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Operator: Good morning. Welcome to the USA Compression Partners Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, November 5, 2025. I now would like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary. Mr. Porter, you may begin. Christopher Porter: Good morning, everyone, and thank you for joining us. With me today is Clint Green, President and CEO; Chris Paulsen, Vice President and CFO; and Chris Wauson, Vice President and COO. This morning, we released our operational and financial results for the quarter ending September 30, 2025. You can find a copy of our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. During this call, our management will reference certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable U.S. GAAP measures in our earnings release. As a reminder, our conference call will include forward-looking statements. These statements are based on management's current beliefs and include projections and expectations regarding our future performance and other forward-looking matters. Actual results may differ materially from these statements. Please review the risk factors included in this morning's earnings release and in our other public filings. Please note that information provided on this call speaks only to management's views as of today, November 5, 2025, and may no longer be accurate at the time of a replay. I will now turn the call over to Clint Green, President and CEO of USA Compression. Micah Green: Thanks, Chris, and good morning. Thank you all for joining our call. We are pleased to deliver another solid quarter with revenues of over $250 million, adjusted EBITDA over $160 million and DCF approaching $104 million, with strong margins and consistent utilization resulting in improved leverage ratio of 3.9x and DCF coverage ratio of 1.6x. Based on year-to-date performance, we have increased our 2025 ranges for EBITDA and DCF guidance. This increase in guidance is a result of management's commitment to effective cost management and operational discipline. This includes certain onetime impacts that Chris Paulsen will discuss later in the call. Additionally, we will deploy most of our 2025 new unit horsepower in Q4, setting the foundation for continued momentum in 2026. We are in the process of finalizing our 2026 capital budget, which we anticipate releasing in February. We expect that new horsepower will exceed 2025 levels given continued natural gas demand and new projects, both expanding takeaway capacity and increased localized demand in the Permian and Northeast. We have already committed to several deliveries in Q2 and Q3 of 2026. Notably, we have recently seen lead times increase to more than 60 weeks for larger orders. Although U.S. producers are still evaluating macro market conditions to arrive at their appropriate capital budgets for 2026, we continue to see growth opportunities in the markets we operate. We expect our active horsepower in the Northeast and Central regions to grow by more than 40,000 horsepower before the end of 2025 relative to Q2. This is partially due to contracting 300 small horsepower units that will draw from idle capacity and increase small horsepower utilization to nearly 80% over the coming months. These contracts include a 36-month initial term. This deployment, coupled with Q4 new unit deliveries to the Permian will bring our projected year-end active fleet to roughly 3.6 million horsepower. Turning to SG&A. We now expect to realize the majority of the $5 million of shared services annualized savings in 2025, ahead of the 2026 time line shared on our last call. These savings have and will continue to come from cost improvements seen through centralized IT efforts and other savings due to economies of scale. For example, Q3 benefited from a onetime health care cost true-up, reflecting a lower monthly per employee health care cost than previously estimated. We expect 2026 G&A to grow modestly off of our new baseline, reflecting typical wage inflation and modest investments in new commercial and financial capabilities. Finally, we are pleased that both our bank syndicate and long-term investors continue to recognize the quality of the compression market. In Q3, we refinanced our ABL and our 2027 senior notes, significantly reducing our weighted average borrowing cost and improved strategic flexibility. With that, I will turn the call over to Chris Paulsen, our Chief Financial Officer, for a detailed financial update. Christopher Paulsen: Thanks, Clint. In Q3, our sales team continued to build upon pricing improvements, up to an all-time high, averaging $21.46 per horsepower for the third quarter, a 1% increase in sequential quarters and a 4% increase compared to a year ago. Average active horsepower remained flattish compared to Q2 at $3.55 million. Our third quarter adjusted gross margins were higher at 69.3%, in large part due to the realization of both onetime and ongoing cost savings tied to our centralized procurement processes, employee health care savings and onetime sales tax refund recognized at the completion of a prior year sales tax audit. While Q3 gross margins were partially elevated due to onetime true-up and cost savings, going forward, we expect margins to stay consistent with our trailing 12-month rate. Regarding the consolidated financial results, our third quarter 2025 net income was $34.5 million. Operating income was $83.9 million. Net cash provided by operating activities was $75.9 million and cash interest expense net was $44.9 million. Our leverage ratio at the end of the third quarter was 3.9x. As you may recall, our leverage ratio is determined in accordance with our ABL definition, which remained consistent with our latest refinancing and is calculated as funded debt divided by the latest quarter annualized adjusted EBITDA. Turning to operational results. Our total fleet horsepower at the end of the quarter was approximately 3.9 million horsepower, essentially flat versus the prior quarter. Our average utilization for the third quarter was 94%, consistent with the prior quarter. Third quarter 2025 expansion capital expenditures were $37.3 million, and our maintenance capital expenditures were $9 million. Expansion capital spending in Q3 primarily consisted of new units, and we expect that to be the same in Q4. Turning to 2025 guidance. We have increased and tightened our adjusted EBITDA range to $610 million to $620 million, increasing the midpoint of the range by approximately $15 million. We have also increased our DCF range to $370 million to $380 million, reduced our expansion capital range to $115 million to $125 million, and maintained our maintenance capital between $38 million and $42 million. Approximately $11 million of expansion capital tied to late December deliveries is now expected to be realized in 2025 instead of January 2026, as stated in our Q2 call and therefore, is factored into our 2025 capital range. As previously discussed, we continue to maintain our leverage ratio and expect it to marginally increase at the end of the year as we fund new growth projects that are back-end loaded. Our target remains at or below 4x debt to EBITDA. Finally, as Clint mentioned earlier, Q3 was characterized by 2 major refinancings. First, we extended and expanded our ABL from $1.6 billion to $1.75 billion, reducing our drawn cost by approximately 25 basis points. Second, we called our $750 million 2027 notes at par in favor of the 2033 notes of the same quantum, reducing our interest rate 62.5 basis points. All in all, we are on track to realize over $10 million annualized interest savings given these efforts and based on forecasted rate cuts, all while increasing overall liquidity and extending tenor. And with that, I will turn the call back to Clint for concluding remarks. Micah Green: Thanks, Chris. I want to thank our employees that have worked diligently towards our ERP implementation in early 2026. The collaboration across the organization has been significant and has brought regions and departments closer together. At the same time, we are realizing cost synergies from our new shared services model. The combination of both is improving our control, sophistication, data integrity and profitability. Therefore, I am excited about the path forward. Operator: [Operator Instructions] Your first question comes from Nate Pendleton with Texas Capital. Nate Pendleton: Congrats on the record quarter. In a sustained slowdown in oil-directed activity, can you speak to your willingness to lean further into compression and dry gas plays in this environment based on the success you just highlighted in your prepared remarks? And then also, would there be any investment in in-basin facilities required to support any significant increase in gas-directed compression? Micah Green: Yes. So Nate, thank you for that question. We're already established in the dry gas markets. We -- while we have the majority of our operations is in the Permian, we're still very large in the Northeast, up in Oklahoma, down in the Gulf Coast. And we see with these demands coming online and these pipelines being built out of West Texas or out of the Permian, we see those plays as a place to -- as a growth where we expect to see drilling for gas instead of drilling for gas and -- associated gas and oil. And I missed the second part of your question there, Nate, what was that? Nate Pendleton: Just to add, would there be any incremental investment needed in the in-basin facility to support any increase in assets deployed there? Micah Green: Well, I mean, we have active horsepower running in those basins, in the other dry gas basins. And so we can move equipment from anywhere that may slow down to those basins or we can buy new equipment and install there for operating. I hope that answers your question. Nate Pendleton: Yes, it does. I was just trying to get your geographic diversification. It does sound like you're already established there, so it would just be a matter of moving the horsepower in. So definitely positive. Micah Green: That's exactly right. Thank you. Nate Pendleton: And then, Clint, if I may, one more. With the strong pricing trends that you guys noted during the quarter, can you speak to recent pricing dynamics and how spot prices are comparing to your fleet average here? Christopher Wauson: Yes. It's Chris Wauson. I'll take that one. Our market has definitely picked up since Q2. So our pricing trends from a dollar per horsepower basis is going to be consistent into the back half of 2025 into 2026. We feel like our dollar per horsepower revenue is going to be consistent. So we'll just see how everything works out, but that's our feeling right now. Operator: [Operator Instructions] There are no further questions at this time. I'll now turn the conference back over to Clint Green for closing remarks. Micah Green: Yes. Thank you all for joining our call. We appreciate the interest in our company, and have a good day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the iA Financial Group Third Quarter 2025 Earnings Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Caroline Drouin with iA Financial Group. Please go ahead. Caroline Drouin: Thank you, and good morning, everyone. Welcome to iA's Third Quarter 2025 Conference Call. This conference call is open to the financial community, the media and the public, and I remind you that the question period is reserved for financial analysts. Before we start, I draw your attention to the forward-looking statements information on Slide 2 as well as the non-IFRS and additional financial measures information on Slide 3. Also, please note that a detailed discussion of the company's risk is provided in our 2024 MD&A available on SEDAR and on our website with an update in our Q3 2025 MD&A, which was released yesterday. I will start by introducing everyone attending on behalf of iA. First, Denis Ricard, President and CEO; Eric Jobin, Chief Financial Officer and Chief Actuary; Alain Bergeron, Chief Investment Officer; Stephan Bourbonnais, responsible for our Wealth Management operations; Renee Laflamme, responsible for Individual Insurance, Savings and Retirement; Pierre Miron, Chief Growth Officer for our Canadian Operations and responsible for Dealer Services Canada and iA Auto and Home; Sean O'Brien, Chief Growth Officer for our U.S. operations; and finally, Louis-Philippe Pouliot, in charge of Group Benefits and Retirement Solutions. So with that, I will now turn the call over to Denis Ricard. Denis Ricard: Good morning, everyone, and thank you for being with us on the call today. Before we dive into our strong third quarter financial results, I'd like to begin with a significant milestone for iA. On October 31, we officially completed the acquisition of RF Capital Group, one of Canada's leading independent wealth management firms. This transaction represents a major step forward in our strategy to strengthen our national footprint and expand our presence in the high net worth segment. We are very pleased to welcome RF Capital's talented teams to iA, and we look forward to the opportunities this partnership will unlock. Later in the call, Stephan Bourbonnais will provide more details on this successful transaction. Now let's turn to Slide 8 for an overview of our third quarter results. We entered the second half of the year with strong momentum. Core EPS reached $3.47, up 18% year-over-year, and our core ROE stood at 17.2% on a trailing 12-month basis, already meeting our 2027 target of 17% plus. These results underscore the resilience and strength of our diversified business models, which continues to deliver consistent long-term value for our clients and shareholders. Sales continued to be strong with premiums and deposits up 6% year-over-year and total assets under management and administration up 15%. This performance reflects our ability to meet evolving client needs through a broad and competitive product suite, supported by high-performing distribution network. Our capital position proves to be robust with a solvency ratio of 138% at the end of Q3, well above the regulatory minimum. This was supported by strong organic capital generation of $170 million during the quarter. As of September 30, our capital available for deployment stood at approximately $1.7 billion. Together, the acquisition of RF Capital and the AMF-revised CARLI Guideline, which we will be discussed in more detail by Eric later in the call, are expected to reduce the solvency ratio by 3 percentage points and to reduce the capital available for deployment by $375 million. Therefore, on a pro forma basis as of September 30, the solvency ratio is 135%, and our capital available for deployment is estimated at $1.3 billion. Finally, our book value per share increased to $79.22, up 11% year-over-year. We continue to return value to shareholders through our active NCIB. Excluding the impact of NCIB, the increase in book value over the last 12 months is close to 13%. Let's now turn to Slide 9 to review the business growth in our Insurance, Canada segment. Sales level and growth were good across almost all business units. Starting with Individual Insurance, sales reached $102 million, marking a second consecutive quarter above the $100 million mark. While this represents a 1% year-over-year decline, it's important to look beyond this figure. We continue to rank #1 in Canada for the number of policies issued with volume up 5% compared to the same quarter last year. This growth reflects strong business activity, particularly in our core market, the mass market. More importantly, net premiums increased by 11% year-over-year. On a year-to-date basis, sales are up 5%, and this is fully aligned with the expectations we shared at our last investor event. This performance underscores the strength of our distribution networks, the effectiveness of our digital tools and the breadth of our product offering. Turning to group insurance. Premiums and deposits rose by 4% year-over-year, supported by good sales implemented in the last 12 months. In Dealer Services, sales grew by 9% to $214 million, driven by continued momentum in P&C insurance and the contribution from Global Warranty. Finally, iA Auto and Home delivered another strong quarter with sales up 10% year-over-year to $180 million, reflecting both an increase in the number of policies issued and price adjustments. Moving to Slide #10 to highlight Wealth Management sales. where combined net fund sales from SEG and mutual funds across all our units surpassed $1.1 billion this quarter. We continue to build on our leadership position in the Canadian SEG fund market, posting strong results in both gross and net sales. Gross sales of SEG fund rose 23% year-over-year, exceeding $1.6 billion, while net sales reached $997 million. These results speak to the strength of our distribution networks and continued appeal of our product offering. In mutual funds, gross sales increased by 58% to $608 million, and net sales reached $25 million, supported by favorable market conditions and a rebound in the industry-wide sales. Sales of other individual savings product declined 17% year-over-year as investors continue to favor higher return asset classes in the current market environment. Finally, in Group Savings and Retirement, total sales reached $607 million compared to $900 million a year earlier. Sales of accumulation products and insured annuities were lower this quarter. Note that volumes in this unit can fluctuate significantly depending on the size of contracts. That said, total assets under management and group savings were up 15% compared to a year ago. Looking at Slide 11. Our U.S. operations continue to perform well. In Individual Insurance, sales increased by 15% year-over-year, reaching USD 78 million or approximately CAD 107 million. Once again, this quarter, our U.S. individual insurance sales surpassed those in Canada, driven by organic growth in our core markets. Vericity continues to benefit from its scalable platform and data-driven capabilities. Its integration remains on track and is supporting our long-term ambitions in the U.S. market. In Dealer Services, sales remained stable at USD 286 million, reflecting consistent year-over-year performance. It's worth noting that sales in the third quarter of 2024 were temporarily elevated due to a system outage and that the growth momentum observed in the first half of 2025 was moderated by dealer group attrition. This attrition was partly driven by repricing efforts as part of the management actions we've been executing with discipline in recent quarters. While repricing efforts led to the loss of certain accounts, it was a strategic decision aimed at strengthening the foundation of the business and ensuring long-term profitability. We continue to invest in distribution relationships and remain focused on driving sustainable growth through our high-quality offerings. Now turning to Slide 12, where our financial metrics demonstrate consistent progress toward our mid-term targets. Core EPS growth for the first 9 months of 2025 stands at 22% year-over-year, well ahead of our mid-term target of 10% plus and a strong indicator of our earnings momentum. Core ROE remains solid at 17.2%, already meeting our 2027 objective. Year-to-date, we've generated $495 million in organic capital, keeping us firmly on track to meet our 2025 target of over $650 million. Lastly, our dividend payout ratio of 28.3% is well within our target range. To conclude, we renewed our NCIB program, allowing us to repurchase up to 5% of our outstanding shares. This decision reflects our balanced approach to capital allocation and underscores our commitment to returning value to shareholders while continuing to invest in organic growth and strategic acquisitions. With that, I will now hand it over to Eric, who will comment on our third quarter profitability and capital strength. Following Eric's remarks, Stephan Bourbonnais will share a few comments on the RF Capital acquisition, and then we will open the line for questions. Eric? Eric Jobin: Thank you, Denis, and good morning, everyone. I'm pleased to walk you through our third quarter results, which reflect the consistency of our performance, the disciplined execution of our strategy and the strength of our diversified business model. These results, combined with a robust capital position, reinforce our ability to deliver on our financial targets. Let's begin with Slide 14, which provides an overview of our profitability and financial strength for the third quarter. Core EPS for the third quarter reached $3.47, representing an increase of 18% year-over-year and reported EPS came in at $3.91, up 31% from the same period last year. This performance reflects strong growth in our core insurance service results, higher core noninsurance activities and a solid increase in the core net investment result. These results reaffirm the strength of our fundamentals and the effectiveness of our strategy in delivering sustainable profitability. The quarterly core ROE annualized for the quarter was 18%, and our trailing 12-month core ROE reached 17.2%, continuing to trend above the target of 17% plus for 2027. We are pleased with this level of performance and remain focused on building on this momentum while staying prudent given macroeconomic and trade-related uncertainties. Our financial position is both solid and flexible, supported by our continued ability to generate organic capital. This strength enables us to pursue high-quality growth opportunities, both organically and through targeted acquisitions while maintaining a strong financial position. I'll return to the financial position later in my remarks to discuss the impact of the RF Capital acquisition and the upcoming 2026 AMF-revised CARLI Guideline. Over the past 12 months, our book value per share has increased by 11%. Excluding the impact of our active share buybacks, this increase would have been 13% Yesterday, we announced the renewal of our NCIB program, authorizing the repurchase of up to 5% of our outstanding shares. This renewal reflects our continued commitment to disciplined capital deployment and delivering value to shareholders. Turning to Slide 15 for an overview of our third quarter total earnings performance. Net income grew by 29% year-over-year, while core earnings rose 17%, reflecting solid contributions from all three operating segments and strong investment results. Notably, net income exceeded core earnings this quarter, driven by favorable macroeconomic variations. Now turning to Slide 16 for a closer look at segment performance in the third quarter. In Insurance, Canada, core earnings were $113 million, up 7% year-over-year. This growth was driven by higher core insurance service result, reflecting an increase in combined risk adjustment release and CSM recognized for services provided. Unfavorable morbidity in group insurance, which continued to -- which contributed to insurance experience loss of $2 million was partially offset by favorable mortality and lower claims at iA Auto and Home. Impact of new business was $10 million as a result of new insurance business in employee plans stemming from high volume of confirmed sales, including one large group. Core non-insurance activities also contributed positively, led by the good performance of dealer services. Finally, core other expenses were slightly higher than last year, reflecting normal business growth. Let's now move to -- from Insurance, Canada to Wealth Management on Slide 17. You'll see that in the Wealth Management segment, core earnings reached $125 million in the third quarter, up 18% year-over-year. This growth was primarily driven by increase in the combined risk adjustment release and CSM recognized for services provided, supported by strong net segregated fund sales and positive financial market performance over the past 12 months. Core non-insurance activities also posted a solid increase, thanks to good performance from Group Savings and Retirement, our wealth distribution affiliates and iA Clarington, where higher net revenues on assets was recorded. Turning to Slide 18, covering our U.S. operations, where third quarter core earnings totaled $32 million, up 3% year-over-year. This result reflects several factors, including a higher combined risk adjustment release and CSM recognized for service provided, supported by good business growth over the past 12 months. The segment also benefited from a lower impact of new insurance business and reduced core other expense. During the quarter, we recorded insurance experience gains of $2 million, driven by favorable mortality in individual insurance. Core non-insurance activities totaled $19 million, in line with the prior year. Higher earnings from Dealer Services were offset by expected losses in Vericity distribution activities. That said, core earnings growth was tempered by higher core income taxes, primarily due to onetime adjustments. Now turning to Slide 19 for the results of the Investment segment. Core earnings for the quarter were $105 million, up from $80 million in Q3 2024. Before accounting for taxes, financing charges on debentures and dividends, the core net investment result was $132 million compared to $111 million a year ago. This strong performance was supported by several factors, including the favorable impact of interest rate variations in recent quarters, stemming from the steepening of the yield curve as well as to a lower extent, higher results from iA Auto Finance and the contribution of additional assets from the June issuance of institutional pref shares. In addition, credit experience was positive with higher impacts from upgrades and downgrades in the fixed income portfolio. At iA Auto Finance, our underwriting discipline and portfolio quality contributed to a positive credit experience in the car loan segment. Moving to Slide 20 for the Corporate segment. Core other expenses totaled $70 million pretax in the third quarter, consistent with our quarterly expectation of $68 million, plus or minus $5 million as we continue to focus on operational efficiency. If you turn to Slide 21 to review our solvency ratio and capital available for deployment. As of September 30, 2025, our solvency ratio stands at 138%, well above the regulatory minimum ratio of 90%. The ratio remained stable during the quarter as the positive impacts of organic capital generation and macroeconomic variations were offset by capital deployment activities, including share buyback, IT investments and other non-organic factors such as adjustment in the investment portfolio. On a pro forma basis, the solvency ratio is estimated at 135%, taking into account the impact of the RF Capital acquisition completed on October 31, 2025, and the expected impact of the 2026 AMF-revised CARLI Guideline. On that note, in September 2025, the AMF published a consultation for a revised CARLI Guideline set to take effect on January 1, 2026. If adopted as published, the guideline would, among other changes, modify the treatment of excess capital recognition for property and casualty subsidiaries. This effect is expected to be positive for our U.S. Dealer Service business unit and results in favorable impact on the solvency ratio and capital available for deployment. During the third quarter, we generated strong $170 million in organic capital, keeping us on track to reach our 2025 target of $650 million plus. As of September 30, capital available for deployment was assessed at $1.7 billion, supported by organic capital generation and the positive impact of the 2025 AMF-revised CARLI Guideline on segregated funds. On a pro forma basis, taking into account the RF Capital acquisition and the expected impact of the AMF 2026 revised CARLI Guideline, capital available for deployment is estimated at $1.3 billion. Despite investing in the second largest acquisition in our history, we remain -- we maintain a substantial amount of capital available for deployment, giving us the flexibility to pursue attractive growth opportunities. As we build on successive quarters of strong profitability and a robust capital position, we entered the final quarter of the year with confidence in our strategy and in our ability to execute. We remain focused on maintaining this momentum and delivering consistent high-quality results that support our long-term objectives. These conclude my remarks. I will now turn it over to Stephan, who will speak about the RF Capital acquisition. Stephan, over to you. Stephan Bourbonnais: Thank you, Eric. Good morning, everyone. I'm pleased to take a few moments to speak about the successful closing of the acquisition of RF Capital. As you know, that took place on October 31. And as Denis mentioned, this transaction marks a major milestone in our ambition to establish ourselves as Canada's leading non-bank wealth management platform. When you look at Slide 23, you'll see that the total price of the transaction is $693 million, which includes the advisor retention strategy we implemented prior to closing. Transaction and integration costs are estimated at $60 million before tax and are expected to be incurred over the first 3 years. So this investment reflects our long-term commitment to the value of advice and advisor engagement, and we expect the acquisition to be neutral to core earnings in year 1 and accretive to core EPS by at least $0.15 in year 2. This acquisition strengthens our position in the high net worth segment and expands our national footprint by adding advisors and offices coast to coast. And by integrating RF Capital Advisor Network, in iA Wealth now operates with three complementary business model with Investia and iA Private Wealth, which will allow us to drive efficiency in technology, operations, and innovation and will position us for accelerated growth, all with the main objective to equip our advisors with tools and expertise that they will have access to that will help them deliver a strong experience and outcome to their clients. If we now move to Slide 24, we present the time line of this acquisition. So since the announcement in July, we've been on the road. Our objective was to meet with RF Capital Advisors. Obviously, the focus was on advisor retention. We wanted to take the time and the opportunity to visit every office in Canada to sit down with advisors one-on-one to get to know them better, to share our vision, and to ensure a smooth transition for everybody involved. The conversations were rich. The conversations were candid and very much forward-looking. We're pleased with the overwhelming positivity and openness demonstrated by the advisors. They see a real opportunity in this new chapter and are genuinely excited about joining forces with us. Three things really captured, I think, their attention in terms of how we wanted to go forward with them. The fact that we wanted to keep it as a distinct business, I think they were excited about the opportunity to continue growing and building their own culture. The thoughtful approach that we had to avoid any disruption for them with advisors not needed to repaper or lose any client data was a key. And last but not least, they really see true value in our partnership, understanding the capabilities from an IT and solution perspective that we could bring immediately to their road map. In the light of their feedback and the enthusiasm they have shown, we are ready to move forward with the integration. The synergy plan is officially in motion. We're approaching it with the same discipline and focus that guides us through our -- all of our strategic initiatives. This is an exciting moment. When you look at the numbers that we show on Slide 24, when we started the process at the end of June, the assets under administration was at $40.4 billion and it now is up to $43.6 billion at the end of September. The number of advisors remained stable. We did lose some advisors, but we started the process with 143 teams. And at the conclusion of the transaction, we were at 142 teams, reflecting teams that have joined us during this process. So with the addition of RF Capital, iA Wealth now serves over 500,000 clients through more than 1,450 advisors with assets under administration exceeding $192 billion. At the group level, we have assets under administration and management in excess of $330 billion, a clear reflection of our continued growth and the successful execution of our strategic priorities. With the retention strategy completed, our focus now shifts to unlocking synergies, accelerating the integration, and delivering the full value, all in line with the iA. These benefits include expanded product access, shared technology, enhanced recruiting potential, and operational efficiency. And this transaction [indiscernible] our strategic vision and sets iA Wealth on a path towards sustained long-term growth. So thank you, and I will now turn it back to Denis for concluding remarks. Denis? Denis Ricard: Thank you. Thank you, Stephan. And yes, we are very, very pleased with the RF Capital acquisition and I'm very proud to close the retention strategy chapter on a strong note with successful outcomes leading up to the closing of the transaction. So before we move to the Q&A, let me just take a moment to close with a few reflections. Please turn to Slide 26. Our third quarter results once again demonstrate the strength and consistency of our diversified business model and our ability to execute with discipline. We're not just delivering, we're compounding. Quarter after quarter, year after year, we continue to build momentum. Our earnings growth is consistent, underpinned by high-quality results and a clear focus on long-term value creation. Our organic capital generation and robust financial position give us the flexibility to invest in strategic growth and return value to shareholders. Sales momentum is strong, particularly in Wealth Management, which generated over $1.1 billion in net fund sales this quarter. These results reflect the continued appeal of our offerings and the strength of our distribution network. This performance is no coincidence. Our strategy is clear. We are executing the iA way. It's the result of a resilient and differentiated business model built on five reinforcing pillars: targeted niche markets, a broad and entrepreneurial distribution network, diversified product offerings, agile technology, and scalable platforms. This unique combination is what sets us apart. It makes us resilient and enables us to consistently deliver across economic cycles while positioning us for long-term growth. Our recent acquisition of RF Capital is a clear example of how we deploy capital to strengthen our foundation and accelerate future growth. We are focused, disciplined, and confident in our ability to continue delivering, not just results, but sustainable compounding growth. Thank you. Operator, we are now ready to take questions. Operator: [Operator Instructions] Our first question is from Gabriel Dechaine with National Bank Financial. Gabriel Dechaine: So another good news on the capital front there with the AMF modification there. Just wondering, is this -- for starters, is this bringing the AMF more in line with OSFI treatment? And then second, I mean, I'll ask the obvious question, what's your appetite for more acquisitions at this stage? It seems like it would default to buybacks in my assumption, but you're an acquisitive company historically. So maybe there's something else on the horizon? Eric Jobin: Yes, Gabriel, it's Eric. I'll take the first part, and I'll leave it the second part for Denis. For the CARLI Guideline, it brings AMF. This dealer business model is kind of unique for an insurer in Canada. So there's not really comparable at the OSFI level. So it's not necessarily that, but it brings AMF in line with the U.S. regulators in terms of capital requirements. So there's -- this is where the alignment is coming. Gabriel Dechaine: Recognizing that it's a P&C business basically or... Eric Jobin: Yes, exactly. And so it takes into account the risk of the business instead of just applying a guideline. Denis Ricard: Yes. It's Denis here. We're very pleased with the end result. Having a level playing field with our competitors in the U.S. was a goal, and we're very pleased that the discussion we had with the regulators. The regulator has been quite open on that. Obviously, the regulator is not here to give us a Christmas gift, but really, the level playing field was the goal all the way for both of us. In terms of the appetite for the dealer business, obviously, it was a milestone for us here in a sense that before we -- this was settled, there was -- I mean we were not sure exactly what will be the end result. And to some extent, we were patient to wait to see what will be the end result. Now that it's being solved, there's one, I guess, step forward before we want to go, let's say, bigger on the dealer business in the U.S., which is really to bring profitability to a, I would say, an adequate level, a reasonable level that we would be comfortable with. And the team is working very, very hard. And at some point, I'm sure we're going to get questions, and Sean can answer that. But we've done various steps toward improving the profitability and the growth of that business. We are on the right path. I'm very confident that within a couple of quarters, we might take a decision to go bigger on that. Gabriel Dechaine: And then my second question, just from a modeling standpoint, I guess, the capital deployed, you closed that RF Capital post quarter. Is there a step down in the expected investment income line that we should expect? And just for clarification, then there would be an offset in somewhere else, I guess, expected profit such that it's still an EPS neutral in the first year? Eric Jobin: Yes, Gabriel, you are right. In fact, one of the reasons why the expected investment earnings in the third quarter was higher than last quarter was that we issued capital in June, and we will get the opposite impact in the fourth quarter where we have now deployed the capital, reduced the amount of asset. So that will reduce our investment income, but increase our operating results in the wealth segment going forward. So that being said, Gabriel, in terms of accretiveness, we -- of course, we just have 2 months into '25. We expect to get some neutrality. But as we look and if macroeconomic holds and Stephan has done a great job with retaining advisors. So we now expect to be accretive in the first year if everything holds like this. So we -- and as a simple rule, we mentioned some accretiveness number in -- when we made and announced the acquisition. You should assume that this number can move a year earlier as a good proxy for what the performance of this acquisition. Gabriel Dechaine: I think that $0.15 could be year 1 as opposed to year 2. Got it. Okay. Eric Jobin: Exactly. But the only thing, Gabriel, is expect some neutrality in the next couple of months. But overall, for the first year, we see that it will be accretive. Operator: The next question is from Doug Young with Desjardins Capital Markets. Doug Young: Maybe for Eric or Stephan. Just continuing with the ARF acquisition discussion. I was going to ask how you get from neutral year 1 to $0.15 accretion in year 2, but you talked a little bit about it. But can you maybe just elaborate like why initially you thought it was going to be 0 in year 1, $0.15 in year 2 and why it could be pulled forward? And then there's been no discussion on -- and I don't think there's been a lot of discussion on revenue synergies, but maybe I missed it. But like do you think there's opportunity for revenue synergies? And can you kind of elaborate a little bit about where that could come from? Denis Ricard: Yes. Well, thank you, Doug, for the question. It's Denis here. When we bid for an acquisition, there's always a lot of assumptions behind that. In this case, there were two that were critical. One was the retention, obviously, and the second was about the, let's say, the performance of the market. And on both sides, we've had fantastic results much better than we expected on both retention and the macroeconomic environment has been very favorable, a huge tailwind. So that's why we're seeing today that the $0.15, we might just realize it in the first year as opposed to the second year. Doug Young: Thoughts on the revenue synergy. Stephan Bourbonnais: Yes, I could take that part. When we visiting with them what we've heard, there's a lot of opportunities. When you think of from a product solution perspective, whether it is UMA, SMA, they need assistance. They were looking for a team that could support them on product development oversight. They were looking for support on economic insight, asset allocation strategy. So those are all the things that we have within our organization that we're going to be able to put forward capital market activities. They did have a team, but I think there's complementary skill set that we're bringing to the table, considering the high net worth profile that they have with advisors in the alternative space, there's an appetite for us to support them. There's a distinct product that we could build with them as well from structured notes, ECM, syndication. They're excited about our trading desk on the equity and FX side. So I really do think there is a lot of opportunity. And the thing that we like is we are ready to bring this forward. So we are actually at the office today speaking to the advisors and the employees, and we are able to show them a road map from the synergies perspective in terms of what we expect right now and for the next coming quarters. We also see a lot of opportunity on the recruiting side. I think I had shared with this group with the Investia model in Private Wealth, we were good at attracting non-bank advisors. There's a huge opportunity in Canada to attract bank advisors. People are looking for an alternative. And I think the Richardson channel offers us that opportunity to bring bank advisors to us. So this will accelerate the recruiting and probably improve as well as the retention. We were doing well, but now having multiple channel advisors, we'll be able to pick and choose where they want to operate based on their needs and preferences. And we could also say there's a huge opportunity on the cash management side for us. So we feel comfortable about what we could create in terms of synergy on the revenue side. Doug Young: That's helpful. And then just second, I don't know if this is for Alain or for Eric, but strong quarter for the Investment division. I was finding this is really tough to model. Can you talk about any puts and takes that we should be thinking about when we're modeling Q4 2026? Anything unusual? I know you did a raise that obviously bolstered cash and then you had cash that's now been deployed with RF. Like I'm just trying to put in context of how to think about that division and model that division, so I don't get any huge surprises. Eric Jobin: Yes. It's Eric, Doug. I'll help -- I'll keep -- I'll take this one. As you're right, first, our -- the capital issuance in June was one of the driver of the beat or the increase quarter-over-quarter. The other item that is difficult for you to predict is when the yield curve is moving and steepening or flattering. So this part is difficult to model. But -- and it was positive in the quarter. And I would say that the third part that has been positive and that is contributing to investment income as well is the improvement in iA Auto Finance performance. The expected investment earnings coming from that segment has improved over the last 12 months. We've done many things to improve the credit underwriting criteria, and we're seeing the results. And now the expected investment earnings is improving and credit experience start to be positive as well. So I think we've been successful in turning around that investment portfolio, and we're just collecting the benefits of that hard work. Doug Young: So is this -- Eric, is this like a normal quarter? Or should we kind of be thinking about something a little less robust? Eric Jobin: You mean in iA Auto Finance, Doug, or in general. Doug Young: No, the general division in general. Eric Jobin: Okay. Yes. In general, I talked about three things that explain. So obviously, the capital issuance is going the other way around this time. As we've just deployed $700 million, you should expect investment income to go down by roughly, I would say, $5 million next quarter. But you will see improvement in the operating result of the wealth segment. And keep in mind the guidance I gave about the accretiveness earlier on. So those are the moving parts. And then it's difficult to guess where the yield curve will move in the coming quarters. But for iA Auto Finance, we're really confident that we're there, and we've made the improvement that we needed to do. So that should prevail in Q4 as well. That's kind of how I see it. Operator: The next question is from Tom MacKinnon with BMO. Tom MacKinnon: I've got two questions. The first is with respect to the core non-insurance activities in the U.S. down quarter-over-quarter, $4 million. You mentioned losses for distribution activities of Vericity. Can you elaborate on that? Is -- how much of those losses are in that $19 million? What's the dollar amount there? And what would drive that core non-insurance activities number to increase? Is it predominantly related to dealer services sales? How should we think about these other distribution activities at Vericity and their impact? And I have a follow-up. Eric Jobin: Yes. Thanks. I'll start with an explanation for the financial impact, and then my colleague, Sean, will step in for the strategy. In fact, what you've seen in the quarter is a decrease related to the sales activity that will Sean comment just after me. And the only thing I would remind you, Tom, is that we say all the time that the profit recognition for dealer service is happening mostly at time of issuance. So when sales go down, it impacts directly the core non-insurance activities. And as a rule of thumb, I said previously, I think someone asked me, and I said 70% -- 75% of the revenue are recognized at time of sales. So it's really that effect. And I will leave now the mic to Sean to explain what he is doing on the -- on your strategy. Sean? Sean O'Brien: Yes. Thanks, Eric. And Denis mentioned in the open, for the Dealer Services business, we're really happy with the recovery we're seeing this year. The real focus was working on the operations, reducing some of the expenses on it and then looking at pricing across the board. And I mentioned last quarter that we've repriced all of our onerous products in that business. And it was expected as part of that process with a real focus on profitable, high-performing dealers that we would see some attrition, which we did, all within sort of the range of what we'd expected. The other impact we're seeing this year is there's some variance in the normal sales flow in the U.S. with Q1 was so strong. It was 23% higher than the year previous, as I recall. And so we sort of saw some pull ahead, I think, at the beginning of the year and Q3 was softer. But overall, really happy with the results. We're going to come in very close to our target of 10%, I suspect, for the year. Yes, so things are looking good, very happy with it. Tom MacKinnon: And the Vericity, what was the impact there? And how should we be -- is Vericity really material to that line? Sean O'Brien: Go ahead, Eric. Eric Jobin: Yes. If you want to add, Sean, the materiality of Vericity, keep in mind that in that core non-insurance activities, you have the distribution impact of the Vericity acquisition. So it's still minimal, Tom, on this. It's slightly negative, but it's as expected. We knew when we made that acquisition that we would have a couple of years of loss and on that line. And when we refer to accretiveness overall, starting in year 2, it's when we look at the overall picture, including the insurance activities that you have in the driver of earnings in other lines. So overall, things are moving in the right direction. But for the distribution arm, it's still operating at loss, and we still expect losses to happen for a little while before it becomes profitable, but things are moving in the direction that we expected. Tom MacKinnon: Okay. And then the follow-up question is just with respect to capital generation, organic capital generation. Year-to-date, your earnings are up. Your core earnings are up 22%. I think if you kind of look just, you might be almost up 18% year-over-year in the quarter. Yes, so certainly tracking well ahead of the 10% guide or the 10% growth plus guide. But the organic capital generation, the $650 million versus the $600 million isn't -- is substantially less than the core earnings growth. Is there any reason why? Or is it the policyholder gains that aren't necessarily transferable into organic capital generation? Just any color there would be helpful. Eric Jobin: Things are moving in line with plan, Tom. We always have some seasonality that takes place for organic capital generation during the year, specifically in the first half where it's kind of lower and then it's stronger in the second half. If you look at the past year, you'll see the same trend. As we speak, we're at $495 million of organic generation, well on our way to get to the $650 million plus. So things are $595 million, excuse me, I said $495 million, but we're well in a good direction to get there. Tom MacKinnon: No, my question isn't, are you going to get there? My question is, why is the growth in the organic capital? Why is that growth less than the growth in the core earnings? Eric Jobin: We'll take it offline, Tom, if you don't mind. It can get technical. Tom MacKinnon: Understood. Operator: The next question is from Paul Holden with CIBC. Paul Holden: Two questions for you as well. First one on the mutual fund sales, a big improvement in gross sales, up 58% year-over-year, and then that drove net sales to the positive, which is great. So I want to understand that a little bit more, obviously, with the idea of sustainability of that improvement. So if you can explain where that huge growth in gross sales is coming from, if it's affiliated distribution versus third party, if there's been improvement of fund performance or if it's more new product launches, whatever color you can give us. Denis Ricard: Yes, we're very pleased with the mutual fund sales this quarter. And maybe, Stephan, do you want to give more color on that? Stephan Bourbonnais: Yes. Thank you. Yes, great improvement, I would say, quarter-over-quarter and year-to-date. The industry has rebounded as well, right? So I think we also benefited from that. But I think what you're seeing here is we've done a lot of work on retooling the team, realigning the team, upgrading our talent. We've been successful at increasing our sales to the affiliate channel with new products that have landed well with our team, mostly with our UMA approach and elite pools that has been a huge success, and we've seen significant adoption. We've supported advisors with alternative products as well that they've been looking at. And we've seen increased sales in the non-affiliate as well. We onboarded a new manager -- a new portfolio manager a year ago with a firm named Agile, and they've been quite successful at opening up doors with the bank. So it's been great to see. And that has driven, obviously, net sales to be in a positive territory. So it's looking good. What I like is we see the consistency week over week. We've seen an increase in sales on our average. We've also seen week after week the net number being there. So it's not like one big week or one big month that is giving and showing to the numbers. It's the consistency in the approach we're having. So I feel pretty good about the momentum where we're at right now. Paul Holden: Okay. Great. And then a bigger picture question on ROE. I mean, as you highlighted, you're ahead of plan in terms of ROE expansion, which is great. If I recall from Investor Day, you kind of highlighted two potential catalysts for the ability to exceed that 17% target, which were share buybacks and acquisitions, two things that look to be in the card. Are those kind of the things we should continue to look at in terms of your ability to exceed that 17% level? Or can you also get there based on where you are today just based on organic growth as well? Denis Ricard: Yes. Thank you for the question. Absolutely. That's the answer -- the short answer. We have a pace of buyback right now, which is lower than our capacity to generate organic capital. i.e., we are actively looking for profitable acquisition going forward. But at the end of the day, there's always a plan B that if we're not able to deploy profitably our capital that we might increase the NCIB, the buyback. So those are the very important tools that return value to the shareholders. Our first choice is really to grow the company, grow the organization. That's what we've done recently with the RF Capital acquisition. But -- and we are actively looking at some. That's of our first choice. But at the end of the day, if we cannot, for whatever reason, we'll return the value to the shareholders. Our goal is not to pile up capital. Operator: [Operator Instructions] the next question is from Mike Rizvanovic with Scotiabank. Mehmed Rizvanovic: Just a quick follow-up from Eric, maybe on the steepening of the yield curve. And just making sure I heard you correctly. So $5 million down potentially, that's for the investment segment overall next quarter? Eric Jobin: Yes, accepting -- excluding any macroeconomic impact. That's what you should expect, everything being the same. Mehmed Rizvanovic: Got it. Okay. And then as far as the movement in the yield curve, the steepening, just trying to get a better sense of was there anything peculiar about the steepening? Is it any part of the curve that drove an outsized result? Just trying to get a sense of just what happened in the quarter. It seems like it's a sustainable level with maybe a bit of downside for next quarter. But generally, you're going to keep those gains because the yield curve has already steepened. Is that the way to think about it? Eric Jobin: Yes, exactly. We always say that we're winning when the curve is steepening overall for the organization. Of course, some sector may be affected by a short-term decrease in interest rate. But overall, when we look at our overall organization, we win and of course, at some point, steepening on its own is not enough. We need a good long-term interest rate as well. But in the current environment, it's favorable for us on both sides, steepening and the level of interest rate. Mehmed Rizvanovic: Okay. That's helpful. And then a quick one for Stephan, just on the retention of the iAs with RF Capital. Do you think you're past the point where the risk of attrition has basically gone? What I'm getting at is I'm not really sure if it's at the announcement date within a few months of the announcement date, and that's when you normally see attrition? Or is it like 12 months later? Like do you feel like you're past the point where the downside risk on attrition has basically diminished at this point? Stephan Bourbonnais: I'd love to say yes to this. But unfortunately, right, our focus is always the same, and it's true for RF, but it's true for Investor and Private Wealth, right? It's always to make sure that we're keeping our advisors to stay with us, right? So obviously, they had opportunities to choose a different path. I think what they're saying is they're willing to stay with us and see what we can do by coming together. So I think we're going to have a really good shot at showing to them the value of our new partnership. I think they're excited about it. So I was obviously concerned from the first few weeks to see how they would react. And I know the industry was close to them and offering them an alternative. And I think the message that we're getting is they're willing to give us a fair shot. And we're going to take it, and we're going to work with them to make sure that it's a successful partnership for both parties. Denis Ricard: Yes. Maybe just one thing to add is that, obviously, the first weeks were very, very critical. So they pretty much understand what's our value proposition right now. And as you've seen from the numbers, I mean, most of the teams are with us as we speak. But obviously, for any other -- for any organization, including us, you always have to demonstrate your value. Operator: The next question is from Darko Mihelic with RBC Capital Markets. Darko Mihelic: I'll be very quick. Eric, I just want to go back to that $5 million drop in investment. Are you talking the -- I mean which line item are you talking about? Because we calculate that the LRCNs alone will be an $11 million impact next quarter. So are you talking ex that? Or am I -- are you talking the investment line? Like are you talking bottom line number for just $5 million? Eric Jobin: No, no. I'm talking about the expected investment income, Darko, the top line of that. When we reduce our invested asset by $700 million, if you make a reasonable assumption, you'll figure out quickly how we get to the $5 million per quarter. Darko Mihelic: Yes. Okay. Great. And then just overall, Denis, are you getting a little -- I mean, the markets have been very kind. How do you feel about the overall exposure to very strong equity markets, a solid yield curve, essentially, where I'm going with this is we're at a stage now where your wealth business is much bigger, your investments are in a very strong place. How do you feel about a downturn, a drawdown supposedly, like something like that. How do you -- can you speak to your sensitivity to these items? And what makes you comfortable that your earnings power is really secure in a bear market, so to speak? Denis Ricard: I mean we have sensitivity -- thank you for the question. We have sensitivity testing on the market movement. So you can relate to that if you want. But the one thing that I would say is that, I mean, as far as I'm concerned, I'm not that concerned of a downturn. We know it's going to happen at some point for sure. When we commit for the 10% EPS growth going forward, 10% plus, it's really for the long term. So there are years where the 10% might not be hit because of market -- if there is a strong market downturn, it might affect the profitability overall. But at the end of the day, when we look long-term, we're pretty confident -- pretty much confident that we will reach or even exceed the 10% plus. We've already had a great ride so far, much more than the 10% plus. So you have to look at it on a very long-term basis. I mean, obviously, from one year to the other, you'll see some sensitivity. Darko Mihelic: Okay. And does it change your capital deployment plans? Denis Ricard: No, it's not changing. Absolutely not. We will be prepared to allocate and deploy our capital in any business, even the ones that is sensitive to the market, like RF Capital that we've just bought, obviously, we're very pleased where we are right now because the market has also collaborated a lot since we announced the acquisition. So if there are other opportunities in this space, we'll get there and any other space like individual insurance in the U.S. is one that is less, I would say, affected by stock market. This is one that we would be very much prepared to invest as well. Dealer Services, we'll see, as I said before, still need a couple of quarters before we go bigger on that. But again, any business we're in, we're pretty happy because the ROE is higher than the target. Darko Mihelic: Eric, if you have a chance, I'd like to also speak offline. regarding your capital. We did an analysis using comprehensive income core and reported, and we found very little relationship between those and organic capital generation. So I'd love to be part of that conversation, please. Thank you. Eric Jobin: No problem, Darko. Operator: This concludes the question-and-answer session. I'd like to turn the conference back over to Caroline Drouin for any closing remarks. Caroline Drouin: Thank you, everyone, for joining us today. All of our Q3 earnings release and slides for today's conference call are posted on the Investor Relations section of our website at ia.ca. A recording of this call will be available for 1 week starting this evening. And the archived webcast will be available for 90 days, and a transcript will be available on our website in the next week. Note that our 2025 fourth quarter results are scheduled to be released after market close on Tuesday, February 17, 2026. Thank you again, everyone, and this concludes our call. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good day, and thank you for standing by. Welcome to National Vision's Third Quarter 2025 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tamara Gonzalez, Vice President of Investor Relations and Communications. Please go ahead. Tamara Gonzalez: Thank you, and good morning, everyone. Welcome to National Vision's Third Quarter 2025 Earnings Call. Joining me on the call today are Alex Wilkes, CEO; and Chris Laden, CFO. Our earnings release issued this morning and the presentation accompanying our call are both available in the Investors section of our website, ir.nationalvision.com. A replay of the audio webcast will be archived in the Investors section after the call. Before we begin, let me remind you that our earnings materials and today's presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and our filings with the Securities and Exchange Commission. The release and today's presentation also includes certain non-GAAP measures. Reconciliation of these measures is included in our release and the supplemental presentation. We would like to draw your attention to Slide 2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. Further, please note that all financial measures in today's commentary are based on a continuing operations basis, unless otherwise noted. As a reminder, National Vision provides investor presentations and supplemental materials for investor reference in the Investors section of our website. I'll now turn the call over to Alex. Alex? Alex Wilkes: Thanks, Tamara, and good morning, everyone. Thanks for joining us today to discuss our third quarter results. We delivered another strong quarter, thanks to our team's intense focus on our transformation initiatives, which are continuing to gain traction and drive positive responses from our customers, energizing our entire organization. The third quarter marks our 11th consecutive quarter of positive comp store sales with adjusted comp growth reaching 7.7% compared to the prior year. We drove healthy year-over-year adjusted operating margin expansion of 90 basis points, supported by higher average ticket with our refreshed merchandising mix and new selling methods. The momentum we're building across our business is driven by the success of the strategy and approach that we have shared this past year. We're growing in areas where we are underdeveloped relative to the category with a focus on our most valuable customers while enhancing the patient and customer experience for all. Our momentum is evident with the growth we have seen among managed care customers. Our managed care business continues to be very strong, approaching low teens comp sales growth in the quarter with both positive transaction and ticket trends. We are also seeing strong performance in the quarter with the 2 other high-value segments we are targeting, progressive lens wears and outside Rx customers. As we have discussed throughout this year, and we'll discuss even more at our upcoming Investor Day, we are maintaining a strong value proposition while focusing on broadening our target customer audience and delivering a healthier bottom line. To this end, while at face value, traffic is relatively flat this quarter, we are pleased with the intentional evolution of our customer mix toward higher-value customer segments that we are confident will lead to a healthier business overall. Managed care, progressive and outside Rx traffic trends are very healthy, and we're seeing early indicators that our new marketing strategy and CRM platform and in-store selling tools are leading to stronger customer engagement. As we continue to execute our initiatives, including making meaningful improvements to our assortment, our messaging and our selling behaviors, we are confident we will strengthen our consumers' perception as the destination for style and value. Although we are just beginning our merchandising transformation, our initial actions are yielding positive results. New premium frames like Lam, Ted Baker, Jimmy Choo, HUGO Boss that we recently introduced are turning faster than our expectations. The fact that our cash pay ticket is accelerating is a good sign. It means that beyond serving our managed care -- outside Rx and Progressive customers, the better product, the cash pay customer is also opting in to the premium brands we are now offering. And we've seen this response even though we still have the opportunity to improve our lifestyle selling techniques, our visual merchandising and product presentation to really showcase our new and exciting products. We are also pleased with our initial pilot of Meta-enabled smart glasses, which we began in 50 stores last spring. Our associates are learning how to sell this unique and highly sought-after product, and we are pleased with the consumer uptick we are seeing. Given the traction we have experienced, we are excited to roll out Meta to an additional 250 locations during the fourth quarter. As we look ahead to the remainder of the year, we will continue to evolve our assortment mix and are on track to have approximately 40% of frames at our stores priced at or above $99 by year-end, up from approximately 20% this time last year. When it comes to our pricing architecture, it's important to keep our journey in mind. When we took our first pricing actions last year, we talked about no regrets pricing, and we've successfully delivered on these actions. We are now looking toward a more sophisticated era of pricing where we consider factors like lens components, managed vision care, packages and targeted discounts and offers in our pricing construct. Our pricing playbook is architected on a thoughtful plan rooted in consumer response and data and we have our next series of pricing actions already mapped out. In the fourth quarter, we're taking our next set of pricing actions on lenses, lens add-ons and our bundle offer. We are also modernizing our bundled pricing. We're moving from $89.95 to a clean and simple $95 price point for our lead offer. This is a result of listening to our customer feedback that our price points felt dated. Just as we are evolving our assortment to fit the needs of the customers shopping in our stores, our price points must evolve as well. As we continue to take pricing actions, we're being mindful of our customers' response by measuring KPIs around conversion and NPS, both of which remain healthy. As hopefully, you've seen, we have made a significant transformation to evolve how we are communicating with our consumers. During the third quarter, we launched our new -- Every Eye Deserves Better campaign for America's Best, which has energized our 13,000-plus team members and is clearly resonating with customers. We are really excited with the response to our new campaign, which has resulted in a significant increase in unaided awareness in the third quarter. This new campaign was launched almost simultaneously with our new CRM platform, which is also showing positive inflection with consumer engagement. Beyond engagement, the platform is enabling greater operating efficiency and more personalized solutions with tangible results and increased number of exams scheduled and higher customer reactivation rates. During the third quarter, we launched our first journeys targeting lapsed customers, those customers who have not returned during their typical purchase cycle. One month into launching lapsed journeys, and we are seeing significant improvement in click-through and open rates. Looking ahead, future journeys plan include post-exam loyalty and scheduler journey, which are all about making sure people show up for their booked exams. We plan to learn from our initial work as we evolve into developing those initiatives intended to improve appointment show rates as these are the most sensitive and business impacting journeys over the next several quarters. Overall, I'm extraordinarily pleased with the urgency and progress we've made in a relatively short time to modernize our marketing approach, both in messaging and technology enablement. Along with advancements in marketing, we are also continuing to enhance the digital tools and capabilities for our store associates. Earlier this year, we introduced digital selling tools that help our associates to visually explain complicated lens benefits like progresses and transitions to our customers. This tool has been impactful in pilot stores, allowing a more seamless and elevated experience for our customers to ensure they get the products they most want and need. It will also be used for pricing demonstrations to explore various frame and lens combinations and help demystify the customer journey. Beyond educational and product demonstration features, associates will be able to take digital measurements, offering a more precise outcome versus our historical manual approach. All America's Best and Eyeglass World locations are expected to have this technology live in store before the end of the year. Having capabilities like this, combined with our new lifestyle selling approach will be a game changer for our stores and the improvements we're making are being enthusiastically embraced by our store teams. During the quarter, we saw sales gains in premium add-ons like superior Progressive Lenses and antireflective coatings. Behavior change is happening and ongoing associate adoption of lifestyle selling is certainly contributing to our results. Our doctor coverage remains healthy and stable, supported by innovative recruiting and retention strategies. We're seeing our best doctor retention numbers in recent memory, and we've once again successfully recruited over 10% of the entire graduating optometry class. Our remote exam technology continues to provide additional capacity flexibility. Our remote hybrid pilot where in-store doctors perform exams in other stores is progressing well with more in-store doctors now trained to perform remote exams in other locations. Looking ahead, we have tremendous opportunity. We are pleased with progress we're making on SG&A leverage. Our cost optimization has given us flexibility to drive AOI expansion even as we face higher health care expenses than planned. Chris will go into more detail on how we're mitigating health care expenses going forward. We are well underway with our broader cost optimization efforts. This is a hyper focus for the organization, and we will be sharing more at our upcoming Investor Day. We're confident in our transformation strategy and the multiple years of runway ahead for continued growth. Our focus on higher-value segments, enhanced product assortment and marketing and in-store selling approach continues to deliver results. Our investments are strategically placed to strengthen our market position and create long-term shareholder value. We remain focused on our core mission of helping people see their best to live their best through exceptional eye care and the modernization work we're doing across technology, branding and operations is just at the beginning of our commercial model evolution. I look forward to sharing more details about our strategic vision and long-term growth opportunities at our November 17 Investor Day. I want to take a moment to thank our team for their exceptional dedication, focus and execution toward delivering an exceptional Q3 and year-to-date. And with that, I'll turn it over to Chris to review our financial results. Chris? Christopher Laden: Thank you, Alex, and good morning, everyone. As Alex shared, the disciplined execution of our strategic initiatives is reflected in our strong third quarter performance. These results continue to reinforce our confidence in the multiyear growth opportunity ahead. I believe the consistent performance we have delivered over the past year serves as a compelling validation of our ability to deliver on our stated objectives and drive sustainable results. Now I'll turn to our third quarter results as compared to the prior year period. Please refer to today's press release for reconciliations of non-GAAP financial measures to their most comparable GAAP financial measures. For the third quarter, net revenue increased 7.9%, driven by adjusted comparable store sales growth of 7.7% and growth from new store sales. The timing of unearned revenue negatively impacted revenue in the period by approximately 80 basis points. During the quarter, we opened 4 new America's Best stores and closed 2 Fred Meyer stores. We ended the quarter with a total of 1,242 stores. Adjusted comparable store sales growth in the period was driven by an increase in average ticket of 7.1%, which reflects a combination of price increases implemented in Q4 and Q1 as well as the benefit from our refreshed merchandising mix and new selling methods. Overall, customer transactions were relatively flat compared to the prior year as healthy trends in our managed care business continued to offset softer traffic in our cash pay business. As a reminder, last year, we ran promotions targeted at cash pay consumers in Q3 that we chose not to anniversary this year. Our eye exam conversion to product sales has remained consistent with prior quarters, which is a key indicator of customer acceptance of our merchandising and pricing transformation. As a percentage of net revenue, costs applicable to revenue decreased approximately 40 basis points. The resulting increase in gross margin is driven by our growth in average ticket and leveraging our optometrist-related costs. We expect gross margin to expand slightly for fiscal 2025. Adjusted SG&A was $242.3 million in the third quarter and as a percentage of revenue, leveraged 10 basis points despite ongoing headwinds in health care costs that many companies like ours are experiencing. Better leveraging our SG&A remains a primary focus for the organization, and we remain on track to leverage adjusted SG&A this year. Additionally, we will share more about the multiyear cost optimization opportunities we are pursuing at our Investor Day. Adjusted operating income was $19.8 million compared to $14.3 million in the prior year period. Adjusted operating margin increased 90 basis points to 4.1% in the quarter. Net interest expense was $4.1 million, same as the prior year period. Adjusted EPS increased to $0.13 per share in the third quarter of 2025 from $0.12 per share a year ago. For the year-to-date fiscal 2025, we delivered adjusted comparable store sales growth of 6.4%, supporting adjusted operating income margin expansion of 120 basis points and nearly 18% growth in adjusted EPS compared to the prior year. Turning next to our balance sheet. We ended the period with a cash balance of approximately $56 million and total liquidity of $349.6 million, including available capacity from our revolving credit facility. During the quarter, we repaid $15 million of the borrowings outstanding under our revolving credit facility, bringing the balance to 0. Year-to-date, we have repaid $94.7 million in debt and convertible notes, bringing our total debt outstanding net of unamortized discounts to $253.4 million at the end of Q3. For the trailing 12 months, we ended the period with a net debt to adjusted EBITDA of 1.1x. Year-to-date, we generated operating cash flow of $133.1 million and invested $48.4 million in capital expenditures, primarily driven by investments in new and existing stores and information technology. We continue to maintain a strong balance sheet and healthy cash flow to support our growth and capital allocation priorities. Moving now to our outlook. We are very pleased to be in a position to raise our expectations for the year. We now expect revenue of $1.97 billion to $1.99 billion, adjusted comparable store sales growth of 5% to 6%, adjusted operating income of $92 million to $98 million and adjusted EPS of $0.63 to $0.71, which assumes approximately 81 million weighted average diluted shares outstanding. As a reminder, this outlook incorporates the benefit of the 53rd week, which we estimate will add approximately $35 million of net revenue and approximately $3 million of adjusted operating income for the year. Our adjusted comparable store sales growth is calculated on a 52-week comparable basis to the prior year. As Alex mentioned, we are in process of executing our Q4 pricing updates in line with our multiyear pricing strategy playbook. These pricing actions are factored into our full year guidance. We have been closely monitoring consumer response to the merchandising and price framework we've implemented to date and have seen consistent conversion and NPS rates. We remain confident that we can continue to evolve our assortment and pricing architecture in a way that drives value for our consumers and our investors. As we discussed, we continue to see strong traffic from managed care customers offsetting a decline in cash pay traffic. We continue to guide for traffic trends to be similar to what we've seen year-to-date. Disciplined cost management remains a primary focus for the organization, and we are excited about the projected operating margin expansion presented in our 2025 guidance. Our outlook includes the cost-out actions we've discussed in prior quarters as well as other cost mitigation actions to offset headwinds in health care costs and our investments in associate variable incentive programs as we continue to reward the team for exceeding their plan and drive behaviors contributing to our top line performance. We expect improved leverage on incentive compensation in the future as these behaviors become the new baseline. For clarity, our outlook continues to include the anticipated impact of tariffs, which are not materially changed from prior quarter's guidance. Now turning to our expectations for capital expenditures. We reduced our guide for CapEx to $80 million to $85 million. This change is largely driven by investments in certain projects that have shifted into fiscal 2026. We remain on track to open 32 new stores during fiscal 2025. Including planned closures for the year, we now expect to open 9 net new stores in 2025. This includes 21 America's Best stores opened through the end of Q3 and an expected 11 openings in Q4. In addition to new stores, we expect to close 23 stores in total this year related to both our fleet optimization as well as overall disciplined fleet management. This includes 4 store closures expected in Q4. For all other details regarding our outlook, please refer to today's press release. And with that, I would like to thank you for your participation in today's call. Operator, we are now ready for questions. Operator: [Operator Instructions]. Our first question comes from Michael Lasser of UBS. Michael Lasser: You've been making a lot of changes over the last year or so, especially with respect to merchandising the assortment. What signals are you looking for to make that you're not going too far and it would only come to light too late. And when do you think traffic will inflect? Is that something that we can -- we should reasonably expect within the next couple of quarters? Alex Wilkes: Thanks, Michael. Yes, as it pertains to merchandising, we're really happy with the changes that we've been made -- that have been made to date. We're monitoring NPS. We're monitoring conversion rate from exam to purchase to ensure that we're not pushing too far. But we do think we have really a long way yet still to go. A couple of signs that we're incredibly encouraged by. One is that our cash pay consumer, the one that we've historically thought is the most sensitive, they're actually adopting some of our higher price point items at a higher clip than we initially anticipated. That's both on the frame side and the lens side. we're seeing inventory turns of our higher value frames that we've just introduced, actually exceed our expectations. So we think that's a really good sign as well, and those are data points that come through in real time. So from an early innings in our merchandising evolution strategy, all signs are still pointing to a very, very positive response rate to what we're up to. In terms of traffic inflection, we have seen traffic inflection where we have intended to see it on the managed care customer, on the outside Rx customer and on the Progressive wear. We're certainly pleased with the inflection in traffic that we're seeing, driving those customers into our stores. It was a very intentional approach on behalf of the team to do that. But overall, traffic remains flat as the cash pay consumer remains a little bit depressed. So again, overall, I just couldn't be happier with all the signals we're seeing in the business. Michael Lasser: My follow-up question is, given the pricing that you're going to take in the fourth quarter as well as what you will have yet to lap from what you've taken earlier this year, if all else remains equal, what would be the contribution from pricing if nothing else happens as you look towards 2026, just so we can get a sense of what the embedded comp already is in the model? Alex Wilkes: Yes. Thanks, Michael. Great question. So we are lapping our price actions from last year, call it, in the mid-November time period. We made some additional changes to the promotion in Q1 of this year. So the pricing actions that we're taking in Q4, albeit in a different character than what we did last year, right? Remember, we did frame pricing and we took some changes to the base offer. This year, we're evolving it to be a bit more surgical, again, around lenses, lens packages. We're changing the offer to be a bit more modern. As I like to stay around here. We're retiring the decimal points to modernize our price points. So -- but largely, we believe that our pricing actions will yield around the same contribution in '26 as they've yielded in '25. Operator: Our next question comes from Simeon Gutman of Morgan Stanley. Simeon Gutman: A follow-up to the prior one. First, you mentioned some of the pricing changes for '26 center on contact lenses. It seems like that category may be a little more commoditized, correct me if I'm wrong. So where do you sit versus peers or brands at this point? And how much leeway can you have? And then to put words in your mouth, you said the pricing benefit may look similar to 2025. Is the ticket lift that we saw this quarter, I think, around 7%, is that the right proxy for '26? Alex Wilkes: Yes. Great. On contact lenses, so we're actually taking some pricing actions on ophthalmic lenses, and we will be taking some pricing actions on contact lenses go forward. One of the things that's been a historic truth for our business as we see cost increases come through from the contact lens vendors, we typically pause for about a quarter or so until we take pricing on contact lenses just to see how the market responds because to your point, it is a more commoditized, more shoppable product in our category. So there generally is about a quarter delay between the time we get cost increases from vendors and when we take our pricing actions to the consumer, but we're always really mindful of how we're positioned, especially versus the online -- versus the online channel. As it pertains to ticket evolution throughout overall '26, we think of our ticket evolution really in 3 components. There is a pricing component. There is an assortment mix component. And there's also a consumer mix component that drives our ticket as well, right? As we're driving more outside Rx, more progressive, more managed care customers, those consumers tend to have a higher purchase value when they shop with us. So really, you have to deconstruct our average ticket growth along those 3 components. We're going to share more about our long-term algorithm on the 17th and share some more of the details specifically where we'll showcase where we're underdeveloped and where we think that can continue to grow over a multiyear time horizon. Christopher Laden: Yes. And Simeon, just one data point for -- you asked about the Q3 run rate. Just keep in mind that we're lapping a promotion from last year, which kind of gave us some additional upside to average ticket. Q3 this year versus Q3 of last year, which we don't think will replicate again in 2026. Simeon Gutman: Okay. And then a follow-up. This is maybe preempting the Investor Day a little, so respect maybe less of an answer. The flow-through of the business, if you're going to -- if the business is going to comp, call it, mid-single digits for the foreseeable future, are you spending into it? It sounds like there's some advertising and other things you can spend and flow-through comes in outer years? Or should there be proportional flow-through as the comps accelerate here? Christopher Laden: Yes, it's a great question. Look, I think we're super pleased with the year-to-date operating margin expansion of 120 basis points this year. I'll tell you that as a focus area for this management team, operating margin expansion remains a primary focus, kind of year-over-year. We are definitely investing back into the business to bring some of these strategic initiatives and transformation to life, but we believe we can do so while continuing to drive positive operating margins. Operator: Our next question comes from Robert Ohmes of Bank of America. Robert Ohmes: Not to front run the Analyst Day either, but can you give some color on what market share trends look like from your perspective, both on a volume and dollar basis? Are you guys gaining share on both the dollar -- obviously, on a dollar, I would expect you are, but on a unit basis as well? Alex Wilkes: Robbie, great question. Thanks so much. Yes. So we actually do believe we're getting share on a volume basis as well. So we look at the Vision Council data that gives a good indication for what exam growth is in the category, and we have been outstripping that through kind of year-to-date. So we do believe we are gaining share on a customer account basis. Robert Ohmes: And then my follow-up question is, can you guys give a little more color on the cash pay customer? Are you -- it's interesting that you're seeing them trade up. But is that -- what are you seeing there? And are you seeing any kind of changes that you could see growth in that cohort again? Alex Wilkes: Yes. No, I'd say 3 things related to the cash pay consumer. We are seeing ever so slight acceleration in the purchase cycle that we think is an encouraging sign. On the ticket evolution perspective, we are seeing them, like I said, opt into higher frames, higher-end frames at a rate that was much above what our expectation was when we started to make some of these changes, right? When we started to make assortment changes early on, we thought that these were going to be more significantly impacting to the managed care customer. The managed care consumers absolutely have responded well. But the really pleasant surprise has been the cash pay consumer that's also opting into our more premium frames. The third component is I'm super pleased with some of the advancements we've seen as we started leaning into more premium lens sales. We're seeing the cash pay consumer also opt into a higher degree of antireflective of transitions and a more premium progressive lenses. So the uptake there with the cash pay consumer has also been super healthy. One additional point just to note is that there is absolute growth in the managed care consumer over the cash pay cohorts. So actually, the cash pay cohorts are becoming managed care customers as the managed care category grows in general by somewhere in the rate of 2% per year. So again, I think our strategy has been working super well for managed care consumers and for where the cash pay customer is, we're also super pleased with the progress being made there. Operator: Our next question comes from Brian Tanquilut of Jefferies. Cameron Harbilas: This is Cameron Harbilas on for Brian. Can I dig a little bit more to the cash pay consumer? You guys said you're gaining share. So it almost sounds like it's not people switching to other providers, but it's just the cash pay consumer base as a whole in the industry. Are you seeing any losses to other competitors? Or do you think it's just like a pause in demand that you expect to reaccelerate in the future? Alex Wilkes: Yes. Again, kind of just double-clicking