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Operator: Good afternoon. This is the conference operator. Welcome, and thank you for joining the d'Amico International Shipping Third Quarter and 9 Months 2025 Results Web Call. [Operator Instructions] At this time, I would like to turn the conference over to Federico Rosen, CFO. Please go ahead, sir. Federico Rosen: Good afternoon, everybody, and welcome to d'Amico International Shipping Q3 Earnings Presentation. So moving straight. Okay. Moving -- skipping the executive summary as usual and moving straight to Page 7, snapshot of our fleet. As of the end of September, we had 31 ships, 31 product tankers, of which 6 LR1s entirely owned, all owned after we exercised the purchase option on the Cielo di Houston, which was previously in bareboat chartered-in for $25.6 million at the very end of September. We had 19 MRs, of which 17 owned and 2 bareboat chartered-in, and we had 6 handy vessels. Still a very young fleet relative to the industry average. The average age of DIS fleet was 9.7 years at the end of September against an industry average of slightly less than 14 years for MRs and 15.4 for LR1s. We increased the percentage of our eco ships, which is now 87% of our fleet. This follows the sale of one of the Glenda vessels, the Glenda Melody, which was delivered to the buyers in July this year. Moving to the next slide. Bank debt situation, very straightforward. We had $19.6 million of bank loan repayment or scheduled bank loan repayments in the first 9 months of the year. We had $5 million of repayment on one of the vessels that we sold. We expect to have $6.2 million of scheduled repayments in Q4 this year. And going to '26 and '27, we're expecting to have slightly less than $25 million of scheduled loan repayments with a minimum level of debt coming to maturity in '26 for only $3.2 million. And a bit of a higher amount of $64.8 million coming to maturity in 2027. At the same time, as you know, we are expecting the delivery of our 4 newbuilding LR1s in the second half of 2027, and we're expecting to finance the ships with a 50% leverage right now, which equates to a bit more than $111 million. Pretty impressive, I would say, the graph on the right that we always show, this goes back really to the significant deleveraging plan that we have been implementing in the last years. Our daily bank loan repayment was $6,147 a day in 2019, and it dropped to $2,426 that we're expecting for 2026, with a total repayment, as I said before, of slightly less than $25 million per year. Moving to the next slide. A bit of a rough outlook on the Q4. Q4 looks really good so far. We have already fixed 54% of our days with time charter contracts, time chartered-out contracts at slightly less than $23,500 a day. We have already fixed 23% of our days at $28,262 on the spot market. So that means that for Q4, we have already fixed 77% of our days at $24,930. So it looks like another very profitable quarter for us. Looking on the right, as always, we show a bit of a sensitivity. So, should we make $18,000, which seems pretty unlikely on the 3 days that we have for Q4, so the days that are fixed right now, that our total blended daily TCE, so spot plus TCE would be of $23,355. Should we make $21,000 a day, our blended daily TCE would rise to $24,000 a day. Should we make $24,000 a day on these unfixed days, our blended daily TCE would be of $24,719 a day. Moving to the next one. Estimated fleet evolution, we're expecting to have 30 ships. As you know, we agreed a sale of 2 vessels, 2 of the older ships of our fleet at the end of Q2 this year. One ship, as I just mentioned before, was already delivered to the buyers in July. The other one is going to be delivered to the buyers by the 20th of December this year. So after that, we will have a fleet of 30 ships at the end of this year, mainly owned, 28 ships owned and 2, which are the High Fidelity and High Discovery, 2 MRs still bareboat chartered-in. Moving to the graph on the right at the top -- sorry, Carlos, if you go one back up. Potential upside to earnings, we still have a sensitivity for every $1,000 on the spot market of $6,000 a day for the remainder of this year. We have a sensitivity of $7.2 million for '26 for every $1,000 a day, we make more or less on the spot market. And the sensitivity is much bigger for 2027, is of $10 million right now. And at the bottom of the page, you also see, as always, what our net result would be for '25, '26 and '27, should we make -- should we breakeven for the day -- in the days that are not fixed right now. So, should we breakeven? For the days -- for the 3 days, we would make a profit of $21.9 million this year, $26 million in 2026 and $4.6 million for 2027. And on the right, you can also see the sensitivity relative to the spot market. So if we make $80,000 a day on our free days on the spot market for 2025 for the remainder of 2025, then our net result would be of $83.8 million. Should we make $21,000 a day, our net result would be of $85.6 million. If we make $24,000 a day, our total net result for the year would be of $87.5 million. And looking at next year, again, should we make $80,000 on the spot on the free days, our net result would be of $47.7 million. Should we make $21,000 a day, we would make a net result of $69.4 million. Should we make $24,000 a day on the free days, our net result would rise to $91 million. So, strong upside to earnings. Going to the next page on the cost side. OpEx, we had a daily OpEx of $8,148 in the first 9 months of 2025. We still have some inflationary pressure that we've been talking about in the last quarters, also in the -- also in Q3, also in the first 9 months of the year. However, the trend is staining a little bit. The overall daily figure is not significantly higher than the same period of last year. And it's really related, as we mentioned previously, to higher crew cost to higher insurance costs, which is also the reflection historically of higher vessel values and also to some inflationary pressure that we also had on some technical expenses. On the G&A side, we had $19.2 million of total G&As. And here, the variance relative to the previous years, as we mentioned in the past, is really related to the variable component of personnel costs, which is really correlated to the very good years that we've been having recently. Moving to the next page. Very strong financial position, as you can see. We had a net financial position at the end of September 2025 of $82.4 million or $80 million if you exclude a small residual effect related to the IFRS 16. Gross debt of $231.1 million, with cash and cash equivalent of almost $149 million at the end of the period. So if you compare a net financial position to the fleet market value of our fleet, which at the end of the quarter was assessed in $1,085.3 million. Our financial leverage, so calculated as the ratio between the net financial position and the fleet market value was of only 7.4%. And just to remind everyone that this figure, this ratio was 72.9% at the end of fiscal year 2018. And this goes back to this very significant deleveraging plan that we've been implementing. Going to the next page. On the income statement side, strong quarter. We made $24.3 million of net profit in the third quarter of the year, which is 24% better than in Q2. Looking at the first 9 months of the year, we made a profit of $62.8 million, which includes also an asset impairment of $3.8 million that is related to the 2 Glenda vessels that we sold. This was booked in Q2 that I just mentioned before. Excluding some non-recurring items from the first 9 months of the year, our net result would rise to $67.1 million. Of course, this is significantly lower than the same period of 2024, in which we had an even better, as you know, freight market, although as you can see, this year is still significantly profitable. Going to the next page, key operating measures. We achieved a spot average -- a daily spot average in the first 9 months of the year of $23,473. We also covered with time charter contracts, 48.4% of our days at $23,700 a day on average, which means that we reached a blended daily TCE of $23,583 in the first 9 months of the year. Looking at Q3, looking at the third quarter, we had a spot average of $25,502, which is a bit more than $1,000 a day more than in Q2 -- what we made in Q2 and almost $4,300 a day more than what we made in Q1. We also covered approximately 55% of our days in the quarter at an average of $23,378. And so our blended daily TCE for the third quarter of the year was at $24,335, and it is so far our best quarter this year. Next page, I pass it on to you, Carlos. Antonio Carlos Balestra Mottola: Good afternoon. Thanks, Federico. So now we look at our CapEx commitments. Not much left in this respect for '25, only maintenance CapEx. And then for '26 and '27, we have the remaining installments for the 4 LR1s ordered for a total investment of $191 million, of which only $17 million next year. And most of this instead due in '27 and more specifically at the delivery of the vessels. Going on to the following slide here, the leased vessels. We exercised the Houston, as previously mentioned by Federico. We still have the Fidelity and Discovery, which we can exercise. These are long lease contracts, which terminate only 2032 and interest rates still haven't come down to levels, which would make exercising these options attractive. So for now, we keep them going. But next year, a window might open up depending on the path followed by the interest rates for us to exercise these options. On the following slide here instead, we show the difference in the market value of the vessels, which were previously on TCE and whose options we exercised and their book value as at the end of September. And we see there's still -- the delta is very positive at around $46 million, slightly less than the $57 million, which represented instead the difference between the market value of the vessels and the exercise price at the exercise date. Going on to the following slide. Here, we show our contract coverage. And for Q4, we have a coverage of 54% at a very profitable average rate of almost $23,500. For '26, we actually have a slightly higher rate than that, $23,700 for 32% of the available vessel days. TCE rates have been gradually moving up over the last few weeks, reflecting the strong market conditions and the strong outlook for the market for the coming years for the reasons, which we will be discussing, outlining in the rest of this presentation. At the bottom, we show the increasing percentage of eco vessels that we are controlling as a result of the disposal of the new eco vessels in our fleet and of course, in the previous years also of the deliveries that we had of new eco vessels, which joined our fleet. Here, we see on this page that on the left, TC rates, the blue line and spot rates with the yellow line have been moving up since April. And on the right-hand side, we see also that asset values have stabilized and actually are moving also -- have been moving slightly up in the last few months. And we show here that the estimated rate for a 1-year TC for an eco MR today is at $23,500. So very profitable rate and for an eco LR1 at $26,500. So going on to the following slide. Russian exports of refined products, they held up very well after the onset of the war for some time. But more recently, we are seeing a decline this year, in particular from April this year. We have seen these exports starting to drop more decisively. And that is the result both of tougher sanctions being imposed on the country as well as the activities by the Ukrainians, which have been targeting Russian oil assets, infrastructure, terminals and in particular, also many refineries. At a certain point this year, we had almost 20% of the Russian refining capacity, which was offline, which could not be used because of these drone attacks by the Ukrainians. So as a result of these attacks, also the Russian government had to take some decisions to reduce exports of diesel, in particular, to keep more of the product domestically. And so I think this is only the beginning and the full effect of the latest sanctions, which were announced on Lukoil and Rosneft are still to be felt. And I think we are going to be start seeing them towards the end of November because there is a phase-in period end December. And then we are going to be starting to see a more pronounced decline in exports of refined products from Russia, which is an important exporter of such products. So, lower exports from this country is going to tighten the refined product market and has already contributed to an increase in refining margins, so as we will see later in the presentation. So here, talking about another disruption to the market, the attacks by the Houthis to vessels crossing the Bab-el-Mandeb strait. Although there is a peace agreement, fragile peace agreement, I would say, in place currently between Israel and Hamas. Vessels have not returned to crossing the strait in a normal fashion. Crossings are still well below where they were prior to the beginning of the conflict. And as we see on the bottom left chart, the red line, which depicts the percentage of crossings through the Bab-el-Mandeb strait. On the top right-hand chart, instead, we show the East to West and West to East CPP ton day volumes being transported. So as a result of more volumes having to sail the longer routes through Cape of Good Hope, if volumes had not been affected as a result of this conflict of having to sail these longer routes, we would have expected ton days to have risen and that authorized. That is what happened in the first 9 months of '24, where we saw a big spike relative to the red line, which is the average for 2023. But thereafter, we saw a decline -- a quite pronounced decline in the fourth quarter of '24 and a further small decline from that level in the first 9 months of '25. There was a pickup in activity over the summer. But nonetheless, the average for the period is well the average of 2023. And then there was a more pronounced decline in October. So, I would argue that even a normal -- if normal crossings were to resume because this peace agreement holds and then this will not -- is not likely to be negative for the market, and it could potentially be also positive. The environment we had in the first 9 months of '24 was exceptional. We had very, very strong refining margins and big arbitrage opportunities, which opened up to import these products into Europe, where stocks were very low. And therefore, traders could justify paying up for vessels and saving the longer route and incurring these additional costs associated with saving such longer routes. In a more normalized market, where these arbitrages are not as big than having to sail the longer route could actually be a negative because it could really kill the trade and force product to stay more regionally, which is what happened mostly since Q4 '24. And here, we show also the effect of cannibalization, which we do not see in the graph in the previous slide. So, not only the ton days overall declined since Q4 '24, but also a larger portion of the products of these products on this, in particular, East to West route were transported on non-coated tankers, VLCCs, but even more so on Suezmaxes. As we see here on the graph on the right-hand side, the blue bars are the Suezmax volumes transported. And on the left-hand side, on the yellow line here, we see the percentage of volumes transported on uncoated tankers. It did spike at 12% in 2024 when the dirty markets were weak and the clean markets were doing very well, and there was a big incentive for vessels -- dirty vessels to clean up to transport these products. It then declined very sharply this percentage, but then it bounced back and now it's at 7%. So, we continue seeing this cannibalization ongoing. It's more to do now with vessels performing maiden voyages. So, newbuilds delivered that transport CPP on their maiden voyages rather than cleanups, but there is also some cleanups which have happened this year. Going forward, it is -- this cannibalization is, we believe, is going to be driven mostly by new builds, transporting CPP on their maiden voyages because of the acceleration in deliveries of newbuilds that is expected, planned, let's say, for the rest of this year and the coming 2 years. Here, we see that the refining margins have increased quite sharply, especially here, we see crack margins for Rotterdam and they have moved up quite significantly over the last few weeks, in particular, for diesel and gasoline. And this spike here, we see coincides with the introduction of the tougher sanctions on Russia on Rosneft and Lukoil by OFAC. U.S. Gulf Coast refining margins also are holding up at very attractive -- at attractive levels by historical standards. So, this should drive refining activity, strong refining activity in the coming weeks and months in our opinion. And this year is actually very important, what we are seeing here on the slide. On the graph on the left, we see this increase in sanctioned oil and water. This is a very pronounced increase on sanctioned oil and water, which has been ongoing, but which gained new impetus this year and in particular, also over the last few months as a result of the tougher sanctions imposed on both Iran, but in particular, on Russia. On the right-hand side, we see the total number of vessels sanctioned, which is above 800 vessels, which on a deadweight ton basis represents more than 15% of the tanker fleet. So it's a huge number. And there are also other vessels which still haven't been sanctioned, which are still involved in trades, which are shady. So part of the, let's say, shadow fleet. So if we include also these vessels, we are at around 20% of the tanker fleet on a deadweight ton basis. So it's a very high percentage of the fleet. And these vessels when they are sanctioned, their productivity falls. We have seen that vessel speeds have increased for non-sanctioned vessels over the last few weeks and months as is to be expected given the strong freight rates, especially for crude tankers that we are seeing. But we have seen a decline in average speeds for the sanctioned vessels. And a lot of sanctioned vessels are really not able to find, let's say, a destination for the product. So now they are on a wait-and-see mode in some cases. So let's say, this increase in oil and water is linked to a more inefficient process to sell these vessels. But to a certain extent, it could also be seen as a sort of floating storage, which is happening because this sanctioned oil is finding it hard to then find the final buyer. We do expect that eventually this sanctioned oil will be sold because these counterparties have proven very adept at circumventing sanctions, but it creates inefficiencies in the market and the product might have to sail twice. There might be an intermediate destination to which the oil is sold and then it's retransported to its final destination where it is consumed. So the more use also of, of course, middlemen to obfuscate the origin of the product and of course, more ship-to-ship transfers. And here, we see instead the fees on both U.S. -- by both the U.S. and China, which were imposed and then removed. Of course, it started with the U.S. imposing fees on vessels, which were built or operated in China by Chinese companies. And these fees took effect on October 14. And just before they were supposed to take effect, China introduced similar reciprocal fees on vessels, which were linked to U.S. interest. And then a few weeks later, the 2 countries managed to reach an agreement to postpone the implementation of these fees by 1 year. But nonetheless, in particular, the fees imposed on Chinese vessels is quite impactful because China is such an important country for the production of vessels today. And the threat of such fees means that companies are not as keen in ordering in China as they otherwise would be. So, these fees might end up never being implemented, but there is a risk that they will be. And as they had been -- as per the last, let's say, version of these fees, those imposed by the U.S., a large number of bigger tankers would built in China would be affected. But of course, even if you are ordering a smaller tanker, you still would have concerns in doing so in China because you never know how the legislation could then be modified at a later date. Going on to the following slide, we see here the dynamics for oil demand and refining throughputs. Both are not growing at a very strong pace, but they are still expanding nonetheless. And what is quite important here is where this growth is happening, in particular, for the refined volumes. And what we are seeing is that quite important closures of refineries in Europe and in the U.S. West Coast. So, we are seeing declines in refining throughputs in these regions, which is being more than compensated by additional refining volumes coming from the Middle East, Asia and Africa. And that, I would say, is very supportive for the market going forward. As we saw over the summer here on the graph on the right, there was quite a sharp increase in refined volumes. And then the decline in October as usually happens because of refinery maintenance before winter in the Northern Hemisphere. And then we have this pickup in refined volumes, which usually happens in November and December and which we expect will occur also this year as refineries increase volumes in the coming months. Oil supply growth has been very abundant this year. It was expected to be a strong year in this respect. But with most of the increase coming from non-OPEC countries, OPEC instead decided to undertake an accelerated unwinding of the cuts, which had been previously implemented between April and September this year. It increased the production quotas by almost 2.5 million barrels per day with other increases then implemented in October and then also planned for November and December this year at a lower pace since October, but nonetheless, a very pronounced increase in production quotas from OPEC this year, which coupled with the non-OPEC supply, which came to market is -- would have created a very oversupplied market. But this didn't happen to the extent that could have been expected because China, in particular, stepped in to buy more products. So, China has been building up its oil stocks, strategic oil stocks, so compensating for what otherwise would have been an oversupplied market. And going forward, it is likely that the lower production from Russia and from Iran could also act as a balancing mechanism to compensate for the sharp increases expected in production also for next year. And that would be good for the market because we would have a situation where sanctioned oil is being replaced by non-sanctioned oil, which, of course, then will be transported on non-sanctioned vessels. So, increasing the demand and the freight rates for the compliant fleet. And going on to the following slide, we see here that the total oil at sea has been rising and not as much as the sanctioned oil at sea, but it has been rising nonetheless also and it's now at levels, which are higher than at any point in time since January 2020 and well above also the levels, which were reached in April 2020 when there was this trade war between Russia and Saudi Arabia for market share where they inundated the market with oil, and we had a big spike in floating storage as we see on the graph on the top. We are still not seeing the spike in floating storage, but we are seeing a big increase in oil and water. So as I mentioned, some of this oil and water is potentially, let's say, a kind of floating storage, which is still not being classified as such. But a lot of it is actually just oil, which is being transported in a more inefficient way, being triangulated more ship-to-ship transfers, vessels, sanctioned vessels slowing down. And going on to the next slide. Here, we see the individual components of oil demand growth. At the beginning of the year, naphtha was expected to be an important contributor together with jet fuel. Jet fuel maintained, let's say, its promises and it was the second biggest contributor, but naphtha disappointed to a large extent. And that has to do with the -- possibly the positive -- more favorable arbitrages available for purchases of LPG, which competes with naphtha as a petrochemical feedstock. And however, what surprised positively, the product which surprised positively this year was diesel for which at the beginning of the year, the demand growth was not very spectacular, the anticipated demand growth. And instead, it ended up being the product which contributed more positively to demand growth this year. Here, we see that despite what we were discussing on the previous slide and not very pronounced growth for naphtha demand, Chinese imports of naphtha have been growing quite sharply over the last few years and also this year despite a decline over the last few months. And that has also to do with the tariffs, which had been imposed by China on imports of U.S. LPG. U.S. is one of the biggest exporters of LPG. And given these tariffs imposed by China on this product from the U.S. it became more attractive for them to import naphtha. And here, we see this is quite an important slide now because as we have been mentioning now for some time, we anticipated the crude tanker market is doing well and that they were going to be providing support to the product tanker market through positive spillover effects because of these transmission mechanisms, which there are between these 2 markets. And that is happening now. So, this thesis is playing out in this moment, and we are seeing this very big spike in freight rates now for the crude tankers, in particular, VLCCs are doing very well right now, trading at above $100,000 per day, but also Suezmaxes and Aframaxes are doing very, very well. And not surprisingly, we have seen that the percentage here of LR2s, which are trading clean has fallen since July '24 from 63% to 57%. So, there's been a steady decline in the percentage. And this has happened despite the large and increasing numbers of LR2s that have been delivered over the course of this year. So as they are delivered, they are delivered as clean vessels, but they have -- a large portion of them have been moving straight into dirty trades, and that has contributed to this reduction in -- as well as the cleanups of vessels, which were previously trading clean to this sharp reduction in the proportion of LR2s trading clean. And this can continue. I mean, in July 2020, this percentage was as low as 54%, but there is nothing which prevents this percentage going even lower than that in the future. And given the strong outlook for the crude markets for next year, for the reasons that we previously discussed, I would expect this percentage to continue falling and therefore, to indirectly continue tightening the clean markets. And going on to the following slide, we see here that once again, there are these closures of refining capacity in Europe and in the U.S., particularly in the U.S. West Coast. And those in the U.S. West Coast also are quite important because of The Jones Act and the high cost of distributing product domestically in the U.S. The needs which are going to arise, import needs for the U.S. West Coast are likely to be met with imports -- increasing imports from Asia, so contributing very positively to ton miles. Here, we see Africa has been an important contributor in '24. Now, there is talks of Dangote, which opened the 650,000 barrels refinery last year, also expanding, more than doubling its production capacity in the coming years to 1.4 million barrels per day. So, Africa and in particular, Nigeria could become a very important exporter of refined products in the coming years according to the government plans. And on the slide here, we see that this is another very positive message that we can show here. And whilst at the end of '24, we had these 2 lines, the gray and the blue line on the graph on the top left, which were very close because of the sharp increase in the order book. Now, they are starting to diverge again. Very few vessels ordered this year. So the order book has declined as vessels have been delivered and now it stands at 14.4%. But in the meantime, the fleet continued aging. So, we had 19.5% of the MR and LR1 fleet now, which is more than 20 years of age. So, this gap between these 2 lines bodes well for the market -- for the future market despite the acceleration in vessel deliveries, which is planned for '26 and '27. But these vessels will then, as they age, soon start reaching also the 25-year mark as we see on the bottom left. And in 2028, you have 4% of the MR and LR1 fleet, which is reaching that threshold and then that percentage in the following years increases even further. So, there's ample scope for demolition starting from 2028, and that should support the market going forward. Demolitions on the bottom graph, you see that they are still at very low levels, but they have been picking up over the last few quarters. So, 11 vessels demolished in Q3. So, well below levels reached in 2021 and 2018, and even more so below what is anticipated from 2028. So on the top graph, we do see that there is this acceleration in deliveries from Q3 '25 and into next year. But if we look at the -- yes, here, we see only 37 vessels ordered this year. So, very low number if you analyze this. This is in the first 9 months, so very low relative to historical standards. And so despite this acceleration in deliveries, the fleet growth across all tankers for next year is around 3%. And given what we discussed with the increasing vessels being sanctioned, the decreasing productivity of the sanctioned vessels, the aging of vessels, we expect the market to be able to absorb this fleet growth quite well and for us to continue benefiting from strong markets also next year. It also should be pointed out that the fleet growth -- if we look at the fleet growth in the sub-20 fleet next year across all tankers, it's less than 1%. So, I think that's also an important indicator because vessels as they cross the 20-year mark, whether they are sanctioned or not, they do start trading in more marginal trades. And so the market for sub-20 vessels is still expected to be very tight also next year. And then finally, here, we show our NAV discount, which is still very significant, although it has fallen a bit over the last few months. We are still at 40%. Okay, this is at the end of September. Thus, the share price has traded up slightly since then, but we are still trading at a big discount to NAV. Here, on the CapEx commitments, I think we already covered this on the previous slide, the use of funds. And yes, just quickly to mention, we didn't talk about the dividends. The Board approved an interim dividend of a gross amount of $15.9 million. And so we don't -- as previously discussed in other occasions, we don't have a dividend policy. But what we can guide today, the market, we can provide some guidance in this respect to the market today in relation to the dividends to be paid out of the 2025 results. The expectation is that the Board is going to be approving for next year an additional final dividend, which would then imply a payout ratio, including the share buybacks where we haven't been very active this year of 40%. So the same payout ratio that we had out of the 2024 results. And so this dividend, which was approved by the Board today is an advance on what we expect them to be, the decision in relation to the dividend that will be approved next year. And finally, yes, we continue working to make our fleet as efficient as possible through energy-saving devices and operational measures. But I think these are the most important slides that we wanted to cover. So, I pass it over to the Q&A. Thank you. Operator: [Operator Instructions] The first question is from Gian Marco Gadini of Kepler Cheuvreux. Unknown Analyst: Just a quick one on the fixing of the spot rates on Q4. We see that they were pretty strong at $28,000 per day. And I was wondering whether this is due to specific events, specific routes or it's something that we can also expect going forward? Antonio Carlos Balestra Mottola: Yes. Thank you, Gian Marco. Thanks for the question. No, I believe it reflects -- I mean, I think we don't have such a big fleet today on the spot market. So, we are slightly more than 50% covered through period contracts now. So, of course, this creates a bit more variability in the spot results and our results can differ slightly more from the market averages because of that. So we were, let's say, I think we employed our vessels quite well over the last few months. So, we managed to catch some good spikes in the market. But we have experienced quite strong markets, I must say. So, this result is a reflection of a strong market, which typically, usually in October, we actually have a quite pronounced correction in the market because of the maintenance activity that we referred to before, and we saw the graphs from the EIA with refined volumes dropping quite sharply in October. But despite that, markets held up at very good levels, especially in the U.S. Gulf. I think they were very -- we had a number of spikes in the market, a lot of volatility, but a number of spikes. And also East of Suez markets held up quite well. So, that is why we have these good results in the days fixed so far in Q4. The markets at this very moment are slightly weaker than that, than these averages that we managed to achieve so far in Q4. But I personally expect that the market will then bounce back in the second half of November and in December, and we are going to have a very strong end to the year. And I'm not the only person expecting that. If you look at the paper markets, also the rate -- the levels are very strong for the last 2 months of this year. So, there is this expectation that we will end the year on a high note because of the very strong -- very high volumes of oil and water, the high refining margins that there are right now. So as these refineries come out of maintenance season in the coming weeks, they're going to be pumping more oil into the market, more refined products. Now, we have a lot of crude oil at sea, but very soon, we will be going to have also a lot of refined product at sea. Operator: The next question is from Massimo Bonisoli of Equita. Massimo Bonisoli: Carlos and Federico, I have 2 questions. One regarding the recent buildup in floating inventories. Could this dynamic accelerate into 2026 if the Brent forward curve moves further into contango? How much demand would create for clean tankers in your opinion? And the second, let's say, on the TC rates, how would you describe the current condition in the time charter market? Are clients still showing reluctance to commit to medium-term contracts? Or are you seeing sign of increased appetite to lock in rates? Antonio Carlos Balestra Mottola: Yes. Massimo, thanks. Good questions. On the floating storage, let's go back to the slide here, which maybe helps us. But this is the sanctioned oil and water, right, where we see this very big pronounced increase here of around over the last few months, 100 million barrels per day -- 100 million barrels, sorry. And that is the main factor, which has driven the increase in the total oil at sea, which we see here in this graph. It seems less pronounced, but still it is at very high levels here. What seems not to be still have risen very much is the floating storage. So, this is oil at sea and on vessels, which are moving. So, they are not being classified as floating storage, but part of this could end up becoming floating storage in our opinion. But a large portion will then be discharged eventually at shore. It will take longer than usual because of the sanctions, because of this need of triangulations. So it will create a more inefficient market. So unless the oil price curve goes really into contango, we are not going to be seeing the onshore storage filling up to the levels, which would then encourage also the floating storage. We are not there yet, but it could happen. Of course, if that were to happen, too, then that would be an even bigger contributor to a very strong market, right? So it would really fire the market up. And some analysts believe that could happen, and they think that if that were to happen, you could see VLCCs reaching $200,000 per day. So it's not inconceivable. We saw VLCCs a few weeks ago, they were at $120,000 per day. So it could happen, and it will drive up all the market, right, not only the VLCCs for the reasons we mentioned because of the transmission mechanism, which there are between these different segments of crude and product tankers. And whether it will happen or not will also depend on how efficient or effective Russia is in continuing to finding workarounds to continue exporting its oil, right, and then how the OPEC reacts to that. So, what is the reaction function of OPEC? If these sanctions do slow down and reduce Russian exports, that could act as a rebalancing mechanism for the market and coupled also with tougher sanctions on Iran could mean the market is not as oversupplied as feared, in particular, if the Chinese continue building stocks. And in that case, we wouldn't be seeing a market going into contango, the forward curve going into contango. If you said the market is flooded with oil because we have not -- Russia continues exporting at the same levels as it was previously. And we have this anticipated growth in non-OPEC and OPEC oil supply. The OPEC supply growth now apparently is going to slow down because they are going to -- after this increase in December, they seem to want to pause further increases for a few months. But there's still a lot of non-OPEC growth planned for '26 and apparently much more than the demand growth. So, that in itself could create a very oversupplied market and a forward curve that goes into contango, if it's not compensated by lower production from Russia and Iran. And in that case, we could see onshore storage filling up and then floating storage happening. That would not be positive for the market longer term because eventually, those stocks would have to be digested, but it would create a very strong boost to the market short term. But yes -- so we don't know how this is going to play out, but there is this possibility. With respect to TC rates, we are seeing more interest today for TC, a lot more interest actually. We have had a lot of counterparties knocking at our doors to take vessels on TC. Also more interest for longer-term deals, which is also a positive sign. And so we will take advantage of that to gradually increase our contract coverage, which is already now at a higher rate than -- we are already now at 32% contract coverage for next year. But I wouldn't be surprised if that rises more before the end of the year. Operator: [Operator Instructions] Gentlemen, there are no more questions registered at this time. I'll turn the call back to you. Antonio Carlos Balestra Mottola: Great. So if we don't have any more questions, thank you, everyone, for participating in today's call and look forward to seeing you again next year when we announce and present our full-year results. And yes, thanks a lot, and see you soon then. Federico Rosen: Thank you. Goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your devices. Thank you.
Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2025 SandRidge Energy conference call. [Operator Instructions] I would now like to turn the call over to Scott Prestridge, SVP of Finance and Strategy. Please go ahead. Scott Prestridge: Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO; Jonathan Frates, our CFO; Brandon Brown, our CAO; as well as Dean Parrish, our COO. We would like to remind you that today's call contains forward-looking statements and assumptions, which are subject to risk and uncertainty, and actual results may differ materially from those projected in these forward-looking statements. These statements are not guarantees of future performance, and our actual results may differ materially due to known and unknown risks and uncertainties as discussed in greater detail in our earnings release and our SEC filings. We may also refer to adjusted EBITDA and adjusted G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website. With that, I'll turn the call over to Grayson. Grayson Pranin: Thank you, and good afternoon. I'm pleased to report on a positive quarter for the company. Third quarter production averaged approximately 19 MBoe per day, an increase of approximately 12% on a Boe basis and 49% on oil, translating to a roughly 32% increase in revenue and a 54% increase in adjusted EBITDA relative to the same period last year, benefiting from increased volumes from our prior Cherokee acquisition and development program this year. I'll turn things over to Jonathan for some more details on financial results for the quarter. Jonathan Frates: Thank you, Grayson. Compared to the third quarter of 2024, the company continued to benefit from higher natural gas prices, partially offset by headwinds in WTI. The company continued to grow production, generating revenues of approximately $40 million, which represents a 32% increase compared to the same period last year. Adjusted EBITDA was $27.3 million in the quarter compared to $17.7 million in the prior year period. We continue to manage the business within cash flow while growing production and utilizing our substantial NOL, which shields us from federal income taxes. At the end of the quarter, cash, including restricted cash, was approximately $103 million, which represents approximately $2.80 per common share outstanding. The company paid $4.4 million in dividends during the quarter, which includes $0.6 million of dividends paid in shares under our dividend reinvestment plan. Including special dividends, SandRidge has now paid $4.48 per share in dividends since the beginning of 2023. On November 4, 2025, the Board of Directors declared a $0.12 per share dividend payable on November 28 to shareholders of record on November 14, 2025. Shareholders may elect to receive cash or additional shares of common stock through the company's dividend reinvestment plan. Year-to-date through the end of the quarter, the company repurchased approximately $600,000 or $6.4 million worth of common shares. Our share repurchase program remains in place with $68.3 million remaining authorized. Capital expenditures during the period were roughly $23 million, including drilling and completions and new leasehold acquisitions. The company has no debt outstanding and continues to live within cash flow, funding all capital expenditures and capital returns with cash flows from operations. Commodity price realizations for the quarter before considering the impact of hedges were $65.23 per barrel of oil, $1.71 per Mcf of gas and $15.61 per barrel of NGLs. This compares to second quarter realizations of $62.80 per barrel of oil, $1.82 per Mcf of gas and $16.10 per barrel of NGLs. Our production remains meaningfully hedged through the fourth quarter of the year with a combination of swaps and collars representing approximately 35% of fourth quarter production based on guidance. This includes approximately 55% of natural gas production and 30% of oil. These hedges will help secure a portion of our cash flows and support our drilling program through recent commodity price volatility. Despite growing production, our commitment to cost discipline continues to yield results with adjusted G&A for the quarter of approximately $2.1 million or $1.23 per Boe compared to $1.6 million or $1.02 per Boe in the third quarter last year. Net income was approximately $16 million during the quarter or $0.44 per basic share and adjusted net income was $15.5 million or $0.42 per basic share. This compares to $25.5 million or $0.69 per basic share and $7.1 million or $0.19 per basic share, respectively, during the same period last year. Adjusted operating cash flow was $28 million during the quarter. Finally, despite the ramp-up of our capital program, the company generated free cash flow before acquisitions of roughly $6 million during the quarter and $29 million year-to-date. Before shifting to our outlook, we should note that our earnings release and 10-Q will provide further details on our financial and operational performance during the quarter. Now I'll turn it over to Dean for an update on operations. Dean Parrish: Thank you, Jonathan. Let's start with recent results. During the third quarter, the company successfully completed and brought online 3 wells from our operated 1-rig Cherokee drilling program. We are currently completing the fifth and sixth wells in the program in our drilling the [indiscernible]. We are pleased with the results of the first 4 operated wells, which had a per well average peak 30-day production rate of approximately 2,000 Boe per day, made up of 43% oil. The first well in the program has now produced approximately 275,000 Boe in its first 170 days of production, demonstrating strong rates beyond the initial 30 days, which indicates attractive recovery trends. A majority of the remaining wells in our development program this year directly offset these and other proven wells in the area, which have had similar performance. These wells and the results in the area give further confidence in reservoir quality and expectations in the area. Moving to our capital program. We plan to drill 8 operated Cherokee wells with 1 rig this year and complete 6 wells. The remaining 2 completions are anticipated to carry over into next year. Currently, all but one of our planned wells are proved undeveloped or PUDs, meaning that our planned drilling locations this year will offset producing wells, which translates to higher relative confidence in well performance. Gross wells costs vary by depth, but are estimated to be between $9 million and $12 million. While we have taken proactive steps to help mitigate the effects of inflation, further changes to tariffs or other factors could influence these costs in the future. We intend to spend between $66 million and $85 million in our 2025 capital program, which is made up of $47 million to $63 million in drilling and completions activity and between $19 million and $22 million in capital workovers, production optimization and selective leasing in the Cherokee play. Our high-graded leasing is focused to further bolster our interest, consolidate our position and extend development into future years. We intend to fund capital expenditures and other commitments using cash flows from our operations and cash on hand. Our legacy assets remain approximately 99% held by production, which cost effectively maintains our development option over a reasonable tenor. These non-Cherokee assets have higher relative gas content, but commodity price futures are not yet at preferred levels to resume further developments or more well reactivations at this time. Commodity prices firmly over $80 WTI and $4 Henry Hub over a constant tenor and/or reduction in well costs are needed before we would return to exercise the option value of further development or well reactivations. Now shifting to lease operating expenses. LOE and expense workovers for the quarter were approximately $10.9 million or $6.25 per Boe compared to $5.82 per Boe in the third quarter last year. We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure, operation center and other company advantages. With that, I'll turn things back over to Grayson. Grayson Pranin: Thank you, Dean. As we look forward to developing our high-return Cherokee assets this year and into next, we anticipate growing oilier production volumes further. From a timing perspective, we expect to deliver 2 more wells to sales this year with another 2 completions carrying over into next year. This, combined with further drilling, could see production volumes, specifically oil volumes increasing meaningfully above 2025 exit rate levels. At current commodity prices, our operated Cherokee wells have robust returns and breakevens for our planned wells are down to $35 WTI. Given these returns and durability, we plan to continue our 1-rig development plan into next year with a watchful eye to adjust if needed. Please keep in mind that we do not have any significant leasehold expirations in the near term and have the flexibility to defer these projects if needed for a period of time. We are hopeful that our nearly 24,000 net acres in the Cherokee play will translate to a meaningful multiyear runway as we look beyond 2025. And we plan to continue to invest in new leasing and other opportunities that will further bolster our operating position and extend that runway. I would like to pause here to highlight the optionality we have across our asset base, coupled with the strength of our balance sheet, which sets us up to leverage commodity price cycles. The combination of our oil-weighted Cherokee and gas-weighted legacy assets as well as robust net cash position give us multifaceted options to maneuver and take advantage of different commodity cycles. Put simply, we have a strong balance sheet and a versatile kitbag, which makes the company more resilient and better poised to maneuver and adjust no matter the commodity environment. I will now revisit the company's advantages. Our asset base is focused in the Mid-Continent region with a PDP well set that provides meaningful cash flow, which does not require any routine flaring of produced gas. These well-understood assets are almost fully held by production with a long history, shallowing and diversified production profile and double-digit reserve life. Our incumbent assets include more than 1,000 miles each of owned and operated SWD and electrical infrastructure over our footprint. This substantial owned and integrated infrastructure helps derisk individual well profitability for a majority of our legacy producing wells down to roughly $40 WTI and $2 Henry Hub. Our assets continue to yield free cash flow. This cash generation potential provides several paths to increase shareholder value realization and is benefited by low G&A burden. SandRidge's value proposition is materially derisked from a financial perspective by our strengthened balance sheet, including net negative leverage, financial flexibility and advantaged tax position. Further, the company is not subject to MVCs or other significant off-balance sheet financial commitments. We have bolstered our inventory to provide further organic growth opportunities and incremental oil diversification with low breakeven in high-graded areas. Finally, it is worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around them. We are particularly proud to announce that our team recently achieved 4 years without a reportable safety incident. This incredible achievement demonstrates our continued commitment to putting the health and safety of our employees and contractors at the forefront of our business. Not only do we continue to operate our existing assets extremely efficiently and execute on our Cherokee development in an effective manner, but we do so in a prudent and safe manner. Shifting to strategy. We remain committed to growing the value of our business in a safe, responsible, efficient manner while prudently allocating capital to high-return growth projects. We will also evaluate merger and acquisition opportunities in a disciplined manner with consideration of our balance sheet and commitment to our capital return program. This strategy has 5 points: one, maximize the value of our incumbent Mid-Con PDP assets by extending and flattening our production profile with high rate of return production optimization projects as well as continuously pressing on operating and administrative costs. Two, exercise capital stewardship and invest in projects and opportunities that have high risk-adjusted fully burdened rates of return while being mindful and prudently targeting reasonable reinvestment rates that sustain our cash flows and prioritize a regular way dividend. An important part of this organic growth strategy is further progressing our Cherokee development and economically growing our production levels while providing further oil diversification. However, we will continue to exercise capital stewardship and maintain flexibility to respond to changes in commodity prices, costs, macroeconomic and other factors. Three, maintain optionality to execute on value-accretive merger and acquisition opportunities that could bring synergies, leverage the company's core competencies, complement its portfolio of assets, further utilize its approximately $1.6 billion of federal net operating losses or otherwise yield attractive returns for its shareholders. Fourth, as we generate cash, we will continue to work with our Board to assess path to maximize shareholder value to include investment in strategic opportunities, advancement of our return of capital program and other uses. Our regular way quarterly dividend is an important aspect of our capital return program, which we plan to prioritize in capital allocation along with opportunistic share repurchases. The final staple is to uphold our ESG responsibilities. Now shifting over to administrative expenses. I will turn things over to Brandon. Brandon Brown: Thank you, Grayson. As we approach the conclusion of our prepared remarks, I will point out our third quarter adjusted G&A of $2.1 million or $1.23 per Boe continues to compare favorably to our peers. The continued efficiency of our organization reflects our core value to remain cost disciplined as well as prior initiatives, which have tailored our organization to be fit for purpose. We will maintain our efficiency and low-cost operation mindset and continue to balance the weighting of field versus corporate personnel to reflect where we create value. Outsourcing necessary but perfunctory and less core functions such as operations accounting, land administration, IT, tax and HR has allowed us to operate with total personnel of just over 100 people while retaining key technical skill sets that have both the experience and institutional knowledge of our business. In summary, at the end of the third quarter, the company had over $100 million in cash and cash equivalents, which represents approximately $2.80 per share of our common stock outstanding, an inventory of high rate of return, low breakeven projects, low overhead, top-tier adjusted G&A, no debt, negative leverage. A flattening base PDP production profile, double-digit reserve life and approximately $1.6 billion of federal NOLs. This concludes our prepared remarks. Thank you for your time today. We will now open the call to questions. Operator: [Operator Instructions] Your first question comes from the line of [ David Terdell ] with [indiscernible]. Unknown Analyst: Congratulations on a great quarter and what looks like a fantastic purchase in Cherokee. Can you talk a little bit more about M&A activity in the Cherokee opportunities for you guys, M&A opportunities overall? And maybe discuss a little bit more about how a year later after having bought these assets, how you can evaluate the success of that purchase? Grayson Pranin: Sure, David, it's great to hear from you and a great series of questions. I'm going to try to tackle from the top if I missed something, please let me know. I think M&A opportunities in the Cherokee exist, although it's a very competitive landscape. So we continue to keep our eyes wide open. I think those opportunities are right now predominantly leasehold or acreage related because a lot of the PDP is new and building, so there's not that sustained level of PDP-based cash flow like you'll get in more aged assets. And that could change over time as further development occurs in the play. I think within the overall Mid-Con, the M&A landscape is healthy. There's been a number of deals announced within Mid-Con overall within the last several weeks. We continue to look at a lot of these and look for opportunities that could have synergies, whether that's in the Cherokee play or within our legacy assets or areas that we could apply our low-cost know-how where there's incremental margin that can be added through our own skill sets and through our structure, right? Because we have this 24-hour, 7-day a week man operations center that allows us to operate very cost effectively. And from a back-office perspective, we can add assets very efficiently without really increasing G&A materially. As we look towards last year's acquisition, I think we continue to see that as very favorable. Not only did it add accretive cash flow, but the operations side of the house has been able to add meaningful margin by reducing costs and on some of the PDP wells, finding opportunities that make that production curve up and to the right through low-cost workovers and other activity there. I think you can see the results of that. And David, you pointed out for themselves, just look at the growth, not only from the acquisition, but what we've been able to do from a development perspective year-over-year with EBITDA near 54% increase -- so I think we're very pleased. And hopefully, that answers your questions. I'm happy to follow on as needed. Operator: [Operator Instructions] There are no further questions at this time. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Ladies and gentlemen, welcome to the Addiko Bank Results Q3 2025 Conference Call. My name is Youssef, the Chorus Call operator. [Operator Instructions] This conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Herbert Juranek, CEO. Please go ahead. Herbert Juranek: Good afternoon, ladies and gentlemen. I would like to welcome you to the presentation of the results of the third quarter 2025 of Addiko Bank AG on behalf of my colleagues, Sara, Ganesh, Edgar and Tadej. Let me show you today's agenda. In the beginning, I will present to you the key highlights of our results. Ganesh will continue with our achievements on the business side. After that, Edgar will give you more details on our financial performance. And Tadej will inform you about the developments in the risk area. Finally, I will do a quick wrap-up before we go on to Q&A. So let's start with a quite positive note. I'm happy to inform you that in Q3, we achieved a record operating performance with an operating result of EUR 31.2 million quarter-to-date due to a strong business performance of our team and due to good cost management. This represents the highest quarterly operating results so far, achieved entirely under the new business model. On a year-to-date basis, the operating result ended up at EUR 82.9 million despite the significantly lower interest rate environment and based on our measures to manage the inflation-driven updrift of our administrative costs. The strong business performance is based on a 17% growth rate in new consumer lending business and on a 9% growth rate in new SME lending business. However, the positive effects from new business were, to a certain extent, neutralized by lower income from variable back book and national bank deposits as well as by repayments of loans driven by aggressive competitor attacks. Nevertheless, we were able to grow our net commission income by 7.8% year-on-year or even at 12.5% if you compare the third quarter with the third quarter last year. Moreover, we managed to expand our active customer base by 5% year-on-year. Altogether, we could keep our net banking income stable, compensating the mentioned negative effects. Let's briefly comment on our risk performance. We were quite successful in reducing our NPE volume further to EUR 140 million at the end of Q3 compared with EUR 145 million at the end of 2024. Our NPE ratio is kept stable at 2.9%, while our coverage ratio continued to improve to 82.2% from 80.8% at the end of June. Our cost of risk on net loans ended up at 0.7% or EUR 25.5 million compared to EUR 25 million last year. Tadej will give you more details on the risk development later. So in summary, we achieved a net profit of EUR 11.3 million in Q3, which results in a year-to-date profit of EUR 35.3 million at the end of the third quarter 2025. Consequently, the return on average tangible equity stands at 5.6% and the earnings per share at EUR 1.83. The funding situation remained quite solid with EUR 5.2 billion deposits and a loan-to-deposit ratio of 69%. Our liquidity coverage ratio is currently very comfortable, above 380% at group level. And finally, our capital position continues to be very strong with a 21.3% total capital ratio, all in CET1, based on Basel IV regulations. Now what else is worthwhile to mention? As presented in our last earnings call, we have laid the operational foundation for our market expansion into Romania in the first half of 2025 and started our fully automated consumer lending business based on a very diligent and prudent risk approach. On that basis, we have started at the end of August with a 360-degree marketing campaign to raise awareness, to build the brand, to position our product and to start generating business. The campaign included TV and out-of-home advertising as well as digital integrated marketing campaigns and was able to create noise and positive reactions in the market. Despite significant parallel marketing efforts by incumbent banks, we view this initiative as a strong starting point for building our brand in a new market and is a solid foundation for continued marketing activities to drive sustained traction. Ganesh will provide further details in his section of the presentation. Now let's come to a different topic. In 2024, Addiko decided to get a listing on the Frankfurt Xetra platform to improve the trading liquidity and to increase the attractivity to a wider range of potential investors. Now after 1.5 years, based on the very limited trading volume in Frankfurt and due to the given changes in the shareholding structure, we concluded to discontinue the Xetra listing in Frankfurt as of 1st of January 2026, as the defined targets were not met. Concerning our ESG program, I would like to inform you that all initiatives are on track and progressing as planned. You will find more information in the appendix of the presentation. Next page, please. Unfortunately, I have to inform you about several unpleasant changes driven by local governments and local regulators with significant impacts to our business revenues. I will explain them country by country. In Croatia, we are confronted with a series of measures with severe impact on our earning capacity. As of 1st of July this year, the Croatian National Bank introduced preventive macro potential measures restricting consumer lending criteria. Amongst other regulations, a debt-to-income ratio of 40% for nonhousing loans was introduced. The effect of this new rule was already visible with an approximately 30% reduction of our new consumer -- Croatian consumer business generation in the third quarter vis-a-vis last year. Now the experience with our respective vintages does not provide the evidence that such a measure was needed. Moreover, we anticipate detrimental consequences for the concerned customers as those affected may be excluded with their loan demand from the banking system and cover it with unregulated providers. Tadej will give you more background later on. Furthermore, the Finance Ministry of Croatia supported a new regulation to restrict and cut banking fees as of 1st of January 2026. This means that we have to offer free account packages, which shall include opening, maintaining and closing the account, Internet and mobile banking, depositing money, issuing and using debit cards, incoming euro transactions and executing payments with debit cards. Additionally, we have to provide a fee-free channel for cash withdrawals for all customers, while for pensioners and vulnerable client groups, both ATM and branch must be free of charge. On top of that, from the 1st of January 2027, 2 cash withdrawals on ATMs of other banks must be offered for free. All of that eats directly into our core business revenues. And one can ask the question, why do banks have to provide such core services for free? In Serbia, starting with the 15th of September, the National Bank of Serbia asked all banks to reduce the interest rate by 300 basis points to maximum 7.5% for citizens with an income of up to RSD 100,000 per month. This reflects almost the average salary in Serbia. In addition, no loan processing or account maintenance fees shall be charged. Unfortunately, this will affect the vast majority of our customers. In the Republika Srpska, the banking agency decided to restrict specific banking fees. As of 9th June 2025, fees for credit party account maintenance, ATM account balance checks and for sending warning letters of delayed payments are not allowed anymore. And finally, in Montenegro, effective 1st of November 2025, a new regulation will introduce a debt-to-income cap of 50%. This will be accompanied by a restriction on maximum interest rates, limiting them to no more than 100% above the average consumer rate in the market, including non-payroll loans and credit cards. Now to summarize. Altogether, the measures depicted on this page would lead to an unmitigated potential impact of just above EUR 10 million on our revenue base. Nevertheless, we are actively working on solutions to mitigate these effects and to create new offers to our customers to enable new growth opportunities. Now with that, I would like to hand over to Ganesh to give you more insights on how we are reacting in this respect and first of all, to inform you on our business development. GaneshKumar Krishnamoorthi: Thank you, Herbert. Good afternoon, everyone. Moving to Page 6, I'm pleased to report strong third quarter performance in our Consumer segment, delivering 17% year-over-year growth in new business with a premium yield of 7.2%. This was achieved despite a persistently low interest rate environment and supported 9% year-over-year growth in the loan book. On the SME side, the new business origination grew 9% year-over-year with a solid yield of 5.1%. However, we continue to face a challenging market with competitors sharply lowering prices to stimulate demand. This has prompted many existing clients to repay loans early, particularly those with higher fixed rates originated last year. As a result, the SME loan book declined 2% year-over-year, mainly due to reductions in large tickets, medium segment loans. I will share more updates on SME turnaround plan on the next page. Overall, our focused loan book grew 5% year-over-year, and this focused book now accounts for 91% of our total loan portfolio, underscoring our strategy to prioritize high return and scalable lending. Please turn to Page 7 for a detailed outlook. Let's take a closer look at our Consumer segment. Year-to-date, we have delivered double-digit growth while maintaining premium pricing, driven by several key factors: number one, strong market demand across our core geographies. Number two, the launch of fully digital end-to-end lending with zero human interventions in 4 of our core markets clearly differentiates us from the competitors. Number three, our point-of-sale lending proposition continues to perform well, achieving 17% year-over-year growth. Number four, we have identified a sweet spot between growth and pricing, enabling us proactively to retain customers and the loan book through disciplined repricing actions. Number five, additionally, we are redesigning our mobile app, introducing new card features with Google Pay and Apple Pay integrations, which has contributed to an 8.5% year-over-year increase in net commission income. As Herbert mentioned, our business model has been affected by new regulatory restrictions. We are already implementing mitigation measures, including downselling, introducing core debt structures and focusing on high-quality customer segments with larger ticket size. Furthermore, we are developing a new specialist program that focuses on non-blending products, aiming at fee-based income growth, and we will share more details once the program is launched. We are confident that these initiatives will not only offset regulatory headwinds, but also strengthen the foundation for sustainable quality growth going forward. Over to SMEs. Our core business model remains unchanged, to be the fastest provider for unsecured low-ticket loans to underserved micro and small enterprises through our digital agents platform. As mentioned earlier, we are facing market challenges due to aggressive pricing, which has led to some loan book contraction. However, we are now seeing a recovery in the market demand. And to reignite growth, we have taken several strategic actions. Number one, our turnaround plan in Serbia, supported by new leadership team, is delivering 20% year-over-year growth in new business. In fact, all countries are recording double-digit growth, except for Slovenia. Number two, we are placing strong emphasis on retaining quality clients and the loan book through better pricing, loan prolongations and superior service delivery. Number three, we also have broadened our product range while maintaining our focus on unsecured loans, we are also expanding to secured investment loans with slightly higher ticket sizes, targeting both existing and new customers. And this has resulted in a 69% year-over-year increase in investment loan volumes. Finally, we have launched a new digital SME tool to process high-ticket loans with a greater speed and simplicity, providing a clear competitive advantage. Overall, we believe these initiatives positions us well to return to a sustainable growth in the SME segment going forward. Lastly, let me touch on our progress with AI adoptions. We are investing in AI technologies to enhance efficiency and customer experience across the organization. Two AI-driven applications are already live, one supporting employees with HR-related inquiries and the other assisting our call center by analyzing customer inquiries, feedback and creating responses. Additionally, we are exploring AI use cases in IT, risk and marketing, further strengthening our operational excellence and data-driven decision-making. To summarize, 2025 is a transitional year, focusing on refining our SME business model and launching new USPs that enhances speed, convenience and value across consumer and SME segments. These investments are essential, not only to drive future growth, but also to strengthen our specialization, stay ahead of the competition, compensate regulatory restrictions and justify high-margin premiums in a low interest rate environment. We are building the foundation for stronger, faster and more profitable growth in the years ahead. Please let me hand over to Edgar. Edgar Flaggl: Thank you, Ganesh, and good afternoon, everybody. Let's turn to Page 9 for an overview of our performance in the first 9 months of 2025. Despite a challenging interest rate environment and cost pressures, we delivered stable results, supported by resilient consumer lending, strong fee income and a robust capital position. Now let's take this one by one. Our net interest income came in at EUR 177.8 million, a slight year-on-year decrease of 2.2%. This marks a modest recovery compared to the 2.4% year-over-year decline, as reported in the first half this year. The decline was mainly due to the lower interest rate environment, which impacted income from our variable back book, so roughly 14% of our book, [ 1-4 ], and on National Bank deposits. As a reminder, the ECB implemented 8 rate cuts since June 2024, totaling a reduction of 2 percentage points, a faster pace than we initially anticipated. This also caused pressure on interest rates we can charge on new loans. Importantly, our Consumer segment performed quite strong with interest income up 7.3%, driven by 9% growth in the consumer portfolio. Overall, the focus portfolio grew 5% year-on-year, slightly ahead of the previous quarter. On the fee side, we delivered solid growth. Net fee and commission income rose 7.8% to EUR 57.8 million, driven by bancassurance, accounts and packages as well as card business, which altogether grew 11.6% year-on-year, with bancassurance as a key contributor. Now looking ahead, new regulations, respectively, law in Croatia, limiting fees on banking products will have an impact on fee generation going forward. Coming back to the end of the third quarter, as a result, net banking income remained stable at EUR 235.6 million despite the challenging environment. Our general administrative expenses in short OpEx increased slightly to EUR 144.5 million, up just 1% year-on-year, and that's mainly due to wage adjustments and operational updates as well as increases. When excluding the 3 million in extraordinary advisory costs related to takeover of [ what we had ] last year, operational costs were only up 3.2% year-over-year. Our cost-income ratio came in at 61.4%, which is a tad higher than last year. The operating result landed at EUR 82.9 million year-to-date, down only 0.8% year-on-year, supported by an exceptionally strong operational third quarter, as Herbert pointed out already. The other result, which includes costs for legal claims as well as for operational banking risks, remained manageable. We have allocated some additional provisions for new legal claims in Slovenia and made a small top-up in Croatia, also to reflect further increased lawyer costs. The main point in Slovenia remains what the higher courts will rule upon regarding the applicable status of limitation and if that will be in line with the dominant legal opinions. As usual, during the fourth quarter, a further deep dive will be conducted in the context of the year-end audit. So there is a possibility for some additions here. When it comes to risk costs, our expected credit loss expenses were EUR 25.5 million, which translates to cost of risk of 0.7% on net loans year-to-date. Tadej will provide more insights in just about a moment. All in all, we delivered a net profit after tax of EUR 35.3 million for the first 9 months. As of today, we do expect the fourth quarter contribution to be less pronounced. So while operating in a challenging rate environment and managing high cost pressures, our focus business remain resilient. And we are seeing solid momentum in our consumer lending and fee-generating activities this year, while also SME lending has started to pick up again in September. Turning to Page 10 and our capital position, which remains a real strength. Our CET1 ratio remained at a very robust 21.3% at the end of the third quarter. For context, that's only slightly down from the 22% at the end of 2024, which was under Basel III rules, while third quarter is calculated under the new Basel IV or call it CRR3 rules. You will notice that our risk-weighted assets increased, and that's mainly driven by changes in risk weighting under Basel IV as well as the new interpretation of EBA guidelines on structural FX, which we already discussed on the back of the half-year results. Looking ahead, we recently received the final SREP for 2026, which includes a small increase in our Pillar 2 requirement, up by 25 basis points to 3.5%, while the Pillar 2 guidance stays unchanged at 3%. So in line with the draft that we disclosed earlier. In summary, our capital position is very strong, giving us a solid foundation for future growth and the flexibility to navigate regulatory changes with confidence. With that, I'll hand over to Tadej for more on risk management. Tadej Krašovec: Thank you, Edgar, and good afternoon, everyone. Let me walk you through the credit risk section for the first 3 quarters of 2025. I'm glad I can report that in the first 9 months, we achieved excellent collection from defaulted clients, surpassing our goals and positively impacting loan loss provisions. At the same time, we managed risk rules dynamically and decisively to keep portfolio quality and NPE inflow under control on the group level. All that led to the NPE decrease, low NPE ratio and the level of loan loss provisions. I will talk about on this on the next page. As we see on the right-hand side of the slide, NPE portfolio decreased by EUR 2.5 million in the last quarter, which brings it to the EUR 4.9 million decrease on a year-to-date basis. NPE volume decreased to EUR 140 million, which is reflected in a stable [ NPE ] ratio of 2.9%. Short-term NPE initiatives are still ongoing, like, for example, further portfolio sale to dynamically drive further NPE portfolio reductions. At this point, I would like to refer to local limitations that central banks are imposing and were before mentioned by Herbert, specifically DTI limitations. Although these regulations will restrict more indebted and therefore, higher risk clients from obtaining larger loans with banks, which will result in an improved consumer portfolio quality; the excluded clients do not have a risk profile that would not be acceptable for Addiko. For context, clients who are no longer eligible due to new regulation limits have on average a default rate twice as high as those that remain eligible. However, the default rates in both groups remains below 2%. Using nearly 10 years of consumer behavioral data, we know that clients who have become noneligible demonstrate a risk profile well aligned with Addiko's business model and profitability objectives. Before going to the next page, let me revisit the topic from the previous calls. This is consumer portfolio in Slovenia. We see that smart risk restrictions implemented in the previous months have already a positive impact on the portfolio quality, which is getting gradually closer to our expectations. Let's move on to Slide 11. Loan loss provisions amounted to EUR 25.5 million in the first 9 months of 2025, resulting in a cost of risk of negative 0.71% on net loans basis. Segment breakdown is as follows: in Consumer, we recognized minus 0.7% cost of risk; in SME, minus 1.3% cost of risk, while nonfocus contributed to loan loss releases with a positive cost of risk of 1.6%. Development in SME segment was impacted by a black swan event, which represent almost 1/5 of loan loss provisions recognized in 2025. We talked about this case already in the previous earnings call. Loan loss provisions also include additional post-model adjustments recognized in the third quarter in the amount of EUR 3 million. The post-model adjustments will be netted out by model changes that will take effect in fourth quarter this year. This amount is in addition to EUR 1.2 million previously booked post-model adjustment to cover sub-portfolios where insufficient data is available for precise calibration. In conclusion, overall, Addiko's risk position remains stable and resilient, further supported by a strong collection performance and active portfolio management, resulting in a reduction of nonperforming exposure and lower loan loss provisions. Thank you for your attention and go back to Herbert. Herbert Juranek: Thank you, Tadej. Let's move on to the wrap-up. At the top of the slide, we present our current 2025 outlook figures. While our guidance is currently under review, due to the potential impact coming from the regulatory front, we have decided to maintain the stated outlook for 2025. We will update our guidance in line with the revised midterm plan and disclose it together with the year-end results for 2025 on the 5th of March 2026. Now we currently operate in a macroeconomic environment marked by global uncertainties, driven by conflicts such as the war initiated by Russia, shifting tariff conditions and persistent supply chain disruptions. Europe and the European Union are very much affected by these developments. However, if we look at the markets where we are operating in, they are performing better than the EU average and are also expected to sustain this outperformance. On that basis, we will concentrate our efforts to further innovate our product offerings and services to our customers in order to initiate sustainable growth in both business segments, Consumers and SMEs. Therefore, we are working on the preparation of our new midterm specialization program, which shall be launched and presented to you in the first quarter of 2026. This program shall enable further optimization of our cost base, expand digitalization capabilities and contain projects to exploit productive and profitable AI-based solutions. Altogether, we are confident to find the path to compensate the negative effects coming from the regulatory front and to prepare Addiko for future growth. Of course, by doing so, we will keep our prudent risk approach as one of our strategic anchors. Together with our dedicated team, we remain committed to delivering our best as we pursue our ambition to become the leading specialist bank for consumers and SMEs in Southeast Europe. On that basis, we will work with full energy to further improve the bank to create value for our clients and for our shareholders. With that, I would like to conclude the presentation. Our next earnings call to present to you the year-end results of 2025 is scheduled for the 5th of March 2026. I would like to thank you for your attention. We are now ready for your questions. Operator, back to you. Operator: [Operator Instructions] Our first question comes from Ben Maher from KBW. Benjamin Maher: I've got a couple. The first one is just on Romania. I was just interested to get your views on why the market is seen as particularly attractive. Is it seen as an underserved Consumer segment? Or is there other reasons that you're targeting a particular market for growth? I understand you're going to give your targets with full-year results, but it would be helpful just to get a sense of how important Romania will be as kind of a share of the business or a share of the loan book in kind of the terminal kind of state. And my second question is on the competitive pressures you note. Is this concentrated in a specific market? Or is this seen across your footprint? And then the third question is just on capital. As you said, it's very solid. I see the dividend still suspend. So I'm just interested for your thoughts on how you plan to monetize the excess capital next year. And then sorry, just a final clarification. Was it a EUR 10 million unmitigated revenue impact from the regulatory changes? I think you said, but perhaps I misheard. Herbert Juranek: Okay. Thank you for your question. Maybe we start one by one with Romania. I will give a brief feedback and maybe also, Ganesh, if you can then add your view on that. We consider Romania as an attractive market, given the digital capabilities given to us and also the stage of development of the market overall and the size of the market. So if you consider our existing markets, we lack scale there because of the size of the given countries. So we see that as an opportunity with our business model. We differentiate ourselves with a solution, which is very, very efficient straight through online. And we differentiate ourselves also with the USP that customers don't need an account with us when we do business. But I also have to admit that we are currently in a starting phase, we have a good engine, but our brand is not known. So that's what we are currently focusing on building up our brand there and getting traction on our business. Maybe, Ganesh, if you want to add something? GaneshKumar Krishnamoorthi: I think you mentioned well there. But additionally, we would like to expand this not just solely on the B2C level, we are also looking at expanding other channels digitally going forward. So we are exploring that options as well. And we will be also enhancing the product features with more refinancing capabilities. So yes, there's more things we are working on, which would help us to position more stronger than what we are today. But I think Herbert covered it with the USP, there's a distinct proposition we have in Romania. Edgar Flaggl: And maybe just to add or conclude on the Romanian questions, if I remember all of them correctly, so you asked about the impact or kind of the contribution in the results. So this year, we are not expecting any noteworthy contribution. It's rather the opposite due to building up the engine and also having some kind of a marketing push, as we disclosed. There is costs. It will take a bit of time for kind of a positive contribution to materialize. But overall, it's rather negligible in the short -- near and short term. Herbert Juranek: Okay. Let's go on to the second question. Edgar Flaggl: So the second one was, and Ben shout, if I misunderstood you, on the competitive pressure that we're seeing if this is like specific markets or across the board. GaneshKumar Krishnamoorthi: Thanks, Ben, for the question. So yes, on the SME level, we are seeing competition really pricing it quite low. They're looking for low margins and higher volumes in the loan book. We have also -- we faced this pressure already in a couple of quarters. We are also adjusting some price going forward and so focusing on growth. You already saw we have recovered well with the growth around 9%. So yes, I mean, we will continue to go forward. So -- but the competition is pricing across the markets, not just a specific market. We are seeing this quite extensively there. On the Consumer side, obviously, the whole Euribor changes is reflecting a much more lower interest rate environment. We see a big pricing pressure and also in Consumer side. And additionally, if you heard Herbert, he also mentioned we have in Serbia, a special situation where we have to drop our price 3% based on the new regulation. So yes, so a lot of pressure across the markets on the pricing side. Herbert Juranek: And the last question was on the capital and on the dividend. So if I understood you correctly, the question was, how is our view there and how do we want to continue here? From -- so according to the current situation, the shareholder situation did not change. So also, our perspective on the dividend is not changing. So there is no change for the time being. So what do we do with the additional capital? Of course, we will use it for further growth. But on the other hand, if the situation with the shareholders would change, we would also return back to the payout. Our dividend policy did not change. So we still are committed to the 50% payout ratio. And as soon as the topic is solved, we would return to that. Edgar Flaggl: And I think, Ben, you had one more question on the EUR 10 million unmitigated potential top line impact, but I didn't get the full question. Benjamin Maher: No. So just checking out the correct number. I want to make sure I didn't mishear -- it was that EUR 10 million unmitigated revenue impact. Edgar Flaggl: Yes, it's just above EUR 10 million. Operator: Next question comes from Mladen Dodig, Erste Bank. Mladen Dodig: Congratulations on the third quarter. If you allow me, I'm happy to see that in Serbia, you have finally managed to capture the decline -- to arrest the decline in the credit portfolio. So congratulations to that, too. As you explained, the moves with the interest rates, very difficult to grasp with also in Serbia. But again, it's a market battle. I already wrote my questions in the Q&A, so I will try to repeat them. IR sensitivity and breakdown of fixed and variable interest rate arrangements, if I'm not mistaken, there is -- that slide is missing in the presentation or not. Edgar Flaggl: Mladen, good to have you on the call. This is Edgar speaking. So you're absolutely right, it's missing because we only publish it on a half yearly basis. But if you would go back to the half-year results, I think it's Page 34, 35 or something, you would actually have it there. And given the structure of our balance sheet, it hasn't changed much. Mladen Dodig: It hasn't changed. Edgar Flaggl: Not much. So 14%, 1-4, is variable in our total loan book. Mladen Dodig: So the colleague already asked about Romania. You said a couple of things about the specialization program. So looking to extend the digital proposition efficiency and AI-based solutions. Any other details, maybe duration or some -- anything else on this? Herbert Juranek: Yes. I mean we will disclose it next year, but -- and we are currently in the process of finalizing our new midterm plan, and the specialization program will be part of that. So it's still under construction, but we aim -- it will have three different layers, the program, and it will be a midterm program. So it will last at least 2 years, potentially a bit more. So intended to bring the bank to the next level. And we will present it then, as said, together with the year-end result in 2026. Mladen Dodig: You already talked about the dividend and the shareholder structure. Could you tell us anything -- I bet you can't, but I need to ask. So is there any kind of event on the horizon that might trigger either the recall of this recommendation or some other action by the regulator? Herbert Juranek: Well, we are not aware about anything which would release or change our perspective on the dividend for the time being. But we are also prepared -- as I said beforehand, if the shareholder situation would change, we would be also ready to take actions on our side and to adjust accordingly. But if there was something already known today, we would, of course, disclose it. Mladen Dodig: And final question regarding Romania. I was recently in Bucharest and wanted to ask you, could it be possible that I heard commercial on Addiko on the radio... Herbert Juranek: Yes, this could be well because we -- as I said beforehand, we started our marketing campaign in August. And we will continue with this marketing campaign, and it also includes radio and TV. Mladen Dodig: Yes. I was driving there, and I heard something on radio because I don't know one word of Romanian, but I think I recognized the Addiko. Herbert Juranek: Good that you recognized it. Mladen Dodig: Yes. So yes, as you said, you are there, but it needs -- it takes time. Sorry for this mess-up with the call. Obviously, I changed recently with my computer. So obviously... Edgar Flaggl: No worries, Mladen. All good. Herbert Juranek: Any other questions? Operator: Ladies and gentlemen, that was the last question from the phone line. I would now like to turn the conference back over to Sara for questions on the webcast. Sara Zezelic: Thank you, operator. We have not received any further questions on the webcast. I'm handing over to Herbert for closing remarks. Herbert Juranek: So in this case, I would thank you very much for your attention. All the best from our side, and we hear each other then in March next year with our year-end results. Thank you very much for attending. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Datadog Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Yuka Broderick, Senior Vice President of Investor Relations. Please go ahead. Yuka Broderick: Thank you, Martin. Good morning, and thank you for joining us to review Datadog's third quarter 2025 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO; and David Obstler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the fourth quarter and the fiscal year 2025 and related notes and assumptions, our gross margins and operating margins, our product capabilities and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended June 30, 2025. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended September 30, 2025, and other filings with the SEC. This information is also available on the Investor Relations section of our website, along with a replay of this call. We will discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com. With that, I'd like to turn the call over to Olivier. Olivier Pomel: Thanks, Yuka, and thank all of you for joining us this morning to go through our results for Q3. Let me begin with this quarter's business drivers. We have seen broad-based positive trends in the demand environment with an ongoing strength of cloud migration and digital transformation. Against this backdrop, we executed a very strong Q3 both in new logo bookings and usage growth of existing customers. As a notable inflection, we saw acceleration of year-over-year revenue growth across our non AI customers. And the sequential usage growth for non-AI existing customers was the highest we have seen going back 12 quarters. This growth was broad-based as our customers are adopting more products and getting more value from the Datadog platform. We also experienced strong revenue growth for our AI native customers and a broadening contribution to growth among those customers. There, too, we saw an acceleration of growth in our AI cohort in Q3 when excluding our largest customer. Looking at new business. Contribution from new customers increased in Q3 in both the amount of new customer bookings as well as the revenue contribution from new customers. And as usual, churn has remained low with gross revenue retention stable in the mid- to high 90s, highlighting the mission-critical nature of our platform for our customers. Regarding our Q3 financial performance and key metrics. Revenue was $886 million, an increase of 28% year-over-year and above the high end of our guidance range. We ended Q3 with about 32,000 customers up from about 29,200 a year ago. We also ended with about 4,060 customers with an ARR of $100,000 more, up from about 3,490 a year ago. These customers generated about 89% of our ARR. And we generated free cash flow of $214 million with a free cash flow margin of 24%. Turning to customer adoption. Our platform strategy continues to resonate in the market. At the end of Q3, 84% of customers were using 2 or more products, up from 83% a year ago. 54% of customers were using 4 or more products, up from 49% a year ago. 31% of our customers were using 6 or more products, up from 26% a year ago and 16% of our customers were using 8 or products, up from 12% a year ago. Digital experience is an example of an area within our platform where our rapid piece of innovation is turning into tangible value for our customers. Our digital experience products include RUM or Real User Monitoring, to observe and improve application behavior in mobile and web apps, synthetics to stimulate user flows and proactively detect user facing issues and product analytics to help users connect application behavior to business impact. Over the years, we built our product breadth and depth in this area, and that is being recognized in the marketplace. For the second year in a row, Datadog has been named the leader in the 2025 Gartner Magic Quadrant for Digital Experience Monitoring. We are pleased that today, these digital experience products together exceed $300 million in ARR. And this includes, in particular, a very fast ramp for product analytics, which has already seen adoption by more than 1,000 customers. We also want to call out our security suite of products where we are executing and accelerating growth. Security ARR growth was in the mid-50s as a percentage year-over-year in Q3, up from the mid-40s we mentioned last quarter. We're starting to see success in including Cloud SIEM in larger deals, and we'll get back to that in a bit in our customer examples. And we're seeing positive trends beyond Cloud SIEM, including fast uptake of good security and an increasing number of wins in cloud security. Overall, we saw year-over-year growth acceleration in each one of our security products. Moving on to R&D. We continue to deliver on what is a very ambitious AI road map. We are seeing high customer interest in our Bits AI agents, which we announced at our DASH user conference in June. We have now onboarded thousands of customers for preview access, the Bits AI SRE agent. And as we prepare for general availability, we are getting very enthusiastic feedback on the time and cost savings enabled by Bits AI. As RUM user recently told us, with Bits AI SRE being on call 24/7 for us, meantime to resolution for our services has improved significantly. For most cases, the investigation is already taken care of well before our engineers sit down and open their laptops to assess the issue. And this is not an isolated comment. We see the potential here for our agents who radically transform observability and operations. In LLM observability, we recently launched LLM experiments and playgrounds for general availability, helping teams to rapidly iterate on LLM applications and AI agents. We also launched custom LLM as a judge evaluations for general availability, which lets customers write evaluation prompts to access application quality and safety. As an illustration of growth and adoption in the past few months, the number of LLM spans customers are sending to Datadog has more than quadrupled. And we are seeing a lot of interest in the Datadog MCP servers. Our MCP server acts as a bridge between Datadog and AI agents, such as Codex OpenAI, Claude by Anthropic, Cursor, GitHub Copilot, Goose by Block and many more. Our preview customers are using real-time production data context to drive trouble shooting, root causes analysis and automation in these agents. One user told us, the Datadog MCP server is a great tool. It enables me to get the last 5 of my app and follow the spans and traces all the way to the root cause. I have never been more hooked on Datadog. So we see MCP adoption as a great way to cement Datadog even further into our customers' workflows. Finally, we continue to see rising customer interest for next-gen AI observability with over 5,000 customers sending us AI data to one or more of AI integrations. On the topic of integrations, we are very proud to now support over 1,000 integrations, which we believe is unparalleled in our space. By using our integrations, customer call it otherwise disparate data sources across Datadog products for deeper analysis. We can see from a customers usage that this is a critical part of the Datadog platform. Our 32,000 customers use more than 50 integrations on average, while customers spending over $1 million annually with us use more than 150. And most importantly, as tech stack evolves, we continue to update and expand our integrations. So our customers can use Datadog to deploy new technologies with confidence. Last but not least, I wanted to give a shout out to our AI research team for the amazing work they have published. Our TOTO OpenWave time-series forecasting model has been one of the top downloads on Hugging Face over the past few months, and that is across all categories. It is very impactful as, among other things, the high quality of this work allows us to attract world-class AI researchers and engineers. Now let's move on to sales and marketing. We had a number of great new logo wins in customer expansion this quarter. So I'll go through a few of them. First, we landed a 7-figure annualized deal with a leading European telco, our largest ever land deal in Europe. This company's previous setup was expensive, inefficient and wasn't scaling to meet their needs. By using Datadog, they expect to save over $1 million annually on tool cost alone, along with millions of dollars more in reduced operation costs, lower engineering time and avoidance of revenue loss. They will adopt 11 Datadog products to start, and we consolidate more than 10 commercial and open source tools. Next, we landed a 7-figure annualized deal with a leading financial risk and analytics company. The company's fragmented tooling has led to major incidents that sometimes took multiple days and hundreds of engineers to resolve. They plan to start with 11 Datadog products including On-Call, Cloud SIEM and Bits AI, and will replace 14 commercial open source and hyperscale observability tools. Next, we landed a 7-figure annualized deal with a Fortune 500 technology hardware company. This is an exciting win for new -- sorry. This is an exciting win for our new go-to-market motions, targeting the largest and most sophisticated companies in the world. Datadog has been chosen as their strategic observability partner, and we are displacing commercial tools across availability, cloud team and incident response. This customer is starting with 14 Datadog products. Next, we signed a 7-figure annualized expansion with a Fortune 500 financial services company. This customer has pockets of siloed teams and data, including one business unit, which manually hosted and maintained 93 separate instances of open source tooling. With this expansion, this company will adopt 15 Datadog products, including all 3 pillars in all of their business units. They will also replace their SIEM solution with Datadog Cloud SIEM in a 7-figure land deal for Cloud SIEM. And by bringing all their telemetry data into the Datadog platform, they expect better insights for their adoption of Bits AI SRE Agents today and Bits AI [indiscernible]. Next, we signed a 7-figure annualized expansion with a Fortune 500 heavy equipment company. With this expansion, this customer will replace its open source log solution with Datadog log management and Flex logs. They plan to adopt LLM Observability and their IT team is using cloud cost management to improve cost visibility and governance. Next, we will come back a leading vertical SaaS company with a 7-figure analyze deal. By returning to Datadog, this customer benefits from our alignment with open telemetry and we'll implement the incident and reliability processes that they were unable to execute on previously. Next, we signed a 7-figure annualized expansion with a major American carmaker. This customer is adopting Datadog products faster than previously expected and this agreement supports the higher usage. With this expansion, they will adopt Datadog incident management and On-Call solution company-wide for a total of 5,000 users who support operational continuity across the business. Finally, we signed a 9-figure annualized expansion with a leading AI company. This company has been a long-time Datadog customer and has expanded their usage of multiple products, securing better economics for a higher commitment with an early renewal. Speaking of AI customers, we continue to help AI native customers big and small to grow and scale their businesses. And we continue to see this group broaden in number and size with more than 500 AI native companies in this group, but 100 of which are spending more than $100,000 annually with Datadog and more than 15 who are spending more than $1 million annually with us. While we know there's a lot of attention on this cohort, we primarily see it as an indication of what's to come as companies of every size and every single industry incorporate AI into their cloud applications. And that's it for another very strong quarter from our go-to-market teams, who are now very hard at work as we have a really exciting pipeline for Q4. Before I turn it over to David for a financial review, I want to say a few words on our longer-term outlook. There is no change to our overall view that digital transformation and cloud migration are long-term secular growth drivers of our business. Meanwhile, we are advancing rapidly in AI, where we are incredibly excited about our opportunities. We're building a comprehensive set of AI Observability products to help our customers tackle the higher complexity that comes with these technologies. And we are building AI into Datadog, and I spoke earlier about the excitement our customers have for our Bits AI agents. The market opportunity in cloud and AI is expected to grow rapidly into the trillions of dollars and companies of every size and industry are looking to adopt AI to deliver value to their customers and drive positive business outcome. So we're moving fast to help our customers develop, deploy and grow into the cloud and into the AI world. With that, I will turn it over to our CFO. David? David Obstler: Thanks, Olivier. To start, our Q3 revenue was $886 million, up 28% year-over-year and up 7% quarter-over-quarter. To dive into some of the drivers of our Q3 revenue growth. First, overall, we saw sequential usage growth from existing customers in Q3 that was higher than our expectations and the strongest in 12 quarters in our non-AI native customer base. We saw year-over-year growth acceleration broadly across our business, including in new logos and existing customers, both enterprise and SMB, with customers across our spending bands, big and small, and customers in a wide variety of industries. Next, we saw strong and accelerating contribution from new customers. New logo annualized bookings more than doubled year-over-year and set a new record driven by an increase in average new logo land size, particularly in enterprise. We believe we are starting to see the benefits of our growth of sales capacity. And we are seeing new logos ramping faster, contributing more to revenue growth. The portion of our year-over-year revenue growth that related to new customers was about 25% in Q3, up from 20% in Q2. Next, our AI native customers continue to exhibit rapid growth, while more customers in this group are growing to be sizable customers. As Olivier discussed, we extended the contract of our largest AI native customer. In addition, we now have more larger AI customers, including 15 of them spending $1 million or more annually with Datadog, and about 100 spending more than $100,000 annually. Year-over-year revenue growth from our AI native customers, excluding the largest customer, again, accelerated in Q3. In Q3, this group represented 12% of our revenue, up from 11% last quarter and about 6% in the year ago quarter. I will note that over time, we think this metric will become less relevant as AI usage in production broadens beyond this group of customers. Our year-over-year revenue growth also accelerated amongst our non-AI native customers. In Q3, our revenue growth, excluding the AI native customer group, was 20% year-over-year, accelerating from 18% year-over-year in Q2, and we have seen this trend of accelerating growth continue in October. Regarding retention metrics. Our trailing 12-month net revenue retention percentage was 120% similar to last quarter and our trailing 12-month gross revenue retention percentage remain in the mid- to high 90s. And now moving on to our financial results. Our billings were $893 million, up 30% year-over-year. Our remaining performance obligations or RPO was $2.79 billion, up 53% year-over-year, and current RPO growth was in the low 50s percentage year-over-year. Our strong bookings contributed to this acceleration of RPO. We continue to believe that revenue is a better indication of our trends in our business than billings and RPO. And now let's review some of the key income statement results. Unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. First, gross profit in the quarter was $719 million, and our gross margin was 81.2%. This compares to a gross margin of 80.9% last quarter and 81.1% in the year ago quarter. As previously mentioned, we continue to see the impact of our engineers cost-saving efforts in Q3 as they deliver on our cloud efficiency project. Our Q3 OpEx grew 30% -- 32% excuse me, year-over-year, down from 36% last quarter. We continue to grow our investments to pursue our long-term growth opportunities, and this OpEx growth is an indication of our execution on our hiring plan. Q3 operating income was $207 million for a 23% operating margin compared to 20% last quarter and 25% in the year ago quarter. And now turning to our balance sheet and cash flow statements. We ended the quarter with $4.1 billion in cash, cash equivalents and marketable securities and cash flow from operations was $251 billion in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $214 million for a free cash flow margin of 24%. And now for our outlook for the fourth quarter and the fiscal year 2025. First, our guidance velocity overall remains unchanged. As a reminder, we based our guidance on trends observed in recent months and imply conservatism on these growth trends. So for the fourth quarter, we expect revenue to be in the range of $912 million to $916 million, which represents a 24% year-over-year growth. Non-GAAP operating income is expected to be in the range of $216 million to $220 million, which implies an operating margin of 24%. Non-GAAP net income per share is expected to be in the range of $0.54 to $0.56 per share based on approximately 367 million weighted average diluted shares outstanding. And for the full year -- fiscal year 2025, we expect revenues to be in the range of $3.386 billion to $3.390 billion, which represents 26% year-over-year growth. Non-GAAP operating income is expected to be in the range of $754 million to $758 million, which implies an operating margin of 22%. And non-GAAP net income per share is expected to be in the range of $2 to $2.02 per share, based on 364 million weighted average diluted shares. And finally, some additional notes on our guidance. We expect net interest and other income for the fiscal year 2025 to be approximately $170 million. We continue to expect cash taxes in 2025 to be about $10 million to $20 million and we continue to apply a 21% non-GAAP tax rate for 2025 and going forward. And finally, we expect capital expenditures and capitalized software together to be 4% of revenues in fiscal year 2025. To summarize, we are pleased with our execution in Q3. We are well positioned to help our existing and prospective customers with their cloud migration and digital transformation journeys, including their adoption of AI. And I want to thank Datadog's worldwide for their efforts. And with that, we'll open the call for questions. Operator, let's begin the Q&A. Operator: [Operator Instructions] Our first comes from the line of Kash Rangan of Goldman Sachs. Kasthuri Rangan: Appreciate it. Congratulations on the spectacular results and showing sequential improvement across the board. Olivier, I had a question for you. We've talked about GPU monetization versus CPU monetization. So how closer are we to the point where you can confidently expand and get your share of the customer wallet when it comes to whether it's training workload, inferencing workload on the GPU clusters, which are becoming more prevalent and increasingly a larger part of the compute build-out in the future? That's it for me. Olivier Pomel: Yes. So we have products that are getting into the market now for GPU monitoring. But these don't generate any significant revenue yet. So all the revenues we've shared, like the acceleration, et cetera, that's not related to us capitalizing more on GPUs, that's a future opportunity. Operator: Our next question comes from the line of Sanjit Singh of Morgan Stanley. Sanjit Singh: Congrats on the acceleration in growth this quarter. Olivier, I wanted to talk about some of those enterprise trends you're seeing in sort of your non-AI cohort. What do you sort of put the improved performance in growth this quarter on? You mentioned that the sales productivity or the benefit from some of the sales investments starting to come online. Is there sort of an uplift in sort of the cloud migration trends as you're starting to see enterprise build more AI applications. I'd just love to get your perspective on the underlying trends in the enterprise and the mid-market business. Olivier Pomel: Yes. I'd say there's 3 parts to it. One part is the demand environment is not -- is positive in general. I don't know that we see massive acceleration of cloud migration, but at least the environment is not pushing the other way. We know which happens from time to time. So that's point number one. Point number two is we've been growing sales capacity quite a bit, and we've created new go-to-market motions to go after the kind of customers who were not getting before. Like we've done quite a bit of investment over the past couple of years and we see that starting to pay off. As I said also, we feel good about Q4 in terms of pipeline on the sales side. So it's too early to tell yet. We still have to close those deals, but we feel good about the scaling of our go-to-market. And point number three is we have a number of products that we've been developing over the years. Some of them are early, some of them a little bit further along that are really clicking. We see -- we have a lot of success with getting large enterprises to adopt Flex Logs, for example. We have a lot of success in some of new products such as analytics that we mentioned on the call. We're seeing some large land deals with our cloud team. So all of that is contributing to the picture you're seeing today. Sanjit Singh: And just as a follow-up on the AI observability opportunity. When you look at some of the independent software vendors that are releasing Agentic solutions, Agentic portfolios. A number of them are including observability as part of their sort of value proposition. Is there any work you think Datadog has to do to sort of infiltrate that market or make sure that customers look to Datadog as that Agentic monitoring capability as some of these independent software vendors try to bundle in observability into their solutions. I would love to get your perspective on that? Olivier Pomel: Yes. I mean there's absolutely no doubt to us that the customers will even want a unified platform for observability for all of this. There's 2 parts to that. One is, historically, every single piece of software we integrate with, whether that's SaaS or things that customers on themselves, also has its own management control and observability control. But you're not going to log into [ 70 ] or in the case of customers we mentioned that they use 60 integrations for the smaller customers, 150 integrations for the larger ones. It's not practical to actually go and manage that separately. So we think all of that belongs in a central place, and that's the historical trend we've seen. We also think that you can't separate the AI parts from the non-AI parts of the business. So you're not going to look at your agents separately that you do at your web hosting and your database and your -- everything else you have in your stack. So all of that in the end will be attached to observability. Operator: Our next question comes from the line of Raimo Lenschow of Barclays. Raimo Lenschow: Perfect. Congrats from me as well. That sounded like an amazing quarter and nice to see it coming together. On the AI side, and I don't want to talk about the customer, but more the other ones, like 15 customers over 1 million. That's like a big number and 100 over 100,000. How do we have to think about the nature of those? Is this kind of -- are those kind of especially the bigger ones of those kind of model builders, but then even 15 is a big number. And over 100 sounds like this whole new application world that we've all been kind of waiting for starting to come together. Is that kind of what's going on there? Because it does sound quite exciting and much more broader than we thought. Olivier Pomel: It's actually fairly broad. So there is model vendors, there's models -- model that can be the lens model that can be video, it can be sound generation, it can be all of the various parts of the stack you see as independent companies. It can be -- there's quite a few companies that do that work on the coding side. So coding assistants and vibe coders and everything in that range. Some of these are very new companies. Some of these are not very new companies, some of these started 5, 7, 8 years ago. And we're sort of not necessarily AI native from day 1, but very quickly, that would give them the growth they see today with the people to AI. So we see a little bit of that. We have companies that are other parts of the stack in AI on the, say, the [ steady ] side, the other components of the infrastructure. And we have other companies that are purely applications filled with AI. So we have a bit of everything in there. Like it's actually fairly representative of the space. Operator: Our next question comes from the line of Mark Murphy of JPMorgan. Mark Murphy: You had mentioned the expansion of the contract with your largest AI native customer and I believe you said better economics for a higher commitment. Can you speak to that because I would assume a higher commitment would carry a volume-based discount. I'm just trying to understand if. For some reason, if that was not the case here, what did you mean by better economics? And then I have a quick follow-up. Olivier Pomel: Yes. I mean, this is without getting to the detail of any specific customer like this is the motion is always the same, like customers grow, they commit to more, they get better prices. So you see, like a, again, talking about customers in general, you see both of usage, drops in revenue as customers renew and get higher commit and a better price and then usually growth after that for those customers. That's the motion that we've had. We have about 30,000 customers so far. Mark Murphy: Okay. And the -- what in that, so the better economics part of it is just where it's going to be netting out like 12 months down the road? Is that what you mean? Olivier Pomel: Well, the bigger economics means you commit tomorrow, you get a better price. And as we -- remember, we have a usage model. So we charge people every month on what they use at the price we agreed. So if you get better economics, and your usage is somewhat similar month to month, one month and the next that you pay less, but the overall backdrop of our business is increased consumption. Mark Murphy: Okay. And then as a quick follow-up, Olivier, the acceleration that you saw in the security growth is pretty noticeable too. We recall, I think about 6 months ago, you had ramped up and engaged a lot more of a channel partners, which is a key ingredient to grow in the security business. Is it a function of that? Or is there a mindset change happening out there where customers want observability to be the central point of collection so that all the security teams and the ops teams are working with the same set of metrics and logs and tracers? Olivier Pomel: Look, I think it's a number of things. Definitely, we've been investing in the channel, and that's certainly helpful to do the security business as a whole. The win -- the big win we mentioned on security that we mentioned a couple of wins in Cloud SIEM. These tends to be more related to product maturity. The strength of our underlying platform, especially when it comes to technology like Flex Logs, for example. And the fact also that we've been learning how to properly go to market for security. And I think we see things clicking in a way that is exciting. Operator: Our next question comes from the line of Fatima Boolani of Citi. Fatima Boolani: Oli, I'll start with you and I have a follow-up for Dave. On the On-Call product, Oli, how do agentic advancements in general detract or enhance the value proposition here? And I'm very simplistically thinking about the core nature and value proposition of the On-Call product intelligently routing, requests for remediation, right? So how do you just broader advancements in AI, help beef up and/or detract your ability to monetize this product? And then just a follow-up for David, please. Olivier Pomel: Well, I mean, if you zoom out, we entered the field with On-Call because we wanted to own the end-to-end incident resolution. So we wanted because we before that, we were detecting the incidents and sending the alerts, and then we were pretty much where the resolution happened after that. Customers were spending their time in data to diagnose and understand what was going on. So we wanted to own the full cycle. . And we thought that with AI, in particular, we'd have the ability to do things if we are on the whole cycle that we couldn't do otherwise. So what you see right now is, I mean, this resonates with customers, they adopting to product. We've mentioned like some exciting customers with say, [ one ] with 5,000 seats for On-Call, which is very exciting. But in the future, there's many more things we can do in working on for that product. If we both detect incident and notify, we can do some sort of things such as even predicting the incident and notifying early or rerouting early or telling people before the incident actually takes place, how they can potentially fix it. So these are all things we're working on. I mean, look, if you look at the various product announcements we've made, whether that's Bits AI or SRE or the time series forecasting model we have released. When you assemble all that, you get to a very, very interesting picture of what we can do in the future. So we're excited by that. Our customers are excited by the vision there too, and that's why these products are successful. Fatima Boolani: Appreciate that. David, on net retention rates, why aren't we necessarily seeing more upward pressure on the metric, just given the strength of expansionary bookings that you alluded to in the quarter from the installed base. And I mean I suspect it's because it's a trailing 12-month metric. But any directional color you can just share on that. And any high-level commentary on some of the non-AI native net retention rate trend behavior? David Obstler: Yes, you've nailed it. It's a trailing 12 months, it's a number that's rounded, it has the dynamics that you might expect in that the growth of the non-AI natives has been, as we mentioned, a combination of landing and expanding at higher rates than we've seen in recent quarters. So if that continues as you go into a trailing 12-month metric, you see a directional movement. Operator: Our next question comes from the line of Eric Heath of KeyBanc. Eric Heath: Oli, David, Bits AI seems like a really exciting thing out of Dash. And I know it's still in preview, but you mentioned there's a lot of interest there. So I'm just curious how you think about the agentic opportunity with Bits AI. How meaningful this can be for 2026 as a differentiator versus competition and also as a revenue contributor? Olivier Pomel: Yes. So -- I mean, look, it's super exciting. The feedback is very good on it. I mean, we've been collecting all the -- so I read one quote, we have dozens that look just like that, that was sent to us by customers. And so that's very, very exciting. We also started having some customers buy and come to it to just to show value and to make sure we're on to the right product mix. And so we feel good that this is something that is high quality and we can monetize. In terms of the impact for next year, on the packaging side, I'm not completely sure yet whether the biggest impact will be seen from what we charge Bits AI itself or for the rest of the platform, that it gets benefits from the differentiation of Bits AI. I think that's more of a broader question of packaging and monetization of AI. And remember that we have a product that is usage based. So anything that drives usage up and adoption from customers is good for us and is very, very monetizable. But what we can tell is this is differentiating, this is good. It works significantly better than anything else we've seen or heard of in the market, and we are doubling down on it. We have many, many teams now working on deepening Bits AI SREs to making sure it goes further into the resolution doesn't just point to the issue, but fixes the code that all these kind of things working hard on that. We're also working on breadth, making sure that we train it on many more types of data, many types of sources, sometimes even systems that are observe the systems that are not dialed up, so we can cut across to other systems our customers are using. So we are very, very aggressively developing Bits AI SRE. It's resonating very well in the market. Operator: Our next question comes from the line of Gray Powell of BTIG. Gray Powell: Congratulations on the great results. So maybe just like taking a step back, if we go back to the beginning of the year, Datadog was expecting 19% revenue growth. It looks like you're tracking to something over 26% growth now, and that's just the high end of your guidance. So I guess my question is, what surprised you the most this year? And then just how do you feel about the sustainability of those drivers as you look forward? Olivier Pomel: I mean, look, the -- so first, I apologize for over delivering on the results. We might do it again, but we'll see. I think the biggest surprise for us has been that -- so AI in general has or AI adoption has grown faster than we thought it would at the beginning of the year. So we've seen that across our AI cohort. We've seen also that we got some of our new products and new, like the changes we're making on the go-to-market side to click perhaps earlier than we would have thought otherwise. So all in all, we saw the leading part of the business with AI growth faster, not the lagging but the slower growing, more traditional part of the business also accelerate and that gets us where we are today. David Obstler: And I'd add, we have a good demand environment and we've been investing whether it be in the products that Oli's been talking about or in