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Operator: Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Greg Secord, Head of Investor Relations. Please go ahead. Greg Secord: Thank you, and good morning, everyone. Welcome to Open Text's [ Fourth ] Quarter Fiscal 2026 Earnings Call. With me on the call today are Open Text's Executive Chair and Chief Strategy Officer, Tom Jenkins, together with James McGourlay, Interim Chief Executive Officer; Steve Rai, Executive Vice President and Chief Financial Officer; and Cosmin Balota, our Senior Vice President and Chief Accounting Officer. Today's call is being webcast live and recorded with a replay available shortly thereafter on the Open Text Investor Relations website at investors.opentext.com. Earlier yesterday, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can also be accessed on the Open Text Investor Relations website. Now turning to the upcoming investor events. I'd like to take the opportunity to invite institutional investors and financial analysts to join us at Open Text World 2025 Investor Track on Tuesday, November 18 in Nashville. The Open Text World Conference is a unique opportunity for investors and financial analysts to learn about our latest product innovations and with full conference access, allow open dialogue with our customers and partners on site. The conference keynotes and investor track will also be available by webcast virtually. Open Text will also be participating in the following investor conferences. On November 21, we'll attend the Needham Tech Conference virtually. And on November 24, we'll be at the TD Technology, Media & Telecom Conference in Toronto. On December 2, we'll be at the Bank of America Leveraged Finance Credit Conference in Boca Raton and on the same day, we'll also be at the UBS Global Technology and AI Conference in Scottsdale, Arizona. On December 8, we'll be at the Raymond James TMT and Consumer Conference in New York. And then finally, on December 10, we'll be heading to the Barclays Global Technology Conference in San Francisco. We look forward to meeting with you at one of those events. And now on with the reading of our safe harbor statement. During this call, we'll be making forward-looking statements relating to the future performance of Open Text. These statements are based on current expectations, assumptions and other material factors that are subject to risks and uncertainties, and actual results could differ materially from the forward-looking statements made today. Additional information about the material factors that could cause actual results to differ materially from such forward-looking statements as well as risk factors that may impact the future performance results of Open Text are contained in Open Text recent Forms 10-K and 10-Q as well as in our press release that was distributed earlier yesterday, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I'll hand the call over to James. Christopher McGourlay: Thanks very much, Greg. I would like to welcome everyone on the call today. Joining us today is Tom Jenkins, Executive Chair and Chief Strategy Officer. I also want to give a warm welcome to Steve Rai, who joined Open Text as Executive VP and CFO in October. Steve brings a wealth of experience from technology and software. He is based in our Waterloo, Ontario headquarters. Also joining on the call is Cosmin Balota. I want to thank Cosmin for his leadership as Interim Chief Financial Officer, and Cosmin has now resumed his role as Chief Accounting Officer. The entire Open Text team is committed to delivering secure information management products that let our customers curate and enable agentic AI with their content. We have a tremendously strong and deep customer relationships. It is because of this that we have such incredible and loyal installed base. Now let's get into our Q1 fiscal '26 results. Q1 total revenues, ARR, adjusted EBITDA margin, adjusted EPS are all above Street expectations. As you saw with the Q1 performance, we are continuing our momentum from last quarter, especially in our core content business. We remain focused on sales execution, having just completed a major product cycle. We believe we are in the market with the right products at the right time. Turning to our cloud performance this quarter. Q1 cloud revenue was $485 million, up 6% year-over-year, which is well on track towards our F '26 outlook range of 3% to 4% growth. Cloud bookings continue to remain strong as we saw Cloud cRPO up 6% year-over-year. More importantly, our long-term cloud RPO is up 16% year-over-year, and total cloud RPO is up 11% year-on-year. Our other measure of cloud performance is enterprise cloud bookings, which were up 20% year-on-year in Q1. This puts us in a good position towards achieving our F '26 outlook range of 12% to 16%. We closed 33 deals greater than $1 million in Q1, which is up 43% year-on-year. We had key wins in the quarter with ALTEN, Australia Department of Health, Core42, Optiv Security and mh Services. In September, we provided additional disclosure on our main business -- businesses, which we break into product categories. This disclosure is in our IR presentation on the website and allows you to better track the performance. Tom will speak more about the tremendous opportunities in our core information management for AI business. For Q1, you can see that Content being our largest business continues to lead our growth in Cloud. Content Cloud grew 21% year-on-year in Q1. This was driven mostly by bookings won in financial services, energy and utilities as well as telecom verticals. We saw strength in retail, automotive and manufacturing verticals which also contributed to our business network positive growth in Q1. We are pleased with our Enterprise cybersecurity business growth this quarter and mainly driven by a few sizable wins. Our product offerings continue to be recognized by industry experts such as Gartner, and we are establishing key partnerships that are important for content management and agentic AI. We're excited about our upcoming Open Text World event being held in Nashville from November 17 to 20. Thousands of our customers and partners and other stakeholders will join in person to see our latest product offerings and innovations, especially our Aviator and agentic AI solutions in action. We will also showcase our sovereign cloud, keeping our customers data local and secure. We are very excited to see how our customers unlock the power of their own data using Open Text products to foster innovation and spur growth. As we look ahead to the rest of fiscal year, we are not changing our fiscal '26 annual outlook. Please remember that we are an annual business and that results can fluctuate quarter-over-quarter. With that said, we expect Q2 total revenue to be between $1.275 billion and $1.295 billion and the adjusted EBITDA margin to be between 35.5% and 36%. We continue to see strength in our Content business going forward. For the second half of fiscal '26, we expect revenue to skew higher towards a strong Q4. There is typical seasonality that we see in Q3, but the momentum from our new product cycle is expected to come mostly in the latter part of fiscal '26 and beyond. We continue to expect ARR to return to growth in fiscal '26 with Cloud growth outpacing maintenance declines, while customer support revenue is on track to meet our fiscal '26 annual outlook. We are seeing some of our customers making faster decisions to shift their workloads from on-premise into the cloud. We have always given our customers the choice of where they want to deploy and note that the on-premise deployment is still being sought after in heavily regulated industries and governments. To conclude my remarks, I want to take a moment to thank our Open Text team across the company for their professionalism, dedication and hard work during this period of change as well as our partners, customers and shareholders. Finally, I would like to thank Tom Jenkins and all of the members of the Open Text Board of Directors. Their support to both myself and all of our employees has been tremendous. This is an exciting time for Open Text. We're in a great position financially and operationally. We are in the right markets of secure content and data that trans-agentic AI. When I stepped in as Interim CEO, my main priority was to take care of our customers and carry forward our initiatives and deliver our fiscal '26 annual outlook. We had a great start to Q1, which sets us up nicely for the rest of the year and beyond. With that, I will hand the call over to Steve Rai, our EVP and CFO. Steve Rai: Thank you for the kind introduction, James. It's great to be here. Good morning, everyone, and thanks for joining the call. I'm 1 month in at Open Text and very excited to contribute to the tremendous opportunity ahead. Over the past few weeks, I've spent a lot of time with James and Tom and the extended team, and I'm in full support of the company's vision and direction. I look forward to working together with them to deliver on this. Cosmin Balota, our Chief Accounting Officer, who was the Interim CFO before I joined, is on the call today, and he will discuss the highlights of our Q1 financial results. I would like to thank Cosmin personally for his unwavering support, insights and maintaining a steady ship through the transition. For those of you who may not know me, my last role was as CFO at BlackBerry, where I was deeply involved in the company's corporate technology and organizational changes. I'm truly energized to join Open Text at this stage in its journey and will be based in our global headquarters in Waterloo, Canada. Since joining, I've been very impressed with the professionalism and passion from everyone that have met across the organization. I see a company with solid financial fundamentals with expanding margin and free cash flow and excellent foundational technology. Open Text supports an impressive global enterprise customer base and is poised to capture a broad-based step change in the market for training and adoption of agentic AI. I look forward to putting my deep experience in technology and transformation to work with such a dedicated team. With that, I'll hand the call to Cosmin to discuss our Q1 highlights. Cosmin Balota: Thank you, Steve, and good morning, everyone. Let me start by saying that in Q1, we continued our momentum from last quarter, particularly from growth in cloud revenues, led by our Content product category and through overall margin expansion. Total revenues for the quarter were $1.3 billion, which was an increase of 1.5% year-over-year. This growth exceeded our expectations for Q1 and was mainly driven by Cloud and License revenues. In the quarter, our Cloud revenues of $485 million were up 6% year-over-year. This growth was mainly attributed to strong demand in our Content product category, which makes up approximately 40% of our overall business and grew 21% year-over-year in Cloud and 3% in total revenues, as outlined on Slide 6 of our investor presentation. Customer support revenues of $587 million were down 1.5% year-over-year, while our ARR or annual recurring revenue was $1.1 billion, which was an increase -- sorry, an increase of 1.8% year-over-year. ARR was 83.2% of total revenues, which was a slight increase compared to the 82.9% in the same quarter last year. Moving to profitability. Q1 GAAP-based gross margins was 72.8% or 76.5% on a non-GAAP basis, which were up 100 basis points and 60 basis points year-over-year, respectively. These increases were mainly due to Cloud gross margins growing 280 basis points year-over-year and 270 basis points on a non-GAAP basis. Adjusted EBITDA for the quarter was $467 million, which is a 36.3% margin and was up 130 basis points year-over-year. This improvement was mainly driven by higher revenues, which, as I mentioned, was primarily from continued growth in Cloud and our Content category with additional benefits realized from the expanded business optimization plan and improved gross margins. The costs and benefits associated with the business optimization plans and other savings initiatives, as outlined on Slide 19 of our investor presentation, and they have not changed since the prior quarter. The strong margin performance in Q1 resulted in an adjusted EPS of $1.05, which was up 12.9% year-over-year. Q1 free cash flow was $101 million, which was a significant increase of $218 million year-over-year. As you may recall, in Q1 of last year, we made a onetime tax payment, driven by the gain on sale from the AMC divestiture. This concludes my summary of the Q1 fiscal '26 financial highlights. And with that, I'd like to hand the call back to Steve. Steve Rai: Thank you, Cosmin. The results in Q1 demonstrate the resilience of Open Text's business supported by the strong financial position of the company. Along with our portfolio-shaping initiatives and announcing the recent sale of our eDOCS business. This solid foundation supports our capital allocation strategy of consistently paying a growing dividend, buying back shares, reducing debt and reinvesting in growth. I'm a month in and looking forward to continuing my engagement with the Open Text team and meeting our investors and analysts. I'm excited to work with James and Tom and the rest of the executive team and Board to carry out our strategic objectives. With that, I'll hand it over to Tom. Paul Jenkins: Thanks, Steve. Good morning, everyone. Before I get started, I'd like to thank Mark Barrenechea for his 13 years of dedicated service to our company. His leadership scaled and developed our company as a leader in enterprise information management. And Steve, a very warm welcome to you, and welcome to Open Text. You've only been here for a month, but I appreciate having you here on the call today. Since we made our announcement on August 11, we've met with hundreds of shareholders and analysts and investors. And it's been great for me to renew all the acquaintances. And I thank all of you who said that I haven't aged a day since the last time you saw me, I wish that was true. This has allowed us an opportunity to communicate to you a simpler strategy for the company to unlock the value that Open Text has. We're going to concentrate on our core business units and enterprise information management and specifically those that provide the training for the new area around enterprise artificial intelligence. You'll hear us use the term at agentic AI as well and more on that in a minute. After all, it makes sense for us because Open Text is one of the biggest -- we think it's the biggest, but it's certainly one of the biggest corporate data and metadata vendors in the world with hundreds of connectors to legacy and current data sets. That's a powerful asset inside Open Text for AI, and we plan to unlock it. We'll do this first, though, by selling off all our noncore business units and using those proceeds to further create shareholder value. And that's really our end goal. And so in a way, what is old is new again, we're going back to our historical roots of being a content management company, except this time, we have additional products in business networks and machine management, wrapped in an enterprise-class security layer. That will be our core business. We already have the global scale, the go-to-market sales force, the product line in these businesses and the core of our core, which is the Content Management business, is also our largest business unit at about 40% of our total revenue. And it also happens to be the fastest growing with, on average, more than 20%. Cloud growth over the past few years. So it was a pretty obvious strategic decision by the Board to take these actions. We now have the entire company from the Board, the exec management team to our 20,000-plus strong global workforce aligned and locked into achieving our FY '26 objectives and beyond. We're going to stick to our plan. There are early signs that we may be even going faster towards the cloud as the year goes on. And as we shed the noncore units, our Cloud Content business will be soon the dominant share of all of our revenue sources. That's our goal. We'll keep reporting our business unit breakout as we go through this journey so that you can track right along with us our progress towards that goal. So speaking of progress, if you take our August 11 release and some of the short-term priorities that we said we would address. I'm pleased to report we've addressed almost all of them. We've had a very busy 90 days and the next 90 days will be just as busy. As I mentioned, we started by providing additional transparency with all of the revenue breakout performance for our business units. We did this in early September so that you could track along with us on our progress. That's where you saw the strength of the Cloud growth. In fact, last year, Content Cloud grew 17%. And this quarter, it grew 21% year-over-year, and that's the acceleration I was referring to. So clearly, our Content Management customers are moving even faster to the cloud, and this will start to change our revenue mix slightly in our plan, but it's an indication that we're moving faster to becoming a fully cloud-centric company. Now of course, we appointed Steve Rai as our permanent CFO. And he, of course, has a solid background in financial and operational reporting. And even more so, with his background at BlackBerry, he has a lot of experience in portfolio shaping. So we welcome that wisdom to the management team. This was followed by our first announcement of a noncore business unit sale within the analytics business, as has already been mentioned. It's an on-premise piece of software. So that will help the pivot towards cloud even further as we shed the noncore units. We also talked about the refreshment of the Board. And recently, we appointed a new Board member, George Schindler. He's the former CEO of global IT consulting giant, CGI. He's a fantastic addition to the Board, brings valuable perspective and now includes other members that we've announced in the past year, such as the senior partner in technology and telecom from Accenture, the Chief Human Resources Officer of Hewlett Packard, the CIO of Cisco, among just the new members that we've announced in the past year. So we're quickly retooling everything at Open Text. Yesterday, we published our Q1 fiscal '26 results that demonstrates the resilience of the business and the continued demand for Content Cloud and AI. We're focused on the right market at the right time. It leaves us with one major priority remaining, which is to find a permanent CEO. Their search is ongoing, both internal and external candidates, and I'm pleased to note that we have had many world-class candidates step up and put the hat in the ring for consideration by our search committee. Our goal is to find a leader whose solutions focused and to help us elevate to the next phase of Open Text's journey. In the meantime, I'd like to thank James for stepping in as Interim CEO. He's been a steady hand leading the operations of the company and to Cosmin for leading the financial group. As you can see from the results, they've both done a great job stepping up on short notice. Open Text is on a solid financial and operational foundation of growing long-term margin and free cash flow. And we're committed to unlocking shareholder value through our capital allocation strategy, which will include reducing debt, paying a dividend, share buybacks and tuck-in M&A. And with all of this, we're committed to providing investors with clear, simple, transparent metrics so you can better understand our business and performance and follow along with us on this journey. Let's turn to our strategy now and how Open Text plays an important role for our customers in agentic AI. We provided some slides. And obviously, we're also going to speak at our user conference and Analyst Day next week, as James had mentioned. So a lot more detail to come, but we thought we'd give you an overview of what you'll be seeing next week. And it really falls around a recent MIT study on agentic AI, which indicated that the importance to productivity that AI must be trained by specific content that can only be found inside the firewall of organizations. Keep in mind that many of the world's first most amazing GenAI products like ChatGPT and Perplexity and [ Claude ] were all primarily trained on public information. Now public information only represents about 10% of the world's information. About 90% of that information is behind the firewall. In fact, many years ago, Open Text wrote a book called Behind the Firewall that described where all this information is and how you find it and how you use it. Now of course, most of that was built as records management and archive for regulated industries, and Open Text was the leader in all of that. So that positions us with an enormous access to all the data. And so as you know, we have hundreds of thousands of organizations all throughout the world that we've built these systems for over the past 35 years. That's really the gold mine for customers that are seeking to build productivity-related agentic AI. So we'll provide a lot more information on that. But where does that apply to Open Text? Well, Open Text in enterprise information management, it's got data stored in 3 major business units that we've broken out for you today in Content, our ITOM and our business networks. These products, our users are able to use their own data to train agentic AI that's way more powerful for anything that's available in the public domain. So that's why we call this enterprise artificial intelligence in the same way that we used to call it enterprise information management and before that, enterprise content management. So what is old is new again, and we're returning to our roots. And we think that there's an enormous demand for this as we go forward. Now we're also seeing an interesting change around proprietary clouds. And in the case of governments, they call it a sovereign cloud. Users don't want to lose the keys to their castle. AI is very different than just storing data. And our users are starting to find that they want to be very careful how they construct clouds that use AI. They want to make sure that they're inside the firewall. So we're noticing that the domestic telecoms throughout the world are starting to take a more substantial role in the supply chain for these proprietary clouds. And I think you'll see in the future, Open Text get more involved with those telecoms throughout the world as those channel opportunities present themselves. It's interesting because we're finding that major corporations that went to the cloud actually don't have an IT capacity internal to their companies anymore. And that's why they're seeking alternatives where they can maintain a proprietary AI, but do it on a managed service basis through ourselves, other vendors and the telecoms, as I have mentioned. Now these trends, they're going to be a major topic of our upcoming user conference. James has mentioned that we'll be having later this month in Nashville as well as the Analyst Day. Now we're also going to have a new book called enterprise artificial intelligence available that explains all these concepts in much more detail, both to yourselves as well as our users. So in closing, what lies ahead for Open Text is perhaps the greatest opportunity in the history of the company. We hope that you'll follow us on that journey as we take our core businesses and focus on them. We're going to train agentic AI with all that content. Our Board committee continues to make the divestitures of the noncore business, and our Board identifies and on boards our new CEO. So with that, could the operator please open the line to have questions. Operator: [Operator Instructions] The first question comes from Richard Tse with National Bank Financial. Richard Tse: So Tom, you're embarking on a pretty ambitious strategy here. I just kind of want to get your thoughts in terms of what you think Open Text's competitive edge is and content as you make this pivot to leveraging your data for AI because there are a number of companies in the marketplace. Paul Jenkins: Yes, the competitive edge, you don't create competitive edges overnight, as you know. That competitive edge was built over 35 years. We're the only company that has the hundreds and hundreds of data connectors. You had to be around back in 1995 to be able to have a connector into word perfect and into the Lotus Notes and then the Lotus 1, 2, 3 and all that stuff. And the reality is that legacy data is critical to training agentic AI. And we have all of those connectors, whether it's in business networks, whether it's in IT operations management or in human content. And that stuff gets built up over decades. You had to have been there at the time. And so all that source code, all of that plumbing is buried inside our products, whether it's SAP archives that are written directly in ABAP, that kind of stuff, you just can't make up later. You had to have been there at the time. So that's the part that really gives us a huge competitive advantage. I think the other part that we're going to find play out in the market is that we offer a hybrid mix. We offer on-prem through license as well as in the cloud and managed services. So there's a mix that users can pick because as you go to build these AI systems, that information is located throughout corporations in many, many different attics, so to speak, throughout. And we're equipped to be able to do that. Richard Tse: And my second question has to do with the Content business. Thank you for that segmented disclosure. It obviously is growing at a pretty rapid rate, certainly on the cloud side. Can you maybe give us a bit of color in terms of the mix of where that growth is coming from? Is it sort of AI readiness? Or is it something else because for mature markets, granted its sort of off a small base on the cloud piece, but still curious to see how that's playing out. Paul Jenkins: Yes. I'll defer this to James. But I will say one thing when a CIO approaches this problem, the first thing that they have to do is they have to curate their content in general. That's why I think you're seeing a lag in some of the adoption of AI because even though we had COVID and even though we created a lot of digital pieces inside our organization, the reality is we were doing that in a hurry during COVID. Getting this in an organized fashion, that takes a lot of content management. It takes a lot of archival, a lot of records management. So a lot of organizations were simply getting digitally ready. They had never been asked to do this before. They were keeping all that data for regulatory reasons. Now they're starting to present that data in real time and ready so that they can do training. So I'll leave it to James to talk about the very specific parts. Christopher McGourlay: I think you covered it pretty well, Tom. We're seeing our customers looking at moving into the cloud for a number of reasons, including the managed capability that we offer, curating their data for AI readiness and just overall simplification of the management of the system for them. So customers are moving quickly. We're seeing new customers coming in, coming on board, jumping directly into our cloud offering, as you would expect in this day and age. But it's across the board, we're seeing a shift to cloud in the customer base. Operator: The next question comes from Kevin Krishnaratne with Scotiabank. Kevin Krishnaratne: Maybe, Tom, just on that last point on the data readiness and can appreciate the sort of decades worth of content that you're managing for your customers. Is that -- like can you just talk about maybe -- is there a sweet spot in terms of how far back customers need to go? You talked about all the data that you've got to train agentic. But I'm wondering like how relevant is data from 30 years ago versus, say, 5 years ago? Is there -- again, just sort of a sweet spot that you're seeing in terms of how far back -- how much data customers are bringing in to think about their agentic AI training purposes? Paul Jenkins: Yes, that's a great question. And even to go further, we could say that there were early attempts to create synthetic data where you would take 5 years of data and just simply replicate it to try and fake out some form of agentic AI training. The reality is, I think the person who did this analysis the best was Larry Summers, who is, of course, now on the Board at OpenAI and former Harvard President when he was doing the analysis of how the Fed had made such an error during COVID. And when he went to look at the Fed models, he discovered that they had gone back 20 years. And you can go on YouTube and watch this. It's a fascinating presentation and analysis by Larry Summers. And basically, he looked at them and he said, you didn't go far enough back. You had to go to where the black swan was, which was in the '70s. And that's why you missed it. And it's an interesting point because what you're doing when you're training GenAI, you're going back looking for patterns. And so if you have the data, you go back as far as you can because you're looking to get the pattern of the black swan. That's what a corporation wants to be able to see. Where are those anomalies. And so quite frankly, you can't go far enough back. If you've got the ability to go back 35, 40 years, you're absolutely going to do that because your AI will be more accurate and quite frankly, wise. And that's the race. There is no such thing as data that is not useful. The more you have, the better off you are. Kevin Krishnaratne: That's super fascinating. Maybe switching over to Steve, welcome to the team. If you think about the Q2 guide on revenue, it's a range. It does imply a scenario that could see quarter-over-quarter decline. So I'm just wondering if you can maybe talk about the drivers that would get you on the one hand down to the bottom of the range and on the other hand, the top end of the range. Can you just talk about expectations for the coming quarter? Steve Rai: Well, I think it's the most critical item for the quarter and the rest of the year and beyond is this theme that we -- that Tom has been talking about and James commented on. I mean, focus -- I'm new on the scene, right? But what's so compelling to me as -- from what I look at is you look at content and those -- and the core pieces that kind of feed into that and -- and that -- and then take a look at the cRPO, right? That current remaining performance obligation, that is just really kind of going to -- that's what's carrying everything here. That is the biggest component of the business. And from a -- what -- where Q2 is versus the second half, we haven't changed our annual outlook. So there is going to be some degree of shift from the other elements of the business, but that trajectory is the key trend to watch. Paul Jenkins: Yes. And don't forget that the thing that we don't know is what's the mix of revenue caused by how fast people are going to the cloud. As you know, the revenue reporting for cloud gets distributed when we make a contract 3, 4, even 5 years as opposed to license, which gets recognized right away in that quarter. So that's part of the issue that we don't know what the mix of that revenue will be. We sure do have the customers, though, it's just that what buckets of revenue will that go into quarter-by-quarter. That's the thing that we think we're seeing an even faster move to the cloud. Operator: The next question comes from Stephanie Price with CIBC. Stephanie Price: Maybe just a follow up on Kevin's question around the Q2 guide, and I appreciate the color on the go-forward strategy. In terms of EBITDA growth in the second half, the reiterated guide implies a pretty significant step-up in H2. Just curious about what's driving that growth? Is it primarily transformation initiatives? Or any color on that, Steve, and welcome would be great. Steve Rai: Yes. I'll let the others jump in. But certainly, there's a lot of the portfolio reshaping, the very significant business optimization initiatives that have been underway for some time and continue to be -- I mean, that's a $0.5 billion run rate improvement since the program was what was announced that we're working on. So a significant portion of that, call it, 1/3, I understand was realized last fiscal year. There's another 1/3 approximately that's built into the plan for the current year, and then we continue to work beyond that. So all of those things really drive that improvement. Stephanie Price: Great. And then, Tom, maybe just an update on the divestitures initiatives. Congratulations on eDOCS. How should we kind of think about the cadence of divestitures over the next several quarters here as you look to divest 15% to 20% of the overall revenue? Paul Jenkins: Yes, that's a great question. We've been grappling with that and talking to Steve about the right way to do it. Clearly, there are multiple business units here that are noncore. And I think what you'll see is we'll establish a pace of doing one per quarter because it does take a lot of effort. If you think about what Steve just said, as we divest a unit, there's parts that do not go with the unit sale that we then have to restructure. So it's a nontrivial exercise. We're going to do it methodically. And I think you'll see us generally be done within the next year. That's sort of what our overall goal is. But yes, you'll see a drumbeat of this. It will not be all at once. that would be irresponsible. We want to stay very disciplined on our EBITDA and keep -- as you know, the company is very disciplined when it comes to EBITDA. We'll make sure that we do this in a methodical fashion so that we don't get big changes in EBITDA. So that will guide us. We'll have to ask everyone's patience while we do it, but we don't want drama. We just want to have it in a real constant drumbeat as we go through the year. Operator: The next question comes from Steve Enders with Citi. George Michael Kurosawa: This is George Kurosawa on for Steve. Maybe one follow-up on the divestiture point. Steve, I think one of the things that jumped out to us on your resume, your time at BlackBerry was your involvement in divestitures with that organization. Maybe any thoughts on your approach or playbook? What do you feel like is similar or different coming into the situation? Steve Rai: Well, the primary difference that we've got here is the core represents the largest and fastest-growing piece of the business. So that is a great position to be in. And then beyond that, just given the kind of the landscape that Tom painted, everybody realizes we're on the cusp of a major step change in terms of AI and agentic AI, in particular, developing. And we've got -- this company has got AI of its own. But in addition to that, that access to all the information to training it. I mean that training ground and providing that access to it is, I mean, what a phenomenal time to kind of -- again, this is 35 years in the making, a great position to be in to kind of capitalize on that market picture. George Michael Kurosawa: Got it. Okay. Great. I appreciate that color. And then I also appreciate the additional disclosure on the business unit side. I think the Content Cloud side really jumps off the page, it's been well discussed. I think the other thing that caught our attention maybe on the flip side was the cybersecurity enterprise piece, particularly that cloud component declining. I know it's small, but I think we were kind of interested in the cross-sell opportunity there. So surprised to see that moving in the wrong direction. Just any color or commentary on what's happening in that business and your outlook there going forward. Christopher McGourlay: Look, I think it's fair to -- it's James speaking. I think it's fair to say that we're working extensively on that business. And we've made several investments in the product development since we acquired the product lines. We are seeing great success as we're moving forward. And we will start to see those cloud numbers coming up with investments in specific regions. But I can look at various deals that we've done with large strategic banks where we've sold content and cloud and security together. So we are seeing success in our cross-selling efforts. We're expanding those efforts, and you'll see us continue to expand those efforts as we go through this year and beyond. Operator: The next question comes from Samad Samana with Jefferies. William Fitzsimmons: This is actually Billy Fitzsimmons on for Samad. I want to double-click on Content Cloud because it's important. And when we think about the 21% Content Cloud growth in the quarter, how would you break down that growth between, call it, net new customer wins, seat expansions, ARPU expansion for selling additional modules in the base? And then cloud conversions in your existing base. And what I'm kind of getting at here is when we think about cloud versus non-cloud, Open Text has always made a point to support customers where they are. And so just so we're all clear, were there any, call it, shorter-term tailwinds to the Content Cloud growth rate from you guys using either carrot or sticks to incentivize your existing on-prem customers to move to the cloud? Or would you more categorize this as customer-driven and that they're choosing to transition because of their AI readiness? Christopher McGourlay: So first of all, I would character this as -- characterize this as a joint effort between Open Text and customers. As you said, we're selling to our customers where they want to be. We allow our customers to make that choice, and that's where we go. We don't have a program in place that incentivizes customers to move into the cloud. We're not pushing people to the cloud. This is really a joint effort and a joint decision as we go forward. There's nothing exceptional that I can -- that comes to mind in the quarter that would drive that growth other than the concerted effort of our sales team selling. Paul Jenkins: I think there's also a really big point buried inside that question. We, as a company, are focused on shareholder value. How do we make the most profit and the installed base has a tremendous amount of ARR, what we would classically call maintenance. It's very lucrative for the company. We're not in a hurry to see that leave. And quite frankly, neither are our customers. Our customers are very -- if they didn't broke, don't fix it. And so we're not in a hurry. I know other vendors because they want to categorize everything into the cloud or converting, we don't see the wisdom of that, not for our customers and not for ourselves. They're happy to actually pay us more under the old way, and we're happy to take it. So I think you'll see that this, as James says, is a partnership ongoing between our users and ourselves. But we're not dogmatic on this. We're just driven by how do we make the most amount of money and the most amount of money is by doing what customers want. William Fitzsimmons: Makes perfect sense and crystal clear on that. And maybe if I can ask one to you, Steve. I'll leave this pretty open ended, but it's only been a month or so since you joined, and this is your first earnings call. Can you just talk through kind of what are your initial priorities as CFO? Steve Rai: Well, obviously, understanding the priorities on the part of our customers, understanding the products. Obviously, there's been some very significant strategic initiatives recently announced, and the Board obviously has been very involved in that. But the big things are the primary trend that we've been talking about with content leading the growth and wrapped with all the business optimization initiatives, and that's really the top line, but bottom line, I mean, those are the most significant and most impactful items. So that's where I'm focusing and just obviously getting to know the team and how we do things. Paul Jenkins: Steve is certainly not bored. There's a lot of balls in the air, and he's just in a perfect position. We had a meeting early in and I said, Steve, what do you think? He said, go faster. And I think that characterizes Steve for us. He's a veteran, been around, he sees what we're doing, just go faster. Operator: The next question comes from Stephen Machielsen with BMO Capital Markets. Stephen Machielsen: So with respect to the ITOM business, you clearly had some strong cloud growth, albeit off of a small base. What would your expectations be for stabilizing total ITOM revenue? Like is this something you hope to accomplish as you exit this year? Or is it still TBD? Christopher McGourlay: I think we're -- I think we'll say at this point, it's still TBD. I mean we are working on stabilizing as we go along. And obviously, you can see the growth coming in on the cloud. There's some great product features, benefits that are coming out in our upcoming releases. We're seeing stronger demand from our customers. So yes, we're working towards stabilizing. I'm not willing to put a date on it at this point in time, but we are progressing well towards that end. And we're winning some great deals against some strong competition. So we've got really positive plans for ITOM and a key part of the portfolio. Paul Jenkins: I think what you'll see at Analyst Day and also at the user conference, although we break out these units as ITOM and enterprise security and content, you're quickly seeing us evolve into a go-to-market strategy where we're training all content for agentic AI. You'll see us go to market where the ITOM, which is really machine-generated content for agentic AI, you'll see business networks, which is really transactional content for agentic AI and then the original content server business, which is human-generated content, all of those components are going to come together in an offering from us because our users, when they go to train agentic AI, they don't think of it as ITOM or the way we as vendors would break it up in the historical way of creating content. They just think of it as content, a big data pool. And so you'll see us go to market where we would in the past call that cross-selling. We're coming to the market now to give our users what they need, which is really all of the data, not select data that previous vendors had but rather all of the data. I think this is a very important thing you'll see us go-to-market with starting with next week with Analyst Day. Stephen Machielsen: All right. We'll look forward to it. My second question is the Q2 revenue guide seems to imply a double-digit decline in license. Can you provide some color on that dynamic? Is it reflective of clients transitioning from license to cloud? Or is there some other dynamic or factor to point to? Paul Jenkins: So this is what I was referencing before. We're really driven by the selection that our customers are making. As James has said, we don't have a definitive target. We simply show up and say, here's the menu. Would you like this on-prem? Would you like this as a managed service. So in many ways, that mix is really a reflection of how quickly customers are going to the cloud. And quite frankly, last quarter, they chose cloud more than they did license. That could change next quarter because there is that other dynamic going on where the need for a proprietary cloud or a sovereign cloud that will have an element of on-prem, and it will have an element of wanting license revenue. So it's not something that we can predict with absolute precision. We think overall, though, that the trend line will continue just like what you saw this quarter into the following quarters. But that variability quarter-to-quarter is really hard to really nail down. James, what's your... Christopher McGourlay: I think you covered it great, Tom. Paul Jenkins: What we're seeing ... Christopher McGourlay: That's what we're seeing. We're seeing our customers move to cloud. There's some large deals out there, some variability in when those deals will happen on the license side. But the main driver is that customers are moving to the cloud. Those are bigger deals, but they're spread over time, and that's the impact on the quarter. Operator: The next question comes from Seth Gilbert with UBS. Seth Gilbert: Maybe another one on the 2Q revenue guidance that you outlined. 2Q usually seasonally stronger than 1Q with the December year-end -- calendar year-end. Maybe can you help us out a little bit, is cloud services, is that line going to be less than the 6% because there's a fine mix if you kind of play with license in the previous question and if you play with cloud. And maybe trying to help us understand for modeling purposes where those 2 will kind of be in 2Q, I think, could help squash a lot of investor fears. Steve Rai: I would kind of start with -- we haven't revised the outlook for the full year. So there is some element of larger deal timing, particularly on the license front because the rev rec is more upfront on that. But this is why at the outset, and I think we've covered in some of our IR presentation as well, that if that's a trade-off and the customer chooses to go to the cloud rather than signing up for a license deal with more upfront rev rec, keep an eye on the RPO because that's where that trade-off and that customer choice ends up and particularly the current RPO, which is the next 12 months. So it's that -- it is a positive shift for the long term to see it. But obviously, there's that near-term accounting rev rec impact. So that's how I guide you to kind of view that. Seth Gilbert: Got it. And maybe as a follow-up, recognizing you have not changed your full year guidance, which was good to see. So maybe this is a question about a little bit further out. But can you talk about how you're thinking about the changing revenue mix to impact margins maybe at a high level? Paul Jenkins: Yes. No matter what the revenue mix, we are committed to the margin. We've always been a very disciplined operator. So there will be no change to the margin regardless of the revenue mix. We will adjust as we go along. And it's like Steve said, some of this from a rev rec point of view, all the so-called dump truck still has the same amount. It's just that we're letting some of it out slower in one of the scenarios with cloud. But the dump truck still has the same amount of dirt in it. So it's just -- as we meter it out, we will make sure we maintain our margins. We've got a long history of being a very disciplined operator. Operator: I will now hand the call back over to management for closing remarks. Please go ahead. Paul Jenkins: Thanks, everyone, for joining us today. We're excited about our fiscal '26 and all the opportunities in front of us. We hope you'll join us at Open Text World in Nashville on November 18 for our Analyst Day. We'll go into more detail on some of the things that we talked about. As Greg noted, we'll be out in the field quite a bit at many investor conferences through the fall spending time with you and looking forward to you hearing your feedback. Thanks again for joining us today. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MasterCraft Boat Holdings, Inc. Fiscal First Quarter 2026 Earnings Conference Call. 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, Alec Harmon, Director, Strategy and Investor Relations. Please go ahead, sir. Alec Harmon: Thank you, Stephanie, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's fiscal first quarter performance for 2026. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. With me on this morning's call is Brad Nelson, Chief Executive Officer; and Scott Kent, Chief Financial Officer. Brad will begin with an overview of our operational performance. After that, Scott will discuss our financial performance. Brad will then provide some closing remarks before we open the call for questions. Before we begin, we would like to remind participants that the information contained in this call is current only as of today, November 6, 2025. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to the safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude items not indicative of our ongoing operations. For each non-GAAP measure, we will also provide the most directly comparable GAAP measure in today's press release, which includes a reconciliation of these non-GAAP measures to our GAAP results. There is also a slide deck summarizing our financial results in the Investors section of our website. As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis, and all references to specific quarters and periods will be on a fiscal basis. With that, I will turn the call over to Brad. Bradley Nelson: Thank you, Alec, and good morning, everyone. We delivered results that exceeded our expectations despite continued geopolitical uncertainty and a dynamic retail environment. Our team continues to execute our key operating initiatives and maintain disciplined cost controls, which contributed to our performance in the quarter. Pipeline inventory levels improved year-over-year, reflecting our balanced approach to dealer health and focus on driving sustainable growth. Q1 net sales increased $3.6 million or 6% year-over-year, and adjusted EBITDA rose nearly $3 million, a margin improvement of 380 basis points. As always, I want to thank each of our team members and dealers for their focus and partnership, which has provided us with a solid foundation from which to build for the rest of our fiscal year. Regarding channel inventory, we maintained the progress made over the past year with pipeline levels ending the quarter 27% improved from prior year. Dealer inventory levels are on track with our expectations, and inventory turns remain aligned with pre-COVID levels at this point in the year, supported by disciplined production planning and proactive pipeline management. From a distribution perspective, we continue to fine-tune our presence in key markets, consistently evolving our network and capitalizing on opportunities to add strong partners globally. While retail variability continues, early industry indicators have not changed our expectations for the year of down between 5% and 10% for our MasterCraft segment. The Pontoon category remains highly competitive with retail softness persisting due to elevated interest rates and promotional activity. Overall, while near-term interest rate cuts provide us with cautious optimism, continued macroeconomic strengthening and sustained breakout in demand would further support meaningful order growth. Our flexible operating model and targeted dealer support programs position us well to respond to evolving retail dynamics and deliver on the full year. Now turning to our brands. We remain encouraged by recent operational and quality trends within our MasterCraft brand, which were echoed by our dealer network during our annual dealer meeting held in late September. The energy and excitement for our brand reinforce confidence in our strategic direction and product road maps. In the quarter, we launched the first model of the all-new X family, the X24 to our dealers, followed by a successful consumer debut. This groundbreaking model ushers in the next generation of premium ski-wake products, featuring advanced technology and elevated design, reinforcing our commitment to differentiated innovation and category leadership. The timing of the X24 launch builds on the momentum of our ultra-premium XStar family and further positions MasterCraft at the forefront of the premium ski-wake segment. Initial dealer and consumer response has been strong, building anticipation for delivery of the full platform of models. We remain disciplined in ramping production throughout the year to ensure quality and demand alignment. In addition to product innovation, we continue to strengthen our brand through strategic partnerships and industry involvement. As an example, our recent partnership with the World Wake Association reflects our standard of delivering premium experiences, welcoming new riders, fostering a vibrant community around water sports while showcasing our latest innovations like the new X24. Turning to our Pontoon segment. Our Pontoon segment delivered meaningful progress with year-over-year improvements in operational execution despite broader market challenges. Crest's model year 2026 lineup was well received at our recent dealer meeting. The refreshed portfolio includes multiple new products, most notably the rebranded Conquest line, which modernizes the offering while honoring Crest's history legacy. We also introduced the Conquest SE, a new model designed to expand our addressable market at a more accessible price point. Combined with the successful addition of several new distribution points in key markets across the U.S., Crest is well positioned to capitalize on growth opportunities as market conditions improve. Our new Balise offering, which now includes the third model in the series, the all-new Halo, launched within the quarter, is garnering excitement and delivering a new level of differentiated consumer experience. While we remain measured in our near-term expectations given broader market dynamics, our focus is on building a foundation of future growth. Our strategy for the Pontoon segment remains centered on delivering differentiated products that elevate the on-water experience, supporting and strengthening our dealer partners and continuing to deliver marked operational improvements. Across the company, our financial position remains strong, and our strategic growth initiatives are fully resourced. Our flexible operating model and consistent cash flow generation are enabling us to invest confidently throughout the cycle. We continue to advance differentiated innovation across our business, returning capital to shareholders through EPS-accretive share repurchases and remain disciplined in evaluating inorganic opportunities. With that, I'll turn it over to Scott to review the financials. Scott Kent: Thank you, Brad. We are pleased with this quarter's performance, delivering results above our expectations for both net sales and earnings due to the strong operating performance of both of our segments. Focusing on the top line, net sales for our fiscal first quarter were $69 million, up $3.6 million or 5.6% year-over-year. The increase was primarily driven by pricing, favorable auction sales, lower dealer incentives and in alignment with our planned production cadence for the first half of the year. Gross margin improved 420 basis points over prior year to 22.3%, a result of strong cost management and operating performance across both segments, pricing and favorable mix. Operating expenses were $11.6 million for the quarter, an increase of $0.8 million when compared to the prior year due to senior leadership transition costs and timing of compensation and commercial activities. We continue to tightly manage discretionary spend and operating expenses remain well controlled. Turning to the bottom line. Adjusted net income for the quarter was $4.5 million or $0.28 per diluted share. This compares to adjusted net income of $1.9 million or $0.12 per share in the prior year, calculated using an effective tax rate of 23% in fiscal '26 compared to 20% for the prior year period. We generated $6.7 million of adjusted EBITDA for the quarter compared to $3.8 million in the prior year. Adjusted EBITDA margin was 9.7% compared to 5.9% in fiscal '25, a 380-basis-point improvement over the prior-year period. We ended the quarter with $67.3 million in cash and short-term investments, no debt and ample liquidity. We expect to deliver positive free cash flow for the year. We believe our debt-free balance sheet remains one of the strongest in the industry and will continue to benefit us as we progress through fiscal '26. We repurchased over 100,000 shares totaling $2.3 million in Q1, reflecting our continued confidence in our long-term outlook. This brings cumulative repurchases to 3.2 million shares and $76.5 million since we started the share repurchase program, a 20% benefit to Q1's adjusted EPS. We continue to prioritize returning capital to shareholders and expect to deliver total repurchases above prior-year levels by the end of the fiscal year. As we look ahead, based on our fiscal Q1 performance and current expectations, we are raising the earnings and adjusted earnings per share ranges of our full year guidance. For fiscal '26, consolidated net sales are expected to be between $295 million and $310 million, with adjusted EBITDA now expected to be between $30 million and $35 million. Adjusted earnings per share between $1.18 and $1.43. We continue to expect capital expenditures to be approximately $9 million for the year. For the second quarter of fiscal '26, consolidated net sales are expected to be approximately $69 million, with adjusted EBITDA of approximately $5 million and adjusted earnings per share of approximately $0.16. Keep in mind, our lower wholesale shipments in the first half remain consistent with our initial production plans for the year as we prioritize the introduction and ramp of our new generation of X family products. In the second half of our fiscal year, we plan to ramp up production as we execute our new product initiatives and maintain readiness for seasonal demand. To that end, our wholesale and financial plan is disciplined and provides us with the ability to deliver year-over-year growth despite continued market uncertainty. I will now turn the call back to Brad for his closing remarks. Bradley Nelson: Thanks, Scott. Our team executed well during the quarter despite retail uncertainty. We delivered solid results supported by disciplined production planning, dealer engagement and the early success of our new product launches, including the X24 and the refreshed Conquest lineup. These innovations reinforce our commitment to quality, performance and delivering the best consumer experiences in our industry. From a capital allocation standpoint, we are in a strong position, fully funded for our strategic initiatives and continuing to return capital to shareholders through our share repurchase program. Our flexible operating model and highly variable cost structure remain key advantages, allowing us to adjust production as needed to support dealer success and align with retail demand. We are managing the business for the long term. And while near-term uncertainty persists, underlying trends continue to move in our favor. As the market stabilizes, we are well positioned to capitalize on any future upswing and drive sustainable growth across our brands and continued value creation for shareholders. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Craig Kennison with Baird. Craig Kennison: I wanted to ask about the current marine consumer. Any details you can shed on -- any light you can shed on the retail trends this quarter and into October? And then just I'm really looking for a sense of how the consumer is behaving in this market with rates moving lower, but still a lot of uncertainty in the year. Scott Kent: Yes. You mentioned rates. Obviously, rates, I think, is a positive thing for the industry as we see them go down. We'll obviously have the backdrop of some of the macroeconomic and job growth, et cetera, that we'll have to pay attention to. Early SSI for Q1 has obviously showed the industry a little bit down. I think we performed really well in Q1. Initial views are we are gaining share in that quarter. I think it's a reflection of all of the focus we've had on new product and as well as some of the dealer growth we've had and changes we've made there. So we still are in line for -- assuming that we'll be down in the 5% to 10% range for retail for the full year. So Q1 didn't change any of our opinions about where the full year comes in. And frankly, I just need to kind of perform generally speaking, how we perform in Q1 for the rest of the year to stay within that 5% to 10%. Bradley Nelson: Also, Craig, we're still doing pretty well with premium buyers out there, and we're seeing that in our portfolio demand. And we're just looking for that sustained retail momentum, and we're hearing the same thing from our dealer network. Craig Kennison: Yes. And regarding your dealer network and then your retail outlook, have the additions you've made to that network, will that result in maybe outperforming the industry? And is that embedded in the 5% to 10% decline you expect? Scott Kent: Yes. I would -- yes to all of that. Yes, we certainly believe that the dealer changes we made are helping us gain the share. It's that along with our new products and product innovations, and we do think that should continue. I mean, we have certainly had that as part of our strategy to make those changes, and I think we're finally starting to see some of the results. Bradley Nelson: Dealers remain cautiously optimistic. I don't think that comes as a surprise to anyone. Some of the macroeconomic conditions can dampen sentiment somewhat, but overall, cautiously optimistic remaining. We're not hearing a lot about canceled orders, and we've not seen significant dealer failures to this point. But again, until we see more sustained retail momentum, we expect some continued cautiousness. Operator: Our next question is from Eric Wold of Texas Capital Securities. Eric Wold: A couple of questions. I guess, first question, kind of following up on the last one. Can you just give us kind of update on your sense of kind of the cadence of how you expect kind of retail to progress through your fiscal year? And kind of on the kind of the rate cut question, I recall from the last call, you were not embedding any benefit from rate cuts in your guidance. Is that still the case? And is that kind of based on you kind of want to see the benefits of how those are flowing through to dealers and consumers before you kind of make that assumption or kind of maybe kind of update your thoughts on that? And then I have a follow-up. Scott Kent: On interest rates, we -- obviously, there's a benefit to both us and our dealer on lower interest rate costs from a financial perspective. And we only embed in our forecast and planning the rates that have already happened. So the rate cuts that have already occurred are certainly factored in, but not necessarily future rate cuts. And obviously, the longer in the year those go, the less impactful they'll be for our P&L anyway. Obviously, love that interest rates are coming down. I think it's a great thing for the industry. It's certainly a psychological, I think, benefit to our customers when interest rates go down. But do keep in mind, a lot of the rates that the consumers actually pay are really more based on longer-term rates and will probably take a little longer to come down than the short-term Fed rates. Bradley Nelson: And Eric, on the cadence of the year, we're pleased with the results from the fiscal first quarter, and Q1 is one of our tougher comps year-over-year, so even better. Scott mentioned projecting down, retail being down in the 5% to 10% range. We still see that. But the way our revenue ramps throughout the year, of course, we're in a low seasonal pattern now. And until boat shows, it's a little bit dark in terms of how we're going to sense the market. But in the second half of our fiscal year, we're confident in a nice ramp there, driven by the launch of our new X Series products, starting with the X24. We are in early low-rate production in that model. So far, dealer sentiment and hunger for that product is high, and we anticipate strong consumer demand, which will ramp into our second half, which is embedded into our outlook. Eric Wold: Got it. Appreciate it. And then kind of the last question. You mentioned you're kind of obviously looking at M&A opportunities out there while still pursuing the share repurchase program. Can you talk about your comfort level with leverage now that you've got obviously a clean balance sheet. How high would you be willing to go in the short term to pursue an acquisition? And then how quickly would you need to or kind of want to work that leverage back down? Or would you be willing to kind of keep a certain level of leverage kind of on the balance sheet kind of longer term? Bradley Nelson: Sure. Thanks for the question. We work really hard to keep a balance sheet that gives us flexibility. And of course, we're going to direct capital within our capital allocation framework and our strategy there for the highest returns for shareholders. So that, of course, includes share buyback. That includes maximizing results in our core business. And certainly, it includes evaluating with high scrutiny inorganic M&A. We do have flexibility to do that. We do have open processes there as we evaluate opportunities. In terms of the scale and the trigger points there, that's something we won't comment on, but we do maintain activity in that arena. Operator: At this time, we're not showing any further questions in the queue. [Operator Instructions] Okay. I'm showing no further questions in the queue. This now concludes our question-and-answer session. Thank you for your participation in today's conference call. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Cineplex Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I will now hand the conference over to Rayhan Azmat. Please go ahead. Rayhan Azmat: Good morning, everyone, and thank you for joining us to discuss Cineplex's Third Quarter 2025 results. I'm Rayhan Azmat, Vice President, Investor Relations, Corporate Development and Financial Planning and Analysis. Joining me today are Ellis Jacob, our President and Chief Executive Officer; and Gord Nelson, our Chief Financial Officer. I remind you that certain statements being made are forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results may differ materially from those expressed in forward-looking statements. Information regarding factors that could cause results to vary can be found in the company's most recently filed annual information form and management discussion and analysis. Following today's remarks, we will close the call with our customary question-and-answer period. I will now turn the call over to Ellis Jacob. Ellis Jacob: Thank you, Rayhan, and good morning, everyone. I'm pleased to share our 2025 third quarter results with you today. After a softer start to the year, the second and third quarters delivered steady performances driven by a consistent supply of high-performing diverse titles with growing consumer demand for premium experiences. While there were strong contributions this quarter, attendance was down versus last year as last August had the record-breaking performance of Deadpool and Wolverine. We reported a third quarter box office per patron of $13.23, increasing by $0.04, supported by sustained demand for premium-priced products. Concession per patron was $9.65, down 2%, primarily due to the Labor Day weekend promotion, which included discounted offers on tickets and popcorn. Taking a closer look at content in Q3, there were standout performances across a variety of genres, including action, horror and anime. Franchise titles like Superman, The Fantastic Four: First Steps and The Conjuring: Last Rites delivered record-breaking results, all becoming the highest grossing titles within their franchise. Beyond franchises and sequels, the third quarter had a nice blend of original content that performed exceptionally well. Standout original horror film, Weapons exceeded expectations and topped the box office for 4 consecutive weeks in 2025. And F1, The Movie, continued its strong theatrical run into Q3, making it the biggest Apple original film ever. Our alternative content offering continues to demonstrate solid results, driving audience engagement and diversifying our programming slate in ways that resonate with evolving consumer preferences. Anime Call Classic Demon Slayer: Kimetsu no Yaiba Infinity Castle became the highest grossing foreign language film in history, both domestically and at Cineplex. Its massive fan following and deeply loyal global audience made it a strategic win for our alternative content portfolio, driven in large part by our ability to engage a varied and diverse audience. International cinema accounted for 13.6% of our box office in Q3, up from 9.3% last year, a testament to our growing ability to find and attract the right audiences for these films. Punjabi language comedy, Chal Mera Putt 4 delivered impressive results, becoming one of the highest grossing Punjabi films in Cineplex history with approximately 80% of its domestic box office attributable to our circuit. This reflects our industry-leading approach to film scheduling and our success in attracting high-value audience segments. International cinema also draws key retail demographics sought by advertisers, which is becoming a growing and unique offering for our cinema media team. In addition to the variety of content drawing moviegoers to theaters, consumers are also choosing a more immersive experience. We're using predictive analytics in our marketing efforts to match a moviegoer to a premium experience while also leveraging our loyalty program to reward moviegoers who choose an enhanced experience for the first time. Nearly 45% of our third quarter box office came from premium experiences, highlighted by the fact that our 3 highest grossing films in the quarter generated over 60% of their respective box office performance from these formats. We started the fourth quarter with Taylor Swift: The Official Release Party of a Showgirl, which energized the typically quieter period and reinforces the power of varied programming to bring audiences into theaters. Artists are increasingly turning to the theatrical experience as a way to unite fans and create shared cultural moments, positioning our theaters as dynamic venues for more than just movies. Our LBE business continues to play a part in our broader entertainment strategy, offering guests fun full social experiences in our venues nationwide. In Q3, LBE revenue reached a third quarter record of $34.6 million, up 11.3% year-over-year, driven by the addition of 3 new locations. Macroeconomic headwinds impacted food and beverage spending, resulting in same-store revenue declining 3.3% and same-store location margins delivering 21%. These locations are demonstrating resiliency in a more challenging environment while new venues are continuing to ramp up. Despite Q3 results being below our expectations, we remain optimistic as we enter our typically busier fourth quarter. With the heightened demand for groups and events activity in Q4, we are focused on building momentum and driving performance across our Palladium and the Rec Room locations. As we look at our cinema media business in the quarter, despite a softer advertising market, it continues to perform well. Cinema Media Q3 revenues increased by 6.1% to $19.2 million despite the decrease in attendance. This growth was primarily driven by an increase in Showtime revenues, which continues to be a key driver of advertiser engagement. Cinema media per patron reached $1.59, a 16.1% increase over the prior year, reflecting the diversity of the film slate during the quarter and strong sales despite a challenging media environment. Titles with broad appeal to key consumer demographics helped to track incremental advertising spend even in a relatively slower market. We also continue to leverage our expertise in data and analytics to optimize campaign performance and drive revenue growth. Last month, we announced we have entered into a definitive agreement to sell Cineplex Digital Media to Creative Realities, Inc. for gross cash proceeds of $70 million, subject to customary closing adjustments. This strategic transaction unlocks meaningful value for shareholders and immediately strengthens our balance sheet, providing capital for opportunistic share buybacks, debt reduction and general corporate purposes. Importantly, Cineplex Media will continue as CDN's exclusive advertising sales agent for its digital out-of-home networks across Canada, ensuring continuity for our partners and clients. CDM has grown into an industry-leading digital solutions company over the past 16 years, and this transaction reflects our commitment to optimizing our portfolio and delivering long-term value. Before I close, I'd like to provide a brief update on our appeal of the Competition Tribunal decision regarding our online booking fee. We filed our notice of appeal in 2023. At that time and with consent of the Competition Bureau, the Federal Court of Appeal granted us a stay of the administrative monetary penalty imposed against us. This stay will remain in effect until the Federal Court of Appeal has made a decision in our case. Our appeal was heard by the Federal Court of Appeal on October 8, 2025. We continue to believe that we complied with the letter and spirit of the law, and we anticipate a decision sometime in the first half of next year. Looking forward from April through September, box office revenues reached 110% of the same period in 2024. While August faced a tough year-over-year comparison due to the exceptional performance of Deadpool and Wolverine, July 2025 emerged as the second highest box office month since the pandemic, trailing only the Barbenheimer phenomenon. This signals positive momentum as we enter the fourth quarter. Looking ahead, the remainder of 2025 looks promising. While October is typically a slower month in the theatrical calendar, November and December are shaping up to be strong with a robust slate of highly anticipated titles, including Predator: Badlands, The Running Man, Wicked: For Good, the sequel to last year's Austin-nominated Wicked, which is already generating early buzz and fan anticipation with very strong presales. Zootopia 2, Five Nights at Freddy's 2, Avatar, Fire and Ash, the third chapter in James Cameron Epic Saga and The SpongeBob Movie: Search for SquarePants. We are also seeing increased interest in theatrical releases from streaming platforms with Netflix announcing that multiple titles will have an exclusive theatrical run before they hit their service. Some of these titles include K-pop Demon Hunters, Frankenstein, Jake Kelly and the latest from the Knives Out franchise Wake Up Dead Man and Knives Out Mystery. Cineplex Pictures is contributing to this momentum with the fourth quarter lineup that includes the Housemaid starring Sydney Sweeney and Amanda Seyfried and the third film in the Now You See Me franchise. Our diversified business model and commitment to delivering premium entertainment experiences and the strong film slate ahead positions us well for continued success into the fourth quarter. Before I close, I'd like to announce that Kevin Johnson, CEO of WPP Media Canada and President of WPP Canada has been appointed to the Board of Directors. Mr. Johnson is a recognized leader in the Canadian media and advertising industry and has more than 2 decades of experience driving growth and innovation with his deep expertise in marketing strategy and new business development. I will now turn the call over to Gord Nelson, our Chief Financial Officer, to walk you through the financials in more detail. Gord Nelson: Thank you, Ellis. I am pleased to present a condensed summary of the third quarter results for Cineplex Inc. For further reference, our financial statements and MD&A have been filed on SEDAR+ and are available on our Investor Relations website at cineplex.com. Our MD&A and earnings press release include a complete narrative on the operational results. So I'll focus on select highlights as well as providing commentary on liquidity, capital allocation priorities and our outlook. Before commenting on the financial results, I want to remind you that with the announced sale of CDM last month, its results are presented retroactively as discontinued operations. There is significant disclosure in our financial statements and MD&A related to this retroactive presentation and all amounts following will be from continuing operations unless otherwise stated. As Ellis mentioned, we were pleased to see continued consistency in box office performance during the third quarter, supported by a diverse mix of film content. This momentum reflects the enduring appeal of the theatrical experience and the strength of our premium offerings. Total revenue for the quarter was $348.9 million, an 8.7% decrease from the prior year. Adjusted EBITDA was $33.3 million compared to $47.9 million in Q3 2024. Our consolidated adjusted EBITDA margin was 9.6%, down from the 12.5% in the prior year. All of these metrics were impacted by the attendance decline as a result of the record-breaking performance of Deadpool and Wolverine in 2024. So let's take a closer look at our segments. Box office revenue in the Film Entertainment and Content segment was $159.5 million, down 8.8% from the prior year. Attendance for the quarter reached 12.1 million guests, were $0.5 million or 5% higher than Q2 2025. This represented a decline of 9.1% compared to Q3 2024, again, primarily impacted by the highest grossing R-rated film of all time, Deadpool and Wolverine, which drove exceptional results last year. Box office per patron or BPP, reached $13.23, supported by sustained demand for premium-priced products, which accounted for 44.7% of total box office. Concession per patron or CPP was $9.65, down 2% -- both the BPP and CPP metrics were impacted by a $5 promotional pricing offer during the Labor Day weekend on tickets and popcorn. While these programs drove incremental attendance and a positive net contribution over a typically quiet Labor Day weekend, the impact on BPP and CPP was approximately negative $0.32 and negative $0.12, respectively, as we did not have this program in 2024. So to reiterate, these programs drove incremental visitation and were a net positive contributor. The year-over-year BPP and CPP change for Q3 should not be read as an indicator of any future trends. During Q2, we saw our first quarter with CPP over $10, and we continue to see opportunity for growth in both these metrics. I also want to speak briefly about our other revenue line, which is comprised of many items attributable to our Film Entertainment and Content segment. During the quarter, other revenue was down approximately $7.9 million as compared to the prior year. The major contributors to this decrease include the following: at the end of 2024, we sold our online business, Cineplex Store. Other revenue included approximately $2.4 million related to this business in Q3 2024 and obviously, nil in 2025. Next, revenue related to our Cineplex Pictures business is based on their films released in any given quarter, and they typically have a limited number of films released in any given year. This quarter, revenue from this business was $1.5 million below the prior year. But looking back to Q2, as an example, revenue from this business was $1.5 million above the prior year. And as Ellis mentioned, we have a number of films being released in Q4 and would expect the revenue to be above 2024's level in Q4. For both the Cineplex Store business and Cineplex Pictures, these revenue declines are also offset by other operating expense reductions. And finally, breakage on our gift card and certificate programs was down approximately $3 million as compared to the prior year, primarily related to true-ups reflected in the prior year comparatives. These 3 items account for $6.9 million of the decrease. Segment adjusted EBITDA was $33.8 million with a margin of 11.4% compared to 14.7% in the prior year. The decline reflects lower attendance compared to the prior year. Importantly, through the end of Q3, Cineplex has exceeded prior year box office revenues of every month of 2025, except 2, reflecting a positive trend in both the consistency of film product and consumer demand for the theatrical experience. Cinema Media revenue for the quarter was $19.2 million, an increase of 6.1% compared to the prior year. Growth was driven primarily by increased demand for Showtime advertising. Our ability to deliver targeted impressions through premium content and audience analytics continues to differentiate our offerings in a competitive media landscape. Segment adjusted EBITDA was $15.2 million with a margin of 79.7%. As a reminder, the Media segment results now only include the results from the Cinema Media business and exclude the Cineplex Digital Media business. While the broader advertising market has been challenged this year, we are encouraged by our growth this quarter alongside longer-term interest from brands seeking high-impact audience-driven placements. Revenue in our location-based entertainment segment was $34.6 million, an increase of 11.3% compared to the prior year, driven by the addition of 3 new venues that opened in late 2024. Same-store revenue declined 3.3%, consistent with our full year expectations of a 3% to 5% decline as previously communicated. Given this revenue decline, same-store level EBITDA margin came in at 21%. Total portfolio store level EBITDA for the quarter was $5.8 million with a margin of 16.7%, down from the 24.4% in the prior year. The decline reflects the lower same-store revenue levels due to macroeconomic headwinds, consistent with the broader LBE landscape, alongside muted operating results from the 3 new build locations, which continue to optimize their operations. Looking ahead, we remain focused on optimizing performance across the portfolio and are encouraged by corporate event bookings heading into the traditionally strong fourth quarter. We have one remaining committed new location, which we expect to open in the first half of 2026. General and administrative expenses for the quarter were $20.2 million, representing a decline of approximately 2% from the prior year. Within this, LTIP costs totaled $2.7 million, reflecting a $1.4 million decrease from the prior year due to increased forfeitures associated with organizational changes. Subsequent to the quarter end, we announced the sale of Cineplex Digital Media for gross cash proceeds of $70 million, subject to customary closing adjustments. As mentioned previously, this reflects an approximate 10x multiple on 2025 estimated earnings and was highly accretive for us. Importantly, Cineplex Media will remain the exclusive advertising sales agent for all CDM operated digital out-of-home networks across Canada, ensuring continuity and value in our media business. We ended the quarter with $38.7 million in cash, a modest decrease from $42.1 million in Q2, reflecting seasonal working capital movements and capital expenditures. We continue to maintain full availability under our $100 million covenant-like credit facility with no drawings as of quarter end. Net cash capital expenditures for the quarter were $4.3 million, primarily allocated to maintenance and premium format upgrades. We continue to expect full year net CapEx to be in the range of $40 million to $50 million, consistent with prior guidance. Our capital allocation priorities remain disciplined and unchanged maintaining appropriate levels of maintenance capital expenditures, strengthening the balance sheet to achieve our target leverage range of 2.5 to 3x, making strategic investments to support long-term growth and providing shareholder returns over time. With respect to the CDM sales proceeds, we intend to allocate up to $18.5 million for opportunistic share repurchases under the recently extended NCIB, consistent with indenture limits and hold the remaining funds for potential debt repayment, pursuing additional buybacks or other corporate purposes. There was no activity under the NCIB during the quarter as we balanced our capital priorities and were restricted with the CDM transaction. With the proceeds from the upcoming sale, we are well positioned to act opportunistically in the quarters ahead. The past several months have demonstrated continued momentum in theatrical exhibition with box office revenues exceeding prior year levels in nearly every month in 2025. This trend reflects not only the strength and diversity of film content, but also the continued enthusiasm of audiences for the theatrical experience. The sale of CDM provides us with additional financial flexibility and our continued role as exclusive advertising agent for CDM's out-of-home networks ensures continuity in our media business. With a strong foundation, a clear strategy and a disciplined approach to capital, we are well positioned to deliver long-term value for our shareholders. We're excited about the path ahead and remain focused on executing our strategy. And with that, I'll turn things over to the conference operator for questions. Operator: [Operator Instructions]. Your first question comes from the line of Ryan Neal with TD Securities. Ryan Neal: This is Ryan in for Derek. So first, I'm just curious how you guys are expecting the 2026 slate to evolve. Do you think it's going to be sort of similar chunkier to 2025 or more balanced throughout the year? Ellis Jacob: 2026, we look upon it being a strong year, and there's a lot of distribution of product. We are excited because of Amazon who've committed to releasing close to a dozen movies. So overall, the big quarters are always the summer quarters and the December period. But I think you'll see it a bit more spread out than it was in 2025. Ryan Neal: Okay. Great. And given the strong slate next year in '26, has that translated into any increased conversations you've had with advertisers maybe looking to increase their cinema media spend? Ellis Jacob: Yes. And as the attendance goes up and as we know, when it comes to the advertisers, they are very focused on the awareness and the attention matrix. And to me, it's one of the few places left where you can basically get total attention for the audiences. So it will continue to get stronger and continue to grow. Gord Nelson: Yes. And Ryan, as we see it and we look at the landscape, when you look at the total media spend in Canada and you exclude digital spend, so all the sort of more traditional forms of advertising spending, cinema was up. So we were up year-over-year, where basically all other forms of advertising, the more traditional spend was down. So it's sort of evident of the kind of the compelling nature and what we provide to advertisers for a very effective campaign. Operator: [Operator Instructions]. There are no further -- apologies. We have a follow-up from Ryan Neal with TD. Ryan Neal: Yes. Just in terms of modeling and for modeling purposes, how do you think we should sort of record or think about depreciation moving forward following the sale? Gord Nelson: Yes. So depreciation -- so depreciation, really, I would say the latest quarter is the best indicator for going forward. We have restated the financial statements to include CDM as a discontinued operations. So the fourth quarter number would be the best indicator on a go-forward basis. Operator: [Operator Instructions]. There are no further questions at this time. I will now turn the call back to Ellis Jacob for closing remarks. Ellis Jacob: Thank you all again for joining us today. We look forward to sharing our fourth quarter results in early 2026 and hope to see you at the movies. