity. So optimistic that we'll be able to announce something here shortly, but nothing to announce today. If you look at the Carina, beg your pardon, we have the ability to keep her working in Brazil or we can bid her outside, and we have continued to bid that rig outside of Brazil as well. That is a true seventh-generation asset. It's got MPD. We could easily retrofit with a second BOP. So that rig, it comes off early next year. We've got the abilities to potentially keep her in Brazil or we can move that rig to a different region as well. So for us, we have some flexibility with the Carina as we look forward. Fredrik Stene: Just a follow-up on that, Samir. Under the assumption that you potentially win something in Brazil since there are a couple of unresolved tenders there going on already. I think they call for late '26, early 2027 start-ups. In the case that you would get an award from something there, are there any extension options on the Carina under the current contract that would limit downtime in between? Because Petrobras tend to have certain clauses that can make contract extensions possible. Samir Ali: Yes. So what I'd say is, if we're not able to close that gap, it does make potential work in '27 in Brazil less attractive from our perspective. But it will be challenging to close that gap. 2026, as we mentioned, is going to be -- there is white space in the calendar, and it is a competitive market in Brazil. So it will be a challenge, but I'd come back to if we can't close that gap, it does make it less attractive for us to stay in Brazil. Operator: Our next question comes from the line of Ben Sommers from BTIG. Benjamin Sommers: So first, to touch on the Capella a little bit more. Just curious kind of how the cost deceleration on this rig has gone over the past few quarters. And then given the line of sight of potential work, kind of what would reactivation cost look like for that rig? Grant Creed: Look, on the cost side, we haven't been too explicit on that. Bearing in mind, it's in active tenders. I'd say we have said, it's stacked. It's more than the -- we've said the Eclipse, for example, is the $7,000 to $8,000 a day range. That's one bookend. I'd say it's more than that, keeping it live for tendering, but less than the typical warm stack that people talk about, the $80,000 a day, somewhere in between. On reactivation costs, it really depends on the opportunity we're hunting for. So it does really vary case by case. So there's no one golden rule. And so I'm kind of reluctant to throw numbers out there. If you think of it as a range somewhere between -- it's going to be more than 20, less than 50, depending on what opportunity we're reactivating for. Benjamin Sommers: And then as I look kind of in the back half of '26, I know we have some availabilities in the Gulf and elsewhere. I guess kind of on the day rate comments made earlier, I guess, where do you see timing on a potential kind of day rate inflection point here when we can really start to see some notable momentum in leading-edge rates? Samir Ali: Yes. So I think our thesis is that second half of 2026 and into '27 is kind of where we start seeing the inflection in the market. You'll see utilization pick up first, and I think day rates will be a fast follower after that. So if our thesis is as we enter next year -- or sorry, enter 2027, we should start seeing that momentum build. Operator: Our next question comes from the line of Doug Becker from Capital One. Doug Becker: Curious how you would characterize your conversations with Petrobras about reducing costs? And maybe a little more explicitly, do you see potential for any blend and extend contracts on any of the existing contracts? Or is it really on about reducing costs in other ways? Simon Johnson: Doug, yes, look, I think at this stage, we're very early in those conversations with Petrobras. I think there's a couple of important points. We're very encouraged to see Petrobras seeking the expertise in the drillers to help identify efficiencies. I think both Petrobras and ourselves are focused on opportunities that will deliver win-win solutions. Both sides need to benefit from the discussions. We are certainly looking to trade value rather than give you lateral discounts and blend and extend is definitely one of the potential approaches. So we're open to that where it makes sense in terms of our contract portfolio and the visibility of backlog and so on and so forth. Petrobras, as you know, is a very important customer for us. We've had a long-term relationship in what's an international market. And ultimately, rigs flow to where the greatest earnings potential is. It's notable that Petrobras have drilled more high-impact exploration wells so far this year and 2025, more so than any other operator in the world. And that's really encouraging for future demand. So the key point here, I think, is that any cost cutting or blend and extend discussions, et cetera, that's not going to have any impact on the underlying rig demand. We believe that continues to be robust on a many years ahead outlook. So yes, I mean, we're entering into those discussions with good faith, and we think there's a possibility of both sides obtaining advantage through a frank discussion of opportunities. Doug Becker: That sounds encouraging. And then, Simon, you appropriately highlighted the operational performance on a number of rigs. Economic utilization did slip sequentially in the third quarter. Just any rigs or regions to call out? And how do you see economic utilization trending going forward? Simon Johnson: Yes, it was a little bit disappointing on the cost side there, and there's a reason for that, which, I mean, there's some comments in the press release and the Q that we filed, but we can add a little bit more color, too. And I'm joined here today with by Marcel Wieggers, who is our Senior Vice President of Operations, who can talk about one of the operational incidents that occurred during the quarter that has sort of led to a departure from what our regular run rate is. Marcel Wieggers: Hello, Doug. So during the quarter, one of our rigs operating in Brazil experienced a downtime event caused by design-related equipment failure. This issue resulted in operational downtime and additional cost to rectify same and implement corrective measures. Learning from that event, we shared it across our fleet to prevent reoccurrence, of course. But in addition, we also proactively communicated these insights to our industry peers who operate some of our equipment to help them to mitigate this risk of similar failures in their operations. So if you look at our technical uptime for the quarter, if you exclude this rig, all the other rigs operated really well for the quarter with a technical uptime of 97.6%. Simon Johnson: Yes. So we think it's a one-off, Doug, yes. Operator: Our next question comes from the line of Josh Jayne from Daniel Energy Partners. Joshua Jayne: First one was just on the Louisiana upgrades you talked about. I assume you wouldn't do those without line of sight into something further. So maybe you could just talk about those upgrades a bit more and how they change the outlook for the rig maybe over the course of the next 12 months or so. Simon Johnson: Yes. In the Gulf of Mexico, there's -- that market has been quite dynamic in the semisubmersible segment. And a number of our competitors have retired rigs there recently. And what we are finding that we need to do in order to keep the Louisiana continuously busy, which we've been very successful in doing that. We've had to look at a couple of different modes of operation. And in particular, we've been getting quite aggressive in the plug and abandonment and the well intervention market. So what we're doing is we're making some discrete modifications to the rig, and we're setting up through an alliance-style partnership with Trendsetter, the ability to switch between drilling mode and well intervention and P&A mode. And the way -- as I say, that requires some discrete modifications to the rig. But most importantly, as you correctly allude to, Josh, it requires us to have confidence in that market segment and its prospectivity. But Samir will add some more color to what I'm sure. Samir Ali: Yes. So I'd say, we're definitely getting more demand pull in this region, and especially in the U.S. Gulf with this combination of the Sevan Louisiana and the Trendsetter system. Given the Sevan's very unique capabilities, it positions her as a unique tool in this market -- in this region. So for us, we continue to see clients coming and asking for availability on that rig. Joshua Jayne: And then on the Sonadrill rigs, congrats on the short-term extensions. Could you speak to the further outlook of those rigs? What exactly they're looking for with respect to signing the rigs up longer-term? And when they do get long-term contracts, any thought on the term that they're ultimately looking for? Samir Ali: Yes, absolutely. So I'd say, in my prepared remarks, I kind of alluded to that we feel confident in our abilities to add some more term to the Quenguela's schedule. That remains the case. We're in active dialogue about how do we add more term also with the West Gemini. I'd say both of those rigs, primary market would be Angola, but the joint venture isn't limited just to Angola. We do have the ability to take those rigs to other parts of Africa as well. So for us, we are focused on keeping the rigs working in Angola, given it's a natural home for them, and you've seen production decline in that market, and there is an active effort by the Angolan government to reverse that production decline. So it's natural to stay there, but it doesn't have to. Simon Johnson: Yes. We've seen subdued demand in Angola in recent times, Josh. But I think it's important to remember that 2 of the assets that are operated by the joint venture are directly owned by Sonangol. And when it comes time to be fed, they're ahead of the queue. And we're not concerned at all about long-term contracting opportunities for the rigs and the joint venture going forward. Operator: Our last question comes from the line of Noel Parks from Tuohy Brothers. Noel Parks: As I think about the last few months from last quarter report to maybe a month or so after as we were sort of wrapping up the summer, it does sound like those last couple of months that the generally more optimistic signs you were seeing have really sort of materialized and solidified. And I do recall some inkling of customers maybe being a little bit more willing to commit. And so I mean, is it just as simple as with the fastest of time, companies have gotten -- have finally just made decisions on their budgets, kept deepwater activity as a high priority. And I was also wondering if maybe looking ahead and contemplating more like Brent with a 6 handle than a 7 handle also made them feel like, yes, time to go back into the deepwater. Simon Johnson: Yes. Look, it's a really interesting question, Noel. Look, perhaps what I can do is speak a little bit to the backdrop and then Samir can speak to what we're seeing at an industry level. I think the key thing is that despite some of the near-term macroeconomic headwinds around tariffs, oil supply demand, we are firmly of the view that the fog is beginning to lift. And we're seeing a lot of data points emerge now, which support our view, which we've been talking about for some time. And definitely, the tone and the tenor of the conversations we're having with customers is improving. FIDs are progressing, contracts have been awarded. We're seeing the rig days awarded in Q3 as a 7% quarter-on-quarter increase, and we believe that's going to increase again in the final quarter of this year. And that's supported by industry commentators like Westwood. And of course, Seadrill are well placed for a couple of opportunities in that period. We're at a 3-year trough in '24 for the value of the FIDs, but that's starting to flip now, and we're seeing quarter-on-quarter improvement. Subsea tree installations are forecast to be at the highest level at the end of this year. We know that there's this weak spot that we've spoke to earlier in the call in the first half of '26. But we see strong signs for improvement on a whole range of fronts beyond that. Investment in green renewable energy has been in constant decline since 2019. And all across the space, the supermajors are clearly stating that there's a return to conventional dispatchable energy. That's where they're spending their capital. But Samir, perhaps you can talk to some of the more focused elements. Samir Ali: Sure. So I'd say that the Red Queen paradox is becoming real for a lot of our clients, right? You've seen reserve replacement ratios at 22% over the last 3 years. The general upswelling of reserve replacement exploration has become kind of the real topic that when we speak to clients, it is becoming a part of their normal daily discussions. You've seen all the supermajors on their recent earnings calls or public announcements saying, there needs to be more exploration. And that's leading to more rig demand for kind of generally the overall market. And we've tried to position ourselves to capture that upswing that we see coming in late 2026 and into 2027. Noel Parks: And I guess the other thing I was wondering is sort of filling out the picture. I was thinking about the comments from Conoco and from Oxy. And are you also sort of seeing internally inside the bigger players things like signs of them staffing up or you're suddenly meeting with a new manager who wasn't there before or just signs of them reallocating resources to address the deepwater opportunity? Simon Johnson: Well, we're seeing a number of different things. I think generally speaking, certainly, the big end of town, I think the supermajors are taking a cold hard look at their cost base generally. But we are definitely seeing certain of those supermajors build out exploration teams that either haven't received funding or have been greatly diminished in recent years. So I think it's -- there's a double story there. One is that they're focused on being more cost effective and trimming headcount. But certainly, in those areas that speak to new ventures, new opportunities, new exploration activity, that seems to be an area where they are willing to allocate capital. And we're seeing that. Just overnight, we're seeing the announcement of the Pakistan offshore oil licensing round, ExxonMobil are investing money in Greece. These are all healthy signs of a more normalized balance of expenditure between exploration and production. And that's been -- that's entirely consistent with the thesis that we've been sharing with the market now for several years. Operator: Thank you, everyone. This concludes today's conference. You may now disconnect.
Operator: Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 First Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead. Todd Leombruno: Thank you, Chloe. Good morning, everyone, and welcome to Parker's fiscal year 2026 First Quarter Earnings Release webcast. This is Todd Leombruno, Chief Financial Officer, speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. And always, we appreciate your interest in Parker, and thank you for joining us today. We address our disclosures on forward-looking projections and non-GAAP financial measures on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release was released this morning, along with this presentation and reconciliations for all non-GAAP financial measures. Those are available on our website under the Investors section on parker.com. The agenda for today has Jenny starting with an overview of our record FY '26 first quarter performance. She will share some highlights from our day 1 celebrations, welcoming the Curtis team members to Parker. Jenny will also then reiterate the strengths of our interconnected portfolio and share an example from our energy market vertical. I will follow Jenny with more details on our strong first quarter results, and then we'll both provide some color on our increase to our FY '26 guidance. After that, we will move to the Q&A portion of the call and address as many questions as possible within the hour. I now call your attention to Slide 3. And Jenny, I will hand it over to you. Jennifer Parmentier: Thank you, Todd, and thank you to everyone for attending the call today. Q1 was a great start to the fiscal year. Operational excellence was on full display, powered by the Win Strategy. We achieved top quartile safety performance with a 20% reduction in our reportable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q1 sales of $5.1 billion, organic growth of 5% and 170 basis points of margin expansion, resulting in 27.4% adjusted segment operating margin. Adjusted earnings per share grew 16% and cash flow from operations was $782 million. And we completed the acquisition of Curtis Instruments. Next slide, please. A long-standing practice within Parker is for a Parker leader to personally welcome the new team at every location. This slide shows pictures from our day 1 events held around the world, welcoming the Curtis team to Parker. This was a great day for all of us, and we are thrilled to have Curtis in the Parker portfolio. Next slide, please. Obviously, we are very proud of the Q1 results delivered by our team and equally excited about our future. So just a reminder on why we win. First, the Win Strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers and executing the Win Strategy every day. Next, we have innovative products that solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. And finally, our distribution network is the envy of the competition and the best in the world. It took us over 60 years to build it, and it is truly an extension of our engineering teams, providing solutions to all of those small to midsized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technology. Next slide, please. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These 6 market verticals represent greater than 90% of the company's revenue. Our interconnected technologies cut across these market verticals and give us a clear competitive advantage. 2/3 of our revenue comes from customers who buy 4 or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. Next slide, please. This slide focuses on our presence in the energy market vertical. Parker is a significant supplier of products into heavy-duty gas turbines used for electrical power generation. We bring both proprietary designs and world-class manufacturing capabilities to offer a comprehensive suite of interconnected technologies. Parker supports multiple global industry-leading customers, and we are seeing significant growth in this space. This business is long life cycle with multiyear backlog and durable aftermarket. This is a great example of products and technology that are shared across aerospace and industrial markets. I'll hand it back to Todd to go through our first quarter highlights. Todd Leombruno: Thank you, Jenny. This was a great start to the fiscal year. I'm on Slide 9, and I will start with a summary of our Q1 results. Once again, and I love saying this, every number in the gold column on this slide is a record. It was just a fantastic quarter where mid-single-digit sales growth, combined with strong margin expansion, resulting in mid-teens EPS growth. Sales were up 4% versus prior. Organic growth was positive at plus 5%. Currency was favorable at 1%. And divestitures were 2% unfavorable. Those are the divestitures that we've previously completed. And I would just note, this is the last full quarter that we will have a full quarter of a divestiture impact. Moving to adjusted segment operating margins. As Jenny said, we did 27.4%, that's an increase of 170 basis points versus prior year. Adjusted EBITDA margin was 27.3%, that was up 240 basis points. And adjusted net income was $927 million or 18.2% return on sales. All of this drove adjusted earnings per share up 16% to reach a record $7.22 per share. It was a really nice start to the fiscal year with a strong quarter across the board, and it gives us confidence for the remainder of the fiscal year. Our global team members really continue to drive results enabled by the power of the Win Strategy. If we could jump to Slide 10, you'll see a bridge on the year-over-year improvement in adjusted EPS. The majority of our EPS growth came from continued strength across our operations as segment operating income dollars increased by $132 million or 10%. That contributed $0.80 to our EPS growth this quarter. Corporate G&A and other were favorable $0.18. That was primarily due to foreign currency exchange in the prior period quarter last year, that was unfavorable last year, that created a favorable for this year. Interest expense was also favorable by $0.07, and that's driven by lower average debt balances across the quarter and lower interest rates across the quarter. Share count was $0.13 favorable, and that was driven by the discretionary share repurchases that we completed over the last 3 quarters. Income tax was unfavorable by $0.16, and that was really simply due to a few favorable discrete items in the prior period that did not repeat. And that is basically it, a really clean bridge to the 16% increase in adjusted EPS. This record was really achieved by strong sales growth across the board, margin expansion and great adherence to cost controls across the company. If we move to Slide 11, we'll just talk about the segment performance. Orders were strong at plus 8% versus prior year, with order rates increasing across all reported segments. Organic growth came in at plus 5%. This was the first time in 2 years we've had positive organic growth across all of our businesses as diversified industrial organic growth turned positive. Every business delivered record adjusted segment operating margins, resulting in great incrementals and that 170 basis points of margin expansion. Looking specifically at the Diversified Industrial North America businesses. Sales were over $2 billion with organic growth positive at 2%. That's the first time in 7 quarters North America posted a positive organic growth number, that was better than our expectations going into the quarter. We continue to see gradual improvement across market verticals with positive growth driven by the aerospace and defense businesses in Industrial North America, in the implant and industrial equipment vertical and also improvement in off-highway that exceeded expectations. If you look at North America, they also had 170 basis points of margin expansion and reached a record 27.0% segment operating margin. That was really driven by higher productivity, some new business wins at great margins and margin mix with strong aftermarket across all those businesses in North America. And North American orders increased sequentially to plus 3% versus prior year. Looking at the Diversified Industrial International businesses. Sales were up. They were a record at $1.4 billion, up 3% versus prior. Organic growth remained positive at plus 1%. Looking at Asia Pacific, that was our strongest region with a plus 6%. EMEA remained down at minus 3% and Latin America was flat versus the prior year. So Asia Pac really drove the outperformance of growth in the international businesses. Adjusted segment operating margins were also a record at 25.0%, that is a 90 basis point improvement from prior year. And I can't say this enough, our international teams continue to show great resilience, they're driving margin expansion and its really great cost controls, and they're really executing the Win Strategy to great success. International orders rebounded, they improved to plus 6% after a flat Q4. Both EMEA and Asia Pac had positive orders this quarter. And lastly, Aerospace Systems, just another exceptional quarter from this group. Sales were a record $1.6 billion. That's an increase of 13% versus prior. Organic growth of 13%. That's the 11th quarter in a row that we've had double-digit organic growth rate in Aerospace. Commercial OEM is the strongest market segment growing 24% versus prior year. Adjusted segment operating margins increased by 210 basis points and, I'm proud to say, reached 30% for the first time ever. Record top line, productivity, continued aftermarket strength all drove the margin expansion. And Aerospace orders continue to be impressive, increasing plus 15%, and backlog also reached a new level -- record level for Aerospace. There's just robust demand, and that continues across all of our aero and defense markets. It's great to be in the Aerospace business right now. If we move to Slide 12, let's look at our cash flow performance. Cash flow from operations, a record $782 million, that's 15.4% of sales. That's up 5% versus prior year. Free cash flow is $693 million, that is 13.6% of sales. That is up 7% versus prior year. Cash flow conversion for the quarter is at 86%. I just want to remind everybody, I think everyone knows this, but our cash flow is historically second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year. And lastly, on this slide, we did repurchase $475 million of shares on a discretionary basis within the quarter. That is a wrap on Q1. And Jenny, I'm going to turn it back to you on Slide 14, and we'll move on to our updated fiscal year guidance. Jennifer Parmentier: Thank you, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by key market verticals. In Aerospace, we are increasing our forecast from 8% to 9.5% organic growth. We continue to see strength in commercial OEM and aftermarket. Implant and Industrial remains the same as our initial guidance at positive low single-digit organic growth. The sentiment does remain positive with continued quoting activity, while customer CapEx spending remains selective. Transportation is our most challenged market this year. Forecast stays the same at mid-single-digit organic decline. We are increasing the off-highway forecast from negative low single digits to neutral. We see gradual recovery progress in construction, while the ag challenges do persist. We are maintaining energy at positive low single-digit growth, with robust power gen activity offset by oil and gas. And we are increasing HVAC/refrigeration from positive low single digits to positive mid-single digits. We see strength in commercial refrigeration and filtration with some nice new business wins with our filtration technology. As a result of these changes, we are increasing our organic sales growth guidance from 3% to 4% at the midpoint. I'll give it back to Todd for some more guidance details. Todd Leombruno: Thanks, Jenny. I'm on 15, Slide 15, with just some of those details. In respect to reported sales, we are increasing the range to 4% to 7% or 5.5% at the midpoint. Currency is expected to be a favorable 1.5 points, and that is based on September 30 spot rates. Now that we have the acquisition of Curtis closed, we are including sales and segment operating income from Curtis in our guide. We have added $235 million to our guide for the remainder of the year, that is approximately 1% of sales. And divestitures that we've already previously completed are 1% unfavorable. If you move to organic growth, the forecast has now increased to a range of 2.5% to 5.5% or 4% at the midpoint. We have increased Aerospace organic growth to 9.5% at the midpoint. And for the Diversified Industrial segment, we have increased North America organic growth for the year to plus 2%. And for international, we still expect organic growth to be 1% at the midpoint. We are raising adjusted segment operating margins. We're raising that 50 basis points to 27.0% for the year. That is now a forecasted increase of 90 basis points versus prior year, and incrementals are now forecasted to be approximately 40% for the full year. Just a few additional items. Corporate G&A is unchanged at $200 million. Interest expense has been increased by $30 million, we now expect $420 million for the full year. And that is driven solely by the funding of the Curtis acquisition. And other expenses just slightly up to $90 million from $80 million last quarter. Our full year tax rate, we expect 22.5%. And we are raising adjusted earnings per share to an even $30 at the midpoint. That would be a 10% increase versus prior year. The range on that EPS is plus or minus $0.40 on either side, and the split is 48-52 first half, second half. In respect to full year free cash flow, we're also raising our guidance there to a range of $3.1 billion to $3.5 billion, with conversion, like I said, greater than 100%. And finally, looking specifically at Q2 for FY '26, we expect organic growth to be -- or excuse me, reported sales are expected to be 6.5%. Organic growth is expected to be 4%. Adjusted segment operating margins, 26.6%, and EPS for the second quarter on an adjusted basis is $7.10. As usual, we have the -- some additional details in the appendix. And really just in summary, FY '26 is off to a great start. That gives us confidence to raise full year guidance for sales margin, EPS and free cash flow. With that, I ask you to move to Slide 16, and Jenny, I'll turn it back to you. Jennifer Parmentier: Thanks, Todd. And a reminder on what drives Parker. Safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top-quartile performance, that allows us to be great generators and deployers of cash. Thank you. Todd Leombruno: All right. Chloe, we are ready to begin the Q&A session. So we'll take the first question. Operator: [Operator Instructions] We'll take our first question from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start off perhaps with the organic sales picture in the DI North America business. Maybe help us understand a little bit better the cadence of demand. It did seem to surprise you positively, I think, in the quarter. How has demand moved there in recent months? And then when we're looking at the full year guide, I think your midpoint for DI North America doesn't embed any acceleration from the September quarter growth rate. Just wondered the thinking there. Jennifer Parmentier: Okay. Julian, so yes, we're very pleased with the performance. We had guided to a negative 1.5% and came in at a positive 2%. So North America performed better than expected with the Aerospace and Defense business it sits inside of our Industrial businesses, distribution, HVAC and electronics. Construction continued to outperform versus our expectations. And margin expansion from a higher productivity on slightly stronger volume really helped us. We had some project wins at attractive margins, and we're getting a margin mix benefit with the lower industrial OE and a very resilient aftermarket. So you are right, we do expect Q2 to be much like Q1 coming in at 2%. So that was prior, as Todd stated, for the year, we were looking at a total of 1%. So as I was just talking about, what we saw in Q1, we do believe that industrial aerospace and defense world remains strong. We're still talking about a gradual Implant Industrial recovery. Certainly positive sentiment from our distribution channel continues. Quoting activity is good. But as I commented earlier, still customers are being very selective on their projects and their CapEx spending. We still see transportation challenges in automotive and trucks. So we don't expect a truck recovery this fiscal year, but we will see some benefit from the aftermarket. In off-highway, gradual recovery progress in construction, but ag challenges still persist. Energy, power gen, robust. But oil and gas upstream still weak. And we're -- HVAC and refrigeration, we're coming off a very strong fiscal year, and we have increased that for the rest of the year. So while some markets are increasing, not all of them are, and that's why we see Q2 pretty much the same as Q1, but an increase for the total year. Todd Leombruno: Julian, I would just add, Jenny covered the organic growth piece perfectly, but I would just add, on a margin standpoint, we did increase Diversified Industrial North America margins 70 basis points for the full year versus our previous guide. So the teams are converting on that, and I have great confidence that we'll be able to do that. Jennifer Parmentier: Yes. And Q2 margin is 150 basis points higher than the prior year. Todd Leombruno: Correct. Julian Mitchell: That's helpful. And just following up on that last point perhaps, so I understand that you've had a higher margin performance year-on-year for the total company than is guided for the full year. I assume that's just sort of natural conservatism given we're early in the year. I wonder if there was any other factors to think about. And allied to that, your Q2 EPS guide is a decline sequentially, which is quite unusual in Q2. Any color on that, please? Jennifer Parmentier: So I think we left the second half pretty much alone. So based on what we see today, we feel really good about Q2. And I think we'll have a better line of sight here after the first of the year. Todd Leombruno: Yes, Julian, Q2, sequentially, it usually is our softest top line. I think the EPS is just pulling off of that. Nothing out of the normal that we see. Operator: We'll move next to Mig Dobre with Baird. Mircea Dobre: I would like to talk a little bit about Industrial International. The orders there were quite good and, frankly, better than what I would guess. A little bit of update in terms of what you're seeing in various geographies. And related to this, if I look at the past 4 quarters, I think your order intake averaged about 5%. So it's quite a bit better than what you have embedded in your forward outlook for organic growth. So I'm kind of curious at what point in time do you start to see these higher orders really flow through organic growth in the segment. Jennifer Parmentier: So with Industrial International orders, they've been really choppy as we often say. If you go back to our Q3, we had a plus 11%, and then Q4, we went flat. And that was because we had some onetime long-cycle orders that didn't repeat in Q4. So it's really not an average of about 5%. So what we're seeing in the region is, if we look at EMEA, we're showing flat to slightly positive organic growth for the fiscal year. There's uncertainty that's remaining, and we're expecting a slow in-plant industrial recovery. We do expect to see some growth in energy. We are seeing some mining recovery underway. And we do think that there'll be some pickup from the stimulus in future defense spending, but that's not something that we think we're going to benefit from this year. So what we see in EMEA is really to remain flat to slightly positive with what we see on the orders right now. In Asia Pacific, we have positive low single-digit organic growth for the fiscal year. We continue to see strong electronics and semicon demand. Implant is mixed as delays continue in China, but we do see some slight growth in India and Japan. Seeing some mining and transportation improvements in China, but I think there's still some continued uncertainty from tariffs across this market. So this is what we're seeing today on Industrial International. I mean we look forward to the time when this will be a higher organic growth. Mircea Dobre: Understood. My follow-up, and I don't know if you can answer this question, Jenny, it's kind of in the weeds. You talked about the ag market where challenges persist. But I do wonder, in terms of your exposure, if you sort of separate out the large ag equipment, so high-horsepower tractors combines versus midsize and in lower horsepower, I'm just wondering kind of what your exposure looks like there because I am starting to see a bit of a divergence forming where, large ag, as you say, it's challenged, but some of these smaller tractors are starting to grow in terms of volumes, and the volumes are actually much higher in lower horsepower equipment than large ag. So I'm wondering if this end market might turn a little bit sooner than maybe we're thinking about when we're thinking about large ag. Jennifer Parmentier: When we talked about last quarter, I made the comment that we thought that, that market had kind of hit trough. And I would say it's broad-based when we look at ag between that equipment. But you can certainly follow up with Jeff on maybe for more details in one of the follow-up calls. Todd Leombruno: Yes. Mig, I would just add, when we look at ag, it's 4% of total company sales. So it's just become a smaller piece of the total pie. It is broad-based. There's aftermarket, there's the OEM side of it. So I don't know if I'd read too much into movements there. Operator: We'll take our next question from David Raso with Evercore ISI. David Raso: Of the organic guide raise, how much was volume versus a change in price? And of the 50 bps margin improvement, can you give us a sense of how much of that may be related to the answer to the first question, volume improvement versus maybe price/cost different than you originally expected for the year? Jennifer Parmentier: David, well, as you know, we don't disclose pricing. Regardless of pricing or volume, I think that we've shown that we can expand margins pretty much in any climate. We have had 2 years of negative industrial growth and we're seeing the gradual industrial recovery playing out with industrial organic growth now positive in Q1. So we're definitely seeing the impact of slightly stronger volume. Operator: We'll move next to Scott Davis with Melius Research. Scott Davis: I've got to ask about M&A. I probably do a lot of quarters, but I'm going to lead with it anyways because it's been a few years since you closed Meggitt and, obviously, that's such a great deal for you guys. But Curtis seems like an interesting deal too, it's just not as big as maybe some of those others. So can you just update us on your pipeline and such? Jennifer Parmentier: You bet. So obviously, we're committed to actively deploying our capital. And as you mentioned, we did close Curtis Instruments in September, and we're really excited about that. And moving forward, the strategy remains the same with plenty of optionality. So when it comes to capital deployment, obviously, we prefer acquisitions, but it has to be strategic and disciplined. You've heard me talk about this criteria before. And I would tell you that the pipeline, the relationships and the analysis continues to be very active. While sometimes timing is hard to predict, we are working it. And we want to continue to acquire companies where we're the clear best owner. And we feel like we have a strong competitive advantage with our interconnected technologies, and that's what we want to add to the portfolio. So still looking for those deals that are accretive to growth, resiliency, margins, cash flow and EPS. And as I've said many times before, the pipeline has deals of all sizes. Operator: We'll take our next question from Amit Mehrotra with UBS. Amit Mehrotra: So obviously, it was, I guess, nice to see the order improvement. Jenny, a quick question about just the broad basis of that. I mean are we seeing a broader activity in pickup? You also won -- I think I saw that somewhere you guys won a large contract to supply components for aero-derivative gas turbines. I'm just trying to get a sense of are we seeing broad-based green shoots here? Or is it mostly explained by the longer cycle pockets that kind of have been working for a while? Jennifer Parmentier: We have the longer-cycle pockets, but then we're also seeing some improvement in some of our other key verticals. So when you look at the change that we had in the guide this month, we took -- obviously, we took aerospace and defense up. We also moved off-highway from negative low single digits to neutral, and we increased HVAC and refrigeration from low single digit to positive mid-single digits. So we are seeing some pockets within those industrial businesses where we're seeing some growth. Amit Mehrotra: Okay. And the other question I have is on Aerospace margins, obviously just really good. One thing I noticed is obviously the incremental margins being so high despite OE revenue up 20%, which I would imagine would be a little bit mix-dilutive. As the OE build cycles continues to improve, can we talk about what the mix impact is on aero margins going forward? Because it seems to like defy gravity in the quarter. Jennifer Parmentier: Yes. Well, we did have 51% OEM and 49% after margin in the quarter, and we do anticipate that that's going to be the mix for the rest of the year. Aero margins are very strong in Q1, and we had a nice bit of spares in Q1, which is really nice margin for us. So that helped us reach that record 30%, hit 30% for the first time. Going forward, we're very confident in our ability to maintain the margins where we've been and go forward with strong margins. If you look at what we did with the guide, we have full year at 29.5% now. That's 100 basis points higher than prior year, and that was raised 60 basis points from the initial guide. Q2, we're forecasting 29.1%, and that's 90 basis points higher than previous year. So we're in a good spot with aerospace. Our teams are doing an excellent job executing the Win Strategy and really benefiting from this volume. Operator: We'll move next to Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: Can we just cut a little further in the aerospace? And also, Jenny, maybe just a little bit of color on kind of how you see the defense side playing out in 2026 versus the commercial side? Any change of thinking there? Jennifer Parmentier: So Jeff, I'm sorry, what was -- so you wanted dig deeper into aero, especially defense, right? Jeffrey Sprague: Yes, I want to kind of get a sense of defense versus commercial mix and how that's playing and if that's changed versus your initial view. Jennifer Parmentier: Yes. We came out with mid-single-digit growth for both defense OEM and MRO, and that's the same. We haven't -- we're not forecasting any change there. Jeffrey Sprague: Great. And then just on Curtis, I think it comes in a bit margin dilutive, it's not apparent given kind of all the other execution and everything that's going on. But can you just kind of give us a little color on at the margin rate it comes in at the work you're doing to integrate it? And any thoughts on kind of how it might be positioned into next year after you've got it kind of fully digested? Todd Leombruno: Yes, Jeff, this is Todd. I can take that. I mentioned earlier, we added about $235 million of sales into the guide. You're right, it is slightly dilutive. But it's smaller, so it doesn't really have an impact. You can see we did raise both North America and International margins for the full year, even after including Curtis into the mix. If you're looking for a number, I would say, high teens, low 20s would be a good number to use. It does add -- it is EPS accretive in a stub year even. You saw that we added $30 million for interest there. And it's only been a little over a month. The team is super excited about it. Jenny mentioned the welcoming day, and I can tell you they're working really hard to integrate and make this part of Parker, just like we have on the last deals. Jennifer Parmentier: I would just add to that, as Todd said, the integration is well underway. Very similar. We've assembled a dedicated integration leader and a team of high-talent team members, and this is how we ensure a very smooth integration. Operator: We'll move next to Joe Ritchie with Goldman Sachs. Joseph Ritchie: Jenny and/or Todd, is there a way that you could maybe size the opportunity on Slide 7 or give some color just around like what the growth rates have looked like? I'm just curious how to think about this business for you guys going forward. Jennifer Parmentier: Well, I don't think we're in a position to go over the growth rates. But what's great about this power gen business is that we do have this suite of interconnected technologies for power gen applications. And you can see on that slide all the different examples of the products that we have. And it's just a very robust order book, like I commented multiyear. We expect solid growth for years to come. And we're working with all of the leading industry customers. So while this market vertical makes up about 7% of our sales and power gen is about half of that, it's a small percent overall, but a very nice growth area for us. And we expect to, not only continue to win in this market, but really benefit from it. Joseph Ritchie: Yes. No, that's great to see, and glad that you guys highlighted it. Other quick question, I know that we won't be talking specifically around pricing. But in an environment, let's say, where you do see some of these tariffs potentially getting rolled back. Like how does that impact the pricing that you've already put through? And then ultimately, is that another potential boost to margins if we do see some pullback on tariffs? Jennifer Parmentier: Well, obviously, as we've talked about tariffs, we have the analytics and the processes to navigate and act quickly up or down. And we had to do a lot of that over the last several months. And the teams have just done a fantastic job. So we're -- we have a strong muscle when it comes to pricing and to price/cost, and we'll adjust as we need to. But as I've stated time and time again, we can't use tariff as a margin expansion device. This is something that we have to recover from a cost standpoint, and we'll adjust as we need to, going forward. Operator: We will take our next question from Joe O'Dea with Wells Fargo. Joseph O'Dea: Wanted to start on the North America implant side of things and what you're seeing from customer activity or what you're hearing from dealers with respect to greenfield and brownfield investment in the U.S. And then around that, whether you're getting any color on the nature of those investments and kind of local for local or you're seeing more kind of foreign participants looking to invest in the U.S. Jennifer Parmentier: Yes. I don't have the detail too much for local for local versus foreign investment. But I would tell you, my comment earlier about the CapEx being selective, I do believe it's still selective. But in the past, we were just talking about delays and delays. And obviously, we saw a stronger area there through distribution and implant in Q1. So we're seeing some things get across the line and projects get started. But I don't have a specific breakdown for you at this time. Joseph O'Dea: And then on the HVAC side of things and seeing some strength in commercial refrigeration and filtration, I think you talked about some nice new wins in filtration. Can you just expand on that a little bit in terms of verticals you're serving there, where you're seeing some of that strength? Jennifer Parmentier: Yes. We've had some nice filtration wins when it comes to gas turbines. We have some proprietary technologies, really nice filtration products in the energy market. And then we've also had some night filtration wins on the -- actually on the mobile side of the business as well. So it's been a growth area for our filtration group this past year. Operator: We'll move next to Christopher Snyder with Morgan Stanley. Christopher Snyder: So obviously, North America Industrial turned organic positive in the quarter. I'd imagine there's some benefit of incremental price, and it does sound like some of the longer-cycle verticals kind of helped that. But I guess my question is, when you look at North America industrial, the more cyclical pieces, do you feel like the cycle is starting to get better? Jennifer Parmentier: Yes, I would definitely say that Q1 is evidence of that, right, and especially those key market variables where we've increased our outlook for the year. So yes, I would definitely say we're starting to see that. Todd Leombruno: Yes, Chris, I would just add -- I was just going to add, Chris, that we've talked about inventory across the channel, and we feel that it's kind of at a trough level. I can't say that we've seen a restocking yet, but it feels like we're closer to that than going the other direction. Christopher Snyder: Yes. No, happy to hear that. You've talked about implant as being one of the industrial verticals doing well showing momentum. Do you have any color to provide on how that business did in the U.S. versus the international markets? Just to get a sense if some of the policy is driving activity into the U.S. Jennifer Parmentier: In North America, as I commented before, it's a gradual Implant Industrial recovery. But as Todd was just saying, although we don't see restocking yet, we still have that very positive sentiment from our distribution channel and a lot of quoting activity. When we talk about EMEA, it's still some uncertainty that remains. So we're expecting a slow Implant Industrial recovery. When we look to Asia Pacific, it's kind of mixed. Delays continue in China, but there's been some growth in India and Japan. Operator: We'll take our next question from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Maybe just at the Analyst Day, you called out data center, and I know, clearly, power gen probably benefiting from that. But maybe just update us on what you're seeing on the liquid cooling side. Clearly, we're seeing some pretty mind-boggling order rates from certainly peers, et cetera. Jennifer Parmentier: Yes. So we do have a nice exposure, and we are seeing rapid growth. But this is not yet large enough for us to call it its own market vertical. It still makes up less than 1% of our sales. But again, this is something what I feel is unique about Parker, and it's these interconnected technologies and its competitive advantage. We can provide great value to our customers in this space. We have the products that they need for the data center cooling, and we have been working with all the industries there. So our ability to provide liquid cooling systems and subsystem components has really given us, I think, a nice position here. Jeffrey Hammond: Okay. And just a couple of housekeeping. One, on the Curtis revenue, can you give us a split between North America and International, kind of how that flows through the 2 segments? And then just you've been more active on buyback. I'm assuming the guide doesn't build in any more buyback, but correct me if I'm wrong. Todd Leombruno: Yes, Jeff, I'll take those. The sales is split almost 50-50 North America and International. I think we'll refine that as we get further on in the integration process. But right now, it's kind of how we're modeling it. And then you're right, over the last 3 quarters, we have done some share buyback. I think we finished the quarter with a net debt to adjusted EBITDA of 1.8. So we're well below our target of 2. That's even after funding the Curtis transaction. We haven't forecasted any additional. You heard Jenny talk about the pipeline. So we're -- that's always a balance of actionability and timing on that. But I would just restate what Jenny said, we're going to be active when it comes to deploying the balance sheet. Operator: We'll move next to Andrew Obin with Bank of America. Andrew Obin: Just a follow-up on all these exciting new verticals, power, AI, just any thoughts, how do you think about, a, available capacity at your technology portfolio to ramp and expand your presence in these markets over the next several years? How much room is there to sort of grow organically or for bolt-ons targeting these specific high-growth verticals that are seemingly new versus where we were for the past decade? Jennifer Parmentier: Yes. Good question, Andrew. So we -- obviously, as I was saying, we've been working with some of the names everybody would recognize when it comes to data centers. And we've been working very closely with them globally to understand the capacity that is needed for our products. And it's another good example of how having this global footprint really helps us because we can partner with these customers in the regions where they need us. In some cases, we can add shifts and add capacity. And in other cases, there's some other capacity increases that we'll have to do. But nothing significant expense or nothing that doesn't have a real nice return to it. So constantly evaluating it and making sure that we're staying a bit ahead of it as we always do. So we can really give them a good delivery and quality experience. Andrew Obin: As we're sort of sitting at the bottom of the cycle, how do you think about the ramp over the next several years? And specifically labor availability, the need to train the labor and any sort of inefficiency as we go from multiple years of limited no growth to actually growing, how do we make sure that the ramp is smooth. Jennifer Parmentier: Yes. We rely heavily on our tools sitting inside of the Parker Lean System and on our culture of Kaizen. That's where we really do get a lot of our efficiency improvement. And the way that we work with Kaizen and the way that we work with our teams, we established how our production line, power assembly cells can operate at different volumes and what that takes from a labor standpoint or flexing at other areas of the factory. So in many cases, we've been able to do that without adding team members. And in other cases, we will add team members as needed. But we put a lot of energy into onboarding and training new team members, and I think we have some really robust programs when it comes to that. So I think we're in a good position. Todd Leombruno: Andrew, this is Todd. I would just add, we did bump up our CapEx forecast for the year. It's higher than we've been historically. A lot of that is going towards automation, safety-related items, capacity in certain regions where needed. So we are -- I think we're being thoughtful about it, and I think we are, obviously, we're preparing for growth. Operator: We'll take our next question from Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Just maybe circling back to the really impressive Aerospace margin performance this quarter. If we kind of look at what you guys are forecasting for the rest of the year, there is a bit of a step-down versus the 30%, and I know that's a really robust result. But is that just because of the mix within the mix with what you said, Jenny, around spare shipments? Jennifer Parmentier: Yes. Spares are hard to forecast. So yes, that would be the biggest part of it, Nicole. For Q2, we have margins at 29.1% for Aerospace, which is a 90 basis point increase year-over-year, and obviously an increase from our initial guide. Nicole DeBlase: Okay. Perfect. That makes sense. And the incremental stepping up to 40% also really good to see. I know kind of the previous long-term target or what's baked into the longer-term 2029 target is closer to 35%. Could this possibly be a new norm for Parker given how strong margin performance is? Or do you still think it's best for us to kind of anchor to the 35% or so in forward years? Todd Leombruno: Yes, Nicole, this is Todd. I'm glad to see those incrementals, they are very much impressive. As you know, they're not easy to get. There's a lot of work around the globe that happens to turn out these great results. Sometimes it's a little easier when the sales are -- the math works a little funny when the sales growth is not enormous. But you've seen our margin expand. You've seen our EBITDA expand. But as far as what we hold our team to, we modeled that 30% to 35%. Of course, it varies depending on where you're at in the cycle. But I don't think we're ready to change that guidance yet. Operator: We'll take our next question from Brett Linzey with Mizuho. Brett Linzey: First question just on construction. So you noted the gradual recoveries. Is this predominantly the MRO piece of that business? Or are you beginning to see a little bit of load-in from OEMs as they're seeing some dealer increases? Jennifer Parmentier: I think it's both. Brett Linzey: A little bit of both? Okay. And then just to follow up on that last question regarding the fiscal '29 targets. So the adjusted op target was 27%. The top end of the guide this year is 27%. So basically got there 3 years early. Should we think of this year as the new bouncing-off point and you're comfortably marching above that? Or is there something about mix or discretionary costs that might need to come back? Jennifer Parmentier: Well, listen, we're really pleased to see what the team was able to accomplish in Q1 and very happy to be able to increase our organic growth forecast outlook from 3% to 4%. We do still have some markets that need to recover. And we think that what we have out there in the guide right now reflects what we see today. Obviously, we could not have achieved this 27% adjusted operating margin without the hard work and dedication of our team. But just a reminder, with the FY '29 target, adjusted operating margin is not the only target, and we're focused on achieving all 5 of those targets. There's still work to do there, but we're confident we're going to get there. Operator: We will take our next question from Nigel Coe with Wolfe Research. Nigel Coe: We've got a lot of grounds, but I did want to go back to the Aero margins. And I'm actually wondering, is there a way to think about legacy Parker Aero margins and Meggitt? And through other question is I'm trying to judge how much more runway there might be to operationalize the Meggitt margins. Todd Leombruno: Nigel, this is Todd. That integration has gone unbelievably well. We have certainly made that part of the Parker operating strategy. It is really hard to tell the difference between the legacy margins now and the Meggitt margins now. A lot of the synergies really came from across the group. And quite honestly, that's not the way we're really running the company now. It's not Parker Meggitt and Parker Aerospace, it's Parker Aerospace. I would tell you they're both stellar, hitting 30% for the first time. It was equal parts of both. And we've got a very great future there. Nigel Coe: Yes. I think that's the right answer, by the way. And then on -- going back to power gen. I think, Jenny, you mentioned, or maybe it's you, Todd, that roughly half of that 7% is power gen. So I'm actually curious, when would you think about breaking it out as a separate reportable subsegment. It seems to be getting to the same sort of size of HVAC. So just curious on that. And then any more color you can provide on the exposures in there? I'm curious the heavy-duty exposure versus the aeros and maybe some of the smaller gas turbines? Sorry for the detail, but it would be interesting to know that. Jennifer Parmentier: Yes. So -- what was the first part of your question? Todd Leombruno: Breaking down the difference. Jennifer Parmentier: The difference. We don't look at the percentage on the market verticals as to where we can break out some subsegments. We haven't gotten that far yet. So I really don't have a number in mind where it would become its own market vertical. Obviously, we're very bullish about the future of power gen. So it's something we continue to evaluate. But energy is an area -- all types of energy we think belongs together. So no real plans to break that out yet. And I would say maybe in a follow-up with Jeff, you could look at some of the other details that you were asking for. But I don't have that available for you right now. Operator: We'll move next to Nathan Jones with Stifel. Nathan Jones: I got a quick follow-up on the gas turbine business. If I remember correctly, many years ago, probably up to nearly a decade ago, the OEM margins on at least some of the components that went into the gas turbine business were pretty low and the aftermarket margins were pretty high. Just wondering if that's still the case and there might be a little bit of a drag as the OE side of that ramps up? Or if that dynamic has changed over the last decade? Todd Leombruno: Yes, Nathan, this is Todd. When you go back and try to compare Parker to a decade ago, it's very difficult. It's a totally different company. The margin expansion is significant. You see that. Every one of these business has been part of that margin expansion. We still have the mix between aftermarket and OEM margins. I would say that that's probably always going to be like that. There's nothing here in power gen that dramatically sticks out that it's lower than the rest of the OEM aftermarket mix. Nathan Jones: Fair enough. And then I had one follow-up on Mig's question earlier on the longer-cycle Industrial International orders. Any color you can give us around what drove those? I know they were maybe 4Q last year that they came in. And Jenny was giving us some cadence on how that doesn't phase in, I guess, to revenue this year, but any color you can give us on when that starts to contribute to growth in International? Jennifer Parmentier: So the longer-cycle orders that we had in Q3, I believe that were in our Engineered Materials business. And that longer cycle could be anywhere from 6 to 12 months. I don't have the details committed to memory on exactly what those were. But they did not repeat in Q4. So longer cycle, longer demand sense, anywhere between 6 and 12 months, I would say. Todd Leombruno: Chloe, this is Todd. I think we've got time for maybe one quick, positive last question, if you could put whoever's next in the queue. Operator: Absolutely. We'll take our last question from Andy Kaplowitz with Citi. Unknown Analyst: This is actually Jose on for Andy. Maybe to wrap it up. You've talked in the past about mega projects and how they could potentially impact Parker. Curious if you could talk about how customers are moving forward with the mega projects? What are you guys listening from your distributors? And how are you approaching that trade-off between there's still a lot of larger projects out there versus a somewhat still uncertain macro environment? Jennifer Parmentier: Yes. And when I was talking about our distribution channel and how they serve all those small to midsize OEMs on capital investments and CapEx, those definitely are those megaprojects. So we still see a very large amount of them out there. We still do hear that there are delays. But there's obviously some of these that are starting to kick off and they're mainly focused on customers looking for productivity and efficiency. And that's what we're hearing from our channel that supports those customers, and that's where we believe most of that is happening today. Todd Leombruno: Chloe, I think we're running out of time. So this concludes our FY '26 Q1 earnings release webcast. Like I said earlier, we appreciate everyone's attention and their time. We thank you for joining us today. Our Investor Relations team of Jeff Miller and Jen Specky will be available for the rest of the day if anyone has any follow-ups or needs clarification. So thank you all, and have a great day. Operator: This concludes today's call. We appreciate your participation. You may disconnect at any time, and have a wonderful afternoon.