the sales capacity we made clear that we were in investment and we're seeing those investments pay off. Operator: Our next question comes from the line of Koji Ikeda of Bank of America Securities. Koji Ikeda: Just one from me here. I wanted to ask a question on the inflection in the non-AI native growth and how to think about the areas of strength in this cohort. Is it coming from your largest enterprises? Is it coming from a certain type of customer? Is there a common theme in the workloads that you're seeing or the products that are being added on that is driving that strength? Or is it just really just broad-based? What I'm trying to get out here is I'm really trying to understand more the durability of this growth reflection. Olivier Pomel: So it is broad-based. And I think, again, speaks to a couple of things. It speaks to the fact that, in general, the demand environment is good. Though I would say, there's been a very, very high growth of hyperscaler revenue like over the past an acceleration for the hyper scalers in general. A lot of that is GPU related, but the growth we're seeing here and the exception we're seeing here is largely not GPU-related. It's a little bit of it, but not a ton of it. So that's not exactly what you've seen with some of the other vendors there. One reason this is broad-based is these are the same products we sell to all customers, and this is largely the same go-to-market organization that we have a few segments, but -- and we've been doing well executing there. I think we've invested quite a bit in product, and we keep and we will keep doing it, and we see the results of that. David Obstler: Yes, I want to -- I'll add that it's across the customer base, enterprise SMB. And when we look at it, it's not just an AI SMB. If you remove the AI companies, you still see a strengthening SMB demand cycle going on. And unlike in previous periods, it also is across spending ranges. We're not seeing larger spenders or smaller spenders. We're just seeing a broad trend of improved demand across the spending trends. Olivier Pomel: And remember that for us, SMB is, any company of less than 1,000 employees. It includes a lot of very legitimate and growing businesses. It's not... Operator: Our next question comes from the line of Ittai Kidron of Oppenheimer & Co. Ittai Kidron: Congrats guys. Really great numbers. Oli, in your answer to one of the questions and kind of going into the drivers behind the upside. You've talked about sales capacity increase. You didn't talk much about sales efficiency. Is there a way you can give us some color on where do you stand on percent of salespeople that are hitting quota, where does that ratio stand relative to historical patterns for you guys? And as you approach '26 year, do you anticipate any material changes in the comp structure just given the breadth of product and the list of opportunities, how do you get people focused? Olivier Pomel: Yes. So we feel good about the sales productivity in general. And the rule generally, you grow by scaling capacity and maintaining productivity, it's hard to drive both up at the same time. And remember, if you want to go to 10x, you can do that by scaling if you can't really do it by improving productivity, so you have to scale. And we've been doing that, and we've been successful at it so far. In terms of the complaints that, look, we keep changing the way we compensate and the way we manage the sales force in general to make sure we have the right focus. One of the gifts of a business like ours is that we see -- we have a very heavy land-and-expand model. And so we get a lot of growth from existing customers. The challenge it creates on the other hand is how do we get to focus the sales force on the newer customers, the smaller ones and the new ones because it is more work to get an extra dollar for a smaller customer or for a new one and it is from an existing one that they already have scale. And so a lot of the tweaks we met to our comp plans relate to that. Who do we make sure we direct our attention and we reward people for what is going to generate the most long-term growth for us. And we've made a number of changes. I won't go through them, these are our internal changes. But we had a number of changes this year, we see a number of them pay off. Another thing I mentioned on the call was you mentioned a win for one of our new go-to-market motions and that specifically getting in place multiyear plans to go after some larger customers that are tougher to land than what we've done in the past. And sometimes, it takes more than a year to land certain types of customers. And the problem is if you comp plan only has a 1-year horizon, like it doesn't give a great incentive for the sales force to go after those customers. And so we cordoned off a few of those companies who have special plans to go after that, and we're starting to see success with that too. It's just an example. Operator: Our next question comes from the line of Andrew Sherman of TD Cowen. Andrew Sherman: Great. Congrats. I know you have a team focused on the Fortune 500, where there's still a lot of white space for you. Curious to hear how the team is ramping to productivity. Did that help drive some of the strong new logo bookings and can this contribute even more next year? Olivier Pomel: Yes. I mean, look, the team is not new, right? I mean, we've been focusing on that for many years, and we're tracking well. One thing I was mentioning just before was one challenge even in the Fortune 500 is to make sure that we focus on landing new customers and make sure that there's the right amount of sales attention and reward for the landing a customer even if it's for a small amount, and I think we've done well. I mean again, we can comment on that again after the next quarter when we have a full year of our new clients that have been validated. But so far, we feel very good about it. Operator: Our next question comes from the line of Alex Zukin of Wolfe Research. Aleksandr Zukin: Congrats on dropping some truly inspiring quotes in the script. Maybe Oli, one for you and then I have a quick follow-up for David. Just the duration of this acceleration of the non-AI cohort. It seems like from all your forward-looking metrics, whether it's billings, RPO, CRPO. Those were, again, really, really strong how long do you think we should think about the duration of this trend of this non-AI acceleration? Olivier Pomel: Well, we're a consumption business. So we -- the hardest thing to understand is what the future is going to look like for consumption. The way I would say it is we feel very good about it at the midterm, long term. Now with ebbs and flow in any given month or quarter, that's harder to tell. And again, that's what we've seen through the life of the company. So we feel very confident about the motion in general for digital transformation and cloud migration is steady. And sometimes it slows down a little bit, but it reaccelerates after that. And we see that key going on for a very long time. Aleksandr Zukin: Okay. And then maybe, David, for you, look, gross profit dollar acceleration while you're seeing your largest customer kind of get better unit economics is also inspiring to see how should we think about the progression of gross margins and gross profit dollar growth, particularly as you continue to also see the AI cohort acceleration. David Obstler: Yes, there's a couple of things. I think we've mentioned that we've been focused and have focused over the many years on the efficiency of our cloud platform. We have significant engineering efforts around cost of sales and delivery of value. And so we've been able to deliver on that. We also have a very broad customer base distributed in terms of volume. So as customers get larger and maybe get volume discounts, we have a number -- a lot of customers coming in, it's smaller, so that balance there. And then in terms of the sort of the future -- I'll repeat what we've always said that we've been running the company with a gross margin plus or minus 80%, we've given that range and not changed it, and we watch it. And it gives us mixed signals in terms of efficiency, how we're operating, it gives us good signals in pricing and things like that and I wouldn't change the comments we made over the many years about looking at that and then developing operations and strategies around that. Operator: Our next question comes from the line of Ryan MacWilliams of Wells Fargo. Ryan MacWilliams: Just one for me. On the large AI contract expansion that you provided commentary on, is there any way we can think about the contribution change from this customer over the next few quarters? David Obstler: No. I mean we don't provide that kind of information on individual customers. We're trying to give a picture of the overall business. Generally, I think as Oli mentioned, on our larger customers, we have a motion of the expansion of volume and then we talk when we work on the term and the volume-based pricing, but we don't give guidance like that on individual customers. Operator: Our next question comes from the line of Mike Cikos of Needham. Michael Cikos: I just wanted to come back to it, Oli, for the non-AI native strength, I know we've kind of hit on this a number of times, whether it's road map sales capacity execution, but like kudos on the numbers here? I'm just trying to get a better sense of the why now. Is it just a composite of all those different pieces clicking together this quarter? Or is there anything more to unpack there? And then I have a follow-up for David. Olivier Pomel: Again, I don't think there's a lot more to unpack there. And I know it's boring in a way, but it's also the way we've been growing for the past 15 years, really. So that's a -- I would call it the usual. Michael Cikos: Awesome. Awesome to hear. Okay. And then for the follow-up to David. David, I don't want to take anything away from the Q3 results you guys just posted, and we obviously have the strong guide here for Q4. But I just can imagine myself a month from now starting to get inbounds from certain folks asking about the holiday season and the fact that we have the holidays landing on weekdays in Q4 here. Can you just kind of discuss how you thought about constructing guidance for this Q4 year? David Obstler: Yes. We have years of experience of analyzing the day-by-day patterns. In the holidays, we know that the holiday period ends up in the usage side because of vacation holidays, and we incorporate that into our guidance. We, I think, evolved a lot over the years and sort of days adjusted types of days, et cetera. And so we would be incorporating that like we've incorporated in other years. If there are differences in this calendar period, we incorporate that as always. Operator: Our next question comes from the line of Karl Keirstead of UBS. Karl Keirstead: Okay. Great. I'll ask one for David and one for Olivier. David, first of all, congratulations on the extension of the larger contract, I think everybody on the line is applauding that. I know you're reticent to get into any details, but maybe I could try. Are you able to clarify whether that was a 1-year deal or multiyear? And then related to that, David, what is the contribution to CRPO from that deal, which I presume landed in your CRPO number. If it is a 1-year deal does the entirety of that contract contribute to the sequential CRPO performance in the quarter? So that's it for you, David. And then Olivier, maybe I'll just ask both at once. Some of the very large AI natives are beginning to diversify to utilizing Oracle's OCI and Stargate. And I'm wondering what's the opportunity for Datadog to essentially follow that behavior and begin scaling on Oracle's target or because a lot of what Oracle is doing with the AI native is training clusters, perhaps that near-term opportunity is more limited. David Obstler: Yes. On the first point, I think we give a lot of examples and our motion, which our customers would be following, including that one would be -- we fix out annual plus commits. We're not commenting on individual contracts here, but it would follow a typical path to other types of contracts. So that's what we would do. Olivier Pomel: Yes. And on the OCI, look, this is -- we've built an OCI integration, and then we see more demand from customers on OCI. Some of the things we see like the targets, et cetera, like these are extremely custom build out, like I don't know -- they're not necessarily exactly cloud because they are custom built for specific customers. So the opportunity there is more remote today. But it's -- again, one company is that it's a not fantastic opportunity to product type. But if 10, 15, 20, 50 companies start using that, then that really becomes a commercial opportunity. And so we're very much plugged into all of that. And we go basically where our customers are. David Obstler: I think you mentioned about the RPO. I think in this case, we've mentioned this current and the total is roughly the same, and there wouldn't be anything in that contract that would have been materially around of those numbers. Those numbers, I think we mentioned are produced from the bookings growth more generally and not from that particular contract. Operator: Our next question comes from the line of Jake Roberge of William Blair. Jacob Roberge: Yes. Just on the recent go-to-market investments, obviously, it seems like there's been a lot of traction thus far with those. So I'm curious if there are any areas like security or the new logos or upmarket that you could look to lean even deeper into just given the growth that you've seen here. Olivier Pomel: Yes, definitely. And there are some things we didn't do this year that we'll definitely go to the next year. So there's a number of things we are -- we're in Q4, right? So we're in the middle of planning for next year, and we basically will keep scaling what's working, stop doing some of the things that are not conclusive and then try to do more things. That's the way it works. Interestingly enough, building a go-to-market is not that different from building software like you experiment together data you see what's working was not working and you build the systems. Jacob Roberge: That's helpful. And then just on the new Bits AI Agents, can you just talk about the early feedback that you've gotten for those solutions and maybe how the engagement with those agents as compared to kind of the ramp of security Flex Logs. I know, obviously, much earlier days, but just how it compared when those were still largely in the preview phase? Olivier Pomel: I mean look, the Bits AI Agent is -- it really has a growth factor for customers. So what works really well is and we've seen that number of times, like we set it up for them. It's running on their alert and they go through an outage and they still go to the motion, so they still go -- they still set up a bridge and they have 20 people and they spend 2 hours and in the end, they have an idea what went wrong. And then they go to Datadog and they see, oh, there's an investigation that had run. And 3 minutes into the outage, it got the same conclusion that we got 2 hours later with 20 people on the call. And that's completely eye-opening for customers when they see us. And we have -- so that's why we get many quotes about it. So now there's more we need to do there, like customers say, "Oh, it's great. Now can it make this fix for me? Can you do this? Can you do that? Can you support that other system that right now, you can't actually set it up for. So we have a very, very full road map of things we need to do, and we're doubling down on it. We also shipped -- I mean this one is in preview, but we shipped a security agent that looks at vulnerabilities and looks at security signals and those triad that basically look at trying to investigate what might be benign or what might be a real issue. We also are getting very, very positive feedback for that. And in fact, that's what helped us win some large land deals for our Cloud SIEM products because the combination of the SIEM that runs extremely efficiently on top of observability data that runs very efficiently on top of Flex Log, but also saves an immense amount of time by getting 90% of the issues out of the way with automated investigation that's extremely attractive to customers. All right. And I think with that, we're going to close the call. So -- before we go, I just want to give one quick shout out to the team because I know, as I said earlier, we have quite a lot going on in Q4, whether it's on the planning side, on the product building side or on the sales side, where I said we have a really, really exciting pipeline. And so we have a lot to do. I want to thank the team for the hard work there. I also -- I'm looking forward to meeting a lot of our existing and new customers at AWS re:Invent in a few weeks, and I'll see you all there. Thank you all. Operator: Thank you for your participating in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and welcome to the CF Industries Q3 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Martin Jarosick, Vice President of Treasury and Investor Relations. Please go ahead. Martin Jarosick: Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, President and CEO; Chris Bohn, Executive Vice President and Chief Operating Officer; Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain; and Greg Cameron, Executive Vice President and Chief Financial Officer. CF Industries reported its results for the first 9 months and third quarter of 2025 yesterday afternoon. On this call, we'll review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Before we begin today's call, I want to provide an update on the incident we experienced at our Yazoo City, Mississippi complex last evening. All employees and contractors are safe and have been accounted for, and there are no significant injuries. The incident has been contained, and an investigation is underway. Now let me introduce Tony Will. W. Will: Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first 9 months of 2025 in which we generated adjusted EBITDA of $2.1 billion. These results reflect outstanding execution by the CF Industries team across all aspects of our business. And most importantly, our team continued to work safely. At the end of the quarter, our trailing 12-month average recordable incident rate was 0.37 incidents per 200,000 work hours. Five years ago, October 2020, we announced a significant shift in the company's strategic direction, including an ambitious plan to begin decarbonizing our production network, a plan to become the world's leader in clean ammonia and a model example of environmental stewardship and how to abate an energy-intensive business in a financially responsible way. Today, that vision has been realized. I'm very excited to announce that the plans we launched 5 years ago have begun delivering real value to our shareholders and broader benefits to the society as a whole. We have made great strides over the last 5 years and have reduced our GHG emissions intensity by whopping 25% from our original baseline. And every single one of the initiatives that contributed to this remarkable achievement have been highly NPV positive, creating substantial value for shareholders. We are the best example of how being environmentally responsible can actually go hand-in-hand with creating significant shareholder value. On our journey, we have executed all of the following initiatives. We closed 2 of our least efficient, highest emissions plants that were also borderline uneconomic to continue operating. We commissioned 2 new highly efficient, lower emissions plants that have return profiles exceeding 20% IRR. We acquired the Waggaman, Louisiana ammonia plant, a very efficient plant with relatively low GHG emissions intensity and increased production at that facility significantly from 750,000 tons annually to over 900,000 tons, resulting in an IRR of over 20%. We installed N2O abatement systems into certain nitric acid plants, the resulting carbon credits from which are being sold at high values, more than recovering our costs within just a single year. And finally, we have begun sequestering approximately 2 million metric tons per year of CO2 from our Donaldsonville complex. The 45Q tax credits from this project will more than pay our installation costs within 2 years, generating an IRR over 20%. And we are currently selling the resulting low-carbon ammonia at a premium. What is otherwise a commodity product, chemically identical to ammonia produced anywhere else in the world has become differentiated and now commands a premium in the marketplace. These initiatives have helped reduce our emissions intensity by roughly 25% from our baseline while creating significant value for our shareholders. And now we are embarking on the development of the world's largest ultra-low emissions ammonia plant at our Blue Point complex in Louisiana. We have 2 world-class equity partners, JERA and Mitsui with us in this venture, and I fully expect the financial and societal benefits will be equally as impressive as the initiatives we have already completed. Additionally, we have a second carbon capture and sequestration project underway at our Yazoo City, Mississippi complex and numerous other initiatives yet to be announced. The end result is that we have a robust high-return growth trajectory in front of us through the end of the decade that will continue to dramatically reduce our GHG emissions intensity while providing exceptional financial returns. Before I turn the call over to Chris to talk more about our operating results, I do want to take a moment and highlight what I consider to be a great misconception in the market. I want to refer you all to Slides #10, 11 and 12 in our materials. Slides 10 and 11 show our consistently strong free cash flow generation and our relentless share repurchase program. Slide 12 shows our remarkable free cash flow conversion efficiency from EBITDA and yet amazingly how we trade at a shockingly low valuation. Oftentimes, CF Industries is compared to agricultural companies, and yet we are very different from most of those. The seed and chemical companies face challenges of products coming off patent and declining margins or of distribution channels being stuffed full and having to go through the pain of destocking. We are also very different from capital equipment companies or those selling more discretionarily applied products like phosphate and potash who are really and truly subject to grower profitability. However, our sole product, nitrogen, is fundamentally different. Even in periods of relatively weak grower profitability, nitrogen demand is unaffected, almost completely inelastic. This year, when there was great hand ringing due to subdued grower profitability, high planted corn acres and global nitrogen supply production disruptions in other parts of the world, created a situation where nitrogen demand and resulting pricing was very, very strong. As Bert will talk about in a few minutes, we see the same strong demand dynamic shaping up for next year. Nitrogen and certainly CF Industries' financial performance is not impacted by most of the factors affecting the rest of the ag sector companies. While other times, we are compared to industrials or material sectors, again, we have very little in common with most of those companies either, especially the chemical companies. We do not suffer from global overcapacity nor from sluggish or declining demand. Our free cash flow generation is consistently high. And yet as shown on Page 12, we have traded at an anemic average cash flow multiple of barely 7.5x free cash flow. Realistically, that should be the low end of an EBITDA multiple, not a cash flow multiple. Oddly, businesses that are on the whole more volatile and structurally way less advantaged than CF trade at a higher valuation. The industrial sector trades at 27x cash flow. The materials sector trades at 30x cash flow, while our consistently high cash flow generation on average has traded at a sickly 7.6x. All of this is a long way of saying the market doesn't really understand our business or our consistently high free cash generation. As Greg will talk about shortly, we have made great progress on our share repurchases and continue to do so. We, around this table, believe CF represents an amazing value, especially when only trading at an average 7.5x cash flow. And we will continue aggressively repurchasing shares from the nonbelievers and those that don't take the time to understand why we are fundamentally different from most ag, industrial and materials companies. With that, I'll now turn it over to Chris to provide more details on our operating results. Chris? Christopher Bohn: Thanks, Tony. CF Industries manufacturing network has operated well throughout the year with a 97% ammonia utilization rate for the first 9 months of 2025. As is typical for the third quarter, we had significant maintenance activity, which reduced production volumes compared to the first 2 quarters. We continue to expect to produce approximately 10 million tons of gross ammonia for the full year. We also have made significant progress on strategic initiatives that are now generating EBITDA and free cash flow growth for the company. In August, we were able to fully utilize expanded diesel exhaust fluid rail loadout capabilities at our Donaldsonville complex for the first time. This enabled us to capture incremental high-margin DEF sales and led to a monthly record for DEF shipments from the site. Also at Donaldsonville, the carbon dioxide dehydration and compression unit, which was commissioned in July, continues to run well. We are generating 45Q tax credits and moved to full rate safely through the quarter. Finally, in October, we completed a nitric acid plant abatement project at our Verdigris, Oklahoma facility. This project is expected to reduce carbon dioxide equivalent emissions at the site by over 600,000 metric tons on an annual basis, which we are monetizing through the sale of carbon credits. By the end of the decade, we expect the returns generated by our CCS projects, along with the Verdigris abatement project will add a consistent incremental $150 million to $200 million to our free cash flow. Longer term, we remain excited about the compelling growth opportunity that the Blue Point project offers us, particularly given the sales team's success in selling low-carbon ammonia from Donaldsonville for a premium. Detailed engineering activities and the regulatory permitting process are progressing well with capital expenditures for 2025 expected to be within the range we projected earlier this year. We expect site construction to begin in 2026. With that, let me turn it over to Bert to discuss the global nitrogen market and the growing interest in low-carbon ammonia. Bert? Bert Frost: Thanks, Chris. The global nitrogen supply-demand balance remained tight in the third quarter of 2025. Demand led by North America, India and Brazil was robust. Additionally, product availability remained constrained due to low global inventories and outages during both the third quarter and earlier in 2025. China's re-entry into the urea export market provided tons the world needed, but did not substantially alter these dynamics. Looking ahead, we expect the global nitrogen supply-demand balance to remain constructive. We believe supply availability will continue to be constrained. Global inventories are low, including in North America. Additionally, major planned and unplanned outages are occurring now while geopolitical issues and natural gas availability, particularly in Trinidad, remain a challenge. The start-up of new capacity also continues to be delayed. At the same time, we expect global demand to remain strong. India is likely to tender for urea in the near term, especially given the result of their most recent tender. Nitrogen demand in Brazil and Europe has picked up recently. And in North America, economics favor corn planting over soybeans next spring based on the December 2026 corn contract, which is currently priced at approximately $4.70 per bushel. Farmer economics across the globe remain a key focus as crop prices have not kept price up -- pace with the price of inputs, equipment, rent and other costs. That said, we believe nitrogen offers clear value for farmers relative to other nutrients for its immediate impact on yields. Given where crop prices are today, we expect farmers to focus on optimizing yield, which should support healthy nitrogen applications. We believe that the strong uptake of our UAN fill program and our robust fall ammonia program and the order book that supports it will support that outlook. We're also preparing for the implementation of the European Union's Carbon Border Adjustment Mechanism, or CBAM, which takes effect in less than 2 months. While there remains some uncertainty about the final structure of these regulations, we feel very confident about our competitive position. Thanks to our Donaldsonville CCS project, we have the largest certified low-carbon ammonia volume in the world. And over the last few years, our team has put in a great deal of time to build relationships with customers, including those who will be affected by CBAM. This has enabled us to sell certified low-carbon ammonia at a premium to conventional ammonia today as customers begin to adapt their supply chains. Based on our conversation with customers, we also believe CBAM will drive significant demand for other low-carbon nitrogen products such as UAN. We see this as a tremendous opportunity for CF Industries on top of our already high-performing nitrogen business. We look forward to working with customers to build out a low-carbon ammonia and nitrogen derivatives supply chain. With that, I'll turn it over to Greg. Gregory Cameron: Thanks, Bert. For the first 9 months of 2025, the company reported net earnings attributable to common stockholders of approximately $1.1 billion or $6.39 per diluted share. EBITDA and adjusted EBITDA were both approximately $2.1 billion. For the third quarter of 2025, we reported net earnings attributable to common stockholders of $353 million or $2.19 per diluted share. EBITDA and adjusted EBITDA were both approximately $670 million. On a trailing 12-month basis, net cash from operations was $2.6 billion and free cash flow was $1.7 billion. We continue to be efficient converters of EBITDA to free cash flow. Our free cash flow to adjusted EBITDA conversion rate for this time period was 65%. As you saw in the press release, we updated our projection for capital expenditures on our existing network to approximately $575 million for 2025. This reflects additional maintenance we were able to complete efficiently during planned outages as well as the timing of strategic investments that Chris mentioned this morning, and he spoke about at our Investor Day in June. We returned $445 million to shareholders in the third quarter of 2025 and approximately $1.3 billion for the first 9 months. In October, we completed our 2022 share repurchase authorization, having repurchased 37.6 million shares, which represents 19% of the outstanding shares at the start of the program. Our share repurchase program continues to create strong value for long-term shareholders. Net earnings increased approximately 18% compared to the first 9 months of 2024, while earnings per share were approximately 31% higher, reflecting our significantly lower share count. The same positive impact can be seen in our shareholders' participation in our production capacity and the free cash flow it generates. We are now executing the $2 billion share repurchase program authorized in 2025 with over $1.8 billion of cash on hand at the end of the third quarter. We are well positioned to continue returning substantial capital to our shareholders while also investing in growth through Blue Point and other strategic projects. With that, Tony will provide some closing remarks before we open the call to Q&A. W. Will: Thanks, Greg. For me, this is earnings conference call #48 and my very last one as CEO of CF Industries. Over the past 12 years, traditionally at this point in the call is when I have thanked the entire CF Industries team for their hard work and contributions to our success. I'm eternally grateful to the entire team. Today may be more so than usual, and I am particularly aware of what an amazing team we have here. So indeed, thank you all said perhaps a bit more heartfelt than the past 47 times. I'm exceptionally proud of the company and the organization I'm leaving. The highly ethical way in which we conduct ourselves, our unwavering commitment to employee safety and our absolute focus on value creation. In addition to the entire CF team, I also want to thank our Board of Directors who have always been supportive of me, providing insight and guidance through the years and importantly, always aligned with me on the objective of value creation. I also want to particularly thank the CF senior leadership team with whom it has been a truly great pleasure to work alongside. I can honestly say this is the best group one could possibly hope for and not only respect them as individuals along with their business acumen, but I also thoroughly enjoy their company and our camaraderie. Finally, I want to thank and congratulate Chris Bohn on being named CEO. Chris has been a consistent thought partner and devil's advocate working with me as we navigated foundational decisions like the Terra acquisition, the sale of our phosphate business, the capacity expansion projects, our strategic repositioning of the company, the Waggaman acquisition, and most recently our Blue Point joint venture. Chris has been hugely successful in leadership roles across the company, including heading FP&A, supply chain, manufacturing, CFO, and his current role as COO. Chris has my complete faith and confidence that he will successfully lead the company to new heights. Again, thank you, and congrats. It has been some kind of a thrilling ride for me as CEO, an incredible honor and a very great privilege. We've accomplished many things over the years. As I say, success has many parents and indeed, all of our successes were team efforts, and I'm delighted to say that the team remains in place. Therefore, I'm steadfastly confident that the company's best years are in front of it. With that, operator, we will now open the call to your questions. Christopher Bohn: Before Q&A, I want to take a moment to acknowledge Tony's retirement and his contributions to CF over his 18-year tenure. Tony's influence and impact on CF cannot be overstated. From his time leading manufacturing where he generated and championed the do-it-right phrase is a core statement of CF's values and culture to his relentless pursuit of personal and process safety. CF has improved through his leadership. Tony's leadership, which can be best described as bias towards action. This has been exemplified through the growth the company has experienced under his guidance through the CHS transaction, Donaldsonville and Port Neal expansion projects, Waggaman acquisition to the recent announcement of the Blue Point joint venture, increasing CF ammonia production and free cash flow generating assets by 45% during his time as CEO and over 200% since he started at CF as a member of the senior leadership team. His safety-first mentality, keen decision-making and focused on disciplined investments and execution is what has positioned CF where we are today, tremendous safety performance, industry-leading asset utilization and superior capital allocation. Over the years, he's not only been a great mentor, but also a great friend. I look forward to building on what Tony has established and wish him the best in his next act. Thank you, Tony. W. Will: Thank you. Operator: [Operator Instructions] First question comes from Ben Theurer from Barclays. Benjamin Theurer: So first of all, Tony, all the best in retirement. I'm pretty sure you have plenty of things you want to do. So enjoy that. And that's -- it was quite a run, I guess. So that's never bad. So enjoy that piece. And maybe as well for you, Chris, all the best on your new assignment as CEO. So 2 quick questions I have. So one, you've talked about in your presentation material about the mid-cycle where you are right now and the mid-cycle where you think you're going to be in 3, 4 years' time as you get these additional projects come through. So I just want to understand the current market conditions obviously still seem to a degree, stretched, right, with the European gas price somewhat elevated versus what maybe mid-cycle in the past was. So I wanted to get your view in terms of the bull versus the bear around that $2.5 billion mid-cycle mark and how we should think about that evolving from a feed cost standpoint of view into the period of 2030? And then I have a very quick follow-up on pricing premiums. Gregory Cameron: Yes. So I'll start. It's Greg. So clearly, today, right, when we built the $2.5 billion, we had a $3.50 gas strip in there for Henry Hub and a price -- realized price on urea at $3.85. As of today and through the year, we've obviously traded below that on the Henry Hub. So from a feedstock, we've been benefiting in our results. And then lately, you've definitely seen a price move up through the course of the year on the urea. So from a results standpoint, hopefully, you're seeing that and appreciating that in the results that we printed at $2.1 billion of EBITDA through the first 3 quarters. I think as you think about it going forward and the spread between what we see here in the U.S. and in Europe, our view is that there'll be some tightening there, we expect to have a competitive advantage and remain lower priced on a nominal basis as well as relative basis versus what we're seeing in European production, which is -- will continue to be a tailwind to us for our financial performance. W. Will: I mean, I guess it's a long way of saying, Ben, that we would agree with you that current conditions are well above mid-cycle and our expectation just based on history of how fourth quarter paces against the other quarters should deliver full year results well above mid-cycle this year. And I think that's consistent with kind of what you said, industry conditions, gas price in Europe, kind of what's going on in terms of the energy space and overall demand, it does feel stronger than, I would say, mid-cycle, but we're delivering against it. Christopher Bohn: And the only other point I would add is on the growth that Greg talked about going to the $3 billion, that is identified in motion being executed on today. So that is not things that are in the pipeline that is what we know today and that will likely grow as time goes on as well. Benjamin Theurer: Okay. Got it. And then that price premium on the ammonia you're selling in Europe, the blue ammonia that you're getting out of Donaldsonville, can you give us a little sense of magnitude as to the premium that you're getting here with your customers? Bert Frost: Sure. This is Bert. And we've been fairly consistent with our goals of as we build the supply, which has come on stream and over time, as we add additional locations and then Blue Point, we want to build correspondingly demand. And so we've been working very synergistically with our European customers, North African customers and even in the United States. So today, the premium is $20 to $25 per ton. As demand grows and we don't see the supply, we would anticipate that those will be matched on as demand grows. So very positive for CF. W. Will: But again, Ben, that was never contemplated as being part of the economics when we went with the dehydration compression plant. So the cost of the plant was just under $200 million. The 45Q benefit when we're sequestering at a rate of 2 million tons a year is going to be about $100 million of cash. And then we're adding another roughly almost 40-ish to 50 from product premium. So we're picking up an extra 50% EBITDA that was never initially part of the justification of that project. And so it's kind of nothing but goodness across the board in terms of our -- that project. Operator: The next question comes from Edlain Rodriguez from Mizuho. Edlain Rodriguez: Tony, clearly, you will be missed. That's clearly the case, and good luck with everything. So a quick question, again, maybe for you, Tony, and maybe for Bert. In terms of -- I mean, as you noted, the nitrogen outlook looks very constructive. But if you were digging for possible bogeyman in terms of trying to find something to worry about in the near or medium term, like where would you look? Bert Frost: Well, actually, we do every day, assess the forward market, the spot market, the prompt market, and we try to be constructive in terms of how we build our order book and thinking about the customer base. That's why we're broad-based in terms of ag business, industrial business, export business, and we're levering those along with our terminaling activity, how do we enter and exit the market and play the market. But when you look at the market today, then it's a global market, you're seeing a constrained supply, and that happened through the global conflicts as well as plants coming offline in Saudi Arabia, Bangladesh and a few other places and gas limitations in Trinidad, high-cost gas in Europe and not a lot of new capacity coming online in low-cost areas. So constructively, supply is, I would say, consistent on a limited basis, while demand continues to grow at that 1% to 2% per year. And we're seeing very healthy demand in India, Brazil, North America, and we plan to continue with that level of demand. And so when I look at the negatives, I think what -- it's -- from your side, it's always yes, but yes -- but this is going to be negative. And we've been hearing about China for 10 years. We've been hearing about other issues for years, and we continue to outperform the market. So looking at the negatives, I would say I like the current market. I think the current market is going to extend into 2026. That's as far as we give a viewpoint. But China's demand internally to consume the tons they produce is pretty well tied to that. So these 4 million tons of exports that we see coming out in 2025 is probably needed. And then India hasn't performed on their production internally. They've been importing consistently high levels of urea and Brazil continues to grow. So I have a hard time finding a negative bogeyman out there. W. Will: See, I was -- Edlain, I'm going to give you a little more flip in answer. I was going to say all you have to do is read some of your other colleagues out there in the industry, you'll get kind of where the bogeyman sits, even though we don't really believe a lot of that is accurate. Edlain Rodriguez: So one quick follow-up for you, this is for Tony and Chris. I mean, Tony, you've talked about the valuation disconnect in your shares. Clearly, I guess, like you failed to convince those jittered investors. Like what else do you think Chris -- and Chris, you could answer that, too. What else do you think you will need to do to convince investors of that valuation gap that you've clearly seen? W. Will: I mean we did a European roadshow this summer or this fall and talked to investors over there. And there was a little bit of kind of not understanding why the valuation was what it was, but also -- there was also, frankly, a little bit of just we trade you as part of this broader group of other companies. And when there's a lot of automated trading going on and there's something that affects, like I said, either the ag sector or something else, all of the company's kind of move. And I think there just isn't a recognition that we're -- our financials are very different from most of the companies in that sector. And I think at some point, when there are few enough shares out, we'll start getting a more realistic valuation against what's remaining. And I think, fortunately, we're generating enough cash, and the shares are such a screaming value that I think continuing just to buy shares out of the market is the only way we can eventually get there. Christopher Bohn: Yes. And the only thing I would add to that is when you ask what should we do, it's to continue to do what we are doing. We have exceptional operational performance focused on safety and a conversion to free cash flow that I think we, as a company, reflect on more than anybody else that I see both in the chemical and the agri and really all industries. And so at some point, that has to resonate with people. Cash is king and whether it's buying back the shares, as Tony said, or making high-growth investments that have great return profiles, it will pay off at some point. So it's continuing to execute the way we're executing. Operator: The next question comes from Joel Jackson from BMO Capital Markets. Joel Jackson: Tony, congrats again. A couple of questions. If you brought forward $75 million of maintenance CapEx this year, does that mean that next year, you should be run rating $425 million CapEx on your non-Blue Point network? Christopher Bohn: Yes. Joel, I'll start with that and then if anybody needs to add something to it. But that increase, we were probably a little light on the $500 million. Generally, we start the year running at about a $550 million is kind of the range we're performing in, but it's really affected by 3 things. One, we completed more projects than we typically do at this time. There's a lot more, I would say, smaller dollar projects that are easier to finish during this particular timeframe. And then we also -- part of it was a timing of a nitric acid precious metal purchase, which was quite a bit that we do from time to time. And then we had, to be honest, slightly higher labor and capital costs related to some of the inflation by a few percentage points than what we had been forecasting. So as I look at 2026, I would still use the $550 million as our range going forward for sort of, let's call it, our base CapEx and then adding CF's component of Blue Point on top of that. Joel Jackson: Okay. And I know it's early, very early, and it's great that no significant injuries. But do you know if what's happening in Yazoo City, is this going to be an outage that's order of magnitude days, weeks or months? W. Will: Yes. It's way too early to speculate on that. I would say the ammonia plant was not directly affected. It's still operating as of this morning. But at some point, you run into inventory containments depending upon how long the upgrades are down. So we're thankful that everyone is accounted for and is safe and that really there is only just a couple of very minor injuries, nothing serious or significant. That was our biggest concern. And then also that there is -- the site has been secured. Now we're in the process of kind of really understanding what the condition of things are and what the root cause was, and then we'll start worrying about turning things on after we do a thorough investigation. I would say, Joel, that this is our smallest segment and a relatively small plant in our smallest segment. So we're not focused on kind of potential financial implications at this time. And as Chris said, we're still expecting to be able to produce the 10 million tons of ammonia this year like we had planned on. Operator: The next question comes from Chris Parkinson from Wolfe Research. Christopher Parkinson: Awesome. Tony, I'm not one to always say like say great quarter, but I'll give you a shout out and I'll say great 12 years and through all the debate, agreements and at times disagreements, you've always challenged me. So I'd like to personally thank you for that. It's been a pleasure. A question to both you and Bert. There's been -- and it shows you outside the market to me. There's been a lot of inconsistency of supply throughout the entirety of this year. And you have things in Russia, Germany, Poland, Romania. I mean perhaps this becomes a broader intermediate to longer-term question. But how much of the demand and the price strength do you attribute to the supply side of it versus the fact that demand, I think, broadly speaking, throughout the year-to-date has also been pretty healthy and kind of led to these price rallies at times at nonseasonal time. So I'd really appreciate your perspectives and kind of how to think about '26 in the context of what we've actually been seeing experience and what we've been experiencing in 2025. W. Will: I think the demand piece of the equation is much easier to forecast going forward. And as Bert said earlier, given where the different products are priced at in the corn-to-bean ratio and just looking at what we saw in the way of the UAN fill program as well as fall application of ammonia that's going on right now, we're anticipating the demand side of the equation to be very strong for the planting year of '26. The supply side is a little harder to kind of peel back. And as you said, it's an integrated kind of question in terms of how much it is the S and how much of it is the D. I would say a lot of the places that you mentioned, not so much Russia and Iran, but a lot of the places that you mentioned where there were some supply disruptions are on the relatively higher end of the cost curve. So those tons don't necessarily move things dramatically up in terms of price. But there's no doubt the conditions that we saw this year due to both the S and the D side were quite strong, and that's why our anticipation is delivering a result that's well above what our mid-cycle numbers when Greg talked about it at Investor Day, what he gave, we expect to be well above that. Bert Frost: I think for CF in particular, how we view the world and being students of the world geopolitically, economically and systematically and how it affects our business. Tony touched on the specifics, but we did lose 5 million tons from the market through the conflicts for Iran and Egypt, Algeria and some in Russia and Turkmenistan. And then I think the lack of China or the late coming in of China in June probably pushed the market higher than anticipated. But we're still tight. And like Tony articulated in terms of demand with India pulling 8 million to 9 million tons, Brazil, 7 million to 8 million tons, North America, 6 million tons and Europe producing less and not having the access and the lack of inventory in any major destination market sets up 2026, I think, very well. And we're going to see, I think, higher-than-anticipated corn acres in North America due to just the economic opportunities and impacts, which is constructive for CF. Christopher Parkinson: Got it. And just as a quick follow-up, I mean, Tony, you've gone through your fair share of capacity expansions, both -- well I should say, very large brownfields and other brownfields and everything within your network. What have you, Bert and Chris learned the most from all of those efforts over the last 12 or so years that Chris and his team can essentially apply the Blue Point to perhaps mitigate a lot of the things. Is there kind of a track record of lessons that you can really apply here? Or is it just going to be every project is different at the end of the day? W. Will: Yes. I would say we learned a ton that is currently in direct application of this project, one of which was we did a full-blown FEED study and detailed engineering of this plant before we announced it, went to FID. And so we have a much better perspective of the actual construction hours, and the unit build material lifts than we did when we announced the expansion projects back in 2012. The other thing I would say is the size of our network and the expertise we have across the network and the scale we have brings tremendous skill sets and capabilities to bear against a project like this. And you see that when you're looking at other people that are trying to start up ammonia plants that are years late because they just don't have the capability and expertise running ammonia. And there are a few of those out there right now. And so I think both the fact that a number of the people involved in this construction project were also involved in the big Port Neal, Dville expansions in 2012 through '16 as well as just some of the broader lessons like the engineering and FEED study, I feel very confident in this. And we also have expertise from our partners that we're going to be able to leverage as well with JERA and Mitsui that are equally, if not even more so, comfortable doing very, very large capital projects like this, and they're bringing some of their best resources to bear as well. Bert Frost: I would say, as Chris said in his comments, Tony, being bold and -- but that boldness is based on market knowledge, understanding -- we've looked at plants all around the world. We've looked at a lot of opportunities over the years. We've had some great debates and discussions and disagreements at times on where to go and how to grow. But in the end, have made some very good decisions on that. And Blue Point is a good example. We're the company that does it right, builds -- stays within, I think, our fairway and brings these plants on safely, and they operate above nameplate. And so it's that bold step of taking it when the market is growing and needs these tons. Christopher Bohn: Yes. And the only thing I would add is that's different from last time, Chris, as we've talked about before, is we're going with modular construction. Last time on a stick build time and material, you started to see labor costs get out of control. So I think that was something that we did a lot of evaluation on and also looking at who we're going to select to build those modules. And then lastly, something that we'll do that we did last time that the whole team is working on, which is we begin hiring operators and engineers today, even though the plant will not be up for 4.5, 5 years or whatever. And what that allowed us last time was to get to over nameplate production within a couple of months after start-up, which nobody else was able to do. So again, as Tony said, leveraging our overall network, not just for engineering expertise, but to train operators and other individuals that will be working at these sites. Operator: The next question comes from Andrew Wong from RBC Capital Markets. Andrew Wong: Just echoing everybody else's comments, Tony, congratulations on a very successful career and guiding CF through a lot of market ups and downs. We've seen a lot. So enjoy your next chapter. W. Will: Thank you, Andrew. Andrew Wong: Yes. And so just maybe on the comments you made earlier around the valuation, I think you made some very fair points. So maybe a question for you and also for Chris. Just given the value in shares and buybacks seem to be the path to kind of realize that value, you have a very strong balance sheet. Would there be any consideration for using debt to fund Bluepoint and then maybe using the cash flows and the cash generation to buy back shares? Like would that make more sense right now. W. Will: I think the problem with doing that a little bit, Andrew, is its sort of a onetime sort of benefit that you get and then you're living with much higher fixed costs as you go. And I think one of the things that we've seen in this business is having a balance sheet with low fixed cost and a lot of liquidity gives us opportunities to move when there's things that are available to us like the Waggaman deal, which we did in cash. And so instead of this being a kind of trying to rush an equity swap for debt, which benefits kind of near-term shareholders. We're really playing the long game here, and it's about trying to make sure that we retain all of the long-term operating and strategic flexibility and at the same time, rewarding the truly long-term shareholders who eventually, I think, will start valuing the company properly. But given my perspective, I'm not going to be here in a couple of months. So this is probably -- Chris and Greg can talk about it. Christopher Bohn: Yes. From my perspective, well, just for starters, I think the numbers that Greg presented and where we're seeing this year, where we're seeing next year and even the mid-cycle, we're going to have enough cash to do both at a significant level, just as we've done over the last decade under Tony, where we've been able to grow and also do significant share repurchases. So the ability to do both. I would echo Tony's comments, like having fixed charges in line, having a, I would say, flexible balance sheet is very important when you're in a commodity business. As we're seeing more of our business here go to ratable, more industrial with premiums and things, we can make different decisions from there. But I think the cash flow that we're generating due to the conversion rate that we do allows us to do whatever we want to do really. Gregory Cameron: Yes. The only thing I would add to it is just emphasize the numbers that we talked about today, right? $1.3 billion of cash back to the shareholders for the first 3 months, $700 million in CapEx, so $2 billion, and we have $1.8 billion of cash on hand today. That creates incredible flexibility for the company. Andrew Wong: Okay. Understood. And then maybe just one on costs. I think SG&A looked still just a little bit elevated for the quarter, obviously, not hugely, but just curious if there's anything there. And then also on just some of the non-gas costs, I suspect that the turnarounds this quarter contributed to some of that. Just I'm wondering if there's anything to flag or anything to add. Gregory Cameron: It's Greg. On the SG&A side, we continue to just update our bonus accrual for the company for the year, and there was a small catch-up as well as a plan for the third. So that's the elevated level on the SG&A. On the non-gas side of production cost, really the one that stuck out to me as I climbed through them was really around ammonia in that segment. And the point to make there is we did have an increased mix around our purchased tons, which obviously come into the system at a higher value than what we can produce them at, but it also contributed to gross margin dollars in the ammonia segment being up 30% year-over-year. So other than that and the timing of some turnarounds, there was really nothing to speak of in the non-production cost. W. Will: Yes. And on the purchase front, just to remind you, the tons that are produced in Trinidad, we purchased, and we realize the value in Trinidad and then that comes through equity earnings instead of directly into the ammonia segment. And then into the U.K., we're purchasing ammonia and then upgrading it to a margin, and then that's going to come through kind of our other ops segment. But the price because we're buying it at market shows up in COGS for ammonia. So that kind of helps dimensionalize what Greg was talking about. Operator: The next question comes from Kristen Owen from Oppenheimer. Kristen Owen: I do want to start with a more strategic long view here, just given some of the prepared remarks about the valuation disconnect. And given your comments on whether it's CBAM, where those Blue Point ammonia tons will go, even some of your comments on DEF, help us understand if we're looking at this business model in that 2030 framework, how much exposure really is ag anymore versus some of these more industrial applications? And how should we think about that mix contributing to that sort of mid-cycle framework? W. Will: Yes. I mean ag is still going to represent the lion's share for the foreseeable future of where we sell our products. And the simple reason for that, Kristen, is that the margins in ag are far superior to the margins in industrial. We could move all of our products into the industrial marketplace, which tends to be ratable and then -- but we would end up doing it at a significantly lower price point, and we wouldn't get the benefit of our distribution and logistics network by doing so. And so some of the -- even though it is kind of "a little bit less predictable," it's at a lot higher volatility. And I'm going to refer back to, I think, sort of something I've heard attributed to Warren Buffett, which is give me a 15% spiky return over a 10% flat, we'd way rather have a spiky to the upside return profile associated with serving the ag marketplace than we would the other way. Now we're starting to build some and that will continue to increase. That does tend to be a little more ratable with predictable margin structures. But we're going to be -- we're 75%, 80% in ag company today, and it's going to be like that for a very long time. Bert Frost: I think you have to also think about how our company is structured with our unique distribution and terminaling assets that are throughout the Midwest on the best farmland in the world with the lowest cost access logistically, if you compare our cost to get to the middle of Iowa for, let's say, $30 for urea against taking that to Mato Grosso from Paranagua or Santos, it's significantly cheaper and the yields are significantly better and the farmer economics is better as well. On top of, we have low-cost gas in those regions. So we are structured to serve the ag business, which, as Tony mentioned, is spiky but profitable. But we balance that with this industrial book and export book that places us in, I think, globally, a very unique position, and we're benefiting from that. Kristen Owen: Sure. And I appreciate that. And perhaps a little clarification on my side. I'm not suggesting that there's some major move out of the ag markets. It's more just how much more meaningful can the earnings potential be on the industrial side given the uplift of some of these markets. So perhaps a slight clarification there. And while I'm here, I'll just ask my follow-up question. Just given the cost curve in China, a little bit more affordable to keep those a little bit more domestic affordability. So just any thoughts on China exports in 2026? Bert Frost: We've been fairly consistent regarding China in that 3 million to 5 million ton range, and that's how they seem to perform. We're expecting them in 2025 to be in the 4 million to 4.5 million ton range. And they've announced this additional export quota. They haven't announced their program for 2026, but I would just bet on the same, probably coming out in sometime in Q2 with exports, May, June and exporting into the early part of Q4. Because their domestic market is so big, their domestic demand, both ag and industrial and where they are capacity-wise and operationally, that 4 million to 5 million -- 3 million to 5 million tons of exports makes sense as you build kind of what their structure should be. W. Will: Yes. Kristen, I'll just add one thing back to your first question. If you think about the 45Q tax credit associated with both Dville and Yazoo City when it comes online, we'll probably be close to $150 million of cash, and that's not net of taxes and everything that is not dependent upon where market pricing is for any of our products. Between what Bert is able to realize in price premium and some of the other initiatives we have like selling carbon credits, there could be another $25 million to $50 million of additional value that accrues to us that is also not tied to the market. So you're starting to get to the point where there's probably -- could be $200 million-ish a year that's coming in that is very ratable and predictable and just part of the base then that, everything else kind of rides above. Operator: The next question comes from Lucas Beaumont from UBS. Lucas Beaumont: Good luck with your retirement, Tony. Congrats on your career [indiscernible] the others. Yes, I just wanted to kind of ask you about Blue Point. So you guys noted that you'd procured all the long lead time equipment now. So kind of just where did the costs come in there compared to the budget? Kind of what percent of the project spend was that. And kind of just remind us of any cost escalation components that are built in there for like inflation and tariffs, et cetera, between now and sort of when the delivery occurs? Christopher Bohn: Yes. Thanks. This is Chris. Well, for starters, I would say the projects were way too early in the phase to say we're under significantly or we're slightly over or whatever. I would say we're right where we thought we'd be. The products that we -- or the equipment that we ordered as long lead time is like your boilers, your compressors, different equipment like that. The modular equipment, which is going to be the significant dollar amount that we'll be selecting the modular yard here shortly. And those have been fixed fee bids in which we had -- which was part of our overall $3.7 billion. So that part, we still feel very confident about. As we look at, I think, your question probably with tariffs, I mean, with the Supreme Court hearing arguments right now, there's still a lot of uncertainty what happens. A lot of the equipment that would be tariffed is most likely going to be coming in, in 3 years from now. So there's still quite a bit of time frame, and I'm certain more will change between now and then. But what I would say is we forecasted quite a bit into tariffs. We're slightly higher than that, that's going into our $500 million contingency, but not anything that would have us concerned at this time. I think additionally, there potentially could be upside dependent on what the Supreme Court rules, but I'm certain there would be some reactions by the administration as well on additional tariffs and other areas. So again, tariff side, a little uncertain, but we feel like we're covered there. Long lead items, those are in path, but those are more some of the more engineered complex items like compressors and such. Lucas Beaumont: And then I guess just on the pricing outlook, I mean, you guys are kind of talked at length about it. I mean, ammonia has been very tight. The pricing is strong. UAN and ammonia imports are sort of running below trends heading into the fall and spring. So I mean the near-term setup looks quite attractive. I mean, at the same time, the TTF futures have sort of been coming off the past couple of months have sort of gone from 12 and looking flattish year-on-year, sort of low 10s kind of now down about $1.50. So I guess just how do you kind of see those 2 factors resolving each together as we go through '26? Or I guess, if you don't think they'll resolve, then why not? Christopher Bohn: Maybe I'll start with the gas side with the TTF -- I mean, TTF has come off about $1. So you're still sitting near $11 on the forward strip with that with the U.S. sitting anywhere from $3.50 to $4. So you still have that differential that is very constructive. As Greg said, longer term, when we get into '28, '29, we may see that contract some, but not nearly to the level just given that the projects being built have to have return profiles with those as well and the additional demand that will be drawing on LNG. So from a constructive standpoint, we still think the gas differential is going to be very strong even if it comes in $1 or $2 from where it is today. Bert Frost: Regarding the market and the tightness we're experiencing today, with Saudi, the plant -- the ammonia plant being down and the late start of some of these new capacities, as well as Trinidad and then suboptimally operating in Europe. The ammonia market is, I think, going to maintain tightness until these new plants come on, and we'll see what happens. But the United States today is at a net import negative on UAN and ammonia, probably balanced on urea. And so again, looking around the world where we participate and where we have communication, you have a tight inventory position in all of the destination markets. And so looking at gas and costs and kind of upside, I think we roll very well into 2026 and probably through the first half easily in a positive way. Operator: The next question comes from Vincent Andrews from Morgan Stanley. Vincent Andrews: I'm actually late to something else, but I wanted to stick around and just congratulate you, Tony and say thank you and good luck in the future. W. Will: Thank you, Vincent. I appreciate that. Operator: The next question comes from Matthew DeYoe from Bank of America. Matthew DeYoe: Tony, congrats on the run. I know I didn't cover you directly for much of the time, but Steve always held you with the highest regard. So I know that goes for the rest of us here at Team BofA. I wanted to ask, I guess, a little bit on the slide where we talk about like ammonia expansions and closures. Certainly, we don't disagree that a number of European plants need to close chemicals across like a lot of chains. But if we look at that 3 to 4 number, I mean, what's the -- how much of that has been announced? What do you think the rates are that those plants are running? And then like I just know that closing plants is expensive and not really done easily. So I'd love a little bit more kind of commentary around your outlook for that capacity. Christopher Bohn: Yes. So this, as you may recall, is a study we did about 1.5 years ago where we analyzed every ammonia plant in Europe based on how its ownership structure was, what its maintenance structure, what its cost structure was going to be to try to identify which of those plants would come off. In Europe used to have about 48 ammonia assets that we're operating and how we have it leveled was red, yellow, green. And what we've seen is the red plants have come off as we expected. And in fact, we're probably ahead of that particular schedule with a number of curtailments and shutdowns that are occurring in Europe from that. But that 48 assets today is probably around 30 assets or maybe 31 assets. And we expect that to drop another 4 to 5 assets over the next couple of years. You have to remember, the decision we made in the U.K. was because we had a significant turnaround coming forward. And these turnarounds are $50 million to $60, so when you're entering into that, you have to make certain you're going to get that return on that cash. Additionally, where TTF is today at the $10 to $12 range makes it difficult to be producing throughout 12 months of the year for really selling in what may be 3 months a year, maybe 4 months a year. So you're making a risk decision based on that. So what we're seeing today is with some of the pricing, there's just a little bit more curtailment going on. But eventually, through our study and what we've seen, you're going to see some of those plants continue to go off. So the European side, we feel very confident that, that 3 million to 4 million is going to come off. Now whether all that gets imported as net ammonia or as upgraded product, that will be determined. But I think the other aspect here is, as Bert mentioned, there is just not a lot of new supply coming on. we have visibility of what plants are being built. And with the exception of ours and the 2 in the Gulf Coast that are about to come on probably sometime in 2026 and one in Qatar, there's really not much coming on. And the other plants that are coming on are upgrade plants that are consuming ammonia and making the ammonia market even tighter. So what we see is a strong constructive gas differential where we'll make money off of that versus TTF. And then we also see a very tight S&D balance that not only continues here into 2026 but really goes all the way to 2030. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Martin Jarosick for closing remarks. Martin Jarosick: Thanks, everyone, for joining us today. We look forward to speaking with you at future conferences. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome, everyone, joining today's EDAP TMS Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to John Fraunces with LifeSci Advisors. Please go ahead. John Fraunces: Good morning. Thank you for joining us for the EDAP TMS Third Quarter 2025 Financial and Operating Results Conference Call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer; Ken Mobeck, Chief Financial Officer; and Francois Dietsch, Chief Accounting Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. Now I'd like to turn the call over to EDAP's Chief Executive Officer, Ryan Rhodes. Ryan? Ryan Rhodes: Thank you, John, and welcome, everyone. The third quarter of 2025 marked another strong quarter for EDAP as we continue to execute on our mission to make Focal One the standard of care for localized prostate cancer. With global revenues of USD 16.1 million, this is the second consecutive quarter with record overall quarterly revenue for the respective period. Additionally, this is also a record for HIFU revenue for the third quarter, which reflects consistent commercial execution, expanding clinical adoption and growing recognition of the value Focal One Robotic HIFU brings to patients, physicians and hospitals. During the quarter, our HIFU revenue reached USD 7.7 million, representing a 57% increase compared to the third quarter of last year. This is consistent with our previously announced strategy of focusing our investments in the company's core HIFU business. We recorded 8 Focal One placements, including 6 capital sales and 2 operating leases. This represents growth of 167% as compared to the same period 1 year ago, reflecting the growing confidence hospitals have in adopting Focal One Robotic HIFU as an integral cornerstone of their prostate cancer program. With new placements this quarter at the University of Virginia and the University of Michigan, Focal One has now been integrated within 21 of the 35 Society of Urologic Oncology, or SUO approved fellowship programs, representing 60% of all such academic centers nationwide. Our growing presence across these leading urology centers is instrumental in training the next generation of urologists, while accelerating clinical awareness and adoption of HIFU focal therapy as a mainstream treatment option for prostate cancer. Focal One procedures in the U.S. grew more than 15% year-over-year, making a return to double-digit growth. This acceleration reflects the growing clinical adoption of Focal One combined with the impact of our sustained investment in market access initiatives. We are seeing meaningful progress in reimbursement coverage with commercial payers, particularly among Medicare Advantage providers, which is driving broader patient access and stronger hospital economics. On the clinical front, an important peer-reviewed scientific study was recently published in the Journal of International Urology and Nephrology. This study concluded that HIFU delivered non-inferior 10-year oncological outcomes as compared to external beam radiation therapy in patients with Stage II prostate cancer. Both the overall survival and cancer specific survival rates were higher in the HIFU group with a statistically significant overall survival benefit favoring HIFU in early-stage disease. This is an important addition to the growing body of evidence supporting HIFU in the treatment of prostate cancer. While both the HIFI and FARP, or FARP studies, are already showing strong midterm cancer control as compared to surgery, this new publication further validates HIFU with favorable long-term follow-up data compared to radiation therapy. Together, these results continue to strengthen the clinical foundation for the Focal One platform and HIFU's role in the treatment of localized prostate cancer. On the reimbursement front, the latest hospital and physician payment rules released by the Center for Medicare and Medicaid Services, or CMS, continue to reinforce the important use case of HIFU, thus providing hospitals and physicians with a clear and predictable Medicare reimbursement pathway. In addition, several commercial payers, both local and national, has started to routinely approve individual claims around the country, particularly within Medicare Advantage plans, further reinforcing the positive economics driving adoption. I will now briefly touch on our development in focused areas to expand into new clinical indications. We are making meaningful progress in our benign prosthetic hyperplasia, or BPH clinical development program, which represents another major growth opportunity for the company. While our combined Phase I/II multicenter study is progressing to plan in Europe, we are proud to report Institutional Review Board, or IRB approval for the U.S. BPH clinical study in partnership with the Icahn School of Medicine at Mount Sinai in New York City, a prestigious academic hospital and recognized leader in urology innovation. This study will evaluate use of Focal One Robotic HIFU for the treatment of BPH, building further on our clinical experience in Europe. Our goal is to demonstrate that Focal One's precision and image-guided approach can offer an effective noninvasive tissue-sparing alternative to conventional treatment options. We expect the first patient to be enrolled in this study before the end of the year. I would now like to provide a brief update on our endometriosis clinical evidence and commercialization progress. Starting first with clinical evidence. On October 20th, Professor Dubernard, the principal investigator of the Phase III randomized controlled trial, previewed the latest clinical data in the plenary session on endometriosis at the Annual Meeting of the European Society for Gynecological Endoscopy, or ESGE. As previously announced, the double-blind Phase III RCT compared patients treated in the HIFU group with patients assigned to a sham treatment group. Patients treated in the HIFU group reported a significant improvement across their various symptom scores at 3 months. Such improvements were maintained at the 1-year follow-up. Over the same period, the majority of the patients in the sham group returned to baseline symptom levels, similar to when they were enrolled in the beginning of the study. After unblinding, over 85% of the patients from the sham group when given the option, elected to undergo a Focal One HIFU procedure to treat their condition. As noted at 3 and 6 months post HIFU treatment, this group reported a significant improvement of their symptoms. These patients continue to be monitored as part of a long-term follow-up clinical study. On the commercial front, we are actively working with leading European centers in a limited launch phase. The goal is to establish a solid foundation to enable the expanded adoption of Focal One HIFU as a noninvasive treatment option for women suffering from deep infiltrating endometriosis. Finally, during the quarter, our teams maintained a strong visible presence across multiple global scientific urology meetings. These meetings allow us to showcase our latest Focal One i Robotic HIFU platform as the leading focal therapy technology. Urologists were able to attend numerous compelling presentations from world-renowned academic users on both the positive clinical benefits and the supporting scientific outcomes. Of particular importance was the World Congress of Endourology and Uro-Technology, or WCET meeting held in Phoenix, Arizona. This meeting featured a Focal One master class led by expert users as well as a semi-live Focal One procedure. During this event, Focal One received the 2025 Industry Award for innovations in Endourological Instrumentation. This prestigious international award given by the Endourological Society acknowledges our innovation leadership in Robotic HIFU technology. Focal One is the first focal therapy technology to receive this distinguished award. I will now turn the call over to Ken to review our third quarter results. Ken Mobeck: Thank you, Ryan, and good morning, everyone. For conversion purposes, our average euro-dollar exchange rate was $1.16 for the third quarter of 2025. As Ryan mentioned earlier, our record revenue for the third quarter was driven by significant strength in our core HIFU business, which grew 49% over the third quarter of 2024. Growth in our HIFU business was offset by expected continued decline in our noncore distribution and ESWL businesses, which declined by 16% in Q3 2025 versus Q3 2024. Total revenue for the third quarter of 2025 was EUR 13.9 million, an increase of 6% as compared to total revenue of EUR 13.1 million for the same period in 2024. Total HIFU revenue for the third quarter of 2025 was EUR 6.7 million as compared to EUR 4.5 million for the third quarter of 2024. The 49% year-over-year increase in HIFU revenue was driven by 6 Focal One capital sales in the third quarter of 2025 versus 3 capital sales in the prior year period as well as a 26% year-over-year increase in Focal One treatment-driven revenue. As mentioned earlier, Focal One procedures in the U.S. grew 15% year-over-year. For the 9 months ending September 30, 2025, HIFU revenue was EUR 21.3 million, an increase of 42% over the same period in 2024. Total revenue for the 9 months ending September 30, 2025, was EUR 43.5 million compared to total revenue of EUR 43.8 million for the same period in 2024. Gross profit for the third quarter of 2025 was EUR 6 million compared to EUR 5.2 million for the same period a year ago. Gross margin was 43% in the third quarter of 2025 compared to 39.4% for the same period a year ago. The increase in gross margin year-over-year was primarily due to the strategic shift to our high-margin HIFU business segment. Gross profit for the 9 months ending September 30, 2025, was EUR 18.5 million compared to EUR 17.5 million for the same period in the prior year. Gross margin was 42.5% for the 9 months ending September 30, 2025, versus 39.9% for the same period in the prior year. Operating expenses were EUR 10.9 million for the third quarter of 2025 compared to EUR 11 million for the same period in 2024. Operating expenses were EUR 35.2 million for the 9 months ending September 30, 2025, compared to EUR 34.3 million for the same period in 2024. Operating loss for the third quarter of 2025 was EUR 4.9 million, approximately EUR 1 million lower as compared to the operating loss of EUR 5.8 million in the third quarter of 2024. Operating loss for the 9 months ending September 30, 2025, was EUR 16.7 million compared to an operating loss of EUR 16.8 million for the 9 months ending September 30, 2024. Excluding the impact of noncash share-based compensation, operating loss for the third quarter would have been EUR 4.1 million compared to an operating loss of EUR 5 million in Q3 2024. Net loss for the third quarter of 2025 was EUR 5 million or EUR 0.13 per share, a EUR 1.4 million improvement as compared to a net loss of EUR 6.4 million or EUR 0.17 per share in the same period a year ago. Net loss for the 9 months ending September 30, 2025, was EUR 17.7 million or EUR 0.47 per share as compared to a net loss of EUR 17.1 million or EUR 0.46 per share for the 9 months ending September 30, 2024. Turning to the balance sheet. Inventory decreased to EUR 13.8 million in Q3 as compared to EUR 15.5 million in the prior quarter. The sequential decrease in inventory was due to continued efforts and focus on just-in-time inventory management. Total cash and cash equivalents at the end of Q3 2025 were EUR 10.6 million as compared to EUR 16.3 million in the prior quarter. The sequential decrease was driven primarily by the cash used in operating activities to support strategic investments in HIFU. As announced earlier, we closed the credit facility with the European Investment Bank, which further strengthens our balance sheet. We are pleased to report that the first tranche of EUR 11 million, approximately USD 13 million was received and will be reflected in our Q4 and full year 2025 financial statements. I will now provide a brief update on tariffs. Based on the latest information, we are still forecasting a 15% tariff impact for all goods transferred between France and the U.S. On a year-to-date basis, the tariff impact to our business has been approximately EUR 300,000, and we are currently estimating a full year impact of EUR 900,000. We continue to monitor the potential impact of U.S. tariff policies on a go-forward basis. In closing, during the quarter, we improved manufacturing efficiencies, optimized supply chain performance and managed our operational spend. We are also making significant progress in our transition to a new supplier regarding our ultrasound imaging scanner and expect to see the cost reduction impact in the upcoming calendar year. These achievements lay the foundation for future growth. I would now like to turn the call back to Ryan for closing comments. Ryan Rhodes: Thank you, Ken. With respect to guidance, we are maintaining our financial guidance for 2025. Our core HIFU business revenue is expected to grow within the range of 26% to 34% year-over-year and our combined noncore ESWL and distribution business revenue is expected to decline within the range of 25% to 30% year-over-year. As we progress through the fourth quarter, our priorities remain clear: first, accelerate adoption and utilization across our Focal One installed base; second, continue expanding market access and reimbursement coverage; and third, maintain a disciplined investment approach specific to market growth opportunities. With the return to double-digit U.S. procedure growth and expanding presence at top academic centers as well as leading community hospitals and the recent recognition of our innovative Robotic HIFU technology, we drive forward in Q4 2025 with strong momentum and clear visibility for continued growth across our HIFU business. With that, I will now turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] We'll take our first question from Charles Wallace with H.C. Wainwright. Charles Wallace: This is Charles on for RK. So, I guess the first question I had was on the EIB deal. Could you maybe give a little bit more color on how these proceeds are going to be used and what was the kind of the main reason to do this? Was it just to provide more financial flexibility? And do you plan to use these funds strictly for the U.S. business or also in the international business? Ryan Rhodes: Yes, great question. With EIB, we've been open about our investment strategy, both in various areas to include product development which is inclusive of R&D, but also in clinical development as we're working on expanding new indications. And so really, it's more in those operating areas. And some, obviously, in the commercial domain, we make appropriate investments where needed. But really, it's across those 3 areas: product development, inclusive of R&D; clinical development; and some additional focus in commercial growth. But it is centered around our HIFU core business. Ken Mobeck: And to follow up, to answer the second part of your question, why the EIB. We did a lot of research and analysis. And given where the stock has been trading over the last 180 days, we thought this was the most attractive financing option to really allow us to further invest in HIFU, as Ryan mentioned, with no short-term dilution to the stock. Charles Wallace: Great. And then I guess you mentioned the double-digit increase in U.S. Focal One procedures. Can you comment on how many of these procedures were covered? And then also, as you work to expand coverage, do you expect the procedure volume to grow? Ryan Rhodes: Yes. So again, we have a Category 1 CPT code. Some of these cases are obviously Medicare patients. Some are also noted in, as I referenced, Medicare Advantage plan patients and some are commercial patients. So it's a little bit of a mix. I think the one area that I commented on was the fact that we saw improvement across the payers that represent Medicare Advantage plans. And that was a positive sign and a positive trend we've been on. And again, we believe looking forward, we will continue to drive momentum and activity across Medicare Advantage plans. Charles Wallace: Great. And maybe one more question, if I can squeeze in. Could you remind us -- I think the third quarter is typically seasonally soft. Can you remind us what you expect in the fourth quarter? Ken Mobeck: So when we look to the fourth quarter, as Ryan mentioned, we're reiterating our guidance for the year. And given what Ryan talked to you about, our guidance remains between $58 million and $62 million for CY '25. So our -- where we don't give quarterly guidance, we feel confident that our Q4 number will be in that range to help us hit those year-end targets. Operator: There are no further questions in the queue. I will now turn the call back over to Ryan Rhodes for any additional or closing remarks. Ryan Rhodes: In closing, I want to thank everyone again for joining us on today's call, and we look forward to seeing you at the upcoming global investor conferences. These include the UBS Global Healthcare Conference being held next week in West Palm Beach, Florida; the Jefferies Global Healthcare Conference in London being held the week of November 17th, and the Piper Sandler 37th Annual Healthcare Conference being held the week of December 1st in New York City. Thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Grant Howard: While they're doing that, I think we're going to get started. Good morning, afternoon, and welcome to the CEMATRIX Q3 Financial Results Webinar. The results were very good. And presenting today will be Randy Boomhour, who's the President, CEO of CEMATRIX; Marie-Josee Cantin, who is the CFO; and out of Chicago is Jordan Wolfe, who is the President of MixOnSite. So again, congratulations. And with that, Randy, I'm going to turn it over to you and the team. Randy Boomhour: Thank you, Grant. Much appreciated. We're really excited to be here with all of you today to share with you some information about our company and our financial results for Q3 2025. As always, there's a disclaimer here. We will make some forward-looking statements so that you understand the context of those. We always like to start with this slide, which I kind of view as a bit of an executive summary, key investor highlights, key things that investors should know. So number one is we're an innovative cellular concrete solutions company, a leading provider of lightweight, cost-effective, durable cellular concrete for infrastructure projects. We have a strong competitive advantage that we'll cover off in an upcoming slide and work primarily as a subcontractor for major North American general contractors. We're in a position of financial strength and overall growth trend. Sorry, I had trouble getting that out. We've had revenue cumulative annual growth of 24% since 2017, which is very impressive. Our margins have been improving. We've met our record for -- a record 2025 commitment already in Q3, and 2026 is forecasted to be another good year. I like this chart here on the right here because it really shows kind of the key metrics that we follow, 2023 being a record year. 2024 is a step back year, but still profitable and then 2025, focused on profitability and delivering a record year already. So, there's a significant market opportunity in front of us. We're an industry leader. The global cellular concrete market is significant and is expected to continue to grow. And there's just increased tailwinds around infrastructure spending, both in Canada and the U.S. And we see more and more the federal and provincial and state budgets just adding more fuel to the fire of increased infrastructure spending. So, I'm going to hand it over here to Jordan next, who's going to cover the next couple of slides. Jordan Wolfe: Thanks, Randy, and hello, good morning and good afternoon, everybody. So, I'm going to just take you a little bit through the team and corporate time line. We are just -- management was introduced just a moment ago by Mr. Howard. So, we are also led by a Board of Directors, including Minaz, Patrick, Steve, Anna Marie and John, who offer valuable insight with all of their experience across many different industries. Insider ownership in our company is strong, roughly 10% of the 150.2 million outstanding shares, 166.8 million fully diluted. The largest insiders include myself with 12.2 million and Randy with 1.8 million shares. In the lower right corner, we like to show this company time line. It just kind of shows you everything that we've been through as a company from being founded in 1999, going through many different scenarios, challenges from financial crisis, oil price crashes and over the last 5 years with the pandemic, the Ukraine outbreak causing global shortages of cement. We've been through it all, but here we are persevering and flourishing with a record level of earnings. So next slide, please. All right. So, let me give you a little recap or explanation, cellular concrete one-on-one, if you will. The product description is -- cellular concrete is basically made mixing water, cement and a foaming agent that looks like an everyday Maxima shaving cream. The foam agent basically creates a bubble inside the mixture, and it holds its shape long enough until the cement and water harden around it, leaving a cellular structure that has many different air pockets and causes a lightweight effect. The key properties include being cost effective and it is low density and lightweight. It has a high bearing capacity. It's extremely pumpable. We've pumped upwards of 14,000 feet before to give you an idea. It's highly flowable, self-leveling, self-compacting, has thermal insulating properties that help out greatly in colder climates. It's very durable and it's very excavatable. And these are just key properties. There's others as well that I'm not mentioning. Primary applications would include a lightweight engineered fill. This is the bulk of the work that we do, otherwise known as load reducing fill and has many different names. One of those would be MSE or mechanical stabilized earth, retaining wall backfill. Others include lightweight insulating road subbases, flowable self-compacting fills, pipe culvert abandonments, tunnel and annular grout applications, shallow utility, foundation installations. And again, this just names a few. There's several others that we rarely get involved in, like roofing and flooring applications as well as underwater placement applications. So this just, again, highlights the primary applications that we do. And our competitors -- our customers and competitive advantage. Our key customers would include some of the largest companies, general contractors and engineering companies in the North Americas, including your Bechtel, Kiewit, PCL's, I could go on and on. We pretty much work for them all. We'll occasionally contract directly with an owner, but the vast majority of jobs that we work on, we are always a subcontractor. And for our competitive advantages, our reputation is probably the most important. We've been successfully delivering cellular concrete solutions on time and over budget -- on time and on budget for 25 years. I often tell people that our production team is actually one of the greatest assets of our sales team because we do so well in the field. It really speaks volumes when general contractors and owners come to us or come to GCs and say they'd like to use MixOnSite CEMATRIX, Pacific International Grout because of our experiences. So it's really important. And that reputation, of course, is built on our team and experience having 200 years -- over 200 years of experience in our field across our employees. Our equipment gives us a great advantage being the largest fleet of technologically advanced equipment producing cellular concrete, and we actually, with our existing equipment, have capacity to grow. Our size and scale helps tremendously. We have multiple locations coast-to-coast, and we can successfully complete projects across Canada and U.S. in a manner that our competitors are not quite fit to do. And we're more sustainable, generally more environmentally friendly than legacy products that we replace. And just to give you an idea, one ready-mix truck that can come down the road with 10 cubic yards, we can take that 10 cubic yards and turn it into 35, 40, 45 when we're doing wet mix applications. The same is true when we do dry mix applications. We can take one tanker that delivers roughly 50 tons, and we can turn that into around 125 cubic yards of material depending on the mix design. But you can imagine having only 1 truck versus 12 trucks on site, not only does it help be more environmentally friendly, but it also adds a safety element as well, having less construction traffic on site. And with that, I'll pass it off to Randy. Randy Boomhour: Thank you, Jordan. Really good job. One of the questions we get quite a bit is just how big is this opportunity? How big is the market? And it's very tricky to nail it down. Really, the best way to do it would be to add up every single bid that came across cellular concrete and across all the markets and across all the applications, but that's practically impossible to do. So, what happens is third parties estimate the size of this market. And so we've seen estimates from as low as $4 billion from Market Research Future to as high as $27 billion from Allied Market Research. Now that would be worldwide. It would be every single application for cellular concrete, even some that we don't pursue like roofing and flooring applications that Jordan mentioned. But I think the bottom line is the opportunity is pretty big, and then all these sources agree that the market for cellular concrete is growing. And then if you look at the market for other lightweight fills or competitive products, that market is even bigger, which means the market that we can capture is a multiple of the sizes that we would estimate. The other thing that we chat about already, and it's really important is infrastructure spending. So, infrastructure in Canada and the U.S. is aging. It needs to be repaired and replaced. Populations continue to grow, requiring new infrastructure and also placing additional load on existing infrastructure. And so because of that, spending on infrastructure is expected to continue to increase now and into the future. And we see this kind of budget cycle after budget cycle for governments. Even the Canadian government recently just came out this week with a focus on putting more investment into infrastructure spending. Now it's really hard for us to tie those bills to very specific cellular concrete projects. But we know in general, with there's more money spent on infrastructure, that's going to be ultimately more opportunities that pop up that require cellular concrete based on the properties of the material and based on the applications and geotechnical needs of the situation. So just a quick summary here of our financials. MJ is going to get into the details of Q3 here, but I just wanted to highlight, we are forecasting a record year for 2025, and we're very careful about the words we choose. We didn't say we're forecasting a record revenue year. We forecast a record year, and we've hit that achievement already in Q3 by delivering EBITDA that's higher than our best year ever of 2023. Despite stepping back in 2024, we have an overall growth in revenue. So the company continues to grow. So the cumulative annual growth rate of the company since 2017 has been 24% per year. And we should be -- we will grow revenue this year as well. We have a positive bottom line, and we're generating cash. So, we've got a record $5.9 million in 2025 year-to-date adjusted EBITDA, and we've got a record $5.6 million of 2025 year-to-date cash flow from operations before working capital adjustments. We have a healthy balance sheet with low leverage. We've got $9.9 million in the bank and no long-term debt at the end of Q3. So the things that are important to understand about our business is that the revenue growth will be lumpy. Everybody I talk to would love to see a staircase, but that's just not the way it works in construction and it's not the way it works, especially in specialty construction because we don't control when our scopes of work start and stop. And so because of that, our revenue can move quite a bit or be variable quite a bit based on when large projects start or stop. But the overall trend, as we've mentioned many times, is one of growth. For our business, because we operate primarily in Northern climates, it's a seasonal business. So, we're going to have higher revenues in warmer months. And I think we've all experienced that where construction activity picks up in the summer and into the fall. If you look at the last 5 years, we've averaged 18% in Q1, 18% of our revenue in Q2, 36% in Q3 and 28% in Q4. Now obviously, each year is different. They're not all 18%. They're not all 36%, but it gives you an idea of how our revenue is spread out through the year. We're a specialty contractor. So because of that, margins tend to be higher than general contractors, but we have more bench time and fixed costs to cover. So, that's an important concept to understand. Project size impacts margins. So when we bid larger projects, there is more competition for those for obvious reasons. Everybody wants to win the big ones. And then when that happens, the margins that we recognize on those projects will always be lower because of that extra competition. And we do have excess capacity. We have excess capacity in our equipment that Jordan mentioned quite a bit, where we could easily do 2 to 3x the revenue we're currently doing and we have excess capacity in our staffing levels. We can't do 2x revenue with existing staff levels, but we could do 2x revenue without a significant increase in staffing. So, I'll hand it over to MJ, who will go through our Q3 financial highlights. Marie-Josee Cantin: Thanks, Randy. So let's talk about revenue. So revenue for the quarter was $15.3 million compared to $10.1 million in 2024. That's a 51% increase. For the first 9 months of 2025, we did $32.6 million in revenue compared to $25 million last year. So, that's a 30% increase. Gross margin is up at 34% compared to 27% last year for the quarter. That's a 7% gross margin increase. And year-to-date, we had gross margins of 33% compared to 26%. That is also a 7% gross margin increase. Operating income is $2.8 million in Q3 compared to $700,000 last year. Som that's a $2.1 million increase. Year-to-date, we did $3.9 million in operating income compared to a loss of $100,000 in 2024. That's a $4 million increase. Adjusted EBITDA was $3.5 million in Q3 compared to $1.4 million in 2024. That's a $2.1 million increase. And as Randy mentioned, we have a record adjusted EBITDA year-to-date at $5.9 million compared to $1.8 million, which is a $4.1 million increase. Cash flow from operations, both positive for the quarter and the year, $3.2 million in Q3 compared to $1.3 million in Q3 of last year. That's a $1.9 million increase. And year-to-date, a record as well, $5.6 million year-to-date compared to $1.7 million year-to-date last year. So, that's a $3.9 million increase. So, we ended up the quarter with almost $10 million in cash, which is similar to what we had at the same period of last year. Looking at these graphs. So on the left-hand side, you can see our revenue and the trend line is growing, as Randy mentioned. So just as a reminder, in teal, you see full-year numbers and in orange, you see year-to-date. So, we basically did quite the same as last year and past previous years. So, our revenue line is growing, which is great. Gross margin percentage is improving over the last few years. So year-to-date, it was 33%, largely due to the higher revenue that we experienced, as well as key contract structure that we'll talk in a minute. And maybe what can I -- sorry, sorry. All right. 32% apologies for that. Debt and interest were -- debt and interest, we have no longer debt on our balance sheet, but we have an equipment financing loan for $1.6 million. So aside from that, there's nothing else. We've come a long way since 2017. In our share structure for Q3, we had 150.2 million shares outstanding, 5.9 million of options, 2.4 million in RSUs and 8.2 million in warrants. These warrants are set to expire at the end of July 2026. So fully diluted, we have 166.8 million financial instruments. Let's talk about our backlog a little bit. So, we had announced $43.6 million in new project awards since the beginning of the year. In Q3 only, we announced $17 million, and these awards are for various applications for our product. Our backlog is growing. It continues to grow with sales success. So at the end of the quarter, we had a backlog of $75 million, and that's compared to $69.6 million at the end of the quarter last year. So, that's a $5.6 million increase. So, I'll pass it back to Randy. Randy Boomhour: Thank you, MJ. So, one thing that we want to highlight for investors from our perspective, the numbers are the numbers. But I think when you're trying to do comparisons, it's important to understand this. So, we had a large contract in 2025 that was going on through Q3 and continues into Q4, where we made the arrangement to allow the customer to buy the cement themselves and the deal was that we would make the same amount of gross margin dollars. So because of that, our revenue and cost of sales was lower than would be versus kind of comparable contract structure and our gross margin percentage was higher. So in this chart here below, we've kind of shown you what it would look like if we had entered into a traditional contract structure with this customer and the impact it would have had on revenue and gross margin. So, you can see that revenue would have been 14 -- sorry, $4 million higher, up at $19 million and gross margin would have been 7 points lower at 27%. And then you can see on a year-to-date basis, our revenue would have been $36.7 million and our gross margin would have been 30%. So again, the numbers are the numbers as reported, but if you're trying to do comparisons and understand what's happening with revenue growth or understanding what's happening with gross margins, it's important that you understand this contract structure. So yes -- so just we always like to end just like we like to start is, if you're a potential investor or an investor, why should you invest in CEMATRIX? And these are the 5 points that we believe are key to understanding that. Number one is we're an industry leader. We're really well positioned to capitalize on the large opportunity in the growing infrastructure construction segment. We are a growth company. We have growing revenue, 24% annual cumulative growth rate since 2017. We have positive adjusted EBITDA, record levels all time, positive cash flow from operations, and we have a really strong balance sheet. We believe that we're currently undervalued based on traditional valuation metrics. Whether that be forward revenue or forward EBITDA multiples, we still think the share price is under where it should be. We don't have to raise any capital in the short term or long term to fund a burn rate. We're self-sustaining now. Any new capital would only be raised in support of an accretive acquisition. And we don't have an accretive acquisition in the short term or near term here that's being contemplated. And lastly, we do have capital to deploy, and we're adding to that capital because we're generating positive cash flow. And so we're looking for opportunities to grow organically or to grow via acquisition if we can find the right opportunity. On the right-hand side here is our Investor Relations contacts with Howard Group and Bristol. And then we have one analyst covering the company from Beacon Securities, who is Russell Stanley. So then, I think that will take us to the Q&A session. Just before we get into the actual questions, I just wanted to cover a couple of things that I think may come up or that I've been thinking about. Number one is just as an investor, like diversification is important. And so if you have a portfolio of stocks, I'm sure you've heard stories of people that have invested everything they had in Tesla or Bitcoin or some other stock and made out like bandits. But what you don't hear as much about is people who did the same thing in other names and lost everything. So, no security in your portfolio should be more than 5% or 10% of your holdings as an investor. It doesn't matter how great any company sounds. You don't want to risk everything on one company. If you do, that's not investing, that's gambling. So don't do that. CEMATRIX is -- we're slow and steady. We're a traditional bricks-and-mortar infrastructure stock that is focused on profitable growth. We're not really -- we're focused on building and running a profitable business that puts the needs of our customers first because we know if we do that, that the share price is going to follow. So, we're less concerned about the day-to-day or week-to-week fluctuations in the stock price. We know that if we run a good business, sooner or later, the share price is going to follow, and we've seen that happen this year. And so the final thing I'll say is we care why the share price goes up. We know that some stakeholders and some shareholders don't care. They just want to see the price go up. They don't care if it stays there as long as they can exit and make money. We don't want that. We want a share price that makes sense, trading based on fundamentals. I want every investor in CEMATRIX to make money, but we do that by focusing on the customer and the 3 things that we're obsessed with: safety, quality and profitability. So that's it. With those kind of comments, Grant, I'll turn it over to you, and we can go through the Q&A. Grant Howard: Thank you, Randy, MJ and Jordan. That was a good wrap, Randy, or wrap up, not a wrap. We've got about 13 questions already in the queue, and you were mentioning Russell Stanley, who happens to be the Managing Director of Equity Research at Beacon Securities. And the first few questions are from Russell. His first one, outside of the contract restructuring, was there anything unusual in the quarter such as revenue pulled in from Q4 from faster work or pushed out to Q4? Randy Boomhour: Yes. Good question, Russell. I mean it's very rare in construction to have revenue move forward. It almost never happens. So, that would be the exception rather than the norm. The norm is that projects and start dates push. So, we definitely saw some revenue push into Q4, and we've seen some projects that we originally thought might go in 2025 that have pushed into 2026. Grant Howard: Next question is about project size. Can you talk about what you are seeing now in terms of projects starting in 2026? Understanding you see a very wide range of project sizes, how do the jobs you are bidding on and winning compare in size to what you were seeing a year ago? With respect to demand, have you seen any specific projects in the pipeline get trimmed back in scale and/or pushed out perhaps out of caution? How does your level of optimism now compare to what you had a year ago on the demand front? Randy Boomhour: Okay. We're testing my memory there. That's a lot of questions. I'll do my best here if I missed part of it, just let me know, Grant. So in terms of contract or project size, right now, we are actively executing the 2 largest contracts that we've ever had in the history of the company. One being the North -- the project in North Carolina, which we talked about quite extensively, that started in Q3, and it's going to continue into 2026 and likely spill over part of it into 2027. The second was the tunnel grouting project in the Midwest that we started in Q2. We're working on in Q3 and we'll finish this quarter. So, we don't see many projects of that size. I will say we're seeing more and more projects in the $5 million size. And I would say, in general, we're seeing more opportunities for cellular concrete where cellular concrete is spec-ed in, and we're finding more opportunities where other lightweight products are spec-ed in and we're working to actively flip them. So from an overall market perspective and kind of consistent with the earlier slide, we just see the market for cellular concrete continue to grow and more and more people are getting exposure positively to cellular concrete and seeing the benefits that it can provide in solving their geotechnical challenges. So, we're really optimistic about where the business is today, really optimistic about 2026 and really optimistic about the future in general. Grant Howard: Well, that answers the latter part of Russell's long questions or series of questions about your level of optimism. You just addressed that. I think the only thing you might want to touch on here more is with respect to demand. Have you seen any specific projects in the pipeline get trimmed back in scale or pushed out? Randy Boomhour: We haven't really seen that. I think -- and I tried to talk about this earlier is people always try to get us to draw direct lines between administrative directions or administrative changes at the federal government level. And we never see that. I think you would more see that at the GC level. When we see projects that kind of get to the point where they're engaging subcontractors, those projects generally are green lit and they're moving forward. So, I haven't seen anything to indicate that there's any kind of slowdown in infrastructure spending. In fact, what I would say is all the tailwinds point to more money will be spent on infrastructure. Grant Howard: Russell's next question. Can you talk about what you are seeing on the M&A front? In the past, you've noted your first choice would be another cellular concrete player in the U.S. with complementary products, technologies representing plan B, how has that environment evolved since the August call? Randy Boomhour: Yes. I would say really, there's no change, right? Nothing has changed there. Our first priority was executing on our commitment this year to deliver a record year, and we really are trying to get the share price fixed to where we're much closer to a fair value because any acquisition we do would be primarily cash, but we would want to have an equity component as part of that. And so until we kind of get the first part of the job done, which is deliver this year and get the -- get our equity more fair valued, we're not really engaging in deep conversations with potential targets. Grant Howard: Next question, but not from Russell. Could you please elaborate more on your comment that you mentioned in the press release and then the quote was "Looking forward into the fourth quarter, we will be very busy in the first 6 weeks of the fourth quarter and then slowing down in the last 6 weeks, consistent with the normal seasonality in our business." Randy Boomhour: Yes. I mean, this feels like a sort of a tricky way to ask me for like more specific guidance on the fourth quarter. And as you know, Grant, we just don't do that. I would just say the fourth quarter is traditionally our second best quarter, and I would expect this year to be really no different. And that's always the pattern. It's always busy for the first 6 to 8 weeks as October, November is a big push to get things done before winter hits. And then once winter hits and we hit into the Christmas season, we always slow down. There's exceptions sometimes like in 2023, we're really busy over the Christmas season because there was a big push on the Trans Mountain project to get that finished. But generally speaking, that's normal pattern that's in our business since we started these companies. Grant Howard: I know this was addressed during the presentation in some way, but the question is, is any percent of your revenues due to residential business? Randy Boomhour: Not really. I would say sometimes we might be working on infrastructure related to residential development, whether that's a gas line or a banding in a pipeline or supporting road infrastructure. But we don't do residential work specifically. Grant Howard: Since AI is such a big topic these days as well as data centers, the question is, do you see any demand coming from data center construction? Randy Boomhour: Yes. So, I've gotten this question probably the last 2 or 3 calls. And what I would say is it always depends on the geotechnical situation. So, you can't say if there's $1 billion in data centers, there's x percent that's going to be for cellular concrete. It doesn't work like that. You could build 10 data centers and have no need for cellular concrete, but you could build a data center in a situation where there's weaker unstable soils or it's in an environment where they're worried about lateral load or they've got some annulus to fill or pipes to abandon from an existing site, and there could be lots of cellular concrete. So, what I would say is I always go back to is just any increased spending in infrastructure sooner or later is going to result in an opportunity for cellular concrete. But it's not going to be -- like every data center is obviously going to have a huge electrical component. So, there's a one-to-one correlation. There's not going to be a one-to-one correlation with data center construction and cellular concrete usage. It doesn't work like that. Grant Howard: How much of your labor costs are variable? Randy Boomhour: Yes, it's an interesting question. I mean, we really think about labor costs as fixed, but there's an element of our labor that does fluctuate with revenue. So, for example, overtime costs are going to be higher during the peak periods and overtime costs are going to be lower in the slower periods. So, I think that just makes sense and it is common sense. But we spend a lot of time and money training our employees and their experience in the field really to what Jordan mentioned earlier, is one of our key competitive advantages. So, we don't want a lot of turnover in that team. And so as a result, even when we're slow, we keep those employees employed because if we don't, then we can't execute projects successfully in the future. And that really gets back to our comment around understanding the margin as well is when you're a specialty contractor, when you work, you get a higher margin because when you're working, you're not just paying for that day's labor, you're also paying for all the labor and the bench time. It's a very similar model that you would see in consulting or any other specialty construction business. Grant Howard: Question about the stock. And have you considered a reverse stock split? Or another way to put it is a consolidation of the stock? Randy Boomhour: Yes, it's funny. I can ask 10 different people for their advice, and I would get 10 different answers. And so believe it or not, there are people that are advocating that we do a stock consolidation. But the vast majority of the experts I talk to don't recommend that. And so we don't anticipate doing that anytime in the near future. It's not something that we're actively considering. It's not something that we're looking at. We're really focused on just running and building a good business because, again, as I said many times, I know if we do that, the share price will follow. I know it's very frustrating for some of our long-term shareholders, myself included, Jordan included. Jordan is the largest shareholder in the company. I'm the third largest shareholder in the company. So, believe me when I tell you that we feel your pain when the share price doesn't respond the way we expect it to respond. But we also know that if we do the right things for the business, over time, the share price will improve. All you have to do is look at this year where earlier this year, we were trading at $0.16 or $0.17. And even though we've stepped back today on the share price, we're up significantly from that low. We're up significantly from last year when I took over as CEO. And we know that if we continue just to run a good company, grow revenue, be profitable, that share price is going to follow. And it will probably take longer than we all hope, but it will follow because it will be based on fundamentals. It won't be based on some hype or press release. It will be based on us actually doing a good job for our customers and our customers recognizing that good job and rewarding us with more work in the future. That's how you build a good company. Grant Howard: Next one. What does the pipeline look like today versus this time a year ago? Randy Boomhour: Yes. I mean, we had a similar question like this, but I would say the pipeline today looks better than it did a year ago. We're seeing more opportunities to bid. We're actively chasing more opportunities. We're investing more in business development so that we're uncovering opportunities we didn't see in the years past. And so our bidding activity is higher this year than it was last year. So, we remain extremely optimistic. And I think you can see that success in our sales results. So, we've so far this year, sold more revenue, added it to backlog than what we've delivered and we're on track for a really good year for revenue. So, that's pretty impressive and I think indicative of what's happening in the marketplace for us. Grant Howard: Question about earnings per share. Maybe MJ, a specific question was what is the EPS for the third quarter, if you have that? Marie-Josee Cantin: I do. The EPS for the third quarter was $0.012. And year-to-date, we are at $0.015. Randy Boomhour: Yes. And again, Grant, I would say there's all kinds of fancy metrics that the spreadsheet analysts can come up with. But it always boils down to the same thing. There's certain constants in the numerator and denominator. And we know if we increase the numerator by making more money, all of those metrics are going to improve. So, people can ask us about free cash flow, return on capital employed, return on assets. It all boils back down to the same thing, fix the numerator, and I guarantee you that calculation gets better, and that's what we're focused on. We're going to make more money and all those metrics that you can dream up or think about are going to get better. Grant Howard: I think the fact you've had a 6-point bump in your gross margin is incredibly positive. And the fact you're sitting on almost $10 million in cash and virtually no debt speaks volumes in itself. Do you have an estimated contract size that generates the best return for CEMATRIX? Randy Boomhour: I don't really because it's very situational, right? So if you had a situation where you just had a large fill or a large hole to fill and it's just an open pour, literally, Grant, you and me could probably go buy a piece of equipment and run it and have a good chance of executing that project. But if you talk about grouting a tunnel that's underground where you're pumping thousands of feet, then you need specialized equipment and you really need to know what you're doing. And so the margin that we would get is really dependent on the situation, the complexity of the task. Who could compete in that area? How far is it from one of our offices? And this is an area that we've really made a lot of strides in, in the last 5 years in terms of trying to get better at recognizing those factors so that we can price that project appropriately. So if it's relatively simple and straightforward, but big, we know there's going to be a lot of competition on it, and we know the margin is going to have to be tight. If it's very complicated, very sophisticated, very sensitive, we know that's going to rule out many, if not all, of our competitors. And so on that one, we can and should demand a higher margin. So it very much is very situational and the answer is it depends. Grant Howard: You do have some major projects underway right now, and this individual is just asking for an update on those projects. Randy Boomhour: Yes. No different than Procter & Gamble wouldn't give you an update on Crest sales in the U.S. We're not going to provide information on specific projects because we don't want to help our competitors. What I will say is both those projects are going well and kind of as expected from our perspective. Grant Howard: A couple of questions on share buybacks or the normal course issuer bid. What's the status of that? And any plans to continue buying? Randy Boomhour: So the status is we've purchased 700,000 shares all in Q2 related to that as we've disclosed. The NCIB remains in place. If in discussions with the Board, we think there's an opportunity to buy more shares after looking at the best use of capital, we could potentially do more than that. I personally -- this is not necessarily the company's position, but my position. I'm a fan of the NCIB. I think in situations where we think the shares are undervalued, I think it's a good use of capital if we don't have an active acquisition. We will never buy back the maximum. I don't see us deploying that much capital into that, but I do see us hopefully doing more NCIB purchasing in the future. Grant Howard: With the proliferation of MSE wall construction, have you seen an increase in contracts specking cellular concrete as backfill material? Randy Boomhour: Yes. No other elaboration, yes. Yes, we have seen that. And I think you can see that in our numbers. That's part of what's contributing to our growth. We make a lot of sense in that application in terms of ease of construction and often, we can be cheaper than EPS. So it makes a lot of sense for us. Grant Howard: Not sure where this one came from, but do you feel confident on collecting accounts receivable that is aged over 90 days? Could you share a little color on that? Randy Boomhour: 100%, we do. As we talked about earlier, our customers are almost always the large general contractors that operate in North America. Almost all of them have really good credit. And there's lots of legal security around these projects, whether it's liens, whether it's payment bonds, whether it's holdbacks. So, we have very rarely had any AR-related losses. When we do, it tends to be on a very, very small job. So, we do a 5 cubic meter job for Randy's pools, and Randy turns out to be not a reputable guy. So, that's where we run into sometimes occasionally an AR issue, but we almost never run into it on a very large project because of the protections that are built in the construction industry. Grant Howard: Another question on buybacks, which you've already addressed. I guess the only other part of it is whether or not those are filed on SEDI. Randy Boomhour: Yes. So, there's no requirement to file NCIB purchasing on SEDI. We are required to disclose it in our financial statements and our MD&A, which we do every quarter. Grant Howard: I already know what your answer is, but what does Randy think the fair share price should be at present? Randy Boomhour: Yes. I don't want to speculate what would be. Just my personal opinion is it should be higher, right? And you can use whatever valuation you want to use, whether it's a discounted cash flow, whether you want to look at peers, whether you want to look at a forward multiple, whether you want to look at a forward multiple of EBITDA, I would say in almost every one of those, you'll come up with a share price that's probably higher than where we're at today. And then what I would say is we're lucky enough to be covered by Russell Stanley out of Beacon, who's a financial analyst who does this for living. And I think you could take some guidance from what he's put out there. Grant Howard: You heard of other players in the cement industry, cellular industry, such as Martin Marietta Materials or Astec. Do you compete with them? Randy Boomhour: So, obviously, we've heard of those guys for sure. Some of them will have a project or a project -- a product that's similar to cellular concrete. But generally speaking, commodity players struggle in what I would call the more specialized or technical sales. So if you sell cement, you're almost like an order taker. So, someone phones you up and they say they want so much cement and you say, here's the price and here's when I'll deliver it. Cellular concrete is a much more complicated sale because you sometimes have to convince people to use it and you've got to go through the technical qualifications about why it makes sense. So it's a much more complicated sale. So, we don't really compete against those guys. Much like we see general contractors trying to self-perform work, you will often see cement companies trying to figure out how they're going to make more money or grow their business. And sometimes they'll dip down into specialty construction around cement products. But our experience is they're generally not successful at it because it's just a different sales process. So we don't -- I would say we don't compete against those guys. Grant Howard: Interesting one around national defense. Federal government has said it's going to spend up to 2% of GDP on national defense and 5% by 2035. We'll see. But anyways, a significant part of this would be updating defense infrastructure. Are you seeing or expecting any demand from national defense? Randy Boomhour: It's a good question. I'm not sure I've seen anything specifically, but examples I could think of is if, for example, the Canadian military or somebody want to upgrade a port, there could be applications for cellular concrete there. We've done some work down in the Houston area around upgrading a port where cellular concrete, again, because of the geotechnical situation, made a lot of sense. So it really is -- it's definitely possible. It would have to be like a physical infrastructure as opposed to the equipment for obvious reasons. So, I wouldn't expect that to be a big opportunity for us, but there could be opportunities that come about for that. Grant Howard: And this was addressed in the presentation and Randy, you've commented further, but any growth plans like acquiring any other companies? And I believe you said that at this point, there's nothing on the horizon. Randy Boomhour: I'd say there's nothing imminent, Grant, right? Like my hope really was that at Q3, the results would come out, the share price would reflect the progress we've made, would reflect the commitment that we achieved by having a record year already in Q3. We'd be in a better spot to come -- to go talk to some of these players more actively. But what I don't want to do is engage in a conversation and not have the ability to complete the conversation. So, we're still kind of waiting to fix the equity. Any acquisition we did because of the types of company we're target is going to be primarily cash based, but we would want some kind of equity component as part of that. Grant Howard: You've talked about this, but what are the key catalysts investors should keep an eye on in coming quarters? I think you're probably going to say watch the fundamentals. Randy Boomhour: Yes. Exactly, Grant. I mean, when we manage the business, we focus on revenue, how is revenue growing, what are gross margins, what's the bottom line, what's adjusted EBITDA, how is cash flow going? And then we're looking at what investments do we have to make to continue to grow our business or maintain our business. And so the things that we show investors are the same things that we use to track the success of our business. So, we really are fundamentally a fundamentals company, right? And I believe strongly that as those fundamentals continue to improve, that's going to get reflected in the share price. One of the things I would really like to see is to get less -- how do I say it, more institutionals or more long-term shareholders, long-term shareholders involved. So, there are some people who have been shareholders for a long time, and those people are definitely frustrated because many of them have a cost basis that's higher than where we're at. But we need more people that believe in the long-term view of the company and hold so that we don't have as much trading that happens around announcements or as much emotional selling or buying that happens around the company. I'd really like to get more of our shares in the hands of people that are long-term holders and see the future in the company, so we can get some of the volatility out of it. Grant Howard: With that, we've got a couple more, but they've been addressed already or they've been addressed. We don't have any other questions. Team, any closing comments? Randy Boomhour: Yes. Maybe I'll just -- I'll let MJ and Jordan do some closing comments, and I'll do something right at the end, Grant. Jordan Wolfe: I don't have much to say other than thank you for the opportunity to present, and we're really looking forward to the future here, not just with Q4, but 2026 and beyond. Marie-Josee Cantin: I echo what you say, Jordan, pretty excited for the future. Randy Boomhour: And I guess I will just kind of pile on there is we're all equally excited. I think as people that are owners of the business and people that run businesses for a living, when we look at where CEMATRIX is, we really couldn't be happier. Like we're growing revenue, we're generating cash flow. Our customers are happy with us. Our employees are happy with us, and we're focused on the same things that our investors are. So, I would say just keep on believing. I think the people that stick with CEMATRIX continue to be investors are going to get rewarded over the long term. Grant Howard: As a shareholder of 15 years, I keep on believing. So with that, thank you very much to all of those who attended. And thank you to the CEMATRIX team, and we'll see you next quarter. Thank you. Randy Boomhour: Thank you, Grant. Marie-Josee Cantin: Thank you. Jordan Wolfe: Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Tripadvisor's Third Quarter 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Angela White, Vice President of Investor Relations. Angela, please go ahead. Angela White: Thank you so much, Felicia. Good morning, and welcome to Tripadvisor's Third Quarter 2025 Financial Results Call. Joining me today are Matt Goldberg, President and CEO; and Mike Noonan, CFO. Earlier this morning, we filed and made available our earnings release. In that release, you'll find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measure discussed on this call. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent management's views as of today, November 6, 2025. Tripadvisor disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to our earnings release as well as our filings with the SEC for information concerning factors that could cause actual results to differ materially from these forward-looking statements. With that, I'll turn the call over to Matt. Matthew Goldberg: Thanks, Angela, and good morning, everyone. In Q3, we delivered consolidated revenue growth of 4% to $553 million and adjusted EBITDA of $123 million or 22% of revenue. We were pleased with this performance, which beat our expectations on adjusted EBITDA and was within range for overall revenue growth. This week, we've initiated a set of changes that represent a fundamental shift in our operating model to support a more focused set of strategic priorities. These actions will sharpen our execution focus, which we expect to accelerate revenue growth, improve operating margins and create a more durable financial profile. To do so, we'll focus on three priorities. First, extending our leadership position in experiences to drive long-term growth by fully deploying our differentiated assets across Tripadvisor and Viator to win in this category. Second, leveraging our unique content, data and brand trust for an AI-enabled future by powering our marketplaces and positioning Tripadvisor at the center of an emerging AI ecosystem. And third, narrowing the focus at brand Tripadvisor to support experiences and our AI future while managing our legacy offerings for profitability. These priorities reflect a shift from optimizing individual brand strategies to speed our transformation into an experiences-led and AI-enabled company. We will direct our focus, talent and investments to what matters most, resulting in a simpler, leaner and faster-moving organization. Our plan is expected to drive significant operational efficiencies of at least $85 million of annualized gross cost savings, which Mike will discuss shortly. But this is not just a cost-cutting exercise. We are aligning ourselves to drive accelerated growth going forward. This is an important moment in the evolution of Tripadvisor Group. We're a very different company than we were 3 years ago with a portfolio mix now anchored in high-growth marketplaces, delivering more sustainable revenue and profit. In the past 12 months, Viator and TheFork accounted for almost 60% of group revenue, up from approximately 40% in the same period 3 years ago, representing a 27% CAGR over that period. In that time, these businesses contributed an incremental gain of more than $150 million of adjusted EBITDA and now comprise 30% of overall group profitability. Today, we are far less dependent on a legacy model built on SEO with its well-known structural headwinds. These trends have reshaped our financial composition, and we expect them to continue. Now let's walk through these priorities in more detail. Our first priority is extending our leadership position in experiences to drive long-term growth. Strategically, we're already well positioned to win in experiences. We've achieved scale and established a clear track record of growing the top line while expanding profitability from breakeven in 2023 and now approaching double-digit adjusted EBITDA margins. Earlier this year, we shared that Experiences is becoming the strategic and financial center of gravity for the group. Over the last 12 months, we've achieved $4.6 billion in GBV, driven by 17% items growth. And over that same period, for the first time, our total Experiences revenue has surpassed the revenue from our legacy business lines. Now experiences will become the unified focus of both Viator and Brand Tripadvisor. The global experiences TAM is expected to reach $350 billion in GBV by 2028, growing faster than any other category in travel. To date, we've been concentrating on the U.S. as our primary source market and focusing mostly on tours and activities. We believe we can accelerate our growth by addressing new geographic markets and expanding into new categories while benefiting from the tailwinds of growing demand and the offline to online shift. This is a dynamic, fast-growing category without a global digital brand leader. Going after this opportunity will be our primary objective as a Group. We believe that our strength to lead the experiences category lies in the differentiated assets across our brands that are hard to replicate. At Viator, we're leading in the world's biggest market with the largest global catalog of experiences. Our improved storefront is driving uplift in conversion, repeat and customer loyalty trends. Tripadvisor offers two key assets that we expect will drive growth and expansion in experiences, a trusted global brand and proprietary data on more trips and travelers than anyone else in the category. This combined reach, along with our third-party distribution creates unmatched value for operators. Together, we believe these capabilities give us a unique advantage for our experiences business that we have not yet fully realized. In order to accelerate the next phase of growth, we're unifying our Viator and Tripadvisor experiences operations, unlocking the power of all our resources to focus squarely on this opportunity. This is a significant shift in our operating model designed to drive meaningful outcomes with more efficiency. Our conviction to go all in on this opportunity is grounded in what we've learned from a period of increased coordination between the Viator and Tripadvisor teams across marketing, product and supply over the past several months. Here are a few examples. From a demand perspective, as I shared last quarter, we've been experimenting with how Tripadvisor and Viator can operate together in a more coordinated manner, not as two separate brands with different goals, one focused more on growth, the other focus more on profitability, but as a united team aimed at winning the Experiences category. We began coordinated testing in marketing and found that we could compete more effectively on a combined basis to deliver more efficient marketing spend overall, improving revenue while maintaining profitability. This is just one experiment, but it demonstrates the power of treating our brands as complementary levers working together rather than as separate independent P&Ls. We also believe there's an opportunity to lead with Tripadvisor to put our large global audience in service to Experiences in key international markets while leveraging our high brand awareness to acquire more customers more efficiently in paid channels. From a product perspective, we've increased our experiment velocity and coordinated learnings across points of sale. As a result, our conversion rate has continued to show improvement at both Viator and Tripadvisor. In this new formation, we will lean even harder into these dynamics, focusing on key conversion drivers like personalization, pricing and availability with more resources deployed to scale our optimizations seamlessly across our full Experiences offerings. From a supply perspective, we're expanding on our unmatched scale, over 400,000 experiences globally and growing. In the last year, we've seen healthy double-digit growth in active products and suppliers. We're broadening our supply coverage in new categories and strengthening our presence in secondary and emerging destinations while building industry-leading connectivity with our recently updated APIs, now enabling real-time and dynamic management of pricing and availability. And we're using Tripadvisor data to identify where new supply is most needed, all while optimizing how new supply performs, improving conversion, refining pricing and smoothing the experience for both travelers and operators. By unifying our teams behind experienced leadership, we'll build on our strong marketplace flywheel. Our product and supply optimizations accelerate our conversion wins to fuel more efficient and effective marketing, which in turn compounds the conversion gains, driving higher repeat rates and improved unit economics. And now we're unleashing the full power of the Tripadvisor brand and its unmatched global awareness in service of Experiences. Our second priority is leveraging our assets to position ourselves for an AI-enabled future. Tripadvisor is among the most trusted names in travel, built on decades of authentic contributions. Sitting at the privileged intersection of hundreds of millions of travelers and the operators who serve them, we have unique insights about how people make travel decisions, a proprietary knowledge graph across experiences, hotels and restaurants, which is unique in the industry and a powerful foundation for what comes next. AI is collapsing discovery, planning and booking into a single conversational moment. For travelers, it means less friction and faster decisions. For Tripadvisor Group, it plays directly to our strengths in the space we helped invent, helping people travel smarter. At a time when it's hard to know what information to trust for a highly considered purchase decision like travel, we believe our first-party data, user-generated content and decades of trust, combined with supplier connectivity, detailed pricing information and booking gives us a unique advantage to lead in the age of AI. Over the past several quarters, we've experimented with a broad set of efforts to learn how travelers use AI. We built data science and machine learning capabilities to drive conversation and conversion, and we've explored the role of our content in the AI ecosystem. Here are a few things we've learned. First, our content and data are unique and valuable. Internally, it's been the foundation of our product innovation and growing engagement. And Tripadvisor is already among the most cited sources by LLMs. According to a recent third-party study,Tripadvisor appeared as the #8 overall and the only travel company in the top 20. Second, travelers have a very specific problem. It's hard to make decisions. There are too many options and getting it wrong means wasting time and money. That friction is why travelers come to Tripadvisor to inform and validate their travel decisions. While LLMs do a good job of generating high-level trip plans, the opportunity lies in the underlying recommendations, their social validation and actionability, which we are uniquely positioned to deliver to help travelers make it happen. And finally, AI is raising customer expectations as they look to solve these problems. Customers are choosing AI-native products over legacy products with AI features. They want technology to remove friction. We will follow the consumer and shift our focus from AI-powered features to a fully AI-native approach. Based on these learnings, we've identified a few specific AI opportunities, each of which we believe has the potential to become the primary way travelers engage. The first opportunity is in the planning phase when travelers have a rough idea of an itinerary and are trying to decide what's right for them amidst the unlimited options. Tripadvisor's first-party data and insights position us to curate the most personalized recommendations validated by relevant travelers and make them as immediately actionable as possible. The second opportunity is during the trip itself. Travelers make a lot of last-minute decisions around what to do, see and eat, but availability, pricing and logistics are tricky, especially in Experiences. So we'll leverage our assets to help travelers experience the destination better while traveling. This presents an opportunity to deploy geo-aware recommendation algorithms and deliver proactive offers with single tap booking and access to real-time customer support. We're advancing rapidly on these opportunities and expect to launch an AI-native MVP for the planning phase in the coming weeks in Q4. From there, we'll intend to build a strong foundation to scale and continuously iterate and enhance the customer experience. Of course, we're also exploring how Tripadvisor can deliver value to travelers as a deeply embedded partner with broader AI platforms. As part of our learning agenda, we're directly integrating our Tripadvisor and TheFork brands into ChatGPT through first-of-their-kind apps with a differentiated approach from others. We expect these to be live over the next few weeks. We've signed valuable licensing deals with the majority of the leading AI companies, and we're experimenting with use cases like Agentic and multimodal AI. Ultimately, whether we scale AI value creation through on-platform innovation or off-platform partnerships will be decided by our customers. We believe that by focusing on where we are uniquely positioned to serve travelers, maximizing speed of execution and continuing to fuel the content flywheel that is our most differentiated asset, we can position Tripadvisor at the center of the AI ecosystem in travel. Our final priority is narrowing Brand Tripadvisor's focus. Beyond experiences in AI, we'll optimize Brand Tripadvisor's portfolio to enhance profitability. Over the last few years, we've invested incrementally in Tripadvisor's broad engagement strategy designed to fuel new monetization paths and stabilize our legacy offerings. However, we recognize that the pace of impact from these investments has not been enough to offset increasing pressure from the shifting SEO landscape. So in our most mature legacy categories, we'll focus strictly on optimizing for profitability. We'll deprioritize the areas that we expect to be in secular decline in favor of shifting resources towards our marketplace growth opportunities while driving efficiency across areas that are more exposed to ongoing headwinds. Operationally, this will reduce our headcount and better align costs with revenue expectations. Let me be clear. Taken together, these actions are not a deprioritization of the Tripadvisor brand. In fact, we believe Tripadvisor will play an even larger role in Group level value creation moving forward. Hotels and restaurants will continue to be an important part of planning a trip and the hundreds of millions of travelers coming to Tripadvisor each month will still enjoy those features. Our partners will continue to benefit from access to these audiences. While this functionality isn't going away, we'll shift Tripadvisor's focus and resourcing to areas where we believe we can deliver the most value to customers, leverage the brand and traffic to drive experiences growth, position our content and data at the center of the AI ecosystem and enhance profit from the legacy portfolio. In addition to this set of priorities, TheFork will continue to execute on a financially disciplined growth strategy. This quarter, the segment continued its strong performance with growth of 28% and a 22% adjusted EBITDA margin, nearly double what it was last year at this time. We will continue to build on our position as the leader in European dining and prioritize the diversification in revenue across B2B and B2C while increasing profitability. We're also excited about the team's innovation agenda, which includes an AI-powered booking assistant that's driving an uplift in conversion and a social feed that allows diners to discover restaurants based on reviews and contributions from their contacts. In summary, we believe that the priorities we shared today position us well for the future to drive value for shareholders. As part of this ongoing program of work, we will also take additional steps to review our group portfolio as we determine where we'll invest and where we'll simplify further through partnership or divestment. We are building a stronger Tripadvisor Group focused on faster-growing categories with large TAMs, durable transactional economics and strong supply. We're prioritizing areas where we have a proven track record and the capabilities to win. We'll do fewer things better, move faster and optimize the lines of business where our scale or competitive position can't lead the market. We believe that our actions will strengthen our financial profile by reducing costs, accelerating revenue growth and growing profitability, both in the experiences category and for the group as a whole. With that, I'll turn the call over to Mike. Mike Noonan: Thanks, Matt, and good morning. I'll start with a review of our financial performance, and later, we'll provide more information on the cost savings program, what our operating model changes will mean for how we report our segments and some thoughts on Q4. As a reminder, all growth rates are relative to the comparable period in 2024, unless noted otherwise. Q3 consolidated revenue was in line with our expectations of $553 million or 4% growth and consolidated adjusted EBITDA exceeded our expectations at $123 million or 22% of revenue. In the Viator segment, the number of experiences booked grew 18%. Growth improved sequentially in both the Tripadvisor and Viator points of sale, while growth in third-party points of sale continued to outpace the overall segment. Importantly, the number of experiences booked through the Tripadvisor point of sale returned to growth this quarter. In North America, our largest source market, we saw bookings growth accelerate sequentially across both points of sale, which we believe is reflective of the strength of both of our brands as we scale our coordinated marketing efforts. Gross booking value, or GBV, grew 15% to approximately $1.3 billion and revenue grew 9% to $294 million. Changes in FX positively impacted GBV revenue growth by approximately 3 percentage points. The difference between the growth in the number of experiences booked and growth in revenue continues to be driven by the high growth of our third-party merchant bookings relative to 2024. As a reminder, merchant bookings generally have a lower average booking value, which impacts GBV growth relative to volume growth. They also carry a lower implied take rate, which impacts revenue growth relative to GBV growth. While the implied take rate is lower than our owned and operated points of sale, third-party merchant bookings are both financially and strategically valuable. From a financial perspective, these bookings carry an attractive profitability profile. Strategically, these bookings are largely sourced from regions outside of our core markets, which enable us to reach incremental traveler demand as we continue to scale our new and repeat booker cohorts globally. Viator adjusted EBITDA was $50 million or 17% of revenue, a margin improvement of 550 basis points, driven primarily by a more efficient marketing channel mix. We continue to see outsized growth in our direct channels and in repeat bookings, each contributing to our profitable growth profile as repeat bookings cohorts continue to scale. In addition, growth in third-party merchant bookings, which come with no marketing spend contributed to the segment's total marketing leverage. Lower marketing costs more than offset modest increases in personnel costs related to targeted investments in technology, product and supply. Altogether, these trends continue to reinforce our belief in the long-term margin opportunity for this business at scale. At Brand Tripadvisor, Q3 revenue was $235 million, a decline of 8%, which was below our expectations. We experienced stronger-than-anticipated traffic headwinds that accelerated throughout the quarter, negatively affecting both free and paid channels. In branded hotels, revenue was $143 million, a decline of 5%. In hotel meta, strong pricing in both free and paid channels was more than offset by accelerating traffic volume headwinds. Regionally, single-digit growth in U.S. hotel meta revenue was more than offset by declines in Europe and APAC. As a reminder, we will continue to manage our branded hotels business for margin stability and not chase low-margin revenue in this category. We remain focused on improving the quality of our hotels offering and delivering highly qualified incremental demand to our partners, and we believe that success is evident by the sustained pricing growth we continue to witness. Media and advertising revenue declined 11% to $36 million, primarily due to the aforementioned traffic headwinds we incurred in the quarter. Experiences and Dining revenue was $47 million, a decline of 9%. Growth in Brand Tripadvisor's Experiences revenue lags unit volume growth, which returned to growth in the quarter, as I mentioned earlier. Experiences revenue performance was largely stable sequentially. And going forward, we expect Experience revenue growth on the Tripadvisor point of sale to accelerate as a result of our new operating model. Brand Tripadvisor adjusted EBITDA was $59 million and 25% of revenue, which exceeded our expectations. Despite accelerating traffic headwinds in the quarter, placing additional pressure on revenue, the team did a good job managing the growing reliance on paid channels with fixed cost prudence to exceed margin expectations despite pressure on adjusted EBITDA. At TheFork, Q3 revenue was $63 million or 28% growth and 20% growth in constant currency. B2C bookings volume grew 11% across all channels and 13% on TheFork's branded direct channel. The strength of B2B subscription revenue growth continues to be driven by restaurants adopting higher-priced premium plans, ongoing evidence of the strength of the feature set and overall value proposition we deliver to restaurants. While still a minority of TheFork's total revenue, B2B subscription revenue is contributing an increasingly share of the overall revenue mix, which we expect to continue in the future as the team executes on its business model diversification strategy. Adjusted EBITDA at TheFork was $14 million or 22% of revenue, representing a margin improvement of approximately 10 percentage points, driven primarily by leverage in personnel costs. Turning to consolidated expenses for the quarter. Cost of revenue was 7% of revenue, an improvement of 10 basis points. Marketing costs were 41% of revenue, higher by 150 basis points. Modest leverage at Viator was offset by deleverage at Brand Tripadvisor due to the aforementioned traffic headwinds. Personnel costs as a percent of revenue improved by 100 basis points. Investment in Viator personnel offset lower personnel costs at BrandTripadvisor. Absent share-based compensation, personnel costs were approximately flat as a percent of revenue. Technology costs at under 5% of revenue were approximately flat with last year. G&A as a percent of revenue improved by approximately 70 basis points, driven primarily by lower real estate costs. Now turning to cash and liquidity. Q3 operating cash flow was $45 million and free cash flow was $26 million. On an LTM basis, operating cash flow was $347 million and free cash flow was $261 million, which represents significant improvement from last year due to a more favorable working capital and onetime cash tax settlement charges in the comparable period last year. Total cash and cash equivalents at September 30 were approximately $1.2 billion. Our cash balance includes approximately $350 million in Term Loan B proceeds raised in the first quarter of 2025, which we plan to use to pay our outstanding convertible notes due in April 2026. After taking into account deferred merchant payables of approximately $393 million and the $350 million term loan, our remaining excess cash balance is approximately $475 million. During the third quarter, we did not repurchase shares given the operating model changes and cost savings programs we were contemplating. However, we expect to restart our open market repurchases this quarter aligned with our previously communicated programmatic approach, subject to a stable macro environment. Today, we have approximately $160 million remaining in our authorization. We believe that our current cash profile and net leverage levels reflect a strong capital structure with appropriate cash for operating needs. Turning to the gross cost savings program Matt mentioned in his prepared remarks. At the group level, we are sharpening our strategic focus in order to accelerate our ambition in the areas where we believe we have differentiated assets and that can drive meaningful shareholder value. We believe that realigning our strategy, our resources and our brand and data assets across Viator and Brand Tripadvisor into a new operating model provides an attractive opportunity to accelerate growth and innovation. This operating model change will result in a greatly simplified organization and allow us to operate more efficiently. We will be launching an annualized gross cost savings program of $85 million in Q4 that we intend to execute throughout 2026 and expect to fully realize by 2027. This savings program will primarily include reductions in headcount spanning Brand Tripadvisor, corporate G&A and Viator by approximately 20%, but will also include other operating expenses -- expense efficiencies as a result of our operating model change. In 2026, the net impact of our savings program is expected to be lower than $85 million due to the timing of these actions. For example, we expect approximately $10 million of the savings to be recognized in Q4 of this year. And as I mentioned earlier, our plan to invest behind reaccelerating experience growth in 2026 may offset a portion of the savings impact. While it's too early to provide detailed guidance for next year, our preliminary estimate today on this program's impact to fiscal '26 would be an improvement of approximately 100 basis points to consolidated adjusted EBITDA margin. We will provide another update next quarter, given we're still finalizing the '26 plan. Next quarter, we also intend to update our reportable segments to align with our updated operating model and resource allocation strategy. We expect to maintain three segments, which we anticipate will be Experiences, Hotels and Other and TheFork. We believe updating our reportable segments will provide investors with a clearer understanding of the growth and margin performance and future opportunity of our entire Experiences business as well as more clearly highlight how we'll manage our legacy businesses. Let me take a moment to quickly explain the major changes that bridge our existing segment structure to our planned updates. In the Experiences segment, the definition and disclosure of unit volume, GBV and revenue will be consistent and unchanged from the way the Viator segment reports today. However, the cost profile will change to include all fixed and variable expenses related to both brands for Experiences, which have been split between the Brand Tripadvisor and Viator segments. By doing this, there will no longer be a need for intersegment eliminations related to experiences, which today is recognized as an affiliate marketing expense in the Viator segment and intercompany revenue for brand Tripadvisor. The Hotels and Other segment will effectively be the current Brand Tripadvisor segment, but without experiences-related revenue and expenses. Finally, TheFork segment will remain unchanged from today's disclosure. Given these changes are still in process, I will provide guidance for the fourth quarter and full year consistent with our existing segment structure. Turning to our outlook for Q4. Our expectations for the quarter include the benefit of approximately $10 million to adjusted EBITDA from our aforementioned cost savings program impacting both brand Tripadvisor and Viator, but do not assume any revenue benefits from our new organizational structure, which we are implementing this quarter and expect to drive benefits throughout 2026. For Q4, we expect consolidated revenue to be approximately flat to last year and consolidated adjusted EBITDA margin of approximately 11% to 13%, which implies the following for each brand. At Viator, we expect total bookings growth in Q4 of approximately 16% to 18%, driven by an acceleration at the Viator and Tripadvisor points of sale. We expect some sequential pressure in GBV growth due to the impact of promotions and a higher mix of lower-priced tickets to average booking value. We expect revenue growth to be in line to a slight acceleration with Q3 growth. Adjusted EBITDA margin is expected to be approximately 100 basis points lower due to a nonrecurring indirect tax credit incurred last year. Absent that onetime benefit, we would expect Viator's adjusted EBITDA margin to increase by approximately 200 basis points. At Brand Tripadvisor, our current expectation is for revenue to decline in the low teens, which assumes Q3 traffic headwinds persist. Adjusted EBITDA margin is expected to decline approximately 900 basis points, driven primarily by pressure in the hotel meta free channels as well as planned marketing spend resulting from ongoing coordinated efforts in experiences. At TheFork, we expect revenue growth in the mid-teens, which reflects a currency benefit of approximately 10 percentage points. The sequential step down in growth is expected as we are now lapping the scaled growth initiatives in B2B and partnerships we began realizing in Q4 of last year. Adjusted EBITDA is expected to be approximately flat year-over-year. Given our Q4 outlook, we now expect full year consolidated revenue growth of 3% to 4%. However, our adjusted EBITDA margin expectations remain unchanged at 16% to 18%. We are excited about our strategic direction as we finish the year and believe that the operating model changes and cost savings actions will sharpen our focus and allow us to grow consolidated revenue and adjusted EBITDA and improve adjusted EBITDA margin in fiscal year 2026. In Experiences, our targeted investments will unlock a larger TAM and position us to accelerate revenue growth and grow adjusted EBITDA. At TheFork, we will continue to execute a financially disciplined growth strategy, and we expect to optimize our legacy offerings and deliver cost savings to maximize profitability in the face of structural headwinds. Over the past few years, we've made notable progress driving a deliberate business model diversification strategy to grow the mix of revenue and adjusted EBITDA from our marketplace businesses. As Matt stated earlier, this year, revenue from Viator and TheFork, our marketplace businesses are expected to represent 60% of total consolidated revenue and 30% of total adjusted EBITDA in our current segment reporting. Under our new operating model and segment reporting structure, we expect this revenue mix shift to steadily continue and the mix of adjusted EBITDA to surpass 50% consolidated EBITDA in fiscal 2026, which we believe reflects our strength as an experiences and AI-enabled company and our overall marketplace mix. We look forward to sharing more detail with you on our Q4 earnings call next year. I'll pass the call back over to Matt briefly. Matthew Goldberg: Thanks, Mike. Before we start Q&A, I wanted to take a moment and welcome Alex Dichter to our Board of Directors. Alex joins us with many years of experience as an adviser and operator with deep travel industry knowledge and an extensive background working with organizations across multiple travel verticals to transform and scale their businesses. This is the first step to bringing on fresh perspectives from independent directors, and we're excited to have Alex join the Board. He joins us as Greg O'Hara departs, and I want to thank Greg for his contributions and leadership over the years. With that, I'd like to turn the call back to the operator for Q&A. Operator: [Operator Instructions] The first question comes from the line of Richard Clarke of Bernstein. Richard Clarke: I'd just maybe like to ask a question on your revenue growth assumptions going forward. I think you said you think you can accelerate growth. I'm just wondering what the shape of that will be. If you're investing even less in the sort of meta and Brand Tripadvisor product, is the revenue growth -- can you still stabilize better than the mid-teens guide you set out for Q4? And with the new organizational structure, would you expect your Experiences segment to be able to grow faster than the 9% sort of high single digits that Viator is doing at the moment? What's the kind of shape of revenue growth going forward? Mike Noonan: Yes. Richard, it's Mike. I'll take this. In terms of thinking about the longer-term shape of revenue and as reflective of our overall operating model, I'll say a few things as we set ourselves up. In Experiences, we do think the operating model and how we're allocating investment to Experiences, we are expecting our Experiences in our new segment to reaccelerate next year, right? And that is both a focus on two things: one, geo TAM expansion, looking at new source markets to acquire bookers, very important in that equation and category expansion as we think about other opportunities to bring other types of things to commercialize in the storefront, think of attractions, right, for example. So those are two important things as we think about that reacceleration statement next year. We also then, I think, as we think about our hotels and other category, which would be our other second new segment, I think we're taking a very pragmatic view of what this looks like. We are -- when you think about the traffic headwinds we've seen, particularly accelerating in the free channels and then you take that with how we will be investing in growth, meaning we're not going to be prioritizing growth necessarily in the paid channels just for growth. We're going to really divert those resources to Experiences. We would expect continued revenue headwinds next year. And then in TheFork, just to round out in terms of the growth, we are continuing to expect that TheFork is going to grow nicely with continued margin evolution. So when you take that all in, when we think about where we sit today, and to be clear, we will be refining our plans as we move through the next 3 months. From a consolidated perspective, we would expect that we would grow both revenue and EBITDA next year. When we take into consideration the cost savings program that we've enacted that really stop the growth of fixed costs in both the Viator and Brand TA segments, which we'd deliver about -- we said about 1 point of margin improvement to the consolidated financial profile next year. So again, important moves we're making today that we believe are important for growth in margin for next year, but not just next year. It's really how we set ourselves up for the next several years and driving the experiences opportunity we have in front of us. Operator: The next question comes from the line of Naved Khan of B. Riley Securities. Naved Khan: A lot to digest here and I think some of the steps here that you described, Matt, do make sense. I'm just wondering, as you look to reaccelerate growth in the Viator business or the Experiences business, is it possible to kind of get kind of closer to your closest competitor? I think they recently disclosed around 30%. And also, you have kind of expanded margins very nicely in this segment. Is it possible to remain on this margin expansion trajectory as you accelerate growth? How -- give us your thoughts on how we think between the trade-off between growth reacceleration versus margins? Matthew Goldberg: Thanks, Naved. And I think you've hit right at the core of why we are so enthusiastic about this fundamental shift to our operating model because we believe it allows us to do just that, reaccelerate growth while we continue to expand margins. And we are already really leading the category today. You can look at it in many different ways and make judgments about who's got the best profile. But let me tell you what I'm excited about our profile. We believe we're in a real position to shape what comes next as the global brand leader in this category. Together with Tripadvisor, it's the category's largest, most trusted and most profitable platform, and we are building it for sustained growth. Why do I say largest? It's largest because of our scale and reach. We're the global leader in scale with unmatched supply and reach, 400,000 experiences, 65,000 operators. And of course, we can more fully tap the hundreds of millions of travelers using Tripadvisor monthly, giving that supply more visibility and more demand that really no competitor can replicate. And the proof points in my mind are the last 12 months GBV of $4.6 billion and 17% items growth. and we believe we can accelerate off that. Being trusted has an advantage. We've got this global reputation of trust, and it's a foundation to grow Experiences globally. A very good percentage of our audience from Tripadvisor is coming outside the U.S., even though Viator has primarily focused on U.S. source market. So that gives us immediate credibility to expand experiences into new markets. We think there'll be lower barriers to adoption in those source markets where travelers already know and use Tripadvisor. And we think that it signals sort of a reliability, which is critical for the emerging category. And in Europe alone, we have 70% brand awareness and it's relatively unmonetized today. So by focusing Tripadvisor on Experiences, we have many, many times more visitors to go take advantage of than others. And finally, profitability. We are driving this performance with financial discipline. And what we've shown is that the category can scale profitably. And we're the only ones who have shown that. And we're doing it efficiency and with discipline and performance. And so Viator was profitable since 2023. Last year, we delivered a mid-single-digit margin. The last 12 months, we have a high single-digit margin, and we are approaching double-digit margins. And as we move from regional strength to building a global platform, we think that, that leadership is within our capability, and we're going to go after it. So thanks for the question. We're super enthusiastic about reaccelerating growth and expanding margins. Mike Noonan: And I'll just add to the second point of your question. Yes, sorry. And just to underscore a few points that Matt said, we are really pleased with the unit growth. And I think I want to make sure that we all focus on the most important metric, we think, is that because it's a statement of real customer conversion and it's a statement of you have the ability to bring back customers on a repeat basis, and that's super important. And so we'll continue to really focus on driving that scale and that unit volume growth. And on the margin, I would say we -- this model, as we continue our disciplined new user acquisition is really around growing margins. And I think we will continue to think about, particularly as we're excited about reaccelerating next year into new geos, there'll be some modest investment into that. But all in all, I expect to continue to see the model produce margin enhancement. Operator: The next question comes from the line of Ronald Josey of Citi. Unknown Analyst: This is Robert on for Ron. Can you maybe give us a sense of new user trends at Viator and as you continue to expand into the secondary and tertiary markets and into newer categories, help us understand your approach to growing supply in each of these newer markets. Mike Noonan: Yes, Rob, I'll take that real quick, and Matt can chime in. Great question because it does tie directly of how we're thinking about the reacceleration point. In the U.S. and North America as our core market, we continue to see very high repeat revenue growth rate from our repeat customers, very important, because that is long-term customers and they generally -- the more times they come to us, the less reliant they are on paid channels. It's part of our core flywheel. On new users, we are very disciplined, right? And it does explain some of the overall growth profile because we are looking at new user acquisition in light of do those ROIs make sense and do they contribute to our long-term margin targets. So we're very disciplined in terms of that new user acquisition. We do believe that a core tenet of the geo expansion and Matt mentioned some of this around where we would think to go would be, hey, where is our brand Tripadvisor, for example, well known, a lot of traffic volumes, which is in Europe, gives us the opportunity to grow that new user base at attractive ROIs, and we're excited about that. And again, is a key principle of how we're thinking about that reacceleration comment? Matthew Goldberg: Yes. And look, I just want to add, Rob, that the marketplace flywheel that we have working between how we generate demand across both of our brands and do that with an ROI-driven acquisition strategy, the way we expand geographically, bring those new users into our store and give them a better experience where we're leveraging AI to do personalization and matching and our sort to be far more relevant for them and then making sure that we have the right supply in those secondary, tertiary markets in new categories. All of that works together to attract new users, get them coming in, converting and then being more loyal, so you get the new and repeat working really well together. And we think that our marketing tests and the tests we've done on our product and with our supply across the two brands allow us to do that with more efficiency than we've ever been able to do it before, and we're going to scale that. Unknown Analyst: Got it. That's great. And then as a quick follow-up, Matt, you had mentioned a few months ago that AI was already making a difference financially across the business today. So can you maybe elaborate on how AI is driving cost efficiencies across the business? And then given your focus on AI going forward, help us understand how you're thinking about the potential revenue opportunities and licensing deals ahead. Matthew Goldberg: Yes. Thanks, Rob. So we're deploying AI fully across the organization in every part of our organization. And from an efficiency and productivity perspective, we've done it in a lot of enterprise use cases across customer service, where we're making major strides in our content moderation and fraud detection, the way we localize, the way we think about driving our marketing teams. It's giving us a lot of advantage. And we will continue to roll that out in every area of the business. In fact, as we're planning for next year, one of the things we want to do is really measure that very clearly so that we can see not only the pilots making sense, but the way we scale that making sense. And I think our -- we've rolled out the tools to do that, and we're excited about how that will continue. More importantly, right, is the way that we are using it in our product to drive innovation. And we've learned a lot over the last couple of years. We've built the AI infrastructure, and we've leveraged it for our product enhancements. And we've shown in succession how we can work with trips and planning and itineraries to the way that we summarize and synthesize our content through to a travel assistant, which we recently learned. And these were all efforts that are leading us to a place where we can go fully AI native and really serve the customer however and wherever they want to engage with that. So we're building on those learnings from our AI innovation. And we are setting ourselves up to put a deep focus on that and not get distracted by trying to chase other things that might not make as much sense at the expense of being able to do it. And that's why we're going to launch an AI native MVP in the coming weeks, and we're excited to continue that. I will say I also believe that the way that we are doing partnerships has been differentiated, and we're learning. We're seeing good value exchange. And we believe that going forward, we can really scale that opportunity. So we're always having conversations to do that. So feeling real good about the AI future. Operator: The next question comes from the line of Doug Anmuth of JPMorgan. Dae Lee: This is Dae Lee on for Doug. I have two. Firstly, on -- with the reset to an experience-led strategy, will the consumer experience on Tripadvisor change? And how do you expect Tripadvisor and Viator brand to be positioned for consumers shopping for experience going forward? Matthew Goldberg: Yes. So thanks for that. Absolutely, the user experience will change because we are going to primarily be focused on how the Experiences category can play on Tripadvisor. We will continue to offer the features that we've had in the past, but our primary focus as we allocate resources, as we set goals with all of our KPIs is going to be driving that experiences future. And we do believe that bringing it together under one team, which we've already proved that we can do with our product, all of the work we're doing in the store to optimize the funnel to take friction out, all the myriad of little things we do to drive conversion and loyalty and repeat will benefit both brands, both points of sale, which will come together in a more seamless fashion so that consumers can engage with us wherever it makes the most sense for them. And I think that will drive that flywheel that we were talking about, which once you get it going, really has a lot of potential to accelerate our revenue. Mike Noonan: I'd just add a few things on to that, Dae, which is this work has -- this is not a cold start. We've been doing this work. And you've seen us talk about the coordinated bidding as an example of this. And the learnings we've gotten from that has enabled us to lean in and actually gain increasing confidence around what we can do in the Tripadvisor points of sale. So we're very excited and it's a key point of -- as we think about experiences reacceleration. Dae Lee: Got it. And as a follow-up to that, what's been driving the acceleration in volume growth at Viator? And then for your guide for 4Q, what will drive acceleration, especially given the tough 4Q comps? Are there any specific channels, products or regions that's driving the acceleration? Mike Noonan: Yes. On the unit side, it's -- on the unit side, it's really been the 3P mixing higher, and that's been growing very fast, albeit on a much smaller base, but growing very fast. I think we've consistently said it around the other channels, Viator, which is by far the largest channel and TA and Viator are the vast majority of that. Viator has been generally growing around the average, and Viator has been growing lower than the average. And earlier in the year is actually -- it was declining year-over-year. But that has been improving largely because of the efforts around product that Matt just mentioned, largely because of the efforts around coordinated bidding. And this quarter, we just mentioned that both channels accelerated in the quarter. The TA point of sale actually turned to positive growth in the quarter, again, reflective -- and these are all on unit basis to be clear, all reflective of that. And so as we move forward, we are very excited about our merchant 3P business for all the reasons we've talked historically, and we'll continue to work with our partners to advance that. But the work very much continues on our owned and operated channels at both Viator and Tripadvisor point of sale, and we're going to continue to work on those. And we expect embedded in our Q4 guide would be expectations of both the TA and Viator channels to have modest acceleration again. Matthew Goldberg: Yes. And just remember, Tripadvisor Experiences has previously been a drag on growth. That's going to shift, and it will no longer be a drag on growth, and we'll get these things working really well. We have marketing products, supply, data plans to do that. Operator: The next question comes from the line of Jed Kelly of Oppenheimer & Co. Jed Kelly: Just two. Will you market -- will the go-to-market strategy for your Experiences, will that be built more around the Viator brand or the Tripadvisor brand? And then can you talk about how you think potentially expanding into other experiences into other regions, particularly Western Europe? Matthew Goldberg: Yes. So the go-to-market strategy is something that we can continue to work on, and we think that it will be where we believe we have the strongest ability to go. Now both brands can exist in both markets because they do different things. They are different products, right? Viator is a very focused vertical when you kind of already know I want an experience and I want the best way to book it. Tripadvisor still is a broad planning and recommendation platform across multiple categories. And that's not going to necessarily change where we'll put our focus and energy is in making sure that if you come to find your hotel, we're also doing a really good job to cross-market experiences to you in a fundamental way. If you're thinking about where you want to eat, there's probably a really interesting tour around that restaurant that we want to make sure you know about and book. So it will depend category by category in experiences and market by market, how we go to market. We think both brands can be there. We may choose to lead with one or the other depending on the market. Mike Noonan: Yes. And I'll follow up on that point, which is your second question on geo expansion. So we are excited about geo expansion, particularly as we think about accelerating growth in new users. When we look at the geos, obviously, we want to look for a large addressable TAM and look for areas we actually have a competitive advantage and Europe clearly is that when we think about the large TAM size, but we also think about -- and this is where it's so critical about the operating model change. The traffic and brand awareness of Tripadvisor is very large there. And so our ability to really enhance and tighten our focus around experiences, leveraging the Tripadvisor brand is going to be very important to how we think about that expansion. And that doesn't mean -- and Viator will always play a point, and we have two brands to think about how we want to grow in the new market. So a lot of work underway as we're working on this, but we're very excited about that expansion opportunity. Operator: The next question comes from the line of Nafeesa Gupta of Bank of America. Nafeesa Gupta: So my first question is on Metasearch. How are you thinking about the legacy business now that you are consolidating both the experiences in Viator and Tripadvisor? Will that business still have investments that you were planning for the last couple of quarters? And the second one is on Fork. There are reports going around regarding exploring sale of TheFork. Any thoughts on that? And how should we think about TheFork revenue growth in 2026 given the B2B lapping? Matthew Goldberg: Well, thanks for those questions. First of all, on our meta business and our hotel business, the hotel product continues to provide real value for both travelers and partners. We have the best advice, the most photos, and we're trusted really over everyone else in the space. And we recognize that with Google taking more and more share of the search traffic for themselves, we're just not going to be able to grow that business at the level of profitability that we'd like. So we know that it's an important part of the journey that travelers find value and price compare, and we're able to send our partners really good quality leads. And we've done some really good product work there to drive conversion rates higher. And we're -- I think we're still focused on that. But what we won't do is we're not going to continue to invest incrementally. You can think of it as an add-on or incremental product to our primary focus that we will make sure maintains the quality for both travelers and partners. Now as it relates to your question about TheFork. TheFork is a great business that is performing really well. We are excited about the path of sustainable growth and the improving profitability profile that really benefits the Group. But of course, we consistently evaluate all options to unlock value in all of our assets, and that includes TheFork. And our primary focus is what's going to drive the most shareholder value ahead. Nothing is off the table. We see it's a leader in core European markets. We have a good and mix of B2C and with growing B2B, and that's giving us advantage. And as a leading European dining platform, we know it's a valuable asset, both for global and regional travelers. It is run separately. There's optionality there. And we recognize there have been precedent transactions out there that suggest TheFork is a highly valuable asset, especially given its unique scale position in Europe. So optionality, and we are focused on it. We love what the team is doing there. Nafeesa Gupta: Just on the revenue growth for Fork, how should we think about that going ahead? I know this last couple of quarters, there was a lot of FX tailwind as well. And how should we think about next year? Mike Noonan: Yes, sorry about that. Yes, listen, I think a couple of things important to understand the growth profile. Big picture, one, but we still expect nice growth and profit improvement next year for sure. We are -- we will have a bit harder comp next year because we're comping and we're seeing some of this before. We're comping some very strong growth in B2B as well as some of the partnership initiatives we've put in place. So we would expect a step down in growth year-over-year, but we still believe we're very excited about the revenue diversification strategy. We're very excited about the B2B business and the ability to continue to grow into our existing restaurant base, new restaurant base, more and more premium plans. Those all offer a very, very nice upside as well as we continue to see very healthy growth -- volume growth in our B2C business, particularly in our proprietary Fork network. So I think, yes, there'll probably -- there will be -- we expect a step down in growth from what we saw this year, but still very healthy as we move into next year. Operator: This concludes the question-and-answer session. I would now like to turn it back to Matt Goldberg for closing remarks. Matthew Goldberg: Thank you all for joining us on this morning's call. The changes we walked through today represent a meaningful shift in our strategic focus and how we'll deliver value for shareholders ahead. We're excited to move into this new phase of our growth for the group. Before I close out, I also want to take a moment to acknowledge the impact these decisions have on our teams. We're grateful for their continued hard work and dedication. We look forward to updating you on our progress and plans for 2026 on the next call. Thanks, everyone. Operator: Goodbye.