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the DRI Healthcare Q3 2025 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Ali Hedayat. Please go ahead. Ali Hedayat: Thank you, operator, and good morning, everyone, and thank you for taking the time to join us today. With me are Navin Jacob, Chief Investment Officer; and Zaheed Mawani, Chief Financial Officer. I will begin the call by providing an overview of our operating highlights. Navin will then discuss our portfolio assets with an update on the market outlook and provide more insights on our recently announced acquisition of the Veligrotug and VRDN-003 royalties. Finally, Zaheed will discuss our key financial highlights before moving on to Q&A. We are pleased with our third quarter results, which reflect the continued strength and resilience of our portfolio, solid execution across our business and the early benefits of our transition to an internalized structure. The third quarter represented our first full quarter operating as an internalized company. I am pleased with the performance in the quarter as we delivered strong performance across all our key financial metrics. Our portfolio delivered double-digit cash receipt growth led by the Orserdu, Xolair and Rydapt franchises, partially offset by lower Omidria performance and the persisting headwinds from Vonjo. Given the continued underperformance of Vonjo relative to our forecast, we have taken the appropriate steps and have booked an impairment to reflect our new expectations for the asset's performance. We expect Vonjo to continue to grow off current levels, both in units and in revenue, but net pricing trends have impacted our forecast relative to our underwriting, which is reflected in our fair value adjustment. While this is disappointing to us, I want to highlight that the revenues to date for Vonjo plus our expected future receipts remain in excess of our original cost, a fact that speaks to our conservatism in underwriting and the intrinsically attractive risk characteristics of our asset class. In addition to strong cash receipt performance, we delivered solid operating margin performance with adjusted EBITDA of $36.7 million or 17% growth over the same period last year. When we embarked on the internalization process, we outlined our view that the management company costs that we were bringing on to the income statement would roughly offset the management fees at the current scale of the business and leave margins at the same level as they had been in the past. I'm happy to say we have demonstrated that in our first quarter as an internalized entity with adjusted EBITDA margins of 84%. With this achieved, the road to higher operating leverage as the business grows should be fairly evident. As we continue to optimize our internal platform, you should expect our cost to come down a bit further in the near-term, after which we will start reinvesting in growth to position the trust for long-term value creation, both on the top line and in our margin structure. The quarter also marked an exciting milestone with the approval of Ekterly on July 7, for which we have begun earning royalties on a 1-quarter lag. With the approval, Calvista exercised its option to receive a onetime $22 million payment, which increased our royalty rate on the first year of sales and also increases the sales-based milestone amount. Ekterly represents a meaningful long-duration asset for DRI with expected cash receipts extending through at least 2041. It's an excellent example of our ability to structure creative and mutually beneficial transactions that deliver long-term value for unitholders and our partners. Navin will provide more detail on our asset performance shortly. Turning now to our latest royalty transaction. On October 20, we were pleased to announce a transaction with Viridian Therapeutics to acquire synthetic royalty streams on a pair of very promising treatments for thyroid eye disease, Veligrotug and VRDN-003. We acquired the royalties for an upfront fee of $55 million, and our total investment is expected to be up to $300 million. Veligrotug has been granted a breakthrough therapy designation from the FDA, and we believe the product will be approved and come to market in the second half of next year. VRDN-003 has a pair of ongoing Phase III clinical trials for the same condition with the top line results expected in the first half of 2026. Together, these therapies represent meaningful progress in treating a disease that affects about 300,000 people in the United States and has a current market size of about $2 billion. I would like to take a moment to lay out the strategic and financial fundamentals of this deal and why it is a very attractive and accretive addition to our portfolio. First and foremost, we believe these therapies, once approved, will provide a meaningful improvement in the quality of life for those affected with the condition. This is core to our mission, and we are pleased to enter into a strategic partnership with Viridian to bring these innovative therapies to market. Second, this transaction illustrates our competitive niche and our ability to structure innovative deal structures to meet the bespoke needs of the counterparty while also providing us with a strong risk-adjusted return profile, meaningful upside optionality and attractive capital efficiency characteristics. Investing in pre-approval drugs inherently carries some level of risk due to the potential for clinical trial failure. While our extensive diligence leaves us with a high confidence in the approval of both therapies, we've approached this transaction with a structure that gives us a lot of downside protection around those approval risks and is in keeping with our overall enterprise risk framework. Navin will share more on the royalty tier structure shortly. In addition to closing the transaction, we took further steps to optimize our capital structure during the quarter. We continue to execute on our normal course issuer bid and acquired and canceled about 394,000 units, bringing our total for the first 9 months of the year to roughly 1.35 million units. In addition, we amended our credit lines to allow greater flexibility and to unlock the remaining gap between our effective capacity and the headline size of the overall facility. We are well-positioned to capitalize on the opportunity ahead of us and to continue to drive value for unitholders. I will now turn the call over to Navin Jacob, our Chief Investment Officer. Navin Jacob: Thank you, Ali. Regarding our existing portfolio performance, the table on Slide 7 shows the individual royalty receipts for the third quarter of 2025 compared to Q3 of last year and the previous quarter. Summarize, Orserdu continues to experience strong growth in the U.S. and internationally. Orserdu royalty receipts were up 51% year-over-year at $16.9 million versus $11.2 million in Q3 2024, driven by sales growth and the removal of certain deductions in Orserdu2, where we are now experiencing a higher royalty rate on a go-forward basis. We continue to monitor the ongoing clinical trials of Orserdu in early breast cancer indications as well as in the metastatic setting in combination with other therapies. These trials, if positive, could potentially expand Orserdu's label, which would represent upside to our acquisition forecast. Offsetting Orserdu strength were our Omidria royalty receipts, which decreased 13% from the previous year as a result of continued impact from the Merit-based Incentive Payment Systems program, or MIPS. Omidria royalties are received with a 60-day lag and thus Q3 2025 receipts reflect sales from May 2025 to July 2025. As mentioned previously, we are now observing stabilization in demand as physicians refine their usage patterns to avoid potential penalties tied to overutilization. We continue to anticipate a gradual recovery in Omidria sales heading into 2026. Turning to Vonjo. Royalty receipts for the quarter decreased 5% compared to the previous year due mainly to changes in U.S. reimbursement impacting gross to net adjustments with the IRA impact to Part D Medicare discounts that came into effect in 2025, as previously discussed. During the quarter, we recorded an impairment to our Vonjo royalty asset in the amount of $13.7 million, which was consistent with Sobi's decision to write down its Vonjo rights. Our impairment reflects negative competitive pressures in the U.S. myelofibrosis market and increased Part D discounts relating to the Inflation Reduction Act. Our adjustment aligns with Sobi's revised outlook. We remain encouraged by Sobi's ongoing life cycle management efforts, including the Phase III PACIFICA study expected to read out in 2027. Ekterly received approval in July. And while the first cash flows won't be received until the fourth quarter, leading indicators are suggesting a launch that is ahead of our acquisition forecast. It is important to note that by design, our portfolio of royalties is diversified across a broad range of therapeutic areas and mechanisms, which helps mitigate the impact of challenges in any single asset. This diversification supports the stability of our cash flows and enables us to continue deploying capital with limited exposure to any one investment. Turning to Slide 8 and our recent acquisition of a synthetic royalty in both Veligrotug and VRDN-003. We are thrilled with the opportunity to make this investment in the franchise and partner with the team at Viridian. Our deep research expertise supports our conviction that these products have the potential to be a treatment of choice for patients living with thyroid eye disease or TED. TED is a serious rare autoimmune disease that causes ocular inflammation and results in bulging of the eyes, redness, swelling, pain, double vision and can even be vision-threatening. In the United States, between 15,000 to 20,000 patients are newly diagnosed each year. In 2024, the TED market was approximately $2 billion with only a single approved product currently on the market. We expect the TED market to grow to over $3 billion and the Viridian products to capture a meaningful share of the total market. Once approved, Veligrotug will be the second approved biologic treatment for TED in the marketplace. It has the potential to improve patients' quality of life by requiring fewer doses and significantly less time for a full course of treatment. Veligrotug has met all primary and key secondary endpoints in its Phase III trials. This week, Viridian announced that it has submitted the biologic license application or BLA for Veligrotug to the FDA. Veligrotug has been granted FDA breakthrough therapy designation, which may accelerate the review process. Pending approval, we are optimistic for a potential U.S. launch in 2026. VRDN-003 is a monoclonal antibody very similar to Veligrotug, but with some modifications to its sequence that can provide novel convenience benefits such as self-administration via low-volume subcutaneous auto-injector. VRDN-003 is being studied in active and chronic TED in 2 Phase III trials, which are anticipated to read out top line results in the first half of 2026. Subject to positive outcomes and subsequent regulatory review, Viridian plans to submit a biologic license application by the end of 2026. Under the terms of the agreement, Viridian is entitled to receive up to $270 million of committed capital, which included an upfront payment of $55 million, followed by a series of stage gate milestone payments. In the near term, upon achievement of such conditional milestones, DRI would fund an additional $115 million. The balance of the funding, specifically $100 million is tied to longer-term milestones coupled with a $30 million funding opportunity to invest in future partnership opportunities as mutually agreed. We have a tiered royalty agreement, which applies equally on annual U.S. net sales of both Veligrotug and VRDN-003. We're entitled to 7.5% of net sales up to $600 million, an incremental 0.8% on sales above $600 million to $900 million and a further incremental 0.25% on sales above $900 million up to $2 billion. We have a soft cap at $2 billion, above which we did not receive any royalties. Following the first commercial sale of Veligrotug in the U.S., we will collect royalty receipts quarterly with a 1 quarter lag. During the third quarter of 2025, we tracked at least 6 royalty transactions totaling approximately $1.7 billion in aggregate value. In the same period, there were more than 40 equity financing completed by biopharma companies across the United States and Europe, raising roughly $6.6 billion. Year-to-date, we have tracked $5.5 billion in royalty transactions across more than 20 deals. This level of activity underscores the strength and breadth of the opportunity set in our market. There is no shortage of investment opportunities. If anything, the pipeline of royalty opportunities continues to expand. What constrains our activity is not deal flow, but our extremely disciplined investment framework, which protected us in a highly uncertain macroeconomic and policy environment in the first half of 2025. As we saw greater clarity in the second half of 2025, our investment framework allowed us to actively pursue the Viridian transaction. In summary, we deliberately pursue a small number of transactions each year, focusing on the ones that meet our highest standards in terms of asset quality and risk-adjusted return potential. We believe that maintaining the selectivity is essential to generating durable value for unitholders, managing portfolio risk and preserving capital for the most compelling opportunities when they arise. I will now turn the call over to our CFO, Zaheed Mawani. Unknown Executive: Thank you, Navin. We are pleased with our financial performance for the third quarter. We recorded $43.6 million in total cash receipts, a 12% increase over the same quarter last year. We recorded $48.7 million in total income, a 17% increase over the same period last year. Adjusted EBITDA was $36.7 million, a 17% increase year-over-year with our adjusted EBITDA margin for the quarter at 84%. Adjusted cash earnings per unit in the quarter were $0.55. For the quarter, we also declared cash distributions of $0.10 per unit. We continue to generate strong cash flow from our assets. Over the last 12 months ending September 30, 2025, we recorded royalty income of $192.7 million, plus the change in the fair value of financial royalty assets, the unrealized gain on marketable securities and other interest income for a total income of $198.4 million. After adjusting for receivables, the unrealized gain on marketable securities and the net change in the financial royalty asset, we achieved normalized total cash receipts of $190.4 million. Our operating expenses, management fees and performance fees totaled $34.7 million, net of performance fees payable, resulting in an adjusted EBITDA of $155.7 million and an adjusted EBITDA margin of 82%. We also generated adjusted cash earnings per unit of $2.25. As of September 30, we had $35.6 million of cash and cash equivalents. We also had $52.9 million of royalties receivable and $265.4 million of credit availability from our bank syndicate. Subsequent to the quarter end and as of October 17, 2025, the remaining credit available was $222 million, which reflects the $50 million drawn to partially fund the upfront payment of $55 million in connection with the Viridian transaction. Our capital capacity positions us well to fund the near-term potential Viridian milestone payments in addition to retaining financial flexibility to fund new deals. We continue to be prudent allocators of capital, and our focus remains on growing our portfolio through the attractive opportunities we are seeing in the market that Navin outlined earlier. In addition, we will continue to pursue all opportunistic capital deployment strategies to maximize value creation for unitholders. This includes continuing to allocate capital to repurchase and retire units through our share buyback program, further reinforcing our commitment to optimizing capital structure and returning value to unitholders. As of September 30, we acquired and canceled over 4.5 million units through our NCIB programs. We will continue to retain discretion in making purchases under the NCIB, if any, and in determining the timing, amount and acceptable price of such purchases subject at all times to applicable TSX and other regulatory requirements. All units purchased by DRI under the NCIB will be canceled. Finally, post-internalization, we will deliberately but thoughtfully seek opportunities to deliver cost efficiencies to contribute to our drive for profitable growth and are pacing well against our expectations on this front. With that, let's open the call for questions. Operator: Thank you so much for that. And before we get to the question-and-answer session, I'd like to remind everyone that we have a disclaimer for this call. Listeners are reminded that certain statements made in this earnings call presentation, including responses to questions, may contain forward-looking statements within the meaning of the safe harbor provisions of Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information Form and DRI Healthcare's other filings with Canadian securities regulators. DRI Healthcare does not undertake to update any forward-looking statements. Such statements may speak only as of the date made. Today's presentation also referenced non-GAAP measures. The definitions of these measures and reconciliations to measures recognized under IFRS are included in our earnings press release as well as in our MD&A for this quarter, both of which are available on our website and on SEDAR. Unless otherwise specified, all dollar amounts discussed today are in U.S. dollars. And again, I'll remind you that today, this conference is being recorded, Thursday, November 26, 2025. DRI's quarterly press results release and the slides of today's call will be available on the Investor page of the company's website at drihealthcare.com. Operator: [Operator Instructions] And our first question comes from Michael Freeman with Raymond James. Michael Freeman: Congrats on these results. My first question is on the Viridian transaction and the TED franchise. I wonder how sensitive your assumptions on these assets providing future cash flows to you, how sensitive your assumptions are on the approval of both assets. So, say, Veligrotug gets its approval and then we find that VRDN-003 does not for whatever reason. I wonder if you could just describe the sensitivity of your assumptions to that. Navin Jacob: Yes. It's Navin. So, thanks for the question, Michael. So, the way we structured this deal, which was very interesting for us and why we did it is that regardless of whether one asset or both assets are approved, it will be quite positive for unitholders. Quite frankly, if 003 is not approved, there is potential upside to our returns. And as such, that's why -- that was part of the reason why we felt compelled to construct this deal with Viridian. Ali Hedayat: And Michael, just to give a little bit more color on that, it's Ali. I think the right way to look at that is the whole package of assets are approved, we'll have a certain return on a bigger amount of dollars deployed. And if 003 is not approved, we'll arguably have a higher return, but on less dollars deployed. So, something to that effect. Michael Freeman: And I wonder if you could describe -- you described the landscape of currently approved assets to treat TED with one approved product. What could you tell us about the pipeline headed toward the TED landscape? Navin Jacob: Yes. Great question. In fact, there was -- so Amgen obviously has TEPEZZA on the market, which is roughly $2 billion -- annualizing at roughly $2 billion. They announced their results just last night or 2 days ago, continues to be annualizing at roughly $2 billion. They just launched Europe, which is interesting. But with regards to other mechanisms of action or other pipeline assets, Roche actually recently presented on their IL-6 a couple of days before we completed our transaction. That data looked subpar, substantially subpar to the anti-FGR1 receptor antagonist that we own in the form of the liquid target VRDN-003, both on the primary endpoint and on secondary endpoints, the IL-6 was significantly worse. In fact, one of the Phase III trials that Roche presented technically was -- did not hit statistical significance. So, there is -- there are some questions as to whether it will get approved. We actually had included quite a bit of market share for that asset in our forecast. So, let's see how it plays out. If it does not launch, there is potential upside to our acquisition forecast. With regards to other mechanisms, there is a fair amount of competition coming. There are anti-FcRn products that are coming, a couple of other IL-6s. However, given the weak data from Roche as well as some clinical -- some clinician investigators-initiated studies that were conducted for other IL-6. We're not particularly concerned about the IL-6 class. But despite that, we have included significant market share in our assumptions for future anti-IL-6s and/or FcRn assets. Operator: Your next question comes from Erin Kyle with CIBC. Erin Kyle: I wanted to first ask on Orserdu and maybe if you can just elaborate how we should be thinking about those sales into 2026 with Lilly competing drug receiving FDA approval in September? And then can you just remind us of, again, the competitive landscape there and if there are other competing drugs that will likely enter the market in the next year or so. I believe AstraZeneca and potentially Roche were also running trials for Orserdu. T Navin Jacob: Thanks very much for the question, Erin. So, with regards to Lilly's Imlunestrant, I think the brand name is Inluriyo, it is only approved as a monotherapy for second-line HER2-negative HR-positive ESR1 mutant breast cancer patients, which is the same indication as Orserdu. This is in line with our expectations, but there had been some expectations from others that it would get a broader label because of some of the combination studies that it ran. When that data came out, we felt strongly that it was unlikely to get that, and it did not. That's well within our expectations. From everything we see, Imlunestrant is at best similar to Orserdu. There is a small argument to be made that it is worse than Orserdu. Having said that, it is Lilly and they're a strong marketer. We're not gun shy on that fact. But with that said, Orserdu has a 2-year -- 2.5-year head start, which is very important in this landscape. And given the undifferentiated profile of Imlunestrant, we're not overly concerned with that. We have that built into our acquisition forecast. The other asset that was -- that has been positive is Roche's Giredestrant and other oral SERDs that will compete against Orserdu, and had data from the evERA trial. That Phase III trial was in combination with an older drug called Afinitor, so Giredestrant plus Afinitor versus the standard of care plus Afinitor. It's a very interesting study. Admittedly, the data did look good, and it did look good in both all-comers and ESR1 patients. With that said, when I say it looked good, it's the PFS data, it's not the OS data. But nonetheless, it looked good. However, Afinitor is a very old drug, and it's not really used frequently in second-line breast cancer, especially not for all comers because you have the CDK4/6 drugs that are used there. Furthermore, Orserdu is also testing this Afinitor combination. They're testing -- or rather Menarini is testing this combination of Orserdu plus Afinitor in a Phase II/III study. And so even if that combination starts taking over some market share, we do have some protection in the fact that very likely, the Orserdu plus Afinitor study will also be positive because on a monotherapy basis, we don't see much differentiation between Giredestrant and Orserdu. Erin Kyle: That's really helpful color there. And then I just wanted to ask on the portfolio weighting. So based on our math, after the Veligrotug transaction, we see our portfolio is now weighted a little over 20% to preapproval, which is, I think, a bit above the 15% weighting target we've discussed in the past. So just in terms of appetite for another preapproval deal or what that looks like, should we expect you to defer on any preapproval deals until Veligrotug is approved? Or how are you thinking about that? Ali Hedayat: Yes, Erin, I think the kind of adding in the gross value of Veligrotug, including all the milestones is probably the wrong way to do that weighting in the sense that the upfront payment is preapproval risk, but obviously, the larger payments are sequenced primarily on approval, right? So almost by definition, when we are making those larger payments, it's an approved drug, not a pre-approval drug. So, on our math, I would say the weighting of genuine preapproval risk right now is the $55 million upfront over our net book value of assets, and it's a sort of mid-single-digit number. And in terms of, I think, broader approach to preapproval, we've been doing a lot of work on a risk framework essentially to really categorize and systematize our approach to pre-approval. We are comfortable with exposure in that space, both because of the return characteristics because of the fact that it sort of anchors at higher returns, ultimately on the back-end approval deals, approved deals, if it's structured correctly, and it sort of gives us duration and various other favorable boost to the portfolio. I think we're well progressed on framing that, and I think we feel pretty good about the framework that we have in place. So, you should expect us to continue to be active in the space. I don't think it will go significantly above the parameters that we talked about before, but it's not something we're backing down from either. Operator: Your next question comes from Doug Miehm with RBC. Douglas Miehm: First question just has to do again with these -- I wouldn't call them new type of approach to the marketplace, but one where you're definitely going to have competitive advantage in terms of pre-approval products. And I guess my question is, in your conversations with investors and owners of the shares over the last 6 to 12 months since you've, let's say, started this approach, how would you say that those conversations have gone? Are people comfortable with these types of deals that you're putting in place? Are they starting to recognize that given the duration, the quality of the assets, they're going to be okay with this approach? I'm just trying to get in their heads. Ali Hedayat: Doug, thanks for the question. I think there's a couple of ways to look at the direction of travel of the business. I think broadly speaking, we have been focused on maintaining high risk-adjusted returns. And I think to use a very broad word, what has become evident over the past 18, 24 months is that if you're targeting a point on the graph of risk-adjusted returns, the complexity under that has gone up. And you can define complexity in many different ways. You can define it as the structure of the transaction. You can define it as more synthetics versus traditional. You can define it as pre-approval. But I would say the mix of all of those things is probably higher for a given return than it was 2 or 3 years ago. And I think that is really what we are communicating to our investors. So, we are not saying it's all sales out for solely preapproval or all sales out for solely synthetic or super complex deals. But in general, to sort of achieve the great risk-adjusted returns the team is achieving, we find that we're being much more competitive when we're taking on situations that are complex, that require a lot of structuring that may have aspects of preapproval that may be synthetic. And we've been very transparent about that. I think our investor base is receptive and understands that. But when you look for a reason as to why the business has a competitive niche in what is a sector where many of our competitors are larger and better resourced, I think it is exactly our ability to execute on transactions like the Viridian one, where we have structured it in a way that is extremely well thought out, where we have taken synthetic risk, where we have managed in, I think, a very clever way the pre-approval aspects of the transaction. So, we have to outrun other people by doing a better job of those things, and I feel we're demonstrating that we can do it. Y Douglas Miehm: I just have a follow-up housekeeping item here. So, when you think about the royalty receipts that were generated by Orserdu this quarter relative to the income that was recognized in Q2, it was lower. And I know there can -- and that sort of thing. But I am curious, are we starting to see evidence of the marketplace pointing towards other products now that they're approved? Or was this simply a case of true-ups from quarter-to-quarter? Y Ali Hedayat: Sorry, Doug, one thing to keep in mind here is obviously the dynamic between our cash receipts and our recognized revenues, right? And I think you will see the impact of some of the Orserdu outperformance in the coming quarter in the sense that we've basically accrued that revenue into the receivables, but not put it through the top line yet, which is our traditional accounting. So, on our adjusted cash receipts, adjusted EBITDA, you are not seeing the impact of the performance of the drug right now. Operator: Your next question comes from Tania Armstrong with Canaccord Genuity. Tania Gonsalves: Congrats on a nice quarter. A couple for me. First, on the Viridian assets. I'm wondering if you have any insight into how Viridian might price those in the U.S. I know one of the big pushbacks against TEPEZZA is pricing, which is why it hasn't performed well in other international markets. And maybe just following along that line of thinking, if you can also comment on why you decided to pursue just the U.S. rights and not other international markets. Navin Jacob: I think you answered the question yourself, Tania, it's a very thoughtful question. That's exactly why we only pursue the U.S. just given the pricing power that we have here in the U.S. and our expectation is that it's priced in line with TEPEZZA. Tania Gonsalves: And then on your total income CAGR, I know you've previously given out guidance for this. I think the last update was kind of a mid- to high single digit through 2030. With these new potential assets in your, I guess, however you're baking in that risk adjustment, where do you anticipate that CAGR being? Ali Hedayat: We're going to update that guidance in the fourth quarter. I would say it's probably a fair statement that we're feeling pretty good about that, just given layering on of these new assets and the performance of the back book. Tania Gonsalves: And then lastly, we did see a bit of a tax recovery come this quarter. I'm just wondering if we should be modeling any kind of tax impact going forward now that the internalization is complete. Unknown Executive: I'll take that one, Tania. No, I think at this point, just given it was relatively material over there, Tania, I wouldn't sort of guide you to start putting that into your forecast. But as we know more through the internalization, if there's going to be another sort of provision that we need to make more regularly, then we'll update you accordingly for your models. Operator: Your next question comes from Zachary Evershed with National Capital Bank. Zachary Evershed: Congrats on the quarter. So just another one on the internalization process here. With this being the first quarter, would you be able to give us an idea of what normalized OpEx might look like, including the cost reductions you mentioned at the top of the call? Ali Hedayat: Yes, Zach, I'd point you to a couple of things. So, I think it's Page 18 or 19 of the MD&A. We have a walk-through of what we would consider sort of one-offs related to the quarter. I think it sums up to about $1.1 million. So that's really comprised of some severance and a few other bits and pieces, a transitional service agreement with our prior manager to deal with some issues that they were handling for us, and we have, at this point, internalized into our operations as well as some tail end of costs related to the internalization advisory work itself. And all of that is going to sort of fall out sequentially, I would say we're also, as a result of our restructuring efforts running at a lower run rate of overhead costs in the fourth quarter, both in terms of our headcount and in terms of our office lease. Unfortunately, our beautiful office on the top floor of First Canadian is going to fall prey to our optimization efforts, and we're moving into a new space, which we're excited about, and it's going to be great for the team, but it's also much more economic. So, I think as we go into the fourth quarter, you'll see sort of all of that fall through to costs. What I do want to caution you on is that it's probably the low point of our cost in the sense that our intention is to reinvest some of that back into growth and hires on the investment team and elsewhere in the organization. So, I wouldn't sort of run rate where we're going to come out at the end of the fourth quarter or the first quarter as our cost base. But I do think it's going to be overall a better mix of margins than we originally anticipated when we internalized. And certainly, that will scale as the business scales. Zachary Evershed: That's really good color. And on your Vonjo outlook, you aligned with Sobi's. What kind of hit to pricing or change in competitive environment do you think there would need to be to generate an impairment on Vonjo1? Navin Jacob: Yes. We feel very strong. We feel pretty good about that Vonjo1 acquisition -- and the forecast associated with that. I can never say never about any asset, but we feel pretty confident about where that forecast stands right now for Vonjo1. Operator: Your next question comes from Justin Keywood with Stifel. Justin Keywood: Nice to see the results. Does the FDA move to accelerate biosimilar development impact your view of future opportunities? Or perhaps are there any points of risk within the portfolio, maybe not today, but in the medium or longer-term? Navin Jacob: No. Very frank, very simply, most of our terms expire when the key patent that we believe is the strongest. When that patent expires, most of our -- most terms expire at that standpoint -- at that time point. And so, we don't rely on sort of the post-LOE tail to fund any of our acquisitions. That is not part of our assumptions. Having said that, 1 or 2 assets may go past the LOE, and that's pure upside, but that's not a driver for us. Justin Keywood: And then on the Viridian transaction, there was subsequently a financial raise and the pro forma cash balance is very healthy for that company, almost at $900 million. So, this was subsequent to the royalty transaction. Does that impact the way you're looking at the outlook for the asset given the healthier cash balance to go to market? Navin Jacob: No, that's an excellent question. There's 2 positive impacts from that. Number one, well, 3, I could argue 3. The first is it just creates a much healthier company, right? Viridian as an entity is much healthier and that reduces any tail end risk that we may have or sort of second standard deviation, third standard deviation risk we have around the credit risk of Viridian. So now they're a super healthy company. That's number one. Number 2, from the perspective of having a well-funded launch, Viridian is extremely well funded now and ready to go. We know that team. They're an excellent management team, very good executors and aggressive. So, we're excited to see what they're able to do with the cash that they have raised, and we're happy for them. So that will allow for a well-funded launch. And then the third is, I think that -- and this is a little bit more intangible, but it is our royalty deal allowed them to conduct that equity deal. And so, to the extent that other companies see that, that's a good thing for our pipeline. Operator: There are no further questions at this time. I'll turn the call back over to Ali Hedayat. Ali Hedayat: Thank you, operator. Thank you all for joining us today, and thank you for -- to the DRI team for an enormous effort in bringing these great results to fruition here. We look forward to discussing our Q4 and full year results with you next March, and thank you for your continued commitment to DRI. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Nomad Foods Third Quarter of 2025 Conference Call. [Operator Instructions] Also, please be aware that today's call is being recorded. I would now like to turn the call over to your host, Jason English, Head of Investor Relations. Please go ahead. Jason English: Hello, and welcome to Nomad Foods Third Quarter 2025 Earnings question-and-answer session. We've posted the associated press release, prepared remarks and investor presentation on Nomad Foods website at noomadfoods.com. I hope you've all had a chance to review them. I'm Jason English, Head of Investor Relations and I'm joined by Stefan Descheemaeker, our CEO; Ruben Baldew, our CFO; and sir Martin E. Franklin, our Co-Founder and Co-Chairman. During this call, we'll make forward-looking statements about performance that are based on our view of the company's prospects, expectations and intentions at this time. Actual results may differ due to risks and uncertainties discussed in our press release, our filings with the SEC and in our investor presentation, which includes cautionary language. We will also discuss non-IFRS financial measures during the call today. These non-IFRS financial measures should not be considered a replacement for and should not be read together with IFRS results. Users can find the IFRS to non-IFRS reconciliations within our earnings release and in the appendices at the end of the slide presentation available on our website. Please note that certain financial information within the presentation represents adjusted figures. All adjusted figures have been adjusted primarily for, when applicable, share-based payment expenses and related employer payroll taxes, exceptional items, foreign currency translation charges, or gains. Unless otherwise noted, today's comments from here will refer to those adjusted numbers. With that, operator, let's open the line to questions. Operator: [Operator Instructions] Our first question here will come from Andrew Lazar with Barclays. Andrew Lazar: Welcome to Dominic. Maybe to start, one for you, Martin. Nomad discussed quite a bit at our September conference about medium-term goals, productivity and even said the company expected to deliver positive EBITDA growth in '26. Obviously, since then, Nomad has changed CEOs. And investors, I think, are rightfully asking whether those commitments sort of are still relevant, as oftentimes a new CEO appointment can signal the need for some form of a profit reset. So I guess my question is whether Nomad still stands by those recent comments at this stage. Stéfan Descheemaeker: Thank you for your question. I would say a few things. First of all, these commitments and if you like, internal commitments and goals are ones that are approved and studied by our entire Board, not just our CEO. We made a few commitments that I think are important that are consistent and what we've talked about already in our prepared remarks. Our EUR 200 million multiyear efficiency target, obviously, it still stands and is still actively being worked on, I think, quite successfully. The second, our medium-term goals to compound EBITDA in low single digits. Those goals continue to be in place and you have to excuse me. And third, accelerating free cash flow growth by delivering EBITDA and also -- and importantly, while reducing exceptional items. So I think all of these goals are in place. Obviously, when we bring in a new CEO, it's our CEO's prerogative to evaluate everything in fairness to Dominic, he's in the company for 3 days. He doesn't take over as CEO until the year-end, but we brought in Dominic because of his growth orientation and in the business. So I'm excited to have him and only see this as being a positive in terms of our metrics of performance. Andrew Lazar: All right. And then maybe as a follow-up, I know I think private label trends tends to lag branded price increases when Nomad's led with them. And sometimes that's led to some temporary market share weakness in the past. I guess how is Nomad balancing sort of the pricing that you're going to be taking next year with keeping share momentum? And maybe can your higher level of productivity help offset some of the inflation such that maybe more modest pricing can be enacted than otherwise that might have had to have been the case? Ruben Baldew: Yes. Thank you, Andrew. Let me take that question. So first, the kind of price lag and dynamics. If we look at the last 3 months, last 6 months, last 9 months, we've seen our price index versus competition and our competition is mainly private label slightly go down, so 2%, 3%, which is helpful in the context that we have to take pricing. I do have to say that's the average of an average. So of course, you always have to go a bit more in the detail per country and the specific product, but there has been a bit of catching up of private label. So that's one thing. I think more importantly, and you were already given half of the answer, is what are we seeing for next year. And we've been clear that the inflation we're seeing most of the pricing we're going to take in quarter 1, '26. Now a couple of things there. The inflation in total is not the same level of inflation. We said it before like 2 years ago. We're looking around cost price inflation of around single digit. And that's probably at this moment what we're looking at. Second point, also when you compare, and that's also probably the question behind your question on competitiveness and not going too aggressive in terms of pricing and losing share, our RGM capabilities versus 2, 3 years are in a better place, and we said it before, we will do this very surgically. Third point is what you alluded to. We've launched this cost competitiveness program, and Martin also mentioned of EUR 200 million, and we still passionately stand behind it. And by the way, this is not only a forward-looking program. You also heard in our remarks that in quarter 3, but also in quarter 2, we are delivering lower overheads, compensating for inflation even when you correct for the bonus release. So that cost competitiveness program, we will drive forward, and that will help for us to make the right trade-offs in how much should you price versus where actually do we have some offset in savings. We will also look at pricing, how that links with the renovation. So if we're looking at some renovation with different superiority, different product quality, we try to link that to pricing. So there's also new news both for retailers as well as consumers. And the last remark, just to be clear, I think it's just too early days to really see what the effects are. We are sending out the price as we speak. We have already sent to certain customers in certain countries. There's a bit of difference overall. And we can come back more on that when we release our quarter 4 results in the new year. Operator: And our next question will come from Scott Marks with Jefferies. Scott Marks: I just wanted to follow up on a question that Andrew asked about reiterating some of the medium-term targets. I think as we think about '26, with pricing coming in, Dominic taking over and some of the other dynamics that you've laid out. Just wondering how we should be thinking about '26 preliminarily in terms of maybe cadence of the year or when we should be thinking about some of these newer initiatives kind of that are kicking in. Stéfan Descheemaeker: Ruben, do you want me to take that? Ruben Baldew: Well, I can do. I build on -- let me just build on what Martin already said. So I think what Martin just said, and it's also your question, Scott, we launched a program strategy in September, which is not only the program of Stefan or of a CEO, it's something endorsed by the entire Board and our whole internal program. What Martin just said, look, we will passionately drive a EUR 200 million competitiveness program. We will see the benefits of cash flow. But it would also be unfair to make a lot of additional comments concretely on '26 with Dominic just coming into the role. But there is a clear focus on the top line recovery and some of the effects we're seeing this year will help also for next year. And overall, we expect results to be better next year than this year. How much that will be completely is more for when we announce our full year results in early next year. Scott Marks: Okay. Appreciate the answer. And then second question from me would be, you called out, obviously, some challenging dynamics in the U.K. with the expectation for some of those to stabilize. As we think towards the Q4 and low end into the guide, if results were to come in, let's say, below what you're anticipating or above what you're anticipating, maybe what would be the reasons for that? How should we be thinking about kind of like the risks and the potential upside risks as well? Ruben Baldew: Yes. So we've said today, we're confirming, reiterating the guidance, albeit at the low end of the guidance. The low end of the guidance on the top line implies a quarter 4 between minus 1.5% and minus 2%. And let's just take a step back. If we look at our sell-out, our sell-out year-to-date is plus 0.2% -- if you look at our sellout -- and by the way, that's plus 0.2% in a year where we're not happy. It's a year where we've seen the impact of the weather, both as well in our savory business, savory frozen food in Northwestern Europe as well, we're not so happy with the ice cream performance more in quarter 3. Despite that, our sellout is plus 0.2%. We also said part of that is transitory, and we see the market recovering and also our own sell-out numbers. If you look at the last 3 months, value is plus 0.5%. Our last 3 months volume growth is plus 0.7%. So our sellout is not where we want it to be, but it is positive and actually it's slightly improving. And that you have to see then to an implied guidance of minus 1.5%, minus 2%. Now, what gives us confidence that we're able to hit that. If you look at our difficulty plan, and you've also seen that some of it in the prepared remarks, we improved the product quality of our pizza business in the U.K. That's one. We started around September with our new campaign in the U.K. It's a bit too early to tell, but the first positive, the first signals are positive. We see distribution increases in Italy, but also in France. So we're now 1/3 of the quarter is now behind us. To your question, what needs to go well, wrong, what could change it. There's a bit where you could look at pricing. We've increased the prices of our chicken range in the U.K. because we said a lot of the pricing will be taken next year. It's a bit depending what competition will do, so that could go up or down a bit, but I think those are probably the big ones. Operator: And our next question will come from John Baumgartner with Mizuho. John Baumgartner: I'd like to stick with private label, but I'm curious more about the competitive aspects because market share has always been high, but it hasn't really increased in your categories for the better part of the decade prior to the cost of living crisis. And even now it seems to have sustained momentum even as price inflation has moderated. So I'm curious, what are you seeing from retailers? Is private label competing differently aside from price? Is the innovation more refined? Is the quality improving? Are there differences in non-price factors that you're seeing over the past 24, 36 months? Because it does seem that maybe there's an evolution here from store brands. Jason English: Thanks for the question, John. I think it's... When you think about this category, frozen food, it's a very good category. Category is growing nicely year after year. But definitely, private label is a big thing. And I think the learning from my 10 years is basically, you have to be -- I mean, every day, you have to be non-complacent. And you have to make sure that you have the right value equation, which is partly price and partly obviously, renovation, A&P and all the rest of it. And when you think about, let's say, this year in the U.K., for example, we lost it a bit. And I think exactly what Ruben mentioned in terms of renovation of fish fingers, in terms of renovation of pizza, in terms of some renovations of packaging in peas, for example, that's exactly what we're doing right now, which is to come back with the right value equation. That together obviously with to Ruben's point, which is pricing-wise, we are slightly better compared to where we were a few months ago, a few quarters ago. I think that's where we think we can do a better job. But definitely, to your point, it's not only pricing, it's the non-pricing peas. And that peas is when I compare '26 with '25, starting now actually, I mean, our program is much better. And let's face it, I think we can be hard with ourselves. I think '25, I don't think we've been good enough in terms of value equation. And that's why we're doing all these renovation in pizza, for example. And what we can see is in the U.K., well, even we've compare ourselves with premium, we are superior with the takeaways. We intend to do the same with the second part, which is thin. We intend to come with the renovation, a superior fish finger, which is a big thing for us. The fish finger is around 40% of our fish business. which is really big. And it's going to hit the market together with the sizing in Q1. So that's the kind of things we're doing. We're doing things. We're renovating the packaging in peas. Peas we have -- definitely, we have a superior product. But definitely, I don't think it can do better in terms of packaging. So it's -- philosophically, it's very simple. I think our job as branded people, we need to bring additional value compared to private label. And if we don't do that, obviously, we lost our relevance. And that's, I think the program for '25, '26, second half of '25 and definitely '26 is going to be much better than what we have. Operator: Our next question will come from John Tanwanteng with CJS Securities. Jonathan Tanwanteng: I was wondering if you could talk about the decision to keep the majority of your repricing to next year. You've previously demonstrated the ability to go to your retailers and make adjustments ahead of that annual negotiation. Maybe first, what drove that decision this year not to do so? And second, does that give you any incremental leverage or ability to make up a portion of that inflation that you ate in '25 as you talk to your retail next year and within, obviously, the context of end demand elasticity? Stéfan Descheemaeker: Well, let me contextualize a bit this decision. Put yourself back in 2022, where between March and June, every month, we had another $50 million additional COGS. And so whilst all the negotiations, the prenegotiations with all the retailers in Europe were behind us. Well, it was simple. It was force majeure, and we decided to reopen everything. And by the way, we not only reopened it once, but sometimes twice, even 3 times. And we did it, and it worked overall even in countries that are probably a bit more difficult like France and Germany. This time, it's very different. It's not force majeure. It's just an additional COGS that came in the middle of the year and the negotiations were behind us. And quite frankly, we took the commercial decision not to take it this year. I think it would have been a mistake to reopen the negotiation for something which was not considered as a hyperinflation. So that's why we did it. But definitely now, obviously, we need to take a more holistic approach for next year, how much we need to price, also combine also with the renovation program and the whole 360 approach. That's obviously for next year. Jonathan Tanwanteng: Okay. Great. And then second, could you talk a little bit more about some of the cost saving items over the next quarter and year and how they phase in and possibly net out between your cost restructure, the resumption of bonus accruals and then how that nets out with also the savings realizations as well? Ruben Baldew: Yes. So it links a bit to our overall $200 million program. That $200 million program, vast majority of that sits in supply chain, around $170 million invested in overheads. Overheads, you already see some savings coming through this year, which is really about making the organization simpler. We've done restructuring in some of our functional support areas. We're also looking at non-people costs where we also now started with the indirect procurement team and getting savings out of that one. So that's the first part. Then if you look at supply chain, we actually have already been delivering quite a bit. It's a step-up in supply chain from EUR 145 million to kind of EUR 180 million, EUR 175 million. The big step-up there is procurement. And it's not that in procurement, we're all tomorrow going to have huge consolidation in the fish supply base. But if we look at elements like ingredients, like packaging, some other ingredient base, we think we can further consolidate our supplier base, and that's the big driver of the savings there. The other part is in our factory footprint, we've lost volumes. So there, we're going to do 3 things. 22% of our volume still sits at CoCopac, and we think we can in-source that. So we'll do that. Secondly, we see some of our bigger factories where we have an opportunity to rightsize both cost and asset base. And thirdly, and again, it's not only promising. You've seen in our year-to-date results that we announced a closure in one of our smaller factories, which not only helps from a profit perspective, but also from a cash perspective. So we're doing that, and we will continue to do that. How we allocate that to the P&L is exactly linked to the question of Andrew, we're going to be surgical where we think that saving needs to be used not to price for the last piece of inflation and dampen some of the supply chain impact or we say, look, in areas like, for example, peas, where we know we have good quality, we're going to invest more in communication or like what Stefan mentioned, we see in fish thing is that we have an opportunity to improve quality, and we're going to use those savings to improve product quality. Operator: And our next question will come from Steve Powers with Deutsche Bank. Stephen Robert Powers: So you've spoken a little bit about this indirectly, but the implied fourth quarter guidance does contemplate an acceleration on a 2-year basis. And I guess you've spoken a little bit about where your confidence comes from that. But I guess just a little bit more clarity or a little bit more color as to how you think you're protected against downside just because the comparison is a bit more difficult. Ruben Baldew: I understand the question. Maybe it's also good to understand '24 comparator, and it's how far back do you want to go versus '23 comparator because we had the same discussion, I think, last year when we delivered a 3% growth in quarter 4, which is the background of your question. If you look at the year before, actually H1, the year before was minus 2%, and in H2, we had a minus 8%. So you also have to look at the comparator of the comparator, which sounds a bit as we're going back very many years. But in the end, it's looking at run rates, and we knew that the comparison run rate wasn't the strongest. The second point, which for me is a crucial point, we are not happy with this year. We know we had the destocking. We had not the greatest ice cream season, but our sellout is plus 0.2%. If you look at the last 3 months, it's a plus 0.5% growth in volume plus 0.7%. That is vis-a-vis a guidance implied of minus 1.5%, minus 2%. So there's some call it buffer, but some difference there. And secondly, if you then look at our activity program for the fourth quarter, there is a lot with additional distribution. There's a lot where we're stepping up quality in pizza. There is the mass brand in the U.K., U.K. specifically because we're not happy with the U.K. performance, and that's not something which will be solved in 4 to 12 weeks, but we see stabilization of shares, which also gives confidence. I think, yes, that's probably all the context and color I can give at this moment. Stephen Robert Powers: Perfect. Okay. That makes a ton of sense and it's confirming. I guess the other question I wanted to ask about was just around capital allocation priorities. I think your comments over the course of time, especially recently have been pretty consistent about how you plan to deploy capital, obviously, supporting the dividend and prioritizing share repurchases. It seemed like in the prepared remarks that there was even more emphasis on that capital allocation prioritization. And I do note that in the recent refinancing that you executed, I think there was an extra $150 million or so raised with that. So should we infer that, that will be deployed towards buybacks? Or are there other uses of that extra capital? Martin Ellis Franklin: I'll take this one. It's Martin. I don't know how many companies you're able to buy at 6.5 PE, but I think while we're in that ZIP code, we're going to be buying back our own stock. We see obviously a far higher intrinsic value of the company than the equity markets give us credit for. I think we said that in our prepared remarks. And obviously, the credit markets really do recognize the strength of the company and its cash flow. So we will be continuing to be bought by stock in the past. We're going to continue to buy back stock until we feel that the markets are fairly valuing the company. And obviously, the extra $150 million of cash that we have gives us more liquidity to do so. Operator: And with no remaining questions, I'd like to turn the call back over to Stefan Descheemaeker for... Stéfan Descheemaeker: Well, thank you all for joining us today. This has been my 40th earnings call with the company, and it will be my last. The past 10 years have been dynamic with the good, but also challenging times, but the company has persevered through it all, emerging from each challenge stronger than before. It held true during Brexit, Russia's invasion of Ukraine, the more recent period of hyperinflation, and it will be true again this year. This year was more challenging than we initially expected, but I'm already seeing the companies begin to bounce back. The foundation for improvement has been laid, and I'm excited to see Dominic build upon it as the next CEO. The best is still ahead for Nomad Foods. And with that, thank you, and goodbye.
Operator: Welcome to the Iovance Biotherapeutics Third Quarter and Year-to-Date 2025 Conference Call. My name is Daniel, and I will be your operator for today's call. [Operator Instructions] Please note that this conference call is being recorded. I will now turn the call over to Sara Pellegrino, Senior Vice President, Investor Relations and Corporate Communications at Iovance. Sara, you may begin. Sara Pellegrino: Thank you, operator. Good morning, and welcome to the Iovance webcast to discuss our business achievements, pipeline milestones and third quarter 2025 results. Members of our executive leadership team speaking on today's call include Dr. Fred Vogt, Interim CEO and President; Corleen Roche, Chief Financial Officer; Dan Kirby, Chief Commercial Officer; Dr. Igor Bilinsky, Chief Operating Officer; and Dr. Friedrich Finckenstein, Chief Medical Officer. During the question-and-answer session, we will also welcome Dr. Raj Puri and Mark Theoret from our Regulatory Affairs executive leadership team; and Dr. Brian Gastman, Executive Vice President of Translational Medicine and Research. This morning, we issued a press release that is available on our corporate website at iovance.com. I would like to remind everyone that this conference call will include forward-looking statements regarding Iovance's goals, business focus, business plans and transactions, revenue and revenue guidance, commercial activities, clinical trials and results, regulatory approvals and interactions, plans and strategies, research and preclinical activities, potential future applications of our technologies, manufacturing capabilities, regulatory feedback and guidance, payer interactions, restructuring, licenses and collaborations, cash position and expense guidance and future updates. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected during today's call. We undertake no obligation to publicly update any forward-looking statements. I will now like to turn the call over to Fred. Frederick Vogt: Thank you, Sara. I will start by sharing our continued progress to increase revenue and margins, advance our pipeline, reduce expenses and improve operational execution. Third quarter revenue grew 13% over the prior quarter and notably, gross margin improved and was 43% following the initial results of our strategic restructuring and cost optimization. More improvements are coming, including today's announcement of our centralization of manufacturing at our internal manufacturing facility. Our highest priority is to accelerate revenue growth to increase Amtagvi adoption across our network of academic and community authorized treatment centers or ATCs. We have expanded to include new academic ATCs and multiple community ATCs. Initial patients are being treated in the community and are generally earlier in their melanoma treatment journey. As we educate community oncologists across our ATCs, including the major academic centers, we are seeing earlier and more frequent patient referrals to drive growth. Real-world data showed response rates of 60% in the second-line treatment setting, which has provided a strong foundation to amplify our compelling story to the melanoma community for the power of TIL therapy in melanoma. We are on track to achieve our revenue guidance range of $250 million to $300 million for the full year 2025. With robust current demand, we expect a strong fourth quarter for Amtagvi alongside increasing Proleukin sales as we saw in late 2024. We continue to project Amtagvi peak sales of more than $1 billion in the U.S. and melanoma with larger additional opportunities in international markets and in future indications. For example, our interim clinical data in previously treated non-squamous non-small cell lung cancer showed a best-in-class -- apologies for technical difficulty here for one second. For the -- for example, our interim clinical data in previously treated non-squamous non-small lung cancer showed a best-in-class profile and unprecedented durability compared to standard of care in this population, including an objective response rate of 26% and a median duration of response not reached at more than 25 months of follow-up. There is a significant market opportunity in this lung cancer indication, which is about 7x greater than our current advanced melanoma indication. We expect to quickly complete enrollment in our LUN-202 registrational trial in 2026 with approximately 80 patients. This sample size will support an accelerated approval given the unmet need in non-small cell lung cancer, precedent of the Amtagvi approval in 73 melanoma patients and recent accelerated approvals based on 70 to 80 patients from defined non-small cell lung cancer population. The U.S. FDA previously provided positive feedback on our trial design, which aligns with FDA guidance for single-arm trials to support accelerated approvals for single agents in conditions with unmet medical need. We look forward to advancing toward a supplemental biologics license application in non-squamous non-small cell lung cancer and a potential launch in the second half of 2027. As we increase revenue and advance our pipeline, we are laser-focused on expense management and profitability. Following our third quarter reorganization, we are refining our operating plan to ensure we are appropriately investing in our commercial launch and high-value programs. Again, cost of sales and gross margin will improve significantly as we transition manufacturing to our internal facility in early 2026. During this call and our future quarterly updates, we will highlight our ongoing efforts toward further expense reductions and resource allocation. Corleen will now highlight our third quarter financials in further detail. Corleen Roche: Thanks, Fred. Good morning, everyone. During my first quarter as Chief Financial Officer, I want to emphasize our focus on driving the company towards sustained profitability. Our strategy included prioritizing top line growth, significantly improving margin and controlling costs with a disciplined approach. In the third quarter, our top line revenue remained strong. Total product revenue increased approximately 13% over the prior quarter to about $68 million. This included Amtagvi sales of approximately $58 million and global Proleukin revenue of nearly $10 million. As expected and consistent with prior quarters, overall gross to net was less than 2% and is expected to remain minimal. As Fred mentioned, we are on track to achieve our revenue guidance in the first full calendar year of Amtagvi sales. Next, I am pleased to highlight initial improvements in expenses and gross margin from the corporate restructuring and continued cost optimization initiatives implemented in the third quarter. We reduced total costs and expenses by approximately 10% over the prior quarter, excluding restructuring charges of approximately $5 million. We lowered cost of sales by approximately 21% over the prior quarter, resulting in improved gross margin of approximately 43%. Importantly, costs associated with patient drop-off and manufacturing results continue to decline as our revenue continues to grow. Gross margin will improve over time as we accrue benefits from our recent restructuring, implement additional cost savings initiatives and centralize manufacturing at our internal facility. Our cash position of approximately $307 million as of September 30 was bolstered by expense reductions and is expected to fund operations into the second quarter of 2027. I will now turn the call to Dan Kirby, our Chief Commercial Officer. Daniel Kirby: Thanks, Corleen. Our ultimate goal is to establish Amtagvi as the preferred option for all eligible patients. Patients deserve a onetime cell therapy with curative intent, and we are steadfast in delivering on that promise. My conversations with patients and caregivers remind us of the commitment to the Iovance mission, pioneering a new treatment paradigm for patients with solid tumor cancers. At the recent Melanoma Research Foundation Gala in Denver, Iovance received the Corporate Leadership Award in recognition of our efforts to advance care for melanoma patients. In my first 8 months at Iovance, we have made notable progress to lay the foundation for revenue growth by driving adoption across our ATCs. I'll highlight 3 key areas of focus. First, new ATCs are driving growth. In the third quarter, we added community ATCs alongside new high-volume academic ATCs. These new ATCs contributed to the highest number of patient starts with better capture in the third quarter. Our first community ATCs are beginning to treat patients with Amtagvi in this setting. New ATCs continue to come online and will drive further growth in the fourth quarter and beyond. Second, penetrating the community market is key to unlocking Amtagvi's tremendous potential as we increase the frequency, speed and efficiency of community referrals to ATCs. Health care professional and patient-focused campaigns are having a positive impact. Under our specialty pharmacy agreement with Biologics by McKesson, patients have broader access to Amtagvi. Hospitals now have flexibility to obtain Amtagvi directly or through a specialty pharmacy, giving their finance teams confidence to place more orders. Our third focus area is to drive earlier treatment with Amtagvi. This will increase penetration in our academic centers. We are educating medical oncologists on the advantages of cell treatment with Amtagvi when it has the greatest benefit. Earlier shifts in referral patterns are supported by our first real-world data that shows 60% of patients respond in the second-line setting. In addition, new initiatives in academic ATCs will address earlier tissue procurement for patient types, such as BRAF mutations, so they can be treated before their health status declines. Proleukin revenue also grew in the third quarter. Our main revenue channel for Proleukin is use with Amtagvi. Two U.S. wholesalers ordered in the third quarter, and all 3 wholesalers are expected to order significant volume in the fourth quarter. Proleukin will continue to grow through this main revenue channel in addition to the 2 other revenue channels for clinical and manufacturing use. Like other companies, we are evaluating our Proleukin pricing strategy outside of the United States based on the current environment, which may help drive future revenue growth. Amtagvi has the potential to reach more than 30,000 patients with advanced melanoma globally. Canada became the first new market to approve Amtagvi and approvals are pending in 3 additional markets. The United Kingdom and Australia in the first half of 2026 and Switzerland in early 2027. In the European Union, we are confident in our planned strategy. We are seeking scientific advice from the European Medicines Agency and intend to resubmit for regulatory approval shortly thereafter. Looking at the broader potential of lung cancer, our interim data demonstrates that onetime treatment with Lifileucel represents a true game changer and potential cure for patients with non-squamous advanced non-small cell lung cancer. With approximately 50,000 addressable patients in the U.S. alone, the market opportunity is about 7x larger than our current melanoma opportunity and represents potential U.S. peak sales of $10 billion. U.S. academic and community practices are enthusiastic about our lung cancer program. All of our current and future ATCs are expected to launch in non-small cell lung cancer. A significant portion of them already treat patients in our LUN-202 trial. The ATC footprint for lung cancer is essentially the same as our melanoma treatment network. ATCs are eager to leverage their current TIL infrastructure to quickly adopt Lifileucel in lung cancer upon approval. I will now pass the call to Igor. Igor Bilinsky: Thank you, Dan. I will provide a brief manufacturing update. We have streamlined our manufacturing organization while reducing costs and improving our manufacturing success rate as reflected in our third quarter gross margin. Importantly, we are finalizing an expansion at our internal facility, the Iovance Cell Therapy Center, or iCTC, that will enable us to support anticipated demand without the need for a contract manufacturer. All Amtagvi and clinical manufacturing will transition to iCTC in early 2026 to maximize capacity utilization, lower cost of sales and drive future gross margin growth. We will complete a key step in this facility expansion during routine annual maintenance around the end of this year. During this time, our contract manufacturer will provide continued access for patients to meet demand before we transition all manufacturing to iCTC. We will also boost capacity immediately prior and following the maintenance period to provide additional manufacturing slots for patients, allowing smooth supply through the next 2 quarters. Bringing all manufacturing internally will be an important milestone for us as a company. In addition to the cost benefits, we will maintain uninterrupted supply during routine maintenance in the future using internal capabilities. We can also scale up within the existing facility to support future markets globally and indications, including lung cancer. I will now pass the call to Friedrich. Friedrich Graf Finckenstein: Earlier this week, we reported interim data from our registrational IOV-LUN-202 clinical trial of Lifileucel. The data demonstrated a potentially best-in-class clinical profile and meaningful improvement over current standard of care in previously treated patients with non-squamous non-small cell lung cancer. Following onetime treatment with Lifileucel monotherapy, the objective response rate was an impressive 26%. An objective response was observed in 10 out of 39 patients, which included 2 complete responses. The disease control rate was 72%, showing a meaningful benefit for many patients with stable disease. Importantly, median duration of response was not reached at more than 25 months of follow-up, which is unprecedented durability for non-small cell lung cancer therapy in the post-chemo and immune checkpoint inhibitor setting. Standard of care docetaxel monotherapy recently showed an objective response rate of only 13% and a median duration of response of only 5.6 months without any complete responses in the same patient population. We are on track to quickly complete enrollment of approximately 80 patients in 2026. We have seen a strong increase in enrollment this year, driven by the positive reception of the efficacy data among trial investigators. In addition to the 39 patients in the data set, a double-digit number of patients are awaiting or have recently received TIL infusions and more patients have entered the trial as of today. We plan to share more data from LUN-202 at a medical meeting next