Operator: Greetings, and welcome to the Redwire Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Alex Curatolo, Senior Director of Investor Relations. Alex Curatolo: Good morning, and thank you, Diego. Welcome to Redwire's Third Quarter 2025 Earnings Call. We hope that you have seen our earnings release, which we issued yesterday afternoon. It has also been posted in the Investor Relations section of our website at rdw.com. Let me remind everyone that during the call, Redwire management may make forward-looking statements that reflect our beliefs, expectations, intentions or predictions of the future. Our forward-looking statements are subject to risks and uncertainties that are described in more detail on Slides 2 and 3. Additionally, to the extent we discuss non-GAAP measures during the call, please see Slide 3, our earnings release or the investor presentation on our website for the calculation of these measures and their reconciliation to U.S. GAAP measures. I am Alex Curatolo, Redwire's Senior Director of Investor Relations. Joining me on today's call are Peter Cannito, Redwire's Chairman and Chief Executive Officer; Jonathan Baliff, Redwire's Chief Financial Officer; and Chris Edmunds, Redwire's Chief Accounting Officer and incoming Chief Financial Officer, effective December 1, 2025. With that, I would like to call -- turn the call over to Pete. Pete? Peter Cannito: Thank you, Alex. During today's call, I will outline our key accomplishments during the third quarter of 2025. Chris, our incoming Chief Financial Officer, will then present the financial highlights for the same period and discuss our 2026 outlook, after which we will open the call for Q&A. Please turn to Slide 5. Now that we have a full quarter of performance from the combination of Redwire Space and Edge Autonomy, I would like to continue to emphasize the major transformation underway at Redwire. As you will see in our accomplishments and results, the technical, operational and financial positioning of our platform has been significantly enhanced. As part of this transformation, I'm excited to introduce our updated vision statement, reflecting Redwire as an integrated space and defense tech company. At Redwire, our expanded vision is to pioneer next-generation space and defense technologies that empower scientific discovery, advance global industries and strengthen security, transforming how humanities explores, connects and protects from the skies above to the stars beyond. Let's now turn to a discussion of highlights from the third quarter of 2025. Please turn to Slide 7. As you can see from the highlights on this slide, the impact of our transformation, including the acquisition of Edge Autonomy was accretive to our financial performance. During third quarter of 2025, we increased our adjusted gross margin to 27.1% in the third quarter. We also saw sequential improvement of $24.8 million in our adjusted EBITDA. Additionally, we recorded significant revenue growth of 67.5% sequentially and 57% year-over-year to revenues of $103.4 million during the third quarter. We continue to scale aggressively. From a growth perspective, we closed a number of key strategic opportunities, adding to our backlog by achieving a book-to-bill ratio of 1.25, resulting in backlog of $355.6 million as of September 30, 2025. We are greatly encouraged by our growth reflected in our strong book-to-bill in Q3 based on strong customer demand for our differentiated products. However, looking forward, we anticipate some issues with near-term timing of awards in Q4 resulting from the ongoing U.S. government shutdown. In particular, we have seen delays in the U.S. Army's long-range reconnaissance and similar UAS programs as well as a slow start to Golden Dome. We've ramped production capability to meet these needs, but have not yet seen awards begin to flow. Therefore, we anticipate the diminished government staff and resulting delay in contracting activity is likely to push a number of our anticipated awards out of the quarter. Notably, however, we do not see a decrease in demand, but rather a temporary near-term timing impact that supports a strong 2026 as the government returns to full strength. Please turn to Slide 8. As Redwire nears completion of its transformation, expanding from exclusively space subsystems and components to becoming a highly scalable space and defense technology platform, I'd like to reorient investors to our 5 primary value-driving product areas. These value drivers represent the product areas where Redwire has differentiated intellectual property, first-mover advantage and recognized thought leadership in rapidly growing domains with sizable total addressable markets. They are differentiated next-gen spacecraft, particularly in VLEO and GEO like SabreSat, Phantom and Mako and others that support next-generation capabilities such as high-fidelity earth observation, quantum key distribution, in-space refueling, AI imaging and maneuverability. Large space infrastructure, specifically our rollout solar arrays and international berthing and docking mechanisms where we provide building blocks for critical space infrastructure like space stations and Moon to Mars exploration. Microgravity development, where we are a global leader with decades of heritage and hundreds of experiments flown in the areas of biotechnology and advanced materials and manufacturing. Combat proven UAS, namely the Stalker and Penguin series, where we supply combat-proven autonomous UAS built in the United States and Europe to war fighters in the most challenging battlefield environments. And finally, sensors and payloads such as optics and radio frequency systems where we support multi-domain missions ranging from airborne ISR to Artemis and the historic commercial moon landings. To underscore our strategic positioning in each area, I will share a brief description of the differentiators, a highlight or 2 from the third quarter as well as examples of future growth targets as we move towards 2026. Please turn to Slide 9. Starting with next-gen spacecraft. Redwire's key differentiators are that we have existing funded customers, classified personnel and facilities and a first-mover advantage in VLEO, GEO and space refueling and quantum secure satellites. During Q3, Redwire announced that we have reached an agreement with Thales Alenia Space to become the prime contractor for ESA's Skimsat mission, a technology demonstration mission for a spacecraft designed to operate in VLEO. The Skimsat mission leverages Redwire's Phantom spacecraft, an advanced European VLEO platform out of our Belgian facility. With this prime ship, we further establish ourselves as a global leader in VLEO capabilities. In addition, we signed an MoU with Honeywell during the quarter for QK-VSAT. Under this ESA public-private partnership, we aim to combine Redwire's quantum platform technology with Honeywell's quantum optical payload as we build towards a QKD constellation. As we look for further growth opportunities, VLEO is a relatively untapped orbit with no dominant provider. Redwire is now executing on 2 prime contracts in VLEO, DARPA's Otter program in the U.S. and ESA's Skimsat mission in Europe. And these funded contracts position us as an early mover and market leader in this exciting orbit. We are leveraging this funded development to position VLEO for Golden Dome and growing European defense spending. In the future, we are targeting opportunities with the intelligence community, Air Force Research Lab, or AFRL, most notably our current TETRA program, Space Force as well as additional phases for DeepSAT and expanding our Honeywell partnership for QKDSat as just a few examples. Please turn to Slide 10. Another key value driver is our large space infrastructure, where we are differentiated as a key supplier for products like ROSA and IBDM on funded contracts from customers with significant heritage and protected IP such as our rollout design. Our unmatched heritage with ROSA on the IFS continues to translate into follow-on orders from customers that need a proven solution. During the quarter, Redwire was awarded a contract to develop and deliver rollout solar arrays or ROSA wings for Axiom's Commercial Space Station. Power is critical to a sustained presence in low earth orbit and another commercial station provider selecting ROSA further underscores our strong positioning in this key capability. Building on Redwire's heritage from the ISS, DART, Blue Origin's Blue Ring, Thales Alenia Space GEO satellites, the power and propulsion element of Gateway and now Axiom's Commercial Space Station, Redwire is pursuing numerous follow-on opportunities to scale with our existing customers as their businesses grow. Additionally, we are aggressively pursuing orders for large space infrastructure such as ROSA and IBDM for other commercial space stations as well as other power-intensive spacecraft programs and Moon to Mars infrastructure like Artemis. Please turn to Slide 11. With hundreds of microgravity experiments conducted, proven IP like PIL-BOX and existing funded commercial, governmental and international customers, Redwire is at the forefront of microgravity development. We are decades ahead of many of our competitors. During the third quarter, Redwire launched 14 PIL-BOXes, studying 18 molecules to the International Space Station with 3 different partners: Bristol-Myers Squibb, Butler University and Purdue University. These PIL-BOXes are expected to return to earth in the coming months. With these, Redwire has now flown a total of 42 PIL-BOXes studying 35 unique molecules as of the end of the third quarter, adding to our extensive heritage in pharmaceutical development on orbit. In terms of future growth, we see the potential impact is extraordinary. Pharma has less than a 10% success rate from Phase 1 trials to approval and a fast-approaching patent cliff that threatens approximately $350 billion in annual worldwide revenue from drugs losing exclusivity through 2030. We see Redwire's pharmaceutical development on orbit as offering a potential solution to these challenges as we will take advantage of the unique microgravity environment in space to grow seed crystals using Redwire's flight-proven PIL-BOX technology. Our subsidiary, SpaceMD, will then sell or license these seed crystals to companies that can use them to create reformulated versions of existing drugs or entirely new therapeutics. We have a template for these commercial agreements and many successes with key partners in the biotech community to build on. Please turn to Slide 12. Next, let's turn to our combat-proven UAS. First, I'd like to take a moment to discuss a few key differentiators of the Stalker. The Stalker is a combat-proven UAS that is built on nearly 20 years of heritage with more than 300,000 flight hours, including in highly contested and harsh environments. The Stalker is silent, enabling covert surveillance and reconnaissance and minimizing detectability in contested or civilian-sensitive environments. The Stalker is also payload agnostic. More than 30 different third-party payloads have been integrated via our modular open systems approach, which enables plug-and-play integration. And finally, the Stalker Block 40 offers extended endurance of more than 18 hours, critical for long-range operations. We also have significant heritage with our Penguin series built in Regal Latvia, having delivered more than 200 Penguin aircraft to the Ukraine armed forces. European defense spending is growing rapidly and we are one of the few European-based suppliers with proven performance on the battlefield. During the quarter, we were awarded and delivered Stalkers for the prototype phase agreement of the U.S. Army's Long-range Reconnaissance or LRR program. The Stalker has previously been selected for 2 programs of record, the U.S. Marine Corps Long-Range Long Endurance and the U.K. Ministry of Defense's TIQUILA program. In total, during the third quarter, we shipped Stalker aircraft to 8 different end customers in the United States and other allied countries, showing the global demand for the combat-proven Stalker platform. Clearly, Stalker is broadly fielded for a variety of mission sets with multiple countries and U.S. military branches based on our differentiated capabilities. From unleashing American drone dominance in the U.S. to the European Drone Defence Initiative, the demand signal is strong. With existing production facilities and a broad customer base, we are targeting future growth globally. Redwire is ready with production capacity and fielded aircraft to deliver on key programs like LRR as we move into 2026. Please turn to Slide 13. Finally, moving to sensors and payloads. Redwire has decades of heritage having delivered thousands of space-based sensors and payloads, including antennas, sun sensors, star trackers and cameras for some of the most high-profile missions. Redwire now also has significant heritage with UAS sensors and payloads, having delivered more than 400 Octopus gimbals to the Ukraine armed forces, for example. These gimbals are compatible with a wide variety of UAS platforms. These are not just for Stalker and Penguin. We are selling these systems to other platform providers. During the quarter, Redwire announced a partnership with Red Cat to integrate their Black Widow Small UAS onto the Stalker to support UAS Army Echelon missions. The Black Widow, which was selected by the Army for its short-range reconnaissance Tranche 2 program can be mounted under the center wing of the Stalker as a deployable payload. By integrating best-of-breed short- and long-range reconnaissance systems, this partnership will provide war fighters on the front lines with mission -- with great mission reach and reliable data for effective decision-making. Stalker and gimbals are already integrated with controllers such as [ ATT&CK ] and CUDA technologies. And after Q3, we announced an MoU with UXV Technologies to enhance controller interoperability and align with the EU's ambitions to strengthen its defense industrial base through cross-border industrial cooperation. As we look forward, we see significant growth opportunities for airborne and space-based sensors and payloads. The UAS EO/IR sensor market segment is forecasted to grow from approximately $1.6 billion in FY '23 to approximately $4.8 billion in FY '32, a 12.9% CAGR. Redwire targets future growth both with the U.S. government and other key OEMs around the world for these products. In space, the proliferation of satellites is expected to continue with an estimated 70,000 satellites expected to be launched over the next 5 years. Further, as capabilities like space situational awareness and airborne ISR become increasingly important, Redwire is positioned for continued growth in this area. Please turn to Slide 14. Although in the near term we've seen delays from the U.S. government shutdown, which is likely to push key awards into next year, our pipeline of opportunities remains very strong and we saw a positive trend in contracts awarded during the third quarter as compared with the first half of 2025. Our contract awards during the third quarter of 2025 almost tripled year-over-year to $129.8 million with a book-to-bill ratio of 1.25x, improving backlog to $355.6 million, including contracted backlog from international operations of $128.7 million or 36% of total backlog. As a reminder, we often see lumpy contract awards from quarter-to-quarter. However, we continue to see a strong pipeline with an estimated $10 billion of identified opportunities across our space and airborne solutions, including approximately $3 billion in proposals submitted year-to-date as of September 30, 2025, inclusive of the year-to-date bids submitted by Edge Autonomy. Although the U.S. government shutdown is likely to delay timing of Q4 awards into 2026 with key wins during the third quarter and in the intervening weeks, we are pleased with the positive change in our trend line for contracts awarded and believe our pipeline of new opportunities is very strong, positioning us for continued growth for the next 12 months and beyond. Please turn to Slide 15. With that, I'd now like to turn the call over to Chris Edmunds, Redwire's Chief Accounting Officer. As previously announced, Chris will succeed Jonathan Baliff to become our Chief Financial Officer effective December 1, 2025. Chris brings deep knowledge of our business and significant finance and accounting expertise, and I look forward to working with him in his new role. Chris will now discuss the financial results for the third quarter of 2025. Chris? Chris Edmunds: Thank you, Pete. Before turning to Slide 16, I want to highlight the photo on this page of the ribbon cutting for our new 15,000 square foot facility in Albuquerque, New Mexico, adjacent to the Kirkland Air Force Base. This facility will support a wide range of capabilities from space, missile defense and other emerging war fighter domains as well as support work under the $45 million contract with the AFRL that was previously disclosed. Redwire is focused on optimizing our operational footprint and smartly investing in locations like Albuquerque, which are key to our nation's defense architecture. Please turn to Slide 16. Let's turn to the financial results for the third quarter of 2025, starting with revenue. Revenues for the third quarter of 2025 increased by 50.7% year-over-year to a record $103.4 million, with Edge Autonomy contributing $49.5 million. Turning to profitability. During the quarter, we saw a significant sequential improvement in our adjusted EBITDA from a negative $27.4 million in the second quarter of 2025 to a negative $2.6 million in the third quarter of 2025. This improvement is largely attributed to the 67.5% sequential increase in revenue and adjusted gross margin of 27.1%, offset by the unfavorable impact of VACs of $8.3 million. Finally, turning to cash and total liquidity. We ended the quarter with total liquidity of $89.3 million, which was comprised of $52.3 million of cash, $35 million of undrawn revolver capacity and $2 million in restricted cash. Although lower sequentially, this does represent a 46.2% year-over-year improvement in total liquidity. Please turn to Slide 17. I'd like to take a moment to provide some additional detail around third quarter adjusted gross profit and cash used in operating activities. Starting with gross profit, as shown on the left-hand chart, during the quarter, we reported gross profit of $16.8 million and gross margin of 16.3%. Included within these results was an $11.2 million noncash purchase accounting adjustment related to the Edge Autonomy acquisition. This represents the amount of the fair value step-up recorded through purchase accounting for the inventory sold this quarter, resulting in adjusted gross profit of $28 million with an adjusted gross margin of 27.1%. We believe that this adjusted gross margin is more representative of the potential of the combined business going forward as we have now fully recognized the inventory fair value step-up in earnings and it will no longer impact future gross margins. Second, as shown on the right-hand chart, we saw a significant and expected reduction in net cash used in operating activities during the third quarter of 2025 as compared with the first 2 quarters. During the quarter, our use of cash from operations decreased significantly on a sequential basis from a use of $87.7 million during the second quarter of 2025 to a use of $20.3 million during the third quarter, an improvement of $67.3 million. Even excluding the impact of acquisition-related costs included in our Q2 2025 operating cash flows, this represents a sequential improvement of approximately $30 million. Although this quarter represents a sequential improvement, we continue to focus on profitability, expanding revenue and gross margin and driving efficient SG&A as we sharpen execution and we achieve profitability, including positive cash from operations. In regards to capital allocation, we remain committed to a disciplined approach to fund our growth initiatives and maintain a prudent balance sheet. In line with this long-term capital sourcing strategy, we expect to file a prospectus supplement for a $250 million at-the-market or ATM equity offering program in the coming days. Please turn to Slide 18, for a brief discussion of the outlook for the remainder of 2025. Although we are benefiting from a diversification in geographical customer mix and despite the improved book-to-bill of 1.25 during the third quarter and the strong bookings we have seen thus far in October, the ongoing U.S. government shutdown has pushed a number of anticipated awards out of the fourth quarter and into 2026. As a result, for the 12 months ending December 31, 2025, including Edge Autonomy from the date of close, we are adjusting to a narrower expected revenue range of $320 million to $340 million. In closing, I'd like to reiterate that although impacts from the U.S. government shutdown have necessitated a prudent revision in revenue guidance, we believe that these anticipated orders have been pushed out of the quarter and into 2026. They have not been lost. With that, please turn to Slide 19, and I'll now turn the call back over to Pete. Peter Cannito: Thank you, Chris. The transformation of Redwire with addition of Edge Autonomy has already been accretive to our financial profile, reflected in our year-over-year revenue growth of 50.7%, 27.1% adjusted gross margin and strong book-to-bill of 1.25x. Finally, before we move to our question-and-answer session, as we announced in early October, our CFO, Jonathan Baliff, will be retiring from Redwire effective November 30, 2025. I'd like to take a moment to thank Jonathan for his leadership and valuable contributions throughout his tenure as he guided Redwire through critical phases of our evolution, both in his role as CFO and as a member of our Board. Thank you, Jonathan. With that, I want to thank the entire Redwire team for their contribution to our results during the third quarter of 2025. We will now open the floor for questions. Operator: [Operator Instructions] And your first question comes from Sujeeva Desilva with ROTH Capital Partners. Sujeeva De Silva: And Jonathan, best of luck with the transition. And Chris, congrats and good luck in the new role here. So starting with the revised guidance, appreciating that you did revise it down. What does that mean for the business looking toward 2026, given what you've seen happening during the second half of '25? Peter Cannito: Yes. So I think as Chris emphasized there in the paragraph on the guidance, these are not lost awards. These are just timing issues, particularly, as I mentioned, with the LRR program. The Army announced publicly right after the award of our prototyping contract that they would be awarding a production capability towards the end of this year and that has not occurred. And we believe the reason that that hasn't occurred is because of the ongoing government shutdown. So we do expect those awards once the government shutdown ends to start to flow. But unfortunately, we only have approximately 7 weeks or so of production time left in the quarter and that includes 2 holiday weeks with Thanksgiving and Christmas. So once the government reopens, and we believe the Army will start placing orders for the production element of LRR, we'll start producing those. And that would lead you to believe that -- and we also believe that that is setting us up for a strong 2026. Chris, anything you want to add? Chris Edmunds: No, I think this is the first quarter we've got the combined results and I think that's a stepping off point as the baseline as we start to go forward, right? So as we think about stepping from today forward and as the government reopens with our diversification geography, we are looking at '26 to be obviously a marked improvement on where we are. And I think we can start to see those trend lines as we're moving out. Sujeeva De Silva: Great. And just to understand that, was the EAC in the quarter, was that related to the government shutdown pushouts primarily? Peter Cannito: No. The EAC was, again, a market improvement quarter-over-quarter as we continue to sharpen our execution. We put a lot of effort into that, but there remain a few space programs that we're rightsizing in terms of our delivery. Sujeeva De Silva: Okay. Great. And my other question here is on the pipeline and bidding activity numbers you provided. And thanks, Pete, for the 5 areas and clarifying kind of the focuses going forward. Which of those 5 areas would you say maybe are the larger emphasis of the pipeline and bidding activity that you have in place today on a relative basis? Peter Cannito: Yes. Well, it's a good question and we are trying to -- I appreciate you acknowledging that because we're really trying to point out where the value is being driven at Redwire, so people have more clarity on that. The good news is all 5 of them are areas with extraordinary potential. Now as we just talked about, the UAS orders, this is something be -- is a major priority for the Army and quite frankly, the Department of Defense in general, our existing customers, the Marine Corps and U.S. SOCOM also have strong needs for UAS. So in terms of -- ironically, even though this is where we saw a pushout in the fourth quarter into 2026, that seems -- that still remains to be an area that has a strong growth potential. But there's been a bit of a slow start to Golden Dome as well and we think the VLEO orbit, in particular, will have a role to play in that defense architecture. So we're really excited about that as well. Those can be sizable orders when you order a large VLEO spacecraft. We believe with the now nomination of Jared Isaacman, who has shown in the past a strong disposition for commercial LEO destinations or commercial space stations that funding may ramp up for the commercial -- for the CLD program for those space stations. And you can see that Axiom is leaning forward. We're obviously in talks with all the commercial space station providers because of our heritage on the ISS. So we think that's really exciting as well. And over the longer term, we're just getting started. We continue to have a strong drumbeat in microgravity. It's not our largest revenue driver. But in terms of the potential for some of the pharmaceutical molecules that we've been working on, we see a lot of growth there. And even in sensors and payloads, that's a tried and true element of both the space and airborne market. And because we sell our payloads and not only use them on our own platforms, but sell them to other OEMs, we see strong growth there as not only coming from us selling more Stalkers and Penguins for UASs, but other people selling UASs in different categories that leverage our Octopus EO/IR sensors. So I guess it's kind of a long answer to your question, but the nice thing about it is we have many paths to victory here. It's just a matter of timing for us. Operator: And your next question comes from Greg Konrad with Jefferies. Greg Konrad: Maybe just sticking to one question. I think you had called out the gross margin improvement, which was noted, but you still had some level of VACs. I mean, how do you think about the right level of gross margins as the business comes back? And then just to reiterate, the fair value purchase adjustment, so that's gone going forward. That is just a 1 quarter adjustment? Peter Cannito: That's correct. So starting with the last part first, 27% to 30% gross margins should be our forward runway. The only reason it wasn't reflected to that and why we call it adjusted gross margin is because of that purchase accounting element. 30% is where we have in the past said is our stated goal for gross margins and where we think the business should be run rate forward, inclusive of any EAC adjustments. Now having said that, we are hyper focused on sharpening our execution. So should we be able to continue to reduce the number of EACs we see on some of these development -- space development programs and as we move out of development and more of our revenue comes from production contracts on the space side, we could do better than 30%, but I think 30% is the right forecasting run rate for us. Chris, I don't know if there's anything you want to add there. Chris Edmunds: Yes, I think you hit it right. As we're looking at the balance of our product mix, we'll continue to make investments where we see expansion in this gross margin. But based on where we are, as Pete said, with the repeat orders like we've seen recently with the announcement of the rollout solar rays with Axiom, again, repeat product line, we'll continue to see that gross margin profile continue to land around that 30% margin, Greg. Operator: Your next question comes from Scott Buck with H.C. Wainwright. Scott Buck: I just want to ask about the commentary around the cost-cutting. Have you completed that cost-cutting process? And if so, what is the annual cost savings target? Peter Cannito: Well, I'll answer the first part, and then I'll turn it over to Chris here. So the short answer is no. We have not completed it. Whenever you do a major acquisition, it's an opportunity to completely review your overall structure. One of the core principles of our acquisition is that we're able to scale to get operating leverage, particularly around SG&A on a much larger platform. So we're going to continue to look at that. And quite frankly, we have a lean culture that we've been implementing and we've been moving a lot of our engineering and development operations towards lean principles. And so that will be a part of who we are going forward. In turning of size and scope, Chris, do you have any comments on that? Chris Edmunds: Yes, playing off of the lean culture. We've gone through -- continue to evaluate all of our processes across the company. And really, the cost control is kind of balanced across all the various elements of the P&L. We are stepping off and making a commitment to a $10 million run rate savings here across the portfolio. We are seeing obviously investments where it makes sense, but being smart about where we can be more efficient in getting operating leverage as we continue to grow the top end of our P&L. We will continue to run the lean program that we've invested in. We do see additional cost savings, again, from production efficiencies as we continue to grow the top end. But no, we're happy where we are. We see margin expansions, as we said on the last comment and we'll continue to see operating leverage with our G&A as we go. Jonathan Baliff: Yes, one other thing, Scott -- yes, Scott, I have to mention [indiscernible] as I retire from the company. This will have -- what Chris has said, will also benefit our cash and cash from operations as we look into the future too. We saw obviously sequential improvement in cash from ops and free cash flow. But all of the things that Pete and Chris are talking about are really meant to obviously decrease the cash burn and eventually become free cash flow positive. Operator: And we have reached the end of the question-and-answer session. I will now turn the call over to Chris Edmunds for closing remarks. Chris Edmunds: Well, thank you all for your questions. Before concluding today's Q&A, as we've done the last quarters, we'd like to ask a select question from our retail community. Government contractors have been inconsistent as to whether they have been impacted by the government shutdown in 2025. Why do you expect to be impacted? Pete? Peter Cannito: Thanks, Chris. As usual, a very poignant and observant question from our astute retail investor base. It's a good one. It's interesting. Like the question states, we've seen a lot of different feedback on the government shutdown. Quite frankly, I'm a little bit surprised that it hasn't impacted everybody in the government contracting sector. But for us specifically, I think it really comes down to the impact on the LRR program. As I stated earlier, the Army had put out an article that they expected production to occur in the latter part of this year for LRR and that hasn't occurred because the government hasn't passed the budget. So those were not 2025 funds that they were playing off of. I also think that in many of our programs, we -- it just happened to line up that we were expecting contract awards to happen in the fourth quarter and those contracts didn't come for some key programs. And for the large defense contractor, maybe I should say, for each defense and government contractor, it probably has to do with where you are in your contract cycle. So maybe some folks that are burning off backlog don't see quite the impact. But we invested a lot in being ready for production for the fourth quarter to meet the operational demands for the drone initiatives that were out there and I'm confident they're coming. But that didn't materialize in the fourth quarter. And with only 7 weeks left for production, we think it's prudent at this time to revise down for ourselves. So thank you for that question. And of course, all the engagement we get.
Operator: Good day, everyone, and welcome to CCU's Third Quarter 2025 Earnings Conference Call on the 6th of November 2025. Please note that today's call is being recorded. At this time, I'd like to turn the conference call over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir. Claudio Heras: Welcome, and thank you for attending CCU's Third Quarter 2025 Conference Call. Today with me are Mr. Felipe Dubernet , Chief Financial Officer; Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager; and Carolina Burgos, Senior Investor Relations. You have received a copy of the company's consolidated third quarter 2025 earnings release. The call will start by reviewing our overall results, and then we will move into a Q&A session. As every quarter, before we begin, please take note of the following statement. The statements made in this conference call that relate to CCU's future financial results are forward-looking statements, which, of course, involve known and unknown risks and uncertainties that could cause actual performance or results to materially differ. These statements should be taken in conjunction with the additional information about risks and uncertainties set forth in CCU's annual report in Form 20-F filed with the U.S. Securities and Exchange Commission and in the annual report submitted to the CMF and available on our website. It is now my pleasure to introduce our CFO, Mr. Felipe Dubernet . Felipe Dubernet: Thank you, Claudio, and thank you all for joining the call today. In the third quarter 2025, CCU posted higher operating results and increased profitability versus last year in a volatile and an uncertain business scenario. Consolidated EBITDA grew 4.6% versus last year, mainly driven by our main operating segment, Chile, which in the context of soft industries expanded EBITDA margin through gross margin improvement and efficiencies, maintaining the positive trend in financial results throughout the year. The International Business Operating segment also expanded EBITDA versus last year. Within the segment, we are facing a very challenging scenario in Argentina, where the beer industry contracted mid-single digit during the quarter. On the other hand, the Wine Operating segment posted a lower EBITDA driven by weaker domestic markets in Chile and Argentina together with a higher cost of wine. Our year-to-date results show that our path to recover profitability remains on track, supported by our 2025-2027 strategic plan, which prioritize profitability through revenue management efforts and efficiencies. Regarding our main consolidated figures in the third quarter 2025, net sales were down 1.1%, explained by 2.2% lower average prices in Chilean pesos, partially compensated by 1.2% volume growth. Gross profit decreased 2.9% and gross margin was down 79 basis points. In addition, consolidated MSD&A expenses in Chilean pesos dropped 4.7% due to efficiencies and a favorable translation currency effect from Argentina. In all, EBITDA expanded 4.6% and EBITDA margin expanded 60 basis points. For the first 9 months of the year, and excluding the nonrecurring gain from the sale of a portion of line in Chile in the second quarter 2024, consolidated EBITDA expanded 9.9%. In terms of our segments, in the Chile Operating segment, top line expanded 1.8% as a result of a 2.4% increase in average prices, partially offset by 0.6% lower volumes. Higher average prices were explained by revenue management efforts in all the categories. This was offset by mix effects between alcoholic and nonalcoholic categories. Volumes were below last year due to soft industries, mainly in alcoholic categories. Gross profit and gross margin expanded 3.6% and 75 basis points, respectively, due to lower cost pressures related to favorable prices in some raw materials, which compensated higher costs from our PET recycling plant, CirCCUlar. MSD&A expenses grew 3.2% below inflation in spite of higher marketing expenses and as a percentage of net sales increased by 46 basis points. Altogether, EBITDA increased 4.8% and EBITDA margin expanded 41 basis points. Isolating costs and expenses associated to CirCCUlar, EBITDA would have expanded 10.2% and EBITDA margin by 117 basis points. In International Business Operating segment, volumes posted a 5.3% expansion, although net sales contracted 8.9%, driven by 13.5% lower average prices in Chilean pesos. The decline in average prices in Chilean pesos was mainly due to the 42.2% devaluation of the Argentine peso against the U.S. dollar and a very challenging pricing scenario in Argentina, where prices grew below inflation and negative mix effects within the beer category. The volume expansion, excluding AV, the recent acquisition in Paraguay was mainly explained by Argentina, fully driven by the water category, while beer volumes contracted in line with the industry. Regarding our other operations, Bolivia and Paraguay posted higher volumes and Uruguay contracted low single digits. Gross profit decreased 16.6% and gross margin contracted 382 basis points. MSD&A expenses were down 19.2% and as a percentage of net sales decreased 552 basis points. In all, EBITDA grew 73.1%, driven by all geographies in the International segment. The Wine Operating segment posted a top line expansion of 1.6%, mainly driven by a 4.8% rise in average prices, while volumes were 3% lower. The higher average prices were mostly explained by a weaker Chilean peso and its favorable impact on export revenues and revenue management initiatives in the domestic markets. Volumes contracted due to a 6.3% decrease in Chile domestic market, in line with the industry. partially offset by 4.5% growth in exports. Gross profit decreased 1.6% and gross margin deteriorated by 128 basis points due to cost pressures from a higher cost of wine and higher U.S. dollar-linked packaging costs. MSD&A expenses rose 4.5% and as a percentage of net sales increased 78 basis points due to higher marketing expenses. Altogether, EBITDA decreased 12% and EBITDA margin was down 224 basis points. Finally, regarding our main joint venture and associated business in Colombia, we delivered low double-digit volume growth, outperforming the industry. We continue to build a robust brand portfolio and sales execution, which is the path to the long-term volume and financial growth. Now I will be glad to answer any questions you may have. Operator: [Operator Instructions] Our first question is from Constant Gonzalez from Quest Capital. Constanza González Muñoz: I have a question regarding the international segment, specifically in Argentina. Are you expecting a recovery in prices for the fourth quarter of this year? And also, what are you expecting for 2026? Are you expecting a recovery in prices and volumes? And secondly, could you tell us more about the environment that you are seeing in conception in that country? Felipe Dubernet: Thank you for your question regarding Argentina. Yes, in the second semester, we are facing a much more challenging scenario in Argentina, let's say, decline especially in the third quarter of the volumes, especially in beer, while the water business is growing mid-teens, let's say. The point of that, as you indicated, is that with prices that are below inflation. In fact, we are practically 9% below the inflation this year, year-to-date. We have increased prices in our side, but the scenario is competitive. The market share are rather stable, but we expect in the near future because everybody needs to recover profitability. Price increases, that's key in order to recover the profitability of the industry. Regarding volumes, let's say, we have maybe a more stable scenario in Argentina after the elections, where the government would -- is expected to, let's say, to decrease the uncertainty and its financial issues regarding -- especially the U.S. dollar. On the other hand, it is expected to do some reforms in this new Congress. Regarding the near future, we expect an increase in private consumption, but more than that, in this increase in private consumption that is expected to be next year, 3%, it would be different among different consumption categories. Maybe as you know, many Argentinians changed their car at the beginning of the year. So they have had some records in car sales. And normal people -- so I'm considering myself normal, I do not change the car every year. It's a very bad business. So maybe some of these resources from the consumers would come back to our categories, especially categories that are more linked to have fun as the beer -- responsible, responsible consumption of beer. And to regain momentum in the industry in the near future, along with -- we hope recovery of the overall economy. So we have had a bad third quarter. However, we expect recovery next year, I would say, and also more price adjustments to be at least in the near future in line with increase. Operator: Our next question is from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I'd like to turn the conversation back to Chile, right? Obviously, there are different dynamics playing out there. But what I see from the consolidated numbers is your pricing growth moderating, actually printing even a little bit below inflation, while I wouldn't call it for a material decline in volumes, but volumes slightly down meaning -- I know probably these efforts to be less aggressive on pricing, let's say, are not necessarily resulting in a stronger demand. Could you please elaborate more how you're seeing pricing versus volume growth versus competition, market share across the different categories, soft drinks and beer please? And more importantly than that, how much space you see for eventually more pricing to be implemented in each one of those going forward? Felipe Dubernet: Thank you, Thiago. Good to hear about you. Thank you for your question regarding Chile. Let me make very clear on price because I saw your report and then commentary now. Price in general per category are in line with inflation or above inflation. The thing that you are seeing is the entire segment, Chile that is showing a price of 2.7%, 2.4% quarter-on-quarter, but because there is a big mix effect between alcoholic categories and nonalcoholic categories. As the industry in alcoholic categories is declining, I have a negative mix effect in price. Excluding that mix effect, prices are increasing 4%, which is above inflation. So I need to make this precision because I read your report. The competitive dynamic, I would say, is very competitive, Chile, as you know. In terms of market share in the overall beverage industry, I would say we gained slightly share compared to previous quarter and quarter-on-quarter compared to same quarter last year, also we gained some share in both alcoholic and nonalcoholic categories because now we see the market as alcoholic and nonalcoholic, especially when you have industries that are declining and they are shift between industries. So I would say it's very competitive, but thanks to our brand equity, our revenue management strategies, our execution while we have increased prices in alcoholic and nonalcoholic categories, we have been able even to slightly gain share. The point regarding going forward in price always, we have an aim of optimizing our revenue management in all the categories, of course, to regain profitability, of course, there is competition. Alcoholic categories, especially wine, but also beer, the industries are very soft, are declining. The one that is declining the most is wine. But beer is also a decline in the third quarter, the industry. The only one that is growing low single digit in alcohol is spirit, thanks to the ready-to-drink where we lead innovation, will lead the market in this fast-growing category, which are the spirits ready-to-drink. Also, we have low alcohol or nonalcohol beer and all the shandies and the flavored beer such as, as an example, the Lemon Stones brand in Chile, where we led the market and it's also growing. Innovation is key in this scenario, okay? That's the answer, Thiago. Thiago Bortoluci: That's helpful, Felipe. And if I may, a follow-up in Chile, right? Obviously, I know this is a harder answer, but would love to pick our brains on that. I guess, across the world, we are seeing, in general, declining volumes in beer, right? 2025 has been an atypical year in some regions, you have adverse weather, you have obviously volatile macro, particularly across South America. What's your assessment of this weakness in beer, particularly for Chile? Would you say something more temporary? Would you say there is a structural component related to the consumption occasions, new generations, preferences? And what is CCU doing itself to try to revert this trend? Felipe Dubernet: Thiago, it's not useful to -- in alcoholic, I prefer to talk about alcoholic categories rather than specific because we have different pictures in different segments, let's say. As I said in my previous answer, the one that the industry is declining more is wine. This is a global trend and has been for many years and also a Chilean trend in the last 10 years. Wine, the per capita consumption in 2014 was 13.5 liters per capita. And in 2024 was 10.5. In the opposite of beer in 2014, per capita consumption was 44 liters per capita and last year for 54 liters per cap. There is no single explanation. We carried out very scientific or [ values ] based on data and on quantitative and qualitative, what are the reasons maybe this year in 2025, we saw a further decline from where we were in 2021 or what we have experienced in previous year. And there are high numbers of factors that came from, and you pointed out correctly, is how much money has the consumer. The economy has not been brilliant in the last years in Chile growing 2% on average or less than 2%, huge adjustment interest rate. Interest rates are declining now. The perspective of the Chilean economy should be better in the next 2 or 3 years. Copper prices are on the roof, thanks to the climate change and all of this. There are a number of projects that Chile with enhanced GDP. So we are positive about the economy in Chile in the near future. And this -- if we have this, maybe we will see a better perspective for overall categories, not only alcoholic but also nonalcoholic categories. But there are other reasons that are linked to alcohol consumption. One example is unsecurity. People feel very unsecure in Chile than it was 10 years ago. The sense of going out to on-premise, having a beer or having a cup of wine and let's say, the on-premise was in Chile 10%. And nowadays, it's 5% to 6%. So -- and this is linked to unsecurity. All presidential candidates, in 10 days, there will be presidential elections in Chile. The #1 priority is unsecurity. And when you ask the consumer, why you are not consuming so much alcohol or why are you not going out and having, as you said, in Brazil, a [Foreign Language] or a [Foreign Language] in French. Now because I feel unsecure to go in the night, so I prefer to stay home and not miss my friends. So -- there are many reasons, Thiago. But we expect because we have studied other realities such as the U.S. market. The U.S. market is declining a lot to beer consumption. But however, there has been some period of history where we have seen rebounds on consumption in specific categories. And the category that is performing very well because it is linked to trends is the ready-to-drink category in spirits, but also variants of beer, where you have flavor, you have low alcohol content, beers that are more seasonable. So innovation is key because we led the categories, especially in Chile, the alcoholic category. And innovation is key to, let's say -- and it's a key pillar of our strategic plan to overcome the situation, let's say. Operator: Our next question is from Fernando Olvera from Bank of America. Fernando Olvera Espinosa de los Monteros: Can you hear me? Operator: Yes, we can hear you. Fernando Olvera Espinosa de los Monteros: Great. Perfect. The first one is related to costs. If you can comment, Felipe, regarding the outlook on costs for the fourth quarter and 2026 would be great. And my second question is related to CapEx also for next year. I mean, considering the soft demand that we are seeing overall in alcoholic beverages, what is your initial thoughts on CapEx for 2026? Felipe Dubernet: Fernando, good question about the cost and commodities. I will give you a medium term, let's say, 2026 as our cautionary statement, I don't do forecast. But what we are seeing, we are doing the budget right now. We are seeing favorable news in practically all the commodities, except aluminum compared to 2025 and also compared to 2024, not yet at the level of prices of commodities that we had pre-pandemic, 2019. But we are seeing better news in barley, sugar, virgin, PET, resins, pulps that was a big hit, especially on juice in the next 2 years. So we are seeing a material, let's say, better commodity prices with the exception of aluminum. We are talking about an easy a projection about $10 million of better commodity prices in U.S. As I said, my #1 commodity is the U.S. dollar, and it seems stable in Chile, at least Chile, which is account for 70% of the EBITDA exchange rate seems stable going forward. And along with a lot of initiatives in terms of efficiencies in Chile that are linked to procurement, let's say, the strategic sourcing also design to value. We always see at our packaging or our formulations in order without affecting at all quality, however, doing in a more valuable or more cost-effective way to deliver the same benefits to the consumer. The consumer is first. However, we always look -- and we work on new material, new specification to reduce cost. And third is what we call nearshoring that is to have closer production of our raw materials and packaging materials to our breweries or factories, let's say, to decrease logistic costs. And in that side, also we have a strong efficiency program. So we saw a better scenario with the exception of aluminum for next year that is increasing practically in our projection 5%. On the other hand, what is -- and we have highlighted this year, we have had higher cost and expenses linked to the CirCCUlar. CirCCUlar is about introducing recycled packaging in our PET bottles up to 15%. And so far, this has had a significant impact in our EBITDA, about [ CLP 10 million ], roughly $12 million of extra cost and expenses year-to-date. On a yearly basis, this year would cost us something like CLP 15 billion. But overall, the aluminum is increasing, but all the rest is in better shape. We have efficiencies, so we expect a better scenario for raw materials and packaging materials going forward. Fernando Olvera Espinosa de los Monteros: No, that's great insight. And what about CapEx, Felipe? Felipe Dubernet: CapEx, I will hand over this question to my colleague, Mr. Joaquin Trejo, Financial Planning Manager. Joaquín Trejo Darraidou: Thanks, Felipe, and thank you, Fernando, for your question. Regarding CapEx, we actually estimate to close the year slightly below what we published in our annual report between 10% and 15% below the published figure for 2025. And looking ahead, we don't actually see major CapEx needs for capacity as the volume trend is what Felipe mentioned earlier, but rather focusing on technology. We are changing our IT system for sales and distribution and also innovation to address this new consumer trend that Felipe also mentioned in previous questions, and also regulatory requirements. The ratio we like to look at is the CapEx over sales, and we forecast it to be below 6% going forward. And also, this is why the CapEx over depreciation ratio should be at some point below 1% going forward, where the new projects are actually a smaller amount compared to previous years where we had, for example, the CapEx for the CirCCUlar plant. But this is also offset by some CapEx carryover from 2025 that is going to be transferred to 2026. But in general terms, Fernando, that's the trend we foresee. Operator: [Operator Instructions] Our next question is from Claudia Raggio from Provida AFP. Could you give us some color on the sales volumes of beer in Argentina on October? Felipe Dubernet: Yes, I would anticipate that we have had in both alcoholic and nonalcoholic, we saw decline also in October. So we have maintained in alcoholic the same trend we have in quarter 3. And in water, practically flat, small decline in water business. Operator: Thank you. We'll give it a few more moments for any further questions to come in. It looks like we have no further questions. I'll now hand it back to the CCU team for the closing remarks. Felipe Dubernet: Thank you all for attending today. In summary, in the third quarter 2025, our main operating segment in Chile continued in a trend of financial results and profitability in the context of soft industries and higher costs from CirCCUlar. The later was boosted by gross margin improvements, efficiencies and lower prices in raw materials. International Business Operating segment posted higher EBITDA, although results were negatively affected by a challenging scenario in Argentina due to a tough deceleration in consumption. The Wine Operating segment contracted EBITDA due to a higher cost of wine and weak scenario in domestic market, while export grew mid-single digits. We will keep executing our 2025-2027 strategic plan and its 3 pillars: profitability growth, enhancing innovation, and sustainability. With special focus on profitability, supported by both revenue management efforts backed by our strong and diversified portfolio of brands and efficiencies across all operating segments and functions. Thank you very, very much for attending today, and I wish you a wonderful end of day. Operator: That concludes the call for today. Thank you, and have a nice day.
Operator: Thank you for standing by, and welcome to the Karman Space & Defense's Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Steven Gitlin, Vice President of Investor Relations. You may begin. Steven Gitlin: Good afternoon, and thank you for joining Karman Space & Defense's Third Quarter Fiscal Year 2025 Earnings Conference Call. I'm Steven Gitlin, Vice President of Investor Relations, and I'm pleased to welcome you today. Joining me on today's call are Tony Koblinski, our Chief Executive Officer; Mike Willis, our Chief Financial Officer; and Jonathan Beaudoin, our Chief Operating Officer. Before we begin, please note that on this call, certain information presented contains forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. All forward-looking statements should be considered in conjunction with the forward-looking statements in our earnings release. Future company updates will be available via press releases. For further information on these risks, we encourage you to review the risk factors discussed in Karman's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein. This afternoon, we also filed our earnings release and posted an earnings presentation to our website at karman-sd.com in the News and Events section. The content of this conference call contains time-sensitive information that is accurate only as of today, November 6, 2025. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP. Our press release contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. Now I would like to turn the call over to Tony. Anthony Koblinski: Thank you, Steve. Good afternoon, everyone. On today's call, I will provide an overview of our third quarter highlights, then Mike Willis will provide a detailed review of our financial performance and capital allocation priorities. Jonathan Beaudoin will then discuss market dynamics and our operational achievements. Following their remarks, I'll return to share our strategic outlook and guidance before opening the call for your questions. Our team delivered another quarter of record performance across our business through their strong execution, continuing our momentum since our February IPO. As shown on Slide 4 of our earnings presentation, here are the key highlights. We posted record quarterly revenue of $122 million, driven by growth across all 3 of our end markets. We produced record gross profit of $50 million. Adjusted EBITDA rose to $38 million, another new quarterly Karman record. And funded backlog continued to grow, reaching an all-time high of $758 million, providing 100% visibility to the midpoint of our full year revenue guidance range and a strong foundation for 2026. During the quarter, we also completed a $1.2 billion nondilutive secondary equity offering that generated significant market demand and resulted in the effective exit of our private equity sponsor as an owner of Karman shares. Shortly after quarter end, we increased our credit facility, providing the resources to acquire Five Axis Industries and pay off our revolver. Summarized on Slide 5, Five Axis is another strategic tuck-in acquisition that expands our capabilities with IP-rich content for the commercial space industry. The Arlington, Washington-based company is a specialized provider of critical systems, including large nozzles for liquid-fueled rocket engines. Their core focus is on high-performance exotic alloys such as titanium, Inconel and high-temperature high-strength copper alloys. Five Axis supports high-priority space launch programs on a single-source basis with its highly skilled team and state-of-the-art facility. We are delighted to welcome the Five Axis team to Karman. Now let's turn to our end markets, where the demand environment remains very strong. Our customers and their end customers continue to communicate their expectations for significant volume increases in programs we support. One measure of that demand is the fact that we now support more than 80 customers on more than 130 programs. The drivers include increased replenishment activity, the Golden Dome for America, hypersonic developments, unmanned and counter unmanned systems and an increasing space launch cadence for both defense and commercial missions. Given our continued strong performance, driven by accelerated progress on current programs and the Five Axis acquisition, we are again raising our 2025 guidance, this time by $7 million at the midpoint for revenue and $2.5 million for adjusted EBITDA. With that overview, I'll turn the call over to Mike for our financial review. Michael Willis: Thank you, Tony. Good afternoon, everyone. Q3 was another strong quarter that demonstrated the effectiveness of our business model and our team. Shown on Slide 6, highlights include revenue of $122 million, representing a 42% increase compared to the third quarter of fiscal year '24. Gross profit grew 48% to $50 million, maintaining gross profit margin at 41%. Net income rose 78% to $8 million. Adjusted EBITDA jumped to $38 million, a 34% year-over-year increase. Adjusted EPS more than doubled to $0.10 per diluted share from $0.04. And funded backlog grew 38% year-over-year and 31% since December 31, 2024. Growth remained broad-based across all 3 of our end markets shown on Slide 7. Hypersonics and Strategic Missile Defense revenue grew 36% year-over-year to $37 million, driven by order growth in PrSM, Standard Missile 3 and 6 and development programs. Space and Launch jumped 47% to $41 million, driven by the timing of orders from both legacy and emerging launch providers. And Tactical Missiles and Integrated Defense Systems were up 42% to $44 million, driven by increasing production rates for GMLRS, AIM-9X and UAS programs. End market mix was balanced with our 2 defense-driven end markets representing 2/3 of quarterly revenue. Space and Launch representing 33% of quarterly revenue, Hypersonics and SMD, 30%; and Tactical Missiles and IDS, 37%. Turning to the balance sheet. We continue to prioritize growth as we consider capital allocation decisions. We ended the quarter with $19 million in cash and equivalents, up $7 million from year-end '24. In late October, we upsized our Term Loan B by $130 million to a total of $505 million to support the acquisition of Five Axis and to pay off our revolver. This results in a net leverage ratio of approximately 3x adjusted EBITDA on a pro forma basis, a ratio well within our comfort level. Looking ahead, we now expect a statutory tax rate for fiscal year '25 of 25.5% and expect CapEx to be approximately 4.5% of the midpoint of our revised revenue guidance range. With that, I'll turn the call over to Jonathan for an overview of our market position and operational highlights. Jonathan Beaudoin: Thank you, Mike. Customer demand signals across our end markets have grown stronger since last quarter. National security priorities continue to drive increased interest and funding for critical programs, while the commercial space market remains very active. For example, in the third quarter, we saw several large new contract announcements from the U.S. Army for systems we support, including those highlighted on Slide 8. $4.2 billion for GMLRS production, $9.8 billion for PAC-3 missiles known as Patriot, and $5 billion for Coyote missile systems. These contract awards demonstrate increasing customer pull for proven solutions that we have been supporting with qualified content for years. This pull is aligned with the demand signals we continue to receive and with the priorities detailed in the Big Beautiful Bill and proposed defense funding, which are summarized on Slide 9. This demand is evident in our strong and growing funded backlog. Golden Dome remains an important driver of demand beyond 2025. We believe that Karman will benefit in several ways from this transformational initiative. First, through increased demand for existing missile defense programs that we support; second, from an acceleration in the development of new solutions such as hypersonic missiles and space-based interceptors. And third, through increased space launch cadence to develop the space layer of the solution. The federal government shutdown has not impacted our 2025 guidance, which is based on our record funded backlog and associated shipping and invoicing schedules. That backlog provides us with full visibility to the midpoint of the increased guidance that Tony will detail shortly. We have seen some solicitations extended, some meeting shift to the right, but no direct impact to our programs. With respect to federal government procurement, we support initiatives intended to streamline and improve the defense procurement process. Any and all initiatives designed to speed deployment of critical capabilities to the war fighter are perfectly aligned with Karman's focus on innovation, speed, efficiency and scale. We are very comfortable operating in a competitive environment, working with fixed price contracts and investing strategically in CapEx and IRAD. For example, we developed our rapid integration payload launcher or RIPL POD, which permits the rapid integration and deployment of the latest air launch effects from Karman's common launch tube. It's adaptable to various payloads, providing agility and deployment speed for our customers. This is only one example of how we apply internal investment to develop new capabilities for our customers. Turning now to our operations. We remain focused on expanding capacity, capability and productivity. In the third quarter, we continued to expand capacity and increase productivity with new capabilities for testing, manufacturing and advanced inspection. One example is the investment we are making in our Albany, Oregon facility that will double our forging capacity for specialty payload production. These investments increase throughput, enhance quality and give us the ability to scale our business further. Our integration of MTI and ISP continues on schedule for completion in mid-2026 as we now begin the integration process with Five Axis. Finally, last month, our commitment to supporting our customers was acknowledged by ULA, which named us the Enterprise Operations Supplier of the Year for 2025. ULA recognized Karman among their hundreds of suppliers for our outstanding support of their reuse development program, our efforts to improve quality and cost and our proactive problem solving. We are proud to support ULA and all our customers. Now I'll turn the call back to Tony. Anthony Koblinski: Thank you, Jonathan. Our business strategy as a merchant supplier to nearly all prime contractors in the U.S. space and defense market remains tightly aligned with our growing market opportunities. Our Five Axis acquisition broadens our capabilities further while expanding our capacity to support our customers' increasing demand. Karman is the result of the combination of scarce IP-rich assets in the space and defense markets. Our capabilities are unique and growing stronger as we identify and acquire new assets. The competitive moat we have built is only growing deeper and wider through our thoughtful, deliberate M&A process. Our M&A pipeline remains healthy with a number of potentially accretive assets that we believe would create more value by being part of Karman. The combined capabilities of these acquisitions, along with our existing expertise, position us extremely well to address the growing demand for advanced space systems, hypersonics, strategic missile defense, UAS and counter-UAS solutions. As Jonathan described, demand signals from the Pentagon and from our customers continue to indicate significant multiyear growth opportunities ahead. Recent reports indicate that the Pentagon is seeking to double and even quadruple missile production. The missile systems cited include THAAD, Standard Missile 6 and 3, PrSM, AIM-9X and GMLRS, all systems Karman supports with qualified content. The demand environment for Karman looks extremely healthy for the foreseeable future. Let me now turn to our outlook and financial guidance for the remainder of fiscal year 2025, summarized on Slide 10. Based on our strong performance in the first 3 quarters of the year, the integration of MTI and ISP, the acquisition of Five Axis and the continued momentum across our end markets as reflected by our growing funded backlog, we are again raising and narrowing our full year guidance. We now expect full year revenue of $461 million to $463 million, up $7 million to the midpoint and non-GAAP adjusted EBITDA of $142 million to $143 million, up $2.5 million to the midpoint. This increased guidance represents 34% year-over-year revenue and adjusted EBITDA growth. This guidance reflects 100% visibility to the midpoint of our increased revenue guidance range. Now looking beyond 2025, our funded backlog for 2026 continues to grow, helping us define the contours of what we believe will be another year of strong growth. For our preliminary view of 2026, we anticipate achieving annual growth consistent with our recent revenue CAGR of 20% to 25%, excluding the impact of any future acquisitions. We're mindful of the added uncertainty introduced by the federal government shutdown, the timing of the 2026 defense funding and Golden Dome orders as we work to finalize our detailed 2026 guidance and share it with you in our fourth quarter earnings call in March. Our differentiated capabilities, strong backlog, growing pipeline and proven ability to execute reinforce our confidence in the long-term growth algorithm of consistent organic growth supplemented by strategic, accretive acquisitions. I want to thank our employees, customers and shareholders for your continued support. And I'd like to remind you that we think of Karman as a new kind of space and defense company, one that is engineered for performance and growth by helping to enable the next-generation space economy and enhance national security. Now let's open up the call for questions. Operator: [Operator Instructions] Your first question today comes from the line of Peter Arment from Baird. Peter Arment: And maybe I'll just go to Mike, on the third quarter, could you give us what the organic growth was for the quarter? And then, Tony, just on 2026 as my follow-up, just how you're thinking about organic growth as kind of a baseline assumption. I know there's a lot of moving parts, but you've done 3 deals since you've come public. Just how you're thinking about that CAGR. Michael Willis: So we talked about in the past about with organic versus inorganic, they quickly get tingled up in the sense from a business development and integration into Karman between cross-selling engineers that are working on multiple facets across businesses, which really blurs the line of what you would call organic. And so that's one of the reasons why we don't put a specific number on it, not to add any confusion just because things quickly become organic. I think what I might direct you towards though, is, of that growth I mean significant -- the vast majority of it is from organic. The businesses that we acquired early this year are smaller in nature. Anthony Koblinski: And again, Peter, as we think about next year, we're simply guiding that with the assets that we currently have under Karman at this point, that we would anticipate, again, consistent growth of 20% to 25%. We're leading this year, of course, to a 34% revenue and earnings. But this is a preliminary view, but wanted to at least give you some look at how we're thinking about '26 early on. Operator: Your next question comes from the line of Amit Daryanani from Evercore ISI. Amit Daryanani: I have two as well. I guess maybe just to start with -- and Tony, I get it's a preliminary guide that you folks have of 20% to 25%, but it does imply some moderation from what you saw in '25. So maybe just talk a little bit about what are the assumptions that are underpinning the growth of 20% to 25%? And how much coverage do you think you already have from the $758 million of backlog for '26? Anthony Koblinski: Yes. Again, view this as a preliminary number. Again, it is our intent to continue to build confidence as we're still relatively new in the market. The backlog that we've talked about of $758 million is strong, but multiyear. But as we think about a rule of thumb that we have been comfortable with of having 75% plus of the future year booked by the beginning of the year, we are well on path for that, quite comfortable with the backlog and how we'll start the year relative to benchmarks that have held true for us. Amit Daryanani: Got it. And then maybe if I just ask you from a backlog perspective again, are you seeing any program level concentration on your backlog? Or is the backlog much more distributed and balanced out versus the revenue run rate is? Anthony Koblinski: I would say that it is consistent the backlog with the revenue that we're achieving. All 3 of our end markets continue to grow. We have advertised before and continue to view no single program making up. I think we're at 11% as we look forward, probably under 10% concentration on our single biggest program. And so again, a consistent and well-balanced backlog and future pipeline. Operator: Your next question comes from the line of Ken Herbert from RBC Capital Markets. Kenneth Herbert: I wanted to first ask, there's been some chatter in the marketplace about some of your customers looking to maybe dual source some of your offerings just as a way of supporting a greater revenue ramp across missiles and other programs. Are you seeing that? And is that at all factoring into maybe any of the maybe slightly more conservative outlook in '26? Anthony Koblinski: No, it would not be at this point. We are not aware of any dual source effort on products beyond what already exists on products that we supply. Again, we don't give our customers a reason to switch. I know there is, as talked about tomorrow at the Pentagon, this notion of to -- field on new programs. But we believe that there is ample demand on the existing platforms and no effort that we're aware of to displace us as a primary provider of the systems that we currently produce. Kenneth Herbert: Great. And if I could, on Golden Dome, you called out 3 specific areas where you expect to potentially benefit. Are you seeing -- or have you bid or seeing RFPs yet on any of these areas that are specific to Golden Dome? Or what's your view on how this program could potentially impact you from a timing standpoint? Anthony Koblinski: Yes. On the existing assets that will be, in fact, part of Golden Dome, as we've talked about before, we are seeing increased demand signals. Now they don't come in labeled as Golden Dome, of course, but the demand there is building. On the new content, the integration of the various pieces, the space-based assets, space-based interceptors and other new, it's still too early. We are very much involved in meetings and industry days that are occurring, but no hard RFQs, request for proposals that we're participating in. And we would see that over the balance of this quarter and probably through the entire first quarter before there's real clarity as to what is the new and how will we participate. Jonathan Beaudoin: I would just add, as part of those discussions, we are leaning into that from a facilitization standpoint, making sure that we will be ready to meet that demand when the POs start to arrive. Anthony Koblinski: Thanks, Jonathan. Operator: [Operator Instructions] Your next question comes from the line of Louie DiPalma from William Blair. Louie Dipalma: Congrats on another quarter of exceptional results. How would -- Tony, how would you assess the M&A pipeline since you've been public, you've been able to make several deals that have been accretive to your EBITDA. But going forward, is it becoming harder to find deals that would enhance your EBITDA given how high it is relative to the rest of the industry? Anthony Koblinski: I appreciate the comments. And I would say the answer is no. We've run the play several times now. It's well worn, and we know how to do it. There is a pipeline, as we've referred to before, of conversations at various maturity levels. We're a little ahead of the pace that we advertised with 3 in the last 12 months, but expect that there will be more. We are not seeing an appreciable difference in terms of the valuations in the deals that we're seeking, right, which are those that are off the radar a bit and not within an auction. And so we continue to be approached by folks that want to be part of the Karman story moving forward, and we think there are more of those ahead. Louie Dipalma: Great. And another question, if NASA were to implement any major changes to the Artemis program, would that impact you? And in general, what are you assuming for the Artemis program? Anthony Koblinski: So as we've talked prior, we have taken out any forecast relative to the space launch system. But in terms of the Artemis program, the Orion capsule, other exploratory programs that fit within Artemis, there is volume and content for us there. Lunar Lander is part of the CLPS program. We are getting orders relative to Orion and other related. And so we think that we've got some solid demand coming forward, but are ready for more. And as you think of the space market, I was just reflecting on it today, of course, Falcon 9 launch today, ULA Atlas V later today, Blue Origin on Sunday, Rocket Lab within about 10 days. I mean the launch cadence and the steadiness of various providers with different mission sets is impressive, and we look forward to supporting it all. Operator: Your next question comes from the line of Alexandra Mandery from Truist Securities. Alexandra Eleni Mandery: This is Alexandra Mandery on for Michael Ciarmoli, Truist Securities. So I was wondering if you can provide margin guidance for 2026? And should we think about EBITDA margin expansion in what range could we expect? Michael Willis: In terms of EBITDA and margin expansions, we've often talked about a target of 50 bps a year that we will gain from operating leverage as we continue to grow. So while we're not necessarily putting out formal guidance, we continue to think that we would capture 50 bps a year going forward on that growth. Alexandra Eleni Mandery: Okay. Great. And then additionally, are you seeing any impact of the government shutdown on bookings and any impact on 1Q '26? Anthony Koblinski: Again, it depends on how long it goes. Glad to hear there's some discussion. Right now, no impact to '25. As Jonathan indicated in his earlier comments, meetings are being pushed to the right, some solicitations are being delayed, but no impact to either '25 or '26 in our view as of now. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Steven Gitlin for closing remarks. Steven Gitlin: Thank you, Rob, and thank you all for your attention today and for your interest in Karman Space & Defense. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.karman-sd.com. We wish you a good day, and we look forward to updating you on our continued progress in the quarters ahead. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Lily, and I will be your conference operator for today. At this time, I would like to welcome everyone to Granite REIT's Third Quarter 2025 Results Conference Call. [Operator Instructions] Speaking to you on this call this morning is Kevan Gorrie, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer. I will now turn the call over to Teresa Neto to go over some certain advisories. Teresa Neto: Good morning, everyone. Before we begin today's call, I would like to remind you that statements and information made in today's discussion may constitute forward-looking statements and forward-looking information, and that actual results could differ materially from any conclusion, forecast or projection. These statements and information are based on certain material facts or assumptions, reflect management's current expectations and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from forward-looking statements or information. These risks and uncertainties and material factors and assumptions applied in making forward-looking statements or information are discussed in Granite's material filed with the Canadian Securities Administrators, and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its annual information form for 2024, Granite's management discussion and analysis for the year ended December 31, 2024, filed on February 26, 2025, and for the quarter ended September 30, 2025 filed on November 5, 2025. Granite posted Q3 2025 results ahead of Q2 and in line with management's annual forecast and guidance that reflects continued strength in our operating fundamentals supported by strong NOI growth, representing $0.06 per unit of the $0.09 per unit growth in FFO quarter over sequential quarter. FFO per unit in Q3 was $1.48, representing the $0.09, or 6.5% increase from Q2 '25, and a $0.13, or 9.6% increase relative to the same quarter in the prior year. The growth in NOI this quarter is primarily derived from strong same property NOI growth, enhanced by leasing spreads of 88%, and the lease-up of previously vacant units in Canada and the United States. NOI growth was further enhanced by the Florida acquisitions completed last quarter. AFFO per unit in Q3 '25 was $1.26, which is $0.03 higher relative to Q2, and $0.04 higher relative to the same quarter last year, with the increase versus Q2 mostly tied to FFO growth and lower leasing costs due to timing of leasing turnover, partially offset by higher capital expenditures incurred. AFFO-related capital expenditures incurred in the quarter totaled $10.5 million, which is an increase of $2.5 million over Q2, and $5.3 million higher than the same quarter last year. For 2025, we continue to expect AFFO-related capital expenditures to come in at approximately $40 million for the year, and that is unchanged from our estimates previously provided. Same-property NOI for Q3 remained robust, increasing 5.2% on a constant currency basis and up 8.4%, and foreign currency effects are included. Same-property NOI growth was driven primarily by CPI and contractual rent increases across all regions, positive leasing spreads on lease renewals, primarily in the U.S. and Canada, and the lease up of previously vacant units in the U.S. and Canada, and the expiration of a free rent period at a property in the United States. Given the continued strong leasing activity in the third quarter of '25, we are increasing our guidance for the year and narrowing the range for constant currency, same property NOI, based on a 4-quarter average to come in at approximately 5.4% to 6.2% from the range previously provided of 5% to 6.5%. G&A for the quarter was $14.1 million, which is $0.9 million higher than the same quarter last year, and $4.1 million higher than Q2. The main variance relative to Q2 is the $4.2 million unfavorable fair value adjustment to noncash compensation liabilities, which do not impact Granite's FFO and AFFO metrics. For the fourth quarter, we expect G&A expenses that impact FFO and AFFO to be approximately $10.5 million. Interest expense was slightly higher in Q3 2025 relative to Q2 by $0.5 million, while interest income remained flat as compared to Q2. The slight increase in interest expense was primarily driven by the draws on the credit facility to fund last quarter's Florida acquisitions. Granite's weighted average cost of debt is currently 2.7%, and the weighted average debt term to maturity is 3.6 years. With Granite's next debt maturity in September of '26, we continue to expect interest expense to remain stable over the next approximate 4 quarters at roughly $24.5 million per quarter, barring any new transactions. Q3 2025 current income tax was $3 million, which is $0.3 million higher as compared to the prior year and remained flat compared to Q2. For the fourth quarter in '25, we are expecting current income taxes to come in at approximately $3 million as well. As in prior years, Granite may realize a credit to current income taxes of approximately $1.8 million in Q4, due to the reversal of prior year tax provisions. However, we cannot confirm the certainty of such credit until December 31, and our guidance does not factor any tax provision reversals. Regarding the '25 outlook, Granite is increasing its 2025 guidance and narrowing the ranges relative to estimates previously provided. Granite's current outlook reflects lease renewals and new leasing of vacant space completed year-to-date, which have increased overall NOI estimates. The current outlook reflects the Florida acquisitions, but does not include any assumption for a potential property dispositions. In addition, the current outlook reflects year-to-date financing and NCIB activity completed in the first half of 2025, and embeds the year-to-date positive impact to FFO of the weaker Canadian dollar relative to the euro and U.S. dollar. So for FFO per unit, we are raising guidance from last quarter to the range of $5.83 to $5.90 representing an approximate 7% to 9% increase over '24. For AFFO per unit, we are raising guidance to the range of $5.03 to $5.10, representing an increase of 4% to 5% over 2024. Granite's balance sheet remains strong. Investment properties totaled $9.1 billion at the end of the quarter, which excludes $370.7 million of 6 assets held for sale, consistent with Granite's messaging last quarter on its disposition program. The increase in investment properties from last quarter was primarily due to $156.5 million of foreign exchange translation gains on Granite's foreign-based investment properties, driven by a 2.3% increase in the spot U.S. exchange rate, and a 1.9% increase in the spot euro exchange rate relative to Q2, partially offset by net fair value losses of $34.6 million. The Trust's overall weighted average cap rate is 5.6% on in-place NOI, increased 5 basis points from the end of Q2, and has increased 32 basis points since the same quarter last year. Net leverage ratio at the end of the quarter was 35%, a decrease of 100 basis points from last quarter. Net debt to EBITDA was 7x, a slight decrease from the 7.1x in Q2, and consistent relative to the same quarter last year. Granite's key leverage ratios remained slightly elevated due to the classification of the 6 assets held for sale as they are excluded from investment properties, resulting in a decrease in the denominator for the net leverage ratio. In addition, Granite has increased unsecured debt due to drawing on the credit facility to fund the Florida acquisitions resulting in an outstanding balance of $78 million at the end of the quarter. Granite does expect these ratios to normalize when the asset sales are completed. The trust liquidity is approximately $1 billion, representing cash on hand of approximately $109 million, and the undrawn operating line of approximately $918 million. As of today, Granite has $79.5 million drawn on the credit facility and $3 million of letters of credit outstanding. Granite does expect to reduce the balance on the credit facility throughout '26 with free cash flow from operations or with proceeds from disposition of certain properties, barring any other major transactions. I'll now turn over the call to Kevan. Thank you. Kevan Gorrie: Thanks, Teresa. As usual, I'll be brief with my comments and hopefully provide some helpful context to our results. As Teresa mentioned, our Q3 results were in line with expectations, driven by strong leasing momentum and NOI growth. And as you can see from our updated year-end guidance, we expect our financial performance to continue to strengthen over the remainder of the year. Firstly, strong leasing momentum continued as the team executed on over 400,000 square feet of new leases in the quarter, and extended 6 leases related to expiries in the fourth quarter of 2025 and in 2026, representing just over 2.3 million square feet. In this quarter, as you can see, the increase on renewals in the third quarter was extremely strong at 88% of 1.85 million square feet of Q3 expiries in the GTA and the U.S. We have now renewed 81%, roughly, of our 2025 expiries at a weighted average increase of roughly 47%. And that excludes the increase on the new lease in Atlanta where the team achieved an increase in rental rate of 58% over expiring rents at the end of the first quarter. Staying on leasing a few comments on relevant market data. 8 of our 16 markets in North America reported flat or decline in market vacancy from the second quarter, and all of our portfolio markets reported positive net absorption in the quarter, led by Dallas-Fort Worth, Indianapolis, Savannah and Houston. With respect to market rents, asking rents fell year-over-year in 4 of our portfolio markets in North America and, increased in 11 led by Houston at 10.3%, Nashville at 8.3% and Louisville at 6.3%. Our weakest market was once again the Greater Toronto area as asking rents fell roughly 5.5% year-over-year. So while leasing conditions steadily improve across our portfolio and our leasing performance continues to be strong, net absorption overall remains below the 10-year average and conditions are competitive. But I would highlight at this time that modern, functional, well-located portfolios are as expected, clearly outperforming the general markets. I will provide a detailed update on our European portfolio markets in the fourth quarter as we receive the data. And in viewing our leasing performance and NOI growth over a longer term, over the past 3 years, we have generated cash NOI growth per unit of 44%, a CAGR of 12.9% over a period, which most of you would characterize as challenging for our sector. I provided an update on our last call regarding the publication of our 2024 corporate ESG report. But I did want to mention at this time that Granite was recognized for the second consecutive year with the top ranking in our industrial peer group by GRESB for overall score and public ESG disclosure. I'll comment briefly on the changes to our IFRS values. As Teresa mentioned, we made minor negative adjustments to capitalization and discount rates broadly across our U.S. and European portfolios, which was partially offset by positive gains from recent renewals in our GTA portfolio. And our overall IFRS value was obviously positively impacted, as Teresa mentioned, by the favorable movement in the USD and euro against CAD in the quarter. Moving on to capital allocation. I'll begin with an update on the planned dispositions. Of the $370 million of assets held for sale, we have agreed to terms on roughly $190 million of those assets in the U.S., and the transactions are progressing well, and we expect to provide a more fulsome update on the dispositions with our Q4 results at the very latest. In terms of capital deployment so far in 2025. We have acquired roughly $145 million in Granite units through our NCIB, as well as funding roughly $10 million year-to-date on our development projects, and $50 million related to our recent acquisition in the Miami market. So to fund over $200 million in these areas and finish the quarter, with only 70 -- I think it's $79 million drawn on our line of credit and roughly $128 million in cash, you can see the power of our low payout ratio and free cash flow. We have also agreed to terms on approximately $240 million in new acquisitions in our target markets in the U.S. and Europe, and expect to close on those transactions in late Q4 or early Q1 2026. Staying on capital allocation. Our $0.15 distribution increase represents the 15th consecutive annual increase since our inception in 2011, and marks the first above $0.10, as we believe the incremental increase is merited at this time and sustainable, supported by the strength of our cash flow growth over the past number of years, and the conservative nature of our capital structure and correspondingly low AFFO payout ratio. We are able to fund the increased distribution while continuing to reinvest strongly in our business without compromising the strength of our balance sheet and capital ratios. So looking out to the remainder of the year, our leasing pipeline remains quite strong at well over 500,000 square feet currently under lease negotiation. And although we'll provide specific guidance in conjunction with our Q4 results, we are confident that the achievements made by the team in 2025 have positioned us well to execute on our financial, operational and strategic objectives for 2026 and beyond. Operator, I'll now open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Brad Sturges of Raymond James. Bradley Sturges: Just on the transaction, I want to clarify there, Kevan. the transactions that you were talking about U.S. Europe, I think that was referring to the dispositions or assets held for sale. Would all that, everything that's held for sale now, could that close by early '26? Or how are you thinking about the time line to those transactions right now? Kevan Gorrie: If you're referring to the dispositions, Brad, I think that -- yes, all of the $370 million would be expected to close as we sit here today by the end of 2026. Bradley Sturges: Okay. And how is -- in terms of redeploying that cash, obviously, I think you've talked about opportunities -- you're even looking at on the acquisition side. How does that pipeline look today? And how do you think about sort of capital allocation priorities once the cash comes back beyond, I guess, repaying the line? Kevan Gorrie: Well, as I mentioned, we have $240 million in acquisitions that we're currently working on. I would estimate probably another $100 million that we are currently looking at, not pursuing in earnest, but looking at. So that's what the pipeline of acquisitions looks like. And as I mentioned before, particularly in the U.S., we have to balance the acquisitions with the dispositions or the pace of those. So that -- obviously, the pace of our acquisitions will rely somewhat on the pace of dispositions. Bradley Sturges: Okay. Just last question, just on the leasing front. I think last call on the -- I guess, within the Indianapolis market, you had the larger facility, you're still looking at lease, you're looking at RFPs, or reviewing them for the entire building there in Indianapolis. Is there any update on that front? Kevan Gorrie: I don't want to update on particular markets. I may sound a little paranoid, but I don't want to do anything that will compromise our efforts on the leasing front, acquisition front or disposition front. So just to say I mean at over 0.5 million square feet under lease negotiation that obviously involves some of our large spaces, and those deals are progressing well. Operator: Your next question comes from the line of Kyle Stanley of Desjardins Capital Markets. Kyle Stanley: So you've made great progress on the '26 maturities already as well. With most of the expiries happening in the U.S., is there any kind of early nonrenewal concerns that you might have? And generally, what kind of leasing spreads would you expect overall and then maybe more for the U.S. portfolio specifically? Kevan Gorrie: I think other than the Samsung space in the U.S. next year, nothing that really stands out to us. But I think we've had some very high levels of renewals. We were over 90% in '24, over 80% at '25. I would expect us to be sort of in that traditional range of 70% to 75% renewals for next year, partly because of the Samsung nonrenewal. In terms of spreads, I think it would be -- look, I wouldn't expect anyone to expect a repeat of 2025, i.e., 47%. I think it would be closer to our range in 2024, which is more in that 20% range for 2026. But I'll have more details on the next call. Kyle Stanley: Okay. No, that's very helpful. I mean leasing activity seems to have remained quite strong or improved even since our last update. What's changed in the last maybe 4 to 6 months that has allowed for this improvement in demand more broadly in the market? And then specifically, within your portfolio to convert leasing tours to and RFPs to signed leases at this point? Kevan Gorrie: I don't know if there's anything specific. I think the two trends that sort of come to mind to me that I think I've mentioned is, one, I think tenants have put off their leasing decisions for a long time. And I think that, that is -- they're reaching sort of a point in time where they have to make a decision to move forward. And two, I do think we are seeing a flight to quality. I think a strong location and assets are really starting to outperform the market. I mentioned that in my remarks and I would certainly highlight that. So I think in terms of our portfolio, and I've said this on calls before, look if the market vacancy rate in the U.S. overall or across our portfolio markets is 7%, we expect to outperform that. So our vacancy is expected to be lower than that. And I think we are seeing that. So I will tell you, I think the activity across our specific portfolio is quite strong relative to the overall market and maybe some of our competitors. But I think that, that's a testament to the quality of the platform and the quality of the real estate that we own. It's starting to show. Kyle Stanley: Okay. I appreciate that. Just one more question. With the fundamentals across the U.S. firming up, are you seeing any new development start to percolate, particularly, I guess, on spec? And has your outlook towards development changed at all in the last several months? Kevan Gorrie: No, I think we're continuing to see a gradual decline. Like in the U.S., it's never going to go to zero in terms of new supply. There has been a gradual decline. I think, 2026, if you look at some of the expectations from CBRE and others, they're expecting the lowest, I think, development pipeline in well over 10 years. So it's never going to go to zero. And I think we've seen pre-leasing in the sort of 30% to 35% range, which is pretty consistent with pre-COVID levels. So we're not seeing an uptick in development, if that's what you're asking or new supply. If there is, it's usually build-to-suit. In terms of speculative, I think it continues to slow down. We expect that trend to continue in 2026. Operator: Your next question comes from Himanshu Gupta of Scotiabank. Himanshu Gupta: So first on capital allocation. Distribution increase was a bit higher than the last couple of years. Just wondering what led to that decision? And is that a reflection of your stronger expected FFO growth next year? Kevan Gorrie: It's a great question. I think -- look, we've been at $0.10 since inception in 2011. And I think our first distribution was $2. So $0.10 represented the first year would have been 5%. And so on a percentage basis, the increase was declining every year. And if we had stayed with $0.10 this year, it would have been sub 3% increase. I think it would have been 2.91. And so I think we thought long and hard about what the right distribution increase was for Granite. I don't think we would have been in this place if we didn't have such strong FFO and AFFO per unit growth over the past 5 years. But where we sit today, I mean, obviously, we want to prioritize reinvestment in our business. But when you have a payout ratio, and AFFO payout ratio in the mid-60s, and you have $100-plus million in free cash flow, the $0.10 to $0.15 only represents $3 million in incremental distributions on an annual basis. And we feel we can do that and continue to reinvest in the business and not compromise our liquidity, and not compromise our free cash flow. So that's why we made the decision. What was really important is if we move to [ $0.15 ], we have to be able to sustain it. And I think all of us on the management team and the Board are very confident we can sustain that level of increase. Again, there's no guarantee. We have to review it every year, but the sustainability of the distribution increase was an important consideration for us when we made this decision to move to $0.15. Himanshu Gupta: Got it. Very helpful. And then on the capital recycling. So you're selling in markets like Indianapolis, Columbus and you're looking to buy in core markets. How tight is the CapEx spread now versus historically speaking, which encourages you to make that move from selling these assets and buying on the other side? Kevan Gorrie: Well, it depends on the market, but we -- I think what we've signaled is, look, as we are continuing this rotation into the Tier 1 markets that we believe are going to be the strongest markets over the next decade. A spread of 75 basis points to 100 basis points is probably something the market should expect. It may not be the case all the time, but that's sort of what we're seeing right now in terms of our dispositions versus our acquisitions. Now keep in mind, that's a year 1 yield. We're certainly targeting assets where we feel we can drive that yield over the next 3 to 4, say, 5 years. So when you look at it on a year 1 basis, yes, you might see a spread of 75 to 100 basis points. But we certainly expect to eat into that spread over the near to medium term, if that makes sense. Himanshu Gupta: Got it. That's helpful. And then as you kick start the disposition program, did you consider adding Magna to the mix as well? And any of the Magna assets to that list? Kevan Gorrie: Yes. I mean it depends on the market. I certainly think we look at all of our noncore assets as part of this disposition program. So the short answer to your question is yes, we do. And I would think in 2026 and 2027, as we look at further dispositions, certainly Magna assets could form part of that disposition program. Operator: Your next question comes from the line of Tal Woolley of CIBC. Tal Woolley: Actually, just following up on Himanshu's question. Now that we're sort of 6-plus months out from when the tariff drama sort of began. You've got a little bit of time to assess how things have shaken out. How are you feeling overall just about automotive exposure in the portfolio period? Kevan Gorrie: I think one thing -- I've talked about this, Tal. I think one thing that really gets missed here, and I don't know really it's interesting to me reading some of the analyst reports on Magna and other automotive parts providers is you don't see tariffs mentioned in their analyst reports. You see tariffs mentioned more with respect to Granite. Let's not forget that the automotive parts industry is covered under [indiscernible]. And that is an important piece. That's an important trade agreement for sure and something that we monitor. And in listening to Magna's calls and Magna's disclosures. They've been very clear. There hasn't been a lot of noise around the tariff side. So I certainly don't think that it merits any immediate action on our part. Those assets continue to perform well. And hopefully, the trade agreement that's in place continues in its current form, or as close to it as possible. And if that's the case, then these assets will, in our opinion, continue to perform well. Tal Woolley: And actually, you're just sort of leading me into where I wanted to go next was just with the [indiscernible] negotiation -- renegotiation coming up, given what you sort of saw this year, do you have any insight for us on how to think about leasing velocity going into 2026? Like how you would expect your clients to respond? Kevan Gorrie: Are you talking about overall in the portfolio in 2026? Tal Woolley: Yes. Kevan Gorrie: Well, I think we've talked about Canada. And if there are any changes to the Magna portfolio specifically in our view, it's not related to tariffs at all. For the U.S. portfolio, it's hard for us to see how it's actually hurt our U.S. portfolio at all. I'm not -- I can't say with any sort of certainty that it has helped the U.S. portfolio. But certainly, we have seen an uptick in manufacturing demand. And not in all markets. If you look at -- looking at a stat the other day, if you look at construction spending on manufacturing facilities in the U.S. the last 12 months, 80% of it has occurred, the Midwest through the South and Southeast. So there's an awful lot of investment, particularly in the manufacturing side going into those markets. And that has benefited our portfolio for sure. So I have no concerns with the U.S. market. With respect to Europe, it has not affected our leasing that we can see anyway at all. So I don't anticipate any impact on our 2026 leasing as a result of the trade sort of narrative that's going on right now or tariffs, if that helps. Tal Woolley: Okay. And just lastly if you look sort of over the last maybe a decade or so, there's been a big change in rent levels in some of your markets. Have you now sort of any long-term kind of implications around, like, for industrial development with occupiers preferring to build their own stuff, given that the rents have risen? Or any sort of changes in terms of whether potential tenants decide to own on their own versus decide to lease? Kevan Gorrie: No. And I mean, we did go through this. There was a period of time where companies like Amazon wanted to own their facilities and then they wanted to not own all of their facilities because they probably have a better use of funds within their own business. So I don't think we -- as I'm looking at the team here. I don't think we've seen a trend of ownership. Now the legislation in the U.S., I think, and the pending legislation, the budget in Canada, I think, certainly incentivizes capital spending. I don't think we anticipate that there will be a big impact on tenant decisions regarding ownership of their facilities. And I mean, we've certainly seen it. There's always a percentage of tenants that will want to own mission-critical facilities, but we haven't seen an uptick in that trend, and we don't expect to see it in the next couple of years. Operator: Your next question comes from Matt Kornack of National Bank. Matt Kornack: Just a follow-up to Tal's questioning there is through this kind of capital recycling that you're anticipating to do, is there a theme that you're trying to play that you currently aren't playing or something in those markets that you see that would be different than where you are? Because to your point, it seems like the markets you're in are actually the ones that have been kind of net beneficiaries of some of the changes in industrial. Kevan Gorrie: Okay. So we should invest more in the Midwest. Is that the point? Matt Kornack: Well, just -- is there something outside the Midwest? Or where -- like what are you trying to get at in going into these new markets relative to your... Kevan Gorrie: I think -- look, I'm not trying to be facetious, but I think we've been clear that it was always our intent. We like the markets that we're in. And I agree with you. And certainly, when you look from a tenant demand perspective, [ Indiana ] and other markets in the Midwest have performed as well as any markets in the U.S. Dallas would be in there. Houston would be in there. Savannah had a terrific year last year despite high levels of supply. They seem to sort of continue to absorb that. So we like the markets that we're in. But as we said, it was always our intent to continue to rotate into Tier 1 markets. And there are markets that we feel are going to perform very well, and we like the pricing in those markets as we sit here today. And so it's not so much looking at an [ Indiana ] Columbus and saying, we just like the market. It's that we have a relatively high level of concentration in those markets. And if we are very interested in moving into Miami, for example, or the U.K. or France, or certain markets in the U.S., we have to use our existing assets to move into those markets. And that's what we're doing. So I hope that that's coming through clear. It is really more a concentration play than anything else, and this allows us to enter the markets that we've been monitoring closely and coveting for years at prices that we think make a lot of sense to us, both from a ingoing yield perspective and from a total return perspective. Matt Kornack: And in terms of the type of industrial building that you'd be getting in these markets, it's consistent with what you own large bay, high-quality taking tenants, et cetera, value-add or anything along those lines? Kevan Gorrie: Well, I mean -- but it has to be modern. It has to be modern is something that we can make modern. We are never going to play in the small bay older generation assets. It's just not what we do. And if you're truly a logistics company, you want to try to the best of your ability to stay with logistics tenant. It doesn't have to be large-bay. We're certainly looking at some very attractive opportunities that involve some mid-bay tenants in there, but the point is they have to be very functional logistics type of assets for us. So it doesn't have to be large-bay. That's not -- we're rather agnostic about whether it's multi-bay or a single tenant large-bay. It's just the functionality of the asset. That's a top priority for us and location within the market. Matt Kornack: Okay. And of course, this is not to say that you need to be there, but have you not caught the data center bug at this point that some of your peers are chasing? Kevan Gorrie: I think -- well when you look at -- if you look at portfolios where companies have converted assets to data centers, we're one of them. We actually have converted an asset in the GTA to a data center. So we have a data center within our portfolio. With respect to the new generation data centers, they are extremely capital intensive. And so it's an area that our team has been paying more attention to, both from a converting existing assets at some point to data centers, if feasible, or looking at new builds. But I would just -- they're very capital intensive and certainly not something that I think would be in the immediate radar of Granite as we sit here today. Matt Kornack: Okay. Fair. Last one for me. Wayfair moved up your tenant list, which presumably was part of the really strong leasing spread that you got this quarter. Can you give us a sense, obviously, the Toronto market, you said, has been a little bit more challenging, but why they would have needed to stay in that space and pay a much higher rent relative to what they were paying? Kevan Gorrie: Yes. I think that that's one of the top 3 assets in the country, to be honest with you. 40-foot clear excess trailer parking, literally across the street from the GTA. It's on 2 bus routes, Mississauga and Brampton, large labor pool. It is just an absolutely fantastic asset. And so I don't think Wayfair had any intentions of moving. And we certainly -- although we were confident in our ability to re-lease the space, it's a large base, and we are happy to keep them in that space. So I think there's a lot of things that were going for that billing that Wayfair recognized in terms of value. And so we were able to get a very strong renewal done in a relatively short period of time. Operator: Your next question comes from the line of Pammi Bir of RBC. Pammi Bir: Just back to the $240 million of acquisitions in progress. Are these all stabilized assets? Or are you perhaps willing to take on some vacancy, maybe create some value in that way? Kevan Gorrie: For the most part, there's stabilized assets. One that we're looking at would be a redevelopment play with income in the short term. I just don't want to provide too much more detail than that, Pammi, but all of them would be stabilized assets at this time. Pammi Bir: Okay. And sort of the mix between the U.S. and Europe. Can you provide some context there? And what sort of cap rates are you kind of seeing these deals come in at? Kevan Gorrie: Well, it is a mixture of the U.S. and Europe, predominantly in the U.S. And as we've said, I think we're targeting ingoing yields in the low to mid-5s. Pammi Bir: Okay. And then just -- sorry. And just coming back to, I think, one of the earlier questions on Samsung. Have you started marketing that space? And any color you can provide in terms of where the re-leasing prospects are? Kevan Gorrie: Yes. No, there was -- we have started marketing the space for lease. The only thing I would say is I would remind people that the in-place rents, or the expiring rents are roughly 25% of the market. And we don't have anything to update you on at this time. Pammi Bir: And is it fair -- and can you remind me, when does that -- that lease is due a year or so, basically before the end of Q3 in '26? Kevan Gorrie: At the end of Q3 '26. Pammi Bir: Great. And I guess it would be fair to assume that there's going to be some downtime there, probably if it does get re-leased, let's say, to 2027? Kevan Gorrie: Yes, I think that's fair. Pammi Bir: Yes. Okay. And then just lastly, on the 500,000 square feet of leases that I think you mentioned were in progress or in discussions. Whats the mix there between new leasing versus renewals? Kevan Gorrie: It's all new leasing. Pammi Bir: Sorry, can you repeat that? Kevan Gorrie: All new leasing. Operator: The last question comes from the line of Sam Damiani of TD Securities. Sam Damiani: So obviously, most of my questions have been answered, but I just wanted to get your sense, Kevan on -- at this point in the cycle, if you see cap rates more likely to be moving in a meaningful way in the next year or so? And if there's any markets in particular where you see potentially some bigger moves? Kevan Gorrie: I don't want to discuss specific markets. Those would be markets that we're paying a lot of attention to. I can assure you of that. Certainly, we've seen more capital come off the sidelines. There is still more of a focus on value-add assets. And by the way, we probably put ourselves in that category with a probably a more refined focus on modern assets. So core assets are still -- they're catching a bit, but it's not that deep. But looking at the dispositions that we're going through, it does feel like momentum is picking up. And if you were to ask me, do I think that there's -- is there a greater chance that cap rates are rising [ and ] falling? I would say absolutely not. Our expectation is cap rates will fall in 2026. Just based on the activity that we're seeing, the competition that we're seeing on our acquisition targets, et cetera. It certainly feels like it's going in a favorable direction. Operator: There are no further questions at this time. I will now turn the call over to Mr. Kevan. Please continue. Kevan Gorrie: Thank you, operator, and thank you, everyone, for joining us on our Q3 call, and we look forward to speaking to you in the new year on our fourth quarter results. Have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Tourmaline Q3 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Scott Kirker. Please go ahead. W. Kirker: Thank you, operator, and welcome, everyone, to our discussion of Tourmaline's financial and operating results as at September 30, 2025, and for the 3 and 9 months ended September 30, 2025 and 2024. My name is Scott Kirker, and I'm the Chief Legal Officer here at Tourmaline. Before we get started, I refer you to the advisories on forward-looking statements contained in the news release as well as the advisories contained in the Tourmaline annual information form and our MD&A available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Mike Rose, Tourmaline's President and Chief Executive Officer; Brian Robinson, our Chief Financial Officer; and Jamie Heard, Tourmaline's Vice President of Capital Markets. We will start with Mike speaking to some of the highlights of the last quarter and our year so far. After his remarks, we'll be open for questions. Go ahead, Mike. Michael Rose: Thanks, Scott, and thanks, everybody, for dialing in. We're pleased to go through Q3 and then answer questions that you may have. A few highlights. Q3 '25 average production of 634,750 BOEs per day was at the high end of our anticipated guidance range of 625,000 to 635,000 BOEs per day despite storage injections and shut-ins during the quarter. We're pleased to announce that we have entered into a long-term natural gas storage agreement with AltaGas at their Dimsdale storage facility, and we view the addition of another large storage position as a strategic opportunity to enhance financial performance and strengthen operational flexibility in volatile natural gas price environments like we just went through this past summer. We've also entered into 2 short-term and long-term LNG gas supply contracts which complement our existing extensive portfolio. Looking specifically at production, fourth quarter production is expected to average between 655,000 and 665,000 BOEs per day with a '25 exit volume of 680,000 to 700,000 BOEs per day. Our third quarter liquids production of a little over 147,000 barrels per day was up 4% quarter-over-quarter. And our '26 average production guidance of 690,000 to 710,000 BOEs per day remains unchanged as does the current multiyear EP plan, which is forecast to yield 30% high-margin production growth to 850,000 BOEs per day by 2031. Third quarter 2025 cash flow was $720 million and third quarter '25 earnings were $190 million. Our third quarter realizations were impacted by unusually large natural gas export maintenance outages, both the East Gate and the West Gate. As a result of these outages, AECO and Station 2 pricing averaged $0.64 and $0.48 per Mcf, respectively, during the quarter. And while we curtailed gas supply during the weakest local price days, the sustained low local prices were the primary reason for lower than our expected third quarter cash flow. The curtailments on export pipelines reduced our volumes accessing downstream markets as well, and that includes our premium markets, such as the Gulf Coast and the Western U.S. by approximately 155 million cubic feet per day. So instead, these volumes were sold into AECO and Station 2 spot prices, and that meaningfully impacted our September natural gas revenue. On a positive note, the force majeure on the Great Lakes pipeline ended in early October and East Gate exports are at normal levels and the West Gate maintenance ends during this month of November. Looking ahead, with the benefit of LNG Canada demand creating additional capacity on local egress pipelines, second and third quarter 2026 AECO pricing is currently averaging $3 an Mcf compared to $1.18 for the same period in 2025. And we think additional upside should be created if AECO basis tightens further, and that is what we anticipate happening. Third quarter 2025 EP expenditures were $825 million. The full year EP capital budget remains unchanged at $2.6 billion to $2.85 billion. We closed a $71.7 million transaction with Topaz Energy Corp., whereby Topaz purchased a GOR on the recently acquired Saguaro and Strathcona Groundbirch Northeast BC Montney development lands. And in addition, on October 28, we completed a secondary offering of Topaz common shares for gross proceeds of approximately $230 million. Moving to marketing. Lots of activity as we continue to vertically integrate our gas business and maximize future realized prices. We have an average of 1.2 Bcf per day of nat gas hedged for the remainder of 2025 at a weighted average fixed price of CAD 4.33 per Mcf. This includes 57 million cubic feet per day hedged at a weighted average price of CAD 20.13 per Mcf in international markets and 109 million cubic feet per day at a weighted average price of $6.86 per Mcf in the Western U.S. markets. Q3 '25 AECO and Station 2 nat gas prices were the weakest in over 30 years. And as mentioned, that negatively impacted cash flow. However, prices are improving thus far in the fourth quarter and the 2026 strip price outlook continues to migrate upwards. We are pleased to enter into that Dimsdale storage deal. We'll have access to 6 Bcf of storage capacity starting in April for a 10-year term with the ability to increase to 10 Bcf in the event that AltaGas takes FID on Phase 2. And we view the addition of another large storage position as a really strategic opportunity to enhance financial performance and provide operational flexibility with these very volatile prices. On the LNG front, we've entered into several new supply contracts as detailed in the release, and I won't go through them, but they're there for you to read. In aggregate, we'll have an average of 213,000 MMBtus exposed to international pricing in '26. That will grow to 250,000 by exit '27 and 330,000 by exit '28. So a very attractive progression. Turning to the capital budget and the EP plan. As mentioned, spending in the quarter was $825.5 million as we executed capital projects deferred from Q2, along with the original Q3 budgeted items really to prepare for incremental production volumes in advance of higher anticipated winter gas prices, which are materializing. Our full year EP spending remains unchanged for 2025 and 2026. The '26 EP capital program is $2.9 billion, and that is unchanged from the release on July 29, 2025. Utilizing current strip pricing, our EP plan anticipates '26 cash flow of approximately $4 billion and free cash flow of approximately $0.9 billion. The strip pricing includes a '26 AECO basis of $1.66 per Mcf, and we anticipate that basis tightening towards USD 1 as the basin dynamics adjust for LNG Canada's demand. And for every USD 0.10 per Mcf that AECO basis tightens, our '26 cash flow and free cash flow would increase by approximately $50 million. And should natural gas prices weaken in 2026, we certainly have the option to reduce capital spending as appropriate to optimize free cash flow and our planned shareholder returns. Approximately $200 million to $250 million of currently planned capital spending could be deferred in such a low price scenario, and that would really have only a minor impact on '26 production guidance. On our cost reduction focus and margin improvement initiatives, the ongoing Northeast BC development project and infrastructure build-out will provide both significant growth and margin expansion by improving all of our operating metrics. Q3 2025 corporate OpEx of $4.80 per BOE was down $0.34 a BOE from the first half of this year, so approximately a 7% improvement. And early components of the Northeast BC build-out have been completed, and that has initiated the cost reduction progression and is contributing to the reduction in OpEx in the third quarter, and this process will really accelerate going forward. The Northeast BC development project is anticipated to systematically reduce combined corporate OpEx and transportation costs by at least $1 per BOE as it is put in place over the next 6 years. And we see the opportunity for meaningful progress on this target in 2026 and all subsequent years. And there is potential to increase the overall total long-term target moving forward. We have a comprehensive corporate focus on reducing all aspects of the cost equation as well as our per well EP capital costs in 2026. So we're targeting a 5% OpEx reduction in the Deep Basin next year and targeting a further 5% reduction in D&C costs over currently budgeted levels. And these reductions are not captured in the multiyear EP plan yet because we'll make sure we realize them first. And we've always had a very strong cost structure, and we plan to make it even stronger going forward. We have elected to pursue the potential sale of our Peace River High light oil and gas complex, so the Charlie Lake Play, which we actually pioneered back in Duvernay Oil Corp days. If completed, this sale would further lower corporate OpEx and provide proceeds that could be reinvested into our higher-margin BC growth assets or emerging EP opportunities that we've assembled in the Deep Basin. So this initiative is just a subset of the significant internal value creation opportunities that exist within the company's overall portfolio. Specifically on E&P in the quarter, we drilled 68 wells, completed 88 wells and entered the fourth quarter with 38 DUCs, the majority of which are expected to be completed in the near term should gas prices continue to improve. We were very pleased our 25 Northeast BC Montney IP90 well performance to date is up 26% over the 5-year average performance as we drill steadily longer horizontal wells in that complex and the percentage of plug and perf style stimulations has been increased. And despite these more expensive completions, our 2025 Montney D&C costs are trending down on a per lateral foot basis. Our new pool new zone exploration success continues across all complexes, and we have 12 to 15 new pool or follow-up delineation wells currently in the Q4 '25 and 2026 drilling program. So lots of exciting opportunities on that front. On the dividend, our Board has declared a special dividend of $0.25 per share. That will be payable on November 25 to shareholders of record on November 14, 2025. And the company intends to declare the quarterly base dividend of $0.50 per share in December. We commenced paying special dividends in September of 2021, and that special dividend has varied between $0.35 per share and $2.25 per share until this quarter where it's $0.25. And while the '26 free cash flow outlook continues to improve, we will continue to find the balance between the planned EP growth program and the size and cadence of the special dividend. And I think that's enough for formal remarks, and there's 4 of us here ready to answer questions you may have. Operator: [Operator Instructions] Your first question is from Kale Akamine from Bank of America. Kaleinoheaokealaula Akamine: I want to start by asking on the Peace River sale. I'm wondering if you can give us any clues as to how you're thinking about the value of that asset. And I guess, fundamentally, if you don't see the price that you want, would you consider retaining the asset? And the part B of the question is, this is essentially a fully developed position that comes with midstream, gas processing, et cetera. Is there any chance that you would hold on to certain assets? Michael Rose: I'll kind of -- thanks, Kale. Not going to give you what our price expectations are at this point because the process is going on. I think you would appreciate that. If it doesn't hit a certain value, we're not going to sell it. You're right, it is a fully developed asset, and I think it's very attractive to people that are looking for new opportunities like that. It would be a great way to start a company. And I think we'd sell it all together rather than break it up. And I did mention in the formal remarks, I mean, it's -- this is a play that we actually invented, started it vertically in Duvernay Oil Corp. days, created a company called X Shaw, ended up buying it back when Tourmaline was in existence. And then the play at a reverse where we had a different application of horizontal multiphase fracking drilling for the Charlie Lake, and it's worked extremely well. So why are we selling it? Well, the reality is that the returns from investing in our 2 very large gas complexes kind of always outstrip the returns from growing the Peace River High asset in a material way. And so it's been essentially on maintenance capital for 4 to 5 years. And we think we have a whole gamut of opportunities in both gas complexes, and we can use the proceeds to kind of more profitably grow with lower OpEx in those 2 gas complexes. So that's kind of the rationale behind it. Kaleinoheaokealaula Akamine: That's great, Mike. I appreciate that. And for the second question, in the release, you called out a handful of what I'll call cash management items. And given the recent price environment for AECO Gas, I think that's prudent, although things seem to be on the mend today if we're looking at AECO prices. We just talked about the Peace River sale, but there's also Topaz equity and there's CapEx deferrals that you have in your back pocket. I'll leave the Topaz question for someone else, but I'm wondering how you would characterize the CapEx deferral of $200 million to $250 million. Is that drilling related? Or is that infrastructure related? Michael Rose: It would be primarily drilling related if we exercise on that in a weaker price environment than we're in today, we would carry on with the BC infra buildout. And I think you can see the rationale for that, that if prices are significantly weaker, we hold the volumes back. And so that would mean the D&C budget would be reduced. Operator: Your next question is from Patrick O'Rourke from ATB Capital Management -- sorry, ATB Capital Markets. Patrick O'Rourke: Maybe just a follow-on with respect to the $200 million to $250 million in potential reductions here. Just wondering what's sort of the time frame for those decision points rolling out into 2026? And then is there any sort of quantification on '27, '28, et cetera, from a volume perspective? Or would this -- my thought is being a company with such a large defined inventory, really well-defined growth on the back of that inventory, would at any point, you consider sort of gearing back on exploration in the near term to preserve capital? Michael Rose: We could do that, although the exploration program has generated opportunities that should we proceed with the sale of the Peace River High complex that over 2 or 3 years, we think would fully replace the volumes from that complex. And as far as timing on when we make those decisions, I think we see if the Peace River High sells first because obviously, there's a maintenance capital budget item associated with that complex in the current '26 budget. So we'd be adjusting the '26 budget at that point. And by year-end, I think we'll have a pretty good look at where the '26 strip is going to be, where basis gets to. And I think it was referenced already that AECO is starting to repair itself. The West Gate is back open today, but there is another restriction in a week or so, and then it's free and clear. So we should be switching to or flipping to withdrawals from storage now. And then that will drive price and receipts were a little higher in the basin over the past week and a good portion of that was due to gas backed up because of storms on the West Coast and LNG Canada was not picking the same volumes west that they have been, which I think has gotten up as high as [ 800,000 ]... Patrick O'Rourke: And then just thinking about sort of the interplay between the balance sheet and potential for special dividends. I know -- I don't want to call it caution, but obviously, it's been a sweep of free cash flow. Debt was a little higher. You've got the proceeds coming in from the Topaz share sale. So that will help. But how do you think about above and beyond the base dividend free cash flow allocation between that special dividend and maybe a little bit more debt reduction in the current environment? Michael Rose: Yes. I mean we're thinking about all those things. And I think we said it reasonably clearly in the press release, we do not intend to use the balance sheet to fund special dividends. I think having 2 quarters of the lowest AECO prices in 30 years is a rare circumstance. And for Q3, paying the special using the balance sheet was one of those rare circumstances. But we will continue to look at the growth capital and the special dividend potential and find that balance. Operator: Your next question is from Sam Burwell from Jefferies. George Burwell: Just another question on the CapEx flexibility. Just curious like what drives that decision? What's -- how do you frame it? Is it based on not wanting to outspend after paying the base dividend? And then like what sort of time frame in terms of like viewing the strip or your view on gas prices are we looking at? Is this like months, some sort of medium-term time horizon? Just curious about how you're thinking about potentially flexing down the CapEx? Michael Rose: Yes. I mean the main control, of course, is the gas price and then everything flows from that. This winter, we're already seeing cash gas prices recover. We're seeing very strong November, December, January, we think there's potential for that to get stronger still. I think all operators are reacting to that. We wouldn't expect any curtailed volume today. So you're kind of seeing fully loaded receipts, and it's not scary. Year-over-year growth is very modest, and we think that will allow this winter strip to improve. Tourmaline has a natural recalibration every spring and breakup. So as we come out of this winter and look ahead to what summer and winter following strip looks like in the months of March, April, May, that's a very natural time to calibrate the intensity of drilling for the back half of the year. And I think that would be a good time for us to also calibrate on free cash and make sure we're still delivering what we've always planned, which is that 5% growth and in excess of $1 billion a year of free cash flow. George Burwell: Understood. And then sort of tying into that a little bit on the Canadian gas macro, like supply has come up a bit, granted that shut-ins coming back and it's sort of typical seasonality and the prices come up. But do you think that there's more room for supply to come on? And just asking this because we are going to get more demand from Train 1 pulling more consistently and then Train 2 pulling another Bcf a day next year. So just curious about your view on supply-demand balance and how much supply can realistically come on to fill the incremental demand from LNG Canada Train 2? Michael Rose: Yes. We regularly refresh this work. And as I was saying, November looks relatively flat to last year, and we don't believe we're curtailed much at all as a basin today. Our expectation is next year grows well shy of 1 billion cubic feet a day on an annual per annum basis. Our number would be around 0.6, 0.7 exit over exit growth. We think actually might even be shy of that, around 0.5 Bcf a day. And to your point, LNG Canada will go from not doing anything in the first half of this year to doing close to and up to 2 billion cubic feet a day, we think as early as the first quarter of 2026. So that's a very meaningful demand change. And the basin will need to react to that with less exports to the United States, and the mechanism to achieve those less exports will be a tighter basis. And we think that will transpire over the next several months. We think there's other tailwinds at play. We believe the Biden expansion on the Northern border is a benefit to the Canadian export picture. It tightens up our basin Erestill. And we also think there's going to likely be power consumption and power announcements over the next 12 months that helps spur long-term demand thinking and tighten up '27, '28, '29 basis picture as well. So from our perspective, everything we are looking to see for this winter and the year ahead is transpiring. We are not seeing a wall of gas answer stronger cash prices. We are seeing LNG Canada ramp very well, and we continue to see lots of green shoots in local demand, whether it be power or [indiscernible]. And I think it will take Canada and Alberta specifically getting a little cooler here in the next 3 weeks to see what the draws ultimately look like on a year-over-year basis. And I think when we look at draws per week in December and compare them to what we were drawing last year, it could be almost a double. And I think that starts to wake the market up. Yes. And the last time the basin had a demand increment like LNG Canada adds to 2 Bs a day was start-up of Alliance. And I think that's flipped the differential for 3 years. Operator: Your next question is from Aaron Bilkoski from TD Cowen. Aaron Bilkoski: I have another question on the Peace River High. If you do ultimately sell it, should we expect you to use the proceeds to add capital to the multiyear plan? Or is the plan to simply redirect some of that maintenance capital that was being spent on the Charlie Lake into the Montney and the Deep Basin? Michael Rose: Yes. More of the latter, Aaron, at this point. I think in order for us to add capital in the EP plan, we want to see strong commodity prices provide that signal. So at this point, it's going to delever the balance sheet. And it's another source of funding for this infrastructure growth that's going to start to add that incremental cash flow and free cash flow that, frankly, we're going to see -- we saw some of it this quarter. We're going to see more of it in '26. And then as Aken comes on and Groundbirch comes on over the years ahead, you're going to see that structural cash flow and free cash flow start. So it's funding that build. Operator: Your next question is from Jamie Kubik from CIBC. James Kubik: Aaron sort of asked the question I was going to ask her, but I'll ask a little bit of a different one. Can you just talk about how you're thinking about debt levels in the business? Is there a target in mind that you're driving to? Is it a function of forward cash flow? Just a bit more color on your thought process around this would be great. Michael Rose: Well, I think we hit our kind of peak debt metric right now at 0.5x to 0.6x at the bottom of the cycle. So that will drive down to 0.2 to 0.3 as we move towards, we think, a more sustainable long-term price cycle. So we're going to keep that pristine balance sheet focus that we've always had, Jamie. James Kubik: Okay. And can I ask maybe is the peak debt level where you're at sort of right now, is that a bit of a driver on the Peace River High disposition? Or is it more a function of just capital allocation between your various assets? Michael Rose: It's for sure, the latter, it's capital allocation. I mean we've been thinking about selling the Peace River High complex for 2 or 3 years, to be honest, simply because it wasn't getting rewarded with growth capital because we had more attractive projects in the 2 gas complexes. And so it feels like this is probably the right time, and there's considerable interest in it. And worth flagging, Jamie, the interest is also what helps spur the process. There is interested parties that are looking to enter this basin, and they have unsolicitedly given us indications of value or interest in acquiring the asset. And so now running the process allows all of them to come to the table with their best number at the same time. Operator: Your next question is from Josef Schachter from Schachter Energy Research. Josef Schachter: Two of them. First thing, you guys have a great track record of making acquisitions in the past. When you look at your 2 core areas versus the M&A market, we just saw the NuVista deal, do you see M&A as part of the growth opportunity? Or is your internal opportunities just that much better? Michael Rose: Yes. We went through like 5 years of putting primarily the BC Montney gas complex together through or expanding it through a whole series of acquisitions from COVID on. And we have put in place now the BC build-out infrastructure for the next 5 or 6 years. Now we're going to go realize all the upside and all the value from those really well-timed acquisitions. So we'll always look at perhaps small asset tuck-ins. But right now, it's -- the focus is much more on organic growth from the extensive inventories we have really in both gas complexes. Josef Schachter: Super. Second question, the Topaz question, did a big sell-down here. Do you see using more sales and then get below 10%, which then allows you to move without market fluctuations? Michael Rose: We have no plans in the short or medium term to dispose of any more of the Topaz shares. But we're super excited how that the whole Topaz story has unfolded and grown. And I think it's just been great all the way along. So we're happy to be shareholders. Operator: Your next question is from Fai Lee from Odlum Brown. Fai Lee: You just touched on it a little earlier about, I guess, growing power demand. There's obviously some bullish projections for gas demand to meet growing electric demand from data centers, artificial intelligence. And I'm just wondering how this on a longer-term basis could maybe possibly affect your strategy for marketing gas? And if you've had any consideration of specific steps you could take to capitalize on these opportunities. For example, do you think you'll ever have like direct gas supply agreements with data center builders? Or I'm just wondering how you're thinking about that. Michael Rose: Yes. We're evaluating that opportunity, Fai. And we would look at it as just another sleeve of our overall gas diversification. But we do have lots to offer. I mean we have many plant sites. We have water. We have power redundancy. We're close to fiber. We're close to the grid. We can provide the CCUS solution, although we have very low CI gas to begin with. And so yes, we're assessing whether that's an opportunity to further diversify our very diversified marketing portfolio already. Fai Lee: Okay. So you're looking at that. And I'm just wondering on the other side, have you been approached from data center builders or people saying, looking at the advantages that you can offer and say, maybe working with them. Is that kind of -- have we gotten to that level? Or it's just kind of just too preliminary at this point? Michael Rose: Yes, there's been lots of conversations, I would say, early in stage, where people are trying to understand how this is all going to work. One of the first things that people were trying to understand first was what the ASO allocation would be and who would be a recipient of that ASO allocation. So that's happened. And we would be the first to cheer on projects like greenlight because that will help consume gas in basin. And the reality is we can build a lot of these. 1 gigawatt on a high-efficient power plant will only consume roughly 150 million cubic feet a day. So we think you could do 10 in short order, and you would still find the basin in balance, and we'd be able to answer that call. And so as operators understood how much ASO allocation they might get, now we're starting to move to that kind of Phase 2 where it's a bring your own power effort and operators are looking to add generation to their projects, and then they need gas supply for that generation. So we would fit naturally into all those conversations. We're having them. As Mike was saying, one of the areas I think we were probably most interested in is those colocation opportunities because it allows us to offer more than one service. And when you offer multiple services to a counterparty, you can enjoy that business. And so we have great sites across our asset base that many of them actually are very, very suitable for this kind of activity. And I think over the next 12 months, we should see all sorts of different data center announcements, some of which should be in the Heartland and we connect to ASO and some of which will be closer to the resource and have a behind fence strategy. And I think we're working hard on making sure we're positioned well to participate in those that are attractive to us. Operator: Your next question is from Neil Mehta from Goldman Sachs. Neil Mehta: Talking through 2026 as well. And as we think about '26, maybe you could talk about cyclical versus structural cost deflation. We continue to be in a relatively favorable oil services environment for the E&Ps. And so just you're curious if you're able to capture some of that cyclical deflation as opposed to maybe some of the structural benefits as well. So just the cost environment going into '26. Michael Rose: Yes. It is -- you're right, Neil. It is a little bit more favorable on the service cost side and D&C costs through this winter. And I think we kind of eyeballed 5% reduction in the press release from where we were mid-2025. We're most excited about the operating cost reductions that we've started to achieve already, and they're structural and repeatable, and they will accelerate over the next couple of years, and they marry up well to base dividend increases. Neil Mehta: And you talked a little bit about the LNG ramp in Western Canada, but maybe you could spend a little bit more time talking about the Shell ramp specifically and how you guys are thinking about that as the driver that could potentially tighten AECO because the counter to that is there just seems to be a lot of gas behind pipe. And so do you actually get the price response with the LNG pulp? Michael Rose: Yes. We think we will. I think Jamie outlined that we really don't think there is a lot of gas behind pipe right now. We think we're seeing pretty much everything that's available on stream at this point. We expect another Bcf plus of intra-basin demand when we get cool weather. We're not cold at all yet here, but that is coming in the second half of November. You've got another 1.2 Bcfs yet to come from LNG Canada when they get Phase 1 and both trains fully on stream. And I think we're eyeballing Q1 of for that. And you still have, although, as I mentioned, for a few days here, the West Gate is fully open, but that's an extra 550 million a day that's still being backed into the basin. That's going to go away when the maintenance is done at the end of November. So in aggregate, you're well over 2 Bcf a day flip. And that's why Jamie was referencing it will be very instructive to see what the actual draws are from our storage during December because we think they're going to really drive a basis tightening once people figure out what's really happening. And as far as refilling from the supply side by our gas industry, kind of the best we seem to be able to deliver on an annual basis is that 0.6 to 0.7 Bcf per annum. So it's going to be close to 3 years to replace that sink. And a lot of that relates to getting on to the system and basin hydraulics and getting meter stations and the long queues that are there already before you can bring new gas on the system. You want to bring gas on the system today or in 2026, you had to be organizing your firm service 4 years ago. Operator: [Operator Instructions] There are no further questions at this time. Please proceed with closing remarks. W. Kirker: Thank you, everybody. We'll talk to you next quarter. Michael Rose: Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the Core Natural Resources, Inc. Third Quarter Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead. Deck Slone: Good morning from Canonsburg, Pennsylvania, everyone, and thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at corenaturalresources.com. Also participating on this morning's call will be Jimmy Brock, our Chairman and CEO; Miteshkumar Thakkar, our President and CFO; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. After some formal remarks from Jimmy and Mitesh, we will be happy to take questions. With that, I'll now turn the call over to Jimmy. Jimmy? James Brock: Thank you, Deck, and good morning, everyone. I am pleased to report that Core Natural Resources had a solid performance in the third quarter despite some operational headwinds. During Q3 '25, we once again generated free cash flow despite weak commodity prices, deployed cash toward our share buyback program, secured 26 million tons of future business and nearly finalized plans with MSHA to recover and reposition the longwall equipment at the Leer South mine. Furthermore, we received the first tranche of insurance recovery for the Leer South fire mitigation efforts. I am also excited to announce that we have verified the presence of noteworthy levels of rare earth elements and critical minerals at our flagship operations in both the Eastern and Western United States. Now let me dive a little deeper into our operational results. Coal production within the High CV Thermal segment came in at 7.6 million tons in Q3 '25 compared to 8 million tons in the prior quarter. During the quarter, our High CV Thermal segment reported realized coal revenue of $59.78 per ton and cash cost of $40.53 per ton. Segment cash costs were slightly elevated compared to Q2 '25 due in part to operational challenges we faced at the West Elk mine as it transitioned to a new seam within the reserves. We believe these initial challenges will continue partly through Q4 '25. However, the B-Seam at the West Elk mine will allow us to take advantage of a much thicker coal seam and better quality characteristics, which will ultimately drive more favorable productivity, realizations and cash costs. During the quarter, the Pennsylvania Mining Complex outperformed versus expectations, which partially offset the challenges at West Elk. Moving forward to Q4, we expect 1 to 2 longwall moves at the Pennsylvania Mining Complex, depending on its level of outperformance relative to our guidance level for the rest of the year. Let's move on to the metallurgical segment. Coal production within the segment came in at 2.3 million tons in Q3 '25 compared to 2.4 million tons in Q2 '25. During the quarter, our metallurgical segment reported realized coking coal revenue of $112.94 per ton and $101.60 per ton across the segment as a whole when factoring in the 372,000 tons of thermal byproduct sales. Cash costs for the quarter came in at $94.18 per ton. Additionally, the metallurgical segment incurred $18 million of costs associated with the Leer South fire and idle-related expenses, offset by $19 million of advanced payments on the Leer South insurance claim. Although the cash margins are depressed compared to recent years, I am very proud of the Core team's ability to manage and continually work toward reducing costs through this market downturn and to continue to realize positive cash operating margins. Now let me provide a brief update on the Leer South mine. After we temporarily resell the mine in July, we have further advanced our continuous mining sections. At the same time, we have continued to work with the federal and state agencies for reentry plans that will involve recovering, repositioning and restarting the longwall system. As we approached our entry date in October, the government shutdown resulted in the unavailability of MSHA personnel needed for the reentry efforts, and we have been in a holding pattern ever since. Our operating team remains confident that the longwall equipment is largely unaffected and that the mine is ready for reentry into the longwall section as soon as the MSHA personnel are available to participate in the process. Now to the Powder River Basin segment. Coal production within the segment came in at 12.9 million tons in Q3 '25 compared to 12.6 million tons in Q2 '25. During the quarter, our PRB segment reported realized coal revenue of $14.09 per ton and cash cost of $13.04 per ton. Both were lower compared to the prior quarter, mostly due to the federal royalty rate reduction in conjunction with provisions in many of Core's existing contracts requiring that cost savings associated with certain policy-related changes be passed along to the customer. From a consolidated perspective, despite operational headwinds, uncertainty surrounding the timing of reentry at Leer South and weak benchmark prices, we still returned more than 60% of our Q3 '25 free cash flow to shareholders. We deployed $19 million towards share repurchases and an additional $5 million to dividends. In addition, we announced this morning that the Board of Directors have declared a $0.10 per share dividend payable on December 15 to stockholders of record on November 28. From a year-to-date perspective, we have returned $218 million to our shareholders or approximately 100% of our free cash flow generation through our robust capital return program. As stated in prior quarters, Core will continue to follow a measured approach to shareholder returns by targeting around 75% of our free cash flow to be utilized primarily for share buybacks as well as a small sustaining dividend, leaving the potential to flex that percentage up depending upon market conditions. With that, let me now turn to a topic that could provide potential future optionality for Core, rare earth elements and critical minerals. Over the last several months, we have completed exploration and sampling at our PRB mines and Eastern operations to analyze the concentrations of critical minerals within our reserves. We are intrigued by our findings across both our PRB mines and Eastern operations. The result in the PRB demonstrated elevated ash-basis concentration of certain rare earth elements and critical minerals, particularly at the top and bottom of the coal seam. In the East, while measured ash-basis concentration were somewhat less elevated than in the PRB operations, the very large flow rates at the PAMC, Leer and Leer South operations could offer unique opportunities for further upgrading. As a result of these findings, we are engaging with several subject matter experts to explore feasibility in advance of potentially launching an RFP process. Now let me touch on some of the early operational successes we've had in integrating our 2 legacy companies and creating a stronger Core Natural Resources. We've executed several best practices across the operations, such as implementing more standardized production schedules to optimize our run time and labor expense, sharing equipment and resources for special projects such as longwall moves and leveraging our scale with suppliers to secure discounts on equipment and services. We continue to leverage our strong logistical network and diverse quality characteristics to create value uplift opportunities for our products through product blending. These are just a few examples of the merger-related synergies that positively impact our bottom line and why we are confident in our ability to create value across the market cycle and to capitalize in a very substantial way when the market turns. Our focus for the fourth quarter is to execute operationally. We are prepared and ready to breach the seals at Leer South as soon as MSHA personnel are available. We have a solid plan in place and expect to have the wall up and running before year-end. However, certain aspects of the timing are out of our control. We remain in close contact with state and federal agencies. At West Elk, we continue to work through the transitions to the B-seam and are optimistic about the operational benefits that we will realize from this thicker coal seam. We expect these efforts during the fourth quarter will set us up for a performance step change in 2026. Due to our low-cost asset base, advanced logistics network and diverse product quality, we are