Asli Demirel: Ladies and gentlemen, welcome to Anadolu Efes' Third Quarter 2025 Financial Results Conference Call and Webcast. Our presenters today, our CEO, Mr. Onur Alturk; and our CFO, Mr. Gokce Yanasmayan. [Operator Instructions] Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with TAS 29. Just to remind you, this conference call is being recorded, and the link will be available online. Before we start, I would kindly request you to refer to our notes in our presentation regarding forward-looking statements. Now I'm leaving the ground to Mr. Onur Alturk, Anadolu Efes' CEO. Sir? Onur Alturk: Good morning, and good afternoon, everyone, and welcome to Anadolu Efes Third Quarter 2025 Conference Call. Thank you for joining us today. As you may recall, due to the continued uncertainties around our operations in Russia, we have classified these operations as financial investments on our balance sheet at the beginning of the year. And accordingly, they are no longer consolidated in our income statement until there is more clarity. However, we separately disclosed the financial results of these operations in our earnings releases for the last 2 quarters. And starting from quarter 3, we decided to stop providing separate disclosure for Russia. And this is primarily because of the information flow has not been as stable, as consistent as before. We will reassess this approach as the situation evolves. And looking at the third quarter, it was a mixed set of results where the profitability was solid. However, the volume momentum came with its own set of challenges. Even so, our broad market presence and agile execution helped us to preserve overall stability as growth in several markets balance softer demands in others. So we maintained our growth trajectory from the second quarter with consolidated volumes reaching 31 million hectoliters, up by 7% on a pro forma basis compared to the same quarter last year. The volume growth was driven by our Soft Drinks operations particularly supported by robust performance in international operations, while Beer group volume performance was softer, mainly impacted by domestic markets. Strong volumes supported top line growth, but the revenue per hectoliter was pressurized due to the ongoing focus on affordability and increased discount rates. On top of strong top line results through gross profit improvement and strict management of operational expenses, we are able to record an expansion in EBITDA margin. Additionally, we successfully generated positive cash flow amounting at TRY 9.4 billion, which was mainly driven by strong operational profitability. As of September 30, 2025, our consolidated net debt-to-EBITDA ratio stood at level of 1.5x. As we shared before, as part of our Vision 2035, one of the key pillars of our growth strategy was geographical and categorical expansion. In this regard, I'm truly pleased to share two important milestones today we achieved during the quarter. Firstly, we have recently started the distribution of Mercan raki spirits in the final days of October, while the discussions regarding the acquisition of 60% of the company are still ongoing. And secondly, we have signed a licensing agreement with Salyan Food Products, which will enable us to produce, sell, distribute and marketing of Efes and Efes Draft brands in Azerbaijan. Turning to Beer group performance. During the third quarter, our consolidated Beer volumes declined by around 5% year-on-year on a pro forma basis. This was mainly driven by a slowdown in Turkiye, where volumes were down by 8.4%. In our international Beer operations, volumes were down low single digits on average. As expected, Moldova reflected a slowdown following the last year's high base. Georgia was temporarily affected by export-related business. On the positive side, Kazakhstan delivered solid growth, supported by strong portfolio execution. And Ukraine also contributed positively by growing low single digit, thanks to ongoing recovery and the low comparison base. Let me discuss Turkiye in more detail. Beer volumes declined by 8.4% in the third quarter. And as mentioned earlier, this was mainly driven by affordability pressures stemming from persistent inflation and weakening of consumer purchasing power. In the second half of the year, the absence of midyear minimum wage adjustments further deepened the pressure on consumer purchasing power and making its impact increasingly evident in the market. In addition, the price adjustments we implemented in early July had a temporary impact on demand, while the slowdown in tourism also weighed on overall volumes, particularly in on-trade and HoReCa channels. And this quarter marked a period of strengthening our portfolio and ensuring it remains well aligned with the customer expectations and market trends. We launched Jupiler 0.0%, a non-alc beer in Turkish markets, which marks an important step in expanding our product range. Although it's very early and it's very small, we expect these launches to be a new strategic pillar for growth for future. And about our CIS operations, starting with Kazakhstan, we delivered low single-digit volume growth, supported by strong brand activations and robust export performance. Our premium segment continued to perform well, driven by effective brand activations like strategic pricing and new can designs that further enhanced brand visibility in the market. And during the quarter, in line with our KEG focus, draft focus, we also launched successfully the Pegas brand SKU, Khmelnoy Los. In Georgia, volumes declined by low to mid-single digits, in line with expectations, actually, mainly due to the restructuring of our export business, which had no impact on profitability right now. And additionally, introduction of Lowenbrau-Oktoberfest Limited Edition helped us to maintain our market presence and customer engagements. In Moldova, volumes contracted in low single digits as expected, reflecting last year's high base. And moreover, year-on-year volume decline was affected from calendarization impacts. Let's briefly review our Soft Drinks operations, too. In the second quarter of the year, CCI's consolidated volumes increased by 8.9%, driven by positive contribution of all international markets. Turkiye volume declined by 1.7%, mainly impacted by weakening consumer purchasing power and deteriorating weather conditions during September, whereas international volumes demonstrated a remarkable growth, posting a 16.1% increase, mainly supported by Central Asia and Iraq. And in Pakistan, volumes increased by 0.7% year-over-year despite severe floods and ongoing political sensitivities. Kazakhstan and Uzbekistan delivered robust growth with 24.2% and 36.5% growth, respectively. And lastly, Iraq volumes up by 7.8%, marking 10th consecutive quarter of growth. When we move on to our operational results. In the third quarter, we continued our solid volume generation on a consolidation basis, although effective portfolio management and price adjustments made in certain markets helped to ease the impact of discounting and affordability focus and revenue per hectoliter decreased by 3%. With improved gross profitability margin and limited increase in operating expenses, EBITDA increased around 8%. As a result, margin also expanded, which was supported with contribution from international operations in both Beer and Soft Drinks businesses. And our consolidated net income was recorded around TRY 5 billion. Although operational profitability remained solid, higher financial expense and lower monetary gains weighed on earnings in the third quarter. Beer group delivered a year-on-year decline in earnings as a result of higher financial expense and a softer operational profitability amid challenging environment. Following a softer quarter 2 performance, we delivered strong free cash flow generation at the consolidated level, driven by our Soft Drink business. On top of the strong operational profitability, we benefited from improving working capital, lower CapEx spendings and tax expenses compared to same period of last year. In the current environment, as I emphasized in our previous conference calls as well, there is no doubt that strengthening free cash flow remains a top business priority, of course, in Beer group, and Gokce will share more details about this. And consequently, our consolidated net debt-to-EBITDA ratio stood at level of 1.5x as of September 30, 2025. And now Gokce will give details on financial metrics. Gokce, please. Gökçe Yanasmayan: Thank you, Onur. Good morning, good afternoon to everyone. Onur covered, as usual, Anadolu Efes' consolidated results. So I will provide an update on the Beer group's performance for the third quarter. But before I start again, I want to remind once more that disclosed figures in my presentation are on a pro forma basis, meaning that they exclude the financial results of Russian operations as of January 1, 2024, to ensure comparability. So in the third quarter, Beer group sales revenue declined by 6.9% on a pro forma basis to TRY 15.7 billion. Even if volume performance and revenue in local currencies were high, international Beer operations sales revenue was recorded at TRY 5.9 billion with a 4.5% decline. Like previous quarters, the decline in sales revenue was driven by TAS 29 implementation as inflation in Turkiye exceeded the depreciation of Turkish lira against local currencies of international Beer operations. So excluding TAS 29, international Beer operations revenue was up 24% on a pro forma basis, again, reaching TRY 6.7 billion. Turkey Beer operations generated a revenue of TRY 9.6 billion in the third quarter, representing an 8.7% decline despite price adjustments during the quarter, revenue per hectoliter decreased due to lower volumes alongside more controlled yet still elevated discount level in line with the market dynamics we have in the country. Thus, on a pro forma basis, Beer group revenue decreased 5.3% to TRY 41.4 billion in 9 months of 2025. And Beer group gross profit declined 11.1% on a pro forma basis again to TRY 7.8 billion in the third quarter, and that came with a margin contraction of 236 bps, though gross profit margin remains at a remarkably good level of close to 50% still. And the decline in the gross margin stem from softer volume performance and higher COGS per hectoliter, driven by increased material costs across our operations and higher hedge levels in packaging costs, especially in this period of the year for Turkey. So in the next slide, I'm going to present the EBITDA. So with an EBITDA of TRY 3.4 billion, Beer group had a 22% margin in third quarter, indicating only a 57 bps decrease. The decline in the top line performance and gross profit in the group -- Beer group was actually partially limited through disciplined operating expense management this quarter, particularly in Turkey operations. On the international front, CIS region on average continues to deliver above 30% margin performance. However, profitability was moderated in this period due to high base of last year. Consequently, Beer group EBITDA in 9 months was TRY 6.4 billion with a 15.4% margin. Again, in the third quarter, Beer group generated unfortunately, a negative free cash flow of TRY 1.3 billion. Softer profitability that we mentioned, together with a temporary deterioration in working capital and lower monetary gain collectively weighted on cash generation despite an absolute reduction in capital expenditures year-on-year. Next slide, please. So for again, information purpose, I'm going to show you the financial statements without -- excluding the impact of TAS 29. However, I have to again say that Anadolu Efes' financial statements are prepared in accordance with TAS, the standard for financial reporting in hyperinflationary economies and the numbers that you are seeing here are just presented for analysis purposes. And excluding the impact of TAS 29, Beer group revenue was TRY 40.5 billion with a growth of 27%. And again, excluding the impact of TAS 29, Beer group EBITDA would increase by 21% to TRY 8.8 billion and net income was reported as TRY 1.8 billion, excluding the CTA impact coming from the scope change in consolidation of Russian operation. About cash and debt management. So as of September 30, 2025, we had 63% of our cash in hard currency denominated in the Beer group and 61% in the consolidated Anadolu Efes level, which is pretty much in line with our previous practices. And the net debt ratio for the period was 1.7x (sic) [ 1.5x ] for Anadolu Efes and 3.9x for Beer Group. And about the risk management, so the key figures to update them, actually no new news for 2025, we are almost done with the year. As for 2026, we have already started hedging aluminum and 16% of our exposure of next year -- sorry, 14% of our exposure of next year for Turkiye and CIS countries has already been hedged. And for the FX of next year, actually as usual practice, we are going to start hedging towards the end of the year for next year. So that basically ends my part of the presentation, and I hand over to Onur. Thank you. Onur Alturk: Well, Asli, let's check the Q&A. Do we have any questions on this one? Asli Demirel: There are a couple of questions from [indiscernible]. Let me start with the first one. Thank you for your presentation. Could you please provide more color on Azerbaijan? When will you start production sales in the country? What are the potential sales volumes and EBITDA contribution and also CapEx? Let me address this to Onur bey, and then there are a few questions more, then I'll address them to Gokce bey. Onur Alturk: Let's briefly discuss Azerbaijan. Azerbaijan is a promising market actually, and CCI already has a strong footprint in the markets. Population is around 10 million, with per capita beer consumption is around, again, 7 liters. And in quarter 3 '25, a license agreement was signed with Salyan Food Products in Azerbaijan for the production, sales, distribution and marketing of Efes and Efes Draft brands. So we already started production of Efes in Azerbaijan. We see it as a strategic step expanding our regional operational footprint. And of course, we want to strengthen our local presence in the market. No CapEx is used for that because it's a [ toll ] fill, third-party manufacturing. And if we see more potential in the markets, there will be an M&A. So we are evaluating this. And also, let me mention a little bit about Uzbekistan, just like because these are the two potential markets for us. And Uzbekistan is even more promising markets where, again, CCI already has a strong footprint. And the population is around 36 million and adding up 1 million every year. And the per cap beer consumption is around 12 liters. So that's a more favorable tax environment is expected in '26. It used to be 3x compared to the local ones. Now it's 2.5. And at the end of '26, we are expecting to the equalization of local and import tax. So if the gap is fully closed, there will be a huge potential. And imports from Kazakhstan has already started in July. Our legal entity and on-site team has been established in Uzbekistan. And our business development team is closely analyzing the market dynamics and potential opportunities like [ toll ] filling, and we are so close to start [ toll ] filling in Uzbekistan as well. And again, we are chasing M&A opportunities with very small investments in this country as well. But the reward seems to be, I mean, very promising in these two geographies. Asli Demirel: The next question from [indiscernible]. Could you please also provide more color on the working capital more at the Beer group level? And what are the initiatives you undertake to improve it? Gokce bey? Gökçe Yanasmayan: Sure. Sure. I mean, overall, as Onur rightly mentioned in his presentation, one of the key focus for us is the cash flow generation on the Beer group side and to turn our free cash flow generation into positive in the coming year. And a very important component of that is working capital, one of the important components of that. On the group level, we can say that our working capital on average is mid-single digit. However, there are certain countries hitting double-digit numbers, some countries close to 0. So on the average, we end up at mid-single digit. And for those who have double-digit or higher working capital, we have started a clear focus project this year and very clearly working on targets for next year to improve the numbers and at the same time, where we want to focus in every other country that we have these high numbers. Therefore, that's especially critical for Turkiye because this working capital financing requirement is being financed with high interest rates. So all the efforts are focused now, especially in Turkiye to decrease this number and the interest payment of next year. Asli Demirel: Thank you very much. Another question is regarding 2026 about the Beer group outlook for volumes and profitability. It's a bit early to comment on this. So let's postpone this to... Gökçe Yanasmayan: Yes, we are at the beginning of our budgeting cycle now. I mean -- and we are changing the numbers very frequently as the assumptions are changing. So we would prefer to give better color towards the end of the year or next year, beginning of next year. Asli Demirel: Exactly. But there is a question from [indiscernible]. Do you expect cost pressure in Turkey after rising food inflation, which may impact wheat and barley prices due to weather conditions? Or have you hedged this cost? Gökçe Yanasmayan: I can give a very, very general color here, maybe just to help you think about it. Recently, our cost base were acting very in line with the inflation in the country. Therefore, for next year to come, initial expectations, again, I mean, we have to work on them towards the end of the year more precisely. Initial indications show currently a slow decline as inflation will decline in the country. So that gets reflected into COGS per hectoliter as well for the next year. Asli Demirel: Another question from [indiscernible]. Can you give more information about Turkey gross margin and EBITDA margin in the third quarter? Gökçe Yanasmayan: Well, I mean, very roughly, we can say that the numbers are in the gross profit in the range of 50s, let's say, EBITDA margins in the third quarter are 20s, we can say so. And those numbers in gross profit margin level, we have seen more contraction as we have discussed in the presentations, but that has been compensated to a great extent with OpEx management. Therefore, the contraction in EBITDA is less than 100 basis points overall. Asli Demirel: Thank you very much. There seems to be no more questions. Let me remind once again, if there are any questions, we can wait a few seconds. And if there are none, we can close the question [ part ]. Okay. There seems to be no more questions. Thank you, everyone, for joining. Onur Alturk: Thank you.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Seadrill's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Kevin Smith, Vice President of Corporate Finance and Investor Relations. Sir, please go ahead. Kevin Smith: Welcome to Seadrill's Third Quarter 2025 Earnings Call. I'm Kevin Smith, Vice President of Corporate Finance and Investor Relations. And I'm joined today by Simon Johnson, President and Chief Executive Officer; Samir Ali, Executive Vice President and Chief Commercial Officer; and Grant Creed, Executive Vice President and Chief Financial Officer. Our call will include forward-looking statements that involve risks and uncertainty. Actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or year, and we assume no obligation to update them, except as required by securities laws. Our filings with the U.S. Securities and Exchange Commission provide a more detailed discussion of our forward-looking statements and the risk factors affecting our business. During the call, we will also reference non-GAAP measures. Our earnings release furnished to the SEC and available on our website includes reconciliations with the nearest corresponding GAAP measures. Our use of the term EBITDA on today's call corresponds with the term adjusted EBITDA as defined in our earnings release. I'll now turn the call over to Simon. Simon Johnson: Thanks, Kevin. Hello, and thank you for joining us for today's call. I'll begin with some highlights from this quarter, which demonstrate Seadrill's continued execution of our strategy to build backlog coverage through 2026, maximize utilization of our high-specification fleet and deliver the operational excellence that drives continuity and long-lasting relationships built on trust and performance. Following my remarks, Samir will provide detail on our contract awards and market outlook. Grant will then review third quarter financial results and provide updated guidance for 2025. As we navigate a period of fluctuating demand, one aspect of our commercial strategy remains clear: Maximize shareholder value by minimizing costly gaps between contracts. Since our last update, we've added over $300 million to our backlog, securing new contracts across 5 rigs. In what is a very competitive market, our collaborative approach with customers and the exceptional performance by our crews have enabled us to maintain our competitive edge. In Angola, securing work for the 3 rigs in the Sonadrill joint venture was a key strategic priority, enhancing the longevity of the partnership and reaffirming our position as the #1 drillship operator in Angola. The Sonangol Libongos commenced its new program in August, keeping the rig committed into early 2027 and extending the relationship with our client into its eighth year. This show of faith by the customer reflects the results delivered by our offshore crews and onshore teams day after day. The Libongos has been recognized as the Seadrill rig of the quarter 8x more than any other drillship in our fleet. The Sonangol Quenguela, which has worked for TotalEnergies since its maiden contract in 2022, has also won further work on a direct continuation basis and began its new program in early October. The Quenguela was awarded TotalEnergies Rig of the Year for 2024 and has sustained its exceptional operational performance through 2025. Finally, the Seadrill owned West Gemini recently completed its special periodic survey and is expected to commence a well-based contract with Sonangol E&P in the next few months. All 3 rigs operated through the Sonadrill joint venture have delivered exceptional performance year-to-date, each achieving near perfect technical uptime in excess of 99.7%. This accomplishment reflects our unwavering commitment to deliver industry-leading operational performance. We sincerely thank our joint venture partner and valued customers for entrusting Seadrill with the management and technical delivery of Sonadrill's operations. Our teams have demonstrated a commitment to developing local talent, world-class performance, and crucially staying at the top of the performance curve. We are proud to contribute to the prosperity of Angola, its communities and stakeholders, building a lasting legacy of responsible development and shared success. In the U.S. Gulf, the West Vela and Sevan Louisiana each secured new programs in direct continuation, adding a combined firm term of 195 days. The West Vela was awarded a 1-well contract with Walter Oil & Gas, which we anticipate will commence in March 2026. The rig will then return to work for Talos to drill an appraisal well following the discovery drilled by West Vela in August this year. The West Vela demonstrates our ability to leverage team expertise and performance excellence. 25% of the crew have been with the rig since it left the shipyard in 2013, and it was among the first rigs in our fleet to be equipped with managed pressure drilling. A decade of shared experience in technology development allows us to drill and complete wells that were previously considered too challenging. The West Vela remains one of, if not the best performing rig in the U.S. Gulf, routinely executing programs well ahead of schedule and under budget. The Sevan Louisiana has secured a new contract with Walter Oil & Gas, which is expected to keep the rig working for over 2 months following the completion of its current assignment with Murphy Oil. We're grateful to Walter Oil & Gas for their continued partnership and confidence in our crews and assets. These new contracts reflect the strong collaboration we've built over time. Also worth noting, the Sevan Louisiana is expected to finish its current campaign with Murphy Oil ahead of schedule. We appreciate the faith Murphy has placed in Seadrill as a new customer and look forward to building on our partnership as we support their operations going forward. We continue to set the standard in collaboration and innovation. Our recent partnership with Trendsetter on well intervention activities in the U.S. Gulf is our most recent example. We're preparing to install Trendsetter's equipment on the Sevan Louisiana, making an already distinctive rig in both design and function even more capable. This upgrade gives the rig flexible operating modes across both shallow and deepwater environments, opening new markets and enhancing its commercial appeal. Staying in the U.S. Gulf, the West Neptune commenced its first well with its newly installed MPD system in October with LLOG. The rig system includes the state-of-the-art Integrated Riser Joint that is set to be the new standard in safer, more efficient and more reliable MPD operations. The West Polaris is also equipped with this system and has successfully delivered 2 MPD wells for Petrobras so far this year. By executing wells safely, ahead of schedule, and under budget, we built a reputation as a trusted offshore partner in the Golden Triangle and in key markets around the world. Additionally, we continue to actively increase the capabilities of our rigs through time with the addition of advanced technologies such as MPD. Turning to the market. We continue to see a constructive pace of contracting and an uptick in global tendering activity, building momentum for a market recovery as we move from 2026 into 2027. Seadrill has consistently highlighted the industry's underinvestment in offshore and the need for renewed sustained spending to offset production declines and meet future energy demand. Our view has been validated. Oil majors are calling for renewed focus on exploration and investment to avoid a future supply crunch, and there is a growing consensus that U.S. shale production has plateaued. At a recent conference, ConocoPhillips emphasized the need to return to large-scale projects and exploration. Notwithstanding the recent increases in production, Saudi Aramco warned of a looming global oil shortage due to a decade of underinvestment, calling for renewed spending on exploration and production. The Norwegian Continental Shelf, Equinor plans to drill 175 exploration wells by 2030. Var Energi is targeting an average 15 exploration wells annually over the next 4 years, and Aker BP intends to drill 10 to 15 exploration wells per year going forward. We agree with Oxy CEO, Vicki Hollub, who said, "When you have the best discovery that has been made in the past couple of decades, i.e., Guyana, producing only enough to cover 1/3 of the demand in 1 year, that is a big issue". The renewed focus on deepwater is becoming clear as the industry faces the realities of prolonged underinvestment and the constraints of short-cycle supply. Capital is flowing back into offshore projects with a steady pace of new FIDs while exploration activity is gaining pace across many geographies and geologies. At the same time, natural gas demand continues to climb, driven by emerging uses such as data centers and the need to support an overstretched power grid. Deepwater is once again at the center of meeting the world's energy needs. With that, I'll turn the call over to Samir. Samir Ali: Thanks, Simon, and good day, everyone. To recap, since our last earnings release, we've added over $300 million in backlog, bringing Seadrill's total contracted backlog to approximately $2.5 billion. We made strong commercial progress, securing new work across 5 rigs, eliminating idle time while focusing on cash generation. Starting with Angola, all 3 rigs in the Sonadrill joint venture have been extended. The Sonangol Quenguela has been awarded a 210-day program with TotalEnergies, which will keep the rig working into mid-2026. We remain confident that the rig will secure more work in the near future. The Sonangol Libongos began a 525-day program in August, filling its schedule into 2027. The West Gemini will start a 280-day contract in the next 1 to 2 months, following the completion of its special periodic survey during the third quarter. Combined, these 3 awards solidify our leading position in Angola. In the U.S. Gulf, 2 of our 3 rigs secured new contracts in direct continuation of existing operations. The West Vela was awarded a contract with Walter Oil & Gas. Drilling is expected to commence in March 2026 with an estimated duration of 65 days and a total contract value of $28 million, excluding MPD. Following this program, the rig will return to work for Talos to drill an appraisal well. The Sevan Louisiana has secured a short program also with Walter Oil & Gas, expected to last around 70 days, starting immediately after it concludes the current work with Murphy. Collectively, these awards contribute over 3 years of backlog, reinforcing the effectiveness of our contracting strategy and the robustness of our customer relationships. Our track record demonstrates an ability to attract new clients while consistently securing additional work with existing partners. Turning to the market and to build on Simon's remarks, we continue to see constructive contracting momentum and an uptick in global tendering activity, supporting a broad-based recovery. These dynamics lead us to believe that there will be an increase in contracted utilization and meaningful day rate progression as we move from 2026 into 2027. The International Energy Agency's latest report reinforces what we're hearing in customer discussions. It highlights that nearly 90% of upstream investment since 2019 has gone towards offsetting production declines rather than adding new capacity. Conventional oilfields now account for only 77% of global oil output, down from 97% in 2000, emphasizing the need for new offshore projects. At the same time, the IEA has halved its forecast for U.S. renewable energy growth by 2030, which signals that hydrocarbons will remain a central part of global energy supply for longer than previously expected. Combined with plateaued shale production, we believe the stage is set for a renewed investment in deepwater development. We're seeing this recognition translate into real investment. Operators are sanctioning major offshore projects with attractive economics and robust breakeven profiles. Recent final investment decisions include ExxonMobil's $6.8 billion Hammerhead development in Guyana, supporting continued drillship demand in that basin, BP's $5 billion Tiber-Guadalupe project in the U.S. Gulf with 6 development wells and additional phases under review, Eni's $7.2 billion Coral Norte development and TotalEnergies' recently lifting force majeure on its $20 billion greenfield LNG project, both in Mozambique. Beyond development activity, exploration momentum is also building. In Brazil, Petrobras secured approval for its first equatorial margin well since 2013, part of a plan for 15 wells and $3 billion investment through 2029. Also in Brazil, Equinor has expanded its pre-salt position through its acquisition of 2 new blocks, highlighting its continued commitment to the pre-salt sector and renewed global interest in Brazil's offshore resources, spurred by BP's recent Bumerangue discovery. In Indonesia, Eni and PETRONAS have created a JV that plans to drill 15 exploration wells and invest over $15 billion in the region over the next 5 years. Earlier this week, Shell finalized an agreement to return to Angola following a 25-year absence, securing exploration rights for 4 new deepwater blocks and investing $1 billion in the project. More generally, Africa and Asia remain the leading sources of incremental demand. Multiple tenders continue to progress, and we remain optimistic that these will translate into rig commitments in late 2026 and 2027. In addition to activity elsewhere, it is our view that Africa and Asia will be the key geographies, which dictate the balance of supply and demand over the next 18 months. In summary, the offshore industry is at an inflection point. After nearly a decade of underinvestment, the market is refocusing on offshore as a critical source of future supply, and Seadrill is strategically positioned to capture value from that momentum. With that, I'll hand it over to Grant. Grant Creed: Thanks, Samir. I'll now walk through our third quarter financial results before providing an update on the remainder of the calendar year. Total operating revenues for the third quarter were $363 million, representing a sequential decrease of $14 million. Contract drilling revenues declined $8 million to $280 million. The decrease is attributable to fewer operating days for West Vela and Sevan Louisiana and lower economic utilization compared to the prior quarter. Management contract revenues decreased $2 million quarter-on-quarter to $63 million as the prior quarter included a retrospective catch-up for year-to-date inflationary increases to the daily management fee Seadrill earns for providing management, operational and technical support to Sonadrill. Reimbursable revenues decreased $5 million to $11 million, offset by a corresponding decrease in reimbursable expenses. Total operating expenses for the third quarter were $337 million, down 9% from the prior quarter. The decrease mostly relates to a $44 million reduction in management contract expenses as the prior quarter included an accrual for historic fees payable pertaining to the Sonadrill joint venture. This was partially offset by an $11 million increase in vessel and rig operating expenses, largely driven by the timing of repairs and maintenance spend. Adjusted EBITDA was $86 million, a sequential decrease of $20 million from the prior quarter. Moving to the balance sheet and cash flow statement. We continue to maintain a robust balance sheet with total liquidity of approximately $600 million. At the end of the third quarter, gross principal debt remained at $625 million with maturities extending through 2030. Total cash increased by $9 million to $428 million, including $26 million of restricted cash. Net cash flow from operations during the third quarter was $28 million and includes $69 million in additions to long-term maintenance. Payments for capital additions captured within investing activities were $19 million. As mentioned earlier, the West Gemini completed its SPS in September with the associated cash outflows taking place in the third quarter. Moving on to our outlook for the remainder of the current year. We are narrowing the adjusted EBITDA range to $330 million to $360 million, and that's based on an updated range for operating revenues of $1.36 billion to $1.39 billion, and that excludes $50 million of reimbursable revenues. Adjusted EBITDA guidance includes a noncash net expense of $33 million related to the amortization of mobilization costs and revenues, of which $24 million has been recognized through September 30. Full year capital expenditure guidance range is narrowed to $280 million to $300 million, and we expect capital expenditure and long-term maintenance to trend lower in 2026. I'll now hand the call back to Simon for his closing remarks. Simon Johnson: Thank you, Grant. In summary, we continue to execute our commercial strategy to build backlog coverage through 2026 and minimize our exposure to contract gaps. We're encouraged by signs that a market recovery is coming into view. We have consistently highlighted the industry's failure to replace deepwater reserves, a view that E&P supermajors are now acknowledging. A shift in capital allocated towards offshore drilling is well underway with a steady progression of contract awards and an increase in final investment decisions on major offshore projects. At the same time, a renewed focus on energy security amid geopolitical instability further reinforces the strategic importance of offshore resources. Seadrill is exceptionally well positioned to support long-term demand for energy services and create sustainable shareholder value. We believe that Seadrill represents compelling value, a view supported by the sell-side analyst community. Seadrill holds the highest proportion of buyer recommendations among the 4 largest U.S. listed offshore drillers, reflecting broad confidence in our long-term value creation potential. I'll now hand the call over for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Eddie Kim from Barclays. Edward Kim: Just wanted to ask about what you're seeing in terms of leading-edge day rates within the Golden Triangle. The 2 short-term contracts you just announced for the Vela suggest pricing is fairly resilient in that region. But you previously highlighted an expectation of some lower data points in West Africa. And I think investors are sort of bracing for maybe some other negative data points in Brazil here on some upcoming contract announcements. So first, do you expect maybe some negative data points coming out of Brazil? And second, is that sort of a fair characterization of how you're seeing things right now, so maybe some softness in West Africa and Brazil, but resilient in the U.S. Gulf. Any thoughts there would be great. Samir Ali: Sure. So Eddie, I'd say it depends what market you're in. I'd say in the U.S. Gulf, you've seen what we think we can get, and we've shown that we're able to price at those levels. And you can do the math on the Vela contracts. It gets us in a pretty good spot. If I go to the other places of the Golden Triangle, I think in the near term, there is potentially some weakness, but it's not dramatic, right? So you're going to see things in those high 3s, low 4s, I think kind of it's generally where we're tracking across the Golden Triangle, but it's really hard to pin down exactly where. But I think for us, we've tried to be very conscious about filling those gaps and focusing on getting near-term work, and we've shown an ability to get those at pretty good rates here in the U.S. Gulf. Edward Kim: And then my follow-up is just on your medium- to longer-term outlook, which is very constructive. One of the things you said in prepared remarks was that you expect Africa and Asia to be the leading sources of incremental demand. We've heard from some of your peers about incremental demand in Africa, of course, but less so about Asia. So could you maybe talk about which countries or which operators you're most excited about in Asia as we look forward over the next 12 to 18 months? Samir Ali: Sure. So in Asia, I'd say, you've got programs in India, Malaysia, Indonesia that are all starting to kind of bubble up to the surface right now. The operators are E&I, ONDC, PTTEP. So you've got to a -- it's not just one operator in one geography. It is kind of spread across different parts of Asia. So for us, we are very optimistic about that market in the near term. And candidly, for us, we've got the West Capella sitting out there that's a dual activity MPD capable rig. So we think it's very well positioned in that market. Operator: Our next question comes from the line of Fredrik Stene from Clarksons Securities. Fredrik Stene: Congratulations on the new contracts. I wanted to touch specifically on the Capella and the Carina. And Samir, you mentioned it briefly now in the end there for the Capella. But clearly, Capella idle already. Carina is rolling off early 2026. What are your current thoughts about potential downtime, et cetera, next year for those 2 rigs specifically? Simon Johnson: Well, perhaps I can kick off first, Fredrik, and then I'll pass to Samir for a bit of color. But I think as Samir foreshadowed in the previous question, this team has done a really good job in incrementally adding term through time. And we do, in fact, have these 3 rigs that have first half exposure, but we are continuing to make progress on the contracting front. And when we have news on that, we can share that with you. But it's really the first half of next year, I think, where we have concern, and we expect that the market will start tightening in the second half. And we've done a good job, we believe, minimizing our exposure to that weak period of the market. But Samir, perhaps you can add some color. Samir Ali: Sure. So back to -- if I look at the South Asia region, the Carina or the Capella, beg your pardon is well placed within there to MPD dual activity. So optimistic that we'll be able to announce something here shortly, but nothing to announce today. If you look at the Carina, beg your pardon, we have the ability to keep her working in Brazil or we can bid her outside, and we have continued to bid that rig outside of Brazil as well. That is a true seventh-generation asset. It's got MPD. We could easily retrofit with a second BOP. So that rig, it comes off early next year. We've got the abilities to potentially keep her in Brazil or we can move that rig to a different region as well. So for us, we have some flexibility with the Carina as we look forward. Fredrik Stene: Just a follow-up on that, Samir. Under the assumption that you potentially win something in Brazil since there are a couple of unresolved tenders there going on already. I think they call for late '26, early 2027 start-ups. In the case that you would get an award from something there, are there any extension options on the Carina under the current contract that would limit downtime in between? Because Petrobras tend to have certain clauses that can make contract extensions possible. Samir Ali: Yes. So what I'd say is, if we're not able to close that gap, it does make potential work in '27 in Brazil less attractive from our perspective. But it will be challenging to close that gap. 2026, as we mentioned, is going to be -- there is white space in the calendar, and it is a competitive market in Brazil. So it will be a challenge, but I'd come back to if we can't close that gap, it does make it less attractive for us to stay in Brazil. Operator: Our next question comes from the line of Ben Sommers from BTIG. Benjamin Sommers: So first, to touch on the Capella a little bit more. Just curious kind of how the cost deceleration on this rig has gone over the past few quarters. And then given the line of sight of potential work, kind of what would reactivation cost look like for that rig? Grant Creed: Look, on the cost side, we haven't been too explicit on that. Bearing in mind, it's in active tenders. I'd say we have said, it's stacked. It's more than the -- we've said the Eclipse, for example, is the $7,000 to $8,000 a day range. That's one bookend. I'd say it's more than that, keeping it live for tendering, but less than the typical warm stack that people talk about, the $80,000 a day, somewhere in between. On reactivation costs, it really depends on the opportunity we're hunting for. So it does really vary case by case. So there's no one golden rule. And so I'm kind of reluctant to throw numbers out there. If you think of it as a range somewhere between -- it's going to be more than 20, less than 50, depending on what opportunity we're reactivating for. Benjamin Sommers: And then as I look kind of in the back half of '26, I know we have some availabilities in the Gulf and elsewhere. I guess kind of on the day rate comments made earlier, I guess, where do you see timing on a potential kind of day rate inflection point here when we can really start to see some notable momentum in leading-edge rates? Samir Ali: Yes. So I think our thesis is that second half of 2026 and into '27 is kind of where we start seeing the inflection in the market. You'll see utilization pick up first, and I think day rates will be a fast follower after that. So if our thesis is as we enter next year -- or sorry, enter 2027, we should start seeing that momentum build. Operator: Our next question comes from the line of Doug Becker from Capital One. Doug Becker: Curious how you would characterize your conversations with Petrobras about reducing costs? And maybe a little more explicitly, do you see potential for any blend and extend contracts on any of the existing contracts? Or is it really on about reducing costs in other ways? Simon Johnson: Doug, yes, look, I think at this stage, we're very early in those conversations with Petrobras. I think there's a couple of important points. We're very encouraged to see Petrobras seeking the expertise in the drillers to help identify efficiencies. I think both Petrobras and ourselves are focused on opportunities that will deliver win-win solutions. Both sides need to benefit from the discussions. We are certainly looking to trade value rather than give you lateral discounts and blend and extend is definitely one of the potential approaches. So we're open to that where it makes sense in terms of our contract portfolio and the visibility of backlog and so on and so forth. Petrobras, as you know, is a very important customer for us. We've had a long-term relationship in what's an international market. And ultimately, rigs flow to where the greatest earnings potential is. It's notable that Petrobras have drilled more high-impact exploration wells so far this year and 2025, more so than any other operator in the world. And that's really encouraging for future demand. So the key point here, I think, is that any cost cutting or blend and extend discussions, et cetera, that's not going to have any impact on the underlying rig demand. We believe that continues to be robust on a many years ahead outlook. So yes, I mean, we're entering into those discussions with good faith, and we think there's a possibility of both sides obtaining advantage through a frank discussion of opportunities. Doug Becker: That sounds encouraging. And then, Simon, you appropriately highlighted the operational performance on a number of rigs. Economic utilization did slip sequentially in the third quarter. Just any rigs or regions to call out? And how do you see economic utilization trending going forward? Simon Johnson: Yes, it was a little bit disappointing on the cost side there, and there's a reason for that, which, I mean, there's some comments in the press release and the Q that we filed, but we can add a little bit more color, too. And I'm joined here today with by Marcel Wieggers, who is our Senior Vice President of Operations, who can talk about one of the operational incidents that occurred during the quarter that has sort of led to a departure from what our regular run rate is. Marcel Wieggers: Hello, Doug. So during the quarter, one of our rigs operating in Brazil experienced a downtime event caused by design-related equipment failure. This issue resulted in operational downtime and additional cost to rectify same and implement corrective measures. Learning from that event, we shared it across our fleet to prevent reoccurrence, of course. But in addition, we also proactively communicated these insights to our industry peers who operate some of our equipment to help them to mitigate this risk of similar failures in their operations. So if you look at our technical uptime for the quarter, if you exclude this rig, all the other rigs operated really well for the quarter with a technical uptime of 97.6%. Simon Johnson: Yes. So we think it's a one-off, Doug, yes. Operator: Our next question comes from the line of Josh Jayne from Daniel Energy Partners. Joshua Jayne: First one was just on the Louisiana upgrades you talked about. I assume you wouldn't do those without line of sight into something further. So maybe you could just talk about those upgrades a bit more and how they change the outlook for the rig maybe over the course of the next 12 months or so. Simon Johnson: Yes. In the Gulf of Mexico, there's -- that market has been quite dynamic in the semisubmersible segment. And a number of our competitors have retired rigs there recently. And what we are finding that we need to do in order to keep the Louisiana continuously busy, which we've been very successful in doing that. We've had to look at a couple of different modes of operation. And in particular, we've been getting quite aggressive in the plug and abandonment and the well intervention market. So what we're doing is we're making some discrete modifications to the rig, and we're setting up through an alliance-style partnership with Trendsetter, the ability to switch between drilling mode and well intervention and P&A mode. And the way -- as I say, that requires some discrete modifications to the rig. But most importantly, as you correctly allude to, Josh, it requires us to have confidence in that market segment and its prospectivity. But Samir will add some more color to what I'm sure. Samir Ali: Yes. So I'd say, we're definitely getting more demand pull in this region, and especially in the U.S. Gulf with this combination of the Sevan Louisiana and the Trendsetter system. Given the Sevan's very unique capabilities, it positions her as a unique tool in this market -- in this region. So for us, we continue to see clients coming and asking for availability on that rig. Joshua Jayne: And then on the Sonadrill rigs, congrats on the short-term extensions. Could you speak to the further outlook of those rigs? What exactly they're looking for with respect to signing the rigs up longer-term? And when they do get long-term contracts, any thought on the term that they're ultimately looking for? Samir Ali: Yes, absolutely. So I'd say, in my prepared remarks, I kind of alluded to that we feel confident in our abilities to add some more term to the Quenguela's schedule. That remains the case. We're in active dialogue about how do we add more term also with the West Gemini. I'd say both of those rigs, primary market would be Angola, but the joint venture isn't limited just to Angola. We do have the ability to take those rigs to other parts of Africa as well. So for us, we are focused on keeping the rigs working in Angola, given it's a natural home for them, and you've seen production decline in that market, and there is an active effort by the Angolan government to reverse that production decline. So it's natural to stay there, but it doesn't have to. Simon Johnson: Yes. We've seen subdued demand in Angola in recent times, Josh. But I think it's important to remember that 2 of the assets that are operated by the joint venture are directly owned by Sonangol. And when it comes time to be fed, they're ahead of the queue. And we're not concerned at all about long-term contracting opportunities for the rigs and the joint venture going forward. Operator: Our last question comes from the line of Noel Parks from Tuohy Brothers. Noel Parks: As I think about the last few months from last quarter report to maybe a month or so after as we were sort of wrapping up the summer, it does sound like those last couple of months that the generally more optimistic signs you were seeing have really sort of materialized and solidified. And I do recall some inkling of customers maybe being a little bit more willing to commit. And so I mean, is it just as simple as with the fastest of time, companies have gotten -- have finally just made decisions on their budgets, kept deepwater activity as a high priority. And I was also wondering if maybe looking ahead and contemplating more like Brent with a 6 handle than a 7 handle also made them feel like, yes, time to go back into the deepwater. Simon Johnson: Yes. Look, it's a really interesting question, Noel. Look, perhaps what I can do is speak a little bit to the backdrop and then Samir can speak to what we're seeing at an industry level. I think the key thing is that despite some of the near-term macroeconomic headwinds around tariffs, oil supply demand, we are firmly of the view that the fog is beginning to lift. And we're seeing a lot of data points emerge now, which support our view, which we've been talking about for some time. And definitely, the tone and the tenor of the conversations we're having with customers is improving. FIDs are progressing, contracts have been awarded. We're seeing the rig days awarded in Q3 as a 7% quarter-on-quarter increase, and we believe that's going to increase again in the final quarter of this year. And that's supported by industry commentators like Westwood. And of course, Seadrill are well placed for a couple of opportunities in that period. We're at a 3-year trough in '24 for the value of the FIDs, but that's starting to flip now, and we're seeing quarter-on-quarter improvement. Subsea tree installations are forecast to be at the highest level at the end of this year. We know that there's this weak spot that we've spoke to earlier in the call in the first half of '26. But we see strong signs for improvement on a whole range of fronts beyond that. Investment in green renewable energy has been in constant decline since 2019. And all across the space, the supermajors are clearly stating that there's a return to conventional dispatchable energy. That's where they're spending their capital. But Samir, perhaps you can talk to some of the more focused elements. Samir Ali: Sure. So I'd say that the Red Queen paradox is becoming real for a lot of our clients, right? You've seen reserve replacement ratios at 22% over the last 3 years. The general upswelling of reserve replacement exploration has become kind of the real topic that when we speak to clients, it is becoming a part of their normal daily discussions. You've seen all the supermajors on their recent earnings calls or public announcements saying, there needs to be more exploration. And that's leading to more rig demand for kind of generally the overall market. And we've tried to position ourselves to capture that upswing that we see coming in late 2026 and into 2027. Noel Parks: And I guess the other thing I was wondering is sort of filling out the picture. I was thinking about the comments from Conoco and from Oxy. And are you also sort of seeing internally inside the bigger players things like signs of them staffing up or you're suddenly meeting with a new manager who wasn't there before or just signs of them reallocating resources to address the deepwater opportunity? Simon Johnson: Well, we're seeing a number of different things. I think generally speaking, certainly, the big end of town, I think the supermajors are taking a cold hard look at their cost base generally. But we are definitely seeing certain of those supermajors build out exploration teams that either haven't received funding or have been greatly diminished in recent years. So I think it's -- there's a double story there. One is that they're focused on being more cost effective and trimming headcount. But certainly, in those areas that speak to new ventures, new opportunities, new exploration activity, that seems to be an area where they are willing to allocate capital. And we're seeing that. Just overnight, we're seeing the announcement of the Pakistan offshore oil licensing round, ExxonMobil are investing money in Greece. These are all healthy signs of a more normalized balance of expenditure between exploration and production. And that's been -- that's entirely consistent with the thesis that we've been sharing with the market now for several years. Operator: Thank you, everyone. This concludes today's conference. You may now disconnect.