year, including a meaningful number of additional patients and longer follow-up. We also look forward to advancing towards a supplemental biologic license application for Lifileucel in non-squamous non-small cell lung cancer and a potential launch in the second half of 2027. We also continue to make progress across the rest of our pipeline, which I am happy to discuss during the Q&A session. Thank you. Operator: [Operator Instructions] Our first question comes from Andrew Tsai with Jefferies. Lin Tsai: Nice execution this quarter. Great to see various dynamics improving. Good job. So my question this quarter is on the lung cancer data update that you had. It's interesting that the signal did not necessarily degrade compared to the prior data cut. In fact, maybe the efficacy on DOR seemed to get better. So for the remaining batch of patients, would you expect the third data cut to be also similar or even better than what we're seeing in this interim that you just had? Or would you expect some kind of efficacy degradation on a larger sample size? Frederick Vogt: Thanks, Andrew. I can start and then maybe Friedrich can chime in here. I don't -- we don't expect any degradation in the efficacy signal. We're getting very good within the LUN-202 trial at making sure our investigators identify the right patients for the trial. And we are obviously going to be cutting the data with longer and longer follow-ups. And with ongoing responders, as you can see in the swimmers plot from that data cut, we would expect to see that durability improve even beyond what we have today. I'll let Friedrich comment a little bit on the details of how we think that study is going to play out, but that's the big picture view. Friedrich Graf Finckenstein: Yes, I agree with Fred. Not much to add there. I think the study now has reached that phase where folks know what they're doing. They're familiar with the therapy. They know how to identify patients. We are able to communicate best practices. So I think this is all in a very stable place. What is noticeable is that we saw a true uptick in enrollment, which is really driven by the positive data that we were able to share with the investigators lately. That's also fairly typical. It's kind of an inflection point where then things just take off because folks see and believe in the therapy and things are working really well. Operator: Our next question comes from Yanan Zhu with Wells Fargo. Yanan Zhu: Congrats on the quarter. Just a quick one on the lung cancer. Can you talk about when did you touch base with FDA regarding the path and the regulatory path? And you did mention 80 patients. I wanted to hear your confidence that 80 patients is enough for the lung cancer filing. Then on Amtagvi in melanoma, can you talk about infusion growth into fourth quarter and into 2026, your confidence for inflection point in the patient infused? And lastly, sorry, if I may, on the improved gross margin, great to see that result. Can you comment on how much of it is coming from patient dropout and manufacturing success rate improvements versus how much is coming from cost reduction measures? Frederick Vogt: Thanks, Yanan. Why don't I start on the FDA point and then Raj Puri will jump in, and I'll ask Dan and Corleen to help out with the Amtagvi, the inflection point as well as the gross margin questions here. We've engaged heavily with FDA on the LUN-202 trial and gotten guidance from them, feedback on the trial design, patient population, CMC, things like the potency assay. We feel very comfortable that we're on the right track here. Obviously, engagement with FDA is a continuous process during the trial. As I'm sure investors know, we have to engage frequently and we do engage frequently. A lot of it doesn't get talked about. So we'll continue to do that on this trial, but we're very comfortable with where we stand right now in the trial design and what we need to do to get a supplemental BLA submitted on time. On the sample size for the patient -- for the 80 patients, we pointed out during a lot of our calls earlier this week as well as during our prepared remarks here that we think 80 patients will be sufficient based on the precedent of Amtagvi with 73 patients which led to the approvals on label in melanoma as well as a lot of recent FDA meeting the last couple of months, FDA approvals in non-small cell lung. So I'll let Raj and maybe Mark comment on that on what they've seen with the FDA and why they think that's reasonable. Raj Puri: In addition to what Fred said that we in continuous interaction with the FDA, we plan to apply for many different priority designations such as Fast Track designation, RMAT designation, et cetera. And as Fred mentioned that 80 patients also based on the 73 melanoma patients that we got Amtagvi approval on. And recently, Mark will elaborate further that the FDA has approved about 4 non-small cell lung cancer trials based on accelerated approval of patients list to 70 to 80 patients. Unknown Executive: I agree with what you had said, Raj. I think there's recent precedent for this number of patients in patients with non-small cell lung cancer and very high unmet medical needs with the response rate and particularly this unprecedented duration of response, we feel based on the precedent and the data thus far, patient data set would be sufficient and compelling. Frederick Vogt: All right. So on the inflection question and fourth quarter growth, obviously, we feel very confident having a strong fourth quarter, but I'll let Dan talk about some of the details there. Daniel Kirby: Thank you. And thanks, Fred, and thanks, Yanan, for the question. First, the answer is yes, we expect continued growth in the fourth quarter and beyond into 2026. The reasons behind that are -- I'm going to separate this from academic and community. In the academic setting, we've launched field efforts, including a disease awareness campaign in Q3 to educate medical oncologists for earlier referral into those centers. We're seeing some results from that right now that will continue moving forward. We also are launching in the academic setting initiatives to increase penetration, which would have to do with addressing certain patient types that we haven't been able to capture such as BRAF mutations I mentioned, where we have opportunities to get tissue earlier. So we do see growth in the academic setting. Moving to community. I mentioned that we're onboarding now and we've started to treat at the first community sites. We have several large ones that are coming on in this quarter that will drive significant growth in Q4 and beyond in 2026, and that also sets the table for... Corleen Roche: Gross margin, let me just focus you on 2 areas, and I think you mentioned them, one, which is patient drop-off and manufacturing results. So if you think about the dollars that are written off from out specs since the beginning of the year, they have decreased by 40%. They're about $9 million this quarter. And we are now seeing the initial benefit of the restructuring that we announced in Q3. So those are 2 key areas that are driving revenue improvement or margin improvement. Operator: Our next question comes from Salim Syed with Mizuho. Salim Syed: Congrats on the progress. I guess one for me on the guidance here. I know you're reiterating the guidance quarterly. And I guess, is there any scenario here in your mind where you're going to actually hit closer to the top end here? I'm just curious why at this point, 2 months left in the year, why we haven't narrowed it down the top end of the range to a lower number that seems more reasonable. Frederick Vogt: Yes, Salim, we reiterated our guidance range of $250 million to $300 million, which is a pretty narrow range to begin with. It's our first full calendar year on the market, as you know, and we're on track right now towards that guidance. Fourth quarter, as Dan was just mentioning a minute ago, we have a large influx of new ATCs. We've got Proleukin sales to contend with, which we think will be very strong in the quarter, especially based on fourth quarter last year. You can go back and look at those numbers. And we have got this ATC growth both in the community and in the academic setting. So I think at this point, we're just comfortable with the guide that we put out, $250 million to $300 million, and we'll be in that range, and that's what we're comfortable saying right now. Operator: Our next question comes from Tyler Van Buren with TD Cowen. Nicholas Lorusso: This is Nick on for Tyler. Just one for me. Can you let us know how many Amtagvi patients were treated this quarter? And then also, how will the CTC maintenance this quarter impact Amtagvi infusions and sales? Frederick Vogt: Yes. Nick, we're not going to -- we're not talking about infusions anymore. We're just going to use revenue going forward, as you can see from our press release. We think that's the ultimate story here, and we hope investors appreciate that we're focusing on the dollars, and that's what matters at the end of the day. On the iCTC maintenance, I'll pass it to Igor for that question. I think he had covered it in his prepared remarks, maybe you can highlight it again, Igor. Igor Bilinsky: Yes, of course. Thanks for the question, Nick. So as I mentioned, as part of the routine maintenance this year, we'll complete the expansion part of the facility that's important for centralizing manufacturing at iCTC and also kind of continue providing uninterrupted capacity from iCTC during future maintenance periods. And this year, we've learned from our experience in Q1 2025. So we made several improvements. We will boost manufacturing capacity immediately and prior to the iCTC maintenance that will provide additional manufacturing slots for patients, and that will allow essentially smooth supply through the next 2 quarters. Operator: Our next question comes from David Dai with UBS. Xiaochuan Dai: A couple of questions from me. So just on the ATC ramp, you're seeing early community initiatives in there. I'm just curious in terms of what are the timeline for the community activation to actually see patients treated. That's the first question. And the second question is just around the margin improvement. You said you're planning to have more margin improvement over the next few quarters. So I'm just curious what is sort of like the margin we should be expecting over the next quarters, essentially, one should be expecting the plateauing of the margin over time? Igor Bilinsky: So I'll take the ATC one first and look at the ramp for that. So you mentioned specifically community. Our first community centers are starting to treat now. Typically, with centers, they treat a few patients, they make sure the insurance goes through, they get comfortable with it and they start ramping patients after that. That is expected to continue with our community ones that are just starting to treat now. The newer ones coming on with the volume will start slow in -- with a few patients in there for it, but then will start to ramp up. The key with the community is that the referral patterns are already there to get those patients in earlier. So as we discuss with those larger entities opening them, we also have robust discussions regarding referral patterns and patients lining up. So we will see a ramp there a little faster than you'll see with the academics, but it should be coming over in the next quarter and 2, and then we'll get to full peak probably by mid next year. Corleen Roche: David, on the gross margin, yes, we mentioned that it will continue to improve. So that will be further benefit from the restructuring, but also a number of initiatives across operational efficiency in the manufacturing plant as well as cost savings initiatives to run the organization as efficiently as possible. Frederick Vogt: And just to finish off, we did announce one of those things today, David, by transitioning all manufacturing to internal as Igor and Corleen and others have discussed, we expect this to have additional margin improvements on the back of that. That's not something that's reflected in the 43% that we reported today. Operator: Our next question comes from Colleen Kusy with Baird. Colleen Hanley: Congrats on the progress. On the community ATCs that you're seeing come online, can you just speak to the capacity that you see at those centers versus what the capacity is that you're seeing at the academic centers? Frederick Vogt: Sure. So thank you very much, Colleen, for the question. The capacity with community centers, they are hospitals. They do have the bed space comparable to the academics. What we do see with them, though, is less of a clinical trial allocation and other competing priorities for those beds and more of a priority in the solid tumor space than we see in the academics for it because they do split beds in the academics with the hematology space, where the CAR-Ts are, et cetera. So we do see an opportunity to have a larger percent of their capacity in the community setting. Operator: And our final question comes from Reni Benjamin with Citizens. Reni Benjamin: I'm sorry, I jumped on the call a little late. So you may have answered this already, so just indulge me. I'd like to understand a little bit more about the global expansion that you highlighted. How do you envision these programs or the expansion without a partner? Should we really be -- should we be thinking about any sort of a meaningful contribution in terms of revenues going forward or at least in 2026? Or is this something that goes out much further? And just a follow-up question regarding both TILVANCE and the LUN-202 study. It seems like enrollment will slow at least from the 202 study. Can you just give us a better sense as to how enrollment is progressing in each of those studies? That would be great. Frederick Vogt: Yes, Ren. So first, on the global expansion, we're not thinking right now really about partnership. TIL technology and the science of delivering TILs to patients, the medicine behind it is complicated. We're not really sure there's a partner out there that would give us any kind of advantage. And we're always really cautious about asset dilution and giving anybody rights to anything that we do because we think that TILs are going to be extremely powerful in the future, and we would like to own all of that. That said, we may work with distributors in certain markets. We may work with people that can help enter markets for us. We tend to staff very light and lean in those markets while we wait for revenue to appear. In 2026, I don't expect a significant amount of revenue from those markets. However, we'll start to see that business grow. And then over time, I think it will become a major component of our business in the future. And since Dan heads those teams, I'll let him give some color and maybe just highlight the markets that we're going to go back into, include the U.K. and we're going to be entering for the first time in the U.K. and Australia and other places where there's a significant number of melanoma patients in need. Daniel Kirby: Sure. And so Reni, one of the things we've always said about our global expansion, if you look at the history of cell therapies globally, this has been more of a long-term strategy to produce revenue in 2027 and beyond, but you needed to get the filing and approvals in place because reimbursement does take a while in those regions, you want to make sure you do it in the proper sequence. So where we are right now with it, we are ramping up in Canada with our first ATC. We have pending approvals in the U.K. as well as Australia. We're in discussion right now in the U.K. about getting an NHS support on which ATCs will go up and running there. So we're getting the process in place as well as within Switzerland and then refiling in the EU. So this has been a long-term strategy with it and something that we will see, if you look at Kite, who did a great job with Yescarta globally, it took them several years from the approvals to get revenue in there. So we follow that model, knowing it would take 2027 would be our first year to have any appreciable revenues. Not saying we won't get any next year, but really appreciable revenues in 2027 from ex U.S. Frederick Vogt: And then on the enrollment question, I'll focus on LUN-202, Reni, because TILVANCE, we really haven't said anything publicly about the enrollment there beyond that it's going well, and we think that's on track right now. But on LUN-202, enrollment has really picked up lately. And if you heard on the calls earlier this week, we have double-digit patients right now waiting for infusions, and we have a lot of activity there. I'll let Friedrich comment in a second here, but we think we can easily hit the time line that we gave for the launch of Lifileucel in non-small cell lung in the second half of 2027 based on our current enrollment timings in the LUN-202 trial. Friedrich, do you want to add to that? Friedrich Graf Finckenstein: Yes. Just really quick, Reni. Since I don't know when you joined, I described that before earlier in the call. I think in the lung study, we've now reached this point where, number one, we have stability and familiarity of the investigators and the sites with the therapy. They know how to pick patients. And important, we have a data set that has the size and the quality and the data that are driving investigator engagement. They see the potential for this therapy, they see the benefit in the patients, and they now are enrolling at the speed of what is typical for a trial that has shown data like this. So I share Fred's confidence in us being on track here with our goals. Reni Benjamin: Got it. And just as a quick follow-up, maybe, Fred, to your comments about TILVANCE that enrollment is going well and things are on schedule. Can you just remind me when do you think ultimately enrollment would be complete or when you might be filing the BLA? Have you provided any of that guidance before? Frederick Vogt: Not yet. We're still pretty early in this trial here. This is a longer-term study. We do have the ability to read at an interim time point for ORR and seek an accelerated approval in first-line melanoma in the study. And that's not too far off. We have not guided anything publicly, and there's obviously a first 670-patient trial, at least 600 patients on the main population. That's tough to predict accurately right now. But we should be in touch pretty soon with some more updates on that as that starts to crystallize for us. Operator: This concludes the question-and-answer session. I would now like to turn it back to Fred Vogt for closing remarks. Frederick Vogt: Thank you again for joining the Iovance Biotherapeutics Third Quarter 2025 Conference Call. We look forward to providing future updates on our commercial launch and pipeline as well as our cost optimization initiatives to drive towards profitability. We are motivated by the stories we continue to hear about the patients who benefit from Iovance TIL cell therapies. I'm confident that Iovance will remain the global leader in innovating, developing and delivering current and future generations of TIL cell therapies for patients with cancer. As always, we are thankful to our patients, the health care and advocacy communities, our partners and our exceptional Iovance team. I would also like to thank our dedicated shareholders and covering analysts for their support. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Shift4 Q3 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. On today's call, we have Taylor Lauber, CEO; and Christopher N. Cruz, CFO. It is now my pleasure to introduce your host, Tom McCrohan, Head of Investor Relations. Thank you, Tom. You may begin. Thomas McCrohan: Thank you, operator, and good morning, everyone, and welcome to Shift4's Third Quarter 2025 Earnings Conference Call. With me on the call today are Taylor Lauber, our CEO; and Chris Cruz, our Chief Financial Officer. This call is being webcast on the Investor Relations section of our website, which can be found at investors.shift4.com. Today's call is also being simulcast on X Spaces, which can be accessed through our corporate X account at Shift4. Our quarterly shareholder letter, quarterly financial results and other materials related to our quarterly results have all been posted to our IR website. Our call and earnings materials today include forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of certain risks, uncertainties and many important factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our corporate website. For any non-GAAP financial information discussed on this call, the related GAAP measures and reconciliations are available in today's quarterly shareholder letter. With that, let me turn the call over to Taylor. Taylor? David Lauber: Good morning, everyone. Thanks for joining the call. Starting with our quarterly performance, we delivered results in line with our Q3 guidance. Gross revenue less network fees were $589 million, and adjusted EBITDA was $292 million. Each of these was up 61% and 56%, respectively. When excluding the impact of Global Blue, gross revenue less network fees grew 19% year-over-year. You will find in our shareholder letter that we also highlight the organic growth of the business, that is to say excluding the impact of recent M&A. Chris will go into more detail here, but that growth was 18% year-over-year. Volumes were in line with our expectations at roughly $55 billion. Each of these growth scenarios can be compared with the medium-term guidance we set forth in our Investor Day in February, and we've also done so in our shareholder letter. You will note that the high teens sit on our hands case compares favorably with 19% delivered in this quarter, while the inclusion of Global Blue obviously brings things notably higher. Furthermore, we continue to find attractive capital allocation opportunities, which supports our most likely case of 30%-plus gross revenue less network fee growth over the medium term. Chris will walk you through our adjusted free cash flow, but while early, we're also feeling ahead of pace for our $1 billion target. Some notable puts and takes in the quarter. Our blended spreads on payment volume were stable at 62 basis points, and we expect them to remain so through the end of the year. Tax-free shopping had some tough comparables, particularly in Asia as a result of a particularly weak Japanese yen last summer. Sales in Store were negative 11% in Asia during Q3, but recovered throughout the quarter and were positive in October. Separately, in the U.S., the last 2 weeks of September and the subsequent weeks of October presented more same-store sales volatility than we've seen in prior periods. While not consistent across verticals, same-store sales have generally skewed negative to our expectations. To put a finer point on it, we saw same-store sales, whether that be restaurants or hospitality, range from positive 1% to negative 4% with meaningful volatility week to week. While not immune from the broader economy, our deliberate and balanced transformation over the past several years does mean we are more diversified and scale, both geographically and by industry than at any point in our history. We also continue to add lots of high-quality customers, as I mentioned above. And we continue to complement our growth with massive payments cross-sell funnel, which becomes increasingly attractive during times of economic uncertainty. The competitive landscape has been a topic of serious debate among investors throughout the last few months. While I can imagine it's tricky to aggregate all of the various data, we would like to reiterate that the competitive landscape from our perspective has been unchanged for quite some time. We are the #1 in hotels in the U.S., we are the #1 in stadiums, and we are the #2 in restaurants but with a large TAM and a clear differentiation in both our strategy and product focus. We are only just beginning to bring these products all over the world where there isn't a clear market leader for any of these verticals. Global Blue also puts us as an undisputed category leader in luxury retail global. And with regard to Global Blue, this is our first quarter since closing the transaction in early July. This business brings both an industry-leading product for luxury retail and also an extensive two-sided network consisting of the best luxury brands around the globe and the high net worth shoppers that frequent them. They are also deeply embedded in the commerce experience at the store, presenting natural synergies for payments. Sales in Store at Global Blue were 5% above the prior year, with Europe growing 13% and Asia being negative 11% for the reasons that I mentioned earlier. We're reasonably happy with these results considering the negative impact currency has played throughout the year. These results are also before any synergies from business combination. You will find the detailed summary of Global Blue's performance in our shareholder letter. And from an integration perspective, we are on track with previously discussed plants. Our 3-in-1 payment terminal for payments, currency conversion and VAT refund eligibility detection is in beta. We also highlighted several Australian hotel payment wins in our shareholder letter distributed this morning. Of note, all the hotels mentioned are owned by Accor, the largest hotel operator in Australia and New Zealand, and also a very large hotel operator globally. The Australian hotel wins represent an early proof point to our strategy to take our industry-leading products into new geographies and markets around the world is working. In Restaurants, we're proud to welcome Nobu, but also signed thousands of other restaurants this quarter across Canada, the U.K., Ireland and Germany, with our international production improving to over 1,300 merchants signed each month. In Hospitality, we won Hyatt Vacation Club and will power payments for their over 20 resort properties around the globe. In Sports and Entertainment, we signed the Cincinnati Bengals, Clemson University, North Carolina State, Rutgers University, and Syracuse University, that one was for you, Jordan. Lastly, we'd like to point out the opportunities that can seem unique, but are a function of the platform effect of constantly adding integrations relevant for our other customers. To that end, we signed Hertz and will power payments across 60 of Hertz' rental car locations. Our presence in nonprofits continues to grow as well, evidenced by the dozens of nonprofits attracted to our platform each quarter as well as the on and off-ramp services for many crypto and Stablecoin platforms such as Stellar and Plasma. As has been the case each quarter, these are just a few of what we've highlighted in our material, even a smaller fraction of what we've actually onboarded. We are delivering these impressive wins while relentlessly streamlining our operations. And in that regard, as many of you know, we take the leading part very seriously in our M&A and integration approach. We made multiple small divestitures, most notably acardo, which is a couponing business owned by Vectron, for $34 million. These sales remove noncore business lines and help keep our laser focus on revenue synergy opportunities. We also closed SmartPay this week. As previously mentioned, this provides us with an existing and proven distribution channel to sign restaurants, hotels and stadiums in Australia and New Zealand. By equipping a proven team with industry-leading products like we have, we can be highly confident in the success of their go-to-market. The combination of these 2 events are roughly neutral, meaning the divestitures and the acquisition of SmartPay and their contribution to the remainder of the year, but both were important operational milestones. Lastly, we agreed to acquire Bambora, otherwise known as Worldline North America. While I'm sure many of you would like to see us slow down, the opportunity presented by a $90 billion payment gateway was something we would not ignore. A core competency of our business and team is to constantly seek out interesting technologies, great customers and excellent talent. Those of you who know our track record of executing on gateway conversions and other synergies can appreciate why this makes so much sense. We expect that transaction to close in Q1 of '26 and are encouraged by our pipeline of opportunities. I wouldn't be able to discuss capital allocation without the notable dislocation in our own valuation despite the continued performance and numerous opportunities we see ahead. In short, our own equity is one of the more attractive opportunities we see. And with expanding cash flows and accelerated deleveraging, we simply can't ignore it. To that end, our Board has authorized the new $1 billion stock repurchase program, which is the largest in our history. We will be implementing a plan to purchase at what we view as highly attractive levels right away. And with that, I'll turn it over to Chris for his first earnings call. Welcome aboard. Christopher Cruz: Thank you, Taylor. We delivered another quarter of consistent results that set new third quarter records across all of our key performance indicators. Volume grew 26% year-over-year to $55 billion. Gross revenue less network fees grew 61% to $589 million. Adjusted EBITDA grew 56% to $292 million, and our adjusted free cash flow conversion was 48%, resulting in $141 million of adjusted free cash flow. Our Q3 adjusted EBITDA margins continued to deliver in line with our expectations of approximately 50% in spite of the continued expansion investments we are making to become the most diversified and scaled that the business has ever been in its history. Double-clicking on our revenue categories. Our Q3 blended net spreads remained stable at 62 basis points, and we continue to expect full year spreads to be stronger than the 60 basis points previously communicated. This stability extends across our verticals of Restaurants, Hospitality and Unified Commerce. Subscription and other revenue was $119 million in Q3, up 16% compared to the same period last year. The growth continues to come from our market-leading vertical software solutions. However, as solid as this growth continues to be, we remain focused on deleting the parts and deprecating legacy revenue streams from acquired companies in favor of what we believe to be higher quality of revenue. This dedication to strategy will continue to influence year-over-year growth rates. As Taylor mentioned in his remarks about the medium-term guidance update, Q3 organic growth for gross revenue less network fees was 18%. Organic year-over-year growth of 18% compares the performance of the base business by removing newly acquired revenue from both the Q3 2024 period and the Q3 2025 period. It's also worth noting that these disclosures related to updates about our medium-term guidance would have been done next quarter at year-end. But based on recent industry events, we wanted to be proactive about pulling forward these disclosures, including that of organic growth for you all. Since the third quarter of 2022, we have grown gross revenue less network fees by 3x, expanded adjusted EBITDA margins by 600 basis points and achieved the balanced transformation of becoming a more diversified and globally scaled provider of software integrated payments. Through continued execution on cross-sell value creation and our delete the parts approach, we expect to maintain disciplined focus on margins and benefit from the operating leverage in our business. An example of the Shift4 playbook at work is the deleting of legacy parts through divestitures. Additionally, and although early, we are encouraged by the potential of AI applications to enhance our operating leverage across operations and product development while enhancing our own ability to drive decisions informed by our large data assets. As it relates to Global Blue, we wanted to provide a more clear breakout this quarter given its new inclusion in results. Global Blue contributed $156 million to gross revenue less network fees and $68 million to EBITDA, which were in line with our overall expectations despite headwinds faced by the business in the Asia Pacific market. Additionally, the subcomponents of Global Blue, consisting of: one, tax-free shopping, acquiring and dynamic currency conversion will be reported within payments-based revenue, while the post-purchase solutions subcomponent will be reported in subscription and other. As you can appreciate, we expect these breakouts to be less relevant over time as we cross-sell products to customers and bring on customers using multiple products. Our adjusted free cash flow in the quarter was a record $141 million, which modestly exceeded our expectations given our third quarter, along with our first quarter, are the higher cash interest expense periods in the year. As you get to know me more, it should come as no surprise that I believe that the ultimate measure of business durability is compounding growth in free cash flow per share. So I'm particularly enthused by the progress of this metric, especially as a jumping off point towards our medium-term guidance goal of exiting 2027 with $1 billion of run rate adjusted free cash flow. GAAP net income for the third quarter was approximately $33 million, resulting in diluted EPS of $0.17 per share. Non-GAAP net income for the quarter was approximately $148 million, resulting in a non-GAAP EPS of $1.47 per share. Note that the latter EPS metric uses our non-GAAP share count of 100.7 million shares, which increases share count by 10 million shares to treat the mandatory convertible preferred on an as-converted basis. On debt capital structure, we are in the enviable position of being efficiently tranched with all debt trading above par, resulting in access to attractive cost of capital in multiple deep markets. As of Q3, our net leverage pro forma for the full year effect of Global Blue was 3.2x, with notable deleveraging achieved quarter-over-quarter that resulted in our newly issued term loan already stepping down by 25 basis points of cost. I will take this opportunity to make clear that our leverage guidance remains unchanged with a view that the business should not exceed 3.75x net leverage on a sustained basis. With the company's current share repurchase authorization coming up for expiration at year-end, the Board has authorized a new share repurchase program of $1 billion through year-end 2026. This authorization level is the largest in the company's history and comes at a time when we have ample liquidity and access to capital to execute upon it. As a reminder, our capital allocation framework judiciously assesses relative value across 4 areas: one, customer acquisition; two, product investment; three, acquisitions and investments; and four, share repurchases. As we evaluate how the current market backdrop compares to historical periods of share repurchase execution, we think it notable that valuation multiples at present would be comparable to the lowest we have executed repurchases in the past. Further, as stated before, the company is the most diversified and scaled it has ever been in history and is generating record results across all key performance metrics. At the same time, the business is delivering growing levels of adjusted free cash flow that continue to require reinvestment. Although we believe that any 1 of our 4 categories of capital allocation opportunities would generate accretive returns, it is hard for us to ignore the relative attractiveness of the trading level of our common shares on an absolute basis, but particularly on a growth-adjusted basis. As someone that has invested in this business multiple times over the past decade, I am eager to make immediate progress against this new $1 billion authorization to enhance long-term shareholder value. Now for guidance. For full year 2025, we are reaffirming guidance within a narrowed range. We now expect volume to range from $207 billion to $210 billion, representing 26% to 27% year-over-year growth. For gross revenue less network fees, we now expect the range to be $1.98 billion to $2.02 billion, representing 46% to 49% year-over-year growth. And for adjusted EBITDA, we now expect the range to be $970 million to $985 million, representing 43% to 45% year-over-year growth. We are affirming our adjusted free cash flow conversion expectation of plus 50%. Within this guidance, our view on Global Blue's contribution remains unchanged as the business does have a seasonally higher calendar third quarter versus its fourth quarter. Also, we wanted to point out that even though these are now narrower ranges to our prior guidance, there is an intentional shape to the relative ranges. The implied fourth quarter range in volume is approximately 5% from low to high, while the same range in gross revenue less network fees is slightly less, and in adjusted EBITDA, this range is 4%. The intent here is that we believe a wider range of outcomes is prudent based on the uncertainty we are observing in macro and industry conditions. While at the same time, for a metric like adjusted EBITDA, there is more in our control and demonstrates our commitment to execution. In summary, after taking into consideration an essentially neutral impact from the acquisition of SmartPay and the offsetting reduction from noncore divestitures, our full year 2025 guidance is reaffirmed within a narrowed range. One last item. In response to inquiries about gross revenue, recall that we do not formally guide this metric. However, we expect a gross revenue range of $4.09 billion to $4.15 billion for the full year. Before passing back to Taylor, I did want to take a moment to express my sincere gratitude to my CFO predecessor and now Board member, Nancy Disman, for the transition support, mentorship and fantastic finance foundation she has established. You will be missed by the team, but I'm certainly thankful to continue to have you on speed dial. With that, let me now turn the call back to Taylor. David Lauber: Thanks, Chris. Before we go to Q&A, some of you may have seen the exciting news that our Founder and Chairman, Jared, has been nominated to run NASA. Again, we're going to be updating you as things progress. But just to be clear, we don't expect really anything is going to change from our previously disclosed plans. He intends to remain the largest shareholder of the business. And so we wish him well, and we're really excited for the road ahead. With that, we're going to turn it over to Q&A. But Tom, I think you had a question we were going to address from X. Thomas McCrohan: Yes. So the question from X this quarter comes from [ Dor Barda ]. And his question is, where is the company's primary focus right now? Are you edged down on integrating and cross-selling into the $1 trillion acquisition funnel? Or are you simultaneously investing heavily in net new product development? David Lauber: Yes, it's a great question. And the answer to both of those is yes. So hopefully, you can sense the theme for this quarter is a reminder of what we always do, which is that we take our category-leading products and we find as many customers as possible to get those in the hands of in as capital efficient of a way as possible. And so whether that is leveraging capabilities like the sales force that SmartPay brings us into Australia, or the distribution network and existing customer base that Vectron gives us in Germany, taking our products into these new geographies with an embedded right to win like an established sales force or an existing customer base is always a significant priority for the business. And with that, operator, if you wouldn't mind opening the line up to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Dan Dolev with Mizuho. Dan Dolev: Great results, Taylor, and congrats on the new CFO role. My question is for you, Taylor. What are the implications of Jared getting nominated to NASA? I think a lot of people are interested in that. And great results, again. David Lauber: Yes, sure. Thanks for the question. Good to hear from you. Well, first of all, it's great for the country. The ambition that we've seen inside our walls for 26 years really has always deserved a bigger stage. So I think it's a phenomenal thing for the country. Now with regard to the company specifically, it's likely to simplify our structure quite meaningfully. So if you recall from the ethics agreement that he executed back earlier in the year, he is not required to divest the stock, but he will be relinquishing the super votes associated with his shares. So it likely means to collapse down to a single share class, which I know a lot of investors will appreciate and simplifying our TRA structure. So I want to reiterate, he intends to remain the largest shareholder of the business. This is something he feels passionately about, but I think it will simplify our share structure when it's completed. Operator: Our next question comes from the line of Timothy Chiodo with UBS. Timothy Chiodo: Again, Chris, good to be working with you here. I want to hit 2 things. First one on Bambora, and then if you don't mind, a brief follow-up around Q4 end-to-end volumes. So on Bambora, let's hit that one first. So $90 billion of gateway opportunity. And I just think back to the time of the IPO and the gateway opportunity back then was $200 billion, and it seems so large. And here we go adding another $90 billion. So I was just hoping you could add a little bit more context around that $90 billion and what's in there in terms of verticals and how other parts of Shift4 and some of the learnings from prior gateway conversions might help to make this gateway conversion a very successful one. And then I'll follow up on the numbers after. David Lauber: Sounds great. I'll hit this one. And you hit the nail on the head, Tim, which is this is textbook Shift4. It is a good technology product with a really captive base of customers and $90-odd billion of volume. Now as also is the case, the volume varies from some of the other verticals we serve. There's some business services in there. There's a few different flavors. So it's probably inappropriate to take one gateway and apply it to the next and apply it to the next. But we feel really strongly that this asset, the sticky customers, many of which have been on it for 20-plus years, will benefit from a consolidated payment solution. This has not been a huge priority for that business for a period of time. On top of that, there's a lot of transparency in this one, which I think behooves us all given the skepticism around M&A in our industry. It is widely understood what Ingenico had paid for that business years ago and what we're paying for it now, which is significant fractions of that. It is clearly telegraphed by Worldline what the contribution of the business is, and then we get to take that and enact a bunch of revenue synergies. Now there are also some capabilities. It's like one of the larger ACH providers in the country. So there's some capabilities we're going to get from it as well and more talent, which we always need more of. So very textbook Shift4 and something we literally train ourselves to be on the lookout for opportunities like this all the time. Christopher Cruz: Yes. And one, thanks, Tim, for the congrats. But on Bambora, the other thing that I think is a really interesting way to frame the attractiveness of it is to look at how many of the capital allocation framework boxes it checks on its own. I mean in and of itself, you can think about the gateway volume potential as a large expansion in customer acquisition potential. You can look at the ACH EFT component as product and capabilities enhancement. And then, of course, in and of itself, I think it's a continued reflection of a disciplined approach to making acquisitions and investments. So that's just one other thing that I think is worth noting and is something I'm enthusiastic about with that transaction. Timothy Chiodo: Excellent. And the minor -- the numbers follow-up. So implied for Q4 in terms of the end-to-end volume, you mentioned a range there. But on an absolute dollar basis, it's roughly $57 billion to $60 billion. And just clarifying, there's roughly -- I think it's slightly less than $1 billion or so a quarter in there from Global Blue acquiring business, and then there's another -- something in that range, maybe slightly less than $1 billion as well from the couple of months of SmartPay. But when we add up those numbers on an absolute basis, is it reasonable for investors to think about taking that $57 billion to $60 billion, annualizing it or multiplying by 4, adding on some conversion, some new production, thinking about same-store sales and churn, but reasonable jumping off point to model out 2026 end-to-end volume expectations? Christopher Cruz: Yes. I think from the perspective of is it reflective of a jumping off point, putting aside kind of like minor nuances and seasonality that's changing a little bit in the business, I think it actually is a reasonable jumping off point reflective of kind of the run rate shape of the business. So I think you articulated it well. Operator: Our next question comes from the line of Jason Kupferberg with Wells Fargo. Jason Kupferberg: Thanks for all the new disclosures. And I wanted to just start on organic growth. I know you were 18% there in Q3, obviously, very consistent with the medium-term Investor Day target. But I think we were trending a bit above that in the first half of the year. Maybe you can clarify that. And then just give us a view on Q4 organic top line growth, just trying to piece together how the current year is coming together, because I know we've been targeting 20% plus from a full year perspective. Christopher Cruz: Thanks. So one thing I just wanted to clarify off the top, and hopefully, it didn't get lost in sort of the prepared remarks was that some of the disclosures really are as a result of an update to the medium-term guidance, which we would have realistically planned for the year-end. But we, given industry events, decided it was prudent to be proactive and pull some of these things forward. And so I just wanted to make sure I reiterated that point. Look, I think on the organic growth, the idea that we have a growth that's on a gross revenue less network fee basis in line with our -- I think the way we've articulated it in the past is the sit on our hands case would signal the consistency of the business. From that perspective, I think we're sort of in line with what we had guided to as far as that case and that medium-term guidance. David Lauber: Yes. And just with regard to the full year, I think, and Chris characterized this well in his remarks, there is caution. Our ranges give us an outcome of greater than 20% down to below that. And I think that's just prudent. The same-store sales environment has been quite volatile. And I don't mean that as persistently negative or anything else. Tried to characterize that in my prepared remarks as well. So yes, it's still within our guidance range, but we want to be prudent. We want to give, obviously, the in-quarter disclosure as well. Jason Kupferberg: Okay. No, that's helpful. And then just a follow-up on Global Blue. Those slides were really helpful also. I think you had the volumes up 5% in Q3. Just curious how that's been trending quarter-to-date, what you've assumed for Q4 there? And then anything you can tell us just in terms of what the year-over-year Global Blue growth was in GRLNF as well as adjusted EBITDA. I know you gave us, obviously, the Q3 '25 actuals. David Lauber: Yes, sure. So I'll start with the performance of the business has been strong despite volatility. So that's really encouraging. And Chris can keep you honest here, but the year-over-year growth of their revenue was about 19%. So a phenomenal business. I think we tried to point this out at the time of the acquisition. In terms of the Sales in Store, which is the tax-free shopping segment of their business, what you saw was a combination of reasonable strength in Europe. Now keep in mind, Europe generates more revenue per Sale in Store than Asia, but also a pretty significant headwind in Asia. So there were a confluence of factors back in the summer of '24 that made Chinese shopping in Japan particularly strong. And so comping that was going to be quite difficult, and that's why you have that negative. So the blend of 5 is something we're reasonably content with. Also keep in mind, and we tried to just kind of illustrate this. When the dollar depreciates and the Chinese currency depreciates, that is really hard on the business, because the shoppers spend less. And so while there's a little bit of translation benefit, it is not a positive for the business when the dollar depreciates. I wanted to clarify that point as well. So awesome business dealing with volatility in their end markets and dealing with it quite nicely and growing strong on a year-over-year basis before we enact any synergies, which is phenomenal. Operator: Our next question comes from the line of Darrin Peller with Wolfe Research. Darrin Peller: I know there were some headwinds in the quarter, whether it be the discussion you had around the currency dynamics in Global Blue or same-store sales you called out, or even some faster conversions of software, yet you came in roughly in line with your guide. And so maybe just help us understand what you saw that made up for that shortfall, and if those trends are sustainable going forward or outperformance trends? And then, Chris, first of all, congrats again. But when I think about guidance, there's been a few quarters of volatility around your guide. So just help us understand your philosophy to build up from a guide standpoint going forward, what we should think about from a conservatism, how you think about it that way versus being more in line, or anything else you can provide? David Lauber: Yes. So I'll start with that, and then Chris can hit the guidance philosophy. With regard to things that we were pleased with during the quarter, customer adds is something we're particularly pleased with. The pace of international adds is something we're particularly pleased with. So the shopping trends that I mentioned in reaction to Jason's call was something we were particularly leery of. Quite frankly, predicting where that would land was almost a fool's errand given how strong the success was of Chinese shopping in Japan back in the '24 period. But maybe just to balance it out, and I made this comment in my prepared remarks, growth in SiS in Asia has grown to positive again on a year-over-year basis in the most recent month of October. So things are going well on that front. It remains somewhat tricky to predict where travelers are going to shop, and there are significant countries and weightings to that. So we're going to continue to get better at that. But Chris, do you want to hit the... Christopher Cruz: Yes. Well, actually, I'll just add on to one point around that is, in some of the variables that we saw through the quarter that were changing, I think Taylor in his prepared remarks highlighted the note that if you were to look at some of the week-to-week trends that we were seeing within same-store sales in some of our verticals, you could end up seeing like a plus 1% to a minus 4%. And that kind of volatility was something that we were trying to react to throughout the quarter. You add to that the topic that we've now talked about a couple of times already around balancing out European strength for Global Blue Sales in Store in the tax-free segment, offset by what looked like a pretty tough headwind in Asia Pacific. And you just had a few moving parts that I think warranted caution going into that period. At the same time, the backdrop was one where certainly from a macro data, certainly from an industry data, from data points we were seeing throughout, it was enough to want to make sure that we were expressing caution. So a lot of data points to take in. At the same time, I think we have the most data we've ever had as far as being able to try to inform our decisions around it. So I think that's a positive. Maybe to the second part of your question, Darrin, one, thanks for the congrats. And two, so look, on guidance philosophy, it's a nuanced topic, I'm sure, and especially one that I think will need some evolution over time as I get more comfortable in the seat. The first thing I would say, though, is that from a philosophy standpoint, there really isn't an intent to change the underlying philosophies. I think the frameworks that we use, the way we inform it with data, the underlying approach to the most important drivers within the business, I mean those are things that I think are pretty foundational, not looking to make dramatic changes. I think as we look at this set of macro backdrop, it is just something that, from my perspective, we want to make sure that we're taking in all of the right data sets and that we're making the most informed decisions possible based on the recency of the information. But certainly something that I think will be an evolving topic. And so feel free to keep asking. Operator: Our next question comes from the line of Andrew Jeffrey with Truist Securities (sic) [ William Blair ]. Andrew Jeffrey: Well, so we'll update that. It's been William Blair for about 1.5 years. But Chris, welcome. Look forward to working with you. I want to say that my wife and I happily contributed to Global Blue's third quarter revenue growth. A question on the pace of processing conversion in that business. It's a big opportunity. I think you said somewhere around $550 billion. Can you just update us on your right to win, how you see payment processing cutover or conversion sort of playing out? And what you -- I guess, competitively, there's one sort of callout processor, I think, today for a lot of those Global Blue merchants. How do you sort of manage those relationships, recognizing that the VAT refund business is such a high-value product for merchants? David Lauber: Yes, sure. I'm going to actually cover this one. It's a great question. But I think it's really important to distinguish between the headline customers that everyone knows and the breadth of the Global Blue business. So certainly, in Downtown Paris, everyone knows the Louis Vuittons of the world. But the reality is you can just as easily go to a village on Lake Como in Italy and nearly every merchant is using Global Blue. And these are SMBs. So we see a breadth of conversion opportunity from SMB all the way up to the largest of the enterprises. And if history is a guide, the earliest success comes from all those assets. It is incredibly low friction to switch from an existing bank terminal into what from a product perspective is going to be pretty revolutionary, which is the terminal that they're used to, but it also does currency conversion and it automatically detects that the shopper is eligible. So to the extent you were traveling in Europe and you encountered a store where they didn't present you with the tax-free option, that's likely because the cashier just didn't know or didn't think to ask. And yet our technology is going to sort of prompt that just like it does in the largest enterprise environments that Global Blue has built so successfully. So from a competitive landscape, we see an opportunity to win business from a ton of local banks in that SMB spread. We can win it reasonably quickly. And then, again, history being a guide, enterprises take longer and take more time. Quite frankly, I think you're probably referencing Adyen. They're a phenomenal company. We admire them a lot, and they serve these enterprises quite well. We're an important piece to the commerce puzzle in that environment. So we want to make sure the technology works incredibly well for those customers. But the conversion opportunity goes far beyond the logos that you see. And if you think, what we're really good at is we're really good at getting that mom-and-pop store a much better technology solution that, quite frankly, is much stickier and harder to leave. And owning all these pieces, we can do that in a way that traditionally has only existed for the largest enterprises. Andrew Jeffrey: Okay. That's helpful. And just as a follow-up on SkyTab and sort of the growth in your software revenue, recognizing the divestiture of some legacy software. Can that accelerate? Do you expect that to accelerate? Sort of does it grow in concert with Global Blue volume conversion? Or how do we sort of dimensionalize the software contribution going forward? Christopher Cruz: Yes. This is Chris here. I think we've articulated this in the past as acknowledging that the idea that we have a North Star model that really emphasizes what we view as highest quality of revenue will come from payment processing. From that perspective, I think we are not shy about the statement that we will look to deprecate the legacy revenue streams, deprecate software revenue streams in favor of the higher quality of revenue. And so I think from that perspective, even though our Subscription and Other was an attractive growth, it grew nicely in the quarter for sure, it's an area that I think will be an area that will continue to be an impact on like adverse growth in the future. David Lauber: Yes. Just to pull it back to philosophy here, we prioritize payment volume as the primary source of monetization. We deliver a heck of a lot of technology to these merchants. Carefully weighing the fixed and variable costs that a merchant pays for our product is, I think, something we spend a lot of time on. Most of our competitors have significantly higher fixed costs, which really manifests themselves in that subscription and other revenue stream. So we tend to lean more towards payments even if the technology solution being delivered has a lot of software embedded into it. And to Chris' point, as a byproduct of this acquisition history, there is always some legacy revenue that we're deprecating. So I completely acknowledge this is probably one of the harder lines to model inside the business. But generally, anything we're doing is in pursuit of that payments revenue growth. Operator: Our next question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani: Congrats, Chris. I guess the share buyback announcement and authorization was a pretty strong statement. Maybe Taylor and Chris, you guys can talk about sort of the cadence of how you expect to take advantage of it. I know you talked, Chris, a little bit about the leverage constraints and stuff. So maybe you could just speak to those as well. And I think it's the right thing to do given where the valuation is. So I would love some color on that. David Lauber: Yes. I'll start with this one. There's been times in our history where we weigh an attractive M&A pipeline against evaluation in our equity and it's a tough decision. In this case, and Chris will comment on our leverage profile, and that comes into this a little bit, but this one isn't a tough decision. So we are trading at levels that we were trading at in December of 2020, and yet there's 12x the EBITDA in the business and accelerating free cash flow and deleveraging at an accelerating pace as well. So the obvious thing to do here is to buy as much of our equity as we're going to be permitted to buy within reasonable price ranges. But to Chris' point, executing at current levels is consistent with the lowest price we've paid for our equity. And we've been pretty aggressive with buybacks. I think M&A kind of gets the headlines, but we've repurchased, I don't know, 12% to 15% of the company in the 5 years that we've been public. This presents an opportunity to do even more than that at the lowest multiples we've seen in the company's history. So incredibly excited to be able to deploy capital into such an obvious opportunity. Chris, do you want to hit the leverage? Christopher Cruz: Yes, sure. So I think I made reference to the fact that on sort of a pro forma LTM basis, we're at 3.2x net leverage. I think the perspective that we have around having ample cash on hand, we have ample liquidity. We are approaching $0.5 billion in adjusted free cash flow generation. So there's probably not been a period in history where the company has had sort of the, we'll call it, availability to capital, but also access to capital across the multiple deep markets. So you take that into consideration, you take into consideration that the free cash flow generated needs to get reinvested. And it's not to say -- and I hope this was clear, it's not to say that we don't think that there are attractive areas within all areas of our 4-part capital allocation framework, but right now, it is really hard to ignore the relative attractiveness of where we're trading today. David Lauber: Yes, that's a good point. These dollars are not coming at the expense of a missed product development opportunity or integration priority or, quite frankly, M&A opportunity, but there's more of them than I think many expected at this point, and the equity is certainly lower. So we have to act on it. Sanjay Sakhrani: Great. And just to follow up on some of the choppiness that you've seen in the Restaurant and Hotel verticals in the third quarter. Could you maybe just explain what you've seen thus far into the fourth quarter and if that's persisted. And I know, Chris, you kind of talked about weighing that as you provided your refreshed outlook. But just how we should think about that? Because like when we look at like cross-border volumes and such, I know it's sort of an overarching number, so it's not specific to your verticals or such, but like how should we think about that as we move through the rest of the year? Christopher Cruz: Yes. Look, I would love to be able to know with precision exactly what the rest of the year is ultimately going to look like. But from a recency data, again, we benefit from being able to see data in a near real-time manner. But from a recency data, here's a for example. I think coming towards the end of the quarter, we were actually starting to see what looked like stabilizing trends in Restaurants, and it created some encouraging signs off of a quarter that had seen some downward skewed negative volatility. But of late, we're starting to see a little bit of a softening again in some of those trends. That would be for example. Now happily, I just want to underscore, because it's an interesting contrast to what you had brought up this idea of cross-border, I think prior to us being as diversified as we are right now, that comment, the impact that cross-border is looking more positive, restaurant might have some softness, that would have been an irrelevant comment a couple of quarters ago. But now actually, from the diversification standpoint, I really think it's important not to lose sight of the fact that because of the positioning of the business, because of the balanced transformation that we've been able to achieve, we actually do have these puts and takes, these offsets. So I think in the grand scheme of things, we do have acknowledged uncertainty in certain areas, but actually some enthusiasm in some other areas. David Lauber: Yes. I would call you back to the revenue diversification that we highlighted in our shareholder letter. And I don't know if this is going to be helpful or further confusing you, but we see all the data points you do about United Airlines having their strongest weeks in their history and Chipotle, no one is buying the burritos. Like we see both of those. And we see them manifest in many ways inside of the cohorts inside of our business, which is Global Blue has got strong shopping and same-store sales in your average restaurant are bouncing week-to-week, but skewed towards that negative volatility. It's confusing, but quite frankly, the scale and diversification of our business is awesome at this point relative to our history. So for us, there are data points that help inform future investment and all these other things and help us, quite frankly, put chips where we think verticals are going to be the most successful over a period of time. But yes, that industry to industry volatility absolutely exists. We're getting both benefit and detriment from that. And this bifurcated consumer, I think, is a real thing. Operator: Our next question comes from the line of Adam Frisch with Evercore ISI. Adam Frisch: It's Adam Frisch. Chris, congrats on the role and great job getting out of the gate pretty hot here this morning. The organic number is really interesting, very welcomed as well. I think you said the number excluded the deals done in both of the third quarters. But is that to say that this quarter included contributions from deals completed in the quarters in between? So maybe just a little color here on the calculation would be great. And then I have a quick follow-up as well. Christopher Cruz: Thanks for the clarifier. Absolutely not. Yes. No, it's meant to be clean of acquisitions for the periods. Adam Frisch: So the 18% does not include any acquisition impact at all from the prior quarters or, I guess, from the prior 4 quarters? David Lauber: Yes. It's the best way to look at the base business, right, which is if you did not have M&A in either of the measurement periods, what would have happened in that base business is great. Adam Frisch: Okay. Okay. Cool. Welcome that very much. And then second, as a follow-up, assuming Jared gets confirmed, I'm getting a bunch of inbounds this morning from investors about whether his shares would create a liquidity event and how that would be handled. So I wanted to give you a chance to address that on this call before it takes on a life of its own potentially. David Lauber: Yes, yes. No, I completely appreciate that, and I addressed this right before the Q&A started. His ethics letter from the first go round is publicly available, not required to divest his shares, and doesn't intend to. He intends to remain the largest shareholder of the business. So we don't anticipate anything there. And in fact, I just want to say he does anticipate converting his shares from the super voting shares down to common. So I think the share class will likely collapse into a single share class and be much easier to understand from the investor standpoint, and quite frankly, open us up to pools of capital that don't invest in multi-share class companies today. So from the company standpoint, it's frustrating not to see them in the halls on a daily basis, but the corporate structure gets a lot cleaner. Christopher Cruz: Yes. And then just -- since we're on the topic, to reiterate a point that also Taylor brought up earlier was the idea that beyond the share class structure potentially changing and collapsing to simplified, you also have what in the last go around, we had talked about the concept that the tax structuring would also attempt to simplify to the ups. Adam Frisch: Great. Okay. Cool. And then just maybe one last one. The merchant conversion progress from prior acquisitions, any color there that you can provide? There were some disclosures in prior quarters, didn't say anything this quarter. So maybe just a little bit there on how you're progressing there from the acquired merchants? David Lauber: Yes, absolutely. Happy to provide color. And this isn't an intentful omission. It's the simple fact that our earnings shareholder letter was, I think, 190 megabytes when I tried to download the public version this morning. So the cross-sell is going quite well. I think that's probably best evidenced by simply the customer adds that I mentioned earlier in response to what I think was probably Darrin's question. So customer adds across the board, whether that be in Germany, whether it be in the U.K., whether it be in Canada, all of those are fueled in some way. buy an M&A asset, whether that's a small sales team or an embedded base of restaurant customers in Germany or Gateway Hotel customers in Canada. So the customer adds are really, really encouraging across the business. It's quite frankly, what helps ballast that same-store sales anxiety that we see in the core base of the business. So it's going well across all of them. This is muscle memory for our business. So if you recall, what happens when we acquire a company is all of the customers inside of that become part of a sales funnel that our team is chipping away at on a daily basis. So the fact that an acquisition occurred doesn't really mean much to the average business development professional inside of Shift4. It just means they've got a lot more customers in their call queue to execute against or in their campaign. So it's going well across the board, quite frankly. Operator: Our next question comes from the line of Will Nance with Goldman Sachs. William Nance: I wanted to follow up, I think, on Tim's earlier question on the volume and approach it a slightly different way. Just look at the kind of low 20s exit rate on volume with a little bit of inorganic contribution, it's kind of roughly in line with where the Street is expecting volume growth in 2026. So I was wondering if you could just talk about the puts and takes off of that run rate and just kind of what would lead you to kind of accelerate or decelerate into next year and just things that we should be keeping in mind as it relates to modeling out to 2026. Christopher Cruz: Yes, sure. Thanks, Will. I would say probably in line with a similar kind of commentary here, and maybe Taylor will have a slightly different nuance to it, but from my perspective, again, it's hard for me to ignore, sort of from a recency standpoint, data that we're seeing. And so I'd say there's a degree of balanced caution within some of the verticals, offset by, obviously, what we're seeing is the diversification effect where we are also seeing some recent strength in other areas like in cross-border, like in luxury. So I would say that the exit rate, which is kind of where Tim's question was at, that annualizes kind of the fourth quarter. I think that's a fine starting point, but we gave the ranges on volume really from a '25 standpoint for a region. And I think that, that range, again, the intentionality of the shape of that range, where the volume range is the widest relative to something more in our control like an adjusted EBITDA, that range is widest because of wanting to acknowledge that there's a complex macro backdrop. David Lauber: Yes. If I had to barbell the 2 items, probably most front and center is we say this volatility of same-store sales is quite real, like it looks bad 1 week and it looks okay the next. It's very confusing, and you want to be cautious about what that could look like over a sustained period of time. Maybe on the other end of the barbell, you've got Global Blue, which is really contributing nothing of substance to that payments growth rate and a massive customer base, lots of geographies, et cetera. So those are kind of -- that's a cylinder that's not firing of any consequence yet and yet will be significantly in 2026. William Nance: Got it. Appreciate that. And that was going to be my second question. Just on some of these logo wins, you had the earlier question, I get it's early and some of the ones on the page are kind of more enterprise in nature, but wondering if you could just speak to the sales process that led to some of these wins. And Taylor, I know you've been doing a lot of traveling over the past couple of months. As you spend time with the Global Blue team, how are you thinking about evolving the go-to-market so that when we see some of the wins on these pages, I'm thinking back to when you put the Hospitality wins and we'd see something indicating it was a gateway conversion. Like how do we think -- how are you thinking about potentially starting to work payments into the selling process of some of these new wins, maybe not some of the logos that we're seeing on the page, but into some of the more SMB sales? David Lauber: Yes. It's an awesome question, and I'll sort of contrast the 2 businesses for you, because this is exactly what we're spending a ton of time on right now. Global Blue is a phenomenal business focused on the highest end of the enterprise, solving the most complex problems and never losing a single customer in that process. They serve the enterprise customer exceptionally well, and they're kind of built to do that. Where if I were to criticize and say there's areas that we can bring strength to the table, it's the service of the really long tail of SMB customers that don't have the best coverage model. They adopt Global Blue because it's a product that the consumer demands and has a lot of traction, and they want to be able to provide that to the shoppers. So it's the village of Bellagio, where it's in Lake Como, right, where there's tons of little mom-and-pop merchants that offer the service, too. So the skill set we're trying to bring to the organization is how do you efficiently serve thousands of SMBs across Europe and the rest of the world. And I think we've got unique skills to bring to that. The skills they are bringing to us are how do you serve the largest and most demanding enterprises within luxury retail. So we're both learning a lot from each other in that regard. And then the only thing I would say is -- and by the way, we're having conversations with every flavor of customer, right? So we're having conversations with SMBs. Those are quick. It's, "Yes, this sounds great. I'll do it." And then we're having conversations with their largest enterprise customers, and they're saying, "Hey, can you help us with this unique problem we have today?" So I'm really encouraged across the board. But the laws of physics are simply those big customers take longer to get those conversations done than the small customers. So I think that's going to be the bulk of the focus. Christopher Cruz: Yes. And I'll add that when you start to look at that customer stratification, it's at a unit economic level, very logical that if you are providing a TFS product to the longer tail of SMBs, the gross profit and revenue density isn't necessarily there to provide the technology and quality of service that you would want if you add to the equation the cross-sell of services that now turn the gross profits and the unit economic model into one that looks a lot more like the SMB that we serve. It makes a ton of sense to be providing all of the service levels, all the support, really starting to elevate the significance of that SMB customer within that segment or within that business is exactly like the benefits of the cross-sell. David Lauber: Yes. And sorry to belabor the answer. I think it's really important, though, where we're going to have to spend a lot of time with you all and the Street is what's the volume pull-through of this. Because to be clear, I think the enterprise customers offer the highest volume opportunity at the lowest spread, but these SMB customers are the inverse of that. And we are quite content with the volume growth that looks lower and a spread that's stable to growing, because that's a fast win cycle. To be clear, all of it is an opportunity, but I think volume growth relative to net revenue growth is something that has undulated inside the business as we skew from time to time more towards enterprise, more towards SMB, et cetera. So that's where we're going to owe you the updates, but my prediction is early success in SMB, and what's going to feed the funnel 2, 3, 5 years from now, it's going to be that enterprise base. Operator: [Operator Instructions] Our last question comes from the line of Dominic Ball with Rothschild. Dominic Ball: Great to hear about Global Blue. On competition, we've seen some turbulence with one of your legacy acquirer peers. Does this present an opportunity to accelerate share gains in the U.S.? And on the enterprise side, we've seen Oracle Payments extend their offering powered by Adyen, but it doesn't seem like it's going to be exclusive going forward. So how do you view that development? And could this open up further partnership opportunities with MICROS? David Lauber: Yes. Awesome question, and congrats on the call, by the way. I think you were the long one. In terms of competition in the United States, I really do want to foot stop this point from my prepared remarks. It's relatively unchanged for our lines of business, which is in Restaurants, we tend to focus on table service. This is not where you see the Clovers and the Squares of the world. We do see Toast. And I know Toast has got wider ambitions to do far more than just table service. But in our kind of slice of the world that is Restaurants in the United States, competition is relatively unchanged. Toast is a great company. We're winning and growing quite nicely in that regard. And we don't see significant pressure from others. Quite frankly, any, let's say, industry chaos tends to be helpful to the extent that big companies are struggling. It will help us, by the way, just as much on the enterprise sale as it will on the SMB sale to have a company that's sort of struggling to redefine its image. Now to go to your point with regard to Oracle, I think they've always had this ambition to try to deliver a simplistic product to their customer base that embeds software payments, et cetera. That's very, very hard to do with the products they serve. And so much -- take yourself out of a point-of-sale system that they sell and put yourself into any other software, it's very enterprise grade and requires a lot of pieces. And this is where Shift4 has found unique success. It's taking what is an otherwise very complicated solution to implement that merchants are dependent on and stitch together all the parts to get it done and do it in a way that feels like an SMB experience, where our team comes in, connects all the dots regardless of the complexity. Again, Yankee Stadium is probably a good example of trying to make an SMB experience delivered in some of the most complex environments. So we don't see really any issue. We partner with Oracle constantly in the Hotel vertical as we have to, to support them. We also activate a lot of restaurants. And we'll be there to the extent any customer needs the help. Thomas McCrohan: Operator? Operator: Thank you. At this time, I'd like to pass the call back to management for any closing remarks. David Lauber: Yes. Thanks to everyone for dialing in this morning and also for the great questions. I look forward to catching up with you all individually as the weeks and quarter progresses. Christopher Cruz: Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to Acorn Energy's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I'll now turn the call over to Tracy Clifford, CFO of Acorn Energy and CEO of its OmniMetrix subsidiary. Tracy Clifford: Thank you, operator, and thank you all for joining our call today. Before we begin, I'd like to remind everyone that today's remarks, including responses to questions contain forward-looking statements. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially from those projected. Factors that may impact our future operating results and financial performance include general risks such as potential disruptions to business operations or changes in consumer or customer demand as well as specific risks related to our ability to execute our operating plan, maintain strong customer renewal rates and expand our customer base. Additional risks may arise from changes in technology, competition or shifts in the macroeconomic and financial environment. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on management's current beliefs, assumptions and information available as of today. There can be no assurances that the company will meet its growth targets or other strategic goals or objectives. The company undertakes no obligation to update or revise forward-looking statements to reflect future events or circumstances that occur after today's call. For a more detailed discussion of the risks and uncertainties that may affect our business, please refer to the Risk Factors section of our most recently filed Form 10-K available online at www.sec.gov or on our own website. Now I'll turn the call over to Jan Loeb, CEO of Acorn and OmniMetrix for further remarks. Jan? Jan Loeb: Thanks, Tracy, and thank you, everyone, for joining this call. First, let me start by acknowledging that although monitoring and hardware revenue each grew over 20% for the first 9 months driving a 35% increase in net income, our Q3 '25 revenue was significantly lower than in Q3 2024 due to lower hardware revenue. The Q3 2025 revenue variance is largely due to the timing of hardware revenue from our large cell phone provider contract. Given the size and nature of our business, a contract of this magnitude, while highly beneficial to both our short-term and long-term cash generation and create variability in our quarterly reporting primarily due to the timing of hardware revenue. This contract was originally expected to roll out over 2 years, but the customer desire faster deliveries, which were largely fulfilled over the first 12 months. Final deliveries that we had expected to record in Q3 2025 have been pushed into Q4 2025 and possibly Q1 2026, resulting in no hardware revenue from this contract in Q3 2025 versus revenue of $724,000 from initial hardware deliveries in Q3 2024. Additionally, we recognized $215,000 of deferred hardware revenue in Q3 2025 versus $436,000 in Q3 2024, a difference of $221,000. Deferred hardware revenue reflects the noncash amortization of hardware sales prior to September of 2023, which were deferred and amortized over 3 years. The amount of revenue recognized from the amortization of deferred revenue will continue to decrease as we have not deferred revenue from hardware sales since September 1, 2023. We when we began selling hardware units that can be sold independently from our monitoring services. Hardware sales are recognized to revenue upon shipment or transfer of title. We expect all deferred hardware revenues to be fully amortized by August of 2026. Adding the $221,000 difference in Q3 hardware amortization plus the $724,000 of hardware revenue results in the delta of $945,000 or approximately 95% of the hardware revenue variance between Q3 '25 and Q3 '24. An additional factor is the reality that new hardware sales have been soft on the residential side of the business, but stronger in the commercial and industrial segment. Echoing this residential trend, last week, a leading generator OEM reported Q3 revenue below expectations in the home market which they attributed to reduced incidence of power outages, one of the lowest rates in 10 years due in part to fewer U.S. hurricane impact this season. As you can imagine, power outages from any source are a major driver of backup generator demand. We also believe ongoing economic conditions, including high interest rates, slowing job growth and other financial uncertainties have slowed deployment of backup generators, which range between $7,000 and $24,000 to purchase and install depending on the home sizes. It is our sense that these economic challenges have tempered residential demand for several quarters. Longer term, we expect residential demand will rebound as economic conditions moderate, root uncertainty builds and power outage incidents grow in frequency and duration. In terms of our large cell phone contract, since inception, we have realized $3.9 million of hardware revenue and $343,000 in monitoring revenue totaling roughly $4.2 million. We are told that there will be additional purchase orders under this contract, but as of right now, we have shipped all the initial hardware order. We will continue to recognize monitoring revenue under this contract that was deferred at the point of sale over the 12-month period commencing on the installed date. Total deferred monitoring revenue at September 30, 2025, under this contract was $290,000. Of course, we fully expect this customer to renew our monitoring services given the customers over $4 million hardware investment. We expect them to be a long-term and happy customer. This is supported by the value and cost savings of our service and cost prohibitive nature of switching to a competing offering, all of which are reflected in our history of greater than 90% annual renewal rates. Looking forward, the big question for shareholders is what is our strategy to build on our scalable, high-margin, cash-generating business to achieve our long-term growth goals. The answer is that we are pursuing a number of initiatives across commercial, industrial and residential markets that fall into 5 distinct buckets. One large commercial and industrial opportunities being pursued by our direct sales team; two, strategic OEM relationships in which we partner to provide our industry-leading technology and services; three, expanding our penetration of the residential market through our over 600 generator dealers; four developing new products and expanding the capabilities and value of existing products; and five, through accretive M&A transactions. I'll briefly touch on each of these growth initiatives. Larger commercial and industrial opportunities are being pursued via our internal sales team across sectors, including health care, telecom, real estate management retail and the military. We have a range of ongoing discussions with many of the organizations are larger and more complex, resulting in sales cycles that are longer and the timing outcome is hard to predict. We see meaningful long-term growth potential from C&I customers because of their regional and national scale and our proven ability to deliver a compelling return on investment in terms of cost savings, improved data and analytics as well as reduced operational risk. Strategic OEM relationships in which we to provide our industry-leading technology and services. We continue to advance discussions with OEMs regarding potential strategic relationships where monitors would be bundled and installed by the manufacturer rather than in the aftermarket. We believe OmniMetrix technology and service leadership, combined with our ability to support all generator brands puts us in a very strong position to partner with OEMs. This will allow an OEM to focus on their core business while delivering a superior total solution across their customer universe. Of course, these initiatives require discussion, research, testing and planning yet there's no guarantee of success, but we believe the concept makes good sense for both sides, and we'll continue to pursue this avenue, which could be an important growth driver for us. Expanding our penetration on the residential market through our over 600 generated dealers, while retail adoption of generators has been slow due to a number of factors, we expect the pace to pick up moving forward. We go to market in the residential space through our network of over 600 generator dealers, and so our primary drivers are working to support them in their outreach. New product development is another area of long-term importance that Tracy will touch on in her remarks. M&A transactions remain a priority in our growth efforts. We are evaluating several complementary M&A prospects with monitoring components to their business. Negotiations with 2 of these are progressing, though it's too early to predict if or when they might happen. We are very motivated to execute on one or more transactions to accelerate our growth and drive further operating leverage. But we remain disciplined on managing risk and the price we relate to pay to ensure we are building value for our shareholders. As we have new investors on today's call, I'll just touch on some of the long-term secular trends supporting our growth. First, remote asset monitoring is projected to grow approximately 23% annually through 2032 and driven by the increasing adoption of IoT connected devices, real-time data collection, demand for predictive maintenance and data analysis as well as compliance and reporting obligations. Given some of you on today's call are probably monitoring things you probably didn't or couldn't just 5 years ago, like home thermostat, lighting, door bell, HVAC systems, appliances, et cetera. Newer cars allow you to monitor the car's location, fuel efficiency, fluid levels and other measures or you may use your remote start, remote climate control or door locks. The same thing is happening within businesses. Remote monitoring is increasingly being seen as a necessary and cost-effective tool to enhance operational performance and reduce the risk of disruption, providing reliability, cost savings and convenience and OmniMetrix is ideally positioned to meet this growing demand. We all read a growing energy demand from AI and data centers, which is taxing the U.S. energy grid and reducing the reliability of electricity access. Though the hurricane season has spared in the U.S., the prevailing trend has been more frequent and severe weather and other natural disasters increasingly disrupting the grid. Electrification demands across the economy are compounding a fragile grid and creating a supply and demand imbalance for electricity. The point is CMI customers and residential customers increasingly need reliable backup power, and that's the key driver of our business. We expect as these major secular trends will continue to support our long-term growth. Based on the trends in our growth initiatives, we continue to believe 20% average annual revenue growth is an achievable target over the next 3 to 5 years. It won't be straight line, and it will require that we execute on one or more of our larger growth initiatives in coming periods, but we feel the scope of opportunity and the strength of our position makes this very achievable. With that, I'll turn the call back to Tracy to go over our financials and for her perspectives on our operations. Tracy? Tracy Clifford: Thanks, Jan. As Jan noted, the primary driver of our year-over-year performance in Q3 and through September relates to the timing of orders under our sell-in provider contract. Focusing on third quarter performance, for '25 versus '24. We realized $148,000 in monitoring revenue related to the contract in Q3 '25 and 0 hardware revenue versus $724,000 of hardware revenue and no monitoring revenue in Q3 '24, an aggregate difference of $576,000. Q3 '25 total revenue was $2,478 million versus $3.050 million, a difference of $572,000. High-margin recurring monitoring revenue grew $422,000 to a record $1.560 million in Q3 2025. Our Q3 '25 gross margin expanding to 78.5% from 71.7%, driven by a significantly higher proportion of monitoring revenue relative to hardware revenue. Operating expenses increased 24.8% to $1.786 million from $1.431 million in Q3 '24 due to higher SG&A and R&D expenses. Increases included $110,000 in nonrecurring corporate expenses related to our NASDAQ uplisting a $60,000 increase in tax professional fees, of which approximately 50% is not recurring as it related to our 382 study that was completed in October, a $40,000 increase in our other public company expenses and stock compensation and $33,000 of higher R&D investments. Q3 '25 net income to stockholders fell to $252,000 or $0.10 per diluted share versus $725,000 or $0.29 per diluted share in Q3 '24. A function of lower revenue and higher operating costs. The year-to-date highlights include revenue of $9,101 billion, which is a 22% year-over-year increase. The first 9 months gross margin improved to 75.9% versus 73%, reflecting the benefit of adding revenue on a largely fixed cost structure and progress we are making in our hardware product margins. EPS of $0.57, an increase of 36% year-over-year even after consideration of income tax expense of $331,000 in the current year period, compared to $67,000 of income tax expense in the prior year-to-date period. Cash flow from operations was $1,795 million, which is 143% year-over-year increase. Quarter end available cash of $4.167 million which increased to $4.372 million as of November 4, 2025, and we continue to be debt free. As a leader in remote generator and pipeline monitoring, we maintain our competitive edge through ongoing investment in product development. Q3 was the beta launch of our next-generation monitors, Omni for residential and on the OmniPro for commercial and industrial use. These next-generation monitor offer smaller size and quicker processing speed, other new features that reduce installation time and service costs and enhanced reliability, such as over-the-air updates, and they offer remote exercise programming and enhanced compliance reporting. These features and upgrades increase the value of our offering relative to our competition. Also in Q3, we began testing a redesigned version of our remote AC mitigation disconnect or RAD for our pipeline segment. Without getting too technical, the RAD product allows remote disconnection and reconnection of alternating current or AC mitigation tools for enhanced employee safety and lower cost versus manual field disconnections, which are required for maintenance. The new RAD EX design adds pipeline measurement capability in addition to the disconnect feature combining 2 important pipeline maintenance requirements into a single product. We also continued to improve our OmniView 2, our OV2-user interface in response to customer requests and suggestions, and we routinely review and update our cybersecurity protocols to mitigate constantly changing risks. Many of our ideas for improvements come from listening to our customers and being proactive in addressing customer concerns and needs in our future offerings and updates. This requires close relationships and partnerships with our customers, which we are very proud of it on the metrics. Our customers sincerely value that our products improve reliability, reduce costs and assist in their compliance and operational reporting. Based on feedback, we're excited about the opportunities ahead, and we look forward to updating you in the coming quarters. Operator, you may now prepare the line for questions. Operator: [Operator Instructions] The first question comes from Kris Tuttle with Blue Caterpillar. Kris Tuttle: Actually, I have a couple. Let's start with the positives. Your recurring revenue on the software monitoring side was up nicely. And I'm curious is -- is that something you see as being sustainable? Are we going to experience kind of ongoing some level of sequential growth in category? Jan Loeb: It is sustainable. It is recurring. So we expect consistent growth in that number. I'm not saying you're going to see 37% every quarter. But systems, we amortized first years. So it comes in over time. And you should see consistent growth. And we view that as the core value builder of our business. Kris Tuttle: Okay. I mean, unless something unusual happens like a customer cancels or something, there should be some as more units come online, the number will go up at least a little bit over time. In other words, this quarter should be at least marginally higher than last quarter. Jan Loeb: At 100% and hopefully better than that. Kris Tuttle: Yes. Got it. Perfect. Now my other question is just turning to hardware for a moment. Obviously, a little bit weaker than maybe people were expecting. And I just want to make sure I understand what you said. It sounds like there's still a few more deliveries on these long term, the big contract that kind of propelled you guys in Q -- in this quarter and in Q1. Do I have that right? Jan Loeb: So the -- basically, we finished the majority of our deliveries to this customer in Q2 of 2025. So we started Q3 of 2024. We ended Q2 of 2025, so over a 1-year period. However, there's we'll call it other stuff that they have told us that we're going to be getting, they haven't given us a date yet. So there's still, I'll call it, the tail end of the contract is still to come. And hopefully, it will be Q4 or maybe it will be Q1 of 2026. And that's -- again, that's not equipment. Kris Tuttle: Right. That's on the hardware line, right, additional deployments. And so with the last question kind of with respect to this contract. And obviously, customer is a large customer, they move to their own beef. They own the football. Do you still believe that there is a possibility you might get? Do they have additional coverage that they want to implement? And could that mean additional purchase orders for you at some point in the future along the same lines of what you had with them? Jan Loeb: The answer to that is yes, but they have given us no indication that that's forthcoming. Kris Tuttle: Okay. And then the last question. Tracy talked about some things on the new product side and you guys got to show me the -- at least the new box that you were putting out. And it looks like a real step forward. And this time, you talked a little bit more about AC power and just -- I mean maybe you could help me understand. I mean, I get it at a high level, but is there a specific kind of market use case customer type that you think about when you look at the AC-based some of the things that Tracy talked about. Jan Loeb: So I believe what you're referring to was AC mitigation, which is in our corrosion protection side of our business. So as I'm sure you know, about 90% of our revenue comes from power generation and about 10% comes from corrosion protection. So this is a product that we've been beta testing in corrosion protection and has seemed to have gotten some industry attention. And so we're hopefully going to roll that out in the fourth quarter, and we'll see what happens. So that's in our corrosion protection side of our business versus our power generation side of our business. Operator: [Operator Instructions] The next question comes from [ Jason Mollin Camp ], Private Investor. Unknown Attendee: I have a more timeless question here, perhaps. So I'm a bit curious if you could discuss -- you guys have always been good about reinvesting in the business and moving the product forward. What I don't have a sense for -- would love to hear from you is when you launch a new product, what -- kind of what percentage of those are to existing customers. I'd imagine some customers' upgrades don't. Can you just discuss that a little bit for folks? Jan Loeb: Sure. So in the case of the Omni and OmniPro, those are products that are replacing existing products. So we have TrueGuard and TrueGuard PRO as existing products, and we're now replacing them with Omni and OmniPro. And as Tracy discussed, all the benefits ties all the benefits, but some of the benefits of the new product versus the old product. In the case of the RAD EX, that would be a totally brand-new product. We don't have an existing product like that in the marketplace. Our product corrosion protection is the hero. So that would be a brand-new line for us. Does that answer your question? Tracy Clifford: Actually, I think, Jason, let me add to that for you. So when we introduced the new generation of TG and TG PRO, our existing customers would not typically replace the units that they currently have. Certainly, moving forward, as you know, we have customers that order on a repetitive basis, and dealers that order on a competitive basis. So their orders -- their new orders would then be fulfilled with the new generation of products. So we will essentially as our inventory depletes on our existing older generation that will be entirely replaced with the new generation inventory. So anyone who orders from that point forward will receive the new generation of products. But it would not -- it's not our expectation that anyone would replace an existing unit that is functioning properly to replace it with our new generation product. I think that was more what you were asking, correct? Unknown Attendee: Yes, correct. That's very helpful. And so the growth there is generally tied to your existing customers or dealers having growth in their business essentially? Is that true? Tracy Clifford: Yes or consistency in their business, yes. Consistent demand. Operator: [Operator Instructions] The next question comes from Joe Stein with Oppenheimer. Jan Loeb: Let's move on, operator. Operator: No problem. We can move on. Joe Stein: Can you hear me? It's the machine. It's Joe Stein. I'm sorry. I got on a little late, but I was -- my question was, was the problem not having the inventory in a receiving product or a lack of demand, where you got no revenue in this quarter on the telephone side. Did I misread that? Jan Loeb: No, it's -- we did not have the order. And we did not have a PO to ship anything. And we don't have an inventory. We have whatever our customers need, we're very good about that. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jan Loeb for any closing remarks. Jan Loeb: Thank you all for joining today's call. We appreciate your continued support. If you have any follow-up questions, please reach out to our IR team listed on today's press release or to Tracy or myself, we look forward to updating you again on our next conference call. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy Third Quarter 2025 and Full Year Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I'd now like to turn the call over to Chris Reading, Chairman and CEO. Please go ahead, sir. Christopher Reading: Thank you. Good morning, and welcome, everyone, to U.S. Physical Therapy's third quarter 2025 earnings call. We've got a few of our executive team on the line with me this morning, including Carey Hendrickson, our Chief Financial Officer; Eric Williams, our President and COO of East; Rick Binstein, our Executive VP and General Counsel; Jason Curtis, our Senior Vice President of Accounting and Treasury. Before we begin to discuss our quarter and our year-to-date performance, I know we need to cover a brief disclosure. So Jason, if you would, please. Jason Curtis: Thank you, Chris. The presentation includes forward-looking statements, which involve certain risks and uncertainties. These forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information. This presentation also includes certain non-GAAP measures as defined in Regulation G and the related reconciliations can be found on the company's earnings release and the company's presentations on our website. Christopher Reading: Thanks, Jason. So I'm going to start out, provide a little color on the quarter, also talk about some things that we're working on and how we kind of are looking into next year. I have some prepared comments that I'm going to touch on. I'm also going to go off script a little bit. I came out to my office this morning. I hadn't really thought about it before this morning. And I think if I'm right, this is my 84th earnings call. So this week on my 22nd anniversary with the company, 21 years since I took over in November of 2004. So a bunch of these. I looked at our stock as the market opened. I was a little bit surprised at the reaction, frankly. I want to hit some highlights. I want to talk about what we're working on and how we look at things going forward. So I think we're looking at things maybe a little bit differently. But -- so volume has continued to be strong for us. For the quarter, we're up 18%. But certainly, a bunch of that is Metro, which you know we completed that acquisition in November. I believe it was November of last year. They're doing great. But what I want to point out is we've added a total of 84 PT facilities. So a lot more than just Metro in this last year. And that's 84 net. So we've added actually more than that and that number is net of closures. So this last quarter, visits per clinic per day produced a new record for us for Q3 of 32.2, underscoring our ability to continue to grow. What's driving all that is the care and the service and the amazing connections that our clinical people are making every day, not just the clinical people, the people who greet our patients as they come in the door, patients come in, they're in pain, they're frightened in some cases. They're worried about the ability to do the things they've always done. As I mentioned last earnings call, last quarter, our net promoter score over 90, almost mid-90s with a 95% active promoter score for our -- across our entire company for our patients in our outpatient facilities, just incredible. So look, none of this is perfect at any given point, but we are making a difference in a lot of patients' lives. Those patients recognize the value and the service they're getting from us. They pay their bills, collect their money and then we get them back later when pickleball happens or there's something else that causes their function to be impacted. This quarter, again, maybe it's against the soft quarter a year ago a bit, but gross profit grew 30%. I haven't said those numbers in a long time. Even if you adjust out some of the noise from a year ago, still mid-teens gross profit increase number for PT. And that's in the middle of an inflationary period in a period where staff is more expensive. We impacted our salary and related cost per visit. On a year-over-year basis, it actually went down some. We're working on a number of initiatives, including AI-driven documentation, including what I refer to as the semi-virtualization of our front desk operations and that's rolling out. We have a target for that by year-end of 200 facilities, about halfway there, but we're beginning to see some impact from both of those things. And we've got more to come. We're just on the front end of the number of these things, which take some time. As we look at the year, one of the big headwinds we've been faced with quite honestly now for 5 years is this Medicare headwind. CMS produced a final rule on Friday. It came out as it often does, there were some incorrect tables in our part and that we had to contact CMS about and took them a couple of days. They looked at it. In fact, they were incorrect. They updated those tables. It's gotten a little bit better than last time we talked. I think last time -- and we're not done with our analysis. Last time, we said it was going to be about a 1.5% increase, probably a little better than that right now. This year is more complicated than most because of the significance and the change in the geographic index factors that kind of shuffled all around the country. One of the things that swung for us, it's a net positive manual therapy, which is when we put our hands on our patients, when we mobilize joints, when we restore motion again through that very upfront and close personal contact, very precise ways. We do that on almost every patient that comes in the door. Manual therapy was slated to go down. We challenged their assumptions. And in this final rule, manual therapy will go up slightly. So it reversed from a negative to a slight positive. So that's positive for us as we re-sort the impact of this final rule. The other thing that I think will be meaningfully positive is that in 2024, we went and began to roll out remote therapeutic monitoring, which was a new code for us. And the rules around that code, I'm not going to go through all of it, but it required a lot of visits and a lot of monitoring, which we did with the partner, Limber, great guys and has done a great job. And -- but it was clunky. It took a little while. We had to integrate Limber's tool into our EMR system. That took some considerable time, wasn't within our control, frankly. And by the end of the year, we hadn't gotten the traction with our partnerships that we had hoped. Now what CMS has appreciated, which is what we've appreciated, the patients who go through and have as part of their care remote therapeutic monitoring actually get better outcomes, they're more engaged with their home program and they're more adherent to their total program, which helps in their exiting function. And so CMS, again, with encouragement from groups like APTQI and others, they've reduced significantly the number of visits that it takes in order to get to a billable code. We now have a fully integrated working model through an app, which integrates well with our EMR. And so beginning 2026, this will be kind of a reinitiation of that opportunity for us, which we're just right now scanning the surface of. So for the first time in a while, we're going to see some blue sky in 2026 in terms of -- particularly in terms of Medicare reimbursement. We see additional opportunity around remote therapeutic monitoring. And then we've got these internal initiatives to help with our efficiency and our patient flow and our cost overall. So that's very encouraging. I want to shift gear a minute and talk a little bit about our injury prevention. Both of those teams are doing really well this year. I read a report that one of the reports that injury prevention for the quarter was disappointing. Look, this quarter, we've lapped an acquisition that we had in the last quarter still as part of those numbers, which gave us mid-20s revenue growth. If I remember right, it's 14%, 15%. That's purely organic. Still strong revenue growth. That's where we've been. We've got other injury prevention opportunities in the pipeline. We continue to love this business. Deals happen when we get them done. We don't talk about them and we don't put information out ahead of time. But you're going to continue to see us grow this business because we have high confidence in our teams in both injury prevention partnerships. We have other things in the market that we like that we think are going to be impactful, help us to grow our industry verticals and help us to grow our service opportunities. And we started this in 2017 and we had a great team, but we had a very small company, very narrow service line. That service -- those service lines have broadened significantly over the years. Teams got even stronger and our industry verticals have gotten wider and wider as we've added more programs and services. So you're going to see that continue to be a strong focus for us. So let me just say this in closing. I touched on a number of things. This is a team that doesn't give up. We've had a lot of headwinds over the year. We always find a way. If you look at the Medicare cuts that we've absorbed in these last few years, they aggregate to over 11%. If you look at the impact just in this year, it's $25 million profit impact. And yet we found a way throughout all those years to continue and it's going to be gone. We have some good things in the mix. We still have a great capital structure and we have a very, very strong resolve to take this company forward and do the things that we've said we're going to do. So with that, I'm going to turn it over to Carey to cover the details, and we look forward to your questions. Thank you. Carey Hendrickson: Great. Thank you, Chris. Appreciate it, and good morning, everyone. Let me highlight a few performance metrics that drove our strong results in the third quarter, some of which Chris has covered, but just to emphasize them. Our average visits per clinic per day was 32.2 and that's the highest third quarter volume per clinic per day in our company's history. Our total patient visits increased 18% year-over-year, supported by the 84 net owned clinic additions Chris mentioned, since the third quarter, 2.2% increase in visits in our mature clinics. Our PT salaries and related costs per visit actually decreased this quarter. They decreased $0.40 per visit compared to the prior year. That's the first time we've seen a decline in our salaries and related costs since the fourth quarter of 2023. And then our IIP revenue grew almost 15% and our IIP gross profit was up nearly 11%, which is all organic growth. And then finally, our adjusted EBITDA increased $2.8 million or 13.2% to $23.9 million. Turning to patient visit volumes. We recorded 1,524,070 clinic visits in the third quarter, along with 30,137 home-care visits. Our average visits per clinic per day, as I mentioned, was 32.2. That -- and it was 32.2 in July. It was 31.9 in August and then 32.7 in September, which follows our normal seasonal pattern with volumes typically picking up in September after the summer months. Our home-care visits continue to build nicely. They moved from just under 23,000 in the first quarter to a little above 28,000 in the third quarter and now a little above 30,000 in the third quarter. So those continuing to build. Our net rate per patient visit for the third quarter was $105.54. That was up modestly from the second quarter of this year, down slightly from the third quarter of last year. September was our highest monthly net rate of the year, highest month of the quarter and certainly, the highest month of the year and that exceeded $106 per visit. So the trajectory there is good. As a reminder, we absorbed a 2.9% Medicare rate reduction that took effect at the start of the year and we saw some rate mix shifts a little bit in the third quarter. Most of our year-over-year visit growth came in the commercial and Medicare categories. So by payer category, commercial visits year-over-year and which are about $106 a visit, though slightly above our average rate, were up about 20% in the third quarter compared with last year. Medicare visits, which averaged approximately $94 per visit, so that's below our average rate, increased 18%. And then workers' compensation visits at roughly $145 per visit increased at a lesser rate of 5%, partly because we're cycling some significant increases in our workers' comp business in the prior year. And we're continuing to focus on expanding our higher rate workers' comp business and expect to add several new workers' comp network relationships before the end of this year. Our physical therapy revenues were $168.1 million in the third quarter of 2025, which was an increase of $25.4 million or 17.8% from a year ago. Most of that growth came from acquisitions we completed since last year with Metro and PT in New York, which we acquired last November, contributing $19.5 million to our third quarter revenue. Our PT operating costs totaled $136.9 million. That was an increase of $18.2 million or 15.3% compared to the same quarter last year. Importantly, as I mentioned, we managed cost effectively. As I noted earlier, salaries and related costs per visit decreased year-over-year from $62.47 in the third quarter of '24 to $60.07 in the third quarter of '25. Total operating cost per visit increased just 1%, moving from $86 per visit last year to $86.88 this year, which we view as a strong result given the inflationary environment. Our physical therapy operating margin was 18.6%. As a reference point, we made a small reallocation of amortization between our PT and IIP segments in the third quarter and then we adjusted the prior year amounts to align with the current year presentation. And we'll continue that approach going forward, making a prospective change on that. The change results in a slight increase of about 20 to 30 basis points in our PT margin across all periods and then a decrease of about 170 to 200 basis points in the IIP margin. Speaking of IIP, as Chris mentioned, our IIP delivered another strong performance. In the third quarter IIP net revenues increased $3.7 million or 14.6%, while IIP income rose $546,000 or 10.7%. And again, emphasizing this growth is all organic. We have not made any IIP acquisitions since the third quarter of last year and our IIP margin for the third quarter was 19.6%. Turning to corporate costs. They remained in line with expectations. Our corporate expenses were 8.5% of net revenue compared with 8.6% in the third quarter of 2024. As I mentioned last quarter, we're in the early stages of implementing a new enterprise-wide financial and human resources system. During the third quarter, we incurred about $700,000 in implementation costs related to that project. And consistent with our practice for similar nonrecurring items, we add those costs back to our adjusted EBITDA calculation. Operating results for the third quarter were $10.1 million, down slightly from $10.4 million a year ago. That small decline was mostly due to lower interest income of $1 million. We had excess cash on our balance sheet in the third quarter of last year, but that's now all been deployed into acquisitions. So we didn't get the interest income associated with that. And then we also had higher interest expense of $400,000. That's associated with the higher debt balance this year because we made acquisitions and put a small amount on a revolver, which we didn't have anything on our revolver last year in the third quarter. On a per share basis, operating results were $0.66 compared with $0.69 in the same quarter last year. Our balance sheet remains in excellent shape. We currently have $132 million on our term loan with a swap agreement in place that fixes the interest rate at 4.7% through mid-2027. In addition, we have a $175 million revolving credit facility with $26.5 million drawn on it at September 30, 2025. We ended the quarter with $31.1 million in working capital cash. We've not yet repurchased any shares under the share repurchase program we established in August. We view that as a prudent tool to have at our disposal, but acquisitions will continue to be our primary capital allocation priority, consistent with our long-term growth strategy. Finally, as noted in our release, we reaffirmed our adjusted EBITDA guidance to be in the range of $93 million to $97 million for full year 2025, reflecting our third quarter results and then our current expectations for the remainder of the year. And with that, I'll turn the call back over to Chris. Christopher Reading: Thanks, Carey. Okay, operator, I know we have some questions. So let's go ahead and open up the lines and happy to take those questions. Operator: [Operator Instructions] Our first question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Maybe, Chris, I'll ask first. I mean, what are you seeing in the demand environment for physiotherapy? And then kind of like the other side of that, how are you seeing or what are you seeing in terms of clinician recruitment and retention? I mean, I know you guys called out the decline in salary per visit. So just curious what are the dynamics that you're seeing there? Christopher Reading: Yes. Demand has, for us, pretty much all year continued to be strong. I would say in the quarter, we had a little bit of a shift between July and August. July was better -- much better than we expected. It actually was very similar to June, which doesn't normally happen. And then August was a little bit softer, concerned us a little bit and then we popped right back up in September. And so I think what happened was we just -- we were busier in July than normal. We probably shifted some summer vacations into August, which impacted us a little bit. These are slight number shifts. Demand pretty much been good everywhere. On the supply side, on the labor side, we made a number of investments over the last year plus in terms of our recruiting, new tracking, applicant tracking platform, new people and resources devoted toward developing more robust school relationships and services and programs, content actually for students that are still in school. And that, we think, is paying dividends. Our time to fill down. Our turnover has been really good, really across all parts of the company. But we're definitely not paying people less. The market is not soft by any stretch. Young therapists still have a lot of debt when they come out of school and plenty of opportunity in terms of employment where they can go. And so it's competitive in that regard. But I think we made some incremental positive strides over the last 12 to 15 months in terms of our infrastructure, our ability and our capability and we're seeing that pay off. Brian Tanquilut: Got it. That makes sense. And then Carey, as I think about your cash generation, I mean, decently good cash flows in the quarter. I know you announced the buyback last quarter, but did not have that. So just curious how you're thinking about opportunities on the M&A side versus weighing share buybacks. And also, I know you and I have had conversations about how IIP is a focus area for M&A. So maybe if you can just touch on that in terms of why that is. Carey Hendrickson: Yes. Sure. On the repurchase side, as I mentioned in my remarks, I mean, we think that's a good tool to have at our disposal and we weigh that versus acquisitions, but certainly acquisitions at this point. We've got a number of them that are in process that we hope to get across the finish line in the relatively near term. But it's just a much better use of our capital at this point or acquisitions because that's their -- the acquisitions we're looking at, to your point, are IIP acquisitions for the most part. We're going to continue to do PT acquisitions, but we are focused on IIP because of the return dynamics. I mean, the growth prospects in that side of the business are just -- are better. And so that's where we're really focusing a lot of our IIP. Our acquisition attention is on that side of the business with better revenue growth, better profit growth there. So -- and we need that segment to get larger. So that's what we're really looking at. Yes. Operator: Our next question comes from Benjamin Rossi with JPMorgan. Benjamin Rossi: So I was hoping you could discuss some of the competitive dynamics that you may be seeing across your markets and physical therapy, just given some of your commentary about the strong demand backdrop. I guess just when we think about existing market competition, your primary end markets in Medicare, commercial and workers' comp, can you just kind of walk through competitive dynamics this year? And maybe if you're seeing any pressure from newer offerings or coverage [ models ] that have kind of changed some of your inbound demand? Christopher Reading: Yes, Ben, it's hard to quantify. And particularly, it's hard to say, well, this year is different than prior years. I can tell you, and again, I'm going to speak in some generalities. I'm not going to call anybody out. But across our market, we typically compete with small practices, mom-and-pops. We compete with hospital-based practices, where PT is often primarily not their top of the list in terms of product lines. And then we compete with other large providers and other consolidators in the market. And really, since, I would say, since the latter part of 2022, some of the larger PE-backed companies have been balance sheet-constrained. And so we're seeing multiples on the acquisition side come down a little bit. That wasn't specifically your question, but we have seen an impact there. In terms of boots on the ground and who gets which patient, really hard to measure. We all have relationships. We're all out there looking to try to get and keep the relationships that we have and expand into new relationships. It's a competitive market, but we're in as good a position as anybody just because our balance sheet is so good. So we have the ability to deploy resources. We have the ability to make long-term investments and make decisions that aren't based upon acuity or crisis or other balance sheet-pressured things. And so I think over time, it's to our benefit, which is one of the reasons our visits per clinic per day continue to move up in spite of the general market challenges overall. Benjamin Rossi: Got it. Okay. Appreciate the comments there. I guess, just thinking about the broader backdrop across your maybe mature cohort and the volume growth there, can you kind of just parse out core growth figures and maybe how that core growth looked across those main segments like Medicare, commercial and workers' comp or at least maybe like directionally, what was up or what was down year-over-year? Carey Hendrickson: Yes. Sure. So within the mature clinic mix, commercial and Medicare were both up. Commercial was up in visits about 2.5% -- 2.5% to 3%. Medicare was up about 4.5%. So those visits both increases on -- to take those 2 together, it was about a 3.5% increase in commercial and Medicare. Similar to our overall business, workers' comp dipped a little bit in their number of visits year-over-year in the third quarter. So that kind of affected the rate a little bit for the mature clinics there in the quarter. So our visit growth was 2.2% and then our rate growth in mature clinics because of that -- a little bit of that mix shift I just talked about and the fact that commercial and Medicare are -- commercial is right at our rate. Medicare is a little bit low rate and that's where we saw the growth, but then workers' comp dipped a little bit, which is a high rate payer category. That rate decreased 2% for -- it was 2.0% for the third quarter in mature clinics. So 2.2% visit growth, 2% revenue growth. So it was up just slightly from a revenue standpoint year-over-year. And that's my category that I'll see. Yes. Operator: Our next question comes from Joanna Gajuk with Bank of America. Joanna Gajuk: So just a very quick follow-up on the final Medicare rate being based on the proposal, you kind of estimated it will be, call it, $1.5 million to $2.5 million to adjusted EBITDA. So based on your, I guess, updated estimate of that impact, it sounds like it's not finally, but where do you land right now in terms of adjusted EBITDA tailwind? Carey Hendrickson: So... Christopher Reading: I don't think we're there yet. Carey Hendrickson: Yes. We're not there yet. Christopher Reading: It doesn't come out until Tuesday. So... Carey Hendrickson: Yes. And it's a pretty complicated calculation. We have to go through by market. But I would say the increase we expect to be, I think, really more of a floor of 1.5% now, whereas we thought that may be kind of right where we ended up, I think that's kind of a floor of 1.5% and there could be -- it could be greater than that. And we'll certainly give more color on that on our next call. But the fact that it's a positive going into 2026 is really, really good. Joanna Gajuk: All right. So I guess, yes, it's going to be a little bit better than that number. So that's, call it, 2% adjusted EBITDA growth next year just for that. I know you're not giving guidance and you said you're finalizing a lot of different things. But anything else we should be thinking about in terms of tailwinds and headwinds into next year? Christopher Reading: Other than what we've talked about, we're working on some cost things. Obviously, those are beginning to come through AI-driven documentation, virtualization at the front desk. We talked about remote therapeutic monitoring being now an update to our high priority work list for 2026, where there's some reimbursement that we're not tapping into right now just because of the complexities historically around how the government set up and funded this program. It's gotten much more logical and much more doable. And so we'll focus on that. And then we got some things that we haven't talked about yet that we're not quite ready to talk about that will be very positive next year that we expect to give an update when we give guidance and talk about our year-end numbers. We think we'll be far enough along then to lay it all out. Carey Hendrickson: Yes. And on the headwinds side, to give anything significant on the headwinds, we've had -- obviously, the big major headwind we've had the last 5 years has been the Medicare rate and we thankfully don't have that headwind going into 2026. So that's why at this point, we'll give the guidance later, but we feel good about kind of how things are shaping up for 2026. Joanna Gajuk: Okay. And if I may, a different topic, different question. I noticed in the release, there's some additional reversals of the payouts from acquisitions. I think you had this in a couple of quarters in a row. So anything in particular? Like what's causing that reversal? Carey Hendrickson: I'm sorry, that's on what, Joanna? Joanna Gajuk: On the payouts from acquisitions. So you said, I think, $11 million this quarter. Carey Hendrickson: Yes. That's really just -- it's a -- it's -- every quarter, we reproject kind of where we think they're going to end up for whatever the earn-out period is and we have to make adjustments based on the Monte Carlo simulation. I just -- so it's really just based on actual performance. But we put lofty targets out there for our acquisitions to achieve and we expect them to achieve that. And if they don't quite get there, then we have to back it off a little bit. Chris, would you -- anything else you'd say about that? Christopher Reading: No. I mean, it's just a quarter-to-quarter adjustment that predicts -- attempts to predict where we'll end up at the end of another period. It's -- to be honest, it's an exercise that I don't think is particularly meaningful, but we have to do it. And so it goes up and down every quarter. Not actually what we're spending at any given time. Operator: [Operator Instructions] We'll go next to Larry Solow with CJS Securities. Lawrence Solow: Congrats on your 84th call. I think if I do the math, this is my 73rd one listening in. It's been a fun ride. I guess just first question, I appreciate all the color on the volumes. Just in terms of the mature clinics, I know they were a little bit flat to last quarter and pretty flat this quarter on both the price and a volume, I guess. So net, just -- and you've discussed the pricing pretty well. You parsed that out pretty well. Just any thoughts on the flatter volumes and how you can maybe -- is that just a timing thing, staffing issue? Any color there? Christopher Reading: Yes. I mean, my sense is that any time you're focused on trying to wring out cost, you probably wring out a little bit of volume. And so you kind of have to pick your poison and we're trying to obviously get it right in each and every situation and there are literally thousands upon thousands of those situations when you look at daily schedules and how many therapists we have and all of it. And I don't look at 2.2% as flat, although it's -- I would rather it have been 3%, let's say, more on our average. And on the flip side, we made a little bit of an impact on the cost side. So I think there's probably some impact there from trying to be as efficient as you can and not have slack resources. Slack resources allows you to take a walk up and have people just show up and be able to deal with them. And when you don't have slack resources, it makes it a little bit harder to do that. And so I think that's part of it probably. Lawrence Solow: And I know, appreciate that. In terms of the ERP, the new ERP system, which is, I guess, a modest headwind in terms of cost today, does that become a benefit, a lot of your other -- your AI virtual notes taking stuff like that, too. So maybe hard to isolate that by itself, but does that end up being an efficiency benefit at some point? Carey Hendrickson: Certainly, Larry. Christopher Reading: Go ahead, Carey. Carey Hendrickson: It'll be a big efficiency positive for us in the finance and accounting area. And with the human resource side, too, so it'll be a really good tool for all of our employees to use for. It'll be a kind of one-stop place they can go and get all their HR information and their financial information too if they have financials that they need to view. So everything will be viewed there is the same. And I think what it does is just provide us more -- provides us quicker and probably more information to manage our business. But that -- from that perspective, it's going to create some efficiencies and positives for sure. Lawrence Solow: Great. If I could just switch gears from one last quickly on the injury prevention. It sounds like really knocking out of the park on the top line, mid-teens growth. I don't know, is that number hard to say sustainable over a multiyear period, but it does feel like you do expect that business to certainly grow faster than the PT business. I guess any color there? And then the follow-up would be, there was a little bit of a gross margin came in a little bit, I guess, year-over-year. Anything we should be concerned about on the IIP side? Christopher Reading: Carey, you take the gross margin one because you touched on that, so maybe reclarify that. Carey Hendrickson: Yes. So gross margin, but when you look at it year-over-year, it did for IIP come down a little bit. It was 20.3% on the properly adjusted basis in 2024 and was 19.6% in the third quarter of this year. So a little bit of dip there, but that margin continues to be really, really strong and near that 20% mark. Part of it is we have added some auto clients, which -- over the last year, which have a little bit lower margin, but that's good business. That's why you see that top line growing at 15%, but not quite as much on the bottom line growth, 11% because it kind of depends on the mix of the business there and what the margins are for those. But nothing really notable to point out related to the margin difference quarter-over-quarter. Christopher Reading: Yes. And Larry, in terms of growth, I don't know if -- I don't pretend to have a perfect crystal ball, but in terms of [ 17% ] -- we've been growing at a pretty good clip. In the early first couple of years, year-over-year growth was more like 30% or 40% for a while. As we get bigger, it gets a little bit harder and I think mid-teens is a pretty good number right now. But as we add these other companies and we pick up more services, it gives us a bigger opportunity to cross-sell. So in that regard, I do think there's a sustainability element, particularly as we've added programs over the years that -- and our team has gotten better at cross-selling. And so I think we can grow certainly at an outsized rate compared to PT when you look at organic growth. Operator: Our next question comes from Constantine Davides with Citizens. Constantine Davides: Chris, just on the home-care visits, can you just talk about directionally how you think that's heading? Are these still largely confined to the Metro asset? Or have you expanded the model out to any of the other logos at this point? Christopher Reading: Yes. Eric, do you want to take -- I'm going to let Eric speak to that. But yes, it's primarily Metro. Eric Williams: Yes. And it's really regional. So it's outside of New York. I mean, we've expanded into the New Jersey market. Michael had the biggest footprint, obviously, in home-care operating out of New York. It's easy to expand as we go to city over and a state over. And so I still think that's going to be the area where we have the biggest expansion opportunity. But we are looking elsewhere within the portfolio around where we can replicate that and make an impact. So we still believe that it can generate growth for us as we continue to grow forward. But right now, most of it will be in the Northeast. Constantine Davides: And can you maybe speak to the relative margin differential between a home-based visit and just kind of historical level of margins on the core PT business? Eric Williams: I'll speak little specifically to New York, New Jersey. I mean, obviously, so it's -- they're -- we're treating Medicare. The Medicare reimbursement up in the Northeast is very, very favorable as compared to other parts of the country. And doing home-care, you do generate pretty decent margins because your only real overhead associated with home-care is labor rates. And you pay a little bit more for home-care staff, but margins are held back and get you a number for you. I don't have that in front of me. It won't be the case everywhere. I mean, there's markets where just based on cost of labor and Medicare rates it won't make as much sense for us. But right now, the Northeast is very, very healthy rate. We're able to find labor and generate economies of scale, which is another big part of the program. I mean, when you bring home-care people on, while they're typically paid on a per visit basis, your ability to attract staff is really based on having the ability to give them a full schedule. And so for us, it's easier to grow off of an existing program and expand as we move into different ZIP. A little bit lower margins, we're just starting up a program for the first time. So I hope that color helps a little bit. Constantine Davides: No, it does. That's great. And then Chris, in your prepared remarks, you highlighted just the really strong growth in the number of facilities. And I guess I'm more focused on de novos here, but it looks like you're going to be pushing probably in the 35 to 40 range this year. So I'm wondering what's the limiting factor on that? And is this kind of a new normal in terms of what you're targeting year in, year out? Or is this just -- is 2025 just a year of just more pronounced de novo growth? Christopher Reading: No. No. So limiting factor first. Limiting factor, really not our ability to get de novos out of the ground. We could do more than we're doing. It's having the right person ready to take over that facility in a leadership position and then being able to backfill that person in the existing clinic. And so that's part of it. And our partners have to be willing to take a near-term dip in distributions and other things, again, to fund that facility and get it up and out of the ground. Having said that, we've got some things that we're working on behind the scenes. Again, this falls into the category of haven't fully lifted the curtain yet that will help us in certain markets accelerate our de novo opportunity and that's something we'll spend some time on, I think, in February when we release our year-end earnings and talk about what we expect to do going forward. That's a general time frame when we're going to be ready to kind of talk about some of these other things. But I think in that 30 to 50 range is likely where we'll be. Operator: [Operator Instructions] We'll go next to Mike Petusky with Barrington Research. Michael Petusky: Okay. Carey, I know that you talked to the year-over-year decline in gross margin in IIP, but I'm actually more confused and you may have addressed this and I missed it, but confused by the sequential decline in that gross margin. Did you talk about that? Or could you talk about that? Carey Hendrickson: Yes. So I mentioned it on the call that we had some amortization that was -- that had been being allocated to the PT segment that really should have been allocated to the IIP segment. So we made that adjustment and we're going to make that on a prospective basis. And so it increased our PT margin a little bit by about 20% [Audio Gap] decreases our IIP margin by 170 to 200 basis points. So when you look -- so there -- so the last quarter that we actually reported is not apples to this third quarter. But as we go along, we'll just prospectively present that in the same manner going forward with that IIP amortization actually squarely placed in IIP. So yes, but if you look at any of that, like the second quarter last -- of this year would have been 170 to 200 basis points less than what we showed in our report. Michael Petusky: Got you. Okay. Perfect. And then in terms of workers' comp, what percentage of overall revenue was workers' comp in this quarter? Carey Hendrickson: Yes, hold on one second. I believe it was -- it's right at 9.6%, I believe is what it was. 9.7%. It was 9.7%. And we did -- overall, we did see workers' comp growth just in visits. It was about a 5% increase in workers' comp visits for our total book of business, just mature clinics. When I was speaking of mature clinics, it was down a little bit in mature clinics, but it is up overall 5%. It just didn't see as big a growth as commercial and Medicare, which were at 20% and about 18%, respectively. So we did see increase in workers' comp visits. Eric Williams: I'm happy to throw a little bit more color on the work comp side here. To Carey's point, the growth wasn't as robust as what we've been seeing over really 2024 and first couple of quarters this year, it was around 5% on the visit side. It was around 5% year-over-year growth on the rate side. And Q3 revenues were up just under 10%, Q3 '25 compared to Q3 '24. On a year-to-date basis, revenues are up 19% in work comp, visits are up about 9% and rate has been up about 9.4%. We signed 11 new contracts in 2025 with work comp, 2 of which came online in Q1, 4 of them Q2, 2 of them late Q3 and 3 of them are coming online in late Q4. So we still have growth opportunity that we're going to see on the work comp side. There's also a concerted effort around volume pull-through and a focus on our PPO contracts which pay a higher rate than some of the work comp specialty networks. So we still foresee good growth on the work comp visit side as we move forward here into 2026. Michael Petusky: Okay. Great. And just a couple more quick ones. The 1.5% is what you guys are calling probably a floor on the Medicare update for '26. I mean, could the ceiling be as high as 2%? Or are we really talking it's 1.5% or it's 1.6% or 1.7%, like pretty close? Christopher Reading: My gut tells me it's going to be pretty close to 1.5%, 1.6%, 1.7% probably. I don't know that it gets to 2%. What could take it to 2% is if we can ramp up remote therapeutic monitoring and get that a meaningful percentage of our Medicare patients, that would pick us up a few dollars per visit over the course of the case. And so that would be a nice lift. That would be a difference maker. But we think on the base -- the reason this is so complicated right now, so many of the geographic index factors, which normally don't move very much, moves a lot. And so we have to model not only kind of the historic look at what the changes would have done, but a prospective look. We have to estimate what we think the migration will be from Medicare Advantage to Medicare. And frankly, it's not entirely precise. It requires some guesstimation. And so that's why we're being a little less precise around this because it's not quite easy to pin the tail on it as it has been in the past. Michael Petusky: Okay. Fantastic. And then just the last thing and I may -- again, I may have missed this as well. July, August, September, did you give the visits per month there? Carey Hendrickson: Yes. So I'll repeat them. Let me get that in front of me here. I know July was 32.2, yes, 32.2 July, 31.9 in August and then 32.7 in September. Michael Petusky: And then just the last sort of second part of that question. As your -- there's a lot of talk in news media and around the elections about sort of affordability, people are getting squeezed by persisting inflation and all the rest of it. Are you guys seeing any evidence of that impacting sort of people later in therapy? Are you hearing anything? Are you picking up anything on that? Christopher Reading: I mean, what we have to look at is our duration of care, right? I mean, that's the one objective measure that we have to look at. And so duration of care hasn't dropped. It's not going backwards. It's been very steady. Eric, I don't know if you want to provide any other color on that. Eric Williams: No, Chris. That's spot on. I mean, even when we went through some of those difficult periods 2 years ago with rapidly rising inflation and a concern that people are going to kind of hang on to the dollars, we saw absolutely no variation in our durations and they continue to be strong and consistent throughout 2025 as well. Carey Hendrickson: And our volumes in October have been really, really good. So that's -- we haven't seen a dip there. Operator: And I'm showing no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks. Christopher Reading: Okay. Well, thank you, everybody. We appreciate your time this morning. We always appreciate your questions. Carey and I are available later today, through the week and into next week, of course, for any follow-up. So I hope you have a great day. Thanks again. Bye-bye. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.
Kevin Miller: Good morning, and thank you for joining us. This is Kevin Miller, Chief Financial Officer of RCM Technologies. I am joined today by Brad Vizi, RCM's Executive Chairman. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates, assumptions and information currently available to us, and these matters may materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward-looking statements and the risks, uncertainties and other factors to which they are subject, please see the periodic reports on Forms 10-K, 10-Q and 8-K that we file with the SEC as well as our press releases that we issue from time to time. I will now turn the call over to Brad Vizi, Executive Chairman, to provide an overview of RCM's operating performance during the quarter. Bradley Vizi: Thanks, Kevin. Good morning, everyone. As we exit our seasonal third quarter, we are entering Q4 from a position of strength, demonstrating record 2026 engineering backlog as of the end of October and continued momentum in health care. Penetration of existing clients continues to increase, while commercial discussions start to crystallize with future flagship clients. I attribute increased traction to growing brand awareness in our end markets, fortified by our employees' commitment to quality and reliable delivery. Also of note, as our visibility increases, so is the strength of our talent pool. We have seen a noticeable change in the number of highly qualified candidates reaching out to RCM, providing further fuel for the flywheel. We will continue to invest behind the business, while many of our peers remain on their heels. Despite excess medical costs to the tune of approximately $1.8 million year-to-date, with Q3 hit particularly hard, our financial results remain resilient. Kevin will provide more granularity into our financial performance later in the call, giving further visibility into our fundamental strength led by healthcare and engineering. I will now provide an update on the progress of each of our business units, starting with Healthcare. We entered the 2025, 2026 school year with momentum, seeing strong growth across our portfolio, driven by our commitment to quality, innovation and client satisfaction. Our roster of new school partners is expanding, and we are equally encouraged by the commitments from our existing clients to broaden our role in staffing their schools. Though competition in certain markets has increased, it simply has not mattered. Our share in these same markets increased regardless, a testament to the commitment of our team and the trust we have built as a preferred provider in the K-12 end market. To put it differently, doubling down on caring is good for business. Despite tracking to close 2025 with our strongest financial performance outside of COVID, we already have an eye toward 2026 as we anticipate seeing the benefits of a record foreign recruitment pipeline that we have invested heavily in the last several years. The future of RCM Healthcare remains bright. Now I will transition to Life Sciences Data and Solutions. In Life Sciences, the industry is seeing a significant shift as it deals with a variety of changes due to tariffs, favored nation drug pricing and process automation. Each have caused momentum shifts with many of our clients from the negative of workforce reductions to the positive of capital investment in manufacturing. Structural industry shifts often present opportunity for RCM. We are capitalizing by partnering with an AI-driven computer software validation and equipment qualification company that has allowed us to streamline compliance protocols and reduce turnaround times across manufacturing sites. The creation of a dedicated life sciences engineering group will further differentiate RCM in the market. As it pertains to data and solutions, meaningful progress has been made in AI and analytics, particularly as applied to Life Sciences. These efforts continue to unlock actionable insights from predictive forecasting to real-time monitoring. The updates reflect how technology is being leveraged not just to optimize operation, but to fuel innovation at the core of the business. As we move into Q4, we feel that our efforts are positioning us for growth. Life Sciences will benefit from ongoing digital transformation, further integration of AI-driven compliance and scaling of the new engineering group. These efforts are expected to drive efficiency and enhance our value proposition to pharma partners. Data and Solutions will continue to expand our managed service offering. We are building the use of AI analytics into our process with a focus on generating deeper insights and supporting innovation across the enterprise. The emphasis will be on predictive capabilities and real-time data to support operational excellence and strategic decision-making. HCM will see growth beyond our foundational managed service efforts in building our direct and BPO business as our pipeline continues to mature. Transitioning to engineering, starting with Energy Services. Energy Services delivered another strong quarter in Q3 in addition to securing record backlog for 2026, reinforcing RCM's leadership in modern grid infrastructure and advanced energy solutions. Our integrated engineering and EPC model continues to gain momentum as utilities and data center developers seek partners with the technical depth, safety, culture and scalability to execute complex multidisciplinary projects and tangible client outcomes. We advanced major programs in substation modernization and energy resilient infrastructure with significant contributions from our civil, structural, mechanical and protection and control teams. We have made great strides growing within our core utility client base, each project reinforcing our reputation for technical precision and execution reliability, solidifying our position as engineer of choice and Tier 1 preferred partner. The business continues to outpace expectations, reflecting the strength of our integrated strategy and increasing market demand. Our engineering teams are designing and executing major programs across North America and internationally, while deepening strategic partnerships with OEMs to strengthen procurement agility and mitigate equipment lead time constraints. In a market challenged by labor availability and resource bottlenecks, RCM leverages our hybrid resourcing model, combining domestic expertise with global engineering design excellence centers. Best-in-class digitalization and 3D BIM to ensure continuity, scalability and cost-effective execution. This flexible approach enables the company to mobilize skilled manpower quickly for time-sensitive and mission-critical infrastructure projects. RCM's combination of specialized expertise, digital innovation and operational discipline is positioning the business for sustained growth. Our teams are designing and delivering infrastructure that enhances grid reliability, integrates renewables and build resilience into the critical systems powering our communities. Our guiding philosophy remains constant, engineering excellence that sets the standard in energy infrastructure. Aerospace and Defense continues to gain momentum in existing program support and increased demand across new clients, primarily in engineering, manufacturing and supply chain areas. When compared to Q3 2024 year-to-date, revenue has grown almost 45%, gross profit by approximately 49% and EBITDA by 110%. Though the third quarter is historically slower when compared to other quarters due to increased PTO and headcount continued to increase through Q3 2025. As projected, we have realized an increase in gross margin and EBITDA in Q3 2025 and subsequently quarter-over-quarter throughout the entire year. Our vertical lift and technology innovator customers doing business with the U.S. government continue to spearhead our progress thus far in 2025 with multiple opportunities on the horizon in 2026 and beyond. As anticipated, success in our new service areas and expertise in supply chain manufacturing and quality engineering with current and new clients has impacted 2025 with a positive outlook for 2026. The awards in our aftermarket arena with 2 existing customers at the start of 2025 continue to contribute to our success in delivering to our aftermarket clients. RCM Aerospace and Defense attributes our latest award as Bell Flight's Best New Supplier in 2025 to our sales and recruitment team, which continues to build trusted valued relationships throughout the client and candidate base. Our investment in new schools and technologies continues to keep our team at the forefront as the go-to stated publicly by many of our clients when they are having challenges with quality resources. Credit to our operations team for helping build a client we added to the portfolio in 2024 into one of our largest clients in 2025. This is just one example of our ability to land and expand quickly, leveraging our core capabilities within RCM. We anticipate growth to continue as we close 2025 and more opportunities are realized with the aerospace and defense environment buying for American companies who can hold clearances up to the secret and top secret level. Where we sit today, we believe many of the aerospace and defense programs are in their infancy, and we look forward to setting a new baseline in 2026. Now I will return the call to Kevin to discuss the Q3 2025 financial results in more detail. Kevin Miller: Thanks, Brad. Regarding our consolidated results, consolidated gross profit for the third quarter of 2025 was $19.4 million, which grew 8.8% over Q3 2024. Adjusted EBITDA for Q3 '25 was $5.5 million as compared to $5.6 million for Q3 '24 for a slight decline of 1.4%. Adjusted EPS was $0.42 for both comparable quarters. As for our segment performance in the third quarter of 2025, in Healthcare, gross profit for Q3 '25 was $9.0 million compared to $8.3 million for Q3 2024, growing 8.5%. Gross margin for Q3 '25 was 30.0% as compared to 31.2% for Q3 2024. School revenue for Q3 '25 was $24.4 million compared to $20.2 million for Q3 '24, growing 20.7%. Non-school revenue for Q3 '25 was $5.6 million compared to $6.4 million for Q3 '24, declining 11.3%. Our Healthcare group experienced a slow start to Q3 due to lower summer session revenue than we normally see. However, our September gross profit for all of healthcare grew over 20% September versus September 2025 versus 2024. Furthermore, billable hours for the first 4 weeks of October 2025 increased by 18% as compared to the same period in 2024. So we're off to a nice start in Q4, and we're excited to see how those results come in. In engineering, gross profit for Q3 '25 was $6.9 million compared to $5.9 million for Q3 '24, growing 17.3% and our best engineering gross profit in quarter in our history. Gross margin for Q3 '25 was 22.0% compared to 24.4% for Q3 '24. We are very excited about where our Energy Services backlog stands. At this time, last year in 2024, our backlog for 2025 was $21 million. Our backlog today for 2026 is just over $70 million. While we are still growing our 2026 backlog, we are now very focused on 2027 and beyond. In our IT, Life Sciences and Data Solutions group, gross profit for Q3 2025 was $3.5 million compared to $3.7 million for Q3 '24, decreasing by 4.2%. Gross margin for Q3 '25 was 39.5% compared to 38.0% for Q3 2024. It is worth noting that our SG&A expense includes $800,000 of costs for medical claims over budget in the third quarter alone and $1.8 million year-to-date. Regarding our balance sheet, frankly, we were disappointed with cash flow from operations in Q3 '25. We again experienced administrative collection issues with 2 of our large school clients. We are optimistic we will see good cash flow in Q4 and expect the cash flow from operations for fiscal '25 will approximate net income. We reiterate that we expect Q4 to yield our highest quarterly gross profit and our highest adjusted EBITDA in fiscal 2025. We believe we have strong momentum heading into 2026. This concludes our prepared remarks. At this time, we will open the call for questions. Operator: [Operator Instructions] And first up, we do have Bill Sutherland of The Benchmark Company. William Sutherland: Curious about the candidates, the foreign candidates that are building in the healthcare group. What -- can you just kind of give us an order of magnitude and maybe timing on that on their impact? Kevin Miller: Well, we certainly can't predict the timing, Bill. It's all dependent on visa retrogression. There have -- according to some things that we've heard, we believe the dates are going to be moved sometime in the fourth quarter. Even if they move a couple of months, we probably have 50 to 60 nurses we can bring over if they move, let's say, 3 or 4 months. That may or may not happen, right? But we have at least 300 nurses in our pipeline that have passed all exams and are ready to come over if we can get them visas, right? And we have a lot more than that in our pipeline that are in the process of passing various exams to be able to come over. It's something that we make a pretty heavy investment in. We know a lot of our competitors have kind of scaled back in that area a little bit because of the difficulty with getting nurses into this country right now, but we believe that the pendulum will swing the other way at some point, and we'll be ready for it. William Sutherland: Okay. I guess there's no way to predict excess medical costs. Do you feel like this is kind of a level that we should just pencil in for 4Q? Kevin Miller: Yes, probably because I don't expect anything radically different in Q4. We have taken some measures long term to try to reduce those costs a little bit, but that's probably not going to impact us too much until 2026, hopefully. It's just been -- it's been a crazy year for medical costs. We had 3 or 4 great years in a row and then '24 and '25 was just terrible. William Sutherland: You can't predict it, I know, it's... Kevin Miller: It's hard to predict. And there's obviously a lot of headwinds with what's going on with a lot of inflationary pressures and hospitals and insurance companies driving up costs. Our insurance for -- all of our insurance is up a lot in '25 versus '24. But at least you know where that is heading into the year and you can budget for it, right? But in the medical claims, you really -- you budget for it, you make your best budget and then it can get wiped out pretty quickly, unfortunately. William Sutherland: So last one for me, Brad, when you were going through the engineering groups, on Industrial Process, I wasn't clear kind of how that's doing and kind of how that's booking for next year. Bradley Vizi: Yes. Part of Industrial Process continues to motor along pretty strong. We're hiring. Demand is robust. And the second unit, it's work in progress. Some changes are being made to strategy, personnel. And the good news is it's our smallest unit, right? There's potential upside there for sure. But whether it's a pretty good year or a very mediocre year, it's unlikely to move the needle. Either way, it has our attention. And I'd say out of all of our businesses, it's the one that it just needs to -- it needs to be on a different trajectory, right now, but it has -- it is stable. Kevin Miller: Yes, it's pretty small, as you know, Bill. But I will say this, I believe we have some pretty exciting projects in our pipeline that we're pretty bullish on, particularly along our next campaign. And we just got to close them. And we think that group will have a good 2026, but we don't have the backlog that we have at our 2 other engineering businesses. And I'm talking relative to the size, but it has good potential, and we're excited to realize some of this pipeline. So hopefully, on our next call, we'll have some good news for you around our P&I business. Operator: Next up, we have William Duberstein of Stone Oak Capital. William Duberstein: I wanted to touch on Energy Services. It seems like it's growing the fastest, probably the largest growth opportunity. Everything we're reading is just pointing to increased utility growth, power -- independent power producer growth. There's behind-the-meter deals happening with data centers. Just wondering if you could touch on how you see the market evolving for you guys, if you're sticking with traditional utility partners, if you're seeing any new entries into the business or if you're exploring new partnerships. And I think you talked about some of your digital capabilities, which -- if you could just elaborate on what you're seeing there, I guess, in general, that would be great. Bradley Vizi: Yes. Our strategy in that business has been to really kind of focus and go all in on our strengths or we can establish a point of differentiation and a reputation with really the Tier 1 clients. In other words, the largest utilities in the country. And so there are certainly a broad list of vendors out there, right? In terms of that Tier 1 list, it's relatively narrow. Those go-to players that kind of get to the final line pretty quickly and are in contention for being the preferred choice. And it's -- the investments we've made in the last several years, they're starting to pay off. We're dialing that in, in terms of being able to really roll out our success