uniquely positioned to generate strong cash flow and shareholder value in all parts of the commodity cycle. Now let me turn the call over to Mitesh to provide the marketing and financial updates. Mitesh Thakkar: Thank you, Jimmy, and good morning, everyone. Let me start by providing an update on our financial results for the quarter. This morning, we reported a strong third quarter 2025 financial performance despite operational challenges at 2 mines within our footprint. We achieved net income of $32 million or $0.61 per diluted share and adjusted EBITDA of $141 million. The reported adjusted EBITDA includes $19 million of insurance recovery advancements for Leer South, offsetting $18 million in Leer South fire and idle costs that were incurred in the quarter. Furthermore, we generated $88 million of operating cash flow and spent $49 million in capital expenditures to generate $39 million of free cash flow. Our operating cash flow was impacted by negative working capital changes of $52 million, mostly related to increases in our accounts receivable and coal inventory balances versus the prior quarter. However, both of these are timing related. At the end of the third quarter, we had total liquidity of $995 million, an increase of $47 million compared to the end of the second quarter. This increase was driven by higher cash balance plus the increased availability on our combined securitization facility. As a reminder, we completed a successful refinancing transaction during the third quarter, whereby we combined the legacy AR securitization programs into one facility. This combination provides greater availability on the facility due to a broader and more diverse customer base, which in turn improves the risk profile of our overall receivables. We'd like to thank our banking partners for their continued and expanding support. Let me update you on the marketing front. In the domestic market, recent policy shifts under the Trump administration have created more support for domestic coal by lowering production and royalty-related costs, providing a more stable regulatory environment and allocating funds to extend the life of coal-fired power plants, effectively keeping coal plants operating and reinforcing the central role of coal in the U.S. energy mix. Through September, U.S. power demand has remained robust with coal-fired generation increasing by approximately 12% year-to-date. However, some of the specific markets we serve are up even more. For example, the PJM RTO is up approximately 16% on a year-to-date basis. Not only has energy demand continued to increase this year, but it is expected to increase for years to come. Data center build-out has been a large part of this increased power demand. And by the end of 2025, the data centers in the U.S. will require 22% more grid power than last year. Furthermore, it is estimated that U.S. data centers will consume nearly 3x as much power by 2030 than they do today. As such, U.S. data center demand is expected to rise to almost 76 gigawatts in 2026, 108 gigawatts in 2028 and 134 gigawatts in 2030. This data center demand boom has caused many electric utilities to look at their long-term load capacities, which has driven a significant shift in how they think about contracting future energy supply. We have seen a noticeable shift to longer-term deals for our thermal products and our low-cost operations allow us to proactively layer in term business cost competitively. On the international thermal front, a prolonged monsoon season and weakness in the Indian rupee have dampened near-term demand. However, longer-term fundamentals remain unchanged. Cement demand in India is expected to grow approximately 50% by 2030 versus 2024 levels and our High CV Thermal product, coupled with our strategic logistical network while the ownership of our Baltimore terminal is well positioned to take advantage. In addition, in late September, India removed a special compensation cess tax, which will support demand growth. Looking ahead internationally for coking coal, global steel prices continue to face pressure due primarily in our view to macro conditions. However, we remain highly constructive on the longer-term fundamentals given the build-out of blast furnaces across Southeast Asia to support strong projected increases in steel demand and infrastructure build-out. At the same time, momentum behind Europe's green steel transition is slowing as governments face significant cost barriers, particularly related to hydrogen supply and energy infrastructure. On the supply side, we continue to believe that years of underinvestment as well as degradation and depletion of the global reserve base will act to constrain global metallurgical supply while exerting a foot pressure on prices. This market landscape lays the backdrop for our contracting progress. Due to the desirability of our products, our marketing team was able to expand our contract book for 2026. On the thermal side, we increased our High CV book by approximately 4 million tons to a sold position of nearly 17 million tons in total. For the Powder River Basin, we increased our sold position by approximately 8 million tons, raising our 2026 contracted book to more than 40 million tons. Due to the nature of the metallurgical segment, long-term contracting is less prominent and pricing in the international arena is generally index-linked. However, our current metallurgical segment has nearly 3 million tons contracted for 2026 with approximately 500,000 of those tons slated for delivery to North American customers. Furthermore, we remain in negotiations with additional North American customers for potential contract volumes and expect to provide more color on our next earnings call regarding pricing. Now let me provide a quick update on our outlook for the remainder of 2025. For the High CV Thermal segment, we are maintaining our guidance for sales volumes while reducing our price range to $60 to $61 per ton. Additionally, we are raising our cash cost guidance by $1 to a range of $39 to $41 per ton. This increase is primarily a result of the West Elk operational challenges that Jimmy mentioned earlier. On the metallurgical front, due to the timing of the Leer South longwall restart, we are lowering our coking coal sales volume guidance to a range of 7.4 million to 7.8 million tons. On the cash cost side, we anticipate a similar cost structure in the fourth quarter as incurred in the third quarter. Therefore, we are decreasing our cash cost guidance for the segment to a range of $93 to $97 per ton. We also anticipate spending $15 million to $25 million in idle and fire mitigation costs during the fourth quarter as we work to restart the Leer South longwall. For the PRB segment, we are again increasing our sales volume guidance to a range of 47 million to 49 million tons, and our committed and price position has increased to 48 million tons at a realized coal revenue of approximately $14.46 per ton. We are maintaining our cash cost per ton guidance range. On the capital expenditures front, we took advantage of attractive equipment financing throughout the year and are lowering our capital expenditure guidance by $40 million to a range of $260 million to $290 million. Now let me pass it back to Jimmy for some quick closing remarks before we open the call for Q&A. James Brock: Thank you, Mitesh. In closing, for the remainder of 2025, we will be focused on a few key areas that we believe will set us up for success moving forward. First, continue to work with MSHA and focus on the restart of the longwall at Leer South at the earliest possible date. In addition, we will drive forward with the completion of the transition at West Elk. Second, we will continue to focus on running our operations as safely and efficiently as possible. The PAMC, Leer, PRB and continuous miner operations ran very efficiently during the third quarter. Third, we will continue to focus on managing our spending levels to maximize our cash margins throughout the cycle despite the weaker benchmark prices we are experiencing today. Fourth, we are prioritizing filling out our sales book in 2026 and beyond. We have layered in nearly 26 million tons of forward contracts, which provides significant revenue visibility as we move into 2026. Finally, let me finish by recognizing our employees. All of our employees are working well together to ensure we develop Core Natural Resources into the premier coal company we envision it to be. Despite the government shutdown, the team has continued to focus on the controllables and stands ready to execute our longwall recovery plan. The core team is adept at navigating the cyclical nature of the coal markets. And we have successfully managed our costs while focusing on our core values of safety and compliance, continuous improvement and financial performance. With that, I will hand the call back over to the operator to begin the Q&A portion of our call. Operator, can you please provide the instructions to our callers? Operator: [Operator Instructions] First question is from Nathan Martin from Benchmark Company. Nathan Martin: Maybe just start on West Elk. Obviously, you guys had the move to B-Seam. Just looking for a little more color there, some reports out that there may have been some elevated methane levels, should there be any ongoing cost or production impacts from that? And then how should we think about cost and production from that mine heading into 2026 at a full run rate? James Brock: Nate, yes, it's a good question. So West Elk, as we said earlier, we did have some methane issues there. It was not any safety concerns. We just had to keep it that way for our employees. So we -- the team went out, managed some ventilation. We made a few control changes there. And we believe that we have the methane situation put behind us. We haven't had any elevated methane reading since we did that. And then fast forward after we were running, we ran up against what we was calling our safe zone or stop margin to whereas we had to dewater the [indiscernible]. So that was overlay and the same we were mining. The team got started on that as quickly as they could. And that's what slowed us down here [ segfort ]. The good news is, I believe by early next week, we will have West Elk back up and running, and I look forward to what we can get done there. I think it will be a low cost as we talked before. I really like the quality of the coal and excited about what we can do with that in the marketplace. So in short, very excited about the future of West Elk. And I think we'll have most of those problems behind us for the remainder of the year. Of course, mining is mining. Some little things could come up, but those things that stopped us from mining, I think we have those under control now. Nathan Martin: Appreciate those thoughts, Jimmy. Maybe one for Bob on the marketing side. Bob, could we get a breakdown of the now it looks like 17 million tons of committed and priced High CV for '26? And then any commentary on the pricing of those tons as well as the 40 million tons of PRB coal you guys called out? Robert Braithwaite: Yes, Nate, no problem. One thing I will say is I certainly am pleased with the team and their efforts in the last quarter, as Mitesh mentioned in his prepared remarks, we had 26 million tons of new sales. And what I like about that, too, is we're looking at sales on the High CV segment alone going all the way out through 2030. So it's certainly providing us a lot of good visibility as we move forward. And the other thing that's very encouraging is these utilities are contracting out longer-term duration. So I think that they are seeing the benefits of the data center demand coming online and they're contracting forward. But for 2026 alone, of the 17 million tons of High CV, 14 million of that is PAMC, about 10 million domestic, 4 million export. Majority of that export is index-linked. So again, we have some upside there if API2 prices continue to rise as we've seen in the coming -- or in the recent weeks and about 3 million tons of that is West Elk. From a pricing standpoint, we're looking at upper 50s right now basis of $105 API2 price. So if we see that rise in Cal '26, that certainly is going to afford us the ability to increase that price. And then on the PRB side, as we mentioned, approximately 41 million tons, and we're seeing pricing in the low to mid-14s on that. Nathan Martin: Okay. Great, Bob. And then any comments -- I mean, I think what Mitesh mentioned roughly 0.5 million tons of fixed price domestic coal for '26. Any comments around the pricing there would be helpful as well. Robert Braithwaite: Yes. We'll provide that on the next call, Nate. Again, we're still in the middle of negotiations, but I'm very encouraged of what we're seeing there. A lot of that is high-vol coal that we've put to bed domestically. But again, we'll give a better update, a clear update on the next call, but I would anticipate that number increasing as when we do report next. Nathan Martin: Okay. Great. And then maybe just one final question before I pass it on. The first tranche of insurance proceeds received, how should we kind of think about the potential range from that insurance and business interruption recoveries from Leer South, Mitesh. I think you mentioned previously maybe around $100 million, but it would just be great to get an update there. Mitesh Thakkar: So I think, Nate, if you look at year-to-date, we have spent about $75 million on fire and idling cost, and we are guiding to another, let's call it, $15 million to $25 million for the fourth quarter. So if you add that up, I think just from firing and idling cost, we're approaching $100 million. And then on top of it, you have to apply the residual business interruption claim as well. So I think we are definitely in 3 digits here. So I think we'll continue to track that. And as we submit the claims, we'll keep you apprised. I think we are not waiting for the full claim to play out. We are starting to put advanced claims in as we incur cost as a starting point. I think our next step is to go ahead with the business interruption claim as well, and you're going to start trickling that in as well. So we are very optimistic of where we will end up with the overall insurance claim. Operator: Next question comes from Nick Giles of B. Riley Securities. Nick Giles: Just wanted to follow up on the High CV cost side and really gauge your level of confidence in your PAMC Longwall operations maintaining their low costs and if there's any room for improvement. I think I -- if West Elk costs were to improve around $10 a tonne, I would back into a benefit of around $2, which would keep the segment cost maybe slightly more elevated than recent years. So just appreciate any color there. James Brock: Nick, I think when you look at cost, it's something, as you well know, that we work on continuously all the time. But one thing that got the High CV segment a little bit out of line was the unfortunate production shortfall we had from the West Elk mine, which obviously would be a little higher cost. I think you're in the ballpark with the numbers. I mean, I'd like to see the Pennsylvania Mining Complex running cash costs where we ran in the past, somewhere around $37 to $39. We think we can stay there. And then when I look at the West Elk, we got to see what that mine does when we're running it very consistently full out all the time with no delays. But I do really believe that I can get it somewhere down and somewhere we should be low 30s, somewhere in there for cost for West Elk. So obviously, that will help the overall cost structure of our operations there on the High CV side. Deck Slone: Nick, it's Deck. Listen, another point, I think that's interesting is, as Bob discussed, for the 17 million tons of High CV thermal, we've committed, maybe a small step down in terms of average price at this point when we look at 2025 versus 2026. But the cost reduction should be with West Elk now being sort of pulling average cost down as opposed to being sort of a force to pull those costs up, sustaining that margin, maybe even improving upon that margin in 2026 is probably entirely realistic in what we're targeting. So that contribution from the High CV thermal segment could, at a minimum, stay sideways even with a little bit of a diminution on the price and perhaps could expand a bit. Nick Giles: I appreciate that. I wanted to ask a similar question on the met side. As we look to 2026, when Leer South is back up and running. How should we think of costs at that mine specifically? And how does that translate to the entire segment? James Brock: Well, obviously, Leer South is really hurting us on the metallurgical side at this time. We get it back up and running. We've had a schedule change there, Nick, as well. I think the mine is going to run a lower cost than what's been there. We'll have to see how that turns out. But I would think it would be very similar to what we're running at our Leer mine and perhaps even a little better with the schedule change that we've made there. So we have to wait and see on that. I really want to get that mine back up and running. We've got to recover the shields, get the face set up. The team there has done an outstanding job and hasn't been in the best possible environment there where they couldn't run the longwall, but they have advanced our mining sections, and they've got the new phase set up and ready. So I'm really excited what Leer South can bring to the table in 2026. Unknown Executive: And Nick, if you think about the broader metallurgical coal portfolio, we are going to have more tonnes coming out of longwall mines compared to CM mines. So there's going to be some tailwinds tied to that as well. Nick Giles: Great. One last one on that, if I could. Do we have any clarification on the total number of met tonnage that will be subject to the 45x credits in '26? Deck Slone: So Nick, it's Deck. And listen, I would say this, that is very clearly a capabilities test when you look at sort of how the legislation is written. So certainly, all of our metallurgical coal and metallurgical segment should qualify. But when you also consider the tons being produced at PAMC, what we're sending into the metallurgical market and selling to steel producers is really a standard blend. So across that full 26 million tons, all of those tons are suitable for use in the production of steel. So we certainly believe that those tons should qualify. Again, it's fairly clear that this is about capability, not end market. We would say this, if the coking coal market were large enough, we could sell all 26 million tons of PAMC into that market. So that's our belief that we would get -- we would qualify on that front. So we can talk further about it offline, but just an initial reaction. Operator: Next question comes from George Eadie at UBS. George Eadie: Can I firstly just ask about the rare earths. So just sort of for Core specifically and financially speaking, do you think it's more prospective in the PRB or East Coast? And maybe also remind us what are the latest on discussions with the government. Jimmy spoke about before subject matter experts, but are the government getting involved here potentially too into underwriting financing and/or prices? James Brock: Well, we've been diligently evaluating the potential to recover rare earth elements and critical minerals from our Eastern and Western mining operations, as we said in the script. That work is ongoing, but it's still in the early stages. But I will say the question is not whether rare earth elements and critical minerals exist at these operations. It's rather the question is, can we cost effectively segregate, upgrade and extract the feedstock that we have available. I mean our studies have shown that we have them in the coal seams out of our Western operations, and it's very similar to what others have said out there. So we do have them. One of the key advantages that we bring to the table is the massive scale of our already permitted active operations that we have. We run the largest underground mining complex in the U.S. at PAMC and the second largest operations in the PRB. So these operations generate huge quantities of material every day. And the angle we're evaluating is whether we can leverage our scale and creating a business case for the rare earth elements and critical minerals. The work is being led by our innovation group, which has a team of highly competent scientists and engineers and work a lot of strong -- and they work with a lot of strong technical partners. So stay tuned for more on that, but we will have everyone involved as we get out into more details about the rare earth elements and critical minerals. George Eadie: Might we get a more material update next -- the full year earnings potentially? Or is that too soon? James Brock: I'm sorry, I didn't understand the question. What was it? Robert Braithwaite: We would expect to comment to some degree on it next quarter. But in coming quarters, we'll continue to provide updates as we move forward, George, but work to do. George Eadie: Yes. Okay. And then maybe moving to the U.S. domestic thermal picture, Mitesh and Bob, perhaps, could you help me understand better the upside here? Looking at those charts and a lot of people speak to this now, the U.S. coal fleet capacity factors are at 50%, which is climbing higher. But can you sort of help ballpark if that got to, say, 60%, given there isn't really much volume upside in the PRB or Northeast without material CapEx. How do we triangulate 5% or 10% higher capacity factors to your margins and pricing in the PRB, PAMC? And then just lastly on that, is there potentially more upside in the PAMC given there's more demand growth in the Northeast for that domestic market versus the PRB? Robert Braithwaite: Yes. I would sit there and tell you, George, couple of things. First, we are encouraged, as I mentioned before, that we are seeing a lot of investment now in the coal fleet. You might not hear about it so much publicly, but we are talking to our customers, and we are seeing them invest in their coal fleet in anticipation that they are going to be running at much higher capacity factors for a period of time here. And a lot of that has to do, again, as you mentioned, with the data center and AI build-out. We think that in total, we could see domestic coal-fired generation increase by 20%, 30%. And if you look at, call it, 400 million tons of coal being burned today, your additional 60 million, 80 million tons potentially not so far in the distant future. We can continue to invest in our operations. I think we always say 26 million tons is our base case at PAMC. We do have the ability to ramp up if the market is there. And I'll tell you that we may get there, right? As I mentioned earlier, 26 million tons of new sales last quarter all the way out through 2030. So it is encouraging. We're starting to get a lot of visibility on the fact that these domestic utilities are going to continue to run. We'll see here as more data centers are committed for build-out. There's a lot on the docket here. And if that comes to fruition, I think, yes, we will continue to invest to see if we can grow production not only at PAMC but also out in the PRB. Mitesh Thakkar: And George, if you look at where all these data centers are getting built out, a lot of them are in the East, and I think PAMC is sitting right on top of all those, right? So I think you're going to obviously see some competition from natural gas. But if you listen to some of the earnings call of industrial companies, they are saying like if you want a new gas turbine, you're going to have to go back in line 2029, 2030, right? So there's going to be this period where you're not going to get a lot of incremental juice out of the gas plants and coal is a natural pivot here, 24/7 consistent power dispatch, and that's what these data center and AI applications need. So I think we are very excited about it. And PAMC as well as our Western operations are going to continue to benefit. I think we're seeing increasing interest from Eastern utilities on our West Elk coal as well. So I think that supports that trend. Robert Braithwaite: And George, just to comment, I mean, we would say at this point, you're already seeing this. To your point, we're already running at 50% capacity factor, but coal consumption year-to-date of about 35 million tons could be up as much as 45 million tons depending on how weather goes for the full year. That's a big step up. So in terms of implications for pricing, we'll see. But obviously, another year or 2 of that is going to put some stress on supply without a doubt. So it could have positive implications there. George Eadie: Yes. Okay. And last one, sorry, maybe Mitesh again. I think this was Nate's question before, but can you remind us potential time lines of when these insurance proceeds will come in? Should we expect all of the funds to be in sort of middle of next year potentially? And also just remind on the Baltimore bridge proceeds, too, please? Mitesh Thakkar: Yes. So I wish I can give you an exact time, George, but I think this is one where we are starting to submit claims as we get the receipts and everything in place as the first line of action on Leer South, which is what we have been doing. So the claim that we just received, we submitted that claim probably 3, 4 months ahead. So there's that lag. We submitted another claim in October. I hope we can get this early next year. So we'll continue to do that, and I think it's going to trickle down. I wish I can give you like an end point. The business interruption claim tends to be a little bit longer gestation period, so to speak. It takes a while going back and forth on assumptions and stuff like that. So I think we are working through that. I think we have made a lot of progress on the Baltimore claim as well, we'll see. I hate to give you like an end date, but I think we expect most of those to be collected next year. Operator: Next question comes from Matthew Key of Texas Capital Bank. Matthew Key: In 2Q, the guidance on merger-related synergies were increased to $150 million to $170 million. I was wondering what percentage of that target have you guys achieved kind of at the end of 3Q? And if there's any other kind of incremental cost savings that you see kind of as you play this out? Mitesh Thakkar: This is Mitesh here. I think we have made a lot of progress on that front, and that number is a little bit higher on an annualized run rate as well. And we'll continue to grind it up. There are a few other things that we are working on. But just in terms of what we have actually achieved, I think if you look at our SG&A trend Q4, Q3 versus what you saw in Q1 and Q2, it kind of reflects some of it. You're seeing that also in the byproduct sales revenue as well. I think on an aggregate, I think we are probably 50% that's probably flowing through the current year, but a lot of that is going to flow through next year. For example, SG&A is going to have full run rate next -- starting second quarter of next year. We have some systems on the IT front that are rolling off. Some of them rolled off in September. So you haven't even seen that impact in the September numbers yet. I think you'll continue to see that and the final system roll-off happens, I think, sometime in April. So I think you will see those numbers flow through. So I think the way to think about full run rate, I would say, sometime second quarter next year, but we are making a lot of progress on that front. Matthew Key: Got it. Appreciate that. That's super helpful. And assuming work at Leer South, the restart there goes as planned. I was wondering if the company would incur any additional fire extinguishment idling costs that kind of bleed into 1Q '26? Or would 4Q kind of be the end of that dynamic? James Brock: I think 4Q will be the end of it, particularly if we get some help here from the government. Like I said, we're ready. The team is ready to go recover these shields. So we don't -- we think what will be left will be the idle expense that's left that will obviously carry through Q4 here. But if we get to recover our shields, -- the longwall face is already mined and set up and ready to receive the new shields. So we'll have all that done in Q4. And there is a possibility if we were turn loose in time and we can't get all the sales that we could actually have production late in Q4 out of Leer South. So it's all based on timing now, but I do think we will have this put to bed in Q4 of this year as far as the fire-related costs. Operator: Next question comes from Nick Giles of B. Riley Securities. Nick Giles: I just wanted to ask about High CV volumes as we look to the fourth quarter. I think your annual guide, the midpoint might imply a slight tick up. But can you just give us some color on what could take us to the higher low end of the range? Are there any longwall moves? Mitesh Thakkar: Yes. I would say that right now, contracted wise, we're in that 7 million to 7.5 million tonne range. PAMC is running very, very well right now. There's a potential we could have a longwall move hit sometime in December. A lot of -- we originally anticipated that in Q1 of next year. But based on the mine running very well, it could funnel in. The big driver there to get to the top end of the guidance will be the return of West Elk, which, as Jimmy mentioned earlier, we're anticipating next week. So all goes well, longwall runs very well, you could see us creep up toward that upper end of the guidance range. James Brock: Yes. And we do have 2 long-haul moves remaining in Q4 for PAMC. Mitesh Thakkar: And just a minor point, too, right? Like we provide sales guidance, not production guidance, right? So we have inventory at the end of the third quarter, which you saw probably in the working capital, too. So it depends sometimes on how many boats show up in the last couple of weeks of December and destock the inventory. So that could drive a little bit of an upside, downside as well. Nick Giles: Got it. Guys, just while I have you, I mean, in recent years, you've spoken about what's the maximum number of volumes that you could send into the seaborne market. But today, just with how robust the domestic market is, what would kind of be the limitations on those volumes? Unknown Executive: I think you just -- you said it right. I mean we are now forecasting, I will tell you, for 2026, we believe our domestic volumes will increase year-on-year. Now again, then the question becomes how is the international market and if we can get more volume out of PAMC. So sitting here today, as I mentioned, 14 million tons we have contracted right now, 10 million of it is domestic. We're still in negotiations for additional business next year. So we'll see how that all plays out. But PAMC is running very well. So we continue to keep on that pace. We certainly could increase some more volumes and get them export. But I would say domestic is going to be year-on-year improved. James Brock: But it works well for us, Nick, compared to -- we've always said in the past that we run to the market. So here's another opportunity, and we run to highest arbitrage. So wherever that may be, if it's domestic or international, we certainly have the ability to get it there. Unknown Executive: And Nick, you talked about the High CV thermal segment as a whole, but West Elk also selling more power gen coal today. And as the story comes to fruition, we could continue to direct more tons into the domestic power gen market from West Elk. And plus, oh, by the way, it's in the B-Seam, we certainly have the ability to run at much higher levels in that thicker coal seam. So additional opportunity there. Operator: There are no further questions at this time. I'd now like to turn the call back over to Jimmy Brock for final closing comments. James Brock: Yes. Thanks, everyone, for joining our call today. We look forward to speaking with you in the future, and we're excited about where Core Natural Resources can be. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
Operator: Good day, and thank you for standing by. Welcome to the Crane NXT 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, Matt Roache, Vice President of Investor Relations. Please go ahead. Matt Roache: Thank you, operator, and good morning, everyone. I want to welcome you all to the third quarter 2025 earnings call for Crane NXT. Before we begin, let me remind you that the slides we will reference during this presentation can be accessed via the Investor Relations section of our website at cranenxt.com and a replay of today's call will also be available on our website. Before we discuss our results, I encourage all participants to review the legal notice on Slide 2, which explains the risk of forward-looking statements and the use of non-GAAP financial measures. Additionally, we refer you to the cautionary language at the bottom of our earnings release and in our Form 10-K and subsequent filings pertaining to forward-looking statements. During the call, we will also be using non-GAAP financial measures, which are reconciled to the comparable GAAP measures in the tables at the end of our press release and accompanying slide presentation, both of which are available on our website in the Investor Relations section. With me today are Aaron Saak, our President and Chief Executive Officer; and Christina Cristiano, our Senior Vice President and Chief Financial Officer. On our call this morning, we'll discuss our third quarter highlights and our operational and financial performance. We will also provide an update on our 2025 financial guidance as well as some initial thoughts on our 2026 outlook for each segment. After our prepared remarks, we will open the call to analysts for questions. With that, I'll turn the call over to Aaron. Aaron Saak: Thank you, Matt, and good morning. I appreciate everyone joining today's call to review our third quarter results. I'd like to start by recognizing our NXT team members around the world for their continued dedication and for delivering another quarter of strong execution. As shown in the highlights on Slide 3, our third quarter performance was in line with our expectations with sales growing approximately 10% year-over-year and adjusted EPS of $1.28. Our strong free cash flow resulted in a conversion ratio of 115% in the quarter, which puts us on track for our full year target range of 90% to 110% conversion. In Q3, we continue to build momentum in strategic growth areas. Growth in our international currency business continues to exceed our expectations. And in the third quarter, we saw several new customer wins, including a prominent country in Latin America. This raises the total number of new denominations that specify our micro-optics technology to 9 year-to-date, putting us on track to achieve the high end of our target of 10 to 15 new denominations for the full year. Additionally, our international currency backlog remains at near record high levels, and our third quarter sales were stronger than our original forecast. As we continue to see growth in orders, we're taking several co-actions to increase production to support our customers. Given this sustained momentum, we're raising our full year sales guidance for SAT and NXT overall. In our U.S. currency business, the Federal Reserve recently released its print order for 2026, including a significant increase in demand for higher denomination banknotes containing our advanced security features. Based on this favorable mix, we expect this business to grow in the high single digits next year. Additionally, we're excited for the release of the new $10 bill with the redesign program advancing as planned. In CPI, our service business continues to expand its offerings outside of traditional cash equipment. And in the quarter, we achieved 2 significant wins with customers for installation and ongoing service of kiosk. These wins are contributing to mid-single-digit ARR or annual recurring revenue growth in service and building a resilient business for the long term. We're also continuing to execute our strategy to expand upon our market-leading positions. In September, we signed an agreement to acquire Antares Vision, a global leader in detection, inspection and track and trace technologies for the life sciences and food & beverage sectors. The acquisition of Antares Vision is another important step, building out our portfolio with differentiated technology offerings and aligning NXT to markets with secular tailwinds. We also continue to make strong progress in our integration efforts within the authentication business. As part of our planned product rationalization and 80/20 actions, we're in the process of upgrading several existing customers from the legacy De La Rue Authentication offerings to our micro-optics technology, improving our margins and our customer stickiness over the long term. Finally, like many other companies, we continue to manage the impact that tariffs and broader macroeconomic uncertainties are having, particularly in our CPI short-cycle businesses. Balancing the strong performance in SAT with the outlook for demand in CPI, we're narrowing our full year EPS guidance to a range of $4 to $4.10. Moving to the next slide, I'd like to spend a few minutes discussing the significant announcements we made since our Q2 earnings call. First is our announcement to acquire Antares Vision, providing Crane NXT with a leading position in the $2 billion life science and food and beverage track and trace and detection technologies market. These markets benefit from strong tailwinds driven by the continuous rise of counterfeiting and the need for greater quality assurance and compliance with government regulations. Antares Vision brings to NXT a differentiated portfolio of advanced detection and inspection systems. It also offers field and remote service capabilities for new equipment, commissioning and aftermarket services, very similar to our service business in CPI. Finally, the company offers market-leading track and trace software to ensure the safety and authenticity of products to consumers, brands and governments. We're moving forward with customary regulatory approvals and expect to close the first phase of the transaction in December. In this first transaction, Crane NXT will acquire an approximate 30% stake in Antares Vision from its largest shareholders. After this closing, we will launch a mandatory public tender offer to all remaining shareholders. Now as a reminder, Crane NXT has secured voting agreements with the largest shareholders of Antares Vision, which assures our ability to take the company private after the completion of the mandatory tender process. Antares Vision is another key milestone in our journey as we continue to build a resilient company through our disciplined M&A process. Over the past 2.5 years, we've taken significant actions to reduce our exposure to cash-centric end markets. And with the acquisition of Antares Vision, we'll have approximately 60% of the portfolio focused on cash-related products and services, down from approximately 80% at the time of separation. These steps strengthen the long-term durability of Crane NXT and align our portfolio to secular tailwinds to accelerate growth. Moving to Slide 5. Another key announcement we made in September was our outlook for the U.S. currency business based on the Federal Reserve Board's release of their annual currency order for 2026. We're very encouraged by the projected increase in volumes for higher denomination banknotes, specifically $10s, $20s, $50s and $100 bills. These notes contain higher levels of security features in the substrate and in the case of the $100 bill contain our proprietary micro-optics technology. The expected order volumes of these notes, partially offset by a reduction in volumes for lower denomination banknotes will result in our U.S. currency business growing at high single digits in 2026. Additionally, we continue to move forward with scaling up for the launch of the new $10 bill with production scheduled for mid-2026 ahead of the expected public launch. Finally, I'm excited to announce our team has made significant progress working with the Bureau of Engraving and Printing on the design of the new $50 bill scheduled for release in 2028. As a reminder, the design of each bill is a multiyear process, starting with design and pilot production before moving to full-scale production ahead of the release to the public. More to come on these developments as we move into 2026. So with that, let me now hand the call over to Christina to review our third quarter performance in more detail. Christina Cristiano: Thank you, Aaron, and good morning, everyone. I'd also like to start by saying thank you to our associates around the world and to express our appreciation for your continued efforts. Starting on Slide 6, we delivered third quarter results that were in line with our expectations. Sales were approximately $445 million, an increase of approximately 10% year-over-year, driven by the impact of acquisitions, favorable FX and continued strong performance in currency. Core sales increased approximately 1%, reflecting accelerating growth in SAT, partially offset by expected softness in CPI. Adjusted segment operating profit margin of approximately 28% was up approximately 50 basis points year-over-year, driven by higher SAT volume and improved mix in currency. Free cash flow conversion was approximately 115% in the quarter, and we continue to expect full year conversion to be in the range of approximately 90% to 110%. Finally, we delivered adjusted EPS of $1.28. Moving to our segments and starting with CPI on Slide 7. Sales of approximately $216 million were down approximately 4% year-over-year as double-digit year-over-year growth in gaming was more than offset by declines in other short-cycle end markets, primarily vending, where like other companies, we continue to face headwinds related to the ongoing macroeconomic and tariff uncertainty. Even with this lower volume, we were able to maintain an adjusted operating margin of approximately 31%, reflecting the benefits of cost reduction measures, pricing and productivity. Looking ahead, we expect sequential margin accretion in the fourth quarter, driven by continued operating discipline, resulting in CPI's full year adjusted operating margin to be between 29% and 30%. Turning to Security and Authentication Technologies on Slide 8. In the third quarter, sales were approximately $229 million and grew approximately 28% year-over-year, including acquisitions. Core sales increased approximately 9% year-over-year, driven by higher volumes and favorable product mix in currency. The volume growth in currency was driven by our ability to optimize our supply chain to produce more banknotes. We are also benefiting from the recent investments we made in our facilities to increase production. Adjusted segment operating profit margin of approximately 24% increased by approximately 250 basis points year-over-year, reflecting the benefit of acquisitions and strong performance in currency. We continue to outperform in currency, maintaining record high backlog levels with approximately 20% organic backlog growth year-over-year. This, along with our strong supply chain execution and ongoing investments to increase production gives us confidence to raise our full year sales guidance. Moving to our balance sheet on Slide 9. We ended the third quarter with net leverage of approximately 2.3x, which we expect will be approximately 2.9x at the full close of the Antares Vision transaction. As we mentioned earlier, we are on track to achieve adjusted free cash flow conversion of approximately 90% to 110% for the full year. This strong free cash flow generation will enable us to pay down debt while continuing to invest in organic growth. Now I'd like to provide an update to our 2025 guidance as shown on Slide 10. Given our continued momentum in SAT, we are increasing our full year sales growth guidance to a range of 9% to 11% from the previous range of 6% to 8%, reflecting the outperformance in currency, partially offset by a reduced sales outlook for CPI. We are also updating our adjusted segment operating profit margin to approximately 25% for the full year from approximately 25.5% to 26.5%, primarily driven by the flow-through of lower CPI volumes and additional costs we are incurring as we increase our international currency production. With these updates, we are narrowing our adjusted EPS guidance to a range of $4 to $4.10. Looking ahead, I'd like to provide our early thoughts on 2026 sales. In SAT, we expect mid-single-digit core growth, driven by favorable product mix in our U.S. currency business and continued strong performance in international currency, supported by our robust backlog and investments to increase our production. We expect core growth in the Authentication business to be mid-single digits, benefiting from increased pricing discipline and cross-selling opportunities. In CPI, we expect flat to low single-digit growth overall with service growing in the mid-single digits. In our hardware products business, where we serve the gaming, retail and financial services markets, we expect flat to low single-digit growth. Finally, we expect vending to be approximately flat year-over-year, reflecting the ongoing impact of tariffs on demand. We'll provide additional guidance for 2026 during our Q4 earnings call early next year. Now I'll turn it back to Aaron for his closing remarks. Aaron Saak: Thank you, Christina. In closing, I want to reiterate a few key points from our call today. First, our Q3 performance was in line with our expectations with strong revenue growth, healthy margins and excellent free cash flow conversion. Second, we continue to build momentum in our strategic growth areas. International currency continues its strong performance, and we're taking actions to maintain our momentum. We're very excited about the trajectory of the U.S. currency business with high single-digit growth expected in 2026, along with the launch of the new $10 bill. Our authentication integration is on track, and we're converting more customers to our advanced micro-optics technology. In CPI, we're making good progress growing ARR in our service business into new higher-growth end markets. And finally, we're taking meaningful steps to expand NXT into adjacent markets with growth tailwinds with our recent announcement to acquire Antares Vision. Well, we've been busy, and we're focused on executing our strategy to be a market leader, providing trusted technology solutions that secure, detect and authenticate our customers' most valuable assets. With all of these actions, we are well positioned to accelerate growth in 2026 and beyond. And I'm excited to share that we'll host an Investor Day on February 25 in New York City, where we'll share more details on our strategy, growth opportunities and financial priorities. And I look forward to seeing many of you there. In closing, thank you for your time this morning, and I'd like to again thank our dedicated team around the world for their commitment to our customers, our communities and all of our stakeholders. And so with that, operator, we're now ready to take our first question. Operator: [Operator Instructions] Our first question is from Matt Summerville of D.A. Davidson. Aaron Saak: Matt, a couple please. Matt Summerville: So first on the currency side of the business, if you're booking in the '27 is it safe to assume you're effectively sold out for '26? And if that's the case, how does this inform what you're doing from a capacitization standpoint in currency overall, whether it be in Malta, whether it be in Sweden or whether it be in New Hampshire? And I guess how much more factory floor flexibility do you have today to accommodate the growth? Aaron Saak: Thanks for that question, Matt. And you're right, currency and particularly international currency has just been a standout for us here in 2025. And we're really bullish on the outlook as we look forward. Some customers are wanting orders now shipped into '27. So we're taking that. So I wouldn't quite say to use your words, we're sold out for '26. I would say we are very confident in the backlog and the position it's put us in, in '26 to actually take some of these actions you're referring to. And it's really due to a combination of things. It's both customers reordering their current micro-optic designs. It's also customers moving forward faster to redesign their currency to get ahead of counterfeiting and specking in our micro-optics. And so where we're at today is we're looking at both organic investments in the near term. That's primarily OpEx in terms of adding people and optimizing our own production. It's also working with outside partners. And to your question, that's procuring substrate materials where that makes sense for us, that's a lower margin part of the business. So that's where we'd want to go out to the market with partners. And then also looking at partners as they would do some printing of banknotes for us as well. I believe as we look forward, and as you know, Matt, we're going to look at continued investments in those core micro-optic facilities where we've already made investments and have the ability and space to increase production. And that's something we're certainly looking at for 2026 and beyond. And quite frankly, it's a great investment and a great return for our shareholder investing in core growth. So we're really excited about that as well. So I think we're in a very good place. But as you can appreciate, we're taking it very seriously our role here of keeping governments fully loaded with their currency. And that's really coming in our international business and through primarily emerging markets. And while the backlog is high, the funnel and the sales outlook is equally high, which gives us high confidence in this business as well. Matt Summerville: As a follow-up, maybe just touch on if USD is growing high single digits, I guess why wouldn't -- if you have all this international goodness, including volume and value rising, market share gains, new redesigns with micro-optics coming faster and the backlog and the order trends you're talking about in the funnel, how does that not equate to a healthier organic outlook for SAT in 2026? Aaron Saak: It's really 2 things, Matt, and it's a good question. It's the balance of your first question, which is looking at how we're optimizing the supply chain and just overall production. So those are trade-off decisions that we're making. And then the second, and it's simply the math is, we're going to have really strong comps to compete against in 2026 just due to this overperformance and how international currency is exceeding our expectations. So in that way, it's just simply the comps. And we just want to have a very prudent, balanced approach as we're setting this outlook going into 2026. Operator: Our next question is from Bob Labick of CJS Securities. Bob Labick: So I wanted to start with CPI. Could you maybe dig a little further into what was the delta versus expectations in vending? Kind of what happened now between now and a few months ago in expectations? And is this a kind of signal of a larger change? Or is this just a lumpiness cyclicality? Or how should we think about that change? Aaron Saak: Yes. Thanks, Bob, for that. And maybe I'll just put that in context the CPI overall to give you some added color. And I think the real point we want to make is we're taking just a very prudent approach to the outlook going forward, particularly in Q4 and to Christina's prepared remarks for 2026. To your question, when we think about vending, this has just been ongoing order softness after the price increases that we enacted due to tariffs. And in Q3, that business was down in the high single digits. And so we expect it to be down in Q4 as well. And it's just continuing delays of customers sweating the assets, pushing out the decisions to buy as we raise prices. So our assumption here, and again, to take a prudent approach is that's not going to change into Q4. At some point, that dynamic does have to change. But again, we just want to level set for 2026. I think the real standout here for us in the quarter when you back up the CPI is gaming with strong double-digit growth in Q3, performed as expected and good order growth in gaming as well. And then our services business, where we've done a lot of investments to improve productivity and add some new service tools in is growing at mid-single digits. and we expect that for the full year. We expect full single-digit growth next year as we're winning new service contracts, improving our ARR outside of the legacy CPI equipment. And that's very optimistic outlook than we have for our CPI service business going forward. I think the other hardware businesses and vending will continue just to have a very balanced, prudent approach to the outlook based on what's happening macroeconomically. Bob Labick: Okay. Great. And then just, I guess, for my follow-up, you mentioned in your prepared remarks, you're starting the kind of upgrading De La Rue sales by adding micro-optics versus their previous security products. Can you maybe dig into that, talk about how that works, what the opportunity is and how it impacts P&L and margins over time? Aaron Saak: Yes. Yes, Bob, and I appreciate that. This is an area and I'm really excited where we're heading and appreciate the hard work the team in authentication has done since we closed De La Rue in May. So through Q3, it's really just 4 months that we had De La Rue in the portfolio. And from day 1, really pre day 1, we've always focused on synergies and executing those, both operational and commercial. And this one that we're talking about here is a little bit of a combination of both, where we originally came in and identified some legacy De La Rue holographic products and went in and did our CBS approach here using our 80/20 toolkit to decide to sunset some products and transition customers to micro-optics. That will be complete as we exit midyear next year. And what we're finding is very good success, moving these customers from a very good technology that De La Rue had, but into really the leading, most differentiated anticounterfeiting technology in our micro-optics. And with that, we're going to see a significant lift in gross margin with those customers as well as increased stickiness because they moved into a very proprietary product. When you put that all together, Bob, we're on track for our synergies that we have communicated. In fact, this program is slightly ahead of schedule and feels very good in the traction that we're getting. And we expect to your question on margins, as we get into the fourth quarter, our authentication business is going to be in the high teens in the fourth quarter in terms of OP. And for all of next year, we're going to be exiting the year approaching 20% operating profit on track to what we said we were going to do last quarter. Operator: Our next question is from Damian Karas of UBS. Damian Karas: I wanted to ask you guys for a little bit more clarity on the redesigns of the -- in the U.S. currency business. So you mentioned the $10 will ramp production kind of in the middle of next year. So are you basically in kind of wait-and-see mode until you get the green light on launching or kind of anything else on your plate until then with respect to the $10? And then on the $50 note that you mentioned you're starting to work for which will ultimately launch in 2028. Help us just understand like the financial model around these redesigns on that $50, is that just like a cost item for you guys right now as you're spending on R&D and I guess, SG&A? Or would you actually start capturing some revenue in these early stages? Aaron Saak: Yes. Thanks, Damian. And again, we're just -- I appreciate the question, incredibly excited about what's happening in this U.S. currency business. As you know and have been following us for a while, which we appreciate, it's been a long time coming, but we're at that inflection point as we get into 2026. The $10 program is just really on track. We have upgraded our equipment, as you know, in the first quarter. We've been running qualification pilot runs as we're exiting this year and working closely with the BEP on the order forecast. So we're all ready mid next year to go in what I would just call full-scale production mode of the new $10 bill. That's going as planned, right on target. And I had the opportunity just a week ago to visit our facility in Dalton, Massachusetts with the team, and they've just done a phenomenal job getting ready for the launch of the $10. So again, I would just say going as planned. We consider that in the outlook Christina mentioned for 2026. As it relates to the new $50, I think this is just an important milestone in the continued decade-long progression of this new U.S. currency series and another key proof point in what it's going to mean as we progress for the SAT segment. In terms of where we're at right now, Damian, I don't expect or should you expect or anyone any real financial impact from it in 2026 or even as we get a little bit into '27. What's important here is that we're in the design phase, working with the Bureau of Engraving and Printing and the Fed on incorporating more advanced security features into that bill than currently exists today in the 50, very similar to what we did with them for the 20. And I think that will be more apparent once the BEP and the Fed announces the new design, which we would expect sometime, let's say, in the middle part of 2026. In terms of just what it means for us, I always go back as we've discussed to you just look at the variable printing cost of the current denominations where the current $100 cost about $0.10 in variable cost. The $50 and $20 are somewhere between $0.05 and $0.06. That delta, while it's just a few pennies, obviously, on several billion banknotes is a material number, and most of that is due to advanced security features, some of which are ours. So that just gives you some bookends on how to think about it. As we get into certainly '26 and in our Investor Day, we'll provide a little more context on what that means for us when you look out these next few years. We feel very good, very excited about where this is headed, Damian. Damian Karas: That's really helpful. And then I'd like to follow up on CPI. It sounds like really it's just vending that's kind of the incremental source of weakness in the lower guidance there. Would you happen to be able to give us a sense on your CPI orders in the third quarter? Like if you excluded vending, what were the rest of the orders overall trending on a year-over-year basis? And I guess just kind of thinking about as we get past these vending headwinds, do you think that the CPI overall is kind of back in growth territory when we get into the first quarter of the next year? Aaron Saak: Yes. That's a good question, Damian. I think I'd go back to Christina's comments that we just want to be prudent on the outlook to your last point there in 2026 with kind of a flat to low single-digit growth dynamic in CPI. More specifically, when you think about the orders that came in, again, our service business, I'll start with that, is going well. There's always a backlog of service orders that's growing commensurate with the mid-single-digit growth that we're seeing in the business. We expect to fully see that and keep investing in it going forward. Gaming, which is part of our hardware business, up double-digit orders, which, again, is consistent with where we were expecting and how that market is playing out. So that feels good. So really the balance is -- and the biggest to the point you made is vending. So again, if we see some positivity, whether that be from tariffs or just generally needing to trigger buys for normal wear and tear, that will have some positivity for us, but we're, again, being prudent on that outlook. And then I think retail for us has been a little bit of a mixed results with the OEMs. Some are performing better than others, and you could see that in some public results this week, still strengthen our customs go-to-market, but net-net, that OEM business is the biggest and the results are mixed, making them down for us to be specific here in Q3. And financial service in terms of the equipment orders down a little bit in Q3 as well. And we think that's just what a lot of other companies are seeing in some shorter cycle businesses just a little uneasiness in the macro environment, and that's playing out in just some incremental delays in ordering in those 3 areas. Operator: Our next question is from Michael Pesendorfer of Baird. Unknown Analyst: This is [indiscernible] on for Mike. So I just wanted to follow up on the upgrading of some of the De La Rue to micro-optics. Are you -- and part of the 80/20 application there, is there walkaway revenue that we need to be considering as we move into next year? What kind of pushback are you getting from customers? And maybe a little bit of color on the receptivity from kind of the sunsetting of the holographic product and moving toward the micro-optic and more proprietary technology? Aaron Saak: Yes. Thanks, [indiscernible]. I think this is a really good area to your question of just how we're executing the integration as we had expected. In terms of the 80/20 process, which I think you're very familiar with, -- in terms of material impact on revenue, there is none. It rounds to 0 effectively because we're seeing not only most customers transitioning to the new technology, which comes at a better price point and better margins, those who won't be, again, nets out effectively for us. So the beauty here is we simplified the offering. We have a better and more simplified supply chain, higher margins and create stickiness with the customers. Generally, with very few exceptions, the receptivity is excellent. And most customers are happy for us to be bringing more advanced technology to them and walking them through what it can mean for their products. And that's been true of the entire authentication integration from the first acquisition of OpSec to now putting OpSec and De La Rue together to form a holistic one company. The customer receptivity to this has been very good, and that gives us a lot of confidence that the thesis here is correct as we've created a true market leader in authentication technologies. Unknown Analyst: Got it, Aaron. That color is super helpful. Maybe switching gears to CPI. Just based on the pieces that you gave us for the 2026 framework, how should we be thinking about the impact to margins as we move into 2026, given the elevated contribution from service in terms of growth rate relative to some of the other pieces of that portfolio and obviously, what's going on with vending. How should we be thinking about the margin trajectory in that segment as we move into 2026 and that mix impact? Christina Cristiano: Well, maybe I'll start and then I'll turn it over to Aaron. And just -- it's worth repeating that we have high confidence in our full year target of 29% to 30% margin for CPI. So continuing to have very disciplined operating execution even with the lower volumes that we're experiencing. And as we said in our prepared remarks, we expect that softness to continue. We're taking a prudent approach to our outlook for next year. But we also expect to continue driving this very disciplined CBS cadence. And so you can expect to see our margins in the same range, if not just a little bit higher with accretion from the synergies that we're driving and the execution of pricing and productivity initiatives. Aaron Saak: Yes. Thanks, Christina. Just to add a little more to what she said. As a service business is very profitable for us. And so that is a positive impact for us in and across CPI as well as it's a very sticky ARR business. So we like that very much, and we're going to keep growing that, as you can see in our results and our outlook. The focus for the hardware business and our vending business is really about maintaining the high operating margins that we have in that 29% to 30% range. As Christina said, I think this is excellent work by the team despite some softness in the top line that we're maintaining this near 30% margin. And that's execution of productivity, cost, CBS toolkit, et cetera. And then I'd be remiss not to say that another hallmark of this business that comes from hardware and bidding is great free cash flow, really an excellent free cash flow profile. And that's another key metric as we look at CPI to maintain the high margins, continue to generate this very strong free cash flow and continue to invest and grow our service business and drive recurring revenue. That's really the playbook of CPI as we get into '26. Operator: Our next question is from Bobby Brooks of Northland Capital Markets. Robert Brooks: In your expectation of the high single-digit revenue growth for the U.S. currency business next year, does that bake in the uplift of what I think is safe to assume a content uplift in the new $5? I'm just trying to get a gauge on if there could be upside to that outlook when the new design is initially revealed. Christina Cristiano: Bobby, I'll start on that one. And let me just for a point of clarification, it's the $10 note that we're redesigning right now that will be launched next year, that we're super excited about. And so the high single-digit guidance is really based on the order that came out earlier in the quarter from the Federal Reserve, which had that favorable product mix, as you remember, toward the higher denomination notes. And that includes the $10 note in there as well as increased volumes for the $20, $50 and $100 bill. So we're super excited for that program to launch next year. And as a reminder, the timing of that is out of our control. We're not controlling that release, but we are prepared to do our production, as Aaron said in the prepared remarks, towards the middle of the year. And so we'll expect to start seeing that production happening in the back half of next year. Robert Brooks: Got it. So it seems like it doesn't necessarily bake in what an uplift in content might look like on $10? Christina Cristiano: Yes. No, it does include the $10 note based on that order. And it's -- remember, it's a small piece of what's happening next year just based on the timing of the launch, right? So if we bring in production in the middle of the year, it's not a full year. But we have high confidence in that sales guidance range that we gave of high single digits for U.S. currency. Robert Brooks: Got it. I appreciate the color. And then -- so on the international currency sales, obviously, that remains red hot. And in your prepared remarks, you had mentioned that 3Q was stronger than you had forecasted. And I was just curious, is that really a result of just timing like countries saying what we wanted in November, we actually want delivered in September? Or is it them having ordered, let's say, 100,000 notes and then they're coming back to you and say, "Hey, we actually want 100,000, 110,000 notes." I'm just trying to understand the drivers of the upside there intra-quarter. Aaron Saak: Yes. Bobby, I'll take it and hand it over to Christina. It's a little bit of customers wanting the currency faster, and we've been working to find ways to get it to them earlier. And that goes back to my comments, I think, in one of the questions around the different actions we're taking to just improve shipments or increase shipments, both using our own internal productivity tools and adding resources and also increasingly working with some partners, which come at a little bit of a higher cost, which is what you're seeing in the segment financials. We don't think this is changing. And it's simply based on the facts of this backlog remaining. And as you can see, we're getting more orders to fill the backlog that we're shipping and our sales funnel is incredibly strong. So -- what's happening here, we strongly believe is a dynamic where more customers, particularly in emerging markets, are needing more currency to the first part of your question. At the same time, they're accelerating the redesign process to add more anti-counterfeiting features. And that was a key reason for the big win that we announced in our prepared remarks in Latin America was to help a country that was motivated and accelerated the redesign to get our very high-end anti-counterfeiting features. And we're seeing that play out in particularly emerging markets all over the world. I hope that helps, Bobby. Robert Brooks: Extremely helpful. I appreciate the color. And if I could just squeeze in one more. Of the 8% core sales growth in SAT, that was really strong, but was that really entirely driven by the increase in international currency? Or were there any authentication wins or expansions that were a part of that core sales growth as well? Christina Cristiano: Yes. Thanks for that question. It's primarily international currency, Bobby, but we did see some favorability in volume and mix in the U.S. currency side of the business and authentication continues to perform as we expected. Operator: Our next question is from Damian Karas of UBS. Damian Karas: Just a few follow-up questions. First, I wanted to ask you about Antares. What's -- how should we be thinking about the business organization in a world in which you have Antares, just thinking about like future segmentation. And would you expect to include Antares in your initial 2026 guidance when you report fourth quarter earnings in a few months? Aaron Saak: Thanks, Damian. And I'll answer the first part and hand it over to Christina for the second. I'd tell you, I just am incredibly excited by the announcement we made a few weeks ago on Antares. I think it's a very key milestone that I think you know in this evolution of the company that's further strengthening our position and it's not only expanding our TAM, but aligning us in the markets with very clear secular tailwinds with a clear technology leadership position in both equipment services and software. So we're on track to the normal process of regulatory approvals that we discussed. When that comes to an end, we'll make our first tranche of investment that will be about 30% of the company. We want to wait, see that through and really not get ahead of ourselves into any segment or alignment discussions, just let that process naturally play out, as you can probably appreciate. And as we get into certainly early next year in our Investor Day and our Q4 earnings call, as that progresses, we'll solidify the alignment as well as some of the guidance. But Christina, I'll let you take the other half of that. Christina Cristiano: Yes. And I'll just reiterate how excited we are to bring Antares into our portfolio. In terms of guidance, I think we will not include Antares in our initial guidance. We'll wait until the close happens at some point in 2026 after that public tender process is completed, and then we'll do an update to the guidance at that time. Damian Karas: Okay. Great. That all makes sense. And then, Aaron, I wanted to ask you a little bit about the strength you're seeing in the service business in CPI and building out that service footprint. Could you just remind us, are these kind of like generalist service contractors that are kind of doing service across the various end markets and customer base? Or are there any particular end markets where you're seeing a lot of this service stand out? Aaron Saak: Yes. Thanks, Damian. I would say these are not -- perhaps based on the definition, general service technicians. These are very highly skilled and trained not only in CPI equipment, but in ancillary equipment, other people's equipment, typically in the front end of stores, checkout areas, kiosks and things of that nature. When you look at our service business today, again, it's about 15% of CPI growing mid-single digits. It's actually spread across many end market verticals. So -- and that's the key to the margins and the optimization of the business that we have good density in a geographic area where we're deploying the service technicians. So today, based on the legacy of that business, about 60% of it is concentrated in financial services. That's really aligned to the legacy CPI and Cummins-Allison products that came into the portfolio in 2019. The rest, though, are in other areas like gaming, retail, vending even end markets. So it's really a nice breadth of offerings that we have kind of with the same type of equipment. And our key wins this -- that we announced this quarter are all with kiosks. So these have nothing to do with cash and coin operations. These are the type of kiosks you see, whether you're at a doctor's office or a retail establishment, a checkout in a particular restaurant, et cetera, that just being normal service contracts and maintenance. And so it's an ARR type business for us now, growing and actually diversifying with all of these wins, which is why I'm particularly optimistic about what the team is doing. Operator: I am showing no further questions at this time. I would now like to turn it back to Aaron Saak for closing remarks. Aaron Saak: Thank you very much, operator. Well, as we conclude today's call, I'd just like to again thank the entire Crane NXT team for all of their hard work and their dedication over the past quarter. As you've seen today, we've taken and continue to take significant steps to evolve the company, and that will continue as we go forward. And as a reminder, we look forward to telling you more about this in our journey ahead during our upcoming Investor Day on February 25 in New York, and I look forward to welcoming you all there. So thank you again for your time this morning and all of your questions, and I hope you have a wonderful week. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnerSys, Inc. Q2 [ Quarter ] 2026 Earnings Webcast and Conference Call. [Operator Instructions] Now I would like to turn the call over to Lisa Langell, Vice President of Investor Relations and Corporate Communications. Please go ahead. Lisa Langell: Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal second quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys Executive Vice President and Chief Financial Officer. Last evening, we published our second quarter results with the SEC, which are available on our website. We also posted slides that we will be referring to during this call. The slides are available on the Presentations page within the Investor Relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated November 5, 2025. Now I'll turn the call over to EnerSys CEO, Shawn O'Connell. Shawn O'Connell: Thank you, Lisa, and good morning. Please turn to Slide 4. During the call today, we will provide an overview of our second quarter results, share progress on our EnerGize strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our third quarter. Please turn to Slide 5. Our performance in the second quarter was strong, with net sales up 8% year-over-year. Earnings growth outpaced revenue growth, driven by favorable price/mix more than offsetting higher costs, resulting in both adjusted operating earnings and EBITDA being up 13%. Excluding 45X benefits, adjusted diluted EPS on our base business was up 15% versus prior year on the higher earnings as well as our lower share count. Our net sales and adjusted diluted EPS both marked new Q2 records driven by strong growth in data center, industrial and A&D. We are seeing positive trends in the majority of our markets, albeit with some lumpiness. Energy Systems led the way this quarter with year-over-year sales growth seen across all end markets, data center, industrials and communications as well as continued margin improvement. Motive Power improved sequentially, but was lower versus prior year as expected on suppressed volumes. Specialty delivered notable performance improvement, nearing double-digit AOE margins on A&D revenue and margin expansion. Free cash flow in the quarter was particularly strong, and we are pleased to return $78 million in capital to our shareholders this quarter through share repurchases and dividends. Please turn to Slide 6. Through our EnerGize strategic framework, we are optimizing our core, invigorating our operating model and accelerating our growth. We are reallocating resources to higher impact projects, and we are focusing on where we have a right to win. We're putting in place the structure that enables our people to focus, specialize and execute with agility and speed. We've made great progress over the past 2 quarters, and I'm excited to update you on these recent highlights. First, the reduction in force actions we announced in July are nearing completion and support our efforts to rightsize the organization. Early benefits are materializing from the $80 million annual cost-saving initiative and the realization of these savings will grow in the third and fourth quarters. Next, we launched our 3 centers of excellence: lead-acid, power electronics and lithium, which are leveraging innovation and best practices across these critical areas to deliver products faster and lower costs. We are already beginning to see ensuing benefits. As an example, our exceptional performance in Energy Systems was bolstered by improved agility from our Power Electronics Center of Excellence. The CoE cut validation time on new components from weeks to days using in-region audits and smarter collaboration. This effort, along with other optimization improvements in our Missouri plants and SIOP helped to support a major communications customer. We delivered a solution within 1 quarter on an initiative that previously could have taken up to 18 months. This is just one instance of how our transformation initiatives are improving execution and accelerating revenue growth. We are also leveraging AI to drive increased efficiency. For example, our lead-acid Center of Excellence has implemented AI-trained inspection cameras and software. This tool enables us to identify defects in battery plates faster and lower scrap rates. We are increasing our rigor around new product introductions and CapEx investments, reallocating resources to focus on higher return opportunities and executing with greater speed. As a data point, our capital spending in the quarter was reduced to 30% to $21 million from $30 million in Q2 '25, even with much of the spend this quarter coming from projects we started last fiscal year. Aligned with our new product road map for lithium technology, we are evaluating our make versus buy options for our lithium cell supply, which includes our planned lithium cell factory. Recent discussions with relevant government officials have been constructive, and we expect to provide an update to you on our new lithium factory plans next quarter. Please turn to Slide 7. In the second quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies. As we've previously shared, approximately 22% of our U.S. sourcing is from countries affected by direct tariff costs. Our estimated direct tariff exposure is now some $70 million annualized for fiscal year '26. This has improved from our prior estimate of $94 million as a result of supply chain mitigation activities. While we anticipate ongoing volatility and further policy shifts, we remain confident we will be able to fully offset the impact of tariffs to our P&L. Our task force continues to proactively mitigate direct and indirect exposure of tariffs, enhance supply chain optionality and assess impact on demand. Please turn to Slide 8. Market uncertainty abated somewhat in the quarter. However, our order book does not yet reflect normalized market conditions. We expect that improving macro conditions and increasing clarity on public policy will continue to support more stable dynamics in the coming quarters. Q2 orders [ pared ] back sequentially after strong orders in Q1, which illustrates the dynamic conditions we are currently seeing in the market. In Q2, backlog in Specialty was up, supported by strong demand in A&D. However, backlog was down in Motive Power on a mix of tariff uncertainty and a return to pre-COVID buying patterns, with levels of book and ship business continuing to increase. Energy Systems backlog is stable. In communications, we are seeing more spending on network refreshes than network expansions. We remain encouraged by the opportunities these customers are reviewing to replace large inventories of older equipment out in the field. Data centers continue to be a key growth vector for EnerSys. While deployment timing can vary by project, demand in this market remains strong. As part of our strategy to accelerate our growth, we are focusing on opportunities to leverage our leading lead-acid market share and expand our share of wallet through new product introductions in this segment. The data center market is in the early phase of a multiyear growth cycle driven by the rise of AI and the increasing need for energy resilience. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies for both tactical and mobile soldier applications. A&D activity in the quarter was robust with visibility to increasing sales for upcoming quarters as the government personnel and spend disruptions settle. Although the Class 8 market remains soft, we saw some improved demand signals in transportation with significant order inflection both sequentially and year-over-year. Please turn to Slide 9. We are proud to have published our fiscal year 2025 sustainability report in October, highlighting how we are delivering measurable energy savings, improving efficiency and reducing costs for EnerSys and our customers. It emphasizes our commitment to communities, operational excellence and our role in supporting global energy resilience. The report reflects the progress we've made and how our sustainability journey aligns with EnerGize, demonstrating how strategic improvements in energy usage, data and systems management drive both efficiency and financial performance. My vision for EnerSys is clear: to embed sustainability, resilience and operational excellence into every part of our enterprise. These principles are not just strategic. They are foundational to delivering long-term value to our customers, communities and shareholders. Please turn to Slide 10. We are excited to announce that we plan to hold our next Investor Day on June 11, 2026, in New York City. We look forward to sharing more details and progress on our strategic road map and longer-term financial targets with you then. In summary, our progress this quarter reflects not only strong execution, but also a shared commitment to continuous improvement and collaboration across the company. We are positioning EnerSys for long-term sustainable success in delivering solutions for our customers and generating value for our shareholders. Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi? Andrea Funk: Thanks, Shawn. Please turn to Slide 12. Net sales came in at $951 million, up 8% from prior year and a record high for our second quarter, driven by a 3% positive impact from organic volumes, 3% positive price/mix, a 1% tailwind from FX and a 1% benefit from Bren-Tronics. The sales growth was driven by strength across most of our end markets. We achieved adjusted gross profit of $277 million, up $23 million year-on-year and up $16 million, excluding 45X benefits. Q2 '26 adjusted gross margin of 29.1% was up 70 basis points sequentially and up 40 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 80 basis points sequentially and mostly flat versus the prior year. Our adjusted operating earnings were $130 million in the quarter, up $15 million versus prior year with an adjusted operating margin of 13.6%. We had a $40 million benefit from 45X in the quarter. Excluding those benefits, adjusted operating earnings increased $8 million, or 10% with an adjusted operating margin of 9.5%, up 20 basis points versus the prior year. Adjusted EBITDA was $146 million, an increase of $17 million versus the prior year, while adjusted EBITDA margin was 15.3%, up 70 basis points versus prior year. Adjusted diluted EPS was $2.56 per share, an increase of 21% over prior year. Excluding 45X, it was $1.51 per share, up 15% versus prior year, both representing record highs for our fiscal second quarter. Our Q2 '26 effective tax rate was 10.5% on an as-reported basis and 23% on an as-adjusted basis before the benefit of 45X compared to 19.4% in Q2 '25 and 21.4% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20% to 22%. Let me now provide details by segment. Please turn to Slide 13. In the second quarter, Energy Systems revenue increased 14% from prior year to $435 million, primarily driven by stronger volumes, along with favorable price/mix and a slightly positive FX impact. Adjusted operating earnings increased 38% from prior year to $34 million, reflecting the benefits of the increased volume and favorable price/mix. Adjusted operating margin of 7.7% increased 130 basis points versus prior year. As Shawn mentioned, we saw unique wins in this business during the quarter that we expect to normalize next quarter. We remain confident in our margin trajectory with upside from here as data center demand and ongoing communications recovery should allow us to generate operating leverage and higher margins with additional support from our structural cost reductions. Motive Power revenue decreased 2% from prior year to $360 million, as anticipated, with lower volumes from macro headwinds more than offsetting favorable price/mix and FX tailwinds. Motive Power adjusted operating earnings were $48 million, down $10 million versus prior year, primarily on those lower volumes. Adjusted operating margins were 13.3%, down 240 basis points versus the prior year. Maintenance-free product sales increased 14% year-on-year and were 29.9% of Motive Power revenue mix compared to 25.8% in Q2 '25. Looking forward, we expect Motive Power volumes to regain year-over-year growth in the third quarter as the macro settles. We expect lithium sales to make up a bigger portion of this growth, which will temporarily pressure margins on higher cost pass-through from both China tariffs as well as elevated costs, which we will experience until lithium sales reach higher volumes. Longer term, Motive Power is well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions. Specialty revenue increased 16% from prior year to $157 million, largely driven by a 7% increase in organic volumes and a 7% benefit from the Bren-Tronics acquisition as well as a 1% increase from FX and price/mix. We remain impressed by the contributions from Bren-Tronics and the cultural fit between our companies, both of which have surpassed our initial expectations. As we acquired Bren-Tronics in the second quarter of our fiscal '25, the results will be included in our ongoing operations in future quarters. Q2 '26 adjusted operating earnings of $15 million were nearly double that of the prior year when we entered the transportation down cycle. Adjusted operating margin of 9.2% was up 380 basis points. We continue to see the near-term opportunity of margin expansion in specialty, driven by robust A&D demand and ongoing TPPL cost and delivery gains from automation under our lead-acid CoE. Please turn to Slide 14. Operating cash flow of $218 million, offset by CapEx of $21 million, resulted in strong free cash flow of $197 million in the quarter, an increase of $194 million versus the prior year same period. This increase was bolstered by the receipt of our U.S. federal tax refund. Free cash flow conversion in the quarter was 288%. Excluding the benefit of 45X to earnings and cash, free cash flow conversion was still an impressive 196%. Primary operating capital increased slightly to just over $1 billion during the quarter on higher sales, with our working capital efficiency measured internally by primary operating capital as a percentage of annualized sales, improving 120 basis points versus prior year and 130 basis points sequentially. As we invigorate our operating model, we will continue to focus on delivering value from enhanced working capital discipline enabled by our CoEs. As of September 28, 2025, we had $389 million of cash and cash equivalents on hand. Net debt of $842 million represents an increase of approximately $61 million since the end of fiscal '25. Our leverage ratio remains well below our target range at 1.3x EBITDA. Our balance sheet is very strong and positions us to invest in growth and navigate the current economic environment. During this period of heightened geopolitical uncertainty, we anticipate maintaining net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation choices and to absorb any macroeconomic dynamics that may impact us. Please turn to Slide 15. During the second quarter, we repurchased 636,000 shares for $68 million at an average price of under $107 per share. We also paid $10 million in dividends. Since quarter end, we repurchased an additional 325,000 shares for $37 million, leaving approximately $960 million in a buyback authorization as of November 4th. We continue to be opportunistic in our share buyback activity, particularly as market conditions remain volatile. Our buybacks, in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders. We continue to evaluate accretive bolt-on acquisitions such as Bren-Tronics and Rebel, that align with our disciplined strategic and financial criteria and are focused on strengthening customer intimacy, expanding share of wallet with our leading positions in exciting end markets and advancing our transformation progress. Please turn to Slide 16. As we navigate the current environment of mixed end market demand trends, we are optimistic but cautious about the near-term outlook. Year-over-year, our Q3 outlook reflects OpEx improvement from realization of our restructuring efforts, healthy demand in data center and A&D, improvements in Motive Power and relatively flat communications revenue following a particularly strong Q2. For the third quarter of fiscal 2026, we expect net sales in the range of $920 million to $960 million, with adjusted diluted EPS of $2.71 to $2.81 per share, which includes $35 million to $40 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.64 to $1.74 per share, up 46% at the midpoint of the range. Our CapEx expectation for the full fiscal 2026 is approximately $80 million. As a reminder, we expect to realize $30 million to $35 million of net savings in fiscal year '26 related to our cost reduction initiatives. While we are pleased with the EnerSys' overall trajectory and are seeing positive momentum across several growth areas, we believe it remains prudent to keep full year quantitative guidance paused due to the dynamic macro environment and its downstream effect on customer buying patterns. That said, we reaffirm our expectation that full year adjusted operating earnings growth, excluding 45X, will outpace revenue growth. We remain confident in the earnings power of our business and our ability to navigate through evolving policy and macroeconomic conditions. With this, let's open it up for questions. Operator? Operator: [Operator Instructions] And your first question comes from the line of Sherif Elmaghrabi with BTIG. Sherif Elmaghrabi: When you talk about demand pull-ins and customers shifting their spending as they manage tariffs, can you tell us what end markets are most impacted? And what do you need to see from some of these customers that would give you more long-term visibility? Shawn O'Connell: Sherif, this is Shawn. I think the big pull-in that we had was in the communications sector. But I don't think it was relative to tariff activity. It was more that customer front-loading their year and opportunity because they were involved in a large acquisition that was going to dominate the second half of their year. So we -- the good news with that is with our centers of excellence, we were able to accommodate them and move very quickly to help them do that. And it provided a little lumpiness in our order book in that front-loading did have a result of a higher Q2. But beyond that, it's not that difficult for us to manage. I will also say in Motive Power, what we're seeing is a restoration of our book and ship business which incidentally was sort of the character of that business for decades where you have a higher percentage of book and ship in the period and a lower percentage of backlog. And as we mentioned in our prepared remarks, [ we're ] started seeing a restoration back to that, which really supports our ability to do quick ship out of our factories. We've spent a lot of time putting that in place. So we don't see a lot of volatility in terms of tariff activity with these pull-ins, as we did in the first quarter. It's more just customers reacting to their localized order demand patterns. Andrea Funk: And Sherif, if I could just add one comment on to that. Shawn is absolutely correct. But the only other comment I'd make with the tariff environment is our customers, particularly on the large capital spending. So buying motive power forklifts or buying Class 8 trucks, that's where we think there's some, I would call it, hesitation in the market. I don't know if you saw the Hyster-Yale release yesterday, they called out a 4% reduction year-on-year on lower forklift truck volume, and they specifically said from ongoing economic uncertainty dampening customers' bookings over the past several quarters. We feel that also. And fortunately, our business isn't affected as much because we have a diversity of end markets. And also we do the replacement cycle as well as the initial battery in the first truck. Sherif Elmaghrabi: Got it. And when we think about lithium driving elevated costs, is that about operating leverage as sales ramp? Or is this kind of an interim phenomenon until the new cell plant comes online? Andrea Funk: Yes. There's actually 2 aspects to that. First of all, obviously, most of the lithium cells right now come from China across the market. So that elevates the cost of lithium batteries in the U.S. in particular. And so we've got that higher cost pass-through, which affects the value proposition. And then we're still in early -- we're ramping up right now, but we're still in early innings. Our lithium battery sales, for example, in the Americas were up 45% in Motive Power. But because we're not yet at full out one, 2 shifts, we're not able to operate at the maximum efficiency that you have when you reach a certain volume level. So even independent of the sourcing of the cells, our pack assembly costs are elevated for the short time until we reach more standardized volumes. Operator: And your next question comes from the line of Brian Drab with William Blair & Company. Brian Drab: Could we first just talk about gross margin? And I think you mentioned it somewhat on the call, but the step down somewhat sequentially and like what are the main drivers of that? I think it's some of the absorption issues, Andi, that you just mentioned. But going forward, how should we think about gross margin at least directionally? And are we going to get back to the levels that we saw in the second half of '25? Andrea Funk: Brian, thanks for the question. Just to clarify, sequentially, we had a pickup in gross margin, both with and without 45X. Are you referring to a specific segment? Brian Drab: No. I'm probably looking at a model that we're just in the process of updating. But can you just comment on the outlook then, how we should think about gross margin from here? Andrea Funk: Yes. So we certainly have price/mix improvements happening across all of our lines of businesses, as you saw in this quarter as well. We've got some mix improvements. There's some dynamics segment by segment. For example, we talked about Motive Power, depending on how quickly lithium ramps, that does put some pressure on gross margin because you have higher cost pass-through as with tariffs in general. But there's no reason to not expect ongoing continuous improvement in gross margin similar to what we've been seeing. Brian Drab: Okay. Got it. Yes. No, I'm looking at updated numbers now. I'm just seeing -- I'm seeing 28.7%. Is that right? Andrea Funk: So if I look at actual reported gross margin, we're at 29.1% versus 28.4%... Brian Drab: Adjusted... Andrea Funk: Adjusted, excluding -- yes, adjusted, maybe that's right. If you exclude 45X, we're at 25% versus 24.1% in Q1. So we look at it both ways. Brian Drab: Okay. It was just much higher in the second half of fiscal '25 unless I'm really off. And I'm wondering, are we going to get -- with some of the cost cutting and all these initiatives and as the capacity -- as the utilization ramps up, these levels that you saw in the second half of '25, is my main question. Andrea Funk: Sure. Good point, Brian, because you bring up an important aspect. In Q3 of '25, it was a 33% reported gross margin. But if you recall, we had the 45X electroactive material catch-up that had prior periods in it. If you look at gross margin, excluding 45X, it was at 24.7%. So again, Q2 was at 25%. Q4, we had -- there was a lot of -- it was a great quarter. But of course, we had also mentioned there were a lot of onetime items that wouldn't repeat. That was at 26.7% and was on much higher volume as well. So the 24.7% in Q3 '25 and then we were at 25% last quarter, and 25% this quarter, I think it's a nice, steady trajectory. And the additional tariffs will certainly give a little bit of pressure with the higher cost pass-through. And there's a nice trajectory in front of us. So I think it's a bright spot. Brian Drab: Okay. And then can you just talk about data center for a second, just how much revenue are you generating in data center? What was the growth rate specifically in data center? And what products are you winning the most with there? And is this including like lead-acid batteries that are being sold in conjunction with generators? Or is it more your stand-alone UPS products? And would love an update there. Andrea Funk: Sure. I can give some of the numbers and then maybe Shawn can follow-up a little bit with the specific products. As you know, in data centers, it is mostly lead-acid and some UPS systems that we have right now with, again, work underway, with Mark leading our engineering efforts for some new product introductions, which we're excited about. That's not yet in the current quarter. Current quarter data centers year-on-year were up 29%. And in the first quarter, they were up 14%. So obviously, it really continues to be a bright spot for us with a lot of opportunities going forward. And Shawn, I don't know if you have anything to add. Shawn O'Connell: Yes. I would just say -- I would say, you have the same thing occurring in the data center environment that we have in Motive and other places and that our TPPL products are resonating very well. We have a leading lead-acid market share that is quite compelling. So most of the products, to Andi's point, are like our HX product line that is valve-regulated technology. And then TPPL is growing at a similar CAGR to what you would have seen in Motive Power and NexSys. And then to Andi's point, I just want to give a little shout out to Mark Matthews. We have a very commercially minded CTO, who's also a lithium expert. And today, the business that he comes from, A&D, we deal in 9 chemistries of lithium, very advanced technological applications. And so Mark's applying that knowledge. Also, our lithium CoE is moving so much faster than it ever has. And he's quickly -- we have some -- we will update you in future quarters on some NPI activity, that's very encouraging to expand that lead-acid market share into other products like lithium. But today, it's lead-acid. Operator: And your next question comes from the line of Chip Moore with ROTH Capital Partners. Alfred Moore: I want to ask -- on communications outside of that large customer that was front-loading, just maybe you can speak to what you're seeing in that end market in terms of less break and fix, but more network build-out and some pull-through on power electronics? It sounds like you think margins should go higher from here, but just any more color? Shawn O'Connell: Yes, Chip, I didn't want to over-index on the pull-in there. The pull-in is just a good sign of what's going on. And the reason for the pull-in, we talked in the prepared remarks about network refresh. And what I'd like to point out is with all of the rise in data and data that -- whether it's the AI or other use cases, the overall aggregate volume of data that has to move around the planet is increasing. And so when we talk about network refresh, it isn't just about updating aged equipment. It's about putting equipment in that can handle the traffic and handle the increase in data traffic. And when we do that, it's also -- that equipment tends to be more power hungry and require more advanced solutions. So I would tell you that we're seeing fairly encouraging demand signals across that marketplace. And while it may not be the 2G or 3G or 4G consistent build-out that we've seen in the past, what we see is users sort of picking -- our customers picking their spots and how they're going to participate in that next evolution in demand. So I would tell you, it's very good. It's not a -- we're seeing singles and doubles. We're not seeing network build that I would call the home run. But again, very encouraging demand signals across communications. Alfred Moore: Great. Very, very helpful color. If I could ask one more, probably more specialty A&D, but just the government shutdown is -- any impacts there or any risks as we look forward? And it doesn't sound like it, but I'd be curious to get your thoughts. Shawn O'Connell: Yes. I would tell you that we've had -- it's sort of a mixed bag. We've had good discussions with our government counterparts relative to our lithium plant and the DOE folks seem to be in the office and working. On the other hand, we saw some of the impacts of the shutdown are main defense type warehouses that aren't as active. But generally, across the board, I'll tell you that the impact has not been substantial. And we're seeing just extraordinary activity in what Andi mentioned the Bren-Tronics folks and how pleased we are with that acquisition. They're doing a great job. They're seeing quite a bit of demand. And then I'll also tell you, we have -- because of our technology position in thermal batteries -- there's only about 3 companies in the U.S. that make thermal batteries, and we have a leading position in advanced technology for thermals. And we're just seeing excellent demand signals across about 12 programs. And what those -- just so you can conceptualize what that is, those are the types of batteries that are used for all -- when you hear talk about hypersonics and advanced defense applications, it's being powered by EnerSys lithium cobalt technology. And so we're very encouraged by that. So I would tell you, overall, A&D demand for us in spite of the lumpiness and the shutdown looks very good. Operator: And your next question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: So it seems like restructuring benefits starting to hit their run rate here, some additional levers being pulled as well on productivity and just overall increased focus on thoughtful resource allocation. So as we think about how that translates to operating margins, what's sort of a fair way to think about the trend in Energy Systems and kind of overall operating margins, even on a sequential basis for what's implied for 3Q, but just sort of directionally, where should they be heading? Shawn O'Connell: Well, I'll start, and I'll give it to Andi to talk more specifically on numbers. But I would tell you that what we're seeing in the CoE realignment is that we have a target-rich environment to continue to work on our costs and gain efficiencies. There's a lot of positive momentum in Keith's business in Energy Systems. I will tell you that they have more opportunities to continue to increase their efficiency there. So we're going to stay on that path. And one of the reasons we're excited to have Keith join us is just because he has that strong operator background, and you're seeing it in the numbers. But we continue that -- we fully expect that trend to continue. And then what I'll also tell you, along the lines of the CoEs, I've been making a concerted effort to get down to Missouri once a month personally and work with the team and walk the factory floor there. And every one of our metrics is improving from OEE to decreasing scrap rates to increased productivity. So the team is doing a fantastic job. You're seeing the evidence of the focus that people aren't too spread thin. They can specialize focus on doing what matters, and that's our bread and butter. So again, we expect that those efficiencies continue. It's early days. We're very encouraged. Andi, do you want to add to that? Andrea Funk: Yes. Thanks, Shawn. As we said on the last call, we had expected that Q1 would be the low point of the year. And in fact, with our dramatic improvement in Q2, that just demonstrates that. Obviously, Q-on-Q adjusted EPS, excluding 45X, was up $0.41 or 37%. Our underlying business is really good. It's actually more compelling than we would have even said a quarter ago. We anticipate full year AOE growth, excluding 45X, will continue to outpace revenue, which obviously implies, Noah, that we'll continue to have margin expansion. I'll give you a little bit of color for each one of the segments of what we're expecting. But as a reminder, our cost reduction program, which was $80 million, $70 million of OpEx and $10 million of manufacturing will start kicking in more. We had a couple of million dollars this quarter, but it's really going to start ramping up in Q3 and Q4. Energy Systems, we're on the path to continuing to improve the margins there. Cost actions have been taken, and there's more work that's central to the strategy. We're seeing steady volume growth for data centers. The comms network refresh is continuing. And while we don't think that might happen this year, but we're confident a build-out has to happen to be able to get all of that AI data delivered into users' hands like you and I. So we think that's going to be more at a measured pace, but ongoing. And the services area is also a key focus for us and has been improving. And Motive Power, as we mentioned, market conditions, hesitant is probably the best word to describe it. But from a positive standpoint, maintenance-free conversions are going great, although lithium might be a little bit of a headwind on margins in the near term. Our soft book-to-bill is a little bit of a concern, I'll be honest. We're not sure how much of that is return to pre-COVID buying patterns versus just this hesitancy that we're talking about. So we're keeping an eye on it. But if you recall, longer term, we've got the Monterrey closure happening next year. We've got our new TPPL and lithium offerings coming online, new chargers, the BESS on the horizon. So we feel really good longer term. And if you look at some of the industry data on Motive Power, I think what you're seeing is very consistent with what we're seeing as well, a little bit of hesitation near term, but no concerns longer term for that business. Specialty, not unreasonable to expect double-digit AOE by next quarter and beyond as our A&D business continues to gain strength. The aftermarket and transportation is starting to pick up, right, from a low starting point. The lead CoE is driving cost improvements, that Shawn mentioned when he's visiting Missouri, it's going well through the automation. And then just as clarity, we don't expect Class 8 to pick back up this year yet. So, I think generally speaking, I'd say the margin improvement, bottom line you saw this quarter is not unreasonable to expect that same level on an ongoing quarterly sequential basis near term. Noah Kaye: That's perfect and comprehensive color. And I'm glad you mentioned the Class 8 aftermarket, which is something that we thought of as a great growth lever for the company and kind of watching for inflection. It sounds like you do expect some growth even this quarter. Maybe just frame up for us where that business stands now? What's sort of driving now improved traction? Any way to think about magnitude of contribution, how meaningful a growth driver this can be? Andrea Funk: Yes. No, we don't give -- we don't specifically guide down to those -- that seg markets. But I will say that we -- the aftermarket business is picking up double-digit. It's just off a slow starting point, and some of that's being offset by the OEMs. But if you look in the aggregate for Specialty, we did have some nice order books for our transportation. Q3 orders sequentially were up 26% and 20% year-on-year. Again, a lot of that is coming from the aftermarket. But you have to remember, it's coming off a low base. So it's not an area that we're -- we expect is going to make a meaningful movement to our bottom line numbers in the short-term. Manufacturing improvement is helping that as well. And the lead CoE will also help us with, I think, more success in transportation longer term. Shawn O'Connell: Yes. And I think Andi mentioned it earlier, and it's just something to just sort of, I think, repeat a bit. If you think of new trucks in Class 8, if the new trucks aren't being built at the same rate, then fleet operators are going to have to do more to keep old trucks on the road or existing fleets on the road, and that bodes well for us. So just like in the forklifts, Andi mentioned that if you're looking at material handling order rates for new trucks, it's more suppressed than we are because we have the replacement and the ability to help them keep those fleets in the warehouse and fleets on the road. So we -- that's part of our -- this renewable component of battery where we'll get a second bite or third bite at the apple with the fleet that -- when new trucks aren't being sold. So I think that's a piece of it. Noah Kaye: Okay. Perfect. If I could sneak one more in. Just outstanding cash generation this quarter, even exclusive of the tax refund, leverage back down to 1.3x. A lot of dry powder for that buyback. Just how are you thinking about repurchase activity here? And maybe kind of update us on your M&A opportunity set as well? Andrea Funk: Yes, sure. Thanks, Noah. We are really pleased with the cash flow generation. And I will say that's an area with invigorating our operating model that we are being intentionally more disciplined and focused on as a management team. So I'm very excited about the outcome of the effort that we've had. So it's a $1 billion buyback, we intend to continuing buying back stock. It's part of our ongoing basis. We generate a lot of cash, and we're committed to returning value to our shareholders. And I would say in periods of dislocation between our stock price and intrinsic value, which we believe is the case now, we're going to continue to buy back at elevated levels. We do want to keep a portion of our available capital capacity to be opportunistic with M&A activities. M&A will continue to be part of our growth strategy going forward. But we don't have anything specific to announce right now. Shawn, I don't know if you want to add any color to that? Shawn O'Connell: Yes, I would just say generally, we -- with all of the focus on operating rigor, I want to make sure we're not giving the impression that we're not going to deploy capital. We're just going to deploy it for high-quality investment opportunities. We have a few M&A opportunities in the pipeline that we think are compelling. But again, for us, it's going to be free cash flow margin and increasing free cash flow margin and then deploying that for the right ROIC, and we're going to stay opportunistic. So I think you can expect us to deploy that discipline and rigor to those opportunities. But definitely, we're going to put that cash to work. And to Andi's point, whether that's buying our own shares when they're undervalued or investing internally in our business for the right opportunities and certainly M&A. Operator: There's no further questions at this time. I will now turn the call back over to Shawn O'Connell for closing remarks. Shawn? Shawn O'Connell: Thank you, Mark. I'd like to thank everybody for joining us on the call today. We look forward to updating you again next quarter. Hope you have a great day. Operator: That concludes today's call. You may now disconnect.
Operator: Hello, and welcome to the Privia Health Third Quarter 2025 Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd like to hand the call over to Robert Borchert, SVP of Investor and Corporate Communications. Please go ahead. Robert Borchert: Thank you, Chris, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of priviahealth.com, along with today's financial press release and slide presentation. Following our prepared comments, we will open the line for questions. Please limit yourself to one question only and return to the queue if you have a follow-up so we can get to as many questions as possible. The financial results reported today are preliminary and are not final until our Form 10-Q for the third quarter and 9-month periods ended September 30, 2025, is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of November 6, 2025. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered along with the cautionary statements in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now I'd like to turn the call over to Parth Mehrotra, our CEO. Parth Mehrotra: Thank you, Robert, and good morning, everyone. Privia Health continued to execute very well across all aspects of our business through the third quarter of 2025. This momentum positions us for continued success in 2026. Today, I'll summarize our business and financial highlights, and David will discuss our financial results and updated 2025 guidance before we take questions. Privia Health's consistent results, operational execution and differentiated business model have clearly demonstrated our ability to perform in all types of market environments. We delivered very strong results across our value-based care book, including the Medicare Shared Savings Program for 2024. New provider signings and implementations remain strong across all of our markets, which provides great visibility for 2026. Implemented Provider growth of 13.1% and value-based attribution growth of 12.8% year-over-year helped support practice collections growth of 27.1% in the third quarter. Adjusted EBITDA increased 61.6% with EBITDA margin as a percentage of care margin expanding 720 basis points to reach 30.5%. This outstanding performance gives us confidence to raise our 2025 outlook above the high end of our previous ranges. In September, Privia Health agreed to acquire an accountable care organization business from Evolent Health for $100 million in cash, plus an earn-out of up to $13 million based on 2025 MSSP performance. This business will add over 120,000 value-based care attributed lives across existing and new states in MSSP as well as various commercial and Medicare Advantage arrangements. The transaction offers a compelling synergy for Privia as the ACO participating providers will have an opportunity to join Privia's medical groups for a full technology and service platform. The transaction is expected to close by year-end 2025, pending regulatory approvals, and we expect it to positively contribute to adjusted EBITDA in 2026. Privia's national footprint now includes 5,250 Implemented Providers caring for over 5.6 million patients in more than 1,340 care center locations operating in 15 states and D.C. Our balanced and diversified value-based care organization now serves over 1.4 million patients through more than 100 commercial and government programs. Our total attributed lives increased close to 13% from a year ago. This was broadly driven by new provider growth and our entry into Arizona. Commercial attributed lives increased more than 12% from last year to reach 864,000. Lives attributed to CMS Medicare programs were up 12%. Medicare Advantage and Medicaid attribution increased more than 12% and 18%, respectively, from a year ago. This diversified value-based care book gives us the confidence to build scale and profitability without depending on any one particular contract. With the ACO business acquisition, Privia's total attributed lives will expand to more than 1.5 million. We remain highly focused on generating positive contribution margin in our value-based contracts as we pursue attribution growth, manage risk and implement clinical and operational enhancements in our medical groups. Our consistent performance over the past few years is a testament of our approach to value-based care and the strength of our actuarial underwriting, physician-led governance structure and clinical operations. Our physicians and providers continue to strive to reduce costs, improve patient well-being and deliver value to our commercial and government payer partners. Now I'll ask David to review our recent financial results, balance sheet strength and our updated 2025 guidance in more detail. David Mountcastle: Thank you, Parth. We continue to see very strong performance across our value-based care book, especially in the Medicare Shared Savings Program. Across our 9 ACOs and MSSP in 2024, Privia managed over $2.5 billion in medical spend. Our aggregate savings rate of 9.4% was up from 8.2% in 2023. Total shared savings of $234.1 million increased 32.6% from a year earlier. This demonstrates our continued success in increasing savings and profitability while adding value-based and downside risk lives and contracts. After CMS' share, Privia's gross shared savings was $160.1 million, a 36% increase over 2023. This is the amount recognized in practice collections and GAAP revenue. In the Mid-Atlantic region, we operate one of the country's largest ACOs caring for about 60,000 patients. We delivered savings of 11%, which for the fifth year in a row was the highest savings rate of all ACOs with greater than 40,000 attributed lives. Privia Health's strong operational execution and growth continued through the third quarter. Implemented providers grew 125 sequentially from Q2 to reach 5,250 at September 30, an increase of 13.1% year-over-year. Implemented provider growth, along with strong value-based performance and solid ambulatory utilization trends, led to practice collections increasing 27.1% from Q3 a year ago to reach $940.4 million. Adjusted EBITDA, which is reconciled to GAAP net income in the appendix, increased 61.6% over the third quarter last year to reach $38.2 million, representing 30.5% of care margin. This is a 720 basis point margin improvement year-over-year as we posted better-than-expected results across our value-based care book, which helped generate significant operating leverage across both cost of platform and G&A. For the first 9 months of 2025, practice collections increased 19.6% to $2.6 billion. Care margin was up 16.7% and adjusted EBITDA grew 43.5% to reach $94.1 million. Our business continues to generate very strong free cash flow. Pro forma cash at the end of the third quarter was $409.9 million with no debt. This assumes the deployment of $100 million by year-end for the ACO business acquisition and the net cash received from CMS for the 2024 MSSP performance year. Year-to-date pro forma free cash flow, excluding cash deployed for business development transactions, was $104.4 million. Assuming no further deployment of capital for business development, we expect to end the year with at least $410 million in cash. This continues to position us with significant financial flexibility to take advantage of opportunities in the current market environment. Our outstanding year-to-date performance positioned us to once again raise our 2025 outlook. Using the midpoints of our new 2025 guidance, implemented providers are expected to increase 11.2% year-over-year to reach 5,325 by year-end. Attributed lives growth is expected to be approximately 12.5%. We expect practice collections to grow 17.1% and care margin 13.2% at their respective midpoints. We are also guiding to adjusted EBITDA growth of 32% at the midpoint and expect more than 80% of full year 2025 adjusted EBITDA to convert to free cash flow. Privia's consistent long-term growth and profitability across economic, health care and regulatory cycles validates the strength of our differentiated business and economic model and consistent execution by our provider partners and our employees year after year. Our momentum and diversified book of business has positioned us well to drive organic provider growth and increase operating leverage for long-term adjusted EBITDA and free cash flow growth as we build our national footprint. We look forward to continuing to serve our physicians, providers and health system partners and their patients on our long-term journey together. Operator, we are now ready to take questions. Operator: [Operator Instructions] And your first question comes from the line of Joshua Raskin with Nephron Research. Marco Criscuolo: This is actually Marco on for Josh. Actually, I had one on your MSSP performance. So given the very strong results for that program in 2024, I was just wondering how you plan to guide to that in the future. Does the outperformance in 2024 now just get factored into the baseline for future planning? Or are there any reasons why we should consider that year to be above the go-forward run rate? Parth Mehrotra: Yes, I appreciate the question, Marc. So I think we're going to be pretty consistent with how we've done it over the past 7, 8 years. We take into account all the data we received from CMS, look at our attribution, see any changes to the program structure, fee rates, et cetera, just factor all that in. We look at the results and if we perform well relative to benchmarks, all that just does get factored into the next year. So every year when we report, we are updating for prior year and then also updating current estimates for the current year. So all that's factored into the guidance. So you can see with our outperformance, that includes both factoring in for '24 actual results as well as updated view on '25. Operator: Your next question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Congrats on the quarter and the good MSSP results. Could you talk to us about the one, the sort of go forward for the 4Q? I know you obviously had the outsized gains in the third quarter, but sort of how are you seeing the core business performing as we go into the fourth quarter? And on prior calls, you talked about over $130 million of EBITDA for 2026. I don't know if you could comment on sort of where you're seeing that number now. Parth Mehrotra: Yes. Thanks, Elizabeth. Appreciate it. So look, I think we continue to see very strong trends. There's no reason to believe the momentum changes in Q4. We don't give quarterly guidance. We're just focused on annual results, given when value-based care results flow in into the year. There's a very specific reason we just avoid the quarterly guidance or implied outlook and so on and so forth. I think we're being our usual prudence in terms of implied guidance for Q4. So I think we'll just see how the year goes. We just didn't want to get ahead of ourselves given we've had a pretty outstanding year, year-to-date Q3. And then I think, look, I mean, the updated guidance, we are sitting close to $120 million for 2024. I think we're going to keep targeting 20% growth off of that where we closed this year into next year. We'll just see how we close the year, hopefully strong and then close the Evolent transaction like we noted, factor all that in, see updated results on the value-based book across all categories as we enter later this year, early next year, factor all that in and give guidance in February like we do. But there's no reason to believe. I mean, we've had one of our best years, and I think the momentum should help us take that forward like we noted in our prepared remarks, that positions us exceptionally well for a pretty strong '26. Operator: Your next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: Okay. When I look at revenues or practice collections per provider, it's just up a ton this quarter. And I know it's just a metric, but can you just talk about the factors influencing the strong fee-for-service growth? I know you don't give same-store volumes, but just the revenues are growing so much faster than the implemented provider growth. Parth Mehrotra: Yes. Thanks for the question, Whit. So I think it was pretty broad-based. We saw that across the fee-for-service book, utilization trends and then also value-based book where if the actual results come in ahead of accruals, all that gets factored in the practice collections. We added a couple of markets. Arizona is now fully factored in. When we give original guidance, we don't include BD like we noted. And once we close the transaction, all that gets factored in. Indiana has got implemented, that got ramped up. So I think you're seeing the momentum across the business, same-store new provider growth, new markets, good value-based book, and it just speaks to the momentum in the business. When all of these things hit, you get results like this and it flows down EBITDA free cash. So I think we're really pleased as to how it's played out. Operator: Your next question comes from the line of Matt Gillmor with KeyBanc. Matthew Gillmor: Parth, I wanted to ask about the synergy opportunities with the Evolent Health ACO. How are you thinking about the pathway to enhancing the savings rate from Evolent's ACO up to previous performance? And then also, can you provide a couple of comments about the physician base, which I think is relatively large, around 1,000 physicians. Just give us a sense for what those practices look like and the appetite to join the Privia Medical Group. Parth Mehrotra: Yes. Thanks for the question, Matt, and kudos to calling the deal out like a year ago when we hadn't even started conversations. Look, I think you noted all of them. I mean our thesis is this is a core part of our business. We've done MSSP for 10 years. We think we can offer a lot more to these provider groups. Obviously, there's a synergy opportunity in our existing states where we have medical groups, we have a full infrastructure. We'll have a pretty tangible ROI for many of the practices that can join us. And so there's that cross-sell opportunity. I don't think it plays out just in the next quarter or 2. I think this thing takes a few years to play out as practices -- some of the larger practices make that fundamental decision to join our medical groups. It's an entirely different business value proposition. And then I think it gives us good opportunity to -- we're now going to enter 6 new states with a lighter model with just in the ACO, but then there's an opportunity for us to find anchor providers and others that we can actually establish our medical group and then implement our full suite and enter these states. And so I think we're going to focus on both of those. And then obviously, improving the performance of the ACO at hand is kind of job #1. So they are at a certain level of shared savings rate with CMS. You've seen our performance across our other ACOs as we've consistently improved that. We have 4 or 5 ACOs that are now close to double digit or higher than double-digit savings rate. So I don't think, again, that plays out in the near term. But over time, our hope is we can improve performance. So there are multiple levers to get synergies out of the business. We haven't closed the transaction yet. So we'll just go through that. And hopefully, that gives us good tailwinds over the next 2, 3 years as we play out that thesis. Operator: Your next question comes from the line of Andrew Mok with Barclays. Thomas Walsh: This is Thomas Walsh on for Andrew. Hoping you could discuss some of the moving pieces in the capitated business this quarter, including the step-up in revenue, prior year claims development and any change in membership? Parth Mehrotra: Yes. Thanks, Thomas. So I think we have a pretty small capitated book, about 20,000 to 22,000 lives. So I think that's just to note that. And then this was a small book that we retained on a capitated basis when we kind of restructured these contracts a couple of years ago, given our view on the broader MA environment. And our hope was that we would perform well in the book that we are keeping. So I think you're seeing that play out. I think it's effectively the factors that you would expect on the revenue side, given attribution, risk adjustment and then obviously, performance relative to that on the cost side with all our programs just performing a little bit better than what we expected, which was the hope. So you're seeing that play out. I don't think it fundamentally changes our view on capitation and how that plays out going forward. We continue to believe having shared risk model with payers, providers, Privia, like we've said on our previous calls. We just think that's the most optimal structure. All the pressures in MA continue to persist as most of the analysts on the call have written pretty extensively about V28 and star scores, utilization trends, none of that is changing fundamentally. So I think we're going to be pretty cautious on capitated MA, but we're really pleased with the book we have, and we'll continue to optimize it for profitability and continue to give that value to both our payer partners and our providers. David Mountcastle: Yes. And just to add to that, for the quarter, there was a little bit of timing of data and a little bit of retroactivity back to 1/1. So I would say we're looking at probably Q3 is the high mark for the year and wouldn't expect that exact trend to continue into Q4. Operator: Your next question comes from the line of Matthew Shea with Needham & Company. Matthew Shea: Congrats on the nice quarter here. I wanted to ask about kind of the go-forward growth algorithm. Historically, you've stuck to a cadence of 1 to 2 markets per year. You demonstrated that this year. Evolent obviously adds more than 1 to 2 markets immediately. So curious, how does the acquisition change the cadence of new markets? Is it fair to expect you will pause for a bit while you process through integrating those assets? Or just how does the deal change the growth algorithm? And then you also commented on the flexibility, the cash position gives you at this point. So just curious what your appetite for incremental M&A is? Parth Mehrotra: Yes. I appreciate the question, Matt. So I don't think anything changes fundamentally. We continue to have a pretty good business development pipeline. Evolent gives us access to 6 new states, but it's not with the full model as we just were talking about. So I think -- when we talk about a new state, it's implementing the full model with our medical groups, risk entities, full services platform. So I think that will be the cadence. I think we have a pretty strong cash balance, $400-plus million even at the end of the year despite spending $200 million this year. I think we're going to continue to take advantage of all the dislocation in the market. A lot of companies that got started public, private have struggled for different reasons. I don't think new money is chasing some of these models, which is great for us. A lot of TAM opens up as some of these models struggle, physicians come out. So I think we're going to continue to be pretty aggressive with BD and try to take advantage of this opportunity and window and keep growing our TAM, keep growing our business and compounding it. So again, but we're going to be disciplined on price, on the types of deal we do as we have been in the past. So I think we'll just continue with the cadence all across. So there's no fundamental change in how we think about our growth algorithm. Operator: Your next question comes from the line of Jailendra Singh with Truist Securities. Jailendra Singh: Congrats on a strong quarter. I want to stay on the topic of MSSP, clearly, strong results there. But the landscape in general, I mean, we have come across multiple companies who were previously only focused on the ACO REACH program and now exploring ways to shift MSSP given all the uncertainties in the ACO REACH program. Is that -- how does that change the landscape for you guys? I mean, on the same topic of M&A, do you think that could be an opportunity for you to look at some of these entities who might have done okay on ACO REACH but now are uncertain about the future? Just give us a flavor about the landscape this might be having some impact on. Parth Mehrotra: Yes. Thanks, Jailendra. I think it ties to the previous question. I think there's a lot of dislocation the barriers to entry to start a REACH or an MSSP ACO were pretty low. But then executing on it and scaling it and making it profitable is where I think all the secret sauce is. I mean there's no IP in health care services. So I think as new money does not flow in and people are not willing to put in good money behind bad money and some of these models struggle to get profitable or scale, I think all of those give us good opportunities. I mean, at the end of the day, if you look at Slide 12, like we are chasing 2 units that drive this business, providers, the patients they cover our lives and then how many of those are in some value-based arrangements. So as I think some of these entities struggle, the physicians come out or we have an opportunity to buy some of these entities at a reasonable price, I think we're going to look at all of those. The transaction we did with Evolent is an example of that. I mean they didn't do REACH, but I mean, there was a pretty big value-based care book available. And I think the transaction was good for both parties. We got it at a reasonable price. They had something that was noncore to them. So I think we're going to look for those kind of opportunities. But I think, like we said, we're going to be pretty aggressive across the Board in looking for opportunities to keep growing. Operator: The next question comes from the line of Jeff Garro with Stephens. Jeffrey Garro: I want to ask how we should be thinking about the evolution of your relationships with payers as we head into the next calendar year and you might be finalizing any of the negotiations or contractual arrangements with those counterparties towards year-end. Has your execution on value-based care from both the cost and quality perspective changed those conversations dramatically? Or should we continue to think about it as kind of incremental gains towards value-based care as you show the high level of service that your providers offer? Parth Mehrotra: Yes, I appreciate the question, Jeff. I think it's a great question. Given the breadth of our relationship across commercial, MA, Medicaid, our -- these are ongoing discussions. It's not like we have contracting discussions at one point of the year because like we said, we have over 100 VBC contracts, they're close to 200 commercial contracts, including commercial value-based. So the discussions are really broad-based. And these happen at the state level, just given how the industry works. But then as we really perform well in one state, we have case studies, we have a history of performance. The payers understand what we've done for them in one state. And so as we enter a new state or we have some of the younger states, I think those conversations help us. So there's a local level discussion. There's a national level discussion. We include multiple aspects to contracting. So when we go and negotiate a fee-for-service contract, it includes a value-based element to it, even on the commercial book, the MA book, the Medicaid book. So I think it's a differentiated value proposition that very few companies in the space have at the scale and breadth that we do. And so I think we continue to work with the payers. They are seeing strong results. We offer them a very low-cost provider network, a delivery network, and that's the right side of history in terms of where -- what you have to do to reduce cost, improve outcomes, improve patient well-being, so on and so forth. So I think it's great to see that play out over 4, 5, 6, 7 years. So you have empirical tangible results to show. And I think that continues to differentiate us. And I think it's not only with the payers, it's with provider groups, it's with the government. So I think all of that bodes pretty well for us as we continue the momentum. Operator: Your next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: On the MA CAP performance, I think I heard you say there was some favorable retro pickup. I guess, could you maybe help us frame how much of that was sort of core performance versus onetime in nature? And then just on the current number of MA lives, 20,000 to 22,000, if you wanted to, is there an opportunity to increase the number of those lives in the current contracts that you have? Or would you sort of have to move outside of those and sign additional contracts to grow lives? Parth Mehrotra: Yes, I appreciate the question. So I think it was a bit of both on the first part. It's also relative to our accruals, what the actual results are. I mean we've been very, very prudent and thoughtful on how we accrue just given the environment, given everything you heard from the payers. So we were fairly prudent in our assumptions. But then at the same time, we just don't take a step back on actually performing in those contracts and then we hope for the best. And I think what you saw was the team did a pretty good job. Now it's a pretty small book. It's like we said earlier, it's 20,000 to 22,000 lives, 1 or 2 states, a couple of payers. So we really focused on what we needed to do to reduce cost, improve outcomes and then have the results we did. So I think it was a bit of both in terms of great performance in the year. Now like we said, I don't think we're going to continue to assume that some of the headwinds in MA just go away. So I think we'll continue to be prudent in our accruals going forward. And if results are better, then you'll see the outperformance again, but I think that's the tactic we're just going to keep. And then I think in terms of increasing attribution, look, I think it's going to be both things. I mean we're looking to increase same-store attribution growth in existing states with existing contracts with existing doctors. We add new providers in the same state, so -- and in the same geography. So if we have an MA contract in a few ZIP codes, we add new providers there, that attribution adds to it. And then we're going to obviously try to enter into new MA contracts in existing and new states as well. So I think you'll see a combination of all of that. Our approach is to continue to increase lives across the value-based book, MA, MSSP, Medicaid, commercial and because that's the chassis for the business and the economic model. So I think you're going to continue to see us just increase lives as fast as we can. Operator: Next question comes from the line of A.J. Rice with UBS. Albert Rice: You have a unique window on a bunch of different payer classes, coverage categories. And I wonder, there seems to still be quite a bit of disruption in underlying utilization trends. Is there anything you're seeing to call out there? There's also been speculation that as people base coverage changes going into the new year, there might be some acceleration on utilization during the fourth quarter. Are you seeing any of that in how people are approaching your primary care operations and so forth? Parth Mehrotra: Yes. Thanks for the question, A.J. So as we've done previously, I think it's important to distinguish between ambulatory utilization, physician practice offices in the communities versus in the hospitals and post-acute and so forth. And so I think we continue to see elevated trends across the Board. I don't think there's any reason to believe that those trends reduce. We'll just see how Q4 plays out and whether all the changes in some of the programs and whether attribution might change with Medicaid or exchange population. It's not really big for us. But I think that impacts more of the post-acute and acute side of things versus ambulatory. But we'll see how that plays out. But I think our underlying assumption is going to be pretty elevated. And so we plan for that in the value-based book. It bodes well for us on the fee-for-service side. So I think that's our view. Operator: Your next question comes from the line of Constantine Davides with Citizens. Constantine Davides: Maybe just Parth changing gears a little bit here, but you've more than doubled the number of providers on the platform in the past 5 years. Can you maybe talk about Privia's ancillary capabilities and how they've evolved over this time frame as you've added new markets and particularly new specialties and increased density in more mature markets. So just again, how your ability to continue to scale the platform is maybe driving your thinking about some of the ancillary services you provide to your groups? Parth Mehrotra: Yes, I appreciate the question, Constantine. So it's a really good point. I think, look, our strategy is enter a state, get density of providers and then run the entire playbook for the whole line of business, all patients, all payers, all lines. And as we develop that density, there's a lot of opportunity for us to get into things like labs, pharmacy benefits, ASCs potentially, clinical research, anything that goes through our practices because we are operating integrated medical groups, risk entities, full tech and services platform. We've got all the data. The medical groups make the decisions collectively with the Privia team. And so there's a lot of saving opportunities that we can offer to the payers, incremental revenue opportunities we can offer to our medical groups and our provider practices. And so you'll see us pursue all that. Now it varies by state depending on density. So it's not going to be homogenous. But across all of those lines, we look to monetize the platform and scale it. So -- and I think that leads to the great economic model where incremental revenue just flows down the P&L as we monetize the network. And I think that's one of the underappreciated parts of our business as to how we can -- how well we can do that. So you're seeing that play out in the thesis. Again, like Slide 12 speaks for itself. If you look at the provider growth, collections growth, care margin, EBITDA, free cash flow, and that's a fully expensed P&L for all sales, marketing, BD, software development, everything. And we are approaching close to target margins. Overall, as a company, we're at 26% EBITDA to care margin. When we went public 5 years ago, we said we're going to target 30% to 35%. I mean, we're pretty much there over the next few years. So I think you're seeing the whole thesis play out as a result. Operator: Your next question comes from the line of Jessica Tassan with Piper Sandler. Derek Gross: This is Derek Gross on for Jess. I had one on Evolent Care Partners. We believe that they had a $220 million a year partial capitation contract with Blue Cross Blue Shield of North Carolina. Do they have any other contracts like this? And did the acquisition include management of this contract or just the MSSP business? Parth Mehrotra: Yes, I appreciate the question. So like as we noted in our press release, when we did the deal, we bought the entire business, all contracts that included commercial and MA as well in addition to MSSP. And so yes, we assume that contract. We're not going to get into details of any specific contract and lives in it or revenue dollars and so forth, like we don't do it for the rest of our book. We'll include them as part of our whole entire platform and how we report it on Slide 6. But yes, we've inherited those contracts, and it's part of our core strategy to just add to lives in each of the circles that you have on Slide 6, and that will add to the MA lives there, and we'll continue to hope to perform as expected or better over time. Operator: Your next question comes from the line of Daniel Grosslight with Citi. Daniel Grosslight: Congrats on another strong one here. If I look at the implied guide for 4Q on a year-over-year basis, it seems like you're projecting limited profitability growth. It's about low single digits and some margin compression. Parth, I know you mentioned that just given where you are in the year, you do continue to guide conservative. But I'm just curious if there's any investments that you're making in 4Q that may be weighing on margin. And I also just wanted to confirm if IMS contributed anything to profitability this quarter? Or are you still expecting that to start contributing in 4Q? Parth Mehrotra: Yes, I appreciate the questions. Yes. So there's no investments. There's nothing -- there's no anomaly. We're just being prudent. We don't want to get ahead of ourselves just given the strong results. If all that momentum continues, hopefully, we'll close the year pretty strong. And so IMS -- and to your second question, IMS will contribute in Q4 and going forward once they were implemented in September. So I think that hasn't contributed. So I think -- look, we expect Q4 to be strong. We'll see how it plays out. Hopefully, it's better than expected. We just had the magnitude of outperformance in the first 3 months -- first 3 quarters that -- like we said earlier, like we don't give implied guidance. We don't guide by quarter. I think we're just looking at the full year. On each of our operating metrics, we are well above the high end. So if it continues at the trend that we expect it to, hopefully, you'll see all that outperformance continue. Operator: Your next question comes from the line of Jack Slevin with Jefferies. Jack Slevin: Congrats on the quarter. Most of my questions have been asked already. So maybe just a tidying up one on the numbers. In previous years, when you've had significant outperformance or a strong lead in? I know you've had sort of higher variable comp or bonuses that have come through in either the fourth quarter or on a cash basis hitting early in the following year. Is there anything we should be looking out for on that front as we look at 4Q and 1Q coming up? Parth Mehrotra: Yes, I appreciate it, Jack. So yes, that's all factored in the guidance. So as we look at our scorecard that you can see in the proxy every year based on the metrics, we accrue for that level of outperformance and bonus accruals and so forth. So that's all in the accrued bonus line on the balance sheet. That's reflected in the P&L. So that's all fully expensed already. And despite that, you're seeing the outperformance. So yes, that will lead to some increased cash outflow in Q1. So you'll expect that. But I mean, that's a result of great business. So the interests are pretty aligned with the shareholders here in terms of how much free cash and EBITDA we generate. Operator: Your next question comes from the line of David Larsen with BTIG. Jenny Shen: This is Jenny Shen on for David. Congrats on a great quarter. I just wanted to ask about the New Big Beautiful Bill Law. Any thoughts on impacts to Privia, any impact on your Medicaid book, even though it's small? Parth Mehrotra: Yes. Thanks for the question, Jenny. So as you noted, I mean, the 2 main areas there were Medicaid and the exchange populations, and both of those are pretty small for us. We don't take any downside risk on Medicaid. It's a pretty small percentage of collections for our practices. We'll see how the patient mix changes, but we don't expect any big changes, any fundamental issues. Practices run at capacity, lives move. I don't think people give up their primary care. It's pretty essential to their well-being and getting back to work and things like that or kids going to school with pediatricians or women getting their care with our OB. So I don't think all of that changes much for us. We'll just see how the shifts happen, but it's happened in the past. But -- so we don't expect any meaningful impact to us given just our business model and mix. Operator: Your next question comes from the line of Ryan Daniels with William Blair. Ryan Daniels: Congrats on the strong year-to-date performance. Parth, I wanted to go back to some of your comments on ancillary services. And I'm curious in particular, I know a few years ago, you signed a partnership with surgery center chain. We've got some potential changes to the inpatient-only list. I'm curious if that, in particular, would be a bigger growth opportunity in kind of managing referrals and point of care for the organization going forward. Parth Mehrotra: Yes, I appreciate the question, Ryan. I think absolutely, as we build out, I mean, we're consciously focused to building a multi-specialty medical group for that reason. Downstream, 80% of the costs are downstream from the PCP, give or take, as you know. So I think as we continue to build out density in different states, that's a core focus for us. I think that comes with opportunities for outpatient surgeries, ASCs, managing more of the total cost of care and partnering with these physicians. So I think as we continue to build out our network in each state, get density, I think you'll expect us to continue to expand in that area. Again, I don't think we're going to be very surgical heavy just given the nature of our business. But I do think folks being taken chronically ill patients, whether it's cardiology, pulmonology, CKD, things like that, I think we're going to keep looking at it selectively. Ortho is another big area. So I do think you'll expect us to continue to do it. It's -- again, it's not going to be homogenous by state. But as we build out the medical groups, that's a big lever to control cost of total care. Operator: And your last question comes from the line of Craig Jones, Bank of America. Unknown Analyst: This is [ Joaquin ] on for Craig. So you have astutely shifted down risk in MA during the first 2 years of V28. What are the odds you think we could see some kind of V29 in the next few years? And what would make you more comfortable taking more risk in MA? Parth Mehrotra: Yes, I appreciate the question, [ Joaquin ]. I mean it's pretty much similar to what we've said earlier. I think we just have to see how it plays out. It's just tough to predict when V29 comes, it doesn't come, what are the specifics on it. We've continued to believe that a shared risk model between the payers, the providers, somebody like a Privia in the middle is the right approach. You have to be thoughtful. These are long-term contracts. The patients don't change their PCPs. You're trying to manage their total cost as they are growing older, they're growing sicker. I don't think any one entity can perform well at the expense of the other on a long-term sustainable basis. So I think you can get anomalies in the middle when somebody is trying to grow their business with some benefit design changes on the payer side or provider enablement entities throwing a lot of money to just get physicians in some risk contracts. And you then see blowups happen like we did in the last 2, 3 years. So we just think the best long-term sustainable model is alignment of interest and everybody having share in the game. And that's what we're going to focus on. I think everybody got too infatuated with this how capitation work and does it have to be 100% downstream at the provider entity level versus the payer. And we just believe in a different approach, and I think that's just more sustainable. So the job to be done is not going to change. You're going to have an aging population that is growing sicker, older and ultimately dying. I mean that's the truism of humanity, unfortunately. So I think if that's the problem at hand, you need doctors in the community to do the work on behalf of the payers. Like the payers, unless they have a care delivery arm, they're not taking care of people. So I just think you need interest aligned and you need to have contracts that reflect that. Physicians need to be paid to get that job done, and that's the lowest cost setting first point of contact. So I think for all those reasons, no matter what the changes are, once we get some equilibrium over the last 2, 3 years, excess has won down, benefit design is getting more normalized. And so we'll just continue to work with our payers to have a sustainable contract to do our job and get paid for it. Operator: And there are no further questions. Please go ahead, sir. Parth Mehrotra: Thank you for listening to our call today. We appreciate your continued interest and look forward to speaking with you again in the near future. Operator: This concludes today's conference call. Thank you all for joining, and you may now disconnect.