Operator: Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 First Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead. Todd Leombruno: Thank you, Chloe. Good morning, everyone, and welcome to Parker's fiscal year 2026 First Quarter Earnings Release webcast. This is Todd Leombruno, Chief Financial Officer, speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. And always, we appreciate your interest in Parker, and thank you for joining us today. We address our disclosures on forward-looking projections and non-GAAP financial measures on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release was released this morning, along with this presentation and reconciliations for all non-GAAP financial measures. Those are available on our website under the Investors section on parker.com. The agenda for today has Jenny starting with an overview of our record FY '26 first quarter performance. She will share some highlights from our day 1 celebrations, welcoming the Curtis team members to Parker. Jenny will also then reiterate the strengths of our interconnected portfolio and share an example from our energy market vertical. I will follow Jenny with more details on our strong first quarter results, and then we'll both provide some color on our increase to our FY '26 guidance. After that, we will move to the Q&A portion of the call and address as many questions as possible within the hour. I now call your attention to Slide 3. And Jenny, I will hand it over to you. Jennifer Parmentier: Thank you, Todd, and thank you to everyone for attending the call today. Q1 was a great start to the fiscal year. Operational excellence was on full display, powered by the Win Strategy. We achieved top quartile safety performance with a 20% reduction in our reportable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q1 sales of $5.1 billion, organic growth of 5% and 170 basis points of margin expansion, resulting in 27.4% adjusted segment operating margin. Adjusted earnings per share grew 16% and cash flow from operations was $782 million. And we completed the acquisition of Curtis Instruments. Next slide, please. A long-standing practice within Parker is for a Parker leader to personally welcome the new team at every location. This slide shows pictures from our day 1 events held around the world, welcoming the Curtis team to Parker. This was a great day for all of us, and we are thrilled to have Curtis in the Parker portfolio. Next slide, please. Obviously, we are very proud of the Q1 results delivered by our team and equally excited about our future. So just a reminder on why we win. First, the Win Strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers and executing the Win Strategy every day. Next, we have innovative products that solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. And finally, our distribution network is the envy of the competition and the best in the world. It took us over 60 years to build it, and it is truly an extension of our engineering teams, providing solutions to all of those small to midsized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technology. Next slide, please. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These 6 market verticals represent greater than 90% of the company's revenue. Our interconnected technologies cut across these market verticals and give us a clear competitive advantage. 2/3 of our revenue comes from customers who buy 4 or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. Next slide, please. This slide focuses on our presence in the energy market vertical. Parker is a significant supplier of products into heavy-duty gas turbines used for electrical power generation. We bring both proprietary designs and world-class manufacturing capabilities to offer a comprehensive suite of interconnected technologies. Parker supports multiple global industry-leading customers, and we are seeing significant growth in this space. This business is long life cycle with multiyear backlog and durable aftermarket. This is a great example of products and technology that are shared across aerospace and industrial markets. I'll hand it back to Todd to go through our first quarter highlights. Todd Leombruno: Thank you, Jenny. This was a great start to the fiscal year. I'm on Slide 9, and I will start with a summary of our Q1 results. Once again, and I love saying this, every number in the gold column on this slide is a record. It was just a fantastic quarter where mid-single-digit sales growth, combined with strong margin expansion, resulting in mid-teens EPS growth. Sales were up 4% versus prior. Organic growth was positive at plus 5%. Currency was favorable at 1%. And divestitures were 2% unfavorable. Those are the divestitures that we've previously completed. And I would just note, this is the last full quarter that we will have a full quarter of a divestiture impact. Moving to adjusted segment operating margins. As Jenny said, we did 27.4%, that's an increase of 170 basis points versus prior year. Adjusted EBITDA margin was 27.3%, that was up 240 basis points. And adjusted net income was $927 million or 18.2% return on sales. All of this drove adjusted earnings per share up 16% to reach a record $7.22 per share. It was a really nice start to the fiscal year with a strong quarter across the board, and it gives us confidence for the remainder of the fiscal year. Our global team members really continue to drive results enabled by the power of the Win Strategy. If we could jump to Slide 10, you'll see a bridge on the year-over-year improvement in adjusted EPS. The majority of our EPS growth came from continued strength across our operations as segment operating income dollars increased by $132 million or 10%. That contributed $0.80 to our EPS growth this quarter. Corporate G&A and other were favorable $0.18. That was primarily due to foreign currency exchange in the prior period quarter last year, that was unfavorable last year, that created a favorable for this year. Interest expense was also favorable by $0.07, and that's driven by lower average debt balances across the quarter and lower interest rates across the quarter. Share count was $0.13 favorable, and that was driven by the discretionary share repurchases that we completed over the last 3 quarters. Income tax was unfavorable by $0.16, and that was really simply due to a few favorable discrete items in the prior period that did not repeat. And that is basically it, a really clean bridge to the 16% increase in adjusted EPS. This record was really achieved by strong sales growth across the board, margin expansion and great adherence to cost controls across the company. If we move to Slide 11, we'll just talk about the segment performance. Orders were strong at plus 8% versus prior year, with order rates increasing across all reported segments. Organic growth came in at plus 5%. This was the first time in 2 years we've had positive organic growth across all of our businesses as diversified industrial organic growth turned positive. Every business delivered record adjusted segment operating margins, resulting in great incrementals and that 170 basis points of margin expansion. Looking specifically at the Diversified Industrial North America businesses. Sales were over $2 billion with organic growth positive at 2%. That's the first time in 7 quarters North America posted a positive organic growth number, that was better than our expectations going into the quarter. We continue to see gradual improvement across market verticals with positive growth driven by the aerospace and defense businesses in Industrial North America, in the implant and industrial equipment vertical and also improvement in off-highway that exceeded expectations. If you look at North America, they also had 170 basis points of margin expansion and reached a record 27.0% segment operating margin. That was really driven by higher productivity, some new business wins at great margins and margin mix with strong aftermarket across all those businesses in North America. And North American orders increased sequentially to plus 3% versus prior year. Looking at the Diversified Industrial International businesses. Sales were up. They were a record at $1.4 billion, up 3% versus prior. Organic growth remained positive at plus 1%. Looking at Asia Pacific, that was our strongest region with a plus 6%. EMEA remained down at minus 3% and Latin America was flat versus the prior year. So Asia Pac really drove the outperformance of growth in the international businesses. Adjusted segment operating margins were also a record at 25.0%, that is a 90 basis point improvement from prior year. And I can't say this enough, our international teams continue to show great resilience, they're driving margin expansion and its really great cost controls, and they're really executing the Win Strategy to great success. International orders rebounded, they improved to plus 6% after a flat Q4. Both EMEA and Asia Pac had positive orders this quarter. And lastly, Aerospace Systems, just another exceptional quarter from this group. Sales were a record $1.6 billion. That's an increase of 13% versus prior. Organic growth of 13%. That's the 11th quarter in a row that we've had double-digit organic growth rate in Aerospace. Commercial OEM is the strongest market segment growing 24% versus prior year. Adjusted segment operating margins increased by 210 basis points and, I'm proud to say, reached 30% for the first time ever. Record top line, productivity, continued aftermarket strength all drove the margin expansion. And Aerospace orders continue to be impressive, increasing plus 15%, and backlog also reached a new level -- record level for Aerospace. There's just robust demand, and that continues across all of our aero and defense markets. It's great to be in the Aerospace business right now. If we move to Slide 12, let's look at our cash flow performance. Cash flow from operations, a record $782 million, that's 15.4% of sales. That's up 5% versus prior year. Free cash flow is $693 million, that is 13.6% of sales. That is up 7% versus prior year. Cash flow conversion for the quarter is at 86%. I just want to remind everybody, I think everyone knows this, but our cash flow is historically second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year. And lastly, on this slide, we did repurchase $475 million of shares on a discretionary basis within the quarter. That is a wrap on Q1. And Jenny, I'm going to turn it back to you on Slide 14, and we'll move on to our updated fiscal year guidance. Jennifer Parmentier: Thank you, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by key market verticals. In Aerospace, we are increasing our forecast from 8% to 9.5% organic growth. We continue to see strength in commercial OEM and aftermarket. Implant and Industrial remains the same as our initial guidance at positive low single-digit organic growth. The sentiment does remain positive with continued quoting activity, while customer CapEx spending remains selective. Transportation is our most challenged market this year. Forecast stays the same at mid-single-digit organic decline. We are increasing the off-highway forecast from negative low single digits to neutral. We see gradual recovery progress in construction, while the ag challenges do persist. We are maintaining energy at positive low single-digit growth, with robust power gen activity offset by oil and gas. And we are increasing HVAC/refrigeration from positive low single digits to positive mid-single digits. We see strength in commercial refrigeration and filtration with some nice new business wins with our filtration technology. As a result of these changes, we are increasing our organic sales growth guidance from 3% to 4% at the midpoint. I'll give it back to Todd for some more guidance details. Todd Leombruno: Thanks, Jenny. I'm on 15, Slide 15, with just some of those details. In respect to reported sales, we are increasing the range to 4% to 7% or 5.5% at the midpoint. Currency is expected to be a favorable 1.5 points, and that is based on September 30 spot rates. Now that we have the acquisition of Curtis closed, we are including sales and segment operating income from Curtis in our guide. We have added $235 million to our guide for the remainder of the year, that is approximately 1% of sales. And divestitures that we've already previously completed are 1% unfavorable. If you move to organic growth, the forecast has now increased to a range of 2.5% to 5.5% or 4% at the midpoint. We have increased Aerospace organic growth to 9.5% at the midpoint. And for the Diversified Industrial segment, we have increased North America organic growth for the year to plus 2%. And for international, we still expect organic growth to be 1% at the midpoint. We are raising adjusted segment operating margins. We're raising that 50 basis points to 27.0% for the year. That is now a forecasted increase of 90 basis points versus prior year, and incrementals are now forecasted to be approximately 40% for the full year. Just a few additional items. Corporate G&A is unchanged at $200 million. Interest expense has been increased by $30 million, we now expect $420 million for the full year. And that is driven solely by the funding of the Curtis acquisition. And other expenses just slightly up to $90 million from $80 million last quarter. Our full year tax rate, we expect 22.5%. And we are raising adjusted earnings per share to an even $30 at the midpoint. That would be a 10% increase versus prior year. The range on that EPS is plus or minus $0.40 on either side, and the split is 48-52 first half, second half. In respect to full year free cash flow, we're also raising our guidance there to a range of $3.1 billion to $3.5 billion, with conversion, like I said, greater than 100%. And finally, looking specifically at Q2 for FY '26, we expect organic growth to be -- or excuse me, reported sales are expected to be 6.5%. Organic growth is expected to be 4%. Adjusted segment operating margins, 26.6%, and EPS for the second quarter on an adjusted basis is $7.10. As usual, we have the -- some additional details in the appendix. And really just in summary, FY '26 is off to a great start. That gives us confidence to raise full year guidance for sales margin, EPS and free cash flow. With that, I ask you to move to Slide 16, and Jenny, I'll turn it back to you. Jennifer Parmentier: Thanks, Todd. And a reminder on what drives Parker. Safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top-quartile performance, that allows us to be great generators and deployers of cash. Thank you. Todd Leombruno: All right. Chloe, we are ready to begin the Q&A session. So we'll take the first question. Operator: [Operator Instructions] We'll take our first question from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start off perhaps with the organic sales picture in the DI North America business. Maybe help us understand a little bit better the cadence of demand. It did seem to surprise you positively, I think, in the quarter. How has demand moved there in recent months? And then when we're looking at the full year guide, I think your midpoint for DI North America doesn't embed any acceleration from the September quarter growth rate. Just wondered the thinking there. Jennifer Parmentier: Okay. Julian, so yes, we're very pleased with the performance. We had guided to a negative 1.5% and came in at a positive 2%. So North America performed better than expected with the Aerospace and Defense business it sits inside of our Industrial businesses, distribution, HVAC and electronics. Construction continued to outperform versus our expectations. And margin expansion from a higher productivity on slightly stronger volume really helped us. We had some project wins at attractive margins, and we're getting a margin mix benefit with the lower industrial OE and a very resilient aftermarket. So you are right, we do expect Q2 to be much like Q1 coming in at 2%. So that was prior, as Todd stated, for the year, we were looking at a total of 1%. So as I was just talking about, what we saw in Q1, we do believe that industrial aerospace and defense world remains strong. We're still talking about a gradual Implant Industrial recovery. Certainly positive sentiment from our distribution channel continues. Quoting activity is good. But as I commented earlier, still customers are being very selective on their projects and their CapEx spending. We still see transportation challenges in automotive and trucks. So we don't expect a truck recovery this fiscal year, but we will see some benefit from the aftermarket. In off-highway, gradual recovery progress in construction, but ag challenges still persist. Energy, power gen, robust. But oil and gas upstream still weak. And we're -- HVAC and refrigeration, we're coming off a very strong fiscal year, and we have increased that for the rest of the year. So while some markets are increasing, not all of them are, and that's why we see Q2 pretty much the same as Q1, but an increase for the total year. Todd Leombruno: Julian, I would just add, Jenny covered the organic growth piece perfectly, but I would just add, on a margin standpoint, we did increase Diversified Industrial North America margins 70 basis points for the full year versus our previous guide. So the teams are converting on that, and I have great confidence that we'll be able to do that. Jennifer Parmentier: Yes. And Q2 margin is 150 basis points higher than the prior year. Todd Leombruno: Correct. Julian Mitchell: That's helpful. And just following up on that last point perhaps, so I understand that you've had a higher margin performance year-on-year for the total company than is guided for the full year. I assume that's just sort of natural conservatism given we're early in the year. I wonder if there was any other factors to think about. And allied to that, your Q2 EPS guide is a decline sequentially, which is quite unusual in Q2. Any color on that, please? Jennifer Parmentier: So I think we left the second half pretty much alone. So based on what we see today, we feel really good about Q2. And I think we'll have a better line of sight here after the first of the year. Todd Leombruno: Yes, Julian, Q2, sequentially, it usually is our softest top line. I think the EPS is just pulling off of that. Nothing out of the normal that we see. Operator: We'll move next to Mig Dobre with Baird. Mircea Dobre: I would like to talk a little bit about Industrial International. The orders there were quite good and, frankly, better than what I would guess. A little bit of update in terms of what you're seeing in various geographies. And related to this, if I look at the past 4 quarters, I think your order intake averaged about 5%. So it's quite a bit better than what you have embedded in your forward outlook for organic growth. So I'm kind of curious at what point in time do you start to see these higher orders really flow through organic growth in the segment. Jennifer Parmentier: So with Industrial International orders, they've been really choppy as we often say. If you go back to our Q3, we had a plus 11%, and then Q4, we went flat. And that was because we had some onetime long-cycle orders that didn't repeat in Q4. So it's really not an average of about 5%. So what we're seeing in the region is, if we look at EMEA, we're showing flat to slightly positive organic growth for the fiscal year. There's uncertainty that's remaining, and we're expecting a slow in-plant industrial recovery. We do expect to see some growth in energy. We are seeing some mining recovery underway. And we do think that there'll be some pickup from the stimulus in future defense spending, but that's not something that we think we're going to benefit from this year. So what we see in EMEA is really to remain flat to slightly positive with what we see on the orders right now. In Asia Pacific, we have positive low single-digit organic growth for the fiscal year. We continue to see strong electronics and semicon demand. Implant is mixed as delays continue in China, but we do see some slight growth in India and Japan. Seeing some mining and transportation improvements in China, but I think there's still some continued uncertainty from tariffs across this market. So this is what we're seeing today on Industrial International. I mean we look forward to the time when this will be a higher organic growth. Mircea Dobre: Understood. My follow-up, and I don't know if you can answer this question, Jenny, it's kind of in the weeds. You talked about the ag market where challenges persist. But I do wonder, in terms of your exposure, if you sort of separate out the large ag equipment, so high-horsepower tractors combines versus midsize and in lower horsepower, I'm just wondering kind of what your exposure looks like there because I am starting to see a bit of a divergence forming where, large ag, as you say, it's challenged, but some of these smaller tractors are starting to grow in terms of volumes, and the volumes are actually much higher in lower horsepower equipment than large ag. So I'm wondering if this end market might turn a little bit sooner than maybe we're thinking about when we're thinking about large ag. Jennifer Parmentier: When we talked about last quarter, I made the comment that we thought that, that market had kind of hit trough. And I would say it's broad-based when we look at ag between that equipment. But you can certainly follow up with Jeff on maybe for more details in one of the follow-up calls. Todd Leombruno: Yes. Mig, I would just add, when we look at ag, it's 4% of total company sales. So it's just become a smaller piece of the total pie. It is broad-based. There's aftermarket, there's the OEM side of it. So I don't know if I'd read too much into movements there. Operator: We'll take our next question from David Raso with Evercore ISI. David Raso: Of the organic guide raise, how much was volume versus a change in price? And of the 50 bps margin improvement, can you give us a sense of how much of that may be related to the answer to the first question, volume improvement versus maybe price/cost different than you originally expected for the year? Jennifer Parmentier: David, well, as you know, we don't disclose pricing. Regardless of pricing or volume, I think that we've shown that we can expand margins pretty much in any climate. We have had 2 years of negative industrial growth and we're seeing the gradual industrial recovery playing out with industrial organic growth now positive in Q1. So we're definitely seeing the impact of slightly stronger volume. Operator: We'll move next to Scott Davis with Melius Research. Scott Davis: I've got to ask about M&A. I probably do a lot of quarters, but I'm going to lead with it anyways because it's been a few years since you closed Meggitt and, obviously, that's such a great deal for you guys. But Curtis seems like an interesting deal too, it's just not as big as maybe some of those others. So can you just update us on your pipeline and such? Jennifer Parmentier: You bet. So obviously, we're committed to actively deploying our capital. And as you mentioned, we did close Curtis Instruments in September, and we're really excited about that. And moving forward, the strategy remains the same with plenty of optionality. So when it comes to capital deployment, obviously, we prefer acquisitions, but it has to be strategic and disciplined. You've heard me talk about this criteria before. And I would tell you that the pipeline, the relationships and the analysis continues to be very active. While sometimes timing is hard to predict, we are working it. And we want to continue to acquire companies where we're the clear best owner. And we feel like we have a strong competitive advantage with our interconnected technologies, and that's what we want to add to the portfolio. So still looking for those deals that are accretive to growth, resiliency, margins, cash flow and EPS. And as I've said many times before, the pipeline has deals of all sizes. Operator: We'll take our next question from Amit Mehrotra with UBS. Amit Mehrotra: So obviously, it was, I guess, nice to see the order improvement. Jenny, a quick question about just the broad basis of that. I mean are we seeing a broader activity in pickup? You also won -- I think I saw that somewhere you guys won a large contract to supply components for aero-derivative gas turbines. I'm just trying to get a sense of are we seeing broad-based green shoots here? Or is it mostly explained by the longer cycle pockets that kind of have been working for a while? Jennifer Parmentier: We have the longer-cycle pockets, but then we're also seeing some improvement in some of our other key verticals. So when you look at the change that we had in the guide this month, we took -- obviously, we took aerospace and defense up. We also moved off-highway from negative low single digits to neutral, and we increased HVAC and refrigeration from low single digit to positive mid-single digits. So we are seeing some pockets within those industrial businesses where we're seeing some growth. Amit Mehrotra: Okay. And the other question I have is on Aerospace margins, obviously just really good. One thing I noticed is obviously the incremental margins being so high despite OE revenue up 20%, which I would imagine would be a little bit mix-dilutive. As the OE build cycles continues to improve, can we talk about what the mix impact is on aero margins going forward? Because it seems to like defy gravity in the quarter. Jennifer Parmentier: Yes. Well, we did have 51% OEM and 49% after margin in the quarter, and we do anticipate that that's going to be the mix for the rest of the year. Aero margins are very strong in Q1, and we had a nice bit of spares in Q1, which is really nice margin for us. So that helped us reach that record 30%, hit 30% for the first time. Going forward, we're very confident in our ability to maintain the margins where we've been and go forward with strong margins. If you look at what we did with the guide, we have full year at 29.5% now. That's 100 basis points higher than prior year, and that was raised 60 basis points from the initial guide. Q2, we're forecasting 29.1%, and that's 90 basis points higher than previous year. So we're in a good spot with aerospace. Our teams are doing an excellent job executing the Win Strategy and really benefiting from this volume. Operator: We'll move next to Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: Can we just cut a little further in the aerospace? And also, Jenny, maybe just a little bit of color on kind of how you see the defense side playing out in 2026 versus the commercial side? Any change of thinking there? Jennifer Parmentier: So Jeff, I'm sorry, what was -- so you wanted dig deeper into aero, especially defense, right? Jeffrey Sprague: Yes, I want to kind of get a sense of defense versus commercial mix and how that's playing and if that's changed versus your initial view. Jennifer Parmentier: Yes. We came out with mid-single-digit growth for both defense OEM and MRO, and that's the same. We haven't -- we're not forecasting any change there. Jeffrey Sprague: Great. And then just on Curtis, I think it comes in a bit margin dilutive, it's not apparent given kind of all the other execution and everything that's going on. But can you just kind of give us a little color on at the margin rate it comes in at the work you're doing to integrate it? And any thoughts on kind of how it might be positioned into next year after you've got it kind of fully digested? Todd Leombruno: Yes, Jeff, this is Todd. I can take that. I mentioned earlier, we added about $235 million of sales into the guide. You're right, it is slightly dilutive. But it's smaller, so it doesn't really have an impact. You can see we did raise both North America and International margins for the full year, even after including Curtis into the mix. If you're looking for a number, I would say, high teens, low 20s would be a good number to use. It does add -- it is EPS accretive in a stub year even. You saw that we added $30 million for interest there. And it's only been a little over a month. The team is super excited about it. Jenny mentioned the welcoming day, and I can tell you they're working really hard to integrate and make this part of Parker, just like we have on the last deals. Jennifer Parmentier: I would just add to that, as Todd said, the integration is well underway. Very similar. We've assembled a dedicated integration leader and a team of high-talent team members, and this is how we ensure a very smooth integration. Operator: We'll move next to Joe Ritchie with Goldman Sachs. Joseph Ritchie: Jenny and/or Todd, is there a way that you could maybe size the opportunity on Slide 7 or give some color just around like what the growth rates have looked like? I'm just curious how to think about this business for you guys going forward. Jennifer Parmentier: Well, I don't think we're in a position to go over the growth rates. But what's great about this power gen business is that we do have this suite of interconnected technologies for power gen applications. And you can see on that slide all the different examples of the products that we have. And it's just a very robust order book, like I commented multiyear. We expect solid growth for years to come. And we're working with all of the leading industry customers. So while this market vertical makes up about 7% of our sales and power gen is about half of that, it's a small percent overall, but a very nice growth area for us. And we expect to, not only continue to win in this market, but really benefit from it. Joseph Ritchie: Yes. No, that's great to see, and glad that you guys highlighted it. Other quick question, I know that we won't be talking specifically around pricing. But in an environment, let's say, where you do see some of these tariffs potentially getting rolled back. Like how does that impact the pricing that you've already put through? And then ultimately, is that another potential boost to margins if we do see some pullback on tariffs? Jennifer Parmentier: Well, obviously, as we've talked about tariffs, we have the analytics and the processes to navigate and act quickly up or down. And we had to do a lot of that over the last several months. And the teams have just done a fantastic job. So we're -- we have a strong muscle when it comes to pricing and to price/cost, and we'll adjust as we need to. But as I've stated time and time again, we can't use tariff as a margin expansion device. This is something that we have to recover from a cost standpoint, and we'll adjust as we need to, going forward. Operator: We will take our next question from Joe O'Dea with Wells Fargo. Joseph O'Dea: Wanted to start on the North America implant side of things and what you're seeing from customer activity or what you're hearing from dealers with respect to greenfield and brownfield investment in the U.S. And then around that, whether you're getting any color on the nature of those investments and kind of local for local or you're seeing more kind of foreign participants looking to invest in the U.S. Jennifer Parmentier: Yes. I don't have the detail too much for local for local versus foreign investment. But I would tell you, my comment earlier about the CapEx being selective, I do believe it's still selective. But in the past, we were just talking about delays and delays. And obviously, we saw a stronger area there through distribution and implant in Q1. So we're seeing some things get across the line and projects get started. But I don't have a specific breakdown for you at this time. Joseph O'Dea: And then on the HVAC side of things and seeing some strength in commercial refrigeration and filtration, I think you talked about some nice new wins in filtration. Can you just expand on that a little bit in terms of verticals you're serving there, where you're seeing some of that strength? Jennifer Parmentier: Yes. We've had some nice filtration wins when it comes to gas turbines. We have some proprietary technologies, really nice filtration products in the energy market. And then we've also had some night filtration wins on the -- actually on the mobile side of the business as well. So it's been a growth area for our filtration group this past year. Operator: We'll move next to Christopher Snyder with Morgan Stanley. Christopher Snyder: So obviously, North America Industrial turned organic positive in the quarter. I'd imagine there's some benefit of incremental price, and it does sound like some of the longer-cycle verticals kind of helped that. But I guess my question is, when you look at North America industrial, the more cyclical pieces, do you feel like the cycle is starting to get better? Jennifer Parmentier: Yes, I would definitely say that Q1 is evidence of that, right, and especially those key market variables where we've increased our outlook for the year. So yes, I would definitely say we're starting to see that. Todd Leombruno: Yes, Chris, I would just add -- I was just going to add, Chris, that we've talked about inventory across the channel, and we feel that it's kind of at a trough level. I can't say that we've seen a restocking yet, but it feels like we're closer to that than going the other direction. Christopher Snyder: Yes. No, happy to hear that. You've talked about implant as being one of the industrial verticals doing well showing momentum. Do you have any color to provide on how that business did in the U.S. versus the international markets? Just to get a sense if some of the policy is driving activity into the U.S. Jennifer Parmentier: In North America, as I commented before, it's a gradual Implant Industrial recovery. But as Todd was just saying, although we don't see restocking yet, we still have that very positive sentiment from our distribution channel and a lot of quoting activity. When we talk about EMEA, it's still some uncertainty that remains. So we're expecting a slow Implant Industrial recovery. When we look to Asia Pacific, it's kind of mixed. Delays continue in China, but there's been some growth in India and Japan. Operator: We'll take our next question from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Maybe just at the Analyst Day, you called out data center, and I know, clearly, power gen probably benefiting from that. But maybe just update us on what you're seeing on the liquid cooling side. Clearly, we're seeing some pretty mind-boggling order rates from certainly peers, et cetera. Jennifer Parmentier: Yes. So we do have a nice exposure, and we are seeing rapid growth. But this is not yet large enough for us to call it its own market vertical. It still makes up less than 1% of our sales. But again, this is something what I feel is unique about Parker, and it's these interconnected technologies and its competitive advantage. We can provide great value to our customers in this space. We have the products that they need for the data center cooling, and we have been working with all the industries there. So our ability to provide liquid cooling systems and subsystem components has really given us, I think, a nice position here. Jeffrey Hammond: Okay. And just a couple of housekeeping. One, on the Curtis revenue, can you give us a split between North America and International, kind of how that flows through the 2 segments? And then just you've been more active on buyback. I'm assuming the guide doesn't build in any more buyback, but correct me if I'm wrong. Todd Leombruno: Yes, Jeff, I'll take those. The sales is split almost 50-50 North America and International. I think we'll refine that as we get further on in the integration process. But right now, it's kind of how we're modeling it. And then you're right, over the last 3 quarters, we have done some share buyback. I think we finished the quarter with a net debt to adjusted EBITDA of 1.8. So we're well below our target of 2. That's even after funding the Curtis transaction. We haven't forecasted any additional. You heard Jenny talk about the pipeline. So we're -- that's always a balance of actionability and timing on that. But I would just restate what Jenny said, we're going to be active when it comes to deploying the balance sheet. Operator: We'll move next to Andrew Obin with Bank of America. Andrew Obin: Just a follow-up on all these exciting new verticals, power, AI, just any thoughts, how do you think about, a, available capacity at your technology portfolio to ramp and expand your presence in these markets over the next several years? How much room is there to sort of grow organically or for bolt-ons targeting these specific high-growth verticals that are seemingly new versus where we were for the past decade? Jennifer Parmentier: Yes. Good question, Andrew. So we -- obviously, as I was saying, we've been working with some of the names everybody would recognize when it comes to data centers. And we've been working very closely with them globally to understand the capacity that is needed for our products. And it's another good example of how having this global footprint really helps us because we can partner with these customers in the regions where they need us. In some cases, we can add shifts and add capacity. And in other cases, there's some other capacity increases that we'll have to do. But nothing significant expense or nothing that doesn't have a real nice return to it. So constantly evaluating it and making sure that we're staying a bit ahead of it as we always do. So we can really give them a good delivery and quality experience. Andrew Obin: As we're sort of sitting at the bottom of the cycle, how do you think about the ramp over the next several years? And specifically labor availability, the need to train the labor and any sort of inefficiency as we go from multiple years of limited no growth to actually growing, how do we make sure that the ramp is smooth. Jennifer Parmentier: Yes. We rely heavily on our tools sitting inside of the Parker Lean System and on our culture of Kaizen. That's where we really do get a lot of our efficiency improvement. And the way that we work with Kaizen and the way that we work with our teams, we established how our production line, power assembly cells can operate at different volumes and what that takes from a labor standpoint or flexing at other areas of the factory. So in many cases, we've been able to do that without adding team members. And in other cases, we will add team members as needed. But we put a lot of energy into onboarding and training new team members, and I think we have some really robust programs when it comes to that. So I think we're in a good position. Todd Leombruno: Andrew, this is Todd. I would just add, we did bump up our CapEx forecast for the year. It's higher than we've been historically. A lot of that is going towards automation, safety-related items, capacity in certain regions where needed. So we are -- I think we're being thoughtful about it, and I think we are, obviously, we're preparing for growth. Operator: We'll take our next question from Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Just maybe circling back to the really impressive Aerospace margin performance this quarter. If we kind of look at what you guys are forecasting for the rest of the year, there is a bit of a step-down versus the 30%, and I know that's a really robust result. But is that just because of the mix within the mix with what you said, Jenny, around spare shipments? Jennifer Parmentier: Yes. Spares are hard to forecast. So yes, that would be the biggest part of it, Nicole. For Q2, we have margins at 29.1% for Aerospace, which is a 90 basis point increase year-over-year, and obviously an increase from our initial guide. Nicole DeBlase: Okay. Perfect. That makes sense. And the incremental stepping up to 40% also really good to see. I know kind of the previous long-term target or what's baked into the longer-term 2029 target is closer to 35%. Could this possibly be a new norm for Parker given how strong margin performance is? Or do you still think it's best for us to kind of anchor to the 35% or so in forward years? Todd Leombruno: Yes, Nicole, this is Todd. I'm glad to see those incrementals, they are very much impressive. As you know, they're not easy to get. There's a lot of work around the globe that happens to turn out these great results. Sometimes it's a little easier when the sales are -- the math works a little funny when the sales growth is not enormous. But you've seen our margin expand. You've seen our EBITDA expand. But as far as what we hold our team to, we modeled that 30% to 35%. Of course, it varies depending on where you're at in the cycle. But I don't think we're ready to change that guidance yet. Operator: We'll take our next question from Brett Linzey with Mizuho. Brett Linzey: First question just on construction. So you noted the gradual recoveries. Is this predominantly the MRO piece of that business? Or are you beginning to see a little bit of load-in from OEMs as they're seeing some dealer increases? Jennifer Parmentier: I think it's both. Brett Linzey: A little bit of both? Okay. And then just to follow up on that last question regarding the fiscal '29 targets. So the adjusted op target was 27%. The top end of the guide this year is 27%. So basically got there 3 years early. Should we think of this year as the new bouncing-off point and you're comfortably marching above that? Or is there something about mix or discretionary costs that might need to come back? Jennifer Parmentier: Well, listen, we're really pleased to see what the team was able to accomplish in Q1 and very happy to be able to increase our organic growth forecast outlook from 3% to 4%. We do still have some markets that need to recover. And we think that what we have out there in the guide right now reflects what we see today. Obviously, we could not have achieved this 27% adjusted operating margin without the hard work and dedication of our team. But just a reminder, with the FY '29 target, adjusted operating margin is not the only target, and we're focused on achieving all 5 of those targets. There's still work to do there, but we're confident we're going to get there. Operator: We will take our next question from Nigel Coe with Wolfe Research. Nigel Coe: We've got a lot of grounds, but I did want to go back to the Aero margins. And I'm actually wondering, is there a way to think about legacy Parker Aero margins and Meggitt? And through other question is I'm trying to judge how much more runway there might be to operationalize the Meggitt margins. Todd Leombruno: Nigel, this is Todd. That integration has gone unbelievably well. We have certainly made that part of the Parker operating strategy. It is really hard to tell the difference between the legacy margins now and the Meggitt margins now. A lot of the synergies really came from across the group. And quite honestly, that's not the way we're really running the company now. It's not Parker Meggitt and Parker Aerospace, it's Parker Aerospace. I would tell you they're both stellar, hitting 30% for the first time. It was equal parts of both. And we've got a very great future there. Nigel Coe: Yes. I think that's the right answer, by the way. And then on -- going back to power gen. I think, Jenny, you mentioned, or maybe it's you, Todd, that roughly half of that 7% is power gen. So I'm actually curious, when would you think about breaking it out as a separate reportable subsegment. It seems to be getting to the same sort of size of HVAC. So just curious on that. And then any more color you can provide on the exposures in there? I'm curious the heavy-duty exposure versus the aeros and maybe some of the smaller gas turbines? Sorry for the detail, but it would be interesting to know that. Jennifer Parmentier: Yes. So -- what was the first part of your question? Todd Leombruno: Breaking down the difference. Jennifer Parmentier: The difference. We don't look at the percentage on the market verticals as to where we can break out some subsegments. We haven't gotten that far yet. So I really don't have a number in mind where it would become its own market vertical. Obviously, we're very bullish about the future of power gen. So it's something we continue to evaluate. But energy is an area -- all types of energy we think belongs together. So no real plans to break that out yet. And I would say maybe in a follow-up with Jeff, you could look at some of the other details that you were asking for. But I don't have that available for you right now. Operator: We'll move next to Nathan Jones with Stifel. Nathan Jones: I got a quick follow-up on the gas turbine business. If I remember correctly, many years ago, probably up to nearly a decade ago, the OEM margins on at least some of the components that went into the gas turbine business were pretty low and the aftermarket margins were pretty high. Just wondering if that's still the case and there might be a little bit of a drag as the OE side of that ramps up? Or if that dynamic has changed over the last decade? Todd Leombruno: Yes, Nathan, this is Todd. When you go back and try to compare Parker to a decade ago, it's very difficult. It's a totally different company. The margin expansion is significant. You see that. Every one of these business has been part of that margin expansion. We still have the mix between aftermarket and OEM margins. I would say that that's probably always going to be like that. There's nothing here in power gen that dramatically sticks out that it's lower than the rest of the OEM aftermarket mix. Nathan Jones: Fair enough. And then I had one follow-up on Mig's question earlier on the longer-cycle Industrial International orders. Any color you can give us around what drove those? I know they were maybe 4Q last year that they came in. And Jenny was giving us some cadence on how that doesn't phase in, I guess, to revenue this year, but any color you can give us on when that starts to contribute to growth in International? Jennifer Parmentier: So the longer-cycle orders that we had in Q3, I believe that were in our Engineered Materials business. And that longer cycle could be anywhere from 6 to 12 months. I don't have the details committed to memory on exactly what those were. But they did not repeat in Q4. So longer cycle, longer demand sense, anywhere between 6 and 12 months, I would say. Todd Leombruno: Chloe, this is Todd. I think we've got time for maybe one quick, positive last question, if you could put whoever's next in the queue. Operator: Absolutely. We'll take our last question from Andy Kaplowitz with Citi. Unknown Analyst: This is actually Jose on for Andy. Maybe to wrap it up. You've talked in the past about mega projects and how they could potentially impact Parker. Curious if you could talk about how customers are moving forward with the mega projects? What are you guys listening from your distributors? And how are you approaching that trade-off between there's still a lot of larger projects out there versus a somewhat still uncertain macro environment? Jennifer Parmentier: Yes. And when I was talking about our distribution channel and how they serve all those small to midsize OEMs on capital investments and CapEx, those definitely are those megaprojects. So we still see a very large amount of them out there. We still do hear that there are delays. But there's obviously some of these that are starting to kick off and they're mainly focused on customers looking for productivity and efficiency. And that's what we're hearing from our channel that supports those customers, and that's where we believe most of that is happening today. Todd Leombruno: Chloe, I think we're running out of time. So this concludes our FY '26 Q1 earnings release webcast. Like I said earlier, we appreciate everyone's attention and their time. We thank you for joining us today. Our Investor Relations team of Jeff Miller and Jen Specky will be available for the rest of the day if anyone has any follow-ups or needs clarification. So thank you all, and have a great day. Operator: This concludes today's call. We appreciate your participation. You may disconnect at any time, and have a wonderful afternoon.
Operator: Greetings, and welcome to the Redwire Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Alex Curatolo, Senior Director of Investor Relations. Alex Curatolo: Good morning, and thank you, Diego. Welcome to Redwire's Third Quarter 2025 Earnings Call. We hope that you have seen our earnings release, which we issued yesterday afternoon. It has also been posted in the Investor Relations section of our website at rdw.com. Let me remind everyone that during the call, Redwire management may make forward-looking statements that reflect our beliefs, expectations, intentions or predictions of the future. Our forward-looking statements are subject to risks and uncertainties that are described in more detail on Slides 2 and 3. Additionally, to the extent we discuss non-GAAP measures during the call, please see Slide 3, our earnings release or the investor presentation on our website for the calculation of these measures and their reconciliation to U.S. GAAP measures. I am Alex Curatolo, Redwire's Senior Director of Investor Relations. Joining me on today's call are Peter Cannito, Redwire's Chairman and Chief Executive Officer; Jonathan Baliff, Redwire's Chief Financial Officer; and Chris Edmunds, Redwire's Chief Accounting Officer and incoming Chief Financial Officer, effective December 1, 2025. With that, I would like to call -- turn the call over to Pete. Pete? Peter Cannito: Thank you, Alex. During today's call, I will outline our key accomplishments during the third quarter of 2025. Chris, our incoming Chief Financial Officer, will then present the financial highlights for the same period and discuss our 2026 outlook, after which we will open the call for Q&A. Please turn to Slide 5. Now that we have a full quarter of performance from the combination of Redwire Space and Edge Autonomy, I would like to continue to emphasize the major transformation underway at Redwire. As you will see in our accomplishments and results, the technical, operational and financial positioning of our platform has been significantly enhanced. As part of this transformation, I'm excited to introduce our updated vision statement, reflecting Redwire as an integrated space and defense tech company. At Redwire, our expanded vision is to pioneer next-generation space and defense technologies that empower scientific discovery, advance global industries and strengthen security, transforming how humanities explores, connects and protects from the skies above to the stars beyond. Let's now turn to a discussion of highlights from the third quarter of 2025. Please turn to Slide 7. As you can see from the highlights on this slide, the impact of our transformation, including the acquisition of Edge Autonomy was accretive to our financial performance. During third quarter of 2025, we increased our adjusted gross margin to 27.1% in the third quarter. We also saw sequential improvement of $24.8 million in our adjusted EBITDA. Additionally, we recorded significant revenue growth of 67.5% sequentially and 57% year-over-year to revenues of $103.4 million during the third quarter. We continue to scale aggressively. From a growth perspective, we closed a number of key strategic opportunities, adding to our backlog by achieving a book-to-bill ratio of 1.25, resulting in backlog of $355.6 million as of September 30, 2025. We are greatly encouraged by our growth reflected in our strong book-to-bill in Q3 based on strong customer demand for our differentiated products. However, looking forward, we anticipate some issues with near-term timing of awards in Q4 resulting from the ongoing U.S. government shutdown. In particular, we have seen delays in the U.S. Army's long-range reconnaissance and similar UAS programs as well as a slow start to Golden Dome. We've ramped production capability to meet these needs, but have not yet seen awards begin to flow. Therefore, we anticipate the diminished government staff and resulting delay in contracting activity is likely to push a number of our anticipated awards out of the quarter. Notably, however, we do not see a decrease in demand, but rather a temporary near-term timing impact that supports a strong 2026 as the government returns to full strength. Please turn to Slide 8. As Redwire nears completion of its transformation, expanding from exclusively space subsystems and components to becoming a highly scalable space and defense technology platform, I'd like to reorient investors to our 5 primary value-driving product areas. These value drivers represent the product areas where Redwire has differentiated intellectual property, first-mover advantage and recognized thought leadership in rapidly growing domains with sizable total addressable markets. They are differentiated next-gen spacecraft, particularly in VLEO and GEO like SabreSat, Phantom and Mako and others that support next-generation capabilities such as high-fidelity earth observation, quantum key distribution, in-space refueling, AI imaging and maneuverability. Large space infrastructure, specifically our rollout solar arrays and international berthing and docking mechanisms where we provide building blocks for critical space infrastructure like space stations and Moon to Mars exploration. Microgravity development, where we are a global leader with decades of heritage and hundreds of experiments flown in the areas of biotechnology and advanced materials and manufacturing. Combat proven UAS, namely the Stalker and Penguin series, where we supply combat-proven autonomous UAS built in the United States and Europe to war fighters in the most challenging battlefield environments. And finally, sensors and payloads such as optics and radio frequency systems where we support multi-domain missions ranging from airborne ISR to Artemis and the historic commercial moon landings. To underscore our strategic positioning in each area, I will share a brief description of the differentiators, a highlight or 2 from the third quarter as well as examples of future growth targets as we move towards 2026. Please turn to Slide 9. Starting with next-gen spacecraft. Redwire's key differentiators are that we have existing funded customers, classified personnel and facilities and a first-mover advantage in VLEO, GEO and space refueling and quantum secure satellites. During Q3, Redwire announced that we have reached an agreement with Thales Alenia Space to become the prime contractor for ESA's Skimsat mission, a technology demonstration mission for a spacecraft designed to operate in VLEO. The Skimsat mission leverages Redwire's Phantom spacecraft, an advanced European VLEO platform out of our Belgian facility. With this prime ship, we further establish ourselves as a global leader in VLEO capabilities. In addition, we signed an MoU with Honeywell during the quarter for QK-VSAT. Under this ESA public-private partnership, we aim to combine Redwire's quantum platform technology with Honeywell's quantum optical payload as we build towards a QKD constellation. As we look for further growth opportunities, VLEO is a relatively untapped orbit with no dominant provider. Redwire is now executing on 2 prime contracts in VLEO, DARPA's Otter program in the U.S. and ESA's Skimsat mission in Europe. And these funded contracts position us as an early mover and market leader in this exciting orbit. We are leveraging this funded development to position VLEO for Golden Dome and growing European defense spending. In the future, we are targeting opportunities with the intelligence community, Air Force Research Lab, or AFRL, most notably our current TETRA program, Space Force as well as additional phases for DeepSAT and expanding our Honeywell partnership for QKDSat as just a few examples. Please turn to Slide 10. Another key value driver is our large space infrastructure, where we are differentiated as a key supplier for products like ROSA and IBDM on funded contracts from customers with significant heritage and protected IP such as our rollout design. Our unmatched heritage with ROSA on the IFS continues to translate into follow-on orders from customers that need a proven solution. During the quarter, Redwire was awarded a contract to develop and deliver rollout solar arrays or ROSA wings for Axiom's Commercial Space Station. Power is critical to a sustained presence in low earth orbit and another commercial station provider selecting ROSA further underscores our strong positioning in this key capability. Building on Redwire's heritage from the ISS, DART, Blue Origin's Blue Ring, Thales Alenia Space GEO satellites, the power and propulsion element of Gateway and now Axiom's Commercial Space Station, Redwire is pursuing numerous follow-on opportunities to scale with our existing customers as their businesses grow. Additionally, we are aggressively pursuing orders for large space infrastructure such as ROSA and IBDM for other commercial space stations as well as other power-intensive spacecraft programs and Moon to Mars infrastructure like Artemis. Please turn to Slide 11. With hundreds of microgravity experiments conducted, proven IP like PIL-BOX and existing funded commercial, governmental and international customers, Redwire is at the forefront of microgravity development. We are decades ahead of many of our competitors. During the third quarter, Redwire launched 14 PIL-BOXes, studying 18 molecules to the International Space Station with 3 different partners: Bristol-Myers Squibb, Butler University and Purdue University. These PIL-BOXes are expected to return to earth in the coming months. With these, Redwire has now flown a total of 42 PIL-BOXes studying 35 unique molecules as of the end of the third quarter, adding to our extensive heritage in pharmaceutical development on orbit. In terms of future growth, we see the potential impact is extraordinary. Pharma has less than a 10% success rate from Phase 1 trials to approval and a fast-approaching patent cliff that threatens approximately $350 billion in annual worldwide revenue from drugs losing exclusivity through 2030. We see Redwire's pharmaceutical development on orbit as offering a potential solution to these challenges as we will take advantage of the unique microgravity environment in space to grow seed crystals using Redwire's flight-proven PIL-BOX technology. Our subsidiary, SpaceMD, will then sell or license these seed crystals to companies that can use them to create reformulated versions of existing drugs or entirely new therapeutics. We have a template for these commercial agreements and many successes with key partners in the biotech community to build on. Please turn to Slide 12. Next, let's turn to our combat-proven UAS. First, I'd like to take a moment to discuss a few key differentiators of the Stalker. The Stalker is a combat-proven UAS that is built on nearly 20 years of heritage with more than 300,000 flight hours, including in highly contested and harsh environments. The Stalker is silent, enabling covert surveillance and reconnaissance and minimizing detectability in contested or civilian-sensitive environments. The Stalker is also payload agnostic. More than 30 different third-party payloads have been integrated via our modular open systems approach, which enables plug-and-play integration. And finally, the Stalker Block 40 offers extended endurance of more than 18 hours, critical for long-range operations. We also have significant heritage with our Penguin series built in Regal Latvia, having delivered more than 200 Penguin aircraft to the Ukraine armed forces. European defense spending is growing rapidly and we are one of the few European-based suppliers with proven performance on the battlefield. During the quarter, we were awarded and delivered Stalkers for the prototype phase agreement of the U.S. Army's Long-range Reconnaissance or LRR program. The Stalker has previously been selected for 2 programs of record, the U.S. Marine Corps Long-Range Long Endurance and the U.K. Ministry of Defense's TIQUILA program. In total, during the third quarter, we shipped Stalker aircraft to 8 different end customers in the United States and other allied countries, showing the global demand for the combat-proven Stalker platform. Clearly, Stalker is broadly fielded for a variety of mission sets with multiple countries and U.S. military branches based on our differentiated capabilities. From unleashing American drone dominance in the U.S. to the European Drone Defence Initiative, the demand signal is strong. With existing production facilities and a broad customer base, we are targeting future growth globally. Redwire is ready with production capacity and fielded aircraft to deliver on key programs like LRR as we move into 2026. Please turn to Slide 13. Finally, moving to sensors and payloads. Redwire has decades of heritage having delivered thousands of space-based sensors and payloads, including antennas, sun sensors, star trackers and cameras for some of the most high-profile missions. Redwire now also has significant heritage with UAS sensors and payloads, having delivered more than 400 Octopus gimbals to the Ukraine armed forces, for example. These gimbals are compatible with a wide variety of UAS platforms. These are not just for Stalker and Penguin. We are selling these systems to other platform providers. During the quarter, Redwire announced a partnership with Red Cat to integrate their Black Widow Small UAS onto the Stalker to support UAS Army Echelon missions. The Black Widow, which was selected by the Army for its short-range reconnaissance Tranche 2 program can be mounted under the center wing of the Stalker as a deployable payload. By integrating best-of-breed short- and long-range reconnaissance systems, this partnership will provide war fighters on the front lines with mission -- with great mission reach and reliable data for effective decision-making. Stalker and gimbals are already integrated with controllers such as [ ATT&CK ] and CUDA technologies. And after Q3, we announced an MoU with UXV Technologies to enhance controller interoperability and align with the EU's ambitions to strengthen its defense industrial base through cross-border industrial cooperation. As we look forward, we see significant growth opportunities for airborne and space-based sensors and payloads. The UAS EO/IR sensor market segment is forecasted to grow from approximately $1.6 billion in FY '23 to approximately $4.8 billion in FY '32, a 12.9% CAGR. Redwire targets future growth both with the U.S. government and other key OEMs around the world for these products. In space, the proliferation of satellites is expected to continue with an estimated 70,000 satellites expected to be launched over the next 5 years. Further, as capabilities like space situational awareness and airborne ISR become increasingly important, Redwire is positioned for continued growth in this area. Please turn to Slide 14. Although in the near term we've seen delays from the U.S. government shutdown, which is likely to push key awards into next year, our pipeline of opportunities remains very strong and we saw a positive trend in contracts awarded during the third quarter as compared with the first half of 2025. Our contract awards during the third quarter of 2025 almost tripled year-over-year to $129.8 million with a book-to-bill ratio of 1.25x, improving backlog to $355.6 million, including contracted backlog from international operations of $128.7 million or 36% of total backlog. As a reminder, we often see lumpy contract awards from quarter-to-quarter. However, we continue to see a strong pipeline with an estimated $10 billion of identified opportunities across our space and airborne solutions, including approximately $3 billion in proposals submitted year-to-date as of September 30, 2025, inclusive of the year-to-date bids submitted by Edge Autonomy. Although the U.S. government shutdown is likely to delay timing of Q4 awards into 2026 with key wins during the third quarter and in the intervening weeks, we are pleased with the positive change in our trend line for contracts awarded and believe our pipeline of new opportunities is very strong, positioning us for continued growth for the next 12 months and beyond. Please turn to Slide 15. With that, I'd now like to turn the call over to Chris Edmunds, Redwire's Chief Accounting Officer. As previously announced, Chris will succeed Jonathan Baliff to become our Chief Financial Officer effective December 1, 2025. Chris brings deep knowledge of our business and significant finance and accounting expertise, and I look forward to working with him in his new role. Chris will now discuss the financial results for the third quarter of 2025. Chris? Chris Edmunds: Thank you, Pete. Before turning to Slide 16, I want to highlight the photo on this page of the ribbon cutting for our new 15,000 square foot facility in Albuquerque, New Mexico, adjacent to the Kirkland Air Force Base. This facility will support a wide range of capabilities from space, missile defense and other emerging war fighter domains as well as support work under the $45 million contract with the AFRL that was previously disclosed. Redwire is focused on optimizing our operational footprint and smartly investing in locations like Albuquerque, which are key to our nation's defense architecture. Please turn to Slide 16. Let's turn to the financial results for the third quarter of 2025, starting with revenue. Revenues for the third quarter of 2025 increased by 50.7% year-over-year to a record $103.4 million, with Edge Autonomy contributing $49.5 million. Turning to profitability. During the quarter, we saw a significant sequential improvement in our adjusted EBITDA from a negative $27.4 million in the second quarter of 2025 to a negative $2.6 million in the third quarter of 2025. This improvement is largely attributed to the 67.5% sequential increase in revenue and adjusted gross margin of 27.1%, offset by the unfavorable impact of VACs of $8.3 million. Finally, turning to cash and total liquidity. We ended the quarter with total liquidity of $89.3 million, which was comprised of $52.3 million of cash, $35 million of undrawn revolver capacity and $2 million in restricted cash. Although lower sequentially, this does represent a 46.2% year-over-year improvement in total liquidity. Please turn to Slide 17. I'd like to take a moment to provide some additional detail around third quarter adjusted gross profit and cash used in operating activities. Starting with gross profit, as shown on the left-hand chart, during the quarter, we reported gross profit of $16.8 million and gross margin of 16.3%. Included within these results was an $11.2 million noncash purchase accounting adjustment related to the Edge Autonomy acquisition. This represents the amount of the fair value step-up recorded through purchase accounting for the inventory sold this quarter, resulting in adjusted gross profit of $28 million with an adjusted gross margin of 27.1%. We believe that this adjusted gross margin is more representative of the potential of the combined business going forward as we have now fully recognized the inventory fair value step-up in earnings and it will no longer impact future gross margins. Second, as shown on the right-hand chart, we saw a significant and expected reduction in net cash used in operating activities during the third quarter of 2025 as compared with the first 2 quarters. During the quarter, our use of cash from operations decreased significantly on a sequential basis from a use of $87.7 million during the second quarter of 2025 to a use of $20.3 million during the third quarter, an improvement of $67.3 million. Even excluding the impact of acquisition-related costs included in our Q2 2025 operating cash flows, this represents a sequential improvement of approximately $30 million. Although this quarter represents a sequential improvement, we continue to focus on profitability, expanding revenue and gross margin and driving efficient SG&A as we sharpen execution and we achieve profitability, including positive cash from operations. In regards to capital allocation, we remain committed to a disciplined approach to fund our growth initiatives and maintain a prudent balance sheet. In line with this long-term capital sourcing strategy, we expect to file a prospectus supplement for a $250 million at-the-market or ATM equity offering program in the coming days. Please turn to Slide 18, for a brief discussion of the outlook for the remainder of 2025. Although we are benefiting from a diversification in geographical customer mix and despite the improved book-to-bill of 1.25 during the third quarter and the strong bookings we have seen thus far in October, the ongoing U.S. government shutdown has pushed a number of anticipated awards out of the fourth quarter and into 2026. As a result, for the 12 months ending December 31, 2025, including Edge Autonomy from the date of close, we are adjusting to a narrower expected revenue range of $320 million to $340 million. In closing, I'd like to reiterate that although impacts from the U.S. government shutdown have necessitated a prudent revision in revenue guidance, we believe that these anticipated orders have been pushed out of the quarter and into 2026. They have not been lost. With that, please turn to Slide 19, and I'll now turn the call back over to Pete. Peter Cannito: Thank you, Chris. The transformation of Redwire with addition of Edge Autonomy has already been accretive to our financial profile, reflected in our year-over-year revenue growth of 50.7%, 27.1% adjusted gross margin and strong book-to-bill of 1.25x. Finally, before we move to our question-and-answer session, as we announced in early October, our CFO, Jonathan Baliff, will be retiring from Redwire effective November 30, 2025. I'd like to take a moment to thank Jonathan for his leadership and valuable contributions throughout his tenure as he guided Redwire through critical phases of our evolution, both in his role as CFO and as a member of our Board. Thank you, Jonathan. With that, I want to thank the entire Redwire team for their contribution to our results during the third quarter of 2025. We will now open the floor for questions. Operator: [Operator Instructions] And your first question comes from Sujeeva Desilva with ROTH Capital Partners. Sujeeva De Silva: And Jonathan, best of luck with the transition. And Chris, congrats and good luck in the new role here. So starting with the revised guidance, appreciating that you did revise it down. What does that mean for the business looking toward 2026, given what you've seen happening during the second half of '25? Peter Cannito: Yes. So I think as Chris emphasized there in the paragraph on the guidance, these are not lost awards. These are just timing issues, particularly, as I mentioned, with the LRR program. The Army announced publicly right after the award of our prototyping contract that they would be awarding a production capability towards the end of this year and that has not occurred. And we believe the reason that that hasn't occurred is because of the ongoing government shutdown. So we do expect those awards once the government shutdown ends to start to flow. But unfortunately, we only have approximately 7 weeks or so of production time left in the quarter and that includes 2 holiday weeks with Thanksgiving and Christmas. So once the government reopens, and we believe the Army will start placing orders for the production element of LRR, we'll start producing those. And that would lead you to believe that -- and we also believe that that is setting us up for a strong 2026. Chris, anything you want to add? Chris Edmunds: No, I think this is the first quarter we've got the combined results and I think that's a stepping off point as the baseline as we start to go forward, right? So as we think about stepping from today forward and as the government reopens with our diversification geography, we are looking at '26 to be obviously a marked improvement on where we are. And I think we can start to see those trend lines as we're moving out. Sujeeva De Silva: Great. And just to understand that, was the EAC in the quarter, was that related to the government shutdown pushouts primarily? Peter Cannito: No. The EAC was, again, a market improvement quarter-over-quarter as we continue to sharpen our execution. We put a lot of effort into that, but there remain a few space programs that we're rightsizing in terms of our delivery. Sujeeva De Silva: Okay. Great. And my other question here is on the pipeline and bidding activity numbers you provided. And thanks, Pete, for the 5 areas and clarifying kind of the focuses going forward. Which of those 5 areas would you say maybe are the larger emphasis of the pipeline and bidding activity that you have in place today on a relative basis? Peter Cannito: Yes. Well, it's a good question and we are trying to -- I appreciate you acknowledging that because we're really trying to point out where the value is being driven at Redwire, so people have more clarity on that. The good news is all 5 of them are areas with extraordinary potential. Now as we just talked about, the UAS orders, this is something be -- is a major priority for the Army and quite frankly, the Department of Defense in general, our existing customers, the Marine Corps and U.S. SOCOM also have strong needs for UAS. So in terms of -- ironically, even though this is where we saw a pushout in the fourth quarter into 2026, that seems -- that still remains to be an area that has a strong growth potential. But there's been a bit of a slow start to Golden Dome as well and we think the VLEO orbit, in particular, will have a role to play in that defense architecture. So we're really excited about that as well. Those can be sizable orders when you order a large VLEO spacecraft. We believe with the now nomination of Jared Isaacman, who has shown in the past a strong disposition for commercial LEO destinations or commercial space stations that funding may ramp up for the commercial -- for the CLD program for those space stations. And you can see that Axiom is leaning forward. We're obviously in talks with all the commercial space station providers because of our heritage on the ISS. So we think that's really exciting as well. And over the longer term, we're just getting started. We continue to have a strong drumbeat in microgravity. It's not our largest revenue driver. But in terms of the potential for some of the pharmaceutical molecules that we've been working on, we see a lot of growth there. And even in sensors and payloads, that's a tried and true element of both the space and airborne market. And because we sell our payloads and not only use them on our own platforms, but sell them to other OEMs, we see strong growth there as not only coming from us selling more Stalkers and Penguins for UASs, but other people selling UASs in different categories that leverage our Octopus EO/IR sensors. So I guess it's kind of a long answer to your question, but the nice thing about it is we have many paths to victory here. It's just a matter of timing for us. Operator: And your next question comes from Greg Konrad with Jefferies. Greg Konrad: Maybe just sticking to one question. I think you had called out the gross margin improvement, which was noted, but you still had some level of VACs. I mean, how do you think about the right level of gross margins as the business comes back? And then just to reiterate, the fair value purchase adjustment, so that's gone going forward. That is just a 1 quarter adjustment? Peter Cannito: That's correct. So starting with the last part first, 27% to 30% gross margins should be our forward runway. The only reason it wasn't reflected to that and why we call it adjusted gross margin is because of that purchase accounting element. 