and to the market broadly. And we're very pleased with the direction that we're headed. Look, that being said, we want to continue to be thoughtful. There is no shortage of activity out there. We are very cognizant about getting caught up and sticking our nose where we shouldn't be and risk management. But we are at a point where we feel like the group is -- we're taking that to the next level. Inevitably, there are investments you make along the way. It's a different set of infrastructure as you go through that process, you dial in personnel, right? But I'd say it's a very positive story there going forward. With respect to data center activity, when you look at that the investment in the grid right now, right, kind of our stronghold is the utility market. So as far as direct data center activity, that's really kind of incremental to us. Just there is no shortage of opportunity with our core client base. So we continue to remain focused on that. And as you know, it's a very stable client base to serve, and we are protecting that and we're growing within it. And we're riding the wave in that regard. But also we see opportunities to get more involved on the data center front selectively. And I think probably the most obvious opportunity is the interconnect aspect of it because the reality is each of these major data centers you see, they require substations, right, to be built, and that's obviously directly in our wheelhouse. So the way I would describe it to you in general, Bill, is it continue to maintain the quality and build on our reputation. And it really gets to the point where you're following your client, you're following that demand, right? So in terms of adding like even just adding 1 or 2 incremental core clients a year, it can really move the needle from our vantage point because, again, you can take any major utility, have a look at it, right? I mean, historically, their CapEx spend might be -- have been $2 billion or $3 billion. Now it's at maybe $5 billion or $6 billion. And then some of them are $8 billion to $10 billion are moving up another level to, call it, $8 billion to $10 billion a year. And the lion's share of that is going towards hardening the grid. So it's an exciting time for sure. But at the same time, it's also a time you don't want to get too far over your skis. So we're being thoughtful about it, but suffice to say, we're pretty excited about where we're headed there. William Duberstein: That's great. And you mentioned you're attracting sort of a new level of talent or you're liking what you're seeing in terms of pulling talent or talent coming to you, I guess, not pulling talent. Would that -- would these -- is that in this energy services area? And is it -- are these people in your points of differentiation? Or are they more of an opportunity to expand, I would say, maybe horizontally or with complementary services, if that makes sense? Bradley Vizi: Yes, that's a good question. Like, look, I mean, one of the nice things about services is to the extent that you meet -- it could even be one person, but you come across a set of very talented folks that you can bolt on, right, to your platform, the opportunity to grow within adjacencies is it's pretty clear. So the answer to your question is it's really both. And I attribute that to is we made a very conscious effort to get behind just investing in our brand in general. I mean, starting at the most fundamental level, it would be the website, our digital presence, LinkedIn, et cetera. I mean, it's a night and day difference if you look, call it, 18, 24 months ago. And one of the nice things about the times we live in right now is the ability to reach like folks in a relatively targeted manner, it's very cost effective. If you have somebody that's very talented about the techniques associated with that, I mean, the costs are relatively de minimis. So it's really, again, some of the investments we've made over the last several years with respect to that technical foundation, really building a substantial reputation in the market, not just as an emerging player. I think it's very fair to say at this point, we're firmly in that Tier 1 bucket and just making sure you're front and center with respect to that target candidate pool and that digital presence in particular. William Duberstein: Great. That's all good stuff. And then just a couple of small housekeeping items. I guess you mentioned the summer was a little slow for healthcare. You always see the seasonality down with school. So with the slow start, which has since recovered, would that be in -- was that in the non-healthcare portion of the business? Or was it schools sort of taking their time ramping up to seeing what they need for the new year? Kevin Miller: Bill, it has more to do with -- so when schools go into the summer session, right, they have kids in the schools, right, obviously, at a much, much lower rate than the primary school year. So our business doesn't go to 0 in July, which all of our schools are closed. And then some start to open up in early to mid-August and some closed in early May all the way through late June, right? So you see softness in June, July and August relative to the other 9 months. But the schools still use our services. But it just depends on how many of our kids are doing summer session. And it's pretty hard to predict. We see a lot of randomness in it from year-to-year. And for the level that we're at today in terms of the number of people and the number of contracts and all that, we expected to see more revenue coming from our school clients in July and August than we actually got. And I don't attribute that to anything but sort of randomness, right? Because once the school year started to kick in, in mid-August and really kick in, in September, we saw great results. So the results for Q3 for healthcare a little -- overall are a little bit lower than what we expected to see because we did expect to see some nice growth in September, which we got. We just expected revenue to be a little bit higher in July and August than it actually was. Does that make sense? William Duberstein: Yes. Got it. So there are basically fewer students than you thought in your client schools over the summer. Kevin Miller: Fewer of our students and our schools just needed less people than we thought. It's a combination of fewer of our students that we had the previous year and maybe fewer people taking off of the summer at the schools, but it just wasn't as great as we thought it would be. William Duberstein: Got it. That makes sense. And then final thing, just back to the healthcare costs. Are you guys self-insuring now? And just given the last 2 years, would you think of maybe changing strategies just given the size of the company? I think you're looking to maybe change something with the strategy there. So I just wasn't sure. Kevin Miller: Yes, we're always looking to tweak our medical plans to bring those overall costs down, not only because we want lower cost for the company, but we -- more importantly, we want lower cost for our employees. And we can attract more people when we have lower cost options available. But to answer your question, yes, we are self-insured. And I think you were asking me if we would consider going fully insured and the answer to that question is no. Because as bad as our medical costs were the last 2 years, they would be even higher if we went fully insured. Because when you go fully insured is -- there aren't many companies -- we're not a big company, obviously, Bill, but we're plenty big enough to -- where the decision is pretty easy, self-insured versus insured. And as you can probably imagine, when you go self-insured, insurance companies, they're building all that risk into that premium and all that profit. So it just -- it doesn't make any sense to go self-insured at our size. If you have like maybe like 100 covered lives, then the fully insured model makes a lot of sense if you're a smaller company, right? But when you have like 800 or more, which is what we have, it's really a no-brainer to go with a self-insured plan. Operator: All right. Next up, we have Liam Burke of B. Riley Securities. Liam Burke: On engineering, the gross margins were well within your stated range, but down lower year-over-year. Is that just a larger contribution of engineering where you have lower gross margin, but you make it up on the SG&A line? Or is there anything else in there? Kevin Miller: Well, like we discussed on previous calls, you're going to see a fair amount of variation to our gross margin in our engineering group. And it has to do with revenue mix and it has to do with how much of our activity is conducted by our subs in a given quarter, right? So we don't make the same profit margin -- the same gross profit margin on our subs that we do on our salaried employees. And then our Aerospace is a little bit lower gross margin than, say, Energy Services or Industrial Processing. And then Industrial Processing has had some randomness to their revenue, which impacts the gross margin as well because we have a sort of a fixed direct cost base there. So there's just a bunch of factors that contribute to the randomness, which is why, at the end of the day, we focus on gross profit dollars. I mean, obviously, there's a correlation -- and obviously, we want to maximize gross margin. But for us, it's focusing on driving and growing gross profit dollars for our engineering group. Liam Burke: And on Specialty Healthcare, you're getting further penetration with your existing schools. You're acquiring new customers. Is that -- are there other areas you can replicate that business model? Or does it look like schools seem to be to fit your skill set here? Kevin Miller: The answer to that question is yes. There are other areas that we can replicate that model, and that's something we spend a lot of time thinking about. Obviously, our -- at our core, we're a school business, right? And we're really, really good at it. We think we're as good as any company, if not better. So we don't want to lose the focus that we have on schools because we're driving nice growth there. And what's great about the school business is it tends to be pretty repetitive, right? We very rarely lose clients, school clients. So we're going to continue that focus. But there are other areas that we're looking at. And Bill Sullivan earlier asked about some of our foreign nurses that are coming over. when they eventually get here, most of them are not going to go to schools. They're going to go to hospitals. Some will go to the schools, but a lot will go to hospitals because there's such a screening need for them. And that's an area where we have a little bit of advantage over the competition because we've been recruiting overseas for 25 years. I mean, we're experts at it, right? And we have a great reputation, and we have a great following in some of these countries that we recruit in. So to answer your question, we're always going to be focused on schools. We are looking at adjacencies. One of the things we've been kicking around, and this is just in a discussion level is possibly supplying substitute teachers to schools, even though that's not healthcare, but it's obviously not that big of a leap and the model isn't that different. We look at things like substitute teaching. We're in the -- we have a significant presence in the Philippines right now, and we're looking at -- and that's largely driven by our healthcare group, although our other groups are in the Philippines as well. We are looking at doing some potential outsourcing in the Philippines for clients in the U.S. for healthcare positions and other positions. So we're always looking for other avenues of growth when one of them becomes meaningful, we will certainly let you know about it. Liam Burke: Great. And just really quickly on capital allocation. You've got the revolver in place. You've got plenty of capacity. It provides you great financial flexibility. How do you balance available debt with your buyback program? Bradley Vizi: Yes. No, it's something -- it's front and center we talk about it a lot. I mean, as you see the last few years, I mean, we weren't at all shy about repurchasing shares. And with respect to valuation of our stock price, I mean, I think it's probably hard to make the argument that we're anything but undervalued materially, and that will take care of itself. I think just -- we're in a really good position right now where when you've taken out 45% of your outstanding, you have like 7.4 million shares outstanding. There's an argument for a baseline level of shares, especially when you have strong insider ownership float to be able to be freely traded and where institutions can get in and out and so on. And we're thoughtful about that. So it's just another dimension you weigh against just simply the valuation of your shares. So I mean, it's kind of a hindsight situation when you take out 45% of your shares and average cost of around $850. And when you're sitting around and sure you have a little bit of debt, right, from a capital allocation perspective. But you have the ability to delever relatively quickly and have no debt and maybe some cash. So I mean, I think really, we're in one of the best positions you can be from a capital allocation perspective is where you're always looking, right, but you really don't have to do anything. So open-minded with respect to a dividend. I've spent a very long time dealing with small cap companies and microcap companies I think there are good arguments against the dividend in certain segments of the market that might not exist in a much larger company. So it's something we think about. We haven't shut the door on it at all. But in the meantime, we can delever. And again, like we think about every aspect of that business is make sure we're prudent about our decision-making process. Operator: All right. At this time, there are no further questions in queue. Bradley Vizi: Thank you for attending our Q3 conference call. We look forward to our next update in March. Operator: And with that, ladies and gentlemen, this does conclude your call. You may now disconnect your lines, and thank you again for joining us today.
Operator: Ladies and gentlemen, welcome to the HOCHTIEF 9 Months 2025 Results Conference Call. I'm Serge, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mike Pinkney. Please go ahead. Mike Pinkney: Thanks very much, operator. Good afternoon, everyone, and thank you for joining this HOCHTIEF 9 Months 2025 Results Call. I'm Mike Pinkney, Head of Capital Markets Strategy. I'm here with our CEO, Juan Santamaria; and our CFO, Christa Andresky; as well as our Head of IR, Tobias Loskamp; and other colleagues from our senior management team. We're looking forward to taking your questions. But to start with, our CEO is going to run us through the details of another strong set of HOCHTIEF numbers, our guidance increase and provide you with an update on the group's strategy. Juan, all yours. Juan Cases: Thank you, Mike, and thank you, everyone, and welcome to everyone joining us for this results call. HOCHTIEF has achieved an outstanding performance during the first 9 months of 2025. The successful implementation of our growth strategy is reflected in the group's strong and sustainable financial performance. We are delivering significant sales growth, rising margins and a positive evolution of the group's derisked operational profile as the proportion of advanced tech projects continues to increase. Due to our expectations of a Q4 acceleration, we are raising HOCHTIEF's operational net profit guidance for 2025 to EUR 750 million to EUR 780 million versus the EUR 680 million to EUR 730 million previously. The new range implies a year-on-year increase of 20% to 25% compared with EUR 625 million in 2024 and versus the previous indication of an increase of up to 17% year-on-year. The higher net profit expectation for the group are driven mainly by the outperformance of Turner, where we now anticipate an operational PBT of EUR 850 million to EUR 900 million in 2025 compared with the previous guidance of EUR 660 million to EUR 750 million. In addition to achieving a strong financial performance during the first 9 months of the year, we have made further important advances on the strategic front. We are increasingly harnessing our geographic footprint and engineering know-how on a group-wide basis to access additional growth and value creation opportunities. Before providing you with an update on the strategic front, let me give you an overview of the key numbers. Group sales during the first 9 months of the year increased by 24% FX adjusted to EUR 28.1 billion, driven in particular by the group's focus on its strategic growth markets. HOCHTIEF's operational net profit rose by 19% to EUR 537 million or plus 26% FX adjusted, above the top end of the 2025 guidance range we provided at the start of the year. Nominal net profit stood at EUR 656 million. Operating cash flow last 12 months of EUR 2.1 billion shows a strong performance, up EUR 400 million year-on-year pre-factoring, driven by a sustained high level of cash conversion and supported by firm revenue growth and margin expansion. The first 9 months of the year incorporate the characteristic impact of seasonality during the first quarter, but show a $163 million increase in net operating cash flow year-on-year adjusted for factoring. Adjusting for capital allocation effects, net cash would show a strong EUR 1 billion plus year-on-year increase. The movement in the group's net debt position since December 2024 has been driven by strategic investment decisions and their consolidation effects as well as seasonal factors. The new orders level of EUR 36.6 billion represents a significant rise of 19% year-on-year, adjusted for FX effects with all operating segments reporting increases. New work includes important project wins in our strategic growth markets such as advanced technology, critical metals, energy and sustainable infrastructure. On a last 12 months basis, new orders represented 1.2x work done, giving you a sense of the continued growth trajectory. At the end of September 2025, the group's order book stood at EUR 70 billion, up by 12% year-on-year, FX adjusted. Now let's take a brief look at our performance at the segment level. Turner delivered an outstanding performance during the first 9 months of 2025. Sales increased by 38% year-on-year to EUR 18.8 billion, driven by very strong growth in data centers as well as high revenues in health care and education. The acquisition of Dornan Engineering, a rapidly growing advanced tech mechanical and electrical business included in the consolidated figures since January '25, further enhanced growth. Turner delivered very strong operational PBT, reaching EUR 629 million, an increase of 60%, supported by a further increase in the operational PBT margin to 3.4%, up 50 basis points year-on-year and driven by Turner's successful advanced tech-focused strategy. Turner's new orders in the period of EUR 23.4 billion showed a very significant increase of 21% year-on-year with particularly strong growth in data center contracts as well as increases in areas such as biopharma, aviation and commercial. As a consequence, the period-end order backlog of EUR 34.3 billion was 20% higher in local currency terms compared to September '24. Due to Turner's strong growth momentum, we now expect an operational PBT of EUR 850 million to EUR 900 million '25 compared with the previous guidance of EUR 660 million to EUR 750 million. The new profit range represents a year-on-year increase of between 49% and 58% compared with 2024. Moving on to CIMIC. CIMIC delivered a steady performance in the 9 months period. On a comparable basis, sales were stable year-on-year with operational PBT of EUR 351 million, up 3% or 10% FX adjusted. CIMIC's solid order backlog of EUR 23 billion was up by 3% FX adjusted with growth across several segments, including data centers, defense and sustainable mobility with a 4% increase of new orders in Aussie dollars. We expect CIMIC to achieve an operational profit before tax for '25 in the range of approximately EUR 480 million to EUR 510 million. Let's take a look at our engineering and construction activities, which continued their positive momentum during the first 9 months of the year. Sales of EUR 1.2 billion increased by 13% year-on-year, and operational PBT grew by 14% to EUR 61 million, both on a comparable basis. In the January to September '25 period, Engineering and Construction secured new orders of EUR 3.9 billion, 21% higher year-on-year, and this strong development supported a further increase in the order backlog, which showed a solid rise of 10% to EUR 12.2 billion. For '25, we continue to expect an operational profit before tax of EUR 85 million to EUR 95 million from the business. Next, we have Abertis, which achieved a solid operational performance in the first 9 months of '25. Average daily traffic at the Toll Road company increased by 2% year-on-year with revenues and EBITDA on a comparable basis, up 6% and 7%, respectively, reflecting a solid underlying business performance. The operational net profit pre PPA amounted to EUR 543 million, with the year-on-year variation, including adverse tax effects in France. The profit contribution from our 20% stake in Abertis after PPA amounted to EUR 48 million. Let me now give you an update on HOCHTIEF's strategic development. As a global leader in end-to-end advanced tech infrastructure projects, HOCHTIEF is in a unique position to benefit from multiyear demand for infrastructure investments driven by the megatrends of digitalization, demographics, defense, deglobalization and demand for energy. HOCHTIEF's strategy is focused on capitalizing on the very attractive opportunities in its strategic growth markets as well as increasing its share in the value chain by investing equity, applying its O&M capabilities and enhancing its engineering value proposition to drive margins and at risk financial profile. Furthermore, the group is combining its global footprint with its local presence and technological know-how to maximize its delivery capability. By leveraging shared digital platforms, procurement networks and design engineering capabilities across Turner, CIMIC and HOCHTIEF Europe, the group is delivering global scale with local excellence. Turning to our strategic growth markets. HOCHTIEF has taken important strides to further strengthen and expand its leading presence. We command a strong competitive position in the digital infrastructure and advanced tech sector. After the exponential surge we've seen over the last 2 years, growth in the global data center market remains very strong driven by soaring demand for cloud services and artificial intelligence. Data centers and compute CapEx in '25 is expected to reach USD 600 billion, double the 2023 level. Industry observers suggest annualized global AI infrastructure spend could reach USD 3 trillion to USD 4 trillion by the end of the decade. North America remains the largest data center CapEx market in the world, and we expect it to continue expanding at a 15% to 20% annual rate over the next several years. Turner's strong position with the leading hyperscalers give us outstanding visibility with major contracts identified for '26 and '27, driving revenue growth through at least '28. Europe is entering a period of acceleration. We're seeing opportunities that will convert into new orders in '26, fueling revenue growth in the following years. Asia Pacific is poised to be the fastest-growing region. We're seeing a sharp rise in investment driven by the rapid adoption of AI-powered technologies and the continued expansion of digital infrastructure across Southern and Southeast Asia. Across all regions, the story is the same. Demand remains high. Schedules are tightening and clients are turning to us because we can deliver more complex projects rapidly and at scale. HOCHTIEF has the capacity to address the strong sector demand growth through our global scale and ability to mobilize resources. This is complemented by our global sourcing capability through Source Blue and the use of modularization to deliver construction products more quickly, safely and with enhanced quality. The group has been awarded several new large-scale data center projects in the period, more than doubling the value of new orders secured in the first 9 months of '25, underscoring the group's leading presence in these strategically critical markets. In July, for example, the artificial intelligence hyperscaler CoreWeave announced its intent to commit more than $6 billion to create a new state-of-the-art data center in Pennsylvania, purpose-built to power the most cutting-edge AI use cases. The initial 100-megawatt data center with potential to expand to 300 megawatts will be delivered by a Turner JV. Earlier this week, OpenAI, Oracle and Vantage as part of the USD 500 billion Stargate program announced a USD 15 billion data center CapEx in Wisconsin, where Turner is one of the selected construction managers. And in Asia Pacific, we have been awarded projects in Malaysia and Singapore, adding to Leighton's Asia expanding portfolio of data center developments in the region where it is also working on or has completed work in Hong Kong, Indonesia, Thailand, the Philippines and India. The group is also advancing in the semiconductors area as a strong demand for AI and increasing digitalization drive investment levels with double-digit growth expectations going forward. Together with the reshoring trend, this is producing a rapid increase in semiconductor-related opportunities. As part of the strategy to expand the group's presence in the entire AI ecosystem, HOCHTIEF aims to establish a pan-European network of sustainable edge data centers. In September, we announced the integration near Essen of the first YEXIO branded edge data center developed, owned and operated by HOCHTIEF, a major milestone for the group's data center strategy. The previously created joint venture Yorizon will operate HOCHTIEF's edge data center network with innovative cloud computing solutions that support digital sovereign net. Another 4 edge data centers are currently being developed in Germany with several further sites identified. Furthermore, HOCHTIEF is looking to expand the business into other European countries, including Austria, Switzerland and the U.K. Energy-related infrastructure is another strategic growth market for HOCHTIEF with substantially rising demand driven by the global energy and supply security needs. HOCHTIEF is strategically focused on building the infrastructure that underpins a low-carbon future from electricity generation and storage to transmission and advanced technology. The company is embarked in projects as a high-voltage transmission upgrades, regional electricity fortification and the delivery of firming assets that strengthen the grid. In October, HOCHTIEF secured a major nuclear and civil works framework contract worth up to EUR 685 million as part of the infrastructure delivery partnership at the U.K. Sellafield site. The alliance style contract lasting up to 15 years involved design engineering and delivery of civil infrastructure works in support of nuclear operations and decommissioning in collaboration with Sellafield and its partners. This strategic long-term partnership reinforces HOCHTIEF's unbroken legacy in the nuclear sector since the 1950s as a trusted partner in engineering and construction for some of the world's most critical nuclear programs. HOCHTIEF has several decades of experience designing and building nuclear power plants and facilities across the world for renowned global energy companies like RWE. We deliver end-to-end services across nuclear market, and we are well positioned to support the deployment of best-in-class small modular reactor technologies. As these technologies evolve and emerge, we're leveraging our global project and engineering capabilities for new build, SMRs, storage and dismantling in an industry, which could see over $500 billion in investments in Europe by 2050. If we turn to renewables, we represent an ever more important energy source. Battery energy storage systems are becoming a crucial element to balance electricity networks. Global BESS capacity is expected to rise by 67% in '25 to 617 gigawatt hours and to tenfold by 2035. In Australia, for example, CIMIC subsidiary UGL was again selected by Neoen, a world-leading producer of exclusively renewable energy and Tesla, a global leader in battery storage and sustainable energy solutions to construct another battery project of 164 megawatts near Perth. The battery is Neoen's first 6-hour long-duration storage asset and will be equipped to support the region's energy reliability and a greater penetration of renewables into the energy mix. Investment in transmission and distribution networks is set to grow strongly in coming years as renewable power supplies an increasing proportion of electricity generation. Overall energy demand is being boosted by the exponential growth in data centers, electric vehicle usage and other megatrends. The group is strongly positioned in Australia, where CIMIC JV is delivering the 148-kilometer HumeLink West project, which will form the backbone of the power transmission network from South Australia through to Northern Queensland. In the U.K., the HOCHTIEF JV is currently completing a 32-kilometer power supply tunnel for the energy supply of London as well as a power supply project in Wales, and we are also very well placed in other markets such as Germany, which is seeing substantially higher grid investment. Global demand for critical minerals and mineral resources is set to increase significantly as a consequence of the exponential growth of clean energy technologies, digital infrastructure and defense investments. HOCHTIEF has developed a unique position in critical minerals globally, primarily through Sedgman, integrated minerals processing solutions and Thiess global mining services, and is growing its geographical footprint and scale. During the period, Sedgman, which has over 100 critical minerals engineering projects globally started work on an innovative critical minerals processing project in Queensland for vanadium and other rare earth metals as well as a 5-year gold project contract extension in Western Australia. Last month, Leighton Asia secured a 3-year extension to an asset integrity contract in Indonesia for critical production assets to extract nickel, a key component in battery technologies and high-performance alloys. Furthermore, we're also carrying out a process design and project implementation for a copper zinc plant in Western Australia, a 3-year nickel and copper's full-service mining project in Ontario and a 4-year contract to deliver on the ground services at a copper mine in Queensland. HOCHTIEF through Sedgman is also expanding its European footprint in critical minerals. We've been working in Germany with Vulcan Energy on the EPCM validation of what will be the Europe's largest lithium extraction plant. The company's integrated lithium renewable energy project will allow it to deliver a local source of sustainable lithium for the European EV battery industry enough for an initial 500,000 electric vehicles per annum. The awarding of European Union strategic project status under the Critical Raw Materials Act highlights its transformative potential for Europe's clean energy future and lithium independence. And Sedgman has also won a contract to provide a feasibility study and front-end engineering design work for a major lithium project in France, and we're also currently working on or have worked on a number of other lithium projects and studies this year in Portugal, Brazil, Australia and Canada. Global lithium demand growth is expected to fivefold by the end of the decade, pushing the market into deficit by the 2030s, and our natural resources company, Thiess has been awarded a contract extension for mining and asset management works at a magnetite mine in Western Australia. The project is a key part of Australia's iron ore export profile, introducing magnetite, a premium product line with lower inherent emissions and which supports our ongoing strategy to diversify our commodities portfolio. Investment in defense infrastructure is expected to substantially increase globally. HOCHTIEF sees this sector as strategically attractive due to the synergies with the group's leading position in civil works, its engineering capabilities and its sector presence in Europe, the U.S. and Australia. Furthermore, and supported by our key security credentials, the visibility afforded by multiyear public investment plans supports the group's long-term strategy of sustainable value creation. We delivered projects for ministries of defense, police agencies and border authorities across our geographical footprint. At the end of the third quarter, the group had a defense order book of around AED 2 billion. In September, for example, civil company CPB contractors began building works for a Royal Australian Air Force base in Queensland and defense infrastructure upgrades in South Australia. These contracts continue the long-standing partnership between the groups and the Australian Department of Defense and support the objectives of the country's defense strategic review. Australia plans AUD 765 billion in defense spending over the next decade, increasing by AUD 70 billion in the upcoming years. In the U.S., the FlatironDragados joint venture is leading the construction of the dry dock at Pearl Harbor, this project is part of the U.S. Navy's Shipyard Infrastructure Optimization Program, which is modernizing government owned and operated public shipyards. Furthermore, Turner's offered Air Force base flood recovery program in Nebraska is progressing strongly. In Europe, major multiyear defense investment plans, including in Germany, present substantial opportunities in defense-related capital works and potentially via the PPP model. In October, for example, the German Defense Minister announced plans to quickly construct 270 new barracks for the Armed Force starting in '27 based on a modular construction concept in order to accommodate a significantly growing active force in reserve. HOCHTIEF's more mature core infrastructure business remains a solid foundation underpinning the group's growth strategy. Turner was again named ENR's top U.S. general contractor, holding leading position across 13 segments, including health care, aviation and data centers. During the quarter, Turner began work on the 46-story 343 Madison Avenue Tower in New York and was selected alongside AECOM Hunt to deliver the USD 2.4 billion Cleveland Browns Stadium. Other major projects for the group include the Metropolitan Museum of Art expansion and aviation upgrades at L.A. and Memphis airports, underscoring our continued leadership in high complexity sustainable projects. The group has been a global leader in transport infrastructure and sustainable mobility for several decades. The outlook for the sector is very positive due to several infrastructure stimulus packages in key geographies. In Germany for instance, in Germany, the EUR 500 billion infrastructure fund approved by the Bundestag Parliament this year will see its first full year deployment in '26 when federal investments are budgeted to rise to a record level of EUR 127 billion, steep increase compared to the around EUR 75 billion level in '24. Furthermore, the current coalition has provided visibility for this record investment level to be sustainable over the coming years. HOCHTIEF is well positioned to benefit due to the scalability of its business model and its core expertise in bridges, tunnels and rail as illustrated by the EUR 170 million rail infrastructure contract win to modernize a section for Deutsche Bank as part of the integrated plan to upgrade the country's rail network. The HOCHTIEF joint venture was also recently awarded a major contract for the construction of the second main line of the S-Bahn rail network in Munich. Overall, during the last 3 years, our order book for German projects has almost doubled to EUR 5.2 billion, and we expect it to continue to rise. Let me turn now briefly to capital allocation, where shareholder remuneration continues to be a key priority for HOCHTIEF. We regularly assess strategic M&A opportunities with our capital deployment focused on growth markets such as digital infrastructure, energy transition assets and concessions. HOCHTIEF's solid balance sheet, strong cash flow generation and increasing revenue profile supports the group's strategic expansion in these high-return areas. Earlier this year, HOCHTIEF closed approximately EUR 400 million for the acquisition of Dornan, marking a major milestone, which will enable the group to accelerate Turner's European expansion strategy. The start of the year also saw the completion of the FlatironDragados transaction, creating the second largest civil engineering and construction play in North America with an unparalleled track record in delivery of large infrastructure projects. HOCHTIEF holds a 38.2% equity consolidated stake in the new business. In October, a EUR 400 million capital injection was approved for Abertis with HOCHTIEF subscribing its EUR 80 million contribution to support the growth of the international toll road operator. In addition to M&A, we also continue to develop and invest equity in greenfield infrastructure projects in strategic growth areas where we see significant value creation opportunities. In Australia, for example, we're further leveraging the group's capability and leadership position in data centers after the acquisition last year of a site to develop a facility with a 200-megawatt capacity. CIMIC also is investing in and developing renewable assets, transmission lines, grid enabling infrastructure and battery energy storage systems. In Europe, we're investing in a network of edge data centers, as I mentioned earlier, and we continue investing in other core infrastructure via PPPs. Another increasingly important pillar of the group's strategy is the adoption of AI at scale across the group, which is allowing us to enhance the value we offer for our clients whilst also improving productivity and safety. Focus on optimizing our core tech platforms and systems as well as supporting our talent management, AI and digital systems are transforming how we work. For example, autonomous drones and AI-powered image analysis now enhance site safety and planning. Digital tracking platforms streamline workflows and provide real-time transparency into progress and resources. And custom GPTs are simplifying daily operations, while our production control system standardizes delivery and reduces operational risk. The group's focus on environmental, social and governance priorities remain on track. On this front, it is notable that HOCHTIEF was awarded prime status for its ESG performance and achievements by ISS, the International ESG Consultant and rating agency. So let me wrap up. The HOCHTIEF numbers published today show an outstanding performance with a 19% increase in operational net profit to EUR 538 million backed by strong cash conversion. New orders have strongly increased, up 19% FX adjusted to over EUR 36 billion with a period-end order book of EUR 70 billion, which is 12% higher year-on-year and with over 85% of this backlog lower risk in nature. HOCHTIEF's growth trajectory is a consequence of our strategy to first reinforce and expand our presence in key growth markets such as digital and advanced energy, defense and critical minerals, which will provide long-term cash flow visibility for the group; two, harness our geographic footprint and engineering know-how group-wide; and third, further leverage our competitive strength. We will continue to deliver on our strategy underpinned by our solid balance sheet and derisked order book. And as indicated earlier, we're raising HOCHTIEF's operational net profit guidance for '25 to EUR 750 million to EUR 780 million, implying a year-on-year increase of 20% to 25% versus the previous indication of an increase of up to 17% year-on-year. Thanks, everyone, for listening and happy now to take questions. Mike Pinkney: We're ready for questions, operator. Operator: [Operator Instructions] And we have the first question coming from Luis Prieto from Kepler Cheuvreux. Luis Prieto: I had 3 questions. The first one is you have raised the guidance for Q4 for the full year on an accelerated rate of growth for Turner in Q4 that I would assume should continue next year and potentially much longer. Could you help us quantify Turner's actual earnings potential in the medium, long term? You talked about all the opportunities, and that's extremely useful. But can you quantify over the longer term? And in this context, what do you think is the right multiple to use for the valuation of Turner? The second question is that I would expect you to cover this in next week's Investor Day, but let me squeeze in this cheeky question now. How should Turner benefit from ACS' data center development activities? Should I assume that everything will be built by Turner for ACS? And the final question and even cheekier than the previous one. Would it make any sense now that things are going pretty well and the momentum has accelerated, would it make any sense to list Turner in the U.S. market as an independent company? Juan Cases: Thank you so much, Luis. So let me start with the first one. So yes, we have increased guidance. Turner is overperforming. Certainly, they are increasing margins. They increased -- they achieved 3.4% in the first 9 months period. We expect Q4 to get to around 3.7%. So basically, the 3.5% margin average that we announced for '26, it's happening in '25, and we expect further growth in '26. So again, we expect further growth in '26 and '27. I mean, as much as we have visibility, we see growth in both revenues and margins. And also, and I link to your second question, they will get the benefit on top of this of the ACS data center platform. So in general, that is very positive. Turner is helping significantly the development in data centers of the rest of the company, FlatironDragados, HOCHTIEF and CIMIC. So Turner is contributing to that, not just through knowledge, supply chain, but also client relationships. So that also is going to help. Now giving a guidance of how much is hard right now, and probably I shouldn't. Are we talking about double digits, for sure, right? Now how much? I don't dare to provide a guidance. I prefer to follow the right milestones at the right time to be providing guidance. But certainly, we're optimistic about Turner performance, and that will continue. There's no doubt looking at the market and the visibility we have right now at Turner. Listing Turner in the U.S., so at this stage, we -- I mean, we are not -- I mean, we are considering all options. We don't have a plan, but we are not rejecting any possibility, but not much I can say at this point. Operator: The next question comes from Marcin Wojtal from BofA. Marcin Wojtal: Firstly, regarding your, let's say, strategic update, you mentioned that you're open to strategic M&A and bolt-on M&A. Is there actually something new in that message? Are you more actively looking for opportunities? That would be my first question. Second, can you indicate what percentage of the backlog of that EUR 68 billion, I believe, or EUR 69 billion that is actually in data centers? And do you have data center exposure and anything meaningful as well outside of the U.S. in terms of backlog? And maybe my question number three, in terms of cash flow, Q4 last year was pretty strong, right? But should we expect a repeat? Should we expect a similar performance in terms of cash flow in Q4? Or it was a bit exceptional in Q4 last year? Juan Cases: Thank you, Marcin. So let me start with the M&A. No, it's not a new message. It's not a change in strategy. Let me go again through the same strategy when it comes to capital allocation and M&A for the last 3 years, right? Two types of investments. The first one is everything that is infrastructure. greenfield, especially and brownfield, specifically in Abertis that give us sustainable EBITDA and dividends, right? That's where we put anything that is a PPP, and in North America, that's where we put our data centers or specific industrial opportunities at dock, right? Nothing changes. This is the, call it, development infrastructure, what we've been doing for the last 50 years. The second one is the bolt-on acquisitions, right? When you look at all what we've been doing in the critical minerals space this year, and I provided a lot of examples, right? All of that has been possible because of the acquisition of Prudentia, MinSol, Novopro, PYBAR, Mintrex, all of that. And we've been announcing a lot of different acquisitions, very small in nature, but very, very relevant in terms of knowledge, right? All of that is what allow us to be going through all these projects with lithium, rare earth, vanadium, nickel, gold, copper, mineral sands, and some of these projects are becoming EPCM opportunities. One example that we believe could become an EPCM opportunity is the Vulcan project in Germany, where we've been working 3 years on the engineering and now it could potentially become a big EPCM, right? So that's -- at the end of the day, that's the end game. And when you look at critical minerals, we have more than 100 projects of engineering developed by us as we speak that could potentially turn into EPCMs or not, right? So this is why it's so important the bolt-on acquisitions. Now this is the example in critical minerals, but in data center, Dornan was another example. And potentially, we will need to continue seeing other opportunities. That on the engineering space. On the metal and minerals capabilities that is also needed for some of these balance of plants, you look that we have been also making some progress. I mentioned Mintrex was one example, but you've seen other, so we're not talking about very big opportunities. We're not talking about anything crazy, but it's very, very strategic, and little things can provide big multipliers for us, and if you analyze individually every bolt-on acquisition that we've been doing in the last 3 years, you take a look at them individually, we have multiplied from 2 to 3x EBITDA almost each month, right? So this is key. Now asking about backlog data centers, it's USD 12 billion in the U.S., USD 2 billion out of the U.S., more around CIMIC, mainly a little bit in Europe. But we are going to see -- well, first in the U.S. will continue to grow. I do not dare to say for how much, but significantly. But we expect a lot of growth in Europe and in Asia Pacific, right? So we do not see a limit to the data center strategy as much as visibility we have in front of us. And then when it comes to the cash flow, I mean, we are quite comfortable with the full year 2025. We expect strong delivery in cash conversion and the fourth quarter cash flow providing the characteristic strong seasonal performance. So yes, we are very comfortable in that sense. We're not expecting anything different. Operator: The next question comes from Dario Maglione from BNP. Dario Maglione: Congratulation for the great momentum. First question, actually, you mentioned the order backlog in data centers for 9 months. Could you actually repeat that number and confirm whether it is USD or euros? Second question kind of related to what was the order intake in data centers Turner in Q3? And maybe last question, looking medium term, so '26, '27, still remains quite impressive, the growth in data centers that Turner is achieving. Do you see any shortage in skills and labor or anything, any other bottleneck that we should consider that could be -- that could limit the growth rate in the medium term? Juan Cases: Good question, Dario. Can you repeat the second question? I didn't get it. Dario Maglione: Yes. The order intake for data centers in Turner in Q3. Juan Cases: Okay. So let me start with the first one. I think that you were asking -- I mean, the figures that I gave you before are in euros, the EUR 12 billion and the EUR 2 billion in euros, okay? Then we get into the order intake in Q3. I don't have in front of me. Let me see if we have it. If not, I'll send it to you, right? But I mean, certainly, we are -- I think that it was more than doubling what we had, but we can provide that figure exactly to you. So now any short-term skills or bottleneck? We're not seeing that at the moment. At the end of the day, the key for a lot of what we do is, first, our -- I mean, availability -- I mean, there are a few things that I believe give us an opportunity or gives Turner or gives us globally an opportunity, right? At the end of the day, the potential constraints in any market, it's always availability of skilled labor, the availability of material equipment and the speed to market, right? These are typically the 3 things that could jeopardize the growth of any sector. Why we believe that we are very uniquely positioned to navigate those 3, right? So let's start with the first one, right? Availability of skilled labor. The beauty of our 150 years managing civil works and general building that's exactly our specialty. That doesn't say that it's easy to get people. But certainly, that's one of our biggest advantages, right? A lot of the big projects we're getting, let me give you the example of Louisiana, but also the latest one awarded as part of the target program in Wisconsin or the one in Ohio or some of the big projects we're doing in Australia is because we have the ability to provide lots of people in a very short period of time in remote locations, right? And that's as important as having the engineering knowledge and as important as having a supply chain. So it is very important. The other thing that is key is what we've been doing with Source Blue on the global sourcing expertise, which has a lot of different components. The first one is hundreds of dedicated supply chain experts that are always stabilizing and accelerating the supply chains, but also access to very -- to manufacturing of specific components to make sure that they are -- I mean, that they are delivered on time at any given time and do not rely on international global supply chains. But also, a big part of what is coming is not just supply chain engineering and mobilization is the ability to start modularizing and manufacturing of site a lot of these things. And that's where we are putting a lot of strategy globally, right, not just in the U.S., but we are I mean, I will advance at some stage what we're doing in that sense, but that's also allowing to build more faster and attract more revenues and larger margins, and that's an important part of the strategy. Most of those workshops are being reconverted. It's not new workshops. We have those workshops. They used to be for precast facilities. They used to be for girders. They used to be for rings in tunnels, and now we're going to be using them for advanced technology building manufacturing, whether it's data centers or semiconductor fabs or we're talking about battery fabs, defense barracks. I mean there's a lot of different things that we can apply those, and we are putting a lot of effort into that sense. So overall, I would say that we are in a good position, and I think that I did answer the 3 questions. Operator: The next question comes from Filipe Leite from CaixaBank BPI. Filipe Leite: I have 2 questions, if I may. First one, if you can give us an update on sale process of the Transportation division of UGL in Australia? And when do you expect to have it completed? And second question on CIMIC and because sales and EBITDA drop in this quarter, how do you see CIMIC business evolving in the next quarter and during next year? Juan Cases: Okay. So starting with UGL transaction, that continues evolving, I think, in a good way, nothing we can announce at this stage, but we're comfortable the way it's going. And CIMIC, how do we see that evolving? So let me talk a little bit about CIMIC. So when you look at CIMIC, growth, if you just look at the reported PBT, FX adjusted CIMIC would have grown 20%. If you don't look at the FX comparison, then it's about 12%. If you look at the comparable, which is the one we should look, FX-adjusted growth would have gone from 3% to 10%, right? So this is relevant because it's true that you cannot compare with the growth of Turner or the growth that we're expecting potentially for '26 in Germany, right, that we are doubling work in hand, and that's going to continue to increase. But we are seeing in CIMIC 2 offsetting market trends. The first one is -- and that explains part of this slow growth. One is the transportation infrastructure in Australia that is coming off, and -- number one. But number two, we are not pursuing a lot of the projects because we are focusing on lower risk product opportunities, and you see that in the slower growth when it comes to civil and transport, and you see that in the unwinding of our net working capital in Australia, coming 100% from that, right? The Leighton Asia is performing, increasing growth income of new orders, cash flow, same thing UGL, Sedgman, but CPB is consuming a lot for all the reasons that I explained. On the other side, the big increase that is going to be bringing the region will come from Leighton Asia and will come from UGL, and it's not at peak, right? I mean, Leighton Asia sales have increased 66%. So we're comparing with the same level of Turner. The only thing is that the volume is still low. We are expecting that to grow. And UGL that is working a lot of the energy projects that there has been some delay. But I believe that, that will come back. So overall, I would say that the big next thing in terms of growth could potentially be Germany, but I do think that Australia is next. Now I'm comfortable that this will start happening soon. But again, we are making sure we -- we're making sure that we derisk the balance sheet. Operator: The next -- we have a follow-up question coming from Dario Maglione from BNP. Dario Maglione: Okay. Actually, two, if I may. First one is on margin for the data centers. How do they differ compared to a typical margin on nonresidential construction in the U.S. like very ballpark figure will be helpful to understand the opportunity for margin expansion at Turner. And second question regarding Germany. You mentioned a doubling working end. What do you think -- is this coming -- I mean, do you already see a positive impact from the German infrastructure fund? Or do you think that this will come later on top of the growth in the market? Juan Cases: Thank you. So let's start with data centers. I mean, unfortunately, it's very difficult for us to give specific margins on projects and sectors, basically because it could jeopardize a lot of our day-to-day commercial activities, right? And also it changes a lot. It's not the same -- every sector or even data centers, it depends a lot on the risk profile of the project. It depends on the relationship with the client. Some clients, they give you permanent orders for their expansion to secure their time to market, and there's a relationship. So typically, I mean, there's a trust relationship with lower margins because it fits you with a lot of work. In other cases, there's a unique one-off opportunities, which probably are considered in a different way, and there's as many -- I mean, prices are complex, different complexities, et cetera. Overall what I can say and putting aside data centers, but in general, that a big part of the increase of Turner's margin is being the delivery of high-tech projects. That's a change. That's what has gone from the type of margins that Turner had a few years ago with the ones we have right now, have come from in the extreme 1-point something or even 2-something 3 years ago to where we are right now of finishing the year of 3.7% and growing next year, right? So all of that is the composition. Now if you look at Turner, right now, backlog, 32% -- sorry, 32% of the backlog is data centers with another 4% in biopharma and another 5% in our high tech. So we're still low in the most advanced technology projects, and that's going to continue changing, right? So that percentage will continue growing. Source Blue as a supplier of services that has high margins will continue growing, and all of that is what is driving the overall margin of Turner. And then when it comes to Germany, so the EUR 500 billion infrastructure fund will see the first full year deployment in '26. So the federal investment is budgeted to rise to a record level of EUR 127 billion, and that compares with the EUR 75 billion level in '24. All of that is going to be driven mainly on rail through Deutsche Bahn, on highways through Autobahn and defense, right? So transport infrastructure is a major contributor or will be getting a lot of these investments. And the coalition government has recently reinforced their willingness to accelerate transport infrastructure spending by creating an extra EUR 3 billion funding on top of what it was already -- what I already mentioned, right? So there's a strong pipeline of opportunities, and I do think that, that will start getting reflected in the HOCHTIEF P&L in the coming years, right? Now also in that budget for '26, there's a significant spending by NATO, and that is also, I mean, as I said before, going through defense, but potentially other nondefense projects, but anyway, we'll be looking at that. But Germany, I mean, I believe, I'm optimistic and especially to HOCHTIEF infrastructure, that we will see the effects of all what I just mentioned through its books very, very soon. Operator: Next question comes from Nicolas Mora from Morgan Stanley. Nicolas Mora: Just a couple. So starting with -- maybe with the guidance upgrade. So I think at the midpoint, you're increasing your operating net income by around EUR 60 million, 6-0. But you basically upgraded Turner's guidance by EUR 120 million. So I was just wondering where the delta, the EUR 60 million have gone. It seems there's been quite a lot of rise in overhead costs. Is that down to new projects or especially in the data center space? So that's question number one. Question number two, outside of advanced tech in the U.S. at Turner, how do you see the rest of the, let's say, more plain vanilla market going? I mean, you've booked a few large tower projects, more in sports and leisure. I mean what's doing well? What's struggling? I would be interested to get a little bit more color on the non-tech side of the business. Juan Cases: Thanks, Nicolas. So let me start with Turner guidance versus the overall guidance. So well, I mean, I'm sure you realize, but the Turner guidance is an operational activity guidance from which taxes need to be deducted. But at the end, the difference between -- in addition to what I just said, there's the FX impact from CIMIC Asia Pacific and Australia region, which obviously comes to play. We had an increase in Turner, offset by some FX impact, but we had a deterioration in some of our business from an FX perspective, and there's other consolidation. So there's around EUR 20 million just from CIMIC Flatiron that you have to take into account just from an FX perspective, and then we have provided an overall assessment, right? At the end, guidance are guidance, so we always need to be careful with what we say. Now when we get into the other, what else besides data center? So let me give some figures specifically for the U.S. market. I think you're referring to the U.S. market. If not, let me know. But yes, the data center market in the last 9 months has grown the order book, 111%. So that's like EUR 14.2 billion. New orders have grown 141%. But if you go to biopharma, and yes, we were talking about lower figures, but new orders in biopharma have reached 400% increase and an order backlog of 234%. Now we're talking about much lower figures, but that shows that there is a big increase and it's going to continue ramping up. The other areas where we are seeing growth in the U.S. is the commercial market. So 12% order book increase. The aviation market with 17% in the order book or 28% in new orders. Sports have increased by 25%. So we saw -- sorry, hotels, plus 21% in order book. What are we seeing going down? So the battery market, we continue seeing that absolutely stopped, right? We -- I think that is minus 58%. But this is a timing effect. Eventually, the battery fabs and the battery projects, and I'm talking about battery fabs, will need to come back, right? It's a matter -- there were a lot of investments in EV vehicles. Demand is not there. All of that is driving all of that supply/demand have to adjust before all of that continues. But if you add all the future plans of all the EV vehicle producers, there's significant spend. The question is that they will continue delaying until demand supply stabilizes. Then we get to semiconductor market. There's -- that has stopped significantly or slowed down, but we are waiting. We're waiting on 5 projects. We're waiting on 5 projects for the clients to get financing, and that there's geopolitical discussions around it, and obviously, there's funding allocation. So we are waiting. Manufacturing is more or less stable, more or less. Health care, not the biopharma part, but the hospitals, we're seeing it at least in the first 9 months going down by 18%, first time that we see that going down. So probably that will change. Education, our new orders were minus 4%. I mean, not a big number, but went down minus 4% and Public/Justice market, a little bit down, minus 18% on the order book. And so yes, that's more or less one by one. Operator: The next question comes from Alvaro Lenze from Alantra Equities. Alvaro Lenze Julia: Just one. I was just thinking on -- you mentioned scalability and flexibility, and I think there is some concern from investors that there is right now a big investment cycle, especially in data centers. I know that right now, it seems like those should continue to increase over the coming years. But I just wanted to know how flexible is your workforce to change activity, imagine if in the future, the investment in data centers goes through a downturn, can it be shifted to other sectors? Or is the capabilities you have are very sector specific to data centers? I wanted to know how scalable and flexible are you both on the way up as you are demonstrating now or on the potential way down in the data center space in the future? Juan Cases: So let me -- well, first of all, thank you so much, Alvaro. Let me answer the question in 3 different ways, right? The first one, a very straight answer. We do have flexibility. At the end of the day, the same flexibility that we've shown moving people from certain projects into our projects. So it will work in the other way, right? So a lot of our people right now working in data centers, we are getting from other sectors and other fields. That's one of the reasons, there's multiple reasons why we put together the ACS University. But one of the reasons is has a very well structured plan of training people from different jurisdictions, different companies, different parts of the world from one sector to different sectors. So we have accelerated training programs for people, if you are going to jump into a semiconductor fab or you're going to jump into a big data center or you are going to jump into a battery, into nickel, so we have special programs that will move people around with special visas with a lot of investment. So this was one of the few reasons why we put the university, right? The university is -- it has a lot of different angles, right? Now let's talk about the investment cycle. I'm going to give my personal reflection on the cycle because, yes, we're talking about trillions and from every day, people say, well, it's going to be more trillions or less trillions or 20% more, 20% less, 50% more, 50% less. For us, 10% of infinite, it's infinite, 20% of infinite is infinite, right? I mean they are talking about so many trillions that it doesn't matter for how much you divide that. It's still trillions, especially because the bottleneck is not the demand, it's the supply of projects. You can argue all the different things that are going to contribute to demand, and there's a lot of literature writing about the demand, right? What's going to influence the demand. But there's no -- there's nothing talking about the restriction on the supply. And that's where the bottleneck is. No matter what figure you take from the demand, the problem is the supply, how you are going to build all those projects. And that's where in my opinion, the few engineering construction companies that are positioned in building a lot of the large programs, I mean, that's where we can provide value, and that's where we can provide our input. And that's why -- I mean, I'm not going to repeat myself all the things we're doing to try to be flexible and to try to move things. But certainly, we have a lot to say and to help. So in other words, as much as we have visibility of the next years, I don't see any reduction in the growth, right? And again, no matter what worst-case scenario you get, still trillions. I mean, how you build all of that, I don't know, right? But if that happened for whatever reason, because there was, I don't know, something a black swan somewhere, we would show the same flexibility that we've been addressing up to now. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the company for any closing remarks. Juan Cases: Just wanted to say thank you to everyone again for following us for -- I mean, following our figures, our strategy. I look forward to seeing all of you very soon. And anyway, Mike, do you want to add anything? Mike Pinkney: No. Thanks to everyone. And if you need to follow up on any detailed questions, obviously, just contact us here at the Investor Relations department. Thanks. Juan Cases: Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, and thank you for standing by. Welcome to the HighPeak Energy 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 speaker today, Steven Tholen, Chief Financial Officer. Please go ahead. Steven Tholen: Good morning, everyone, and welcome to HighPeak Energy's Third Quarter 2025 Earnings Call. Representing HighPeak today are President and CEO, Michael Hollis; Executive Vice President, Ryan Hightower; Executive Vice President, Daniel Silver; Senior Vice President, Chris Munday; and I am Steven Tholen, the Chief Financial Officer. During today's call, we may refer to our November investor presentation and our third quarter earnings release, which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions and future performance. So please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our November investor presentation. I will now turn the call over to our President and CEO, Mike Hollis. Michael Hollis: Thank you, Steve. Good morning, everyone, and thank you for joining us today for HighPeak's third quarter conference call. I'm going to start today's call with a brief overview of our third quarter results and a quick update of our current development activity, after which and more importantly, I want to use this opportunity to give you a glimpse into our company road map looking forward. With that said, before we start talking about HighPeak's future, I'm proud to report that we delivered a solid third quarter results, which tracked our internal expectations. Production levels were consistent with the second quarter despite our reduced level of development activity. We only ran 1 rig through the entirety of the third quarter, drilled 6 wells and turned in line only 9 wells. That's roughly 2/3 of our tills that we had in Q1 and Q2. Our CapEx was down 30% from Q2 as a result of our deliberate reduction of development activity and was spot on with our internal estimates. We held our LOE per BOE consistent with our first half 2025 levels. And as we discussed on last quarter's call, we successfully amended and extended our term loan, pushed out debt maturities until 2028 and materially increased our liquidity. Now turning to current operations. Due to continued weakness in commodity prices and overall market volatility, we delayed picking our second rig back up until mid-October, a roughly 1.5-month delay from our original plan. Now we plan to run both rigs throughout the fourth quarter before making a determination as to what the appropriate level of activity should be for 2026, which will be heavily dependent on oil prices, D&C cost and overall market conditions. And we recently finished our second successful simul-frac completion on a 6-well pad with 15,000-foot average lateral lengths. This operation went smoothly with HighPeak recognizing cost savings per well of over $400,000 compared with our traditional zipper frac technique, and we were even able to increase some efficiencies compared to our first simul-frac job, more lateral footage completed per day. We utilize continuous pumping operations and averaged over 4,700 feet of completed lateral footage per day. The operations team keeps delivering. We are very encouraged by the results that we've achieved to date utilizing the simul-frac ops, and we plan to tailor our 2026 development program to incorporate this completion technique more. Suffice it to say, HighPeak's operations and well performance are a well-oiled machine. That said, we will always find new innovative optimization opportunities. As we have always done, our operations department will maintain a laser focus on low-cost operations. Now let's turn our focus to the future. I know you've all have heard from me and the other HighPeak senior team members on these calls in the past, but this is the first time I've had a chance to speak with you as the CEO, and I will very clearly lay out our vision for HighPeak moving forward. With our new Chairman of the Board and the entire team pulling in the same direction, we are moving forward with purpose and a sense of urgency. We're getting back to the basics, running a tight, disciplined operation built on focus, efficiency and sound business sense. Our assets are strong, our people are capable and our commitment to managing cash flow and capital is steadfast. Now I won't sugarcoat it. Our debt is high, and the market has told us exactly what it thinks about that. For a while, we drifted without a clear long-term plan, and it showed. That changes now. We're rolling up our sleeves to strengthen the balance sheet and rebuild the trust the only way that works through steady, consistent results. We know talk doesn't cut it in this business, results do, and we will deliver. Now the first step in figuring out where you're heading is being very honest about where you stand and how you got there. Now we've done a lot of things right, and I want to tip my hat to the team for the hard work and follow through, but we also have some issues we need to face head on, no sense pretending otherwise. At the end of the day, the management, the Board and every one of us at HighPeak own the results we have delivered to date, the good, the bad and everything in between. It's ours to fix and to build upon. So let's reflect on what we have done well over the past 5 years and also what needs improvement. You can refer to Page 6 of our investor presentation. So what have we done right over the past 5 years? Well, we've assembled a high-quality asset base in one of the most desired basins in the world composed of 2 highly contiguous acreage positions with oil-rich inventory, allowing for cost-effective extended lateral development and strong IRRs. We've done a great job operationally, maximizing efficiencies and developing a lean cost structure to drive enhanced economics. I would put our operational efficiency against any public company in the E&P space. We've also delineated a long runway of highly economic multi-bench oily inventory that is primed for full-scale capital-efficient development. These are all great attributes, and I want to commend the HighPeak employees, management and even our investors for believing in the team in this area. But now let's look at some areas where we have misstepped and now need to improve. We are a controlled company, which has led to poor governance quality scores and high risk potential from the likes of ISS, Glass Lewis and some notable rating agencies. At times, we had a growth at all cost mentality even in the face of commodity price weakness. This ends now. This last view of cash management led us to overusing leverage and resulted in high cost of capital. Finally, what we've heard loud and clear from our investors is that our short-term focus on the business has eroded market confidence. We own these weaknesses, plain and simple, and we have a plan to set them right. So what does that look like? Well, some of these fixes we can tackle right now, and we've already started. Others are going to take a little time and patience. This isn't something that happens overnight. We see it like climbing a set of stairs, one solid step leads to the next. The first one is already behind us. We have reset our governance and put the right structure in place. That gives us the footing to run this company the correct way with discipline, accountability and good old-fashioned business sense. We're not trying to reinvent the wheel here. Our focus is simple: Generate steady, sustainable cash flow; pay down our debt the smart way and keep our financial house in order. Lucky for us, we've got a solid asset base that gives us the horsepower to get it done. And as we follow through step by step, I believe we will earn back the market's confidence the right way by doing exactly what we said we would do and sticking to our long-term plan. Now let's talk a little bit more about each of these areas needing improvement. If you take a step back and look at any public company, there are 3 levels of control. First, you have the Board of Directors providing direction and oversight. Second, you have management team directing the day-to-day operations. And finally, you have the shareholders who bring accountability and real-time feedback to the organization. Previously, all 3 of these control groups were effectively consolidated or led by a single individual. Again, this has led to poor governance scores by proxy advisory firms and credit agencies. However, over the last few months, we have made key changes in each of these areas. First, as most of you know, we've had a change at the top. Effective immediately, I have accepted the role of permanent President and CEO of HighPeak Energy. And I've got to say I'm proud of how this team has stepped up. Several folks in senior management have really grabbed the reins and leaned into the vision. It's been all hands on deck, and I couldn't ask for a stronger group to work alongside. We have made several changes to the senior management levels, and I want to congratulate several of these employees on their new roles and titles. Second, we are pleased to welcome our new independent Chairman, Jason Edgeworth. It's been a genuine pleasure working alongside him. Jason brings strong leadership, clear perspective and a shared passion for the company's long-term success. I am confident with full alignment between the Board, management and shareholders; we will drive HighPeak forward with focus and alignment to shareholder value. Third, unlike in recent past, we now have a fully independent Board committees in place consistent with best practices for noncontrolled companies. These include the Compensation Committee, the Nominating and Governance Committee and of course, the Audit Committee. This structure strengthens oversight and reinforces our commitment to transparency, accountability and integrity in everything we do. I want to emphasize again that both management and the board are completely aligned in our priorities. We share one clear goal, driving long-term success and sustainable value creation for HighPeak and its shareholders. Now regarding the shareholders, there are some major changes planned. As you may know, HighPeak, the public company, is majority owned by 2 private equity partnerships, HighPeak Energy Partners I and HighPeak Energy Partners II. These 2 partnerships own and control over 75 million of our 125 million outstanding common shares. As was recently disclosed, these partnerships plan to begin methodically distributing shares over the next 2 years, with HighPeak II being distributed first in 2026 and HighPeak I in 2027. It is important to note, most of the limited partners have a long-term investment mindset. While we anticipate most of these shares will continue to be held by the limited partners, it will potentially provide an opportunity for some larger institutions and investors to be able to invest in HighPeak stock, which should assist our low float issue. With all these changes, we plan to effectively split the 3 forms of control; management, the Board and the shareholder base into independent but fully aligned groups. Now continuing on the topic of accountability. Management will operate under clearly defined measurable goals, and our compensation will be directly tied to our performance against those objectives. We are in the process of finalizing our 2026 road map, which will outline these performance metrics and align our incentives with long-term value creation. You can expect this framework to be in place and active in early 2026. Now let's talk a little more about sound business principles. As you know, commodity prices have a very direct effect on profitability. So despite improvements in operational efficiencies and cost structure, commodity prices are the single biggest factor in changes to our cash flow. So how are we going to navigate this volatile commodity market? In our slide deck, on Page 9, we have laid out a very simple yet common sense approach. And I want to point out that the oil price laid out on the slide are long-term pricing. Again, we are taking a long-term approach to capital discipline. All that to say, we will not have a knee-jerk reaction to very short-term swings in pricing. We will take a methodical and disciplined approach. Let's start with the bear case scenario, which we are currently close to right now. In the event long-term oil prices are below $60 a barrel, our focus will be exclusively on operating within cash flow. This means on the CapEx front that we will be operating less than a 2-rig development program. This level of activity would lead to a moderate decline in overall production volumes, but this goes without saying there's absolutely no need to focus on growing production in an oversupplied or weak market. Again, we have a long-term view on value creation, and there is no reason to overdevelop or accelerate in drilling our high-value inventory in a low commodity price environment. Now as far as liquidity is concerned, in the face of sustained low oil price environment, anything is on the table. We will preserve liquidity. Now moving to the base case scenario of long-term oil prices in the $60 to $70 a barrel range. Our focus will be on free cash flow generation and prudently paying down our debt. On the CapEx front, this would most likely equate to a 2-rig development program resulting in maintaining current production volumes. Now on the liquidity front, we would maintain our current dividend and use the additional free cash flow for a modest debt paydown strategy. In a bull case scenario of $70-plus oil, our focus will still be on increased free cash flow generation and accelerated debt paydown. On the CapEx program, we would likely be 2 rigs or just slightly more, leading to moderate production growth. And on the liquidity front, it would allow us to accelerate debt paydown. But let me be clear, we would have to be in this bull case scenario for quite some time and reach a reasonable leverage ratio before we would ever consider additional shareholder value initiatives. We will get our financial house in order first. As I said earlier, these are basic business principles, but I wanted to lay them out in a very clear and concise manner. This will be the framework for our high-level road map for 2026 and beyond. Now we have listened to our constituents, shareholders, creditors, rating agencies and peers in the industry. And we have compiled some of these comments that we've heard and hear often, and we've laid them out