Unknown Executive: [Interpreted] Good morning, everyone, and welcome to Iochpe-Maxion Third Quarter 2025 Earnings Release Video Conference. I'm Rodrigo Caraca, Senior Investor Relations Manager, and I'll be conducting today's video conference. Present in the video conference today and available for the Q&A session are Mr. Pieter Klinkers, CEO; and Mr. Renato Salum, CFO. We inform you that this video conference is being recorded and will be made available in the company's Investor Relations site along with the respective presentation. We highlight that Mr. Pieter will conduct the presentation in English. [Operator Instructions] Before moving on, we would like to clarify that statements made during this video conference related to the business perspectives for the company, projections and operating goals and financial goals constitute beliefs and assumptions from Iochpe-Maxion's management based on information currently available to the company. Future considerations are not performance guarantees because they involve risks, uncertainties and assumptions regarding events in the future that may or may not occur. I will now give the floor to Mr. Pieter Klinkers, CEO. Please proceed, sir. Pieter Klinkers: Hello, everybody. Thank you for listening in to our third quarter 2025 earnings call. Before we start to share some slides and talk about some numbers as we do usually, I want to come back to something I said earlier this year during our Investor Day in Sao Paulo when I referred to a quote from Ayrton Senna, I think all of us know him, who said -- you may remember, I said this. Who said when it's sunny weather, you cannot overtake 15 cars. But when it rains, you can. And so why am I referring to that quote again is because I think when you look at our third quarter results, it is reflecting some rainy weather in some regions, particularly in North America. And so we cannot change the weather, of course, but we can try to adapt as fast as possible, maybe faster than others. And we can try to mitigate that rainy weather in one particular area with some more sunny weather, and some more performance in other regions. And I think that's what you will see back when you look at our numbers and when we talk through the slides. So let's keep that in mind. That we can go have a look at some of those numbers. If you look at the next slide, you see we used to look at global production ex China. And so you see a little bit of contraction in LV, light vehicle, 0.3% this year and next year, some more light contraction, maybe stability, but it's not great. There's not great growth at this moment. If we look on the truck side, on the right side, I think here, it doesn't look too bad. it's plus 2%, including China, minus 5%, excluding China. But if you look -- and we will talk about it more during this call, if we look particularly at North America, which is a very important market for us, especially when we talk about components, not so much when we talk about wheels. But for components, it's very important that segment and especially the heavy truck segment is very important. You got Class 4, 5, 6, 7, 8, and most of our business when we talk components in North America is actually in Class 7 and by far, the most is in Class 8. And so the higher up the classes, the more contraction we've been seeing already in quarter 2, but quarter 3 was particularly down in that area -- in that segment. And we will talk about it a little bit more during the call. If we look on what that does to our net revenue, this market situation, you can see our revenue in the third quarter amounted up to BRL 3.8 billion, which is slightly down, 4.5% down to the same period in last year 2024. And so there is another slide where I will talk a little bit more in detail about it. But I can guarantee you that if we would have had only half the drop of what we have seen in North America truck, that number would have been up instead of down. And so this has been impacting our overall net revenue meaningfully. Our gross profit, I would say, given that situation in North America truck, very healthy, remained at about 12% -- 12.1% in the third quarter of '25, and we're actually pretty happy with that number. Our EBITDA amounted to BRL 390 million in the third quarter, and that represents a margin of 10.3%, excluding restructuring costs, which amount to approximately BRL 32 million. Our net income was BRL 35 million. And with all of that, our leverage ended up at 2.55x, a little bit higher than we wanted, but still a little bit lower than in the same period 1 year ago. We will also talk a little bit more about growth, particularly in South America. There is a dedicated slide about that in the remainder of the presentation. If we look in more detail on our revenue, you can see that in the third quarter 2025, we were pretty much equal to the last year same period. And if you look at the 9 months 2025, we actually show some growth. But if you exclude FX, these numbers are a little bit down compared to last year same period. And so as I said before, this North American truck market situation has impacted both the 9 months, but more so the third quarter of 2025. I can also tell you that our -- when our impact was the highest in the third quarter of 2025, also our mitigation was the highest in the third quarter '25. That's one of the reasons why the numbers are pretty equal between the 2 quarters last year and this year. And so that means the more impact we have been having, the more we have been able to offset that in other segments, other products, other regions in the world, which is, I think, a good thing to have happening in the company. If we look on our revenue by product, as we already saw happening in the second quarter, you can see, of course, with that North America truck situation impacting components -- our components business very meaningfully. You can see that the percentage of wheels in the company has been growing. And so again, that's because of components going down, but it's also because wheels going up overall in the world. And so right now, it's about an 80%-20% split between wheels and components. If you go to the next slide, you see that also in our revenue by customer. Clearly, see TRATON. TRATON is a global customer for us for wheels and for components, but we have a big business in components with TRATON. That's their international brand in the U.S. And you see that revenue going down year-over-year same quarter. Same for Daimler. Of course, again, this is a global business, and we do a lot of wheels with them around the world. We do business with them for components in South America, but just the impact of North America truck makes that bar go down in 2025 meaningfully versus 2024. The good thing is, again, that some of the other bars are going up. And so if you look at customers like Ford or you look at Toyota, you look at Volkswagen, we are actually gaining quarter-over-quarter. And so that means in total, the impact of the North American truck market is there, but it's not as big as we -- it would be if we would not have been winning in other segments with other customers in other regions. If we look more in detail in other regions, I think South America, clearly, I would say we are continuing. You've been seeing that already in the first and the second quarter, and we're doing it again in the third quarter. We are outperforming the market. And the market quarter-over-quarter was pretty flat from a light vehicle point of view, and it was pretty down, even though it's only 4,000 trucks, but pretty much down on the commercial vehicle side quarter-over-quarter, year-over-year. And contrary to that, I think Maxion clearly up in light vehicles in a flat market and not as much down at all in the commercial vehicle sector. So overall, our revenue is up in the first 9 months of the year, meaningfully 6%, 7%. And even in that third quarter, it's still up by 2.6% versus the same quarter last year. On the other hand, if we look at North America, we see this is where the big drop is and not so much in light vehicles, but specifically in commercial vehicles. And you look at some of the market numbers and they say it's minus 5% or maybe when you look at North America, it's minus 25%. But in the segment where we operate, Class 7, mostly Class 8, we've recently seen some public announcements from big customers. I talked about TRATON. They were announcing the sales were down in the third quarter at about 64%. Daimler Truck said their sales were down close to 40%. We think the production may be a little bit more down than what the sales were down because already in the second quarter, they were down, so they've been slowing down production even more than their sales has been slowing down in order to build down some inventory. So overall, our numbers reflect very much what is happening in the market of heavy trucks in North America. And so here is where we see the big drop in our revenue quarter-over-quarter and with that third quarter also for the 9 months in 2025. If we look -- if we go to EMEA, this used to be Europe, now we call it EMEA. The only difference is the South African plant, which is, I believe, our smallest light vehicle aluminum plant, but of course, the comparison between the 2 quarters and the 9 months compared to last year, that's apples-to-apples. It's the same perimeter. But I would say I'm happy to say that we have a strong performance, stronger than the market performance, and that's true for both light vehicles and in commercial vehicles. And it's true not only for revenue, but I can tell you it's also true when you look at units. And so that does support our overall global results. Now the units is clear. We're gaining share because the market in light vehicles is pretty flat. Our numbers are up. Our units are up in light vehicles. And in commercial vehicles, okay, again, it's only 10,000 trucks more, but the market has been coming back a little bit in the third quarter of '25. Let's hope that continues into the fourth quarter and into next year. But at the same time that the market came back, also our market share keeps on growing. And so besides the units being up, we can also say that the recovery of higher raw material costs and other inflationary costs and a positive mix. And with that, I mean, we're supplying, for instance, on the light vehicle aluminum segment, we are supplying more and more the premium segment. That all contributes to a positive story, I would say, in Europe, EMEA. We go to the next slide. Asia, our revenue a little bit down in the third quarter 2025, but I can assure you that we will be growing in the Asian market, which, as you know, for us is mainly not only, but it's mainly the Indian market. We're very focused on India with our operations and with our sales. And so I wholeheartedly believe that we will be growing in this growing market, and you'll see that back in 2026. With that, what does that all do to our profit and our profit margin? As I said before, a 12.1% gross profit, actually, we think that's a very appropriate number given the circumstances that we talked about -- when we talked about the market. And so BRL 460 million in the third quarter or BRL 1.44 billion in the 9 months from a gross profit point of view, we think those are very -- those are actually very strong numbers. We go to the next slide. We see our EBITDA and our EBITDA margin. And here is where we see a little bit of the contraction where we cannot fully mitigate all of that heavy rain when we talk about Ayrton Senna and his rain, the heavy rain in North America from a truck market point of view. And so our margin, excluding nonrecurring effects, primarily restructuring costs in North America ended up at 10.3% in the third quarter and now amounts to 10.2% year-to-date. We go to the next, the net income, BRL 35 million in the third quarter. I would say this, again, North America truck production situation impacted our results meaningfully also from a net income point of view. On top of that, we had the restructuring costs. And on top of that, of course, as we all know, financial expenses are higher simply because of the CDI, the SELIC costs. So that's what we see back here on this slide as well. When we look at investments, we talk -- we always talk about disciplined CapEx management. And I think you see that back in -- on this slide. Our investments are actually down year-over-year. And of course, we do that because of some of the market slump that we see primarily in North America. So we try to manage our investments down there where appropriate, there were possible. And we think at the end of the year, we will come in with the number that we have been talking about in the prior calls, maybe a little bit lower because of the adaptations that we're doing because of the market situation. We go to the next one. Our leverage, our leverage is a little bit higher than we were targeting. But given the market situation, we're still happy to say even with that, we are slightly below where we were 1 year ago, even though we are slightly up from the prior quarter's presentation. So 2.55x was the number for our leverage at the end of quarter 3. Go to the next. Our gross debt, not so much change on this slide. We think it's a healthy composition of currencies when it comes to our debt. When you look at the term, 93% is long-term debt. So that's very healthy. And if you look on the top right, also our liquidity, our cash situation seems to be very healthy with BRL 1.6 billion cash in hand. And on top of that, BRL 760 million of undrawn credit lines. If you look at the cost on the bottom, I don't think these costs are uncompetitive. It's actually -- these are pretty good numbers. I think the plus 1.2% is competitive, the 3.5% in euro is competitive and the 5.4% in dollars is competitive. It's the CDI that is not competitive, but we all know about that situation. We go to the next one. Going away a little bit from the financials, talking about the business. We present here our third quarter 2025 SOPs. But I think it's more important to mention to you guys that when we talk about market share gains and outperforming in some important regions for us in the world, when we look at wheels, I can tell you that our new business wins, so the amount of new orders, of new -- of wins we have is significantly higher year-to-date 2025. And then I don't talk 5%, 7%, I talk tens of percentages, significantly higher than the same period last year. And already last year was better than the prior year. And so it's another proof for me when I look at the numbers that we are having some very good traction with the company globally on winning new business at appropriate margins. We go to the next slide. If you win share, especially when you win share in a growing market, and a good example of that is the South American light vehicle aluminum wheel market, our wheels are wanted and cars are wanted as well. And so you want to service your customers correctly, you need to do something. And I think you could have seen in the press release that we have been working hard on being able to service our customers like we want and to profit, of course, from this market growth. And so besides supporting our customers temporarily from global operations, which is very important to be doing, and we can do that as a global company. Also, we are redeploying assets from entities around the world, Europe, Asia back to Brazil to our plants in Limeira and in Santo Andre. And on top of that, I believe you may have all read about our recent acquisition of a majority share in Polimetal, which is an aluminum wheel factory in Argentina. And of course, the Argentinian market is doing well, and we believe we will be doing well going forward also. But the main strategic target here is to expand this factory, and it will be much more efficient for us to expand the factory here. In fact, we have equipment standing ready to be installed on adjacent land in San Luis. And so doing that in Argentina creates for us a situation where we will be able to produce wheels that we produce today in Brazil for Argentina to produce those wheels in Argentina, which again frees up capacity in Brazil for Brazil. And so this is just an example of how we try to service a growing market where we gain share in a very efficient way, meaning without spending a huge amount of money by building a new plant, we try to figure out a way to serve the market correctly and profit from that market growth that we are having in that market. With that, let's go to the next slide. We talk a lot about steel components and steel wheels and aluminum wheels, but we don't talk so much about the 2 materials being merged. And I cannot tell you yet that it is happening. But I can tell you that we have been trying for some time. And I can tell you that we're making a lot of progress. And we're now at a stage where we are involved with 2 OEMs, one in Asia and India, one in Europe for making a wheel that is made out of steel and out of aluminum. And as you guys know, wheel is a very important styling element, but the styling you only need there where you look at it, not there where you put a tire on it. And so we would make the rim out of steel and we will make the disc out of aluminum. And with that, we save costs on the steel part, and we guarantee the styling on the aluminum part, not easy. But I think if anybody will be able in the world to make it happen to pull it off, it will be Maxion because we are kind of the only one that is producing both steel wheels and aluminum wheels. And in many instances, by the way, we produce it at the same location or in the same region. And so this would be a true strategic advantage for our company if we will be able to make that happen. Again, I can't guarantee it yet. We're working at it with our customers, but I hope we will be able to talk about it a little bit more in one of the following earnings calls. With that, I think let's go to the last slide, wrap it up. I think it's not what we wanted, the market that we see in North America, and it's impacting us. But we believe that is a temporary situation, and we believe we will be very strong when that market comes back. I'm not saying if that market comes back, I say when it comes back. And I think in the meantime, we're doing a good job on managing through that situation locally and mitigating that situation with our results in the rest of the world. And so that makes us, I believe, a resilient company. We continue to deliver appropriate productivity. We continue to be disciplined in our costs, and we continue to be disciplined in our pricing management. I can guarantee you that. From a growth point of view, I have given some examples on how we try to grow and what we're doing with new business wins. It's really a good story. And I think overall, very important as well, our customers remain to see us as a very reliable, stable and high-performing partner. And I come back to Ayrton Senna, maybe we go a little bit slower because of some heavy rain locally, but I believe we will be able to overtake. And with that, I pass it on for Q&A. Rodrigo Caraca: [Interpreted] [Operator Instructions] And our first question is from Gabriel Tinem from Santander. Gabriel Tinem: [Interpreted] I'd like to know if the capacity has been adjusted already, if there's anything else to help. And in terms of capital allocation, if you could explain the rationale for the [ participation ] of Polimetal and the opportunities you see in these markets? And also still in that topic, if you could talk about the North American market and talk a little bit about how you saw cash management and how you see the leverage for 2025 and 2026 [ a little ]. Pieter Klinkers: Okay. Thank you very much. I believe that were 3 questions. So, I will try to give 3 answers. I believe the first question was around our management of capacity in North America. And of course, we have been adapting our capacity in the sense that we adapt headcount. And so a very significant number of people have been leaving the facility. We hope to see them back in the future. I'm sure we will see a good part of those people back in our plant. But in that way, the capacity has been adapted. We are also convinced that when this market comes back and the longer the downturn would last, the steeper that comeback would be, we believe. When it comes back, we are very well prepared with our existing operations in Mexico from a components point of view as well as with the new plant that somewhere in 2026 will be ready to operate. And it might just be that is exactly the same time when this market comes back. So I hope that answers the question from a capacity point of view. The other question -- the second question was, I think, around the rationale on Polimetal in Argentina. And as I said, the light vehicle market in Mercosur, particularly in Brazil, is doing well, and we are doing well in that market. And so, if you're gaining market share in a growing market, you also need to make sure that you have the capacity. And so, instead of building yet another new plant, we've come up with some other solutions that require some investment, but a lot less investment than just building a new plant. And so, the redeployment of assets, getting equipment from around the world there where we need less than in Brazil is 1 pillar. And the other pillar is expanding capacity in Argentina at a much lower CapEx number than when we would build a new plant, for instance, in Brazil. And so, those actions together, we believe, will make sure that we can supply our customers, which is really what we want to do because this is a very good market for us and for our customers. The third question, I think, was around the market in North America. And so I think it's impossible to say what will happen to this market on the short term. I think most industry analysts would agree with me when we say this market will come back. But if you ask me what day, what months? Exactly that's going to be very hard to predict. But we believe that somewhere, and this would be our assumption that somewhere during the course of 2026, which is not too far away anymore, by the way, we're having the November earnings call, somewhere during the course of 2026, this market will turn and then we should be ready to supply this market with a steep increase, which is our assumption. I hope this answers the questions you asked. Gabriel Tinem: [Interpreted] Yes, it did. Unknown Executive: [Interpreted] Next question comes from Gabriel Rezende from Itau BBA. Gabriel Rezende: [Interpreted] I would just like to follow up regarding North America. I understand Pieter's comment that you should expect some return in summer 2026. But I'd like to confirm how you have been feeling the body language of the OEMs in terms of orders for the next 2 or 3 months. I understand that short time before we had a deterioration of the market. I would like to understand that if this is continuing to happen or they have stabilized now in the third quarter, mainly if the volumes have started to stabilize. And also, would like to confirm the matter of the restructuring now for the third quarter. Should we expect anything in other markets considering 2026 where volumes-- were the performance not as good as 2025, especially for commercial vehicles? Is that the expectations of the company? Do you expect any impact on other geographies also? Pieter Klinkers: Gabriel, thank you for the good questions. And so, North American market, I think the visibility from our customers is very low. That's unfortunately something that we need. But that being said, volumes are not only stabilizing, we see an increase of volumes, but we only see it for November and December. So, we like it, and we will make it happen. And it's a good thing to happen. But we're not sure if this is the start of a structural recovery or it's just a temporary impact in the end of 2025. And so, I hope it's more structural and it's the beginning of a strong recovery. But right now, we see that happening in the last 2 months of the year, but we don't have that visibility yet for the first quarter of 2026. So, some good news, but let's see if that's structural or just temporary, but we'll take it. When you talk about us seeing any potential other restructuring, particularly in CV in 2026, I would say Europe not, we -- the market should come back to some extent. And we are gaining market share. So, I think 2026 will be a good year for us when it comes to Europe. The same in Asia. I think we'll have a good year in Asia next year with growing volumes in both India and China for us from a commercial vehicle point of view. And North America, my take would be that what we lost in 2025, particularly in the second half, hopefully, we will gain it back over the year 2026, maybe a little bit more towards the second half of the year than the first half of the year. But let's see how this situation in November, December that we see right now develops into 2026. When you talk about South America, interest rates are too high. And so, I would say, we don't expect a major downturn, but we also don't expect a major upside in South America. So, I would say we're not particularly worried about that market. We're also not particularly excited about that market. But it's an adequate level for us. We don't believe we need to do a lot of restructuring, if any, as we see it right now. Does that answer your question? Gabriel Rezende: [Interpreted] Yes, Pieter. Unknown Executive: [Interpreted] Our next questions comes from Fernanda Urbano from XP. Fernanda Urbano: [Interpreted] We have 2 questions. The first regards Europe. What got our attention was the good performance, especially for light vehicles in the region. And you have commented -- mentioned the possibility of gaining share in that area. If you could give us a current view of the competitive scenario in that area? And if you expect any growth in the region higher than the consolidated one for the company? And the other regards supply chain. We have heard many news in the media regarding semiconductors. Some OEMs have mentioned possible stopping production, but it seems that in Brazil, it is under control with the guarantees from Chinese suppliers. And I'd like to know if that has impacted you and if you see any risks in the supply chain talking about automotive production globally for 2026? Pieter Klinkers: Thank you, Fernanda. So, let's start with the European market. I think from a market point of view, I believe next year, there will not be a lot of growth. I don't know if it's going to be 1% or 2% contraction or 1% or 2% growth, but I think it's pretty flat, which is not a disaster, but I think we need to do something more if we want to grow. And our plan is to continue to grow in Europe, both from an LV point of view as well as from a CV point of view. I think the CV, actually, the market is designed to grow back a little bit next year. So that will be a combination of market growth and market share growth, which is -- we would be looking forward to that. And it's our target. It's our assumption that this is going to happen next year. When we talk about market share growth, in our business, if you win something or also if you lose something, you don't lose it. If you won it, you don't lose it the next year or if you lost it, it will take you a little time to regain it. So, once you're on this trend of gaining market share, I'm not saying it's there forever, but it's there for longer than just the current year. And so what we see happening this year in Europe, to some extent, maybe even a little bit more, maybe a little bit less, but I think the trend should be continuing into 2026. And so, even though the market is kind of flattish on LV, I think we will be able to grow. And in CV, I am very, very convinced that we will grow and actually grow more than the market next year. Talking about supply chain and Nexperia coming from Holland, it's all over the news, as you can imagine. I think people were very worried and rightfully so until recently when there was some relaxation, as you mentioned already. So, we are not out of the woods, I would say, but it seems that it's going in the right direction. I can tell you that to-date, we've had no or negligible effect in our customer releases because of this situation. So, let's hope it stays like that. And as you say, it looks like there is some relaxation compared to just 1 or 2 weeks ago. Unknown Executive: [Interpreted] Our next question comes from Andressa Varotto from UBS. Andressa Varotto: [Interpreted] There are some items I'd like to mention. First, regarding margins, thinking about the trajectory of margin and thinking of the recovery of the North American market. The third trimester's recovery, could you consider a normalized level until the volume recovers? Or can the company expand the margin considering the explanation you have given, although there is a consensus that the market will take a while to recover? Another item also regarding North America, regarding Structural Components that if [ this is ] [0:37:32] even more for commercial vehicle. And I'd like to understand what is the exposition of these 2 segments in commercial vehicles and understand the difference. Pieter Klinkers: Thank you. I've noted 3 questions for myself here. So, first of all, talking about margin and maybe normalized margin. So, let me put it like this. If the North American truck markets would have been similar this third quarter than what it was in the third quarter of 2024, I think our margin would have been a solid 11%, okay? So, when that market comes back, that would be my minimum expectation to be reached. And as you know, every year, all other things equal, we will be targeting some volume increase, so some top line increase and also some bottom-line increase. And so that was our target, and that will remain our target. And I feel confident we can make that happen next year based on how I see things today. I hope that answers the question on margin. On the truck market, there is -- within the truck market in North America, there is large differences. The smaller trucks that we, for instance, supply with wheels, there is not such impact as what we see on the heavy trucks. And the heavier the truck gets, the more impact we see. And so, as said TRATON and Daimler on their heavy trucks, the Class 8 trucks, the biggest trucks, they really see big drops, 40%, 60%. And that is what we are seeing as well for the products that we supply to that segment. But not for the smaller trucks, the Class 4, 5, 6, actually is pretty stable. And you see that back in the Wheels numbers in our company because that's the segment that we supply from a Wheels point of view. And those numbers are actually slightly up in our company. So it's a big difference within the North American truck segment between smaller trucks, medium trucks on the one hand and heavy trucks on the other hand. Does that answer your question? Andressa Varotto: [Interpreted] Yes, yes. Unknown Executive: [Interpreted] Our next questions comes from Luiza Mussi from Safra. Luiza Mussi Tanus e Bastos: [Interpreted] Could you give us a little bit more details about the difference we saw from light vehicles in North America with steel wheels growing up and the aluminum wheels going down. And we would like to understand what led to the difference in performance in that sector. Pieter Klinkers: Thank you for the question. I'm going to answer this one as well. So, North American steel wheels is a -- it is a good start for us, and I think you will see that actually expanding that situation into 2026. We've won very significant business that has just started up in the second half of this year with a big North American EV manufacturer. And believe it or not, those are steel wheels and not aluminum wheels. And so that is a big win. That was a big win for several of our factories around the world. But the first one to start up is our plant in Mexico, and that's what you see happening on steel wheels in this case, in San Luis Potosi in Mexico. So that's explaining the steel wheels story. On the aluminum side, we are changing programs between customers. And I'm very convinced next year, we will see a very meaningful growth beyond the market. in our plant in Mexico from a wheel's point of view in Chihuahua. And so even though we have a little bit of a decline right now, we're gearing up the plant for SOPs starting now in the fourth quarter of 2025 as soon as we can. And as soon as we're ready with the tools and we can supply and that will continue throughout 2026 and going into '27, '28. So, it will be a good story also from an aluminum point of view in North America. I hope that answers. Unknown Executive: [Interpreted] Our next question is from Andre Mazini from Citi. André Mazini: I wanted to ask about the Ford aluminum factory fire in New York State that happened in September 16, so kind of recent. It seems to have impacted the F-150 production. So of course, Ford is the second biggest client of Iochpe, if we should expect any impact from that on the fourth quarter? This is question number one. Question number two would be, any comments you could have on the Section 232 tariffs, which are, of course, on steel and aluminum. You guys have production of wheels both in the U.S. and Mexico. So maybe those 2 production hubs could be affected by the tariffs. So any comments on that? Pieter Klinkers: Thank you, Andre. So the Novelis fire, of course, we've all notified that. And even though we see a little bit of impact, so it's not that we don't have impact. We see some impact, but it's more than compensated by the good news that I just talked about in the prior question from Luiza. So, I think we see some impact, but we have more good news than bad news. And so bottom line, it's still a growth story for us. When you talk about tariffs, it's still the same mantra as what we have been saying in the last couple of calls. And so yes, there is indirect impacts that we see. For instance, North America truck is related to tariffs, we believe. But we don't foresee major direct impacts for our production in in Mexico for our wheel or components production and sales in Mexico or from Mexico to the U.S. Still the same -- sorry, very little direct impact, but of course, we see some indirect impacts. Hopefully, that answers your question. André Mazini: It does. Unknown Executive: [Interpreted] With that, we are closing the question-and-answer session, and I would like to give the floor to Mr. Pieter Klinkers for his final considerations. Pieter Klinkers: Thank you, Rodrigo. So, all in all, I would say a third quarter that is a little bit weaker than what we would have wanted and then what we would have expected. But if we look at the macroeconomic environment, if you look at the North American truck market, I can say, bottom line, the teams have been doing a good job on both mitigating regionally there where the issue is -- was and is as well as mitigating the impact from a global point of view. And I believe going forward, I've mentioned it a few times, we cannot change the market, but we will try to continue to do better than the market there where possible, there where appropriate. And you can count on us to give it our all to make that happen. And so I believe on the midterm -- short term, midterm, the market in North America will come back. We will be very well positioned to serve that market then appropriately. And then the rest of the market, we're doing good anyway, and our plan is to continue to do that also in the fourth quarter and in 2026. Thank you very much. Bye-bye. Unknown Executive: [Interpreted] The earnings meeting video conference is closed. Iochpe-Maxion's Investor Relations department is available to answer any other questions. Thank you very much, and have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good afternoon, and welcome to Funko's 2025 Third Quarter Financial Results Conference Call. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded. I will now hand the conference over to Funko's Director of Investor Relations, Rob Jaffe. Please proceed. Robert Jaffe: Hello, everyone, and thank you for joining us today to discuss Funko's 2025 Third Quarter Financial Results. On the call are Josh Simon, our recently appointed Chief Executive Officer; and Yves Le Pendeven, the company's Chief Financial Officer. This call is being broadcast live at investor.funko.com. A playback will be available for at least 1 year on the company's website. I want to remind everyone that during the course of this call, management's discussion will include forward-looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC reports. In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with the U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Funko's press release announcing its 2025 third quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today. Also, we have posted supplemental financial information on the Investor Relations section of the company's website, which includes, among other things, a net sales bridge, a gross margin bridge and key IP and product drivers. I will now turn the call over to Josh Simon. Josh? Josh Simon: Thanks, Rob. Good afternoon, everyone, and thank you for joining us. This is my first earnings conference call at Funko, and I want to start by saying I couldn't be more thrilled to be joining the team at this exciting time. Over the course of my career, I've seen this industry from a variety of perspectives, making movies at Disney, creating products at Nike and most recently leading the global consumer products and live experiences division at Netflix. Now across all those worlds, I gained a strong understanding for fandom, the culture of entertainment and how it translates into physical products. And I can unequivocally say there is no one better at it than Funko. There's one clear trend I saw across my years in entertainment and consumer products. Almost every filmmaker, creator or celebrity with whom I've worked inevitably asked that they would get their own Funko Pop! It seems as a sign of having made it in the entertainment world among the biggest Hollywood talent from the outside that love for Funko and its brand and products was energizing. Now I want to begin with some takeaways for my first 60 days after diving deep into the business and speaking with our customers, licensors and employees. Then I'll outline some of what I think it will take to get back to growth. I have the opportunity to meet with some of our most passionate fans at our retail stores and at New York Comic-Con. I've been able to spend time with our employees in the U.S. and Europe and we've engaged in senior leadership strategy sessions with key retailers like Hot Topic, Walmart and Target, licensed stores like Disney, Warner Bros., Universal and Netflix. And I have a deep, long-standing set of relationships with most of these partners and welcomed an honest dialogue. In talking with our partners, I heard 2 consistent themes. First and most importantly, they see the growth opportunity together and are energized by the far-reaching scope of our brand and products; and second, they suggested some very clear areas where we can improve. We definitely appreciate and value their feedback, and we'll use it to further strengthen our competitive advantages, namely first, we have a passionate and broad fan base. In September at a fan event at our Hollywood store, I was able to celebrate an important milestone for the company, 1 billion units sold. This amazing achievement puts us in very rare company among the most successful toy brands in the world. Membership in our fan loyalty program has grown 27% since the start of the year. We have a strong footprint of 9 million followers across our social media channels. And our customer base is highly diversified and evenly split between male and female with purchasers across an 18- to 55-year-old demographic, many of whom are buying for kids. Second, we work with the world's biggest IP and serve fans across every corner of the pop culture universe. Our robust relationships across multiple genres, more than 900 active licensed properties and 250-plus content providers create a strong moat around this industry-leading portfolio of licenses. Our product offering is highly diversified. We're not reliant on one character or single franchise. Now I'm pleased to announce that we've recently signed several multiyear renewal agreements with major licensing partners, Warner Bros, NBC Universal, 20th Century, Paramount and our biggest partner, the Walt Disney Company, which includes Pixar, Marvel and Lucasfilm. Third, our products are sold everywhere fan shop through a large and diversified global network of retailers, including more than 1,400 mass market specialty, e-commerce and mom-and-pop partners around the world as well as our own websites and flagship stores. There are very few brands that are equally relevant across a mass retailer like Walmart and that can spark a robust resale market on eBay at the same time. I'm still early into my tenure here, but my leadership team and I have identified our areas of focus and are ready to act immediately. Our growth will be driven by what we're calling our Make Culture POP! strategy, built at the intersection of 3 pillars: culture, creativity and commerce. This is where Funko has excelled and will align our priorities and organization to maximize the opportunity in these 3 focus areas. Let's start with culture. We aim to be the definitive brand for transforming pop culture into products. That includes fandoms that are existing strengths like film and TV, along with exploring new corners of pop culture through categories like footwear, cosmetics and food. We can do more in the areas of K-pop, sports, music tours and fashion and working with relevant content creators to expand into newer areas of fandoms like Twitch streamers, YouTubers and influencers. We want our products to be at the center of the moment everyone is talking about, created by us or with us. Now some examples of what that means. We will look to identify trends even faster and supercharge our speed to market. Let me give you a quick example of what I mean through the lens of KPop Demon Hunters, Netflix's most popular movie ever. Our team was among the first to recognize the appeal of this property for both mass audiences and collectors. We moved quickly to create an exciting line of the products that's become one of our biggest presale items ever when it launched on funko.com a month ago. And the Funko team was able to bring this product offering to market within just a couple of months across pop figures, backpacks and accessories compared with much longer lead times by other major toy companies. This speed to market is one of our unique advantages and will be one of the only toy companies that have KPop Demon Hunters' products on retail shelves this holiday season. We're operationalizing our quick strike and hyper strike offense across our entire value chain to make this more repeatable. By operating at a faster pace and being more on trend, we also aim to position our products at the center of what everyone is talking about across all corners of pop culture. For example, we partnered with The Late Show with Stephen Colbert for a surprise on air product reveal time to the show's 10th anniversary in September. The episode featured Stephen Colbert unveiling a brand-new Funko Pop! and marked a major crossover moment between late-night television and fandom culture. The launch included a live studio audience giveaway creating a shared moment of celebration between Colbert, his millions of at-home viewers and Funko collectors around the world. In music, we added to our Funko Pops music artist collection [La Fede], the Latin American sensation with nearly 30 million fans across Instagram and TikTok. In just a few weeks, our partnership has driven more than 5.7 million views on social media and is representative of our efforts to work with more artists who are in the global zeitgeist and create touch points for our growing customer base outside of the U.S. In addition to [Fede], we recently added a number of other artists to our Funko Pop music artist collection, including the K-pop and BTS, the Swedish rock band Ghost, Sabrina Carpenter, and classic artists like Tom Petty, Metallica and Ozzy Osbourne. Now an important part of cultural relevance also comes from embracing our community of passionate collectors around the world. Just as I saw at NIKE, supporting the collectors market through exclusive drops, and giving them something special is critical to building fan communities and driving brand awareness and excitement. It's a major priority for us to rebuild credibility and enthusiasm with core collectors and mega fans who have been loyal to us for years by improving execution around limited editions, storytelling and drop cadence. In the third quarter, we dropped a number of limited edition collectible pop figures with various tiers of rarity, Don Hero from the Lord of the Rings, Star killer from Star Wars, Sonic, Spider Cat, Bob's Big Boy and Fantasm. Each of these one-of-a-kind pops sold out within 1 hour. For the community of sports stands, we expanded our relationship with Inter Miami of major league soccer. At the start of this MLS season, we have dedicated retail space at the team's new state-of-the-art home stadium where fans will be able to purchase on-site a pop yourself with Inter Miami's official logo, standard Funko Pop figures of the team's most famous players and exclusive products only available at the store or take the growing global fandom of anime. We have even more opportunity to grow this business, which represented 30% of our sales in Q3 and is now our second largest and vertical. The U.S. market for anime remains very strong, and we've only scratched the surface with expansions in Europe, Asia and Latin America. Now let's talk about creativity. The goal is to continue innovating new form factors, expanding our product offering and obsessing over the details across design, development and storytelling, so our products feel meaningful for fans. We've built a beloved and truly unique franchise with Pop! and we're working on adding additional dimensions for fans, more excitement and bringing compelling new products to market. One example already showing traction is Bitty Pop!, our mini vinyl figures. Bitty Pop! is integral to our evolving strategic partnership with Walmart. Last month, Bitty Pop! was officially introduced in their toy aisle and made Walmart's 2025 top toy list and was featured in Walmart's toy boat catalog, which went out to over 40 million homes in the U.S. just in time for the upcoming holiday season. On top of that, an out-of-aisle placement of Bitty Pop! is expected to land in 1,800 Walmart stores later this month. We have built out the Bitty Pop! line to include the ability to world build. We intend to further expand the line to include more license than original characters and environments that allow fans to create realistic worlds or use their imagination to create new ones. As the Blind Box format continues to grow in popularity around the world, we're planning to expand our existing blind box offering, Mystery Minis. These collectible figures, which have been on the market for the last 12 years are smaller than our pop vinyl and larger than our Bitty Pop! figures. We see additional growth potential in the Blind Box space across new IPs, genres and fandoms spanning films, series and social media, and our own original characters. Earlier this week, we initiated a limited launch with several of our specialty retail partners for our new premium wine box collection, an artist-driven product line that gives fans the opportunity to discover gold and imaginative new designs. Beginning with 2 entries in this category, we intend to expand into new IP over the course of 2026. Our premium Blind Box line includes a chase variant, and we're looking to add more offerings for both internal and external artists. Now it's also important to note we have a diverse product archive of formats going back 25 years, many of which I think can be leveraged in more relevant ways to capture the hearts of today's fans and collectors. Now let's talk about commerce. We see a significant opportunity to expanding internationally, particularly in Asia and Latin America, enhance our presence with existing retail partners and deepen our digital and direct-to-consumer capabilities. To start, there's a significant opportunity to grow our international business with a more dedicated focus in Asia and Latin America. This was an area of particular focus for me at Netflix, and there is a clear lane for Funko to excel in these important geographies. With our D2C business, we intend to simplify the experience on our e-commerce site and app. This includes a more intuitive design, improved functionality around limited edition drops, wishlists and loyalty programs. Pop! Yourself, which just launched in Europe is a great example of the unique experience only we can offer. And we're planning to add a new AI-powered builder later this year, which allows the user to upload a picture and recommends options to more quickly build a customized pop, which we think will be transformative. We're also planning new innovative retail experiences such as selling Bitty Pop! products through vending machines with a surprise for mystery element to the purchase experience. In addition to the Pop! Yourself kiosks at Inter Miami's new stadium, beginning early next year, we plan to add more Pop! Yourself kiosks to support other year-round retail experiences and pop-up activations both in the U.S. and in Europe. We also plan to refresh existing kiosks in our flagship stores with enhanced capabilities, including the AI-powered builder. Now to summarize, our Make Culture POP! strategy is focused on maximizing opportunities at the intersection of culture, being at the center of the moment everyone is talking about across more fandom, creativity through new products and form factors, and commerce by being more strategic with partners in the U.S. and Europe, Latin America and Asia and direct-to-consumer. Now to be clear, we already have many ongoing initiatives against this plan underway. We're building the right team and capabilities to attack these opportunities in a focused manner and drive growth. Now that said, I'm only 60 days in, and we have a lot more to come. I'm excited and confident about our team and the opportunity working with our partners to ignite growth and to sell the next 1 billion Pop! products. And with that, I'll turn it over to Yves to review our Q3 results. Yves Le Pendeven: Thanks, Josh. Hey, everyone. Thanks for joining us today. For the third quarter, total net sales were $250.9 million, in line with our expectations. Compared with Q3 of last year, approximately $11 million of the decrease in net sales can be attributed to SKU rationalizations as well as a reduction of clearance sales. As a reminder, we posted supplemental financial information on our website, which includes a net sales as well as a gross margin bridge. Direct-to-consumer sales mix in the quarter was 18% of our gross sales down from 20% in last year's Q3 due in part to a pullback in marketing spend. Gross profit was $100.8 million equal to gross margin of 40.2%, which was better than expected. Price increases helped fully offset the impact of increased tariffs. It's worth noting that with the exception of our 2025 second quarter, which was significantly impacted by tariffs, we have maintained a gross margin in the 40% plus range since the first quarter of 2024 were in 6 of the last 7 quarters. SG&A expenses were $79.8 million compared to $92.7 million last year. Approximately half of the reduction came from a full quarter benefit of cost reduction actions taken in Q2 and the other half came from a reduction in marketing spend. Adjusted net income was $3.2 million or $0.06 per diluted share. And finally, adjusted EBITDA was $24.4 million, which was higher than our expectations. Turning to our balance sheet. At September 30, we had cash and cash equivalents of $39.2 million. Net inventory was $99.8 million and our total debt was approximately $241 million. Turning now to our outlook. We're pleased with our Q3 results and the progress made against the second half outlook, which we shared last quarter. We now expect for the 2025 fourth quarter net sales to increase modestly from Q3 2025, driven in part by the launch of Pop! Yourself in Europe and sales of our KPop Demon Hunters product lines, gross margin of approximately 40% and adjusted EBITDA margin to be in the mid- to high single digits range. A few comments on our refinancing process. Our 10-Q filing for the 2025 third quarter includes disclosures about the company's ability to continue as a going concern. As previously announced, we executed an amendment to our existing credit facilities, which mature in September of 2026. The amendment waived financial covenants for Q2 and Q3 and introduced a minimum cash requirement and a series of milestones to demonstrate progress against a refinancing transaction. We've engaged Moelis & Company LLC to advise the company on our refinancing process, and that process is ongoing. With that, I'll turn it back over to Josh. Josh Simon: Thanks, Steve. Compared with where we were 2 years ago, we've made progress on improving the quality of our business. Our gross margin trend has largely improved. We have a stronger retail footprint. We've fully implemented a price increase and inventory owned and in the channel is lower and at healthier levels. Now I want to reiterate the sense of urgency and opportunity around our Make Culture POP! strategy, executing across the intersection of culture, creativity and commerce. In the short term, I'm looking to maintain the momentum Yves discussed. Over the long term, what's most exciting to me, and I hope is equally exciting to our investors are the multiple opportunities to transform the company for substantial growth. We have a strategic advantage from building this company over the last 27 years, and we intend to leverage that legacy and relationship with our community of fans to take advantage of the huge opportunity in the increasingly global world of entertainment and pop culture fandom. I'm incredibly excited about joining Funko. From my perspective, the company has lots of potential on which we've already begun acting. And with that, we'll open the call for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Josh, welcome. Thank you for all those thoughtful highlights on the strategy. I'm curious as you look out ahead against some of those opportunities that you outlined, how you're thinking about what opportunities exist over the next 12 months to execute against how investors should be thinking about what you're prioritizing the sizing of some of those opportunities. Perhaps what point of the strategy do you feel like you need to get correct here over the next year or so before it unlocks the option value over the longer term to take Funko to the next level, so to speak. Anything -- any top priorities that come to mind, I think, would be helpful for us to understand. And then I have a follow-up. Josh Simon: Great. I appreciate the question. I mean, look, I'd say in the short term, our focus is on continuing the performance momentum that we've been talking about and then over the long term, obviously, transforming for more growth. I do really think it comes down to -- and I'll give you some specifics around the Make Culture POP! strategy. In the short term of the area of culture, I think there's really some areas of fandom where we can continue to expand. Obviously, as you know, we've been doing a lot in the areas of sports and music. But we just -- there's opportunities to move quicker in those areas. And so as an example, we just recently were able to launch the Dodgers Championship 5 pack. There's some really great details to it. It even includes them sort of wearing their alternate road uniforms. So really like how we think about operationalizing quick strike end-to-end capabilities, sensing trends, designing and manufacturing more quickly and getting it to consumers in new ways is really an important part of the cultural impact that we're looking to drive. And obviously, we share more details about that in the future. On the creativity side, I mean, we're really focusing on how we bring more dimensions to our core franchise, which is Pop! Bitty is a really great example of that. Obviously, we mentioned how it's rolling out into Walmart now. I'm spending a lot of time engaging more broadly with the creative community bringing people internally to help think about new sort of evolutions of products that we can launch, leveraging my relationships across the entertainment industry and the product space, thinking about how we can more closely collaborate with talent. Those are all sort of immediate things that we can do to continue to evolve our form factors and creative product strategy. And then on the commerce side, I mean, I've been able to engage with some really great strategic meetings with some of our biggest retailers over the last couple of months. International is a huge component of that. And so I think particularly based on pre-existing relationships I have there, we'll look to come back next quarter and talk in a little bit more specifics about some goals that we're immediately looking to get after with retail partners in Asia and Latin America. And look, I should also note on the -- because I think this is an important point to highlight on the commerce side as well. We were able to execute some really great extensions of our licensing deals with all the biggest studios in the last few months. And so I think that puts us on really firm footing to kind of take everything that we talked about as part of our Make Culture POP! strategy and drive growth through those relationships as well. Stephen Laszczyk: That's great. That's really helpful. And then if I could just ask a question, maybe more in the near term in the quarter and the broader retail environment, maybe for both Josh and Yves on 4Q. Just as you have conversations with retailers heading into this holiday season, anything you'd point out in terms of the cadence of stocking, how they're approaching restocking this year, how they're particularly engaging with Funko as a brand, as a partner this holiday season that differs from perhaps what you've seen in historic years or perhaps where the levers are as we get deeper into holiday on where restocking could come from upside, downside in the model, et cetera? Yves Le Pendeven: Stephen, this is Yves. I'll start by saying I think we're kind of encouraged by our POS trend, which has remained relatively strong and stable. In Q3, our global kind of POS in units was down only 3% year-over-year. Now we are continuing to see a pretty big difference in our various territories that we operate in. U.S. was more like down mid- to high single digits in units and then EMEA was up in low double digits. So we continue to see the consumer demand for our products. That being said, obviously, the tariff announcements earlier this year pretty significantly disrupted in Q2, kind of shipping of our orders out of Asia. And in Q3, I'd say we kind of continue to have a bit of a hangover effect from that. What you have to keep in mind is that retailers were placing their buys for Q3 and early Q4 shipments during, what I call, kind of peak uncertainty about what the tariff rates are going to be, how the consumer is going to hold up through the holiday period. And that was in part why our sell-in was down over last year in Q3. I would say as we head into the holiday period, it's a bit of a mix depending on the channel and the retailer, but I would say that we continue to have good momentum in Europe. In the U.S., a little bit more cautiousness, I think, from buyers. We do see a little bit more strength and momentum in the mass channel, and Josh mentioned the growth in Bitty Pop! sales there. So we're encouraged by that. It feels like for the smaller kind of specialty mom-and-pops distributors. And maybe a little bit of speculation here, but it feels like might be more kind of financially impacted by the tariffs or just generally more cautious about overcommitting to inventory. Josh Simon: Yes. And what I would continue with is the content slate is pretty big for us in Q4. The final season of Stranger Things will launch, and that's a big priority for some of our biggest retail partners as well as us. Obviously, the sequel or the Part 2 of Wicked will also be in the market, and we have products there. And then I think most importantly, just as a reminder, we really will have a lot of unique shelf space through our KPop Demon Hunters assortment across both Funko and Loungefly. So I think some good sort of content slate strength and shared priorities with our retail partners on that front. Operator: Your next question comes from the line of Keegan Cox with D.A. Davidson. Keegan Tierney Cox: Tom, I just wanted to ask a little bit as you open up this creativity in commerce. I know you talked a little bit about the vending machines and kiosks. I was just wondering how do you look at that market? It seems pretty competitive. I've seen a few of your competitors moving in there, just like my mall visits and retail visits. Just curious to how you see that market and how you plan to attack it? Josh Simon: Yes. Well, look, I think for us, the primary driver and excitement is around the Pop! Yourself experience, which is pretty unique to us. The ability for a fan to go and create customized Funko Pop! of themselves or a friend as a gift is something that I think we are uniquely able to offer. And so when we talk about the kiosk strategy, we have examples of those kiosks that currently exist in a couple of locations, primarily in our flagship stores. But we've already been deep into conversations with some of our bigger retail partners about how we can start to create experiences within their real estate footprint and bring that experience to more of our fans around the country and around the world. So it's -- I think we offer a pretty unique angle there. Keegan Tierney Cox: Got it. And then as I was just looking at the results, Europe sales down slightly versus an easier comparison last year. I know you're launching Pop! Yourself in the fourth quarter, but what are you seeing outside of that in Europe? Josh Simon: Well, like I mentioned previously, our POS trend is pretty strong in Europe. I would say one of the factors that's not super material, but we did have a little bit of production delays that impacted our European sales in the quarter, just some orders that just couldn't make it out of the factory in time. As a reminder, we moved pretty aggressively to move production from China to Vietnam. And so that was a bit of a result of that, but we expect those orders to ship in Q4. And then along with the launch of Pop! Yourself in Europe, which happened a few weeks ago, we expect Europe to be back to growth in the fourth quarter. Keegan Tierney Cox: Got it. And one more, if I can, just on pricing. I know you were able to essentially offset all of the tariff costs. But are you seeing that impact demand? I mean the POS for the U.S. essentially with weeks. I'm wondering how pricing played into that? Josh Simon: We've actually been pleasantly surprised by that. We rolled out the price increases. They were in effect on the shelf in early July. I mean we did anticipate that there would be slightly lower unit volumes. It's hard to attribute that directly to the price increase and not to the other kind of factors going on in the U.S. market. But generally, it's been in line with our expectations. I mentioned the POS trend so that the unit sales have held up pretty well. And then the price increases are fully in effect. So it's gone pretty well for us. Operator: There are no further questions at this time. I will now turn the call back to management for closing remarks. Josh Simon: Thanks, everyone, for joining us on the call today. We look forward to sharing our progress on our next call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Black Hills Corp. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sal Diaz, Director of Investor Relations. Salvador Diaz: Thank you, operator. Good morning, and welcome to Black Hills Corp.'s Third Quarter 2025 Earnings Conference Call. You can find our earnings release and materials for our call this morning on our website at blackhillscorp.com. Leading our quarterly earnings call are Linn Evans, President and Chief Executive Officer; Kimberly Nooney, Senior Vice President and Chief Financial Officer; and Marne Jones, Senior Vice President and Chief Utility Officer. During our earnings discussion today, comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our website and our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. With that, I will now turn the call over to Linn Evans. Linn? Linden Evans: Thank you, Sal. Good morning, and thank you all for joining us today. I'll start my comments on Slide 3 with a summary of our quarter and our strategic outlook, including an update on our merger with our friends at NorthWestern Energy. Kimberly will provide our financial update, and Marne will discuss our operational performance and progress on key initiatives. We're fulfilling our commitment to deliver results for our stakeholders in 3 key areas that we identified at the beginning of the year. First, we're delivering on our financial commitments, having reaffirmed our earnings guidance and completed our planned financing activities. Second, we're executing on our regulatory and growth initiatives, including our $1 billion capital plan to support key projects to serve our customers' growing needs. And third, we're providing excellent operational performance, including top quartile reliability and a positive customer experience. I'm proud of our team's remarkable work in delivering strong financial results and making significant progress on our key initiatives. We're on track to achieve our earnings guidance for the full year with 3 primary drivers: new base rates, rider recovery and customer growth. We're also continuing to maintain a healthy balance sheet. We have made significant progress with our regulatory strategy, including securing a recent settlement for our rate review in Nebraska. Including this settlement, our team has successfully completed 7 rate reviews since the beginning of last year, highlighting our expertise in managing multiple regulatory requests. We also successfully advanced several key near-term projects that will drive growth. We're on schedule to complete our 260-mile Ready Wyoming transmission expansion project by year-end, and we broke ground on our Lange II generation project in Rapid City during the quarter. Additionally, customer growth, including growing demand from our large load customers such as data centers and economic development in our service territories are providing solid contributions to earnings. In addition to our current plan, we continue to be very actively engaged with high-quality data center partners. We have now signed nondisclosure agreements for more than 3 gigawatts of demand. If and when these negotiations lead to signed agreements, only then will we incorporate them into our plan. Our financial outlook is provided on Slide 4. We're reaffirming our prior 2025 earnings guidance with an adjusted EPS range of $4 to $4.20, excluding merger-related costs. This represents a 5% growth rate at the midpoint over our 2024 EPS. Looking ahead, with solid progress in our regulatory and growth initiatives, we plan to deliver in the upper half of our 4% to 6% long-term EPS growth target starting in 2026. Our confidence in achieving our long-term growth target is further strengthened by our $4.7 billion capital plan and strong customer demand, including the data center opportunities I previously mentioned. We anticipate presenting an updated financial outlook during our fourth quarter and full year earnings call in February, including earnings guidance for 2026 and capital investment plans for the years 2026 to 2030. Slide 5 represents our current $4.7 billion capital plan. Our base annual investment is approximately $700 million, prioritizing our customers' core needs for safety, reliability and growth. Additionally, our transformative infrastructure expansion investments will cost effectively enhance our systems' resiliency and support growing demand and evolving requirements for both our electric and natural gas systems. Some of the major capital projects in our current plan include our Ready Wyoming transmission expansion that is on schedule to be completed by year-end, our 99-megawatt Lange II generation project in South Dakota that is under construction, and we expect to place in service in the second half of 2026 and our battery storage project in 2027 to comply with the Colorado Clean Energy Plan. Our 2025 through 2029 capital plan does not currently include significant investments related to data center demand. We anticipate continuing to profitably serve large load demand through our market energy model with minimal capital investment at a level of approximately 500 megawatts of demand through 2029. However, demand exceeding that level will likely necessitate incremental investments in generation and transmission. Marne will provide more detailed information about data center demand in her business update. Moving to Slide 6. On August 19, we announced our merger with NorthWestern Energy. Although we are well positioned as stand-alone companies, this merger will create a stronger, more competitive entity with greater scale and enhanced financial profile and complementary strengths, enabling us to unlock additional value creation opportunities for our customers and our shareholders. In October, we submitted joint applications to our regulators in Montana, Nebraska and South Dakota, requesting their approvals of our merger. We anticipate receiving procedural schedules and commencing the discovery process this quarter. We're also diligently working through the S-4 process and intend to secure all necessary approvals to finalize the merger within the second half of next year. With that, I'll turn the call over to Kimberly for our financial update. Kimberly? Kimberly Nooney: Thank you, Linn, and good morning, everyone. Our team is executing our strategy exceptionally well. From a financial standpoint, we have successfully accomplished several of our objectives in the current quarter and throughout the year. Our financial results met expectations, and we have maintained our strong investment-grade credit rating while funding our $1 billion capital plan for 2025. On Slide 8, we provide a bridge comparing Q3 2025 to Q3 2024. For the current quarter, we delivered $0.34 per share of GAAP EPS, which included $0.10 of merger-related transaction costs. After adjusting for these costs, we reported $0.45 of adjusted EPS for Q3 2025 compared to $0.35 per share for Q3 2024. For the quarter, our regulatory efforts provided $0.21 per share of new rates and rider recovery margin, which offset unfavorable weather, O&M costs and a moderate increase in financing and depreciation expenses. Weather was a $0.07 headwind compared to the same quarter last year. We experienced $0.04 of unfavorable weather this quarter compared to normal, primarily driven by lower agricultural irrigation demand in Nebraska. O&M was higher by $0.08 per share, which included $0.10 of merger-related transaction costs. Excluding merger costs, we reduced our O&M expenses compared to the same period last year by $0.02. Financing costs increased $0.03 per share, which included $0.06 of higher interest expense, $0.01 of share dilution and a benefit of $0.04 per share from AFUDC, driven by ongoing large construction projects. We also incurred higher depreciation of $0.02 per share, reflecting new assets placed in service. Year-to-date EPS drivers are shown on Slide 9. We reported GAAP EPS of $2.58, which included $0.11 of merger-related costs. Removing these costs from the year-to-date results, we delivered $2.68 of adjusted EPS, an increase of 6.3% compared to $2.52 for the same period last year. Our year-to-date results tell a similar success story to the third quarter. Excluding merger-related costs, our regulatory efforts delivered $0.68 of new rates and rider recovery, which more than offset higher operating expenses, financing and depreciation. We benefited from $0.07 of weather favorability with $0.04 of milder-than-normal weather this year compared to $0.11 of milder-than-normal weather for the same period last year. Our earnings guidance is based upon normal weather within our jurisdictions. O&M increased by $0.37, primarily due to merger-related expenses, employee costs and outside services, insurance premiums and unplanned outages. Excluding merger-related costs, we expect to manage our 2025 O&M expenses to a compounded annual growth rate of approximately 3.5% off of 2023 O&M expense. We incurred $0.34 of financing and depreciation expenses supporting our capital investments. Financing and costs increased by $0.25, which included $0.23 of higher interest expense due to higher interest rates, $0.11 of dilution from new shares issued and a benefit of $0.09 from AFUDC. Depreciation expense increased by $0.09, driven by new assets placed in service. As we approach the end of the year, we remain confident in our ability to meet our adjusted EPS guidance range and remain committed to achieving the financial commitments we made at the beginning of the year. Further details on year-over-year changes can be found in our earnings release and our 10-Q to be filed with the SEC later today. Slide 10 presents our solid financial position through the lens of credit quality, capital structure and liquidity. We continue to sustain a healthy balance sheet by delivering credit metrics within our targets of 55% net debt to total capitalization and 14% to 15% FFO to debt, 100 basis points above our downgrade threshold of 13%. We completed our planned equity issuance for the year, issuing a total of $220 million of net proceeds in 2025, achieving our stated equity guidance range of $215 million to $235 million. Looking forward, we expect our 2026 equity issuance to be significantly lower, driven by stronger cash flows from the successful execution of our strategic capital investments, regulatory plans and increasing data center load growth. In October, we completed our planned debt offering, issuing $450 million of 4.55% notes, a portion to be used to pay off our January 2026 long-term debt maturity of $300 million. As a result of our team's successful execution of our 2025 financing activities, we have funded our capital plan and maintained strong liquidity with more than $600 million of availability under our revolving credit facility at quarter end. Slide 11 shows our earnings growth trajectory beginning in 2023, along with our 2025 earnings guidance assumptions. For 2025, we expect adjusted EPS to be between $4 and $4.20 per share, which at the midpoint represents a 5% increase over 2024 earnings. Our long-term earnings growth will be driven by ongoing customer growth within our jurisdictions, increasing data center demand and new rates and rider recovery on strategic investments like Ready Wyoming and Lange II that will provide long-term benefits to customers. We believe we are well positioned to achieve the upper half of our long-term EPS growth target of 4% to 6% beginning in 2026. Slide 12 illustrates our industry-leading dividend track record of 55 consecutive years. We continue to target a 55% to 65% payout ratio. A dependable and increasing dividend is an important component of our strategy to deliver long-term value for our shareholders. I will now turn the call over to Marne for our business update. Marne Jones: Thank you, Kimberly, and good morning, everyone. I'm excited about our current position, the progress we have made on key initiatives and the promising growth opportunities that lie ahead, all while continuing to provide our customers with safe, reliable and cost-effective energy they rely on every day. Slide 14 illustrates our industry-leading reliability for our Electric Utilities. 