on that. We actually do think we are taking share from the category. I can't speak to specific retailers or competitors that we could be seeing some movement between. But on a category basis, we are share takers based on the data that we have at our fingertips. But that's true for both the cash pay and the managed care consumer, right? This is the consumer group in general. I think that the thing that's true across the category is there is still a delayed purchase cycle of the cash pay consumer. I'd say our data point that months between purchase is still depressed is a true one for the category. And as we've talked about at length over many, many of these calls, at some point, that has to accelerate as we burn through the purchases of consumers that were made in the kind of post-COVID era. Cameron Harbilas: And then just as a follow-up, thinking about pricing actions in Q4, that price increase to $95 for an exam, that's going to hit in Q4, correct? Alex Wilkes: That's correct. Yes, that's going to be rolled out on November -- call it, the weekend of November 15, November 16 is when that will go live. Operator: Our next question is from Paul Lejuez of Citi. Paul Lejuez: Curious if you could talk about what's happening on the competitive front from a pricing perspective? And if you're seeing anything today on that -- on the pricing side that's different than what you were thinking 3 months ago? Alex Wilkes: Yes. So in terms of category pricing, our category scan would indicate that the category is generally growing on price versus on exam growth or customer count growth. And I think that's been a true statement for the last 5 years. I think historically, we've shared that National Vision has not kept up with the market in terms of price evolution, and we are certainly using this as an opportunity now to close that gap. We still believe at our core that we are going to be the destination for value in the category, right? We are not looking to match some of the more premium price competitors in the market, but we are certainly closing the gap versus some of the actions that they have taken over the past 5 years. Paul Lejuez: And I'm also curious if you could speak to any regional differences that are noteworthy? Alex Wilkes: Generally, not so much. I mean the category doesn't really experience a ton of regional price discrepancy, at least from a chain retail perspective. Operator: Our next question comes from Kate McShane of Goldman Sachs. Katharine McShane: We were curious about 2 things. One, with regards to just new customer acquisition, is there anything more there that you can tell us about how many new customers you're acquiring that are walking through the door for the first time? And just what the brand awareness scores may have changed or how they've changed since the brand relaunch that you've had? And then our second unrelated question is just with the change in CapEx, is there anything meaningfully changing with projects that you're pursuing in '25 versus '26? Alex Wilkes: Yes. Kate, thanks for the questions. I'll take the first ones, and then Chris can take the CapEx one. As it pertains to traffic, we're seeing traffic growth in the low teens for managed care -- outside Rx and Progressive Wares. So again, from our traffic-driving initiatives, that's where we're seeing -- and that's where we pointed our assets to drive growth. With the brand relaunch -- with the brand relaunch in the third quarter, we're super, super happy with our growth in unaided brand awareness. Since we've launched a new campaign, we've actually seen some of our best scores to date. We've seen unaided brand awareness grow around 19%. We've seen brand consideration up about 10%. And our overall creative copy has scored better than our ads in recent memory. So again, in terms of things that give us a whole lot of confidence in our direction, the leading indicators of our new campaign resonating with consumers, again, we just could not be happier with the results, and we couldn't be happier with the early indicating scores that we've seen on our campaign assets. Christopher Laden: Yes, Kate. And on the CapEx front, the decrease in our guidance for capital really just comes from a timing perspective. We're not investing any less in the strategic initiatives that we anticipate investing in. It really just becomes a matter of timing that the bills we paid shifting into 2026 versus Q4 of this year. Operator: Our next question comes from Matt Koranda of ROTH Capital. Matt Koranda: Just wanted to see if you could break down the lens pricing actions that you referenced earlier in a little bit more detail. Is that going to be on basic ophthalmic lenses or more specialized lenses like progressives and coatings? And I guess, how would those actions impact out-of-pocket spend for managed care customers? Alex Wilkes: Yes. Great question. So we're taking -- this is going to be an era of much more surgical increases, right? Because lens pricing is a much more complicated endeavor. We are taking some price changes on some coatings. We are taking some price changes on our lens materials in light of some planned reimbursement rates. So we're considering how plans pay and what the division is between plan pay versus member out-of-pocket in our lens pricing architecture. So those are really the areas of focus. So when I talk about our lens playbook evolving, the no-regret actions we've taken previously have been more of the kind of straightforward obvious 101 level stuff. And now we're graduating into 201 pricing architecture within optical. Matt Koranda: Okay. Makes sense. And then my follow-up, I guess, is if I look at the fourth quarter implied comp, even if I'm sort of looking at the higher end of the guide, I guess it's in the kind of mid-4% range, which would be a bit of a deceleration from the third quarter growth rate. Is that actually what you guys have observed in October? Just wanted to hear a little bit more color on sort of what you're seeing on the ground level. Christopher Laden: Yes. I think in Q4, we haven't seen anything that would materially take us off of our guide. We did -- just a reminder from a Q3 perspective, right, we're lapping our promotion. So as you think about the run rate from Q3 into Q4, we should see some deceleration in comp driven by that. From a consumer sentiment perspective, I think we're remaining pragmatic about what is our customer sentiment to open their wallet in Q4, given just some of the macro uncertainty, especially around the holidays. Operator: Our next question comes from Anthony Chukumba of Loop Capital Markets. Anthony Chukumba: I guess my first question, you talked about the new America's Best advertising campaign, which yes, I've seen it a lot. It's a vast improvement. I don't miss Ali. I believe that's his name. But was -- and you also talked about taking price in America's Best. I was just wondering what your plans are for Eyeglass World in terms of a new advertising campaign and also potentially raising that opening price point. Alex Wilkes: Anthony, thanks for that. One of my favorite topics recently with our management team, actually. So as we have just kind of cleared the work with America's Best. And just to be clear, there's a lot more to do, right? And in terms of marketing evolution, we've nailed the campaign assets that we feel just so great about. There is more work to do on the media side on America's Best. Historically, I've talked about we needed to rearchitect our brand campaign and messaging so that we could have assets that work better in mid-funnel media. We now have that. So we're turning our attention a bit to now how we invest the media go forward at America's Best. But we're turning our creative teams onto an Eyeglass World replatforming. So I would look to that as a '26 initiative. Priti, our Eyeglass World General Manager, is going to share a little bit more color on that on the 17th. But we do plan on taking a similar approach to what we took at America's Best for Eyeglass World in 2026. That being said, we are really, really happy with the early success that we're seeing at Eyeglass World. Eyeglass World is comping in the mid-single digits for the first time in quite some time. And that's been on the back of some assortment evolution and some price evolution at Eyeglass World taken out of the America's Best playbook. So we're borrowing from the America's Best playbook. We haven't fully yet rolled it out, but we're seeing some really nice early wins within the Eyeglass World brand. Anthony Chukumba: Got it. That's really helpful. And then just my second question, a quick one just in terms of managed visit care penetration. I know it was 40% for a while. Last quarter, I believe you said it was 50%. I was just wondering if you had any update on that. Alex Wilkes: Yes. So -- managed care penetration is growing. Like I said, it's been growing in the low double-digit rate for the past quarters and we're still on that trend. Christopher Laden: Yes. I think what we had said previously is that our North Star was 50%, not that we were at 50% just yet. But yes, we entered the year around the 40% penetration mark, and we do see that growing as part of that journey to 50%. Operator: Our next question comes from Dylan Carden of William Blair. Dylan Carden: Curious if you could unpack kind of the puts and takes in the gross margin for the quarter. And maybe specifically kind of some of those comments around the leverage on optometrist costs and what to expect perhaps from a rate of change standpoint as you raise your teaser price and then kind of related, how you're thinking about availability of doctors now that we're kind of in a more stable market go forward relative to your scale? Christopher Laden: Yes. I think we were excited about our gross margin expansion in Q3 as we saw neutral traffic and increase in average ticket, just to kind of think through the operational impact of that. We're generating more value per customer without necessarily needing to put more doctors in lane. So we did see some improved leverage there, which we're even more excited about is Q3 is a large hiring quarter for us. So generally, we bring on a lot of doctors that are not as productive as they're onboarding with us. In terms of kind of long-range opportunity, I think it's an area for us to continue to focus on as we drive focus both on average ticket and traffic. We're remaining laser-focused on how do we drive efficiency in the doctor spend line as well as other areas of SG&A. Alex Wilkes: And then Dylan, just a couple of sound bites on overall doctor recruiting and doctor availability. I'm pleased that this is a topic that as a management team, we're not having to have a whole lot of discussion about at the moment, right? We're super pleased with what we're accomplishing from a recruiting perspective. We don't necessarily see a lot of risk or challenge from a dark store perspective. So it's a topic that, again, full credit to the organization for the last few years for what's happened from a remote capability perspective, from a hybrid capability perspective, from dialing up our recruiting efforts and landing the right messages so that we can recruit over 10% of the graduating class every year. So again, it's, I think, a great progress that's been made over the last few years that we're now continuing to benefit from. Dylan Carden: And I don't know how much you can speak to this, but Essilor is putting up some pretty large numbers as it relates to the Meta glasses. Any comment you kind of have about the opportunity, current business, anything really? Alex Wilkes: Yes. I mean our bullish notion on it is similar to the premium frames turning at or above our expectations, we've seen great performance with Meta in the first 50 pilot locations that we rolled out. Again, exceeding our expectations. And as I've talked to my pals at EssilorLuxottica, they'd say that in the 50 stores that we've launched, our turns and sell-through is among the best that they've seen globally. So we're really happy with our first kind of entree into the smart glass arena. Hence, our plans to scale it to an additional 250 stores as rapidly as possible. Operator: Our next question comes from Adrienne Yih of Barclays. Adrienne Yih-Tennant: It's great to see the progress on all the initiatives. Alex, I guess my first quick question is the trends that you saw throughout the quarter, I'm imagining they sound like they're pretty consistent from back-to-school through end of quarter and into current day. Also, are you seeing the cash pay consumer, the target household income? Is it edging upwards in any way to suggest that they're a little bit becoming more resilient to kind of price increases? And kind of along those lines, what advertising or acquisition strategies are you using to engage this MC customer to get them into the exam room and to bring them in-house? Alex Wilkes: Great. Thanks, Adrienne. Great question. We didn't see much kind of variation throughout Q3. I think the character of our sales, July, August, September were roughly all kind of in line and similar. So not a whole lot of variability there. And as Chris mentioned, in October, we haven't seen anything that would signal a difference in our guide or in our performance. What we're doing from an acquisition perspective against the mid -- sorry, against the managed vision care consumer is specifically activating a bit better mid-funnel. We're spending a bit more in social. We're spending a bit more in display. We're shifting our media out of overall kind of broad TV advertising into more digital assets. So if you think about historically, we probably spent 60% of our media budget on linear. We're beginning to pull that down and invest that in more targeted digital assets. So think of your YouTubes, YouTube TV, Hulu, et cetera, where you can be much, much more targeted to a specific consumer and a consumer cohort. So this is going to be a continued evolution for us from a company that was historically spending the vast majority of our advertising on linear and in search that we're now entering into spending more mid-funnel where we can be more targeted. But that's certainly going to be part of our media evolution in '26. Adrienne Yih-Tennant: Okay. And then does that -- because of that target where you're going, does that necessarily mean that you're acquiring that managed care customer at an earlier age at the beginning of their career perhaps? Alex Wilkes: Well, what it means is we are acquiring the managed care consumer when either they become insured for the first time, and we are talking to managed care consumers that maybe historically we weren't in their consideration set. And I think one of the things we've learned is that our historical message of 2 pair of eyewear for x price with an eye exam was a very compelling message to the cash pay consumer, but it didn't necessarily speak to the managed care consumer because they knew they were covered by an insurance benefit. So the notion of an included exam didn't resonate as strongly with them. So being able to shift and change our messaging in a way that's more targeted to that consumer specifically, I think we now have the opportunity to reinforce with them that we actually are an obvious brand destination for them when historically, they might not have even had us in their consideration set. Adrienne Yih-Tennant: That's super helpful color. And then for Chris, 2 kind of, I guess, modeling ones. In terms of the health care costs, obviously, they're kind of limiting flow-through in the third quarter. Was that kind of like -- was that kind of a step-up in the health care cost? How much are those up year-on-year? And then on the incentive compensation, same thing, you typically -- I guess, you get some accruals in the back half of the year, third quarter, fourth quarter. So just the timing of when we'll see some -- maybe less pressure on the incentive comp accrual. Christopher Laden: Yes, great question. On the health care cost front, that's been something that's been kind of burdened in the P&L. Each quarter year-to-date, Q3 was a little bit more disproportionate in terms of the magnitude of impact. And our guide does assume that, that continues into Q4. In terms of the variable incentive compensation, I mean, that's really something that we'll see kind of rebalance as we get to 2026 planning and guide. We think we're adequately accrued for business performance, inclusive of what's in our guide. So while it will be -- again, said simply, it's in our guide that the STIP accrual or short-term incentive accrual remains consistent with what we've seen year-to-date. And again, it's an area that we're making intentional investments and rewarding the team for driving these behavior changes. But again, as those behavior changes become run the business, we do expect to see leverage in 2026. Adrienne Yih-Tennant: No, we love to see incentive comp go up. That's always a good thing. We'll see you in a couple of weeks next week. Operator: Our next question comes from Zachary Fadem of Wells Fargo. David Lance Hays: This is David Lance on for Zach. So you're still on track to open 32 new stores this year. Curious if you can walk through the new store economic model as it stands today and provide any color around openings for '26. Christopher Laden: We'll share more details on our '26 openings at our Investor Day. In terms of new store economics, really no material shifts in terms of what we've previously communicated. As we're thinking about long-term evolution of the model, right, as we contemplate things like new store formats, and some of the infrastructure that we're building from a marketing and CRM perspective, we do expect over time that these infrastructural investments will help us accelerate our ability to break even in new stores, but we're still in the early innings of observing kind of the data coming back from these initiatives to be able to model that in. David Lance Hays: Got it. That's helpful. And then can you talk about the ramp of remote in a bit more detail and where penetration sits today? Alex Wilkes: Yes. Penetration of remote, we are north of 70% of our locations are enabled with remote. We are scaling remote to a handful more Eyeglass World locations in context of the doctor model switch out that we just executed in the third quarter in Florida. We are deploying it in the markets that we have -- that we can deploy it. But I think we feel -- again, we feel great about the penetration where we are and the investments that we've made to date, and you can start to see a, I guess, more moderate pacing because we're at our saturation rate that we were hoping to achieve. Christopher Laden: Yes. And just a reminder for the group, due to state regulatory constraints, we cannot deploy remote in all of our stores. It's kind of a state-by-state consideration. Operator: I am showing no further questions at this time. I would now like to turn it back to the CEO, Alex Wilkes, for closing remarks. Alex Wilkes: Great. Thanks so much, everyone, for the thoughtful questions, and thanks for your focus on our business. As I hope you can take away from this call, we're super pleased with the transformation efforts that we've undertaken. The business is performing well. Our teams are engaged and the strategic initiatives that we put in place are playing out exactly as we'd hoped. So more to come here from National Vision Guys, and we hope to see you all on November 17 at our Investor Day. Thanks so much. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings, and welcome to the Sachem Capital Corp. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Armen Kassabian, Investor Relations. Thank you, sir. You may begin. Unknown Executive: Good morning, and thank you for joining Sachem Capital Corp.'s Third Quarter 2025 Earnings Conference Call. On the call from Sachem Capital today is Chief Executive Officer, John Villano, CPA; and Executive Vice President and Chief Financial Officer, Jeff Walraven. This morning, the company announced its operating and financial results for the quarter ended September 30, 2025. The press release is posted on the company's website, www.sachemcapitalcorp.com. In addition, the company filed its Form 10-Q today, which can be accessed on the company's website as well as the SEC's website at www.sec.gov. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. These include the risks detailed in our annual Form 10-K and this Form 10-Q, such as those related to nonperforming loans, credit losses and market conditions. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, the company will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our SEC filings. With that, I'll now turn the call over to John. John Villano: Thank you, and thanks to everyone for joining us today. I will begin by reviewing our operating and portfolio activities for the third quarter and provide an update on our strategic progress. I will then turn the call over to Jeff to discuss our financial results and balance sheet. Then we will open the call to questions from our analysts. During the quarter, we continued working towards growing our lending platform while taking further steps to strengthen our financial position. Our efforts over the past year to protect our balance sheet have had a meaningful impact on stabilizing our portfolio while avoiding potentially dilutive financings. We are now well positioned for growth as opportunities arise. Building on the progress made in the first half of the year, in the third quarter, we remained focused on strengthening Sachem's balance sheet and improving liquidity. During the quarter, we fully repaid and delisted our SCCC 7.75% unsecured unsubordinated notes due September 30, 2025, utilizing proceeds from our recent senior secured private placement, availability on our revolving credit facility and loan repayments. The timely repayment of these notes reflect the strength of our balance sheet and underlying portfolio and enhance our financial flexibility. During the third quarter, our portfolio continued to perform in line with expectations. We still have approximately $104.1 million gross unpaid principal balance of nonperforming loans included in loans held for investment or $93 million net, down $15.5 million gross, $9 million net from the $119.6 million gross and $102 million net as of June 30, 2025. Our REO net increased nominally by $300,000 or 1.5% over the June 30 quarter. The quarter-over-quarter activity included our Urbane operations intentionally converting 2 land assets totaling $4.3 million into investment in developmental real estate entitled for multifamily development to be contributed to a significant development partner for an equity stake in the project. This was offset by $4.7 million of additions to REO, representing the culmination of lengthy foreclosure processes where we can now position the assets for sale. Resolving our NPLs and REO can be a difficult and lengthy process. Our team's focus continues to make meaningful progress working through these legacy assets, which we believe is a critical step to facilitating further capital sourcing and ultimately, future portfolio and dividend growth. Interest charges and late fees collected on NPLs during our workout process totaled $2.35 million, consisting of $1.95 million of interest income and $396,000 of borrower charges and late fees. Our REO balance will continue to ebb and flow as NPLs are added and properties are sold. Subsequent to quarter end, reductions in REO are comprised of 2 building lots sold at par plus accrued interest totaling $226,000, a building lot under contract for $115,000, representing par plus accrued interest and a commercial office building under contract for $3.72 million with an expected closing in December of 2025. As of September 30, 2025, our book value was $2.47 per share, representing just a 2.8% decrease from June 30, 2025. Turning to Naples. We continue to actively manage our significant single borrower exposure in Southwest Florida. These are 2 cross-collateralized loans totaling approximately $50.4 million as of September 30, 2025, representing 13.4% of our outstanding mortgage loan portfolio. For reference, this compares to $55 million or 14% at year-end 2024. These loans remain in our nonperforming loan portfolio and on nonaccrual, which continues to weigh on monthly earnings by roughly $450,000, consistent with prior disclosures. As we've discussed on prior calls, this legacy 2021 investment has been challenged by permitting delays, the impact of 2 separate hurricanes, contractor and borrower performance issues and legal disputes involving the city of Naples and former capital partners. The mediation event that we indicated on last quarter's conference call with the former capital partner holding the second lien position, a claim set aside multiple times in bankruptcy court, but kept alive through repeated appeals was postponed and is now scheduled for Friday, November 7. A constructive outcome at mediation would clear the path to resolution. First, the sale of the remaining completed condominium units; second, the completion of an additional 4-unit condominium building on site; and third, the development or sale of the other site. Based on our current assessment, we continue to believe the consolidated cross-collateralized value of the assets exceeds our carrying value on these loans. We can't control the weather or the court and mediation calendar, but we can control our discipline. Our priorities remain the same: protect principal first, then monetize value. We will keep you apprised as we reach milestones and following the November 7 mediation, we'll evaluate the fastest, most economical path to resolution. As previously disclosed, we have 4 development initiatives managed by Urbane, our in-house construction and development platform, our Westport, Connecticut office asset with an approved residential component and 3 single-family residences in Coconut Grove, Florida. Execution remained on plan this quarter. In Westport, we continue to advance leasing discussions to increase occupancy. On a GAAP basis, the office assets are generating approximately $1.3 million of annual rental income. The residential component, 10 homes, including 2 affordable units remains fully entitled and is progressing through the development planning phase. In Coconut Grove, construction is proceeding as scheduled. One residence is expected to reach substantial completion in the mid-fourth quarter 2025, with remaining 2 scheduled for completion in the first half of 2026. In addition to these developments, Urbane is actively working across our REO portfolio to identify and convert selected assets into higher-value development opportunities, including pursuing incremental entitlements and where appropriate, continuing or initiating construction to enhance value. Additionally, at quarter end, we had invested an aggregate of $33.7 million in projects managed by Shem Creek Capital through 6 investment funds, excluding our $5 million in the Shem Creek Capital Manager. As a reminder, Shem Creek Capitalis a commercial real estate finance platform that provides debt capital solutions to multifamily properties and allows us to participate in multifamily finance with strong borrower sponsorship. During the 9 months ended September 30, 2025, these funds and manager investments generated approximately $4.1 million in revenue, of which $1.1 million was for the current quarter ended September 30, representing an attractive low-risk double-digit yield. Turning to the macro environment. Our industry continues to navigate a mix of cautious sentiment and persistent challenges. The Federal Reserve has recently implemented its second rate cut this year, lowering the target range to 3.75% to 4% and market expectations incorporate another 0.25 point cut before year-end. While this provides some relief to borrowing costs, medium- and longer-term rates remain elevated, keeping affordability stretched and existing home sales well below historical averages. Renting continues to offer a meaningful cost advantage over homeownership as new construction continues to face headwinds from higher costs, tighter credit conditions and ongoing permitting hurdles. While these conditions have weighed on origination activity and contributed to ongoing elevated NPLs and REO, they also continue to create opportunities for experienced lenders like Sachem to provide flexible capital solutions in areas where traditional financing remains limited. Our pipeline of new opportunities remain strong, and we are well positioned to capitalize on them as the market adjusts to this evolving environment. We remain committed to our disciplined approach in evaluating new loans, maintaining our focus on single-family and multifamily residential assets in markets with strong underlying fundamentals. Our underwriting standards continue to emphasize highly experienced and creditworthy sponsors. Our post-COVID era loan originations continue to perform exceptionally well. As we move into the end of 2025, we remain confident in our strategic direction and our ability to capitalize on the opportunities ahead. We will continue to focus on working through our legacy REO and NPL assets while pursuing accretive growth opportunities that align with our risk management principles. We are very excited about the opportunities ahead. And with that, I will now turn the call over to Jeff. Jeffery Walraven: Thank you, John. I'll now walk you through Sachem Capital's financial highlights for the quarter and year-to-date. I'll start with 3 takeaways upfront. First, sequential quarterly revenue improved. Second, credit costs moderated as reserves stepped down. And third, we efficiently repaid the September bond maturity while extending duration and keeping liquidity intact. As to our results and revenue mix, total revenue for the quarter was $12 million versus $14.8 million in the third quarter of '24 and up 11.4% from $10.8 million in the second quarter of '25. The revenue mix this quarter was $8.3 million of interest income on loans, $2 million of loan fees, $1.1 million from LLC investments, $0.1 million from other investment income and $0.5 million of other income. The year-over-year decline reflects a smaller performing loan portfolio and a higher nonaccrual mix. The sequential quarter lift alternatively reflects modest growth in average loan performing balances and steady fee generation. Lastly, gains on equity securities of $1.36 million sit below operating income. Two quick pieces of color on the above. Our loan yield on average performing loan balance of roughly $268 million for the quarter, our effective interest rate was approximately 12.4%, which is consistent with the performing loan return profile in this rate environment. Inside the $2 million of loan fees, we recognized $0.84 million of origination modification fees, $0.19 million of extensions and $0.48 million of late and other fees. Now speaking to expenses and the bottom line. Quarterly operating expenses were $12.4 million, down from $19.6 million a year ago. The big swing factor was the provision for credit losses, which fell to $0.8 million from $8.1 million as last year's reserve build gave way to a steadier credit cadence. Interest expense was $6.6 million. Compensation and benefits were $2.3 million, reflecting team rebuild costs and onetime bonuses of about $0.4 million noted in the filing. We delivered GAAP net income of $1 million. But after the $1.1 million of Series A preferred dividends, net loss to common shares was $0.12 million or $0.00 per share, a sharp improvement from the $0.13 loss per share in the prior year quarter. Sequentially versus the second quarter, revenue rose 11.4%. Interest expense increased as we shifted the funding mix around the September maturity. Compensation and benefit impacts are the same as previously noted. G&A was up due to increased spend on the cost of maintaining REO properties and all other expenses normalized after adjusting for the second quarter benefit in the loans held-for-sale valuation line. On a net-net basis, it was a noisier expense quarter, but a cleaner revenue base. Now taking a look at credit portfolio mix and other activity. We ended the quarter with 119 first lien loans, $375.2 million gross principal and $361.7 million, net after $11.1 million of allowance and net of deferred fees. The weighted average contractual rate, including the default rate was 13.21%, and the weighted average remaining term is 6 months. Our property mix was 54% residential, 30% commercial, 12% mixed-use and 4% land. Geography remains diversified with the concentrations in Connecticut and Florida of 31% and 26%, respectively, of outstanding principal. Principal on our nonaccrual loans was $104.1 million, down from $119.6 million at June 30 as cash resolutions and migrations to REO outpaced additions. Our allowance for credit losses on loans ended at $11.1 million or approximately 3% of unpaid principal, down from the $17.6 million at second quarter, chiefly due to charge-offs on assets moving into REO and reserve rightsizing as individual loan files progressed. REO totaled $18.9 million across 19 properties. Loans held for sale were $8.8 million net. That ebb and flow is intentional as we utilize every traditional strategy to protect principal and monetize value. In third quarter, we disbursed $44.7 million, collected $40.7 million and converted $10.9 million of principal to REO through foreclosure, blocking and tackling as we work these legacy files while underwriting and funding new disciplined business. Additionally, during third quarter, we extended terms, a weighted average of 10 months on $29 million of loans, generally to bridge permit, lease-up and construction timing. These extensions were done to safeguard collateral when repayment visibility is intact. Our Shem Creek LLC funds and manager investments contributed $1.1 million of income in the quarter on carrying value of $38.6 million at quarter end. These positions continue to generate attractive double-digit returns for Sachem. Looking at our balance sheet, capital funding and liquidity. Our balance sheet is straightforward with total assets at $484.4 million, liabilities at $308.8 million, resulting in asset to liability coverage of approximately 1.57x. Cash at quarter end was $11.2 million. In September, we retired in full the 7.75% FCCC notes at stated maturity of $56.3 million and opportunistically repurchased $0.6 million of other unsecured notes during the quarter, recording a small gain on the extinguishment. To fund the FCCC notes AC maturity without stressing originations, we drew an additional $40 million on our 9.875% senior secured notes due 2030. $10 million remains undrawn and available through May 15, 2026. As a result, quarter-over-quarter, unsecured notes decreased by $56.5 million, senior secured notes increased by $40 million, repurchase agreements fell $6.6 million and the Needham line rose $6.5 million. Further on our credit facilities and related covenants, our Needham revolver -- on our Needham revolver, we have $32.7 million outstanding at prime minus 25 basis points, 7.0% at 9/30, secured by pledged and assigned assets of $90.6 million, with customary covenants, including 150% average asset coverage test. On our senior secured notes due 2030, we have $90 million outstanding at 9.875% fixed, secured by pledged and assigned assets of $183.4 million gross value or $153.2 million net after note agreement required valuation limits and haircuts with standard leverage liquidity covenants and a 1% commitment fee on the undrawn $10 million. On our Churchill repo, we had a $7.8 million outstanding balance at an effective rate of 8.33%, secured by pledged and assigned assets of $30.7 million gross value. Subsequent to the quarter end, we have fully paid off our Churchill repo line and the pledged and assigned assets are being released. On all of our facilities, we were in compliance with covenants as of and for the 3 and 9 months ended September 30, 2025. Discussing our capital, our book value per common share was $2.47 at quarter end, down from $2.54 at June 30. The driver was simple. Preferred and common share aggregate dividends of approximately $3.5 million exceeded the quarter's GAAP breakeven net income. These dividends were declared by the Board and paid in September and were $0.05 per common share and $0.484375 per share on the 7.75% Series A preferred. For a reminder, the company's Board will address the fourth quarter dividend declaration and payment consideration in the first week of December 2025. This is consistent with the company's prior communication that the intended normal dividend cadence for both preferred and common will be addressed in March, June, September and December each year. Wrapping up this quarter's commentary, our management team remains focused on 3 levers: First, reduce our nonperforming loans and monetize REO; two, fund sound high-return loans against strong collateral; and third, manage our liquidity, leverage and debt maturities. This is how our business model works and how we intend to continue to restore faith in our book value and support the dividend framework going forward. I'll now turn the call back to John for closing comments. John Villano: Thanks, Jeff. We continue to believe Sachem is well positioned as a leader in small balance real estate finance. Our key priorities are resolving our remaining REO and NPLs, further enhancing liquidity with the goal of capitalizing on our robust pipeline of opportunities to originate new loans that meet our underwriting standards. As markets normalize over time, we believe our disciplined approach will drive book value stability, support our dividend and deliver long-term value for our shareholders. Thank you, and we will now open the call to questions from our analysts. Operator: [Operator Instructions] Our first question comes from Christopher Nolan with Ladenburg Thalmann. Christopher Nolan: On the Naples property, what amount of the nonaccruals does that account for? And if the mediation on Friday is favorable, could that impact the allowance? John Villano: Chris, the Naples project is -- obviously, it's $50 million. It's approximately 14% of total loans and a very significant portion of our NPLs come just under half. But with respect to the mediation, our goal with the mediation is to secure the asset, right? We've done our best to protect asset value. Our borrower has kind of fallen off track. There is still some ongoing issues with second mortgage, which is comprised of former capital partners of our borrower. This mediation -- it's this Friday. It could be very significant to having Sachem take control of the asset and perhaps use the Urbane personnel to effectively manage and work through the sales process enables. We are considering if mediation goes well, a construction of what we call the South building, which we feel has strong marketability. It is a demand. Its price points are in line with the area, somewhat below what's going on in the area nowadays. But again, a lot depends on what happens on Friday. But I want to be clear. When we come out of that meeting on Friday, we will have a hard and fast route to resolving this issue. Christopher Nolan: And then as a follow-up question for Jeff. Jeff, in your comments, did you mention that the net charge-offs in the quarter was due to loans heading into real estate owned? Jeffery Walraven: Yes, there was movement down into real estate owned. There's a schedule that is in the footnotes to -- it's in footnote 6 in REO in the [indiscernible]. And you can see there -- well, from a year-to-date perspective, charge-offs that went into REO was $8.3 million for specifically the, I guess, the quarter... Christopher Nolan: I think it's... Jeffery Walraven: How much -- a good portion of that was in the quarter as there was a group of real estate that had moved into their plus, which monetizes or crystallizes actually the charge-offs that were previously in the CECL allowance. Operator: [operator instructions] Our next question comes from Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask you on the loan disbursement. In the prepared remarks, you gave a number for the loan disbursed during the quarter. I wanted to get some details on that number. Was that for unfunded loan commitments? Or were there any new loan originations this quarter? Jeffery Walraven: There would be both. Gaurav Mehta: Okay. And as far as the remaining unfunded commitment in your portfolio of around $47 million, what's the timing of that? Jeffery Walraven: It would stretch out legitimately on that. I mean the number of unfunded commitments ranging between, call it, mid-$45 million and -- $55 million is kind of consistent quarter-over-quarter as we continue to turn over the portfolio. So that $47 million is legitimately spread over the next 12 to 18 months. Gaurav Mehta: Okay. And then lastly, on the new loan originations, can you provide some detail on where the yields are for the loans that you're looking at in the market? John Villano: Our yields are -- our pricing of debt right now, we have not dropped yields with other market competitors. We are still able to earn our 12 and 2, perhaps maybe a little bit more. We don't feel the need that we need to discount. So our pricing is firm, and we'll need to stay firm, right? Our cost of debt has increased a bit, and we're not in a position where we can sit and discount our financing costs. Operator: Our next question comes from Craig Kucera with Lucid Capital Markets. Unknown Analyst: Jeff, I think you mentioned that some of your G&A items increased this quarter because you had to take on some additional expenses related to REO and managing that. Is it fair to assume that, that will be recurring? Jeffery Walraven: It really depends on the nature of the asset that has gone into REO. But yes, to the extent while REO balance stays where it is, but we're actively continuing to resolve that. We have a number of resolutions that are coming to a near end. But when it's in REO, we're -- we've got property taxes. We may have other preservation maintenance depending on where the property sits, how far along it was developed to make sure that there is no degradation of value. John Villano: I'd like to add one thing to Jeff's comment. Craig, excuse me, I'd like to add one thing to Jeff's comment. While the movement to REO increased, we company-wide looked that as positive. This is the culmination of a long-term battle with our borrowers to get control of our assets. And while the markets look at REO as being absolutely terrible, right, it really is the light at the end of the tunnel for us because we can now work on those projects. We're situated in a great place with our Urbane unit to work through these. And we touched on a few of them during the call. And it's the only way and the quickest way of unlocking our capital is really to dump it into the REO. So we're quite excited that we have now clarity on a large chunk of those NPLs. Unknown Analyst: Got it. And sort of excluding what could possibly happen with the Naples properties and the mediation event here this Friday. What are your expectations for kind of working out some NPLs here over the next, call it, 3 to 6 months? John Villano: Well, the process is ongoing. In a perfect sense, these things are resolved on the courthouse steps, right? And they don't come back. The NPL shows up, there's a cash infusion, whether there's a gain or a loss on the final tally, that's our best -- we'd like to see that first. The next best outcome is to gain control, like I mentioned. It is ongoing. There's a lot of activity in the pipeline. We will continue to see great improvement in the reduction of the NPLs. And I just want to be very clear, our post-COVID originations are not adding to the totals. So this is a finite number of issues that are going away, and there's really no new additions to the overall total. Operator: We have reached the end of our question-and-answer session, which now concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and thank you all for attending the Lemonade Q3 2025 Earnings Call. My name is Brika, and I'll be your moderator for today. [Operator Instructions] I will now hand over to the Lemonade team to begin. Unknown Executive: Good morning, and welcome to Lemonade's Third Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's third quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made on this call may contain forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our letter to shareholders and the Risk Factors section of our Form 10-K filed with the SEC on February 26, 2025. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our certain performance metrics, a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business. With that, I'll turn the call over to Daniel for some opening remarks. Daniel Schreiber: Good morning, and thank you for joining us to review Lemonade's results for Q3 '25. I'm happy to report another very strong quarter. Our in-force premium grew to $1.16 billion, marking our eighth consecutive quarter of accelerating growth. Our revenue was up 42% year-on-year, while our in-force premium enjoyed 30% growth, growth rates we were not expecting before 2026. Happily, our strong top line metrics were matched by our profitability KPIs. Our gross margin climbed into the 40s, while our gross profit more than doubled to $18 million, propelling us steadily and predictably towards EBITDA profitability in Q4 of next year. All our products and regions contributed to this dynamic of accelerating top line and improving profitability, though it is worth spotlighting car, which saw 40% growth with more than half of that coming from existing Lemonade customers essentially CAC-less acquisition. That's transformative to car's unit economics as is the 16% year-on-year improvement in car's loss ratio, which came in at a lovely 76%. Staying with loss ratios, our company-wide gross loss ratio in Q3 was 62% and our trailing 12-month loss ratio was 67%, both our lowest ever. If nothing unexpected happens in the coming weeks, I anticipate that we will set a new record once more this quarter, Q4. Against this backdrop, it's worth remembering that while declining loss ratios and expanding gross margins are a thrill, they are not per se what we are solving for. As I explained at some length during our Investor Day 1 year ago, the metric we are looking to maximize is gross profit dollars. Loss ratios always affect gross profit but not always as a simple counter movement, whereby lower loss ratios yield higher gross profit. In reality, the relationship is non-onotomic, meaning that often a higher loss ratio will yield higher gross profit. The underlying mechanics are obvious when you think about it. Given the incredible price sensitivity in insurance, each percentage reduction in price can often yield outsized returns in terms of conversion and retention. Lower prices worsen gross margins and loss ratio, yes, but the attendant boost in revenue often more than makes up for that. This means that for some parts of our business, certain products, certain channels, certain segments, a higher loss ratio and slimmer gross margins will actually translate into higher gross profit. Given the choice, we will always privilege dollars over percentages, which is why when we see an opportunity to trade higher loss ratios and slimmer gross margins for higher absolute gross profit dollars, we will take that trade 10 times out of 10. And indeed, as noteworthy as our loss ratio progression has been in these past 2 years, during that time, our gross profit has surged by 261%. The full significance of this comes into sharp relief when paired with the fact that during the same time, our underlying expenses increased by single digits. This means that we've essentially transformed our variable expense into fixed costs. That's extraordinary. It's the hallmark of an AI-first company, and it is the reason why our gross profit trend line charts our path to profit and beyond. And with that, I'll hand it over to Shai. Shai Wininger: Thanks, Daniel. I wanted to shed some light on something that captures one of the ways AI shows up in our results, the LAE ratio. For those less familiar with our industry, LAE or loss adjustment expense measures the cost of handling claims as a percentage of premiums. It's a simple but powerful indicator of operational efficiency, and it is one of the few metrics that truly allows apples-to-apples comparison of the underlying efficiency of different insurance companies. It should be noted, though, that this metric is influenced by economies of scale. And so the larger the insurer, the more they are expected to have a good LAE ratio. For reference, large carriers typically report around 9% LAE. In other words, they spend about 9% of their premium dollars to handle claims on top of the claim payment itself. I'm happy to report that our investment in automation has been paying off. And despite our relatively small size in comparison to the largest U.S. carriers, we reached a superior level of efficiency with an LAE of 7% on average across all of our products. In fact, in the past 3 years alone, we've cut our LAE ratio in half and the number of Lemonade claims adjusters actually declined, all this despite our claim volume growing 2.5-fold. Using blender, our AI-powered insurance operating system, claim adjusters are able to handle 3x the claim volume they could before, all while providing our customers with a more transparent and instant experience. But having the best-in-class LAE is not where we stop. We wanted to take this further and expect to cut the LAE ratio in half yet again in parallel with our next doubling of the business. With that, I hand it off to Tim, who will cover our financial performance and outlook. Tim? Timothy Bixby: Thanks, Shai. Let's start with our Q3 scorecard. In-force premium grew 30% year-on-year to $1.16 billion, driven by customer growth of 24% and premium per customer growth of about 5%. We added a record 176,000-plus net new customers in the quarter. Gross loss ratio was 62%, an improvement of 11 points year-on-year and 5 points sequentially, while trailing 12 months gross loss ratio improved 3 points sequentially to 67%. Prior period development was 5% favorable, driven by 2% unfavorable CAT prior period development and 7% favorable non-CAT prior period development. Total CAT in the quarter, excluding the cat prior period development was 4% -- favorable prior period development was driven primarily by home, car and EU operation, while the unfavorable CAT development was related primarily to the California wildfires in Q1. And on a net basis, prior period development was similar with non-CAT about 6% favorable and CAT 4% unfavorable for a net impact of about 2% favorable. Prior year development, which we report on a net basis, was $6.3 million favorable in Q3 and $18.9 million favorable year-to-date. Gross profit more than doubled to $80 million as did adjusted gross profit to $81 million for a gross margin of 41% and an adjusted gross margin of 42%. These metrics use revenue as their denominator. Adjusted gross profit as compared to gross earned premium was 29% in Q3, up 11 points from 18% in the prior year. Revenue grew 42% to $195 million, while our adjusted EBITDA loss improved by about 50% in the year to a loss of $26 million. And it's worth highlighting that revenue grew fully 12 percentage points faster than IFP, a dynamic we expect to continue through at least Q2 next year, primarily due to the recent increase in retained business through our quota share reinsurance structure renewed July 1. Our Q4 revenue guidance, in fact, implies a roughly 49% year-on-year growth rate at the high end of the guidance range. Importantly, adjusted free cash flow was positive for the second consecutive quarter at $18 million, while operating cash flow was positive $4 million. And we ended the quarter with just under $1.1 billion in cash and investments, of which $278 million is held as regulatory surplus. Annual dollar retention, or ADR, began to improve again as expected and was up 1 point to 85% versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $17 million or 13% to $141 million in Q3 as compared to the prior year. And let's break those expense lines down a bit. Other insurance expense grew by $4 million or 22% in Q3 versus the prior year versus a 30% growth rate of in-force premium. Total sales and marketing expense increased by $6 million or about 12% due to increased growth spend versus the prior year. In Q3, that growth spend was about $46 million, up 16% as compared to the prior year. We expect Q4 growth spend to be at a roughly similar level, which would put us at a total growth spend of about $180 million for the year. We continue to see both ROI strength and diversity across growth channels, where we've been able to maintain our LTV to CAC ratio above 3:1 across products, across channels and across geographies. Technology development expense was up 13% year-on-year to $25 million, primarily due to increases in personnel expense, while G&A expense increased 11% as compared to the prior year to $35 million, primarily due to an increase in interest expense. Headcount decreased sequentially from 1,274 in Q2 to 1,259 in Q3 and was up about 3.5% versus the prior year and essentially flat versus 24 months ago. Our net loss was $38 million in Q3 or a loss of $0.51 per share as compared to a net loss of $68 million or $0.95 per share in the prior year. Our adjusted EBITDA loss was $26 million in Q3, significantly improved versus $49 million EBITDA loss in the prior year. We're well positioned to continue to fund this growth to expand across geographies and continue to diversify our customer mix. With over $1 billion of cash investments, efficient capital surplus management and positive adjusted free cash flow, we're well positioned to fund our growth strategy without need for additional capital. Given strong year-to-date performance, we are raising our full year 2025 guidance across in force premium, gross earned premium, revenue and EBITDA loss. Our expectation for positive adjusted EBITDA for the full quarter of Q4 2026 remains unchanged. And with the recent change in our quota share ceding ratio, we expect our ceding rate to continue to decline in Q4 to roughly 40%. Our Q3 results show continued execution on and ahead of our targets, 30% premium growth, double-digit loss ratio improvement, a doubling of gross profit, revenue growth well outpacing premium growth, recurring positive cash flow and a strengthening balance sheet. We are delivering a unique combination of growth and profitability improvement and are doing both at scale with real discipline. Let's talk through our Q4 expectations, and then we'll take some questions. For the fourth quarter, we expect in force premium at December 31 of between $1.218 billion and $1.223 billion, gross earned premium between $283 million and $286 million, revenue between $217 million and $222 million and an adjusted EBITDA loss between $16 million and $13 million. We expect stock-based compensation expense of approximately $18 million and a weighted average share count of approximately 75 million shares for the quarter. And this implies for the full year, gross earned premium of between $1.044 billion and $1.047 billion, revenue between $727 million and $732 million, and adjusted EBITDA loss between $130 million and $127 million, stock-based compensation expense of approximately $61 million and a weighted average share count for the full year of approximately 74 million shares. And with that, I would like to pass over to Shai to answer some questions from our retail investors. Shai Wininger: Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. Paper Bag asked, with the Local and L2 announcement, what tangible things will be accelerated as the number of car states we plan to launch in 2025 and beyond changed? Are there any new products planned to be coming out faster? And will we see further operating leverage in our engineering teams? Thanks, Paper Bag. The local platform represents a major leap forward in how we build and evolve our insurance products. And yes, it's already accelerating a lot of what we do. For those who aren't familiar, Local is what we call our next-generation LLM first no-code insurance product builder. And it effectively gives our teams a new way to configure, design, test and launch complete insurance products and experiences without needing to write or deploy code. Local is being built in a modular way. It is already deployed and delivering value in some parts of the business, even though much work remains before local is complete. And based on the rollout so far, processes that used to take weeks can now happen in hours. And yes, it accelerates our operating leverage by freeing our engineering teams to focus on higher impact initiatives since much of the product improvements and tests we're doing can be handled directly by our product and actuarial teams with no engineering involved. Paper Bag also asked, what is the reason or rationale for the recent board seat nominations of PayPal's CMO and Meta's VP of AI Product and are there potential partnerships with either company in the works? Paper Bag, the rationale for the additions of Jeff and Prashant to our Board is that both of their areas of expertise, AI and brand are central to Lemonade's strategy. Jeff and Prashant each bring exceptional experience that aligns directly with where we are headed as a company. Prashant is Meta's VP of AI Products, prior to which he was Meta's VP of Generative AI, giving him a unique insight into how cutting-edge AI can be deployed at scale. Jeff is CMO at PayPal and Venmo and was previously Global Head of Marketing at Airbnb. So he has shaped some of the world's most loved and enduring consumer brands. As we continue to leverage AI to deliver delightful customer experiences and ultimately transform the insurance industry, their experience and perspectives will be invaluable in helping guide our next phase of growth. There are no specific partnerships with either company to highlight at this time. Our rationale is strategic expertise and not corporate collaboration. There are several questions about the future of FSD and how we are positioning our car insurance product in that shifting landscape. So I'll share some thoughts responsive to that general theme. This is an area we pay close attention to. The time line for widespread autonomy is uncertain. It could take longer than the optimists predict or accelerate faster than most expect, and we're building with that range of scenarios in mind. Whenever autonomy reaches its tipping point, we believe we are well positioned to capture what many incumbents might see as a threat. The shift toward autonomy plays to our strengths. The future of car insurance is increasingly about pricing per mile driven and distinguishing between human and system-driven miles. Our system is built around usage-based pricing, real-time data and flexible coverage, precisely the infrastructure needed for that future. And we don't have any legacy systems or traditional business models holding us back. Lastly, there were a number of questions about our Tesla integration. We recently announced a direct integration with Tesla's API, which with proper customer consent allows us to pull driving data straight from the vehicle. This gives us access to a much richer and more precise array of data than what's possible through a phone app or plug-in device. Things like seatbelt usage and more accurate trip insights, for example. It's the kind of granular telemetry that becomes critical as cars get smarter and more autonomous, data that not only sharpens our pricing and underwriting precision today but also positions us to learn directly from the evolution of FSD systems over time. As for ensuring FSD miles at near 0 cost, we aren't able to share material updates on that at the moment but promise to do so when we can. What we can say is that integrations like these are early building blocks for the future where usage-based and system-driven pricing becomes the norm and where our platform is already designed to adopt. And with that, I'll pass it over to the moderator, and we will take some questions from the Street. We. Operator: [Operator Instructions] We have the first question from Tommy McJoynt with Keefe, Bruyette, & Woods. Thomas Mcjoynt-Griffith: You noted about half of new car customers were existing Lemonade customers and thus were effectively CAC-less. How does that level compare to prior periods? And is the plan for the majority of new car customers for the foreseeable future to be CAC-less? Timothy Bixby: I would say that, that 50% rate has been consistent, plus or minus for a few quarters now. So it's a good number. It's a stable number. The CAC-less approach is without question, part of our focused, driving customers to multiple policies. We've seen growth in the multiply policy rate above 5%. It has increased sequentially every quarter for quite some time. But I would think of that 50% plus or minus number is a good stable number that we expect can continue. Daniel Schreiber: Just to add to that, in addition to these customers being CAC-less, they are remarkable in other ways. They tend to have much better loss behaviors, loss patterns. So they are less costly not only to acquire but to service. They tend to have higher retention rates. There's a lot to love about these cross-sold customers. We -- in the letter we refer to them or in my comments refer to them as CAC-less, it would be more accurate to almost think about it as negative CAC. These are customers that tend to be profitable in whatever line of business we acquire them through and then they add a car policy on to that. So it's really an important part of the business. I will just add that while 50% or as we said, over half of our customers coming this way is a big deal. It's a core plank of our strategy, always has been. That part grows more organically, whereas the one that we target is less organic, and we have dials that we can dial that up or down. So the more you find us spending on acquisition, the more that will affect those ratios over time. Thomas Mcjoynt-Griffith: Got it. And then switching over, looking at the ceding commission revenue line, was there a contingent or profit share tailwind in that ceding commission in the third quarter? It looks like it was a higher percentage of ceded premium than it had been running at. Timothy Bixby: The bulk of that ceding commission is driven by loss ratio and because the loss ratios came in quite nicely, a record low in the quarter. As you know, there's a sliding scale of commissions. So the commission varies somewhat up and down based on the loss ratio. There's a cap and a floor, a high and a low. So at some point, you cap out when your loss ratios get really, really good. So that was the main driver in the quarter. And probably worth a reminder, the ceding commission that you see on the face of the P&L is about 4 points different than the actual ceding commission, and that's an accounting nuance. I think you'll see an effective ceding commission rate of about 28% in the quarter. But on a P&L basis, because of the accounting nuance, you see about 24%. So you're exactly right, a couple of points better both year-on-year and sequentially. Operator: Your next question comes from Jason Helfstein with Oppenheimer. Jason Helfstein: I'm going to try to sneak in like 2 and then a quick housekeeper. So obviously, we're seeing like impressive improvements in kind of the contribution ratio efficiency. No doubt you are finding ways to use AI to make the business more efficient. That being said, where would you rate yourself on like at a 10, this would be us using all of the AI tools out there that we could and where you are? That's question number one. Question number two, again, you've got the business dialed in now between kind of growth and marginal contribution improvements. Is there anything philosophically to think that you're going to lean more into growth because of the way the business is and the metrics are playing out? And then lastly, Tim, just expenses were up on a year-over-year basis and sequentially in the third quarter, like OpEx, i.e., technology and G&A more than we've seen in a while. Just is there just anything to call out from an expense standpoint in the quarter? Daniel Schreiber: Jason, -- so the AI is now -- the impact of our AI deployments, I think, is now reflected on pretty much every line in our P&L. So you're quite right. We see it almost anywhere you look. We spotlighted the LAE as a way to really provide apples-to-apples comparison and that way you can see how dramatically different it is from the incumbency. You could look at the fact that we've OpEx -- sorry, our gross profit has gone up tenfold in the last 3 years, whereas our headcount hasn't moved, has actually moderately declined. So there are a lot of indications of something pretty dramatic happening in terms of the AI, and we see that in terms of all the efficiencies. And if you look at the life cycle within kind of the customer engagement with Lemonade, you'll see AI everywhere. It starts with how and where we deploy the marketing dollars that attract you as a customer. So as you know, about 90% of those dollars that Tim referenced earlier that we deploy to acquire customers, about 90% of them are guided by AI, some 50 different machine learning models that optimize how we spend, where we spend based on LTV to CAC predictions of every customer, every segment, every advertising campaign. Then when you come to us, our recommendation of products and also some other settings and cross-sells during the purchase process is AI-driven. And then later, when you engage with us and ask customer support or claims, and you'll see again the majority of our claims being settled without human intervention by AI. So by one measure, I would say that we score very high on your 1 to 10 scale. We really do use AI across the board. The majority of our code, software engineering is now written by AI. So we're really seeing this everywhere. At the same time, I think if you take a zoomed out perspective and you kind of judge today by where we will be a year, 2 years, 3 years from today, I think you'd rate us as a. I think we're just getting started. And there is so much more that we see that we can do. We're scrambling to do it all. As we are doing that, the ground beneath us is shifting because models are becoming so much smarter, so much faster. So I think both we have done a lot and we have done very little, one measured against what the industry knows and the other one measured against the potential that we see coming over the course of the next few years. Another word about your second question. Can you -- Tim, do you have that? Jason Helfstein: Yes, it was about just philosophically now that everything seems to be kind of working would you consider leaning into more growth and pushing out like kind of profitability targets and then there would be housekeeping expense. Daniel Schreiber: Okay. So yes and no, and we tried to touch on this in our earlier comments. We see ourselves turning EBITDA profitable in Q4 of next year. That's not moving. I don't anticipate any change in that. That's been our expectation for some 3 years, and it's becoming increasingly obvious, I think, to people outside the company and why we're so confident of that. So that particular profitability metric is unlikely to change. But there are other metrics that talk to profitability, such as gross margins, which we see as more pliable. So what we are optimizing for is gross profit dollars. And in pursuit of maximizing gross profit dollars, there will be segments where we will let loss ratio rise because the elasticity of demand is such that, that will spike demand and retention in a way that offsets the margin becoming a little bit more constrained. So depending on which -- pick your metric, and I'll give you a better answer, the gross profit dollars, we expect to maximize, and we don't expect to take our foot off the pedal there at all. And the ultimate EBITDA breakeven is locked in for Q4 of next year, and we're not anticipating that changing. Timothy Bixby: Great. And then a couple of notes on the expense side. You're right that the tick up in this quarter was a little higher than is typical. We do see it vary quarter-to-quarter. I don't see that as a step change or an ongoing change. But particularly in the quarter, growth spend, obviously, is a notable year-on-year increase, and we break that out. We're spending a bit more for tech personnel, and you see the offsets from that in efficiencies elsewhere but that's a dynamic where if you isolate that line, over time, you can see some increase there year-on-year. Some of it is just purely inflation. The team size doesn't grow dramatically but the cost goes up modestly. In G&A, our interest expense growth, and that grows with our growth spend more or less because we're -- as you know, we're financing about 80% of that growth spend. So from an expense standpoint, it jumps out. But from an overall cash flow benefit standpoint, obviously, that's a terrific benefit to our -- the IRR measures of the company as a whole. A little bit of noise in our merchant fees, which can be seasonal, meaning they can move a little bit more or less than the premium in the quarter. So a number of little things, but the big picture is unchanged, single-digit expense growth and 30% plus top line growth, and you see that in the chart that we published, and that's what we expect going forward. Operator: Your next question comes from Katie Sakys with Autonomous Research. Katie Sakys: A couple from me. I guess, first, it sounds like there's a bit more growth scheduled for 4Q than previously messaged the last time you hosted a call. So I guess I'm just trying to reconcile the change in the IFP guide for the full year '25 given the magnitude of 3Q results relative to previous guidance. It doesn't sound like you're messaging necessarily a pull forward in growth into 3Q from 4Q, but it kind of does seem like the full year guide implies a bit of a sequential deceleration next quarter back down below the 30% growth rate. So I'm just looking for some additional color there on the change in the full year guide when 3Q IFP netted out relative to the previous guide. Timothy Bixby: Sure. Katie, your math is right. So when we have a big beat on a key metric in a quarter, then obviously, we evaluate how much of that we expect to continue forward and how much we want to make certain adjustments on the top line, that IFP number captures the entire business, not just the additional sales or the new sales or the growth rate. So while our growth spend has increased and our new sales, we expect to increase as well, we're cautious about retention. Our Q3 results were actually quite good, and we're able to overperform but we're somewhat thoughtful about that top line going into Q4 because that captures the entire business. The opposite is true on the other line items. So in gross earned premium and revenue, we captured not only the beat in Q3 but additional increase in Q4. So there's a little nuance there between the metrics, that's what's going on. Katie Sakys: Okay. Yes. No, that makes total sense. It's just -- I mean, ADR, like to your credit, improved versus last quarter, showing upward progress there. I understand, obviously, some of that is coming from the lapping of nonrenewals on home from last year. But I mean, it looks like you guys are doing well in terms of retention versus maybe we were at the start of this year. So I'm just curious about the conservatism, like you were able to exceed the 30% IFP growth rate this quarter. So what in the financial plan is potentially looking a little bit less positive as we end up the year, especially as retention continues to improve? Timothy Bixby: I would think of it as all quite positive if you're looking for our view and how we see things rolling out, particularly in the fourth quarter where we're a month plus in. We have pretty good visibility. I'd remind that we continue to be really thoughtful about our home book of business. The underlying numbers actually look quite good, the loss ratio and the other metrics. But we continue to work through what we've called our clean the book exercise. That continues unchanged. Actually, it will have a level of impact in the second half that's similar to the first half. But that continues, and that's part of our plan. So we're growing at a 30% rate despite that sort of pruning of our customer base. So all your questions are fair, but I think we're quite optimistic I just want to be thoughtful about the parts we know about and the parts we don't yet know about, which is the remainder of the quarter. Daniel Schreiber: And maybe, Katie, sorry, just for the benefit of people listening on who haven't done the math as you have, our guide does anticipate a 30% next quarter at the high end of the guide. We've guided at something between 29% and 30% growth for Q4. So we're certainly not anticipating or guiding to any considerable reversal or slowdown as guided. Katie Sakys: Okay. And then if I could just sneak in one more. I can appreciate that the trailing 12-month gross loss ratio is trending well below the 73% target you guys have previously messaged. Just kind of thinking about that in the context of the changes to the quota share structure and ongoing maximization of gross profit dollars. Is 73% gross loss ratio still the right target for the business at this point? Or do you eventually see a pathway to taking that target down lower? Daniel Schreiber: It's a great question, Katie. And to be honest, we've tried to be responsive to questions such as this one and provide a target loss ratio. But I do want to give you an insight into how we think about this, which is that there isn't a target per se. Loss ratio is an input, not an output. It's a lever which we use to optimize the business. It's not necessarily evident that the business is optimal. So because we are as efficient as we are and our other cost structures are declining as they are, we are in a position to be price leaders, a thesis that we developed at some length almost a year ago during our Analyst Day on November 20 of last year, which is to say, we think that there is a structural advantage that Lemonade enjoys where in a price-sensitive market like ours, but oftentimes a 1 percentage move on price will yield a fivefold increase in conversion or other metrics. It may make sense for us to continuously refine within certain markets and certain segments get to very competitive price points. And that will put pressure on gross loss ratio. But just to give you a hypothetical, I spoke earlier about the CAC-less acquisition of great customers in the car business. Why do we need to optimize to a 73% or any other particular number for these customers where there is no cost to acquire the customer and almost no cost to service the customers. You can envisage a situation where we could lower prices so dramatically where we would be profitable with a 90% loss ratio. The math here and the degrees of freedom that we have is pretty dramatic and something that will be very, very hard for the incumbency to replicate. So we are using the data to guide us in terms of what is optimizing gross profit. At times, that will mean selling a lot more with thinner margins, at times not. Some of our products are more price elastic, some are less, some campaigns are more elastic, some are less. So it will aggregate into a loss ratio that we will report on a quarterly basis. But we're thinking about loss ratio less and less as one big aggregate number with a target more and more as fine-tuning of optimization of by product, by campaign, by region, and that will result in different loss ratios, different product lines but always in the service of maximizing gross profit. I hope that gives you -- I hope that helps give you an insight into how we are approaching the question that you're asking. Operator: We now have Zachary Gunn with FT Partners. Zachary Gunn: So I also just wanted to follow up on the gross loss ratio, so down 5 points overall, up 13 points in Europe. So can you just talk a little bit about what drove that decrease in Europe? Is it benefits of scale? Was it product mix? And then just I'll get my follow-up on that topic as well. I think previously, you've talked about U.K. being really strong in Europe from a growth perspective, maybe Germany being a little bit weaker. Any updates there within the European market of what you're seeing? Daniel Schreiber: Sure, Zachary. Let me start it off and then Tim, please come in with anything that you feel I missed. Our European business is doing spectacularly well. We put a spotlight on it a couple of quarters ago, I think, but it really is. We're seeing something like 170% growth in our European business this quarter. We're seeing our customer base doubling year-on-year and a very healthy loss ratio. I think we mentioned in the last quarter, if memory serves, that when our American business was at this -- or the size, this dimension, its loss ratio was 30 points worse than we are in Europe today. So things that are moving along the same trajectory as our U.S. business. But to some extent, we've learned lessons and built systems and to some extent, the nature of the European business allows us to do things faster. And let me just unpack that last sentence for you, which is in the U.S., as you know, regulators across the 50 states have varying requirements. But by and large, there are systems, hoops, loops that we have to jump through before we can affect price changes, not so in Europe. In Europe, there are other regulatory constraints but we have freedom or much more freedom to price and to change prices dynamically, which means that when we pick up signals in terms of pricing inaccuracies, there isn't the time lag that we have in the U.S., we're able to course correct instantly. And our systems are set up to do just that. So we are seeing that our business there is much more responsive to any signal that we pick up. And I think that as much as anything else, we've got a fabulous team. We've got lessons learned and some scar tissue from where we missed steps in the past but that more than anything else has just allowed us to move at a pace that we just can't in the U.S. Tim, anything you wanted to add to that? Timothy Bixby: Yes. Just general good news across the board, I think, and particularly from a loss ratio perspective, we're starting to see some mix benefit. So as the U.K. grows and in particular, the renters book in the U.K., that sports a nice effectively low loss ratio, that starts to show up in the total. So that's part of the driver. Some of it is prior period impact, also favorable in the quarter, and that's good news. That just means when you have a younger book of business and you're more thoughtful in your reserving, you can at times have a favorable release of prior period. We saw a bit of that in our French book, which is a smaller book of business. With the U.K. heading in aggregate above the 50% level, that bodes well. But we're also seeing nice improvements in other territories as well. We've gone from having really no home business in Europe to having a really nice and effective home product now in 3 of the 4 territories. So Europe is really hitting on all cylinders. It's still a relatively small portion of the book but it's become material, and you'll likely hear more about it from us as we go forward. Operator: Your next question comes from the line of Andrew Andersen with Jefferies. Andrew Andersen: Just looking at pet, it's been growing pretty well and the loss ratios seem pretty stable there. I was wondering if you could just touch on kind of the competitive environment you're seeing with pet, maybe how you feel your pricing is relative to some of the industry? And if you could maybe touch on what you're seeing in terms of loss trends there. Timothy Bixby: Yes. Again, I feel like a broken record. The things I said about the EU are also true in pet, super stable and predictable loss ratios at this point, a little bit of seasonality. The partnership with Chewy continues to hum along. about almost 5% of the business now has been driven through that partnership. From a competitive standpoint, we've done in 4 or 5 years. I think what it took pet-only providers that are really, really strong players in the market, 10 or 12 years to do. So we really like what we're seeing from a pet perspective. From a pricing perspective, I would think of it as similar to our other products where while we don't aim to be -- to underprice the product or to be price anything as a loss leader, we will often be, if not the most -- the least price, a super competitive price. So we do lose business if it doesn't satisfy our LTV model requirements but we're typically quite competitive with the strongest players. Andrew Andersen: And I just want to go back to some of the LAE comments and the potential for improvement in that ratio over time. I'm just trying to think about how you are managing kind of maintaining a similar customer service level but also taking into consideration, I imagine at some point over time, there will be a pivot back towards some more homeowners and auto will be a different or a higher mix of the book. So how do you kind of manage through the different customer service levels and the changing needs there, but also using automation efforts? Daniel Schreiber: Andrew, you'll note in the letter, we break down the LAE by product. And you'll see that there's a uniformly down to the right shape to all of the curves, all of the products, including the more complex ones that you're asking about. So we are seeing that we're able to use AI across the board, across the product line to great effect and to achieve dramatic improvements in terms of automation. The very nice thing about using AI to do this work is that it's never at the cost of customer service. It is to the delight of customers. The overwhelming majority of complaints that we get, I think well over 90% for that things that humans do rather than AI does. So when we deploy AI to do these things, it's not the old thing that you used to get when you dialed United Airlines and you have to repeat yourself 7 times to be understood and press 1 and press 3 and press 5 and you knew you were interacting with a machine. These are very high level -- we only deploy the technology once it reaches very high levels of customer satisfaction. And once it does that, it usually exceeds or in the areas that we agree to let it go live, it exceeds what humans do because it's much faster. The error rate is often lower. So we're seeing it able to handle ever more complex things. Jason asked me earlier about kind of our scale of 1 to 10, and I think that would apply here as well, which is you can see how much we've done. And at the same time, we just think that there is a whole lot more that we can do. We really do see a blue ocean in front of us of areas that we can improve. So we're fairly bullish on kind of if you zoom out on the prospects of AGI within the next few years, which really means that machines will be able to do every activity, every intellectual activity that humans do today. And therefore, the idea that some of these products are more complex and require humans today is both true and transient. I think in the coming years, you will find that we'll be able to deploy systems to take care of all of our customers' needs, lowering our costs and raising the level of customer delight. Timothy Bixby: And I think add a thought, sorry to interrupt. I think there's a note or 2 in the letter that's kind of elegant around this concept of shifting variable cost to fixed cost. And so if you think from a customer satisfaction standpoint or a customer experience standpoint, very specifically, in the older world, even if you automated responses or interactions with customers, you had to have a human evaluating and improving those responses. So they weren't -- so they were constantly improving and getting better. And that human evaluating those responses became a variable expense. They had to review and think and make judgments even though they weren't actually responding to every request with the tools -- with the AI tools we now have at hand, even that review process with a human intervention can be automated such that an improvement in the response can filter out to our entire customer base in real time. And so this concept of constantly looking for variable expenses that we can convert to fixed expenses is really -- it sounds simple but I think in the world of AI, it really helps to kind of sharpen the focus on how these things actually turn into things you can see on the P&L. Operator: [Operator Instructions] We have Jack Matten with BMO Capital Markets. Unknown Analyst: This is Charlie on for Jack. I'm sorry, we joined late, so apologies if you addressed this. But we saw Shai tweeted this morning that Lemonade plans to start lowering rates. Can you elaborate more on the timing and magnitude of when you may plan to file for these rate cuts and which lines of business are you talking about specifically? Daniel Schreiber: Charlie, yes, we've addressed this both in my opening comments and in answer to previous questions. So I'll keep my comments brief. I didn't see Shai tweet what was alleged. So I think what Shai said is that -- or certainly what he meant -- the point that we're trying to get across is that there is a sense in which we -- and there was a question about this, we've achieved everything that we said we were going to achieve in terms of loss ratios and they're at record lows, and we're anticipating them potentially going even lower this coming quarter. And yet, we don't always see -- this is a moment to kind of take a victory lap and we're thrilled with it and it's excellent but we don't always see lower as better. That's what we were saying. And there are times when you can optimize gross profit with higher loss ratios as well. And it can be counterintuitive because you think lower means more profit but it also means taking a hit in terms of conversion and retention and therefore, growth. And the smart thing as far as we're concerned is to optimize not for a particular loss ratio number but to optimize for gross profit. It's what we do. And all that means is that different loss ratios for different products, different campaigns, different regions over time. There's nothing dramatic. We're not signaling any findings that are imminent or we're not guiding to a new target loss ratio or anything like that. We think the loss ratio, in fact, will continue to improve in the near term, just saying that it's important for our investors to be aligned with us about what metrics are important ultimately. And we think gross profit is the one that we're solving for and loss ratio is an input to it. I hope that clarifies that. Unknown Analyst: Yes. Sorry about that. And I guess for my second question, I know you've already adjusted your main quota share program to retain 80% of top line. Are there any other changes regarding your broader reinsurance program that you're thinking about heading into the new year given the expectation for reinsurance costs to continue to moderate? Timothy Bixby: Yes. I would say we're right on track with our typical approach to reinsurance, which is we're constantly thinking thoughtfully about what we might change or improve. But structurally, that renewal comes in July. We have the opportunity to add or subtract things during the course of the year, which we do almost never but we certainly have that opportunity. So we're constantly looking at those ways that we might help manage both the benefits of reinsurance from a volatility standpoint as well as managing capital surplus, and that really is the driver there. But we are in a great position with the renewal that came through July 1. We're heading towards a point by midyear next year where we'll be ceding just about 20% of our premiums and losses to our quota share partners. As you know, it takes a while to flow through the book once you get to a renewal as the business renews over the course of the year. The impact of that will be such that in Q4, our effective overall seed rate might look more like around 40%. So you're seeing, as expected, that decline as we move closer and closer to the next renewal. In the early part of the year next year, we'll start to get more serious with our partners as we have in the past and think through what that next renewal might look like. Unknown Analyst: If I could just sneak in one more. Any color on the competitive environment in pet? It feels like we've been hearing more public insurance carriers talking about that business more and more. Timothy Bixby: Nothing notable. I think we're still finding -- it's funny when you kind of look at the market from a competitive standpoint, you hear about either Google algorithms changing or competitors getting more aggressive and these things definitely happen from time to time. But if we look at our Q2 results, our Q3 results, our view into our guidance for Q4, it's really steady as she goes. Even frequency and severity of claims in the quarter was not notable, and that's good news for that book of business because it is -- continues to grow in terms of its share of our overall business. So while we kind of track the competitors, it's not top of the list of the things we think about. The things we are doing are working. They're working well. And pet as it has been for quite some time, is a key pillar that enables us to grow at 30% plus. Operator: Our final question from the phone lines comes from [ Luke Nelson ] with Cantor Fitzgerald. Unknown Analyst: I just have a couple of brief questions this morning. My first question being with card, it's roughly around 15% of IFP today. Where do you guys kind of see that mix trending long term? So is 25% the right ceiling? And are there limits on auto exposure we should be thinking about? Timothy Bixby: So best indicator, I think, is to kind of think back a bit to our recent Investor Day, which is about a year ago now. So it's not quite so recent but we sketch out a plan and a vision to track and drive growth at the company from $1 billion of premium to $10 billion. And what we sketched out at that time was a CAR component of that of around 40%. I would think of that as sort of a thematic share but a pretty good one. It could be more, could be less. The TAM for car is in just the U.S., not to mention Europe, which we don't have a car product in yet. But in just the U.S., it's just an enormous potential market and even just our own customer base is an enormous market for us. So there's really no restriction from a TAM perspective. It's about us optimizing the LTV to CAC, really driving that cross-sell dynamic because that's what helps us with retention. The gross loss ratio improvement was terrific. So if you think about a mid-teens ratio today and a 40% CAR share at $10 billion, your number is not far off. 20%, low 20s is certainly within reason in the coming couple of years. We -- the nice thing about Lemonade is the mix of business is quite diverse. And so that number can ebb higher or lower, and we'll still be well able to track to our growth rate targets overall but I think CAR will end up in that range that you're thinking about. Unknown Analyst: Got you. That makes sense. And then just my last question is a 2-parter, and you might have touched on it previously, but I noticed retention increased to 83% but ceding commission increased as well despite the reduction in reinsurance. So can you kind of walk us through that dynamic? And where do you expect retention to trend over the next few quarters? Timothy Bixby: Sorry, if you could -- I think I misheard your question. Was it around ceding rate? Or was it around retention? Unknown Analyst: Right. So yes, my question was, I noticed retention increased to 83%, but at the same time, ceding commission income also increased. So can you just kind of walk through the dynamic between the 2? And where do you expect retention to trend over the next few quarters? Timothy Bixby: Yes. So a couple of metrics just to pull apart there. So we disclosed a retention metric, which is a customer metric. So ADR is annual dollar retention. And just as a reminder, that's the dollars from any given cohort of business, 1 year later, how much have you retained. And that number has tracked upward nicely from the 70s to the high 80s over many, many quarters consistently. It dialed back a couple of points over the past few quarters because of our home effort to clean the book, and we had some nonrenewals there that camped that number down. We've now seen that reverse as we expected. It went from 80 -- up 1 point this quarter sequentially. So it feels like we might be back on track to have that number increase. That's customer retention, stable and improving. From a ceding commission standpoint, that's a bit of a -- that's a different part of the business, and that's really related to the premium we share and the losses we share with our quota share partners. And so that, I'd kind of send you back to our earlier comments about the quota share renewal. So at July 1 this past year, we were ceding -- or June 30, we're ceding about 55% of our book of business. That has shifted such that it will move from 55% to about 20% over the 12 months from Q3 to Q2 that we're in right now. The commission we earn on that is a variable rate commission, and that's -- you'll see that pretty clearly outlined in our 10-Q disclosures that we'll file today, so you can kind of dig into the nuances there but we continue to get a mid-20% roughly ceding commission on all the premium that we see to that partner. And so we'll see fewer dollars. That's a good thing but we'll continue to earn a healthy commission rate on all those dollars that we see for our partners. Operator: Thank you. I can confirm that does conclude our question-and-answer session here. And I'd like to conclude the call. Thank you all for your participation. You may now disconnect, and please enjoy the rest of your day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Tiffany Kanaga, Vice President of Investor Relations and ESG. You may begin the conference. Tiffany Kanaga: Good morning. Thank you for joining us for Elanco Animal Health's Third Quarter 2025 Earnings Call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Bob VanHimbergen, our Chief Financial Officer; and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.com. Today's discussion will include forward-looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the risk factors discussed in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements. Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. References to organic performance exclude the estimated impact of the aqua business which was divested July 9, 2024, and certain royalty and milestone rights that were sold to a third party in May [Technical Difficulty]. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff. Jeffrey Simmons: Thanks, Tiffany. Good morning, everyone. Elanco's strong third quarter results build on our consistent priorities of growth, innovation and cash. As highlighted on Slide 4, Elanco continues to deliver, growing 9% organic constant currency in the quarter and outperforming the high end of our guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was led by U.S. Farm up 20% and U.S. pet health up 9%. This marks 9 consecutive quarters of underlying total growth and our highest quality of growth in the 9 quarters. Innovation continues to exceed expectations, achieving $655 million in year-to-date revenue. We are further raising our full year expectations by an additional $100 million at the midpoint to $840 million to $880 million. The consistent outperformance reflects broad-based momentum from our diverse basket of innovation across geographies, species, and products large and small. The portfolio benefits of our newer products are also driving more stability in our base business. Our strong focus on cash and operational execution improved our net leverage ratio faster than planned to 3.7x at quarter-end. We now expect to end the year at 3.7x to 3.8x. Additionally, we refinanced our $2.1 billion Term Loan B facility, extending the maturities through 2032. We expect our balance sheet to be in a strong position as we exit 2025. On tariffs, our intervention actions, FX tailwinds and year-to-date execution are mitigating potential impacts and risks. We continue to expect a 2025 net impact of $10 million to $14 million and believe any likely tariff risk scenarios are covered in our 2025 guidance. With our consistent outperformance, we are well positioned to raise our top and bottom-line outlook. For the full year, we now expect organic constant currency growth of 6% to 6.5%, adjusted EBITDA of $880 million to $900 million and adjusted EPS of $0.91 to $0.94. This guidance raise considers the dynamic macro environment and our confidence in the underlying momentum, agility and strength of our business. We are turning strategy into results providing a long runway for shareholder value creation. Looking at the third quarter revenue performance on Slide 5, we break down the 9% underlying organic constant currency revenue growth. This chart demonstrates strength across our global business with all 4 quadrants growing nicely. U.S. pet health had another solid quarter, up 9%. We saw growth in the vet clinic driven by Credelio Quattro and Zenrelia and also at retail through our OTC parasiticides. It is clear that our innovation insulates us from vet visit volume declines and benefits the broader portfolio with Galliprant and vaccines also showing growth in the quarter. Moving to international pet health. We achieved 8% organic constant currency revenue growth, driven by Zenrelia, Credelio and AdTab. We are very pleased with the early results for the Zenrelia's launch in the EU and Great Britain, following our success in Brazil, Japan and Canada. We expect geographic expansion to be a tailwind for our basket of innovation in the coming quarters and years. U.S. Farm Animal delivered an outstanding quarter, up 20% on top of 11% in Q3 of 2024, bolstering our market leadership. Cattle led the way with strong growth for Experior and Pradalex, poultry vaccines also contributed to the quarter. Finally, international farm animal was up 5% in organic constant currency with growth coming from poultry and ruminants. As expected, the quarter was modestly impacted by some pretariff buying shifting to Q2 from Q3 to satisfy customer demand, primarily in China. Overall, we're encouraged by the performance of the business, supported by strong animal protein markets. Looking at Slide 6. We delivered $655 million of innovation revenue year-to-date with outperformance across a diverse basket, led by Credelio Quattro, Experior, AdTab and Zenrelia. We are again raising our innovation guidance for 2025 by $100 million at the midpoint of the range to $840 million to $880 million. This target reflects several large margin-accretive products, and they are gaining traction in the marketplace with our no-regrets launch approach. Let's further discuss the progress of our major innovation products on Slide 7, starting with Credelio Quattro. In early September, Quattro became Elanco's fastest pet health blockbuster in history and one of the industry's fastest ever, reaching blockbuster status of $100 million in net sales in less than 8 months. This is especially notable with a single geographic approval. We're seeing incredibly strong demand for the all-in-one products from both pet owners and veterinarians pushing the U.S. broad spectrum endecto market to $1.4 billion today with growth at almost 40%. We believe Quattro is best medicine and its fastest-growing animal health market, and our product is not only expanding the market even further, but we're also gaining share ahead of expectations. These gains grew from the second quarter, both into and out of the clinic. Our strategic DTC investments, our expanded sales team and distribution partners are all driving the success of this launch, as veterinarians and pet owners clearly appreciate Quattro's 3 dimensions of differentiation. First, Quattro has broad coverage. This includes multiple species of tapeworms. And following a recent label update also includes protection against the black-legged and longhorn ticks for prevention of Lyme disease. Second, Quattro kills ticks twice as fast as the competition as detailed in a published head-to-head study. And third, Quattro has heartworm coverage from month 1. We've also received positive feedback from vets and pet owners praising its great palatability. Introduction of Quattro has bolstered our broader Elanco portfolio in clinics as we now offer veterinarians a complete ecto, endo, and endecto portfolio with a variety of parasiticide coverage at a variety of price points to meet veterinarian and pet owner needs. This more complete portfolio is especially enhancing our offering for corporates where we've historically under-indexed. Cannibalization has been limited as approximately 70% of Quattro share capture has come from the competitive product switches, new starts or repeat patients. Our product ranks highest on Kynetec Puppy Index versus other broad spectrum endectos. This is supported by our puppy program and DTC investments, but mostly by the differentiated product profile and performance. Looking ahead, we are excited about Quattro's international rollout with launches expected to start in 2026. Next, on Zenrelia. We are seeing strong momentum and positive developments on several fronts as we make further inroads into the $2 billion global dermatology market that is consistently growing at a double-digit rate. We estimate our market share at approximately 5% in the countries where we have launched. Zenrelia posted its best quarter since launch. As we move through peak allergy season sales accelerated nicely, nearly doubling globally compared to the second quarter. Over 12,000 U.S. clinics are buying the product, up from 10,000 in August, and the reorder rate also continues to climb now over 80%. We have continued to achieve growth ahead of our expectations with more first-line treatment use and willingness to use, a reflection of Zenrelia's efficacy, convenience and value. We are also expanding the market with approximately 18% of Zenrelia patients being new to therapy. Zenrelia's momentum in the U.S. was particularly strong at the end of the quarter with a label update in September. Upon evaluation of submitted data, the FDA concluded that the totality of evidence supports removal of vaccine-induced disease language, which has been subsequently removed from the Zenrelia label in the U.S. This development has sparked new interest among veterinarians and increased pet owner acceptance. Also, Elanco has recently submitted additional new data to the FDA Center for Veterinary Medicine seeking to further update the Zenrelia label in the U.S. This data, peer-reviewed and published, evaluated Zenrelia's impact on dogs' immune response to common booster vaccinations. Our aim is to amend the vaccine warning to make the U.S. label more consistent with the other major geographies where it's already approved. Overall, we believe this data combined with 13 months of positive use in the U.S., along with 35 country approvals, all with nonrestrictive labels support further positive change to the U.S. Zenrelia label. In the $700 million derm market outside the U.S. Zenrelia continues its good progress, launching in the European Union, Great Britain and now Australia. You remember, we completed a head-to-head study in Europe versus the marketplace incumbent as part of the EU approval process. We are encouraged by the early results in these geographies, reflecting the head-to-head data and overall strong efficacy of Zenrelia. The newest launches follow success in Brazil, Canada and Japan. Notably, Zenrelia has double-digit percent market share in these markets, supporting our long-term belief in the product with a clean label. We believe the consistent key driver to Zenrelia's increased momentum is product testimonials on its differentiated efficacy profile. Now our OTC parasiticide product AdTab. In Europe, it continues to achieve good growth with sales up more than 25%. AdTab's robust trajectory is fueled by the April approval and launch in the U.K. and supported by data-driven strategic DTC investments. AdTab is now the market leader in the European ISOC OTC market and the only product in the space that can be used in both dogs and cats. Finally, on CPMA, our treatment for the deadly canine parvovirus we do expect growth to remain tempered in the near term. We are working to expand access to shelter promotions. Moving to farm animal. Experior continues to grow rapidly, up 70% in Q3 on top of more than 100% growth in Q3 of 2024. We continue to benefit from the historically small U.S. cattle herd size, which reached the lowest midyear count in more than 50 years of record keeping. This dynamic is driving stronger producer economics and sticky demand with Experior's customer retention rate remaining over 90%. Looking ahead, Experior does face stronger comparisons as it laps the combination clearance for heifers. However, there are early positive signs of herd rebuilding, representing a multiyear tailwind. We see significant runway for this blockbuster and the benefits of its portfolio synergies and an estimated potential market of over $350 million in the U.S. and Canada, with also geo expansion as another expected tailwind over the longer term. Lastly, regarding Bovaer, the product continues to grow, but at a more measured pace than initially projected. We see consistent demand from CPG brands, which supports sustained interest and consistent cow numbers. As we've seen with other innovative farm animal products, the adoption curve can take time. However, our experience shows that once these products are integrated and their value realized, they become sticky, providing significant and lasting benefits to farmers. Overall, we continue to see substantial value in Bovaer for both our CPG partners and the producers we serve. Moving to Slide 8. We offer some recent highlights across the 3 parts of our IPP strategy, Innovation, Portfolio and Productivity. First, on Innovation. Ellen and her team have refilled the pipeline and are progressing our next wave of blockbuster products. She's created an organizational capability to generate a consistent flow of high-impact innovation. More near term, IL-31 remains on track for commercialization in the first half of 2026. We are in the final stages of the USDA dossier review. Given our data submissions and constructive conversations with the USDA, we're cautiously optimistic that the product will be approved in the fourth quarter. However, the lack of ADUFA time lines and the government shutdown introduced some potential for variability beyond our control. Our commercialization time line can absorb a modest potential delay from the shutdown and perhaps, most importantly, this year's progress and growth innovation and cash has clearly demonstrated that our results are driven by our total portfolio. As our diverse portfolio of innovation scales, it also stabilizes our base business, driving overall industry-leading growth. Our U.S. Farm Animal business is consolidating its leadership, having achieved 11% growth on a trailing 12-month basis, led by beef cattle. At the same time, our life cycle management efforts continue to strengthen our portfolio. For example, Credelio recently became the first ever FDA product to receive emergency use exemption for treatment of New World screwworm in dogs. Price is also an important portfolio growth enabler. We have achieved 2% price growth year-to-date, and we continue to expect the full year to also be up 2%. While pricing was flat in the third quarter, this performance aligned with our expectations, representing fluctuation in customer and product mix. Remember that our newest launches like Quattro are not reflected in price. Our strategy continues to align price with customer value. Finally, on productivity, we continue to rapidly pay down debt and strengthen our balance sheet. We now expect to improve our net leverage ratio by 2 turns in just 2 years with the under 3x milestone in sight in 2027, especially as our company-wide margin enhancing initiative, Elanco Ascend, drives meaningful efficiencies beginning next year. Our recent debt refinancing further strengthens our balance sheet with an improved capital structure that both extends our maturities and lowers our cost of debt. We expect our net leverage ratio to benefit on multiple fronts ahead growing EBITDA and debt paydown. And on the manufacturing front, we remain on track for a strategic expansion of our facilities in Fort Dodge, Iowa and Elwood, Kansas with the latter supporting our MAB platform for IL-31 and beyond. With that, I'll pass it to Bob to review our third quarter results and financial guidance. Robert VanHimbergen: Thank you, Jeff, and good morning, everyone. I will focus my comments on adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in reported results. Starting on Slide 10, we delivered $1.137 billion of revenue, representing an increase of 10% on a reported basis. Organic constant currency growth was 9%, primarily driven by an increase in volume. As anticipated and as Jeff noted, price was flat in the quarter. On Slide 11, you'll see revenue by the 4 quadrants of our business. Globally, pet health revenue increased 8% in constant currency in the third quarter. In the U.S., pet health delivered 9% growth, driven by demand for our key innovation products, Credelio Quattro and Zenrelia. Outside the U.S, our pet health business grew 8% in constant currency, with growth led by Zenrelia. Moving to farm animal. Our global business achieved 10% organic constant currency growth. The U.S. farm animal business grew 20%, driven by the strength of Experior and poultry vaccines. Outside the U.S., the farm animal business contributed 5% growth in organic constant currency, driven by cattle in Europe and poultry in both the LatAm and APAC regions. Continuing down the income statement on Slide 12, gross margin increased 90 basis points to 53.1% primarily driven by productivity from increased volume. Our operating expenses grew by 7% year-over-year, largely driven by strategic investments in the global pet health product launches. The increase was slightly below our 8% target as some expenses will shift to the fourth quarter. Interest expense totaled $34 million representing a $12 million reduction from the same period last year. This decrease reflects our continued progress in deleveraging. On Slide 13, we provide walks to illustrate our year-over-year performance and adjusted EBITDA and adjusted EPS. Adjusted EBITDA was $198 million, an increase of $35 million. Adjusted EPS was $0.19 in the quarter, an increase of $0.06 year-over-year. On Slide 14, we provide an update on our cash, debt and working capital. Cash generated from operations was $219 million in the quarter compared to $162 million in the same quarter last year. We ended the quarter with net debt of approximately $3.3 billion and a net leverage ratio of 3.7x, better than expectations. Now moving to Slide 15. We have communicated a consistent capital allocation strategy with debt paydown as a primary use of free cash flow. We are pleased with the progress we have made on deleveraging this year, having already exceeded our 2025 debt paydown target with gross debt paydown of $562 million. We expect to end the year with net leverage between 3.7x and 3.8x. Longer term, we aim to be under 3x levered and anticipate capital allocation flexibility below that level. On Slide 16, we provide an update on our debt capital structure. On October 31, we successfully refinanced our $2.1 billion Term Loan B facility into 3 new debt facilities. Importantly, this refinancing activity improves our debt portfolio's maturity risk profile by extending the 2027 maturity to 2029 and 2032 and reduces our cost of debt. Looking ahead to 2026, we forecast interest expense to increase by approximately $15 million year-over-year. The projected increase is due to the expiration of a favorable interest rate swap amortization benefit in the third quarter of 2025, which originated from a 2022 interest rate swap restructuring. The increase is inclusive of the interest savings secured through our recent debt refinancing transaction. Now let's move to our guidance, starting on Slide 18. We have consistently delivered on our commitments this year. And this momentum gives us confidence to once again raise our full year expectations. We now expect to deliver organic constant currency revenue growth of between 6% and 6.5% versus our previous outlook of 5% to 6%. We are increasing our expected reported revenue range to be between $4.645 billion and $4.67 billion inclusive of an expected $30 million tailwind from foreign exchange rates since our August earnings call. Slide 19 provides year-over-year bridges for 2025 adjusted EBITDA and adjusted EPS. And Slide 28 in the appendix provides a number of additional assumptions to help support your modeling efforts. We are also raising adjusted EBITDA guidance by $20 million at the midpoint of the range. The increase reflects our $28 million outperformance in Q3, partly offset by $10 million of increased investments in our recent launches and $5 million in shifted timing. We're also passing through the $15 million in FX tailwinds for adjusted EBITDA that was previously held back with macroeconomic uncertainty, half of which benefited the third quarter results, with the remaining expected to benefit the fourth quarter. For adjusted EPS, we are raising our guidance by $0.05 at the midpoint, bringing the new range to $0.91 to $0.94. On Slide 20, we continue to expect net impact of $10 million to $14 million on adjusted EBITDA in 2025 due to previously announced tariffs. This estimate is included in our guidance and considers our multiple mitigation strategies. For 2026, we will continue with our prudent and balanced approach to guidance and proactive interventions as we navigate potential changes in tariff exposure. Our fourth quarter guidance presented on Slide 21 includes organic constant currency revenue growth of 4% to 6%. On a reported basis, we expect $1.085 billion to $1.11 billion in revenue. The year-over-year increase in operating expenses is expected to be approximately 10% in constant currency, including the incremental DTC investment and a shift in timing of some expenses. As a result, we anticipate adjusted EBITDA of $168 million to $188 million and adjusted EPS of $0.09 to $0.12. Finally, as usual for this time of the year, we provide some preliminary context on our expectations for 2026 on Slide 22. We see a clear path for sustainable competitive revenue growth through our diverse portfolio of innovation, continuing to scale globally on top of a stabilizing base. This innovation helps to insulate us from macro headwinds like declines in U.S. vet visit volumes. Price should also contribute to our revenue growth. In pet health, while we recognize pressures for competitive launches, we believe we are well positioned to gain incremental share, both in the U.S., where our corporate offering benefits from our more complete portfolio and globally as we launch our innovation in new markets. We also expect to build on our OTC pet health retail leadership. On the farm animal side, while we are facing difficult comparisons, especially in the U.S., there remains a runway for continued solid growth, driven by our new products in cattle and favorable producer economics. We expect to bolster our leadership in cattle and poultry. We continue to expect EBITDA margin expansion beginning in 2026, led by general and administrative cost savings and manufacturing efficiencies under the Elanco Ascend program. This is a company-wide initiative that we anticipate will drive additional productivity and capabilities in key areas, as we're looking beyond the margin benefits, we can actually capture through better mix, consistent growth and moving past heavier launch investments in 2025. There's more we can do in digital, automation and AI to leverage those capabilities across the organization. Procurement is working to identify opportunities with suppliers to help offset inflation. Tariffs remain a headwind and a risk but have been manageable to date with our strong execution and proactive mitigation plans. Lastly, as I shared earlier, we expect a step up in interest expense in 2026 of approximately $15 million. From a cash perspective, we expect accelerating free cash flow to fuel additional debt paydown with net leverage improving towards our goal of under 3x. Now I'll hand it back to Jeff for closing comments. Jeffrey Simmons: Thanks, Bob. Elanco knows our charge, consistent, reliable delivery to our customers and shareholders. and I'd like to thank our teams for the disciplined execution and the delivery this quarter. Employee engagement is at a high in Elanco, which I believe is a strong leading indicator, demonstrating confidence in our future. We know the hard work continues in this competitive fast-growing animal health industry and we are committed to continue to deliver for our customers. I see a durable path forward. our IPP strategy is driving results, positioning us well to raise our 2025 guidance even in a dynamic global backdrop. Elanco is clearly in a new era of growth and innovation, with significant opportunity for continued shareholder value creation. We look forward to sharing more on our strategy, our financial outlook and our innovation pipeline at our December 9 Investor Day. With that, I'll turn it over to Tiffany to moderate the Q&A. Tiffany Kanaga: Thanks, Jeff. We'd like to take questions from as many callers as possible. [Operator Instructions] Operator, please provide the instructions for the Q&A session, and then we'll take the first caller. Operator: [Operator Instructions] Our first question comes from the line of Umer Raffat from Evercore. Umer Raffat: Congrats on the quarter. I wanted to clarify something, Jeff, you mentioned, unless I heard it wrong, did you say Quattro did $100 million in 3Q? And if so, what does that mean for innovation basket ex Quattro on a year-over-year basis? And then secondly, to the extent Quattro is annualizing in that $300 million to $400 million range right now, what do you see as a realistic peak sales potential? I guess, thinking out loud, why can or can't it be $1 billion at peak? Jeffrey Simmons: Thanks, Umer. I appreciate the question. Yes, let me clarify. We announced in September that it had reached $100 million in the year up till September. So it wasn't in the third quarter. Let me clarify that. But let me put a little color though, to the question. There's no question, we believe that this is our fastest blockbuster to date. It's only in one country and to reach that in 8 months. I think it shows a lot about the value of the differentiation of the product. A little bit more color just on the product itself. I think the differentiation is playing out in the field as well as we're not only taking share, but the broad spectrum endecto market continues to grow. It's a $1.4 billion market Umer. It's growing at 40%. So we've got the rise of the market combined with the share that we're taking. And we're only in 1/3 of the clinics at this point in time. So we're adding business inside the clinics we have with a return rate of over 80% of reorder rate. And at the same time, we're seeing really positive indicators. And the one I'd point to is actually the Kynetec data on the puppy index. I mean, today, we've got the highest puppy share overall. And when you look at that, that means that puppies are a higher percentage of our total Quattro patients compared to any competition. And this is a lead indicator of the vets confidence in this product and that this product, I've said, has been best medicine. I now believe it has the potential. And in my eyes, it is the best-in-class product and the fastest-growing animal health market. So it's set up well. There's a lot more room to grow. We'll be globalizing this product with international approvals next year. And we see really, really nice upward opportunity. Operator: Our next question comes from the line of Jon Block from Stifel. Jonathan Block: Jeff, I'm going to start with maybe just asking for a little bit more color on the U.S. Zenrelia, call it, like cleaner label aspirations and maybe the timing behind that initiative? I know you took a step forward. You mentioned the share gains accelerating exiting 3Q. But I mean, obviously, removing the box warning would be a big step forward. And I'm asking because you also referenced, I believe, the higher share gains in the international markets for Zenrelia despite being there for a shorter period of time. So I would love any color on what needs to get done and then maybe the timing behind that? And then I'll ask a follow-up. Jeffrey Simmons: Yes, Jon. I'll point to the 3 markets that we introduced this product into first outside of the U.S., Japan, Canada and Brazil, I highlight kind of new data here showing that we're a double-digit market share in those markets. In my 36 years in animal health, I've never seen a product with the efficacy profile and the testimonials that we've seen over the last year with Zenrelia. We have something here that you know this market is growing double digit. It is an unsatisfied market, and we've got a product that we think is clearly differentiated. So with -- and it's off to a good start in Europe as well. So yes, we have a multipronged approach on the label. The first one was the PCR data, that allowed us to remove the fatally induced disease off the label. And then this last quarter, we have submitted another package of data, peer-reviewed published data all around the booster side, and we do believe that combining that data will hopefully satisfy the FDA's need to be able to see this as well as 13 months of use in the U.S., over 0.5 million dogs. All of this, I believe, will further support a label that could be updated to look more like the international markets. I will say, though, that label change did in September and October, you can see we're adding close to 2,000 clinics a quarter but the actual use monthly sales per clinic has grown here in the U.S., nearly 50% since Q1. So our base is becoming more loyal. We're moving to more first-line treatment. And I think that's all coming back from the testimonies on efficacy. So more to come, the regulatory strategy is working, big milestone with this other data submission that we made here in this last quarter. Your follow-up, Jon? Jonathan Block: Yes. No, that was great color. And then maybe for the follow-up, and Bob, this might be for you. But the 2025 EBITDA guidance, the midpoint is now $890 million, it's up from the initial. I think I got this right, of $850 million. But importantly, that's with a good amount of incremental OpEx investments all throughout 2025 along the way. So I'm curious where you guys are with those incremental OpEx investments. How do we think about that going into '26? In other words, does that continue to occur? Because maybe this is just a moving target. In other words, as you continue to see favorable returns do you just sort of keep your foot on the gas. So just maybe asking for some context in that regard. Robert VanHimbergen: Sure. Yes, Jon, thanks for the question. Yes. So you're absolutely right. Our previous guidance had a range on EBITDA of $850 million to $890 million. And so we did range -- or did provide an updated range of $880 million to $900 million. So we did raise the guide at the midpoint, fueled by the $28 million beat in Q3. And again, I want to highlight it was in my prepared remarks, but that did include $8 million of foreign exchange with the other $7 million of FX coming in Q4. But then the 2 offsets, one is $10 million of incremental OpEx. And it's continuing down this no-regrets approach to launches. We've been extremely pleased with the innovation basket, raising that bar by another $100 million. And we're going to continue to use a data-driven approach with DTC and continue to drive that top line. And I have the opportunity to meet with the team again here recently and the data suggesting our marketing is working, and we're seeing that top line growth. So as I think about 2026, Jon, listen, we're still going to use data to drive the right behaviors and again, continue that no regrets approach. But with that being said, I do -- we do see 2026 to show top line growth, EBITDA growth and EPS growing and it's because of the strong market fundamentals we have, and our products are performing extremely well. Operator: Our next question comes from the line of Andrea Alfonso from UBS. Andrea Zayco Narvaez Alfonso: Congrats on a nice quarter. Just a quick question on the slide outlining the early considerations for '26. We did notice that there was a call out on consumer macro pressure and U.S. debt visit declines. It seems to be a bit of a newer call out versus when you outlined considerations for 2025 a year ago. So just curious if anything has changed structurally in 3Q versus 2Q, thoughts on the makeup of the non-wellness visits and whether there's been some consumer reticence around the use of therapies. And it also does seem that third-party data is showing some improvement, at least on the non-wellness side. So curious if that mirrors exactly what you're seeing thus far. Robert VanHimbergen: Yes. Maybe I can answer a few of those questions. Andrea, and I'll let Jeff pipe in. But really, nothing's changed quarter-over-quarter with our considerations. We are taking a grounded and disciplined approach to guidance, and so we'll be consistent in how we guide. And so just being consistent with prior years, we're showing early considerations. And obviously, competition is something that we have our eyes on and feel very good about where we are for 2025, but we're taking a balanced approach. And obviously reflecting on not only competition, but the macro environment as we think about next year. Jeffrey Simmons: And let me pick up, Andrea, I think it's important to just give our lens on vet visits. They're important. They are stabilizing. But I want to let you -- let me explain a little bit of, we believe, through our lens, vet visits are maybe a little bit over-indexed. And so -- and we are, we believe, insulated from them even more so going forward. And let me just explain. I think it's the strength of the markets that we play in and the strength of our strategy. First, we're in strong growing markets. I think these are very important points. We're in strong growing markets, endecto is up 40%, derm is up 13%. Second, we've got differentiated innovation, best medicine in these. So we're taking share with Zenrelia, Credelio Quattro and IL-31 is coming. I think the third is just this whole 4 dimensions of our portfolio. We're one of only 2 companies that can bring that. And we're seeing proof points this quarter with both pain and vaccines actually growing. And lastly, as we rolled in Bovaer, we've been talking about omnichannel, the omnichannel strategy is working. We've got the largest vet sales team we've ever had. We've got significant media with good data, as Bob just mentioned. We've got very unique distribution agreements today that I think give us competitive advantage. And lastly, we are the #1 pet retail company. So Elanco is meeting more pet owners where they want to shop at more price points than any other animal health company. And I think that sets us up very nicely to say we don't really see vet visits and even some of the consumer trend. We're entering this time as durable and as competitive as any animal health company. And again, I see that in a really balanced positive way, not just in '25, but definitely going into 2026. Operator: Our next question comes from the line of Michael Ryskin from Bank of America. Michael Ryskin: Great. Congrats on the quarter and the update. I want to go back to something I think that Jon touched on in an earlier question on the margins and just sort of the investments needed to sustain it, especially around the innovation component. I think you've seen really good traction with Credelio Quattro, obviously, so far, Zenrelia seems like it's accelerating very, very nicely. As we think about going into year 2 and year 3 of these, very competitive markets, you're going to see more competitive entrants from Merck [indiscernible]. You're going to see possibly Bravecto have something coming up. So competition is only going to ramp up. Can you talk about how you think about that no regrets approach to supporting them going forward? How should we think about incremental margins as these ramp and become over $100 million, over several hundred-million-dollar products? What should that ramp look like in year 2, year 3, year 4 launch? Because this should become meaningfully margin accretive. I'm just trying to think through the timing of that relative to the investment needed to support them. Jeffrey Simmons: Yes, Michael, let me just share a few comments here relative to this and then I'll maybe have Bob share a little bit from an investment perspective. But yes, the no regrets approach, we've been working on this for multiple years and preparing the capability, hiring the expertise from around the industry, making sure we've got good lead indicator data for the legs in the industry, and now we're globalizing faster than we ever have. So I start with the differentiation is significant. And even as we start to enter a derm market in Europe that's very competitive, the early signs are that we've got a differentiated product. We've got launch capabilities that are, we think, close to best in industry and all of that's going to allow us to say, "Hey, we globalize the innovation. We really, really doubled down on showing the differentiation. We are in growing markets." I think that's the other thing. As you look at derm continues to expand, as we pointed to, just we've got 18% of Zenrelia use coming from first-time users. So we are making these markets bigger, and we will continue to lean in. Today, we are seeing every dollar of investment give us significant returns. So -- and we are expanding, and we'll continue to structure our organizations to have as much share of voice as possible, first with our team, second with distribution, third with omnichannel. So all of that put together, I think we're in as strong of a competitive position, as I've seen as a company and our portfolio were not a company dependent on one product. We've got a portfolio of products. And our para, I'll point out portfolio is probably as strong as any in and outside of the vet clinic as well. So maybe, Bob, just from an investment philosophy perspective and the data we're looking at. Robert VanHimbergen: Yes. So thanks, Jeff. So listen, I would highlight that this basket of innovation already has margins above our corporate gross margins, all right? So that's the reason we continue to lean in. And again, using data to support the effectiveness of our DTC. But as I think maybe just holistically about margins, we're going to continue to see growth. And so by leveraging our existing cost base, we're going to see natural margins come through just the volume as well as the natural mix. And then I want to again rehighlight what we talked about last quarter is launching Elanco Ascend. And that's going to help us go beyond just the natural mix benefits of the innovation as well as the volumes. But really helping us be proactive in accelerating efficiencies across the organization, and that's going to be not only within our 4 walls and manufacturing facilities. It's going to include G&A, but also our procurement team is doing a fantastic job already leaning in and finding cost savings across the organization. So with that being said, like listen on Investor Day here in a month, really looking forward to sharing more about the direction of the company and sharing a lot more on Elanco Ascend. Michael Ryskin: All right. And can I squeeze in a quick follow-up. Really strong growth in livestock, not just this quarter in farm animal, but a couple of quarters in a row. You've also seen really strong results from Zoetis, from Phibro, Merck on this. Like longer term, we think of livestock as a low to mid-single-digit market. It seems like '25 is a particularly good year for everybody. Could you just give us an update on sort of what's driving that? How sustainable that is? Is this a 1-year cyclical event? Or is this a multiyear event? Just how do broad start I think about livestock in '26 and '27, maybe? Jeffrey Simmons: Yes, Michael, I think as you and I've talked in the past, it's probably one of the more underappreciated things about Elanco and even our industry, farm animal is still bigger than pet health. It is a very global industry. I would just point to a few things on the industry and then on Elanco. We continue to see the demand for protein growing. I mean it has rebounded. I say lead indicators, the U.S. dairy industry is now well over $10 billion of investment just because of this trend of where things are, and we're looking for a new dietary guideline coming out here in the U.S. that I think is going to increase saturated fats, dairy and animal protein. So there is a resurgence. I was on the phone yesterday with one of the largest CEOs and he -- and they're seeing it globally, and they're expanding globally. So I think overall, that is part of it. And look, when it comes to whether it's [ biles ] and prevention of disease to food safety, to productivity, to a small cattle herd of 50 years in history, producers are making money, but producers are willing to spend because every pound of protein matters more today than ever it has. So I think that's important. And we point to ruminates, dairy and beef, and we point to poultry is where we think we can take competitive advantage. And our strategy has been clear, and we will have José Manuel de Simas and Ramiro, 2 of the best, I think, in the industry highlight this 4-pronged strategy. It's innovation, it's winning portfolios. It is value beyond product and that it is competitive kind of customer interface, that farm gate access and that strategy is playing out well. It isn't just about Experior. That's been a key driver. It's been about building winning portfolios, especially in ruminants and in poultry, and we'll share more about that on -- in December. Operator: Our next question comes from the line of Erin Wright from Morgan Stanley. Linda Bolduc: This is Linda Bolduc on for Erin Wright. So given some recent competitive launches in [indiscernible] and parasiticides, any thoughts on how it has evolved for the company in third quarter and into fourth quarter to date? Also, any thoughts on how much competition has been embedded in the latest guide? And will that amount ramp significantly in 2026? Jeffrey Simmons: Yes. We have the competition in our guidance ranges for 2025, and we've got a good view on it for 2026. And specific to the para market, as I've highlighted, we've not seen any impact on competitive entries and especially the broad-spectrum endecto market that's grown 40%. We've really observed also no real material impact on new para competitors, even in the international markets. So I think in the lane that we are competing in, we see a very strong marketplace. And then again, our differentiated portfolio is allowing us to take share. Linda Bolduc: That's great. And any additional color for the topics covered in the upcoming Investor Day in addition to Elanco Ascend? Jeffrey Simmons: Yes. We have -- thank you for the question. We've actually reached out to our investors when -- and really, what we're planning to do is really the content will reflect the investor feedback. So we heard your desire to get more clarity, as Bob just highlighted on our growth trajectory. Also on the margin improvement and Elanco Ascend opportunity, you'll see aspects of our pipeline and also our leverage reduction plan. So we'll really double down on our IPP strategy. And most importantly to me is you'll be able to have a chance to meet and hear that directly from the executive team. So again, December 9 in New York City and looking forward to a real efficient high-value 3 hours between 9 and 12. Operator: Our next question comes from the line of Daniel Clark from Leerink Partners. Daniel Christopher Clark: I wanted to ask on the innovation sales, obviously, target up a fair amount once again here. Can you just help break out maybe what the drivers or main products of that guide increase were? And how should we think about growth of the innovation basket as we look ahead to next year? Robert VanHimbergen: Yes. So thanks for the question. So again, we're really pleased with what we've seen already on the basket of innovation. We did raise the guide as $100 million, as Jeff has highlighted. I do want to highlight a bit on timing, right? So as you think about the first half of the year. We are more weighted just due to the seasonality of the business with parasiticides more weighted in the first half. And AdTab specifically in Europe is a first half-weighted product we have. But we think about this as a basket. Now, that being said, I'd tell you, in the year, we're seeing great progress with Experior, AdTab, Credelio and Zenrelia and more specifically in Q3. But as we think about moving forward, listen, we've got a lot of momentum going into 2026. We're in growing markets, and we're seeing share improve as well. Operator: Our next question comes from the line of Chris Schott from JPMorgan. Ekaterina Knyazkova: This is Ekaterina on for Chris. Congrats on the quarter. So first question is just on Zenrelia and any initial thoughts on the launch in Europe. Just how that's trending relative to your expectations? And any surprises as you kind of think about the competitive landscape and just level of promotional activity you're seeing? And then second question is just on Credelio Quattro. Do you have a sense of what percent of your volume is coming kind of from the vet clinic versus online? And how do you see that changing over the next several quarters? And any interesting trends you're seeing as you kind of look at both channels. Jeffrey Simmons: Yes. Thank you. Yes, we have launched in Europe and Great Britain, and its still early days. But what I would say is we are ahead of our launch expectations. We're off to a very fast start. And I think the headline is the head-to-head non-inferiority study that we actually did compared to the incumbent is playing out in the marketplace. I mean, we're using that data with customers, and we're seeing that in the testimonials early on that this is a product that we believe, has really strong efficacy profile as well as the convenience and value overall. But that's the early days playing out. And as I said, the earlier markets, I would point to Japan, Brazil and Canada, we've seen us move now into double-digit market share. So -- and again, those trends are continuing. We'll keep you updated. Relative to Quattro, as I highlighted earlier, on Quattro, you've got a really growing market in the U.S. We've seen, as I just highlighted, a move to get to $100 million in less than 8 months in one country is the fastest blockbuster we've seen with a whole lot more runway. We're adding close to 2,000 clinics per quarter. And I would just say that when we look at the -- where it's coming from, we're getting about 75% of our growth from switches from competition, new starts and repeat patients, and I'll point again to that puppy index to really highlight that is a great lead indicator for us to say we've got a nice runway of growth. And then we will see this profile, we think, play very nicely in the international markets. Yes, we have Credelio Plus. But now when we put Quattro into these markets, we believe that international will be a nice move also for 2026 growth in para with Quattro as well. Operator: Our next question comes from the line of Brandon Vazquez from William Blair. Brandon Vazquez: I'll ask 2 upfront, a little bit related in terms of run rates into next year into 2026. So you were talking earlier about OpEx growth and no regrets kind of investment, which clearly has been coming to fruition within the sales growth. and even, frankly, within profitability growth. The question being, I think you said expectations are now for 10% OpEx growth for the year. As we go into 2026. Is there a tail on some of these investments? Or should we be basing around kind of a double-digit OpEx growth into next year as well? Basically asking, can you modulate those back? And then similarly, for '26 on the top line, the follow-up that I'll just ask now is you give a helpful slide on the tailwinds and the headwinds going into next year. I think encouragingly, this is the first year in a while that there's a lot more tailwinds than there are headwinds. So is it safe to assume that we should be modeling, I think like the Street has an acceleration of the business into 2026. Jeffrey Simmons: Yes. So maybe I'll give you just a couple of points for consideration there. So the 10% is really for the quarter, not for the year. But again, we'll be focusing on data to drive decisions on investments. But -- the thing I would highlight again is the Elanco Ascend. We are going to be operationally excellent in G&A. And you could actually look at our 10-Q, you can see the effectiveness we've had on G&A, it's actually down year-over-year, but we've been leaning into R&D and DTC and marketing spend. And so I would expect that trend to continue and us continue to be operationally excellent with Ascend coming in. But again, on your point on 2026 tailwinds and headwinds, listen, we have a strong -- we're operating in a strong market. Our products are performing extremely well. We have momentum going into 2026. And so again, as we sit here today, we believe we're going to have top line growth, EBITDA growth and EPS growing. Operator: Our next question comes from the line of Navann Ty from BNP Paribas. Navann Ty Dietschi: Can you discuss the pricing and promotional strategy of Zenrelia and Quattro including the extent and the length of promotional activity? And then I have one on Bovaer. Is that status quo on governmental incentives? And can you discuss the progress on pivoting to productivity focus. Jeffrey Simmons: Yes. Thank you, Navann. Yes, our -- in the U.S. with Zenrelia. We've highlighted that we've been -- we priced initially in the market. Things have changed a little bit, but at a 20% discount because of the label. What I would say is the value profile is growing, and we're excited about that. And over time, we will price to value. In Europe, we've not highlighted our detail there, but the label is different. The value profiles being seen very strongly, more details overall. And then really on both Zenrelia and Quattro, this increased investment, Bob was talking about -- it's a combination of multimedia. It's also including an increase in our sales force and sales force incentives as well as distribution. So it is a multipronged approach to have as competitive share of voice and really next-gen commercial in the field. So that will be -- continue to be our lean-in strategy even going forward. On Bovaer, yes, we highlighted coming into 2025 that we did not have the incentives. But what I would highlight is we've seen really good demand from the CPG companies, and we've really repositioned Bovaer to where Bovaer is helping the CPG brands, the major dairy brands that buy milk, they're utilizing Bovaer to really and paying for through our inset market and dairy producers are actually getting the benefit from that. We noted even back a few quarters ago, we had $10 million in the quarter really that was going from CPG companies into the dairy producers, and that will continue to be our strategy going forward. Operator: Our last question comes from the line of Andrew Dusing from Cleveland Research. Andrew Dusing: Just want to ask 2 quick, I'll ask them upfront. On pricing, I thought that was called out for a driver for '26, and I don't want to get too far ahead of the guide. But maybe I wanted to dig in specifically on your thoughts on the pet side of things. I think the industry the last couple of years has seen pet pricing up in the 3% to 4% range. I think you look at this year with Elanco, it's probably closer to 1.5%, if my math is right, strategically. I guess as we think about Elanco for FY '26. Can you guys get into that like normal range? Or should we even think there's potential to be above it when you throw in the innovation, lapping some of the launch promos. Any commentary on pushes and pulls or directionally, what we should think about pet health pricing would be helpful. And then on Zenrelia, great to see the progress here. I wanted to ask on go-to-market. You've mentioned the strong distribution agreement earlier today. You did have a competitor come out and give their largest derm product to distribution kind of at the end of September. I'm curious just feedback on how October has gone, if there's been any changes due to the distribution changes at a competitor. Robert VanHimbergen: Yes. So I'll take that first one here. Just a couple of tidbits on price. And so our strategy is to continue to align price with customer value. But what's an important factor to remember, Andrew, is that our launches are excluded from our pricing calculation. So Quattro and Zenrelia, for instance, those are excluded from pricing calculation today, and you'll see that lap in 2026. So our 2026 price will include those current year launches. Jeffrey Simmons: Yes. And Andrew, on Zenrelia and the change, we've been very consistent. I think it's what's put us in a really nice position with distribution. We've got great relationships. They're adding a lot of value to us. And our agreements have been very consistent. And most importantly, we offer the total portfolio. And the highlights that you just had with competitors, we've seen them be more selective to one SKU, maybe not the other SKU, year-to-year a lot of change. And we've really prided ourselves in being very consistent partners with distribution, and we believe that's paid off, and that's differentiated. Operator: Thank you. I will now turn the call over back to our CEO, Jeff Simmons for closing remarks. Jeffrey Simmons: Yes. Thank you, everybody, for your time. As you see, we've entered Elanco into a new era of growth and innovation, built on 9 quarters, more than 2 years of consistent reliable delivery. Our basket of innovation is performing and beginning to globalize driving renewed opportunity in the full portfolio, while our R&D team is laser focused on delivering a consistent flow of high-impact innovation, so this will continue. Most importantly, our Elanco team is highly engaged and driven by creating value for our customers, and our vision to make life better. And I would just say we're turning strategy into results, and I want you to be assured that we're staying very disciplined and balanced as a company. We welcome being an execution and show me story and it is our intent to create long-term value for you as investors, not just this quarter but going forward into the rest of the decade. We look forward to seeing you all at our Investor Day on December 9. Thanks for your time today. Operator: Thank you for joining the call today. You may now disconnect.
Operator: Good morning, and welcome to Sila Realty Trust Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the conference over to your host, Drew Miles, Senior Associate of Capital Markets and Investor Relations for Sila. You may begin. Drew Miles: Good morning, and welcome to Sila Realty Trust's Third Quarter 2025 Earnings Conference Call. Yesterday evening, we issued our earnings release and supplement, which are available on the Investor Relations section of our website at investors.silarealtytrust.com. With me today are Michael Seton, President and Chief Executive Officer; and Kay Neely, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts, such as statements about expected financial performance are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings. Please note that on today's call, we will be referring to non-GAAP measures. You can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our third quarter earnings release and our earnings supplement, both of which can be found on the Investor Relations section of our website and in the Form 8-K we filed with the SEC. With that, I will turn the call over to Michael Seton, our President and Chief Executive Officer. Michael Seton: Thank you, Drew, and good morning to everyone joining us today. As we reflect on the third quarter, I am pleased to report positive results that continue to exemplify the resilience and strength of Sila Realty Trust's investing platform. Our steadfast commitment to pursuing prudent, accretive growth has consistently yielded meaningful results for our shareholders, reinforcing the value of our strategic long-term approach to building our company. During the quarter, we made significant strides to further expand our net lease health care real estate portfolio by making several key investments in lower cost patient settings. Our $16.3 million acquisition of the Southlake portfolio comprised of a medical outpatient building and an adjacent ambulatory surgery center operate symbiotically and demonstrate the type of necessity-driven health care real estate that is central to our investment thesis. These buildings are anchored by investment-grade affiliated tenancy and benefit from strong operational synergies and are strategically located in Southlake, Texas, an affluent suburb of Dallas. The overlapping physicians who are uniquely aligned in their ownership of the ASC tenant seamlessly transition from providing patient consultations in the MOB to surgical procedures in the ASC. Furthermore, the ownership affiliation with and proximity to Baylor Scott & White Medical Center enhanced the overall tenancy, acting as a referral network for strong patient volumes. In addition to the Southlake acquisitions, during the quarter, we closed on the $70.5 million Reunion Nobis portfolio, which is comprised of 2 newly constructed state-of-the-art inpatient rehabilitation facilities located in Plano, Texas; and Peoria, Arizona. These purpose-built facilities operated by an experienced and well-regarded partner and Nobis Rehabilitation Partners serve 2 of the fastest-growing markets in the United States. Both the Southlake and Reunion Nobis transactions, which total approximately $87 million, demonstrate our laser focus on acquiring best-in-class net lease health care assets in markets with strong and growing demographics. In addition to the achievements on the acquisition front during the quarter, we have had success at sourcing opportunities to deploy capital at attractive yields to serve our existing tenancy. In the first example, PAM Health entered into an amended lease in May for a facility, which we own in San Antonio, Texas, whereby Sila is providing approximately $5 million of capital at an attractive yield for the property's redevelopment as a 34-bed inpatient rehabilitation facility. The commencement of operations at this location is anticipated for December 2025. Please note that PAM Health has been paying full rent to Sila as it has anticipated repositioning the facility to better serve the San Antonio marketplace. Base rent will increase to reflect Sila's additional capital deployment upon commencement of operations, and Sila will also enjoy the benefit from a new 20-year triple net lease term. As another example, we have made significant strides at our Dover Healthcare facility located in Dover, Delaware, which is tenanted by a joint venture between Bayhealth and PAM Health. Sila purchased the facility in April 2025 for $24.1 million. During the third quarter, we acquired adjacent land to the facility to support an approximately $12.5 million expansion of the building, which we expect to be completed by the end of 2026. Sila expects to generate a highly attractive yield on the deployment of its capital to expand the facility and benefit from a new 20-year triple net lease term, which commences upon completion of the expansion. This development will add nearly 13,000 square feet and up to 12 new beds to the facility, a much needed increase to serve the high demand of the patient population in Dover, Delaware. As a final example, we expect to have a similar expansion in capital deployment opportunity at our PAM Health and University of Kansas IRF in Overland Park, Kansas, which is anticipated to cost approximately $16 million. This expansion will add 2 additional floors and 17 new beds, which we expect to commence and be completed in 2026. Collectively, the opportunities, which I just mentioned, along with others that we have in the pipeline, are our concerted response to the ongoing demand for high-quality health care services in the markets in which we operate. These expansion opportunities underscore our consistent ability to enhance value for Sila's shareholders, generating cash yields on our incremental capital deployment of typically 150 basis points or better, beyond our acquisition cash cap rates. Real estate ownership often presents opportunities to provide capital to a captive audience, our existing tenants. Utilizing our existing portfolio, these opportunities that I mentioned, along with more to come, lend support to our thesis of continuing to externally grow the company through acquisitions of highly utilized health care real estate. Our pipeline for acquisitions remains strong with an approximately $43 million opportunity that has been awarded to Sila and is anticipated to close in early 2026, subject to our customary due diligence process. We have a strong acquisition opportunity set as we head into 2026 and expect a similar level of acquisition volume next year, as we have accomplished so far this year. We do expect our targeted cap rate to tighten somewhat due to anticipated looser Central Bank monetary policy. As I have stated repeatedly, we are committed to growing thoughtfully, strategically and accretively. Turning to leasing activity. We have successfully renewed 90% of our 2025 lease expirations. In the third quarter, we executed 3 lease renewals, which accounted for approximately 58,000 square feet or 1% of portfolio ABR. Following the close of the quarter, we experienced an unanticipated tenant departure at our Alexandria healthcare facility located in Alexandria, Louisiana, whereby a tenant with whom we had a lease-out for signature to renew decided to vacate. This tenant represents 15,600 square feet or approximately 0.3% of total portfolio square feet in ABR. The tenant paid full rent and holdover rent between its stated lease expiration of July 31, 2025, and through, and including October. In addition to leasing news, we are pleased to report that despite having approximately 3 years left on a lease with Community Health Systems, or CHS, at our Fayetteville Healthcare Facility in Fayetteville, Arkansas, we are agreeing to terminate our lease early with CHS, receiving a termination payment and anticipate simultaneously executing a new lease with Washington Regional Medical Center, best-in-class regional hospital system. Washington Regional will assume the entire facility under a new lease agreement for 17.5 years, and we expect this transition to take place in December 2025. This strategic transition from CHS to Washington Regional will move CHS from being our third largest tenant to our sixth largest tenant. I would like to take a moment to remind everyone what Sila's differentiated proposition brings to its shareholders. Sila distinguishes itself from many peers through its integrated focus on health care assets and a long-term net lease structure, which we believe yields better long-term outcomes for shareholders. The nondiscretionary nature of health care spending has been demonstrated to show durability and resilience across market cycles. Our thesis around triple net lease structures is critical to achieving the best outcomes for our shareholders over time as property operating expenses are passed through to tenants, mitigating the high cost of day-to-day ownership of real estate. Our longer duration lease terms should result in reduced re-tenanting capital expenses, namely tenant improvement allowances and lease commissions, relative to peers with shorter term lease agreements. We are confident that our distinctive and disciplined approach, supported by our robust balance sheet and available liquidity, position us to be able to sustain positive momentum and deliver value to our shareholders. At this time, I will turn the call over to Kay to provide further insight into our financial performance. Kay Neely: Thank you, Michael, and good morning, everyone. I am pleased to share that our disciplined capital allocation and accretive transactions continue to result in strong financial performance in the third quarter. For the third quarter of 2025, cash NOI was $42.8 million, an increase of 4.9% from $40.8 million in the third quarter of 2024. This increase was largely driven by acquisition activity over the last year and same-store cash NOI growth of 1.2%, partially offset by reduced cash NOI from our Stoughton Healthcare Facility. Compared to the second quarter of 2025, cash NOI increased 2.2%, primarily due to the acquisition of the Southlake and Reunion Nobis portfolios as well as reduced carrying costs at Stoughton as demolition of the building is underway. Our third quarter AFFO per share decreased by 0.8% compared to the third quarter of last year, primarily due to the increased interest expense related to the new swaps we entered into at year-end 2024. This was partially offset by the acquisitions and other cash NOI items mentioned previously and increased notes receivable interest income related to our fully funded mezzanine loans. Compared to the second quarter of this year, AFFO per share increased 4.2%, primarily driven by the acquisitions mentioned previously, increased interest income from our mezzanine loans and a decrease in G&A. Beyond earnings, Sila's in-place tenancy remains strong. Our percentage of reporting obligors increased by 2.4% to 75.8% and collectively reported an EBITDARM rent coverage ratio of 6.19x, up from 5.31x from the second quarter of 2025. This increase in coverage was largely driven by one tenant, which possesses a high EBITDARM rent coverage ratio that was recently added into the reporting population due to a lease assignment. Without this one tenant, our average EBITDARM rent coverage ratio would have remained at 5.31x quarter-over-quarter. These strong coverage ratios of our tenants and guarantors help further solidify our portfolio's resilience and demonstrate the durability of the income stream that we have built in our pursuit of providing long-term value to our shareholders. Though political headlines and the macroeconomic landscape continue to be top of mind, we believe our strong tenancy, balance sheet position and available liquidity continue to distinguish us in terms of both security and growth potential. At the conclusion of the third quarter, our revolver provided nearly $450 million of available funds, resulting in total liquidity exceeding $476 million, while our net debt-to-EBITDAre ratio of 3.9x remains below our targeted range. The combination of a robust balance sheet, low to moderate leverage and a prudent AFFO payout ratio of 71% for the quarter, reinforces our confidence in our ability to maintain a sustainable dividend and our ability to grow our portfolio thoughtfully and accretively. During the third quarter, the Board authorized a share repurchase program of up to $75 million in gross proceeds for a 3-year period from August 4, 2025, limited to $25 million in gross proceeds in any 12-month period. We did not purchase any shares under the program during the quarter. Additionally, on August 12, 2025, we entered into an at-the-market equity offering sales agreement or our ATM program, through which from time to time, we may offer and sell shares when we believe it is in the best interest of our shareholders. We established the ATM program, as many REITs have done, to add another tool in our toolbox to be readily available when we are able to accretively raise equity capital with an immediate vision into how those funds will be deployed. To date, no shares have been issued under the ATM program. We are particularly proud of the results from this quarter, building on to many successes throughout 2025. Although we still possess considerable dry powder, we will continue to remain prudent in the allocation of our capital, ensuring that leverage levels are maintained within sustainable limits. We have now put in place various tools, including the share repurchase program and the ATM, which give us full flexibility to take thoughtful and accretive actions when we believe the time is right. We remain fully committed to our capital allocation philosophy, focusing on the acquisition of high-performing triple net lease health care assets leased to quality tenants that operate in growing markets close to the patient. With that, we look forward to taking your questions. Operator: [Operator Instructions] Your first question comes from Rob Stevenson from Janney. Robert Stevenson: The CHS termination payment, was that in third quarter? Or is that going to be in fourth quarter? And how much was that? Michael Seton: Rob, thank you for joining. That CHS termination payment that we anticipate would come in the fourth quarter. The expectation is that Washington Regional will take over that facility. So essentially, we'll have an effective lease starting December 1. And so, my expectation is simultaneous with that, we would terminate the CHS lease, and we would receive that termination payment, which is, roughly speaking, a couple of hundred thousand dollars. Robert Stevenson: Okay. That's helpful. And then, Kay, you're going to get -- in the fourth quarter, you're going to get the full quarter benefit of the August and September acquisitions and the -- you're going to -- that's going to net out against some of the Louisiana departure. Anything else of note positively or negatively likely to impact the income statement in the fourth quarter versus the third quarter? Kay Neely: Yes. The main things I would factor in would be continued decreased carry costs for Stoughton. So as that -- more and more of that building comes down, the carry is reduced. We're, I think, roughly about $75,000 a month as we get to the end of the year. And we expect that to be roughly about $35,000 a month into 2026. However, our intention is also to appeal real estate taxes and to drive that down even further once that occurs. In terms of -- we [indiscernible] a clarification on deferred rent. We have deferred rent we're receiving, Michael spoke to in his prepared remarks, on one of our PAM properties. That will just be reflected in rental revenues going forward. So you won't see that line item. So the amount will still factor in. It will just be up at the top as opposed to added in for AFFO. We do think G&A for the year will come in below previous communicated range. Previously, we had indicated a range of $22.5 million to $23.5 million for G&A. We do believe we will be at the low end, if not slightly below that range for 2025. We do have demolition costs. Of course, those, if you see in our supplemental, are added back for core and AFFO, but separately distinguished on our income statement and in that reconciliation table, so you can see those amounts. Those amounts will continue to be incurred through the end of the year and into the very early parts of 2026. And the only other item that's a little bit seasonal in nature is just any accruals related to any bonuses. Robert Stevenson: Okay. That's extremely helpful. Thank you very much for that detail. And then I guess the other thing for me is, so you've got -- it seems like with the third quarter, I don't know what the fourth quarter is looking like for you, but it seems like the deal volume has been kicking up as the stock price has sort of moved below $24. If you do that $40 million transaction in early '26, how much more capacity do you have and stay within your targeted leverage ranges to do additional deals without needing to issue equity at these type of levels? Kay Neely: We estimate something around $200 million, $220 million to hit the midpoint of our communicated leverage target, which we had previously stated would be 4.5 to 5.5x net debt-to-EBITDA. So to around 5x is $200 million roughly. Robert Stevenson: Okay. That's extremely helpful. And then last one, Michael, as you're looking at the -- whatever you guys refer to it internally, but essentially a tenant credit watch list, and you look back a couple of quarters, is that list getting shorter? Is it staying the same? Is it increasing as operators have difficulty? How do you sort of characterize the sort of evolution of your credit watch list these days? And where is that likely to be going as we enter the beginning of '26? Michael Seton: I would say that we're cautiously optimistic. We had a very good rent collection year this year. I would tell you, we're more focused on lease maturities and obviously, renewal rates for those leases as we look forward. We have a long lease duration in the portfolio, as you well know. I don't -- I wouldn't tell you the watch list has per se increased. We have things move up, we have things move down. I think we had a very solid year in 2025. We're obviously not done yet, but I'm optimistic. As we go into next year, we do see our operators performing well. I mean, as you know, Big Beautiful Bill Act has been out there. We've talked about our assets being a mitigating factor in that space. I would say, overall, we're -- I'm cautiously optimistic about what the future holds. I mean that from a tenant credit perspective, because I don't think anybody knows what the future holds in the context of federal government reimbursement and so forth. But what -- you can see our coverage ratios are strong and they remain -- and they continue to be strong and they continue to go up. So we feel good about who we're aligned with on the tenant side. Operator: Your next question comes from John Kilichowski from Wells Fargo. John Kilichowski: My first one is just on capital deployment and where you find opportunities that are most attractive. I mean, given where your stock is trading today, does -- maybe rotating out of some noncore assets, surgical specialty and buying back stock here get more attractive relative to growing the asset base. I'm curious what that spread needs to be for you to say that's where incremental dollars should go? Michael Seton: John, thank you for joining. We found opportunities, I'll speak first to really 2025 thus far -- The opportunities that we found have been more in the IRF space than the other spaces that we target. Of course, MOB is a key area of that. We've seen a lot of MOB sales. I mean, volumes are down admittedly from years ago, but we've seen a number of MOB sales out there, particularly large portfolios as you monitor as well in the marketplace. But the quality of that hasn't been the quality that we seek to have within our portfolio, hence, our targeting of particularly IRFs, where we can get long WALT, we can get high-quality operators, we can get demonstrated performance in the portfolio. So that's what we've clearly found in the Nobis transactions. That's clearly what we found in the transaction that I'm referring to, that we may close on in January subject to our due diligence. From the capital recycling perspective, we're long-term owners of real estate. Sure, there are things that we have on the radar, and we do have a list of properties that could be potential dispositions. I would say those tend to be a little bit more event-driven, whether they're tenant-driven, could be an issue with the tenant, or as it relates to a tenant simply wanting to own their real estate, which we have a number of those occurring as well. So I don't know that they'll come to fruition. Nothing is per se penned in. There are some discussions taking place. But as we look at those opportunities, I think the -- we are, I would say, slanted and prejudiced towards deploying capital in new investments at this point. Obviously, we are very aware of our share price in terms of cost of capital, ability to raise future equity capital. Kay gave some numbers as it relates to ranges where we can expect to lever up to, and the runway that we have. That being said, the Board did approve a share repurchase program. So we've got really, I would tell you, all the tools in the toolbox, capital ready to deploy, certainly properties that we could sell where we could invest those or buy back shares, of course, and then the share repurchase program. So we're remaining nimble in terms of our approach to capital deployment. John Kilichowski: Well, that was very helpful. And I guess as you think about -- obviously, you're still tilted towards the acquisition side. I guess when you talk about the development opportunities that you're seeing that are a little bit higher yielding and you look at your leverage capacity, I think the number was $200 million. What percentage of that do you think could be deployed into maybe some of those opportunities relative to just the few simple acquisitions that you noted cap rates are getting a little bit tighter here? Michael Seton: We like the -- we, as you know, had done late last year now those Lynchburg mezzanine loans, and we like those kinds of opportunities because they're double-digit, mid-teens type returns. We recognize it as interest income for purposes of -- income purposes. So it's current development deals. If we're funding the development as equity owner, really the income gets recognized when that property goes into service. That being said, when we talk about expansion opportunities within our portfolio, those are relatively short-term constructions, 12 months or less. And those yields, as I mentioned, are 150 basis points or greater. So we'd like to find more of those opportunities. We're conscious of tenant exposure. We want to make sure there's opportunity for that -- expansion of that property in that particular marketplace. But we love those opportunities because the tenants also captive to us because we own the underlying land, for instance, and they're adding on to their building and attaching it to existing building, which we already own. And by the way, I would mention some of those yields are 300 basis points wide of our acquisition cap rate. So it can really vary, but we -- I tried to be, I would say, relatively conservative in saying minimum kind of 150 basis points or greater. So we're looking for those development opportunities. I don't think there's a ton of medical development in the marketplace today. I think banks out there are willing and able to do, for instance, MOB transactions. But in the rehab space, there's probably more limited folks willing to do those kinds of transactions on the lending side. So we want to be a partner to those developers and to those tenants that want to expand. John Kilichowski: Okay. Last one for me, if you wouldn't mind. Just on the opening remarks, you made the comment about the Alexandria tenant, and I apologize if I missed this, but that move-out that's happened in October, is there like -- do we have any expectations on what's going to happen to rent in 4Q? Michael Seton: Yes. So they were scheduled to expire already in late July. And as mentioned in the remarks, I mean, we had a lease out for signature with them. They paid holdover rent through the months of August through October. So full rent plus the 25% additional holdover rent. And we do have an expectation that they may need another month of staying there. So we may very well get November rents with holdover. We're obviously very early in the month of December. Most tenants kind of pay in the first, I'll call it, 10 days or so. So -- but that's the indication to us at this time. Operator: [Operator Instructions] Your next question comes from Michael Lewis from Truist Securities. Michael Lewis: As far as these development or expansion projects, how do you know when one is a [ candidate ]? How do you know it works and that the risk reward is balanced? Does the tenant come to you with it and you kind of evaluate it? How do you get comfortable with those and you know you've got the right one? Michael Seton: Michael, thank you for joining. I would tell you, it's -- the vast majority of the time, it's really an inbound from the tenant. So we're monitoring, as you know, the financials of these operations. The operations in a particular case may be doing very well and that property may be busting as it seems essentially. And that tenant is saying, "Hey, there's a market." So we'll often review those pro formas of the tenant saying, "Hey, this is what it looks like if we add this number of beds." We've already got, of course, the benefit of the credit of the existing operations because the operations in those facilities are not shut down or stopped, they actually continue and the construction goes on. So I would tell you, it's really communication from the tenant. Of course, we monitor, so we know which properties are good candidates for those. And we do market our tenants and say, "We're here to be your partner and provide capital." Michael Lewis: Okay. Great. And then, this is an old question, I guess, but still relevant. As the shutdown goes on and the battle seems mostly focused on these ACA subsidies, you've got good coverage across the portfolio. Is there any risk anywhere you see if the, I guess, call it, the Republicans prevail and those subsidies go away? Michael Seton: Yes. I mean that's a great question. I mean, as you know, we're not acute care hospital owners per se -- short-term acute care hospital owners per se. We're focused on outpatient procedure settings, lower-cost patient settings. So even when we have a situation where there may be a hospital partner, which we have a number of LifePoint transactions like that. In fact, all of our LifePoint transactions are really like that. We're not looking really to the hospital credit in that case. We're looking to the site performance in those transactions. We like the benefit of the branding of hospitals related to marketing and patient recognition. But from an operational standpoint, we're not looking to those. I do think that it's -- we're going to see -- even if there is some ACA subsidy continuation or there's something more done than is currently passed by the Big Beautiful Bill, we might see more influx to emergency rooms. Naturally, we'll see less insured. I mean, even if someone's premium goes up $100 a month, they may elect to not have insurance. So I think that we'll see that. And I think that's a stress on the whole system overall. The facilities that we focus on, as you know, looking at our portfolio is really the MOB and the lower-cost patient setting, post-acute spaces. So the rehab and of course, we own some LTACs as well, kind of a limited amount of behavioral. So we think we're much more insulated than a lot of folks out there. But I would tell you, it's not good for the whole health care marketplace, just generally speaking. But again, with our focus, we think we're pretty well insulated. Michael Lewis: Okay. And then lastly from me. So you've got the ATM program. You've got the buyback program. Is there -- are you closer to one or the other? Or does neither one of those look attractive here? Does it depend if an opportunity pops up? How do you think about that? Michael Seton: Well, we've read your reports, Michael, and I think you have a good -- when you think about NAV, for instance, for us not necessarily price target, as well as with your peers, that's what we're thinking about when we're thinking about kind of ATM type levels. So we feel we need to be higher. Issuing equity now, we think, is very dilutive and not reflective of the value of the company. So we don't think this is the right level to do it. So we do feel we're trading at a pretty substantial discount. So that leads into, of course, your -- the alternative, which we could be doing. And I think that, that's always a topic of conversation in the company and with the Board. We want to be thoughtful about how we're spending money. If we only have $1, we only have that $1 to spend. So we want to put it in the right place. I mentioned from an acquisition standpoint that we had done -- we've done about $145 million of acquisitions so far this year. And sort of the indication I gave for next year was, hey, it's going to be a base case scenario kind of relatively consistent with that. And I think that's a fair statement. It could be more if we find the right opportunities. But at the end of the day, we want to be thoughtful and we want to be also -- what's critical in our minds is also the quality of our balance sheet as well. Operator: Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Michael Seton, CEO, for closing remarks. Please go ahead. Michael Seton: I would like to once again extend my sincere thanks to the entire Sila team. Their hard work and dedication continue to drive successful outcomes. On behalf of our leadership team and Board of Directors, we deeply appreciate the support and confidence of our shareholders. Thank you, and have a great day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.