on Slide 10 of our company presentation. Now we're fully aware of the challenges in front of us from geographical positioning of our assets, to cost of capital, to questions surrounding the company's potential strategic options. Now the key question is how to begin to rebuild and sustain market confidence. We're not ignoring the realities of our situation. Instead, we're facing them head on. And I want to take a moment to address several of the most common concerns we often hear. I want to do that openly and directly. Number one, Eastern Midland Basin is unproven. HighPeak has drilled over 350 horizontal wells and have produced over 90 million BOEs from those wells, and third-party organizations are now recognizing well performance, cost differences, i.e., profitability and inventory quality and scale. HighPeak's and offset operators' track records over the last several years have dispelled this comment. Number two, you guys have a growth at all cost mentality. As I previously said, there were many times in our history that may have been the focus. But I think HighPeak has been consistent over the last couple of years in trying to maintain our current level of production and show the market that we are going to operate within cash flow. Number three, HighPeak is overlevered. That is a true statement. We are overlevered for the size of company we are today, and this is one of our primary focuses moving forward. We are working to address this issue in a thoughtful and methodical way. Hopefully, you've gotten that sense through this call that operating within cash flow and paying down debt are absolutely top of our list and major areas of focus. Number four, you're starting to have GOR issues as your percentage gas production is increasing. We have seen increases in gas and NGL production. However, this is primarily due to historical takeaway issues that have been solved. As our gas midstream partners increase their takeaway capacity, and we have connected all of our central tank batteries to our gathering system and our gatherers have lowered field-wide pressures, has allowed more oil and gas -- or more gas and liquids to flow to sales. I would also like to remind everybody that our percent oil production will fluctuate from quarter-to-quarter at times due to where our completion operations are taking place and the timing associated with turning online new pads. But at any reasonable cadence, our oil percentage should trend closer to 70%. Number five, HighPeak has no float in their stock. Now I hear this one a lot. Typically, I own it in my personal account, but I can't own it in my fund. Now this has been a serious issue that we have faced for some time now, and we have done some things in the past that may have exacerbated the problem. However, we are working to fix this issue as it is extremely important moving forward. I've already discussed the methodical distribution plan for the 2 HighPeak partnerships. We are going to be measured and deliberate in how we solve this problem. It cannot be fixed overnight. Number six, HighPeak has been for sale for years. HighPeak is a publicly traded company. And as such, we are always open to evaluating value-enhancing opportunities. That said, again, I want to be very clear, the Board and management are fully aligned and unwavering in our commitment to long-term strategy of operating within cash flow, exercising disciplined decision-making and maintaining measured controlled execution. Our focus remains on building sustainable value for our shareholders over the long term. Final one, HighPeak is a controlled company, and there is no oversight. As I've highlighted earlier in the call today, we're very encouraged by the progress we've made over the last few months. We have established fully independent Board committees, appointed an independent chairman and put in place a clear plan starting in 2026 to transition away from being a controlled company. These steps strengthen oversight, enhance accountability and position HighPeak for long-term sustainable value creation. Now in conclusion, our company is in the midst of a meaningful transformation, one centered on stronger governance and accountability and a long-term focus on creating value for our shareholders. We're allocating capital with discipline, managing costs with precision and maintaining relentless focus on efficiency. Our asset base gives us the flexibility to operate within cash flow, generate sustainable free cash, reduce debt and continue building value the right way. We are not in the business of chasing production for short-term gains. We are here to build a durable, well-run enterprise, one that applies sound business principles and puts every dollar to work where it drives the greatest return. Through disciplined execution, clear direction and a unified team; we're positioning this company to perform in any environment. We are proud of what we have built, confident in where we are headed and focused on delivering lasting value for our shareholders, employees and partners. Thank you. And with my comments now complete, we'll open the call up for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Robertson with Water Tower Research. Jeffrey Robertson: Mike, can you talk in the context of your leverage plan, how you think that unfolds over 2026 under, say, your $65 scenario and how much flexibility that might give you or give the company to address the term loan? Michael Hollis: Absolutely, Jeff. No, great question. Obviously, the free cash flow generation is going to be dictated mostly by the oil price that we garner from the market. HighPeak is doing all the things we can control from cost management to capital deployment. But again, as you've pointed out, in that kind of base case scenario, we can generate significant free cash flow. Our term loan debt that we have today, we can pay down debt at par with no penalty. So as we generate free cash flow in that scenario, look for us to do that again, which will reduce absolute debt as well as reduce our leverage ratio. Now if you look further into the future, again, could be a year, could be more as we continue to delever the company and as we continue to progress and our production base ages, what you'll see is our corporate decline rate will come down, call it, 1.5% to 2% a year. Today, we sit kind of mid- to high 30% decline rate. That changes your credit profile and again, opens you up to potentially more normal way financing into the future. But again, Jeff, today and into the very near future, our goal is capital management and paying down debt. Jeffrey Robertson: How do hedges fit into those goals, Mike? I know you've got, I think, an average swap price on some of your production for '26 at about $63 a barrel. Michael Hollis: Yes. And could you repeat that? Our speaker was cutting out a little bit there, Jeff, I'm sorry. Jeffrey Robertson: Sure. Just basically, how do you think about hedging in the context of managing cash flows in a $60, $65 per barrel price environment to work towards your leverage goals? I know you have some, I think, minimum requirements, but I'm just curious how you think about that as you go forward. Michael Hollis: You bet. No, great question, Jeff. We want to be very -- what you will see from HighPeak is a much more systematic and methodical hedging program. Obviously, we do have some minimum requirements and we will continue to have to hedge a little bit into the future each quarter, but those are small pieces. Now we'll always be opportunistic if that opportunity were to come along. You'll notice that we layered on some gas hedges a couple of quarters back that were fantastic prices in the $4.43 range. We've also hedged some basis differentials. But I think what you'll see in the -- as prices continue to stay in this lower range, it will be very methodical and small slices that we will layer on. Again, you tend to see less when prices are low. And then when prices move up a little bit, I think you're going to see us layer on a little bit more. We want to protect our capital budget. We want to protect the dividend as it sits today, again, in this kind of base case $60 to $70 range. But I think looking forward to think somewhere in the 55% to 65% hedged at these kind of prices are probably what you would see HighPeak move towards. Obviously, if we had a spike in commodity prices, you may see us push that above that hedge percentage going forward. Operator: Our next question comes from the line of Noah Hungness with Bank of America. Our next question comes from the line of Nicholas Pope with ROTH Capital. Nicholas Pope: Curious, as you kind of look at this plan and you look at the flex that you have with different -- at different oil kind of environments, you brought that second rig back. Curious if there's changes in how you're thinking about where kind of within the acreage footprint you're going to be drilling or what you're going to be drilling? And if the focus changes in those different scenarios, maybe between Flat Top, Single Peak or even in the different formations, like how much flexibility is there? And how much does the pricing affect what and where you're drilling these different scenarios? Michael Hollis: No. Great question, Nick. The good thing is we're drilling Wolfcamp A, Lower Spraberry codeveloped. I think 5% to 10% that we will drill in the Middle Spraberry zone, whether we run 1.5 rigs or 2 rigs, that split will not change in what we drill. Now where we drill, if you look at the split of the capital deployment that we've had in the recent kind of year or so, it's about 70% up at Flat Top and 25%, 30% in Signal Peak. That also fits with what our inventory in each one of those zones are between Flat Top and Signal Peak. Returns are very similar between the 2 areas in all these zones. So again, we approach it as a co-development program and the split between Flat Top and Signal Peak is more based on the split of inventory, which is about 70-30. Nicholas Pope: Got it. That makes sense. As you kind of look at the base, I mean, the lease operating expenses have been, I mean, almost flat the last 6 quarters. I'm curious if there's opportunities for going back into wells, seeing an uptick in workovers, field maintenance type work as you're maybe shifting a little bit away from a more active drilling program, the field optimization kind of you talked about 350 wells that have been drilled in this Eastern extension of the Midland. Curious how that might change with kind of maybe a slower development program. Michael Hollis: No. Great question, and we're ahead of you on that. So if you look at the last kind of 2 quarters, you'll see some expense workover spend that was a little higher than what it had been kind of Q1 of this year or Q4 of the previous year. So where we were normally running kind of $0.80 per BOE, somewhere in that range, we've been $1 or a little bit more in the last 2 quarters. So as we pulled back on that capital program, now there are some capital workovers that we have done as well, but think very, very high rate of return work. So we've gone into some of our wells and done some expense workovers and have seen some really good results from that. So again, while we've pulled back activity on the drilling complete side, we have gone back and optimized our production base. And we'll continue at a little bit lower pace going forward because we hit all of the large items that we had on our list in the last quarter or so. But there will be additional work every quarter that we will continue to focus on to keep that efficiency high. Nicholas Pope: And those expense workovers that you kind of highlighted, I know you break out somewhat, is that production optimization? Or is that kind of remediation type work? Is the -- what's the kind of mix of... Michael Hollis: So the answer there, Nick, will be yes and yes. So usually, what you have is you'll have a well that may be struggling with a pump that's 2 years old. And again, the fact that we are able to get run lives of 2-plus years out of these pumps is almost unheard of in the Permian Basin. But for instance, when that will happen, we -- obviously, you would have an expense cost to go replace that or change the artificial lift. We'll take the opportunity at that point to go in, do a little bit of cleanout on the well, maybe a little bit of what I call small pump job, nothing like a frac job, a little asset and things like that to be able to optimize that production. And then we typically lower where we pump the well from. So we will move down in the hole so that we can pull down the pressure we're pumping these wells at to a lower point, i.e., giving more drive from the reservoir into our well, and we're seeing great results from that. Some of these wells we're actually pumping deep into the curve, lowering our point that we're drawing that fluid from by as much as 250 to 300 feet. And with the reservoir we have with a little bit higher permeability, we're seeing great results from that. So you don't see it day 1. It takes time, but you're going to start seeing better and better recoveries from these wells. Operator: [Operator Instructions] Our next question comes from the line of Jeff Robertson with Water Tower Research. Jeffrey Robertson: Just a follow-up, you said you're going to keep the second rig at least through the end of December. Can you just talk about how the carryover inventory will impact production at least in the first half or maybe first 3 quarters of 2026? Michael Hollis: Yes, sir, absolutely. So we picked up the second rig October 15. Just kind of a rule of thumb for where we're at in the basin, we typically drill 2 wells a month per rig. So that will get us an additional 5 to 6 wells that we've drilled a little more than 2 per month now. So call it, 5 to 6 wells that we will have drilled in the fourth quarter in addition to the 1 rig program that will carry into 2026. Again, we're not talking about 2026 activity per se. Obviously, we laid out in the prepared remarks, a kind of high-level overview bear, base and bull case that will flow through our decisions on how we guide for 2026. Again, it's a little early. We'd like to see where oil prices kind of level out over the next month or so. But to your point, bringing over those 5 wells because, again, anything you drill in the fourth quarter typically doesn't come online until the first quarter or early second quarter. So as we look into 2026, we will have somewhere in the range of 16 to 18 DUCs are wells in some form of completion that roll into 2026, again, supporting that kind of Q1 and Q2 production forecast. Operator: Our next question comes from the line of Noah Hungness with Bank of America. Noah Hungness: For my first question here, you guys yesterday filed an S-3. Could you maybe just talk about what the reasoning behind that was and if you had any plans with that moving forward? Ryan Hightower: Yes. Noah, this is Ryan. Great question. The sole reason for filing the S-3, our previous shelf registration statement that we had on file went stale and expired. So all we were doing was refreshing it. We have absolutely no intention of issuing any new shares anytime soon. Noah Hungness: Great. And then given that we're kind of on the border here of your base and bear case. How long do you need to see prices kind of either sub-60 to drop activity or between that $60 to $70 to move into that base case? Is it a month? Is it a few weeks? Just how are you thinking about that? Michael Hollis: So a couple of ways we're thinking about it, Noah. And obviously, there's -- it's a multivariate problem. Obviously, you can have a couple of days. You can even have a month. When you look at this year, we've probably averaged, I don't know, $63, $64 for the whole year. That would put you pretty squarely in between the bear and base case. Again, these aren't hard lines. There's going to be some squish between them. But if I look into 2026, even if you were in the bear case, something less than 2 rigs, again, remember, you pick up, it's kind of like -- they call it a dip switch, on or off, right? So you pick a rig up, it's on, lay it down, it's off. So in order to get something that's less than 2 kind of infers something more than 1, so call it 1.5. The way you would do that is drill with 2 rigs for a portion of the year and then lay it down. Now kind of when I answered the question for Jeff on timing, when you drill these wells and when you bring them on are important for production throughout the quarters of the year. So in reality, I would foresee if we drill -- and with Board approval, obviously, if we chose to do more than 1 rig and we're in kind of the 1.5 to 1.7 rigs for next year based on whatever the oil prices look like toward the end of the year, we would most likely have that second rig going for the first portion of the year. So you may see us keep the second rig for some months into 2026. And then it would be determined by kind of oil price and long-term outlook as well as just the whole macro environment that we're in. It's very volatile right now. So I want to make sure that we keep that kind of long-term prudent look of what's going on in the market. Noah Hungness: Got you. And just one more question. Could you maybe add some details around the distribution plan for '26 just regarding HighPeak Energy Partners II. Is this going to be just a single drop down to the LPs in one go? And then just a rough idea on timing within the year, if you could give that. Ryan Hightower: Yes. Noah, this is Ryan again. Really good question. At this point, I don't think we're prepared to lay out the exact plan, but the plan, like Mike said during his prepared remarks, is to be very methodical, which most likely translates to us slowly metering them out to the different LPs throughout the calendar year. Again, most of the limited partners have a very long-term investment mindset here. So it's nothing that causes us any concern from any kind of share overhang. We don't expect anybody to rush to sell by any means, especially at current share prices. But we will be very strategic and methodical about it. And it will most likely start early in the year, but will last throughout the calendar year. Operator: And I'm currently showing no further questions at this time. This does conclude today's call. Thank you all for your participation, and you may now disconnect.
Operator: Good day, everyone. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Health Care REIT Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Lukas Hartwich, EVP Finance. Please go ahead, Mr. Hartwich. Lukas Hartwich: Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our earnings guidance for 2025 and our expectations regarding our tenants and operators and our expectations regarding our acquisition, disposition and investment plans. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2024, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section website at sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, CEO, President and Chair of Sabra Health Care REIT. Rick Matros: Thanks, Lukas, and thanks, everybody, for joining us. I'll start by making some comments on our SHOP portfolio. So the growth of our SHOP portfolio has exceeded our expectations, and now stands at approximately 26% of our portfolio. As a result of that, we had set -- we had publicly set a target of increasing our SHOP from 20% to 30%, we're now setting a new target of setting our SHOP from where it is now at 26% to 40%. And as we get closer to that, we'll reach that target again. Cash NOI growth was a solid 15.9%, excluding the 16 ex-Holiday properties included in same store and with those in same-store was still a solid 13.3%. We believe the performance of the 21 facilities in transition had bottomed out in July. We saw a really nice improvement in August and even stronger improvement in September. So we look forward to that portfolio continuing to stabilize and to contribute to earnings growth going forward. We will exceed the high end of our investment targets. Originally, our investment target was $400 million to $500 million. We will exceed the $500 million. In addition to that, the pipeline continues to be robust, and we'll be working on deals diligently, obviously, through the end of the year, which will allow us to get 2026 off to a much stronger start and should bode well for volume next year. Our EBITDAR rent coverage in all asset classes increased as they have been in the past 2 quarters. SNF occupancy and skilled mix continues to increase. Our top 10 had its best showing yet. Our skilled exposure dropped below 50% for the first time. We're really focused on having a very well-balanced portfolio between skilled nursing and senior housing, with senior housing, obviously, being SHOP specifically, being a much stronger driver of earnings growth than the triple-net portfolio. The regulatory environment for skilled nursing remains stable. Leverage came in below 5x. And Talya and Darrin will both provide details on our SHOP performance. Talya? Talya Nevo-Hacohen: Thank you, Rick. First, I want to say something, and that is this is my last earnings call at Sabra. So before I begin my remarks, I want to thank everyone for following and supporting Sabra for the past 15 years. As of the third quarter, Sabra's managed senior housing portfolio contributed nearly 26% of our total annualized cash NOI as recent acquisitions contributed to Sabra's expanded exposure to manage senior housing and reduce Sabra skilled nursing exposure below 50%. During the quarter, Sabra invested $237 million in managed senior housing, including $20 million for the acquisition of the operations of 4 leased senior housing properties. In addition, during the third quarter, Sabra was awarded an additional $124 million in managed senior housing investments, which closed after quarter end. Subsequent to quarter end, Sabra's pipeline of acquisitions remained strong, with an additional $121 million of awarded deals not including the acquisition of the operations of a leased senior housing community for an additional $14.5 million, all of which are expected to close later this year or in early 2026. Closed plus awarded deals in 2025 totaled more than $550 million. We continue to see high-quality properties coming to market, and while competition for assets is real, pricing has remained reasonable, allowing Sabra to continue to be competitive. The full impact of acquisitions from the first half of the year and the partial impact of third quarter closings resulted in continuing positive momentum in the portfolio. Cash NOI and cash NOI margin were up 18.6% and 90 basis points, respectively, on a sequential basis for the total managed portfolio, including non-stabilized communities and joint venture assets at share. Further, occupancy increased 60 basis points to 86.8% and RevPAR rose 4.3%, both sequentially in the total managed portfolio, excluding non-stabilized communities and those held for share, underscoring the quality of the properties in which Sabra has been investing. Development of new senior housing remains in a lull suggesting that the current supply-demand equation will continue for some time. Now I will turn over the call to my colleague, Darrin Smith, to discuss Sabra's same-store portfolio operating results. Darrin Smith: Thank you, Talya. Sabra's same-store managed senior housing portfolio, including joint venture assets at share and excluding non-stabilized assets, continued its strong performance in the third quarter. The key numbers are: Revenue for the quarter grew 5.4% year-over-year with our Canadian communities growing 10.2% in the same period. Third quarter occupancy in our same-store portfolio was up 110 basis points to 86%. Notably, our domestic portfolio occupancy increased 90 basis points to 82.6%, while our Canadian portfolio was up 150 basis points to 93.1% over the same period and marking the sixth consecutive quarter where occupancy has been above 90%. RevPAR in the third quarter of 2025 increased 3.4% year-over-year, while in our Canadian portfolio, RevPAR grew 5.8% over the same period. While RevPAR and occupancy continue to grow, exPOR remained relatively flat, only increasing 30 basis points across the same-store portfolio. Cash NOI for the quarter grew 13.3% year-over-year in the same-store portfolio. Excluding the 16 properties in the same-store portfolio formally operated by Holiday, same-store cash NOI grew 15.9%. While in our Canadian communities, cash NOI for the quarter increased 20.2% on a year-over-year basis, demonstrating the impact of operating leverage that higher occupancy burnings. Industry tailwinds remain strong, senior housing communities continue to gain occupancy while operators balance rate and occupancy to maximize revenue. With cost structure stable and revenue increasing, cash NOI and margin continue to grow. Our net leased stabilized senior housing portfolio continues to do well, with sequentially improving rent coverage, a reflection of continued strong operating results. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer. Michael Costa: Thanks, Darrin. For the third quarter of 2025, we recognized normalized FFO per share of $0.36 and normalized AFFO per share of $0.38. Year-to-date through September 30, normalized FFO per share was $1.09 and normalized AFFO per share was $1.12, representing an increase of 5% and 4%, respectively, over the same period in 2024. In absolute dollars, normalized FFO and normalized AFFO totaled $88.6 million and $92.2 million this quarter, respectively. Cash rental income from our triple-net portfolio decreased $3.5 million from the second quarter, while cash NOI from our managed senior housing portfolio increased $4.7 million for a net sequential increase of $1.3 million. The decrease in cash rental income was primarily due to a $1.4 million decrease from transitioning 4 previously triple-net leased senior housing facilities to our managed senior housing portfolio during the quarter, a $1.2 million decrease related to facilities sold late in the second quarter and during the third quarter and a $600,000 decrease in percentage rents. As we noted in last quarter's call, percentage rents were elevated during the second quarter while the third quarter was closer to the historical trend. These decreases were partially offset by annual rent escalators on leases accounted for on a straight-line basis which improved normalized AFFO, but do not have an impact on normalized FFO. Cash NOI from our managed senior housing portfolio totaled $30.1 million for the quarter compared to $25.3 million last quarter. This $4.7 million increase was primarily the result of investment activity completed during the quarter, including $1.9 million from the aforementioned transition of 4 previously triple-net leased senior housing facilities. This transition also resulted in the write-off of $9.2 million of straight-line rent receivables and $1.2 million of lease termination expense, both of which have been backed out of normalized FFO and normalized AFFO. Interest and other income was $12.7 million for the quarter compared to $10.3 million last quarter. This increase was primarily due to a $2.8 million lease termination income recognized as a result of terminating the Genesis leases and has been backed out of normalized FFO and normalized AFFO. Cash interest expense was $26.7 million compared to $25.8 million last quarter. This increase is due to higher borrowings under our revolving credit facility to fund recent investment activity. Additionally, noncash interest expense increased by $500,000 from the previous quarter, primarily related to the repayment of our 2026 bonds and entering into our new 5-year term loan this quarter. Recurring cash G&A was $9.1 million this quarter compared to $9.4 million last quarter. As noted in our earnings release, we have updated our 2025 earnings guidance ranges. However, the implied midpoint for both normalized FFO and normalized AFFO remain unchanged at $1.46 and $1.50 per share, respectively. Consistent with previous quarters, our guidance only includes completed investment, disposition and capital market activities. We are also reaffirming the following assumptions included in our previously issued guidance. General and administrative expense is expected to be approximately $50 million, which includes $11 million of stock-based compensation expense. Ignoring the impact of acquisitions and dispositions, cash NOI growth for our triple-net portfolio is expected to be low single digit, in line with contractual escalators. Additionally, our guidance assumes no additional tenants are placed on cash basis or moved to accrual basis for revenue recognition. Our updated guidance assumes that full year average same-store cash NOI growth for our managed senior housing portfolio is expected to be in the mid-teens. For context, this quarter, cash NOI for our same-store managed senior housing portfolio increased 13.3% year-over-year, and on a year-to-date basis is approximately 16%. Our updated guidance also assumes that cash interest expense is expected to be approximately $104 million. Lastly, our updated guidance assumes a weighted average share count of approximately 244.7 million and 245.7 million for normalized FFO and normalized AFFO, respectively, which is in line with this quarter's weighted average share count after adjusting for the timing of ATM issuances during the quarter. Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 4.96x as of September 30, 2025, a decrease of 0.04x from June 30, 2025, and a decrease of 0.34x from September 30, 2024. As of September 30, 2025, the cost of our permanent debt was 3.94% and the weighted average remaining term on our debt was 4.4 years, with the next material maturity being in 2028. All metrics that were meaningfully improved through the opportunistic refinancing of our 2026 bonds with a 5-year term loan during the quarter. Additionally, we have no floating rate debt exposure in our permanent capital stack, with the only floating rate debt being borrowings under our revolving credit facility. We remain committed to maintaining a strong balance sheet, and this commitment, together with the anticipated future earnings growth of our portfolio were significant factors in Moody's upgrading our credit rating to Baa3 during the quarter. This quarter, we entered into a new $750 million ATM equity offering program, which gives us added capacity to thoughtfully and efficiently finance the numerous investment opportunities we are evaluating. During the quarter, we issued $58.5 million on a forward basis at an average price of $18.45 per share after commissions. And in total, we currently have $157.3 million outstanding under forward contracts at an average price of $18.14 per share after commissions. We also settled $165 million of outstanding forward contracts to fund this quarter's investment activity. We expect to use the proceeds from the outstanding forward contracts to close on the investments we have been awarded and do so on a leverage-neutral basis. As of September 30, 2025, we were in compliance with all of our debt covenants and have ample liquidity of approximately $1.1 billion, consisting of unrestricted cash and cash equivalents of $200.6 million, available borrowings under our revolving credit facility of $717.8 million and the $157.3 million outstanding under forward sales agreements under our ATM program. As of September 30, 2025, we also had $690.9 million available under our ATM program. Finally, on November 5, 2025, Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 28, 2025, to common stockholders of record as of the close of business on November 17, 2025. The dividend is adequately covered and represents a payout of 79% of our third quarter normalized AFFO per share. And with that, we'll open up the lines for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Farrell Granath with Bank of America. Farrell Granath: And first, I want to congratulate Talya. Thank you for everything you've done. And looking forward, I'm sure, to not having to be on these earnings calls again. But my first question is really around the guidance. So as you were saying, we saw strong core performance, especially in your SHOP portfolio as well as we've seen these increased acquisitions. And I'm just curious how the guidance was maintained, while we're also seeing these increasing core metrics? Michael Costa: Yes. I think the easiest answer to that, Farrell, is the fact that the vast majority of these investments that we're closing on this year are in the latter half of the year, so they're really going to have a pretty muted impact on 2025 performance, but we look forward to their contribution to 2026. Farrell Granath: Okay. And I was wondering if you could also just give a little bit more color on the core SHOP portfolio and pretty much the metrics, excluding Holiday, specifically on the occupancy. If you can give any color on those transitioned assets and maybe the impacts that are causing the difference between the same-store NOI. Darrin Smith: Yes, this is Darrin. So the same-store NOI is largely being driven down, as we had mentioned before, through Holiday. The Holiday same-store NOI is at 5.1%. All the other metrics are very positive. Rick Matros: Yes. And we also -- it was a pretty tough comp as well to a year ago, if you go back and look at it. So -- but from our perspective, one of the reasons we changed the guidance to reflect mid-teens versus low to mid-teens is because our confidence continues to grow in the stability and contribution of SHOP, but the comp was a big part of it. Michael Costa: The other thing I'll add to that, Farrell -- sorry, one other thing I'll add to that. Our same-store pool, the occupancy there was 86% for the quarter. The occupancy for those Holiday assets that are included in that same-store pool are probably closer to 80%. So you kind of do the math there on what the non-Holiday assets are, how they're performing. Operator: Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Knowing that the same-store pool is a significant chunk of the overall SHOP portfolio, but can you just share what total portfolio occupancy is? And then also how that compares to where occupancy stands on the recent SHOP acquisitions? Michael Costa: Yes. So we don't disclose that, Austin. I would say the majority of the assets that are not in the same-store aren't in same store because they haven't been around long enough to be in same store. That's a good chunk of that. And the occupancy in those non-same-store assets is going to be largely in line with our same-store pool is probably the easiest way to describe it. Austin Wurschmidt: Got it. And I guess, as you continue to lease up the senior housing managed assets, what type of pricing power do you think is achievable for the markets that you're targeting as this becomes a growing part of the overall company? Talya Nevo-Hacohen: Well, I think that's a really interesting question. Some of the statistics Darrin provided on our Canadian assets is very telling about pricing power. As those assets have been above 90% occupancy, the rate growth there, I think Darrin said, it was over 5% on a Q-over-Q basis. So I think you can extrapolate that over time, assuming there isn't a major development occurring in this country, which it doesn't look like it's going to be anytime soon, that we're going to -- our domestic portfolio will hit -- will get to that level of occupancy where pricing power becomes very relevant and very impactful in addition to operating leverage. Austin Wurschmidt: Can you share any sense what annual rent increases in the SHOP segment could look like heading into '26? Talya Nevo-Hacohen: I think we're looking at mid... Darrin Smith: Yes, mid-single digits. Operator: Your next question comes from the line of John Kilichowski with Wolf Fargo. William John Kilichowski: My first one is on, Rick, you made some opening remarks about Holiday starting to improve this quarter. And I just wanted to hear more about the glide path of those assets and what are those operators accomplished so far? I think you noted that occupancy is a little bit lower there. Is there a possibility that they're additive to the overall growth of that portfolio? Rick Matros: Yes, they will be additive. I think the primary accomplishment to date with all 3 operators because they all assessed their piece of the Holiday portfolio the same way. And that is that they've rightsized and stabilized labor in the buildings because even in IL, there's been some acuity creep and the lack of stability in labor or the lack of appropriate staffing of labor prior to the transition did contribute to the -- just sort of meandering of occupancy and contributed to greater move-outs and move-ins because they simply couldn't take care of certain residents. So job one basically has been accomplished, which is stabilize all that, now remarketing themselves to the referral sources so they can demonstrate that they can, in fact, take residents who are a little bit higher acuity, which should result in not just a wider number of residents that can be admitted but better length of stay, which obviously contributes to occupancy as well. So there's always going to be some lag time between stabilizing your infrastructure and having the benefits of that stability result in a stronger top line, but that's fully our expectation. William John Kilichowski: Okay. And then my second one is just on underwriting. Obviously, there's a bit of concern about cap rates are getting a little bit tight relative to where your spot cost of capital is. But maybe if we think longer term about that unlevered IRR that you're achieving today on these, I don't know if you can give color there. And then also talking about what that implies as far as like a stabilized occupancy or a stabilized margin. Darrin Smith: Sure. This is Darrin. So the investments that we have closed on and are evaluating have going in yields of between 7% and 8% and are expected to deliver a mid-single-digit annual earnings growth. As a result, we estimate levered -- or unlevered IRRs, excuse me, for the investments we've made are in the low double-digit range. As far as occupancy is concerned, it really depends on each individual micro markets, but we typically temper stabilized occupancy to be in the lower to mid-90% maximum. Operator: Your next question comes from the line of Seth Bergey with Citi. Seth Bergey: I guess my first one is just kind of on the pipeline. As you kind of increased your target for the SHOP exposure, how do you see kind of the mix of the pipeline of opportunities you're looking at skew between SHOP and skilled? Darrin Smith: So this is Darrin again. So our current pipeline as it has been for the past several quarters, typically, we see 90% to 95% of that volume or opportunity set is within SHOP and only maybe 5% to 10% on SNF. So I would expect us to be heavily weighted towards SHOP moving forward. Rick Matros: We have a couple of smaller off-market SNF deals that we are working on that more likely to be in early 2026 event. And we do have some hope that we'll start seeing more SNF volume next year. We're not shying away from it. I mean we have our own standards relative to the quality we're looking for, but we are looking forward to being able to get more SNF deals done next year. Seth Bergey: Great. And then I guess just a second one kind of on the loan book piece. You have the $300 million mortgage loan that matures next October. Can you just kind of give us an update on your thoughts around what happens as you kind of get closer to the maturity date there? Rick Matros: Yes. I think the only comments we'd make at this point is that the operations continue to get better. They have a great operating team in place. So that's really been great to see. And as far as what we're going to do on a go-forward basis as we get closer to the extension, we're having those conversations now. Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just hoping you could talk a little bit, Rick, about your appetite or lack thereof around pursuing skilled nursing or RIDEA or opco investments as everybody looks for external growth opportunities in the space? Rick Matros: No appetite. Juan Sanabria: I like succinctness. Secondly, just hoping you could give us a little bit more color on the U.S. versus Canada split for SHOP. What's the current split on an NOI basis today? Is Canada market you'd like to grow in? And is there any kind of limitations or governors on RevPOR growth in Canada? I know some markets, Quebec may or may have some pricing restrictions or rent controls. So just curious on that. Talya Nevo-Hacohen: I'll take the part about appetite. So we would like to grow in Canada. We've had good success with the portfolio investments we've made there. I think the biggest -- and Canada faces even a longer time frame for getting new supply added to their existing inventory and they have the same demographic issues we do, but without the labor -- same labor pressures. So there's a really good setup there. The challenge for us is pricing, and that is assets trade for, call it, 6 handle cap rates, and that's just not -- doesn't work for us right now. We continue to stay close to that market and obviously have enough exposure to see what's going on. I'll let Darrin respond to the rate and as such. Darrin Smith: Yes. As far as the rate is concerned, it does determine which province you're located in, with Quebec having the most punitive or tempered sort of rate opportunity. That being said, there tend not to be any sort of rate restrictions with respect to care, so it's a balance. Juan Sanabria: And what's the split between the U.S. and Canada presently in the SHOP portfolio? Darrin Smith: Of the 70 total same-store assets, Canada is 25. Operator: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Richard Anderson: So I have a question about the fact that everybody is sort of doing the same thing, which is expanding into SHOP. And it reminds me of, I don't know, 2015-2016 time frame when operators were all pushing the REITs to move from a net lease model to a SHOP model. I remember thinking what do they know that we don't. And then next thing you know, we're oversupplied and the REITs are underwater, it's not underwater, but struggling with SHOP. So I mean when you use that history of sort of everyone moved to SHOP, now everyone is buying SHOP and everyone is going in SHOP, do you have any concerns about this sort of mass wave of movement that everyone is doing it and maybe we should be thinking about this a little bit more closely because it does feel a little herd like to me. And I wonder if that enters any concern in your mind about pursuing this like everybody else is doing. Rick Matros: Yes. So I totally get your point. I think the dynamics are dramatically different right now. I mean you've got the demographics that everybody has been waiting for, for 3 decades are really kicking in. We've got several years, if not longer runway before new supply has any impact whatsoever. When you look at the breadth of opportunities out there, for those of us who have been on the SNF side of the REIT business as well, it's almost like it was before the pandemic where there were just so many different SNF opportunities out there. They were enough for all of us to get sort of our fair share. And I think that's the case now. And then the other thing, obviously, is a complete change in interest rates in the debt market from when the PEs got high on crack because of really 0 interest for so long and just leverage everything up. And of course, that all imploded on them once the pandemic hit. And even with interest rates coming down, it's not going back to what it was. And as PEs start to circle around and get more interested in maybe getting back into the space, they still need a spread and they're not going to be able to impact cap rates the way they did back then. So that's my answer, Rich. Richard Anderson: Well, I mean -- go ahead, Talya. Talya Nevo-Hacohen: I want to add one other thing, and that is we've been doing SHOP for a long time, like basically almost a decade, if not actually a decade. So that's one. We're not newbies to this. That's one. So we didn't follow everybody. But I think the important thing to note is we continue to be really selective of what we're buying. We're very intentionally buying recent vintage assets. All those assets that those PEs develop that then they took forever to lease up and it ruined their IRRs, we're taking advantage of that. And it's been an opportunity to buy new assets that are geared to the future and those residents like me in a few years. And I think that's really important for people to understand. There's plenty of senior housing you can buy, that's value add at that 20-plus years old, there -- that may forever be in value-add mode. We're not buying those. Richard Anderson: Okay. By the way, Talya, good luck to you. I will miss your perfect pronunciation of every word that comes out of your mouth. I don't know if anybody else has noticed that about your delivery, but I have. Talya Nevo-Hacohen: Thank you. Richard Anderson: My second question is what's the shelf life of this growth spurt? Like what -- do we have 5 years ahead of us? As soon we have a SNF of new supply coming at us, obviously, maybe that changes that dynamic. But assuming that holds off for the time being, is this a 5-year sort of story, 2 years? What do you think knowing what's out there today? Darrin Smith: Yes, this is Darrin. I think at the very least, it's going to be 2 years. I think there's -- I've seen numbers around $20 billion of senior housing mortgage debt that's coming due over the next 2 years, which should provide a lot of opportunity there. I think it's at least 2 years. Operator: Your next question comes from the line of Alec Feygin with Baird. Alec Feygin: So first, may you speak about the managed seniors pipeline/deal flows, specifically what you were seeing between IL and AL? Darrin Smith: Yes, sure. So we see a combination of both, but it's definitely much more weighted towards AL memory care than IL. Alec Feygin: Okay. And second one for me is, are there any new observations with private capital entering or exiting either the skilled nursing or the SHOP acquisition market? And do you think Sabra and its public REIT peers are taking market share currently? Talya Nevo-Hacohen: On the SNF side, I think you're still seeing very active private capital involved using HUD debt for leverage and REITs having to be clever in how they deploy capital into the SNF world. On senior housing, we are starting to see private equity come in. They are not disrupting pricing, at least not yet because of the factors that Rick outlined, but we are seeing names come in, they're not coming in with doing huge deals, but they -- or take privates yet or other methods that they use to go in and make a big splash in the past. We're seeing them at the asset level, onesie-twosies start. I think they're tiptoeing coming back in. I think there's some institutional memory, although it's usually brief. Operator: Your next question comes from the line of Michael Stroyeck with Green Street. Michael Stroyeck: So you've now had 3 consecutive quarters of, call it, 1% to low 2% SHOP expense growth. Do you see this as a sustainable pace in the near term? Darrin Smith: This is Darrin. Yes, we don't see anything that should disrupt that trend from continuing. Rick Matros: And the operating leverage as occupancy continues to grow just contributes to that. Michael Stroyeck: Right. Okay. Is any of that low expense growth due to maybe weakness in occupancy within the Holiday portfolio or maybe that's actually been a headwind given some of your comments on labor rightsizing, just curious how the Holiday portfolio is impacting that? Michael Costa: Yes, it was more a headwind than anything. And we've talked about this now for several quarters now, Talya's always pointed this out. On an exPOR basis, we've actually seen flat to declining exPOR on our portfolio because of the operating leverage. Given where the occupancy is on this total portfolio, there's not a lot of incremental expense you need in order to increase occupancy. Operator: [Operator Instructions] Your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Talya, end of the road, we'll definitely miss you and all your advice, and I wish you all the very best. Congrats on the credit upgrade guys. Just kind of curious as you kind of think about the cost of debt the implications of the upgrade, does it kind of -- you're going to issue debt -- of unsecured debt going forward? Do you think you're kind of 25% -- or 25 bps in? Or does it have any impact on your pricing grid? Michael Costa: Yes, it's a good question, Tayo. I think the short answer is it doesn't have a material impact on our pricing today by having all 3 credit rating agencies rate us investment grade, probably a couple of basis points to be very honest with you. It doesn't impact our pricing grid on our credit facility anything like that. I think what it does for us more than anything. One, it validates our story, which is huge and something we've been pounding the table, with Moody's on for 15 years and finally, that worked. But then importantly, is now that we have all 3 of those rating agencies onboard, we're not exposed to perhaps one of them going rogue one day and changing their rating methodology hypothetically, right, and that would impact our credit rating. If we only had 2 at that level and then one did that, then we'd be in a different situation from a pricing perspective. So now it just gives us more breathing room, more comfort over being able to continue being an investment-grade issuer going forward. Omotayo Okusanya: Got you. That's helpful. And then could you just talk a little bit about the behavioral portfolio at this point and kind of long-term plans around that? Rick Matros: Sure. So you'll see that continue to shrink as a percent of our portfolio. When we first started investing in it, it was really still during the pandemic, and it was just another pathway to growth. And it was before both the senior housing and skilled spaces really started recovering way more quickly than anticipated from the pandemic, and it became clear that the best use of our capital allocation was in senior housing and skilled nursing to the extent that we could find opportunities. And we noted all along from the beginning of those investments that we thought it was an interesting space. It had some different dynamics and unit economics from both skilled and senior housing that we liked, particularly the fact that the breakeven point on profitability was sort of in the 50% to 60% range. We like that. We see it as a growing space. But all that said, we also noted that it was very young. There were -- the operators that have been proven were few and far between. And so the opportunities were always going to be incremental. And so that's kind of how we sort of got into it and why the growth is really was so slow initially, and we just haven't grown in that. But again, since, call it, the latter part of '23, when it became so apparent what the runway was going to be for senior housing and skilled, that really is the best use of our capital. So it will shrink naturally, as I said, as a percent of our exposure. If we have opportunities to divest some of those assets, we'll explore that. And that's kind of it. Does that answer your question, Tayo? Omotayo Okusanya: Perfectly. Operator: At this time, we have no further questions. I will now turn the call over to Rick Matros for closing remarks. Rick Matros: Thank you all for joining us today. We appreciate the support. As always, we're available for follow-up and look forward to talking with all of you again. And for those of you that we don't talk to before year-end, hope you all have great holidays and be safe. Thank you. Operator: This concludes today's conference call. We thank you for your participation. You may now disconnect. Have a pleasant day, everyone.
Operator: Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Third Quarter 2025 Fiscal Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Spencer Andrews, Vice President of Investor Relations and Marketing. Please go ahead, sir. Spencer Andrews: Thank you, Tina, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the third quarter ending September 30, 2025. I'm joined on the call today by our CEO, Dan Oberste; our Chief Financial Officer, Tom Cirbus; and our Chief Operating Officer, Susie Rosenbaum, who are all available to answer your questions after our prepared remarks. Before we begin, I want to remind listeners that certain statements made on this conference call about future events are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. In addition, we will reference certain non-GAAP financial measures that we believe are useful supplemental information about our financial performance. For more information, please refer to the cautionary statements on forward-looking information and a description of our non-GAAP financial measures in our news release and MD&A dated November 5, 2025. Dan, over to you. Daniel Oberste: Thanks, Spencer. The third quarter represented a significant inflection point for BSR as the REIT completed its redeployment of capital midway through the quarter, continued the integration of our newly acquired assets and, frankly, powered through a softer leasing environment than most anticipated. Despite some continued challenges in the macro level operational backdrop, the REIT's capital allocation and stewardship has positioned our unitholders for upcoming growth. The results will speak for themselves as they have many times in the past when we have executed similar capital allocation decisions. The most recent example being our cancellation of approximately 20 million units or 39% of the outstanding units in the REIT since 2022. To that end, in the third quarter, same-community NOI increased 2.7% compared to Q3 last year. Same-community weighted average occupancy was 94.3%. Our retention rate was 58.2% at quarter end, a further 80 basis point expansion from 57.4% at the end of Q2. Leasing momentum at Austin lease-up Aura 35Fifty continued with occupancy reaching 86.6% at quarter end, up from 59.7% at the end of Q2. We also experienced continued green shoots on the rate front. Blended same community rental rates increased 0.4% over prior leases, representing the first time that blended rental rates have increased since the third quarter of 2024. And we acquired The Ownsby for $87.5 million during the quarter. The Ownsby, which comprises 368 apartment units, is located in the Dallas suburb of Celina, which was the fastest-growing city in the U.S. in 2023 and grew by a further 19% in the 12 months ending July of 2024. The fundamentals of our business are undeniable, though continuing to percolate a little longer than originally anticipated, supply will materially exit the picture in the relative near term. As I highlighted last quarter, CoStar and several other data providers have adjusted their expectations for new deliveries from Q4 '25 through '27, which should ultimately yield additional elasticity and pricing power for our apartment units. Therefore, we believe that this is just the beginning of a period of consistent growth in rental rates. Above and beyond rental rates, we have significant internal growth opportunities in front of us, given the going-in occupancy of the assets we acquired in 2025. As our team stabilizes these new properties and optimizes our existing best-in-class Texas portfolio, unitholders stand to benefit. I'll now invite Tom to review our third quarter financial results in more detail. Tom? Thomas Cirbus: Thanks, Dan. Our operational performance in the third quarter was in line with management's expectations as our blended trade-outs continued to improve and as Dan highlighted, turned positive in the quarter. Blended rates increased 40 basis points in the third quarter, which follows a 3.2% and 0.7% decline in Q1 and Q2, respectively. Clearly, we are seeing the results of the market absorption of previous deliveries. More broadly, the REIT's same-community revenue was $26.5 million in Q3 2025, a decline of 1% from last year. This was primarily driven by the negative trade-outs we have experienced up to the third quarter, which resulted in a 1.2% year-over-year decline in average monthly in-place leases. That decline was partially offset by an increase in other property income driven by enhanced resident participation in our credit building service, an increase in utility reimbursements and an increase in properties receiving valet trash service over the prior year. We're thrilled to see these internalization activities help drive results and believe it is a case study of the value-add potential embedded in our portfolio. It's worth noting that there are several of these internalization activities, including expansions of our valet trash and bulk Internet initiatives, which will provide meaningful acceleration to expected organic growth and will begin to materialize in 2026 and beyond. Same community NOI for Q3 2025 was $14.4 million, a 2.7% increase from Q3 2024. Our acceleration in same-community NOI was mainly driven by a 5% decline in same-community expenses, the primary drivers of which were a $0.6 million decrease in real estate taxes and a $0.2 million decrease in property insurance. Below NOI, G&A improved by approximately $0.1 million or approximately 5% and net finance costs declined 2.7%, largely due to our net paydown of debt following our 2025 disposition and acquisitions activities. In total, FFO in Q3 was $0.19 per unit compared to $0.23 per unit last year. On an AFFO basis, total AFFO per unit was $0.17 per unit compared to $0.21 per unit last year. The year-over-year declines in FFO and AFFO per unit are primarily driven by: one, the time lapse in redeploying our disposition proceeds into new acquisitions; and two, the occupancy concentration of our development and new acquisitions, which we expect to stabilize to similar levels of our same community properties in the coming quarters. In addition, during the third quarter, the REIT declared cash distributions totaling $0.14 per unit, a 2.5% year-over-year increase. Turning to our balance sheet. The REIT's debt to gross book value as of September 30, 2025, was 51.3%. This amounts to $726.6 million of debt outstanding with a weighted average interest rate of 4.0%, 99% of which is either fixed or economically hedged to fixed rates. On the liquidity front, total liquidity was $63.4 million as of September 30, including cash and cash equivalents of $6.6 million and $56.8 million available under our revolving credit facility. As usual, we have the ability to obtain additional liquidity by adding properties to the current borrowing base of the facility. During the quarter, we amended our 3.27% $105 million interest rate swap to lower the fixed interest rate to 3.1% and extend the counterparty optional termination date to January 1, 2027. Note that, as I highlighted last quarter, we have undergone some material changes to our derivative book this year as we were called out of in-the-money swaps. Accordingly, ongoing finance costs will reflect the higher cost replacement of these derivative instruments, particularly evident when viewed on a per unit basis. However, as a reminder, our use of swaps to hedge our interest rate exposure was laddered by design when we initiated this program. We continuously monitor and adjust various hedges with the goal of achieving the best cost of capital for the REIT. Finally, our financial and operating results continue to be affected by very recent property acquisitions, lease-ups and the replacements of swaps. So with so many moving pieces, we are continuing our suspension of more detailed annual guidance at this time. I will now turn it back to Dan for his closing remarks. Daniel Oberste: Thanks, Tom. As we quickly approach the holiday season, I will remind everyone that 2025 has been a transformative year for the REIT. We've sold 10 fully stabilized apartment communities at extremely attractive pricing to best-in-class buyers, once again, underlining the veracity of our NAV. In turn, we have traded those 10 stabilized communities for recently developed assets with higher embedded growth potential while increasing our relative concentration to Houston. With the acquisitions of the Ownsby and Venue Craig Ranch in Dallas, Forayna Vintage Park and Botanic Living in Houston and the lease-up of Aura 35Fifty in Austin, we have now added a tremendous new cohort of assets to the REIT. These new communities will help us capitalize on the improving market fundamentals and generate sustained cash flow growth that results in increased value for unitholders. While we have now redeployed our 2025 disposition proceeds, it doesn't mean we're out of the acquisition business. We continue, as always, to examine acquisition opportunities in markets where the external growth environment is improving. However, we're not in the business of taking unnecessary risks with our investors' capital. To that end, we want to see a future return profile in excess of our weighted average cost of capital. Before wrapping up, I would like to call your attention to the fact that BSR was recently named one of the best places to work in multifamily for the fourth consecutive year. This is a tremendous achievement and speaks to the culture and team we have built at BSR as we approach our 70th year in the real estate business. We're proud of our management platform and firmly believe that it represents the secret sauce that brings us the best team in the business. That concludes our prepared remarks this morning. Tom, Susie and I would now be pleased to answer your questions. Operator, please open the line for questions. Operator: [Operator Instructions] The first question will come from Tom Callaghan from BMO Capital Markets. Tom Callaghan: Maybe just to start, nice to see the blended lease spreads turn positive there this quarter. Just wondering if you can add some color in terms of the cadence of those spreads and what you saw in the market really over the course of the quarter, just given I think it does imply a bit of a slowdown from the July levels that you talked about last call. Susan Koehn: Sure. Yes, I'm happy to answer. So as you're aware, we've got 2 levers that we can pull when it comes to maximizing cash flow for the portfolio. And what we did is we -- those levers are obviously occupancy and rate. And what you saw was we pushed rates in both July and August. And then we saw occupancy slightly drop in September, which made sense because the kids have gone back to school and you have less people looking for an apartment. So you've got some seasonality blended in, which is completely normal. We're still in that 94% to 96% occupancy, which I've said before is our sweet spot. Tom Callaghan: Got it. That's helpful. And that was actually going be my next question there just in terms of kind of those -- that push versus pull on occupancy and rate. How are you thinking about that into Q4 and 2026? Thomas Cirbus: Yes. I mean, I'll jump in, and we're thinking through all the budgeting things real time here, Tom. And so let me say, it's one of those things where the data providers, we could sit here and quote it to you are all over the map. And I don't know that, that's a productive exercise. We have our best data providers of our in-house team working through it real time. So not -- we don't have a great forward-look answer there. What I'd tell you is at our Analyst Day here in December, we're looking to give you more color there. So let me punt to then. Tom Callaghan: Okay. That sounds good. I look forward to that. Maybe one last one for me is just on capital allocation. Dan, you did mention in the press release, you're now fully redeployed in terms of the 2025 disposition capital. So I guess just in that vein, how should investors think about your approach to really capital allocation over the next 12 months? And part and parcel of that is just balance sheet leverage. Are you comfortable with where that is right now? Or do you have kind of a target in mind? Daniel Oberste: Yes, Tom, we like the players we got on the field in our portfolio right now. We bought the 5 assets that we've talked about in our prepared remarks, and you're seeing the performance and the lease-up expectations in some cases, in Austin, exceeding our lease-up velocity expectations. And in others, pretty much leasing up as we underwrote and expected. I think the team should focus right now on the occupancy potential from here on out and its potential to generate revenue. That's priority #1. And our investors are in luck because that's something we've been doing going on 70 years. So we feel pretty confident that we'll be able to obtain the revenue generated from those lease-ups. When we think about additional acquisitions, step one is we always underwrite our properties on their return on fair market value, and we rank them from 1 to 26%. If we see a rotation opportunity, I think you've seen us take advantage of those opportunities in the past. Number two, if we see there's an opportunity to deploy capital through leverage, equity or other creative means to drive a higher return for our investors. I think you've seen us work in creative and predictable patterns in the past to deliver those returns. But back to our current portfolio, we like the team we have on the field. We like the 5 new players that we put on our team this year. Operationally, I think we do what we're equipped to do, which is be a manager, and I think that's how we can maximize returns. We don't have any near-term plans to use credit to acquire nor do we have near-term plans to rotate, I would say, through the end of the year. As the year approaches or if anything changes in our portfolio, we certainly take advantage of rotation acquisition opportunities as well as other opportunities fueled by one or all means of capital. Operator: Kyle Stanley from Desjardins has the next question. Kyle Stanley: Just going back to the leasing spread front. It was encouraging to see the improvement on the new leasing side in Austin. Could you just speak to maybe what's driving that improvement in Austin? Is it the mix of leases? Is it may be less competition in the market today? Just love your thoughts on that. Susan Koehn: Sure, Kyle. So exactly, Austin, for the first time in a while, we saw the total percentage of properties offering concessions drop slightly. That -- and so that certainly would account for the fact that we were able to push rates a little more in Austin than we have in the past. Dallas-Fort Worth and Houston were the exact opposite. We saw concessions actually tick up slightly in Dallas and in Houston as far as properties go that are offering these. Kyle Stanley: Okay. Perfect. Next, so I think Tom mentioned the kind of look forward and maybe updating us at the Investor Day. Can we expect annual guidance for '26 provided at that point or at least getting back to providing annual guidance for the year ahead? Thomas Cirbus: Yes, Kyle, I think we have every intention of bringing back annual guidance in the future. I think we'll give some forward looks in December, TBD on to what extent, but we're moving in that direction for sure. Kyle Stanley: Okay. Perfect. And then just the last one for me. Dan, you've mentioned the lease-up opportunity of your recently acquired assets and that being a key focus today. On average, where would the in-place occupancy at those 5 newly acquired assets or the 5 new assets in the portfolio, where would that be today? And how quickly do you expect stabilization to occur over the next several months or quarters? Daniel Oberste: Yes. So I'll take a first stab on it and then invite Susie to add some more color and details. Typically, when we underwrite -- well, first of all, where are they ending today? The occupancy on each of those 5 assets is going to be higher today than it was at September 30 when we reported those numbers. We see the upside opportunity in occupancy from here on out, we can value that at about $4.5 million of revenue in 2026. Now what margin that revenue falls on, it's naturally going to be higher. I mean it makes sense that the top end of your stack is at a significantly higher margin than the first lease you get. Whether it's 65%, 75%, 80% margin is what we're working through right now incrementally as you can understand the challenges of rotating and then providing guidance on lease-ups. Some -- well, all of them are exceeding our expectations on occupancy and leasing velocity. Did that answer the first part of your question? Kyle Stanley: It did. I guess the one just clarification. The $4.5 million of revenue, that's incremental to what's already being generated today upon lease-up, correct? Daniel Oberste: Yes, that's incremental to what we're probably depicting for September numbers. I mean we see that as the occupancy. I'm not going to say low-hanging fruit because it's difficult to lease apartments. That's a specialized task. But to our people, they consider that low-hanging fruit because that's what they do every day. Occupancy is something that comes when, as Susie mentioned earlier, you have the product. Susie, are there any other details that you'd like to add on to that? Susan Koehn: Yes. Just -- yes, as you pointed out, so they were 90% occupied at the end of the quarter. But as Dan pointed out, that doesn't mean that, that was 90% the entire time. So we do have a lot of room to pick up there. I'd like to point out, though, that we would expect 3 of these assets to be stabilized from an occupancy standpoint by the end of the year, and the other 2 would be in the first half of next year. But we get 2 bites at the apple. Here's the thing that's important to remember, occupancy is number one, but then we still have to or get to burn off concessions, which will also raise rental revenue. Operator: Up next, we'll hear from Sairam Srinivas, Cormark Securities. Sairam Srinivas: Just looking at the acquisition market, and you guys have obviously been active in that. Are you seeing additional participants now actually come into these assets versus what you would probably see 6 to 8 months before? Thomas Cirbus: So I think the acquisition market is relatively healthy. I think the same participants are happening as were happening 6 to 8 months ago. I think it's a confluence of all the typical parties. I don't think that there's been a material change in the type of buyer over the course of the last 6 months, but I welcome Dan's thoughts as well. Daniel Oberste: No, I think Tom summarized it very well. I mean the acquisition market continues to present opportunities. And as we see the movement of the interest rate curve from a historically flat curve over the last year or 18 months or 5 years, depending on if you're counting, to some volatility on a look forward in the interest rate curve, the volatility creates opportunities to finance a risk against a desired return. We think there's an improved outlook next year, the following year and the following year, all the way into '28 for just the fundamentals of the cash flow, the ability of properties to deliver cash flow in our business. We don't think -- and I know our investors can share our opinion. We don't think the markets are accurately underwriting the revenue potential and the upside in net operating income that the sector is probably going to drive, and we empathize with that. Our partners in the market that are private that are attempting to sell their projects right now. For the most part, people that are selling have a difficulty and they have a little bit higher leverage, well, significantly higher leverage than us and other public REIT participants have. And that higher leverage and that higher interest burden certainly creates challenges in that private developer earning the cash flow that they had underwritten. Now above leverage, I think the operations, if I was -- I think many of our operating partners, when you remove interest rate and when you remove cap rate from their underwriting in '21 are experiencing pro forma net operating incomes in line with what they expected their developments to achieve. I think the difficulty that our private sellers are seeing right now is the cap rate placed on that cash flow stream, that net operating income that they underwrote. It's not that the cap rates have risen beyond -- I think our NAV is a great depiction of the market cap rate for the market. It's that the expectations in '21 and '22 for those private developers who raised private capital were not a 5.1% or a 5.2% exit cap. They probably align more closely to a sub-4 cap. And so when you build a property and it operates and the trains come in on time and the revenue and occupancy and the net operating income matches your pro forma, but your reversion cap for your investment went from a 3.9% cap to perhaps a 5% cap, that's a significant deterioration in your sales proceeds. As we discussed in prior quarters, those developers face challenges, and they've decided to, in some cases, sell their properties. Some of our good partners have sold properties to us that we are totally excited about from a purchase price standpoint and from an operational standpoint. Other potential sellers and developers have decided to refinance that risk and wait for better days, which I'm in their camp on because we just bought 5 properties, and we're looking at the same fundamental economics in our markets that those developers are. They might just be willing to take a substantial amount of risk with their private capital investment dollars that maybe in the public markets, we're not comfortable with from a leverage standpoint. Sairam Srinivas: That makes sense, Dan. And maybe we've spoken about that cliff of supply earlier and how essentially once that runs out, it actually just plummets all the way down. When you look at the market right now and what you're seeing post quarter, how much time do you think it actually takes for all that supply to eventually get absorbed and for you to actually come to that precipice where you could probably see rents start jumping again? Daniel Oberste: Yes, sure. So if the supply that has occurred in the past is met with the same relative absorption that we've seen this year so far, not very long, Sai. And I want to reiterate that the first 9 months of 2024 was the best first 3 quarters for apartment absorption in history outside of a little blip in the post-COVID era. So if we see that same pace of absorption, then you can count the supply problem being a problem, you could count that on your watch. I. think that -- and I think most people think that with population growth muting a little bit driven by perhaps a lack of international immigration nationally, that absorption may taper down a little bit in the future, though it will still well outpace in our markets and many others, the demand and absorption is going to top supply in these markets for the foreseeable future. So I think you can probably continue to see a pace of absorption in line relative with deliveries that you've seen in the first 9 months. As you see deliveries drop by 50% next year and 40% the year after that, you may also see absorption drop just a tad next year and just a tad the year after that from a gross standpoint. But from a net standpoint, that's an extremely healthy indicator as absorption is set to outpace supply for the foreseeable future. Sairam Srinivas: That makes sense, Dan. And my last question is, when you look at October last year versus what you've seen in the past month, how would you characterize the leasing trends at? And do you -- like is there a sustained improvement that you're seeing? Susan Koehn: I think October looks pretty similar right now to what Q3 looks like. Operator: Himanshu Gupta from Scotiabank has the next question. Himanshu Gupta: So if I look at occupancy, a bit softer in Q3, and I know you did mention some seasonality. And when I look at rental spreads, I think they were a bit better. So just wondering, is there like a shift in focus maybe a bit more on rents than defending occupancy in the near term? Susan Koehn: Yes. Like I was saying earlier, we did start pushing rents in July and August intentionally, right? And then we started to see occupancy slightly drop off in September, which is normal with seasonality, but also probably has to do with the fact that we were more aggressive on rates. We have these 2 levers that we use to balance our cash flow, which we believe the team is really good at doing. And as long as we're staying in between what we call our sweet spot, 94% to 96% occupancy, we think we're doing the right thing. Himanshu Gupta: Got it. And then Houston, and I think Dallas as well, you mentioned concessions have picked up a bit. Can you elaborate? I mean, is that a function of like job growth being slower than expected or some still lingering impact from supply? Susan Koehn: So with Dallas, that's mostly -- it's the North Dallas market, and that's a supply issue right now. But there are still a lot of people moving into these North Dallas markets as well. So we know it's going to be absorbed. The question as everybody is asking is just when is that over. But that certainly has to do with the slight uptick in the number of properties offering concessions there. Himanshu Gupta: Okay. Okay. Fair enough. And maybe my last question would be, I mean, Houston is your largest market, biggest market. Are you comfortable keeping this as your highest exposure market in the medium term? And I know Houston has less supply pressures for now, but can Houston outperform rent growth compared to the other markets in the near term or in the medium term, rather? Daniel Oberste: Yes, certainly, Sai. Houston this year and next year, we're very comfortable with our market concentration in Houston. And then our viewpoint that we've made in the past on future rotations as evidenced in our future acquisitions as evidenced in Q3 is that we plan to backfill and grow probably in Dallas to be in shape to take advantage of some mid-market economics and in the latter half of '26 moving into '27, '28. So the answer -- the short answer is absolutely 100% yes, incredibly comfortable with Houston right now for this setup. And then again, as you've heard us say before, we get right in the path of growth and thus rent increases relative to other markets and occupancy and potential residents, and we'll always keep our investors' money in that path. Operator: Your next question comes from Jonathan Kelcher, TD Cowen. Jonathan Kelcher: Just going back to the 5 new assets. I just want to -- like stabilized occupancy, is that that's 94% to 96%, correct? Thomas Cirbus: Correct. Jonathan Kelcher: Okay. And then what -- in order to get there, what are you currently offering on concessions that will hopefully start to burn off next year as you hit the occupancy? Susan Koehn: Sure. Yes. So I'm happy to say that in October, we're not offering concessions anymore on the Aura 35Fifty development in Austin. In Dallas, it's still 10 weeks free. Jonathan Kelcher: Okay. That is helpful. And then just lastly, the decrease in same property taxes this quarter, was there any -- were there any onetime property tax rebates in there? Or was it just lower assessed values that drove that? Daniel Oberste: It's a combination of both, Jonathan. We saw some opportunities to settle some tax rebate appeals in the quarter, and we accelerated some of those settlements. And I think you've seen us do that in the past. We try to smooth out those settlements for earnings, but we don't let that tail wag the dog. If we see an opportunity to settle sooner than later, we certainly take advantage of that. I'd put that in the tune of a couple of hundred thousand dollars or $0.0025, $0.005 for the quarter. We talked about that in the past. So it comes and goes, but it's generally not incredibly disruptive to the performance kind of on an FFO basis. Operator: [Operator Instructions] We'll go next to Jimmy Shan, RBC Capital Markets. Khing Shan: So just a follow-up on the revenue contributions from the 5 new assets acquired. The $4.5 million of incremental revenue, so is that relative to the Q3 run rate revenue? Or is that relative to their 2024 contributions when they were acquired? Daniel Oberste: Yes, I see it as relative to the Q3 revenue. We tried -- we thought that there would be some questions about the acquisition impact on a run rate. And we do empathize with the choppiness of the return that we generated in the third quarter. And so we really wanted to communicate our -- the revenue upside from Q3. So that's about $4.5 million. And then I'll finish that with, I'd rather take a choppy $15 million than a smooth $10 million, Jimmy. Khing Shan: Sure, sure. And the concessions. Can you quantify those as well on those 5 assets? I guess, as they burn off, would that be in addition to the $4.5 million? Thomas Cirbus: Yes. The $4.5 million just assumes that we put people in vacant units today. So there's a bunch of upside, which we're not ready to quantify sitting here today in addition to the $4.5 million for all the ancillary things that Susie's team does really well, including but not limited to, the burn-off of concessions that is the second bite at the apple in whatever, 8 to 16 months or whatever the numbers are. Khing Shan: So if I heard correctly, in Dallas, you're offering about 2.5 months free rent. So we could ballpark it from that standpoint. Daniel Oberste: Yes, I think that's fair, Jimmy. Khing Shan: Yes. Okay. And then the leasing spreads, the softer leasing environment, I don't think you're the only one seeing that. So can you -- yes, there's some seasonality, some rate push. But what do you think that is attributable to this softer leasing environment? Daniel Oberste: We think it's entirely attributable to macroeconomic volatility, which is why we didn't acquire until, I'll say, after the end of April when you think about when we started closing on these assets. So I think the tepid response by the customer right now, driven by volatility in the macroeconomic environment, whether it's tariffs, whether it's Federal Reserve banking policy, has a whole lot to do with politics and global politics and United States politics. I think we've all seen that. We were cautious when we decided to acquire assets coming out of the AvalonBay transaction. We're very cautious with our investors' monies. We underwrote in a very cautious manner. So I think that might be what's driving the overall macro environment, but it doesn't necessarily surprise us from our underwritten -- our returns against our expectations. Khing Shan: Okay. And sorry, last question. Tom, you mentioned all these swaps. And so what is -- how should we model the interest expense going forward? Thomas Cirbus: Yes. So similar to what Dan was saying earlier, I'll emphasize that it's a little bit challenging to do because the third quarter numbers do have some relative uncomparability there in the sense of -- don't forget that we have 2 really -- our '25 acquisition class are all in some form of stabilization that are carrying the full expense load and thereby being a little bit of a drag on earnings. Now that said, as it relates to the swap book more generally, we've continued to monitor that. And we just saw us this quarter increase our -- the tenor on one of the cancellation options out another year and to the REIT holders benefit by a lower rate. Khing Shan: So if I read that, this quarter looks about right for the next quarter or 2? Daniel Oberste: Yes. I think that's fair, Jimmy. But with that said, our REIT has historically taken the view of about 80% hedged to fixed rates and 20% exposure to the short end of the curve. That's been what we've discussed with our investors since our IPO. Now as you know, in the month of -- in March of '22 and that quarter right after that second quarter of '22, we began increasing our fixed debt to 100% of hedging. Now our investors have enjoyed the cash flow benefit of this decision for the last 3 years. Now we kind of see the opportunity in the interest climate moderating, and that affords us the opportunity to accretively decrease our hedging exposure back to what we think is fair, which is about 80% from its current position at 99%. Now this is -- this may create a little bit of complexity in the forecasting of interest expense in Q4 and Q1, but we think any disruption is to the benefit of our investors. And we believe that the decision is going to -- what to do with $102 million of call options in January and February will impact Q4 in the positive, if possible, and Q1 and Q2 in the positive. But I think I would model a little bit more short-term exposure to our hedges. And I see -- we see the opportunity to do so. And by short term, I mean 0 to 2 years, not 30 days. Operator: And everyone, at this time, there are no further questions. I'll hand the call back to Dan Oberste for any additional or closing remarks. Daniel Oberste: Thank you for listening, everyone, and we hope you enjoyed the call. If you have any additional questions, management is available at your convenience to discuss. We look forward to seeing some of you at our Investor and Analyst Presentation Day in early December during NAREIT in Dallas. Otherwise, have a good rest of the month. Thank you very much. Operator: Once again, everyone, this does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.