2 of our 3 ranked in the top 10 companies in EEI's most recent report based upon 2024 SAIDI metrics. This reflects the benefits of our long-standing commitment to our customer-focused strategy and investments. Moving to Slide 15. We continue to see significant data center interest. And in Wyoming, we are fulfilling this demand through our flexible service model of market energy, contracted generation and utility investment. Through our innovative tariff, we have served growing demand from Microsoft hyperscale data centers for more than a decade. We are now serving Meta's new AI data center under construction in Cheyenne, which we expect to transition from construction power to permanent service later this year. As Meta ramps up its data center and Microsoft demand continues to grow, our current plan includes 500 megawatts of data center demand by 2029, growing data center earnings contribution to more than 10% of total EPS in 2028. Other leading data center partners are also recognizing the value of our customer-focused offerings and the ideal attributes of our service territory as a choice location. As a result, our growing pipeline of load requests offers compelling upside to our current plan. We are actively engaged in negotiating with high-quality partners, representing more than 3 gigawatts of data center load, a significant increase from our previously disclosed pipeline of 1-plus gigawatts. Supporting this expanded pipeline, 2 additional data center sites were announced in recent months to be constructed in Cheyenne and to take energy as early as 2026. To capture this growth, we have executed nondisclosure agreements and are negotiating service agreements for these and other projects. While doing so, we continue to prioritize meeting our customers' unique needs, maintaining overall system reliability and appropriately addressing risks while ensuring we earn a fair return for our shareholders. Keeping with our normal practice, we will announce details when agreements are signed. Moving to Slide 16. We are very excited to be in the final stage of construction on our 260-mile $350 million Ready Wyoming transmission expansion and are just weeks away from the project being placed in service. By year-end, we will be serving customers with a stronger system that reduces reliance on third-party transmission, enhances resiliency and increases access to market energy, including renewables. Our interconnected transmission network will support long-term price stability for our customers and enable continued growth across our service territory. And as a reminder, this investment is recovered through our Wyoming transmission rider with new rates effective in January 2026. Slide 17 outlines our progress on South Dakota Electric Resource Plan. During the third quarter, we broke ground on our Lange II project, a 99-megawatt utility-owned natural gas-fired generation resource located in Rapid City, South Dakota. This new resource will replace aging generation facilities and address updated reserve margin requirements. We are on pace for the facility to be placed in service in the second half of 2026. Moving to Slide 18. In Colorado, our Clean Energy Plan is ever evolving, moving from a 350-megawatt plan to a 250-megawatt plan. This week, we received approval of our CPCN settlement for a 50-megawatt utility-owned battery storage project. And recently, the commission provided additional guidance on the solar projects. They have requested us to continue negotiating on the 200-megawatt PPA and abandoned negotiations on the 100-megawatt solar project due to increased pricing. Slide 19 summarizes our regulatory progress. We are pleased with our settlement, which was reached during the third quarter for our Nebraska rate review. The settlement provides $23.9 million in new annual revenue based on an ROE of 9.85% and a capital structure of 50.5% equity. We anticipate approval of this settlement in December with new rates effective January 1, 2026, to replace interim rates in effect since August. The settlement also includes the renewal of our 5-year system safety and integrity rider, an insurance cost tracker and a weather normalization pilot program. In Arkansas, we're preparing to file a gas rate review to recover investments that support safe, reliable service and strong growth in the region. We are also preparing for an electric rate review in South Dakota after holding base rates unchanged for more than a decade. The request will recover our customer-focused investments, including the Lange II generation project and increased cost to serve customers since our last rate review in 2014. And finally, in Wyoming, we are preparing to file our Wildfire Mitigation Plan this month for commission approval in accordance with wildfire liability legislation. Following our approval process, we expect to obtain significant liability protections as we remain in compliance with our approved plan. With that, I will now turn the call back to Linn. Linden Evans: Thank you, Marne. As I hope you've heard, we delivered another strong quarter, achieving significant progress within our financial, strategic and regulatory strategies. This gives us confidence in achieving our 2025 earnings guidance and our ability to deliver in the upper half of our long-term EPS CAGR starting next year. We're at a pivotal juncture in our company's history. We have large transformative projects coming online in the near term, coupled with a robust pipeline of growth opportunities, including expanding data center demand. Additionally, our planned merger with NorthWestern Energy will provide us with the advantages of increased scale and new opportunities. Thank you for your interest and your trust in Black Hills as we partner to grow long-term value for our customers and our stakeholders. This concludes our prepared remarks, and we're happy to take your questions. Operator: [Operator Instructions] Our first question comes from Chris Ellinghaus with Siebert Williams Shank. Christopher Ellinghaus: Marne, given your pipeline for data center potential resource requirements, have you guys done anything to put in options or reservations on any important critical equipment at this point? Marne Jones: Chris, thanks for the question. We're obviously very excited about the pipeline that we're building. And much to your point, it is going to require some generation. But we have -- we do have some reservations, and we also continue to use our LPCS tariff, which allows us to serve it through that mix of utility-owned, contracted as well as market purchases. And so really providing us a lot of flexibility in how we serve this growing pipeline. Christopher Ellinghaus: Yes. I wanted to ask you about this. I assume you have a preference for utility-owned, but do you have any considerations or thought process on having it be nonregulated generation transmission? Marne Jones: Yes. With the tariff, certainly, there's good opportunity for utility ownership. But I think the flexibility is what's most important because our tariff does allow us to earn a utility-like return even without the rate base investment. And so that flexibility is really important as we talk about this expanded pipeline because we can be almost agnostic in some perspectives of how we serve it. It's really important, as I mentioned earlier today that making sure we have the reliability. So that obviously is going to come through some control of capacity, but we want to make sure that we're managing it from a risk perspective with tail risk and protection of customers. We want to make sure we're getting the returns. And so that model that we've been talking about here for -- gosh, we've had in place for a little over 10 years will continue to be the model that we use as we talk about this growing load. Christopher Ellinghaus: Okay. Great. Given -- I don't know how to phrase this, but given the activity in the Montana commissions in the last couple of months, have you got any concerns or thoughts about the approval process in Montana? And are you thinking that, that could be extended given what's been happening there? Linden Evans: Chris, this is Linn. We're watching that closely with our friends at NorthWestern. NorthWestern, of course, does a lot of business for a long time in Montana. We're taking a lot of guidance from them in terms of the politics, et cetera. To be blunt, we're not worried. In fact, some of the things that have happened recently arguably can be helpful to the process. We're watching it closely, staying highly engaged with that commissions through our application. We'll be starting discovery here quite soon. We'll look forward to the procedural schedule that will tell us a lot, too. So we're aware and we're managing our way through it. Christopher Ellinghaus: Okay. Given the good third quarter results and sort of where consensus expectations are for the fourth quarter, that sort of implies towards the upper end of your guidance range for the year, but you didn't really address where you think you're falling in the range so far. Are there any fourth quarter issues that you'd highlight that might be on the more negative side? Kimberly Nooney: Yes, Chris, it's Kimberly here. I don't think there's anything that we would highlight. Everything operationally, financially, we're really hitting on all cylinders. We're obviously always focused on the weather. And I'd just remind listeners that our earnings guidance is based on normal weather. So that's the thing that we watch and are probably most concerned about, but it's outside of our control. Operationally, we're in a really good place. So overall, there's just nothing else that I would highlight. And again, I'd just remind listeners that we did reaffirm our guidance for the year. So we're really feeling good about where we're at. Linden Evans: Chris, this is Linn. I would only highlight beyond what Kimberly just said that the largest project -- capital project in our company's history, our Wyoming Ready project is on schedule. We'll have that finished before the end of the year. So that's a big deal for us, too. Christopher Ellinghaus: Sure. Lastly, there's been some data points on some economic issues, some weakness here and there and lots of layoffs of late. Have you seen any indicators of weakness in your service areas at this point? Linden Evans: We monitor that closely, Chris. And I'd say the short answer is no. We're watching that closely. But in our particular service territories, the economic conditions seem to continue to be strong, maybe not as strong as they've been in the past, but they're still -- they're certainly not weak, put it that way. Operator: [Operator Instructions] Our next question comes from Andrew Weisel with Scotiabank. Andrew Weisel: First question, I want to ask [indiscernible] try to quantify the EPS upside from the Crusoe-Tallgrass data center project. Bear with me here. I know that you're not going to answer the direct question here, but I want to go through this thesis going around, you may have heard. The basic concept is you've talked about 10% of 2028 EPS coming from data centers based on 500 megawatts. We can take 2025 EPS, grow it by 5% per year, take 10% of that, divide by 500. That gives a simplified math of EPS per megawatt. You multiply that by 1.8 gigawatts, you get a huge potential impact in the neighborhood of like $1.50 of EPS or more by the time this project is at full scale. It would be even higher if we did like 2.5 gigawatts or 3 gigawatts that you've talked about today. So admittedly, this is very simplified math. But does that approach make sense to quantifying the upside? Or I know you've talked a lot about the tariff structure. Are there diminishing returns or any other reason to think that, that approach and that level of upside is wrong? Kimberly Nooney: Andrew, it's Kimberly. What I generally say is your theory and your mathematical calculation is directionally correct. It's really important to understand that we negotiate with each of these data centers. And so the nuances of those contractual agreements will be different between each of the respective hyperscalers, whether it's our existing customer base with Microsoft and Meta, whether it's the forecasted opportunities with some of the hyperscalers that we're currently negotiating with. So in general, each megawatt is going to look a little different. But from a theoretical perspective, you're absolutely right. This is going to be a significant opportunity from Black Hills' long-term growth perspective. Linden Evans: And Andrew, Kimberly answered that question very, very well. I'd also add that some of these revenues also go back to customers. They go back through administrative fees and other kinds of fees. So it's very beneficial to customers the way these tariffs are set up as well. Andrew Weisel: Okay. Great. That's helpful and very encouraging. Along those lines, you talked earlier about incorporating the upside to the growth plan from data centers only after contracts are signed, which makes sense. Should that happen before the merger closes, would you address the growth outlook? Or is the 4% to 6% more or less frozen, so to speak, until the deal closes? I'm not looking for a number, I'm asking for a philosophy. Kimberly Nooney: Andrew, yes, this is Kimberly again. So obviously, we're very focused on achieving our current growth rate, and we're on target to do that. We've obviously guided to the upper end of that range as a result of a lot of the projects our teams are working on that will go into service, Ready Wyoming, our Lange II project, et cetera. So as we think about data center growth, obviously, it would be a significant upside to our plan. And we would obviously provide an update at the point that we're going to close or sign these contracts. And at that point, we'll assess whether it's the right time to change our earnings guidance range, our long-term earnings guidance range for any reason. So that's really how we're thinking about it at this point. Andrew Weisel: Okay. Very clear. One last one, if I may. You own a coal mine, which has not gotten a lot of investor attention recently. But in today's environment, it might be worth more than it has been in the past. How are you thinking about that asset? Is it something that you could potentially monetize? Coal, obviously, is not a rare earth mineral, but it seems to fall into that rare earth conversation. How do you think about that asset strategically? Linden Evans: We're keeping our options open, I suppose, Andrew. You might know my background is mining engineering. So I'm aware of what this could be and what it could not be. We are aware we have rare earth minerals in our coal, in our fly ash, et cetera. It'd be my personal opinion, probably not enough to monetize, but stranger things have happened. We'll watch what's happening at the Washington, D.C. region, especially if there was a price floor or something of that nature. We're all aware that the Chinese can flood the market very quickly if they choose to in that regard, et cetera. So we're keeping an eye on it, I suppose. Our coal has been tested, analyzed. So we're kind of aware of what's there, but we don't think there's anything that we need to be really happy or concerned about in the near term. How does that sound? Operator: Thank you. I would now like to turn the call back over to Linn Evans for any closing remarks. Linden Evans: Well, thank you, everyone, for your interest in Black Hills today. We appreciate your time. We appreciate your investment in us and your confidence in us. As you can see, I think we're hitting on all cylinders. So we're very excited about finishing our Ready Wyoming project. We're excited about our merger in the second half of next year with our friends at NorthWestern Energy. We'll be seeing many of you in the next couple of days at the Edison Electric Institute Financial Conference. We wish you safe travels, and we look forward to connecting with you there. And then finally, I just want to say a huge thank you to our team, how engaged you are as you're improving our customers' lives with energy every day. Thank you for what you do. And with that, enjoy a Black Hills Energy Safe Day. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Chimera Investment Corporation Third Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Miyun Sung, Chief Legal Officer. Thank you. You may begin. Miyun Sung: Thank you, operator, and thank you, everyone, for participating in Chimera's Third Quarter 2025 Earnings Conference Call. Before we begin, I'd like to review the safe harbor statement. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These events are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimers in our earnings release and our quarterly and annual filings. During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliations to the most comparable GAAP measures. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. I will now turn the conference over to our President and Chief Executive Officer, Phil Kardis. Phillip Kardis: Thanks, Miyun. Good morning, and welcome to Chimera Investment Corporation's Third Quarter 2025 Earnings Call. It's great to have you with us today. Joining me are Jack MacDowell, our Chief Investment Officer; and Subra Viswanathan, our Chief Financial Officer. After my remarks, Subra will review our results, and then Jack will discuss the portfolio before we open it up for questions. This quarter's story doesn't start in ancient Greece. It doesn't involve hedgehogs or foxes, so we remain proud to be a hedgehog. It began this past spring when we learned that HomeXpress mortgage was for sale. At that point, we weren't looking for an originator. We had just completed our strategic analysis, sharpened our focus and executed on that clarity with the acquisition of Palisades. That integration went smoothly, proved that discipline and culture matter. Because Palisades manages assets for third parties who own HomeXpress loans, we knew the high quality of their production. So when HomeXpress came to market, we reached out. We had an introductory call with Kyle Walker, as CEO and members of the senior team. That conversation was the first of many over the ensuing months. They confirmed we weren't just buying a platform, we were partnering with a team that shares our values and vision. We saw 7 key reasons why this acquisition made sense. First, it met our high standard. When we look at a potential acquisition, we asked 3 questions. Does the management team share our values and vision? Is it profitable and well run? Can it make the whole greater than the sum of the parts? HomeXpress passed each test. I'll discuss profitability, operations and synergies shortly, but what are our values and visions. Our values are simple, long-term orientation, high ethical standards and an insistence on operational excellence. Our vision is to build a company that endures, one where our team members are proud to work, clients receive tangible value and shareholders are rewarded for their partnership. That's the standard and HomeXpress met it. Second, the size and growth of the non-QM market. While there's not a lot of data on non-QM originations, we believe such originations have grown every year since 2021 from about 1.1% of total residential mortgage originations in 2021 to an expected 5.1% or more than $100 billion in 2025. That's a roughly fivefold increase in the sector's market share in the last 4 years. Forecast for the size of the 2026 non-QM market range between $110 billion and $150 billion. We like markets with durable tailwinds. Third, the management team. HomeXpress has an experienced management team that knows how to grow in a disciplined manner, placing quality of production over volume. Fourth, the synergies. The synergies with Palisades and Chimera, we believe, are obvious. Palisades already manages assets for some of the buyers of HomeXpress' loans. By connecting origination and asset management, we can widen that reach to others and support the performance of HomeXpress' loans. While HomeXpress has not had its own securitization program, Chimera is a leader in securitizing residential mortgage loans. We believe that the ability to securitize some of their production at the cost to originate while still satisfying their customer base will provide an additional longer-term source of income. Fifth, expansion runway. Today, HomeXpress originates business purpose loans in 46 states and consumer loans in 42 states. We plan on adding additional states, including New York and accelerate the correspondent channel growth alongside the already successful wholesale channel. Sixth, the MSR opportunity. HomeXpress currently sells all loans servicing-released. They plan to obtain the servicing license they don't have, which will enable us to grow our own MSR book, both from our production and from purchases from third parties, which will create a hedge for our loan portfolio and reoccurring income engine. Seventh, agency originations, a small but promising business that adds optionality and balance. Turning to the transaction. We closed the acquisition on October 1 for $267 million. That's the sum of the 6/30 (sic) [ 8/30 ] book value of nearly $120 million, $120 million premium and about $28 million in stock. The price will be adjusted based on the 9/30 book value and some other true-ups, which we expect will result in an increase in the purchase price of around $5 million. Importantly, the HomeXpress leadership team remains in place, and we granted retention stock to HomeXpress' employees that vest in 3 years because ownership builds alignment and alignment builds results. Let's talk about the numbers. Through September 30, HomeXpress originated $2.4 billion by UPB, up 36% year-over-year, about 40% consumer, just under 60% business purpose and the rest agency. For Q4, we expect around $1 billion in originations, yielding expected pretax earnings of $15 million to $18 million and after-tax earnings of $13 million to $15 million. That's after the application of our net operating losses, and annualized return on equity of 19% to 23%. For 2026, we project $4 billion to $4.4 billion in originations, pretax earnings of $62 million to $80 million and after-tax earnings of $53 million to $68 million, again, after the application of our NOLs. That's a 20% to 25% return on equity. So looking ahead, what does it all mean? It means we believe HomeXpress is accretive to our earnings. It gives us a new revenue stream, greater diversification and more recurring income. It accelerates our strategy, growing our assets and fee generation, which we believe will lead to an increase in our dividend paying ability and total economic return over the long term. We're not just building a bigger company, we're building a better one, one designed for the long term. Now I'll turn it over to Subra to walk you through the financials. Subramaniam Viswanathan: Thank you, Phil. I will review Chimera's financial highlights for the third quarter of 2025. GAAP net loss for the third quarter was $22 million or $0.27 per share. GAAP book value at the end of third quarter was $20.24 per share. For the third quarter, our economic return on GAAP book value was negative 1.4% based on the quarterly change in book value and the $0.37 third quarter dividend per common share. And year-to-date 2025, our economic return on GAAP book value was 8.3%. On an earnings available for distribution basis, net income for the third quarter was $30 million or $0.37 per share. Our economic net interest income for the third quarter was $69 million. For the third quarter, the yield on average interest-earning assets was 5.9%. Our average cost of funds was 4.5%, and our net interest spread was 1.4%. Total leverage for the third quarter was 4.8:1, while recourse leverage ended the quarter at 2:1. Recourse leverage increased this quarter as we continue to increase our capital allocation to Agency RMBS securities. For liquidity and strategic developments, the company ended the quarter -- ended the third quarter with $752 million in total cash and unencumbered assets compared to $561 million at the end of second quarter. During the quarter, we strategically raised liquidity through staggered sales of select assets. We sold $617 million of retained bonds, non-Agency RMBS and Agency CMBS IO positions, releasing $116 million of capital. In addition, we issued $120 million of 8.875% senior unsecured notes due 2030. Net of the underwriting discount and other debt issuance costs, we raised $116 million in capital. The increase in cash balance prepared us with anticipated funds required to close the HomeXpress acquisition, which was finalized on October 1. We closed on our acquisition of HomeXpress for $240 million in cash comprised of an estimated adjusted book value of $120 million. This is subject to certain post-closing adjustments and a cash premium of $120 million plus the issuance of 2,077,151 shares of common stock. Okay. So I just wanted to update one remark from Phil's earlier prepared remarks. The -- Phil mentioned that the adjusted book value was as of 6/30, but it is actually the adjusted book value as of 8/30, make a correction. The purchase price that we paid. And for liquidity, continuing on, separately during the quarter, we added $275 million of Agency RMBS securities and closed on our initial $38 million MSR investment. For repo and hedging, we had $2.1 billion outstanding repo liabilities secured by the residential credit portfolio. 53% of the outstanding residential credit repo or $1.1 billion had a floating rate sensitivity, and we maintained $2.2 billion in notional value of various interest rate hedges protecting the repo liabilities. We had $1.3 billion of either non or limited mark-to-market features on our outstanding repo agreements, representing 64% of our secured recourse funding for the residential credit portfolio. On the Agency RMBS side, we had $2.4 billion notional value of interest rate swap, swap futures and cancelable swaps with varying tenors protecting against $2.4 billion of outstanding repo liabilities. For the third quarter of 2025, our economic net interest income return on average equity was 10.6%. Our GAAP return on average equity was negative 0.1%, and our EAD return on average equity was 7.3%. And lastly, compensation, general, administrative and servicing expenses were higher by $2 million, primarily driven by onetime severance payments. Our transaction expenses were higher by $10 million this quarter, reflecting the costs associated with HomeXpress acquisitions. I will now turn the call over to Jack to review our portfolio and investment activity. Jack Macdowell: Thanks, Subra, and good morning, everyone. We had a busy third quarter as the team remained focused on repositioning the portfolio while maintaining elevated levels of cash in preparation for the HomeXpress acquisition. Against this backdrop, the U.S. economy remained mixed but generally resilient. Growth was supported by continued strength in nonresidential investment, particularly in artificial intelligence-related infrastructure, equipment and software, while labor conditions show gradual signs of cooling. Policy and regulatory developments once again shaped the tone of financial markets. The Federal Reserve shifted from holding the line on restrictive policy to actively easing, cutting the target Fed funds rate by 25 basis points in September. Importantly, the Fed acknowledged that risks have begun to tilt toward labor market conditions rather than inflation alone, reinforcing a market narrative that policy is now oriented towards sustaining growth and employment rather than focusing solely on price stability. In rates, the curve steepened as front-end yields led the rally. The 2-year treasury declined 11 basis points during the quarter, while the 10-year fell 8, widening the 2s 10 spread to 54 basis points. Agency MBS continued to offer attractive carry even as OAS tightened amid lower volatility and strong demand. Current coupon nominal spreads tightened by 24 basis points versus swaps and 21 basis points versus treasuries. Primary mortgage rates declined roughly 35 basis points to 6.32%, spurring a rise in refinance activity as the refinance share of applications climbed from 40% in early July to more than 60% in late September. Housing activity improved modestly, though existing home sales at a $4.1 million annual pace remains well below the 27-year average of $5.2 million. Credit markets remained firm. Investment-grade and high-yield corporate spreads tightened 9 and 23 basis points, respectively. Non-Agency RMBS saw strong demand and healthy absorption of supply with the non-QM credit curve flattening as AAA spreads tightened in the context of 15 basis points and BBB spreads held steady. In the legacy reperforming loan sector, which represents the majority of our portfolio, AAA and senior unrated bonds tightened by approximately 10 and 25 basis points. Overall, mortgage credit fundamentals remain solid, supported by high homeowner equity, low incidence of default and near historic low unemployment. Even so, rising defaults and isolated idiosyncratic events in non-mortgage sectors have prompted heightened investor awareness. Turning to our portfolio. Book value declined approximately 3.2% during the quarter, largely driven by the combined effects of tighter non-Agency RMBS spreads and the rally in short-term rates, each of which lifted the valuation of our securitized debt more significantly than the corresponding gains in our loan portfolio. We made substantial progress in repositioning the portfolio during the quarter. while also preparing for the HomeXpress acquisition. To put that in context, excluding the Palisades acquisition, we began the year with more than 90% of our economic capital allocated to residential credit, just 4% in Agency MBS and the remainder in cash. As of October 1, we are beginning to see a more balanced and diversified portfolio with robust sources of income. The residential credit allocation is now below 70%. Agency MBS has increased to about 17%. MSRs are small but growing at just over 1%. And importantly, we deployed roughly $267 million or about 13% of our economic portfolio into the HomeXpress investment. The issuance of $120 million in senior unsecured debt during the quarter allowed us to retain a larger portion of the Agency MBS portfolio in advance of that acquisition. Our investment strategy remains centered on rotating out of fully valued assets and redeploying capital across opportunities that align with our long-term portfolio construction goals and enhance earnings power. During the quarter, we exited $453 million of retained and non-agency bonds, including senior and subordinate positions, along with the $164 million notional Agency CMBS IO position. These sales released approximately $116 million of net liquidity at a breakeven GAAP ROE of just over 7%. We purchased a net $275 million of Agency MBS, settled our previously announced MSR transaction and increased our cash balance ahead of the HomeXpress closing. This elevated cash balance was a temporary drag on earnings, but we believe that drag will be more than offset by the near-term contributions from HomeXpress as illustrated on Slide 9 of the presentation. Our agency pass-through portfolio now stands at just over $2.5 billion across the coupon stack. Leverage on the agency pass-through book increased modestly to 7.3x from 6.6x during the quarter, with rate and spread sensitivities remaining within risk parameters. We continue to hedge with swaps to maintain tight duration alignment, match our SOFR-based funding and capture additional carry. These positions continue to deliver high-quality income with levered ROEs in the low to mid-teens. On the credit side, the majority of our portfolio is made up of reperforming loans that exhibit high levels of borrower home equity and over 17 years of seasoning. Loan performance remained stable with these loans reporting a modest increase in delinquencies of 20 basis points during the quarter. Recourse leverage on the residential credit portfolio declined by approximately $329 million to $2.1 billion, reflecting asset sales and normal course paydowns. 64% of this financing was structured as non-mark-to-market or limited mark-to-market, up from 58% in the second quarter, while the floating rate component declined from 58% to 53%. As discussed last quarter, our interest rate hedging strategy for the residential credit portfolio remains designed to protect earnings power in a rising rate environment while maintaining upside in the declining rate scenario. During the quarter, we added $600 million in 1.5x 2-year swaptions to further hedge our floating rate liability exposure further out the curve. We continue to evaluate opportunities to unlock value and reinvestment capital by exercising call rights on our legacy securitizations. The scope of our review currently includes 18 transactions collateralized by approximately $5.9 billion of loans. At times, we may call these deals and either sell or resecuritize the loans. These activities can allow us to unlock capital to reinvest in higher return opportunities that drive earnings growth and support our portfolio repositioning efforts. While redeeming debt at par can reduce book value when the debt is valued at a discount, we balance those near-term effects against the benefits of our long-term portfolio objectives. These activities are designed to enhance earnings durability and reinforce the portfolio's resilience across economic, interest rate and credit environments. Turning to HomeXpress. We're excited to welcome the team as this transaction further diversifies our earnings base, creates synergies with our third-party asset management activities and supports our long-term portfolio goals by enabling us to retain loans for our own investment and securitization programs. Overall, the third quarter was another transitional period for both the portfolio and the broader business. We continue to unlock value organically through strategic divestitures, redeployed capital into accretive investments, most notably HomeXpress, diversified our portfolio and sources of income and enhanced our platform capabilities. We remain focused on executing our strategy. And with the HomeXpress acquisition now closed, we are well positioned to capture earnings tailwinds heading into the fourth quarter and into 2026. That concludes our prepared remarks. We'll now turn the line back to the operator for questions. Operator: [Operator Instructions] Our first questions come from the line of Bose George with KBW. Francesco Labetti: This is Frankie Labetti on for Bose. Congrats on the deal closing as well. And first question is on book value. You noted that the change was due to like the steeper yield curve and the increase in value of the securitized debt more than the value of the loans. Can you just walk through that and why the loans don't get a similar mark? Is it due to like liquidity or -- yes. Jack Macdowell: Yes. No, it's a good question. And part of it is a lag in just the timing with respect to when we're seeing spreads change in the securitization markets versus when we actually see that propagate down into the loan market. So that has one effect. The other piece is the shape of the yield curve. So as we saw the 2-year rallied 11 basis points, the 5-year, only 6 basis points, so that steepening caused the yields in our securitized debt to increase -- to decrease more than on the loan side. So that has the effect while our loans actually increased in value, the increase in the value of our liabilities increased more. The other piece I would highlight there, we saw spreads tighten across non-Agency RMBS during the quarter. But when you think about what our portfolio is comprised of, it's really reperforming loans. So there's a rated and a non-rated component there. And the unrated portion of the RPL market is where we saw the tightest spreads that came in somewhere between 20 and 25 basis points. So that represents somewhere between 55%, 60% of our securitized debt. And again, that's what caused the increase in value of our debt more so than what we saw on the loan side. Francesco Labetti: Great. That's very helpful. And do we have an update of book for the quarter? Jack Macdowell: Yes, yes. And actually, we've seen some of that reverse. Some of that has to do with the timing and seeing some loan activity during the course of October, but we're up about 2.4% through October 31. Francesco Labetti: Awesome. And just one last one on the deal, is goodwill $120 million? You noted that the deal was -- that was a premium to book. Is that -- I just want to confirm that. Subramaniam Viswanathan: Yes. This is Subra. Thanks for the question. Well, the total premium was -- well, all the payments above the $120 million book value. Obviously, we haven't closed, and there will be an adjustment, meaning there is some final adjustments to the book value that will come through as we true up September. Now as far as everything is going to be goodwill, that all depends on the purchase accounting. We're going through these numbers right now. And a portion of the purchase accounting, that will -- we are still evaluating how much of that premium is related to intangibles versus goodwill. Operator: [Operator Instructions] Our next questions come from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: A couple of questions on HomeXpress. First of all, thank you for the projections for Q4 and 2026. That's very helpful. I guess when you guys think about the earnings contribution that you're going to get from HomeXpress, can you talk about how you guys are going to approach that with the dividend? Would you expect to pay out the majority of HomeXpress' earnings as part of the dividend? Or do you think a lot of that will be retained to sort of finance future growth in that business? Phillip Kardis: Yes, sir, this is Phil. So that's a question and we started to address last time. It's -- first, as you know, it's a final determination by the Board. But we'll look at a variety of factors, which are related to how much HomeXpress would need to retain to continue to grow and as we want to be able to grow our own asset base even through securitizations, for example, versus current dividend needs. I mean we recognize the benefits for both, and we're just going to have to look at the timing and make assessments at that time where we think the split is appropriate between current dividend needs and future growth. it's a little bit wishy, but it's hard to predict right now for that. Trevor Cranston: Sure. Okay. And then as you look at the origination volume that they're producing, can you talk about kind of your near-term expectations as to how much of that you might retain and securitize for an ongoing investment on the balance sheet and how you sort of view returns on retaining that production as investment relative to some of the other areas you've been deploying capital? Jack Macdowell: Yes, sure. This is Jack. I guess what we would say, first and foremost, is our intent is not to disrupt any of the partnerships that they have with their existing investor base. That's a very important component of their business. We continue to believe that our job is in part to support that effort. With that being said, given just the predictions for the growth in overall mortgage originations in 2026, and the fact that the non-QM share of total mortgage originations has increased every single year since 2020. We believe that their volume is going to be such that our retention of loans will not disrupt any of those partnerships. So I think a fair assessment of that is we'll look to do something in the context of 4 to 5 securitizations a year, maybe 1 per quarter. When that starts will be a function of market conditions. And it's also a balance between they are generating some healthy gain on sale income. And when we retain those loans for our portfolio, that's a long-term investment decision, but we're also giving up some of those near-term gains. So there's an economic assessment that we go through as well. But I think it's a fair assessment to assume something along the lines of 1 deal per quarter. And the other piece of your question, I think, is with respect to economics. I mean it depends on the structure of the deal, how far we sell down in the capital structure and what we ultimately retain. But we're looking at returns on our retained pieces of those deals somewhere in the context of mid- to high teens. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Phil Kardis for closing comments. Phillip Kardis: Thanks for participating in our third quarter earnings call. We look forward to speaking to you in February about the fourth quarter and 2025 end of the year. So look forward to seeing you. Thanks for joining. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen. Welcome to the BK Technologies Corporation Conference Call for the Third Quarter of 2025. This call is being recorded. [Operator Instructions] There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, it is now my pleasure to turn the floor over to your host for today, Jen Belodeau of IMS Investor Relations. Please go ahead. Jennifer Belodeau: Thank you. Good morning, and welcome to our conference call to discuss BK Technologies' results for third quarter 2025. On the call today are John Suzuki, Chief Executive Officer; and Scott Malmanger, Chief Financial Officer. I will take a moment to read the safe harbor statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenue and profits. These statements are subject to known and unknown factors and risks. The company's actual results, performance or achievements may differ materially from those expressed or implied by those forward-looking statements, and some of the factors and risks that could cause or contribute to such material differences have been described in this morning's press release and in BK's filings with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. All right. With that out of the way, I'll turn the call over to John Suzuki, CEO of BK Technologies. Go ahead, John. John Suzuki: Thank you, Jen. Good morning. Thank you, everyone, for joining today. I'll start by reviewing some of the highlights of our operations and financial results during the quarter -- during the third quarter, and then I'll turn it over to our Chief Financial Officer, Scott Malmanger, for a deeper dive into our financial results. We'll conclude by opening up the call for a brief Q&A. This was an excellent quarter for our business, highlighted by significant revenue growth of 21% to $24.4 million, driven primarily by robust order activity from federal customers, including multiple purchase orders totaling $12.9 million from the USDA Forest Service. Gross margin improvement to 49.9% compared to 38.8% in the third quarter of 2024, primarily reflecting the ongoing shift in the product mix to our higher-margin BKR 9000 multiband radio. This revenue growth and gross margin improvement, coupled with ongoing cost management, drove a 46% increase in net income to $3.4 million or $0.87 per diluted share. On a non-GAAP basis, fully diluted adjusted EPS was $1.27 in the third quarter of 2025 compared with fully diluted adjusted EPS of $0.71 in the third quarter '24. We also significantly strengthened our cash position in the quarter with cash and cash equivalents totaling $21.5 million compared with $7.1 million at year-end 2024 and have no debt. This gives us the flexibility to deploy capital thoughtfully. Through pursuing that, offer the highest return on invested capital, whether through new product innovation, strategic partnerships or technology investments that strengthen our long-term competitive position in our core public safety communication markets. Over the past four years, we have seen consistent improvement in the gross margins of our business as we have reduced costs, outsourced manufacturing to our partner, East West and launched our higher-margin BKR 9000 multiband radio. We continue that trend in the third quarter, delivering a sequential increase in our gross margin of 250 basis points as compared to the second quarter of 2025. As the BKR 9000 multiband radio continues to gain traction among our customers, the radio's higher price point and margin profile are favorably impacting our gross margin performance. Price increases implemented in the first half of '25 benefited our third quarter margin as well, though some tariff exposure in Asia slightly offset these improvements. With the progress we've made to date, we're confident in our ability to exceed our stated gross margin target of 47% for the full year. Growing demand for our BKR Series radio has driven both sequential and year-over-year revenue growth. We achieved revenue growth of 21% in the third quarter compared to the prior year period, primarily driven by strong federal order activity that included multiple purchase orders from the USDA Forest Service for a total of $12.9 million. Additionally, our BKR 9000 is performing well in the market. We are on pace to deliver between 2x and 3x the amount of BKR 9000 multiband radios in 2025 as we did in 2024. Our particularly strong third quarter revenue growth also benefited from the increased amount of finished goods that we imported in the first half of the year to mitigate the impact of tariffs on our shipments, which allowed us to ship more radios in the quarter. So all in all, a great quarter for the company with continued strong execution by the team. With that, I'll turn it over to Scott Malmanger, CFO, to give a more detailed overview of our third quarter financial performance. Go ahead, Scott. Scott Malmanger: Thanks, John. My prepared remarks will focus on the third quarter results. For a full review of year-to-date results, please consult the press release issued earlier today or the earnings presentation posted on our website. Sales for the third quarter totaled $24.4 million, an increase of 21% compared to the $20.2 million in the third quarter of 2024. As John mentioned, gross profit margin in the third quarter was 49.9% compared with 38.8% in the third quarter of 2024, reflecting tariff-related price increases and improved sales mix as the BKR 9000 continues to gain traction in the market. Selling, general and administrative expenses, or SG&A, for the third quarter increased to $7.3 million compared to $5.2 million for the same quarter last year. SG&A expense for the quarter includes noncash stock compensation expense of approximately $600,000. On August 6, 2025, the company issued 39,250 shares of common stock at a closing price of $38.27 related to restricted stock unit grants, RSUs, issued in 2023 for performance-based compensation around the BKR 9000 radio. Expenses in the quarter also included our continued investment in sales, marketing and engineering. Operating income was $4.8 million in the third quarter of 2025, representing an operating margin of 19.8%. This compares to an operating income of $2.6 million in the third quarter of 2024 or an operating margin of 12.9%. The company achieved GAAP net income of $3.4 million or GAAP EPS of $0.93 per basic and $0.87 per diluted share in the third quarter of 2025 compared with net income of $2.4 million or $0.67 per basic and $0.63 per diluted share in the prior year period. Non-GAAP adjusted earnings, which adds back net realized and unrealized loss on investments, noncash stock-based compensation expenses, noncash income tax provision expense and severance expenses, was $5 million or $1.35 per basic and $1.27 per diluted share in the third quarter of 2025. This is compared with an adjusted earnings of $2.7 million or $0.75 per basic and $0.71 per diluted share in the third quarter of 2024. We reported non-GAAP adjusted EBITDA of $5.3 million in the third quarter of 2025, a substantial increase over the non-GAAP adjusted EBITDA of $3.1 million in the third quarter of 2024. Third quarter 2025 adjusted EBITDA margin was 21.5% and represents our second consecutive quarter of adjusted EBITDA margin greater than 20%. On Slide 7, you can see our enhanced profitability metrics dating back to the first quarter of 2024. While profitability has consistently improved overall, we did recognize a slight decrease in adjusted earnings on a sequential basis related to a provision for income taxes of approximately $1.5 million in the quarter, which is related to the year-to-date R&D tax credit adjustment related to The Big Beautiful Bill signed in July. Overall, our profitability trend has been strong, and we anticipate continued profitability growth as product mix shifts and we increase BKR 9000 sales. Our balance sheet continues to improve as well. At September 30, we had $21.5 million of cash, which, as John mentioned, is a significant improvement over our year-end 2024 cash position of $7.1 million, as well as no debt. Working capital improved to $33.8 million at September 30, 2025, compared with $23 million at December 31, 2024. Shareholders' equity increased to $41 million compared to $29.8 million at December 31, 2024. The strong and improving balance sheet gives us the flexibility to deploy capital thoughtfully to continue to strengthen our long-term competitive position in our core public safety communications markets. To conclude, we're very pleased with our third quarter results, and we believe that we're favorably positioned to execute on a long-term strategy of delivering enhanced value to our shareholders. I will now turn the call back over to John for closing remarks. John Suzuki: Thanks, Scott. With the federal government still shut down, I thought I would take a moment to address the business impact. We have received letters from some of our federal customers asking us to hold shipments while the shutdown is ongoing. And of course, we are complying with these instructions. With that being said, we will continue to execute with the intent to make the planned deliveries by year-end since, in our opinion, it is unlikely the shutdown will extend to the close of the year. In the extreme case, where the federal government shutdown does persist, the business is prepared to pivot product deliveries to fulfill other state and local customer orders. At this point, we believe we have mitigated the federal government shutdown risk as we remain focused on closing out a very strong year of operation execution for the business. We continue to be highly confident in our stated targets for the full year, which are high single-digit revenue growth, full year gross margin of 47% or greater, full year GAAP EPS of $3.15 and full year non-GAAP adjusted EPS of $3.80. Lastly, we continue to make meaningful progress on the development of the BKR 9500 multiband mobile radio, a companion radio to the BKR 9000, with revenue expected in 2027. We look forward to carrying the momentum that we've built year-to-date through Q4 as we close out what should be an exceptional year for the company. With that, I will now open the call for questions. Kelly? Operator: [Operator Instructions] Your first question is coming from Jaeson Schmidt with Lake Street Capital Markets. Jaeson Schmidt: Congrats on the really strong results. John, I want to start with your comments on the government shutdown. Curious if you think any orders got pulled into Q3 in anticipation of this? And I guess, relatedly, I just want to clarify that the outlook for the full year takes into account any continued friction here. John Suzuki: Yes. So September 30 was the year-end for the fiscal year for the federal government. So they don't have money that's associated with the new year, and that's why there's the shutdown. So any of the orders that were planned for the last year's fiscal year had to be spent or issued in terms of purchase orders by September 30, midnight time frame. So in terms of our case, all the orders that we were expected did get processed. Some of them got processed late on the 30, but they all did come in. So it would be very unusual to get an order, like to pull in an order in our business because, again, those funds haven't been approved, and so they couldn't generate an order for the new fiscal year. Sorry, I forgot the second part of your question, Jared. Sorry, Jaeson. Jaeson Schmidt: Just the full year guidance accounts for sort of the continued shutdown. John Suzuki: Yes. So the first thing I would say is, is we don't believe that the shutdown is going to extend through the end of the year. So our planning is, is that we continue to drive the material and stage the orders for shipment because our customers still need that material. They just -- there's just nobody there to receive them, right? So hence, the letters to hold the shipments. We believe that the shutdown will -- the business -- the government will open before the end of the year. Once they open, then we'll be getting approval to ship. So that's what our belief is. And so that's what we're working towards. Now that doesn't mean that's going to happen. There is the upside chance that the shutdown does extend through the end of the year. And so we put a mitigating plan in place that we could redirect that material to fulfill on other state and local orders. So all in all, we believe we're very confident regardless of what happens with the shutdown in terms of our overall revenue guidance. Jaeson Schmidt: Okay. That's helpful. And then just looking at gross margin, understanding some of the step back here in Q4 is related to lower revenue, but anything else that we should be aware of that would sort of drive that sequential decline in gross margin? John Suzuki: So we didn't comment on a sequential decline in gross margin in the fourth quarter, Jaeson. So I'm not understanding your question. Jaeson Schmidt: Okay. So gross margin should be able to remain stable from Q3? John Suzuki: That's our belief. Scott Malmanger: Yes. I think what you were referring to was the decline in our operating income or our net income, and that's due to the tax event related to The Big Beautiful Bill. It's basically an adjustment -- a year-to-date adjustment for the R&D tax credits as part of The Big beautiful Bill that was passed in July. Jaeson Schmidt: Okay. No, understood. Just with the sort of that gross margin outlook for the full year being 47%, I mean, obviously, that was maintained. But just given the Q3 performance, the outlook for the full year probably is -- you're feeling a little bit better on that gross margin line. That's a fair assessment? John Suzuki: Yes. Yes, that's right. We just didn't update it. I think our year-to-date is 48 something, 48.2% is the first nine months. So -- and typically, your margins are higher in the first and fourth quarter because typically, the margins are affected by federal orders, more aggressive pricing, which is usually in quarters two and three. Now a lot of that's just been skewed over the years just because we've been making other improvements. So you really haven't seen that dynamic. At some point, the margins will start to level off, and you'll see that dynamic a little bit more with more aggressively priced products being shipped to the federal government in more of that Q2, Q3 time frame. Operator: Your next question is coming from Samir Patel with Askeladden Capital. Samir Patel: Congrats on a really nice quarter. Scott, I wanted to ask about cash flow, which has been really strong this year and particularly in this quarter. And I noticed that you've actually kind of had some working capital favorability and your cash from ops has exceeded adjusted EBITDA, if I'm looking at that right. So maybe you can just help me think through over the next few years as you continue to grow, just how much -- how you think about working capital and cash from operations as compared to your income statement metrics, basically the cash conversion. Scott Malmanger: Yes. Thanks for the question. Basically, I think we have significant operating leverage. I think that's the best way to explain it. We have seen incremental expenses in our SG&A for investments in sales marketing and engineering on the new products that are under development. So there's going to be some incremental improvement as our revenues grow with the mix of the 9000. So I would say a significant amount of the gross margin improvement will fall through to the bottom line. Samir Patel: Yes. Sorry. I apologize. Maybe I wasn't clear. I was asking more about the cash flow and just receivables, payables, inventories and just as you grow the business, how much you expect to need in working capital? Because this year, you haven't -- it doesn't seem like you've really -- in fact, it's been a contributor as opposed to a detractor, even though you've grown revenues a little bit. Scott Malmanger: Okay. Thanks for the clarification. Yes, I think you are correct that basically, we have favorable terms for our AP and the cash collection cycle still remains very strong. So we will see improvement in the cash cycle itself just due to the timing of the payables and the receivables. We will also expect to continue to reduce our inventory, but that's -- it's not a straight path. It's going to depend on what we have for finished goods for the sales increases. Samir Patel: Okay. So basically, as you look out over the next few years, you don't think you need to invest in working capital. You think it should be pretty clean from income statement to the cash flow statement? Scott Malmanger: Yes. Samir Patel: Perfect. Okay. And then the second question, I just wanted to make sure I understood the comments you made, John, about your mitigation plan for the shutdown. So I guess if I'm understanding this correctly, and just tell me if I'm not, you have a backlog of state and local orders for, I guess, the same radios that you'd be shipping to the federal government. And so if you don't have the ability to ship those federal orders this quarter, you're basically going to pivot, ship those same products to state and local customers this quarter instead of next quarter. And then I guess, whenever the government reopens, you would kind of go back and ship those orders to the federal government. So you're saying that essentially it wouldn't be a material impact to revenue because you're kind of just changing out delivery slots. Is that the right way to understand what you said? John Suzuki: That's correct, Samir. Operator: Your next question is coming from Robert Van Voorhis with Vanatoc Capital Management. Robert Van Voorhis: So I actually just had a few questions. One is a follow-up on the one that Samir just asked actually. And John, is the right interpretation of that dynamic that we are actually currently undershipping demand? Because if all of our -- if the mitigation is just to ship the state and local orders if the shutdown continues as opposed to the federal ones, does that mean actually, if we could ship everything in this Q4, then we would have meaningfully higher demand than what would be maybe implied, if you understand what I'm asking? John Suzuki: Yes. Yes, sure, I do. So there are two aspects. One is we plan our material with our production facilities. We did drive our finished goods a little stronger this year because of the potential tariff increase. So we've been carrying that a little bit higher than normal, I would say, but that will deplete out to the fourth quarter. So we do plan our material for the quarter, right? So it's not like you can just pivot on a dime and drive more material in. It's very difficult to do that. The other part of it is, is the customers. So although the material may match your other customers, those customers have been promised material in certain time frames. And so some of it is going back to those customers and saying, "Yes, I know I promised you in January, but would you accept it in December?" And so there is a little bit of work. It's not as simple as saying, "Oh, I've got all this extra demand, let's just go ahead and ship." You have to have the material to fulfill that larger demand. And then, of course, the customers have to be willing to accept those deliveries. Robert Van Voorhis: Okay. Got it. That makes sense. And so I just have maybe two more questions. And the first one is just on gross margins. So I know our goal for a few years now has been getting to 50%. Clearly, we're already there, and we still have more room to go on the 9000 in terms of fulfilling demand in the out years. So longer term, John, it sort of seems like, at least to my eye, that 50% is not really the ultimate goal. I mean, do you have any comments on where you really want to see it long term? John Suzuki: Yes. So that was certainly our goal to hit 50% by 2025, and we were hoping that we would get that for the full year. It'll end up very close. In terms of where we see the margin profile going forward, we will be talking about our Vision 2030. And one element of that is further margin expansion. So I'll just leave it at that because I don't want to get ahead of myself. We'll be talking about that in the March time frame when we do our Q4 investor call. Robert Van Voorhis: Okay. Got it. And then my last question is just on sort of capital allocation and our plans for the cash. And I know previously, we had alluded to the fact that we might do some M&A. And I just want to ask a bit more directly like how are we thinking about the risk profile with that M&A? I mean, in terms of maybe size and what sort of return metrics we'd be looking at? I mean, is it -- are we going to be acquiring technology that maybe is loss-making now and then in the future is not going to be as you roll it in? Like how do we think about it? John Suzuki: I think I'm going to defer that question, if you don't mind, until the March time frame because part of our Vision 2030 is really -- I mean, we're projecting over the next five years to generate a fair amount of cash. And so I think it's more appropriate to kind of defer it to that time because then the question becomes more material, right? You're going to generate this cash, what do you plan to do with it? And then what kind of companies are you looking at? I think it's better if we have that discussion then, that way I can provide a more thoughtful answer. Operator: [Operator Instructions] Your next question is coming from Aaron Martin with AIGH Investment Partners. Aaron Martin: Congratulations on a great quarter. Scott, I'll start first with you on the tax. I understand it's almost $1.5 million, call it as a catch-up. How should we think about the non-GAAP tax rate going forward? Scott Malmanger: That, I think, is going to be pretty much at the rate -- it depends a lot on The Big Beautiful Bill and the treatment for the R&D tax credits because there's going to be an acceleration function. So depending on our tax experts to give us some good guidance there, but what we've guided to in the past is a rate in the range of 24% to 26% for income taxes. Aaron Martin: Got it. So which means there wasn't that much of a catch-up in this quarter that was close to a full tax rate. Scott Malmanger: There was quite a bit -- if you look at what we had for year-to-date in June, I think it was something like a 14% rate. The third quarter was definitely a catch-up. I think year-to-date now the rate that we had was about 20%. So it's trending towards the 26%. That's correct. Aaron Martin: Got it. Okay. And John, going back again to hash out this shutdown and your handling of it, what -- how much -- I guess, roughly what percentage of your backlog is federal versus state versus other agencies? John Suzuki: I don't have that number off the top of my head, Aaron. We did make quite a bit of deliveries to the federal government in the third quarter, which helped us achieve that $24 million. I don't have it -- we'd have to get back to you. I don't want to guess. It's easy the majority is state and local, right? The majority... Aaron Martin: I would say, it's not 70% federal, 30% state. It's something... John Suzuki: Yes. I think it's -- yes, it's like 25%, 35%. We thought we would do about 35% federal business this year, which we're -- we'd probably be less than that maybe, depending on the shutdown and how that goes. Aaron Martin: Got it. John Suzuki: But yes, the majority of the backlog is state and federal. Aaron Martin: And then I want to nitpick you a little bit on the 9000. You talked about the confidence in the 9000 being -- shipping 2x to 3x the number of radios in 2025 than from 2024. In the past, the language you've used was 3x revenue. So I don't know if this is -- should we be taking this as a different language there? Or what should I take from that? John Suzuki: Yes. Actually, I'm not -- I don't remember using 3x revenue. I think the last few calls, we've been saying 2x to 3x as many units. But the units average pricing, I think we talked about was about $2,500. That's consistent. So... Aaron Martin: Okay. So no change there on your expectations for the 9000 growth? John Suzuki: No. Aaron Martin: Congratulations on the progress. Operator: [Operator Instructions] Samir Patel has a follow-up question. Samir Patel: Apologies. I was on mute. I just wanted to go back to gross margins and a comment you made in response to the last question. So first of all, you had elevated federal orders in Q3 relative to Q1 and Q2, correct? John Suzuki: Yes. Samir Patel: Okay. But you also saw -- I mean, you saw a pretty significant step-up in margin from 47.4% in Q2 to 50%-ish around in Q3 as you had the price increases, the mix, et cetera, but that was with, I guess, the headwind of having more of those federal orders, which are your lower-margin product and your best pricing, correct? John Suzuki: Right. Samir Patel: So on a like-for-like basis, I mean, if you're looking at on a -- if you're trying to just separate out kind of the structural margin of the business, I mean, your mix -- it seems like the margin in the quarter was, I guess, even stronger. And to -- I think Robbie asked the question earlier about gross margins. I mean that should give you confidence that even with a heavy federal quarter, if you're hitting 50%, then if you kind of average it over the year and look at more of your growth obviously coming from the state and local, I mean, surely, you should be pushing well into the 50s. Is that a reasonable interpretation? John Suzuki: Yes. Operator: There are no additional questions in queue at this time. I would now like to turn the floor back to John Suzuki for closing remarks. John Suzuki: Thank you, Kelly. Before I close the call, I would like to also mention that Scott and I will be attending the 14th Annual ROTH Technology Conference this month on November 19 at the Hard Rock Cafe or Hard Rock Hotel in New York City. With that, I wish you all the best, and have a great day. Operator: Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