Operator: Welcome to the Adient's Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] I'd like to inform all participants that today's call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Linda Conrad. Thank you. You may begin. Linda Conrad: Thank you, Denise. Good morning, everyone, and thank you for joining us. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I am joined by Jerome Dorlack, Adient's President and Chief Executive Officer; and Mark Oswald, our Executive Vice President and Chief Financial Officer. On today's call, Jerome will provide an update on the business. Mark will then review our Q4 and full-year financial results as well as our guidance for fiscal year '26. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. And with that, it is my pleasure to turn the call over to Jerome. Jerome Dorlack: Thanks, Linda. Good morning, everyone, and thank you for joining us to review our fourth quarter and full year fiscal '25 results. We will also discuss our fiscal '26 outlook and share additional information on how we are positioning ourselves for long-term success. Turning now to Slide 4, which summarizes our fourth quarter and full year results. With business execution remaining strong, we delivered an adjusted EBITDA margin of 6.1% and free cash flow of $134 million in the quarter. It's worth noting that full-year free cash flow ended at $204 million versus the previous high end of our guidance range of $170 million, leaving us with ample liquidity when it comes to '26 capital allocation, which Mark will cover in his section. This performance comes amidst challenging business conditions, not just in the fourth quarter, but throughout the year, including customer volume reductions and dynamic tariff policies. The Adient management team would like to recognize all of our employees for stepping up and meeting these challenges. By working together with both our customers through commercial negotiations and remapping value chains and our suppliers through supply chain management, we have successfully mitigated the lion's share of our tariff exposure this year. On a full-year basis, we generated $881 million of adjusted EBITDA and $14.5 billion in sales with an adjusted EBITDA margin of 6.1%. Customer volume reductions continue to be offset with strong business performance. From a cash perspective, we were able to generate an additional $204 million of free cash flow this year, net of funding our European restructuring program. Given our solid cash generation, we're able to return capital to our shareholders through $125 million of share buybacks, which represented a 7% reduction of our beginning year share count and 18% since the start of the program. Mark will provide additional details in his section, but we also want to highlight the amendment and extension of our ABL revolver. The team has worked diligently to optimize our debt structure and day-to-day cash needs over the last few years. We have taken the opportunity to better align our liquidity needs and reduce interest expense. Moving now to Slide 5. Let's take a moment to emphasize some of our accomplishments this year. Our operational performance and focused execution have continued, whether it's launching new business, managing the uncontrollables such as tariffs, or driving continuous improvement, the Adient team has delivered over $100 million of business performance this year, excluding the net impact of tariffs. We have actively pursued and won onshoring opportunities, and we'll continue to do so as customer footprint strategies evolve. We have pursued and won important conquest and replacement business, including replacement business on one of our largest platforms, the F-150, which we will talk about on the next slide. We have won $1.2 billion of new business in China, with nearly 70% of those wins with domestic China OEMs, as we aggressively work to confirm ourselves as the premier seating supplier in China. We are winning new profitable business in Europe, putting us on track to drive revenue and margin growth in the region in the out years. Adient is committed to driving long-term shareholder value by investing in innovation across every facet of our business. We are strategically integrating artificial intelligence into our operations for manufacturing and engineering to support functions, to enhance safety, efficiency, quality, and scalability. To ensure we maximize the benefits of these technologies, we are proactively equipping our workforce with the skills needed to leverage AI and adapt to a rapidly evolving digital environment. These initiatives position Adient to capitalize on emerging opportunities, strengthen our competitive advantage, and deliver sustainable growth for our investors. Turning now to Page 6. We continue to prioritize winning new and conquest business while also successfully launching several new programs. As previously mentioned, we have secured the replacement of the JIT and foam business on the Ford F-150. In addition, we were able to conquest incremental content and secure the trim business as well, which we will talk more about on the next slide. In addition to the F-150, in the Americas, we have won conquest JIT foam and trim business with an Asian OEM on a full-size SUV and another conquest win on metals content on the Mercedes GLE and GLS in the Americas and replacement on the S-Class in EMEA. In Asia, we continue to grow with leading domestic China OEMs, including BYD. We have also continued to penetrate new domestic OEMs such as Cherry with our recent complete seat win on their upcoming pickup truck. We could not continue to win the new businesses like those just mentioned without delivering on our customers' expectations through successful launches. These programs continue to showcase our high level of execution and our ability to meet the rigorous safety, quality, and on-time delivery standards of our customers, reinforcing our supplier of choice status. We have just been talking about what we are doing to win new business, but it's not just about our execution excellence and which programs we are winning. It's about how we are driving sustainable value for our customers, which is the cornerstone of our future growth. Turning to Slide 7. Winning the F-150 business was not just about winning the JIT and foam replacement business. It was also about working with our customer to drive enhanced craftsmanship through design collaboration. By collaborating on design to optimize foam, trim, and JIT manufacturing, we have been able to improve overall quality, appearance, and the customer experience. It is this kind of partnership that reinforces the value we bring to our customers every day and why we remain a supplier of choice. On the innovation front, we have continued to see more demand from our customers on enhanced safety features as consumer seating trends for comfort and autonomy drive additional requirements for occupant on position protection. Through our joint development agreement with Autoliv, as announced earlier this month, we are providing our customers with enhanced safety solutions built around the principle of multidimensional collaborative protection. Adient's Z-Guard is a dynamic safety system designed to protect occupants in the event of a collision when in deeply reclined positions. As electrification and smart technologies continue to evolve the passenger experiences, this will position Adient and Autoliv at the forefront of seating and safety solutions. Each of these items just mentioned are meaningful by themselves, but it's the combination of them together with the execution excellence, customer collaboration, and investments in innovation that will collectively drive our future growth. When we look forward to 2027, Adient has line of sight to double-digit growth over market in China, mid-single-digit growth over market in North America, and growth at market in Europe. As we turn to Slide 8, we would like to highlight our commitment to that growth through a new strategic partnership. We are pleased to announce that we have secured a partnership in China that builds on Adient's long-standing local business model and strong customer relationships. This agreement expands our operational footprint, which accelerates and deepens our engagement with China's leading OEMs to further strengthen our competitive position and support sustainable growth in this key market. The new unconsolidated JV is targeted to close in Q1 fiscal year '26. Moving to Slide 9. It is clear that Adient's end-to-end innovation strategy is creating sustainable value for shareholders. Across every area of our business, we are focused on initiatives that strengthen our competitive position and drive long-term growth. Here are just a few examples that demonstrate this. First, automation by design. We're working closely with our customers on product design, optimizing plant layouts for more efficient automation, and enabling long-distance jet and modularity. We have recently launched our first long-distance jet operation in North America and are looking to expand this with other programs and customers in the region in the future. This approach reduces cost, improves efficiency, and offers greater flexibility for our customers in the dynamic North American market, where an ever-shifting tariff landscape and geopolitical landscape requires greater flexibility. When it comes to process automation, we have introduced smart manufacturing technologies such as AI-driven relaxed ovens in partnership with the University of Michigan, which improve quality, enhance energy efficiency, and optimize labor. On product innovation, we recently launched our deep recline mechanical massage seat, which sets a new standard for occupant comfort and fatigue relief while maintaining industry-leading safety and durability. We already have 2 programs in production, with more actively being quoted across multiple customers. Through design innovation, we are launching sculpt the trim in Q2 fiscal year '26, which is the next generation of seat trim that delivers complex shapes that were previously unachievable with current cut-and-sew processes. This product offers greater design flexibility, superior craftsmanship, and continued labor optimization. Not only that, it leapfrogs automated sewing by replacing the sewing process. With this end-to-end innovation mindset, we will be able to capitalize on enhanced in-cabin customer experiences, mobility trends, and evolving customer requirements to drive value for all of our stakeholders. As we move to Slide 10, let's take a look at the key initiatives that each of our regions will focus on in fiscal year '26. In the Americas, the key driver will be what happens with production volumes. Right now, the forecast is based on October's S&P, and that shows a decline. In 2025, we also expected volumes in the region to decline, and they did not. If that repeats again in North America in 2026, our outlook would improve significantly. In the meantime, we will continue to drive business performance, capture onshoring opportunities, and invest in new and conquest business. For EMEA, the key drivers are successful launches, business performance, and continuing to make progress on our multiyear restructuring plan. Balance in, balance out will begin, but it is being impacted by changes in customer programming timing where program and the productions are being delayed. Despite that, we expect margins to begin improving toward the mid-single digits beyond fiscal year '26. In Asia, we are driving for growth, especially with local China OEMs. We know that there will be some margin compression as we pursue this business, but expect incremental growth to help offset this and sustain double-digit regional margins and strong cash flow generation. As we focus on fiscal year '26, what Adient must deliver is clear, but it's also clear that the world will continue to be dynamic with many uncertainties. Tariff policies, the geopolitical landscape, and ever-changing supply chains, just to name a few. With that said, the management team wants to assure you that Adient will continue to execute on what we can control and aggressively mitigate what we cannot control to maximize the results for our shareholders. Moving now to Slide 11. So what do we want to leave you with today? Adient is clearly focused on flawless execution and planting the seeds for our future growth, both of which are needed to drive long-term sustainable value. We are investing in innovation and our people. We have created a team fully dedicated to automation to expand innovation across all of our plants globally. We will continue to leverage our world-class footprint and are laser-focused on our strategic objectives and delivering value to all of our stakeholders. We will deliver on our European restructuring plan. And if needed, we will pursue additional restructuring as customer requirements evolve. We will continue to be good stewards of capital and execute our balanced capital allocation strategy. We are committed to being a supplier of choice for our customers. We are driving profitable new business, including onshoring opportunities as they arise, and replacing legacy contracts that have weighed on our bottom line for too long. These are the key drivers that make Adient well-positioned for future growth, cash flow generation, and sustainable shareholder value. With that, I'd like to hand it over to Mark to take you through our financials and our outlook. Mark Oswald: Thanks, Jerome. Let's jump into the financials. Adhering to our typical format, Slides 13 and 14 detail our reported results on the left side and our adjusted results on the right side. We will focus our commentary on the adjusted results, which exclude special items, which we view as either one-time in nature or otherwise skew important trends in underlying performance. Details of all adjustments are in the appendix of the presentation. High level for the quarter, sales of $3.7 billion were 4% better than fiscal year '24 with adjusted EBITDA of $226 million and adjusted EBITDA margin of 6.1%. Adjusted EBITDA and adjusted EBITDA margin were both down year-on-year, primarily due to the timing of commercial settlements and equity income, reflecting the impact of modifications to our KEIPER joint venture agreement, which were partially offset by favorable cost impacts and business performance for both the Americas and EMEA. In addition, equity income was also impacted by a few one-time nonrecurring items within the JVs, such as an income tax adjustment and timing of engineering expense and recovery. Adient reported adjusted net income of $42 million or $0.52 per share. For the full year, as shown on Slide 14, sales came in at approximately $14.5 billion, down 1% year-over-year due to lower customer volumes and unfavorable mix, which was partially offset by FX tailwinds. Adjusted EBITDA landed at $881 million, essentially flat with 2024 despite the increase -- decrease in volume, positive business performance offset the unfavorable volume mix headwinds as well as lower equity income year-on-year. For the year, we reported adjusted net income of $161 million or $1.93 per share, which represents a 5% improvement on adjusted EPS versus the prior year. I'll go through the next few slides briefly, as details of the results are included on the slides. This should ensure we have sufficient time for Q&A. Digging deeper into the quarter and beginning with revenue on Slide 15. We reported consolidated sales of approximately $3.7 billion in Q4, which was $126 million increase compared to Q4 fiscal year '24, primarily driven by FX tailwinds and favorable volume and pricing in the quarter. Shifting gears to the right side of the slide, Adient's consolidated sales were favorable to the broader markets in the Americas, while sales in EMEA underperformed due to customer mix and intentional portfolio actions. Sales in China trailed the market due to production declines from our traditional premium OEM customers, while the rest of Asia outperformed due to customer launches in prior years ramping to full production this year. In Adient's unconsolidated revenue, year-on-year results declined approximately 4% adjusted for FX. Results were primarily affected by JV portfolio rationalization items in the Americas that were finalized in Q1 of fiscal year '25. We saw growth in both EMEA and China on consolidated businesses. Turning to Slide 16. We provided a bridge of adjusted EBITDA to show the segment performance between periods. Adjusted EBITDA was $226 million during the quarter, down $9 million year-on-year. The primary drivers of the year-on-year performance include, as mentioned earlier, the timing of commercial settlements, which tends to be lumpy from quarter to quarter and was particularly impacted by certain actions pulled into our third quarter of this year. The year-over-year decline in equity income mentioned previously, which was partially offset by positive business performance in the Americas and to a lesser extent, in EMEA. FX and net commodities provided modest tailwinds in the quarter, and overall business performance was favorable year-on-year despite a net $4 million tariff impact during the quarter. Moving to Slide 17 and our full-year results. Adient's adjusted EBITDA was $881 million, essentially flat with the prior year. Adient drove nearly $100 million in favorable business performance year-on-year, which included $17 million of net tariff expense. Our commitment to operational excellence drove additional efficiencies and lower launch expenses during the year, which offset the $50 million of unfavorable volume and mix headwinds due to lower volumes in Europe and other customer mix headwinds in Asia. In addition, net commodities were a $28 million headwind year-on-year, primarily resulting from the timing of recoveries. Despite the challenges presented in fiscal year '25, the Adient team was able to expand margins by 10 basis points year-on-year. As in past quarters, we provided our detailed segment performance slides in the appendix of the presentation. High level, for the Americas, we expanded margins by 40 basis points for the full year and drove $41 million of incremental favorable business performance through lower launch costs, commercial actions, and input costs year-on-year despite a $17 million net tariff impact during the year. Volume and mix was a $19 million tailwind for the year in prior year slowing ramp launches reaching full production volumes in 2025. Net commodities were a $28 million headwind for the year, driven by the timing of contractual pass-throughs. In EMEA, fiscal year '25 results were influenced by volume mix, which was a $36 million headwind during the year due to lower customer production volumes. Positive business performance of $17 million during the year due to improved net material margin and improved operating performance, partially offset by $12 million in unfavorable FX due to the transactional exposure to the zloty. And finally, in Asia, business performance was a $34 million tailwind during the year due to improved net material margin, lower launch costs, and improved engineering and administrative expenses, which offset the $33 million volume mix headwind during the year due to lower sales in China and adverse customer mix in the region. FX was a $17 million tailwind in '25 due to the transactional impacts of Asian currencies and translational effects versus the USD. To sum up the regional performance in 2025, the team has done an outstanding job of demonstrating continued resiliency, driving positive business performance in the face of macro challenges. I would just reinforce what Jerome has already highlighted, the Adient team is doing what it needs to be done to control what's in our power and to control focusing on operational execution. Turning to Adient's cash flow now on Slide 18. For the full year fiscal year '25, the company generated $204 million of free cash flow, which is defined as operating cash flow less CapEx. On the right side of the slide, we have highlighted the key drivers impacting the full-year free cash flow. During the year, we benefited from certain fiscal year '24 dividends that were delayed and paid in fiscal year '25 from certain of our China joint ventures. This favorable timing of dividends was more than offset by elevated cash restructuring in EMEA and the timing of customer tooling recoveries. In addition, cash flow was favorably impacted by approximately $30 million of items pulled ahead from '26. Excluding these actions, Adient would have been at the high end of its guidance range, how about $170 million. These actions resulted from a combination of timing for customer payments and actions taken by the company to proactively mitigate the potential impact of timing from JLR-related receivables due to their cyber event. One last item to highlight on the slide, at September 30, 2025, we had approximately $185 million of factor receivables versus $170 million at the end of '24. Adient continues to utilize various factoring programs as a low-cost source of liquidity. Moving to Slide 19 for our liquidity and capital structure. On the right side of the slide, you'll note that Adient ended the fiscal year with strong liquidity, totaling $1.8 billion, comprised of $958 million of cash on hand and $814 million of undrawn capacity under our revolving line of credit. During the fiscal year, the company returned a total of $125 million to its shareholders for full year '25, retiring approximately 7% of its shares outstanding at the beginning of the fiscal year. In addition, Adient continues to proactively manage our capital structure. In September, before the close of the fiscal year, we launched an amend and extend initiative on our ABL, which closed in mid-October. This action extended the maturity from 2027 to 2030. As Jerome pointed out earlier, the team has optimized our cash needs over the past 2 years, so we were able to reduce the revolver by $250 million and opportunistically reduce our annual interest expense on both drawn and undrawn capacity by approximately $2 million per year. Focusing now on our balance sheet, Adient's total debt and net debt position totaled $2.4 billion and $1.4 billion, respectively, at September 30, 2025. The company's net leverage ratio at September 30 was 1.6x, near the lower end of our target range of 1.5 to 2x. As you could see, Adient does not have any near-term debt maturities. Moving now to Slide 21. We'll review some of the key underlying assumptions to our fiscal year 2026 outlook. As we typically do, we have based our outlook on a combination of the October S&P vehicle production forecast, near-term EDI releases, and any customer production announcements. In addition to volumes, FX rates have also changed year-on-year, with the euro moving most significantly. Tailwinds from the euro will essentially mask the volume pressure as we look at revenue. As you can see, Adient is expected to grow significantly above market in China, however, face stiff headwinds in Europe and North America. As we will discuss further on the next slide, it should be noted that we have put in a Q1 adjustment for Ford not yet reflected in the October S&P production estimates, which slightly skews the growth over market comparison negatively for North America. With that as a backdrop, let's turn to Slide 22 to see the expected impact to Adient's fiscal year '26 results. First, I would like to specifically address our assumptions around F-150 volumes, which is Adient's second-largest platform in the Americas. When it comes to the F-Series and reflecting on the impact to their customer fire, we have reflected the downtime that has been announced to date, which is currently through the week of November 10. Because Ford has not indicated the mix of F-Series vehicles that will be down, specifically the mix between F-150 and the Super Duty vehicles, including cadence for recoveries, we do not think it prudent for Adient to come up with our own forecast, especially with regard to make plans. Of course, we are actively monitoring the situation, and we'll provide additional insights once we have more clarity from Ford. In addition to the F-150 volumes, we are also proactively monitoring other current events such as the potential chip supply challenges from Nexperia. We view these events as more as production disruption issues versus fundamental demand challenges. Given the underlying macro factors remain stable, especially in North America, we remain hopeful that volume stability will continue into 2026. As we look beyond specific events, basing our outlook on the current S&P assumptions, North America and Europe revenue are projected to be down by approximately $650 million year-on-year, but this will be partially offset by growth over market in China for a net decline year-on-year of approximately $480 million. Typically, you would expect the adjusted EBITDA impact of this to be roughly $75 million, but you could see we have a higher decremental mix impacted by continued mix headwinds in Europe and margin compression in China. While we expect to maintain double-digit margins in China, the combination of growth with domestic China OEMs and volume headwinds from the luxury global OEMs in China is expected to compress overall margins, as we are forecasting headwinds of roughly 100 basis points. While margins in China are forecast to compress with an offset of positive EBITDA from growth, we do not expect the adverse impact to overall Adient margins. As we executed approximately $100 million of business performance in '25, we are targeting a similar amount for fiscal year '26. However, as we are also focused on growth, about $35 million of that performance is expected to be invested in growth through launch costs and engineering for future programs, resulting in a net impact of business performance at $75 million. For illustrative purposes, if we were to hold volumes constant year-on-year, you can see that our financial outlook would show approximately $14.8 billion in sales and $925 million of adjusted EBITDA, resulting in adjusted EBITDA margin of about 6.3%. Turning to free cash flow on Slide 23. The year-on-year decline that is forecasted free cash flow is driven by 3 factors: the offsetting impact of the favorable $30 million pull-ahead actions previously mentioned in 2025; elevated cash taxes in fiscal year '26, driven by approximately $20 million for a potential settlement associated with an ongoing tax audit within a specific jurisdiction as well as lower adjusted EBITDA and higher CapEx, reflecting our investment in future growth and innovation. The cumulative impact of these items results in free cash flow of approximately $90 million based on current volume assumptions. However, we would expect that to be closer to $170 million at constant volume. I do want to remind everyone that below free cash flow, Adient expects to have an additional dividend of approximately $85 million to our nonconsolidated interest or NCI. As Jerome mentioned in his section, we are committed to investing in future growth. The investments we are making today are expected to drive double-digit growth overall market in China and single-digit growth overall market in North America. These investments are expected to drive volume, profitability, and incremental cash flow in the out years. The combination of our execution excellence and our investment in future growth and innovation is why Adient expects to maintain strong, sustained cash flow generation for 2027 and beyond as we ensure our investments today drive shareholder value in the future. Turning now to our guidance on Slide 24. I've already walked through several key items on the slide, so I won't read through those. In addition to what we have discussed, I would add our guidance on equity income remains approximately $70 million. Based on our current debt levels, our interest expense is expected to be approximately $185 million to $190 million. As we have said throughout the presentation, our guidance reflects Adient's commitment to controlling what it can. Our business execution and commitment to continuous improvement will continue to drive strong business performance. We will manage through the volume challenges and continue to invest in the future as Adient is committed to driving long-term shareholder value. Turning to Slide 25 before going into Q&A. In closing, I would like to reiterate that Adient is firmly committed to executing our balanced plan for capital allocation. Driven by our business performance, we enter fiscal year '26 from a position of strength with strong balance sheet and solid liquidity. We ended fiscal year '25 with $958 million of cash on the balance sheet, well ahead of the roughly $800 million we need for ongoing operations. This provides Adient the opportunity to proactively manage its capital allocation, whether it's through investment for future growth, debt paydown, or continued share repurchases. As a reminder, Adient has $135 million of authorization remaining on its share repurchase program, leaving room for additional purchases as appropriate in fiscal year 2026. By utilizing the levers I just mentioned, the Adient team is committed to prudent capital allocation and maximizing shareholder value. And with that, we can move to the question-and-answer portion of the call. Operator, can we have our first question, please? Operator: [Operator Instructions] That is going to come from Colin Langan with Wells Fargo. Colin Langan: Maybe if we could start with the 1% forecast underperformance versus S&P. Any color on the major puts and takes there? I think you mentioned the F-150. Did you say that you factored in the downtime that's expected, but not the recovery that Ford has actually kind of indicated this recovery? And then any color maybe in particular on the wind-down of unprofitable business in Europe? Is that another big driver there that we should be considering in sort of the 1% drag? Yes. Jerome Dorlack: So thanks, Colin, for the question. I'll take it. So on the F-150 in particular, we -- out of respect for our partner for the customer, we don't want to get ahead of them. And so what they've indicated on their call was F-Series. And F-Series is a mixture of F-150, F-250, and the entire Super Duty lineup. And they haven't officially made any announcements of where that recovery is going to come from and how all of the downtime will mix into that. So what we have forecast in our guidance is the downtime that we know today, what we actually have in our EDI releases, which takes us through the week of November 10, with a restart on November 17 with no recovery. So no makeup of any volume. In addition to that, what we don't know is what that recovery in makeup volume will look like. Will it come with significant overtime? Will it come with additional crews, additional makeup? Will it be kind of low-calorie makeup type revenue? And what will that mix look like? So that's part of that 1%. When S&P comes out with an updated at a November number, I think we'll tie out closer to that because they will capture some of the F-150 downtime. So that's part of it. The other piece of it is the European picture. So the -- we now have the full Star Louis, our plant in Star Louis, the exit of that business as that winds off, as well as a plant in Novamesto in Slovakia, the exit of that business as well, winding down, which would be below kind of S&P performance. So hopefully, that answers your questions on that. Colin Langan: I mean are those major contributors to the 1% overall? Or are those combined still? Jerome Dorlack: Yes. I mean would be -- those would really capture the 1% overall, yes. Colin Langan: And then if I just look at the walk on Slide 22, the volume mix drag is, I think, something like a 26% decremental, which seems pretty high. Any color on why such a high decremental for the lost volume? Jerome Dorlack: Yes, I'll start, and then Mark can add any color if he needs to. There's a couple of factors that go into that. First of all, we have things like F-150 factored into that. And you have to remember, that's not coming out at a normal decremental because of the nature of how that F-150 downtime is coming in. It's coming in first at a very short notice. It's coming in. Initially, it was basically half shifts. So we were having to staff 2 full plants fully, but only getting half volume on it. It ran like that for several weeks, and now we're having to run it at full down weeks, but still having to pay subpay. And given that is 6% of our total sales, that's a pretty severe decremental for us for a very large portion of our Q1. In addition to that, in our Q1, we also have Nexperia downtime. And that Nexperia downtime is coming -- it's been public announcements at one of our very large Japanese customers, significantly impacting our North America operations. So when you think about Q1, it's going to have a very significant decremental in it because of those 2 factors, Nexperia and F-150, very short notice, partial shifts that are running either half or sub-pay impacted with very high decrementals associated with them that we're not really able to manage just given the short notice of them. Those are 2 factors. The third factor in there is one that I would say we will monitor closely throughout the year, which goes a bit to why we've given our official guide, and then if it were flat volumes, the mix of what S&P is calling off. They have called off in their October release some of our platforms, which are maybe higher contribution margin, being down year-over-year, and we'll see how that plays out throughout the year. And then the fourth factor, which is what Mark talked to, we're rolling on in our China business, significant new business this year. As that business rolls on, it isn't rolling on in its first year of production at full kind of incremental margins, right? We have significant launch costs going into it. We're rolling on with some of the China local OEs. As those roll on, they're not rolling on at kind of the regional contribution margin level. It takes us some time to bring those up to the standard margin level. And I'd say that's the fourth factor associated with some of that volume mix. But the first 2 are very significant, just how some of those downtime -- that downtime is coming at us in Q1. Operator: The next question comes from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: First question is on the growth investments, $85 million investment for the future. Can you just comment a little bit more around how much of that is discretionary, how far out in terms of the future we're looking at for this payback versus things that are nearer term and just needed because you have new launches coming up? Jerome Dorlack: Yes. I'll start, and I can turn it over to Mark for additional comments. Yes, I'd say it's an investment that's needed to really drive the growth. In my prepared comments, we kind of commented on what we see '27 shaping up to be where we see North America being able to grow in the mid-single digits over kind of vehicle volume, especially when we take kind of the metals out of that, which we've said we want to wind down metals. And we see China and Asia growing at kind of double digits over market. And we have that line of sight. And so we see that investment as needed. That's what I would call kind of the program growth and some of the engineering associated with it. The other thing that I would point you to, Emmanuel, where we're really driving business performance aggressively is on the automation and AI side. If I look at '25 versus '26, in '25, we spent 20 -- just round numbers, $25 million on automation and AI in our plants, and that yielded about $20 million in savings. As we begin to ramp up these efforts, we have a facility in Moore, Hungary that's dedicated to capital improvement, AI, and automation. We have a MIRO facility in Plymouth, Michigan that's dedicated to the same activities. We will spend upwards of about $60 million in AI and automation. And on a run rate basis, that will yield almost $40 million in savings. So the capital is roughly doubled, but the savings is more than doubled on a run rate basis. And that's factored into that total expense improvement or increase year-over-year. So I wouldn't necessarily label it as discretionary as much as it is driving business performance. an improvement into the business year-over-year. Mark Oswald: Yes. And Emmanuel, the payback on that CapEx that Jerome was talking about, innovation is typically about 2 years. It could be anywhere from 1.5 to 2 years. That's what we try and focus on there. And as Jerome indicated, the other, call it, $35 million is really engineering and launch support for programs that are being launching with our customers. So think of it in 2 buckets. Jerome Dorlack: Yes. And we'll see those launches, Emmanuel, really start coming on in the end of '26 fiscal year and then accelerating through '27. Okay. Emmanuel Rosner: And then I was also hoping for a potential update on onshoring. There wasn't as much discussion on this in this quarter than in the past. I think that you had obviously mentioned already previous wins, but it sounded like you were getting close to some potential additional wins there. So just curious where that's tracking. I guess, what will be the timeline of it starting to help the revenue? Jerome Dorlack: Yes. So in terms of helping the revenue, the one product that we announced is a Japanese customer. It's now -- initially, it's with Nissan on the road, that's now in production. So that is in our kind of '26 figures, that incremental volume as they have onshored back into the U.S. It's unfortunately being offset by some other production challenges that we see just in terms of volume. The other Japanese customer, we expect that to launch at the end of our fiscal year '26. It will be running up to full volume. And then as far as other onshoring wins, we are, I'd say, in the final kind of last rounds of negotiation with a significantly large program, around between 200,000 to 250,000 units that will move from Mexico into the U.S. It would be incremental volume for us, utilizing existing footprint for us. And I would anticipate we'll have more news on that in the next call it, 3 to 4 months or so. Operator: The next question is from Dan Levy with Barclays. Dan Levy: You gave some impressive growth over market targets for '27. And I know that there's some mix issues here in '26. Basically, can you just walk us through what the line of sight? And I know that there's obviously the macro environment can move. But what is the line of sight of sort of secure business? It's a function just of launches coming out? And how do you factor in -- there is still some uncertainty on how automakers might be moving their plans, powertrain stuff moving around. What is the line of sight on that growth of market? Jerome Dorlack: Yes, I'll start, and then Mark can add comments. I'd say the line of sight, Dan, if I just kind of go region by region. In China, as we spoke kind of on the last earnings call, it really comes down to customers' ability to launch and execute. We were, I'd say, impacted last year. And if you look at kind of half-over-half, we saw almost a -- I think it's, call it, what, 50 basis point -- sorry, 500 basis point improvement, half 1 to half 2 in terms of mix improvement or growth over market improvement in China because our launch has finally started to accelerate there. And that's what really gives us confidence in our '26 and then moving into '27 is, one, our mix shift to the China OEMs, but then their ability to now launch and their launch cadence is finally picking up. So I think in China, we have a reasonable kind of line of sight. Within the Americas, which is our other region now that we're starting to gain some significant traction, it's really dependent on the Japanese OEMs and their ability to, I think, rotate some of their powertrain and rotate some of their plants. What gives us confidence is they generally do what they say they're going to do. Their level of execution, their level of commitment, their ability to plan, do, and execute is at a high level. So I think we have generally a high level of confidence when we look at what happens in the last quarter of '26, that's when a lot of these launches kind of time in and cadence in, thus the high level of engineering and elevated CapEx spend this year, and as that rolls into '27. So I think generally, we feel pretty good about what we see moving into '27 for the business. And then the other key piece of that, especially in the Americas, is when we think about growth over market, and we'll have more of this as we roll through '26 and really into '27 is it's also the portfolio. We've talked about this is rolling off some of that third-party metals business, and then really looking at growing the JIT, trim, and foam. And so it's that portfolio rotation that will also help to accelerate growth over market in those markets we really want to play in. And that's why the F-150 business not just winning what we had on the JIT and the foam, but also conquesting that trim business, getting more down the vertical integration stream, and providing that value proposition with Ford, codeveloping with them a better end product for the end customer was really crucial. Dan Levy: As a follow-up, same vein, I know that '26 on the margin side has some unique volume mix issues. But you've talked about this midterm 8% EBITDA margin target. There's a few different work streams in terms of balance in, balance out Europe. Should we understand '26 just as a transition year, but the broader positive margin trajectory is still on track with each of these work streams, and that 8% is still something that you're shooting for and is a realistic target over time? Mark Oswald: Yes, Dan. I would say that nothing has fundamentally changed. Obviously, '26 significantly impacted by volume. That said, we continue to drive the positive business performance. We're investing in the growth. As Jerome just mentioned, we have a good line of sight in terms of where that growth is coming from in '27 and '28. That balance in, balance out story still holds, right, albeit certain of those programs have been extended in terms of their end of production life, right? So it's sort of muted the impact in '26. But I think when you get into '27, right, you've got your growth, you've got your balance in balance out, right? You've got your portfolio mix starting to change. Those are all the elements that will continue to walk us up from the current level of margin up to, call it, that 7%, 7.5% approaching that target. Operator: And the next question comes from Nathan Jones with Stifel. Nathan Jones: I guess I'll just start with a question bluntly on the first quarter, given the disruption of the F-150 and your expectations there. So just if you could provide any more color on what you're expecting specifically for revenue margins in the first quarter of '26. Mark Oswald: Naty, we don't provide quarterly guidance, but I think as you're adjusting your model and you're fine-tuning based on your production assumptions, we did, call it, $195 million of EBITDA last year in the first quarter. There was no production declines at that point last year. As Jerome indicated, this year, we're facing not only F-150, but the on-off shifts related to the Nexperia chip shortages there. So is it possible that you're going to see a $15 million, $20 million decline in overall EBITDA quarter year-on-year for the first quarter? Absolutely, right? And then you throw in there JLR, right? They just started to produce their units, right, at the capacity. So again, it's those macro factors that I think probably puts Q1 at the trough for the year, and then we start building on that as we get into Q2, 3, and 4 as F-150 comes back as you have the supply chain shortages worked out with Nexperia, right? You have JLR. So that's sort of the way I see the calendarization as I go through the year. Nathan Jones: And I guess my other one is on capital allocation. Lower free cash flow in '26. But as you noted, you have more cash than you need to run the business. Any expectations for what share repurchases in 2026 is likely to be relative to 2025? Mark Oswald: Yes. So again, we'll opportunistically look to balance that between the share repurchases, debt paydown. As I indicated, we have $135 million left of repurchases on the current authorization. So we'll time the repurchases and the magnitude of the repurchases in line with how we see clarity with production playing out this year, as we see the cadence of our cash flow coming in this year, right? And so, without giving you a specific number, I'd just say that we'll balance taking the cash off the balance sheet between debt paydown as well as the repurchases. Operator: The next question comes from Joe Spak with UBS. Joseph Spak: Super helpful detail on the decrementals in your '26 guidance. I just want to maybe talk through one other element because I know you said you're not counting on some of that F-150 volume coming back. But if it does, is it fair to assume that the incrementals on that volume actually don't come close to the decremental margins because of all the trap labor and costs and some of the inefficiencies you mentioned? So it will help dollars, but the overall decrementals will still look a little bit worse than we would normally expect. Is that fair? Mark Oswald: Yes. I think that's right, Joe. I mean if you just think about how that volume comes back on, as Jerome indicated, are they going to be running over running weekends, right? So that goes into that equation. Joseph Spak: Any help, any guidance on sort of what we could expect the incrementals on that volume to be if it does come back? Jerome Dorlack: I think it's too early to say still. A lot of it's going to depend on how does it come back? What are some of the discussions we have with Ford around the total recovery mechanism of it. I think it's too premature to engage in those types of forecasts. And that's one of the reasons why, again, out of respect for our partner, Ford, we didn't want to put anything in here because we just -- we don't know the timing cadence. If it's going to be run over, let's say, the Easter break, I mean, that's going to be a lot of premium costs. It's just going to be run over Saturday and Sunday, that's a different model. So it just -- it's too early to say at this time what that even looks like. Joseph Spak: The second question, I guess, is just on free cash flow, and apologies if I missed this. I know you spoke about elevated restructuring in '26. I think it was about $130 million in '25. Did you give an actual number for '26? And then you talked about more normal levels beyond that, but I just want to get your sense of sort of what gives you confidence that continued restructuring, particularly in Europe won't be needed that you're going to be more rightsized after '26. Mark Oswald: Yes, Joe, so good question. So we did about $130 million of cash restructuring last year. I think that drops down to about $120 million this year, right? Normalized run rate for us, right, is probably going to be somewhere in that $50 million, right, plus or minus, once we get through, I'd say, the elevated restructuring in Europe. Part of it, and we've been very transparent, and you and I have talked about this before, right? We do see that trending down. But in terms of the overall timing, some of that's going to be dependent on customer just program runoffs, right, and what they decide to do with their facilities and where they're going to source certain of their programs. So again, for modeling purposes, I'd assume a $50 million run rate. So again, when you think about this year for '26, right, a couple of the elements, the calls for cash that are elevated, right? I'd say my cash taxes at $120 million are elevated; those typically would be in that $100 million, $105 million mark on a run rate basis. My restructuring dollars, rather than $120 million, should be falling back to that $50 million run rate. And then it's just a function of EBITDA, right? So if you were going to ask what's the normalized level of free cash flow, start with your EBITDA. Let's just say we do $900 million CapEx. We've always said that, that will be running somewhere in that $280 million to $300 million, especially with the growth investments and the automation that Jerome talked about, cash interest, call that $185 million, $190 million, cash taxes, $100 million and restructuring $50 million. So you get to a normalized level, call it, somewhere around that $250 million, $260 million mark at a $900 million EBITDA, right? So that's the way I think about free cash flow, what's normalized levels for us. That's the bottom of the hour. So if you can move to wrap the call up, that would be great. Linda Conrad: So in closing, I want to thank everyone once again for your interest in Adient. If you have any follow-up questions, please feel free to reach out to me. Also, I'd like to acknowledge we will be in New York City later this month, participating in the--
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Third Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead. Todd Spencer: Good morning, and welcome to Charles River Laboratories Third Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Mike Knell, Senior Vice President, Interim Chief Financial Officer and Chief Accounting Officer. They will comment on our third quarter results for 2025. Following the presentation, they respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today and can be also accessed on our Investor Relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster. James Foster: Thank you, Todd, and good morning. Before I comment on our third quarter results, I'd like to discuss our strategic review. As you know from today's press release, we provided an update on our comprehensive strategic review. The Board strongly supports the company's strategic direction and believes we should continue to focus on strengthening our leading scientific portfolio within our core markets, divesting underperforming or non-core assets, maximizing our financial performance and maintaining a disciplined approach to capital deployment. I would like to thank our Board for the progress that it has made in such a thorough and collaborative review process, which has and will continue to evaluate a wide range of value creation options to help ensure the best strategic path forward for the company. As we move forward to support our strategy, we will focus on several strategic actions to help drive long-term shareholder value creation. The first action is continuing to strengthen our portfolio by investing in core growth initiatives, including through M&A, partnerships and internal development efforts. We have built a scientifically differentiated portfolio, which enables us to take advantage of the unique opportunities that are present across the evolving biopharmaceutical landscape. Our focus on science and innovative solutions designed to enhance the efficiency and speed to market of our clients' life-saving therapeutic programs has positioned us extremely well to continue to adapt and lead the industry through advances in drug development such as NAMs or new approach methodologies. We have identified areas of future growth, all of which are well within our core competencies, including opportunities across our 3 business segments. Specifically, we will evaluate opportunities to enhance our scientific capabilities in the areas of bioanalysis, in vitro services and NAMs as well as to continue to evaluate our geographic presence. The second action to refine our portfolio addresses our ongoing efforts to streamline operations and maximize our financial performance. As part of our portfolio review over the past several months, we have evaluated the strategic fit and fundamental performance of our global businesses and infrastructure. And as appropriate, we'll take actions to drive long-term value creation. These actions are expected to result in the sale of certain underperforming or non-core businesses, which will enable us to focus on more profitable growth opportunities. In aggregate, these businesses represent approximately 7% of our estimated 2025 revenue. Once completed, the proposed divestitures are expected to result in non-GAAP earnings accretion of at least $0.30 per share on an annualized basis. This does not include any benefit from the reinvestment of the transaction proceeds or impact to net interest expense. We will strive to complete any potential divestitures by the middle of 2026. We will also continue to focus on new initiatives to drive greater efficiency in our business and maximize our financial performance. As you know, we have taken extensive action with a goal to protect our operating margin and reinvigorate earnings growth. Over the past few years, we have already implemented restructuring initiatives that are expected to result in approximately $225 million in cumulative annualized cost savings in 2026, which represents a reduction of more than 5% of our cost structure. In addition to these actions, we are also implementing initiatives designed to drive process improvement and greater operating efficiencies, including through procurement synergies and implementation of a global business services model. These additional initiatives are expected to generate incremental net cost savings of approximately $70 million annually, which will be fully realized in 2026. We also expect to continue to transform our relationships with our clients through best-in-class technology platforms and access to clinical data, becoming an even more efficient partner for them. Finally, we remain committed to deploying capital in a disciplined and value-enhancing manner. We will continue to regularly review the optimal balance between strategic acquisitions, stock repurchases, debt repayment and other uses of capital. As part of our capital allocation strategy, the Board of Directors approved a new $1 billion stock repurchase authorization. This replaces the previous stock repurchase authorization for which we had repurchased $450.7 million in common stock since August 2024. We will regularly and carefully evaluate the prudent level of stock repurchases going forward and we will take into consideration valuation, future growth prospects, expected returns and earnings accretion from repurchases as well as our leverage and other uses of cash. With these actions clearly outlined, we are intently focused on executing this plan to enhance the company's long-term value by building upon the core strengths of our unique portfolio, advancing scientific innovation and driving greater efficiency in both our operations and our clients' R&D and manufacturing efforts. Moving on to our quarterly results and demand trends. We are continuing to see clear signs that client demand has stabilized. Many of our global biopharmaceutical clients appear to have progressed through their restructuring efforts and the biotech funding environment showed increasing signs of improvement throughout the third quarter. These are positive signals that the industry may be on a path towards recovery and the improvement we saw in DSA proposal activity during the third quarter strongly supports this view. At the same time, there is still some uncertainty in our end markets. Therefore, we will continue to remain cautious at this time and focused on strong execution to drive further wallet share gains with our clients. The business trends in the third quarter were consistent with those that we described in August, with RMS performance benefiting from the favorable timing of NHP shipments in the quarter. DSA revenue declining sequentially as the first quarter bookings strength that contributed to meaningful outperformance in the first half of the year returned to recent historical levels and manufacturing revenue declining primarily due to the completion of work for a commercial CDMO client. Collectively, trends were slightly better than we had expected, which led to modest outperformance in the third quarter. Before I provide more details on these trends, let me provide highlights of our third quarter performance and updated outlook for the year. We reported revenue of $1 billion in the third quarter of 2025, a 0.5% decrease year-over-year. On an organic basis, revenue declined 1.6% as declines in both the DSA and Manufacturing segments were partially offset by an increase in the RMS segment. Third quarter revenue slightly outperformed the outlook provided in August. By client segment, revenue for small and midsized biotech clients declined, reflecting tighter budgets likely driven by the softer biotech funding environment as we exited 2024 and in the first half of this year. Revenue for global biopharmaceutical clients remained below last year's level, but that was primarily due to the loss of a large commercial client in the CDMO business whose work at our Memphis site wound down in the second quarter. Revenue increased for global biopharmaceutical clients in both the RMS and DSA segments, demonstrating that preclinical demand from this client base had bottomed and is beginning to improve, consistent with the upward trajectory in the DSA booking activity at the beginning of this year. Revenue for global academic and government clients increased slightly in the quarter, we have not experienced any meaningful impact from NIH budget uncertainty or the government shutdown to date. The operating margin was 19.7% in the quarter, a decrease of 20 basis points year-over-year, also driven by the DSA and Manufacturing segment. This anticipated margin decline primarily reflected lower sales volume in the DSA segment and lower commercial CDMO revenue in the Manufacturing segment. For the full year, we continue to expect the operating margin will be flat to a 30 basis point decline, unchanged from our prior outlook. Earnings per share were $2.43 in the third quarter, a 6.2% decline from the third quarter of last year, but modestly above our prior outlook. The tax rate was the most significant year-over-year headwind as we had anticipated, totaling $0.24 per share in the quarter due to the enactment of new tax legislation. Mike will provide additional details on the nonoperating items shortly. With 1 quarter remaining, we are narrowing our revenue and non-GAAP earnings per share guidance ranges for the year. We now expect 2025 organic revenue will be in the range of 1.5% to 2.5% decrease or the middle of our prior range. We also expect our non-GAAP earnings per share will be at the top end of our prior range at $10.10 to $10.30, reflecting a $0.10 increase from the midpoint of our prior guidance range. I will now provide details on the third quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $600.7 million in the third quarter, a 3.1% year-over-year decrease on an organic basis, driven by lower revenue for both Discovery and Safety Assessment Services. As was the case during the first half of the year, lower sales volume was partially offset by a modest benefit from favorable study mix. We can also report that spot pricing remains stable overall. Although the DSA backlog declined to $1.80 billion at the end of the third quarter from $1.93 billion at the end of June, DSA demand KPIs were stable in the third quarter. The DSA demand environment remained quite stable from the trends that I described 1 quarter ago, including a third quarter net book-to-bill ratio of 0.82x, which was identical to the level reported in the second quarter. The cancellation rate improved in the third quarter and continued to normalize toward historical levels. Net bookings decreased slightly on a sequential basis to $494 million in the third quarter, reflecting lighter booking activity for small and midsized biotech clients during the summer months. However, booking activity from biotech clients has improved since the summer, leaving us cautiously optimistic that biotech demand will accelerate over the coming quarters, assuming clients continue to have access to more robust funding for their IND-enabling programs. Booking trends for global biopharmaceutical clients remained healthy in the third quarter and were stable on both a sequential and year-over-year basis. We were encouraged by these overall booking trends that led to a steady increase in the DSA net book-to-bill in each month since the beginning of the third quarter. We were also pleased to see DSA proposal activity improved in the third quarter, particularly for biotech clients for which proposals increased at a high single-digit rate, both year-over-year and sequentially. Collectively, this reinforces our cautious optimism that booking activity for biotech clients will continue to improve. For the year, we expect DSA revenue will decline 2.5% to 3.5% on an organic basis as the focus for us, our clients and many of you on the Street begins to shift to 2026. We are closely monitoring the level of bookings that are needed to drive DSA revenue growth next year. It's still too early to provide even a preliminary outlook because we are still fully engaged in the budgeting process, and we'll need to monitor demand activity over the next several quarters. Bookings at the end of the year and the first quarter of next year will meaningfully influence our growth potential as will other drivers such as backlog, conversion, change orders, study mix and related factors. That said, we firmly believe that DSA business demand trends are stable, and there are positive signs indicating biopharma demand will rebound, including improved biotech funding and proposal activity in the third quarter as well as more certainty around tariffs and drug pricing in the global biopharmaceutical sector. For the third quarter, the DSA operating margin declined by 200 basis points year-over-year to 25.4%. The decline was primarily due to the impact of lower study volume. We expect the fourth quarter DSA operating margin will face additional pressure from 2 primary factors. First, we expect higher staffing costs due to hiring in part to backfill open positions, and we also expect higher third-party NHP sourcing costs due to the procurement of additional models to support the better-than-expected demand this year. RMS revenue was $213.5 million, an increase of 6.5% on an organic basis compared to the third quarter of 2024 and essentially unchanged on a sequential basis. The higher RMS growth rate this quarter was driven by the favorable timing of NHP shipments. As we previously noted, NHP shipments were accelerated into the third quarter. And as a result, NHP shipments are expected to be a modest headwind to year-over-year revenue growth in the fourth quarter. For the year, we continue to expect RMS will report flat to slightly positive organic revenue growth as the quarterly fluctuations from NHP shipments largely normalize on an annual basis and the underlying RMS demand environment remains stable. From a client perspective, revenue from both our academic and government client segments increased again in the third quarter, including a slight increase in North America. Aside from a small $3 million reduction in scope of an NIH agent contract that I referenced last quarter, we have not experienced any meaningful revenue loss related to NIH budgets and the uncertainty in Washington to date. Demand from small and midsized biotech clients has been more challenging this year, having a notable effect on the growth rates for small models, particularly in North America this quarter as well as CRADL site occupancy. In the third quarter, revenue for small research models was essentially flat as revenue increases in Europe and China were offset by North America, where price increases could not fully offset unit volume declines, particularly for biotech clients. Revenue for research model services increased slightly in the third quarter, driven principally by the GEMS business. Insourcing Solutions revenue was flat because CRADL occupancy has remained relatively stable this year, but overall demand from early-stage biotech clients for these services remain constrained due to funding challenges. In the third quarter, the RMS operating margin increased by 400 basis points to 25%. The improvement was primarily due to a favorable mix resulting from higher NHP revenue as well as the benefit of cost savings resulting from our restructuring initiatives. We anticipate that the third quarter RMS operating margin would be robust due to the favorable timing of NHP shipments and we expect -- and we continue to expect the fourth quarter RMS operating margin will moderate due to the timing of NHP revenue and normal seasonality in small models business. Revenue for the Manufacturing segment was $190.7 million, a 5.1% decrease on an organic basis from the third quarter of last year, largely driven by lower commercial revenue from CDMO clients. The CDMO business as well as biologics testing are also driving a slightly less favorable outlook for the segment as we now expect manufacturing revenue to be flat to slightly lower on an organic basis this year compared to our prior outlook of approximately flat. However, the Microbial Solutions business continued to perform very well, reporting high single-digit revenue growth in the quarter. As we have discussed throughout the year, our relationship with one commercial cell therapy client has ended and the work for that client wound down during the second quarter. This creates an approximate $20 million revenue headwind for the CDMO business in the second half of the year when compared to the first half. However, we are pleased to report that we are continuing to work with another commercial cell therapy client at our Memphis site. The Biologics Testing business reported lower revenue again in the third quarter, driven by the continued impact of lower sample volumes this year for both biopharma and CDMO clients, particularly several large clients facing project delays or regulatory challenges. Booking activity did improve during the third quarter, so we are cautiously optimistic that demand trends in the biologics testing business will stabilize. The Microbial Solutions business generated robust revenue growth and remains on track to grow at a high single-digit rate for the year. We experienced strong demand across our comprehensive manufacturing quality control testing portfolio, including Accugenix microbial identification services led by increased access instrument placements, share gains for our Endosafe endotoxin testing platform and higher sales of Celsis microbial detection products. Clients continue to choose our Endosafe cartridge-based platform for rapid test results, and we have been increasingly able to gain share due to the placement of automated systems and technology that drives efficiency in our clients' quality control testing labs. The Manufacturing segment's operating margin decreased by 200 basis points year-over-year to 26.7% in the third quarter due principally to lower commercial revenue from CDMO clients. Before I conclude, I'd like to provide an update on our strategy for NAMs or new approach methods. You may have recently read our press release announcing our Scientific Advisory Board. former FDA Principal Deputy Commissioner, Dr. Namandje Bumpus, will lead the Advisory Board, whose mission is to provide strategic guidance to our team of internal scientists and business leaders in evolving the company's comprehensive commercial and regulatory strategy to advance NAMs in the biopharmaceutical industry. We are extremely pleased that Dr. Bumpus has agreed to oversee this important initiative to drive alternative method innovation and adoption. Last quarter, I spoke of some of the in vitro capabilities that we are developing across our DSA sites. Today, I will highlight some of our NAMs capabilities utilized across our portfolio, including next-generation sequencing solutions in our biologics testing business to provide an in vitro approach for pathogen testing as well as genetic characterization of cell lines and drug products produced under GMP conditions. Additionally, our Endosafe Trillium recombinant bacterial endotoxin test is an animal-free product that reduces reliance on horseshoe crab-derived LAL for endotoxin testing. We continue to see increased client adoption of Trillium, albeit from a small base after its launch last year. In our DSA business, we are developing an in vitro assessment of human immunogenicity to support clients developing biotherapeutics including monoclonal antibodies and cell and gene therapies as well as to gain share in the biosimilars market for which animal testing is minimal and no longer required. By providing clients with valuable immunogenicity data, we will be able to help offer insights into the potential immune response against the drug. We continue to believe that adoption of more NAMs-enabled approaches will be a gradual long-term transition by our clients because the scientific capabilities to fully replace animal models do not exist today. As a leader in drug development and manufacturing support solutions, we have the breadth of scientific capabilities, regulatory expertise and access to data that will enable us to be at the forefront of NAMs innovation. and that makes us the logical partner for biopharmaceutical companies to advance their use of NAMs as alternative technologies over time. Before I conclude my remarks, I'd like to introduce Mike Knell, our Interim Chief Financial Officer. Mike has been with the company since 2017 as the Senior Vice President and Chief Accounting Officer and has agreed to lead the finance organization through the transition until a new CFO can be named. Mike is a valuable member of our management team and has worked closely with the CFOs during his tenure. He has a deep knowledge of our business, financial reporting and forecasting processes as well as the finance team. We are working together collaboratively to ensure a seamless transition of the CFO role. Now Mike will provide additional details on our third quarter financial performance and updated 2025 guidance. Michael Knell: Thank you, Jim, and good morning. I'm pleased to join today's call as Interim Chief Financial Officer. Throughout my 8 years at Charles River, I have gained a great understanding of our global business and have tremendous confidence in our team's ability to execute on the company's strategic and financial priorities. I want to thank Jim and the Board for their support. Before I begin, may I remind you that I will be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring initiatives, gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. We are pleased with our third quarter performance, which included revenue and non-GAAP earnings per share that modestly exceeded the outlook we provided in August. As a result of the third quarter outperformance, we are narrowing our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 0.5% to 1.5% and organic revenue will decline 1.5% to 2.5% or at the middle of our prior ranges. Non-GAAP earnings per share are now expected to be in a range of $10.10 to $10.30 or at the upper end of the prior range. The $0.10 guidance improvement at midpoint was largely driven by the third quarter operational outperformance. By segment, our updated revenue outlook for 2025 can be found on Slide 29. We have narrowed the organic revenue outlook for the DSA segment to a decline of 2.5% to 3.5% to reflect better-than-expected performance to date. You may recall that we started the year with initial DSA outlook of a mid- to high single-digit organic revenue decline. We have slightly tempered the Manufacturing segment's revenue outlook to flat to a slightly negative organic decline, and the RMS outlook is essentially unchanged. The outlook for the operating margin is also unchanged at flat to a 30 basis point decline. Unallocated corporate costs totaled $58.9 million in the third quarter or 5.9% of revenue compared to 6.6% of revenue in the same period last year. The decrease was primarily due to lower health and fringe-related costs. For the full year, we continue to expect unallocated corporate costs will be approximately 5.5% of total revenue, unchanged from the prior outlook. I will now provide an update on the nonoperating items. Total adjusted net interest expense was $24 million in the third quarter, which represented both a sequential and year-over-year decline. The reductions were primarily the result of shifting debt to lower interest rate geographies. For the full year, we expect total net interest expense will be in a range of $100 million to $105 million, consistent with the prior outlook. At the end of the third quarter, we had outstanding debt of $2.2 billion with approximately 70% at a fixed interest rate compared to $2.3 billion at the end of the second quarter. In addition to lowering our interest expense, continued debt repayment resulted in gross and net leverage ratios of 2.1x at the end of the third quarter. The non-GAAP tax rate in the third quarter was 28.3%, representing an increase of 700 basis points year-over-year. As expected, the increase primarily reflected the impact of the One Big Beautiful Bill Act, or OB3, as well as the impact of the enactment of certain global minimum tax provisions. For the full year, we continue to expect our non-GAAP tax rate will be in the range of 23.5% to 24.5%, which is unchanged from our prior outlook. Free cash flow for the third quarter was $178.2 million compared to a record $213.1 million achieved in the same period last year. The year-over-year decrease was primarily driven by lower earnings. However, free cash flow improved sequentially by $8.9 million as a result of continued improvement in working capital. CapEx was $35.6 million or approximately 3.5% of revenue in the third quarter compared to $38.7 million last year, reflecting our focus on disciplined capital spending. For the full year, we expect free cash flow to be in the range of $470 million to $500 million, an increase from our prior outlook of $430 million to $470 million due to the robust third quarter cash generation. CapEx will be approximately $200 million, a decrease from our prior outlook and at approximately 5% of 2025 revenue, it will be well below our peak capital spending in recent years. The improved free cash flow outlook reflects our tightly managed capital spending and disciplined working capital management. As Jim mentioned, the Board refreshed our stock repurchase authorization in October to a new $1 billion, all of which is available for future repurchase activity. We will continue to evaluate the optimal balance between strategic acquisitions, stock repurchases, debt repayment and other uses of capital as part of our capital allocation strategy. With our strong free cash flow generation, we will regularly evaluate making additional stock repurchases under this authorization. As part of the strategic review, we will continue to work diligently to maximize our financial performance, including through disciplined capital deployment and by actively managing our cost structure. A summary of our 2025 financial guidance can be found on Slide 35. With 1 quarter remaining, our fourth quarter outlook is effectively embedded in our full year guidance. For the fourth quarter, we expect reported revenue to be in a range of flat to a low single-digit decline and organic revenue will decline at a low to mid-single-digit rate year-over-year. Looking at the sequential progression from the third quarter, RMS revenue will be lower due to the acceleration of NHP shipments into the third quarter as well as normal fourth quarter seasonality. DSA revenue is expected to be stable to modestly below the third quarter level and manufacturing revenue is expected to improve due to the year-end ordering patterns in the Microbial Solutions business. Non-GAAP earnings per share are expected to be flat to 10% below the third quarter level of $2.43, reflecting margin pressure in the DSA segment due in part to higher staffing and NHP sourcing costs and in the RMS segment due to timing of NHP shipments and normal seasonal trends. In conclusion, we are pleased with our third quarter performance, which modestly exceeded our expectations and with the actions that we will undertake as part of the Board's strategic review. The initiatives we are taking to strengthen our portfolio, maximize our financial performance and maintain a disciplined capital allocation strategy will further strengthen our market position and lead to long-term shareholder value creation. Thank you. Todd Spencer: That concludes our comments. We will now take your questions. Operator: [Operator Instructions] Our first question comes from Patrick Donnelly with Citi. Patrick Donnelly: Jim, maybe one just on the overall backdrop here, back-to-back quarters in that low 0.8 range on book-to-bill. Can you talk about what you're seeing from customers? Is the biotech market loosening up a little bit? I know you guys leaned in a little bit on hiring last quarter. What's the right way to think about just the demand trends going forward here and what you're seeing from customers? James Foster: Yes, sure. We're seeing proposals up pretty much with our pharma -- large pharma clients and our biotech clients as well. We're seeing cancellation levels decline, which is definitely a good thing. We're seeing net bookings up for the pharmaceutical folks and biotech folks still not. We had kind of a slow summer for our biotech clients in particular, but things have strengthened post the summer, and we had actually an improvement in monthly book-to-bill for the last sort of 3 to 4 months, which we're really pleased to see. I think as everybody knows, but if not, just let me state the fact that biotech funding was way up in Q3 and biotech funding for October was the second highest month in the history of all of biotech. So one of the things that we've been watching, obviously, very closely is that because lack of funding for the last, I'd say, 18 months has definitely constrained expenditures by our biotech clients. I think we're going to have to see the continued opening up of the capital markets and access to capital for those folks to feel confident that they'll stay open, but that's a really positive sign for us. And we're seeing definitely an improvement in the demand from those folks. And we'll just have to continue to watch it and see what the situation is there. But I would say that things have bottomed out. The pharmaceutical companies have finished reducing their portfolios, biotech has a lot of work going on. I guess one last thing that's actually quite relevant. We've been talking a lot about we've been doing a lot of post-IND work, which is sort of the more expensive specialty work, which is great, great margins, nice growth rate, but we want both. And so we have begun to see more general Tox studies, more early work, more IND filings. And as -- I think we're seeing 2 things in the marketplace as biotech funding begins to strengthen, you're seeing more work going on with the clinical CROs, but also we're seeing this early pre-IND work for us. And I think as the capital markets continue to open up or stay open, maybe I should say, we should see more spending by biotech because pharma is quite strong. Patrick Donnelly: Okay. That's helpful. And I guess given that commentary, given the bookings that we've seen in DSA in the last couple of quarters, is there a path to DSA growing in '26? And what does that mean maybe for the margins? Obviously, you guys had the cost outs, which is nice to see. But what is the DSA set up given the bookings and given, again, to your point, maybe a little bit of improving trends over the last couple of months as we head into '26? James Foster: Yes, sure. So we definitely want to see the conclusion of the year as we always do, and we want to see the beginning of next year. We also want to finish our 2026 budget, but also more importantly, we want our clients to finalize their '26 budgets. A lot of the pharma companies don't do that until sort of mid or sometime the end of the first quarter. But assuming that happens as predicted, we would want to see continuing improvement in book-to-bill over a sustained period of time, which we are hopeful that we will see. And there are other things to take into consideration in addition to that, I should say, not instead of, which is what does the backlog look like, how fast do we move through the backlog and also what's the nature of the studies that we get. In other words, are they longer short-term studies, if they're short-term studies and they start relatively quickly, that certainly could generate incremental sales. So we're going to -- we'll obviously watch the bookings very closely, and we'll report to you folks whether things continue to improve. Operator: Our next question comes from Dave Windley with Jefferies. David Windley: Jim, I wanted to drill in on a couple of topics there. You mentioned the long-term studies and wanting a balance of both inferring -- want to see more short term. Are you seeing that? And what is the difference and say, what's flowing through revenue versus what you're seeing coming in short term versus long term in the bookings or backlog? James Foster: Yes. So we're beginning to see more short-term work or pre-IND work, which is an important part of what we do and always do. We like a balance of short and long term, and you typically don't get the long-term work until you have the short-term work. So I think, as I said a moment ago, that's clearly a commentary on comfort level of our clients to spend more earlier because access to capital has improved over the last -- what is it, over the last 4 months. And those -- and the backlogs now are sort of 9 months-ish. And you'll remember, Dave, that we were sort of 9 months -- 6 to 9 months, I would say, for many, many years. And that's a nice backlog number because it allows you to slot studies when stuff slips and it also allows you to get the bookings -- get the revenue relatively quickly because the studies are shorter. So I think that's only good news and a positive indication of incremental spending, particularly by the biotech folks. And given all the things that we just said, we should see that playing hopefully through enhanced bookings and revenue as well. David Windley: Got it. So relatedly, to your point about slotting studies, one of your peers, I believe, talked about RFP flow bookings and then study start timing, where the first 2 were okay, but it was the study start timing that was problematic. Are you seeing anything like that? Is that something maybe you've already seen and it's flowed through or you haven't seen yet? I'm just wondering if like the study start timing and your ability to kind of move slots in your own calendar would be impacted by clients' willingness to move study starts. James Foster: Yes. So we have read and heard that some of our competitors are in that situation. I would say that we're able to start studies relatively quickly and in concert with the time frames that are important to our clients. As I said, so we have a nice backlog, but a shorter backlog with studies that are starting more rapidly, particularly when -- since we have availability. So that lines up really well for us. I mean, all 3 of those factors. So we're very much focused on being as flexible and accommodating to our clients as possible and getting the work started on a time frame that they're interested in. David Windley: Okay. And if I could just slide in one more, which is, would you be willing -- on the divestiture, the strategic review, the 7% that you quantify, it seems like the CDMO is probably part of that, but not all of that. Would you be willing to provide some color on what those targeted divestitures are? James Foster: Yes. We're going to stay away from the specificity of that, except for the fact that it's around 7% of our revenue and should generate $0.30 accretion on an annualized basis. It's important to the divestiture process, but I think we may not be specific about those assets. Operator: Our next question comes from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I appreciate the updated commentary, Jim, on the NAMs. Can you talk about whether you're starting to see any change in behavior among any of your client groups regarding NAMs? Are there certain people who are thinking about it, not thinking -- no one is thinking about it, et cetera? And then two, for the incremental $70 million in cost savings, could you maybe double-click on that slightly more and just sort of help us think about the pacing of that and sort of any other details you could provide as to where those savings are coming from? James Foster: Sure, sure. I'll let Mike take the cost savings question in a minute. On NAMs, the pronouncements by the FDA and others is a recognition or a focus on the fact that if possible and when the technology is available and works that other technologies could be used or should be used in lieu of or at least in addition to research models. And I think that that's a philosophy that everybody embraces, including us that if there are legitimate alternatives, that's great. The scientific reality is that most of these technologies are relatively nascent and somewhat crude and provide some valuable somewhat anecdotal information relatively early in the drug development process, particularly around the discovery phase. And by the way, that will be really beneficial for the companies to focus on a lead compound to hopefully get those lead compounds into the clinic faster. And as a result of that, to get them into the market faster, it should also allow them to spend less time working on drugs that aren't promising. And except for a very small sliver, monoclonal antibodies is sort of poster child, we don't see them having much impact on safety. So we're hearing very little from our clients, except until the alternatives are scientifically robust. They're going to keep doing things the way they have always done them. And there's some internal investment by our clients in NAMs, particularly in the discovery phase. So -- we're thrilled with the Scientific Advisory Board we put together run by this #2 -- former #2 person at the FDA. And we have a host of NAMs technologies in our portfolio and some others that we're looking at from an M&A point of view, which should allow us to provide a leadership -- be in a leadership position with our clients and the FDA because we're going to have to validate this stuff. And as you've heard us say before, I think that ultimately, we'll probably be filing or our clients will be filing data, both the NAMs data and animal data simultaneously. So I think that's how it's going to move. And Mike, why don't you take the cost savings question? Michael Knell: Yes, sure. Elizabeth. So we previously disclosed we've identified $225 million of annualized cost savings, and then this morning's press release, we talked about an additional $70 million. And when you think about where they're coming from, really think about 5 different categories. The first one, network planning or facility consolidation, site closings, that's been going on for some time. Second one is really around workforce rightsizing, so not only in the business to rightsize for the demand, but also in our G&A pretty extensively throughout the company. Third one is in procurement savings. So we took a pretty extensive review of our procurement spend this year, and we've made -- we've got some significant savings from that. We talked -- the fourth one is really around GBS. So we talked about this -- it's really about being more scalable, more flexible, operating more efficiently, and that program is just starting now. And then the last one is really some internal efficiencies and automation. We've done a lot of digital investments over the years, and we're expecting to see some benefits around just internally how we operate. And so with the carryover from some of the initiatives we've implemented this year and the additional $70 million next year, you should think about $100 million of incremental savings in 2026. Now those all won't fall and drop to the bottom line next year. We're going to use those as a lever to offset a lot of the inflationary and cost pressures that we have and really other headwinds and protect the operating income given the demand environment we're in right now. Operator: We'll take our next question from Eric Coldwell with Baird. Eric Coldwell: Quite a few of mine have already been covered. I wanted to -- just on those last comments about the $100 million of incremental savings in '26, but not all of it falling to the bottom line. Can you possibly give us a sense on how much you would expect to fall to the bottom line? If I missed that, I apologize. Michael Knell: Yes. I don't think we -- we have -- as we're in the middle of our planning process right now, Eric, and it's hard to tell how much will fall through. I know we are focused on generating and reinvigorating earnings growth next year. And so that's -- we've been really judicial and prudent in focusing on these cost savings with the intent of expanding earnings next year. But it's a little too early to tell just how much will fall through the bottom. Eric Coldwell: Jim, I'm going to circle back on a question that's going to bug you and probably isn't fair. But I think one of the biggest things the Street is struggling with this morning is the outlook for DSA growth next year, and I fully realize that bookings over the next 2 quarters are incredibly important on many fronts. But as you sit here now in November, a couple of months from the start of the new year, if you were in our seat on the buy side, on the sell side, Wall Street looking in, where would you be framing DSA to start the year? I mean we're coming off of 4 of the last 5 quarters, I think, have had book-to-bills in the 0.8 ZIP code. It's just -- it feels like this could be a down year in '26, but I know things can change literally overnight in DSA. So how would you help us frame the thought process for '26? James Foster: Yes. I mean -- we want to be careful not to get too deep into '26, but I certainly understand the nature of the question. I think the factors that we outlined that I talked about in the first couple of questions are, I think the most relevant thing. So the big drug companies seem to be pretty much done with their work. We're seeing greater access to capital for the last certainly 4 months or so by biotech. We've seen improvement in book-to-bill over the last 3 or 4 months. Proposals are way up. Cancellations are down, and we're seeing net bookings improve for our global clients where we have significant market shares. And so really, everything that sort of caused a decline in our PSA business over the last 18 months or so has been like 100% related to access to capital markets by the biotech clients. So we are guardedly optimistic that if they -- if those factors remain positive and/or improve, that obviously will be extremely beneficial for us going into next year. But we need to see that continue -- some benefits continue for the fourth quarter and as we move into the first quarter. So we just have to stop short of predicting what the actual numbers will be for '26. I just think it's just too early. Eric Coldwell: Just a quick other one outside of the scope of what people are asking today. There was some news and updates around the BIOSECURE Act back in October. I'm curious if you have any updated thoughts on what that might lead to. James Foster: Yes. We haven't really seen any impact. We don't -- interestingly, we hear virtually nothing about BIOSECURE Act and others from our clients. So it's either an essential part of what they're doing every day and they just deal with it or they don't think it's significant. So we're not hearing anything additionally from them. So we really don't have any updates on that. . Operator: Our next question comes from Justin Bowers with Deutsche Bank. Justin Bowers: So Jim, it sounds like proposals were pretty healthy in 3Q, up high singles year-over-year and sequentially as well. Was that consistent across globals or biotechs? Or was it weighted one way or the other? And then can you also give us an indication of the slope of how DSA bookings progressed during the quarter and if that slope continued or how the slope continued into October? James Foster: Yes, sure. So proposals for mid-tier were up over the prior year and the previous quarter. So we were really pleased to see that after kind of a slow summer. For Global, they were up over the prior year and not up over the prior quarter. As I said earlier, cancellations were down for both -- for all of our client base. So that's an extreme positive. Gross bookings for Globals were kind of flat, but net bookings were up. And we still have a gross to net bookings issue with the mid-tiers, which we hope will ameliorate as access to capital continues to free up for them. So obviously, really pleased to see a significant increase in proposals. Justin Bowers: Got it. And then just a quick one on the timing of the asset divestitures. Do you have LOIs for any of those assets? And do you plan on treating that as discontinued ops going forward? Or are you going to keep it in continuing ops? James Foster: So we're actively working to divest certain assets. We hope that -- I think we said on the call, we hope that will be done by the middle of the year. We're not in an LOI stage yet. But obviously, we'll move forward with new speed and some sense of urgency to make that happen. And Mike, why don't you take the accounting question? Michael Knell: Yes. So the accounting rules have pretty specific criteria when to go into discontinued operations and one of those being a materiality concept. And just based on the nature of the businesses, their impact to our operations and financial results that just don't qualify for -- Disco Ops. So they will continue to be in our continuing operations until sometime as they're divested. Operator: Our next question comes from Casey Woodring with JPMorgan. Casey Woodring: Great. On DSA margins in 4Q, you mentioned higher third-party NHP sourcing costs. Can you just elaborate on that and if that's expected to be a drag on DSA margins next year? And then my follow-up here quickly is just you've talked a lot about how book-to-bill has improved each month. Is there any way to quantify what book-to-bill was in September or -- and how much that stepped up in October? I think one of the questions is if you can kind of continue this trend of sequential month-over-month bookings growth, if you can exit the year at over 1 book-to-bill in 4Q. So any color on that would be helpful. James Foster: I'll leave that to you, Mike. Michael Knell: Yes. In the beginning of the year, we -- remember in DSA, we had expected a mid- to high single decline rate, and we're meaningfully improved over that outlook by the end of the year. So when we are exceeding the expectations, we have to source from third-party NHPs that come with a higher cost since we have to procure additional models to meet that additional expected demand. So as far as 2026, no, I mean, as long as we can plan and we are consistent with the demand levels, it shouldn't be a continuing drag on the business. Casey Woodring: And then just on that month-over-month book-to-bill, any sort of color on where September kind of shook out and maybe where October landed too? Todd Spencer: Yes. Casey, this is Todd. We're not going to provide any specificity into the months. We really don't like to call out the months because we like to look at the trends overall. I think just as Jim mentioned earlier, what we're really looking for and what we saw over the past kind of 3 or 4 months is that, that trend continued to improve. And obviously, we'll be closely monitoring to see given the strength of some of the proposal activity and biotech funding that we are cautiously optimistic that, that will continue. Operator: Our next question comes from Michael Ryskin with Bank of America. Michael Ryskin: First, I want to ask on the strategic review update, a lot of different bits here. I guess in a way, is this a final update? Or are there more discussions in progress? Is there an opportunity for further updates 6 months from now, a year from now, kind of the point that you've announced several incremental cost savings initiatives. Do you feel like you sort of finished your analysis and there's nothing more to get? Or should we kind of view this as still being open-ended? James Foster: Yes. So maybe a review of your assets is never complete. But certainly, we've gone through a deep portfolio review, sort of our strategic direction. And how we intend to allocate capital. So I would say that, that part has been completed at least for now. And we're moving on to the implementation phase, which is trying to divest certain assets. I think we do a really good job with the strategic planning and capital allocation committee of our Board, reviewing our portfolio sort of on a continual basis and looking at assets that aren't generating the returns that we would like, making sure that we're investing capital appropriately, both in M&A and occasionally buying back our stock and continuing to pay down our debt. So that's why I say maybe it's never complete. But certainly, in process, which has been going on for the last 3 or 4 months. I'd say the first phase of that is complete. We're really pleased with the sort of focus and initiatives that we're taking both to invigorate the top line and the bottom line and to get some of the assets in our portfolio that are definitely headwinds out so we can spend more time on things that have higher growth potential and greater opportunity to be accretive to the bottom line. So I think it was a very thoughtful and thorough and robust process. Michael Ryskin: Okay. That's helpful. And then a lot has been asked on DSA and next year and things like that. I want to ask it sort of from a more qualitative perspective. Do you feel like visibility into customer demand, sponsor demand? Do you feel like conversations with customers are becoming more stable? I know it's been a very uncertain time over the last 6, 12, 18 months. Just kind of want to talk about the planning process and how much forward visibility you have and how comfortable you feel with plans? Is that settling down at all a little bit even though we talk about the actual bookings and things like that? James Foster: I think that things are definitely more stable with sort of both client segments. The big drug companies have been reducing their infrastructures. We reported over the last quarter or 2 that we have very large multiyear contracts with most of the big pharma companies, and we've been sort of working through re-ups of those. So there's definitely stability there and sort of visibility and predictability. We have a lot of biotech clients who obviously have no internal capacity to do any of the things that we do. They're very innovative, and they've got a bunch of drugs in development that have paused. Some they're trying to push into the clinic with the money that they have and some they're going back and getting the IND filed. So yes, I think there is increasing stability and visibility. We like the backlog at 9 months. When it got to 14, 15, 18 months, it actually was too long. And by the time clients got to the point where they should be starting studies, they actually oftentimes didn't have them. So 9 months gives you a significant backlog to fill the gap when things stall. -- which happens all the time, but also gives you the much, much greater predictability of your business model. So we're encouraged by the access to capital. We're encouraged by the third quarter. We're encouraged by what we're hearing for our clients. We're encouraged by book-to-bill improving sequentially over the last 4 months. We need to have all of that continue through the back half of the fourth quarter and the beginning of the first quarter and all of our clients to put their operating plans to bed for 2026 before we feel that we'll have our arms around what the growth rate ought to be for that for the next fiscal year. Operator: Our next question comes from Ann Hynes with Mizuho Securities. Ann Hynes: Great. Just in DSA, like I know you don't want to give 2026 guidance. But if the biotech IPO really heats up market in Q4, how long does that usually end up? And how long does that take to show up in your backlog and revenue? And then my second thing would be about capacity. I know you've been reducing capacity in the segment. Could you remind us how much you have reduced capacity to date and what capacity utilization you're running at and maybe where you would like that to go just to see growth again? James Foster: Yes. So we used to give exact percentages of capacity utilization. It used to be sort of optimal utilization. It used to be in the low 80s, which surprised everybody. But if you're 95% full, it's actually inefficient to turn over new rooms. So that's sort of where we like it. We stopped giving those numbers. But capacity utilization is below that. So that's not maximum efficiency. By the same token, it's good to have incremental capacity when and as the demand heats up. And there was a question earlier about how quickly we can start studies and having incremental capacity allows us the ability to do that. So we try to stay ahead of the demand curve historically by building incremental space and now by holding on to. We've been building some incremental space in our laboratory sciences aspect of our Safety Assessment business. which is important. If we don't have the space when the clients have the work, that's obviously a problem. And it takes, I don't know, 18 to 24 months to build some new space and a longer period of time to validate it. So I would say capacity for us is in a good place as we finish the fiscal year and move into the next one. And hopefully, as demand increases, we should be able to accommodate that. Just tell me -- remind me the first part of your question had something to do with backlog in the fourth quarter. Ann Hynes: No, if the funding environment really heats up, say, in Q4. How long does that take to... James Foster: There was a lag. Always tough to predict. I would say that while they're sort of waiting for the capital markets to open up and they've got some work backed up, they tend to be kind of judicious and thoughtful about how they spend their money because they want to make sure that the capital -- that access to capital will remain. So it's typically not overnight. It usually takes a couple of quarters anyway. But I think once they have the confidence that the capital markets are open for some period of time for private companies that want to do IPOs or relatively recent IPO biotech companies that were counting on secondaries that are worrying about access to capital. I mean that definitely changes the slope of demand. These are the discovery engines for the big drug companies, and this is where a lot of the innovation is coming from. And as we continue to say they have no internal capacity to do the work that we do. So it obviously will be a positive. It's a little bit tough to discern how quickly they begin to spend, except to tell you what they've done historically, which is to be a little bit careful. This could be different because I do think there's a fair amount of pent-up demand and a desire to get INDs filed, which is something that these companies focus on intently every year. And we know that there's a bunch of drugs that sort of stalled before they got the INDs filed. So hopefully, we'll see that pick up. Operator: Next question comes from Max Smock with William Blair. Max Smock: I know we're over here, so I'll keep it to one. I just wanted to ask a higher-level one, Jim, on your comment about still seeing some uncertainty out there from clients. And it sounds like on the biotech side, another month or 2 of good funding will take care of that uncertainty. But on the large pharma side, what do you think they're really waiting to see before accelerating spend? It feels like the MFN and tariff headwinds that we've discussed seem to be resolved or at least kind of moving in the process of being resolved. Does further progress there eliminate the remaining uncertainty? Or are there any other factors out there that we should consider as having an impact on pharma spend here over the next couple of quarters? James Foster: Yes. We feel very good about pharma spend given net bookings, proposal volumes, et cetera. given these long-term contracts that we have and given the fact that a lot of the reductions in their cost structure in anticipation of the patent cliff has happened. Obviously, the drug companies have plenty of money. So ability to spend is never a problem with them. And they spend in their -- for their -- to support their own R&D shops, but they also access molecules from the biotech community, either licensing them or buying entire company. So I think they're in a good place generally and increasingly for us should be stable to growing part of our client demand. And we have significantly higher shares than the competition in pharma. But biotech has I'd say, for the last decade or 1.5 decades been the principal driver of our growth, just given how many companies there are, how many new companies are created every year, how innovative they are and how much they need our capabilities. So we are intently focused on biotech and being accessible to them and flexible with them and guiding them through the regulatory process to get the drugs into the clinic and ultimately into the market. So we're very pleased to see the capital markets begin to open up. We've been looking forward to this for a while, but they need to really open and stay open for a while for things to substantially invigorate. Max Smock: Jim, if I could just ask a quick follow-up there. On your point about replenishing their pipelines with licensing and M&A, there has been a nice uptick in both so far year-to-date. Just wondering to what extent M&A either helps or hurts how you think about that recovery. And in particular, licensing from China, what impact that would have relative to maybe some of the licensing deals that have been more U.S.-centric. Does that limit your opportunity to benefit from large pharma replenishing their pipelines? Or is it more of a net neutral? James Foster: No, I think that that's kind of an always the buying and accessing molecules from China. I wouldn't say it's brand new, but it's relatively new and increasing somewhat because there's a fair amount of innovation coming out of China. So I mean, I think that's fine. the extent to which the big drug companies need to further develop molecules that they access either from China or somewhere in the U.S. or Europe, that we're certainly thrilled to have that work. Since we have with very few exceptions, principal market shares with all of the big drug companies, it's likely that we'll get work if further work needs to be done on those molecules, it depends on what stage they're at. And for a lot of the, obviously, U.S. and European small biotech companies, we're already doing work for them. So it's unlikely that a pharma acquirer would change horses midstream. So we're likely to keep that work and get the incremental work as well. Operator: Next question comes from Luke Sergott with Barclays. Luke Sergott: I just wanted to think -- talk about the increased staffing on the DSA. And from a timing perspective of how you guys continue to add the service piece to match the oncoming volumes. Is that still in line with what you had done in the past, like, let's say, like 3 to 6 months as you continue to look out there? James Foster: Yes. I mean the cremental hiring is -- it's essential. We need to do it to accommodate demand. We need to backfill some positions because we have some turnover like all companies. We're adding headcount to our laboratory sciences part of Safety Assessment, which has been growing nicely and is a major focus for our clients. So we're really -- we're adding capacity where we're seeing growth. And I just want to remind you that what we're seeing in our DSA business, particularly the Safety Assessment business is we have a level of demand that's meaningfully above what we initially thought for this year in terms of our operating plan, and we have provided guidance to that. So having the people in place is obviously essential to being able to do the work. So we're happy to have some incremental capacity. We were getting to the point where it was tight on having sufficient staff to do the work in a time frame that our clients want. And obviously, everything with us is about both the quality of our execution and the speed of our execution because all of our clients are in a rush to get their drugs into the clinic and ultimately into the market. So we feel that as we move through the back half or the rest of the fourth quarter and as we move into next year that these incremental jobs will be essential to be able to accommodate the work in 2026. Luke Sergott: Great. And then from a follow-up, just as you guys think about the investments going forward, I understand there's a lot of moving pieces with divestiture and cost outs, et cetera. But you also talked about from a strategic review, adding new technologies or capabilities. Elizabeth talked a little bit about the NAMs. Just talk about appetite here from an inorganic sense on bolt-on versus on more strategic -- and then kind of where you would be willing to take the balance sheet or your leverage levels given that you're continuing to take those down right now, but if you need to do something more strategic. James Foster: Yes. We've always felt that strategic acquisitions was the best use of our capital and still believe that. There are some areas that we pointed out in our prepared remarks that where we have a lot of focus by our clients and where we need to continue to look and invest to invigorate our pipeline. But we're going to stay in our core. So we're looking at things like bioanalysis, which is part of our laboratory sciences capability. We're looking at some geographic expansions in some of our businesses that maybe something in Europe that we don't have in the States or vice versa. We're looking at a host of in vitro technologies that sort of fall squarely under the NAMs nomenclature. So it's -- there are several things that we're looking at that will be important to our growth, to our margins, to our competitive strength. Our leverage is in the low 2s. We're certainly comfortable levering up to the mid or even the high 2s because almost always, we've been able to reduce our leverage substantially within 12 months. And so our free cash flows are really quite substantial. Debt is coming down, interest related to that debt is coming down as well. So balance sheet is in good shape. We're certainly comfortable in the mid-2s or even the high 2s once we get it down. We're pretty much committed to keep it under 3 turns. Operator: Our final question comes from Rob Cottrell with Cleveland Research. Rob Cottrell: I guess I'm just encouraged to hear you say that spot pricing is stable for the second straight quarter. Is the selected discounting that you all were discussing last year still a headwind year-over-year into the fourth quarter? And at what point do you expect pricing to flip from a headwind to a tailwind? James Foster: Yes. I'm not sure it's a headwind. I mean we're trying to do it very strategically. And so the extent to which it minimally allows us to protect share, that's obviously important. And maximum allows us to take share, which obviously helps our growth rate and could help our margins as well from just covering that level of volume. I think we're using it really well. If a new client calls and wants to get a price on something, well, we'll give them pretty healthy prices. A lot of the big clients that we have long-term contracts with prices are prenegotiated and so we know what that is going to be. So and pricing, absolutely, if you look historically and as we look to the future, as demand picks up and space gets tighter, pricing will be available and easier for all of us. And nobody -- I can just speak for us, certainly, there'll be no need to reduce prices to compete in the marketplace. So we feel that we're using it thoughtfully and strategically and beneficially -- and there's -- while our shares are pretty good versus the competition, there's still pieces of business that we're desirous of getting. And if that's what's required initially to get the business, then we'll play that card. Rob Cottrell: And then along those lines, any change in win rate during the quarter? James Foster: I don't know if we -- Todd, will we ever disclose that? Todd Spencer: No. I mean we didn't really -- we haven't disclosed that. I would just kind of echo Jim's comments that we continue to look at price selectively to -- at a minimum, we try to -- the goal is to maintain share, if not win share. Operator: We have no further questions in queue. I will turn the conference back to Todd Spencer for closing remarks. Todd Spencer: Great. Thank you, Angela, and thank you, everyone, for joining us on the conference call this morning. This concludes the call. Operator: Thank you. That does conclude today's Charles River Laboratories Third Quarter 2025 Earnings Call. Thank you for your participation, and you may now disconnect.
Operator: Good day, and welcome to Cresco Labs Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to T.J. Cole, Senior Vice President of Corporate Development and Investor Relations for Cresco Labs. Please go ahead, T.J. T.J., please go ahead. T.J. Cole: Thank you. Good morning, and welcome to Cresco Labs' Third Quarter 2025 Earnings Conference Call. On the call today, we have Chief Executive Officer and Co-Founder, Charles Bachtell; Chief Financial Officer, Sharon Schuler; and President, Greg Butler, who will be available for the Q&A. Prior to this call, we issued our third quarter earnings press release, which has been filed on SEDAR and is available on our Investor Relations website. These preliminary results for the third quarter are provided prior to completion of all internal and external reviews and therefore, are subject to adjustment until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the quarter ended September 30, 2025 on SEDAR and EDGAR later this week. Before we begin, I want to remind you that statements made on today's call may contain forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described in our earnings press release and in the most recent annual information form and MD&A filed with the securities regulators. This call also contains non-GAAP measures, also outlined in our earnings press release and in the MD&A filed with the securities regulators. Please also note that all financial information on today's call is presented in U.S. dollars, and all interim financial information is unaudited. With that, I'll turn the call over to Charlie. Charles Bachtell: Good morning, everyone, and thank you for joining Cresco Labs' Q3 earnings call. This quarter demonstrated the power of our disciplined execution and resilient platform as we delivered consistent results while positioning Cresco for the next phase of industry growth. The cannabis industry continues to evolve, entering a new era defined by scale, efficiency and strategic leadership. Growth will come from increased consolidation and scale in existing markets, expansion in the new state-regulated markets and by broadening our reach beyond the traditional state-regulated cannabis system. Cresco Labs is built for this moment. Our focus remains clear: execute in our core markets with precision, strengthen profitability and invest intelligently for long-term value creation. In Q3, Cresco Labs generated $165 million in revenue, up 1% sequentially. We produced $80 million in adjusted gross profit, $40 million in adjusted EBITDA and $6 million in operating cash flow. Importantly, we completed our debt refinancing, reducing the size of the debt, extending maturities, improving flexibility and reinforcing our balance sheet to fund future growth. This quarter also reflected our ongoing commitment to improving the quality of our earnings. We're focusing on durable cash-generating operations and making portfolio decisions, such as our California exit that strengthen long-term profitability and balance sheet health. The industry trends we've been watching over the last several quarters continue to play out with clear signs of consolidation emerging across markets. Every decision we make is guided by one objective, building a more productive and cash-generating platform that delivers value today and creates substantial growth for tomorrow. Let me walk through how we're executing on that strategy. First and foremost, our #1 priority is maintaining a solid balance sheet with a strong cash position. We've built a balance sheet that enables the stability and flexibility our strategy requires. With a solid cash position and debt refinancing behind us, we've successfully extended maturities, eliminated near-term obligations and improved flexibility for future investments. We're now positioned to lean into disciplined M&A and broader growth initiatives. Our pipeline includes several compelling opportunities that align with our operational strengths, accretive, synergistic and strategically located. The quality of deals available today is the strongest we've seen in years, and we expect M&A to become a meaningful growth lever in 2026. As part of our ongoing effort to strengthen our business and ensure long-term sustainability, we closed on the sale of our California operations on October 31. While the transaction has a nominal cash value, it improves our go-forward profile by removing liabilities, eliminating operating losses and reducing organizational complexity. California has been an important part of Cresco Labs' evolution, but stepping away allows us to focus resources squarely on our most productive and strategically aligned projects. We have a strong and flexible balance sheet with capacity for strategic investment that will be used to create long-term value for our shareholders. Second, our focused footprint uniquely positions us to win with organic growth from our core markets and growth potential from target expansion markets. We are methodically expanding in markets where we already lead while laying the foundation for new opportunities. In Ohio, we're holding the #1 retail share position as we've opened the first of 3 new dispensaries planned to open through early 2026. The new store's early performance has exceeded expectations, validating our disciplined site selection and operational playbook. The next 2 Ohio dispensaries are on schedule to open in the first quarter, further strengthening our position in one of the most promising emerging U.S. markets. We're also making progress in Kentucky, where we're preparing to open operations in one of the country's newest medical markets. Our cultivation and processing facility build-out is advancing on schedule, positioning us to bring our consistent high-quality products to patients starting in late Q2 and ramping up through the second half of 2026. We believe Governor Beshear and state leaders have developed a smart, sensible regulatory framework that's focused on safety, patient access and responsible growth, and we're excited to be a part of it. While near-term financial drivers and disciplined execution are top priorities, we're also reaching beyond U.S. regulated markets to nurture opportunities that can grow our platform over time, including hemp and international markets. In the coming weeks, we will be taking an important first step globally by launching our flagship Cresco branded flower in Germany, marking our entry into the European Union. We've spent considerable time learning about the European market and believe Germany's well-structured medical framework and expanding patient base make it an ideal place to pilot our brand strategy and consumer insights model. This test-and-learn approach allows us to make small, cost-effective bets that have the big long-term potential, while keeping our core U.S. market performance at the forefront. We're in control of our growth story. Every decision to expand is wrapped in a clear understanding of where it can add value and how we can execute with discipline. We're balancing organic growth, nurturing long-term bets and weighing new acquisitions and new channels to enable a resilient, profitable performance-driven platform. And lastly, our proven retail and wholesale capabilities will keep enabling us to outperform the market. In wholesale, adding cultivation capacity has directly translated to performance gains. We grew share quarter-over-quarter in Illinois, Pennsylvania and Massachusetts, landing #1 branded share positions in all 3 states and maintaining top 5 positions across our limited licensed wholesale markets. Our deep expertise across cultivation, manufacturing and distribution is making Cresco Labs the producer of choice for some of the most respected brands in the industry. Brands like Kiva and a growing roster of premium partners look to us for reliability, innovation and consistency, qualities that define true category leadership. On the retail front, we continue holding top share positions in our limited license states, including #1 position in Illinois and Ohio. We're tapping into our long-standing history of retail technology innovations to drive new efficiencies that also enhance the customer experience. For example, Sunnyside recently rolled out self-serve kiosks to improve transaction speed, increase throughput and optimize staffing, all while maintaining high-touch service. The result is faster checkouts, higher customer satisfaction and improved operating margins. Our integrated retail and e-commerce ecosystem continues to scale profitably, while deepening shopper engagement. Recently, our sunnyside.shop platform surpassed $1.5 billion in cumulative sales, a testament to the enduring strength of our omnichannel retail strategy and the loyalty of our customer base. Our wholesale and retail performance reflects our ability to execute with precision, adapt to evolving market dynamics and lead through both growth and margin-focused cycles. With these capabilities in hand, Cresco Labs is positioned to not only outperform the market, but also to exemplify leadership within it. In closing, Cresco Labs is ready for the next chapter of growth. In Q3, we delivered results in line with expectations, maintained our leadership positions across key markets, strengthened our balance sheet through the successful completion of our debt refinancing and streamlining our footprint. Together, these actions reinforce our financial foundation, preserve shareholder value and create greater flexibility to invest in the future of Cresco Labs. This approach reflects the discipline that has guided us from the start, building a scalable, stable platform designed to outperform in every environment. With that, I'll turn it over to Sharon to walk you through our Q3 financial performance in more detail. Sharon Schuler: Thank you, Charlie, and good morning, everyone. We reported $165 million in revenue, representing a 1% sequential increase from Q2. Our results reflect the continued stability of our core business and the benefits of increased cultivation, which helped offset price compression across several of our markets. Wholesale revenue grew 10% quarter-over-quarter, driven by the expanded capacity and strong market share gains in both Illinois and Pennsylvania. On the retail side, one new dispensary opening in May helped partially offset continued price pressure across the network, resulting in sequential retail revenue down 4%. As discussed last quarter, gross margins were in line with Q1 as some of the onetime favorable mix and production factors we benefited from in Q2 did not repeat. The quarter reflected a mix of progress and the expected transitory factors. We continue to make incremental operational improvements across our network, increasing yields, optimizing cultivation practices and lowering unit costs. As we ramped production in Illinois and Pennsylvania, we sold through high-cost flower during the quarter, resulting in adjusted gross margins of 49%, consistent with Q1 and our guidance. We've made continued progress on streamlining our business, removing $2 million from adjusted SG&A compared to Q2. Our team's focus on the bottom line and unending quest for efficiency is leading to small savings across the organization that makes a collective difference. Adjusted EBITDA was $40 million or 24% of revenue, which is consistent with underlying performance trends when excluding the nonrecurring benefits realized in the prior quarter. In Q3, we generated $6 million in operating cash flow and invested $7 million in capital expenditures from Kentucky as well as upgrades in Ohio and Florida. Year-to-date, we've generated $45 million in operating cash flow, resulting in free cash flow of $20 million. We ended the quarter with $82 million in cash, including restricted amounts after paying down $35 million of principal from our debt. With our debt refinancing behind us and no near-term cash obligations, our balance sheet is in a strong position to execute our strategy. Looking ahead to Q4, we expect revenue from our core platform to remain roughly in line with Q3. Expanded cultivation capacity in Illinois will help offset ongoing price compression across several markets and increased retail competition anticipated near high-volume Sunnyside dispensaries. Revenue will be further reduced following our exit from California, which in Q3 contributed less than 3% of revenue on a consolidated basis. While our expanded cultivation network positions us well for 2026, we expect to continue selling through higher cost flower in Q4. This is the natural result of ramping new production with lower yields and utilization early in the process. We also expect price compression to continue to act as a headwind for gross margins. We're expecting SG&A to remain relatively stable going forward. While we'll continue to look for opportunities to optimize, the next phase of margin expansion will primarily come from top line growth and operating leverage. Our team remains focused on disciplined execution and productivity, optimizing our asset base and positioning the business for stronger margin contribution and growth in 2026. With that, I'll turn it back to Charlie for closing remarks. Charles Bachtell: Thank you, Sharon. The cannabis industry is entering a new phase of growth and consolidation. Operators with scale, efficiency and financial discipline will define the next chapter, and Cresco Labs is built to lead it. You can see our leadership in Illinois and Ohio, where we outperform expectations and hold the #1 retail share and #1 branded portfolio in core wholesale markets like Illinois, Pennsylvania and Massachusetts. These results underscore the strength of our integrated model and our ability to execute consistently even in challenging environments. While we're optimistic about federal reform, we're not waiting for it. Momentum in Washington represents meaningful upside for the entire industry, but our strategy does not depend on it. By leveraging our core assets, capabilities and operational excellence, we are building an emerging growth platform designed to create long-term value, both within and beyond regulated U.S. cannabis. I want to thank the Cresco team for their continued commitment, adaptability and teamwork in positioning the company for long-term success. With that, we'll open the call up for questions. Operator: [Operator Instructions] Our first question comes from Aaron Grey from AGP. Aaron Grey: So first one I want to talk about is your international aspirations. You're announcing the initial launch in Germany. Maybe just some additional color you can talk about in terms of the supply chain, the partnerships, assuming it's more asset-light in the near term. So how you're looking to approach that initiative? And then more longer term, I know you're in still test and learn, but how important do you feel like it is to own the supply chain potentially international similar to the U.S.? Or could you potentially have more of an asset-light strategy even in the long term? Charles Bachtell: It's a great question. The way that we're thinking about the evolution of the international expansion, I think, is the same way that we're thinking about the evolution of cannabis, in general. It's dynamic. It's going to have certain characteristics today that could change and evolve over time. And so developing a dynamic approach to it, to the international expansion is the same way that we think about growth within the U.S. cannabis space as well. So we're excited to be taking this first step. You asked about the supply chain. It is -- it's an interesting supply chain, where you don't necessarily have to own and operate it. There's infrastructure that's in place. There's cultivation and manufacturing from certain countries. There's processors from other countries that are EU GMP certified that can bring your product into the EU and then there's distribution channels within Germany. So this is part of the rationale for the test-and-learn approach. It's different in the way that you can implement an asset-light international multi-country distribution approach unlike the U.S. market. So we're really excited about it, but a lot to be learned, and we'll continue to provide updates. Aaron Grey: Okay. Great. Appreciate that, Charlie. Second question for me. It also sounds like in the prepared remarks, you talked about some evolving thoughts on hemp. So if you could expand on that a bit. Are those specific for formats? Obviously, a lot of people have been getting more into the beverages in terms of some of your peers. So just more color in terms of how you're looking to potentially think about hemp over the near and the long term. Charles Bachtell: It really comes back to THC and cannabinoids, right? So it's how do we think about THC and cannabinoid, both production, branding -- branded products and distribution. How the hemp regulations evolve or don't evolve is just part of the broader cannabis story. And so again, it's forming Cresco to be a leader in the normalization, professionalization of the cannabis industry. It really is in the production and distribution of branded cannabinoid products. So again, similar to international, I want to make sure that we are educating ourselves, that we are testing and developing approaches regardless of how state or federal or international reform occurs relating to the cannabis plant as a whole. So it's an interesting opportunity to reach more customers today than through the regulated state legal cannabis channel. So we're developing products. We're developing go-to-market strategies. And again, I think it's a very interesting and unique opportunity for us to develop the skill sets and the approach regardless of how reform happens for cannabis going forward. And Greg has additional comments. Greg Butler: Thanks. I think to build on what Charlie is saying, as we look at hemp, we do see the potential. The regulatory patchwork framework does both create opportunities, but as Charlie mentioned, also risks that we have to be thoughtful about. But as we think of this, a couple of things that are in play for us right now. We have a number of prototype products that are both in beverage and also in the edible form. We're really pleased with the quality of the products. And we think in this space, quality and repeat purchase is going to win. It's very akin, I think, to the craft beer industry. We have a lot of players quickly getting into the space with a story about kind of the anti-booz positioning. We're seeing that happen. Our position will be a high-quality product that meets a few other needs. But I think why we're taking this a bit slow right now is, one, the regulatory frameworks, we'd like to see more clarity on it. But two, I think both distributors and retailers are also figuring it out. There are some things that excite them, but we've also talked to a lot of retailers and a few distributors, too, about what is frustrating right now with the profitability profile and the velocity profile of what's out there. And so we want to give the time to let them test and learn so we can really meet their needs with products. But as Charlie mentioned, it's an exciting time, I think, for him. And we feel really good that as we figure out what's the right profitable path forward. We have some really high-quality products that we're really proud about that will do quite well. Operator: [Operator Instructions] Our next question comes from Frederico Gomes from ATB Capital. Frederico Yokota Gomes: First question on the comment about M&A and how that could become a meaningful growth lever in 2026. So could you just talk a little bit more about what's the size of transactions you're looking at? How meaningful could it be? And then in terms of valuations, how are they looking like? Just a broader comment on the M&A environment and how you're thinking about that? Charles Bachtell: Thanks, Fred. So size of the transactions, valuations associated with it, it will depend. Like what we're seeing now is more deal flow than we've seen in recent years and partly because of the new opportunities that have been created in cannabis, but also part of stemming from the frustrations of operating in the cannabis space and limited access to capital and the expense of it. So there's some good assets that are out there that are currently owned by distressed operators. So it really does run the gamut from single-store opportunities all the way to multistate platforms and everything in between. And so as we look at it -- and valuation-wise, I think valuations are starting to move with general valuations in the sector and become interesting value plays because these assets need good operators. There's a trend that we're seeing, and we think we're a great opportunity not only for us, but great opportunity for existing owners and our lenders as these assets need better homes, and we're excited to evaluate all of them and find the ones that fit best for us. So again, it really does -- it runs the gamut from single-store operations to multistate footprints, and we're weighing the ROI on each of them, and we're going to be real disciplined and patient with how we allocate capital and make sure it's setting us up for great long-term growth and shareholder value. Frederico Yokota Gomes: I appreciate that. Second question on the commentary about that you still expect to see -- to sell higher cost flower in Q4. So just curious about the ramp there in terms of when is that expected to be worked through and sort of normalize and that could be a tailwind for margin, I guess, next year? Charles Bachtell: Sure. And this one, Sharon, do you want to handle this one? Sharon Schuler: Sure. Yes, let me take that one. Yes. So obviously, seeing some of the impact in Q4. I think you'll see some continue slightly into the beginning of next year. And then obviously, I think as we mentioned, right, some of the improvements we expect or continue to refine will come in the face of margin over time. But I would say we still probably have a good couple of quarters to work through some of that higher cost. Operator: We currently have no further questions. So I'd like to hand back to Charlie for some closing remarks. Charles Bachtell: I appreciate everybody's time today. Thank you for joining the call, and we look forward to talking to you in 2026. Thanks, everybody.