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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 202 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings. With that, I will turn the call over to John Hall, Global Head of Investor Relations. Please go ahead. John Hall: Thank you, operator, and good morning, everyone. We appreciate you being with us today for MetLife's Third Quarter 2025 Earnings Call. Before we begin, I direct you to the information on non-GAAP measures on the Investor Relations portion of metlife.com in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer and Head of MetLife Investment Management. Other members of senior management are also available to participate in today's discussion. Last night, we released a set of quarterly supplemental slides, and they're available on our website. John McCallion will speak to these slides in his prepared remarks. An appendix to the slides features additional disclosures, GAAP reconciliations and other information, which you should also review. After the prepared remarks, we will have a Q&A session, which will close at the top of the hour. As a reminder, please limit yourself to one question and one follow-up. With that, over to Michel. Michel Khalaf: Thank you, John, and welcome, everyone, to this morning's call. Last night, MetLife reported strong third quarter results, showcasing the earnings power of our diversified set of market-leading businesses and shining a spotlight on the positive impact of our New Frontier strategy. The expectations we outlined in the second quarter emerged in the third quarter as anticipated. Most notably, underwriting results bounced back in our flagship Group Benefits business on normal disability experience and seasonally better dental profitability. Variable investment income posted its highest recent contribution to adjusted earnings as capital markets activity accelerated, unlocking value in private equity. Our global retirement liability origination platform is in high gear with growth in the U.S. and the U.K. as well as in Japan, where our efficient capital structure is supporting stellar sales growth. And in Latin America, our innovative digital platform for embedded insurance, Accelerator continues to attract and win over new strategic partners. Turning to our quarterly results. We reported adjusted earnings of $1.6 billion or $2.37 per share, up 22% per share from the prior year period. Notable items totaled $18 million or $0.03 per share and included our annual actuarial assumption review and a tax adjustment in Mexico. Excluding notable items, adjusted earnings totaled $1.6 billion or $2.34 per share, a 21% increase from a year ago. The greatest driver of our outperformance in the quarter was strong investment margins led by variable investment income as well as volume growth across several business segments. We reported variable investment income of $483 million, above our implied quarterly outlook of $425 million on higher private equity returns, which reached 3% for the quarter. With the rebound in variable investment income, MetLife generated an adjusted return on equity, excluding notables, of 16.7%, a level more on par with the company's earnings power and near the top of our target of 15% to 17%. And we delivered a direct expense ratio of 11.6% in the third quarter. We are well ahead of schedule with this ratio relative to our New Frontier commitment with the force multiplier effect of AI and other emerging technologies accelerating our productivity and efficiency gains. Moving to MetLife's businesses. Group Benefits adjusted earnings, excluding notable items, totaled $457 million, up 6% from a year ago, reflecting solid underwriting results. Disability results returned to normal and dental profitability ramped up in the quarter, consistent with its seasonal profit pattern. As a result, we saw a 230 basis point sequential improvement in our nonmedical health loss ratio, providing further confidence in achieving a combined 400 basis points of improvement across the third and fourth quarters. In Retirement and Income Solutions, adjusted earnings, excluding notable items, totaled $423 million, up 15% from the prior year quarter, reflecting higher variable investment income. Chariot Re officially launched in the third quarter with an initial reinsurance transaction of roughly $10 billion. This strategic partnership helps expand MetLife's retirement liability origination capacity in a capital-efficient manner while also generating institutional assets for MetLife Investment Management. Total liability balances in RIS were up 3%. The solid result was driven by strong general account balance growth, including structured settlement production, a record quarter for us, in fact, and volume growth in U.K. longevity reinsurance. We did not report any new pension risk transfer deals in the third quarter. However, the fourth quarter is shaping up to be a record quarter as we've already written $12 billion of PRT transactions, demonstrating the trust the marketplaces in MetLife. Our long-term outlook for the PRT business is positive. A few weeks ago, we released the results of our annual poll of pension plan sponsors. The survey found that 94% of those sponsors planning to derisk their portfolios expect to fully divest in the next 5 years. This is the highest percentage we've recorded since we initiated the survey 10 years ago. Shifting to Asia. Adjusted earnings, excluding notable items, were $473 million, a 36% increase on a reported basis from the prior year quarter. Sales surged 34% on a constant currency basis, driven by an outstanding 31% increase in Japan. Our competitive Japanese product portfolio, which includes both foreign currency and yen-denominated retirement products has gained excellent traction across our multipronged distribution in the country. More than keeping pace, constant currency sales in other Asia markets jumped 39%, led by Korea, China and India. In Latin America, adjusted earnings, excluding notable items, were $222 million, up 2%. Adjusted PFOs for the region totaled $1.7 billion, up 11% on both a reported and constant currency basis, indicative of continued business momentum across the region, most notably in Mexico, Chile and Brazil. We recently added e-commerce leader, MercadoLibre as a partner on our Accelerator digital platform in Mexico and Brazil. We now have more than 20 partners across Latin America, and the Accelerator platform has generated more than $340 million of annualized premiums since its launch, another powerful example of New Frontier in action. Finally, EMEA posted another strong quarter with adjusted earnings, excluding notable items of $89 million, up 19% on a reported basis, primarily due to volume growth. As we do each third quarter, we published our 2024 value of new business or VNB results. It is hard to overstate VNB's importance as a tool for MetLife in maintaining capital and pricing discipline around the globe. Over time, the principal use of VNB has powered our transformation into a more capital-light business with consistent improvement demonstrated year after year. Again, the results for the past year are impressive. In 2024, we deployed $3.4 billion of capital to support new business origination. This is the highest order use of our precious capital. The capital deployed in 2024 was put to use at an average internal rate of return of 19% and a payback period of 5 years. Our success with VNB does not occur in isolation. Achieving high internal rates of return on new business with short payback periods feeds directly into our ability to produce a high return on equity and generate strong free cash flow. To that end, we continue to manage capital with discipline, protecting liquidity and balance sheet strength while returning excess capital to shareholders. Our track record is well established. We have returned almost $24 billion to shareholders through buybacks and common dividends in the past 5 years. And the third quarter was no exception. We returned about $875 million to shareholders through common stock dividends and share repurchases. We paid roughly $375 million of common stock dividends and repurchased around $500 million of our common stock. With approximately $150 million of repurchases in October, our total year-to-date share buyback is now roughly $2.6 billion. We ended the quarter with cash and liquid assets at our holding companies of roughly $4.9 billion, which includes about $700 million earmarked for near-term debt maturities and is above our target cash buffer of $3 billion to $4 billion. There is no doubt capital deployment and capital management have been integral to our past success and will continue to be as we push forward with the execution of our New Frontier strategy. We are working hard towards the successful closing of 2 strategic transactions: the acquisition of PineBridge and the sale of a legacy block of variable annuities to Talcott Resolution Life. In both cases, we are fully engaged and on track to close in the fourth quarter. As we execute across our New Frontier strategic priorities, we are extending our leadership in the places we have the right to win. Underpinning our strategic priorities is our investment portfolio and our time-tested approach to credit and our unwavering commitment to risk management. For 157 years, MetLife has navigated complex and evolving credit markets, delivering consistent investment results even through periods of significant volatility. Today, while the credit environment is reasonably stable and credit fundamentals resilient, we recognize spreads are historically tight and in some ways, priced for perfection. We maintain an up and quality bias across our portfolio, supported by active surveillance and disciplined underwriting. Our diversified high-quality portfolio and active risk management position us well to navigate a wide range of economic outcomes, ensuring we deliver regardless of the market environment. In closing, our third quarter results illustrate MetLife's ability to create exceptional value for shareholders and stakeholders alike and the power of the New Frontier as a growth engine. As we do each year, we just completed the annual pressure testing of our strategy with our Board of Directors and came away confident we have the right strategy for the right time. Our focus on consistent execution, steady capital management and expense discipline will continue to strengthen and differentiate our market leadership while fueling our superior value proposition comprised of strong growth and attractive returns with lower risk. Now I'll turn it over to John to cover the quarter in more detail. John McCallion: Thank you, Michel, and good morning, everyone. I'll walk through our third quarter results and refer to the 3Q '25 supplemental slides, which covers highlights of our financial performance, including details of our annual global actuarial assumption review. In addition, I'll provide updates on our value of new business metrics and our liquidity and capital position. Beginning on Page 3, we provide a comparison of net income and adjusted earnings for the third quarter. We have introduced a new line item, net activity attributable to ceded reinsurance arrangements, which captures the net income impact from the growing use of ceded reinsurance following the launch of Chariot Re in Q3 of '25. Much of the offsetting amounts are captured in accumulated other comprehensive income, or AOCI, and primarily represents the change in unrealized gains or losses on the reinsured portfolio ceded to the reinsurer. Therefore, we believe most of the accounting for this item to be asymmetric or noneconomic in nature. Additionally, the main factors contributing to the difference between net income and adjusted earnings this quarter were net derivative losses resulting from stronger equity markets, rising long-term interest rates and strengthening of the U.S. dollar. The net investment losses were generally in line with recent quarters. Overall, we continue to believe we are operating in a relatively stable credit environment. Moving to the bottom of the table, we recorded 2 notable items that mostly offset each other, resulting in a net increase to adjusted earnings of $18 million or $0.03 per share. The first item relates to the resolution of an industry-wide tax matter in Mexico regarding the value-added tax deduction of certain health insurance claims expenses. This resolution and related change in tax law resulted in an after-tax charge of $71 million in 3Q of '25 in Latin America. We anticipate an additional after-tax charge of $20 million to $25 million in 4Q. And for 2026, we estimate a reduction in Latin America adjusted earnings of roughly $50 million to $60 million as we recalibrate our underlying rate assumptions in Mexico with little to no impact in 2027 and beyond. The second item relates to our annual actuarial assumption review, which increased adjusted earnings by $89 million. Turning to Page 4. We provide additional details of these effects on adjusted earnings and net income by segment. The overall impact from the annual review was modest. In Retirement Income Solutions, or RIS, our payout annuity business benefited from higher mortality. Within Asia, we recognized more favorable experience in Japan due to lower morbidity in accident and health products and favorable lapse experience in life insurance. And in MetLife Holdings, we had favorable mortality in life insurance and favorable lapse rates in variable annuities. Next, let's look at adjusted earnings by segment on Page 5. This shows third quarter year-over-year comparison of adjusted earnings, excluding notable items by segment and Corporate and Other. All my comments related to this slide will be made on an ex notables basis. Adjusted earnings were $1.6 billion, representing a 15% increase year-over-year. This was primarily driven by higher variable investment income and strong volume growth. These were partially offset by less favorable underwriting and lower recurring interest margins when compared to the prior year. Adjusted earnings per share were $2.34, up 21%. Growth was supported by disciplined capital management. Moving to the businesses. Group Benefits results showed steady growth and improved margins. Adjusted earnings were $457 million, up 6%. The key drivers were favorable expense margins and volume growth. This was partially offset by less favorable life underwriting. The group life mortality ratio, excluding the assumption review, was 83.3% for the quarter, which is below the bottom end of our 2025 target range of 84% to 89%, but less favorable than the 82.4% on the same basis in the prior year. The nonmedical health interest adjusted benefit ratio was 72.5%, modestly above the midpoint of our annual target range of 69% to 74% and essentially flat to Q3 of '24 of 72.4%. This result represented an improvement of 230 basis points sequentially from the second quarter, primarily due to the anticipated dental seasonality and an expected recovery in disability. We continue to expect our nonmedical health ratio to improve further in 4Q due to typical lower seasonal utilization in dental. Turning to the top line, Group Benefits adjusted PFOs were up 3%, which was dampened by approximately 1 percentage point due to the impact on premiums from participating life contracts. In addition, sales were up 5% year-to-date due to growth across most products. RIS maintained its strong momentum, coupled with higher investment income. Adjusted earnings were $423 million, up 15% year-over-year. The primary driver was higher Variable Investment Income or VII. RIS investment spreads were 131 basis points, up 29 basis points sequentially due to higher variable investment income. RIS spreads, excluding VII, were up 1 basis point sequentially at 102 basis points. In addition, the transfer of approximately $10 billion of RIS liabilities to Chariot Re in 3Q of '25 resulted in a reduction in adjusted earnings, which was in line with our prior guidance of $15 million to $20 million per quarter. RIS continues to achieve strong business momentum. Adjusted PFOs, excluding PRTs were up 14%, primarily driven by higher structured settlements and U.K. longevity reinsurance sales. In addition, our spread earning general account liabilities grew 4% year-over-year, while total liability exposures grew 3%. And as Michel mentioned, we've already secured a record level of new PRT mandates so far in Q4. Turning to Asia. The segment displayed strong performance across all key metrics. Adjusted earnings were $473 million, up 36% and up 37% on a constant currency basis. The primary drivers were higher variable investment income and volume growth. Additionally, results were positively impacted by a $30 million after-tax benefit from a model refinement applied to accident and health products in Japan. General account assets under management at amortized costs were up 6% year-over-year on a constant currency basis, and sales were up 34% on a constant currency basis. Sales in Japan, our largest market in the region, were up 31% on a constant currency basis, driven by product launches and enhancements earlier in the year. And other Asia markets also contributed meaningfully with sales up 39% year-over-year on a constant currency basis, led by Korea and China. Latin America had solid top line growth and resilient earnings. Adjusted earnings were $222 million, up 2% on both a reported and constant currency basis, primarily due to volume growth across the region. In addition, a favorable Chilean encaje return of 6% contributed to LatAm's solid performance, although it was below the 8% earned in 3Q of '24. Latin America's top line continues to perform well. Adjusted PFOs are up 11% on both a reported and constant currency basis, and sales were up 15% on a constant currency basis, with strong growth across the region, most notably in Mexico, Chile and Brazil. EMEA had broad-based volume growth, driving a double-digit adjusted earnings increase. Adjusted earnings were $89 million, up 19% and 17% on a constant currency basis. EMEA adjusted PFOs were up 11% and up 9% on a constant currency basis, and sales were up 24% on a constant currency basis, reflecting strength across most markets led by Turkey, Gulf and the U.K. MetLife Holdings delivered adjusted earnings of $190 million, up 12%, primarily reflecting higher variable investment income. Corporate and Other reported an adjusted loss of $288 million for 3Q of '25 compared to a loss of $249 million in the same period last year. This increase was primarily driven by market-related employee costs as well as higher interest payments on outstanding debt. The company's effective tax rate on adjusted earnings in the quarter was approximately 24%, which is at the bottom end of our 2025 guidance range of 24% to 26%. On Page 6, this chart reflects our pretax variable investment income for the past 5 quarters, including the third quarter of 2025, which was $483 million, above our implied quarterly guidance of $425 million. Private equity returns of 3% in the quarter drove the outperformance, while our real estate and other funds yielded an average return of approximately 50 basis points. As a reminder, PE and real estate and other funds are reported on a 1-quarter lag and accounted for on a mark-to-market basis. Page 7 presents post-tax variable investment income by segment and Corporate and Other covering the last 5 quarters. Each business segment maintains a distinct investment portfolio, carefully matching its liability profile. The majority of VII assets are concentrated in Asia, RIS and MetLife Holdings, reflecting the long-term nature of these obligations. As of September 30, 2025, total VII assets stood at approximately $19 billion. Asia represented over 40% of these assets, while RIS and MetLife Holdings accounted for about 30% and 20%, respectively. This distribution underscores our strategic approach to asset allocation, ensuring that the investment portfolios are aligned with the duration and risk characteristics of each segment's liabilities. Turning to expenses. Page 8 illustrates our direct expense ratio trends over time. For the third quarter of 2025, our direct expense ratio was 11.6%, an improvement from 11.7% in Q3 of '24 and notably below our full year target of 12.1%. We continue to emphasize that the full year direct expense ratio offers the most meaningful measure of our expense management given the inherent variability in quarterly results. However, this quarter's outcome further demonstrates our continued commitment to disciplined expense control and operational efficiency while maintaining responsible growth across our businesses. Turning to Page 9. The chart highlights MetLife's value of new business, or VNB, metrics across our major segments, which we report annually and highlight the past 5 years. During 2024, we allocated $3.4 billion in capital to support new business initiatives, achieving an average unlevered internal rate of return of approximately 19% and a payback period of 5 years. This disciplined capital deployment generated about $2.6 billion in new business value. The 2024 VNB results underscore our ongoing commitment to investing in opportunities that deliver responsible growth and attractive returns. We view annual VNB as a key indicator of our ability to expand our ROE and accelerate free cash flow generation over time. Let me now review our cash and capital position as detailed on Page 10. MetLife remains strongly capitalized, maintaining robust liquidity well above our internal targets. As of September 30, cash and liquid assets at the holding companies totaled $4.9 billion, exceeding our target cash buffer of $3 billion to $4 billion. We continue to prioritize returning excess capital to our shareholders with total cash returns in the third quarter reaching approximately $875 million, comprised of roughly $500 million in share repurchases and approximately $375 million in common stock dividends. In addition to these returns, holding company cash reflects the net impact of subsidiary dividends, debt issuances, operating expenses and other cash flows. For our U.S. entities, preliminary statutory operating earnings for the first 9 months of 2025 were approximately $2.1 billion, with net income of $1.3 billion. Our estimated U.S. statutory adjusted capital on an NAIC basis stood at approximately $17.1 billion as of September 30, essentially unchanged from the prior quarter. We anticipate the Japan solvency margin ratio to be around 740% as of September 30, pending the final statutory filings in the coming weeks. Looking ahead, we are pleased with our progress toward the transition in Japan to ESR, a capital framework that closely aligns to the economic capital model we use to manage our business. Based on our initial work, we expect to report an economic solvency ratio within a range of 170% to 190% from March 2026. This ratio reflects the strong capitalization of MetLife Japan as evidenced by its stand-alone AA- rating from S&P as well as our capital management efficiency. We have yielded cash dividends from Japan totaling more than $4 billion over the past 5 years. Before I wrap up, I'd like to note that starting in the fourth quarter, we plan to report MetLife Investment Management or MIM, as its own business segment. In addition, we plan to eliminate MetLife Holdings as a stand-alone segment by consolidating it into Corporate and Other. This new reporting structure aligns with our New Frontier strategy. As part of this resegmentation, we will disclose recasted historical financial results in early January, which should allow enough time to update your models prior to our fourth quarter earnings call. In summary, MetLife delivered a strong quarter, underpinned by sustained momentum and solid fundamentals across our diverse set of market-leading businesses. We achieved robust top line growth, maintained disciplined underwriting and exercised prudent expense management, all while benefiting from higher private equity returns. And our value of new business metrics highlight our strategic and disciplined approach to allocating capital. Backed by a strong balance sheet and reliable free cash flow generation, we are well positioned to achieve responsible growth and deliver attractive returns with lower risk, creating sustainable value for both our customers and shareholders. And with that, I will turn the call back to the operator for your questions. Operator: [Operator Instructions] We'll take our first question from Ryan Krueger at KBW. Ryan Krueger: My first question was on Asia sales. Can you provide some additional color on the strength that you saw? What were the key drivers? And what do you think will -- to what extent can this momentum continue going forward? Lyndon Oliver: Ryan, it's Lyndon here. Look, we're really pleased with the strong quarter we've had in Asia. We've seen a 34% increase in the overall Asia market. So let me give you some more color here. Let's start with Japan. Sales were up 31% year-over-year. We've launched a couple of new products. We've got a new single premium FX Life product that we launched in April. And this product continues to do very well. In addition, we launched a new yen variable life product in August, and this too has been received very well by the market. We've also made some product enhancements. We've enhanced our single premium FX Annuity product earlier this year, and this continues to do well when we compare to the prior year. So if you take all the product launches we put in place as well as the product enhancements, combine it with our distribution strength, that's really what's driving the strong growth that we see in both our channels, bancassurance as well as the face-to-face channel in Japan. Now when we look to the rest of Asia, sales there were up 39% year-over-year. And we're really seeing strong performance in Korea and China here. China sales were higher in the bancassurance channel, and that's really been driven by the fact that we've launched some new key bank partners as well as been able to penetrate existing bank partners. In Korea, we continue to deliver consistently strong performance. And here, we are showing strength in our U.S. dollar product sales as well as our one variable life product and in the face-to-face channels. So good results overall. Now looking ahead, we expect this momentum to continue going into the fourth quarter, and we expect to exceed full year sales guidance for '25. I hope that helps. Ryan Krueger: Great. And then just a quick one on expense seasonality. Can you -- I think you typically do have some expense seasonality in the fourth quarter. Can you give us any rough magnitude of what to expect there? Michel Khalaf: Yes. Ryan, it's Michel. Yes. Look, we are really pleased with the -- our direct expense ratio coming in well below the 12.1% that the target that we had set during the outlook. There is some seasonality, fourth quarter being somewhat higher than the first 3 quarters. But I would say that our expectation is that we will come in below the 12.1%, I would say, even well below the 1.1 at year-end. And 2 factors contributing to this, I will say. One is early this year, we had asked our teams, given the uncertain environment to tighten our belts and to see how we can manage expenses to a greater extent without sacrificing any of the investments we're making in growth and strategic initiatives. And the reaction has been really great, really pleased with it. And we've also asked the team to make sure that we carry some of those savings into next year and beyond. And the other factor here is technology related. Over the last 5 years, we've invested over $3 billion to simplify and modernize our technology ecosystem. This really has laid the foundation for us to integrate emerging technologies, including AI into our core processes, products and services. We've also developed a proprietary AI platform, which we call MetIQ. This platform blends generative agentic and classical AI capabilities that support responsible solutioning across business domains. So think about app development and customer service, for example. We've also provided tools for our employees, our associates as well as increased training. So this is all leading to both productivity gains as well as driving further efficiencies. And this is also contributing to the lower direct expense ratio that you're seeing here. Operator: We'll move next to Tom Gallagher at Evercore. Thomas Gallagher: First question, just on the $12 billion of PRTs that you've won so far in Q4. Is that a few large deals, several smaller ones? And can you just comment on what's happening competitively in that market to allow you to have so many wins? Ramy Tadros: Thank you, Tom. It's Ramy here. We're really pleased with our 2025 performance in PRT. To date, we have written more than $14 billion. And as Michel mentioned, there's $12 billion of that coming in the fourth quarter, which is making it a record for us. It's a few large deals. So as you know, we focus on the jumbo end of the market versus the small end of the market. So think of those as jumbos, not small deals. And the other -- maybe 3 other points just to think about and put this kind of record quarter in context for us. One is that we have distinct competitive advantages in that jumbo end of the market. It's our balance sheet size, our investment capabilities. And look, Tom, at the jumbo end of the market, financial strength, disciplined risk management and established track record are all very important factors for plan sponsors and their advisers, and we're extremely pleased that we're winning the trust of the marketplace here and having a record quarter. The 2 other points I'd make here as well is to also reiterate our disciplined approach to these deals. We do take an M&A lens to our capital deployment here and evaluate the risk and return of each deal. So the focus on value is very much there, and you see us also disclosing our VNB metrics, which really also encapsulates that. And for PRT, we continue to achieve ROEs in this business, which are supportive of our enterprise ROE targets. And then maybe the last point also though, just to put this in context, this is also a quarter where this win is a great illustration of us deploying our retirement platform and our capital strategies that we talked about at our Investor Day. So we're bringing the strength of our liability origination, our RIS platform. We're using our own balance sheet, but we're also using third-party capital here to enhance financial flexibility. So think about those deals driving spread earnings for RIS as well as additional growth and fee revenue for MetLife Investment Management. So it really ticks a lot of the boxes that we talked about back in Investor Day with respect to our strategy here. Thomas Gallagher: That's good color. I appreciate it, Ramy. I guess my follow-up would be for you as well. Can you just comment on what's happening underneath nonmedical health on your improvement? I guess several peers have seen some volatility in group disability this quarter. Can you comment on the split between dental and disability, what you saw in Q3 and then why you're still confident that you can continue to improve into Q4? Ramy Tadros: Thanks, Tom. We're also very pleased with our underwriting results here in group. And you saw us print a nonmedical health ratio that's 230 basis points down sequentially, which is slightly above where we indicated last quarter. So just to split that up for you in terms of disability, in particular, and then Dental. I would say the 2 drivers behind the sequential improvement. One is the favorable seasonal utilization pattern in dental. We did talk about that in the last quarter, and that's materialized here in the third quarter. We also have the benefits of our pricing actions continuing to flow through our bottom line. And I would remind you that this seasonality also exists in the fourth quarter, which is why we expect to see a further improvement in this ratio come Q4. Disability is performing well for us. It's very much in line with our expectations. Incidents and claim severity are in line. We are seeing very strong recoveries. And I would say that's an outcome of investments we've made in various capabilities in disability over a number of years. So this is coming through as well in very strong recoveries. So all in all, consistent with what we talked about in the last quarter. And so think about that 400 basis points improvement that we talked about, this 230 gets us more than halfway through in that direction of the overall 400. I hope that helps. Operator: I'll go next to Suneet Kamath at Jefferies. Suneet Kamath: Just on PRT, is any of the $14 billion that you are planning to write this year going into Chariot Re? And how do we think about the difference in earnings impact if it goes in Chariot Re or if it stays on your balance sheet? John McCallion: Suneet, it's John. Let's just start with -- we launched Chariot Re on 7/1. We transferred just under $10 billion of liabilities to Chariot Re and did all that launching in less than -- a little less than or just over a year. So -- we're very pleased with the progress we've made. Look, I think this comes back to our strategic approach and something we laid out in Investor Day and that Michel kind of articulated around just how we think about complementing our own capital with third-party capital. We see more growth in the retirement business. So it's hard to kind of pinpoint is this Chariot or is -- Chariot is kind of ongoing. We're always working with them. That's kind of the process. And that will be part of the -- how we accelerate growth on our retirement platforms. It's -- but it's not necessarily always so perfectly aligned and things don't always line up. So I'd say yes, but to your answer, I think you could argue that we'll look more holistically at just our total asset growth and then use third-party capital to augment that. And then I think the comments we gave back a quarter ago in terms of like the impact, the temporary impact on earnings is somewhere between $15 billion to $20 billion on the $10 billion deal. That's kind of a rough justice of an earnings impact in any one quarter. So just so you have like a sensitivity, but we would expect that to be temporary in nature while we then refund that with other growth. Suneet Kamath: Okay. That's helpful. And then I guess, Michel, in your prepared remarks, you referenced this efficient capital structure in Japan. I was hoping you could unpack that a little bit. Is that unique to Met? And then relatedly, on the ESR, the $170 million to $190 million, are there any adjustments that you're making to, I guess, the rules that come from the FSA? John McCallion: Yes. It's John again. Maybe I'll just touch on that given your -- the collective components of that question. So when we talk about the efficient structure, obviously, we're referencing we have a pretty big presence in Bermuda. So we've leveraged Bermuda for certain products. And that has helped us get to a more economic regime. We've continued to build our presence in size in Bermuda, both our affiliate and as well as obviously the launch of Chariot Re. So we've leveraging that framework. And then your question was on ESR. Was it just how that relates to ESR, that was your question? I just want to make sure I got it correct. Suneet Kamath: Yes. No, it's the 170 to 190. Some companies have talked about company-specific adjustments that are made when they report those ratios. That's what I was looking. John McCallion: Okay. Yes, this has no adjustments. This is just prescribed. We're following the prescribed rules here. So that's the $170 million to $190 million. And look, as we've been -- we have operated under an economic framework. We've always used both to kind of think about our products and how we run that business. I referenced in my remarks about we've been consistently dividending, including this year out of Japan. We've had $4 billion of distributions up to the holdco over the last 5 years. So this is just the general range that we would expect to run this company. Operator: We'll move next to Alex Scott at Barclays. Taylor Scott: First one on -- going back to Group Benefits. Can you talk a bit about just what you're seeing in the competitive environment, pricing environment and what you think that could lead to in terms of growth? Do you feel like at this point, you can get back to a more long-term growth outlook for 2026? Ramy Tadros: Thanks, Alex. I would say we continue to see a market that's competitive, but a market that's rationally priced, which means we kind of always find opportunities to grow and we grow that business while maintaining discipline in terms of underwriting and achieving our target returns. And you hear us talk about that, but I think just keep in mind, 2 specific attributes here that have sustained this competitive yet rational environment. The first is the fact that these are short-term products. So underwriting results emerge fairly quickly. And this acts as a natural check, if you will, on the competitive dynamics. The other is, look, customers here are looking for real solutions to help them deliver their overall talent strategies and drive business outcomes. So yes, price matters, but they're also looking for solutions that give their employees good experiences, enhances their productivity. In many instances, they're looking to transfer administrative burden in terms of leave and absence. They want to do that with a carrier that's tightly integrated with them and is easy to do business with. They want to do more with fewer. So they're looking for bundled solutions across the entire range of products. And look, we are a leader in this industry. And so we bring all of the above and more to the table. which allows us to drive good growth, and that comes through good retention, good renewal pricing and also we can do that while maintaining discipline. So I would say all of these things are really good attributes that we -- that the market has. And we have a 4% growth rate in this quarter once you kind of net out the impact of the [indiscernible] contracts, 4% on top of $25 billion in absolute terms is a pretty significant number, and we're really pleased with the momentum that we have in this business. Taylor Scott: Second one I have for you is just if you could give us your views on some of the comments that have been made around private credit investing in insurance recently. And I think some of the comments were focusing on private letter ratings and this idea that maybe there's ratings inflation out there. So if there's any kind of stats you can give us about your private credit book and the way that you go about applying ratings and so forth, that would be helpful too. John McCallion: Alex, it's John. I'll start here and maybe I'll ask my partner here to even add some color. So let me just give you some broad themes. So -- and Michel referenced before, first, let's just -- we are constructive on the credit environment right now. There's strong fundamentals, corporate profits are strong. But as you heard from Michel, spreads are tight. So you need to be very mindful and disciplined around value and risk right now. And for us, that generally means up in quality. Even in higher-yielding strategies, we're up in quality. I did see the same referenced article that you had. And look, they were pretty generic comments. So hard to kind of unpack that and wouldn't try to even do that here. But I think for us, if I look at just us, we're a top-tier private asset, private credit manager. We've been doing this for decades. Importantly, having done this through credit cycles, right? Not everyone has done that. And these assets give us many, many benefits. And I'll ask Chuck. Chuck is our Chief Investment Officer, and he can give a little color on some of the specifics and how we think about underwriting. Chuck Davis: I mean I think John's first point is spot on in that we've been a major investor in this sector for a long period of time. And I think it's important when you -- when we hear all the comments out there to understand that MIM does our own underwriting. Our primary source of credit underwriting is the own work we do. It's not rating agencies. It's not a rating letter. It's our specific underwriting. And the vast majority of our corporate bonds are investment grade, 95%. And the exposure that we have to below investment grade is mostly up in quality. So I think all those factors, good underwriting, good experience, focus up in quality puts the portfolio in pretty good position. Operator: We will move next to Wes Carmichael at Autonomous Research. Wesley Carmichael: First question I had for you was on RIS and just kind of your outlook for the base spread from here. I think, John, you mentioned it improved a basis point. But as we look forward, how are you thinking about the base spread? John McCallion: As you said, we had 131 basis points in spreads, about 29 basis points of that was VII. And so we came in at 102%, and that was actually up 1 basis point from Q2 and better than our guidance we had given. And we had expected some seasonality in some real estate that wasn't as severe as we thought, and there was also a few other smaller favorable items that helped us maintain consistency. As we think about Q4, all else equal, we'd expect kind of a steady spread level from Q3. The one headwind we'll have to be just think about or be mindful of is with the large amount of PRT mandates that we've won during this quarter, that can cause a quarter -- temporary quarter headwind as you reposition assets, and that could be a couple of basis points, if any. But I think putting it all together, we see relatively flat, I think, would be kind of our viewpoint at this point. Wesley Carmichael: That's helpful. And second, I guess there's a press release out this morning from Brighthouse, the company is expected to be acquired by Aquarian. And I believe MIM manages a portion of assets for Brighthouse. But I just wanted to see if there's any other potential impacts to MetLife. I don't think it should be AUM you managed, but are there any other impacts that we should be thinking about from here? John McCallion: Yes. No, we saw the report as well, and I think congratulations to the team. And obviously, all this was rumors until it's not. And -- but to the extent that it's not a rumor, you know then that there was a lot of hard work that went into something like this. So we're certainly happy and congratulate the team for all the hard work they went through. Look, for us, it's been a -- we have a great relationship with Brighthouse. We obviously have a long history with them. And so we have kind of a fun place in our heart for that relationship. At the same time, we have some very unique asset management capabilities that we think help them achieve their strategic objectives. So the key relationship right now, to your question, is our asset management relationship, and we look forward to leveraging the partnership and working with them to help them with their strategic outcomes. Operator: Next, we'll go to Joel Hurwitz at Dowling. Joel Hurwitz: On MIM, any color on the performance of the business this year and how third-party flows have been? John McCallion: Joel, it's been a good year. To be honest, if we had to kind of unpack the first and second half of the year, the first half, just given the market volatility was a little muted. Also, the announcement of PineBridge probably put a little bit of a slowness on things in the beginning of the year, but the team has worked tremendously hard to kind of educate the external environment. And we saw -- we had a strong second half. I think we're just above on total assets under management of just over $630 billion of AUM, above $200 billion on third-party assets. So -- and the flows in the second half of the year have been very strong. So we're very excited about what's ahead for MIM. And obviously, kind of it's one of our strategic initiatives to accelerate the growth of -- and the team has been working very hard and excited to become our own segment come next year. Joel Hurwitz: Got it. And then a couple on LTC. First, any material changes to the assumption set there? We've seen a couple of players have some adverse incidence trends. Not sure how that's trending for you guys. And then just any update on what you're seeing in the risk transfer market for that business? John McCallion: Yes, sure. I'll start, and then I'll hand it over to Ramy to give some thoughts on the market. So broadly, you saw our actuarial assumption review pretty modest, slight positive overall, some slight positive in RIS with some higher mortality benefiting there and -- then in Asia, some favorable experience on morbidity and lapse rates. And then in Holdings, we actually had some favorable life experience as well as some favorable lapse experience on VA, a very, very modest LTC number of 2 million post-tax change. And so I think the block continues to perform well. The ADE is in line with what we would typically expect. And I'll turn it over to Ramy to give some color on just what he's seeing in the market. Ramy Tadros: Thanks, John. As we've said before, we have and continue to look at risk transfer opportunities here. And clearly, very much seeing the recent risk transfer activity that's taken place -- so we're engaged and continue to look at that. And having said that, though, we will be very disciplined here as we explore these opportunities. We have a very well-managed book of business. It's well capitalized and well reserved. We continue to have a successful rate action program that's allowing us to obtain the necessary premium increases that the book needs. So as we look at any potential transaction, price is going to really matter here. And ultimately, any transaction needs to be accretive from us -- for us from a shareholder value perspective. Operator: We'll take our next question from Wilma Burdis at Raymond James. Wilma Jackson Burdis: Could you just discuss the forward timing of the impact of the Mexico tax law change? Eric Sacha Clurfain: Yes, this is Eric. So as John mentioned, this quarter, we took a notable charge related to the change law in the tax law in Mexico. So first, let me start by giving you a little bit background on this item. So in the past few years, the Mexican tax authorities have been challenging the VAT deduction of certain insurance claims-related expenses. And although the discussions were ongoing for several years, there was really no -- little to no progress until the past few weeks when the government and the industry reached an agreement, making the change effective for 2025 and beyond. And this revision to the tax law just passed the legislator last week. So for MetLife, this industry-wide insurance change only affects our health product offering. The change to the VAT deductions results in notable impacts in 2025 with lesser impact in 2026. And as we transition to the new rule, and then there will be little to no impact in earnings by 2027. So we are already working to adjust our underlying rate assumptions for this annually renewable product, along with other management actions which will help mitigate the impact of this transition. So from our experience also, this market has been very resilient and rational, which gives us confidence that we will work through this quickly. Our business in Mexico is strong. We have a large and very well-diversified franchise, and we're confident in our ability to continue to deliver on that strong performance. So in summary, this impact to the VAT change is isolated in nature, and it's temporary. And we expect we'll be back to our run rate and growth trajectory for the region by 2027. I hope this helps. Wilma Jackson Burdis: Okay. And then you had some positive assumption updates in Asia. Is any of that potentially ongoing? John McCallion: Wilma, it's John. No, that's -- those are all generally onetime in nature. Operator: And that concludes our Q&A session. I will now turn the conference back over to John Hall for closing remarks. John Hall: Great. Thank you, everybody, for joining us this morning, and we look forward to engaging as the quarter goes on. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Evergy's 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 Peter Flynn, Senior Director of Investor Relations and Insurance. Please go ahead. Peter Flynn: Thank you, Haley, and good morning, everyone. Welcome to Evergy's Third Quarter 2025 Earnings Conference Call. Our webcast slides and supplemental financial information are available on our Investor Relations website at investors.evergy.com. Today's discussion will include forward-looking information. Slide 2 and the disclosures in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations. They also include additional information on our non-GAAP financial measures. Joining us on today's call are David Campbell, Chairman and Chief Executive Officer; and Bryan Buckler, Executive Vice President and Chief Financial Officer. We will cover third quarter highlights and provide updates on economic development activities and our regulatory agenda. Bryan will cover our third quarter results, retail sales trends and our financial outlook. Other members of management are with us and will be available during the Q&A portion of the call. I'll now turn the call over to David. David Campbell: Thanks, Pete, and good morning, everyone. I will begin on Slide 5. This morning, we reported third quarter adjusted earnings of $2.03 per share compared to $2.02 per share a year ago. The increase over last year was driven by a recovery of regulated investments and growth in weather-normalized demand, partially offset by higher interest and depreciation expense and dilution from convertible debt. Our year-to-date adjusted earnings are $3.41 per share compared to $3.46 per share a year ago. With these results year-to-date, we are narrowing our 2025 adjusted EPS guidance range to $3.92 to $4.02 per share from our original 2025 adjusted EPS guidance range of $3.92 to $4.12 per share. The lower midpoint is primarily due to weather headwinds from below normal cooling degree days in the second and third quarters, which negatively impacted our results by $0.13 per share. I would like to compliment the team for implementing mitigating actions across the business, offsetting more than half of the weather headwinds. However, we have not been able to offset the full magnitude in what has otherwise been a strong year of regulatory and operational execution while advancing our strategic objectives. Our fundamental long-term outlook remains very strong, bolstered by tailwinds from a generational economic development opportunity and the investment needed to enable it. Bryan will discuss the quarterly drivers and our earnings outlook in more detail in his remarks. We've achieved strong operational and reliability performance through September. Year-to-date, our generation availability as measured by the forced outage rate as well as our overall grid reliability as measured by SAIDI are both favorable to target. These results demonstrate the benefits of our continued infrastructure investments and the hard work of our operations teams. I'd also like to recognize Wolf Creek as it nears completion of our 27th refueling outage with strong safety and overall performance. Wolf Creek generates around 1,200 megawatts of non-carbon-emitting energy enough to power more than 800,000 homes. I'd like to thank everyone on our nuclear team for their hard work and focus on sustaining the excellent operational performance of the plant. I'm happy to announce a 4% increase in our quarterly dividend or $2.78 per share on an annualized basis. This increase is consistent with our updated growth outlook and working toward the midpoint of our 60% to 70% target payout ratio. Looking ahead, we will provide a comprehensive financial outlook update on our year-end call in February. We will include refreshed views on our load forecast based on large customer impacts, our 5-year capital investment plan, the related financing plan and our long-term adjusted EPS growth outlook. The 5-year capital plan will incorporate expected generation investments to serve load and meet SVP's increasing reserve margin requirements as well as transmission and distribution projects to support reliability. As Bryan will discuss with respect to the long-term update, we believe there are noteworthy tailwinds to our earnings power as we advance our plans to support growth and economic development that will benefit our Kansas and Missouri customers and communities. Slide 6 outlines our economic development pipeline and opportunities over 15 gigawatts, which relative to our size, represents one of the most robust backlogs in the country. Reflecting the geographic advantages of our region, the overall pipeline is strong in both Kansas and Missouri, and we are well positioned to continue to attract new businesses. Large customer interest in the Evergy service territory remains very strong. Focusing on the top 3 categories of the pipeline, we outlined a 4 to 6 gigawatt opportunity of large new customer load that represents the most active part of our queue. This Tier 1 demand represents a transformative 10-year growth opportunity for Evergy. When executed, we expect these projects will deliver significant regional benefits across our states, supporting a leading -edge digital economy, creating jobs and expanding the tax base while enabling us to spread system costs over more megawatt hours, helping to maintain affordability for all customers. We continue to work closely with Tier 1 large load to develop and implement transmission and distribution solutions to serve their expected ramp rates over the coming year. We are confident that we will be successful in winning and serving a large portion of this queue, which would in turn transform the size and growth of our company and enhance the economic prosperity of our region. The remaining pipeline totaling well over 10 additional gigawatts highlights the robust activity and sustained interest in Kansas and Missouri. Many customers have already secured land or land rights, finalized site plans and are actively participating in capacity studies. While not all of this load will ultimately be addressable, the ongoing dialogue underscores the depth of engagement and the readiness of customers to step in should others exit the queue. Slide 7 expands upon the 4 to 6 gigawatt Tier 1 large customer load opportunity. Beginning with the actively building category, I'm happy to report that last week, Lambda announced its plan to transform an unoccupied data center located in Kansas City, Missouri into a state-of-the-art AI factory and data center. Their facility is expected to launch in early 2026 with 24 megawatts of capacity and has a potential to scale up to more than 100 gigawatts -- 100 megawatts, excuse me, in the future. This project is a great example of a data center leveraging existing infrastructure with an ability to ramp load relatively quickly with minimal grid investment required and exemplifies why Missouri is an attractive destination for projects of all sizes. For the balance of our actively building customers, Panasonic and Meta are up and running, and our third large customer is making good progress through its heavy construction phase. Inclusive of Lambda, we now anticipate peak demand of 1.2 gigawatts from these customers with over 500 megawatts online by 2029, supporting our demand growth forecast of 2% to 3%. Moving to the finalizing agreements category, we remain in the final stages of negotiation with large customers for 2 data center projects. Subject to final agreements and project announcements, we expect to see an impact on our demand growth from these customers in 2027 and '28 and into the next decade, which would raise the overall company demand forecast to 4% to 5% load growth through 2029. Approval of the LLPS tariffs in both states is a key next step for finalizing these negotiations. Additionally, we recently added a third data center to this category, reflecting significant progress and initial executed agreements. This project was previously in our advanced discussions category and demonstrates the high interest from large customers in advancing their projects. We also remain in advanced discussions with multiple customers whose load would represent approximately 2 to 3 additional gigawatts of peak demand. These customers have secured land and land rights, shared site plans and in some cases, reached letters of agreement and provided financial commitments to move the evaluation forward. Load from these customers is not contemplated in our upside view of 4% to 5% annual load growth and therefore, would be incremental. Overall, we continue to see an incredible level of interest in our service territories, and we're making progress with potential new large customers across all stages of discussion. Each category reflects potential new entrants that will empower growth, investment and drive prosperity for our region. Now moving to Slide 8, I'll touch on our latest regulatory developments. 2025, as you know, has been a busy year for our regulatory team, and we've demonstrated considerable progress in advancing our strategic objectives. The team's results this year reflect the constructive policy framework and economic development opportunities in both states as well as our ability to find alignment with broad groups of stakeholders and achieve constructive settlement agreements. Beginning with Kansas, we filed for and received approval of predetermination to own partial shares of 2 new combined cycle natural gas units and a solar farm, both -- are all at Kansas Central. These projects were identified in our IRP preferred plan and reflect our all-of-the-above approach to meeting growing customer demand and higher capacity margin requirements in the SPP. The Kansas Corporation Commission issued an order approving a unanimous settlement agreement for Kansas Central rate case on September 25. The settlement achieved a balanced outcome for all parties, including adequate recovery for the investments needed to provide reliable and affordable electric service. A key open agenda item in Kansas is the unanimous settlement agreement we filed on our large load power service tariff docket on August 18. The proposed tariff applies to customers with demand exceeding 75 megawatts and establishes a rate structure with a focus on large customers paying their fair share and being subject to additional protections that I'll describe later in my remarks. We believe the LLPS establishes a competitive rate and positions Evergy to attract and serve large new loads, enabling growth and prosperity for our communities. We anticipate an order from the KCC on the settlement agreement as part of the commission's business meeting later today. Pivoting to Missouri, we've successfully advanced plans to construct new generating resources. The MPSC approved settlement agreements in our CCN applications for 2 solar farms, partial ownership in 2 combined cycle natural gas units and full ownership of a simple cycle natural gas plant. We believe these projects form a cost-effective package of reliable energy solutions for our customers, and this outcome demonstrates alignment with the Public Service Commission's interest in securing additional generation resources for our Missouri utilities. Similar to Kansas, the large load power service tariff proceeding continues to advance in Missouri. Parties filed a nonunanimous settlement agreement earlier this fall with terms similar to those filed in Kansas, including contractual protections, provisions to ensure that large customers pay their fair share of system costs and a competitive rate that supports economic development. We anticipate an order from the MPSC by the end of the year. Last, the planning process for our upcoming Missouri Metro rate case is underway, and we expect to file the case in February 2026. Slide 9 highlights legislation and regulatory mechanisms that support growth in our region and help to position Kansas and Missouri as premier destinations for infrastructure investment to ensure reliability and new advanced manufacturing facilities, data centers and other large customers. These mechanisms are the product of broad-based alignment between Evergy, the governor's office, state legislators, our regulatory commissions and key stakeholders as well as our shared commitment to seize on the growth opportunities ahead of us for our customers and communities. Constructive regulatory frameworks that enable timely infrastructure investment to meet the needs of both existing and new customers are critical to our success and the bills passed over the past 2 years in both states advance these priorities. This supportive landscape reinforces our region's position as a top destination for growth. Evergy is committed to delivering safe, affordable and reliable service to our 1.7 million customers. As large new customers join our system, all stakeholders benefit from broader cost sharing and unprecedented economic development. I'll conclude my remarks on Slide 10, which highlights the core tenets of our strategy. I'll focus specifically on affordability. Since the merger that created Evergy, we have achieved tremendous progress on affordability and regional rate competitiveness, driven by significant reductions to our cost structure and investing at a slower pace than peer utilities. Over that time, our rate trajectory has remained well below regional peers and far below inflation. This required hard decisions and the full focus and dedication of everyone in our company. I'm very proud of the results that these activities enable us to deliver for all of our customers. It is critical that we sustain this momentum as we enter a new era of growth and demand and economic development. This new era will require the same level of dedication and focus from our company, and that's exactly what we intend to deliver. As part of that focus, we will continue to invest in infrastructure and operate our business in a way that maintains reliability and benefits all of our communities. Higher levels of investment to serve new large customers must be fairly borne by those customers, and we designed our large load power service tariffs to do exactly that. Under the proposed LLPS tariff, new large customers will pay a higher rate than that paid by our existing large customers. As a result, the revenues from new customers will directly mitigate future rate increases for our existing customers as we are able to spread the fixed cost of our system over a broader base. In short, new large customers will pay a reasonable premium to the cost to serve them while also maintaining a competitive rate. And all customers will benefit from a modernized grid and new highly efficient generation resources. The tariffs are also designed with key safeguards in place. These include, among others, customer commitments of 12- to 17-year terms, an 80% minimum monthly bill requirement, exit fees upon early termination and collateral posting. It's important to note this tariff structure is consistent with the intent of our large new customers to be good stewards as part of our Kansas and Missouri communities. In the LLPS dockets, they were active participants throughout the process and along with many other stakeholders, contributed to and signed on to the settlement agreement. As I noted earlier, these agreements are currently pending approval by the Kansas Corporation Commission and Missouri Public Service Commission with the KCC's decision expected later today. Collaboration with large customers does not stop at paying their fair share. Their projects will create construction jobs, permanent jobs and expanded property tax base and community development benefits. As an example, one of our customers announced it will bring its Skilled Trades and Readiness or STAR program to the Kansas City area. The company is collaborating with Missouri Works Initiative and the Urban League to help increase the entry-level pipeline in the skilled trades with a focus on underrepresented communities. All STAR preemployment programs are paid training programs and offer networking opportunities to help participants move directly into employment on local construction projects. We hope and expect that this example will be just one of many. The vitality of our region has made it an attractive destination for advanced manufacturing and data center customers and their investments in turn have tremendous potential to drive a virtuous cycle of growth and prosperity in Kansas and Missouri for years to come. I will now turn the call over to Bryan. W. Buckler: Thank you, David. Thank you, Pete, and good morning, everyone. Let's begin on Slide 12 with a review of our results for the quarter. For the third quarter of 2025, Evergy delivered adjusted earnings of $475 million or $2.03 per share compared to $465 million or $2.02 per share in the third quarter of 2024. As shown on the slide from left to right, the year-over-year drivers are as follows: first, a 2% increase in weather-normalized demand growth drove the majority of the increase of $0.06 per share in the margin shown on the slide and recovery of and return on regulated investments contributed an additional $0.11 of EPS. Offsetting these favorable drivers are higher depreciation and interest expense related to our infrastructure investments, leading to a $0.07 decrease in EPS and dilution from our convertible notes led to a $0.03 decrease for the quarter. Turning to Slide 13, I'll provide more detail on our sales trends. On the left-hand side of the page, you'll see weather-normalized demand increased by 2% in the third quarter as compared to last year, following the 1.4% year-over-year increase we experienced in the second quarter. This continued strong momentum was driven by increases in both residential and commercial usage, including load from the Meta data center in Missouri that is reflected in our commercial customer class. At a macro level, the continued robust customer demand in our service areas is supported by a strong labor market as the Missouri, Kansas and Kansas City Metro area unemployment rates remain below the national average of 4.3%. Moving to Slide 14, I'll provide some further detail on our expectations for full year 2025 results. As David mentioned, we are narrowing our guidance range to $3.92 to $4.02 as compared to the original guidance range of $3.92 to $4.12. Our mitigation efforts of approximately $0.10 of EPS benefit are expected to offset a substantial portion of the $0.13 of headwinds experienced by below normal cooling degree days in the second and third quarters. In addition, we now anticipate an incremental $0.02 of dilution related to our convertible notes given our recent strong stock performance. We have forecasted incremental dilution from the convertible notes in our 2026 EPS modeling and continue to expect to achieve the top half of 4% to 6% growth in EPS in 2026 off of the midpoint of our 2025 original guidance range. As I'll discuss shortly, Evergy's fundamental long-term outlook remains stronger than it has been in decades, bolstered by tailwinds from a generational economic development opportunity and the investment needed to enable it, which will benefit all future years in our financial plan. Slide 15 outlines a recap of our long-term financial expectations and considerations for our comprehensive growth update we will share with you during our fourth quarter call in February. First, we highlight our Tier 1 customer opportunity of 4 to 6 gigawatts of peak load. As a reminder, our current 5-year plan incorporates load growth of 2% to 3% annually through 2029, reflecting solid growth in our current customer base and buoyed by the Panasonic, Meta and Google projects. This load growth expectation is further bolstered by rapid development data centers such as the Lambda facility discussed by David earlier, which is able to scale more quickly than the mega data centers via their use of existing buildings and existing electric infrastructure. Also, we are nearing final agreements with 2 data center customers that could drive an incremental 600 megawatts by 2029, which would raise our load growth forecast substantially to 4% to 5% on a CAGR basis through 2029. We've also made great progress with customers in the advanced discussions category, which represents a 2 to 3 gigawatt opportunity, driving even more load growth toward the back half of our 5-year plan. We certainly believe we have one of the most compelling customer growth opportunities in the entire industry that we expect will drive robust growth, not just in our 5-year forecast, but into the next decade for Evergy and for the communities we serve. Next, I'll discuss our capital expenditure and rate base growth forecast. The foundational earnings power of the company will be fortified by our capital investment program. Higher levels of infrastructure investment are needed for grid modernization and incremental generation capacity to support the expansion of our existing customer base and new large load customers. These are tailwinds to our current $17.5 billion capital plan and corresponding to 8.5% rate base growth through 2029. On the regulatory front, to maintain the credit profile of our utilities and to incorporate the affordability benefits of large loads, which allow us to spread system costs over a broader base, we plan to be on a somewhat regular cadence of rate case proceedings. With a large infrastructure plan comes regulatory lag. And over the past couple of years, the states in which we operate have taken proactive steps to help utilities better manage elevated depreciation and interest expense through the use of plant and service accounting mechanisms. We also utilize natural gas CWIP provisions in both Kansas and Missouri. These constructive mechanisms help to reinforce our solid credit profile. During this phase of significant infrastructure build-out, we will utilize equity and equity content financing options to fund a portion of our capital requirements and to support our strong investment-grade credit rating and FFO to debt threshold of 14%. It is important for you all to know that we will continually evaluate the overall level of equity funding needs, recognizing that large load customers in our pipeline could significantly improve our cash flows from operations, beginning in 2026 and accelerating throughout the next several years. Thus, there is a real opportunity to moderate our equity needs for the current $17.5 billion capital investment plan. Now our company can only be successful when our communities thrive and we maintain affordability for our customers. We are committed to staying laser-focused throughout the years ahead on affordability for our current customers, and we believe our long-term plan will be successful in doing so. As we look to rolling out our updated 5-year plan in February, I'll mention again the many tailwinds to our current adjusted EPS growth outlook and the transformational opportunity for us here at Evergy. We're excited for what's to come and look forward to sharing details with you on our year-end call. And with that, we will open up the call for your questions. Operator: [Operator Instructions] Our first question comes from the line of Paul Zimbardo from Jefferies. Paul Zimbardo: The first one I wanted to touch on just as we think about 2026 in Missouri legislative session, obviously, there's been a lot of progress in recent years for all the different flavors of utilities. Do you have any priorities or anticipate efforts for 2026? And could this influence the rate case cadence? David Campbell: Paul, we were pleased to work closely with many stakeholders last year in Missouri. It had a list, obviously, the Commission Chair Hahn, the governor's office. legislative leadership of the utilities and key stakeholders. So there's a lot of progress made in SB4. A lot of next year will be around implementing and following through on the elements of SB4 related rulemakings. So I don't anticipate there's -- I always talk with the team, we always talk with the team about ways that we continue to advance constructive mechanisms. But after such a busy year and such consequential legislation last year, I think it might be a little lighter calendar in 2026. But important steps to undertake to advance forward on the constructive mechanisms on SB4. Paul Zimbardo: Okay. Understood. And then obviously, you've got the big refresh coming ahead. Just maybe a little bit of a sneak peek, not so much on the numbers, but even just the cadence in the current plan, it's slower upfront and then accelerates. With whatever -- to the extent you do change the growth rate, should we think about that as kind of a linear profile or also accelerating as you move towards the end of the decade? David Campbell: Gosh, Paul, it's hard to answer that question without getting into what will be in our year-end update. So I think that Bryan did a nice job of describing the multiple tailwinds that are -- make us so excited about the prospects for growth in our region and all that's going to bring for our customers and communities, and that's both the load growth element, the investments needed to make sure that we can serve that load and meet SPP's higher reserve market requirements and beneficial impacts it can have in the financing plan. So the -- our prior capital plan, we laid that out by year. We'll lay it out by year in our upcoming capital plan. There's obviously a significant amount of investment. You can see what that is by year, but there's also loan growth that helps to mitigate any regulatory lag. So we're really excited about the tailwinds around it, and I won't get ahead around the profile. I think Bryan did describe for 2026 itself. We got -- we're reaffirming our confidence being in the top half of the range of '26, and then we'll be talking about the -- how those tailwinds manifest themselves in upgdeddated set of -- an updated financial plan that we'll outline in the year-end call. Paul Zimbardo: Okay. I understand. I had to try. David Campbell: We're excited, Paul, as you know, because we're excited because of the benefits it's going to bring to our region, our customers and communities, and it's a comprehensive set of factors that are driving that excitement. Operator: Our next question comes from the line of Travis Miller from Morningstar. Travis Miller: It seems like Kansas and Missouri have been working pretty well together here over the last few years. I was wondering within your service territory, how much competition is there at the local level in terms of attracting some of these large loads? I got to think just the way all states work that there might be some competition here, either legislatively, politically, local to try to get some of this economic development. Is that happening? David Campbell: That's a great question. And as a person, I'm now nearly 5 years in this region. And I've been very impressed. And of course, our service territory extends over to Central Kansas and Wichita. So we're -- it's much broader than just the Kansas City area, and there are parts of the states that are more distant from the state line. But to ask the question narrowly about our region, I'm Vice Chair of a group called the Kansas City Area Development Council. It represents counties on both sides of the state line