Operator: Good day and thank you for standing by. Welcome to the Borr Drilling Limited Q3 2025 Results Presentation Webcast and 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, Mr. Bruno Morand, CEO. Please go ahead. Bruno Morand: Good morning, and thank you for participating in Borr Drilling third quarter earnings call. I'm Bruno Morand, and with me here today in Bermuda is Magnus Vaaler, our Chief Financial Officer. First, covering the required disclaimers, I would like to remind all participants that some of the statements will be forward-looking. These matters involve risks and uncertainties that could cause actual results to differ materially from those projected in these statements. I, therefore, refer you to our latest public filings. For today's call, I'll start with a review of Q3 and highlight key developments since quarter end. Magnus will then review our quarterly financial results. I'll follow with a deeper look in the market and our commercial execution, and we'll conclude with your questions. Let's get started. Our third quarter results were strong, extending the rebound delivery in the second quarter. With 23 of our 24 rigs active, our commercial team continues to execute at the highest levels, delivering strategically and timely contract despite a volatile and dynamic market. Revenue increased by $9.4 million quarter-over-quarter and adjusted EBITDA rose 2% to $135.6 million with a margin of 48.9%, confirming the quality of our earnings. Operational execution continues to be industry-leading with technical utilization of 97.9%, and economic utilization of 97.4% across the fleet. Subsequent to quarter end, in October, we are pleased to announce 3 contract extensions in Mexico. Mexico remains an important market for Borr Drilling. Notably, collections restarted in September with approximately $19 million received in September and October. These inflows, together with the recent government actions to strengthen Pemex finances are the basis for our confidence in continued normalization of payments. Additionally, in October, newly imposed international sanctions affecting one of our counterparties in Mexico required us to issue termination notices for the old and the new contracts. Today, we announced new commitments expanding Borr Drilling footprint into the Gulf of America and Angola. These awards strengthen and diversify our customer base and portfolio, underscoring our ability to navigate evolving markets and minimizing idle time across the fleet. We expect fourth quarter 2025 results to reflect fewer operating days due to several rigs transitioning between contracts and the recent impact of sanction-induced contract terminations in Mexico. Despite this, we anticipate full year 2025 adjusted EBITDA in the range of $455 million to $470 million. In recent quarters, we've experienced a step-up in jack-up demand across several international markets, absorbing available capacity and providing gradual relief to the headwinds from 2024. While near-term volatility may persist, clear signs of demand inflection in Saudi Arabia and Mexico, 2 of the world's largest jack-up markets, together with incremental activity in other areas provide us with confidence that the market is now past the trough. We foresee a tightened market in the near to medium term that should support higher utilization and day rate levels. I'll walk you through that in more color later in the call. But now I'll hand the call to Magnus to discuss third quarter financial results. Magnus Vaaler: Thank you, Bruno. I will now go into some details of the financials of the third quarter. As Bruno mentioned, we continued the good trend seen in the previous quarter and the results quarter-on-quarter improved. Total operating revenues increased by $9.4 million due to $2.5 million increase in day rate revenue and $6.4 million increase in bareboat charter revenue. The $2.5 million increase in day rate revenue was primarily due to an increase of the number of operating days and day rates for the Ran and Thor, recognition of day rate revenue for the Odin versus previously being recognized as bareboat charter revenue and an increase in reimbursable revenue for the Balder. These increases were offset by a decrease in the number of operating days for the prospective one. The $6.4 million increase in bareboat charter revenue is primarily due to the rigs Galar, Grid, and Gersemi being fully operational in the quarter compared to being on suspension for part of the prior quarter. This increase was offset by the decrease in bareboat charter revenue for the Odin, and the bareboat charter contract was terminated effective June 30 and begun earning day rate revenue in August 2025. Total rig operating and maintenance expenses increased by $6.3 million, which is primarily as a result of the increase in reimbursable expenses for the Grid. This in total gives us an operating income of $98 million, a $1.5 million increase from the prior quarter. Further, below the operating income line, total financial expenses net increased by $2.2 million, primarily due to foreign exchange loss offset by some higher interest income and lower interest expenses. Income tax expenses increased by $6.5 million, primarily due to a one-off deferred tax benefit recognized during the prior quarter, with no comparable in the current quarter. As a result of the before mentioned, net income for the quarter was $27.8 million and adjusted EBITDA was $135.6 million, an increase of $2.4 million. Moving on to cash. Our free cash position at the end of Q3 was $227.8 million. In addition, we have $234 million undrawn under our revolving credit facilities, resulting in total available liquidity of $461.8 million. Cash increased by $135.4 million in comparison to the prior quarter, explained by the following: Net cash provided by operating activities of $72.1 million, which includes $6 million of cash interest payments on our convertible bonds and $13.2 million of income taxes paid. Operating cash flow for the quarter was further impacted by a buildup of working capital, primarily driven by approximately $42 million increase in trade receivables in Mexico and a $13 million increase in trade receivables relating to the rig Vali. However, subsequent to quarter end in October, we received approximately $17 million related to the trade receivables in Mexico and $10 million related to the Vali. We expect to receive further settlements for our Mexico receivables, both in November and December. Net cash used in investing activities was $33.9 million and is comprised of jack-up additions, primarily as a result of activation costs and contract commencement for the Vali, capital additions for drilling equipment and maintenance costs. Lastly, net cash provided by financing activities was $97.2 million, primarily due to $96.9 million net proceeds for the company's July 2025 equity offering. With this, I will pass the word back to Bruno. Bruno Morand: Thank you, Magnus. Year-to-date, we have secured 22 new commitments, adding $625 million to our backlog. Since our last report, we've continued to secure meaningful awards. First, in Mexico, we secured 3 contract extensions. Galar and Gersemi received 2-year extensions on improved commercials and payment terms. These commitments not only strengthen our 2026 utilization, but they also provide visibility well in 2028. Under the revised structures, operating costs will be reimbursed by the customer on a fixed 45-day payment term, materially reducing our working capital needs. Bareboat charter payment terms will be kept at 180 days. And for the Galar, this cap will progressively improve over time. Additionally, we received a short-term extension for the North and continue in active discussions with our customer in Mexico about a long-term deployment for the rig. In Mexico, going forward, we will have a total of 5 rigs working from a previous count of 7, with 2 rigs being reassigned to new work elsewhere, as I'll cover shortly. Regarding the 5 remaining rigs in country, 2 are long-term contracted with payment protection provisions, 2 are contracted with IOCs, and only 1 has direct Pemex payment exposure. This is a significant change in our fleet mix in country. I'm also pleased to report on recent awards in Americas and West Africa, along with several other contracting updates. In the Gulf of America, the Odin received a letter of award for a 6-month campaign with an undisclosed operator. The campaign is expected to commence in January 2026. This will mark our entry into the U.S., and again highlights our team's ability to timely secure work for the rig, following sanction-induced contract termination. In West Africa, the Grid has received a letter of award for a 6-month commitment plus unpriced options with an undisclosed operator in Angola. The campaign is expected to commence in the first quarter. Leaning on our strong relationships, we have collaborated with our partner in Mexico to reassign wells previously allocated to the Grid to our other rigs in country. This will enable us to conclude operations with the Grid in Mexico in November, and the rig will begin its mobilization to West Africa in December. Also related to the Grid, we have agreed with New Age to reassign the contract we previously allocated to the NAT to the grid, and expect to commence a 1-well campaign with New Age in Congo in January, prior to commencing the work in Angola. Additionally, in West Africa, we are in discussions with ENI regarding their current well sequence for the NAT in Congo. While there are various scenarios in consideration, we now expect the NA to stay busy with ENI in Q4, and potentially into early part of 2026. I'm also pleased to share that we have agreed with Shell in Nigeria to accelerate the NAS campaign originally scheduled to commence in November 2026, now to April 2026. This significantly reduces potential idle time for the rig and provides Shell the ability to accelerate their well delivery schedule. It is clear to me that Borr Drilling is the preferred partner for shallow water drilling operations. In recent months, we have been trusted with commitments from our customer to deliver critical wells globally. For example, Shell with their highly anticipated HI project offshore Nigeria, ONE-Dyas for the first fully electrified offshore drilling campaign in the Netherlands and CME in Mexico for their Bacab-Lum project, just to name a few. It is particularly notable that despite the various market headwinds presented in 2024, and early this year, our 2025 fleet coverage has reached 85% at an average day rate of $145,000. This is in line with our earlier targets of achieving 80% to 85% coverage in the year. Our full year 2026 coverage, including price options, now stands at 62%, a 15-point improvement since our last report. Taking a closer look into 2026, we have 79% coverage in the first half, a solid position to build from as we enter into the year. Based on our current pipeline of opportunities and ongoing negotiations, we expect that utilization levels for the first half of 2026 will continue to increase in the coming months. At the same time, recent developments in Mexico and Saudi give us increased confidence in a tightening jack-up market and a constructive outlook for the second half of the year. This should position us well to gradually fill up the coverage for 2026, while maintaining a disciplined commercial strategy. On the commodity front, Brent crude has remained volatile, but range bound in the mid-60s. Current price levels have still allowed for meaningful contracting activity this quarter as lower breakeven shallow water projects offer a relatively rapid B2 barrel cycle for our customers. Despite several macro uncertainties, global utilization has remained resilient, in fact, increased quarter-over-quarter with modern rig market utilization at approximately 93%. In Saudi Arabia, we're encouraged by the market reports confirming that Aramco has issued notices calling back several rigs previously suspended in line with our earlier expectations. As of today, our count is that 7 to 8 rigs have been called back by Aramco, effectively taking the majority of the readily available modern rigs still available from suspensions. The remaining idle rigs are either rumoured to be committed elsewhere or have moved to cold stacked after the suspension last year. The increase of activity levels in Saudi will significantly tighten the supply and demand balance in the region. Equally positive, as we highlighted in our last call, we continue to see visible incremental demand in the Middle East, particularly Kuwait and the neutral zone with multi-rig, multiyear tenders progressing towards awards. Now coupled with the callbacks from Saudi Aramco, there is a real scenario for rigs from outside of the Middle East to be required to mobilize into the region to meet the forecasted increased demand in late '26 and into 2027. In Southeast Asia, demand has remained resilient despite various market obstacles. As mentioned on past calls, weakness in the region has been driven by excess supply targeting opportunities following Aramco suspensions. We expect this dynamic to improve in 2026. In West Africa, incremental demand has continued to materialize as expected, and as evidenced by our mobilization of an additional unit to the region. Contract activity has continued to accelerate in the past 12 months, and we see opportunities developing in areas that historically held a much higher jack-up count, particularly in Nigeria and Angola. Mexico is one of the world's most consequential shallow water markets and remains strategically important for Borr Drilling. Over the past year, industry-wide payment timing challenges and temporary contract suspension at Pemex have affected activity cadence. We responded constructively. We evolved our Mexico contract portfolio, thoughtfully diversifying beyond concentrated Pemex positions into IOCs and independents while continuing to partner with Pemex for terms to support sustainable operations. Looking into 2026, we see a market where turbulence begin to ease as the year progresses. White space for the global modern jack-up fleet is heavily weighted towards Asia and the Middle East in near term, a phenomenon we see reconciled by demand increases in those regions over the next few quarters. In closing, I'm pleased to see how Borr Drilling continues to successfully navigate the dynamic market experienced over the last couple of quarters. We secured important contracts for our premium rigs, strengthen our fleet coverage in 2025 and into 2026. We have continued to partner with our customers to optimize our fleet availability or offer them unique operational schedule flexibility. Based on that, we now anticipate 2025 full year adjusted EBITDA to be $450 million to $470 million, aligned with our early expectations and adjusted for the impact of the recent sanction-induced terminations. Demand for modern jack-up rigs remain resilient. The jack-up market has bottomed, and we're seeing clear inflection in rig demand across key regions, including Saudi and Mexico. Lastly, I want to emphasize the strength of our drilling operating platform. It is built on operational excellence, anchored by a strong focus on safety culture and streamlined operating model that keeps us efficient and predictable. It's relentlessly customer-centric, informed by intimate knowledge of the shallow water market and strengthened by deep-rooted relationships. It is powered by our premium jack-up fleet and our global footprint. This platform is our defining competitive advantage and position us uniquely to benefit from ongoing market inflections. With that, I'll now turn the call over to Q&A. Operator: [Operator Instructions] We will now take the first question from the line of Scott Gruber from Citigroup. Scott Gruber: It's good to hear, obviously, the new contracts in Mexico for you and good to hear Saudi is calling some rigs back. It seems like the market is improving here. But just curious how you view the next 12 to 24 months in the global jack-up market. Is this momentum going to continue? Are we going to see a genuine inflection in demand in the next year or so, even if crude is range bound? Or do we need some improvement in crude to really drive that inflection? Bruno Morand: No. Thanks, Scott. As I mentioned earlier, a lot of the inflection now is basically resulting from the fact that the headwinds experienced earlier, namely Saudi and Pemex are now starting to revert. If you look at activity levels or if you look at utilization levels, at 93%, that number is very healthy. And with the suspension now rolling back, the 93% is a real number. It's not a number that requires adjustment. So we are in a territory that is quite interesting. Obviously, it takes a little bit of time for some of these dynamics to take place. We expect that as particularly the tenders in the Middle East start to conclude, the push for rigs to come back will start to kind of come through and that rebalancing is what eventually helps us in achieving higher utilization and better day rates in general markets. Now I say beyond the Middle East, we've seen that most markets have been operating at or very close to balance, and that includes, for example, West Africa. And we think that obviously, the ongoing inflection will support faster recovery in markets like that. On the opposite end, as I mentioned in my remarks, markets such as Southeast Asia, for example, where the demand takes a bit longer to materialize, may take a quarter or 2 before we see the real impact of that. But I think the way to think about it is we're going to continue to navigate some volatility in the first half of the year, improving. The potential here for a much stronger second half of the year seems to be solid defined based on this development that we see. Now we said before, in terms of commodity price, pricing where it is, I believe, is quite healthy for the jack-ups. It is -- jack-ups are very economical barrels for the customers. They are fast barrels to the market. And we think it's actually quite interesting for us to have pricing at that level. So I don't think that pricing movements here are needed to spark additional activity. It's really just the timing that takes for the development in Saudi, the developments in Mexico and some of the ongoing tenders to really come through. Scott Gruber: I appreciate that color. And then one of the macro themes we're seeing here is rising demand for natural gas around the globe to help power data centers and just generally rising power demand. How do you think that impacts the jack-up market in the years ahead? And I'm particularly thinking about Southeast Asia. Is there a pull from the gas side that's going to help that market? Bruno Morand: No, indeed, Scott. And we've been participating in several very interesting gas projects around the world. And I think in the previous quarters, we named, for instance, the ENI project in Congo, which is a very interesting and large-sized gas development. In Asia, we've been participating in gas projects before. There are a few very interesting projects, particularly in the area of Sarawak, that have been put on hold for now until the situation in Malaysia gets resolved, the political situation in Malaysia gets resolved. Aramco has, over time, obviously expanded their presence in gas, and I think it's been largely onshore focused. But there have been discussions over the last few quarters about Aramco potentially returning to gas in the offshore space in a more meaningful way. So clearly, what you see is true. We do expect that there will be high interest from our customers to start developing some of these gas projects that are available around the globe. Operator: We will now take the next question from the line of Eddie Kim from Barclays. Eddie Kim: Congratulations on the 2 separate 2-year extensions on the Galar and Gersemi in Mexico. Just curious on pricing for those 2 rigs. I don't know if you can share if the day rates on those 2 extensions are similar to what they're earning today, or higher or at a discount? Just any kind of directional commentary there would be great. Bruno Morand: Very good. And we haven't disclosed specific numbers for that. But what we shared, they are a notch above from where the rigs are operating at the moment, which that on itself is very interesting. But equally relevant, as I mentioned in the prepared remarks, is the fact that we were able to negotiate improved contract terms and payment terms for those rigs in particular. What we've seen over in Mexico over the last several quarters has been that collections has been a very relevant topic. So we took marked efforts to ensure that we were adjusting these things in this contract, not only to improve the day rates because that's an important part, but equally important to make sure that those day rates are received in the bank account, and we don't have a growing working capital requirement in the country. Eddie Kim: Separately, it's great to hear about the expected activity inflection in Saudi Arabia. Just curious, I mean, 2 years ago, the Saudi Aramco jack-up rig count was as high as almost 90 jack-ups. Today, it's around 55. Just curious, where do you think we get to sometime in 2027? Probably not back up to that 90 level -- but does 70, is that reasonable? Or even that too high? Just curious your estimate of where the jack-up rig count could get to by 2027. Bruno Morand: Yes. And Eddie, this is a great question, probably not a very easy one to be precise. I -- from our deck, we think that a number in the high 60s and 70s is very likely. I think a number in the high 70s is possible. The reality is that the big scheme of things, as I mentioned in the prepared remarks, even with this callback that just took place over the last couple of weeks, capacity in the region is actually already very tight, right? So whether that number is low 70s, whether that number is high 70s, I think actually has very little bearing on how the sector is going to respond. Because in any case, any lag up from where we are at the moment is very likely to cause an acceleration in utilization and consequently in economics in the space. I think a number in the 70s is very reasonable, but I would probably fall shy of trying to predict around for behaviors. We all try and the best. It's definitely not an easy thing. They have a lot of things going on. So that's the way to think it. I think anything they do on top of the callbacks that already took place is more than welcome in the sector and kind of strengthen the space tremendously. Operator: We will now take the next question from the line of Fredrik Stene from Clarksons Securities. Fredrik Stene: I have 2 questions for you today. And the first one relates to Mexico and the payments there. Clearly, liquidity in general has been a recurring theme given your historical or Mexico exposure, mostly Pemex. Now that you've received some money in October and small sum in September as well, how do you think about potentially -- I think historically, Pemex has paid suppliers mostly. Should we expect any similar payments as you got in October in November and December as well? Do you have any clarity on that kind of taking your receivables down? Magnus Vaaler: Thank you, Fredrik. Obviously, very positive to see that what we have predicted payments starting to flow in the second half of the year actually has happened, and we received $17 million in October. We have -- from what we see in the plans, there are payments to come in, in both November and December as well. And following that, we would also expect things to return more to normal with monthly settlements. Also, that being said -- and Bruno, Bruno also mentioned the improved payment terms that we have in our new contracts, which has actually a cap on the number of days we can have outstanding for operating costs that we pay on our O&M of 45 days. So we expect to get that paid within 45 days, and also a maximum of 180 days outstanding for the bareboat. So that's also going to improve on our collections as we see it since we're not contracting directly with Pemex for these 2 rigs, but between the intermediaries, we have obtained payment terms from them. Fredrik Stene: For my second question, switching gears a bit. There has been some industry consolidation in the space this year with ADES likely acquiring Shelf if all -- everything is checked. And clearly, there's -- in almost any type of consolidation, there are room for fleet improvements, scrapping and whatnot. But you guys, you have a premium -- a full premium fleet already. And I'm sure there are some other assets out there that could be an interesting fit for you guys. Have you thought any more actively on how Borr could potentially be in any M&A or asset transaction scenario, since you're kind of both in the third quarter and in relation to the equity raise in July seemed a bit more open to that particular theme compared to what you have been earlier? Bruno Morand: Thanks, Fredrik. And see, I hope my answer is probably not too much of a repetition from what I've tried to put across in earlier calls. Consolidation is definitely important for the space. It has been welcomed in general. And you're right, whether result of that consolidation or just the state of the market, we have seen together with it some additional retirements, some additional scrapping, some additional repurposing, which is obviously another very important dynamic for the sector. So those things are indeed interesting. We continue to look -- you're right, as I highlighted in the remarks, we do believe we have a very strong operational platform that can deliver better value for jack-ups than perhaps quite a few of our peers. And that's really what puts us in a position to meaningfully look into how we participate in consolidation if opportunities were to come. But as you said before, and you mentioned that in your question, there are some metrics that are very important for us to consider. And one of those metrics is really the quality of the fleet. We are very proud to have the youngest and the most premium fleet in the water. And obviously, it's important for us to make sure that anything that we're looking to does not come at the expense of diluting the quality of the fleet that we have. Similarly, as we said before, I think a very strong driver for the company at the moment is to make sure that we continuously delever our balance sheet over time. So when we look at any M&A transactions, it has to be something that makes sense from a deleveraging perspective. So when you put these things together, we continue to see what is out there. I do think that we have a great platform to grow -- we don't have to, and we're going to continue to look at that opportunistically. I do think that the sector can do more consolidation. And if it can be part of it, if it is rational, if it fits our strategy, we're definitely open to see what's out there. Operator: We will now take the next question from the line of Doug Becker from Capital One. Doug Becker: Bruno, you've emphasized the expanding Borr footprint. Curious how you're thinking about balancing portfolio diversification versus having scale in particular markets to manage costs? And maybe putting it differently, do you view growing the fleet in the U.S. Gulf, Angola, Saudi Arabia as strategic priorities? Bruno Morand: Thanks, Doug. And see, I think you're right. There's a very interesting balance between not stretching ourselves too wide. But the way I see at the moment, our operation, if you look in the markets where we are present, we are in very large scale in these markets. And generally, our expansion has been in adjacent markets. So obviously, Angola is a new place for us, but we have a very strong operation in West Africa and a very strong knowledge of operation in West Africa that will help us to build that up. The U.S. is definitely a new frontier. But on the Mexico side, we're present. We understand the operational challenges. We understand how to be successful in that environment. Certainly, there will be some learnings from the U.S., which is new to our portfolio. But certainly, we feel that we are in a good position to manage that. Frankly, I don't -- I wouldn't say at this time that the U.S. is expected to be a large expanding market for us. Getting rig there, I think, is a good achievement for us. It's a new place that we're going. I do see some of the policies in the U.S. potentially supporting more activity. For now, we see a pipeline that is enough to keep Odin busy for quite a while, and that's what we're targeting. If more opportunities come in the back of changing policies, changing incentives for operators in the U.S. to go forward their projects, we'll be ready to look at that. For now, I think it's probably a rig play. Doug Becker: Then just given the increased confidence that the jack-up market is past the trough, any changes to the capital priorities? I know you mentioned deleveraging over time, still a priority. But just given a better market outlook, is there any shifting in how capital might be allocated? Bruno Morand: No, not at this time, Doug. I think we maintain the view that deleveraging is a priority for us, and it will be for a while. So we want to make sure that by the amortization that we have in our bonds, by the potential cash sweeps that we have in the bonds, we're positioning ourselves to be in a very favorable position to refinance our debt in 2028. That is on the back of obviously, deleveraging consistently over time. Other priorities, I think we'll leave it for another day. I think it's a bit too early for us to consider. The momentum is positive. That doesn't drive a change in strategy for now. Operator: We will now take the next question from the line of Ben Sommers from BTIG. Benjamin Sommers: I know you touched on it a little bit in the press release, but kind of curious how you're looking at the new build market. I know you guys mentioned that there's some supply chain challenges that you think will kind of push out these new build rigs entering the market. So just kind of curious any color there on what you're seeing. Bruno Morand: Yes. No, nothing's changed, Ben. We -- I think quite a few quarters ago, we shared a view that we believe that the order book that is namely there, there may be 1 rig, 2 rigs maximum that would come to the market. That was several quarters ago. None of these rigs have come out. And obviously, the longer they stay in the shipyard, the more complicated it is. A lot of these rigs are very -- were in very early stages of conclusion when they were stopped or abandoned, is not easy. We haven't seen any one of them coming out. I honestly do not expect that to change as things improve. Unknown Analyst: Awesome. Then I know you touched a little bit on the U.S. Gulf entry, but just curious kind of on Angola, now bringing a rig there, just kind of any outlook or color on that market. Bruno Morand: Yes, sure. I mean, it is a new area for us. We have been looking at Angola before and waiting for the right moment and the right opportunity to be in country. As I said earlier, we have a very well-established infrastructure in West Africa. So Angola was a bit of a natural growth opportunity for us. Historically, as I mentioned in the remarks, it is a market that had a quite substantial activity level for jack-ups that has been subdued for quite a few years. It seems that the potential is very large. And that's not limited to Angola. We see quite a few markets in West Africa that haven't had enough activity for quite a few years now coming back and being able to penetrate Angola now. Having that as an opportunity for our portfolio, I think strengthens our flexibility going forward. Operator: We will now take the next question from the line of Greg Brody from Bank of America. Greg Brody: Just you talked about better collection terms on your new contracts and obviously, collected $19 million in October from Pemex. How should we think about what the opportunity to recapture sort of that -- the receivables is over the next year? Bruno Morand: Sorry, your question was on how to capture the receivables from Pemex? Greg Brody: Pemex, that's the main one, yes. Yes. Bruno Morand: No. I think what we've seen now is that Pemex has -- and the government of Mexico has put in place several schemes this year, want to refinance their financial liabilities and also their vendor or supplier liabilities with a $12 billion setup. And that's something we've seen they've gone through now in the second half started to repay, and we received $17 million so far in October. We see times of having more payments come in, in November and December and expect a return to normality when it comes to payments in Mexico. So I think it's looking like they are taking the right steps in Pemex and the government in Mexico to become more current on their payables definitely. Greg, just to highlight what we've kind of mentioned earlier, obviously, we have current receivables that we are -- and we will continue to work hard to collect them. With the new contract terms that we have and the new allocation of the portfolio in Mexico, effectively, then York will continue to have Pemex payment exposure, while the remainder of the fleet in country will now either be working on IOCs or include fixed payment terms that diminishes tremendously our exposure to the Pemex payment friction. So that doesn't resolve the current outstanding receivables, and we continue to work very hard, as Magnus said, to lean on the existing facilities in place, the mechanism the government put in place to accelerate that. But going forward, we expect that very soon the new terms will slow down considerably the accumulation of receivables in Mexico and keeps us far more current. Greg Brody: Then just with the sanctions, you -- obviously, you moved one of the rigs, so that leaves the hill. What are your expectations for how this plays out, in particular with what I think is the sale to Gunnlod of those assets. But what's your expectation for that? And how are you thinking about what you do with the Hill from here as a result? Bruno Morand: Yes. It's probably early to say, Greg. What we know is we've worked very diligently. As soon as we became of the sanctions, we did what we were required to do to make sure that we stick to our governance and comply with international requirements. We are currently winding down operations on those rigs. We're expecting both of them to finish around mid-November, the ongoing activities as allowed by the sanctions. And we continue to monitor the situation. It could change if there's a sale potentially. We don't want to speculate. For now, we're doing what we have to do. It's a customer that, over time, I think we deliver great service for them. They seem to be extremely happy with what we've done over time; and provided no sanctions affect our ability to continue working in that field or delivering that program, we definitely will be more than happy to continue to do that. But I don't want to speculate for now. We're sticking to the rules as they apply, and then we'll see if things change as we go along. Greg Brody: Have you seen this uncertainty with sanctions impact the rig market at all? You're probably a little closer to this than me, but how many others have been affected by the suspensions? Bruno Morand: Well, I won't comment much about others. I mean, the only thing I think has been in the news recently was a similar impact of advantage on the deepwater market. In the shallow water market, I haven't seen any other announcements. As far as we are concerned, the impact of that has been limited to Mexico. We'll continue to monitor the whole topic of sanction is a very dynamic topic at the moment. For now, that's been the only impact to our business, which we disclosed, which is the loss of revenue. For the Odin, we're very happy to see that the rig has been re-contracted now. For the Hild, we'll continue to see what are the opportunities for the rig, whether it involves returning to the same project once the field is sold or if the field is sold or alternative deployments for the rig within with the region. Greg Brody: Great. And one last one. Just what's your expectation for cost trends on the operating side here relative to this quarter going forward? How should we think about that? Bruno Morand: Sorry, Greg, I'm not sure if I got your question. Cost trends on the operating side. Greg Brody: What's your expectations for the direction of your cost up -- or is there opportunities to cut costs? Just wondering how you're thinking about that going forward. Bruno Morand: Yes. No. And as we said before, we've been seeing operating costs very steady over time. There are differences in operating costs from region to region, from country to country. But all in all, we have not seen a significant change in operating costs over the last few quarters and neither we have any reason to believe that that's going to be changing going forward. The team continues to be working focusedly on finding savings in our operations, streamlining operations, and that clearly has been more than enough to offset any inflation experienced in the sector. But so far, it has been flat. I have no reason to think that will change going forward. Operator: We will now take the next question from the line of Joshua Jain from Daniel Energy Partners. Joshua Jain: Just I really only have one, which is on rig attrition. Maybe do you have a number in mind with respect to how many incremental rigs could leave the market next year or any insights there? Or maybe to put the question differently, could you speak to broadly the capital investment that may be required for a number of operating rigs that are out there today that are older to sort of keep pace with a lot of the newer spec rigs and how that frames market dynamics? Bruno Morand: Thanks, Josh. We see that standard rig market or the older vintage rig market has been shrinking over time, and they've been limited to a few markets. The rig count in that side, the active rig count in that side is about 100 rigs at the moment in the water and the average age is above 40 years old. So there's obviously, a lot of potential for attrition. Some of the attrition should happen as a result of lack of contracting opportunities for these rigs. Some of the attrition will happen as a result of just the high CapEx required to maintain these rigs active going forward. Rigs are mechanical equipment and as such, they require capital to stay in good working class. And by the time they are 40 years old and beyond the retirement age, that only gets better -- only gets worse exponentially. So I don't know how many rigs I'll say can get out of the market. Clearly, there's a potential for a lot of the rigs to go out of the market. We're seeing that trend accelerating, we're seeing rigs now converted to -- or sold for conversion to MOPU, including quite a few of the rigs that came out of Saudi. We'll continue to look obviously for us. We expect owners to act diligently in that and discipline on that. For us, it's a bit of a muted point. Our rigs are all very new with the youngest fleet in the industry. So let's see what happens. Operator: Thank you. That's all the time we have for questions today. I would now like to turn the conference back to Bruno Morand for closing remarks. Bruno Morand: Very good. Thanks for participating in today's call, and I look forward to speaking to you guys soon. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Group 9 Months 2025 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Arne Riscassi, IR Manager of Banco BPM. Please go ahead, sir. Arne Riscassi: Good afternoon, and welcome to Banco BPM 9-month Results Conference Call. We have here Giuseppe Castagna, our CEO; and Edoardo Ginevra, Joint General Manager and CFO, which will take you through the presentation. This will be, as you know, followed by a Q&A session, and I kindly ask you to limit yourself to 2 questions. Now I hand over to Giuseppe. Giuseppe Castagna: Thank you, Arne. Thank you, everybody, for being with us for this Q3 presentation. Let's start immediately on Page 6 of our presentation. We wanted to show you just a full picture of what we are doing and how we are delivering our vision that we announced with our business plan in February this year. We think we have completed almost the product factory activity that we started 2.5 years ago with the bancassurance, payment system, life insurance and recently asset under management. This brought us already quite a relevant set of results, let's say, almost EUR 400 billion of total customer financial assets, 49% of fee-based generated models or non-NII revenues on total revenues, a strong reduction on NPE ratio, 2.48% gross and 1.4% net and maintaining and building up, again, a strong capital position up to 135%. Profitability is growing as we expected. We have now reached ROTE of 22% vis-a-vis 16% of 2024 and 14% in 2023 with an ROE which stands at 6.5%. In terms of shareholder remuneration, we can confirm that the Board has approved a distribution of EUR 0.46 per action per shares to be paid in -- later in November on 26th of November this month, representing interim dividend for 2025. If you can make a comparison with the previous dividends starting from '22, you can see the growth that we are having, considering like-for-like results, EUR 350 million '22, EUR 850 million '23, EUR 1,100 million, excluding extraordinary distribution for the Numia one-off in 2024 and already EUR 700 million in 2025. Total shareholder remuneration during this year is 565%. We will -- the dividend yield that we will pay will be 7.3% on a yearly basis. Net income stands at EUR 1.660 billion, well on track towards our guidance. Common equity ratio at 13.52% Again, as you can see, excluding one-off, we are 17% higher than last year results, and we have already reached 85% of the total guidance we gave for this year. Then we will come back to that. Net income was very strong, EUR 450 million, considering the seasonality of August and one of the best quarter -- third quarter in our story. This pace we deem is fully consistent with our long-term targets. In terms of the commercial performance, new lending was 39% higher year-on-year. Asset under management net flows was EUR 1.7 billion in 9 months compared to EUR 700 million of 2024 and the cost income stood at 45%, down from 47% 9 months '24. Again, cost of risk reduction to 34 basis points compared with 40 basis points last year. The interim dividend has a yield on 6-month yield of 3.6% and again, has been approved today will be paid on 26th of November. We have already accrued EUR 170 million in the first 9 months of the year to be distributed between the interim and the final distribution. Economics are very solid, both in terms of growth in revenues, 5% stated vis-a-vis last year. If we consider pro forma the contribution of Anima, we increased these results EUR 120 million. We already say that non-NII revenues stood pro forma at 49%, very close to 50% of the target in '27 as well as net fee and commission rose 18%, including the contribution of Anima, but pro forma also the first quarter of Anima, this will grow of another EUR 140 million. Also the contribution from income from associates, insurance NFR increased from EUR 140 million to EUR 290 million in line with our expectation for '27. In terms of cost control, we were able to reduce again the cost-income to 45% with a reduction of 2% like-for-like vis-a-vis '24 and just a slight increase if we consider the Anima inclusion of cost. Significant decline in provision from 30% year-on-year from EUR 350 million to EUR 24 million with a cost of risk going down from 40 to 34 basis points. Capital, if we consider the acquisition of Anima and the regulatory headwinds, we were able to build up 152 basis points in terms of organic generation through managerial action after paying 240 basis points out of the Anima transaction and 60 basis points for regulatory headwinds and including, of course, also 200 basis points that we will pay as dividend, 80% dividend payout. On Page 10, let's have a look to the trajectory towards our target in 2027. As we already said, net income grew in terms of quality of the contribution. You remember that we switched our bank from a pure commercial banking activity to a more equilibrated and more capital-light activity, diversified activity. We had the target to grow from 24% to 35% is a contribution in terms of wealth asset management and protection. We are already at 33% after 9 months from the target decision. The same is for specialty banking contribution that is almost in line with the minimum target of 27% and reduction of commercial banking activity, which went down from 65% to 57% with a target of 50% to 55%. The quality -- these results were driven by non-NII revenues, again, growing from 40% to 49%, cost income ratio reducing from 47% to 45% cost of risk down to 34 basis points. In terms of figure numbers and the different contribution of the main area vis-a-vis the current results and the target -- we have still -- we are fully in line with our expectations. We still have a delay of EUR 30 million per quarter in terms of NII, which will easily reach through the refresh of replicating portfolio in the next couple of years. The decrease in cost of wholesale funding, which is already contributing more than EUR 40 million per year and the growing commercial volumes, which we expect in terms to up to EUR 3 billion by the end of the business plan. Net fees and commission, still we have some growth to expect from the full speed of the different product factory, including, of course, Anima contribution and improvement in the running fees, but also we expect some improvement from insurance business. You may remember that this year, we had 2 IT migration for both life and non-life business, which impacted on our results and also on the payment system activity with Numia. Meanwhile, we are still -- we are experiencing a very strong growth in terms of fees coming from corporate investment banking, Banco agro's trade finance, and we expect this to continue to grow for the coming 2 years. In terms of cost, both operating cost and cost of risk as we anticipated are well on track. Cost of risk is below the target we expected. So we have an advantage that would help the final target that we have in terms of net profit. So very confident to reach our target. Let's have a look to Q3. We wanted to dedicate a slide to the Q3 contribution. We are very satisfied of our EUR 450 million of results. On the right side of the slide, you can see the profit before tax, which stood at EUR 685 million in Q3, which has normally deflated by seasonality, but the difference of EUR 70 million coming from the Q2 results is due essentially only to the Monte Paschi dividend that we included in Q2. Meanwhile, the seasonality has been partially recovered through organic improvement expected in fees and lower cost. So a very solid result for Q3. Let's have a look to the 9 months, net interest income down 8%. But if you consider net interest income at full funding cost, which means including the cost of certificates, which are, of course, a source of funding for our bank, we go down to 5.7%. And core revenues, although experiencing a reduction of EUR 225 million in NII vis-a-vis the 9 months '24 have an increase of 1.6% as total core revenues year-on-year. If you include the net financial result and other operating income, this advantage vis-a-vis last year grew to 5% and operating cost meanwhile registered a 2.2% increase due to the Anima impact if we consider year-on-year without Anima on a like-for-like is a reduction of 2% in general cost. Provision down 30%, leading to a net profit from continuing operation and net income one-off down better with 17% vis-a-vis last year. On the right side, you can see the trend of the last 2 years with the continuous improvement, which are very encouraging for the remaining growth that we have to experience by 2027. As you can see, revenues grew 13%, almost EUR 550 million in 2 years. NII at full funding cost registered this year is at the same level of 2023, notwithstanding a Euribor, which is 106 points below the average of 2023. Cost income down, cost of risk down. Let's pay some attention to net profit from continuing operation, which is EUR 1.5 billion compared to EUR 1.1 billion of '23 is EUR 440 million more also after considering almost EUR 200 million reduction of NII. So that means that we had a profit generated by a strong increase in fees and a very strong reduction in general cost and cost of risk. We already mentioned NII. Let me just say that the reduction we had has been offset for EUR 84 million by managerial action out of EUR 100 million that we expected by 2027. So we are also, in this case, at a good point. Now we have almost the same spread asset liability in the region of EUR basis points. And we are consistently taking advantage from the bonds issue spread, which has been reducing 40 basis points, generating a lower cost in terms of NII for EUR 41 million per year. You have some example of in the different kind of bond issued by the bank of the strong reduction we are experiencing since the previous issuance, that were strongly higher in terms of spread vis-a-vis the current situation. We also gave you some figure about the replicating portfolio, which now stood at almost EUR 28 billion. We have to refresh by the end of the year and next year for a total consideration of something like EUR 9 billion to EUR 10 billion that will improve also the general yield and the contribution to NII. Notwithstanding, we have -- we were able to have an increase in new lending of 39%, exactly 57% in mortgages and 44% to nonfinancial corporates the level of our stock remaining basically the same. As you know, we are not registering an increase in loan demand, although we are confident that by 2026, having kept the level of loan at the same level of beginning of the year, we can register a strong increase that is testified by the good activity we are having in granting new loan. We are taking, of course, a lot of attention to the quality of our portfolio. Stage 2 loans reduced EUR 1.6 billion to below EUR 9 billion. And now our corporate nonfinancial corporate portfolio is 53% secured, 64% if you consider only small businesses. 92% of our stock is concentrated in the best risk classes and the same level is up to 98% if we consider the new lending of the first 9 months of this year. Let's go to Page 16. Total net fees and commission, up 3%, which would be pro forma 5% if you exclude the contribution of ecobonus and instant payments last year. Of course, the stated figure is much higher because it includes the contribution given by Anima, which is up to EUR 1.8 billion. And if we include the full consolidation of Anima starting from January, this figure is almost EUR 2 billion. The investment product fees grew 10%, mostly in upfront fees, but with a good contribution also running fees in line with the growth of investment product placement, which after 9 months stood at EUR 17 billion vis-a-vis EUR 15 billion of last year and EUR 7 billion was realized notwithstanding EUR 2.3 billion of issuing of BTP by our bank. Let's say that also in October, we are continuing this strong production. And also in October, we have increase of another EUR 2 billion the investment product sales. For other fees, we have a reduction, which is driven by the commercial banking activity, the 2 business line I mentioned before, especially ecobonus and instant payment, which went down EUR 35 million year-on-year. Meanwhile, we are growing almost EUR 40 million in terms of fees generated by corporate investment banking, structured finance and trade finance. So very strong results. Let's have a look to the contribution of Anima. On the left, we have the growth in terms of total asset generated by the bank stand-alone. Also in this case, we wanted to give you the progression of the last 2 years, we grew basically EUR 20 billion in less than 2 years from EUR 210 billion to EUR 230 billion with the growth year-to-date of EUR 3.4 billion in terms of assets under custody, EUR 2.4 billion in assets under management, EUR 2.3 billion in terms of deposit. These, of course, are excluding consolidation of Anima. In terms of net inflows, we grew EUR 1.7 billion versus EUR 700 million last year. On the right side, you have the consolidation of Anima. We increased EUR 230 billion to almost EUR 390 billion vis-a-vis EUR 377 billion of end of '24. So a strong increase also in terms of Anima asset contributed to the bank. On Page 18, on the left side, you see the main feature of Anima, which we consider a first-class network, which is still performing consistently well. And we have on the right, the outstanding commercial and financial results, a growth in assets under management of 2.4%, namely EUR 2.5 billion in 9 months of asset under management net flows, excluding the insurance mandates. In terms of revenues and net income in the 9 months compared to 9 months '24, we have an increase of 11% in terms of revenues [ up 50% ] in terms of net income generated by Anima. Cost-income ratio down to 45% as you can see, like-for-like, we have a reduction of 2%. Meanwhile, we have a stated with a small increase of 1%, driven by the Anima inclusion. The staff cost was down, again, like-for-like 1%. Still, we have some further advantages that will be generated in Q4, even though mostly offset compensated by the new labor contract and hirings that we are still having in order to offset the exit of the early retirement scheme. We will have another EUR 40 million of reduction next year generated by the early retirement scheme ended December '25, but part of that, of course, will be offset by the. Also other administrative expenses and D&A are down 4% like-for-like and other admin expenses stand-alone are down 7%. Cost of risk at a very good level of 34 basis points, driven in effective credit management over the life cycle. The gross total NPEs went down from EUR 3.2 billion to EUR 2.5 billion, the net from EUR 1.7 billion to EUR 1.35 billion. The net bad loan ratio is low as 0.4% of total loans as much as we -- if we include also the state guarantee, this figure go down to 0.1%. And the share of the cake between UTP and bad loans is 80% UTP and 20% bad loans. We already mentioned the reduction in Stage 2. Let's see some figure that generated this 34 basis points of cost of risk. First of all, default rate down to 0.8%, rate up from 4% to 6.5% with the net default rate which was as much low as 0.7% from 1% -- the coverage is increasing both in terms of total coverage to 45.7% as total NPEs with vintage in terms of years, which has been reduced from 2.5 to basically 2.1 years. If we include the state guarantee -- if we exclude the state guarantee NPEs, we have an increase in bad loans to 77% in UTP to 43% and in total NPEs, 55.3%. Let me pass the -- give the floor to Edoardo for some figure in terms of net financial results. Edoardo Ginevra: Thank you, Giuseppe. So very quickly on the financial contribution to capital and the financial part of the balance sheet contribution to capital and to P&L. Capital-wise, we are at a contribution which from reserves at comprehensive income that remains at EUR 330 million, similar to last quarter, a significant improvement versus the value at the beginning of the year, which was negative for EUR 500 million, allowed this improvement by the active management of the bond portfolio. In terms of stocks, situation is that we have EUR 47 billion, similar to what we had -- slightly above EUR 47 billion, similar to what we had 3 months ago and also the split between fair value comprehensive income and amortized cost didn't change, EUR 32 million as opposed to EUR 68 million with a slight increase of the fair value comprehensive income versus the beginning of the year. Share of Italian govies on total govies is below 40%, which is our risk appetite threshold, also very well under control. Contribution to P&L, as I was saying, it's positive for EUR 97 million. Bearing in mind that in this P&L line, we have to offset the negative contribution from certificates, which is as high as EUR 129 million this year, down from EUR 29 million -- EUR 20 million in the 9 months of 2024. So with a positive impact from the reduction in rates, as also shown in the first part of the P&L of this presentation, concerning the overall contribution of NII at full funding cost. Rest of NFR of trading is EUR 226 million positive through the year, benefiting not only from MPS dividends, but in general, from the active management of the bond portfolio. Page 22. Liquidity is at EUR 54.7 billion, so almost EUR 55 billion, increasing again this quarter and from the beginning of the year, which was EUR 48.4 billion. Total direct funding increased, especially for the contribution of retail deposits, which, of course, leads gives interesting perspective in terms of -- interesting outlook in terms of positive potential P&L contribution, NII contribution. We have continued actively our activity in the market for issuance being the first Italian bank and the second in Europe issuing in October a green bond under the EU green bond fact sheet. Issuance activity has been also encouraged by the positive evolution of our rating position with a positive outlook assigned by Standard & Poor's, Moody's and Fitch and an upgrade by DBRS to BBB (high). DBRS also is -- has assigned a first A level rating to the bank recently in October. Very positive, reassuring also the position for the liquidity indicators, LCR at 157%, NSFR stable at 126%, MREL buffer at 7.8 percentage points of the total. So a very significant level of the buffer. 23 for capital -- Page 23 for capital. As mentioned in the first part of this presentation, capital creation in -- from the beginning of the year has been 152 basis points after taking into account more than 200 basis points of dividends. In the last quarter, the progress has been 20 basis points, which is some 12 basis points from the difference between positive performance and accounting for additional dividends, 20 basis points from our source of capital that constantly gives a contribution which is DTAs and reserves fair value other comprehensive income in total, 13 basis points negative from the expansion of the books in terms of RWA increase. On the contribution from DTA and fair value comprehensive income, we confirm that this will be important also for the rest of our plan horizon with 145 basis points as shown in the bottom of this page, materializing in between now and end of 2027. MDA buffer quite comfortable now above 400 basis points in 50 basis points above the minimum threshold of our plan. Let me conclude. Let's recap this very strong first 9 months of the year. I don't have to remember that during the year, our bank was also some pressure, I would say. But notwithstanding that, we were able to almost complete the target for this year, the guidance for this year. Let's say that we are increasing profitability through the non-NII-related business, benefiting from our unique product factories model. We are continuing strong and efficient cost discipline. We have built up an excellent asset quality, which reflects the footprint and the geography of our branches. All in all, we were able in 1 year to increase the ROE adjusted and ROTE adjusted adjustment means without Anima contribution -- one-off Anima contribution for '25, one-off Numia contribution for '24 up to almost 200 basis points in terms of ROE and almost 550 basis points in terms of ROTE. And this notwithstanding the NII impact due to the reduction of Euribor from 3.6% to 2.2%. So we consider this a very strong results and already on top of our target in 27. Having already said of the capital position, the capability to build up further capital over the next quarter, we were able to approve the EUR 700 million distribution for our shareholders to be paid on 26th of November with an increase of 15% year-on-year on the interim dividend distributed in November '24, EUR 0.46 versus EUR 0.40 last year with an annualized expected dividend yield at 7.3%. In terms of cumulative remuneration after 18 months, we are already -- we have already delivered and will distribute EUR 2.2 billion in 18 months, fully in line with the over EUR 6 billion we expect for the full duration of our business plan. Some hint on the guidance. We already say that we prefer to leave the guidance at the level we announced EUR 1.95 billion. Whatever will be the accounting treatment of the fiscal impact that they will have, and we don't know yet which kind of impact, but we are pretty sure that having already reached 85% of the target we wanted to achieve in '25, we will be able to leave this guidance, whatever will happen in terms of fiscal impact this year. That's all. And now we will leave the floor to M&A session -- Q&A session, sorry. Operator: [Operator Instructions] The first question is from Giovanni Razzoli, Deutsche Bank. Giovanni Razzoli: I have 2 clarifications. The first one is on Slide 23. You mentioned the 145 basis points of organic capital generation that I interpret as deriving only from the release of DTA and the fair value reserve in the next 2 years. Is that -- is my understanding correct? And is my understanding correct that out of these 145 basis points, around 60 basis points are from the securities on fair value on other comprehensive income. That's my first question. And the second one, again, on capital, I was wondering whether you plan to complete some SRT transaction on risk-weighted asset optimization in Q4 or if there are any regulatory headwinds that you can expect? Edoardo Ginevra: So thanks, Giovanni. As far as the question on capital -- the 2 questions on capital, let me first confirm that we are finalizing an SRT transaction, which we plan to complete in the next few weeks, so before the end of the year. For the capital creation from DTAs and fair value comprehensive income, so this is EUR 145 million is what is expected to come as additional capital in the quarters in the next -- between the next quarter, '26 and '27 in total. You asked what is the split between DTAs and fair value comprehensive income. DTA is around EUR 120 million. The rest is fair value comprehensive income pull to par effect. Before continuing -- let me add also that we prefer here to stick to the plan horizon. Needless to say, there is additional capital to come also after end of '27. Operator: The next question is from Manuela Meroni, Intesa Sanpaolo. Manuela Meroni: The first one is on the guidance of 2025. You confirm your EUR 1.95 billion guidance, but considering what you have already achieved in the 9 months, this embeds a fourth quarter significantly weaker compared with the third quarter. On the other hand, you are guiding for a stabilization of NII and fees up on a quarterly basis. So I'm wondering what -- if there are some reason to be so prudent on the fourth quarter, so what you are expecting there? And the second question is on the dividend. You have already at 13.5% common equity Tier 1 so well above your 13% minimum threshold. You have these tailwinds from DTA and fair value through the OCI. So I'm wondering if you might consider to increase the payout above the current level. Giuseppe Castagna: Thank you, Manuela. Let me be more precise on that. Of course, we think that we will reach the guidance. As I said before, whatever will be the final accounting principle to regulate the fiscal impact that we are still waiting from the government to deliberate. So let me be a bit prudent, but also, let's say, on the other way, a bit aggressive in saying that even though we should be obliged to put the potential amount into profit and loss, we feel that we can be able to still respect a figure in the region of EUR 1.95 billion, which I think was not expected. And I didn't hear from anybody else such a possibility. On dividends, of course, as you may remember, we were very much questioned about the possibility to be above 13%. In the first 3 quarters, we have generated a lot of capital. We are respecting 80% of payout still increasing to 13.5% our common equity Tier 1, let's say that still we are below our peers. So let's wait for end of the year to understand which will be the capital generated by the bank in the next couple of quarters, and then we can discuss the increase in the remuneration of the payout. Operator: The next question is from Sofie Peterzens, Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. My first question would be on net interest income. In terms of the trough, we saw weak volumes, but new production is very encouraging and also lending margins are stabilizing. So do you think we have reached the net interest income trough? Or do you think that's still ahead of us? And then my second question would be on M&A. If you could just talk about your kind of thoughts around M&A. The press has been talking about CRA, Italy. Any comments you can make here? Edoardo Ginevra: So let me talk about NII and then Giuseppe on the M&A session, which you wanted to start earlier. On NII, considered that in our plan, we have a guidance of -- we have a target of slightly above EUR 3 billion for 2026, which we believe that at this point is confirmed with a scenario of Euribor at 2%. We announced already that we would be able to absorb more shocks on the scenario. But basically, we don't see reasons why we should change this target and this assumption on given the evolution -- the market evolution that we are facing at this point. Then we expect, as described in Slide 10 that this is the basis to achieve higher level of NII and to hit our target in 2027 with a mixture of actions that will provide contribution from the financial part of the portfolio, and this is replicating portfolio and decreasing cost of wholesale funding. To give you an idea, we have EUR 25 billion EUR 27 billion replicating portfolio target is EUR which is where we expect to stay on average next year. This EUR 25 billion are paying currently a level that is some 20 basis points above Euribor for a pure mechanical effect of time lag on the repricing and the readjustment. If Euribor stabilizes, this mechanical effect will disappear and 20 basis points on EUR 25 billion is around EUR 50 million. Similarly, benefited from issuance of wholesale funding. We have EUR 5 billion of new issuance per year. And so in the next -- in a total of EUR 10 billion, which is the average over 2 years, including issuance of second part of this year and issuance and half of issuance of 2027, a benefit of 50 basis points leads to an improvement down the line of around EUR 50 million. Commercial volumes, just look at the spreads, which are quite similar on the asset and on the liability side means that every EUR 1 billion either of growth in loans or growth in deposits will provide us with an improvement of some EUR 15 million, 1.5% in terms of P&L. Deposits are growing at a very -- an excellent pace, have been growing at an excellent pace throughout the last few years. Loans is the next challenge, but we believe we are very well equipped to restart in growing the loan book once investor -- once our clients will restart -- will revamp this investment process, maybe on... Giuseppe Castagna: Thank you, Sofie. Let me just give some color to your question. I think we have shown this year to be able to respect our guidance also considering unexpected headwind as we are having. On top of that, we managed this year to cope with the Anima acquisition on one side and let's say, to be obliged to stay unde [indiscernible] for 9 months with our network. We had to cope with 2 IT migration in the 2 bancassurance deal and the integration of the product factory we have built up in the last year. So a lot of work to do, reaching always strong results. The same we have for 2026. Of course, we are not scared of taking one eye on reaching our target for '26 and also considering any opportunity coming from the market in terms of M&A. We are not -- in this moment, of course, we have nothing in mind. We are not dealing with any traction. But we know very well that there are some stakeholdings either in our bank or our stakeholding in other banks that could generate during 2026, some potential M&A. So I think we have to consider our stand-alone plan and the capability in any situation, in any market situation to respect our plan on one side, and the possibility to deal with opportunities that we show that we were able to do together with reaching our results. So attentive to have anything happen on the market. We have not many left in the market, but still with a lot of opportunities. Operator: The next question is from Luis Pratas, Autonomous. Luis Pratas: My first one is on NII. We saw a much lower quarterly reduction this quarter in the customer spreads compared to, let's say, Q1 and Q2. So do you think we are close to the bottom in the customer spread? And how do you see the spread going forward, split by the asset and liability spread? And then my second question is on the Anima minorities. I wanted to hear your latest thoughts on how you plan to deal with the minorities. Do you have the goal to own 100% of Anima and delist? Giuseppe Castagna: Thank you, Luis, for the 2 questions. Let's say, yes, we think we have reached the bottom, both in terms of asset spread. Of course, the same, I think, is also in terms of liabilities. We don't think we can -- with Euribor, which is now quite stable. Again, I want to stress especially the work we have done on the asset spread because on the liability, I think we dealt very well with the spread. On asset, as I mentioned before, we managed to maintain the same level of stock with a strong increase, almost 40% of increase in new loans generation, which, of course, are a good boost for our commission. In a situation in which loan growth was 0% or minus 0% because we don't have -- we are not having loan growth in our country. So thanks to our geographic footprint, we were able to stand at a very good level of new loans, maintaining the situation, but of course -- and sorry, bettering the quality of this credit book with a lot of guarantee taken also with the opportunity of the guarantee state scheme. This, of course, in a situation in which loans are not growing, and we are willing to better our quality, of course, you can lose some few basis points, which is what happened to our portfolio. We feel, as I also understood that my colleagues think that in 2026, there will be a recovery in terms of investment. If this happen, as historically happened, our bank is -- will be in the best situation to take advantage from that. And with a growing, even though not booming, but growing market in terms of loans, I think also the asset spread will increase. Second question about minorities. We are -- I always say that we're going to buy Anima in order to make Anima greater. We want to have our distributor of Anima. We think there is an opportunity to have some other banks joining the group of distributors. And we want to leave room for also giving a stake in Anima to this new distributor. So until this situation will be open, and we will have the opportunity to manage some contact with other banks, I think we will leave for the time being, the stock listed, but I hope that quite soon, we will understand what will be the opportunity for the next quarter. So give us some time to experience the opportunity of having somebody else on board, and then we will decide what to do with the stake. Operator: The next question is from Hugo Cruz, KBW. Hugo Moniz Marques Da Cruz: My main question is around dividend, the final dividend for 2025. If I understand your dividend policy is you net out the gain on the revaluation of Anima. You already raised the interim larger than last year. So even if you beat the guidance on earnings, it sounds like the final dividend will be lower year-on-year. Is that something you're comfortable with or not? And then a second question, why are you not seeing loan growth? You're in the most dynamic part of Italy. Some of your peers, at least in the past quarter have shown loan growth. So is that too much pricing competition and you don't want to compete there? Or because a system level, there is -- that you're starting to have loan growth for the whole of Italy. So why shouldn't you be doing better than the system when you are in the better part of the country? Giuseppe Castagna: Thank you, Hugo. For the first part, yes, of course, the one-off of Anima will not be considered. We announced that with our business plan. But of course, if we will beat the guidance, the dividend will increase and our effort will be to give a dividend, which would be as much as possible in line with last year, in which we include the Numia one-off contribution. So let's say that like-for-like will be much better this year. We will decide, depending also on this fiscal impact, how to increase further this contribution. Let's say that when we announced the EUR 6-plus billion in 4 years, we already say that, of course, there would have been an increasing dividend distribution in the last part of the 4 years, increasing, of course, also the profitability. We are perfectly in line and hopefully, depending on the unexpected situation, we can try to also increase the contribution. On the loans, we think we are doing better because we are basically maintaining our loans at the level they are. Meanwhile, I think there is some reduction in loan for other banks, notwithstanding is the best part. Unfortunately, investments are still lacking. So the geopolitical situation, the uncertainty on tariffs have been very persistent during the year, and we still now in the beginning of November are not having a signal -- strong signal of recovery. But being the third year in a row, we really are confident that some recovery there could be. And in this occasion, I'm sure we will be better than others in recovering and increasing our loans. Operator: The next question is from Ignacio Ulargui, BNP Paribas Exane. Ignacio Ulargui: I have 2 questions. One is on fees. I mean, do you think that whatever is not fees from specialized activities within the other fees bucket have probably bottomed at this level, and we should -- we could see some recovery into the fourth quarter, thanks to seasonality? And the second question is linked to Monte dei Paschi stake. So if you could just share with us a bit of your thoughts on the stake going forward? Edoardo Ginevra: Okay. Just a minute and get into the page -- yes. So you were mentioning about the product factories because we have 3 categories, commercial banking and other product factories, which means consumer credit payment system and P&C insurance. And the last one is from Corporate Investment Banking and Trade Finance, which one you are precisely? Ignacio Ulargui: I was just referring to the commercial banking and other fees and product factories, which -- I mean, if I just look into the year, they have been relatively flattish, whether that could be -- you see that could recover into the year-end? Edoardo Ginevra: Yes. We think that there will be basically everything which is not included in product factories and in corporate investment banking and trade finance activity is on the other, which mean current account, commission on loans, other commission on payment activity, money transfer and so on is included in that. Last year, we had also a strong contribution from the discount on fiscal credit. You know that in Italy, we had such a possibility to discount the fiscal credits, the famous super bonus or ecobonus. And together with the commission that we were able to get from the instant payment, which now are not anymore possible to apply, there is a reduction of almost EUR 40 million, EUR 35 million to EUR 40 million. The other are doing well, especially, of course, on loans because as you -- as I said before, we were increasing 40% the new loans activity. So all in all, we think that like-for-like, we are increasing the commission also on the commercial banking, and this will stand also for the next quarter. For the other, as I mentioned before, the one from specialized activities are doing very well. Meanwhile, we have registered some reduction in the bank insurance because of the migration I was mentioning before, both in the Life activity and the non-life activity, which will not have any more, of course, going forward in the next quarter. This is for the first question. The second question go back to the problem of we were talking about delisting Anima until we don't understand exactly what will be Monte Paschi, as you know, is a strong contributor in terms of distribution of Anima. We had in the past some talks about the possibility for them to continue this activity, also getting possibly some interest in being shareholders. So we will see after that what the final word about our stake in Monte Paschi. Operator: The next question is from Delphine Lee, JPMorgan. Delphine Lee: My first one is on the Italian bank taxes. I know it's still being discussed, but just wanted to kind of have your thoughts, your initial thoughts on how much that impact could be? And then my second question is on M&A. So CredAg has already commented that they wouldn't -- they're not considering selling their subsidiary in Italy. So just kind of wondering what other forms this M&A potential could take. Like, I mean, would you consider more partnerships with CredAg in Asset Management or in other areas? -- which I think is something that they would be keen on. If you could just share your thoughts here, that would be great. Edoardo Ginevra: Yes. So thanks for the question. On bank taxes, there are various, of course, items that are of interest by the law or the project of law, which has not been, as you know, approved yet. In the current scenario, we expect to have a one-off this year of payments of levy that is in the order of magnitude of around EUR 100 million, and this is a one-off. For the next years, the scenario is not clear, but we expect this to be affordable in the margins of flexibility and buffers that we will have in our plan once the real amounts and the technicalities of taxes will be clarified, then of course, we will have to take care of planning the impacts and potentially adopting measures to counterbalance these impacts. But we don't believe them to be a real changer versus our targets. Giuseppe Castagna: Okay. Let's go back to M&A. You were mentioning CASA doesn't want to sell, but we never talk about buying the network of CASA. We're never talking about having anything else with CASA other than being, I hope, an happy shareholder of our banks. We are not aware of anything happening in terms of a possible merger. And so we will see what happen. They also requested to increase their stake to ECB. They have not yet received the authorization. Once they will receive the authorization, they will decide the stake to take. Of course, we will understand better what could be the possibility to have some more collaboration with them. Up to now, there is nothing at all. I read the speculation about buying the activity in Italy, but there is nothing in course. Operator: The next question is from Adele Palama, UBS. Adele Palama: Two questions. One is a clarification on the capital impact. So 145 basis points does include also like the impact that you were expecting in the business plan from the securitization. So if I remember correctly, you were guiding for like 48 basis points from synthetic securitization. How much of that 48 basis points has been already taken? How much is left? And if it is included in that 145 basis points. And then if you can give us a guidance on the other provision and provision for risk and charges. Because this quarter, you reported like positive number there. I'm just trying to understand a little bit the gap versus the target, which seems a little bit conservative for full year '25. And then on cost of risk, so which is the guidance for this year? Because again, I mean, you have reported like around 35 basis points. But then if I try to bridge with your target, it looks like that you are expecting some additional extra provision in the fourth quarter. Is that right? Which is the guidance there? Edoardo Ginevra: So on capital, thanks for giving the opportunity to clarify. 145 basis points that we showed -- that we mentioned in Page 23 of today's presentation is only the impact during the plan horizon from DTAs and fair value comprehensive income. Securitization transactions are on top and will continue to provide the contribution that we have announced in the plan. By the way, we are overdelivering on that, taking into account the fact that in the plan, we said 48 basis points, including the effect of amortization of existing ones. But in general, in this quarter, we didn't have securitization since SRT transactions, we -- as I said earlier answering to the previous question, we will have impact in the fourth quarter. And in general, we will continue to generate capital through this lever also in the next few years. Normally, the high-level guidance, I would say, is that we do 2 to 3 transactions per year, and we have an impact of each transaction of around 10 to 15 basis points on average, but part of this impact is eroded by the amortization of existing ones. Giuseppe Castagna: For cost of risk guidance, we always said that this year, we would have been below 40 basis points. We can confirm we don't expect extra loan loss provision in Q4. As I mentioned before, we have a 0.1 net bad loans ratio. We have a very good default rate. We are almost at half of November, so halfway to the year-end. So I expect apart from some managerial action that we could take by the year-end, I expect something in line with the previous cost of risk. Operator: The next question is from Matteo Panchetti, Mediobanca. Matteo Panchetti: I have one clarification on RWAs and capital for the quarter. Can you please clarify because when I see on your booking loans, they are down 2% Q-on-Q, but your RWA were up quarter-on-quarter. So can you please clarify if there was any headwinds during this quarter or if the density has been increasing? And the second one is on the overlays. You still have EUR 150 million overlays, which point you will consider to release or eventually using that? Edoardo Ginevra: No. We have grouped the 13 basis points in Page 23. RWA and other, actually, this includes a number of of second effects that give a contribution, the specific part of RWA is only 6 basis points, and it's related in general to normal refresh of the portfolio, but nothing that creates any real drift towards a higher level of density or headwinds in this quarter. The rest is due to a number of minor impacts, for example, increase in the value of our participations that we deduct from capital and that if they mature, if we use equity method for our valuation, if they mature net profit over the quarter, then this net profit is accounted for in the value of the participation and this value is an increase in the capital deduction. So not material effect on credit in general. Yes, overlays, overlays, well, usual debate. Overlays, technically speaking, are not something like a treasure we have and at some point will be left for release. Overlays are a way to account for unexpected risk that are not modeled and that you capture in your framework of risk management framework and IFRS 9 accounting framework through adjustments on top of what the risk model suggests to have in terms of generic provisions on performing loans. The only thing that counts is the level of coverage on performing Stage 1 and Stage 2. And this coverage is driven by considerations on the status of the portfolio. We are sticking to a coverage, which is in the area of above 40 basis points. We have increased from 45 to 46 basis points in this quarter. We believe that this is our sweet spot in general in the long run. And so we believe that any comparison should take into account between banks on this KPI should take into account, of course, geographic footprint, average rating of portfolios and so on and so forth. Operator: Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks. Giuseppe Castagna: So if there are no other questions, thank you very much for being with us for Q3, and we will see in the next days or talk to you for further details. Thank you and have a good evening. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.