Operator: Good morning, and welcome to the Gold Resource Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Following management's presentation, there will be a question-and-answer session. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, November 5, 2025, at 12:00 p.m. Eastern Time. I will now turn the conference over to Chet Holyoak, Gold Resource Corporation Chief Financial Officer. Mr. Holyoak, you may proceed. Chet Holyoak: Thank you, Mike, and good morning to everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our third quarter 2025 results. Before we begin the call, there are a couple of housekeeping matters I would like to address. Please note that certain statements to be made today are forward-looking in nature and, as such, are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings. Please note, all amounts referenced during this presentation are in U.S. dollars, unless otherwise stated. Joining me on the call today is Allen Palmiere, our President and CEO. Following our prepared remarks, we will be available to answer questions. This conference call is being webcast and will be available for replay on our website later today. Yesterday's news release that was issued following the close of the market, and the accompanying Form 10-Q have been filed with the SEC on EDGAR and are also available on our website at www.goldresourcecorp.com. I will now turn the call over to Allen. Allen Palmiere: Thank you, Chet, and good morning, everyone, or afternoon, I guess technically. I would like to thank you for joining our third quarter conference call. I would like to address a few points first, then I will follow that up by addressing operations, followed by Chet addressing the financials. Following these remarks, I'll make a few close comments, and then we will take questions. I'm pleased to tell you that we are seeing the early signs of a turnaround at our operations in Mexico. As you may be aware, a year ago, we were facing significant challenges. We knew it was necessary to address these challenges, but we were capital constrained. As we are able to raise funds, we began slowly implementing our plans and made some management changes. There were major issues to address, lack of development severely constrained our production, our mining fleet needed renewal and availability further constrained our production. Another issue related to the size of our mining equipment. Our fleet was sized for wider veins, which resulted in inappropriate mining methods having to be employed and [ resulted in excess dilution. ] As part of our fleet renewal process, we have and are acquiring replacement equipment to address aging assets. Several units appropriately sized for our projected mining requirements have already arrived and are operational. As previously announced, to reduced production risk, we engaged a mining contractor to assist in mine development and to focus on mine development and production from the new Three Sisters area. Development by the contractor continues to progress well with 1,435 meters completed in the Three Sisters area. Their progress has validated our expectations, revealing good vain widths and high-grade mineralization. Notably, this work has enabled the commencement of production from the Three Sisters, marking a significant milestone. The material extracted from this zone is high in precious metals, reinforcing our confidence in the area's potential. With properly sized equipment, we are changing our mining methods in narrow vein zones. One key improvement has been introduction of cut and fill for approximately 40% of our stopes, which is more profitable in narrow banding applications. By reducing dilution, this method results in lower tonnes mined while delivering the same metal units to the mill. Lower transportation, crushing, grinding and processing costs, coupled with higher recovery, results in higher profitability. In addition to the operational improvements we've discussed, we're also benefiting from record high metal prices. While our strategy does not depend on elevated pricing, these market conditions are certainly contributing to a stronger economic position. This added momentum supports our efforts as we continue executing on the plans that we laid out earlier in the year. I would like now to provide an update on the operations. During the quarter, the operation unfortunately recorded several lost time injury incidents, which, while concerning do not reflect our long-standing commitment to maintaining a safe and healthy workplace. In response, we have engaged an external consultant to conduct comprehensive safety assessment and audit. This initiative will help us identify operational risks, evaluate our current safety maturity and develop a proactive plan aligned to our 0 accident mindset. Despite a challenging quarter driven by extensive mine development activities, our team implemented key adjustments to mining methods, particularly in the narrow Arista veins and Three Sisters areas to reduce dilution. These changes yielded measurable results, resulted in higher production volumes and enhanced ore grades delivered to the plant. As a result, metallurgical recoveries across all metals exceeded prior quarters. To support our growth strategy, we successfully acquired specialized narrow vein mining equipment, which has improved selectivity and operational control. While we await arrival of the third filter press, the dry stack tailing system, we completed several upgrades at the filtration plans. These enhancements have increased productivity per cycle, allowing us to maintain a steady milling rate of approximately 1,350 tonnes per day on those days that we operate. Permitting and rehabilitation efforts resumed at the alteration line with commissioning targeted for early Q1 of 2026. Mine development and exploration drilling remain critical to sustain production and expanding our resource base. Continued support from mine development contractor and 2 diamond drilling contractors is essential to advance some resource to reserve conversion pipeline. I'll now pass the presentation over to Chet to discuss the financial results. Chet Holyoak: Thank you, Allen. As we have mentioned in the past, and as you can see in reading our current Form 10-Q, 2025 has been a difficult year. I do not want to rehash all the information in the filed report, but there are a couple of points that I would like to make. We concluded the third quarter with a strong cash position of over $9 million, reflecting both our success in capital raising efforts and disciplined cash management. In addition to this cash balance, as previously noted, our production ramped up significantly towards the end of Q3. We completed multiple shipments in late September were still in transit at quarter end. As a result, the associated revenue was recorded under accounts receivable, with cash collections occurring in the first few weeks of October. Importantly, we also showed mining gross profit during the quarter, a key milestone that signals meaningful progress on our path back to profitability. While our cash cost per gold equivalent ounce and all-in sustaining cost per gold equivalent ounce remain above our long-term targets, we are encouraged by the downward trend that was shown during the third quarter. As production efficiency improves and the quality of mine material increases, we are seeing a corresponding reduction in related cost per equivalent ounce. It is also worth highlighting that the current environment of elevated precious metal prices is positively impacting our operations. The precious metal content in our material, especially in silver has increased, which is contributing meaningful -- meaningfully to our cash flow and overall financial performance. As previously discussed, many of the operational challenges we faced earlier this year stemmed from insufficient underground development, which limited access to multiple mining faces and higher-grade zones. To mitigate these issues and support long-term growth, we made significant capital investments in both underground development and exploration throughout the year. Specifically, we invested over $2.6 million in underground development and more than $6.5 million in underground exploration development, mainly in the Three Sisters area. These investments are already yielding results. As noted, we now have access to multiple mining faces and production has commenced from the Three Sisters area. We will continue to invest in developing and exploring these areas to meet the long-term plans that we have for the mine. I will now pass the presentation back to Allen for his concluding remarks. Allen Palmiere: Thank you, Chet and thank you all once again for joining us today and your continued support. It's encouraging to be able to share positive developments, and we're optimistic that the momentum we're experiencing will not only continue but strengthened through the remainder of this year and into next. We're beginning to see the tangible benefits of executing the strategic plans we outlined earlier this year. I'd also like to take a moment to address the Back Forty Project. As you're aware, lack of capital has prevented us from advancing the project. With the improvements at our mine in Mexico, we are now able to fund the permitting process and complete feasibility study, advancing this exceptional project towards a production decision. We will expect that this work will commence in the next couple of months, and we will be keeping you posted on a regular basis. With that, I'll turn the call over to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Jake Sekelsky from Alliance Global Partners. Jacob Sekelsky: So just starting with the development work at Three Sisters you were just talking about, are you able to quantify the level of throughput you're targeting from here, I guess, as we head into 2026? Allen Palmiere: We're heading into 2026, we're anticipating that between 40% and 50% of our total production will be coming from the Three Sisters. The balance will be split roughly equally between Arista and Switchback. Jacob Sekelsky: Okay. That's helpful. And do you think you'll hit that 50% balance from Three Sisters in Q1? Or do you have a time line to kind of get to that? Allen Palmiere: We're anticipating it actually being at least 40% in Q1, potentially higher with the progress that the contractor is making. And certainly by Q2, we'll be at that run rate. At the latest. I'm anticipating it earlier. Jacob Sekelsky: Got it. Okay. And then just from a high level, I mean, we've seen base metals rally the last few months. Any thoughts on hedging to kind of lock in some of those higher credits at these levels? Allen Palmiere: It's something that we consider on a regular basis, Jake. On a fairly regular basis, we go out, get quotes for [ callers ] primarily. We've been reticent to hedge in the past, but with metal prices where they are, it's something that we are actively considering. And I'm not going to say we're going to hedge all of our precious metal by any stretch of imagination. But zinc is pretty strong, copper is pretty strong. And by underpinning those, it will help us with surety in achieving our cash flows. Operator: Your next question comes from the line of Heiko Ihle. Heiko Ihle: Can you guys hear me all right? Allen Palmiere: You're perfectly clear Heiko. Good to hear from you. Heiko Ihle: Perfect. I'm standing in the lobby of an office building, waiting to go into a one-on-one. So I apologize for the background noise. In your press release, you talked a bit about receiving some used equipment at site. Can you elaborate on what exactly has been received, what you're still waiting for? How much you paid for it and how you paid for it? And also maybe just maybe quantify the uptime delta that you had compared to what you had before? Allen Palmiere: The what Delta, Heiko,sorry? Heiko Ihle: The difference in uptime that you have now versus what you had before with the older... Allen Palmiere: Availability. Okay. Chet, I don't know if you have the expenditures at your fingertips, do you? Chet Holyoak: I do not have them right at my finger tips. Allen Palmiere: Okay. Directionally, Heiko, we've spent probably $4 million on new -- it's not new equipment. There's a blend of new and used equipment. We've received [ just 2 ] 2.5 yard scoops and that's specifically for the narrow vein. We received a 6 -- acquired a 6-yard scoop to replace 1 of the old ones. And we have a jumbo that we have received. We're still waiting for a narrow profile jumbo for the narrow vein mining applications. But I would anticipate that by the end of this month, we should have most of our mining equipment operational, on-site and operational. Heiko Ihle: Fair enough, fair enough. Allen Palmiere: One thing we -- sorry, I just want to elaborate a little bit more, Heiko. The contractor, of course, brought all of their own equipment in. And it's a blend between narrow vein and long-haul equipment. So they've got a couple of small scoops and about 6-yard scoops. And they've got quite a large inventory of equipment. So they're able to bring in what they need on demand. That has freed up our equipment to focus on Arista and Switchback. Heiko Ihle: Fair enough. Okay. That makes sense. You talked a little bit in the -- go ahead? Allen Palmiere: I forgot to mention the availability on the new equipment, and it's running north of 80%. Heiko Ihle: Okay. So that's probably quite a big change to what it was before. And I assume the old stuff, like at least some of the spare parts can be scavenged in like 3 loaders turned into 1, right? Allen Palmiere: That is exactly what we're doing. The old stuff is parked, and then we salvage all usable parts from it and scrap the frame and anything that's unusable. Heiko Ihle: Fair enough. Can you walk us through the impact of cut and fill mining, like the method on cost per tonne? I mean, obviously, dilution improves, but do we need to make any amendments to our model based on that change? Allen Palmiere: If you have to make amendment cycle, the net result would be an increase in revenue per tonne mined. The cost, historically long haul, is running in the low 40s. Cut and fill is running low to mid-50s per ton. But the big change, of course, when we were long hauling the narrow veins, we were unfortunately experiencing dilution in excess of 40%. By properly constraining the cut and fill, and we are throwing in a bit of resuing just to ensure that we get lower dilution. We managed to bring dilution in those areas down to 13% to 17%. So we're moving 25% less material to the mill, but we're producing -- moving all of this, your mining cost is up directionally 10%, 15%. But the volume moved is down by 25% for the same revenue generation or better generation because the delivered head grade is higher. So our recoveries correlates with grade, we're getting better recoveries as well. Net-net, it's a significant improvement. Operator: At this time, there are no further questions. I'd like to turn it back over to management for closing remarks. Allen Palmiere: Thank you, Mike. I do want to thank everybody for joining us today. I do want to stress the importance of what we are seeing in terms of a turnaround at the Don David mine. I'll put it in context a little bit in that July was a terrible month. It was terrible because we were in the midst of converting from long haul to cut and fill in a number of areas of the mine, necessitating additional development. But as we got into August, things approved. September, we significantly exceeded our forecast in terms of tonnes produced. I'm happy to tell you that in October, we significantly exceeded our forecast in terms of tonnes produced, and I'm expecting that to continue for the balance of the year. So the turnaround is very much in hand, and I expect to be able to tell you when we next talk that we have seen very significant improvement sustained and looking forward to additional proven to the future. With that, I will thank you once more for joining us, and look forward to speaking to you, if not sooner, for year-end results. Thank you. Operator: Thank you. This does conclude today's conference call. Thank you for attending. You may now disconnect your lines.
Operator: Welcome to the GXO Third Quarter 2025 Earnings Conference Call and Webcast. My name is Shamali, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements, the use of non-GAAP financial measures and the company's guidance. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, except to the extent required by law. The company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules during this call. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables are on its website. Unless otherwise stated, all results reported on this call are reported in United States dollars. The company will also remind you that its guidance incorporates business trends to date and what it believes today to be appropriate assumptions. The company's results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and consumer demand and spending, labor market and global supply chain constraints, inflationary pressures and the various factors detailed in its filings with the SEC. It is not possible for the company to actually predict demand for its services and therefore, actual results could differ materially from guidance. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section on the company's website. I will now turn the call over to GXO's Chief Executive Officer, Patrick Kelleher. Mr. Kelleher, you may begin. Patrick Kelleher: Thank you, and good morning, everyone. Welcome to the call. Also joining me on our call today are Baris Oran, Chief Financial Officer; and Kristine Kubacki, Chief Strategy Officer. This is my first opportunity to speak with you as the CEO of GXO. I am looking forward to discussing our third quarter results and sharing some early reflections from my first 90 days with the company. I'd like to begin by thanking my predecessor, Malcolm Wilson. Our transition has been very smooth, enabling me to hit the ground running. I've visited many sites across the U.S., U.K. and Continental Europe. Malcolm played a pivotal role in establishing GXO as the global leader, and I am so energized to build on the strong foundation that he set. That strong foundation is evident in our third quarter results. GXO drove record quarterly revenue of $3.4 billion with organic revenue growth across every region. Adjusted EBITDA grew 13% from last year to $251 million. New business wins of $280 million were up 24% year-over-year, including a fully automated win in the U.S. with one of the fastest-growing global sportswear brands. Alongside significant wallet share expansion with existing customers, our visibility to growth continues to improve with nearly $700 million of revenue already secured for 2026, an increase of nearly 50% compared to this time last year. I want to recognize and thank our GXO teammates for these results. Our people make the difference with attention to detail and a passion for providing the very best customer service. And I want to welcome the Wincanton teammates to the GXO family. Wincanton integration is underway and primed to unlock growth opportunities for us across Europe, most notably in the industrial and aerospace and defense sectors. The Wincanton and GXO business units were integrated in October with back-office functions following this month. We are actively collaborating on a range of strategic customer tenders and have already realized our first win as a combined team. Synergy realization remains on track. Looking ahead to next year, further growth in new business wins, coupled with the Wincanton integration now underway, gives us confidence that we'll see growth and margin expansion in 2026. Baris and Kristine will discuss our results and the new business wins in more detail later in the call. Since I joined in August, I've been on the road under the hood of our operations and culture. I've connected with our leaders and operations teams, engaged with investors, customers and prospects and done a lot of listening to understand what's working and where our opportunities exist. As many of you know, logistics is in my blood. Over the past 32-plus years, I've held operational, commercial and management roles across every facet of the supply chain, which has given me a unique view of the operational and commercial landscape and opportunities within it. I've kept a close eye on GXO since the spin. We are a category-defining company that put contract logistics on the map and one that I'm honored to lead. A personal motto that has fueled me and the teams that I have led is even more, even better, and it exemplifies the opportunity that I see at GXO, an impressive track record of growth, nearly doubling the size of the business since the spin and with the attitude of a high-performing team, a clear opportunity to achieve even more. Profitable growth is the priority. Organic growth is a critical element of this, and every decision and action will be taken with an eye to accelerating this engine. I see clear opportunities to expand margins as we focus on profit market verticals and geographies, leverage technology to drive performance and share in the value that we generate for customers. I'd now like to take a moment to share some more detailed views on these 2 key areas. Number one, first, where I see the opportunity to drive even more organic growth; and second, to ensure even better execution behind it because the 2 go hand in hand. Despite our global scale, we hold less than 3% of the global TAM, so there's a long runway of growth ahead. With a sharp commercial strategy on where to play and how to win, there are clear near-term opportunities to accelerate in North America, especially and across high-growth customer segments and verticals globally. First, North America. GXO has a strong and well-established position in the U.K. and Europe with meaningful opportunities for continued growth. North America represents a similar opportunity for us, one of the largest and fastest-growing logistics markets globally with a total addressable market in excess of $250 billion. We are energizing our approach to meet its dynamics and opportunities. Michael Jacobs joined us this week as the new President of the Americas and Asia Pacific region. Michael is a 30-year industry veteran whom I've known for more than 2 decades. He brings terrific experience from Ferguson Enterprises and Keurig. He has a proven track record of managing complex supply chains, increasing productivity through automation and robotics and improving cost and service. To further capitalize on the North America opportunity, we are strategically reallocating resources towards sales, solutions and digital marketing, all to accelerate organic growth. Second, regarding customer segments, technological innovation continues to redefine what's possible within the warehouse. As I visited our sites, I have seen firsthand use cases of AI in large retail operations, including volume forecasting and proactive replenishment. These highlight the opportunity to further improve our cost to serve. This is already a differentiator for GXO, but greater focus in this area will enable us to grow our market share, especially with midsized companies, a market opportunity in excess of $100 billion TAM. Lastly, within our verticals, we are leaders in retail, luxury, technology and CPG to name a few. In recent years, we've made strategic inroads into high-growth sectors like aerospace and defense, data centers, industrial and life sciences. In aerospace and defense, as an example, we have deep competency in North America. And following our acquisition of Wincanton, we are one of the leading supply chain providers to the U.K. defense industry. We leverage our relationships and expertise to export this capability to other markets. In Life Sciences, our landmark $2.5 billion 10-year deal with the U.K.'s NHS supply chain went live flawlessly last month, and we are already exploring opportunities to expand that relationship as well as our overall growth in the life sciences space. In short, we have all the ingredients for growth. You'll see us doubling down on what differentiates us and being disciplined about where we play and how to win. Turning to operations. Execution is one of our greatest strengths. As I visited our sites, I have seen countless lighthouse examples of operational excellence. And as we accelerate growth, our operating model must keep pace with our growth ambitions. I see significant opportunities to benefit from sharing solutioning best practice globally, increased site level productivity through our technological leadership and a clear rational and global approach to customer relationships and pricing. That's why we've introduced the Chief Operating Officer role to take the very best of what we already do so well and scale it consistently across our global operations. We believe operational discipline will not only drive margin expansion, but also accelerate profitable growth by making us even more competitive. In closing, we are embarking on a new era of growth. GXO is a fantastic company operating in a fast-growing, highly fragmented industry with a path towards higher organic growth, structurally higher margins and strong free cash flow. There is a fantastic opportunity to generate strong shareholder returns. And with this in mind, I will be focused on allocating capital to generate the highest possible returns with organic growth as the priority. Under my leadership, you can expect a sharp commercial focus, strong operational discipline and clear consistent communication about our progress. I look forward to sharing our strategic plan to deliver long-term value for our shareholders in future quarters and at an Investor Day in 2026. With that, I will hand the call to Baris. Baris Oran: Thanks, Patrick. Building on the strong momentum year-to-date, GXO's third quarter performance reflects the power of our resilient business model. With record revenue, higher margins and robust free cash flow, we are delivering on our commitment to drive profitable growth. In the third quarter of 2025, GXO delivered record revenue of $3.4 billion, up 8% year-over-year, of which 4% was organic. Every region delivered organic revenue growth, highlighting the value of our contractual business model throughout a dynamic trade and macro environment. We now have about $800 million of incremental revenue secured for 2025, which, in combination with a retention rate in the mid-90s, puts us in excellent shape to achieve our full year organic growth target. We delivered adjusted EBITDA of $251 million, up 13% from last year. Our margins expanded by 100 basis points sequentially and were up 30 basis points year-over-year. The margin increase was driven by improved site level productivity and the sizable automated start-ups we discussed last quarter, which matured faster than expected. We recorded net income of $60 million and adjusted net income of $91 million. Our diluted earnings per share was $0.51, and our adjusted diluted earnings per share was $0.79. Our free cash flow in the third quarter was $187 million, and we are on track to deliver our target adjusted EBITDA to free cash flow conversion for the full year. We remain disciplined in our capital expenditures and working capital management, which allows us to continue to invest in our business with high returns. Our operating return on invested capital improved further and remains well above our target, driven by improved operating performance. Our leverage levels improved to 2.7x net debt to adjusted EBITDA, even after executing $200 million share buyback in the first half of the year. As Patrick mentioned, the integration of Wincanton is moving at pace, and we are on track to deliver the run rate cost synergy of $60 million by the end of 2026. We also expect to gain significant revenue synergies over the coming years. We remain laser-focused on disciplined capital allocation. We continue to prioritize investments that accelerate our organic growth and drive the greatest returns. Our focus for the remainder of the year will be to deliver strong free cash flow, further delever our balance sheet and set the foundation for 2026. Given our excellent operating performance year-to-date, we are reaffirming our full year guidance. As a reminder, for 2025, we expect to deliver organic revenue growth of 3.5% to 6.5%. Adjusted EBITDA of $865 million to $885 million, adjusted diluted earnings per share of $2.43 to $2.63 and adjusted EBITDA to free cash flow conversion of 25% to 35%. With strong operating performance, a solid financial foundation and a robust sales pipeline, GXO's resilient and predictable business model continues to deliver exceptional value to both our customers and shareholders. With that, I'll pass the mic to Kristine. Kristine, over to you. Kristine Kubacki: Thanks, Baris. Good morning, everyone. The third quarter demonstrates the strength of our business. The priorities Patrick outlined, accelerating the organic growth agenda and enhancing our operating model will drive real value creation for customers and shareholders. On growth, we are making significant progress building our global relationships with blue-chip customers and expanding across geographies and into high-growth verticals. During the third quarter, we won $280 million in new contracts, up 24% year-on-year. This brings year-to-date wins to over $800 million with a clear line of sight to exceed $1 billion in 2025. We continue to grow with top brands like Boeing, BMW, L'Oreal, Sephora and Unilever. Last quarter, we highlighted the significant opportunities we see in fast-growing verticals such as life sciences, aerospace and defense and data center infrastructure. These areas remain a strategic focus for us, and I'm excited to share the meaningful progress we've made this quarter. First, in Life Sciences, we reached a major milestone with the launch of our landmark operation with the U.K.'s NHS supply chain in early October. We're gaining good traction in the $34 billion life sciences vertical with another notable win expected to close in Q4 and a robust pipeline of strategic opportunities expected to close before year-end. Second, we're seeing increased activity in industrial, aerospace and defense across all of our regions. During the quarter, we further expanded our partnership with Boeing and with a significant percentage of Wincanton's pipeline concentrated in the industrial, aerospace and defense verticals, we are well positioned to capitalize on high-value opportunities and drive sustained growth in these sectors. Third, we continue to build momentum in the fast-growing data center market, a critical part of the rapidly expanding AI and cloud infrastructure ecosystem. As a key logistics partner in this complex supply chain, we are well positioned to capture share in the $28 billion technology vertical. During the quarter, we secured 3 new contracts with a leading hyperscaler and expanded our strategic partnership with NetApp, demonstrating our ability to scale with high-growth customers. Turning to our pipeline. Our $2.3 billion sales pipeline is robust and well diversified across our regions and verticals with accelerated activity in strategic sectors. Opportunities in life sciences and aerospace and defense each increased 30% quarter-over-quarter, while technology tripled. These trends reflect our ability to scale with high-growth customers across critical industries. Altogether, our recent wins translate to approximately $700 million in incremental revenue already for 2026. This gives us confidence in reaffirming our full year guidance and provides visibility into our long-term growth trajectory. The second priority Patrick outlined was strengthening our operating model for growth. Core to driving operational excellence is our leadership in automation, technology and AI. As of the third quarter of 2025, we have over 15,000 automated units and cobots deployed at customer sites, rolled out 8 proprietary AI modules to numerous sites and secured 2 large-scale, highly automated contracts during the period, building on the more than 40% of revenues from automated operations. With this strong foundation, we are poised to scale these capabilities further, enhancing execution and serving as a powerful lever for accelerated growth. As we continue expanding our customer base, deepening expertise across high-growth verticals and advancing our technology capabilities, we are well positioned to deliver even greater value. Through seamless digital solutions and sharper customer insights, we see significant opportunities to win new business and grow with existing customers. Looking ahead, we have a strong foundation to drive organic growth, margin expansion and compelling returns in 2026 and beyond. And with that, I'll pass the mic back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: First, Patrick, welcome. Looking forward to working with you as well. I wanted to -- I appreciate the commentary in terms of the opportunity that you outlined in North America, in particular, the growth area. If you could maybe give us some perspective based on what you've observed over the last 90 days or so, where do you view the biggest opportunities within North America? And then maybe let us kind of highlight to us what you believe will be done differently from a go-to-market and execution strategy within North America specifically. Patrick Kelleher: Yes. Thank you, Stephanie. As you point out, I think the North America market is a tremendous opportunity for us, a total market opportunity there over $250 billion. The introduction of Michael Jacobs to the business, I think, is a big catalyst. Michael is a seasoned supply chain veteran, and I think it will have a big impact on operational execution and organic growth in the region. I see big opportunity for us as we shift focus to add aerospace and defense to continue to build on the great foundation that we have in industrial, particularly with data centers, as Kristine talked about, and life sciences. Our historic business in North America has been very oriented to omnichannel retail, CPG and those historic market verticals that we focus on globally. I think the addition of the market vertical focus in aerospace, defense, industrial and life sciences is a big catalyst for growth in the region. I think additionally, the addition of our Chief Operating Officer and Chief Commercial Officer will go a long way globally to sharpening commercial execution and driving organic growth as well as from an operating perspective, making sure that we're really well positioned to execute against increased organic growth going forward. Stephanie Benjamin Moore: Great. And then just a follow-up. I wanted to ask on the 2025 guidance and really the implied 4Q organic growth guidance. If you could just maybe give us what the underlying assumptions are as it relates to this holiday season as well as just underlying demand trends compared to the third quarter. Patrick Kelleher: I'll pass that to Baris. Baris Oran: Stephanie, in Q3, there was an acceleration on organic growth, which was driven by higher new business wins and slightly improved volumes. And on a sequential basis compared to Q2, the volumes were the main drivers. They are higher than last year, but lower than Q2 in Q3. As we switch to Q4, we expect more contributions from new business wins, including the ramp-up of the huge NHS contract we won. We expect the softer trends in volumes to continue, and we fully expect to be within the full year guidance range. Operator: Our next question comes from the line of Scott Schneeberger with Oppenheimer & Co. Scott Schneeberger: Welcome, Patrick. I'm going to follow up on Stephanie's first question. It sounds like you're looking to branch out in North America into a lot of areas and kind of maybe -- you mentioned non-consumer areas. It doesn't sound like you're moving away from consumer, but want to get a lot more diverse. How should we think about the business mix in a few years, if you're prepared to answer that at this point? Patrick Kelleher: Sure. We are absolutely going to continue to focus on the core of our business that has been in the past with omnichannel retail, CPG and those other various market verticals. We do want to focus in on the ones that I talked about in terms of aerospace, defense, industrial, life sciences, and there are tailwinds in terms of growth opportunities there, particularly in North America that we want to capitalize on. I don't want to predict yet the mix a couple of years out, but that is something that we can speak to in our investor event in early 2026. Scott Schneeberger: Looking forward to that event. I guess, Baris, for you, could you speak to what went well in the third quarter with regard to your EBITDA outperformed our expectation. Could you just speak a little bit more to the success of what drove profitability and maybe some thoughts on EBITDA specifically looking out? Baris Oran: Sure. As forecasted, we have improved our margin sequentially by 100 basis points in Q3. This reflects our usual seasonality and positive contributions from our productivity initiatives at both site level and central level. As you will recall, we have highly automated contracts mature more rapidly than budgeted as it was the case in Q2. And then looking into Q4, we have harder comparisons in the fourth quarter, and we expect a more muted year-over-year margin performance. This is mainly down to phasing of prior year effects. We have delivered ahead of our EBITDA plans 3x this year. As Patrick mentioned, we expect margins to rise in 2026 as Wincanton synergies become more material. Operator: Our next question comes from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Welcome, Patrick. I guess maybe I wanted to pick up on the margin commentary. So you noted in your prepared remarks some of the opportunity for margin expansion. That has been one thing that has been a little bit more difficult to achieve. The top line growth has been pretty solid, but we haven't necessarily seen consistent margin expansion. So I guess I get the Wincanton synergies as we think about 2026, but can you talk a little bit bigger picture about what you think you can do to drive margin expansion across the portfolio? Patrick Kelleher: Absolutely. And thanks, Chris. I believe there is a structural margin opportunity for us here. Margins have been diluted, as you say, to the delays -- by the delays of the Wincanton integration. That will correct itself in 2026 as we focus on delivering the $60 million run rate synergies that are available there. I see a number of other levers that we can be leveraging to improve margin performance. Number one, the verticals that we're looking to expand faster will bring in higher margins, and we're committed to making that happen. There is an opportunity to share best practices across the group globally from an operations perspective. I'm particularly focused in on driving greater labor productivity through technology and AI, and there's great work already started by the team on that front. Additionally, I see an opportunity for ongoing cost discipline and leveraging our existing SG&A as we are driving more organic growth into the business going forward. Christian Wetherbee: Okay. That's helpful. I guess we'll get more details on that as well on the Investor Day next year. And then maybe a little bit more specific for the fourth quarter. When you think about organic revenue growth, you've given kind of a wide range for the full year still that gives some variability into the fourth quarter, but there should be an acceleration. I'm guessing you have NHS, which started up, so that's a fourth quarter contributor. I think you also mentioned another new opportunity that's starting in the fourth quarter. So can you give us maybe a little bit of sense of expectations around organic revenue growth for 4Q? Patrick Kelleher: Yes, sure. I'm going to pass that to Baris for comment. Baris Oran: Yes. For Q4, we expect more contribution from new business, as I highlighted and softer trends to continue. And we fully expect to be within our full year guidance range. Shape of the peak and volumes will drive the magnitude of the growth in Q4. Operator: Our next question comes from the line of Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Welcome, Patrick. Just wanted to ask you, I guess, a bigger picture question first about deploying technology and how it's implemented across the suite of services. You mentioned a little bit on that earlier, but is there anything different that you're looking at implementing in terms of either sourcing the new technologies, how you're pricing it into some of these contracts and redeploying them and then ultimately, with a look at getting the returns from that. So maybe you can give a little bit more thoughts on how you see that with GXO initially here. Patrick Kelleher: Sure. I've been really impressed by GXO's capabilities, our capabilities around robotics, automation and AI. And there really is deep expertise within the organization. I think as even more -- even better opportunities there focusing in on the technologies that really create the most value for customers and a strong return on investment is an opportunity for us in working with a few strategic partners to really advance and accelerate the rollout of those technologies. I also think that global alignment around the development of these technology solutions and how our people are partnering with our strategic partners to develop -- co-develop new technologies going into the future. That will be really important on the AI front, especially. I'm really passionate that we continue to build consistent expertise with our people. We have great people focused on these solutions, and we want to extend the breadth and the number of people that we have focused on that. I think a great platform for this is GXO IQ. We went live in the third quarter. We're going to report back on a later date in terms of the progress on that. But that is our platform for rolling out especially AI solutions across our business. We've got 8 AI modules, which we've deployed at a number of sites already. And we have further work with GXO IQ making that happen. The other dimension on IQ, which is not lost and should not be lost is we see opportunity to improve overhead efficiency, where we can improve our own business through use of AI focused on corporate functions like HR, IT and finance, and those agendas are progressing as well. Brian Ossenbeck: Let me just quick follow-up on the NHS contract, it sounds like it's off to a good start, but it's a fairly big one, obviously. So what are some of the I guess, early impressions of that is going faster than you expected. And if this is going to have -- it sounds like it's going to have a decent mix impact, at least here in the fourth quarter. Patrick Kelleher: That business has started. The start-up there, as I said, has been flawless and is going to lead, we believe, to additional opportunities. And I'll ask Kristine maybe to comment on what we see there. Kristine Kubacki: Sure, Patrick. It's Kristine here. Yes, we're very excited. This was a critical milestone, really on track as we expected. We started that contract up in the 1st of October, certainly, and so the teams are doing a great job. Again, this is just the beginning here. As I noted in my prepared comments, we're seeing already a lot of momentum in the pipeline, and it's up 30% quarter-over-quarter. And this is just a huge addressable market for us globally. So over $34 billion opportunity that we're really just getting started at. So we're very excited. More to come here. Operator: Our next question comes from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Patrick, in your initial kind of introduction, meet and greet conversations with customers. I bet you also got a little bit of a sense of what they're thinking about the current environment. So hopefully, in a world of some level of tariff normalization post de minimis, et cetera. What are they telling you about how they're going into 2026 and what they're thinking here and how GXO can play a part? Patrick Kelleher: Yes, I would say, well, for us, while there's still uncertainty around current tariffs and trade discussions, there hasn't been a material impact on our business. I think our customers as you point out, are working to solve the complexities and challenges that come with that, and we're a big part of helping them do that. I would emphasize that 2/3 of our business is outside North America. We also have no direct exposure to China. We operate long-term contracts with our customers, which protects us on volume volatility. I mean the big thing is the macroeconomic is driving supply chain change that is happening. And we win when there is change because we are so well positioned to help our customers make those changes. As I emphasized on the focus on aerospace defense, the industrial sector, and life sciences. All of those market verticals are seeing additional activity, manufacturing coming back to the U.S. in many cases in those verticals or additional volume and new infrastructure being implemented in the U.S., and that is an opportunity that we're standing in front of with our strategic focus there. Kristine, anything to add to that? Kristine Kubacki: Patrick, I think you summed it up nicely. I think we also have an opportunity with that complexity with the long value-added services that we can offer our customers that would be everything from restickering, rebagging and tagging and also with free trade zones. So that definitely obviously is an inbound that our customers are looking for to help solve those complex operations. And so that's another opportunity of growth -- accelerated growth for GXO. Ravi Shanker: That's really helpful. And as a follow-up, maybe for you, Kristine. The AI hyperscaler opportunity sounds really interesting. Can you expand on that a little bit? How different is this business versus your kind of, I'd say, if I would use the word regular industrial or consumer-based customer in terms of margin, complexity, automation and if we can kind of maybe size the TAM there? Kristine Kubacki: Thanks, Ravi. It's Kristine here. So you hit on all of it. It is obviously a high-value strategic vertical for us, not only in the U.S. but globally. The TAM is $28 billion today. But as you know, it is booming and growing very rapidly. This is a complicated and complex supply chain. We're not necessarily supporting the construction of these data centers, but really what we're providing is the, as I said, complicated, lifetime logistical services to support those data centers and really grow and scale with our customers. And you need a partner like GXO with our global reach in order to scale. This is, again, a very critical part of our pipeline. And again, quarter-over-quarter, just to contextualize it, we saw the pipeline in this area grow -- it tripled quarter-over-quarter, and we just see the opportunity to continue to grow globally. Operator: Our next question comes from the line of Jason Seidl with TD Cowen. Jason Seidl: Patrick, I wanted to go back to your comments about expanding the long-term margins. You spoke about pushing into some higher-margin verticals. I was wondering if you could talk about the difference in terms of these new verticals and your legacy business in terms of the margins? And then also, can you maybe expand on what are the things GXO needs to do to penetrate these verticals going forward? And then I have a follow-up on 4Q. Patrick Kelleher: Sure. I could say in the first 100 days here, I've been in a number of operations and was very, very excited about what I saw in terms of our capabilities and competencies, especially in aerospace, defense and industrial, where I feel like we're just getting started, but we have lighthouse examples of operations that we've already implemented and can build on. The complexity of those operations and the value-added services associated with the services out of those operations really lends itself to being profitable market verticals for us. We, certainly see from a total business perspective, the margin expansion opportunity from our participation in those verticals going forward. And it really is about continuing the great execution that we have demonstrated already there, and that is why the focus for the Chief Operating Officer is so important to make sure that we're sizing our operations and our capacities there to meet the organic growth that we're going to generate in those market verticals going forward so that we can ensure we capture the margin expansion opportunities associated with that growth. Jason Seidl: And in terms of trying to size the difference in the margins between those verticals in the legacy business? Patrick Kelleher: Yes. I would say just from a portfolio perspective, marginally higher than what we've seen in our current business. Jason Seidl: Fair enough. I wanted to jump back to the 4Q outlook. I guess I was a little surprised you guys didn't raise the bottom of the guide, given what you did in 3Q, which you exceeded our estimates pretty easily. You called out a little bit of softness, I think, as we head into 4Q here. I was wondering if your views on peak season has really changed any? Or is this just you being a little cautious given what you're seeing? Patrick Kelleher: Yes, I'll start and then maybe Baris can comment. We're experiencing a normal peak season going right to that. It's not strong but not weak and right now in line with our full year expectations of flat customer volumes. We've done a lot of work early in this year to position customer inventory in the right place for peak. A lot of that activity happened earlier than in years past. Customer inventories right now are at a level where our customers' peak season expectations can be fulfilled. We need to see the demand come through for that. In line with that, we've got the labor in place in order to deliver against that. And as you point out, the impact of the ramp-up of the NHS contract and the pace of that will have an impact as well. Baris Oran: From a numbers perspective, for Q4, as I highlighted, NHS is coming online. That's going to improve our new business contributions in Q4. We do expect softer trends in volumes to continue, but we are confident on achieving our full year EBITDA guidance of $865 million to $885 million despite FX weakening marginally in the recent weeks and the volume environment being dynamic as we head into peak. Operator: Our next question comes from the line of Ari Rosa with Citi. Ariel Rosa: And Patrick, let me echo others in congratulating you on the new role. So I'm curious, Patrick, you've held a number of roles across the supply chain. As you said, you have extensive experience in this area. I was hoping you could speak to what attracted you to GXO? How do you think about GXO's place in the market? What does GXO do differently or better than its competitors or anyone else in the industry? Patrick Kelleher: Sure. I've shared with many I watched GXO for a long time with a lot of admiration, maybe even a little bit of envy, especially since the spin-off in 2021. GXO has continued to be a leader in the technology space, particularly around automation, robotics and AI. The people and the culture at GXO is really what differentiates the organization. This is a performance-oriented culture. And stepping in has been really excited just to be around the people at GXO and the attitude that people bring to work every day around creating amazing customer experiences, delivering great customer service and a passion for growth and performance. I would say, from an operational execution perspective, I've seen so many great examples, and I talked about a few in aerospace and defense. I would add the capabilities that we have in GXO Direct in our multi-customer network presents a great opportunity for us to service midsize customers, who I think can really benefit from our value proposition, the investments that we're making in technology, automation, AI and especially our people in a way that midsized companies can't invest at that level for themselves. I think we've got a great value proposition for that marketplace. The geographic breadth that we bring as a business, 27 countries that we're operating in today allows us to truly be a global partner for customers. We have 50% of our customers who are doing business with us in 2 regions and a handful that are in all 3. So for me, the excitement is that the foundation is there. We've got great operational execution. We have the very best people and for me, the organic growth opportunity here is something that has really excited me coming in, and that's been a big part of my career in the past and something that I really thrive on and looking forward to driving forward. Ariel Rosa: That's great. We're definitely excited to see you execute on that. If I could just for my follow-up, I'm curious, you've mentioned a desire to hire a COO and that's obviously a big focus area. What is it that you are hoping a COO brings to the organization? If you could talk a bit about the extent to which best practices have or have not been kind of shared between regions or between customers and what the kind of margin opportunity that could be created from that might look like? Patrick Kelleher: Sure. We have a way of operating today. That is the GXO way. We want to continue to increase the level of maturity -- operational maturity that we have in executing the GXO way. That includes how we incorporate technology automation and AI into our operations and how we create the best operational environment for our people and how the GXO way delivers the best service for customers. The Chief Operating Officer is going to focus on how we're driving forward continued increased productivity in operations, continued improvements on quality, making sure that we're seamlessly sharing best practices around the world. And then especially making sure that we're positioning our operational capacity in a way that we can meet the demands of the organic growth that we are going to deliver and doing that in a consistent way around the world. And so this is very much about making sure from an operational perspective, we are well positioned as we're embarking on our new era of growth going forward. Ariel Rosa: Do you have a sense on what the margin uplift could look like from that? I mean are we talking like 100 bps? Are we talking more or less? Or is it too early to say? Patrick Kelleher: As I'm in early, I think that will be something I'll be well positioned to talk to when we get to the Investor Day in 2026. Operator: Our next question comes from the line of Richa Harnain with Deutsche Bank. Richa Talwar: Patrick, first off, congrats to you and looking forward to working with you. You just went through some of GXO's biggest competitive advantages, be it the tech, the people, the global reach and those allowing you to win strong business. I mean we've heard on these calls consistently the strong TAM across a number of verticals and that being multiples above GXO's annual top line. So obviously, a lot of exciting room for growth. But can you also talk to if there's a key benefit to being a stand-alone entity? And on the flip side, what are some of the benefits your competitors naturally enjoy that you might have to overcome? Is it overhead scalability? Or do you do not necessarily see that? Patrick Kelleher: We are the largest pure-play contract logistics provider in the world. As you point out, we have the scale to successfully win in the marketplace. Our biggest competitor isn't the competitive set. It is our customers' decision to in-source or outsource. And we are positioned to make that decision easy for our customers and the things that we bring forward, like I talked about on technology automation, AI and especially our people and the focused solutions that we have to meet the needs of companies that are competing in the target market verticals that we are pursuing. It is really about making sure that we continue to execute really well, and we're putting more effort as I talked about, into building out our pipeline through things like digital marketing and focus on our sales teams and making sure that we're positioning from an operations perspective, the capacity to deliver our organic growth aspirations. So I feel really great about the position that we're in to win going forward. Richa Talwar: That's great. And then just a quick one. You guys reiterated your Wincanton synergies today. Baris, I think you mentioned significant revenue synergies potentially down the line as well. Patrick, you talked about securing your first win in collaboration with Wincanton. So any early thoughts on potential revenue synergies if they could be similar to the cost synergies or how to think about those? Baris Oran: Wincanton has been trading solidly so far as a good contributor on a year-over-year on the especially EBITDA results. We began the integration in the third quarter. We have realigned the organization structure and beginning to combine the support functions. Procurement benefits will come more obviously in 2026 and onwards. We expect integration benefits to be about GBP 10 million in this year and $60 million by the end of 2026 is the full run rate. These are mainly cost, and we do expect sizable revenue synergies. You have -- you can see clearly how we were able to grow other enterprises, we acquired. You've got a lot of NHS business through the acquisitions. We're growing our health care business quite robustly. We have grown different geographies through acquisitions as well. It's too early to call the numbers out. I think we would better wait for the Investor Day in 2026, where we can highlight the details and go over the numbers with you. Operator: Our next question comes from the line of Bruce Chan with Stifel. J. Bruce Chan: Nice to have you on the call here, Patrick. Just another follow-up on Wincanton, especially now that you've had a quarter or so of it fully under your belt. Maybe first, just to clarify, I'm assuming that any legacy pipeline in Wincanton has been kind of included in the numbers that you're quoting today? And then, Patrick, you talked about sharing of best practices a couple of times. Just specific to Wincan, can you remind us what the margin differential looks like between those 2 businesses? And maybe also comment on the level of automation in that acquired portfolio and what opportunities you see going forward to maybe deploy some of your capabilities into those legacy contracts? Kristine Kubacki: It's Kristine. I just want to contextualize a little bit about the pipeline. As we stated, our pipeline as a consolidated company is at $2.3 billion. Very robust even in terms of the wins that we had in the quarter of $280 million. But looking at Wincanton, a majority of what they're bringing in terms of the pipeline, a significant portion of their pipeline is coming over via aerospace and defense. So we're very excited about those opportunities. And again, as Baris just touched on, we're just at the starting gate. If we look at the broader global aerospace and defense and industrial total addressable market, it's hundreds of billions of dollars of opportunity. And for us, that -- again, that aerospace and defense pipeline has already started to move up, and we're seeing good momentum. So quarter-over-quarter, it was up 30%. Baris Oran: From a margin perspective, as I highlighted before, Wincanton margins are lower than GXO as a less scale, and they are extremely capital light. Their return on invested capital has been very high. They're almost working capital neutral. As we get more and more synergies, cost synergy benefits, we do expect a margin uplift in 2026 and onwards from Wincanton and the revenue contributions will follow that. Operator: Our next question comes from the line of Bascome Majors with Susquehanna International Group. Bascome Majors: Patrick, we've heard organic growth come up in the vast majority of your answers today, and that clearly seems to be something you intend to lead within your tenure here. But if you take a step back to next 2, 3 years, high level, like -- can you rank order the key drivers of what you think will drive bottom line growth for GXO between organic optimization and efficiency and maybe even kind of absorption? And lastly, if M&A is part of your plan? Patrick Kelleher: Sure. Without specifics, which we'll talk to in Investor Day 2026. In terms of advancing the bottom line, as you point out, that is a blend of a focus on organic top line growth being cost disciplined around SG&A. We absolutely see productivity improvement opportunities in our current operations. On top of that, as we've talked about, the Wincanton contributions that come as we continue to integrate that business going forward. From an M&A perspective, and you highlighted it, organic growth is primary area of focus. M&A is not in our short-term agenda. We will be doing M&A in the future. We're going to be very disciplined about M&A. We've done a fantastic job as GXO over the last 4 years in assembling the combination of companies through M&A that have given us the platform that we deserve organic growth now and we can deliver against that, and we want to capitalize on the M&A that has been done. Our M&A strategy will be focused on, especially North America and the key verticals that we want to participate in. But again, not in our short-term agenda as we look forward. We really want to emphasize the organic growth engine and driving for performance there. Bascome Majors: Just as we think about the Investor Day, do you have a sense of what the right timing is? Or maybe a better way to ask that is what sort of operational learnings and key personnel you need in place before you can have that discussion with the investment community? . Patrick Kelleher: Yes. I think you just pointed it out there. The key is getting the executive leadership team assembled and filling the recruiting efforts that are currently underway for our CFO, COOs and the Chief Commercial Officer, I expect those to be completed late this year, by the end of this year or January of next year latest. And then from there, we'll identify the best timing for Investor Day in 2026. Operator: Our next question comes from the line of Patrick Creuset with Goldman Sachs. Patrick Creuset: Patrick, you set your focus on accelerating organic growth in the U.S. and raising margins. We start with the U.S. growth initiatives. What do you think is achievable in terms of scaling the U.S. business, perhaps relative to the business you have in Europe? I mean looking at your U.S. business, about half the size of your U.K. business right now looking at relative market size, is there any reason it couldn't be substantially bigger than the U.K. business in the medium term? And then on margins, looking at some of your peers in Europe, that's been operating, albeit with different vertical mix that at least a couple of percentage points higher EBIT margins through the cycle. So would you see that as a useful benchmark for us to start thinking about your margin potential? And if not, why not? Patrick Kelleher: Sure. In terms of the North American market, again, I see substantial opportunity here. I don't want to predict in the future what percentage North America will make of the total portfolio. And it's really important to point out, we're going to be growing all regions that we participate in. So the denominator will change there as we move forward. But I will emphasize the $250 billion market in North America. We are really well positioned to capitalize on that opportunity through organic growth, and we're positioning the resources and teams in place to make that happen. From a margin perspective, as it relates to our peers and so forth, we have line of sight to being high performing, and we'll share more in the Investor Day 2026 in terms of our specific aspirations there and what we're targeting. So more to come on that. Operator: Ladies and gentlemen, that is all the time we have for questions today. I'd like to hand the call back to CEO, Patrick Kelleher for any closing remarks. Patrick Kelleher: Great. Thank you, operator. Before we close, I just want to leave you with a few takeaways from me. First, we delivered a solid quarter with a record quarterly revenue delivered. Our sales pipeline is strong. It's a diversified and scaling in high-growth sectors. Wincanton integration is on track and thanks to solid revenue visibility and our resilient model we're reaffirming our full year guidance. Second, in my first 30 days, I've seen firsthand the depth of talent and potential across GXO, and I've talked a lot about that today. This company is so well positioned to grow going forward. with that strong foundation and now the opportunity to achieve our full potential, we are entering a new era of growth. This is one where we realized GXO's promise to be even more, even better. That means even more growth driven by commercial focus and customer intensity, even better execution powered by the innovation and operational excellence that has defined us. I really appreciate your questions today. I'm looking forward to meeting many of you in person in the weeks ahead. I'm confident in the path, and I look forward to sharing our continued progress as the quarters come. Thank you. Operator: Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.
Operator: Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 5, 2025. [Operator Instructions] I would now like to turn the conference over to David DeMartino, Senior Vice President, Investor Relations. David DeMartino: Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's Third Quarter 2025 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, President and CEO; and Suky Upadhyay, our CFO and EVP Finance, Operations and Supply Chain. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. For a detailed discussion of all these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements, please refer to our SEC filings. Please note, we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Additionally, the discussions on this call will include certain non-GAAP financial measures, some of which are forward-looking non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our third quarter earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Ivan. Ivan? Ivan Tornos: Thank you, David. Good morning, everyone, and thank you for joining today's call. I want to start today the way that I always start by sharing my sincere gratitude to the Zimmer Biomet team members around the world, who move our business and mission forward each and every day. Thank you for your tireless work, your dedication to solving the most pressing challenges in healthcare, and thank you for your relentless commitment to serving our customers and their patients. Today, Zimmer Biomet is a totally different company than it was just a few years ago, and this is thanks to your efforts. During my prepared remarks, I'm going to cover 3 key areas. First, I'm going to summarize the third quarter results and review the momentum of our recently launched new products, which strongly validate our innovation cycle, while I'm also going to briefly cover some of the commercial execution improvements that we are making and will continue to make. Secondly, I'll address our updated 2025 guidance. And third, I'll cover the 3 key strategic priorities of Zimmer Biomet; people and culture, operational excellence and innovation and diversification. Starting with the third quarter, we grew sales 5% on an organic constant currency basis with our critical U.S. business accelerating 330 basis points sequentially to 5.6% from 2.3% in the second quarter. This is the best revenue growth performance in the U.S. since the middle of 2023, with the U.S. being the largest business here at Zimmer Biomet. That said, late in the quarter, unexpected weakness in Eastern Europe, Latin America and noncore segments of S.E.T., namely restorative therapies, impacted our growth by nearly 120 basis points. for the quarter. Importantly, we have identified the issues, are moving swiftly to address them and are contemplating these headwinds in these 3 areas in the guidance that we are providing for the year 2025. Overall, we are very confident in our actions and remain highly enthusiastic about the early market reception of our new products and the upcoming launches, which we do believe will be catalyst for growth. Equally important, we continue to see healthy market growth rates, fueled by demographics, standard care dynamics like the shift to the ASC, ambulatory surgical center, environment here in the U.S. and broader adoption of technology. Unpacking our U.S. performance for the second consecutive quarter, here in 2025, Knees accelerated sequentially with growth of 3.5% or up 180 basis points from 1.7% growth in the second quarter of 2025. This was driven by adoption of Persona OsseoTi, or total cementless knee, and Oxford, or partial cementless knee, which is performing above our internal expectations when it comes to post-training adoption rates. Specifically, Persona OsseoTi now represents nearly 30% of our U.S. total knee implants, and we remain on track to exceed 50% -- 5-0 penetration by the end of 2027. Next, our robotics and navigation strategy of offering a comprehensive and differentiated suite of customer-centric technology solutions is resonating deeply with surgeons. U.S. technology and data, bone cement and surgical sales increased 20.3% this quarter, driven by the strongest robotics capital sales quarter in more than a year. Importantly, utilization continues to increase with U.S. ROSA accounts now performing over half of their knee implants robotically, up 400 basis points for the year. U.S. Hips were up 4% in the quarter, as our triple play of Z1, HAMMR and OrthoGrid continues to gain traction. Z1, or triple-taper stem, accounted for over 25% of hip stems in the third quarter of the year, and HAMMR, or surgical Impactor, the utilization rates double through the first 9 months of the year to 20%. Finally, our U.S. S.E.T. business continues to benefit from new product launches, growing 6.4% in the quarter, up over 250 basis points sequentially from 3.9% growth in the second quarter of this year, and this is in despite of the weakness in restorative therapies that I mentioned earlier. Our decision to invest more in high-growth areas is showing great returns. For example, our upper extremities business increased in the high single digits, driven by our Identity Total Shoulder and OsseoFit, a stemless shoulder, for which 80% of users were competitive accounts. In addition, one of our most exciting businesses, CMFT, craniomaxillofacial thoracic, was up over 20% on the back of new product introductions in rib trauma, cardiac surgery and neuroablation. CMFT continues to be a recipient of investment, and we foresee a bright future for this platform for many quarters and years to come. For 2025, we're updating our full-year organic constant currency revenue growth expectations to a range of 3.5% to 4% from our previous 3.5% to 4.5% range. This excludes the contribution from Paragon 28, while we are maintaining our 2025 adjusted EPS guidance of $8.10 to $8.30. The updated revenue range contemplates, number one, continued weakness in restorative therapies. Number two, a more measured outlook for certain international emerging markets, where we address some of the challenges that we saw late in the quarter here in Q3. And thirdly, the modest slowdown in the U.S. revision market for both hips and knees persisting throughout the rest of 2025. Suky is going to provide more detail on guidance during his prepared remarks. We are continuing to transform Zimmer Biomet at a rapid pace to achieve our long-term ambitions. Let me start now in closing some of the updates relevant to the 3 key priorities of organization. Again, those being people and culture, operational excellence and innovation and diversification. Starting with people and culture, we are committed to having the right people in the right roles, so we can consistently execute on our strategy without hiccups. We owe this to all of our stakeholders, those being patients, customers, employees and investors. We hold the team to this standard, and we'll continue to make performance-based changes when commitments are not made. Along with that approach, and reflected in the guidance we're providing today for 2025, we are making leadership and governance changes in some of our international businesses to address some of the headwinds that we have seen in these geographies throughout the year 2025. Also, in the U.S., our Group President, Kevin Thornal, continues to drive the U.S. channel transformation at the right pace, showing promising results as we demonstrated in our Q3, third quarter, results. These changes include bringing in new sales leadership for ASCs, ambulatory surgical centers, for S.E.T. for our key account management, while we also continue to drive a sales incentive plan, which increasingly rewards growth. Kevin is leading tremendous efforts to drive sales excellence, and he and the team continue to implement sales force specialization for key growth categories, such as robotics and S.E.T. Additionally, we have installed new leadership in restorative therapies, and we have changed reporting lines in some of our U.S. businesses to drive maximum visibility, consistency and accountability. Again, all of these changes are contemplated in the guidance that we are providing. I'm confident that the best is yet to come here at Zimmer Biomet, as we continue to merge best-in-class innovation with solid and consistent commercial execution. Now, turning to our second key priority, operational excellence. This strategic pillar encompasses efforts on both the top and bottom line to accelerate revenue growth, improve margins and increase free cash flow generation through inventory management. I'm proud of the work that the team has done in 2025 to drive adjusted EPS and free cash flow. The efforts of the team have enabled Zimmer Biomet to grow adjusted earnings per share in 2025 versus 2024, and this is in the backdrop of executing 2 significant M&A deals, Monogram and Paragon 28, absorbing the impact from tariffs and making meaningful commercial investments that will yield meaningful growth in quarters and years to come. Meanwhile, the focus on reducing days of inventory on hand underpins our strategy to increase free cash flow, and we continue to see progress in this area. Finally, in the third priority of innovation and diversification, very excited to share that on October 7, we closed the acquisition of Monogram Technologies, which is the company behind the mBôs, semi and fully autonomous AI-driven, orthopedic robotic system. A few weeks ago, we held initial demonstrations of this technology at the Hip and Knee Society meeting in Dallas, Texas, to a selected group of around 100 surgeons, most of them currently using competitive technology. We walked away extremely energized by their feedback. This technology is already changing the conversation, and with data and time, we expect it to also change the standard of care. In a healthcare system, which continues to be constrained by cost, and in an orthopedic environment, where physicians and staff are desperately seeking more efficient ways to deliver best-in-class patient care, we believe that mBôs will offer an elegant and compelling solution. That said, we're not betting on just one platform, we believe in optionality, customer centricity and flexibility. The Monogram Technologies is one part of our very comprehensive suite of customer-centric offerings, which range from simplified navigation such as OrthoGrid to non-CT, non-CAT scan based robotics with ROSA, to meet the diverse needs of our broad range of global customers. We now look forward to completing the clinical protocols for Monogram, which started back in early July, and to launch the world's first semi-autonomous robot with Persona implants, the world's leading knee implant, in early 2027, swiftly follow by the fully autonomous platform at the end of 2027 or early 2028. Relative to our diversification mandate, we continue to see the integration of Paragon 28 moving at the right pace and in the right direction. And our expectations for this business remain unchanged for the year 2025 and beyond. There continues to be a strong excitement for the opportunity, as we launch new products and continue to integrate commercially. In addition to Monogram, we continue to deliver on a broader innovation roadmap bringing new to the world technologies. This includes iodine-treated hip in Japan, for which we recently received PMDA approval. This is a first-to-the-world technology that inhibits bacterial adhesion and biofilm formation on the implant surface to address PJIs, Periprosthetic joint infections. We're launching before the end of 2025, ROSA with OptimiZe, which has a simplified user interface and offers kinematic alignment for implants. We're also deeply in launch mode for next-generation foot and ankle products. This is coming mostly from Paragon 28 and include fusion plating and other key growth areas within lower extremities. Groundbreaking technology is coming from Zimmer Biomet as part of our digital ecosystem to complement our leading positions and drive core implants there. And then lastly, we have over 20 new products in S.E.T. over the strategic horizon, which address safety, efficiency and best-in-class clinical and economic outcomes. In conclusion, we are very proud of the progress in our organization and are excited about the future ahead. We're going to continue to bet boldly on innovation that changes the standard of care in high-growth areas, while we continue to improve commercial execution. Along the way as we responsibly reposition the organization for higher growth, we're going to remain highly disciplined on capital allocation, ensuring that this company remains synonymous with a strong earnings growth and free cash flow generation. And with that, I'll now turn the call over to Suky. Thank you. Suketu Upadhyay: Thanks, and good morning, everyone. This quarter, we grew sales 5% on an organic constant currency basis and delivered adjusted earnings per share of $1.90, which was up 9.2% year-over-year despite dilution from the Paragon 28 transaction, the impact of tariffs and continued investments in our commercial organization. As Ivan mentioned, we are encouraged by the progress of the U.S. business, which was up 5.6% on an organic constant currency basis year-over-year, driven by our new product cycle. This performance was partially offset by headwinds in emerging markets and certain non-core businesses that negatively impacted growth in the quarter by over 100 basis points. As we get into the details of the results, unless otherwise noted, my statements will be about the third quarter of 2025 and how it compares to the same period in 2024. And my commentary will be on a constant currency and adjusted operating basis. 2025 organic constant currency commentary and guidance excludes the impact from the Paragon 28 acquisition that closed in April. Net sales were $2 billion, an increase of 9.7% on a reported basis and 5% excluding the impact of foreign currency and the Paragon 28 acquisition. Consolidated pricing was 20 basis points positive in the quarter. Our U.S. business grew 5.6% on an organic basis, which reflects increasing customer adoption of recently launched products and strong robotic placements. Internationally, we grew revenue 4.2%, where emerging markets represented a headwind to growth. Global Knees grew 5.3% in the quarter with U.S. increasing 3.5% and international increasing 7.8%. This U.S. performance was driven by increasing penetration of our Persona OsseoTi Cementless Total Knee and continued adoption of our Oxford Partial Cementless Knee. International growth benefited from new products and the timing of orders in EMEA, which were partially offset by lower growth in China. Hips grew 3.8% with the U.S. increasing 4% and international increasing 3.6%. The U.S. growth was a result of our triple play of Z1, HAMMR and OrthoGrid, driving share of wallet and competitive conversions. Next, our S.E.T. segment grew 3.6% globally on an organic basis with low teens growth in CMFT and high single-digit growth in upper extremities, partially offset by a low teens decline in restorative therapies. Finally, technology and data, bone cement and surgical increased 11.3% globally, with strong ROSA placements during the quarter. Now turning to our P&L. We reported GAAP diluted earnings per share of $1.16 compared to GAAP diluted earnings per share of $1.23 in the prior year. Higher revenue, a decrease in acquisition and integration-related charges and lower share count were offset by higher interest expenses due to the Paragon 28 transaction and a step-up in year-over-year tax tied to certain one-time favorable items in the prior year. On an adjusted basis, we delivered diluted earnings per share of $1.90 compared to $1.74 in the prior year. This increase was driven by higher revenue, improved gross margin and a lower share count, partially offset by a step-up in interest expense tied to the Paragon 28 transaction. Adjusted gross margin was 72.6%, higher than the third quarter of 2024, due to lower manufacturing costs and favorable mix. Adjusted operating margin was 26.5%, modestly higher than the prior year as a result of better gross margin, partially offset by increased commercial investments and the addition of Paragon 28. Adjusted net interest and nonoperating expenses were $72 million, above the prior year, driven by higher debt related to Paragon 28 and higher interest rates on refinance debt that matured in 2024. Our adjusted tax rate was 17.8%, and fully diluted shares outstanding were $198.8 million, down year-over-year due to share repurchases in 2024 and in the first quarter of 2025. Now turning to cash and liquidity. We had another strong quarter of cash generation, with operating cash flows of $419 million and free cash flow of $278 million, bringing year-to-date free cash flow to about $800 million. Our working capital initiatives, including inventory reduction, continue to pay off, as we reduce days on hand by 10 days compared to the third quarter of 2024, despite higher inventory levels associated with Paragon 28. We ended the quarter with approximately $1.3 billion in cash and cash equivalents. Now regarding our outlook for 2025. We are maintaining our 2025 reported revenue growth guidance of 6.7% to 7.7%, adjusted EPS guidance of $8.10 to $8.30 and free cash flow guidance of $1 billion to $1.2 billion. We are updating our 2025 organic constant currency revenue growth guidance of 3.5% to 4% from our prior range of 3.5% to 4.5%. In spite of this, we continue to expect consolidated pricing to be roughly flat for the full year and selling day differences to be a modest headwind to full year growth. Importantly, as Ivan mentioned, this updated guidance range contemplates continued weakness in restorative therapies, a more measured outlook for certain international markets and the slowdown in the U.S. revision market for both hip and knee persisting throughout the remainder of the year. Now let's walk through the moving parts that impact our reported revenue guidance. At recent rates, FX is now expected to be more favorable to our full year outlook than previously anticipated. At current rates, we now anticipate FX to contribute 50 to 100 basis points of growth in 2025. We continue to expect Paragon 28 to contribute around 270 basis points to reported sales growth in 2025. As previously communicated, we expect our operating margins to be down about 100 basis points versus 2024, which factors in our previously communicated tariff headwind of about $40 million. Adjusted net interest and other nonoperating expenses are now expected to be approximately $280 million, down from $290 million, in part due to lower borrowings on better cash flow. And we continue to expect our adjusted tax rate to be approximately 18% for the full year and fully diluted shares outstanding to be approximately 200 million shares. I'd like to close by thanking the entire ZB team for their hard work and dedication. We continue to make meaningful positive change across the business while investing to accelerate long-term growth. And with that, I'll turn the call back over to David. David DeMartino: Thank you, Suky. Operator, let's open up for questions. [Operator Instructions] Operator, please go ahead. Operator: [Operator Instructions] We will take our first question from Robbie Marcus from JPMorgan. Robert Marcus: Ivan, I wanted to ask on, I would say, guidance in general. On the last quarter call, you talked about scratching 6% in third quarter, which was above consensus at the time and you ended up at 5.0 for organic growth, and fourth quarter or the full year guide is ticking down. So really, the question is, how are you thinking about guidance philosophy? What happened exactly in the quarter? And any preliminary thoughts on how we should be thinking about 2026, recognizing that, excluding the easy comp from last year, we're sort of in a 3-plus percent growth range? Ivan Tornos: Robbie, thank you for asking that question. It's an extremely fair question. So let me unpack a few things here. So I -- as said back in August that I would be very surprised if we didn't scratch 6%. And I'll tell you what, I'm indeed very surprised that we didn't overdeliver on such number, not that we didn't scratch it, but rather that we didn't overdeliver on that 6%. For what it is worth, it was actually an undercommit and overdeliver comment based on what we believe to be a very strong data at hand at the time with the U.S. in July growing around 7%, robust growth across the board, not just in one region and in possession of a very solid pipeline of positive things happening across Zimmer Biomet at that time, almost midpoint into the quarter. So yes, I am very, very surprised. But speaking of surprises, 3 things happened really late in the quarter with less than a week to go, which caused Zimmer Biomet around 120 basis points. And give me just a minute or 2 to go through some of these, and then, we'll talk about guidance and philosophy and whatnot. But with a week to go in the quarter, 3 things happened. We saw a last minute cancellation of distributor orders in emerging markets of Europe, mostly from the Middle East and Eastern Europe. Number two, our Restorative Therapies business, rarely talk about this business, is around $110 million annually, HA, hyaluronic acid, injections. Here in the U.S. made some pretty basic commitments by a fairly large amount, especially for the size of that business. And then thirdly, in Latin America, we missed our forecast by north of 15% given some distributor challenges in the region, that's 15% -- 1-5. And again, it happened really, really late in the quarter. So noncore areas, noncore business, but painful, Robbie, by the time that you put all of them together at the tune of around $24 million to $25 million. So again, just on those 3 things alone, you got another 120 basis points to the 5% that we're reporting today. In any given quarter, as you can imagine when you run a complex company like Zimmer Biomet, in any given quarter, you're going to have a variety of these things happening. But to see all of these events happen at the same time is unique to say the least, especially when you got just a few days to go to finish the quarter and having budgeted somewhat conservatively for all of these 3 items that I'm talking about here today. Clearly, this has taught me that we, or rather I, need to be far more measured in our external commentary. And you better believe, Robbie, that such change has started effective today. I own it. I said what I said. I had the data that we had, and I don't anticipate that I'll be repeating these type of comments moving forward, even when the data shows to be as compelling as it was back in early August, so measured is the word when it comes to commentary and philosophy on guidance or more measure is the word when talking about commentary and guidance moving forward. That said, Robbie, I will hope that the comments that we made, or I made, non-prudent perhaps in hindsight, don't end up tarnishing what was, otherwise, a very solid quarter across a variety of key areas. So as you heard in the prepared remarks, we grew our U.S. business by 5.6%, delivering the best quarter in the U.S. in over 2 years. Our largest product franchise, Knees, actually grew 5.3% globally on an organic constant currency basis with Hips delivering mid-single-digit growth. We had the best quarter in robots in quite some time. S.E.T., another consistent quarter with the U.S. delivering close to upper single digit. EPS, as you heard from Suky, was another solid story. Even with softer revenue coming from these 3 key areas, we ended up delivering above expectation on EPS. And guidance on EPS for the year remains untouched. We've gone back to the original $8.10 to $8.30 even after dealing with tariffs, integrating 2 companies and absorbing very meaningful commercial investments. So I can go on and on, but, again, the comments, perhaps non-prudent, but the performance was there. I said what I said on it, and I'll make sure to be far more measured moving forward. Relative to the guidance for the rest of the year, to your question, it is very measured. We're very comfortable that we're going to deliver on that guidance. And once we get into 2026, we'll have a conversation around philosophy and what the guidance looks like for 2026. Thanks for the question. Again, it was very fair. Operator: We'll go next to Travis Steed with Bank of America. Travis Steed: One follow-up to that question. I guess, the 120 basis points this quarter, does that come back at some point? Is it a continued headwind in '26? Is it a positive or negative in '26? And -- I don't know if you can quantify that. And there were some comments on kind of a slowdown in the U.S. revision market. Does that continue as a headwind into next year as well? And there were also some comments I noticed in the script, where you remain highly disciplined on capital allocation. So just wanted to see what that means as you look into next year as well. Ivan Tornos: Thank you, Travis. I'll let Suky talk about capital allocation in a second. So this international noise, is it coming back in 2025, in the fourth quarter? Look, as I said, we're going to be measured. So we took that out of the guidance. So we're not counting on that revenue from those 3 key areas to be back in 2025. If it does, that's great. Do we think that's going to continue in 2026? Again, too early to talk about that. But what I will tell you is that as we think about external commitments made for 2026, we're going to stay away from putting some of these revenue from noncore areas in our external commentary and the external guidance that we're going to be providing. Suky do you want to talk about capital allocation? Suketu Upadhyay: Yes, sure. Let's start with a few data points. So this year, we're going to be generating over $1 billion of free cash flow, quite attractive. We're in excess of $1.6 billion, almost $1.7 billion of adjusted EBITDA, and we have a net debt leverage ratio in the very low 3s. So you can see there are some really strong fundamentals there, a very strong balance sheet with a significant amount of firepower. The way we think about that capital allocation then is we're going to prioritize businesses and acquisitions, assets that continue to move us into faster growth markets that continue to accelerate near-term as well as long-term revenue. But we're going to do it in a prudent way. And I think you've seen that with the Paragon 28 acquisition; very exciting Monogram transaction that we've done quite recently; OrthoGrid, which has been a differentiator for us. So we're going to continue that path, but in a disciplined fashion as we always have. But that also that very attractive balance sheet always gives us also strategic optionality to do share buybacks opportunistically as we see fit based on market conditions. So the net takeaway is that nothing has really changed fundamentally on our capital allocation strategy. If anything, it continues to get stronger. Ivan Tornos: And Travis, your other question there around the revision market that I failed to answer. So look, it's too early to tell. It's fairly choppy. One quarter, we see more revisions than the next. So it's a bit hard to predict. It's too early to tell whether we're going to see softness in 2026, when it comes to revisions. But again, going back to guidance philosophy, we'll account for that at the time we provide guidance for 2026. Operator: We'll go next to David Roman with Goldman Sachs. David Roman: I was hoping maybe we could -- you could contextualize the performance in 2025 against the LRP targets that you laid out, I guess, about 1.5 years ago now. As I think about the guidance here, the midpoint of the range being in the 3.5% to 4% range and the 4% to 6% that you had provided, you would need each of the next 2 years to be in the 5% to 6% range to end up at the midpoint of your LRP. And I think, Ivan, when you talked through some of the dynamics that came up late in the quarter, those things like that kind of just happened. So does a material acceleration in growth require an everything goes right set of circumstances to get into the LRP range? And is it feasible to see growth in the 5% to 6% range going forward to get back on track with the LRP? Ivan Tornos: Thanks, David. So present and future kind of question here. So in the present, second half of 2025, we are growing mid-single digit or above. So -- actually mid-single digit, not above, so we are there. As we think about '26 and '27, give us a chance to get into February, we'll discuss what '26 and '27 looks like. I'll tell you, we think of the 3-year plan across 3 components. You got market dynamics, innovation dynamics and commercial execution dynamics. We know that from a market standpoint, the market supports companies delivering mid-single-digit growth, 4%, 4.25% market dynamics. So the basin is there for companies to deliver mid-single digit or above. As you move to innovation, the innovation cycle is working out. That is again why in the second half of 2025, we are delivering that mid-single-digit growth rate. And let's evaluate the sustainability or acceleration of that innovation cycle as we get into '26 and '27, but we're very confident that the innovation cycle is real and more things to come. And then you got the lingering question on commercial execution. Do we feel like today with the fragility we got in some noncore areas, with the changes we're making in the U.S., that can be an accelerator, that can be something that is going to drive sustainable mid-single-digit revenue growth? That's something we're evaluating, and that's something that we're going to discuss coming early 2026. But market is where it needs to be, innovation is where it needs to be. We've got to address some execution issues here. Thanks for the question. Operator: We'll go next to Caitlin Roberts with Canaccord Genuity. Caitlin Cronin: I guess, just turning to your product pipeline. You received clearance for your Iodine Technology in hips recently in Japan, and then, also announced the FDA granted the Technology Breakthrough Device designation in the U.S. You could talk through these developments and just the timeline for the launch in the U.S. and/or further indications beyond hip. That would be great. Ivan Tornos: Thanks for the question, Caitlin. So exciting product launch. We've been working on this technology in Japan for over a decade. It is one of the most complex clinical trials that I've seen in my 31 years in MedTech. And it's great news that we got approval in Japan. This is a $1.3 billion market, the second largest market outside the U.S. We're going to be launching at the end of 2025. And yes, this is going to be a meaningful revenue contributor for 2026. And again, we'll talk about it once it's time to talk about it with really good pricing. It is differentiated technology. There's nothing like that. It does suppress or prevent biofilm formation on the implant with again, robust clinical data for 10 years. It is technology that alludes over a prolonged period of time. So again, unique and something that we think is very compelling. Most importantly, the FDA thinks it's also very compelling. This happens to be one product from Zimmer Biomet that is getting the Breakthrough Designation here in the U.S. That doesn't mean that we're going to be launching immediately. That doesn't mean that the approval cycle is going to be shorter, but it does mean that we get to work with the FDA elbow-to-elbow in launching this technology at the right price in the U.S. I'm not going to commit to a date in terms of when we're launching iodine-treated devices in the U.S., but it is breakthrough, so we like what we see. We're going to start with hips, and then, we're going to move into knees, shoulders and other categories in due time. But again, Breakthrough Technology, and thanks for the question. Operator: We'll go next to Patrick Wood with Morgan Stanley. Patrick Wood: Beautiful. You guys mentioned obviously some of the refocusing on growth and -- when it came to the incentive structure. Was that at like the rep level? Was that at the divisional head level? Just any more details on how you're structuring the incentive plan that kind of push people towards growth. Ivan Tornos: Patrick, it's at all levels. So this is a company that has gone through a lot over the last decade. You know that. And we fail to put the right incentive plan across the board. And today, we make external commitments around revenue, earnings per share and free cash flow. Yesterday, folks at different levels were not getting paid on those 3 levels of commitment. Today, I can tell you that every senior manager that owns a P&L here at Zimmer Biomet gets paid on revenue growth, earnings per share performance and free cash flow generation. As you click down to the commercial structures, we are paying people on growth, we are paying people on margin, and that goes all the way to the sales rep level. We hold sales reps across Zimmer Biomet accountable for that pricing dynamics. And if you're not growing on revenue, if you're not growing on margin, the things that you can control within margin, you're not going to get paid your full compensation. So this is something that has been choppy over the last, call it, 3 or 5 years, but I can tell you that the discipline is there today. Thanks, Patrick. Operator: We'll go next to Larry Biegelsen with Wells Fargo. Larry Biegelsen: Ivan, it looks like the recon market improved in the third quarter versus second quarter. What are you seeing into Q4? And Suky, you have this goal of EPS of 1.5x sales. Is there anything you would highlight for next year, like the tariffs, that would make it difficult to achieve in 2026? Ivan Tornos: Larry, yes, we did see an acceleration in Q3 over Q2. Overall, we look at trends. And if you look at post-COVID dynamics and you take out the backlog, we see the market as being healthy. And I think my peers that have reported already have said the same thing that the markets are stable, a combination of volume and price. In terms of Q4, look, I'm going to learn my lessons. I'm not going to tell you anything about market dynamics in Q4. I'm just going to tell you that the market overall is expected to be around 4%. Suky? Suketu Upadhyay: Yes. Thanks for the question, Larry. I think you'll see this year, and if you look back even over the last several years, we've been incredibly disciplined in growing margins and growing our bottom line in concert or better than our top line. As Ivan noted in his prepared remarks earlier, if you look at our earnings per share guidance for this year, we're basically right where we started at the beginning of the year and that's even after stepping over the tariff burden as well as integrating Paragon 28 as well as Monogram. So as you can see, we've been quite disciplined throughout the P&L and all the way down to cash flow. It's too early to talk about 2026 at this time. As Ivan said, we'll come out in February and give a lot more color on that. What I will point to though is, again, strong performance this year, which marks a number of consecutive years of very strong performance on margin and earnings. Operator: We'll go next to Rick Wise with Stifel. Frederick Wise: I'm hoping, Ivan, I can ask you to talk a little bit more about innovation, the very visible innovation that's innovation pipeline at Zimmer Biomet. I hope you would agree that innovation done well should drive -- again, done well should drive steadily improving pricing, share gain, new accounts, better margins, among many other factors. And I feel like you're well underway with your Wave 1, the Mag 7, and there are others. These are largely launched, still rolling out and much more to go. Wave 2, you're highlighting it today, Monogram, the Iodine hip, et cetera, and others. So my question -- sorry for the long windup, is where are we in that Wave 1 rollout process and impact? I feel like third quarter in the United States is showing -- I mean, please correct me if you think I'm wrong, is showing clear positive concrete signs of that early Wave 1 rollout with, again, more to come. So the bottom line is, when can we expect a more significant, meaningful impact from the -- your actually impressive pipeline? Ivan Tornos: I love the question, Rick. So you spoke about waves. So maybe let's segment innovation of 3 waves. So Wave #1 was catching up on certain categories were absent. And that's the lion's share of what we're doing with what we call the Magnificent 7. And as you saw in the U.S., we delivered 5.6% growth, and this is largely induced by this Magnificent 7. . And in my prepared remarks, I offered all kinds of commentary around adoption rates for Oxford Partial Cementless, above expectations; Z1 triple-tapers, we're regaining market share. I love where we are with OrthoGrid and navigation, lots of accounts that we had lost to competitors that we are regaining. I like where we are with the knee franchise, so Wave 1 catching up Magnificent 7 is working, and it should accelerate as we get into 2026. So that's Wave 1. Wave 2 is moving from catching up, what I call, competitive-centric innovation, things that others were doing that we failed to do. With that behind, we have moved already into Wave 2, customer-centric innovation. How do we change the standard of care by being first to market in new technologies? That's fully autonomous and semiautonomous robotics, that's next-generation digital ecosystem, which we are doing. That's the example that I provided to Caitlin around iodine-coated devices, first to market with breakthrough technology. So we are deep already into the second innovation cycle. So call that Wave 2. And then, it's Wave 3. How do we apply these innovation capabilities into spaces outside of core orthopedics? And that's going to come largely or mostly from inorganic means and a lot of the fact that we got the balance sheet that we have to get into that space. So again, 3 different ways of innovation catching up, done working. Now we need to accelerate it. Customer-centric innovation, and I provided 2 or 3 examples. And yes, we look forward to bringing innovation capabilities outside of core ortho. I love the question, Rick. Operator: We'll go next to Matt Taylor with Jefferies. Matthew Taylor: I know that the guidance update here includes a more measured outlook for these international markets in the near term. I guess, would you expect some pickup in those areas that you saw softness in Q3 in 2026 just at a high level? Ivan Tornos: Thanks for the question, Matt, and I think Travis does something similar, and I failed to answer. No, we're taking those hiccups outside of any consideration for 2026. And again, I'm not going to talk on whether they're going to stick around or not, we're going to take them out. That's not in the guidance for 2026, the way we think about guidance today, again, too early. And they're not in the guidance for the rest of 2025. So as you think about narrowing the guidance from 3.5% to 4.5% to now 3.5% to 4%. So thinking of midpoint around 3.75%, and I think that's where we're going to land. That's a 25 basis point reduction or roughly $20 million. And that's largely induced by some of this volatility that we have seen in some of these noncore areas. Operator: We'll go next to Joanne Wuensch with Citi. Joanne Wuensch: I'm going to apologize for it in advance. I think what you're -- what many of us are asking today is, given the miss on the third quarter and the updated guidance for '25, how should we think about '26? And I'm respectful, it's too early to give that guidance, but is there a way to give us some maybe headwinds and tailwinds? Anything that you can help to sort of set our models correctly so that when we do get to guidance, we're not surprised. Ivan Tornos: Thank you, Joanne. No, you don't need to apologize, you are doing your job. So, again, early to talk about 2026, but I'll go back to the 3 key components of guidance; markets, commercial execution and innovation. Markets is definitely something that we have a lot of data on, and we like where these markets are at. On innovation, as per my answer to Rick earlier, love where we are with Magnificent 7, love the opportunities with things like iodine-coated devices in Japan and other markets. I love the fact that we're moving some of this innovation from the U.S. now into other geographies. So that's definitely something that gives us a lot of confidence. We just need to evaluate some of this fragility around commercial execution. So again, the sum of all parts will inform the guidance in terms of what is the right guidance. We'll be measured. We'll make sure that whatever we say externally has a very high probability of being able to achieve. Thanks for the question. Operator: We'll go next to Matthew O'Brien with Piper Sandler. Matthew O'Brien: Can we just talk about the U.S. knee market specifically? And -- I know you've got all these new products coming out. Can you talk about some of the mix benefit that you're getting already from these new products? And then, I don't have perfect information that one of your bigger competitors hasn't reported, I get that. But I'm still showing you're losing market share here in Q3 in the U.S., and it's a trend that's been going on for several years. So what I'm wondering is with some of these mix benefits you might be getting and maybe volume benefits that you could be starting to realize, as you get back into some of these accounts, is that something where there's kind of a lag effect where it could really rebound in '26 from a share perspective? Or do you need something else? I don't know if it's monogram, et cetera or some of these new ROSA placements to really help you stem some of the U.S. knee share loss. Ivan Tornos: Another very fair questions. So are we losing market share in the U.S.? Let's see what the quarter looks like once everybody reports, and we're able to analyze all the different dynamics. We are losing market share, I'll tell you, Matt, we're doing so at a much lower rate than we did before, which again validates that the innovation cycle is working out. And as we get into 2026, we're going to be in a much deeper stage of this innovation cycle with more stuff to come. So again, hard to tell what's going to happen in '26. But I like the momentum. I like the sequential growth we've seen in the U.S. I like the 5.6% growth in the U.S. I like where we are with Knees in the U.S., increased quarter-over-quarter, now 3.5%. And hips, look, it was not too long ago, Matt, that we're losing market share at the tune of 500 to 600 basis points, and now, we're growing mid-single digit in the U.S. So if we are losing market share in the U.S., it's not at the same pace as before, and this is still early in this innovation cycle. In terms of margin, yes, every single one, if not, most of these new products that we're launching have a better margin profile, whether it's Oxford Partial Cementless, whether it's Persona Revision in Europe, whether it's Persona OsseoTi, where we get better margin and definitely get a share of wallet opportunity. It's not just launching innovation, it's getting a better margin profile with this innovation. And relative to 2026, again, I look forward to the conversation in early 2026. Thanks for the question. Operator: We'll go next to Ed Ridley with Rothschild & Company Redburn. Edward Ridley-Day: First of all, just a quick one on Paragon. Can you speak to the organic growth there that you're seeing behind the acquisition benefit and the momentum? And given Johnson & Johnson's announcement, a long-duration exit tends to throw up opportunities for others. Can you speak a little to that? And how you think there might be some opportunity there, both in terms of personnel or potentially geography? Ivan Tornos: Thanks for the question, Ed. So Paragon 28, maybe let's take a step back and recall what the thesis behind acquiring this asset was. We wanted to acquire something that was growing higher. We got in a higher market, or a higher market growth rate, that's Paragon 28. This market is growing solidly in the, call it, 6% to 8% range. We wanted to build a platform, not just buying one company. We wanted to build a platform around lower extremities. We've done that, whether it's lower trauma, whether it's foot and ankle and other components, biologics, we got that going on. We wanted to have a more meaningful presence in the ASC space. That's enabling that. I wanted to buy a company that had innovation today, but a pipeline for tomorrow. And all of that remains true with Paragon 28. The organic performance for the quarter was in the upper single-digit range. We are stabilizing some of the early, I guess, contract friction that you can see in this category, but everything is looking solid. We're not touching the guidance for the year 2025. We continue to see great momentum with commercial execution, and again, launching new products. And we think of this asset as something that needs to be growing double digit for a period of time. There may be some hiccups every once in a while. But overall, the organic growth of Paragon 28 should remain in the teens. And -- sorry, relative to J&J, look, I'm not going to comment on the disruption there. I want to be respectful to my peers out there. But there is disruption. Every time you go through a spin-off, divestiture, we've seen a hit at Zimmer Biomet, there is going to be some level of disruption. And there are customers that are going to be asking whether Zimmer Biomet offers a better solution, and there may be some short-term opportunities. But again, I'm going to be respectful to my peers and don't comment too much on this. Operator: We'll go next to Matt Miksic with Barclays. Matthew Miksic: One follow-up on the iodine hip -- iodine-coated implants and then just a clarification on some of the issues that impacted Q3. So on the sort of new implant line, you mentioned FDA's Breakthrough Designation. Wondering if that's a -- if that turns into a premium product, understanding that premium and negotiations for implant prices engages hospitals and requires value assessment committees and value and sort of that pathway. Is this a -- does this effectively kind of drive mix in a significant way? Or Ivan, are you thinking about this more as a way of catching more volumes here just because of the clinical benefits, the products you kind of bring? And I guess with FDA designation -- or Breakthrough Designation, is there a possibility for CMS sort of pass-through there to support a price lift? And then I have one quick clarification, if I could. Ivan Tornos: Yes. So on iodine, yes, to all of the above, Matt. So getting a Breakthrough Designation in the U.S. does enable premium pricing, better reimbursement dynamics. You go through value committees at a faster pace. And the assumption is that once we have this product in the U.S., it's going to command higher pricing. But let's not talk about the future and focus on the present. This is already happening in Japan. So with this approval in Japan, it's a similar dynamic. We are going to get a pretty significant price uplift in the country. And again, it's the second largest market for Zimmer Biomet. We're going to get a level of reimbursement that is far better than other devices in the market. So the answer to iodine is yes to all of the above. Breakthrough does deliver better pricing dynamics, faster adoption opportunities through committees and whatnot. What was your second question, Matt? I apologize. Matthew Miksic: Yes, sure. So second, just a follow-up on the restorative therapies, short with softness or whatever you would describe it as lower than expected orders. That's -- just to be crystal clear, my apologies, I should know this probably. But is this bone growth simulators? Is this glue? And also -- I understand there's some additional competition in bone growth, not that it's a business we spend a lot of time thinking about these days, but was that a factor? Any color on the product lines and whether -- what the dynamics were around that? It would be helpful. Ivan Tornos: Yes, absolutely. So first things first, let me simplify it. When we talk about restorative therapies, basically talking $110 million, $120 million of revenue, annual, and on one product, that's HA injection. So that's hyaluronic acid injections. And what happened is quite simple. I would say 3 things. One, we didn't budget adequately. So that's a mistake we're not going to repeat. We had some challenges on commercial execution because the focus has been elsewhere. And then thirdly, as you probably recall, there were some reimbursement changes in the U.S. through CMS that we thought that were behind, and they're not behind. So it's a really acute element of pricing that impacts this business. But I will say the sum of all parts is mostly commercial execution. And again, as we think about 2026, I keep repeating myself, we're not going to offer commentary. But when it comes to this noncore business, we're going to be far more measured in the expectations that we have from restorative therapies going into the year. Operator: We'll go next to Danielle Antalffy with UBS. Danielle Antalffy: Just a follow-up question. Ivan, you mentioned some high-level personnel changes and things like that. I'm just curious about, how far into that you are and sort of how we should think about that potentially impacting the next few quarters as far as any potential disruption? Or do you feel like those are pretty easily transitional, it's not much of a transition, so we shouldn't expect any issues there? Ivan Tornos: Danielle, thanks for the question. So first things first, the organization is always evolving, going back to strategic pillar #1. We're going to have the right people in the right jobs, people, folks that know how to make commitments and deliver on commitments. And once those things don't happen, we have to make changes at the right pace. Those changes are embedded in the guidance we're providing. So as we think about this guidance on both revenue and EPS, the assumption of these changes is already in there. On the commercial changes in the U.S., look, we're going a bit faster than before, but we were working on commercial -- on the commercial channel for quite some time, and that's also embedded in 2025, and it will be part of our 2026. So long-winded answer to say is reflected in the guidance, and we look forward to making these changes. Operator: This concludes the question-and-answer portion of today's call. I would like to turn the call back over to Ivan for any closing comments. Ivan Tornos: Thank you very much. So my closing comments is that we continue to be proud of the evolution of this business, the improvements that we're making in this business. We're going to stick to the 3 key priorities of organization. And again, as we think about the rest of the year, we're very confident on when achieving the guidance. And as we think about 2026, we continue to see health. When it comes to market dynamics, we are highly encouraged about our innovation cycle. And we will address the fragility that we get in some pockets when it comes to commercial execution. Thank you for your time this morning. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Evotec SE Quarterly Statement 9M 2025 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Volker Braun, Head of IR and ESG. Volker Braun: Thank you, Lorenzo, and good morning, good afternoon to all of you in this call. We have a lot to cover today, and I'll keep my part very short. So let's move on to cover the housekeeping items on Page 2. We share the cautionary language here as usual, and some statements will be future-looking based on information available today and they might be subject to change in future. But now let me hand over to our CEO, Dr. Christian Wojczewski. Christian, please. Christian Wojczewski: Thank you, Volker. Good morning and good afternoon to everyone. It's a pleasure to welcome you all to this call. I'm looking forward to taking you through the progress we've made over the past 6 months of transition since the announcement of our new strategy. Very pleased with the momentum and high speed of our transformation towards better monetizing our technology leadership. The steps we've taken in the past couple of quarters are a strong fundament for our value creation path and for the execution of our mid-term outlook. I'm confident that this will become more visible to you while we lead you through this presentation. Let us now take a closer look at the year-to-date performance. In the first 9 months, Group revenues landed at EUR 535.1 million, which is a 7% decline versus the previous year. This is driven by our D&PD business, where we faced continued softness in the early drug discovery market, leading to 12% revenue decline. In contrast, our Biologics business, JEB, remains on a strong growth path with plus 11% growth in the first 9 months. As mentioned in the last call, we expect the trend in D&PD to continue in the second half of 2025, while for Just-Evotec Biologics, we anticipate revenue growth to further accelerate. Taking a closer look into the D&PD business, we see several main elements driving past and future performance. Talking about the early drug discovery market environment, the VC funding for biotech is certainly not yet favorable, affecting the business development activities of the transactional service business. However, over the last 2 quarters, the number and value of proposals going out from Evotec to customers is clearly trending upward, indicating that the business is stabilizing. Also, the level of negative change order volumes in Q3 has substantially improved versus first 2 quarters. In the meanwhile, we have taken appropriate actions to adjust our cost base. We've introduced a new organization structure, and we're strengthening our commercial and operational capabilities. 12 months ago, we were targeting EUR 30 million of cost out in 2025. We raised the bar over the course of the year. And during the last call, we committed to EUR 60 million of cost out, and we will stay ahead of plan. As announced last call, we are working on delivering additional EUR 50 million of cost out and productivity measures in the future. You should expect a full update on the initiatives we're working on during our next call. The business momentum with strategic partnerships remains healthy, ensuring continued mid-term revenue streams. Those strategic partnerships are expected to also result in meaningful progression of our asset portfolio over the next 6 to 9 months. Several catalysts lie ahead of us, leading to the transition of molecules from the early drug discovery stage into preclinical and from preclinical into clinic. And I'm pleased to announce today that we're expecting up to 4 molecules from our partnered asset pipeline to be in Phase II clinical studies in 2026. This is exciting news for Evotec as it demonstrates the scientific strength and the outstanding capability of our technology. And it underpins our plan to generate meaningful upside to milestone and royalty payments in the future. More about this a bit later. At Just-Evotec Biologics, we're making great progress in our efforts to diversify and broaden our customer portfolio. Business development within non-Sandoz and non-DoD business is moving fast. The momentum for this part of the business has further accelerated versus half year results to now over 100% growth after 9 months. Moreover, we signed a transformational deal between Just-Evotec Biologics and Sandoz just hours ago. This landmark transaction is a strong testament to our cutting-edge technology and capabilities in the fast-growing biologics business. It will unlock payments of more than $650 million over the next years. In addition, we expect to generate sizable revenues from royalty streams related to 10 biosimilars. We're extremely excited and proud to have been selected as partner by Sandoz on their path to shaping the biosimilars market. In a nutshell, we are well on track with our strategy, driving both scientific and operational excellence. Since the VC funding for biotech customers is relevant for approximately 30% to 40% of our revenue base in D&PD, let me share some further background information about the market trend. Updated data on total venture capital funding environment shows no material change compared to the analysis we shared in August. The absolute funding level has not grown over the past 2 quarters. The share related to discovery and preclinical stage companies remains well below pre-pandemic levels, suggesting a continuing short-term investment focus on companies with clinical stage assets. We spoke about the temporary deprioritization of early discovery and development activities and funding. It needs to be overcome before we see forceful recovery of the early drug discovery market. That said, we do see some encouraging developments. Negative change orders are normalizing and customer activities are increasing. In the first half of 2025, the balance between positive and negative change orders was impacted by higher than expected cancellation volume, contributing to a weaker sales performance in D&PD. This effect was related to a small number of contracts, which were canceled by customers either for strategic or scientific reasons. In Q3, we're back to normal levels. The development of our change order balance is shown in the upper graph. In contrast to the comparably low funding activities for early-stage biotech, the business activity level at Evotec has picked up. The number of proposals issued to our customers has grown 20% over the past 2 quarters, and this is also in line with the growth in total value of proposals. Even though those early indicators are promising, we are not yet indicating a change of trend. We remain vigilant in monitoring market developments and continue to adopt to our customers' evolving needs in a more agile way. In parallel, we are building a more targeted go-to-market approach. And as mentioned last time, we are strengthening our commercial organization. I'd like to now hand over to Paul, who will guide you through our financial results. Paul Hitchin: Thank you, Christian, and a warm welcome from my side. Let me guide you through our year-to-date results in a little more detail. Our first 9 months Group revenues reached EUR 535 million, a 7% decline versus the same period in 2024 and is aligned with our expectations. Firstly, our D&PD revenues declined by 12% to EUR 391.9 million in a persisting soft market in early drug discovery, as Christian commented on in his introduction. Also, as mentioned last time, included in this result is the expected temporary decline in the BMS revenues. Our Just-Evotec Biologics business continues to grow strongly in the first 9 months of the year and is on track for a very strong 2025. For the first 9 months of 2025, revenues reached EUR 143.2 million, which is up 11% versus the first half of 2024. As we mentioned last time, we continue to see a broadening of our customer base with non-Sandoz and non-DoD customers growing 105% in the first 9 months versus last year. During the first 9 months of 2025, our Sandoz business grew low-single-digits. Although as we look forward, we expect meaningful full year growth following the completion of the recently announced transaction, which will include multiyear consideration for technology access, development revenues and product royalties. Our R&D spending remains on the trajectory shared last time and is reduced by 33% versus prior year period from EUR 41.1 million in the first 9 months of 2024 to EUR 27.7 million in the first 9 months of 2025 as we direct our investments to those most relevant for our partners. Adjusted Group EBITDA reached negative EUR 16.9 million, driven by the weaker than expected D&PD revenues and our fixed cost base. We are well on track with our cost-out initiatives to deliver the EUR 60 million of in-year structural cost reduction in 2025 that we communicated in our last call. We also remain focused on delivering the additional mid-term cost and productivity actions that we discussed in our April update. Our Just-Evotec Biologics business remains ahead of expectations, helped by positive operating leverage despite the planned J.POD build-out. Bridging to our full year outlook, we expect our fourth quarter profile to reflect the higher revenue contribution weighting that we have seen in prior years. In addition, our recent guidance update in July reflected lower full year D&PD revenues with an overall improved business mix, including the effects of the events announced last night. Now continuing with cash flow. Our year-to-date free cash flow has improved by 14% versus the same period last year. This is despite our third quarter operating cash flow having a tough comparable to last year when we received $125 million of BMS payments, whilst the recently announced BMS neuro payments has only been received in the fourth quarter of this year. However, in line with our expectations, our investing cash flow continued to see sequential improvements as we drive more rigor in our CapEx investment processes whilst also completing the J.POD build-out. Our net debt levels grew versus the second quarter of 2025, which also reflected the higher lease obligations following the adoption of a long-term lease agreement in our Hamburg facility. Following the completion of our transaction with Sandoz planned in the fourth quarter of this year, we expect our liquidity to be in a significantly stronger position with the residual long-term debt portfolio. With that, I hand over to Cord. Cord Dohrmann: Thank you, Paul, and good morning and good afternoon to everybody on the call also from my side. As you know, at Evotec, we strive for technology and science leadership on our mission to pioneer drug discovery and development. Our ambition is to accelerate the journey from concept to cure in partnership with our customers. Today, we are pleased to talk about considerable achievements we have made along this strategy in both segments. Let me start with a look at the D&PD segment first. We are seeing great scientific progress with our strategic partnerships. Based on these achievements, we continue to feed and expand our strategic partnerships and are confident that our common asset pipeline will show substantial progress not only in 2025, but also during the next 6 to 9 months. So what is our approach? Christian already mentioned that we offer end-to-end discovery services, including development and also highly innovative drug discovery technology platforms. We strive to combine both offerings to create superior customer value. Our core service offering spans the entire value chain from target identification to IND. When we combine those individual services, we can seamlessly run integrated research projects using highly automated workflows. This train of services, shown in blue on this chart, is the backbone of our operations. Within our strategic partnerships, we are then adding proprietary AI-enabled technology platforms on top of this. These are shown here in pink. These platforms elevate our drug discovery platforms to the next level. Our AI-driven platforms are targeting, in particular, 4 goals. We create a much deeper understanding of disease biology, and therefore, patient stratification through our proprietary molecular patient database. We improve our target ID and validation efforts as well as hit identification through superior in vitro disease models driven by our iPSC platform. We enhance and accelerate hit to lead and lead up processes through in silico profiling and an eye supported molecular design. We reduce the risk of failures due to industry-leading tox and safety predictive tools. So this means that AI for us is not a stand-alone feature. We have embedded AI deeply into our toolbox, enhancing the performance of each and every platform in the value chain. Based on this, we not only shorten time lines, but we also improve outcomes. Let me briefly take you through the individual elements. Our proprietary molecular patient database consists not only of highest quality and comprehensive clinical data, but also of deep multi-omics data based on corresponding patient samples. This database is invaluable when it comes to target ID and validation and is supported by AI machine learning algorithms. Our E.INVENT platform is a highly comprehensive suite of AI machine learning supported molecular design tools, predicting everything from solubility, ADME-tox parameters, affinities to targets, but most importantly, it supports our -- it accelerates our molecular design cycles. Our AE safety platform is a suite of NAMs consisting of gold standard in vitro models, which are combining with high content omics and/or high content imaging data to predict the safety and tox profiles of drug candidates. We are doing this with extremely high accuracies, and I will come to this in more detail later. Furthermore, we have an extremely versatile iPSC drug screening platform, which in combination with omics and high-content imaging data is able to profile disease relevance as well as efficacy and safety of drug candidates throughout the drug discovery process with higher granularity, and therefore, higher accuracy than standard in vitro models. All of these platforms are underpinned by our seamless high-performance omics platforms, which can generate, in particular, transcriptome, proteome and metabolome data at highest quality and with unmatched throughput. I will come to the details here later as well. Finally, we are able to bring all of these data together in our data analysis tool called PanHunter. This tool facilitates the handling and the analysis of high-dimensional data sets and is in many areas, AI machine learning supported. On the next page, I will show you selected examples of significant scientific achievements in 2025 and also talk about how they translate into commercial results with our strategic partners. And thereafter, I will show you how those partnerships are associated with highly attractive long-term financial upside. But let me take you through a few selected highlights. I have mentioned the importance of our Evotec molecular patient database as a foundation for a better understanding of disease processes, and therefore, also target ID and validation. And in 2025, we have significantly expanded the database through the addition of new cohorts, in particular, in kidney diseases, obesity, but also immunological diseases. This database continues to support strategic partnerships, while also generating multimillion dollar success-based payments. As far as our iPSC drug discovery platform is concerned, we continue to upgrade our disease models into more complex organoid-type in vitro models. We have done this particularly successful in the kidney disease space. We continue to also make progress in our AI-supported small molecule design platform, E.INVENT. Here, we continue to build models that support specifically the design of certain compound classes as we believe that there are no one-size-fits-all models that are suitable for every compound class. We mentioned previously that we continue to invest in new approach methodologies, NAMs, to predict safety and toxicology of drug candidates. Also, here, we continue to make very significant progress by continuously improving our existing models, while also adding further models. For example, our drug-induced liver injury tox prediction tool continues to improve as now we have reached a predictive accuracy of more than 90%. Similarly, we have developed a highly predictive cardiotox prediction tool, which also has a predictive accuracy of about 90% A further example is a new model of a -- in a teratogenicity prediction tool, where we are currently approaching 80% of predictive accuracy. To our knowledge, these omics and image-based AI-supported safety tox prediction tools are absolutely industry-leading when it comes to their predictive accuracies. Finally, I would like to briefly talk about scientific progress in our PanOmics platform. Our high-performance PanOmics platform continues to evolve. In 2025, we reached 2 landmark achievements. With our high-throughput transcriptomics platform called ScreenSeq, we conducted a high-throughput compound screen, screening over 250,000 compounds using transcriptomics as the primary read-out. To our knowledge, this is an industry first and has never been done before. Similarly, we keep improving our proteomics platform. We have improved efficiency, automation and throughput of our platform significantly and expect to profile over 100,000 compounds in 2026 using proteomics as the primary read-out. To our knowledge, there is no other company generating as many proteomic compound profiles in the industry or processing as many samples using proteomics. So it is great to see that we continue to make this much progress on our AI-supported proprietary platform. Just as important is, however, that these platforms continue to support the business financially. The combined order value to these -- directly tied to these AI-powered platforms is currently north of $200 million already. Beyond this, it is important to keep in mind that these platforms are not only supporting the business through research payments, they enable us to build strategic partnerships, which fuel our partnered asset pipeline with very substantial financial upside. And this is shown in more detail on the next slide. Today, Evotec has a pipeline of more than 100 projects. Over 60% of these projects are part of strategic partnership, and therefore, fully supported by these. All of the more advanced assets, in particular, those in clinical and preclinical stages are supported by partnerships, and therefore, represent pure financial upside for Evotec. Collectively, this portfolio represents a non-risk-adjusted value of over EUR 16 billion just in milestones. In 2025, the pipeline progressed significantly, which means that the total milestone potential of more than EUR 16 billion as well as significant royalties is becoming increasingly tangible. Accumulated returns up to 2028 could total on the order of EUR 500 million. In April, we gave you a status update on our asset portfolio. At that time, in total, we had 12 projects of our 100 projects were beyond the discovery stages, 6 of these were in preclinical stages and 6 in clinical Phase I. In 2025, 2 assets have progressed from Phase I to Phase II of clinical development. Furthermore, we expect that 1 asset will move from the preclinic into the clinic. And moreover, we anticipate further progress over the course of the next 6 to 9 months with 2 further molecules expected to move to clinical Phase II. This means that there's a high likelihood that our asset pipeline will have in total 4 molecules in clinical Phase II, each of them with a different partner in different indication areas. Overall, we are clearly pleased with a lot of progress on multiple fronts. First of all, we have very significant scientific progress on AI-supported platforms. We have been able to show very significant progress in our clinical and preclinical portfolio of assets with 2 new assets in Phase II and additional assets expected to come to the clinic soon. And finally, our discovery stage pipeline also continues to expand and is expected to continue to fuel our preclinical stage portfolio going forward. So a lot more exciting news to come here within the next 6 to 9 months. This is where I hand over and back to Christian. Christian Wojczewski: Thank you, Cord. Let us now switch gears from monetizing technology leadership in D&PD over to doing the same for Just-Evotec Biologics. As you will have noted, last night, we announced a successful signing of the sale of the Just-Evotec Biologics' Toulouse site to Sandoz. Under this transaction, Sandoz will acquire Just-Evotec Biologics EU plus a technology license to our continuous manufacturing platform. The agreement includes additional license fees and development revenues. This marks a pivotal milestone in the journey of Just-Evotec Biologics and underscores the successful execution of our strategy. We aim to close the transaction together in 2025, subject to meeting customary closing conditions, including foreign direct investment clearance by the French authorities. With the transaction, we are reconfiguring our successful partnership with Sandoz which started back in 2023 with the intent to support the expansion of Sandoz biosimilars pipeline and was extended in July last year. We are now converting a collaboration that was based on a long-term manufacturing arrangement into a new partnership centered around technology transfer and enabling our partners. The rationale for the deal is clear and compelling and it follows the strategy we outlined for the whole company. Number one, we will focus on our core competencies. This is making business by leveraging our technology leadership. Our intent is not to run a fleet of manufacturing sites as a classic CDMO player. Number two, we're entering a new episode of growth. Our commercial approach will pivot towards an asset-lighter, higher-margin business model, one that leverages best our technology, scales to partnerships, avoids the need for large upfront capacity investments and delivers superior returns. Number three, we remain fully equipped to serve all our customers through our center of excellence in Redmond and Seattle. Operationally, we have no limitations to support the growth plans of our partners. Number four, this deal is financially highly attractive for Evotec as it provides us with short, medium and long-term economic benefits. On this page, you see a summary of the financial parameters of the deal. We've agreed on an initial consideration of about $350 million for the site transfer and upfront technology license payments, which will be effective short-term. Over the mid-term, Evotec has the potential to generate revenues from licenses and development services plus milestones of over $300 million. Those payments are related to enabling our partner to manufacture biosimilars. In the time period thereafter and starting with commercial success, Evotec is eligible to royalty payments for up to 10 molecules. These 3 phases, starting with a handover, create sustained cash flows over an extended period. At the same time, we improve our revenue mix, reduce CapEx intensity and unlock high-margin IP and technology streams. As part of the deal, up to 10 molecules developed with the Evotec continuous manufacturing technology are eligible for royalties. As recently published by Sandoz, the Evotec partnered molecules in development are targeting a fairly large share of the originator biologics market. For example, the 6 most advanced molecules address a combined net sales of approximately $92 billion. Another 4 molecules are currently not disclosed. Looking ahead to the future of Just-Evotec Biologics beyond our great collaboration with Sandoz. Our U.S. operations will remain a center of excellence for biologics discovery, process development and manufacturing. The hub of innovation fully aligned with our mission to discover, develop and deliver the next generation of medicines faster, smarter and more sustainably. Given the strong momentum of our U.S. business with over 50 ongoing customer projects, we've expanded P&PD in Redmond and are contemplating further expansion in manufacturing selectively. Going forward, we will provide additional commercial routes for our customers to use our proprietary technology. With the transaction announced last night, we've validated the value of the technology, and we've demonstrated the IP licensing model for our continuous manufacturing platform is a very attractive path for our partners. We're now adding further optionality, including licensing of our cell lines, perfusion media and the launch pad concept to enable alternative manufacturing platforms via our J.POD design. In very simple terms, our job is to drive the innovation forward and to enable our partners to successfully launch and manufacture biologics products. Just-Evotec Biologics has 4 main compelling modules to offer on this page in blue, J.HAL for molecule discovery; J.MD, our machine learning-enabled molecular development technology; JP3 for complex biologics process development; and the J.POD for continuous manufacturing. Until now, we have deployed this technology as part of an overall plan to manufacture biologics. This would have required Evotec to continue to invest in the expansion of our manufacturing footprint. The transformation towards the next-generation CDMO model allows us to now deploy the technology without having to make those investments. All components are already in place, such as J.CHO, J.MEDIA, J.TRAIN and J.POD, here in pink. The performance of our proprietary cells and cell culture media customized for the perfusion-based continuous manufacturing process is industry-leading. Today, we are only using them for in-house development. For tomorrow, we see the potential to leverage these assets along a product commercialization path. On the path to enable our customers, there are multiple options to ramp up manufacturing capacity using our technology without us directly investing, such as integrating a J.TRAIN into a customer's facility or providing turnkey solutions at the customers' premises. Over to guidance and outlook. Our mid-term outlook shared in April is based on the ambition to better leverage technology and science leadership, the foundation of our strategy. It is therefore encouraging to see that the endorsement of an important customer of Just-Evotec Biologics, such as Sandoz, translates into tangible results only a few months later. Furthermore, our asset portfolio in D&PD has substantially progressed. The visibility towards our mid-term goals has improved substantially. You heard the detailed financial analysis from Paul earlier. Hence, I keep it short here on this page. Despite the headwinds in the early drug discovery market, we have full confidence and confirm our guidance for 2025 with a targeted revenue of EUR 760 million to EUR 800 million and an expected adjusted EBITDA in the range of EUR 30 million to EUR 50 million. We also see Evotec on track to reach its mid-term outlook at 8% to 12% top line growth and EBITDA margins greater than 20%. With the actions in place, we gained visibility and increased confidence in delivering our EBITDA margin. Let me conclude by making reference to what we discussed on 17th of April this year with you. Only half a year later, we see 3 out of 4 levers of our mid-term value creation unfolding their impacts. While it is too early to call the challenges in the D&PD market mastered, we see green shoots and continue to prepare our organization to be more competitive in this environment. Our cost-out program is ahead of plan. We fast track the execution of our new strategy at Just-Evotec Biologics and the asset pipeline is progressing well. For now, I would like to say thank you. We're now happy to answer your questions. Back to Lorenzo. Operator: The first question comes from the line of Charles Weston from RBC. Charles Weston: They're kind of sequential in nature. So I'll just ask them one at a time, please. Firstly, just factually, how much were Sandoz revenues in the first 9 months? And what would the division have looked like without the Sandoz revenues and the associated costs in Toulouse? Christian Wojczewski: Are you going to -- okay, so you want me to answer right away, right? Charles Weston: Yes, please. If that's okay. Christian Wojczewski: I will hand this over to Paul. Paul Hitchin: Yes, Charles. So I would answer your question as non-Sandoz revenue year-to-date was north of 50% of the overall year-to-date. Also, your question was around, I think, earnings contribution within that. So the way to think about that is within the just profile that you see on a year-to-date basis, that includes the Toulouse build-out cost of around EUR 20 million. So it gives you a little bit of a view of what our kind of normalized view of share and profitability looks like for the division. Charles Weston: Okay. And then associated with that, therefore, how much of the EUR 30 million to EUR 50 million EBITDA guide for this year is the expected upfront recognition from the Sandoz deal? Paul Hitchin: Yes. When I -- just to give a little bit more color on the full year bridge. So first of all on the D&PD segment, just to reiterate what we said last time, we see similar trajectory on full year revenues for D&PD. We do see some potential mix improvements from milestones as we get into the fourth quarter. On the Just-Evotec Biologics side of the business, again, a couple of things. Continued outperformance and operating leverage as we go into the end of the year. Some impact of lower cost base in Toulouse, depending upon the completion timing once approvals are met. And we believe there's a license recognition element from Sandoz. Charles Weston: Sorry, I missed that last bit that you said around just after operating leverage. Paul Hitchin: So lower cost base in Toulouse, depending upon completion timing. And then yes, there is a license recognition from Sandoz, the split of which is included -- or the value of which is included within the initial consideration that is shown on the presentation, Charles. And at this stage, we're not actually splitting out the license component within that initial $350 million of upfront payment. Charles Weston: Okay. That just leads me on to the last one, please, for now, which is around the trajectory from 2025 to 2028. You've given us those revenue -- that revenue CAGR range. The margin guidance sort of implies EUR 140 million to EUR 180 million EBITDA in 2028 of a number that excluding the Sandoz deal is there or thereabout 0 this year. So can you just help us understand what the trajectory is of that in terms of what we might expect as the sort of year-on-year progression over the next few years? And how lumpy it might be depending on those milestones that you've talked about? Paul Hitchin: Yes. Charles, let me go. So on the mid-term outlook, you said we announced 10% to 12% revenue CAGR growing with EBITDA margin to 20% by 2028. Following the transaction and also the events that occurred so far this year in the D&PD business, I would say the revenue CAGR is on the lower end of that revenue range. However, we do see stronger potential on the EBITDA margin rate versus our initial assumptions. As it pertains to milestones, obviously, as you know, those are quite lumpy in both sides of the business, whether it's on D&PD or the Just-Evotec Biologics business. When you think about the transaction with Sandoz that we disclosed, where there are -- there is consideration between 2026 and 2028, what you should think about is around 2/3 of that is product development type activity and about 1/3 is licenses and milestones, which are subject to certain criteria. So it gives you a little bit of flavor of what that may look like over that period of time over the next 3 years. Operator: The next question comes from the line of Brendan Smith from TD. Brendan Smith: Actually, I really appreciate all the color on the AI capabilities internally. So I actually wanted to ask just a bit more about this. And really, I guess, to what extent the NAMs capabilities actually come up in your conversations with partners and customers thus far this year? If you've seen any material shift in that kind of tone? I mean, we get a lot of questions about whether pharma is kind of increasing investments in AI internally on their side is impacting their engagement with external partners offering those kinds of capabilities. So just wondering if you're seeing any demonstrable shift in where they're engaging on that side of things or if NAMs offerings are actually increasing that? I mean, how you might expect that to kind of help grow revenues over the next, let's say, 12 to 18 months? Christian Wojczewski: Thanks, Brendan. I'll hand this over to Cord, and I'm really pleased to see also these questions. We recognize that we've maybe talked a little bit less in the past about those topics. But rest assured, there's quite some activity at the Evotec side. Cord, please. Cord Dohrmann: So the NAMs are definitely getting more attention and also from the pharma side, particularly. Nevertheless, it's still sort of a muted growth in the area at this point in time. But we do see real signs of acceleration because people -- a lot of projects are integrating these NAMs at an earlier stage. You can imagine if you sort of have a predictive tool for drug-induced liver injury, if you introduce this late in the process, you essentially have to profile a handful of compounds maybe. But if you introduce it early in the process, you are continuously profiling potentially hundreds of compounds. And here, this is why we keep talking about industrialization of these platforms and making them high throughput feasible because this sort of opens up the funnel to really bring this into the -- on the critical path of the drug discovery value chain and incorporating these kind of assays at an earlier stage. So basically, right after hit finding, essentially, you can start incorporating this. So I think with this sort of seeing that people are getting more and more interested in incorporating these NAMs early, I would expect to see the revenues vastly accelerate on this front. If it's within the next 6 months, I would say that would be very ambitious. But within the next 12 to 24 months, certainly. Operator: [Operator Instructions] The next question comes from the line of Fynn Scherzler from Deutsche Bank. Fynn Scherzler: So the first one, I would like to ask them one by one, it's on your drug discovery and preclinical development segment and whether you are able to give any sort of glimpse on what you expect into 2026. Some of your U.S. peers sort of gave an early indication. I think consensus sits at around 5% growth for next year. Do you consider this a sensible starting point for the year or as of now would you point us to take a more cautious stance? I understood you spoke of green shoots and so on, but not really of an inflection yet. This would be very helpful. Christian Wojczewski: Thanks, Fynn, for the question. Obviously, our visibility at this point in time is not all the way through 2026. And keep in mind, collectively, the industry since quite a bit was actually looking at when exactly the tipping point is happening. So I'm a bit cautious with making statements about when exactly the market is coming back. And as I said earlier, when you look at the individual bits and pieces here, you've seen on one slide, the change order pattern that wasn't favorable in the first and second quarter, the negative change orders, but it was also related to a few individual wins. Q3 looks much better than you've seen the number of prospects going out, right, plus 20%. You can draw conclusions out of that, but I'm not doing it at this point in time because these prospects need to convert into sales orders. So at this point in time, given that we have probably visibility into the next couple of months, I would not make a statement around plus 5% for the market next year. Fynn Scherzler: Okay. That's helpful. If I can maybe follow-up with 2 shorter ones. So on the profitability in the Discovery & Preclinical Development segment, I think it was surprisingly weak this quarter, but the revenues were sequentially actually about stable. So could you maybe help explain that? Christian Wojczewski: Say that again, please? I'm not sure I... Fynn Scherzler: No, sorry, I was just saying that I think the revenue in the Discovery segment was pretty much flat sequentially, but the profitability was much worse than probably expected. What was the explanation for that? Paul Hitchin: Yes. Fynn, this is Paul again. When you look at the year-to-date profile of the D&PD business and then compare it to third quarter, you're correct that it appears to take a step down. We did actually in the first half have better mix and then also a license benefit in the first half that impacted positively. It didn't repeat in the third quarter. As I said in my comments, however, we do see further opportunities around milestones for the fourth quarter for D&PD. And that volatility, if you like, on milestone recognition will continue in this segment. But that explains the delta there. Fynn Scherzler: Okay, helpful. And then one last one on the Sandoz deal. I'm not sure if you sort of compare the revenues that investors and the sell-side had expected from sort of your CDMO income stream that is now falling away. How does this compare to what you will get now in terms of licensing revenue and so on and so forth? So sort of the EUR 300 million package you described. What I'm trying to understand is consensus sits at around EUR 420 million for JEB business in 2028. Does that then look completely off from your point of view or is this still sort of the right ballpark or are people totally misunderstanding this at the moment? Christian Wojczewski: I think a couple of points here. First of all, I tried to explain that there is the Sandoz deal, and that's a fantastic opportunity to partner with Sandoz, and it will continue to generate revenues and profit for the company. Then there is another 50 customer projects that we are serving out of the U.S. Don't forget to keep that in consideration. And then what we said is we're basically pivoting to a different model, right? So the way that we look at it is a much more capital-effective way of doing business. So moving from a manufacturing view to a license model allows us to generate revenues in our view, at a higher margin rate and much more capital efficient. And that's the driver why we've concluded that this is a great deal for the company. And as we said also last time from an NPV perspective, for us, this is a positive contribution. Paul Hitchin: Yes, Fynn. So there is some level of reduction on revenues. But as Christian rightly says, significant improvement in the gross margin driven by that higher quality revenue mix, whether that's tech licenses, royalties, consumable sales that we've talked about as well and that lower capital intensity. So we're trading to higher quality mix of business. Operator: The next question comes from the line of Michael Ryskin from Bank of America. Unknown Analyst: This is Aaron on for Mike. You called out the soft early drug development market environment and VC biotech funding. Given the current market environment, can you talk a little bit about what you're hearing from customers? And related to that, a little bit more about the implications for the overall pricing environment? Christian Wojczewski: So I think there's still uncertainty in the market, especially in biotech, and I've also mentioned that our D&PD business, 30% to 40% of the revenue is related to biotech. So there's quite some exposure here. That's number one. Number two, as we also mentioned throughout the course of the year, while conversations continue, there's more slicing happening than what we've seen in the past. So more cautious spending, less larger projects, more smaller projects and decision-making is slower. So that's a little bit the environment that I have -- the picture I've painted already in Q1 and in Q2. And we see this continuing with maybe the difference that, as I said, the number of prospects have come up quite a bit over the course of the last month and quarters, which shows that there is more activity and hopefully also more prospects for 2026. Pricing, obviously, is a function of also capacity in the market. It's clear that there has been overcapacity across the market in drug discovery, but it's also clear that most players are right now adjusting like we're doing it. So I see this actually also starting to normalize when demand and capacity is coming more into balance again. Unknown Analyst: Great. And then just a quick follow-up. I wanted to actually ask about the prospects. I'm wondering if you're seeing the prospects of green shoots within similar geographic regions, if there's any geography that's performing better than expected or worse than expected, if you could provide a little bit of color there? Christian Wojczewski: That is actually the case, but it depends a little bit on the subsegment. And as you know, we're less penetrating the Asian market. So we've seen a little bit less dynamic in the U.S. market earlier this year and that has flipped more to the European market. So not very consistent and conclusive at this point in time, but there is variation. Operator: The next question comes from the line of Charles Weston from RBC. Ladies and gentlemen, we lost the line with the questioner. So there are no more questions at this time. I would now like to turn the conference back over to Volker Braun for any closing remarks. Volker Braun: Thank you, Lorenzo, and thanks to all on the call for the engaged discussion. In case you feel not all of your questions were addressed, please feel free to reach out to me any time. We're looking forward to meeting many of you at the upcoming investor conferences in November and December. And with that, we wish you a good rest of the day. Thank you, and goodbye.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Cory Kos, Vice President, Investor Relations. Please go ahead. Cory Kos: Thank you, operator, and good morning, everyone. Welcome to Cameco's third quarter conference call. I would like to acknowledge that we are calling in from both Toronto and Saskatoon today, Toronto was on Treaty 13 territory in the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinaabe, Chippewa, Haudenosaunee and the Windet Peoples and now home to many diverse First Nations, Inuit and Metis Peoples. Our corporate office in Saskatoon, which is on Treaty 6 territory is the traditional territory of the Creed people and homeland of the Metis. With us in Toronto are Tim Gitzel, CEO; Grant Isaac, President and COO; and Heidi Shockey, SVP and CFO; Rachelle Girard, SVP and Chief Corporate Officer is joining from our Saskatoon headquarters. I'll hand it over to Tim momentarily to speak to the strong financial results we've delivered through the first 9 months of the year, which have kept Cameco in a solid position amid growing momentum in nuclear markets. Tim will also touch on the recently announced agreement for the U.S. government to purchase Westinghouse reactors, which is expected to drive significant value to Westinghouse to Cameco, setting up the Westinghouse reactors as the leading technology in the global deployment of gigawatt scale nuclear. After, we will open up to your questions. Today's call will be approximately 1 hour, concluding at 9:00 a.m. Eastern Time. Our goal is to be open and transparent with communication, and we want to respect everyone's time and conclude the call by 9:00 a.m. Therefore, should we not get to your questions during this call or if you would like to get into detailed financial modeling questions about results, we will be happy to respond to any follow-up inquiries. There are a few ways you can contact us with additional questions. You can reach out to the contacts provided in our news release. You can submit a question through the Send Us A Message link in the Investors section of our website or you can use the Ask A Question form at the bottom of the webcast screen, and we'll be happy to follow up after this call. If you join the conference call through our website event page, there are slides available, which will be displayed during the call. In addition, for your reference, our quarterly investor handout is available for download in a PDF file on our website at cameco.com. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to 2 questions and return to the queue. Note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. As required by securities laws, we also need to make you aware that during today's discussion, the company will make a number of references to non-IFRS and other financial measures. Cameco believes these measures provide investors with useful perspective on underlying business trends and a full reconciliation of non-IFRS financial measures is available at cameco.com/invest. Please refer to our most recent annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. I will now turn it over to our CEO, Tim Gitzel. Timothy Gitzel: Well, thank you, Cory, and hello, everyone. We appreciate you taking the time to join our discussion today. Hope everyone is doing well and has had the opportunity to enjoy some quality time with friends and family over the past few months, whether that meant settling into the last days of summer or enjoying the early signs of spring depending on where you are in the world. The baseball fans out there, what a ride it was for the Toronto Blue Jays and the L.A. Dodgers in the World Series this past week. As Cory said, we're actually calling in from Toronto, Canada today, and I can tell you the air is still a little heavy. Even though the home team Blue Jays didn't come out with the trophy as the only major league baseball team here in Canada, they certainly gave us all a thrilling run and plenty to be proud of. We're here in Eastern Canada for this call because we had the opportunity as a Board and a management team to head south to Georgia yesterday, where we took a tour of Vogtle Units 3 and 4, which are Westinghouse AP1000 technology and the 2 newest reactors in the U.S. Seeing that technology in action was a powerful reminder of what's possible when innovation, policy and industry align. Speaking of alignment, I'm delighted to start today by touching on the recent announcement of the transformative partnership between Cameco, Brookfield and the U.S. government and Westinghouse marking a major milestone for the company and for the entire sector. Backed by at least USD 80 billion in planned investments in Westinghouse nuclear reactors, we expect this milestone will accelerate the global deployment of Westinghouse's reactor technology, strengthening energy security, revitalizing domestic supply chains, and creating significant growth opportunities for both Westinghouse and for Cameco. For the nuclear industry, this long-term commitment to new nuclear is a clear sign that the growth story continues to build momentum. It's not just about energy security, it's about powering the infrastructure behind AI, data centers and hard-to-abate sectors with the next generation of clean, reliable electricity. For Westinghouse, the partnership highlights clear support for its best-in-class reactor technology from the nation that hosts the largest nuclear fleet and has the most significant experience in operating nuclear reactors. Support from the U.S. bolsters confidence for the global jurisdictions that are currently advancing toward AP1000 deployment. And for those countries still deciding on a technology for their nuclear build-out, this partnership should provide an incredible amount of confidence that the Westinghouse designs are the technology of choice. For us at Cameco, the agreement adds significant support to the industry growth story. It's positive for the outlook for nuclear across North America and globally and therefore, positive for Cameco's long-term contracting and production strategy. If it wasn't already clear from the press release this week, let me reiterate that the agreement signed with the U.S. government is about support for nuclear energy and Westinghouse reactor technology. That's a great development for Cameco and our stakeholders, thanks to our investment in Westinghouse. We directly addressed some of the misinformation we've seen published in the last few days. U.S. government partnership interest does not extend the Cameco's core business. Although our uranium products and fuel services are certainly well positioned to support the build-out and long-term operation of the global fleet as it grows. Partnership strengthens our footprint to create meaningful value for our stakeholders, but the participation interest by the U.S. government is only focused on the Westinghouse business. It's a rare opportunity to combine policy momentum, proven technology and commercial scale. And we believe it positions both Cameco and Westinghouse to deliver sustainable growth, ongoing innovation and energy leadership for decades to come. As we look ahead, it's clear that today, nuclear energy is not just maintaining relevance as the global energy landscape evolves, it's undergoing an expansion and meaningful transformation. In that transformation, the entire fuel cycle is now receiving more significant attention than ever, not just the front end of uranium mining. From conversion and enrichment to fuel fabrication and reactor deployment, the momentum is real, and we're frequently seeing new promises of future supply and capacity within each stage. Unfortunately, a compelling narrative alone won't turn a turbine. Execution is key, and Cameco is in an exceptional position to execute and deliver value. With decades of experience operating unique and complex assets, we play a critical role in the long-term health of the nuclear industry. That experience gives us the ability to be selective and strategic, committing unencumbered productive capacity under long-term contracts that align with customer needs. Our approach ensures downside protection while preserving exposure to future market price improvements. It's a disciplined strategy that balances risk and opportunity built on trust performance and a deep understanding of how to build value across market cycles. This demand continues to grow, driven by energy security, decarbonization and digital infrastructure, we're confident Cameco with assets that are critical to the industry, is well positioned to support the next chapter of nuclear growth. Turning to a discussion centered on those assets. I want to run through a few brief highlights for the quarter and year-to-date. I'll first note that the update we shared in late August regarding our McArthur River and Key Lake operations, where development delays in 2025 resulted in a decreased annual production forecast. We previously expected 18 million pounds of McArthur/Key and we now expect packaged production of between 14 million and 15 million pounds on a 100% basis. Depending on operational performance at the Cigar Lake Mine in the fourth quarter, we may be able to make up some of the shortfall from McArthur, but we do not expect to make up all of it. We've therefore reduced our consolidated production outlook for 2025, and we now expect our share of production to be up to 20 million pounds of uranium. Remember that while our mine production is expected to be lower, our supply sourcing flexibility is one of our many competitive advantages. At JV Inkai, which, as a committed purchase, is among our sources, production is going well. We continue to expect production of 8.3 million pounds, of which our purchase allocation is 3.7 million pounds. A portion of that allocation is currently in transit to Canada, including about 900,000 pounds that had remained a JV Inkai from our 2024 purchase allocation. In our Fuel Services division, our annual production outlook remains on track, totaling between 13 million and 14 million kgU of combined fuel services products. To meet our sales commitments and deliver full cycle value, we plan years in advance and always provide for flexibility in how we source the supply we need, including production, inventory, product loans in both market and long-term purchases. This quarter reflects our flexibility as we adjusted a number of the supply levers that we have at our disposal, including our planned market purchases and product loans to help offset the impact of the production changes. We will continue to balance all available sources with a focus on value creation, risk management and sustainability. Moving to Cameco's financial results. After a solid first 9 months, we're in a position for a strong finish to the year, supported by the higher expected deliveries in our uranium and fuel services segments in the fourth quarter and a solid quarter for Westinghouse. Key contributor to the positive performance year-to-date was the increase of over USD 170 million in our share of Westinghouse's revenue recorded in the second quarter. While quarterly uranium and fuel services sales volumes were lower overall, we saw continued improvement in average realized prices in both segments. As we always highlight, quarterly results will vary due to timing of our customers' requirements, and it's our annual expectations that matter most. As I said earlier, those expectations continue to point to higher deliveries in the fourth quarter. Looking at our financial position, we've remained disciplined in managing liquidity to support our operations and sourcing decisions. Our discipline enables us to deliver on our strategy, take advantage of opportunities and self-manage risk. We're maintaining a strong balance sheet, guided by our investment-grade rating and supported a strong cash flow generation. So from a financial perspective, we are in excellent shape with $779 million in cash and cash equivalents, $1 billion in total debt and a $1 billion undrawn revolving credit facility. Subsequent to the quarter, in October, we received USD 171.5 million from Westinghouse related to the Korean reactor build in the Czech Republic, which was announced in the second quarter. With our improving financial performance and the receipt of the additional distribution from Westinghouse, our Board of Directors elected to accelerate our plan to grow the dividend and have declared a 2025 annual dividend of $0.24 per common share. These are incredibly exciting times for this industry, and the outlook is becoming stronger with each passing day. That strength is reflected in Cameco's improving performance as we navigate challenges and seize opportunities. It's about more than just supplying fuel. It's about enabling a future energy system that is secure, reliable and carbon-free. We remain focused on strong partnerships and long-term value creation, enhancing energy and national security objectives and advancing nuclear as a cornerstone of the clean energy transition. We are not just participating in the energy transition, we're shaping it. Before we conclude, I'd like to highlight a couple of changes to our executive team. Our Chief Marketing Officer, David Doerksen, has announced his intention to retire at the end of the first quarter of 2026. It has been an absolute pleasure to work with David during his 28-year career with Cameco, over which he has held senior positions in corporate strategy, corporate development, treasury and marketing. On behalf of the Board and management team, I'd like to thank David for his significant contributions not only to Cameco, but to the entire nuclear industry and for sharing his deep industry knowledge and expertise over the years. We wish him the absolute best in his retirement. Beginning January 1, 2026, David will assume the role of Senior Adviser Marketing until his retirement date of March 31, 2026. Lisa Aitken, currently Vice President, Marketing has been with Cameco's Marketing Group for nearly 20 years. She will be appointed Senior Vice President and Chief Marketing Officer effective January 1, 2026. I'm pleased to welcome Lisa with her strong leadership and the market experience that she brings to the senior executive team. Tim Sherkey, currently Senior Director in the marketing group will move into Lisa's previous role of Vice President, Marketing. So thank you all for joining us today, both on the line and via webcast. We appreciate your continued interest, and we'll now open the floor to your questions. Operator: [Operator Instructions] The first question today comes from Ralph Profiti with Stifel. Ralph Profiti: Tim or Grant, on the issue of the standby product loan facilities, which are part of the supply levers, are those discussions as flexible? And is that material as accessible as in the past, say, the last 1 or 2 years? And what can you tell us about the timing of when those pounds need to be repaid? Timothy Gitzel: Thanks for the question. I'll get Grant to handle it. Grant Isaac: Yes, Ralph, I'm just going to use a word you did, which is flexible. We don't have a standard arrangement. It differs by counterparty. Availability continues to be strong, as demonstrated by the adjustments to our outlook, production was down, but our market purchases didn't go up. And then in terms of what the actual repayment looks like that just differs from counterparty to counterparty, and we just always aim to create the most amount of value under our contract portfolio for doing it. So we've really important tool in our toolbox. I can't emphasize that enough. It is a very unique incumbent advantage that Cameco has that others don't, an advantage we continue to take full use of when required. And ultimately, it comes from the fact that you can only store uranium at a few places. And we just happen to have a couple of those licensed facilities and therefore, it gives us a tremendous advantage. Ralph Profiti: Okay. And I have a follow-up that's sort of on a different topic. The U.S. seems to be taking a much more of a leadership role when we think about the demand outlook. And do you think that we're close to a market where chemicals production decisions may be viewed differently on pricing dynamics, if that material is sourced from within the U.S. versus non-U.S. production? Or do you still see this as a one-price homogeneous market? Grant Isaac: Ralph, that is -- it's a great question. And I would say this market already is recognizing the value of incumbent producers, in particular, sovereign safe jurisdictions. And what I mean there I'm just going to illustrate it by the long-term price of uranium. We see a long-term price of around USD 84 per pound, and folks have heard me say before, when you look at that long-term price, remember, all you're looking at is the information that's collected from those who are willing to fix a portion of their forward sales. Market-related contracts don't inform that long-term price. We know as Cameco, we can do better than today's long-term price if we were fixing a portion of our supply going forward. Given that, that long-term price is an average, it must mean that somebody is fixing below that $84, clearly indicating that Cameco is capable of driving premiums in the market. So I think that type of market pricing dynamic is already occurring. I think some jurisdictions are having to discount around that. Unfortunately, when the price reporters then report, they like to report the lowest offered as opposed to where the demand is actually sitting. That's just a construct in our market. One that I think is improving, but clearly indicates that stronger pricing is there for not just origin, Ralph, but the quality of the supplier. And when we're dealing with a counterparty, they know Cameco has never missed a delivery of uranium, and that's worth a lot. Operator: The next question comes from Brian Lee with Goldman Sachs. Brian Lee: Condolences on Blue Jays on a great series. But on the flip side, kudos on the Westinghouse, Cameco, Brookfield, U.S. government deal. I think a lot of folks are trying to hone in on some of the details here. Not sure what you can share here, but I'll do my best. With regards to the sort of $80 billion agreement here with the government, I guess, there's a lot of questions just around how the mechanics are going to work. It sounds like the government will be responsible for ultimately reaching the FID go, no-go decision? And then maybe thoughts around including the required IPO type of event, if that were to come to fruition between now and January 29 and also what the 20% equity stake from the government and the $17.5 billion of cash distributions. Just maybe walk us through some of the mechanics of how those pieces came together. But just starting from the top of the funnel, maybe first, just government FID, what's involved there? What are the milestones between now and then? Timothy Gitzel: Brian, I'll just say at a high level, we're absolutely delighted to be part of this with our partner, Brookfield, all came together about a week ago, I guess, a week ago, Tuesday, October 28. We signed the deal. I was with a bunch of CEOs from U.S. utilities yesterday, and it's really we've been waiting to kick start the nuclear build in the United States and really around the world. And I think this does it, Grant and Dominic have been very involved with Brookfield and the U.S. government and others and putting it together. So Grant, maybe you can just walk through -- what we know today, obviously, we're early in the process, and we're working out the details. But what we know today, Grant. Grant Isaac: Yes. What this reflects, obviously, is a very clear signal from the U.S. government that it is time. We were, I think, struggling as an industry in the United States to find lift-off conditions. What is going to get reactors going and not just a first 2 pack, but a meaningful order of reactors that would stimulate sufficiently the supply chain in the U.S. and quite frankly, globally. And I think the U.S. government just recognized that for it to have energy security, for it to take advantage of the tremendous technology that is the AP1000, it would need to be a bigger investment than just sort of the next 2. So what the U.S. government has done is committed to step in and be that stimulant, if you will. Their commitment is to facilitate the financing. And just on that point, I would say we are assured there are a number of options that are available to the U.S. government in order to facilitate that financing. That ranges from direct support through known structures like perhaps the Department of Energy's loan program office, all the way through to project financing dollars that may come from other jurisdictions. We're assured that there is a lot of interest in investing this minimum $80 billion in order to begin the process. The next step then is to figure out what an order looks like, when are we at FID? And that is part of the next steps of coming to a definitive agreement. We've got a lot of things to work out. We are just absolutely delighted by the fact that this is entirely performance-based. And in order for the U.S. government to meet its vesting interest in this potential partnership, they have to deliver and they have to deliver fast. And we just think that's a wonderful alignment for Westinghouse and the U.S. government and therefore, for Brookfield and Cameco with the U.S. government. After that, if we see FID on this $80 billion minimum worth of spend, stimulating the supply chain, getting the reactor technology going, identifying sites, removing any of the impediments to approvals and licenses and permits, then the U.S. government will have gone a long way to meet its vesting condition. And that $80 billion then allows it to consider participating in the Westinghouse business. I'm just going to draw a point on that. The Westinghouse business only. It's not a participation interest in either Cameco or Brookfield. It is only in Westinghouse. And the mechanics of that are very simple. Westinghouse is worth a lot more today than when Brookfield and Cameco acquired it. And that's recognized in that first claim of $17.5 billion of distributions. They go to the current owners. That is the value that we have been building and we have been investing in. The U.S. government support then would then participate beyond that. And so if you use the example of a $30 billion underwritten value at time of an IPO decision, you have the potential for the U.S. government to be an 8% holder in Westinghouse. The difference between $17.5 billion and $30 billion, which, by the way, seems like a very reasonable participation. That means they have performed. That means they have invested $80 billion. That means reactors are under construction in the United States, which are then creating a platform for a global deployment of this leading AP1000 technology. And I always think of it as that means the pie is growing and everybody's slice has just gotten a heck of a lot bigger. So this is set up to be a performance-based, fully aligned partnership designed to create energy security in the United States and be the platform for energy security elsewhere. A lot still to be decided, source of funding, site selection. Obviously, we have definitive agreements to complete. But I just want everybody to understand the main takeaway is the United States has decided it is time to start building AP1000s, and we are very excited about that. Brian Lee: Super comprehensive. Maybe just a second one, and I'll pass it on a bit more mundane on the pricing side. we've seen term pricing up $4 a pound or so over the past couple of months for U308 after being flat for most of the year. Be curious what you're seeing in terms of contracting activity, maybe expectations here into year-end, given what's been a relatively soft volume environment year-to-date? And then your general thoughts around the appetite amongst customers for higher floor ceilings given these recent moves in term pricing? Grant Isaac: We continue to be very constructive on where the uranium price needs to go. It is at the heart of the fact that we remain in supply discipline. We are not in a mood to ramp up production because we think price needs to reflect more fundamental production economics than we're seeing today. I point to the World Nuclear Association's recent fuel report. That fuel report indicates an even bigger gap between where demand is going, demand that has just been absolutely strengthened by the U.S. government partnership that we just talked about, where that demand is going and where the supply is, in fact, going. I would also point out, when we look at something like that gap in the World Nuclear Fuel report, we believe it actually dramatically understates demand. It does not include the demand that we just talked about. That is not baked into there. It does not include the demand that a lot of people are ascribing to nuclear through AI. And this is a really important point to make. The fundamental investment opportunity in uranium does not require the AI build-out. That is an absolute accelerant to it, but it is just -- it just requires the known reactor fleet plus the reactors under construction to continue. And then we look at the supply side, and we say it's grossly overstated. We say that the fuel market report includes stuff that will not be in the market in that time frame and will not be in the market at an $84 long-term price. So we look at these fundamentals, Brian, and we say, now is the time to remain disciplined, allow that market to express more demand because that expression of demand is ultimately going to push prices to where they need to be to incent the next tranche of material that's going to begin to fill that demand. This looks very, very good to an incumbent uranium producer who not only has Tier 1 assets, but is a globally recognized Tier 1 supplier. That term market is just not there yet. A couple of factors for that. On the uranium side, I would say there remains a little bit more focus downstream in the services, especially enrichment than there is in uranium. And on the supply side, like let's just be really clear. One of the headwinds on the demand formation for uranium is all of the hyper promises that are coming from those who have projects that have never delivered before, have never done, quite frankly, anything before, that are promising huge volumes of uranium in a very short period of time. If you're a fuel buyer, you're sitting there wondering if that material is really coming to the market, and it's giving you a little bit of pause. So there are those on the supply side that are responsible for some of the hesitation that we're seeing among fuel buyers to bring big uranium demand. Now ultimately, this is a good thing because those projects will not be proven out. They will not perform well. And then we're going to see more panic buying in the market, and that's going to discover probably even higher prices. Now is the time to remain disciplined, and that's exactly what you're seeing from us. Operator: The next question comes from Alexander Pearce with BMO. Alexander Pearce: So you touched on the Westinghouse partnership. Obviously, it does look now like the pipeline is accelerating in terms of new builds. Maybe you can just touch on how Westinghouse is set up right now in terms of capacity for new build projects and what kind of investments do you think need to be made in the business, obviously, to deliver what could be quite a sizable change in new builds? Timothy Gitzel: Well, Alex, obviously, even before this announcement, we had a healthy pipeline of projects. We were just at Vogtle yesterday to do the last 2 that were finished in the U.S. But if you look around the world, there are AP1000s being built today in countries in Eastern Europe that we've been working with that plan to build and I can't think of a whole lot of countries around the world that aren't looking at new nuclear build and AP1000 as part of the build-out. And so this has just added accelerant, as Grant said, lighter fluid to the desire to build new AP1000s. And so on the Westinghouse side, Grant, you can talk about the Energy Systems Group. Grant Isaac: Yes. The key thing to delivering on this kind of vision, Alex. And like Tim said, we were already in flight starting to move forward the pull in new build, the Bulgaria new build, participate in the Czech new build. There's important Westinghouse equipment that goes into that. At the heart of this, our 3 simple concepts. Number one is standardized. Number two is sequence. Number three is simplify. If we get that right, it's not clear what the boundary condition is or how much you can put in the pipeline. If you go back to the build-out in the '60s and '70s, you had a situation where Canada was bringing on a reactor a year. The United States was bringing on 7 reactors a year. France was bringing on 8 reactors a year. And of course, now we're seeing the Chinese starting 10 reactors a year. So if you standardize your sequence and you simplify it, it's not really clear that there's a boundary condition on doing that. If you just look at Westinghouse today, there is capacity to start a number of reactors as long as those long lead items are flowing and you're not doing a shotgun start on every program and you're sequencing it properly, you can then start to build up that supply chain, that stimulated supply chain, then allows you to lever to obviously a new outcome or a higher level of orders. We're not there yet. But I'm going to go back to the comments I made about the U.S. government partnership. The key to the $80 billion investment was the understanding that it's not sufficient just to start with the next 2. You have to start with a bigger order, is that bigger order is what creates the critical mass to get the supply chain going. And then once that's going, we will understand better what are the investments that need to be made in order to bring that along. But we feel very comfortable that Westinghouse is in a position to start 2, 2 packs a year and put that into the system as long as we standardize, sequence and simplify. Alexander Pearce: Okay. Maybe I can just ask a question around conversion now. And obviously, you've mentioned -- Tim mentioned that the interest is increasing in the rest of the fuel cycle, too. Is timing now right to restart conversion capacity at Springfields? Or is there actually any additional upside potential in your Canadian operations too? Grant Isaac: Yes. Conversion is a very interesting market, and I think it's illustrative of what's coming into the uranium space. The issue for making a decision around bringing new capacity back at something like Springfield is you may be surprised to hear this, Alex, it's not price. I mean, converted prices is at historic levels. And we could probably find a handful of utilities globally that would be willing to underwrite the restart of Springfield at a premium to today's historic price but they want to do it for a very short duration contract. Utilities are very smart. They want to stimulate capacity to come into the market and then they want to reprice it when there's more capacity in the market. You and I would do the exact same thing if we were a fuel buyer. That would be our job. And so for us, it's about blending appropriate pricing with appropriate tenor. What we want to see is a longer-term commitment to restarting something like Springfields. And the example I will use is when our friends at Constellation made the decision to restart the Crane Clean Energy Center at Three Mile Island, they didn't do it on SPAC. They didn't do it for a 3-year contract. They did it for a 20-year contract with Microsoft that was above market to support the restart of infrastructure. The nuclear fuel cycle should not be looked at any differently for us to restart infrastructure that's in care and maintenance, we need to see pricing as well as tenor that supports that capacity. And the lesson learned in uranium is you only get one chance to bring new capacity into the market. So we're hearing some very silly statements from some saying, "Well, we're going to contract, but we're only going to contract for 3 years and then we'll roll that contract over to a higher price afterwards." And you absolutely won't because now you're competing with your own capacity. So in this market, driven by long-term value creation, you need price and you need tenor. And on the conversion side, price is there, tenor is not there yet. Although I'm -- it's feeling pretty constructive that we're going to get there. Operator: The next question comes from Andrew Wong with REC Capital Markets. Andrew Wong: So the U.S. government partnership, it's for at least $80 billion of investments, which supports, let's say, 8 to 10, AP1000s. But the wording of at least implies there's potential upside to that. And brand, I think in your -- just your previous commentary on the previous question kind of touches on the longer-term build-out potential here. So the longer-term goal for the U.S. is in other countries is to triple nuclear capacity. Is there a scenario where the U.S. government supports 20 or 30 or maybe more reactors? And is anything that being part of discussions or maybe did that U.S. government partnership spark any conversations with other potential partners on a bigger build-out? Timothy Gitzel: Well, Andrew, great question. This has just been priming the well. Of course, we've been talking to all of the utilities, I think, in the U.S. about nuclear for years now, and it really got spruced up earlier this year, I think it was May 23 that the President put out his for executive orders on nuclear, calling for 10 new ones to be started by 2030, which we're now working on, and there's a plan behind those. And then to have, I think, 400 gigawatts of nuclear by 2050. And so I think he's serious about it. We're seeing the indications of this deal we put together last week with Brookfield and the U.S. government. And now we're -- yesterday, Grant and I talking to U.S. utilities, all of them super interested on, I'd say, excited about this saying, "Hey, how do we get involved? And how is it all going?" So lots of work to do over the next days and weeks, first to get more details on how we're putting it together and then pulling together the utilities and starting to drive it forward. So the answer to your question is yes, we're just getting warmed up. And I think there's the 94 units and as Grant said, in the U.S., they did that before. They've done it before, and this administration and these utilities want to do it again and the economy needs it. So... Grant Isaac: Andrew, we did use the term minimum, and you see that throughout the agreement. I like to think about this as the stimulant for launch conditions in the United States, it is absolutely reasonable to assume that once financing is arranged and permitting and licensing is approved and long lead items are ordered under this structure, that the order book among the traditional utility base, both within the United States and beyond is going to grow because this is at the heart of eliminating what the main barrier was, which is that next of a kind, being that next 2 pack or the next 2 pack after that. We never had a problem engaging people for 5, 6 and beyond. It was just starting the process and the U.S. government has stepped in to overcome that really big hurdle to being the next of a kind, the being the next up. It's promising a bigger investment than I think anybody was anticipating and we do expect that it will create some followership. There may be other countries interested in foreign direct investment in the United States that might want to partner in a very similar fashion. We've seen early indications of a willingness to engage in this kind of project financing for critical infrastructure at a time when the U.S. government is prepared to support the leading gigawatt scale technology. So we didn't do this as a deal that now we're done with energy systems. We did this as the deal to kick start the very exciting opportunity for Energy Systems, which as everybody remembers, we essentially valued at 0 when we acquired Westinghouse. So the upside to the acquisition case is enormous. Andrew Wong: That's great. And then just maybe on -- just switching over to enrichment. GLE recently achieved TRL-6 and had it independently verified. So what are the next steps from here? What is the TRL-6 demonstration tell us about the economics of GLE? And is this the -- does this mark the start of Cameco's option to increase its ownership stake in GLE? Grant Isaac: Yes. Good question. I would characterize TRL-6 a little bit different. And this is a structure that goes all the way to technology readiness level 9, and we're at 6. And 6 means that we can verifiably ensure that we can enrich uranium to the nuclear reliability level, that 99.9% 6 Sigma level of reliability. So effectively, it means the technology risk is removed from GLE. Levels 7, 8 and 9 are where you prove up that project risk can be minimized. So there's still more work to do. Ultimately, we wouldn't have pushed it to TRL-6 if we didn't think there was an economic opportunity. You continue to evaluate that as you go. But now the real attention is taking a verifiable technology and figuring out the project delivery of it. It's an important stage in the nuclear industry because as we talked about with conversion and just talked about with uranium, you sell this capacity forward under long-term contract. You don't build an enrichment plant and then start knocking on people's doors and trying to sell enrichment supply because just like uranium, just like conversion, there's no in-year demand for this stuff. So building it for a spot market exposure is about the stupidest thing you could do. So what you want to do is start building your capacity into long-term contracts. TRL-6 is a really important milestone because now we can engage more meaningfully with utilities out the support case for GLE, and we've removed the technology risk. Yes, there's still some project risk in it, but we've removed the technology risk. So it really is an important milestone. It absolutely we're proud of the team. We're proud of their achievement. And we continue to believe that this is a world that wants not only supplier diversification and enrichment but technology diversification and wants it from a proven reliable supplier like Cameco. Operator: Next question comes from Bob Brackett with Bernstein Research. Bob Brackett: Before October 28, you all in Westinghouse had laid out a fairly clear contracting framework around capturing 25% to 40% of the plant cost with EBITDA margins of 10% to 20%. I note you've repeated that in your investor deck. Is that a stale framework? Or should we continue to think about using that as the framework? Grant Isaac: We are continuing to use that as the framework subject to the finalization of definitive agreements with the United States, subject to finalization of securing what that financing package is going to look like, where it's going to come from and subject to the magnitude of initial long lead item orders. Why I think that framework remains useful. I may go back to something I said earlier, which is the key to delivering new nuclear at the gigawatt scale is to standardize the sequence and to simplify. So even if we pull forward the long lead items on a number of critical nuclear components, you still want to sequence the reactor builds accordingly, much like the United Arab Emirates did partnering with the Koreans on the Barakah site for example, much like Bruce Power and OPG sequenced the refurbishments, the major component replacements in Ontario. So it is still a very good framework to use subject to figuring out exactly how we're going to bind this agreement with the U.S. government and the flow and the rate at which the financing is coming. Bob Brackett: Very clear. And the follow-up would be the participation infrastructure allows the government to receive 20% of cash distributions exceeding $17.5 billion from Westinghouse. If I think about Westinghouse's free cash flow year-to-date, it's around $433 million. You've gotten a distribution of maybe $350 million. Am I comparing apples-to-apples that we should think about maybe Westinghouse's free cash flow as feeding the cash distribution, and therefore, there's a lot of room before we get to a $17.5 billion threshold? Grant Isaac: You are absolutely thinking about it right. And then some of the things that would affect that, of course, are the speed at which the projects are advanced in the United States, therefore, the speed at which the procurement part of the long lead items kicks in. And quite frankly, the success of the Koreans in building APR1400 in other markets triggering royalties that come back to Westinghouse. All of those things would be upsides to the case. But you're thinking about the right way, Westinghouse is worth a lot more than when we acquired it, and that's what's being reflected in the $17.5 billion distribution claim for Cameco and Brookfield prior to the U.S. participating in anything. Operator: The next question comes from Craig Hutchison with TD Cowen. Craig Hutchison: I just wanted to circle back on the partnership with the U.S. government. Obviously, congratulations, a huge deal to see. Is the expectation that the U.S. government will own these reactors longer term? Are they just financing them if they are owning them longer term? Is there a possibility at some point they could sell these to utilities? Just want to try to understand that. And then maybe as a follow-up question. I know it may be a difficult question to ask, but if the government is spearheading the financing and the permitting, can you give us any kind of rough goalpost in terms of how long you think it would take to permit the new AP1000 in the U.S.? Grant Isaac: Yes, 2 really big questions there. I characterize this in answer to an earlier question as really being a catalyst. The U.S. government stepping in and saying, it is time. It's time to get going. So I think the -- we have to have a range of options in mind, one that goes from the U.S. government simply finances somebody else's build, own and operate to the U.S. government does its own build, own, operate or something in between where it's build, own and then transfer to a utility. I think all options are on the table because the driver here is to get 24-hour baseload carbon-free electrons onto the market as soon as possible in order to meet the onshoring demand and meet the AI demand. So I think there's going to be a number of structures, which is going to make for a very exciting part of this project figuring out how to structure it. It's a little bit tied to your second question, which is, how should we think about permitting? Remember, one of the executive orders back on May 23, actually spoke to using federal lands to deploy new nuclear. And doing that under a federal exemption or federal domain exemption. So there could be possibilities of accelerated licensing and permitting or we could take a page out of the DOE lift-off report from last year and simply look to sites that already have pads that are approved for large nuclear power plants but weren't built on as a consequence of the slowdown after 3-mile Island. So I guess what I'm trying to say, Craig, is there's a lot of optionality here. But what was holding everything up was who was going to finance that next of a kind. And that's what's been unlocked with this deal. But I think if there are 8 plants representing 4 large nuclear power plants as the first initial launch, there could be 4 different commercial structures to go along with it. And that's just the reality that we're all getting prepared for and designing for and figuring out how to bring the right partnerships and the right coordination together to achieve that. Craig Hutchison: Okay. Perfect. And I guess the AP300 could also be part of the mix, correct? Grant Isaac: It absolutely could. Remember, one of the most elegant things about the AP300 is it's part of an AP ecosystem. And if you're a utility and you're looking at new nuclear, the prospect of having a similar -- or the same instrumentation and control environment, the same fuel and fuel handling environment, essentially the same reactor where up to 85% or 90% of the supply chain is identical, that is a pretty compelling business case, especially if we're going to underwrite that ecosystem with the build-out of AP1000. It's -- our priority here is AP1000 just given the scale of the demand. But we've always said the best way to sell an AP300 is to start building AP1000s. Operator: The next question comes from Gordon Johnson with GLJ Research. Gordon Johnson: I just want to revisit, I know there's been a lot of questions about the deal with the U.S. government, but I just want to ask maybe the question from a different angle. So looking at what AREVA did roughly 8 years ago when it spun out its fuel cycle business. And then looking at you're in Brookfield, 49% ownership of Westinghouse. In the deal you announced in the U.S., clearly, you're not getting the $80 billion check up front. But clearly, it looks like every AP1000 built in the U.S. directly benefits your downstream earnings, fuel fabrication, service parts, et cetera. So is it possible that you guys could potentially look at -- look to spin out Westinghouse, given the interest and hype around AI and the potential risk further down the line of the U.S. bill? And then I have a follow-up. Grant Isaac: Gordon, I'll jump in here, and I would say, agree and echo one of the points you made. At the time of us acquiring Westinghouse, folks will remember that we talked about its alignment with what we do because we love strategic assets. We love assets that are Tier 1. They're proven, they're scarce, they're absolutely mission-critical and Westinghouse had those assets on the fuel side. And so it just fits beautifully with McArthur River, Cigar Lake, Key Lake, and all the assets that Cameco already had. It was a bundling of just the world's best nuclear fuel assets together in a joint venture, which we absolutely love. Why did we love the Energy Systems? Because of the AP1000, a reactor where the design was locked down, the fuel was locked down, the licensing risk was locked down. The regulatory risk had been dealt with by the good folks at Southern Company, who had built 2 of them, and it really was just down to project risk. So Westinghouse had everything we liked. And what we particularly liked was as we grew Energy Systems, it grew the core of the business. So we have a business model where the growth of Energy Systems actually grows the whole business. In other words, as the U.S. government partnership showed, we can grow our own demand for the core of our business, and that is a great place for us to be and to be in control of. When we think about the value of Westinghouse, we are always looking to make sure there is no trapped value for our shareholders. There is definitely a unique interest in investing just in Westinghouse. And it's hard to -- Cameco is a funny proxy for that. Brookfield is probably an even funnier proxy to invest in just Westinghouse. So we're always mindful that the last thing we want to have is trapped value within this family of assets that we put together to benefit shareholders. So let's just say, we're going to keep all options on the table. This partnership agreement does not force us to leave Westinghouse in 2029. We don't have to sell any of our share or we may, if the value of Westinghouse is so significant come 2029 when that window opens up and every option in between. But we will just maximize the optionality for the maximum benefit of Cameco shareholders. Gordon Johnson: That's helpful. That's very helpful. And then just one last one for me. I would like to know -- and I'm getting a lot of these questions from investors. When will the market see signs of serious contracting from utilities? Like what's the precursor because that is the precursor for U308 prices to go up. So what signs should we be looking for a serious signs of contracting, long-term contracting from utilities from your standpoint? Timothy Gitzel: Thanks, Gordon. Grant? Grant Isaac: Ours is a market that has, time and time again, proven that it does not respond to forward forecasts. It responds to the reality of the contracting environment that it's in. Conversion is at historic pricing because a couple of years ago, so much conversion capacity has been shut in, that when utilities went into the market following the Russian invasion of Ukraine looking for conversion, it was not there. Uranium has not discovered that yet for 2 main reasons. One, you have a group of uranium producers who have come back to the market, small volumes, but did not do the hard work of building homes for that supply and stuck it into the front end of the market, into the spot market, which then allowed traders, intermediaries to compete for some of the long-term demand that was coming into the business. In other words, nobody has shown up yet to contract in uranium and discovered that there isn't a willing counterparty and in some cases, a counterparty willing to discount. On the other hand, there are utilities that are looking at the supply stack. They're looking at the promises of big supply out into the future, and they're saying they're willing to take the chance. So this was my point earlier, Gordon, that there are some utilities who are actually believing some of the definitive feasibility studies that are out there, and they're looking out into a window and they're saying there's going to be a lot of producers who haven't done any contracting today, they're going to build big assets, and then they're going to be flopping around the market trying to place it. So I might as well take advantage of that. That has not been proven to be a failed strategy yet. So if we want the uranium price to reset like we have in other parts of the supply chain, everybody who's invested in a producer who is undisciplined, who is over promotional and sensational needs to tell that management team to understand how the market works and that they're not helping the formation of price in this market. Operator: The next question comes from Lawson Winder with Bank of America. Lawson Winder: Can I just fit in a question on McArthur River? And just how would you handicap the potential from McArthur development delays to then fall into 2026 and impact '26 production? And then similar vein, but just looking at Cigar Lake as a potential offset, you've highlighted the potential to produce up to an additional 1 million pounds from Cigar Lake versus the original 2025 guidance of 18 million pounds, 100% basis. What are the factors driving that? And could that also show up in 2026? Timothy Gitzel: Thanks. Great question. Grant was just up there, Grant, of course, is our Chief Operating Officer, in addition to everything else he does. So you just visit the McArthur and had a look underground. Grant Isaac: Yes, I did. I was up there, McArthur, Key, Cigar, Rabbit. And Lawson, it just was a good reminder for me, just how extraordinary our assets are and how strong our incumbent position is and how grateful we are that we don't have a greenfield project that we have to try to build right now because it's difficult. It's difficult to build new. It's difficult to execute on that. And all of that will eventually be reflected in uranium pricing. It's too early for us to put out our guidance for next year. We normally do that in our Q4. So that will come out in February. When you think about McArthur River or you think about Cigar Lake or any of our assets, you can never divorce our operating decisions from our strategy. And as I've said a number of times already today, our strategy is that we remain in supply discipline because as the last question reflected, this market has not even brought replacement rate demand into the uranium segment yet. So we're not going to front run that. That means we're not going to make heroic decisions with our operating assets when the market is not yet valuing it. So we produce for our committed sales. We look at McArthur River, we see that there have been some challenges setting up the mining areas, not mining, but setting up the mining areas. It's complicated mining. It requires a certain amount of freeze infrastructure before we go in and develop underneath that region infrastructure. So there have been delays setting it up, and we're just in a position of supply discipline. We're not going to take any heroic actions. We are just going to pace this out at the pace that the market is signaling. Whether that affects 2026 or not, it's too early to tell, but it would require a change of our strategy, which would require more demand in the market for us to do anything different than we're currently doing now. A responsible uranium producer has a strategy to mine, mill and market uranium as a united strategy, not you just produce as much as you can and you hope to God the market is there for it. That is a failed strategy. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tim Gitzel for any closing remarks. Timothy Gitzel: Well, thank you, operator, and thanks to everybody who joined us today. We appreciate it. As Cory noted in the intro, if you have any detailed follow-up questions related to our third quarter results or any questions that we didn't get to answer today, please send those in, we'll be absolutely happy to address those directly. Just to wrap it up, we're seeing continued momentum through pronuclear government policies, energy-intensive industries, taking action to decarbonize and public sentiment around nuclear that is increasingly positive and better informed. These trends point to a global convergence. Nuclear is essential for safe, constant secure and reliable power and Cameco is exceptionally well placed to deliver on the promises of nuclear. So thanks again, everybody, for joining us today. Stay safe and healthy, and have a great day. Thanks. Operator: This brings to an end today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning. My name is Antoine, and I will be your conference operator today. At this time, I would like to welcome everyone to the EyePoint Third Quarter 2025 Financial Results and Recent Corporate Developments Conference Call. Please be advised that this call is being recorded at the company's request. I would now like to turn the call over to George Elston, Executive Vice President and Chief Financial Officer of EyePoint. Please go ahead. George Elston: Thank you, and thank you all for joining us on today's conference call to discuss EyePoint's third quarter 2025 financial results and recent corporate developments. With me today is Dr. Jay Duker, President and Chief Executive Officer of EyePoint. Jay will begin with a review of recent corporate updates and discuss our clinical programs for DURAVYU in wet AMD and DME. I will close with commentary on the third quarter 2025 financial results. We will then open the call for your questions where we will be joined by Dr. Ramiro Ribeiro, our Chief Medical Officer. Earlier this morning, we issued a press release detailing our financial results and recent corporate developments. A copy of this release can be found in the Investor Relations tab on the company website, www.eyepointpharma.com. Before we begin our formal comments, I'll remind you that various remarks we will make today constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These include statements about our future expectations, clinical developments and regulatory matters and time lines, the potential success of our products and product candidates, financial projections and our plans and prospects. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC and in other filings that we have made or may make with the SEC in the future. Any forward-looking statements represent our views as of today only. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. I'll now turn the call over to Dr. Jay Duker, President and Chief Executive Officer of EyePoint. Jay Duker: Thank you, George. Good morning, everyone, and thank you for joining us. I am pleased to discuss with you today the tremendous progress we've made during the past quarter, continuing our strong track record of execution. As you will hear, our momentum underscores our confidence in the differentiated clinical profile of DURAVYU, our lead program and its potential to transform the treatment paradigm in the 2 largest retinal disease markets, wet Age-related Macular Degeneration or wet AMD and Diabetic Macular Edema, or DME. I'd like to start with a brief overview of our recent highlights. DURAVYU is on track to be the first to file and first to market among all current investigational sustained delivery wet AMD and DME programs, positioning DURAVYU at the forefront of the treatment landscape with potential first-mover advantage. We completed enrollment of the LUCIA trial, the second Phase III trial for DURAVYU in wet AMD in July. Both trials, LUGANO and LUCIA were enrolled in 7 months and together recruited over 900 patients, making them among the fastest enrolling wet AMD pivotal programs to date. Top line data for DURAVYU and wet AMD is expected in mid-2026. Following the positive end of Phase II meeting in July for DME, we were pleased to align with the FDA on a non-inferiority trial design that we believe is clinically rigorous, efficient and derisked. As a reminder, DURAVYU is the only tyrosine kinase inhibitor or TKI in development for DME. We are rapidly moving forward with a pivotal Phase III DME program with first patient dosing expected in Q1 2026. The Phase III DME trials, COMO and CAPRI will leverage our existing wet AMD clinical trial infrastructure and our enthusiastic network of investigators. We announced new preclinical data showing that vorolanib, the active drug in DURAVYU, is unique among TKIs being tested in retinal diseases as it inhibits both [ VEGF ]-mediated vascular permeability and interleukin-6 or IL-6 mediated inflammation. This multi-mechanism of action has the potential to be particularly effective in the treatment of multifactorial diseases such as wet AMD and DME. These new data underscore the impressive Phase II results of the VERONA trial in DME and strengthened our confidence in our clinical programs. Finally, our path to potential success in Phase III is supported by our strong balance sheet. We ended September 2025 with over $200 million in cash and equivalents and closed a $172 million follow-on offering in October. Our cash is now expected to fund operations into Q4 2027, well beyond Phase III wet AMD data anticipated in 2026. With this continued exceptional track record, EyePoint will enter an eventful 2026 from a position of strength. Now I'd like to take a closer look at the current market landscape for wet AMD and DME. With a combined current global market of $10 billion and growing, these indications make up the vast majority of the global branded retinal disease market. Despite the size and scale of these diseases, they are dominated by a single treatment modality, monotherapy anti-VEGF biologics. Due to the high burden of frequent injections, many patients remain undertreated, even with the addition of recently approved extended duration options. Additionally, these current standard of care anti-VEGFs demonstrate subpar real-world efficacy in DME with growing literature supporting the role of not only VEGF activation, but also IL-6 signaling and inflammation driving disease severity. We believe our lead product candidate, DURAVYU, is well positioned to deliver much needed innovation in both wet AMD and DME. As a differentiated sustained-release TKI, DURAVYU is designed to improve the current standard of care by providing durable disease control while reducing the treatment burden. Further, DURAVYU's potential multi-MOA blocking VEGF, PDGF and IL-6 signaling may be uniquely suited to effectively address multifactorial retinal diseases such as DME and wet AMD. Beyond its unique MOA, DURAVYU offers a compelling product profile that supports strong competitive positioning in both wet AMD and DME. Unlike other sustained release options in development, DURAVYU is formulated in our Durasert E technology. a biodegradable sustained release insert specifically designed to prevent free floating drug particles. Additionally, DURAVYU is shipped and stored at ambient temperature and administered via a standard intravitreal injection. DURAVYU features the most robust clinical data package among all investigational sustained release programs. This includes Phase II wet AMD and DME data, demonstrating meaningful visual and anatomic improvements from a single DURAVYU dose and a consistent and favorable safety and tolerability profile with no safety signals observed in over 190 patients across 4 completed clinical trials. Given its advantageous clinical profile, multi-target MOA and unique storage and administration conveniences, we are confident that DURAVYU offers a differentiated value proposition that is meaningful to physicians and patients. And if approved, would present a compelling option within the current and future landscape for retinal disease treatment. Let me now walk through recent updates for our Phase III programs, beginning with wet AMD. Our fully enrolled Phase III pivotal program remains on track to deliver top line data starting in mid-2026. As a reminder, in July, we completed enrollment of the Phase III program with over 900 patients randomized across the 2 trials. To ensure we are positioned for commercialization, we are highly focused on our manufacturing capability and CMC submission for an [ NBA ]. We have already produced DURAVYU registration batches at our state-of-the-art GMP-compliant manufacturing facility in Northbridge, Massachusetts. The 41,000 square foot facility was built to both U.S. FDA and EMA standards and will have capacity to support the commercial launch. Moving on to the recently initiated Phase III program in DME. Our program consists of 2 non-inferiority trials, COMO and CAPRI, evaluating DURAVYU 2.7 milligrams versus on-label aflibercept control. Each trial will enroll approximately 240 patients. Additionally, given the established non-inferiority pathway as well as our ability to leverage our existing Phase III clinical trial infrastructure, we believe the program is significantly derisked. We look forward to dosing our first patient in Q1 2026. As I mentioned earlier, there is growing clinical evidence supporting the multifactorial nature of retinal vascular diseases with both VEGF-mediated vascular leakage and inflammation contributing to disease pathogenesis. IL-6, a pro-inflammatory cytokine is a key driver of this inflammation and is found at significantly higher levels in DME and wet AMD patients versus healthy individuals. Recent preclinical findings, which we presented at the American Academy of Ophthalmology meeting in October, demonstrate that vorolanib, the active ingredient in DURAVYU, inhibits IL-6 signaling through [ JAK1 ] receptor blockage in addition to its known inhibition of PDGF and all VEGF receptors. In vitro data shows a meaningful reduction in IL-6 activity of more than 50% with vorolanib, suggesting a multi-MOA capability. This data may explain the rapid fluid reduction and vision improvements observed as early as week 4 in the DURAVYU arms in the Phase II VERONA trial. In summary, we are well positioned to extend our clinical leadership in sustained release therapy for the 2 largest retinal disease markets. We remain focused on reporting top line Phase III data for both LUGANO and LUCIA starting mid next year, positioning DURAVYU to be the first to file and potentially first to market among all investigational sustained release programs in wet AMD. Our Phase III DME program is now underway, and we expect first patient dosed during the first quarter of 2026. We are moving swiftly and confidently to bring DURAVYU to patients in need while continuing to ensure our progress follows a derisked, clinically rigorous and patient-centric approach. Before passing it over to George to review our financials, I want to thank the entire EyePoint team for your dedication to improving patients' lives through better vision as well as the patients, study coordinators and clinical investigators outside of our organization who enable our clinical research. We are grateful for your confidence, and we are proud to advance our therapeutics for the benefit of the entire retina community. We look forward to continued progress towards our upcoming milestones as we further our leadership in sustained ocular drug delivery. I will now turn the call over to George. George? George Elston: Thank you, Jay. To begin, we continue disciplined financial management and good stewardship of our resources, ending the third quarter with $204 million in cash and investments. As Jay mentioned, in October, we completed a $150 million follow-on financing plus the exercise of the underwriter's greenshoe option on October 29 for a total of approximately $172 million in gross proceeds, adding to our cash position and enabling the execution of the Phase III DME program. We expect that cash and investments as of September 30, along with net proceeds of the financing will support our operations into the fourth quarter of 2027, well beyond key data readouts from the Phase III LUGANO and LUCIA pivotal trials anticipated in mid-2026. As the results for the 3 months ended September 30, 2025, were included in the press release issued this morning, my comments today will be focused on a high-level review for the quarter. For the quarter ended September 30, 2025, total net revenue was $1 million compared to $10.5 million for the quarter ended September 30, 2024. This decrease was primarily driven by the recognition of deferred revenue related to the company's 2023 agreement for the license of YUTIQ product rights in the prior year period. Operating expenses for the quarter ended September 30, 2025, totaled $63 million compared to $43.3 million in the prior year period. This increase was primarily driven by clinical trial costs related to the ongoing Phase III LUGANO and LUCIA clinical trials of DURAVYU for wet AMD. Net nonoperating income totaled $2.3 million and net loss was $59.7 million or $0.85 per share compared to a total net loss of $29.4 million or $0.54 per share in the prior year period. As I noted earlier, cash and investments on September 30, 2025, totaled $204 million compared to $371 million as of December 31, 2024, which, along with net proceeds from the October financing, we expect will enable operations into Q4 2027. In conclusion, we are very pleased with our progress and continued execution in 2025 and are well capitalized to deliver DURAVYU Phase III wet AMD data in 2026, while advancing our Phase III DME program with the COMO and CAPRI clinical trials. I will now turn the call back over to Jay for closing remarks. Jay Duker: Thank you, George. As you've heard this morning, EyePoint is on the cusp of a milestone year in 2026. Our decades of drug development experience, clinical track record, next-generation technology and blockbuster potential of our DURAVYU franchise underscore our exciting growth story. With our strong balance sheet and disciplined cash management, along with our thoughtful derisked development strategy, we are prepared to execute through our key upcoming milestones, including top line data for the Phase III LUGANO trial anticipated in mid-2026 with LUCIA data to closely follow, positioning us for a potential MDA submission for DURAVYU in wet AMD and the first patient dosing in our pivotal Phase III DME program anticipated in Q1 2026, with full enrollment expected in the second half of 2026. Thank you all for your attention this morning. I will now turn the call over to the operator for your questions. Operator: [Operator Instructions] Our first question comes from Tess Romero from JPMorgan. Tessa Romero: I wanted to ask a market sizing question today. Can you just refresh us for the wet AMD population overall here in the U.S.? What percent of patients are treated every 4 weeks, every 6 weeks, every 8 weeks or longer? And what is your latest view on how the doctors will use DURAVYU, if available in that context? Jay Duker: Thanks for the question. It is insightful. And as you may surmise, the data is not strong to give exact numbers for each of those intervals. What we do know is approximately 20% of wet AMD patients have to be treated monthly regardless of the drug that they're using. If you look at the clinical trial data, even with the newer extended duration agents, 50% of the eyes can't go longer than every 8 weeks. Depending on a doctor's toleration for fluid, some patients can certainly go 3 and 4 months in between injections. But again, it's individualized to the patient and oftentimes individualized to the doctor's tolerance of fluid and adherence to the label. So I don't, off the top of my head, have exact numbers to give you for those other percentages. And I'll pause and see if Ramiro has any other insight. Ramiro Ribeiro: Yes. No, thanks, [ Tessa ], for the question. I think when we think about DURAVYU, in our Phase II data, we showed that after dosing DURAVYU, about 65% of patients did not require any supplemental injection with anti-VEGF. And even when we look at 0 or 1 injection over that 6-month period, then the number is about 90%. So we believe that DURAVYU is really well positioned if we see the results in the Phase III study being replicated to bring the market for wet AMD patients. Jay Duker: And to answer the second part of your question, Tess, I don't think you can look at it as an either/or, meaning if DURAVYU is approved, doctors will be limited to just using one agent. We're a different MOA. And clearly, the more recent data with IL-6 inhibition suggests that we may offer an MOA that the [ ligand ] blockers cannot. That would open up market tremendously to us. And as Ramiro just explained, physicians, I'm sure, would be willing to take advantage of 2 MOAs. We do that in chronic diseases all the time. And therefore, the market share for DURAVYU, when you speak to some of the KOLs on the podium even recently have said up to 80% of their patients would be eligible. So we're really optimistic that the acceptance of a multi-MOA TKI with sustained release in both wet AMD and DME is going to be high. Operator: Our next question comes from Yigal Nochomovitz from Citi. Unknown Analyst: This is [ Jen Kim ] on for Yigal. Regarding DME, can you provide any additional color on how you're structuring your enrollment criteria to provide the broadest reach in the DME marketplace relative to competitors in the long-acting TKI space? Jay Duker: Sure. I'll let Ramiro answer that question. Thank you very much for it. And again, I can quickly answer the second part of the question. We're the only TKI sustained release that has a DME program. So that part is easy. But Ramiro, why don't you talk a little bit about how we've designed the trial? Ramiro Ribeiro: Yes. So first, to give an overview on our Phase III DME program, CAPRI. So we are going to be enrolling patients with active DME, both treatment naive and previously treated. as a control arm, we're going to use aflibercept on label and then DURAVYU is going to be being dosed every 6 months. We are very fortunate to have a strong infrastructure here at EyePoint as we conducted our wet AMD study. We have also a very strong relationship with investigators. So for our DME program, we're going to be able to leverage those strengths into a hopefully rapid enrollment for the DME program. I think it's our understanding that we might be the only Phase III program enrolling patients next year for this indication. So again, I think we expect to see a rapid enrollment, similar strength that we did for the [ wet AMD ] program. Unknown Analyst: And regarding enrollment, just for clarification, I believe I heard you say second half ' 26. Is that for both COMO and CAPRI? Ramiro Ribeiro: So I think what we're guiding now is that both studies are going to be starting Q1 of next year, 2026. Operator: Our next question comes from Tyler Van Buren from TD Cowen. Unknown Analyst: This is Sam on for Tyler. I wanted to ask about the use of the blended endpoint, which you guys have remained consistent on with the pivotal wet AMD and DME trials. We have seen the FDA greenlight a single endpoint more recently. So curious if you thought about using a single endpoint at all for the DME studies and why you believe the blended endpoint is the best approach? Jay Duker: Thanks, Sam. I appreciate the question. And I'll let Ramiro go into the details. But to answer quite simply, did you think about a single endpoint, quick answer is no. Ramiro, why don't you talk a little bit about our interactions with the FDA over endpoint and why the blended endpoint is actually derisking? Ramiro Ribeiro: Yes. Thanks, Sam, for the question. So for both our wet AMD program and our DME program, we are using blended endpoint, meaning that for the primary endpoint, we're counting 2 visits. The benefit of that is that we prevent missing data. So in this type of study, it is not uncommon to see patients missing the visit because they have medical appointments or they're in the hospital for some [ systemic ] disease. So by having 2 visits, we reduce the amount of missing data. And also very important, if a patient has, for any reason, a loss in vision in one of the visits, they have the ability to capture the recovery of that vision in the next visit. The use of blended endpoint has been common in clinical trials for retinal disease for the past few years with the main goal of decreasing the variability and increasing the power of the study. And that's why we feel confident on using the blended endpoint for both wet AMD and DME. And of course, we have the green light from the FDA to do so. Operator: Our next question comes from Claire Dong from Jefferies. Unknown Analyst: This is Jenna on for Clara. Could you talk about the differentiation in IL-6 inhibition? And could you help us kind of elaborate on how that could translate into clinical benefit in DME versus an anti-VEGF only approach? Jay Duker: Thanks for the question, Jenna. And this is really timely because you may be aware, there's some recent data from Genentech who used an IL-6 blocker in a DME trial combined with an anti-VEGF. Both were delivered monthly and the arm with the IL-6 blocker along with the anti-VEGF had better vision as early as week 4 and sustained through the trial. We were able to show a very similar vision improvement and course of improvement in our VERONA trial using just 2 injections over 6 months as opposed to 12 injections over 6 months. And when we looked into it more closely, we discovered that, in fact, vorolanib is a potent inhibitor of IL-6 pathway by blocking the JAK1 receptor. There is substantial evidence in both wet AMD and DME that IL-6 plays a pathogenic role, especially in eyes that are not responding. And therefore, the ability to block both VEGF pathway and inflammatory IL-6 pathway could be a significant improvement over what we have now, especially coupled with sustained release. so that you're not having to give 2 biologics on a monthly basis. Operator: Our next question comes from Yatin Suneja from Guggenheim. Yatin Suneja: Maybe 2 questions from me. One is on the mechanism regarding the IL-6. Jay, if you can comment on the relevance of it in one disease versus the other? Do you think there is more relevance in DME versus AMD? So that's one. And then the second question is now more around the expectation now that the studies -- wet AMD expectations, right. Now the studies are enrolled, I think our investors are sort of beginning to think about what we should be expecting from the data. And I think there is focus on 3 things. One is the BCV and noninferiority, what sort of injection burden you can produce? And how should we think about rescue rate? So if you can comment on that, that would be very helpful. Jay Duker: Thanks, Yatin. Two great questions. Let me start with the IL-6 question. IL-6 has been implicated in inflammatory macular edema for well over a decade. And additional data suggests that IL-6 levels in the vitreous are much higher in DME patients than in diabetics with no diabetic retinopathy. In addition, there's data that suggests high IL-6 levels in aqueous humor portend a worse outcome in both DME and wet AMD. So overall, the evidence for a role of IL-6 as an inflammatory pathway in DME is very strong. And while it's there in wet AMD as well, it appears to be a prognostic factor in the percentage of eyes that aren't doing well with VEGF blockage alone. We believe that if the preclinical data we have shown and the rapid and early and sustained response in our VERONA DME trial can be shown in Phase III. This would be an exceptional result, which would put us at the forefront of both wet AMD and DME therapies. As for the clinical trial results, which we expect, again, the first trial, LUGANO mid next year, second trial LUCIA soon to follow. Based on our strong Phase II data, we would expect non-inferiority to the on-label Eylea control with continued safety. And again, safety is of paramount importance here, as I'm sure you all know. But based on the ongoing mask safety that we've seen in these 2 Phase III trials as well as the extensive safety database we have for both DURAVYU and vorolanib. we're confident that the safety will be quite good. As for reduction in treatment burden, again, that's important. There's no specific cutoff that says it has to be above or below a certain level. And based on our discussions with KOLs and the design of the trials, we think a 50% reduction in treatment burden will, again, put us into the forefront of therapies for wet AMD. Operator: Our next question comes from Debanjana Chatterjee from Jones. Debanjana Chatterjee: Congrats on all the progress. So assuming LUGANO and LUCIA meets its, the non-inferiority endpoint, does your statistical analysis plan allow for testing superiority? And if so, how do you expect clinicians to interpret those data related to on-label Eylea compared to potential competitors pursuing superiority claims based on like less frequent dosing? Jay Duker: So Ramiro, why don't you answer that? Thanks, Debanjana. I appreciate the question. Ramiro Ribeiro: Yes. Thanks for the great question. So our -- as you mentioned, our analysis plan does allow for testing superiority again, aflibercept if our noninferiority is met. So it's a hierarchical testing. So we have the ability to test for that. Of course, if we see that DURAVYU produce superior visual outcomes compared to on-label aflibercept, then, of course, I think it will be an outstanding results for the retina community and wet AMD patients and would allow us to position DURAVYU as a premium medication. Of course, having a superiority claim against on-label aflibercept, I think from a retina specialty perspective is much more relevant than having a superiority versus a single dose of aflibercept. So we are -- we continue to be optimistic with our LUGANO and LUCIA study. We were very fortunate to have the [ DABE2 ], our Phase II study to support the design of the Phase III programs, a lot of the learnings coming from there, and we're looking forward to see the results mid next year. Operator: This concludes the question-and-answer session. I will now turn it over to Jay Duker for closing remarks. Jay Duker: Thanks very much. Before we close, I do want to mention a tremendous honor that EyePoint received this week. We were voted a 2026 Best Places to Work by BioSpace. In fact, we were in the top 5 best biotech companies nationally. This is a testament to the incredible team and culture we built here at EyePoint. Exceptional execution does not come in a vacuum. I want to thank all of our amazing team for this honor, but especially our human resources group led by our Chief People Officer, Jen Leonard. Thank you all for your time and attention this morning. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and welcome to the Geron Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Dawn Schottlandt, Senior Vice President, Investor Relations and Corporate Affairs. You may begin.  Dawn Schottlandt: Good morning, everyone. Welcome to the Geron Corporation Third Quarter 2025 Earnings Conference Call. Before we begin, please note that during the course of this presentation and question-and-answer session, we will be making forward-looking statements regarding future events, performance, plans, expectations, and other projections. Including those relating to the launch, commercial opportunity, and therapeutic potential of VYTELLO, anticipated clinical and commercial events, and related timelines. The sufficiency of Geron's financial resources and other statements that are not historical facts. Actual events or results could differ materially.  Therefore, I refer you to the discussion under the heading Risk Factors in Geron's most recent periodic report filed with the SEC, which identifies important factors that could cause actual results to differ materially from those contained in the forward-looking statements and our future updates to those risk factors. Geron undertakes no duty or obligation to update our forward-looking statements.  Joining me on today's call are several members of Geron's management team: Harout Semerjian, Chief Executive Officer; Michelle Robertson, Chief Financial Officer; and Dr. Joseph Eid, Executive Vice President of Research and Development and Chief Medical Officer. Ahmed ElNawawi, our Chief Commercial Officer, will be introducing himself at the beginning of Q&A.  Before handing the call over to Harout Semerjian, I'd like to say I'm truly energized to join Geron. This is a company that can change the lives of patients with blood cancers. The work ahead of us is real, but in my 3 weeks here, my confidence in our ability to deliver has grown every day. With that, I'll turn the call over to Harout.  Harout Semerjian: Thank you, Dawn, and good morning, everyone. I'm very excited to be hosting my first earnings call as CEO of Geron. On this call, we will provide a commercial overview, an update on medical affairs and our pipeline, and end with an overview of our financials. Three months ago, I joined Geron because I saw a company with real promise, a differentiated product that is effective, and it addresses a high unmet need in lower-risk MDS.  Over these past months, I've been deeply impressed by the strength and dedication of our organization. The culture here is patient-focused and resilient, giving me conviction that with improved alignment, we can build an execution-oriented organization that brings the promise of RYTELO to more lower-risk MDS patients.  Let me share 4 reasons that support our belief. First, RYTELO is a compelling drug. It has demonstrated meaningful efficacy in lower-risk MDS, and it is differentiated in its mechanism of action and clinical profile.  Second, lower-risk MDS is an area of high unmet need with few, if any, potential treatments being studied in the clinic that can provide the differentiation that RYTELO can as a telomerase inhibitor. There is a clear opportunity for RYTELO to be an important therapeutic option in lower-risk MDS.  Third, there is an opportunity to accelerate growth with the right strategy and improved execution. And fourth, the company is well capitalized. We have a strong cash position, which we believe is sufficient to support the robust commercial and medical affairs engagement needed to increase RYTELO utilization.  Now, let me provide you with an overview of our Q3 commercial performance. Net product revenue was $47.2 million for the third quarter. During the quarter, demand for RYTELO was down 3% compared to last quarter. New patient starts in the first and second line increased to 36% compared to 30% in Q2.  However, new patient starts did not offset the discontinuations we saw from patients using RYTELO in later lines. It is clear we have work to do on establishing RYTELO as a second-line therapy in eligible patients with low-risk MDS and educating HCPs on treatment management. Prescribing accounts increased by 15% in the quarter, with approximately 150 new ordering accounts added in Q3, expanding our footprint to 1,150 accounts.  Lastly, we completed the first shipment of RYTELO to Germany under a named patient early access program. We're preparing for the planned commercialization of RYTELO in select EU markets in 2026. Q3 was an important quarter for us as we took stock of what we need to do to ensure RYTELO reaches more patients.  We're assessing both internally across people, processes, messaging, and overall effectiveness, and externally with our customers to amplify partnerships and ensure the appropriate usage of RYTELO. We recently announced the addition of Ahmed ElNawawi as our new Chief Commercial Officer.  ElNawawi is an experienced commercial leader with an established track record of launching multiple global oncology products and leading commercial teams in both biotech and pharma. He brings a wealth of expertise to Geron to execute a strong commercial strategy to support RYTELO's growth.  With the recently announced additions to the executive leadership team, along with existing team members, we can realign to accelerate momentum and grow RYTELO. I'm confident we can realize the full value of RYTELO and build a bright future for Geron.  We believe Geron and RYTELO can be transformational in the lower-risk MDS space with improved execution. We have already identified 4 initial actions to step up our execution and support future revenue growth.  First, we need to substantially increase awareness for RYTELO among U.S. HCPs through a comprehensive, well-coordinated account plan. Our market research is clearly telling us that education is key to increasing usage in the appropriate patients. This is especially critical when an HCP prescribes RYTELO to the first few patients. Our field-based commercial and medical colleagues have sharpened their approach to customer engagement aimed at educating HCPs on how to use RYTELO, identifying the appropriate patients to start therapy, expanding reach into the community, sites improving conversions and retention, and effectively managing patients on therapy. We believe, over time, this push to increase awareness for RYTELO will grow our U.S. prescriber base and drive sales in the U.S. Second, we need to significantly and consistently increase our in-person and digital presence in hematology forums. We are just starting to do this through expanded relationships with U.S. KOLs and increased engagement with key patient advocacy groups. A good example of this would be Geron's efforts at this year's Society of Hematologic Oncology Conference in September in Houston. At the conclusion of this conference, we noticed a surge in engagement from physicians who participated in our multiple advisory boards and other engagement activities, with a positive change in Geron's external perception. We received anecdotal feedback that more physicians are beginning to shift their thinking on RYTELO, not just as a third or fourth line option, but as a therapy worth considering earlier. That shift won't happen overnight. But as we continue these efforts throughout 2026, we expect to see an impact on RYTELO utilization. Lastly, we're excited to expand our IST program with U.S. clinical sites and HCPs to address additional key medical questions about potential uses of imetelstat and the benefits of telomerase inhibition. The IMerge trial predominantly enrolled sites in Europe. We have work to do to collaborate with U.S. HCPs and give them opportunities for additional research with imetelstat. These initial initiatives are just the beginning as we expect to identify additional opportunities to improve execution in the near term. It is important to recognize that the pull-through of the improved execution to revenue growth will take time. As for the additional utility of RYTELO, we recently completed enrollment in our IMpactTMF Phase III clinical trial evaluating imetelstat in relapsed/refractory myelofibrosis. We currently project the interim analysis to occur in the second half of 2026, with the final analysis projected in the second half of 2028. Our base case is for the trial to run to the final analysis, as is the case for the majority of trials with overall survival as the primary endpoint. Should we see an opportunity to help patients with data from the interim analysis, we will be ready to explore the next steps rapidly. Success in myelofibrosis could double our addressable patient population. Finally, before handing it over to Joe, I want to reiterate my optimism in Geron's future. Our priorities are clear. We are working to maximize the impact of RYTELO for patients today while advancing our first-in-class telomerase inhibitor to benefit more people tomorrow. With that, I'll now hand the call to Joe to review clinical and medical affairs progress. Joseph Eid: Thank you, Harout. On today's call, I will highlight our upcoming presence at ASH, medical affairs actions we have taken to improve RYTELO execution, including events at SOHO and investigator-sponsored research. And then I'll provide an update on our Phase III clinical trial in relapsed/refractory myelofibrosis. First, we had 5 abstracts accepted for ASH. The data feature a new clinical and translational analysis of imetelstat across lower-risk myelodysplastic syndrome and myelofibrosis. Two abstracts, including an oral presentation, will feature new analyses from the Phase III IMerge trial. The oral presentation offers insight into how early cytopenias observed with imetelstat are on target pharmacological effects and may be associated with treatment response, offering valuable context for interpreting treatment patterns and managing patient outcomes. This data will help us educate HCPs to better understand, anticipate, and manage these effects, helping to ensure patients are appropriately maintained on therapy. The other IMerge abstract highlights a 42-month landmark analysis of long-term outcomes from the trial. While the analysis was not prespecified, the totality of the data and the results of the landmark analysis suggest a favorable trend for imetelstat in overall survival, progression-free survival, and time to progression to AML compared to placebo. Both abstracts highlight the value of the unique mechanism of action of RYTELO in lower-risk MDS disease and its management. There will also be 3 additional posters, including data from the EMbark and IMproveMF trials in MF and the investigator-sponsored trial, IMpress, in high-risk MDS and AML. We plan to continue our medical engagement at ASH. We are planning an advocacy forum that is designed to bring together patient advocacy organizations and professional societies to raise awareness and provide education on lower-risk MDS and the use of RYTELO as a treatment option. This is the first event of this nature hosted by Geron. In addition, we are planning to engage with an increasing number of hematologists at ASH, both in one-on-one and group settings. These engagements help us convey new data to physicians as well as collect insights that can help refine our strategy. Our presence at ASH will build upon the primary medical affairs efforts taken this quarter that focus on 4 strategic initiatives: community site penetration, initiation of ISTs, awareness and education ramp-up, and KOL and advocacy alignment. We strongly recognize that in order for RYTELO to be successful, we need to be successful in the community setting, where approximately 80% of lower-risk MDS patients are treated. Last quarter, we described how we are focusing on increasing HCP awareness of RYTELO, particularly in the community setting, as well as academic centers that were not part of the Phase III pivotal trial.  Our team has been actively engaged with these sites directly at an important medical meeting. The expansion of our medical affairs field team has allowed us to refine our targeting model, better prioritize mid-disile physicians, and improve awareness among community sites. We continue to intensify our messaging via webinars and peer-to-peer educational efforts.  In our most recent awareness trial utilization tracking, we observed positive shifts in physician understanding of RYTELO's efficacy in terms of robust and durable hemoglobin response and appreciation of cytopenias being on target based on RYTELO's unique mechanism of action.  In parallel, we continue to support several investigator-sponsored trials exploring imetelstat in diverse hematological settings, including combination regimens and earlier line use, as well as real-world evidence. We expect that these independent studies will help build external validation and broaden the clinical and real-world evidence base for imetelstat. We observed high interest in investigating imetelstat in preclinical, clinical, and real-world evidence settings. We received a good number of proposals, and we decided to fund a number of these proposals that we expect to commence generating data in 2026.  We are also actively engaging with KOLs and advocacy groups to broaden the reach of RYTELO's data narrative. Our goal is to help key opinion leaders become ambassadors, reinforcing that RYTELO can be considered alongside existing therapies in earlier lines rather than a drug of last resort. These efforts are starting to yield early results. Post-engagement surveys suggest that physicians who initially expressed reservations about cytopenia now report a better understanding of the mechanism of action, dose adjustment strategies, and monitoring protocols.  Our data confirmed that physicians who have used RYTELO in practice view its profile more favorably than those who have not. As many of you know, the Annual Society of Hematologic Oncology meeting was a major touch point this quarter. Our team presented real-world case studies, translational biomarker data, and longer-term follow-up from earlier treated patients. The reception was constructive. Among key opinion leaders, we are seeing a growing perspective that RYTELO deserves a position as the #2 option for eligible patients with lower-risk MDS after standard CSA therapy, especially in certain high-risk subpopulations.  This is supported by the recently updated NCCN guidelines that now recommend RYTELO as a treatment for use in low-risk MDS patients with serum EPO over 500 ahead of HMAs. A central theme during the SOHO meeting was how RYTELO's use fits with luspatercept. We made the case that RYTELO and luspatercept can be complementary rather than mutually exclusive, i.e., that RYTELO does not need to displace luspatercept, which can be used sequentially or in stratified patient segments based on its approved label and NCCN guidelines.  This narrative struck a chord, and we believe it could help ease some of the challenges in physicians' minds.  On the clinical front, I am pleased to report that our IMpactMF trial is now fully enrolled with 320 patients from 26 countries. This is a Phase III trial in relapsed/refractory myelofibrosis and is the first MF clinical trial with overall survival as the primary endpoint. We expect to have an interim analysis in the second half of 2026 and the final analysis in the second half of 2028, subject, of course, to achieving the specified number of death events.  With a high bar set for the interim analysis, we are planning for the trial to conclude at its final analysis. This is typical for a trial with the primary endpoint of OS.  To close, our medical affairs and R&D teams remain fully aligned with our commercial team. Our combined efforts are focused on evidence generation, physician engagement, and data dissemination to support broader adoption of RYTELO in lower-risk MDS. I'll now turn the call over to Michelle to go over our Q3 financials.  Michelle Robertson: Thank you, Joe, and good morning, everyone. For more detailed results from the third quarter, please refer to the press release we issued this morning, which is available on our website. As of September 30, 2025, we had approximately $420 million in cash and marketable securities compared to $503 million as of December 31, 2024. Total net revenue for the 3 months ended September 30, 2025, was $47 million compared to $28 million in Q3 of 2024. Gross to net increased from Q2 to Q3 due to increases in the Medicaid mix rate, fees from new GPO contracts, and returns from several customers where their supply of RYTELO had reached its expiration date.  As of September 30, 2025, ending inventory at distributors was on the high end of our range of 2 to 4 weeks. Research and development expenses for the 3 months ended September 30, 2025, were $21 million compared to $20 million for the same period in 2024. The change was primarily due to increased CMC and personnel-related expenses. Selling, general, and administrative expenses for the 3 months ended September 30, 2025, were $39 million compared to $36 million in Q3 last year.  The change was due to an increase in sales and marketing headcount and additional investments in marketing programs. For fiscal year 2025, we expect our total operating expenses to be between $250 million and $260 million, below our previously announced guidance of $270 million to $285 million. We continue to focus on efficiencies and prudently manage our spend while continuing to prioritize investments in our RYTELO commercialization strategy, commercial supply redundancies, and post-marketing commitments, as well as preparations to launch RYTELO in selected EU countries in 2026.  Overall, with our current cash and marketable securities and anticipated net revenues from expected U.S. sales of RYTELO, we believe that Geron remains in a strong financial position to fund projected operating expenses for the foreseeable future. I'll now turn the call back to Harout for closing remarks.  Harout Semerjian: Thank you, Michelle. In closing, I want to reinforce 3 key takeaways from this call. Number one, shifting physician behavior and building a brand in hematology takes time.  The urgency across our organization is understood, and we're fully committed to the patients who are depending on us. Number two, improving alignment and generating momentum, is our focus. And lastly, RYTELO is a drug that works. With the right execution, we believe it can be positioned for long-term success. We appreciate your support. Before we begin our Q&A, I'd like to hand it over to Nawawi, our new CCO, to say a few words introducing himself. Nawawi? Ahmed ElNawawi: Thank you, Harout. Let me start by saying thank you for the opportunity to be part of that Geron team. I am halfway through my third week, and what I have seen through my one-on-ones and team meetings with the entire commercial organization is that we are deeply committed to patients. We have a drug, RYTELLO, that has the potential to address an unmet need in low-risk MDS patients. With improved alignment and our focus on driving operational excellence, I am confident we can grow revenue by delivering RYTELO to eligible patients. Harout Semerjian: Thank you, Nawawi. Operator, we're ready for Q&A. Operator: [Operator Instructions] Tara Bancroft: Your first question comes from Tara Bancroft with TD Cowen. So I have one very quick one and then a real one. So the first one is just being, if you can perhaps, Michelle, give us a little bit more insight into the current gross to net that you mentioned increased this quarter. Wondering if the previous mid-teens range still applies or if we should amend that. And then, so demand being down 3% this quarter, it's nearly flat. But I'm curious to hear more about what drove that. I know you stated that discontinuities in later lines are a big factor, but I'm curious to hear if there were other headwinds that you can speak of this quarter that you observed, like reluctance to reorder or seasonality, but basically, looking for any outlook on those for Q4 that may perhaps be reversing? Michelle Robertson: Tara, thanks. Yes. So I believe that the mid- to high teens are still applicable for the forecast. What we did 1 year in, it's reasonable to review your launch assumptions, check the channel mix. And in our case, we had an increase in the Medicaid channel mix. So we've increased our reserves for those rebates. And going forward, that will kind of moderate itself. We did have some returns. So we also looked at our rate of returns and trued that up and adjusted that and increased that moderately. And then we did expand our GPO contract business. So we had some additional fees this quarter, and we'll see those going forward also. But we still feel confident that we'll be in the mid- to high teens going forward. Harout Semerjian: Tara, thanks for the questions. Yes, I mean, you'll see basically what we're doing a lot. There's a lot of resetting and making sure that we have a strong base going forward. Regarding your question about the demand side, I mean, it is at 3%. That's the accurate number. I agree with you. It's flattish, given that our base number of patients where we are, a few patients can make a difference one way or the other. So keeping that in mind, what we're seeing is that we are getting new patients, but the discontinuation of patients who existed or who came in on the brand, they're really later-line patients. And unfortunately, those patients are much more beaten up, and they don't stay on therapy for very long. So what we really want to make sure that we are doing is we're getting the right patients upfront in the early setting, and that's going to happen by really driving the education, the brand awareness and the additional actions we're taking beyond just sending in a rep, that's where we believe that by doing the surround sound, that can drive the right patients to start on therapy. And that's where we're saying we have work to do on that part, so that's the focus area that we have. Operator: The next question comes from Stephen Willey with Stifel. Stephen Willey: I guess you talked about the growth in ordering accounts, I think, 15% sequentially. Do we know anything about just the breadth of prescribing at this point and how many of those ordering accounts have either already written the script and/or are new to the brand? And I just have a follow-up. Harout Semerjian: Yes. Steve, thanks for the question. Yes, I mean we're pleased to see the continuous increase in the number of new accounts coming on board. So another 150 accounts have ordered RYTELO in this quarter versus last quarter. So that puts us this year to more than 500 new accounts ordering RYTELO versus last year. So the breadth of folks getting on board, we're pleased with that. I think the work we have is making sure the depth is there and the right patients are the ones who are being put, namely, earlier lines of patients. So repeat business was about 80% of accounts that have reordered in the last quarter. So we're pleased with that. So I think that's not our bigger challenge where we want to focus on is getting the breadth of patients, especially having the first patients, especially in the community, to really have a right start, we call it. So basically, get the right patient on, know how to manage effectively the first few patients, especially in the community setting. And that we believe will lead to a depth of prescription, which can really be helpful for patients. So that's some of our focus areas. The breadth of accounts is actually going in the right direction in terms of additional accounts over time, coming on board with RYTELO. Stephen Willey: And then, do you have any idea what the average duration of therapy looks like at this point? I know you're talking about use primarily occurring in these later-line patients. I know the label calls for 6 cycles, I guess, at a minimum. I'm just curious what you're seeing, if anything, on the duration of therapy side. Harout Semerjian: Yes. Thank you, Steve. What we have said is that in the real world, we're seeing that the therapy duration is in line with IMerge in a similar patient population. So, keeping in mind that in IMerge, there were predominantly more second-line patients. And in the real world, there are more third, fourth, and fifth-line patients. That's where the difference is happening. So that's where we want to make sure that we continue to encourage physicians to use RYTELO in earlier lines of therapy to really mimic what we're seeing in IMerge and beyond because currently, it's apples to oranges and IMerge is most second line and in real world, it's more third, fourth line, which is shorter than that 8 months that we've seen in IMerge. Operator: The next question comes from Corinne Johnson with Goldman Sachs. Unknown Analyst: This is Anubham on behalf of Corinne. Can you talk about the revised operating expense guidance for the year? Where are you finding the savings or the efficiencies in the budget? And what should we expect with respect to the OpEx cadence for the next year? Michelle Robertson: Yes. Thanks. So I mean, we're not giving guidance just yet for the 2026 full-year spend. But for 2025, in the past, I have mentioned that we have levers to pull, particularly around some of our CMC investment. And we've also slowed down just some of the infrastructure, organizational infrastructure investments related to IT systems, and we were able to pull in our full year OpEx this year to the $250 million to $260 million. So we feel pretty confident in those numbers. Operator: The next question comes from Emily Bodnar with H.C. Wainwright. Emily Bodnar: I had one on your sales force. I believe a few quarters ago, you mentioned that you would have the sales force fully hired by the third quarter. So I'm curious if that's been completed. And also any commentary you can give on what metrics you're using to evaluate the sales force, and their impact on demand generation? And also, if you can give an update on your EU partner search, if that's still ongoing. Harout Semerjian: Thank you, Emily. Good question. So yes, we have reported last quarter that we have hired our field force. And I would say our customer engagement folks, because it was beyond just the commercial people; we also doubled our MSLs in the field. So both have been done in the last quarter. The training has happened over the summertime. And now we do have an effective customer engagement folks, both on the commercial side and also on the medical side. Where the focus has now been is not just on the number of bodies that we have, but on the effectiveness of all the customer-facing folks, and then with the head office people, to really be effective, to be outcomes-focused rather than activity-focused. So there is quite a bit of work happening in the background on the operational excellence type, and that's where I'm very excited with Nawawi coming on board and together with the rest of the ELT, that we really drive the appropriate uptake of RYTELO in the right patients. So that's regarding the sales force and the execution piece. Regarding the EU, we remain excited. I mean, we do have an approval in the EU, which really sets us apart, and we're very excited about that. We want to make sure that we're good stewards of our investments. That's where the focus at this point of our own internal efforts are on the U.S., obviously, for 2 reasons: the U.S. being the largest market, but also the fact that IMerge has had much more robust uses in Europe rather than in the U.S. So from our own efforts, we're focusing on the U.S., but then also making sure that we're having the dialogue with appropriate potential partners in Europe and beyond. The whole idea is that RYTELO, we believe, needs to be everywhere, helping patients across the world. We don't need to be everywhere as a Geron ourselves. So those conversations are happening as we speak. But we want to make sure that it's the right people, it's the right timing. We are always having the patient in mind. So we're pleased to start seeing that we have our first named patient sales happening in Germany, but we will make sure that it's really the appropriate setup whatever we come up with, especially now that we have half of the ALT is new and there's a reset that we're doing internally and ensuring that we have the appropriate conversations given how much collective partnership opportunities we have across the world. So stay tuned on that. That's ongoing, and we will update the market as we have new updates. Operator: [Operator Instructions] Your next question comes from Faisal Khurshid with Leerink Partners. Faisal Khurshid: Just wanted to ask if you could characterize your level of confidence that you figured out what the issues are and that you truly believe that awareness is the main lever to pull here. And then also, if you have any updated views on the timeline to see a return to growth here based on your efforts and expanded field force? Harout Semerjian: Yes. Thank you, Faisal. I mean, look, we will not be here if we don't have confidence. I mean, we have very high confidence. I personally have high confidence, and every leader who is here has high confidence, be it newly joined or folks who've been here and who really believe in RYTELO. So confidence is definitely there. It's a prerequisite, but that's not enough, Faisal. Positive thinking is not where we're going. We really are focused on the execution of key areas such as brand awareness. I mean, that's one of the prerequisites, in my opinion, at least, that we want to make sure that more and more hematologists, when asked, do you know RYTELO in lower-risk MDS. The answer is yes. We want to make sure that physicians know how to use it, be it in academic centers or be it in the community. That's why we're really increasing our search on the ISTs because having hands-on experience with a drug like RYTELO by our U.S. hematologists is an important aspect of what we do. At the same time, on the community level, we want to make sure that our community physicians who are dealing with all kinds of different hematology and oncology situations and lower-risk MDS might not be the largest pool of patients they have, but they are able to effectively select the right patients and put them on the right therapy, manage the first couple of cycles of the adverse events so that they can get to the efficacy that we've seen in IMerge and others. So from a confidence perspective, Faisal, we definitely have the confidence. But beyond the confidence, we do believe we have the right identification of the diagnosis and some of the key programs that are now in place, and we look forward to continuing to update the market on that. At the same time, we are saying that these things do take time. I mean, it just is. And there is nothing wrong with that. It does take time. So we want to be also very open in terms of these are not light switch moments. We have the cash, we have the people, we have the plans, and we look forward to updating you as we start expanding our demand. Faisal Khurshid: And then, do you have a timeline that you're willing to kind of guide the Street? I don't know when we should expect growth. Harout Semerjian: No, we're saying at this point, this is a 2026 growth story, Faisal. And we are not giving any guidance at this point on our top line, but we look forward to that being something that we plan to tackle in the near future. So we're assessing at this point. But we think now we've put our heads down, get to work. And in 2026, this is a growth story over there. But we're not giving any specific guidelines in terms of is it's going to start growing on March 31 or April 15. That's not what we're saying. But we are very confident about the trajectory. And as you're seeing, I mean, this has been a very important quarter to really level set many of the things that we need to do to ensure that we're doing the right things and then over time, growing the demand appropriately. Operator: This concludes the question-and-answer session and will conclude today's conference call. We thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Cadre Holdings Third Quarter 2025 Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir. Matthew Berkowitz: Thank you, and welcome to today's conference call to discuss Cadre's third quarter results. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Cadre and the industries and markets in which we operate. More information on potential factors that could affect Cadre's financial results is included from time to time in Cadre's public reports filed with the Securities and Exchange Commission. Please also note that, we have posted presentation materials on our website at www.cadre-holdings.com, which supplement our comments this morning and include a reconciliation of certain non-GAAP financial measures. I'd like to remind everyone that, this call will be available for replay through November 19, 2025. A webcast replay will also be available via the link provided in yesterday's press release as well as on Cadre's website. At this time, I would like to turn the call over to Cadre's Chairman and CEO, Warren Kanders. Warren Kanders: Good morning, and thank you for joining Cadre's third quarter earnings call. I am joined today by our President, Brad Williams; and Chief Financial Officer, Blaine Browers. This continues to be an exciting time for Cadre, marked by outstanding execution, disciplined growth and meaningful progress against our strategic objectives. The Cadre operating model is driving improvement every day, which is clearly reflected in another quarter of strong results. In addition to delivering financial performance above expectations in Q3, which Brad and Blaine will outline, we continue to capitalize on Cadre's robust M&A funnel. With the agreement announced last week to acquire TYR Tactical, a leading manufacturer of mission-critical protective equipment, we again delivered on our commitment to expand our portfolio and enhance Cadre's market leadership across categories. TYR Tactical brings world-class engineering capabilities and global reach, which importantly includes relationships with key military customers in Northern Europe that we believe will help Cadre unlock new growth opportunities in high-value end markets. Under the leadership of Jason and Jane Beck, TYR has seen impressive growth since its founding in 2010 and shares with Cadre a long-standing commitment to innovation, quality and a life-saving mission. We are excited to partner with Jason and Jane and welcome them both as significant shareholders. For Cadre, this agreement marks our sixth and largest acquisition since going public. Along with our recent deals in the nuclear and robotics markets, it underscores our relentless focus on disciplined M&A that strengthens our diversified platform of durable safety businesses. In total, over the past 24 months, we have deployed more than $400 million consistent with this strategy. Looking ahead, we continue to see robust acquisition pipelines in both the public safety and nuclear markets. We will remain patient and disciplined in our approach to identify high-quality, high-margin businesses that align with our operating model and can deliver sustainable growth and strong cash flow generation over time. Before I turn it over to Brad, I want to thank our employees for their hard work and dedication in upholding our mission. Together, we save lives. The results this quarter once again demonstrate the strength of our culture, the resilience of our businesses and our team's ability to deliver consistent execution. We are confident that the foundations we have built will continue to drive long-term value creation for our shareholders. With that, thank you for being with us today, and I will turn the call over to Brad. Brad, over to you. Brad Williams: Thank you, Warren. On today's call, Blaine and I will provide a Q3 update and business overview, including recent trends, financial performance and full year outlook, followed by a Q&A session. We'll begin on Slide 5. During the third quarter, we again delivered on our strategic objectives, advancing Cadre's track record of consistent and stable growth despite a dynamic operating environment. We continued to successfully implement our pricing strategy, which reflects both the strength of our brands and the value our customers place on our mission-critical products. Third quarter mix was positive, driven by strong demand for EOD and favorable product mix in our nuclear categories. Importantly, our organic backlog increased by $20 million sequentially, reinforcing our confidence in the outlook for the remainder of the year. Based on our discussion last quarter, you'll recall that we saw a higher mix of large opportunities that have been delayed. This significant backlog growth is a very promising sign reflective of our progress booking some of these previously delayed opportunities. I will speak more about this progress shortly. In terms of capital allocation, Cadre's strong free cash flow generation enables the company to make dividend payments while also supporting core organic growth and M&A objectives. Our November dividend will mark our 16th consecutive since our IPO. As you heard from Warren, we also delivered on our commitment to enhancing Cadre's market leadership through disciplined M&A. Our agreement to acquire TYR Tactical represents a significant step forward in advancing Cadre's strategic focus on mission-critical products with high margins, strong cash flows and compelling growth tailwinds. It further opens the door to international markets and provides access to new customers based on long-standing relationships that drive demand. Blaine will speak more about the deal shortly, specifically about TYR's differentiated customer base and highly unique manufacturing capabilities. Overall, TYR is exactly the kind of high-quality, strategically aligned business we seek to add to our platform, one that enhances our leadership, accelerates growth and delivers long-term value for our shareholders. Turning to Slide 6. I'd like to highlight another major win for the company. In September, Cadre's EOD business, Med-Eng, was awarded the BEMO contract, known as the Blast Exposure Monitoring System by the U.S. Department of Defense. This is a $50 million IDIQ contract signifying a major achievement for our team and a significant milestone in our work with the U.S. military. Those who have followed us since our IPO know this award has been a part of our long-term road map and something that we have been working towards since 2019. While the formal press release has been delayed due to the government shutdown, the award information has been made public through sam.gov and the DoD website. Links are available in the materials we shared yesterday. The BEMO award builds on Med-Engs legacy as the global standard in bomb suits with market share of approximately 90%. Its reputation as the most trusted brand in the industry is based on decades of experience evaluating blast effects on personnel and protective equipment. For the last 20 years, the team has been designing, manufacturing, testing and commercializing several generations of wearable blast sensors culminating in this latest technology. We are incredibly proud to win this award, which is a testament to Cadre's long-term commitment to innovation and also positions Med-Eng at the forefront of efforts to better understand and mitigate blast exposure in the field moving forward. Next, on Slide 7, we lay out industry tailwinds supporting Cadre's long-term growth opportunity across both our core LE and nuclear safety sectors. On the law enforcement side, we see rising safety threats globally, coupled with resilient and growing spend on protection equipment. In both the U.S. and in Europe, support for public safety is bipartisan. Turning to nuclear. Long-term demand continues to be driven by policy and commercial tailwinds across our 3 market segments: environmental management, national security and nuclear energy. Support across these markets continues to build both in the public and private sectors with the government clearing the path and private investment flowing in. Landmark announcements dominate the headlines from federal partnerships to state-level investments, all reinforcing the recognition that nuclear must play a central role in achieving energy security and reliability in this year’s ahead. Combined with nuclear material waste processing and expanding national defense initiatives, Cadre Nuclear Group is strategically positioned at the forefront of a rapidly evolving industry with large-scale and collective capabilities to support the full nuclear life cycle. On Slide 8, I'll take a moment to zoom in on a couple of market trends and their impacts on our core law enforcement business. Trends in North America law enforcement remain positive, highlighted by significant federal investment in government agencies, including substantial focus on recruitment. Looking at another market trend highlighted on the slide, new products and innovation drive everything we do at Cadre. We continue to hear enthusiastic feedback about new products launched over the past 24 months, including our tactical carrier system, HyperX and the Safariland SX HP package, the thinnest, lightest and most protective hybrid ballistic armor on the market. Before I turn it over to Blaine, I would like to briefly address the macro environment. Last quarter, we spoke about how our full year outlook was slightly affected by our higher mix of large opportunities that have been delayed. There was a level of uncertainty related to timing and whether these opportunities would be booked this year or early next year. We are pleased to report that we have made considerable progress in the third quarter booking some of these reflected in the significant backlog growth that I referred to earlier. One of those opportunities is the blast sensor 5-year IDIQ that the U.S. Department of Defense has disclosed on its website as well as sam.gov. We received our first BEMO purchase order for approximately $10 million with shipments being planned throughout 2026. Additionally, we received large duty gear, armor, crowd control and EOD purchase orders in Q3. Our expectation has not changed that other larger opportunities we'll book in the coming quarters as we continue to track well on these opportunities. I'll now turn the call over to our CFO, Blaine Browers, to speak to more about M&A, Cadre's Q3 financial results and 2025 outlook. Blaine Browers: Thanks, Brad. I'll kick off my comments with a review of our latest acquisition as well as our M&A strategy more broadly. As Warren and Brad discussed, we've agreed to acquire TYR Tactical, a specialty provider of high-performance advanced tactical gear, including soft armor, hard armor and tactical nylon products to U.S. and allied militaries and law enforcement agencies around the world. It is a business that fits squarely within the strategic criteria that define our disciplined approach to M&A outlined on the right side of the slide. Key attributes include a leading market position, strong brand recognition, differentiated manufacturing technology as well as exceptional product quality and commitment to innovation. A key point to underscore is that TYR Tactical -- is that the TYR Tactical customer base has minimal overlap with Cadre's existing Safariland armor business. On Slide 11, we show TYR and Cadre's global armor revenue by customer channel, which illustrates how complementary the 2 brands will be in the marketplace. TYR serves a worldwide customer base, including top-tier special ops units, government agencies and militaries. You can see that 66% of its revenue is derived from international customers, while U.S. federal and U.S. military totaled 27%, both areas where Safariland does not have a major foothold today. In addition, TYR brings significant hard armor capabilities via their large presses and autoclaves that will be a significant resource addition to the Cadre armor business. We are excited about how the strengths of both companies will complement each other and enable new growth opportunities. In particular, we believe the Cadre operating model will unlock significant value for both brands. Taking a step back in terms of M&A strategy. This latest transaction demonstrates that we are not done building upon our leadership positions in our core law enforcement military categories despite our long-term vision to launch multiple new verticals. We continue to see attractive opportunities to broaden our product range, enter new markets and increase customer wallet share. Overall, the M&A market remains strong, and we're excited about the prospect of add-on opportunities across both nuclear and core law enforcement targets moving forward. Turning now to a summary of Cadre's financial performance. Slide 13 details our third quarter results. Q3 net sales of $155.9 million increased 42% year-over-year. Of note, third quarter gross margin improved 610 basis points year-over-year and 180 basis points sequentially. Year-over-year, it's driven by favorable pricing, the absence of inventory step-up amortization in the prior year and the cyber incident in 2024. Illustrated on Slide 14 is net sales and adjusted EBITDA growth year-over-year, including our 2025 guidance, which I'll discuss more in a moment. Our full year outlook implies a year-over-year revenue and adjusted EBITDA growth of 10.5% and 8.7%, respectively, at the midpoint. On Slide 15, we present our capital structure as of June 30, 2025, prior to the agreement to acquire TYR Tactical. Our pro forma net leverage will be around 2.7x when the deal closes. We believe Cadre's strong free cash flow generation, coupled with the strength of our balance sheet gives us ample financial flexibility to continue to pursue organic and inorganic opportunities ahead. We are reaffirming our 2025 guidance on Slide 16. Net sales are expected to be between $624 million and $630 million. Our adjusted EBITDA guidance is between $112 million and $116 million, implying adjusted EBITDA margins of 18.2%. I'll now turn it back to Brad for concluding comments. Brad Williams: Thank you, Blaine. We're excited -- we're executing well against our strategic priorities and our strong Q3 results underscore the effectiveness of the Cadre operating model and the dedication of our talented teams around the world. Complementing our core organic growth initiatives, we are particularly happy about the recent progress we have made on our M&A program with the agreement to acquire TYR Tactical. We can't wait to get started and begin the integration process following the expected close in the first half of 2026. Supported by Cadre's entrenched positions and favorable industry trends across our law enforcement, first responder, military and nuclear end markets, we're excited to continue to build our platform and further enhance our market leadership moving forward. With that, operator, please open up the lines for Q&A. Operator: [Operator Instructions] Your first question is from the line of Larry Solow with CJS Securities. Lawrence Solow: Congrats on a good quarter. Really nice margin improvement sequentially. I think, I was just looking at because I guess year-over-year is a little tough to look at because of the cybersecurity comp. But any thoughts, any color just on the nice sequential improvement? It looks like gross margin was up almost 20 bps, which dropped to EBITDA. I imagine the operating model can't work that fast. So, I'm just curious, any thoughts on that? And just color on how Carr's is progressing under that operating model, which you obviously only have for a few months, but any thoughts on that would be great. Blaine Browers: Yes. I appreciate the question, Larry. And when we look at the margin improvement, I'd say the really positive piece we see is it's pretty broad-based. This isn't margin driven by one particular business. So sequentially, we saw improvement really in all our major categories. And kind of within that, you're going to have some price sequentially. A lot of that's driven by productivity and then some positive mix in the quarter as well. But again, kind of going back, it is very broad-based. This isn't a case where one particular business was driving that improvement. But it's what we really like to see, which is everyone really executing well and seeing those margins drop through. Brad Williams: And then Larry, it's Brad. On the Carr's side of things, you asked about the operating model and kind of where we're at on it. Really good progress. We've actually had the gentleman that leads our Cadre operating model has been over to Germany and also the U.K. meeting with Bendalls and also Walischmiller businesses, and taking a look at the progress they've made with the initial tools in the operating model. And as of the week before last, the team reported just exceptional progress. So culturally, they're excited about the tools. They're adopting the tools. It takes a while to learn these tools and master them as we go forward, but we're really excited about what's going on and the progress that's happening. Lawrence Solow: Great. And just switching gears, if I can, just on the Med-Eng, and I know you discussed this a little bit more at your Analyst Day, $50 million IDIQ. I imagine or I suppose this could expand significantly over the longer term. It's a much larger market opportunity. And I think this was an exclusive award for you, too. So, any just color on that longer-term opportunity there? Brad Williams: Yes, absolutely. So, if you remember back in IPO days, we had this listed as one of our kind of longer-term opportunities. And like a lot of bigger R&D projects like this with U.S. Department of Defense, things get pushed around and delayed. So that's where we kind of ended up at this point. But the good news is, at this point, it looks like that award, the $50 million IDIQ and then the initial $10 million purchase order, which is great, by the way, for those that know IDIQs, sometimes those initial purchase orders aren't that large. So that just shows you the commitment that's behind the program at this point from the DoD. We're going to take one of these at a time. So, this obviously gives us an upper hand on any competitors out there in the marketplace that have been looking at blast sensors or working on blast sensor technology, because now with this adoption for us, it gives us that opportunity to take this technology to other countries. I won't disclose which countries have already reached out but we've had other countries reach out asking for sensors, having meetings with our technical teams, et cetera. So, we'll see where it goes, but we feel like it's a good future forward with the blast sensor program. Operator: Your next question is from the line of Jeff Van Sinderen with B. Riley Securities. Jeff Van Sinderen: Just wanted to touch on or circle back to, I guess, gross margins, SG&A leverage. As we're thinking about Q4, anything in the expected mix of business that's likely to impact gross margin, also realizing it's early and you haven't closed the TYR acquisition yet. But assuming the closure of TYR and then second half contribution from TYR next year, among other business inputs, would you expect gross margin to increase, yes, next year, just thinking about all that together? Blaine Browers: Yes, I appreciate the question. For gross margins in Q4, we expect them really to land somewhere between Q2 and Q3 rates, maybe a little bit on the higher end range based on what we've seen in Q3 and the backlog makeup for the rest of the year. And then, I think as you've seen before, if you look back to Q4 last year, the operating leverage can be pretty powerful, with bigger volume quarters, and that's what we kind of look out as the rest of the year. So very positive outlook for the remainder of this year. When we layer in TYR, keep in mind, we'll have inventory step-up amortization as well as some intangibles amortization, which will impact the GAAP gross margin that we'll report. So there's probably a little bit of pressure there into next year but that's really only at that gross margin line. As we move down to adjusted EBITDA, as we've said, it will be accretive on the bottom line. So we get very excited about that and really bringing those 2 businesses together as we talked about. We think there's a tremendous value on both sides of the business. I'm looking forward to having the TYR business join the Cadre family and really the opportunity for both sides to learn from each other. Jeff Van Sinderen: Okay. And I know you touched on this a little bit at the Analyst Day, but -- maybe you can kind of speak to the manufacturing capabilities of TYR. And on that side of the business, how close will you be to vertical integration and manufacturing once you have TYR in-house? Brad Williams: Yes. Great question, Jeff. So just to kind of go over the capabilities that TYR has and kind of contrast that to what our, I'll call it, our Safariland brand and a couple of other armor brands have. So first of all, it's the pressing capability, that's the biggest one from an equipment standpoint. So as raw materials become more advanced in the armor market from suppliers like Honeywell and DSM and others, as those become more advanced, they require a higher level of pressing capacity. And the reason you need that is to press materials so that you can elongate molecules and the raw materials so that you continue to have strength in materials within that process. So just to give you an idea, Safariland capabilities from a pressing tonnage standpoint is anywhere from 250 tons to -- we maxed out around 500 tons of compressing capacity. TYR has 2 large presses at 7,000 tons, okay? So at this moment, what we've been having to do with our hard armor business, I am talking plates and shields with some of the newer materials is we have to go externally with a few other companies to press some of these materials so that we can get to the level of pressure that's needed. So, we're very, very excited about these capabilities that the TYR folks have in the Peoria facility there. And as we go forward, that pressing capability will be used by both companies. And in terms of vertical integration, Jeff, we will be -- our vertical integration will not be any more than what it is today, right, because we press today, TYR presses today. In the armor business, if we were going to go additional vertical integration in the supply chain, that would be into the raw material side of things, ballistic materials, for example, nylon materials and that side of the supply chain, which we're definitely not in that space. Jeff Van Sinderen: Okay, excellent. I appreciate that. It seems like overall, it gives you a pretty nice competitive advantage in manufacturing capabilities. Operator: Your next question is from the line of Eegan McDermott with Jefferies. Eegan McDermott: Organic growth in the quarter looks to have been driven by armor and duty gear. Do you have a sense of how much of that is the step-up in demand for these end markets versus easier cyber comps? Blaine Browers: Yes. You were a little tough to hear, but I think you were asking about organic growth for armor and duty gear, and on a year-on-year just because of the tough cyber comp. Is that correct? Eegan McDermott: That is correct. Sorry, if I'm not coming in clear... Blaine Browers: No, no, that's all right. When we look at -- and it's a difficult number. Let's maybe start with that, trying to adjust out the cyber and spread it out. When we look year-on-year or sequentially, we did see growth in the armor business. And when you kind of spread out prior year for duty gear, our run rate was up from last year. So, we look at that and say we're in a pretty good position. And then based on the bookings and large orders that have come in and outlook for the year, we're pretty confident we'll have organic growth in those businesses. So very excited about kind of where they position and Q3 makes it very difficult to kind of unpeel them. But I appreciate the question. Brad Williams: Yes. I would just add to that by saying just to underscore, last quarter, we talked about the higher number of large opportunities that we had in our funnel that the teams were working on. And we got asked quite a few questions about our confidence level in those. And I think we've shown that, right, with our increase in our backlog. The backlog increase of $20 million, $10 million of that BEMO and then another $10 million are these larger orders that we’re tracking and doing really well on. So, the team is lining up those orders, knocking them off one by one and grabbing those wins. And as we get into the rest of the year, we've got additional opportunities that fall in that large order bucket that we spoke of last quarter, and we're still in that lead position and really excited about those when they do come through. And some of those are very noteworthy type opportunities that we can't wait to talk about externally if we win those. Eegan McDermott: That sounds great and that's helpful. If I could maybe ask a follow-up. The offset, I guess, in the quarter was order timing in the nuclear business. And with, I think, $6.5 million taken out of the nuclear backlog last quarter. Would you call out any risk in that end market in terms of demand or funding, whether it'd be U.S. or international? Blaine Browers: No, great question. I mean this is -- you're going to be part of that Alpha Safety, if you think about that nuclear business with large opportunities, because it is more concentrated on fewer large opportunities, just naturally, we're going to see some timing around that backlog build and then backlog bleed as they execute on the projects. But when we look ahead and look at the funnel of opportunities for both the Zircaloy businesses as well as the Carr's businesses, formerly Carr's businesses and Alpha, we're still very bullish on outlook for next year and beyond. Operator: Your next question is from the line of Matt Koranda with ROTH Capital. Matt Koranda: Maybe just attacking sort of the growth question, because I know the comparison is a little wonky from last year, attacking it from a different angle. What was the nuclear contribution, I guess, to product revenue in the third quarter between Carr's and Alpha? Blaine Browers: The Carr's businesses would be kind of like what you'd expect based on what we disclosed for revenue, if you kind of split it out, so that gets some just a little bit under $20 million and Alpha was slightly less in the quarter than you'd expect on a run rate basis. Matt Koranda: Okay. That helps. And then maybe just switching gears and thinking about the guidance that's implied for the fourth quarter. Just curious how the government shutdown might impact things if the shutdown drags on deeper into the fourth quarter. Is there any impact that's contemplated in the guidance? Or how should we just be thinking about sort of delivery schedules and the disruption that could happen? Brad Williams: Matt, it's Brad. I appreciate the question. We have considered that in the guidance overall. There's a couple of our business units and a couple of our product lines that we're watching closely that are connected more to government being open and whether that's sign-offs on various shipments that need to go out or just the fact that with the government shutdown, if folks aren't doing training and doing work to then pull through some of the shorter cycle type businesses that we have. So those are contemplated in the Q4 side of things. We're going to keep watching them. We've got our teams. We've got our hit list of which ones those are. The teams go through those on a weekly basis when they go through their daily management sessions daily and weekly, and they're on top of those to continue to push those as we go forward. So, at this point, we're optimistic that we've got it covered in there. Matt Koranda: Okay. All right. Great. And then maybe just if I could sneak one more in. Great to see the PO on the blast sensor for $10 million. I know we're always asking for more detail here, but any thoughts on sort of the cadence of how that could be delivered? Is it going to be like a lumpier within 1 or 2 quarters next year or should we just be kind of thinking about a ratable delivery on that PO throughout next year? Blaine Browers: Matt, I think we expect it to be a bit lumpier. There's kind of 2 -- I wouldn't say challenges, but 2 things you got to think about. I mean we have the first PO in the IDIQ. We'll work to deliver those as soon as possible to the end user, which likely kind of weights it towards the kind of front half to middle of the year. What we don't know yet, right, and certainly, the government shutdown is helping is kind of visibility on any follow-on orders, and that's one we'll just have to wait and see. Operator: Your next question is from the line of Jordan Lyonnais with Bank of America. Jordan Lyonnais: I just want to ask on your guide, is there any downside risk just on if the government remains shut down through the rest of either the quarter or just late into November? And then two, how are you guys thinking about opportunities for next year with the DHS funding from the reconciliation bill starting to go out for the World Cup? Brad Williams: I'll take the first part of that. So, that's a similar question to what Matt just asked in terms of the -- what's going on from a government shutdown perspective and what's affecting us. So again, we feel like we've got any of those potential slippages covered in the Q4 guidance side of things or the full year guidance side of things. But when you look at some of those opportunities within some of the business units they do exist potential delays, but we feel like we're covered at this point. Blaine Browers: And then on the -- your question about the DHS and World Cup. We would likely expect some uptick in spending around security. I think it's difficult for us at this point to really point to particular products, or opportunities just because it hasn't kind of gone through the funnel. But the great news is the teams are out there, staying close to our end users, our customers, our distributors and just making sure we're in a position to fulfill those needs if and when they ask. But at this point, really difficult for us to put an estimate out. Brad Williams: I'd just add to that. When you think about security when it comes to those kind of larger scale events like that, there's any federal folks involved, state and local, when you go head to toe when you look at those folks, right, with the TYR acquisition, Safariland products, whether it's holsters, body armor, there's helmets involved, shields involved, crowd control products, you name it, that type of stuff. That's why we continue to build out in our public safety side of things. We've been in it for a long time, very comfortable with public safety, who's out there, who's in the market, opportunities to go after. This is squarely within what we do. So, I'm sure when that contends to move forward as it firms up with the breadth of products we have, we're going to be right in the mix of that. Operator: Your next question is from Mark Smith with Lake Street. Mark Smith: I wanted to ask about input costs and inflation. Is there anything that you see kind of going up significantly? And similar with that, has anything changed in your outlook or ability to take price at and above inflation? Blaine Browers: No. Thanks. Great question. Our inputs have tracked pretty consistently with what we've seen recently. Obviously, there's some variability coming into the year with tariffs and the likely impact. But we haven't seen any price come through from destocking from any of our suppliers. So, it's one we're staying close to but that has not been anything unexpected at this point. And we don't have any indications that next year is going to be significantly different. So, we're comfortable there, staying close to it. The other pieces we kind of look to -- kind of the 2 pieces to counteract any of that pressure if it was to occur, right? On the price side, as you asked, nothing's changed in the dynamic. It is one, a tool we need to be and we'll continue to be thoughtful in the application of it, right? No difference in how we always approach it that we want to be thoughtful and make sure we're getting the value that the products deserve based on their performance in the field. And the second piece is really about model, right, and making sure we're leveraging those tools to offset whether it's material or labor inflation or drive increased throughput or better margins. So, as we kind of look at it, we feel pretty good about that material inflation environment as we see it today. We also feel really good about the tools we can leverage to counteract that and really maintain the business and the margins. Mark Smith: Okay. And then I also want to ask about new product mix, and I know this is tough with nuclear and acquired business and maybe not as much on a year-over-year comp. But just as we think about the legacy business, how have new products mixed here recently versus kind of historical averages? And then I'm curious, similar to that with TYR, if there's a history or legacy of innovation and new product mix that drives that business. Brad Williams: Yes. It's a tough number for us to track, but I can tell you when we look at a couple of the business specifically, compared to what we've historically done with our portfolio significantly refreshed in the last few years, we're seeing gains in those markets with those new products. So that's very exciting for us. And on the TYR, TYR was really built on innovation. And Jason and Jane and the rest of the team have done a fantastic job of innovating both around the tactical that carrier, the nylon as well as the body armor. So, we expect as we bring these 2 teams together that we'll really get the best of both worlds and continue that innovation journey for both of us. So very excited about the future. Operator: At this time, there are no further questions. I will now hand today's call over to Brad Williams for closing remarks. Brad Williams: Thank you, operator. I'd like to thank everyone again for joining us on today's call and for your continued interest in Cadre. Have a great day. Operator: This concludes the conference call. Thank you, and have a great day.