extending all the way from Topeka to Kansas City and Eastward to North and South. So it's -- and it's a collaborative approach. There's actually been legislative truths in the past to mitigate potential poaching of that might go on across state lines. So they really do a nice job of collaborating the -- in the great state of Texas, I live 250 miles from many state lines, and I was reasonably close to them. Here, I'm quarter mile from the state line, and it's the collaboration that happens when you've got that kind of seamless integration, I've been very impressed to see. I've got an older brother. There are times when within a family, you might have dynamics, and that can happen. But in general, the teamwork is strong and the collaboration is high. Travis Miller: Okay. We'll hear more family stories later on. David Campbell: Indeed, -- they often involve. Travis Miller: Yes. And then other question. In terms of that $17.5 billion CapEx, assuming that you get the large load tariff there, you've got -- you'll have that, you'll have the PISA, the CWIP. How much of that $17.5 billion would actually be subject to a typical rate case filing, right? Essentially, how much of that can you recover without going through a regular rate case, as you call it, the cadence of base rate cases? David Campbell: Yes. So there's -- ultimately, all of our investments are subject to reviews to make sure they're prudent and reasonable. There's a set of different mechanisms that help to mitigate the cash regulatory lag. With PISA in both states that mitigates the earnings lag, but we've got riders in place in both states. all from property taxes to pension to other elements. And the CWIP will help with our new natural gas plants. We lay out the different parts of our capital plan in the appendix. So the new generation component is shown, I think it's on Slide 21. So that could give you a good measure for what -- which pieces of the capital plan. are in the more traditional category versus what's in the new generation category. The CWIP mechanism is slightly different between Kansas and Missouri. But in both states, we were pleased to get that -- those provisions introduced. It was in Kansas '24 and Missouri in '25, reflecting the support in both states. We're building new natural gas generation and recognizing that, hey, with the investment programs of that size is important to have some mitigants to lag. So that's -- out of our total capital plan, you'll see that new generation is about 1/3 and 2/3 is in the traditional categories, grid modernization, ensuring reliability, keeping the lights on and providing great service to our customers. Travis Miller: Okay. That makes sense. So then the other one, transmission would be obviously FERC so to pull that out. So it would be the 3 buckets of potential base rate would be legacy generation distribution in general. David Campbell: Yes. And most of our transmission investments in the Kansas side, you've got that right. Operator: Our next question comes from the line of Nicholas Campanella from Barclays. Nathan Richardson: It's actually Nathan Richardson on for Nick. I just have a quick one for you. So I was wondering if you could talk a little bit about the third data center you mentioned. And given the 4% to 5% sales growth guidance, I was wondering how impactful that third data center specifically could be in moving the needle for the sales growth. David Campbell: Nathan, that's a great question, and I'm glad you asked it. So the -- as you know, we've included in our financial plan that we provided last year, a 2% to 3% annual load growth, but we have quantified that the 2 customers in the actively building category have potential to raise that annual load growth to 4% to 5%. The addition of the third -- I'm sorry, the addition of the third customer, and this is in the finalizing agreements category, even I'm mixing up the categories. So the 2% to 3% load growth is from the actively building category. The potential to go to 4% to 5% is from the first 2 customers in the finalizing agreements category. You're absolutely right, that third data center customer we've now added to the finalizing agreements category would be additive to the 4% to 5% as with the customers in the advanced discussions category. So thank you for that clarification. Nathan Richardson: Is there any quantification there or just that is incremental? David Campbell: No. The bulk of that, we expect would be post 2029, but we've not quantified it, but that will be part of our -- obviously updated the year-end call what the overall view is on load growth tailwinds. We added it to the category of finalizing given just the sheer amount of progress we've made with that customer in terms of advancing discussions and advancing agreements and agreements related to those. So it made sense to include in that category. We've not quantified the incremental amount, but we've just noted that it's -- those additional customers beyond the 2 that are in the finalizing agreements category would actually be additive to the 4% to 5% annual load growth potential. Operator: Our next question comes from the line of Steve D’Ambrisi from RBC Capital Markets. Stephen D’Ambrisi: Yes, I just had a quick one on the LLPS tariff discussions. Given you guys have a settlement, I know it's not unanimous, but can you just talk about like effectively at a high level, what's left there, what the main sticking points are? And what you think kind of the time line for resolution around some of this stuff is? I'm pretty sure there's a settlement conferences coming up and then expected time line is the end of February, but just want to hear about that and then how that works into kind of moving some of these finalizing agreement buckets into the actively building bucket or signing ESAs associated with it. David Campbell: You bet. I'm glad you asked the question because I'll clarify because I think you may be thinking about the time line that's occurring on a different side of the state. in Missouri. So for us, we have 2 LLPS proceedings. One is in Kansas. We have a unanimous settlement agreement that we signed in Kansas, and there's already been briefing on that. And it's actually -- we expect a decision on that by the Kansas Corporation Commission later today. It's on the docket for today. So given that they've already had a hearing on that unanimous settlement agreement, we actually anticipate a decision in Kansas later today. And that was a unanimous settlement agreement covering all issues, including all parties. In our Missouri LLPS proceeding, we did have a partial settlement. We have gone through a hearing. Not all parties were alignment on it. The structure of the settlement that included many parties, but not all, has terms that are very similar to the ones in Kansas. So it has protections. It has a rate that is higher for the LLPS customers. And it's a structure that ultimately like as we saw in Kansas was a result of robust dialogue and included the large customers. So I think it's a competitive rate as well. We think it aligns with the governor's policy in the state and support for growth and development and with the commission's overall focus on that. But we'll have a decision on that we expect by the end of the year in our case. There are other proceedings in Missouri for other utilities that are a little behind ours. We filed that first. So hopefully, that makes sense with respect to the different context in Kansas. Stephen D’Ambrisi: That's helpful. And so basically, the comment on the slide that talks about announcements expected after LLPS tariffs are finalized to the extent the facilities are in Kansas, that could be freed up as early as tomorrow, and then we'll see when Missouri gets done hopefully by the end of the year. Is that -- those are the kind of the gating items from a time line perspective? David Campbell: I like your thinking. I've got some team members in the room now, and I'll tell them they need to be -- no, I'll kidding aside. Yes, I think the LLPS being signed is a very important enabling step. So that's -- and we do hope -- Kansas has always been a little bit ahead schedule-wise, but Missouri is not far behind. So we think that the time line sets us up well for what we know is going to be an important update in the year-end call. And it's important for these customers as well. The queue is a very active one. Folks are eager to come online. A big chunk of why we have a such a big queue is because we've got customers lined up for any reason, and we don't see those reasons happening. There's tremendous interest in the customers who are interactively building and finalized agreements with the category, a lot of momentum, but we've got folks lined up behind them. So we believe that the LLPS decisions being on the time line they are should enable us to move on the time line we're hoping to achieve. Operator: Our next question comes from the line of Paul Patterson from Glenrock Associates. Paul Patterson: Just on the financing plan and the $2.8 billion, and I see the forward -- we obviously have the forward and what have you. But I'm just wondering how we should think about this? I mean, you're also mentioning, obviously, the potential for what you guys mentioned earlier about the cash coming from these potential new agreements being finalized. How should we -- if you could just sort of quantify like how that -- how much that you think that would impact the $2.8 billion and the sort of timing or if you could just elaborate a little bit more on how we should think about the finalizing of those agreements and what have you. W. Buckler: Paul, it's Bryan. Thanks for the question. As a reminder for everyone, our current capital investment plan 5 years is $17.5 billion. In total, we believe that will be funded in part by up to $2.8 billion of equity and equity content capital market instruments such as JSN's Junior Subordinated Notes. I do think it's important for you to know that we'll continually evaluate the overall level of equity funding needed, recognizing that, as you say, that energy usage from customers in our pipeline could significantly improve our cash flows from operations beginning in earnest in 2026 and then accelerating throughout the next several years. Thus, there's a real opportunity to bring that level of equity down by what I've said before, hundreds of millions of dollars. I should also mention that we continue to see upside bias in our capital investment needs to serve our existing and expected new customers in the year ahead, which will also necessitate a somewhat balanced approach to debt and equity financing. Does that help? Paul Patterson: Yes, that does. I mean -- but just to sort of clarify, so that would be something that would obviously have -- require more capital needs and therefore, might be an offset to some of this cash flow that you'd be seeing as well. Is that how we should think about it? W. Buckler: Yes, that's the way to think of it for modeling for sure. Paul Patterson: Okay. And I guess we'll get more clarity, obviously, as time goes on. But -- and then I guess I wanted to -- on the $0.10 of mitigation measures that you guys had, with respect to the earnings. How should we think about those mitigation measures going forward? Do those -- are those a timing issue and they'll show up next year? Or are those things that you found that you think are more ongoing or some mixture of the 2? David Campbell: Paul, I'll describe those. Those are in-year mitigation measures. So obviously, we are -- the size of the weather headwinds and a little bit of incremental headwind from the convert was -- we would hope that we could offset all of it, but we were able to offset $0.10 of it, but that's really in-year mitigation measures. It doesn't impact our fundamental long-term outlook. I've now been -- this is my fifth year at the company. There are 2 years where we had really warm weather and adjust the range upwards didn't change our long-term fundamentals. This is a year where we have weather headwinds, so it's going to impact our performance of this year, but it's -- both the weather impacts and the mitigation measures are really within the context of this calendar year. The drivers for our fundamental plan, as Bryan mentioned, our view on 2026 and then the drivers for our long-term plan remains intact and sort of unaffected by the vagaries of weather. Paul Patterson: Okay. And then with respect to the Lambda deal, which would seem sort of interesting here. I'm just wondering, would that -- I guess, first of all, when would it go -- at what time frame would it go from 25 to the 100? I guess 25, it sounds like it would -- the 25 megawatts would be beginning of next year, but then it goes to 100. I'm just wondering how long does that ramp-up take? I'm just curious. Or is it known? David Campbell: Yes. We -- as I described, it's the in the 25-megawatt range starting next year, and it's probably in the next 4 to 5 years that it gets to that potential overall size. Really excited about that project, new company deploying advanced technology in their data center and AI factory as they describe it. So it's -- we are pleased to see that announcement. It was tied well with some economic development meetings here in town and reflects how attractive our region is and really impressed by how they leverage an existing building, an existing T&D infrastructure largely, and that's how they were able to ramp up to that level. Historically, a 25-megawatt customer would be considered very large. Now in the new era, it is a new era. But it's still obviously a creative approach, and we're pleased to have an advanced facility like that taking advantage of a building like that. Paul Patterson: Right. That sounds kind of unique. I guess what I also wondered was like in terms of the context of these large load tariffs that you were describing, since it's under 75 megawatts and then going to 100 megawatts, would a scenario like that be subject to -- obviously, it's hypothetical as and all they approved. But I'm just wondering how in the context of these settlements that you've had with these large load tariffs, how would a customer like that be treated? Would that be a large load since it came in initially below the 75 megawatts, but would go to the 700 megawatts, do you follow what I'm saying? Or would it be because the final number is 100, it would be a large load. Does that make sense? David Campbell: Yes. Typically, these customers are focused on what their ultimate load level is going to be because they want to make sure that they've got the infrastructure and capacity to get there. And this is an example. So the tariff addresses as you ramp up getting up to those higher levels. And again, these customers, the ones that go into the large loads definitely want to make sure they've got the capacity and ability to do this, and they know and are contemplating getting up to the LLPS. If ultimately stay in the 25-megawatt range, you need a different tariff level. But the ones that -- these customers are very interested in those higher levels of loads, and they know that as they get there, they get to that tariff rate. Paul Patterson: Right. So it's what they ultimately get to, would it be 1 of these like -- okay I got it, I understand. Operator: Our next question comes from the line of Anthony Crowdell from Mizuho. Anthony Crowdell: If I could follow up, I think, on Steve's question earlier. On Slide 7, is the actively building category, is that what's currently in the 4% to 6% EPS growth rate and the finalizing advanced discussion is what's not included in the current growth rate? David Campbell: Yes, the actively building -- that was probably my fault for how I answered it earlier. So if you look at Slide 7, a good place to go. The actively building, which is Panasonic and Meta and the third customer is in the heavy nearing completion of construction, that's in the 2% to 3% load growth rate. And that's... Anthony Crowdell: And in the 4% to 6%, right? David Campbell: No, the 4% to 6%, you get to if you include the 2 data center customers that are in the finalizing agreements category. This is the annual load growth rate. You're talking about -- if you're talking about the earnings growth rate of 4% to 6% -- sorry. The earnings growth rate of 4% to 6% that we said we're targeting the top half and then we're going to update on the year-end call. That is reflected in the 2 that are in the actively building category. Anthony Crowdell: Great. Just the 2, not the third? David Campbell: Correct. Anthony Crowdell: Great. And then I think when I look at your spread between your rate base growth and your earnings CAGR, it's roughly about 250 basis points. Is that a good spread going forward or the adoption of the large load tariff or the additional load, if you expect that to change, where is a good place to think where that settles out? David Campbell: Yes. So we haven't given guidance on that specific range. But I think if you look at our -- the $17.5 billion capital plan going back in time, there were higher levels of capital in the out years in that plan. We know that we will be presenting as part of the year-end call an integrated financial plan that reflects the relationship between rate base growth, incremental load growth is obviously help in reducing regulatory lag and the relationship that you see between that rate base growth and earnings growth. And there's a range that you see across different companies, and there's no reason why we would be outside that range, though obviously, links as well to what the phasing is of both the load growth and the capital in the plan. So we would -- we know that that's a question that we'll be addressing as part of our year-end update and the load growth and as we move into higher years in our capital plan, that will be reflected in the update that we provide. Anthony Crowdell: Great. And then just lastly, you talked earlier, I think, in your 5 years there, you've seen some big weather swings. I think for 3 of the 5 years this year, very mild weather, you ended up lowering 25. As you work on rolling out a new capital plan with a new load, does the very big swings in weather, will that cause you either to give a wider range or bake in more conservatism in your plan, given you've seen how much of a swing weather could be in your yearly performance? David Campbell: I think it's a very insightful question. I think it's something I really like having Bryan and Pete join the team. Bryan worked with a couple of different utilities. I know in my background, I'd like being able to describe to investors here are the factors that we can control, here are the factors that are clearly outside of our control and are readily quantifiable, but recognize that a number of our peer utilities and there's -- like the investors can like to see, hey, you can offset even if it's something easily track and identifiable like weather, you find mechanisms in your plan or build in an approach in the plan that can offset that. So we'll continue to have that discussion internally because we recognize that feedback. We'll always be very transparent -- plan to be very transparent with [indiscernible] because they -- as I mentioned, they didn't impact the fundamentals when they were positive. They're not going to impact the fundamentals when it's in year when it's a little more mild. It's a very mild August in particular here. But it's something that we'll consider, and Bryan will be a real helpful thought partner as we consider what the best approach is there. But again, we're very excited about the long-term fundamentals. We're certainly not overreacting to the -- was demonstrably a very mild Q2 and Q3, recognizing that we needed to implement the offsets that we did. And we're certainly always going to strive to be within hitting our targets and hitting our ranges. So it's a good question. We'll continue to think about it. Operator: Our final question comes from Paul Fremont from Ladenburg. Paul Fremont: I guess my first question, I just want to get a sense of the type of data center developments that are in your service territory. When the largest of those sort of build out, how many megawatts is that in terms of demand for the largest of your customers right now? David Campbell: We haven't given the size by customer, though I suppose you can -- if you go back to our last -- well, we've said it's 3 customers in the finalizing agreements category are 1.5 to 2 gigawatts. So that gives you a pretty good sense for the average size. That's a good indicator for us. We haven't given more specificity in terms of size by customer. But that math will give you a pretty good road map for what the peak size typically is. There's some variability by customer, of course, but clearly large -- 3 large customers making up that 1.5 to 2 gig. Paul Fremont: Okay. Because -- I mean, it does seem like the size is smaller than in some of the neighboring states. And I was just wondering, is there some factor that is causing sort of the size of your facilities to be more modest? David Campbell: Most of our customers want to expand past their regional peak once up. Some of these projects are similar customers involved. So I don't think there's a fundamental dynamic there. And for most of the -- we obviously track what the other customer announcements are. And there are a couple of unique large ones out there. But we're -- it's an average size that is in the 600 to 700 megawatt range is still a very, very large customer and very large data center. And as I noted, the most want to expand past original peak if we're able to accommodate it, but we like some diversification in customers and sites, which is reflected in a robust queue that helps keep everyone motivated as well. Paul Fremont: And then at what point would you need to build new generation in terms of, I guess, the 3 categories that you've outlined actively building, finalizing and advanced discussions? David Campbell: So we -- that's a great question. And as we noted, that's going to be one of the factors that's a driver for our plan update that we plan to give. Our integrated resource plan that we filed in '25, and we outlined in the appendix, which projects in the integrated resource plan were in last year's capital plan, which were not. As we develop that integrated resource plan, we included -- because track this information, we had included the 2 customers that were in the finalizing agreements category. You will see in that IRP from last year, a significant amount of incremental generation required to serve that load that was not yet included in the plan. So we have taken steps in terms of long lead time equipment, actions we need to take to be able to serve the customers that we've lined up. So we have some flexibility to do that. But I'd also note that we're going to be -- the next update to our capital plan and our integrated resource plan is going to factor in not only load growth expectations and the plants we need to serve those, SPP's reserve margin requirements, but also changes in federal and local policies impacting renewables. If renewables are less economic or harder to build, for example, we'll look at market capacity options. We'll look at potential retirement delays. We're going to look at the whole package to make sure that we are driving reliability and affordability for our customers. But at the end of the day, there's some incremental investments that we expect are going to need to be made. But we're going to look at that package of things in terms of what's that right mix of generation and how do we make sure we ensure reliability, take advantage of the growth opportunity, but also always keep an eye on affordability. Paul Fremont: And last question for me. Taking into consideration all of the legislative and regulatory changes, what estimate would you have for regulatory lag on a go-forward basis in your jurisdictions? W. Buckler: Yes. Paul, this is Bryan. We haven't given an exact number for regulatory lag we expect compared to allowed our authorized ROEs in our states. Things we point to is that historically, you've seen us earn -- have some pretty low ROEs, but the PISA and CWIP legislation certainly help in that regard. We also have loan growth that we haven't seen in many years, and we think it's going to be at a level that we haven't seen in many decades, which will help us kind of bridge that gap and get, we hope, very close to our authorized level of ROE. So that's directionally what I would give you, and we'll share more details in February. Operator: This concludes the question-and-answer session. I would now like to turn it back over to David Campbell for closing remarks. David Campbell: Thanks, Halen, and thanks, everyone, for joining the call today. We look forward to seeing all of you at EEI this weekend and next week. And that concludes today's call. Thank you. . Operator: Thank you for your presentation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Enerflex 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 speaker today, Jeff Fetterly, Vice President, Corporate Development and Capital Markets. Please go ahead. Jeffrey Fetterly: Thank you, Gigi, and good morning, everyone. With me today are Paul Mahoney, Enerflex's President and CEO; Preet Dhindsa, our CFO; and Ben Park, Enerflex's Controller. During today's call, our prepared remarks will focus on 4 key areas: one, the continued strong performance of Enerflex' business, two, our outlook going into 2026; three, capital allocation, including an increase in Enerflex's dividend; and four, some initial commentary from Paul and strategic priorities. Before I turn it over to Paul, I'll remind everyone that today's discussion will include non-IFRS and other financial measures as well as forward-looking statements regarding Enerflex' expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties, and the stated expectations could differ materially from actual results or performance. For more information, refer to the advisory statements within our news release, MD&A and other regulatory filings, all available on our website and under our SEDAR+ and EDGAR profiles. As our prepared remarks -- as part of our prepared remarks, we will be referring to slides in our investor presentation, which is available through a link on this webcast and our website under the Investor Relations section. I'll now turn it over to Paul. Paul Mahoney: Thanks, Jeff, and thank you all for joining us on this morning's call. I'm pleased to join Enerflex at a very exciting time for the company. The Enerflex team has made significant operational, financial and strategic strides in recent quarters. And I want to start off and thank the team across our global operations for their energy, their commitment and all of their efforts. We are pleased to report another strong quarter of financial and operating results. The energy infrastructure and aftermarket services business lines continue to be the foundation of our results, contributing 58% of gross margin before depreciation and amortization during the third quarter. The Engineered Systems business line benefited from a favorable project sequencing and strong execution to generate the highest quarterly operating revenue in its history. First, I'll start with a few strategic and operational highlights. Enerflex's U.S. contract compression business continues to perform well led by increasing natural gas production in the Permian. Utilization remains stable at 94% during Q3 across a fleet size of approximately 470,000 horsepower. Enerflex remains on track to grow its North American contract compression fleet to approximately 485,000 horsepower at the end of 2025. We expect to continue expanding this business in 2026 and we'll provide more specifics early in the new year. In the U.S., Enerflex was awarded a contract to construct a 200 million cubic standard feet per day cryogenic gas processing facility and associated natural gas compression. The project will be executed by the Engineered Systems business line and scheduled for delivery during 2026 with a strategic client partner in the Permian Basin. The company continues to broaden and strengthen relationships within the midstream client partner base in the U.S. which includes strategic alliances and further developing relationships established through the acquisition of Exterran. During Q3, this resulted in Enerflex securing multiple orders for large compression equipment. In Oman, Enerflex successfully completed the construction and start-up of the Block 60 Bisat-C Expansion Facility for its client partner, OQ Exploration and Production. The project was delivered ahead of schedule and achieved first crude oil in less than 18 months. Enerflex's investment is supported by a long-term contract and reported as a finance lease. In Argentina, Enerflex delivered a state-of-the-art all electric gas compression station for a long-standing client partner in the Vaca Muerta shale play. Lastly, Enerflex received the prestigious Export-Import Bank of the U.S. Deal of the Year Award for its collaboration on a gas-to-energy project in Guyana. First of its kind in Guyana, Enerflex provided the natural gas conditioning and cryogenic infrastructure for this project. We will generate 300 megawatts of power, reduce the country's dependence on imported fuels and expand access to power in underserved communities. And now a few comments on each of our business lines. Engineered Systems backlog as at September 30 of $1.1 billion provides strong visibility into future revenue generation and business activity levels. Bookings of $339 million during Q3 compared to a trailing 8-quarter average of approximately $320 million. The book-to-bill ratio calculated as bookings divided by revenue and normalized for accounting treatment associated with the Bisat-C Expansion project was 0.9x during Q3 and 1x on a trailing 8-quarter average, highlighting that the company is consistently replenishing its backlog in line with project execution. The outlook for Engineered Systems is supported by healthy bidding activity and backlog visibility that extends into the second half of 2026. Notwithstanding, Enerflex continues to closely monitor near-term risks, including tariffs and commodity price volatility and will proactively manage this business line. Activity levels for the ES product line during Q4 of '25 are expected to reflect a pull forward of certain projects into the third quarter. Enerflex continues to expect gross margin for the ES business line in coming quarters to align more closely with historical averages reflective of a shift in project mix. We believe the medium-term outlook for ES products and services is attractive, supported by anticipated growth in natural gas and produced water volumes across Enerflex's global footprint. Results for the aftermarket services business line benefited from increased activity levels and customer maintenance activities during the quarter. We expect these trends to continue into 2026. The Energy Infrastructure business continues to perform well, supported by approximately $1.4 billion of revenue under contract. Our U.S. contract compression fleet is an important part of our energy infrastructure asset base and the fundamentals for this business remain strong. Operational KPIs for this business are highlighted on Slides 15 and 16 of our investor presentation. Slides 17 and 18 highlight our international Energy Infrastructure business, which includes approximately 1.1 million horsepower of operated compression and 24 build, own, operate and maintain or BOOM projects in Bahrain, Oman and Latin America. The international Energy Infrastructure business has a strong contract position, with a weighted average term of approximately 5 years and is expected to provide a steady foundation to Enerflex's financial performance in the coming years. I would like to comment briefly on strategic priorities. Since joining Enerflex at the end of September, I've had the wonderful opportunity to visit the key parts of Enerflex's North American operation and interact across all levels of the company. The strength of Enerflex's people, culture and position and as a global leader, have been evident. We expect to provide further insight into strategic priorities including capital allocation in coming months following continued strategic clarity and discussion with our Board of Directors. I would like to emphasize that our go-forward approach will, one, focus on Enerflex's strengths and areas of excellence; two, stay true to the values that have guided the company for decades and three, continue to emphasize discipline, providing meaningful direct shareholder returns and making investments that support long-term shareholder value creation. In the near-term, Enerflex' priorities are unchanged and include: one, enhancing the profitability of core operations two, leveraging the company's leading position in core operating countries to capitalize on expected increases in natural gas and produced water volumes; and three, maximizing free cash flow to strengthen Enerflex's financial position, provide direct shareholder returns and invest in selective customer supported growth opportunities. Before I turn it over to Preet, I would like to briefly touch on emerging opportunities we are seeing in the electrical power generation part of our business, including opportunities associated with data centers. The delivery of modularized power generation solutions is a core competency of Enerflex. The Engineered Systems business line has been delivering these types of solutions for over 30 years, and our international energy infrastructure asset base includes upwards of 100,000 horsepower of modularized power generation assets. The microgrid power generation market in North America is very much in formation stage. But recent announcements from OEM suppliers and industry participants provide an indication of the potential opportunities. Although power generation represents a modest portion of Enerflex's current Engineered Systems backlog and overall business, we are developing solutions that we believe can address a range of applications and are excited about opportunities in 2026 and beyond. For context, we are currently executing FEED studies for existing and potential client partners and evaluating over 500 megawatts of opportunities across our Engineered Systems and Energy Infrastructure business lines. We look forward to providing updates as Enerflex continues to develop this market opportunity. With that, I'll turn it over to Preet to speak to the financial aside. Preet Dhindsa: Thanks, Paul, and good morning, everyone. I'll start with highlights from the third quarter. We generated revenue of $777 million in the third quarter compared to $601 million in Q3 '24 and $615 million in Q2 '25. Higher revenue is primarily attributable to the Bisat-C Expansion project that Paul highlighted, which contributed $116 million in revenue to the Engineered Systems product line, and strong execution of ES projects alongside a high level of operational activity, which led to certain project milestones being achieved earlier than expected. This results in revenue being realized in Q3 that was originally anticipated in later periods. Gross margin before depreciation and amortization was $206 million or 27% of revenue, including $14 million related to Bisat-C Expansion project compared to $176 million or 29% of revenue in Q3 '24 and $175 million or 29% of revenue during Q2 '25. As Paul referenced, the EI and AMS product lines generated 58% of consolidated gross margin before depreciation and amortization during Q3 '25, lower compared to 65% during Q3 '24 and our guidance for the full year 2025 as a result of contribution from the Bisat-C Expansion project and strong ES activity. Energy Infrastructure performance continued to be strong with gross margin before G&A of $95 million compared to $91 million in Q2 '24 and $86 million in Q2 '25. Aftermarket Services gross margin before G&A was 21% in the quarter, benefiting from strong customer maintenance programs. SG&A was $71 million in the quarter, down $11 million from the prior year period, driven by cost-saving initiatives, improved operational efficiencies and the absence of onetime integration costs incurred in Q3 '24, partially offset by higher share-based compensation. Adjusted EBITDA of $145 million is a new quarterly record for Enerflex that compares to $120 million in Q3 '24 and $130 million during Q2 '25. Adjusted EBITDA benefited from higher gross margin before depreciation and amortization, cost-saving initiatives and operational efficiencies. Cash provided by operating activities before changes in working capital or FFO, increased to $115 million compared to $63 million in Q3 '24 and $89 million in Q2 '25, a function of higher adjusted EBITDA. Free cash flow decreased to $43 million in Q3 '25 compared to $78 million during Q3 '24 due to working capital investments relating to the execution of projects in the ES business line and higher growth capital spend, offset by -- offset partially by proceeds from the sale of EI assets in Latin America. We saw a build of $41 million in net working capital during the third quarter, principally related to strong revenue recognition during the latter part of the quarter, which temporarily increased accounts receivable, strategic inventory investments to support future projects, including purchase of select major components with increasing lead times and continued investment in the Bisat-C Expansion project with $12 million spent during the third quarter. Return on capital employed increased to 16.9% in Q3 '25, a new record for the company compared to 4.5% in Q3 '24 and 16.4% in Q2 '25. Higher ROCE is a function of the increase in trailing 12-month EBIT and lower average capital employed, predominantly due to a decline in net debt. Net earnings of $37 million or $0.30 per share in Q3 '25 compared to $30 million or $0.24 per share in Q3 '24 and $60 million or $0.49 per share in Q2 '25. Compared to Q3 '24, profitability benefited from higher gross margin, lower SG&A expense and lower finance costs, partially offset by $16 million unrealized loss on redemption options related to senior secured notes. Now we'll touch on our strong financial position. Enerflex exited Q3 '25 with a net debt of $584 million, which included $64 million of cash and cash equivalents, a reduction of $108 million compared to Q3 '24 and $24 million compared to the second quarter of 2025. Enerflex's bank adjusted net debt-to-EBITDA ratio was approximately 1.2x at the end of Q3 '25 down from 1.9x at the end of Q3 '24 and 1.3x at the end of Q2 '25. In early Q3, Enerflex entered into an amended and restated credit agreement with respect to a syndicated secured revolving credit facility. The maturity of the facility has been extended by 3 years to July 2028, and availability is unchanged at $800 million. Let me shift to capital allocation. First, on our CapEx plans. We invested $47 million in the business consisting of $33 million in capital expenditures, $15 million for growth and $14 million primarily related to the Bisat-C Expansion in the EH region. Enerflex continues to target a disciplined capital program in 2025 with total capital expenditures of approximately $120 million. This includes approximately $60 million for maintenance and property plant and equipment and $60 million allocated to growth opportunities. Disciplined capital spending will focus on customer support opportunities, primarily in the U.S. market. And now direct shareholder returns. Enerflex returned $11 million to shareholders in Q3 and $35 million during the first 3 quarters of 2025 in the form of dividends and share repurchases. The company repurchased 777,000 common shares at an average price of CAD 12.98 per share during Q2 '25 and a total of approximately 2.7 million common shares and average price of CAD 10.93 since its normal course issuer bid commenced on April 1, 2025, to September 30. Under the NCIB, which expires March 31, 2026, the company is authorized to acquire up to a maximum of approximately 6.2 million common shares or approximately 5% of its public float as at the application date for cancellation. Enerflex' Board of Directors increased the company's quarterly dividend by 13% to CAD 0.0425 per common share, effective with the dividend payable in December 2025. The Board's decision to increase our dividend for a second consecutive year reflects confidence in our business and Enerflex a strong financial position and aligns with our priority to provide meaningful direct shareholder returns. Going forward, capital allocation decisions will be based on delivering value to Enerflex shareholders and measure to get to Enerflex's ability to maintain balance sheet strength. In addition to disciplined growth capital spending, share purchase and dividends Enerflex will also consider further debt reduction to strengthen its balance sheet and lower net finance costs. Unlocking greater financial flexibility positions the company to respond to evolving market conditions and capitalize on opportunities to optimize its debt stack. I want to thank Enerflex employees for their efforts to continuing to deliver strong operational and financial results. With that, I'll turn the call back over to Paul for closing remarks. Paul Mahoney: Thanks, Preet. Let me reiterate that I'm pleased to join Enerflex at an exciting time for the company and appreciate all the efforts of the Enerflex team and making significant operational, financial and strategic strides. We believe the long-term fundamentals driving our growth, including global energy security, and the continued increase in demand for natural gas remain firmly in place that Enerflex is well positioned for those fundamentals. We will now hand the call back to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Aaron MacNeil from TD Cowen. Aaron MacNeil: Paul, congratulations on the new role. I can appreciate you're going to give us an update in the coming months. But I guess I'm just curious to know what the team is telling you throughout the early days of your tenure in terms of what they think Enerflex does really well and what they think needs to be improved? And how does your prior experience sort of inform your perspective? Paul Mahoney: Yes. Well, thank you, Aaron, for the question and the comments. First, let me start that the openness and the transparency through my visitations for the first 30 days have been wonderful. I've probably met well over 1,300, 1,400 people in 30 days. And so what I would say has been confirmation of really focusing and seeing the benefits still in front of us around ruthless focus on some execution levers. Being able to drive cost, price opportunities and gross margin, along with driving working capital efficiency and the efficient use of capital remain priorities as Enerflex has demonstrated. I do see opportunities to enhance our core operation with digitization initiatives and efforts all while staying focused on our investment discipline, that being around investing in core competent areas, core countries and having a very strong specific line of sight for customer activity. Aaron MacNeil: Okay. Great. You mentioned mobile power in your prepared remarks. I was hoping you could dive a bit deeper into that. How do you think about the BlueSky potential for Enerflex, what would 500 megawatts of opportunities translate to in terms of potential revenue opportunity? And given the sort of immediacy of the demand of this sort of product, does the return or margin profile differ versus other products in the portfolio? Paul Mahoney: Great question. This is a very, very embryonic state, I would say, in power, and it's changing quite rapidly. It's clear that speed is a key differentiator and a key need. 500 megawatts could easily grow to well over 1 gigawatt is what I'm trying to say, using behind the meter need an application is seeing strong, strong dialogue activity, quoting activity, balancing OEM delivery dates and really being able to make committed opportunities coming forward. It's very dynamic. It's very much in an area that Enerflex has experienced. As I've said in my opening remarks, with 30 years of power experience. So we're very excited about the opportunity, very cautious, very disciplined, but it's a pretty dynamic situation at the moment. Operator: Our next question comes from the line of Keith MacKey from RBC Capital Markets. Keith MacKey: Welcome to the call, Paul. Maybe just to continue on the power angle. I know you noted it was across Engineered Systems and Energy Infrastructure. Can you maybe just detail a little bit more how you think you might be able to participate in both of those areas. And then as a follow-up would just be what your readiness would be to capitalize on some of these opportunities. And certainly, as you mentioned, speed is of the essence. And the market appears to be moving at a very fast rate with a lot of announcements out from various types of companies these days. So any incremental color you can give on that would be appreciated. Paul Mahoney: Yes, sure. So as I mentioned, I think speed being directly correlated to some of the OEM delivery pieces is what we're working through at the moment. There's opportunity around the recip engine space, natural gas being cost efficient, speed being a differentiator and Enerflex having a history and ability to execute are all coming together. It's very, very dynamic. I see opportunities in Engineered Systems. But what we haven't mentioned is there's a strong opportunity for a follow-on aftermarket services play for operations and maintenance. So it's very exciting, and we're working very hard to build those partnerships. Partnerships here are going to be vital not only with the supply base, but also the power-related folks that are out there trying to solve this challenge or behind the meter activity and microgrid activity. And those partnership meetings and events have been occurring at a high pace. Keith MacKey: Okay. Very good. And just more broadly on the OEM engine availability. Can you just comment on your inventory levels to support or execute existing projects as well as your ability to continue to book new work? How do you feel about the supply chain both in Engineered Systems and aftermarket services from that standpoint? Paul Mahoney: Yes. Maybe I'll open up with some comments and maybe turn it to Preet here. But I've had the opportunity to meet with our major OEM suppliers in the first 30 days and get a really good understanding of what we could expect over the next 12 months. We have started to invest in some strategic inventory. That being tied specifically to customer activity, customer commitment. And so we've started to be able to manage what our '26 commitments will be and what the lead times in our inventory position is. So... Preet Dhindsa: The only thing I'd add is you see the investment in working capital, largely that's focused on the ES business, whereby long lead time equipment requires advanced bookings for that. So we've been doing that quarter-over-quarter. We feel good about customer-supported activities that will clearly procure these items as and when they arrive. But the longer lead times are area of focus for us. And once again, starting to invest in inventory in order to meet the customer support demand down the road. Operator: [Operator Instructions] Our next question comes from the line of Tim Monachello from ATB Capital Markets. Tim Monachello: Congrats, Paul. First question, I just wanted to follow up on the power gen portfolio. You mentioned in your prepared remarks that you might be developing some additional product lines that you think maybe are better suited. My understanding is you have a pretty wide breadth of, I guess, megawatt packages that you can package for the market, but perhaps more suited to the smaller end of that. Can you talk a little bit about what the demand looks like in terms of package sizes and where your product lines fit in and what you might be developing? Jeffrey Fetterly: Tim, it's Jeff. As Paul referenced in the prepared remarks, modularized is a core competency and focus for Enerflex. And there is a very wide range of potential applications, both size that you referenced as well as configurations. I don't think it's appropriate for us to get into the details of that in any specific nature on the call. But as we talked about, we see a wide range of applications and significant opportunities that could align with those as well. Tim Monachello: Okay. I understand there's probably some competitive dynamics there. Can you talk a little bit about, I guess, where you are in that process, if you're going to have the product suite you think is optimized for demand right now? And when do you think that might be available? Jeffrey Fetterly: And as Paul referenced in the prepared remarks, this is business on the Engineered Systems side that we participated in for over 30 years. We continue to be active in delivering power generation solutions, both domestically and internationally. And we continue to be responsive to the customers and engage with the OEMs and the customers to continue to customize those as well. So from our perspective, we believe it's real time, but as Paul also referenced this is an emerging developing market that's moving quite quickly, too. Tim Monachello: Yes. Okay. That's helpful. In terms of, I guess, the natural gas compression market, can you talk about leading edge demand a little bit and where we stand for lead times on key components like Cat engines and compressors. Paul Mahoney: Yes. Good question, Tim. Clearly, in the production -- oil and gas production space, let's focus maybe on the Permian a bit. You do see a constrained capital disciplined environment that's impacting, right, drilling and completions and things like that. But what you're also seeing is operators really trying to get the most out of their dollar spend. And so production optimization, production efficiencies are very, very high on the agenda. What that looks like from a compression standpoint, you still see the centralization of compression happening and occurring you're seeing growth rates in perhaps different production technologies that would utilize the gas, the available gas in gas lift production technologies. So the demand doesn't necessarily correlate with what you may think on drilling and completions and things it's correlating to more centralization and leveraging gas for production optimization efforts. Tim Monachello: Okay. And lead times for the engines and compressors, where we think we're at there. Jeffrey Fetterly: Tim, it's Jeff. It's obviously been fairly widely publicized the increases in lead times associated with certain engines and configurations and we certainly are seeing that. And as Paul and Preet highlighted in their earlier remarks, we've been responding to that with inventory investments and engagement on the OEM side. But we're certainly seeing certain engine configurations where deliveries are now extending into 2027, and in some extreme cases, 2028 and it's really reflective of the convergence that you've seen in recent quarters between what have been traditionally more compression-oriented applications with power gen on the reciprocating engine side. Tim Monachello: Okay. That's helpful, too. And then just on the outlook, in particular, for the Engineered Systems business. When you back out the Oman project, margins were really strong in the quarter. And you guys have been guiding to margins coming down for a few quarters now. We haven't -- I think that it's probably outperformed your expectations and ours. I guess, why do you think you can't keep that outperformance going because I would have imagined that your backlog and the mix in that backlog had been shifting towards negative or towards lower margins over the last number of quarters here? Preet Dhindsa: Tim, you're right, we've been guiding towards historical Enerflex averages for a couple of quarters now. The Oman project, obviously, that contributed $14 million to gross margin, $116 million came out of backlog for that into revenue. And we still feel, given mix, product mix in our backlog and bookings company in we still feel it's prudent to guide slightly to the mid-teen level historical averages. We feel that's still the right spot to be in. And we're pleased with our results to date. As Paul mentioned, look at operational efficiencies where we can. So over time, if we feel we're trending in an even more constructive direction, we'll advise. But right now, we feel good about the historical average gross margin, which is still something you should probably peg to. Tim Monachello: And then last one for me. Can you help quantify how much was pulled forward from Q4 into Q3? Jeffrey Fetterly: Tim, I think the easiest rule of thumb is when you look at the average revenue of the ES business over the last couple of years, it's been between $300 million and $325 million per quarter. If you look at what we reported close to just over $400 million or close to $400 million, you back out the Bisat-C Expansion that we referenced I think that would give you an indication of the strength of Q3 and the execution we saw in Q3 relative to normal cadence. Tim Monachello: Okay. And then you think that much of that comes out of Q4? Like the amount that you're above that cadence in Q3, you should be below it in Q4... Jeffrey Fetterly: I don't know if we can give you a direct correlation. But as was referenced in the remarks, there was definitely some pull forward and accelerated execution that happened in the third quarter. Operator: Thank you. At this time, I would now like to turn the conference back over to Paul Mahoney for closing remarks. Paul Mahoney: Before we close today's call, I'd like to take a moment to acknowledge the upcoming Remembrance Day in Canada and Veterans Day in the United States. We honor the courage and sacrifice of those who served and continue to serve in our armed forces, including many employees now part of the Enerflex family. Their dedication has safeguarded the freedoms and piece we enjoy today. Thank you for joining today's call, and we look forward to sharing our fourth quarter and year-end financial results in February. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen and welcome to the Kimball Electronics First Quarter Fiscal 2026 Earnings Conference Call. My name is John and I'll be your facilitator for today's call. [Operator Instructions] Today's call, November 6, 2025, is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website. At this time, I would like to turn the call over to Andy Regrut, Treasurer and Investor Relations Officer. Mr. Regrut, please begin. Andrew Regrut: Thank you and good morning, everyone. Welcome to our first quarter conference call. With me here today is Ric Phillips, our Chief Executive Officer; and Jana Croom, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2026 ended September 30, 2025. To accompany today's call, a presentation has been posted to the Investor Relations page on our company website. Before we get started, I'd like to remind you that we will be making forward-looking statements that involve risk and uncertainty and are subject to our safe harbor provisions as stated in our press release and SEC filings and that actual results can differ materially from the forward-looking statements. Our commentary today will be focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Ric will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2026 and Ric will complete our prepared remarks before taking your questions. I'll now turn the call over to Ric. Richard Phillips: Thank you, Andy and good morning, everyone. I'm pleased with the results for the first quarter and start to the new fiscal year. Sales were in line with expectations, driven by strength in the medical vertical. Margins improved year-over-year. Cash from operations was positive for the seventh consecutive quarter and debt at the end of Q1 was the lowest level in over 3 years. We have ample liquidity to navigate the current operating environment and plenty of dry powder to opportunistically invest in growth. I continue to be impressed with our team's progress in positioning the company for the future. Our solid footing as an EMS provider and our capabilities as a medical CMO are unique in the industry and we look to expand upon them through organic and possibly inorganic channels. We remain confident this powerful combination will result in a return to profitable top line growth next year and we are reiterating our guidance for fiscal 2026. Turning now to the first quarter. Net sales for the company were $366 million, a 2% decline compared to Q1 fiscal '25. From an end market perspective, strong results in Medical were offset by declines in Automotive and Industrial. Starting with Medical. Sales in the first quarter were $102 million, up 13% compared to the same period last year and 28% of total company revenue. Nearly half our medical sales were in North America, the other half roughly split between Asia and Europe. The increase in Q1 was driven by robust sales growth of approximately the same amount in both Asia and Europe, while North America was up mid-single digits. We expect the growth to continue as we lean further into the medical space with production capabilities beyond electronics and printed circuit boards, expanding into higher-level assemblies and finished medical devices. Our new medical facility in Indianapolis will add capacity for manufacturing medical products, single-use surgical instruments and drug delivery devices such as autoinjectors. This is also where we are focusing our efforts on inorganic growth, potentially adding new end markets, customers or even new geographies. We continue to view the medical market as a compelling opportunity to diversify revenue and leverage our core strengths as a trusted partner in a complex and highly regulated industry, particularly as the population ages, access and affordability to health care increases, medical devices get smaller in size and require higher levels of precision and accuracy and the adoption by patients and end users increases. Next is Automotive, with sales of $164 million, down 10% compared to the first quarter of last year and 45% of the total company. The decline in Q1 was driven by lower sales in North America, a result of the electronic braking program transferred out of Reynosa in mid-fiscal '25 and a decline in Asia. This combined impact was partially offset by strong sales growth in Europe as the new braking program in Romania continues to ramp up. Longer term, we expect to return to growth in this vertical, particularly as new systems and technologies such as steer-by-wire and brake-by-wire or electronic mechanical braking continue to increase the electronic content being added to vehicles. Finally, sales in Industrial totaled $100 million, a 1% decrease compared to Q1 last year and 27% of total company sales. Our industrial business is heavily concentrated in North America and the decline this quarter was in the low single-digit range, where we are seeing softening demand for HVAC driven by the slowing housing market. Europe, which is a much smaller business for us, was down more significantly, while Asia reported strong sales growth in Q1. Before I turn the call over to Jana, I would like to provide a brief update on tariffs. As you know, beginning in February 2025, the U.S. implemented tariffs on a variety of countries and commodities. The global tariff landscape is evolving at a rapid pace with changes impacting businesses and markets around the world. While these increased tariffs have and may continue to impact end consumer demand, we expect that we will recover the tariff costs by passing them on to our customers. If we're unable to fully recover these costs, our operating results and cash flows could be adversely impacted. We are working closely with manufacturing constituents and lawmakers to address the challenges real time. As we monitor the progression of tariffs, reciprocal tariffs and the geopolitical economic environment broadly, we are committed to profitability and expect to incur additional restructuring costs over the course of the fiscal year as necessary. I'll now turn the call over to Jana for more detail on Q1 and our guidance for fiscal 2026. Jana? Jana Croom: Thank you and good morning, everyone. As Ric highlighted, net sales in the first quarter were $365.6 million, a 2% decrease year-over-year. Foreign exchange had a 1% favorable impact on consolidated sales in Q1. One housekeeping item on our split of sales by vertical. Beginning this quarter, certain customers previously included in automotive were reclassified to industrial. This was done because our work for these customers is more aligned with commercial vehicle applications versus passenger vehicles. All prior periods have been recast for comparability. The gross margin rate in the first quarter was 7.9%, a 160 basis point increase compared to 6.3% in the same period of fiscal 2025, with the improvement driven by favorable product mix, the closure of our Tampa facility and global restructuring efforts. Adjusted selling and administrative expenses in the first quarter were $11.3 million, nearly flat year-over-year. When measured as a percentage of sales, the rate was 3.1% this year compared to 2.9% last year. In the first quarter of fiscal year 2026, following a customer termination of a program, an agreement was reached for the customer to compensate us for incurred costs, resulting in recognition of a $2 million recovery recorded in selling and administrative expenses. As I indicated in the last earnings call, we anticipate adjusted S&A will increase as a percentage of sales over the course of the year as we make strategic investments to support our long-term needs as we return to growth. Adjusted income for the first quarter was $17.5 million or 4.8% of net sales, which compares to last year's adjusted results of $12.6 million or 3.4% of net sales. We expect Q1 to be our strongest quarter from an adjusted operating income perspective as demand and costs related to tariffs and softening in the U.S. housing market pressure margins in North America. Other income and expense was expense of $3.5 million compared to $6.2 million of expense last year. Once again, this quarter, interest expense drove the decrease, down 50% year-over-year. The effective tax rate in Q1 was 8.3% compared to a tax benefit of 9.4% last year. The lower rate in Q1 of this fiscal year is driven by tax opportunity related to OBBA. As you may recall, last year's negative rate was a result of a favorable ruling on a prior period tax audit. For the full year of fiscal '26, we continue to expect an effective tax rate in the low 30s. Adjusted net income in the first quarter was $12.3 million or $0.49 per diluted share, up 2x from last year's adjusted results of $5.5 million or $0.22 per diluted share. We are pleased that despite top line declines, we have made efforts across the business to rightsize expenses, reduce debt and take advantage of tax opportunities, all of which meaningfully contribute to net income and EPS. Turning now to the balance sheet. Cash and cash equivalents at September 30, 2025, were $75.7 million. Cash generated by operating activities in the quarter was $8.1 million, our seventh consecutive quarter of positive cash flow. Cash conversion days were 83 days, a 2-day improvement compared to Q4 of fiscal '25 and a 25-day improvement year-over-year. This represents our lowest CCD in over 3 years with receivables and payables posting the largest improvement within the quarter. Inventory ended the quarter at $272.7 million, roughly flat versus Q4 but down $62.6 million or 19% from a year ago. Capital expenditures in the first quarter were $10.6 million, with much of the spend on leasehold improvements in the new facility in Indianapolis. Borrowings at September 30, 2025 were $138 million, a $9.5 million reduction from the fourth quarter and down $108 million or 44% from a year ago. Short-term liquidity available, represented as cash and cash equivalents plus the unused portion of our credit facility totaled $370 million at the end of the first quarter. We invested $1.5 million in Q1 to repurchase 49,000 shares. Since October 2015, under our Board-authorized share repurchase program, a total of $105.2 million has been returned to our shareowners by purchasing 6.7 million shares of common stock. We have $14.8 million remaining on the repurchase program. As Ric mentioned, we are reiterating our guidance for fiscal '26 with net sales expected to be in the range of $1.35 billion to $1.45 billion and adjusted operating income of 4% to 4.25% of net sales. We continue to estimate capital expenditures of $50 million to $60 million in the fiscal year. I'll now turn the call back over to Ric. Richard Phillips: Thanks, Jana. Before we open the lines for questions, I'd like to share a few thoughts. It is customary at the beginning of the fiscal year that I complete a profit sharing bonus tour. It's an opportunity to travel to each location in our global footprint, connect with the teams and experience real time the strides we're making to return to profitable growth. I'm very pleased with our progress. Whether it's in the new business we're winning in all verticals, improvements in our operations, quality, on-time delivery or cost initiatives. The engagement and accomplishments are evident. I'm also very encouraged by the early impacts on the top line in the medical business. This is expected to continue. As we evaluate the medical CMO space, we see an opportunity for accelerated growth and higher margins over time. Our strategy to pursue growth with blue-chip customers with long product life cycles and a high degree of visibility. We're building a scalable platform that supports the work we already do well, creates opportunities for vertical integration and positions us to take on more of the complex programs that align with our strengths. A great example is the new facility in Indianapolis, adding production capabilities and capacity but it's not the only. Our medical businesses in Thailand and Poland focused on HLAs and finished devices are also having a meaningful impact. As I noted earlier, we are looking to augment this growth with a tuck-in acquisition strategy that will add new end markets, manufacturing capabilities and new customer relationships. I'm confident in this strategy and have never been more excited about the future of the company. In closing, I am proud of how our entire organization addressed the challenges of the past 2 years while remaining keenly focused on our strategic future. We look forward to a return to growth in FY '27 centered on the medical space, aligning with our goal to even out our verticals and improve margins over time. We will continue to provide updates as the year progresses. Operator, we'd now like to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Mike Crawford from B. Riley. Michael Crawford: And I really appreciate the working capital management. But as Kimball starts -- resumes top line growth, is that around the same time we should also expect to see an increase in the working capital? Or is there still more work -- progress you can make there? Jana Croom: Mike, that's a great question. So yes, I would not expect a significant amount of increased working capital management and debt reduction. To your point, as we prepare for growth in FY '27, we're going to have to buy all the inventory. We're going -- and so I would actually take that as a good sign. So to your point, we've done a lot to wring out the excess inventory in the balance sheet and improve working capital. But as we return to growth, you're going to see us have to spend some dollars and you're going to see those numbers start to move. Michael Crawford: And Jana, the cash conversion days, would that -- I mean, is this a good level to think about it remaining stable at? Jana Croom: Ideally, I would like it to have a 7 in front of it. But realistically, if we just stay where we are in the very low 80s, particularly as we start to grow the business again, I think stabilizing it here is pretty good. Michael Crawford: Okay. And then we like the 7.2% EBITDA margin in the quarter. We do have the message and as modeled, have that stepping down for the rest of this year. But we also have that declining further next year. And I would -- is that the wrong way to be thinking about your business given where you are? Or is it too early to tell? Jana Croom: Well, so it is early days to think about FY '27. But I will say this, I would not expect a deterioration, right? As we return to growth, as we get better absorption in our facilities and we're going to work to do some additional restructuring over FY '26, we would actually expect EBITDA in FY '27 to be better, right? We need to get to a consistent adjusted operating income margin of 5% and then corresponding EBITDA margin on top of that. So I would not be projecting declines next fiscal year. Operator: Your next question comes from the line of Max Michaelis from Lake Street. Maxwell Michaelis: Nice quarter. I want to jump to the Medical segment here. And I know you talked about some inorganic opportunities. So what's sort of the focus around potential acquisitions and maybe expanding already current platform offerings or kind of heading into new markets? And then can you also touch on some of those new markets that are kind of at the top of the charts? Richard Phillips: Max, thanks for your question. Yes, definitely an area from an M&A standpoint that we are continuing to explore. It would be focused in the medical CMO space specifically. We like our differentiated capabilities there with our ability to handle drug and have significant experience with the FDA and so on. But there's always additional extensions of that, that we could think about. And as I mentioned, that could include new technologies that extend us and allow us to play a bigger role with our customers there. It could include new customers. It could include new geographies. So we look quite broadly at those potential opportunities but again, very focused only on the medical CMO space at this point. Maxwell Michaelis: All right. Perfect. And then looking at my notes from last quarter, I think outside of medical growth, I think you guys maybe had expected some modest industrial growth. And I know sort of the HVAC softness kind of hindered that this quarter. But do you see any sort of maybe breakeven or maybe low single-digit growth in the industrial? Or should we kind of think of kind of the declining 1% as a solid cadence throughout the rest of the year? Jana Croom: You could take Q1 results in terms of percentage of sales increase as sort of a proxy for full year FY '26. So industrial is going to be softer than we had previously anticipated. Medical is going to be much stronger. And automotive is going to come in roughly as expected. Maxwell Michaelis: Okay. Perfect. And then just sort of your largest customer on the medical side in the respiratory care, the assembly and in higher-level assemblies, how did that perform in the quarter up to your expectations or compared to your expectations? Richard Phillips: It's been very good. It's been very good. Our relationship with that customer has probably never been better. We expect continued growth and the partnership in that program that we talked about has been very strong. So we feel good about that. Operator: Your next question comes from the line of Derek Soderberg from Cantor. \ Derek Soderberg: So I want to start with the Medical segment, ramping up really nicely here on an organic basis. To me, it feels like you guys have been signing on new programs for over a year now, meaning these programs are starting to reach production and revenue. Can you talk about that pipeline of medical projects sort of turning into revenue over the next 6 months? Maybe how that compares to where we were sort of at a year ago and how it sort of sets up the company for accelerated growth? How does that pipeline of those projects turning on look over the next 6 months? Richard Phillips: Thanks, Derek. Yes, we're really pleased with our funnel. I mean we're very focused across our leadership team on driving growth in medical. And so we have very regular reviews of what new is coming in the funnel, what did we win? What can we add? And so the outcome of those things in the funnel are uncertain, of course. But I would say the volume of that, particularly in medical, as you asked, is as high as it's been. So we're really pleased about that and we're hoping to close those as we move throughout the year. And again, we track it really closely but good funnel. Jana Croom: And I think it's important to note the growth in medical was not centered in one customer or one program. It wasn't even centered in one geography, right? And so the growth that you saw in medical was split between Europe, Asia, with a smaller piece in North America. So to your point and Ric's point, multiple programs and customers. \ Derek Soderberg: Yes, that's great to hear. And then just a quick one on the Automotive segment. Can you maybe talk about the core automotive business? What's maybe the run rate of high visibility revenue, revenue with long-standing customers on your core products? Can you talk about that? Are we sort of bottoming here in automotive? It sounds like we're going to be kind of flattish from here. Richard Phillips: It's hard to say, Derek. I mean I actually just met with our top 4 automotive customers in a week. And I'd say that they anticipate challenges over the next couple of years in the overall automotive market. So again, we really like where we're positioned and electronic content being added to vehicles is huge for us. Our relationships are strong. We're continuing to be strategically focused in those areas of automotive that work for us and that are not commoditized. But we anticipate continued pressure, whether it's from tariffs or the impacts on the economies around the world that put pressure on people buying cars. Derek Soderberg: Got it. Got it. That's helpful. And then, Jana, a couple for you. Just with the balance sheet where it's at, you guys are buying shares back, paying down debt, much leaner company than you had been in the past. How are you feeling about -- there was a question on inorganic growth. How do you feel about making a move like that? And how do you balance just continuing to improve operations organically, using your new capacity in medical, continuing to generate cash flow, et cetera. How are you guys thinking about that? Jana Croom: Yes, that's a really great question. And capital allocation has been top of mind for probably the last 9 months as we were looking at the strengthening balance sheet and how we were going to deploy capital to grow the business most efficiently. What I can tell you right now is, given the 18-month growth pattern we had in terms of organic expansion with Thailand, Poland and Mexico from just a pure organic growth, we've got a really great footprint. You're seeing us now put capital to work in [ India ] for the CMO. And so we need to grow into that body of manufacturing facilities. And so we have plenty of dry powder for an inorganic opportunity. If there was something that came to this leadership team that was going to augment the CMO in a meaningful way, allow us to improve our EBITDA margins for the business, we would definitely take advantage of that. But nobody has got a burning hole in their pocket to spend cash. So we're not going to do something foolish. This company is very, very disciplined. And I think you guys know I'm a balance sheet CFO. And so it would have to be really thoughtful. We wouldn't want to issue equity to do it unless it was something absolutely compelling. And quite honestly, I don't see that being feasible. And so it's how much debt can you spend and still keep your balance sheet strong enough to support the working capital needs of the organization while it returns to growth. Derek Soderberg: Yes. Yes. Got it. And one final one, Jana. Can you talk about the accelerated depreciation within the latest, the Big Beautiful Bill? Is that impactful for you guys at all? That's my last question. Jana Croom: It is. And so the bigger impact for us, for OBBA is, I mean, certainly accelerated depreciation but some things that we were able to take advantage of related to specifically interest expense deductions on domestic income. That for us was actually a slightly bigger benefit. We're looking specifically at R&D credits and some other things that we can take advantage of for sure as well. And also to be honest, we're still working through it. Yes. Operator: [Operator Instructions] Your next question comes from the line of Anja Soderstrom from Sidoti. Anja Soderstrom: I'm just curious with the gross margin expansion despite the lower revenue, what's the puts and takes for that? Jana Croom: Sorry, you just caught me having a big drink of water. So a few things related to gross margin. The first was we had favorable product mix. And that was driven across geographies with the ramping of certain programs coming online and just better absorption and utilization. As you know, we spent much of FY '25 and FY '24 doing restructuring. We're seeing some of the benefits of that come through. But the biggest benefit is closing our Tampa facility and all of the fixed costs associated with that facility that are no longer part of our cost structure. And one of the things that we're doing is continuing to evaluate cost structure, restructuring efforts, S&A needs as we grow to figure out timing of some of those things so that we can hold not just gross margin but S&A at a level that we're delivering solid operating income margin and EBITDA to our shareholders. And that's really important. Anja Soderstrom: Okay. And then did you say you expect the SG&A to increase as a percentage of sales for the rest of the year? Jana Croom: We do. It was artificially low in FY '25 purposefully and that was a result of us being really mindful about the challenges that we were having and the need to tighten the belt. But similar to working capital needs, there's S&A that we are going to have to spend in order to prepare for the growth. Anja Soderstrom: Okay. And then that should come down then into 2027 as you expand your revenue and [indiscernible]. Jana Croom: Yes. And the focus areas for S&A are really going to be around things like technology, business development, areas where we just need to grow so that we can support the business. Anja Soderstrom: Okay. And then how do you -- you touched on it a little bit already in terms of debt reduction but how should we think about further debt reduction? Jana Croom: So I actually think next quarter, debt is going to climb just a little bit and it's going to be due to some of the needs that we have to fulfill. So think about FY '27 return to growth NPI launch. We had to order all of that inventory. It's got to come in now so that we can be prepared for it. And so you're going to see us spending a little bit in support of the growth that's coming. But I actually take that as a really good sign. Anja Soderstrom: And then in terms of M&A opportunities, it seems like you are quite actively looking for opportunities there. How would you say the market has changed over the recent quarter? Jana Croom: So M&A has been really interesting, especially as a strategic buyer, right? And so what you saw probably for the last 3, 4 years was the PE companies being prepared to pay what I would consider to be somewhat absorbent multiples to buy up some of these companies. What you're seeing now is a much more rational market, people being able to have the confidence to walk away if something just seems overly expensive. And so because of that rationality, we actually feel better about being able to buy the right opportunity at the right price point and then integrate it and grow it as part of our CMO strategy. But we are very disciplined as a strategic. We don't want to get in over our skis. We've got a solid organic growth strategy. Nobody's got a burning hole in their pocket where we're going to do something that is not going to drive shareholder value, first and foremost. Operator: [Operator Instructions] There are no further questions at this time. This concludes today's conference call. A telephone replay of the call can be accessed by dialing (877) 660-6853 or (201) 612-7415 with the access code 13756429.