Operator: Good morning, everyone, and welcome to Orion Energy Systems Fiscal 2026 Second Quarter Conference Call. [Operator Instructions] In this call, Sally Washlow, Orion's CEO; and Per Brodin, its CFO, will review the company's second quarter results and its fiscal 2026 outlook. Then we will open the call to investor questions. Today's conference is being recorded. A replay will be posted in the Investors section of the company's website, orionlighting.com. I will now turn the call over to Per Brodin, Orion's CFO. John Brodin: Thank you, Rica. First, as a reminder, prepared remarks and answers to questions include statements that are forward-looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally include words such as anticipate, believe, expect, project or similar words. Also, any statements describing future objectives or goals, company plans and outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other matters, those that Orion has described in its press release issued this morning and in its SEC filings. Except as described therein, Orion disclaims any obligation to update or revise forward-looking statements made as of today. In addition, reconciliations of certain non-GAAP financial metrics to their nearest GAAP measures are also provided in today's press release. Now I will turn the call over to Orion's CEO, Sally Washlow. Sally Washlow: Thank you, Per. Good morning, and thank you for being with us today. I am extremely pleased to report our Q2 results, highlighting a year-over-year increase of more than 1/3 in gross profit. This is also our fourth straight quarter of positive adjusted EBITDA. We recorded incremental growth in total revenue and significantly more than that in maintenance services, even as we unburdened ourselves of an unprofitable contract. And we saw a welcome bounce back in EV charging as the sector-wide uncertainty of the earlier part of the year began to dissipate. When we last convened, I said that we are on track to achieve 3 milestones in fiscal 2026. Milestone 1, by the end of the second quarter, a positive resolution that enables a publicly traded Orion to maximize its opportunity for growth in shareholder value. We achieved that by maintaining our NASDAQ listing. Milestone 2, by the end of the third quarter, the enactment of a growth, profitability and cost containment initiative that enables Orion to become a recognized long-term market leader in its core businesses. This is already contributing in the second quarter as we reported 34% higher gross profit and the fourth straight quarter of positive adjusted EBITDA. Milestone 3, by the end of the fourth quarter, $84 million in revenue at or near a positive adjusted EBITDA for the full fiscal year. We are on plan and our expectation for the fiscal year is unchanged. We have only just begun, and we are demonstrating building towards sustainable and profitable growth beginning in the second half of this year. Even in these early innings, it is gratifying to see that our work is being increasingly recognized and not just by our shareholders. Our partners and customers have long recognized Orion as their go-to partner for installation, ongoing maintenance and managed services for LED lighting and EV charging. We are also seeing an increase in activity related to quoting and winning work within electrical infrastructure. As I noted in our last call, industrial, commercial and public sector facilities operated by some of the largest enterprises in the United States rely on Orion. With products made in America, along with the global supply chain and now in our fourth decade, Orion serves as a go-to provider to Fortune 100 corporations and other global leaders in sectors ranging from manufacturing to government to retail. A recent illustration is last month's announcement of a major retailer's 3-year renewal with us, representing reoccurring revenue of between $42 million to $45 million. Our largest long-time customers stay with us year after year because we deliver unsurpassed quality and unsurpassed ROI. Whether deployed independently or in a combination with our ESCO and distribution partners, Orion solutions deliver unrivaled ROI to industrial facilities requiring the most demanding standards of efficiency, reliability and compliance. That recognition serves us particularly well at this pivotal moment. Just in Q2 alone, we saw an upswing in the lighting market with the recent Dodge Momentum Index report that commercial, industrial and public sector construction planning is 33% ahead of year ago levels. We see an improved outlook in the EV charging market with the confidence boosting federal declaration reassuring the availability of $5 billion in government EV charging funds. We are beginning to see increased opportunities for electrical infrastructure installation and maintenance with megatrends from reshoring to refurbishing to replacing manufacturing and other industrial plants in the United States. All of these tailwinds mean that Orion has a multi-sector reoccurring revenue win at our back, whether it is in lighting, EV charging or maintenance services. As I promised on our first call, we will continue to keep you apprised with increasing frequency and with increasing granularity throughout this fiscal year and beyond. Now drilling down further on the second quarter. Once again, Q2 featured solid stability and progress in our 3 business lines as well as positive guideposts for the rest of the fiscal year. The quarter resulted in enhanced margins, reduced costs and meaningful progress on the bottom line. We remain in a solid position for the full fiscal year. Orion's Q2 '26 revenue was $19.9 million versus $19.4 million in Q2 '25. Q2 '26 gross profit grew 800 basis points to 31% versus 23.1% in Q2 '25, and we achieved our fourth consecutive quarter of positive adjusted EBITDA. Per will provide details in a minute. Let's look at a quick snapshot of some of the highlights from Q2, which featured solid accomplishments in our 3 business lines. In Lighting, we had some significant new business wins exemplified by $11 million in government lighting and up to $7 million in LED lighting for facilities belonging to some of the biggest names in the automotive industry. In EV charging, we saw a welcome bounce back from the uncertainty that the entire EV sector experienced in the first few months of the year. A particular Q2 highlight was the $8.5 million in EV charging work in Massachusetts. We also saw the continence boosting federal clarification reassuring the availability of $5 billion in government EV charging funds. In maintenance, these and other engagements featured ongoing managed services that ramp reoccurring revenue and ensure a close, continuous and expanding relationship with our enterprise customers. It's also important to note a couple of particular points about Q2. One is that our maintenance services achieved significant growth even while allowing the lapse of an unprofitable contract. Another is that EV charging showed a welcome bounce back from the uncertainty that the entire EV sector experienced in the first few months of the year. Our Q2 gross profit now at 31%, a year-over-year jump of more than 1/3 was also a standout. This was largely achieved by continuing reductions in LED lighting fixture cost via our ongoing improvements in reengineering, plant efficiency and improved sourcing as well as via both margin and volume increases in our maintenance services business. We continue to benefit from the success of our cost control initiatives, and we expect to see ongoing improvement throughout the rest of the fiscal year. On the new business front, we continue to build our expanding pipeline of contracted LED lighting projects even as we penetrate and radiate within existing maintenance services customers. We are laser-focused on increasing sales in our LED lighting distribution business. On the new product front, we continue to gain traction with our value-based LED lighting fixtures. The marquee name here is Triton Pro designed and engineered in response to popular demand from both customers and channel partners. Triton Pro is a competitively priced LED lighting line that is getting traction with a number of customers. We also continue to partner with our customers to bring together seemingly discrete products and services into the connective tissue domain of electrical infrastructure, a name we've been dropping lately, you may have noticed. Electrical infrastructure integrates offerings like LED lighting, high-voltage EV charging stations and a high-impact array of maintenance and managed services. We'll have more to say about this initiative as well. For now, suffice to say that it is in response to requests from our customers as well as those megatrends I mentioned earlier: data centers, AI, manufacturing, retail, electrification, industrial and complete commercial fleet management and others. These are the headlines of the day. You see these headlines in the Wall Street Journal, in Barron's, in your hometown paper. You may have noticed that you see them in Orion press releases, too. Orion sits squarely in the confluence of these megatrends, and it has solutions to not just serve them, but to accelerate them. With that, let me turn to Orion's CFO, Per Brodin, to review our financial performance and outlook. John Brodin: Thank you, Sally. Today, we reported fiscal Q2 '26 revenue of $19.9 million as compared to $19.4 million in Q2 '25, with 2 of Orion's 3 segments growing year-over-year. LED lighting segment revenue decreased 2% to $10.7 million compared to $10.8 million in Q2 '25, reflecting increased project activity and distribution channel sales, offset by lower ESCO channel sales. Orion's expanded LED lighting project pipeline and efforts to drive growth in the distribution channel are expected to contribute to higher revenues in the back half of fiscal '26 versus fiscal '25. Lighting achieved a Q2 '26 gross margin of 27.5% versus 25.4% in Q2 '25, with pricing increases, cost reductions and sourcing initiatives being amplified by a more favorable Q2 '26 project and revenue mix. Maintenance segment revenue increased 18% to $4.5 million in Q2 '26 from $3.8 million in Q2 '25, reflecting the benefit of new customer contracts and the expansion of some existing relationships. We achieved a maintenance segment gross margin of 23.7% in Q2 '26 versus 15.3% in Q2 '25, as there was a significant inventory charge recorded in Q2 '25 as part of the segment restructuring. EV charging solutions revenue was $4.8 million in Q2 '26 compared to $4.7 million in Q2 '25, reflecting the expected completion of a significant project within the quarter. EV achieved a strong gross margin of 45.8% in Q2 '26 versus 23.7% in Q2 '25 due to a strong improvement in sales mix. Our overall gross margin increased 790 basis points to 31% versus 23.1% in Q2 '25, reflecting pricing and cost improvements in all segments, particularly LED lighting and maintenance. We expect overall gross margin to remain strong in fiscal '26, though it will likely vary on a quarter-by-quarter basis due to revenue mix and volume. Total operating expenses declined to $6.4 million in Q2 '26 from $7.7 million in Q2 '25, reflecting ongoing overhead and personnel expense reductions and earnout expense of $0.6 million in Q2 '25 that did not recur in 2026. We expect operating expense to approximate Q2 levels in the remaining 2 quarters this year. Reflecting stronger gross margin and lower operating expenses, Orion's Q2 '26 net loss improved to $0.6 million or $0.17 per share from a net loss of $3.6 million or $1.10 per share in Q2 '25. Adjusted EBITDA improved to a positive $0.5 million in Q2 '26 versus a negative $1.4 million in Q2 '25, reflecting cost control and financial discipline. As Sally mentioned, this was Orion's fourth consecutive quarter of positive adjusted EBITDA that puts our trailing 12-month adjusted EBITDA at $0.9 million on sales of $80 million. Year-to-date cash provided by operating activities improved to $1.3 million in Q2 '26 from a use of cash of $2.5 million in the prior year period, primarily due to the improved bottom line performance. During the year, we have also had a net paydown of our revolving credit borrowings by $1.25 million. Net working capital was $8.1 million at Q2 '26 versus $8.7 million at year-end, primarily reflecting the use of cash to pay down on the revolver. Available financial liquidity was $13.5 million versus $13 million at year-end. During the quarter, we issued $1 million of common stock and made $875,000 of cash payments to partially satisfy the Voltrek earn-out obligation. Turning to our fiscal '26 outlook. We have reiterated the fiscal '26 revenue growth expectation of 5% to approximately $84 million that we initiated in June. We have also reiterated that our revenue growth outlook positions Orion to approach or achieve positive adjusted EBITDA for the full fiscal year, depending on revenue mix. This growth outlook anticipates modest growth in LED lighting and electrical maintenance revenues and flat to slightly lower EV charging revenues. And this concludes our prepared remarks. Operator, would you please commence the question-and-answer session? Operator: [Operator Instructions] Our first question comes from the line of Eric Stine of Craig-Hallum Capital Group. Eric Stine: So maybe just starting on the EV business. I mean, clearly, a positive development with clarity from the government. And I know that a lot of your business there has been through utility programs. But I guess I'm curious what you are seeing with some of your customers. And I think this maybe goes hand-in-hand with the energy infrastructure initiatives and a bundled offering. But I do know that part of the reason that you made this acquisition a while back is because your customers were requesting these capabilities. So just curious what you're seeing from your enterprise customers. Sally Washlow: Eric, yes, we're absolutely seeing some of that from our enterprise customers, bringing whether it's an LED lighting project that would have started out as that, but bringing then EV charging into their parking lots as well. So that is some of the things that we're seeing in that. Our business was -- had a lot of utility programs, but I think you've seen in recent announcements, further expansion of the work with Boston Public Schools, MassDOT, as well as the state continues to build out its infrastructure and then hiring additional salespeople. We hired gentlemen based in our Florida office to help further expand our geographic reach as well. And we have a couple of other areas targeted that we're investigating right now and more to come on that. Eric Stine: Okay. And then, I mean, I guess, segue to energy infrastructure, is this something where you feel like you can accelerate some of that traction if you are going to the market with more of a bundled offering? Or maybe that's -- I'm not sure if that's how you think about it or not, but a bundled offering where, again, a customer just has one point of contact for everything that they want to do. Sally Washlow: Yes. We're certainly looking at that, and a lot of it has been developed through customer requests. We're on site. They see the work that we do. An example of this would be it started as an LED lighting project, but maybe they need help bringing their facilities up to code. And then they turn to us to say, "Can you do that and manage that project for us as well?" So those are where the work in electrical infrastructure is expanding, and we're at the very beginning of this as well, but even energy storage so that they look to offload the peak time, so working to develop relationships to bring energy storage into their facilities as well. Eric Stine: Got it. Okay. Maybe last one. Just you had the maintenance agreement renewal. I think we can all kind of guess who that customer is. But just curious, maybe not to that size, given who that customer is, but what are you seeing on that front? Clearly, you are sounding more positive, although modest growth this year, certainly long term on the maintenance side. What are you seeing in terms of demand there from other enterprise customers? Sally Washlow: So we have some other customers as well. It's a little bit of a slower build as we work with them. But month-over-month, that revenue is growing with them as well and the trust that they have in us. So we think that, that will continue to expand. Operator: Our next question comes from the line of Sameer Joshi of H.C. Wainwright. Sameer Joshi: Just a little bit more on the EV outlook. I know you are expecting flat or slightly lower year-over-year growth there. But in terms of the strategy going forward, given that these funds are now -- the $5 billion are being made available, do you expect or are you planning to have some kind of a geographic expansion or maybe a roll-up with some other similar businesses that might increase the size of your EV offering? Sally Washlow: Sameer, we are certainly looking at a geographic expansion. And of note, hiring a sales gentleman to lead our Jacksonville office and then other areas of the country as well. The teams are working on mapping out where we best have personnel and then also where there's a lot of EV infrastructure work going on. So we certainly expect further geographic expansion. Sameer Joshi: Understood. Switching to lighting. I think one of the things I may have misheard, but just making sure the $42 million to $45 million recurring revenue potential, is that over the life of the contract? Or what do those numbers represent? Sally Washlow: Yes. It's a 3-year contract renewal. So that's over the life of the 3-year contract. Sameer Joshi: Okay. And then, of course, I should have started with congratulations on the cost control efforts and the results. But I also heard during the commentary from both of you, the word ongoing. Should we expect further improvements in gross margins to like mid-30s or near that level? And on the operating expense front, I have noticed in the last couple of quarters, your sales and marketing expense as a percent of revenues have reduced. Are there some synergies you are seeing there that we may have missed? John Brodin: Yes, Sameer, I think a couple of thoughts on those questions. I'll try to catch all of them. On the expense line, I think what I tried to convey is that the Q2, the most recent quarter that we completed from an OpEx standpoint is the level that I think we expect for the next 2 quarters. We are -- I think some of the other comments are aimed at saying that we will continue to look for savings opportunities that are out there. But at the same time, we'll also look for opportunities that we may need to invest a little bit of money as we did with the salesperson in EV because we think that will have a good payback for us as we expand sales in the EV segment. From a margin standpoint, I don't think in the near term, we have an expectation of getting into the mid-30s. I think being in the neighborhood of the high 20s to 30% is probably more realistic. As I mentioned, there will definitely be some fluctuation there depending on mix as well as sales volumes that cover fixed costs within our COGS structure. So hopefully, that clarifies those two. Sameer Joshi: Yes, understood. Just last one maybe and just a clarification. The $875,000 paid during the quarter, were they part of -- on a GAAP accounting basis from a previous quarter? Or are these $875,000 included in the OpEx that are for the September ending quarter? John Brodin: The $875,000 that was paid had been accrued as of March 31, as was the $1 million that was paid in equity. So we had the larger accrual at March 31, we made those two payments. And then there's still a remaining balance that as we've disclosed separately, is subject to arbitration. So we expect that to play out over the next quarter or so. Sameer Joshi: And has that been accrued or is that pending the settlement? John Brodin: We've accrued what we believe is the appropriate amount, and that was accrued as of March 31. Operator: [Operator Instructions] Our next question comes from the line of Bill Dezellem of Tieton Capital Management. William Dezellem: I have a group of questions. I'd like to start with the Lighting business. You brought in some talent to reignite ESCO distribution revenues. Would you please discuss whether there's been any tangible benefit yet? And I recognize it's very early to ask the question or whether that pipeline is still developing. John Brodin: Bill, it's Per. Yes, I think in my remarks, I mentioned that in the quarter, our distribution channel revenues increased, and that's where the, I'll say, the main talent addition that we discussed back in the June time frame was mentioned. I think that he has landed on solid ground and with a running start of some sort because of his connections within the industry. And we think that he will continue to build that. That was consistent with another comment I made in my commentary. So I think the ESCO channel, we've not made recent investments from a sales standpoint in that channel, but that is a channel that we will also press on to ensure that we can maximize the opportunities on all 3 of the lighting channels. William Dezellem: So in spite of his short tenure, there already has been a benefit. So if that's the case, presumably one doesn't hit their full stride and at maximum performance in just a few months. So presumably, that business builds and that's part of what your comments were alluding to relative to the remainder of the year? John Brodin: That's correct. And we have high expectations as we move forward into the next 2 years. William Dezellem: Great. And Per, did I hear you in response to my question, also say that you will be adding additional sales talent in the distribution arena? And if that is the case, are you essentially waiting for a little higher revenue so that you can pay for that individual who will then generate the next level and start layering on top of layers? John Brodin: No, I did not say that. I'd say that it's something that would certainly be considered as the current executive continues to perform and as we evaluate other opportunities to grow that channel. But no firm plans at this time. William Dezellem: Okay. That's helpful. And then I'd like to shift to maintenance real quick. The quarter you said had a headwind because you had unprofitable maintenance contract that you walked away from. How much of a revenue headwind was that in the quarter? Sally Washlow: So we -- I don't have the exact number right now at my fingertips, but it was from last quarter. So quarter-over-quarter as that -- or last year, I apologize. As those contracts lapse, then we're growing the business in other areas was the intent of that. John Brodin: Last year, we essentially were wrapping up that contract in Q2 of fiscal '25. So there was headwind of a tough comp, but it was not -- I'd just say round numbers, it would have been less than $0.5 million. William Dezellem: Okay. And then did you add any notable business beyond your largest customer in the maintenance arena this quarter specifically? Sally Washlow: We have continued to add some customers or growth within customers beyond the large customer. The large customer does take up a significant portion of it. So they're of note to us because they are growing every month, and we'll continue to watch their growth and further partner with them and gain more customers in that area. John Brodin: Maybe another way to think about it, Bill, is we've gained new customers over the past year, and the business we're doing with them has expanded as we've moved forward in that relationship. William Dezellem: Per, I'm going to build off of that. Do you see an opportunity with those customers to continue to build further as you execute? Or are you now reaching kind of a steady-state run rate with them and you'll be needing to add additional -- not that you don't want to already, but you'll need to add additional customers to build revenue further? John Brodin: I think it will be a little bit of both. The -- we don't believe we're at run rate with some of these newer customers. So we think that will continue to expand, and we think we will continue to attract new customers as we move forward. William Dezellem: Right. Okay. That is helpful. And then at a high level, do you see the maintenance business as a lead generator for product sales, whether it be lighting or EV? Sally Washlow: I mean we are seeing some of that with the maintenance products. Product sales within that segment are increasing. So certainly, we look to all customer touch points as potential lead generators into other areas. William Dezellem: I guess, Sally, where I was going with that is, does it give you a special insight that you may not otherwise have if you weren't inside the customers' 4 walls doing the work? Sally Washlow: Yes. So I guess to answer that part of it, absolutely, we see some of that with the expansion of some of the services that we're doing. Had we not been within the 4 walls of the customer and maybe doing work in other areas, and they're asking, "Can you project manage this part of bringing some of our systems up to code as well?" We wouldn't have gotten that business had we not been there working side-by-side with them. William Dezellem: That's helpful. And then I know I'm taking up a lot of time, but one additional question or clarification relative to the EV business. I heard I thought 2 different things in terms of your commentary. One is some level of caution for the remainder of the year for sales there, but that there's also more clarity on the EV rules and that bodes well for the future. So let me try to put a fine point on it here that the Q1 EV revenue was $2.7 million. Here in Q2, it was $4.8 million. Are you anticipating approximately holding at this $4.8 million for the next couple of quarters? Or do you continue to see some level of growth from the $4.8 million? Sally Washlow: Yes. I think we're cautious on our guidance for the year because we ultimately lost a couple of months there with all the uncertainty at the beginning of the year. But our expectation is to be flat to a little bit down in EV for the year. But I think your numbers are right in the realm of what we expect to do for the next couple of quarters to deliver on that and start to regain some momentum from what was basically lost or at a standstill in the first quarter. Operator: Our next question comes from the line of Steve Rudd of Blackwall. Steve Rudd: Very encouraging results. Can you talk about the cost containment? I mean, obviously, we're seeing top line trend of growth from a cost containment and cost leveraging point of view or infrastructure leveraging point of view, how much more room do we have to go? John Brodin: If I interpret your question properly. We think we have -- I'll step back. Earlier in the year, we think we rightsized the business so that we could be at or above breakeven in the $80 million to $83 million of revenue standpoint. And that's on an adjusted EBITDA basis. I think now that we have 4 consecutive quarters of positive adjusted EBITDA and $80 million of trailing 12 revenues, I think that's holding true. So -- and then if you look at our guidance, we obviously are expecting a little bit stronger performance in the second half compared to the first half to get to the $84 million. In terms of what we can deliver with the infrastructure that we have, we think that we can leverage this infrastructure quite a bit. There certainly are some variable costs such as commissions on sales. We always are happy to pay increases in commissions because that means our sales are increasing. So there'll be some things like that, that will come to us. But we think on an overall basis, we'll be able to leverage this infrastructure with a fair amount of revenue growth. Steve Rudd: So it's your assessment at this point that you have your baseline costs exactly where you'd like them to be and not much more to be done there? John Brodin: I'd say in general, yes. But to my -- one of my previous comments, you're always looking for opportunities for savings. And some of that you may need to try to find money to invest in growth opportunities, and that's the balance that we'll continue to work on as we move forward. Operator: This concludes our Q&A session. I'll now turn the conference back to Sally Washlow for concluding remarks. Sally Washlow: I want to thank everyone again for taking time to join us today. We look forward to updating investors on our third quarter call in early February. In the interim, we hope to have an opportunity to meet with many of you either in person or virtually. We will be presenting at a number of conferences, including the Craig-Hallum Alpha Select Conference on November 18. Details will be coming out tomorrow and the Singular "Best of the Undercovered" (sic) [ Uncovered ] conference on December 11. We will announce details via press releases. Please also reach out to our Investor Relations team with any questions or to set up a meeting. Their contact information is at the bottom of today's press release. Thank you again for your interest in Orion. I look forward to updating you on our progress next quarter. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Vonovia SE Interim Results for the 9 Months 2025 Analyst and Investor Call. I'm [ Moritz ], 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 Rene. Please go ahead. Rene Hoffmann: Thank you, [ Moritz ], and welcome, everybody, to our 9 months 2025 earnings call. Speakers today are once again, CEO, Rolf Buch; and CFO, Philip Grosse. They will be happy to lead through today's presentation and then answer your questions. With that, over to you, Rolf. Rolf Buch: Thank you, Rene, and welcome to everybody also from my side. Today, it's earning call #50, so 5-0 for me, but also for the company. And as you are well aware, it is my last one. I want to take this opportunity to remind everybody of what drives Vonovia and what makes this company different. That is why before Philip dives into the 9 months results, I will share a few slides that are more fundamental and general, but very instrumental for understanding how Vonovia approaches the business. But let me start with a brief summary on Page 3 to get us started. 9 months into the year, we are fully on track towards achieving the upper end of the guidance. Total EBITDA is up 6.4%. EBT is up even slightly higher with 6.8% and post minorities EBITDA, the most important figure for you, as I know, is up like EBITDA by 6.4%. As you will see on the guidance page, our growth momentum carries over into next year and will gain full momentum towards '28. We are well on track for our ambitious EBITDA targets. And most importantly, organic rent growth will increase to around 5% by '28. Personally, I think with higher investments and the strong underlying market rental growth, Vonovia may well see rent growth above 5% by then. The market in which we operate continues to normalize and move in the right direction. Organic value growth is happening, and we will probably see a bit more in H2 than what we have seen in H1. The transaction market remains somewhat below the levels we have seen in the ultra-low interest rate period, but it is back to the normal level that we have seen before that period. On Page 4, let me summarize our fundamental beliefs, what our fundamental beliefs are and why I think Vonovia is different. First, a mantra that I keep repeating because it is so fundamental. Our business is built on and followed certain megatrends that provide stability and safeguard Vonovia's long-term earnings and value growth. Imbalance of supply and demand in urban areas, the focus on CO2 reduction and the positive impact of demographic change on our business will not go away for the next 20 to 30 years. Against this backdrop, there are 3 guiding principles that we believe in. First, it is a low-risk business and a low-margin business because the underlying business is regulated and very low risk, the incremental yields are comparatively low. The consequences for us is that cost leadership is crucial, and we achieved this by building scale and rigorously pursuing standardization and industrialization. Second, -- our business is a B2C business. The long-term nature of rental contracts and the relation with our customers makes us a subscription-based business based on real estate. The consequences for us is that we pursue deep vertical and horizontal integration, maximum control over our value chain through in-sourcing and rolling out ancillary services to increase our share of wallets of our tenants. And third, location and portfolio quality matters. Even though it's a subscription-based business, it is still real estate. And there, location matters. There is not the one initial yield for German resi. Supply/demand imbalance is very different in different locations and housing market in urban areas simply have different fundamentals compared to the countryside. And when you are in the right location, you can unlock additional earnings and value growth through investments in the long run. The consequence for us is that we have worked hard through acquisition and disposal to focus our portfolio in the right locations. And second, we have developed the know-how and the capacity to run a large-scale and industrialized investment program. I mentioned the low risk in the underlying business in the markets in which we operate. The beautiful thing about that is obviously that our operating performance does not produce negative surprises. Rents keep going up, tenants pay their rent in full and vacancy only exists in cases where we do modernization work in the apartment. What may be a surprise to some people, even though it should build into -- it is built in the system and actually should not be a surprise is the acceleration of rent growth. We have spent a lot of time and effort in trying to explain the catch-up effect in rent from higher inflation of the past years. It is becoming more and more evident now. As you see on the guidance page later, we are continuing to move upwards to around 5% organic rent growth and above, which will, of course, have very positive implications for both earnings and value growth. Go to Page 6. One of the consequences of running a B2C end consumer business is the need for scale. The size we have reached is impossible to replicate and clearly gives us an advantage on the cost side that cannot be copied by other players who are smaller and in most cases, are a lot smaller. The chart on the bottom shows for Germany how the increase in the portfolio volume led to an expansion of the margins and the reduction of the cost per unit. What is also noteworthy here is that our customer satisfaction increased sustainable from an index 100 at the IPO to 125 today. The cost per unit number is maybe a bit complex and more difficult to compare. So let me make my point about the scale and efficiency very simple and transparent. Let's have a look on Page 7 for gross yields and adjusted net yields. Gross yields are rental income divided by fair value. Gross yields differ within the peer group, which is, of course, no surprise given the very different portfolio locations and quality. If you then look at the adjusted net yields, so EBITDA operations adjusted for maintenance because maintenance spending is clearly not a sign of efficiency, but capitalization policy, we see that the cost leakage with German resi is very different. Vonovia loses 0.4 percentage points between gross and net. And if you look only at the German portfolio, it is just 0.2% versus almost a full percentage point of the peer group. This is the result of our superior scale and efficiency that we have reached since the IPO when our spread was as high as 1.5 percentage points. Of course, at this time, we had a much smaller portfolio. In a business with low initial yield, this gap is huge. It means that we are uniquely positioned to succeed in low-yielding markets, which, of course, have higher growth potential. And it means that we generate more than EUR 400 million additional EBITDA with our platform and our way to do business, then we would have the average peer group leakage. And it means that we are extremely well positioned for a successful second Vonovia strategy. I have mentioned our platform a couple of times, so let me give you a better understanding of what I mean by that. This is Page 8. We have developed a fully integrated one-stop shop that covers the entire value chain in our business from the acquisition and development of new units to the asset and property management to the value-add and facility management to the disposal expertise. We cover the full range of the asset life cycle. And we do it an operating system that is SAP head to toe, which clearly defined interfaces between operating entities and central support functions and the seamless integration between local and central responsibilities. Today, this platform services most of our own portfolio. Owning and operating European's largest residential asset base, including being one of the largest homebuilders, safeguards unparalleled experience and a unique data pool that forms a strong backbone of the platform. Page 9. We are all aware of our activities to increase non-rental EBITDA. The general effort to do that so is not new. We have been ramping up for nonrental EBITDA since the IPO to as much as 20% of total EBITDA by '21. The sudden change in interest rate environment and our focus on liquidity generation over profitability resulted in lower non-rental EBITDAs for good reasons. Going forward, however, there is absolutely no reason why we should not be able to grow outside the rental segment. Of course, the absolute amounts are bigger than in '21, thanks to the successful integration of Deutsche Wohnen. But the underlying strategy of doing more than just collecting rent has been in Vonovia's DNA since the IPO, and there is no reason why this should not be a key element of Vonovia's strategy going forward because it makes all sense of the world. The objective for '28 to reach a level of non-rental EBITDA that we have achieved before Deutsche Wohnen is really not a stretch. Let's go to Page 10 to talk about more about locations. Again, this seems to be misunderstood by the market sometimes. Germany is not the same all across the country. Fundamentals and yields are very different in different locations. The general distinction I would make is that there are urban markets, which tend to come with lower initial yields and there are rural markets, which tend to come with higher initial yield. In both cases, this is obviously a function of the different long-term growth potential of these markets. The strong convictions about the different quality of local markets within Germany prompted a laser focus to make sure that we are in the right location. The large acquisition to grow our portfolios are well known. But what is sometimes forgotten is that we sold more than 100,000 units in what we consider rural and therefore, weaker market. Between the IPO and today, we cut the number of locations in half, and that led to not just better portfolio quality, but also to higher efficiency. And why it is so important to be in the right locations, let's go to Page 11. Most of you will have seen this analysis in previous earnings calls. The appeal of our business, as we see it, is that the annual rent growth may not always be as high as in other sectors, but it is as robust as it can get and allows us to predict our rental growth for many years to come. The gap between the market reality rent levels and our rent level ensures many years of attractive risk-adjusted rent growth. Of course, this does not apply to all markets, but only to the ones where you have a structural supply and demand imbalance. And that's why vacancy is not a concern for us. Doing modernization and charging a higher rent for a better product is not a concern for us and reletting an apartment in line with the regulation at a higher rent is not a concern for us. Affordability to make it short, is not our problem and not the problem for our tenants. As I said earlier, not only the right location matters when it comes to asset management, investments are key to unlocking further earnings and value growth. As consequences, comprehensive investment programs have been a cornerstone of Vonovia's strategy since the IPO. And the peer group comparison clearly shows that we have invested more. I know that the return of these investments cannot be easily extrapolated from the financial results because there is no immediate link between the investment amount of 1 year and the return in the next year as many of these investments take more than 1 year to be completed. That is why we looked at all investments that we have made and fully completed between 2014 and 2024. The aggregate investment amount was EUR 7.4 billion, and the average operating yield we have achieved was 7.1%. So to us, it makes all the sense in the world to continue with these investments and to increase them to EUR 2 billion per year as planned by '28. They make economic sense, and they also make sense from a sustainability point of view. So it's a win-win situation. We talked about locations. We talked about buying and selling to be in the right markets, and we talked about investments to deliver additional growth. Let me put this into context on Page 13. Because of the dynamic in our local markets and because of the comprehensive investment we have been making, we have been able to deliver best-in-class rental growth. As I said earlier, I'm personally convinced that this gap will widen in the future from superior market rent growth and superior investment driven rent growth. And this rent growth, combined with the investment and the portfolio focus has delivered a higher CAGR for value growth based on the development of fair value per square meter since the IPO. The market focus seems to be very much on earning these days, and that is fine. But let's not forget that you have 2 types of returns, earnings and value. I learned this by you 13 years ago where I joined the industry. This is a good segue into the last page of this chapter before I hand over to Philip. When you invest in Vonovia, you do not buy into an initial yield portfolio. That is why I refuse to accept the argument that we are a bond proxy and that it is all about the spread between bond yields and the net initial yield of our portfolio. Rather one should look at the total shareholder return, so earnings and organic value growth and compare that to other equity investments on a risk-adjusted basis, of course. And while it is entirely up to the investors and the market in general, what they make out of it, I consider 13% total return based on the current share price and an attractive from a risk return point of view, and that is why I look forward to remaining a Vonovia shareholder long beyond my tenure here at Vonovia. And with this, over to Philip. Philip Grosse: Thank you, Rolf, and welcome also from my side. I will start with Page 16. I think it actually speaks for itself. So no need to go into too much detail here. But let me allow to make one important point. Our Rental segment is still impacted by the smaller portfolio. Year-on-year, we have 9,000 fewer units, and that, of course, weighs on the top line. Nonetheless, nominal growth in our Rental segment alone, so excluding the non-rental EBITDA contributions overcompensated the increase in the net financial result in the first 9 months, and that is exactly the logic we have been talking about and the consequence of our long-term and very balanced maturity profile. Yes, our interest expenses are going up as expected, but rents are going up more. And combined with the non-rental growth, we will continue to be able to deliver attractive risk-adjusted earnings growth. Let's go through the 4 segments one by one and start with the Rental segment on Page 17. Rental revenue, as you can see, was almost up 3%, only held back by losing some of our top line as explained. Maintenance was a touch higher as expected and operating expenses were very much in line with last year. All in all, we basically managed to preserve the top line growth on the EBITDA level for a year-on-year increase of 2.5%. Organic rent growth remained very robust with 4.2% overall and 2.8% from market rent growth. Like in previous quarters, no need to deep dive on occupancy and collection rates as they both remain exceptionally high and are expected to remain at that superior level for the foreseeable future. On value add, that is Page 18. As you can see, the internal revenues grew by more than 15%, and that is largely a result of our increased investment and our higher in-sourcing ratio. The year-on-year comparison is skewed in so far as that the prior year includes EUR 58 million nonrecurring adjusted EBITDA from the coax network lease agreement we have made with Vodafone. Adjusting for this onetime benefit last year, value-add EBITDA were actually up 11% equally as expected. In spite of this onetime effect, we expect the value-add EBITDA for the full year to be considerably higher than last year, and that's mainly driven by higher investments and value creation in our craftsman organization as well as rising contributions from our energy business. So here, we are well on track towards further expanding the EBITDA contribution from our value-add segment as we have been guiding for. Recurring sales on Page 19, we sold 1,553 units to be precise, in the first 9 months, up 2.4% compared to last year, revenue growth of almost 12% and the higher fair value step-up far exceeded the growth in units and resulted in EUR 300 million for the 9 months 2025. And it's the combination of higher revenue and higher gross profit plus stable selling costs that drove the EBITDA contribution to almost EUR 57 million, which is 45% above the prior year. For recurring sales, we remain, again, very much on track towards further expanding EBITDA contribution. Finally, development on Page 20. We have explained in previous calls the development EBITDA was positively impacted by a larger land sale that closed early this year, hence, the extraordinary and not sustainable gross margin. If we adjust for this land sale, however, the gross margin comes down to 19%, which I consider a very normalized developer margin we are targeting that is yes, as we have been expecting for. Either way, our development business is a valuable contributor to the overall EBITDA. And here too, the increasing EBITDA contribution is very much on track. That much about the segments. On EPRA NTA, that is Page 21. The main point for the NTA really is that to a new law that will bring a reduction in corporate income tax, we saw a shift of roughly EUR 2.3 billion from deferred tax liabilities to IFRS equity. So on a net basis, more or less flat, but the composition somewhat changed. Page 22 for the debt KPIs. There isn't much change from one quarter to the other. And the bottom line on the leverage side remains that we consider it well under control. The yardstick for that is mainly with what the rating agencies expect from us to be safe on our BBB+ rating with a stable outlook. As I said last time, different points in the cycle require a stronger focus on some debt KPIs more than on others, and we are at a point where our main attention is on the ICR. There are 2 ways to look at the ICR. The numerator is the same in both cases, adjusted EBITDA total of the last 12 months, but the denominator is different. One definition, and that is the one used in bond covenants uses net cash interest and the denominator. This can be a bit volatile from time to time, depending on the interest payment dates. The bond covenant threshold is 1.8x. So I hope we can all agree that this is somewhat irrelevant from a risk point of view. To allow for a more normalized measurement of ICR, we are using the net financial result that we also use in getting from adjusted EBITDA to adjusted EBT. The ICR threshold we have set to ourselves internally is, as you know, 3.5x. Let me reiterate. Our focus is to make sure our debt KPIs are in line with the BBB+ rating criteria and a stable outlook. This is now essentially an organic development as we expect values and EBITDA to grow and therefore, to further move the debt KPIs in the right territory or even further. On the guidance, this is on Page 23. We have fine-tuned 2025 guidance and moved to the upper end of the range for both rental income and adjusted EBITDA total. As we usually do in the third quarter, we are also giving an initial guidance for the next year. No need to read all individual line items now, but do allow me to zoom in on the organic rent growth. You may recall the concept of the additional irrevocable rent increase claim that we introduced a few quarters back. We are showing it here again to demonstrate that the rent growth is coming. It is actually already there, apartment by apartment. But because of the Kappungsgrenze, it cannot be implemented just yet. Kappungsgrenze, as a reminder, is the cap that allows you not to increase rents by more than 15% for selling tenants over a 3-year time horizon in tight markets. We explained the underlying concept on Page 30 of the presentation in more detail. Let me say this, for 2026, we have a net increase of another 0.4 percentage points to a total of 3% that is already booked onto the underlying apartments, but can only be implemented once the rental cap has lapsed in subsequent years. I can put it differently, if the 0.4 percentage points net buildup would be harvested already next year, 2026 organic rent growth would be around 4.6%. So you can actually see that the acceleration is coming through as promised. Without any rental cap, by the way, 2026 organic rent growth would be north of 7%. We did the math on how much net buildup and net use of this additional irrevocable rent increase claim we will have on our way to 2028. And based on our probably rather conservative assumptions for future rent indices, we will see a net use that will take the actual organic rent growth to around 5%, also supported by higher investments. So what we are moving towards is a step change in rental growth that surpasses historic rent growth numbers, which should not come as a surprise actually because at the end of the day, this is higher inflation finding its way over time into organic rent growth like we have always said. And referring back to the commentary Rolf made, this higher level of rent growth will have a positive impact on both types of shareholder return, and that is earnings growth and value growth. Final comment on the guidance page. Some of you are asking for more clarity on minorities and taxes. EBT minorities are expected to be around 10% of adjusted EBT. And cash taxes, and that obviously includes taxes for our disposal segments are expected to be inside 10% of the adjusted EBITDA total for 2025 and same applies for 2026. The CEO handover process is underway, and Luka will be joining at the end of this month before he will officially assume his new role as CEO starting in January. We will miss Rolf, but we are equally excited about Luka joining and with that commentary, for the last time, Rolf, back to you. Rolf Buch: And for the last time -- thank you, Philip. Before we go to the Q&A, allow me briefly summarize the relevant point of today's presentation. As we laid out, the way Vonovia approaches the business is different, and it has led to operational outperformance that we expect to continue. This puts the company in an excellent position for the future earnings and value growth. Our market environment and operating business remains rock solid, and we are well on track towards achieving our ambitious targets, both for rental and non-rental growth. We have put the company into a tremendous stable footing, and we have -- and we leave it well positioned for further earnings and value growth. We have built a platform that is second to none and will prove to be the cornerstone in the company's effort to build a second Vonovia. All this will be in great hands with Luka. I wish him and the entire Vonovia team all the best and have no doubt that together, they will write a new and very successful chapter in the history of Vonovia. But more important, I would like to thank you all for your support in the last 12 years. Without the support and the willingness to invest, it would not have been possible to build this Vonovia, this great platform. With this, thank you very much. And back to Rene for the Q&A. Rene Hoffmann: Thank you, Rolf. Thank you, Philip. I hand it back to [ Moritz ] for the Q&A. And just as a reminder, everybody, let's keep it to 2 questions per person, please. [ Moritz ], can you start the Q&A part? Operator: [Operator Instructions] And the first question comes from Charles Bossier from UBS. Charles Boissier: I have 2 questions. The first one is on the change in the organic rent growth guidance for 2028 from 4% plus to now 5%. What exactly has changed, I would say, versus the initial guidance that you had set up, whether in the market or in terms of your ability to capture that rental growth? Philip Grosse: Charles, answer is very, very simple. We've been telling you before above 4%. I think now we have become more precise. If we look at the underlying data, and we have done a very comprehensive analysis, we can see that historic inflation is coming through over time to the extent allowed by the Kappungsgrenze, the rental caps, and you will see also going forward numbers in between 2.5% to 3%, non-investment driven and the other bit is investment driven. That is currently 1.4%, but with us more or less doubling the investments vis-a-vis what we have seen last year, we will see also an acceleration in rental growth, in the investment-driven bit. And here, as a reminder, cash-on-cash is 6% to 7% with the vast majority ending up in the rental EBITDA and a portion of that ending up because of the value creation of our craftsman organization in the value-add EBITDA. Charles Boissier: Okay. Very clear. And on the transaction market, you present quite a positive story of normalization and you're also pointing to H2 valuation accelerating versus H1. Still in Q3, it seems rather slow in terms of transaction activity. Of course, there were some small deals here and there, 850 apartments at long transaction. But what are you seeing in the transaction market that makes you confident that it has normalized and you would be able to sell assets at book values? Rolf Buch: So first of all, even in the bad times where the transaction market was much worse, we sold assets for book value. So it's probably quality of assets, which is relevant. But to be very clear, what you see and what is seen in the public is the big transactions. In reality, there is an underlying transaction market of smaller players. And this I mentioned in my speech is actually back to the level where it has been before the ultra-low investment rate environment. So -- what we see here in the listed sector is just a small part of the big transactions. But the market really is consisting out of a lot of smaller transactions. And there, we see a very stable thing, and we see the demand and we see supply coming to the market. So I can confirm that the market is pretty stable and going in the right direction. And as Philip said, we will expect a higher valuation in H2 than what uplift than we have seen in H1. Operator: Then the next question comes from Valerie Jacob from Bernstein. Valerie Jacob Guezi: I've just got a follow-up question, a clarification on the comment that you made that you expect organic growth in asset values to be higher in H2. I think part of it is mechanically driven by you spending more CapEx. So I was wondering, is this comment is also valid if we exclude the CapEx from your asset value growth? That's my first question. I've got a second question. Philip Grosse: You have that acceleration on both sides on a gross as well as on a net basis. And in H1, you have seen net value growth of 70 basis points, and that number will be exceeded in H2. Valerie Jacob Guezi: Okay. That's clear. My second question is on your ICR. I mean I'm not sure this is helpful that you're changing a definition again. So I was just wondering, going forward, are you still going to publish the definition on the bond definition? Or are you only going to publish your own definition? Philip Grosse: Valerie, I think what we just wanted to make clear is that we internally manage our business in a different way and not by bond covenants. That, by the way, is no different if you look at LTV metrics. Because if you look at the covenants that the LTV is not a concept in the bond covenants. But here, you more look at capital -- more broader capital ratios. The flip side, if you will, on the bond definition is, as I said, there's a bit more volatility. It very much depends point in time where you actually pay interest. Over time, if you don't make the quarter-by-quarter comparison, the 2 are very, very similar to each other. So typically, a difference of 10 basis points. And more specifically, we will disclose both. Operator: And the next question comes from Bart Gysens from Morgan Stanley. Bart Gysens: My first question is also on the ICR actually. You talk about moving that into better territory. But I just wanted to understand how you can do that for the ICR. I mean the average cost of debt is running at 1.9%. You managed to keep that flat. You have to refi about EUR 4 billion to EUR 5 billion a year medium term. Now even if reported EBITDA grows by 7% per annum as you're guiding, that suggests that actually if you finance at the current marginal cost of debt, interest cover will not improve on the contrary. So how do you look at that? And are you considering more alternative solutions like convertible bonds or preferred equity? Philip Grosse: No, Bart, to be very precise, where we are moving in the right direction is in terms of LTV and is in terms of net debt to EBITDA. LTV because I have conviction as we have seen this in the running here that the rental increase, net of the investment required to achieve that rental increase will translate itself into value growth. And if I look at net debt to EBITDA, we have, as you know, a number of initiatives which are running very well to, in particular, increase also the nonrental EBITDA and that will move that metric further down. The ICR is really our intention to keep that somewhat stable at current level. And that is going to be the major focus. And here, yes, we probably need some positive backdrop in market in terms of refinancing costs. Our assumption is that this somewhat remains at current level of 4%. And it's also no secret that I think that convertible product as part of the capital structure is a good addition. You should not overplay it. So it should be a moderate portion of your capital structure in terms of liquidity and the underlying stock, plus in terms of the overall debt burden. But with that having said, I think there is capacity for more. And to be crystal clear, convertible is for us, no ambiguity, 100% debt. And the assumption always is that it will never come to the dilution, but that if the convertible is in the money and at maturity is going to be refinanced by a new convertible [indiscernible] was at a higher stock price and that is essentially, if you do the math, reducing contingent dilution. But again, the focus, and that is what is driving the capital structure going forward is going to be the ICR. Bart Gysens: Great. And then my other question is on recurring sales on Slide 19. So you've sold more or less the same amount of units as a year ago, but at a different price point, right, around 10% higher per unit. Have you started selling a different type or quality or location? Should we read anything into this? Rolf Buch: No, I think the biggest -- there might be a small different mixture, but I think what you should read is that what we have announced, we have sold also this product in the period where liquidity was for us important actually with less focus on price. As we announced in October or November last year, we said now we will come back to normal. And what you see is that the margin is actually coming back what we have expected. So this, of course, comes together with the recovery of the market. So you see here that the market obviously is ready to pay the well-known premium, which was paid before the crisis for individual apartments versus blocks. So the retail and wholesale margin is back to normal, which is also, I think, an additional answer to the question about what -- why the market is coming back. You can see it in this figure. Operator: . And the next question comes from Thomas Neuhold from Kepler Cheuvreux. Thomas Neuhold: My first question would be on the non-rental business. Can you please provide us an update on the new expanded business areas such as stranded assets, occupancy rights and third-party business? Did you manage to strike already some interesting deals there? Rolf Buch: Yes. I think to what we call managed to green assets, which is a former called undeveloped assets, but I think managed to green is a much better and more precise definition. As you know, we have signed the first deal. We are in a round to -- in the final round and actually exclusive negotiation with others with more potential. It took us a little bit longer to get this started than originally we expected. But now I think we are on the full run. So I don't see anything else. This is the same for the occupancy rights. And actually, to be very clear, we manage all these additional activities in total, the 10 where we see -- we are in line with our expectation. We are in line with the guidance which we have given you to '28. So there is no reason to do any -- to be nervous actually or the opposite. Some of them are getting better and especially for the second Vonovia, as you know, we will not talk about potential deals there. But I can tell you that in the last 2 months, which are remaining for me here, there is still a lot of opportunity where we are in discussions. Thomas Neuhold: And my second question is for Philip. Can you please give us an indication what impact the lowered corporate tax rate in Germany will have on your cash tax rate going forward once it's going to be implemented? Philip Grosse: I mean, still some time out. It's starting 2028. So this is now asking for a very long-term guidance. This is, as I said, for now, predominantly impacting deferred tax liabilities, which because of the embedded reduction in corporate tax rate is resulting in that one-off gain of EUR 2.3 billion. In terms of more broader picture, I think let me tell you that much. I mean, by us significantly increasing our investments, our rental and value-add business is not hugely impacted by tax payments because most of the investments we undertake according to German GAAP are actually reducing our taxable income, and that you will see in lower tax rates actually for our rental and value-add business going forward. That, however, is somewhat compensated by higher tax rates because we do more disposal business, and that is for development to sell equally as for our recurring sales business. And yes, here, you may have some small benefits in the long run on the lowering of the tax rate. I think what is, however, even more important, and that is in particular for development to sell in global assets is about structuring and the way how you sell it essentially, which allows you to optimize the tax line. Operator: The next question comes from Andrew McCreath from Green Street. Andrew McCreath: I also have 2. Firstly, on development. Looking at your numbers, 3Q doesn't suggest much acceleration in activity. Could you please just provide some color on the dynamics there? Are you seeing any improvement in sales pace? That would be the first question. And the second would be on construction. For the initial projects in Berlin and Dresden, you've guided to an all-in cost of EUR 3,600 per square meter. What sort of yield on costs are you underwriting for these developments? Philip Grosse: On your first question, Andrew, on the development, as I said, if you look at the profitability, that was really much driven by the sale of a land plot we closed in Q1. And that is essentially also the somewhat overriding story for this year because we have sold essentially all project developments we had in our pipeline in the last 2 years in order to generate cash. And because of the crisis did not start new projects, we first need to have building up a platform on the basis of which we can earn the targeted gross margins of 15% to 20%. You will see a kind of more steady development already next year but only partially because also next year is going to be a mix between first completions and selling of those completions or started projects, which we sell based on POC method. But you will also see the disposal of land plots in the coming year. And I think the kind of ramp-up as we have been budgeting for is really to come through as of 2027 and beyond. Rolf Buch: And for the new construction, I think this is one topic which is not only important for Vonovia, but for the whole German market. I think with the about turbo and with [indiscernible] the most recent new legislation, it will provide us with the possibility to reduce the construction cost by 30%. So this famous EUR 3,500, all including, which is actually comparable to the lateral letting. And we are targeting a initial yield of roughly 5%. And then, of course, these buildings come with in the first years, no maintenance and an increase of rent, which is often very indexed. So that's why the initial yield is low, but then the yield will go up over time. And that's why it's a good investment. And this is either for us on our own balance sheet or if it's for sale, it's for others who are ready to invest 5% yield. Philip Grosse: Let me be very clear and add one thing. What you see in the development EBITDA is only development to sell. And development to sell, as I said, we are targeting gross margins of 15% to 20%, and we are essentially targeting IRRs north of 10%. And that is what you will see in that profitability line. So it's not yield on cost driven how we manage that business. It's IRR driven. Operator: The next question comes from Paul May from Barclays. Paul May: Just a couple of questions from my side. Thanks for the analysis on the return on investment, I think 7.1% you highlight over multiple years. I think as you know, we calculate close to 5% based on reported numbers. I think you said that's not possible to make that calculation. So thank you for providing that color. Just wondered why is that below the 8% to 10% return on investment that you've previously and multiple times guided to? That is the first question. And the second question, I think you highlighted through the presentation how you're better than other listed peers based on your NOI yields. But I think on our numbers, where a lot of your cost comes is through your admin cost line versus others. And if you look at it more on an EBIT yield or EBIT margin basis, you're either lower or similar to peers, and therefore, you obviously your yield much lower. And also, are you penalizing certain peers by including land in their gross asset value and not including, say, housing profits or housing sale profits in the EBITDA or in the NOI? Just wondering if you're sort of overly penalizing certain peers. Rolf Buch: No, I think the last one we are not doing. This is all public information, and I think Rene can guide you through. To be very clear, we are operating a little bit different in a different platform. That's why I added the site of the platform that our way to do central and noncentral is a little different. That's why this is the reason for efficiency. So I think the only way how you can really compare it is to do the net yield and the gross yield, and we can guide you through this, but this is based on public information. The other question was about... Philip Grosse: One was on the yield of the investment program. Paul, we've been, I think, explaining for quite some time that the mix of our various investment programs, and that is the energetic modernization of the building that are the reletting investments when we have tenant churn, that is also our develop to hold business are averaging out with cash-on-cash yields of 6% to 7% and that we, at least historically, are more at the upper end of the range that calculation is demonstrating. What we are benefiting here and that is probably a bit different for Vonovia than for the broader sector is that we are able to compensate for some of the maintenance spend, which, by definition, is a part of broader investments by putting our own craftsman organization into play because here, again, we can earn some extra money. So that yield is actually vast majority ending up in the rental EBITDA, but part also in the value-add EBITDA. And it's only for that very reason that we can achieve these high numbers. Operator: The next question comes from Thomas Rothaeusler from Deutsche Bank. Thomas Rothaeusler: Two questions. The first one is on the value-add business. Operating profit was only flat despite the pickup of investments. Actually, we see the same pattern for rental growth, which even came down if you look at modernization-driven rent adjustments. You basically say that investment returns come with a time lag of more than 1 year. Just wondering by when we should see a meaningful -- more meaningful pickup here. Rolf Buch: I think what you're doing is now you're comparing quarter-by-quarter, right? Thomas Rothaeusler: Actually, year-on-year, if I look at the investments year-on-year and look at the performance of the value-add business and look at the performance from rental growth out of monetization measures. Philip Grosse: What is -- if you look, Thomas, at the profitability line of value-add, what is distorting a year-by-year comparison is a very big onetime benefit we have seen last year by the conclusion of a finance lease agreement with Vodafone, and that resulted in an EBITDA, which is not repeating itself this year of more than EUR 50 million. Now if I look at the composition of the various profitability streams, which are adding up to the value add is really very much the craftsman organization where we have seen a very nice turnaround story. Craftsman organization, a, benefiting from higher investment volumes; b, benefiting from higher in-sourcing ratio that, by the way, is also why you see that change in terms of revenues in favor of internal versus external. And what you can equally see is that we are seeing a nice ramp-up in our energy business, and that is thanks to the investments we undertaken photovoltaic. All the other businesses really flattish with the exception of multimedia, where we have year-on-year a decline, I think, of 60%, and that is because of that onetime impact, which is not repeating itself. Is that sufficiently answering your question? Thomas Rothaeusler: Perfect. On the second point is actually on disposals. I mean you referred to improved investment markets. Should we expect this to allow you to speed up noncore disposals maybe? Rolf Buch: Yes. I think we are now back on the normal level. So we are doing noncore disposals as it is accretive and attractive for the pricing. So we are not pushing so much for volume, but we are pushing a little bit also related to the price. Yes, but it is becoming easier also for the noncore disposal. Operator: The next question comes from Marc Mozzi from Bank of America. Marc Louis Mozzi: My first question is around your number of shares. How should we assume the number of shares you're going to use for the calculation of your dividend and EPS for this year at the end of the year because there are some changes here. And I'm just wondering if you can help us having some clarity on that number. I'm talking about the weighted average, not the total. Philip Grosse: I think there is no change whatsoever. It's always the same if we look at profitability numbers, we take the weighted average of the past 4 quarters. By way of reference, little change. I mean, what you have seen in terms of increase in share count is, a, the scrip dividend, which has seen a take-up of slightly above 30%; and b, I think in total, 12 million shares as a result of the domination and profit loss transfer agreement with Deutsche Wohnen, so people accepting the exchange offer, but that is really marginal. When we look at balance sheet numbers, and that is EPRA NTA, we look at the year-end number in terms of share count, but also no change. And the dividend is always end of period. Marc Louis Mozzi: Fair enough. And the other question is around the dividend. And I would like to understand how we should think about the dividend per share for the year because we know that it's 50% of the EBT. So that's roughly EUR 950 million plus surplus liquidity, which I understand is very subjective. I guess you would like to show some dividend growth, what sort of growth on which basis, how are you going to assess your dividend proposal to the shareholder and to the Board? Philip Grosse: Look, Mark, no change here. I mean, for now, I think our dividend policy is what our dividend policy is. It's 50% of EBT plus liquidity, and that is based on the operating free cash flow. And as usual, we will discuss that at the appropriate time and make a proposal to the shareholder meeting, which I think is in May next year. Marc Louis Mozzi: Are you comfortable with the current market forecast of your dividend for this year? Philip Grosse: [indiscernible] what that is actually. Marc Louis Mozzi: Fair enough. That's exactly what I thought. It's EUR 126 million, EUR 125 million... Rolf Buch: So we should not come even not indirect to dividend guidance. This is not the time we will come with a dividend proposal and not we, but the new management team will come with a dividend proposal if it's appropriate and this is next year. Marc Louis Mozzi: Fair enough. I totally understand. Well, Rolf, I would like to congratulate you for running Vonovia for the past 12 years and all the best for what's next for you. Operator: The next question comes from Simon Stippig from Warburg Research. Simon Stippig: First one is on Page 7, you showed your gross to net yield translation. And you mentioned that here in Germany, it's only 20 basis points. So in Sweden and Austria, I think you're holding only 11% based on units of your portfolio. So could you explain me the reasoning of why holding on to the portfolios in Austria and Sweden? And second one would be -- in regard to your operating free cash flow, Q3 was the lowest compared to previous quarters. I know it's mainly due to net working capital movements that comes obviously from your development to sell pipeline. But could you explain or indicate what we can expect here for the last quarter? And then also more importantly, what you see here for the next year. And by that, I mean items that are not so well explained, not like the minorities, for example, I think you were very clear in previous conference calls. But maybe the capitalization rate, does it stay the same and also your capital commitment to development to sell? And lastly, I, Rolf, stay in good health and best of luck for the next challenge. Rolf Buch: Okay. For example, the first time -- the first question I take, I think Austria in this respect is probably less relevant. It's all about Sweden. And you know in Sweden, this is a warm rent, so it includes the energy. So that's why the gap, which is actually energy is counted here as cost to operate. That's why technically it is higher, and that's why we are coming to 0.4% in total. But this -- then you have to compare the Swedish business with other Swedish players, which, of course, we have done, and we could provide you the same, for example, comparison with Heimstaden and we are more efficient with Heimstaden. That's why I mentioned the 0.2% because in the end, this slide is more relevant if you compare it to the German peers, you would compare it more with 0.2% and not the 0.4%, which is in the -- in the notes. But because you cannot directly extract from our reported figures, the 0.4%, you can report from the figures that we -- I think we showed the 0.4%. But the difference between 0.4% and 0.2% is because of the different nature in the Swedish market where everybody has to cover the cost as a part of cost and not of a pass-through item. Philip Grosse: Then, Simon, on your second question, a bit more specific on the operating free cash flow. I mean, you know that we are not guiding on that. What we have been guiding for is excluding changes in the net working capital, why is it that we have done that? Because there's, by definition, some volatility, in particular, if you look on a quarter-by-quarter comparison because it largely depends on the point in time when we have the cash in, for instance, for bigger global exits in the development to sell business. So please don't get nervous on the quarter-by-quarter comparison, but that's not really the picture to draw. More long term, how I would look at it without guiding, if I were you, is that if you start with the depreciation line, that is impacted by, in particular, our investments in photovoltaic, which I think is around EUR 100 million per annum, depreciation 20 years. And given that we do invest in photovoltaic quite significantly, you will see that line gradually going up, which is positive for the cash flow. I think as in the past, net working capital is very difficult. And as a reminder, there are 2 elements in it. It's development to sell, where my intention is to manage the business in a way that it's at least more or less flattish in terms of the net working capital movements, not on a quarter-by-quarter comparison, but on a rolling 12-month basis. What, however, is also in there is the managed to green business, Rolf was mentioning, and that will require an initial capital buildup. So that kind of portion will be negative and how negative depends on how much we are actually able to acquire. But we will give details on that, and we will also give details on the split of those 2 elements going forward, how it affects the net working capital. And the rest, I think, is straightforward. Capitalized maintenance, I would kind of monitor vis-a-vis inflation because this is what's driving that line item. Dividends and minorities, I think we talked about in length. So you should have all the details, including the additional disclosure we put on our web page. And income taxes, I think the guidance somewhat remains also longer term, and I was making that point previously that I expect that to be slightly inside 10% of total EBITDA. Simon Stippig: Great. Second question was very clear. Maybe I can ask a follow-up on the first one. Is that possible? Philip Grosse: Yes. Simon Stippig: Great. I think it's more profound because you made the case that you want to get to scale and scale brings your cost ratio down. So I just wonder in Austria, you're not building up the portfolio. And then Sweden also, I'm sure things have changed since you acquired BUWOG and also since you expanded into geographies in the North. But is it really that you want to build that up? Or is it more a hold case? Or is it really also the potential that you could sell it and then reallocate the cash towards your own business in Germany or even buying back shares? Rolf Buch: So first of all, and really Austria and Sweden is actually 2 types of story. First of all, the Austrian platform is partly because of language, because of very similar rental systems is partly integrated into or has a higher overlap between the German platform. So -- and then, of course, Austria is also linked to the development business because in Austria, they are running a development to sell business. So you're building a part, you're taking it on your platform for 10 years and then you are selling it with a high margin. So that's why the Austrian part is probably more linked to the development business than to the rental business. For the Swedish business, actually, the same applies. We have bought -- the only 2 listed companies. So we have consolidated the listed market there. We have superior cost in comparison to the other listed -- other Swedish operators are nonlisted by definition because they're not listed left, but we know this data. So it's the same. It's the same opportunity then in Germany, we have in Sweden for the second Vonovia. So I see actually in both in Germany and in Sweden, the chance for playing this platform and making money out of doing just services based on the better cost structure in comparison to people who own assets and want to get rid of the expensive platform where they operate or buy new assets with a very attractive platform. So I see the possibility in both and also you cannot compare Sweden to Germany. You have to compare Sweden to Swedish and you have to compare Germany to Germany. So that's why I think it's 2 different markets. And in those markets, the presentation we have shown you on Page 7 is applicable also -- is applicable. Operator: The next question comes from Pierre-Emmanuel Clouard from Jefferies. Pierre-Emmanuel Clouard: Actually, I have a quick follow-up question on Simon's question about Sweden. Is this something that has been discussed with Board members about potential sale of the Swedish portfolio? Or is it up to the new CEO, especially in light of a rebound of the investment market? Is it an open question? Or is it not a case today and Sweden will be there among Vonovia's portfolio for many, many years. Rolf Buch: So to be very clear, it was discussed in the period of '22 where we talked about disposal. And this was a question where we ended up with alternative structures, which are more attractive at this time. In the moment, it is not part of the discussion which the Management Board is doing with the Supervisory Board, and it's not a discussion inside the Management Board, but also to be clear. So I personally think -- and I think this is not coming to a surprise for you. I personally think that if you are talking about second Vonovia, it is better if you cover more jurisdictions than less. So I think this is important for the second Vonovia strategy, but I'm also here only 2 months left. So I think the new management team under the lead of Luka has also to think about it. But at the moment, there's no indication that there is a thinking, but I should not predict what happens in the future. Pierre-Emmanuel Clouard: Okay. That's clear. And my second question is on the value-add business and Vonovia in general. With the expected increase in minimum wage in Germany, is there any impact to expect on the -- on margins on your value-add business segment from 2027? Rolf Buch: No. Very simple question, no. Pierre-Emmanuel Clouard: Right. Why that? Rolf Buch: Because the business where we operate, so the craftsmen are much above the minimum salary anyway because this is a different general agreement with the unions. So there is no impact. And the people in some parts of the gardeners are close to the minimum salary, but these are pass-through items to the tenants. Operator: The next question comes from Manuel Martin from ODDO BHF. Manuel Martin: The first question, it's a bit kind of accounting question. We saw the effect of the change in legislation on deferred taxes in the P&L and also in the EPRA NTA calculation. When it comes to the EPRA NTA calculation, the EPRA NTA seems to have nevertheless decreased marginally in 3Q versus H1. Is there a special reason behind that? Or is this also kind of effects in the deferred tax? Maybe you can give us a hint there, please? Philip Grosse: This is predominantly driven by the liabilities we had to account for, for the guaranteed dividend in the context of the exchange offer we made to Deutsche Wohnen minority shareholders. Roughly EUR 400 million. Manuel Martin: EUR 400 million. All right. Second question is a bit more broader question on the market. I mean the rental increases in the market and which Vonovia is showing and will show in the future, is this something which is also monitored by government and politicians? And what do you hear from politicians? Might that be an issue in the future? Rolf Buch: No, I think you have to distinguish between sitting tenants and new letting. So for the sitting tenants, it's very simple. I just showed it in the political debate here in Germany. Our increase in sitting tenant between '22 and '24 was 4.8% for sitting tenants without investment. So just having the apartment with no increase. And the increase in salary was more than 10%. So the affordability is going up and not down. So we have no affordability gap. For the new letting, of course, there is an issue because especially if you refer to the gray market. So the market which is outside the mid-price from the partly illegal, of course, where the situation is extreme, where we really have an affordability issue for gray market rents, EUR 20 for Berlin. This is beyond the affordability of normal people. And that's why you have to distinguish this. I think it's getting more and more understood by the politicians, that this is 2 things. But the gray market, even with the mid-price premise, you cannot stop it. So there is only one solution to work on the imbalance of supply and demand to do more products. That's why we have the [indiscernible] where I think this will help. But as you see me in the press, we also now have to work on the rental regulation because the existing rental regulation with mid-price premise with Kappungsgrenze and with the EUR 2 and EUR 3 will not make it happen that there will be more investment in housing. And this means that the situation of high gray rents will be coming worse and not better. And I am positive that one day the politicians will get it. Manuel Martin: Okay. I see. And Rolf, all the best for you in your future positions or plans. Operator: The next question comes from Neil Green from JPMorgan. Neil Green: Just one, please, and it goes back to kind of one of the earlier comments about marginal debt costs. I think you said around 4% was in the guidance. I think your long-term unsecured bonds are trading within that 4% at the moment. And I think it's fair to say then that the secured debt would also probably be within 4% as well. So I'm just wondering whether that 4% assumption you have is kind of conservative or if there's something that I'm perhaps missing, please? Philip Grosse: I think we will see later today the actual proof point where our cost of debt are currently because we are in the market with a bigger bond issuance, 7, 11 and 15 years. Look, I mean, if you do a midterm planning, I think it is overly aggressive if you were to assume a decrease in rates. And the 4% I've been mentioning actually in our internal planning, I'm even putting kind of a safety margin on top of it because you never know whether there is a slight shift up or down vis-a-vis spot rates. I feel comfortable with the assumption of kind of a stable financing environment. As I said before, that obviously is very paramount for us on how aggressively we need to manage the ICR. But again, my baseline is that 4%. Operator: Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Rene for any closing remarks. Rene Hoffmann: Thank you, [ Moritz ], and especially thanks, everybody, for dialing in and joining this call. As always, if you have any follow-ups, you know where to find me and also my colleagues, feel free to ask. We're looking forward to connecting with you in the days and weeks ahead. And that concludes today's call. As always, stay safe, happy and healthy. Bye now. Rolf Buch: Bye-bye. Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.