30% is where we have in the past said is our stated goal for gross margins and where we think the business should be run rate forward, inclusive of any EAC adjustments. Now having said that, we are hyper focused on sharpening our execution. So should we be able to continue to reduce the number of EACs we see on some of these development -- space development programs and as we move out of development and more of our revenue comes from production contracts on the space side, we could do better than 30%, but I think 30% is the right forecasting run rate for us. Chris, I don't know if there's anything you want to add there. Chris Edmunds: Yes, I think you hit it right. As we're looking at the balance of our product mix, we'll continue to make investments where we see expansion in this gross margin. But based on where we are, as Pete said, with the repeat orders like we've seen recently with the announcement of the rollout solar rays with Axiom, again, repeat product line, we'll continue to see that gross margin profile continue to land around that 30% margin, Greg. Operator: Your next question comes from Scott Buck with H.C. Wainwright. Scott Buck: I just want to ask about the commentary around the cost-cutting. Have you completed that cost-cutting process? And if so, what is the annual cost savings target? Peter Cannito: Well, I'll answer the first part, and then I'll turn it over to Chris here. So the short answer is no. We have not completed it. Whenever you do a major acquisition, it's an opportunity to completely review your overall structure. One of the core principles of our acquisition is that we're able to scale to get operating leverage, particularly around SG&A on a much larger platform. So we're going to continue to look at that. And quite frankly, we have a lean culture that we've been implementing and we've been moving a lot of our engineering and development operations towards lean principles. And so that will be a part of who we are going forward. In turning of size and scope, Chris, do you have any comments on that? Chris Edmunds: Yes, playing off of the lean culture. We've gone through -- continue to evaluate all of our processes across the company. And really, the cost control is kind of balanced across all the various elements of the P&L. We are stepping off and making a commitment to a $10 million run rate savings here across the portfolio. We are seeing obviously investments where it makes sense, but being smart about where we can be more efficient in getting operating leverage as we continue to grow the top end of our P&L. We will continue to run the lean program that we've invested in. We do see additional cost savings, again, from production efficiencies as we continue to grow the top end. But no, we're happy where we are. We see margin expansions, as we said on the last comment and we'll continue to see operating leverage with our G&A as we go. Jonathan Baliff: Yes, one other thing, Scott -- yes, Scott, I have to mention [indiscernible] as I retire from the company. This will have -- what Chris has said, will also benefit our cash and cash from operations as we look into the future too. We saw obviously sequential improvement in cash from ops and free cash flow. But all of the things that Pete and Chris are talking about are really meant to obviously decrease the cash burn and eventually become free cash flow positive. Operator: And we have reached the end of the question-and-answer session. I will now turn the call over to Chris Edmunds for closing remarks. Chris Edmunds: Well, thank you all for your questions. Before concluding today's Q&A, as we've done the last quarters, we'd like to ask a select question from our retail community. Government contractors have been inconsistent as to whether they have been impacted by the government shutdown in 2025. Why do you expect to be impacted? Pete? Peter Cannito: Thanks, Chris. As usual, a very poignant and observant question from our astute retail investor base. It's a good one. It's interesting. Like the question states, we've seen a lot of different feedback on the government shutdown. Quite frankly, I'm a little bit surprised that it hasn't impacted everybody in the government contracting sector. But for us specifically, I think it really comes down to the impact on the LRR program. As I stated earlier, the Army had put out an article that they expected production to occur in the latter part of this year for LRR and that hasn't occurred because the government hasn't passed the budget. So those were not 2025 funds that they were playing off of. I also think that in many of our programs, we -- it just happened to line up that we were expecting contract awards to happen in the fourth quarter and those contracts didn't come for some key programs. And for the large defense contractor, maybe I should say, for each defense and government contractor, it probably has to do with where you are in your contract cycle. So maybe some folks that are burning off backlog don't see quite the impact. But we invested a lot in being ready for production for the fourth quarter to meet the operational demands for the drone initiatives that were out there and I'm confident they're coming. But that didn't materialize in the fourth quarter. And with only 7 weeks left for production, we think it's prudent at this time to revise down for ourselves. So thank you for that question. And of course, all the engagement we get.
Operator: Good day, everyone, and welcome to CCU's Third Quarter 2025 Earnings Conference Call on the 6th of November 2025. Please note that today's call is being recorded. At this time, I'd like to turn the conference call over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir. Claudio Heras: Welcome, and thank you for attending CCU's Third Quarter 2025 Conference Call. Today with me are Mr. Felipe Dubernet , Chief Financial Officer; Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager; and Carolina Burgos, Senior Investor Relations. You have received a copy of the company's consolidated third quarter 2025 earnings release. The call will start by reviewing our overall results, and then we will move into a Q&A session. As every quarter, before we begin, please take note of the following statement. The statements made in this conference call that relate to CCU's future financial results are forward-looking statements, which, of course, involve known and unknown risks and uncertainties that could cause actual performance or results to materially differ. These statements should be taken in conjunction with the additional information about risks and uncertainties set forth in CCU's annual report in Form 20-F filed with the U.S. Securities and Exchange Commission and in the annual report submitted to the CMF and available on our website. It is now my pleasure to introduce our CFO, Mr. Felipe Dubernet . Felipe Dubernet: Thank you, Claudio, and thank you all for joining the call today. In the third quarter 2025, CCU posted higher operating results and increased profitability versus last year in a volatile and an uncertain business scenario. Consolidated EBITDA grew 4.6% versus last year, mainly driven by our main operating segment, Chile, which in the context of soft industries expanded EBITDA margin through gross margin improvement and efficiencies, maintaining the positive trend in financial results throughout the year. The International Business Operating segment also expanded EBITDA versus last year. Within the segment, we are facing a very challenging scenario in Argentina, where the beer industry contracted mid-single digit during the quarter. On the other hand, the Wine Operating segment posted a lower EBITDA driven by weaker domestic markets in Chile and Argentina together with a higher cost of wine. Our year-to-date results show that our path to recover profitability remains on track, supported by our 2025-2027 strategic plan, which prioritize profitability through revenue management efforts and efficiencies. Regarding our main consolidated figures in the third quarter 2025, net sales were down 1.1%, explained by 2.2% lower average prices in Chilean pesos, partially compensated by 1.2% volume growth. Gross profit decreased 2.9% and gross margin was down 79 basis points. In addition, consolidated MSD&A expenses in Chilean pesos dropped 4.7% due to efficiencies and a favorable translation currency effect from Argentina. In all, EBITDA expanded 4.6% and EBITDA margin expanded 60 basis points. For the first 9 months of the year, and excluding the nonrecurring gain from the sale of a portion of line in Chile in the second quarter 2024, consolidated EBITDA expanded 9.9%. In terms of our segments, in the Chile Operating segment, top line expanded 1.8% as a result of a 2.4% increase in average prices, partially offset by 0.6% lower volumes. Higher average prices were explained by revenue management efforts in all the categories. This was offset by mix effects between alcoholic and nonalcoholic categories. Volumes were below last year due to soft industries, mainly in alcoholic categories. Gross profit and gross margin expanded 3.6% and 75 basis points, respectively, due to lower cost pressures related to favorable prices in some raw materials, which compensated higher costs from our PET recycling plant, CirCCUlar. MSD&A expenses grew 3.2% below inflation in spite of higher marketing expenses and as a percentage of net sales increased by 46 basis points. Altogether, EBITDA increased 4.8% and EBITDA margin expanded 41 basis points. Isolating costs and expenses associated to CirCCUlar, EBITDA would have expanded 10.2% and EBITDA margin by 117 basis points. In International Business Operating segment, volumes posted a 5.3% expansion, although net sales contracted 8.9%, driven by 13.5% lower average prices in Chilean pesos. The decline in average prices in Chilean pesos was mainly due to the 42.2% devaluation of the Argentine peso against the U.S. dollar and a very challenging pricing scenario in Argentina, where prices grew below inflation and negative mix effects within the beer category. The volume expansion, excluding AV, the recent acquisition in Paraguay was mainly explained by Argentina, fully driven by the water category, while beer volumes contracted in line with the industry. Regarding our other operations, Bolivia and Paraguay posted higher volumes and Uruguay contracted low single digits. Gross profit decreased 16.6% and gross margin contracted 382 basis points. MSD&A expenses were down 19.2% and as a percentage of net sales decreased 552 basis points. In all, EBITDA grew 73.1%, driven by all geographies in the International segment. The Wine Operating segment posted a top line expansion of 1.6%, mainly driven by a 4.8% rise in average prices, while volumes were 3% lower. The higher average prices were mostly explained by a weaker Chilean peso and its favorable impact on export revenues and revenue management initiatives in the domestic markets. Volumes contracted due to a 6.3% decrease in Chile domestic market, in line with the industry. partially offset by 4.5% growth in exports. Gross profit decreased 1.6% and gross margin deteriorated by 128 basis points due to cost pressures from a higher cost of wine and higher U.S. dollar-linked packaging costs. MSD&A expenses rose 4.5% and as a percentage of net sales increased 78 basis points due to higher marketing expenses. Altogether, EBITDA decreased 12% and EBITDA margin was down 224 basis points. Finally, regarding our main joint venture and associated business in Colombia, we delivered low double-digit volume growth, outperforming the industry. We continue to build a robust brand portfolio and sales execution, which is the path to the long-term volume and financial growth. Now I will be glad to answer any questions you may have. Operator: [Operator Instructions] Our first question is from Constant Gonzalez from Quest Capital. Constanza González Muñoz: I have a question regarding the international segment, specifically in Argentina. Are you expecting a recovery in prices for the fourth quarter of this year? And also, what are you expecting for 2026? Are you expecting a recovery in prices and volumes? And secondly, could you tell us more about the environment that you are seeing in conception in that country? Felipe Dubernet: Thank you for your question regarding Argentina. Yes, in the second semester, we are facing a much more challenging scenario in Argentina, let's say, decline especially in the third quarter of the volumes, especially in beer, while the water business is growing mid-teens, let's say. The point of that, as you indicated, is that with prices that are below inflation. In fact, we are practically 9% below the inflation this year, year-to-date. We have increased prices in our side, but the scenario is competitive. The market share are rather stable, but we expect in the near future because everybody needs to recover profitability. Price increases, that's key in order to recover the profitability of the industry. Regarding volumes, let's say, we have maybe a more stable scenario in Argentina after the elections, where the government would -- is expected to, let's say, to decrease the uncertainty and its financial issues regarding -- especially the U.S. dollar. On the other hand, it is expected to do some reforms in this new Congress. Regarding the near future, we expect an increase in private consumption, but more than that, in this increase in private consumption that is expected to be next year, 3%, it would be different among different consumption categories. Maybe as you know, many Argentinians changed their car at the beginning of the year. So they have had some records in car sales. And normal people -- so I'm considering myself normal, I do not change the car every year. It's a very bad business. So maybe some of these resources from the consumers would come back to our categories, especially categories that are more linked to have fun as the beer -- responsible, responsible consumption of beer. And to regain momentum in the industry in the near future, along with -- we hope recovery of the overall economy. So we have had a bad third quarter. However, we expect recovery next year, I would say, and also more price adjustments to be at least in the near future in line with increase. Operator: Our next question is from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I'd like to turn the conversation back to Chile, right? Obviously, there are different dynamics playing out there. But what I see from the consolidated numbers is your pricing growth moderating, actually printing even a little bit below inflation, while I wouldn't call it for a material decline in volumes, but volumes slightly down meaning -- I know probably these efforts to be less aggressive on pricing, let's say, are not necessarily resulting in a stronger demand. Could you please elaborate more how you're seeing pricing versus volume growth versus competition, market share across the different categories, soft drinks and beer please? And more importantly than that, how much space you see for eventually more pricing to be implemented in each one of those going forward? Felipe Dubernet: Thank you, Thiago. Good to hear about you. Thank you for your question regarding Chile. Let me make very clear on price because I saw your report and then commentary now. Price in general per category are in line with inflation or above inflation. The thing that you are seeing is the entire segment, Chile that is showing a price of 2.7%, 2.4% quarter-on-quarter, but because there is a big mix effect between alcoholic categories and nonalcoholic categories. As the industry in alcoholic categories is declining, I have a negative mix effect in price. Excluding that mix effect, prices are increasing 4%, which is above inflation. So I need to make this precision because I read your report. The competitive dynamic, I would say, is very competitive, Chile, as you know. In terms of market share in the overall beverage industry, I would say we gained slightly share compared to previous quarter and quarter-on-quarter compared to same quarter last year, also we gained some share in both alcoholic and nonalcoholic categories because now we see the market as alcoholic and nonalcoholic, especially when you have industries that are declining and they are shift between industries. So I would say it's very competitive, but thanks to our brand equity, our revenue management strategies, our execution while we have increased prices in alcoholic and nonalcoholic categories, we have been able even to slightly gain share. The point regarding going forward in price always, we have an aim of optimizing our revenue management in all the categories, of course, to regain profitability, of course, there is competition. Alcoholic categories, especially wine, but also beer, the industries are very soft, are declining. The one that is declining the most is wine. But beer is also a decline in the third quarter, the industry. The only one that is growing low single digit in alcohol is spirit, thanks to the ready-to-drink where we lead innovation, will lead the market in this fast-growing category, which are the spirits ready-to-drink. Also, we have low alcohol or nonalcohol beer and all the shandies and the flavored beer such as, as an example, the Lemon Stones brand in Chile, where we led the market and it's also growing. Innovation is key in this scenario, okay? That's the answer, Thiago. Thiago Bortoluci: That's helpful, Felipe. And if I may, a follow-up in Chile, right? Obviously, I know this is a harder answer, but would love to pick our brains on that. I guess, across the world, we are seeing, in general, declining volumes in beer, right? 2025 has been an atypical year in some regions, you have adverse weather, you have obviously volatile macro, particularly across South America. What's your assessment of this weakness in beer, particularly for Chile? Would you say something more temporary? Would you say there is a structural component related to the consumption occasions, new generations, preferences? And what is CCU doing itself to try to revert this trend? Felipe Dubernet: Thiago, it's not useful to -- in alcoholic, I prefer to talk about alcoholic categories rather than specific because we have different pictures in different segments, let's say. As I said in my previous answer, the one that the industry is declining more is wine. This is a global trend and has been for many years and also a Chilean trend in the last 10 years. Wine, the per capita consumption in 2014 was 13.5 liters per capita. And in 2024 was 10.5. In the opposite of beer in 2014, per capita consumption was 44 liters per capita and last year for 54 liters per cap. There is no single explanation. We carried out very scientific or [ values ] based on data and on quantitative and qualitative, what are the reasons maybe this year in 2025, we saw a further decline from where we were in 2021 or what we have experienced in previous year. And there are high numbers of factors that came from, and you pointed out correctly, is how much money has the consumer. The economy has not been brilliant in the last years in Chile growing 2% on average or less than 2%, huge adjustment interest rate. Interest rates are declining now. The perspective of the Chilean economy should be better in the next 2 or 3 years. Copper prices are on the roof, thanks to the climate change and all of this. There are a number of projects that Chile with enhanced GDP. So we are positive about the economy in Chile in the near future. And this -- if we have this, maybe we will see a better perspective for overall categories, not only alcoholic but also nonalcoholic categories. But there are other reasons that are linked to alcohol consumption. One example is unsecurity. People feel very unsecure in Chile than it was 10 years ago. The sense of going out to on-premise, having a beer or having a cup of wine and let's say, the on-premise was in Chile 10%. And nowadays, it's 5% to 6%. So -- and this is linked to unsecurity. All presidential candidates, in 10 days, there will be presidential elections in Chile. The #1 priority is unsecurity. And when you ask the consumer, why you are not consuming so much alcohol or why are you not going out and having, as you said, in Brazil, a [Foreign Language] or a [Foreign Language] in French. Now because I feel unsecure to go in the night, so I prefer to stay home and not miss my friends. So -- there are many reasons, Thiago. But we expect because we have studied other realities such as the U.S. market. The U.S. market is declining a lot to beer consumption. But however, there has been some period of history where we have seen rebounds on consumption in specific categories. And the category that is performing very well because it is linked to trends is the ready-to-drink category in spirits, but also variants of beer, where you have flavor, you have low alcohol content, beers that are more seasonable. So innovation is key because we led the categories, especially in Chile, the alcoholic category. And innovation is key to, let's say -- and it's a key pillar of our strategic plan to overcome the situation, let's say. Operator: Our next question is from Fernando Olvera from Bank of America. Fernando Olvera Espinosa de los Monteros: Can you hear me? Operator: Yes, we can hear you. Fernando Olvera Espinosa de los Monteros: Great. Perfect. The first one is related to costs. If you can comment, Felipe, regarding the outlook on costs for the fourth quarter and 2026 would be great. And my second question is related to CapEx also for next year. I mean, considering the soft demand that we are seeing overall in alcoholic beverages, what is your initial thoughts on CapEx for 2026? Felipe Dubernet: Fernando, good question about the cost and commodities. I will give you a medium term, let's say, 2026 as our cautionary statement, I don't do forecast. But what we are seeing, we are doing the budget right now. We are seeing favorable news in practically all the commodities, except aluminum compared to 2025 and also compared to 2024, not yet at the level of prices of commodities that we had pre-pandemic, 2019. But we are seeing better news in barley, sugar, virgin, PET, resins, pulps that was a big hit, especially on juice in the next 2 years. So we are seeing a material, let's say, better commodity prices with the exception of aluminum. We are talking about an easy a projection about $10 million of better commodity prices in U.S. As I said, my #1 commodity is the U.S. dollar, and it seems stable in Chile, at least Chile, which is account for 70% of the EBITDA exchange rate seems stable going forward. And along with a lot of initiatives in terms of efficiencies in Chile that are linked to procurement, let's say, the strategic sourcing also design to value. We always see at our packaging or our formulations in order without affecting at all quality, however, doing in a more valuable or more cost-effective way to deliver the same benefits to the consumer. The consumer is first. However, we always look -- and we work on new material, new specification to reduce cost. And third is what we call nearshoring that is to have closer production of our raw materials and packaging materials to our breweries or factories, let's say, to decrease logistic costs. And in that side, also we have a strong efficiency program. So we saw a better scenario with the exception of aluminum for next year that is increasing practically in our projection 5%. On the other hand, what is -- and we have highlighted this year, we have had higher cost and expenses linked to the CirCCUlar. CirCCUlar is about introducing recycled packaging in our PET bottles up to 15%. And so far, this has had a significant impact in our EBITDA, about [ CLP 10 million ], roughly $12 million of extra cost and expenses year-to-date. On a yearly basis, this year would cost us something like CLP 15 billion. But overall, the aluminum is increasing, but all the rest is in better shape. We have efficiencies, so we expect a better scenario for raw materials and packaging materials going forward. Fernando Olvera Espinosa de los Monteros: No, that's great insight. And what about CapEx, Felipe? Felipe Dubernet: CapEx, I will hand over this question to my colleague, Mr. Joaquin Trejo, Financial Planning Manager. Joaquín Trejo Darraidou: Thanks, Felipe, and thank you, Fernando, for your question. Regarding CapEx, we actually estimate to close the year slightly below what we published in our annual report between 10% and 15% below the published figure for 2025. And looking ahead, we don't actually see major CapEx needs for capacity as the volume trend is what Felipe mentioned earlier, but rather focusing on technology. We are changing our IT system for sales and distribution and also innovation to address this new consumer trend that Felipe also mentioned in previous questions, and also regulatory requirements. The ratio we like to look at is the CapEx over sales, and we forecast it to be below 6% going forward. And also, this is why the CapEx over depreciation ratio should be at some point below 1% going forward, where the new projects are actually a smaller amount compared to previous years where we had, for example, the CapEx for the CirCCUlar plant. But this is also offset by some CapEx carryover from 2025 that is going to be transferred to 2026. But in general terms, Fernando, that's the trend we foresee. Operator: [Operator Instructions] Our next question is from Claudia Raggio from Provida AFP. Could you give us some color on the sales volumes of beer in Argentina on October? Felipe Dubernet: Yes, I would anticipate that we have had in both alcoholic and nonalcoholic, we saw decline also in October. So we have maintained in alcoholic the same trend we have in quarter 3. And in water, practically flat, small decline in water business. Operator: Thank you. We'll give it a few more moments for any further questions to come in. It looks like we have no further questions. I'll now hand it back to the CCU team for the closing remarks. Felipe Dubernet: Thank you all for attending today. In summary, in the third quarter 2025, our main operating segment in Chile continued in a trend of financial results and profitability in the context of soft industries and higher costs from CirCCUlar. The later was boosted by gross margin improvements, efficiencies and lower prices in raw materials. International Business Operating segment posted higher EBITDA, although results were negatively affected by a challenging scenario in Argentina due to a tough deceleration in consumption. The Wine Operating segment contracted EBITDA due to a higher cost of wine and weak scenario in domestic market, while export grew mid-single digits. We will keep executing our 2025-2027 strategic plan and its 3 pillars: profitability growth, enhancing innovation, and sustainability. With special focus on profitability, supported by both revenue management efforts backed by our strong and diversified portfolio of brands and efficiencies across all operating segments and functions. Thank you very, very much for attending today, and I wish you a wonderful end of day. Operator: That concludes the call for today. Thank you, and have a nice day.
Operator: Thank you for standing by, and welcome to the Karman Space & Defense's Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Steven Gitlin, Vice President of Investor Relations. You may begin. Steven Gitlin: Good afternoon, and thank you for joining Karman Space & Defense's Third Quarter Fiscal Year 2025 Earnings Conference Call. I'm Steven Gitlin, Vice President of Investor Relations, and I'm pleased to welcome you today. Joining me on today's call are Tony Koblinski, our Chief Executive Officer; Mike Willis, our Chief Financial Officer; and Jonathan Beaudoin, our Chief Operating Officer. Before we begin, please note that on this call, certain information presented contains forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. All forward-looking statements should be considered in conjunction with the forward-looking statements in our earnings release. Future company updates will be available via press releases. For further information on these risks, we encourage you to review the risk factors discussed in Karman's periodic reports on Form 10-K and Form 10-Q filed with the SEC and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein. This afternoon, we also filed our earnings release and posted an earnings presentation to our website at karman-sd.com in the News and Events section. The content of this conference call contains time-sensitive information that is accurate only as of today, November 6, 2025. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP. Our press release contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. Now I would like to turn the call over to Tony. Anthony Koblinski: Thank you, Steve. Good afternoon, everyone. On today's call, I will provide an overview of our third quarter highlights, then Mike Willis will provide a detailed review of our financial performance and capital allocation priorities. Jonathan Beaudoin will then discuss market dynamics and our operational achievements. Following their remarks, I'll return to share our strategic outlook and guidance before opening the call for your questions. Our team delivered another quarter of record performance across our business through their strong execution, continuing our momentum since our February IPO. As shown on Slide 4 of our earnings presentation, here are the key highlights. We posted record quarterly revenue of $122 million, driven by growth across all 3 of our end markets. We produced record gross profit of $50 million. Adjusted EBITDA rose to $38 million, another new quarterly Karman record. And funded backlog continued to grow, reaching an all-time high of $758 million, providing 100% visibility to the midpoint of our full year revenue guidance range and a strong foundation for 2026. During the quarter, we also completed a $1.2 billion nondilutive secondary equity offering that generated significant market demand and resulted in the effective exit of our private equity sponsor as an owner of Karman shares. Shortly after quarter end, we increased our credit facility, providing the resources to acquire Five Axis Industries and pay off our revolver. Summarized on Slide 5, Five Axis is another strategic tuck-in acquisition that expands our capabilities with IP-rich content for the commercial space industry. The Arlington, Washington-based company is a specialized provider of critical systems, including large nozzles for liquid-fueled rocket engines. Their core focus is on high-performance exotic alloys such as titanium, Inconel and high-temperature high-strength copper alloys. Five Axis supports high-priority space launch programs on a single-source basis with its highly skilled team and state-of-the-art facility. We are delighted to welcome the Five Axis team to Karman. Now let's turn to our end markets, where the demand environment remains very strong. Our customers and their end customers continue to communicate their expectations for significant volume increases in programs we support. One measure of that demand is the fact that we now support more than 80 customers on more than 130 programs. The drivers include increased replenishment activity, the Golden Dome for America, hypersonic developments, unmanned and counter unmanned systems and an increasing space launch cadence for both defense and commercial missions. Given our continued strong performance, driven by accelerated progress on current programs and the Five Axis acquisition, we are again raising our 2025 guidance, this time by $7 million at the midpoint for revenue and $2.5 million for adjusted EBITDA. With that overview, I'll turn the call over to Mike for our financial review. Michael Willis: Thank you, Tony. Good afternoon, everyone. Q3 was another strong quarter that demonstrated the effectiveness of our business model and our team. Shown on Slide 6, highlights include revenue of $122 million, representing a 42% increase compared to the third quarter of fiscal year '24. Gross profit grew 48% to $50 million, maintaining gross profit margin at 41%. Net income rose 78% to $8 million. Adjusted EBITDA jumped to $38 million, a 34% year-over-year increase. Adjusted EPS more than doubled to $0.10 per diluted share from $0.04. And funded backlog grew 38% year-over-year and 31% since December 31, 2024. Growth remained broad-based across all 3 of our end markets shown on Slide 7. Hypersonics and Strategic Missile Defense revenue grew 36% year-over-year to $37 million, driven by order growth in PrSM, Standard Missile 3 and 6 and development programs. Space and Launch jumped 47% to $41 million, driven by the timing of orders from both legacy and emerging launch providers. And Tactical Missiles and Integrated Defense Systems were up 42% to $44 million, driven by increasing production rates for GMLRS, AIM-9X and UAS programs. End market mix was balanced with our 2 defense-driven end markets representing 2/3 of quarterly revenue. Space and Launch representing 33% of quarterly revenue, Hypersonics and SMD, 30%; and Tactical Missiles and IDS, 37%. Turning to the balance sheet. We continue to prioritize growth as we consider capital allocation decisions. We ended the quarter with $19 million in cash and equivalents, up $7 million from year-end '24. In late October, we upsized our Term Loan B by $130 million to a total of $505 million to support the acquisition of Five Axis and to pay off our revolver. This results in a net leverage ratio of approximately 3x adjusted EBITDA on a pro forma basis, a ratio well within our comfort level. Looking ahead, we now expect a statutory tax rate for fiscal year '25 of 25.5% and expect CapEx to be approximately 4.5% of the midpoint of our revised revenue guidance range. With that, I'll turn the call over to Jonathan for an overview of our market position and operational highlights. Jonathan Beaudoin: Thank you, Mike. Customer demand signals across our end markets have grown stronger since last quarter. National security priorities continue to drive increased interest and funding for critical programs, while the commercial space market remains very active. For example, in the third quarter, we saw several large new contract announcements from the U.S. Army for systems we support, including those highlighted on Slide 8. $4.2 billion for GMLRS production, $9.8 billion for PAC-3 missiles known as Patriot, and $5 billion for Coyote missile systems. These contract awards demonstrate increasing customer pull for proven solutions that we have been supporting with qualified content for years. This pull is aligned with the demand signals we continue to receive and with the priorities detailed in the Big Beautiful Bill and proposed defense funding, which are summarized on Slide 9. This demand is evident in our strong and growing funded backlog. Golden Dome remains an important driver of demand beyond 2025. We believe that Karman will benefit in several ways from this transformational initiative. First, through increased demand for existing missile defense programs that we support; second, from an acceleration in the development of new solutions such as hypersonic missiles and space-based interceptors. And third, through increased space launch cadence to develop the space layer of the solution. The federal government shutdown has not impacted our 2025 guidance, which is based on our record funded backlog and associated shipping and invoicing schedules. That backlog provides us with full visibility to the midpoint of the increased guidance that Tony will detail shortly. We have seen some solicitations extended, some meeting shift to the right, but no direct impact to our programs. With respect to federal government procurement, we support initiatives intended to streamline and improve the defense procurement process. Any and all initiatives designed to speed deployment of critical capabilities to the war fighter are perfectly aligned with Karman's focus on innovation, speed, efficiency and scale. We are very comfortable operating in a competitive environment, working with fixed price contracts and investing strategically in CapEx and IRAD. For example, we developed our rapid integration payload launcher or RIPL POD, which permits the rapid integration and deployment of the latest air launch effects from Karman's common launch tube. It's adaptable to various payloads, providing agility and deployment speed for our customers. This is only one example of how we apply internal investment to develop new capabilities for our customers. Turning now to our operations. We remain focused on expanding capacity, capability and productivity. In the third quarter, we continued to expand capacity and increase productivity with new capabilities for testing, manufacturing and advanced inspection. One example is the investment we are making in our Albany, Oregon facility that will double our forging capacity for specialty payload production. These investments increase throughput, enhance quality and give us the ability to scale our business further. Our integration of MTI and ISP continues on schedule for completion in mid-2026 as we now begin the integration process with Five Axis. Finally, last month, our commitment to supporting our customers was acknowledged by ULA, which named us the Enterprise Operations Supplier of the Year for 2025. ULA recognized Karman among their hundreds of suppliers for our outstanding support of their reuse development program, our efforts to improve quality and cost and our proactive problem solving. We are proud to support ULA and all our customers. Now I'll turn the call back to Tony. Anthony Koblinski: Thank you, Jonathan. Our business strategy as a merchant supplier to nearly all prime contractors in the U.S. space and defense market remains tightly aligned with our growing market opportunities. Our Five Axis acquisition broadens our capabilities further while expanding our capacity to support our customers' increasing demand. Karman is the result of the combination of scarce IP-rich assets in the space and defense markets. Our capabilities are unique and growing stronger as we identify and acquire new assets. The competitive moat we have built is only growing deeper and wider through our thoughtful, deliberate M&A process. Our M&A pipeline remains healthy with a number of potentially accretive assets that we believe would create more value by being part of Karman. The combined capabilities of these acquisitions, along with our existing expertise, position us extremely well to address the growing demand for advanced space systems, hypersonics, strategic missile defense, UAS and counter-UAS solutions. As Jonathan described, demand signals from the Pentagon and from our customers continue to indicate significant multiyear growth opportunities ahead. Recent reports indicate that the Pentagon is seeking to double and even quadruple missile production. The missile systems cited include THAAD, Standard Missile 6 and 3, PrSM, AIM-9X and GMLRS, all systems Karman supports with qualified content. The demand environment for Karman looks extremely healthy for the foreseeable future. Let me now turn to our outlook and financial guidance for the remainder of fiscal year 2025, summarized on Slide 10. Based on our strong performance in the first 3 quarters of the year, the integration of MTI and ISP, the acquisition of Five Axis and the continued momentum across our end markets as reflected by our growing funded backlog, we are again raising and narrowing our full year guidance. We now expect full year revenue of $461 million to $463 million, up $7 million to the midpoint and non-GAAP adjusted EBITDA of $142 million to $143 million, up $2.5 million to the midpoint. This increased guidance represents 34% year-over-year revenue and adjusted EBITDA growth. This guidance reflects 100% visibility to the midpoint of our increased revenue guidance range. Now looking beyond 2025, our funded backlog for 2026 continues to grow, helping us define the contours of what we believe will be another year of strong growth. For our preliminary view of 2026, we anticipate achieving annual growth consistent with our recent revenue CAGR of 20% to 25%, excluding the impact of any future acquisitions. We're mindful of the added uncertainty introduced by the federal government shutdown, the timing of the 2026 defense funding and Golden Dome orders as we work to finalize our detailed 2026 guidance and share it with you in our fourth quarter earnings call in March. Our differentiated capabilities, strong backlog, growing pipeline and proven ability to execute reinforce our confidence in the long-term growth algorithm of consistent organic growth supplemented by strategic, accretive acquisitions. I want to thank our employees, customers and shareholders for your continued support. And I'd like to remind you that we think of Karman as a new kind of space and defense company, one that is engineered for performance and growth by helping to enable the next-generation space economy and enhance national security. Now let's open up the call for questions. Operator: [Operator Instructions] Your first question today comes from the line of Peter Arment from Baird. Peter Arment: And maybe I'll just go to Mike, on the third quarter, could you give us what the organic growth was for the quarter? And then, Tony, just on 2026 as my follow-up, just how you're thinking about organic growth as kind of a baseline assumption. I know there's a lot of moving parts, but you've done 3 deals since you've come public. Just how you're thinking about that CAGR. Michael Willis: So we talked about in the past about with organic versus inorganic, they quickly get tingled up in the sense from a business development and integration into Karman between cross-selling engineers that are working on multiple facets across businesses, which really blurs the line of what you would call organic. And so that's one of the reasons why we don't put a specific number on it, not to add any confusion just because things quickly become organic. I think what I might direct you towards though, is, of that growth I mean significant -- the vast majority of it is from organic. The businesses that we acquired early this year are smaller in nature. Anthony Koblinski: And again, Peter, as we think about next year, we're simply guiding that with the assets that we currently have under Karman at this point, that we would anticipate, again, consistent growth of 20% to 25%. We're leading this year, of course, to a 34% revenue and earnings. But this is a preliminary view, but wanted to at least give you some look at how we're thinking about '26 early on. Operator: Your next question comes from the line of Amit Daryanani from Evercore ISI. Amit Daryanani: I have two as well. I guess maybe just to start with -- and Tony, I get it's a preliminary guide that you folks have of 20% to 25%, but it does imply some moderation from what you saw in '25. So maybe just talk a little bit about what are the assumptions that are underpinning the growth of 20% to 25%? And how much coverage do you think you already have from the $758 million of backlog for '26? Anthony Koblinski: Yes. Again, view this as a preliminary number. Again, it is our intent to continue to build confidence as we're still relatively new in the market. The backlog that we've talked about of $758 million is strong, but multiyear. But as we think about a rule of thumb that we have been comfortable with of having 75% plus of the future year booked by the beginning of the year, we are well on path for that, quite comfortable with the backlog and how we'll start the year relative to benchmarks that have held true for us. Amit Daryanani: Got it. And then maybe if I just ask you from a backlog perspective again, are you seeing any program level concentration on your backlog? Or is the backlog much more distributed and balanced out versus the revenue run rate is? Anthony Koblinski: I would say that it is consistent the backlog with the revenue that we're achieving. All 3 of our end markets continue to grow. We have advertised before and continue to view no single program making up. I think we're at 11% as we look forward, probably under 10% concentration on our single biggest program. And so again, a consistent and well-balanced backlog and future pipeline. Operator: Your next question comes from the line of Ken Herbert from RBC Capital Markets. Kenneth Herbert: I wanted to first ask, there's been some chatter in the marketplace about some of your customers looking to maybe dual source some of your offerings just as a way of supporting a greater revenue ramp across missiles and other programs. Are you seeing that? And is that at all factoring into maybe any of the maybe slightly more conservative outlook in '26? Anthony Koblinski: No, it would not be at this point. We are not aware of any dual source effort on products beyond what already exists on products that we supply. Again, we don't give our customers a reason to switch. I know there is, as talked about tomorrow at the Pentagon, this notion of to -- field on new programs. But we believe that there is ample demand on the existing platforms and no effort that we're aware of to displace us as a primary provider of the systems that we currently produce. Kenneth Herbert: Great. And if I could, on Golden Dome, you called out 3 specific areas where you expect to potentially benefit. Are you seeing -- or have you bid or seeing RFPs yet on any of these areas that are specific to Golden Dome? Or what's your view on how this program could potentially impact you from a timing standpoint? Anthony Koblinski: Yes. On the existing assets that will be, in fact, part of Golden Dome, as we've talked about before, we are seeing increased demand signals. Now they don't come in labeled as Golden Dome, of course, but the demand there is building. On the new content, the integration of the various pieces, the space-based assets, space-based interceptors and other new, it's still too early. We are very much involved in meetings and industry days that are occurring, but no hard RFQs, request for proposals that we're participating in. And we would see that over the balance of this quarter and probably through the entire first quarter before there's real clarity as to what is the new and how will we participate. Jonathan Beaudoin: I would just add, as part of those discussions, we are leaning into that from a facilitization standpoint, making sure that we will be ready to meet that demand when the POs start to arrive. Anthony Koblinski: Thanks, Jonathan. Operator: [Operator Instructions] Your next question comes from the line of Louie DiPalma from William Blair. Louie Dipalma: Congrats on another quarter of exceptional results. How would -- Tony, how would you assess the M&A pipeline since you've been public, you've been able to make several deals that have been accretive to your EBITDA. But going forward, is it becoming harder to find deals that would enhance your EBITDA given how high it is relative to the rest of the industry? Anthony Koblinski: I appreciate the comments. And I would say the answer is no. We've run the play several times now. It's well worn, and we know how to do it. There is a pipeline, as we've referred to before, of conversations at various maturity levels. We're a little ahead of the pace that we advertised with 3 in the last 12 months, but expect that there will be more. We are not seeing an appreciable difference in terms of the valuations in the deals that we're seeking, right, which are those that are off the radar a bit and not within an auction. And so we continue to be approached by folks that want to be part of the Karman story moving forward, and we think there are more of those ahead. Louie Dipalma: Great. And another question, if NASA were to implement any major changes to the Artemis program, would that impact you? And in general, what are you assuming for the Artemis program? Anthony Koblinski: So as we've talked prior, we have taken out any forecast relative to the space launch system. But in terms of the Artemis program, the Orion capsule, other exploratory programs that fit within Artemis, there is volume and content for us there. Lunar Lander is part of the CLPS program. We are getting orders relative to Orion and other related. And so we think that we've got some solid demand coming forward, but are ready for more. And as you think of the space market, I was just reflecting on it today, of course, Falcon 9 launch today, ULA Atlas V later today, Blue Origin on Sunday, Rocket Lab within about 10 days. I mean the launch cadence and the steadiness of various providers with different mission sets is impressive, and we look forward to supporting it all. Operator: Your next question comes from the line of Alexandra Mandery from Truist Securities. Alexandra Eleni Mandery: This is Alexandra Mandery on for Michael Ciarmoli, Truist Securities. So I was wondering if you can provide margin guidance for 2026? And should we think about EBITDA margin expansion in what range could we expect? Michael Willis: In terms of EBITDA and margin expansions, we've often talked about a target of 50 bps a year that we will gain from operating leverage as we continue to grow. So while we're not necessarily putting out formal guidance, we continue to think that we would capture 50 bps a year going forward on that growth. Alexandra Eleni Mandery: Okay. Great. And then additionally, are you seeing any impact of the government shutdown on bookings and any impact on 1Q '26? Anthony Koblinski: Again, it depends on how long it goes. Glad to hear there's some discussion. Right now, no impact to '25. As Jonathan indicated in his earlier comments, meetings are being pushed to the right, some solicitations are being delayed, but no impact to either '25 or '26 in our view as of now. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Steven Gitlin for closing remarks. Steven Gitlin: Thank you, Rob, and thank you all for your attention today and for your interest in Karman Space & Defense. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.karman-sd.com. We wish you a good day, and we look forward to updating you on our continued progress in the quarters ahead. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Lily, and I will be your conference operator for today. At this time, I would like to welcome everyone to Granite REIT's Third Quarter 2025 Results Conference Call. [Operator Instructions] Speaking to you on this call this morning is Kevan Gorrie, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer. I will now turn the call over to Teresa Neto to go over some certain advisories. Teresa Neto: Good morning, everyone. Before we begin today's call, I would like to remind you that statements and information made in today's discussion may constitute forward-looking statements and forward-looking information, and that actual results could differ materially from any conclusion, forecast or projection. These statements and information are based on certain material facts or assumptions, reflect management's current expectations and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from forward-looking statements or information. These risks and uncertainties and material factors and assumptions applied in making forward-looking statements or information are discussed in Granite's material filed with the Canadian Securities Administrators, and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its annual information form for 2024, Granite's management discussion and analysis for the year ended December 31, 2024, filed on February 26, 2025, and for the quarter ended September 30, 2025 filed on November 5, 2025. Granite posted Q3 2025 results ahead of Q2 and in line with management's annual forecast and guidance that reflects continued strength in our operating fundamentals supported by strong NOI growth, representing $0.06 per unit of the $0.09 per unit growth in FFO quarter over sequential quarter. FFO per unit in Q3 was $1.48, representing the $0.09, or 6.5% increase from Q2 '25, and a $0.13, or 9.6% increase relative to the same quarter in the prior year. The growth in NOI this quarter is primarily derived from strong same property NOI growth, enhanced by leasing spreads of 88%, and the lease-up of previously vacant units in Canada and the United States. NOI growth was further enhanced by the Florida acquisitions completed last quarter. AFFO per unit in Q3 '25 was $1.26, which is $0.03 higher relative to Q2, and $0.04 higher relative to the same quarter last year, with the increase versus Q2 mostly tied to FFO growth and lower leasing costs due to timing of leasing turnover, partially offset by higher capital expenditures incurred. AFFO-related capital expenditures incurred in the quarter totaled $10.5 million, which is an increase of $2.5 million over Q2, and $5.3 million higher than the same quarter last year. For 2025, we continue to expect AFFO-related capital expenditures to come in at approximately $40 million for the year, and that is unchanged from our estimates previously provided. Same-property NOI for Q3 remained robust, increasing 5.2% on a constant currency basis and up 8.4%, and foreign currency effects are included. Same-property NOI growth was driven primarily by CPI and contractual rent increases across all regions, positive leasing spreads on lease renewals, primarily in the U.S. and Canada, and the lease up of previously vacant units in the U.S. and Canada, and the expiration of a free rent period at a property in the United States. Given the continued strong leasing activity in the third quarter of '25, we are increasing our guidance for the year and narrowing the range for constant currency, same property NOI, based on a 4-quarter average to come in at approximately 5.4% to 6.2% from the range previously provided of 5% to 6.5%. G&A for the quarter was $14.1 million, which is $0.9 million higher than the same quarter last year, and $4.1 million higher than Q2. The main variance relative to Q2 is the $4.2 million unfavorable fair value adjustment to noncash compensation liabilities, which do not impact Granite's FFO and AFFO metrics. For the fourth quarter, we expect G&A expenses that impact FFO and AFFO to be approximately $10.5 million. Interest expense was slightly higher in Q3 2025 relative to Q2 by $0.5 million, while interest income remained flat as compared to Q2. The slight increase in interest expense was primarily driven by the draws on the credit facility to fund last quarter's Florida acquisitions. Granite's weighted average cost of debt is currently 2.7%, and the weighted average debt term to maturity is 3.6 years. With Granite's next debt maturity in September of '26, we continue to expect interest expense to remain stable over the next approximate 4 quarters at roughly $24.5 million per quarter, barring any new transactions. Q3 2025 current income tax was $3 million, which is $0.3 million higher as compared to the prior year and remained flat compared to Q2. For the fourth quarter in '25, we are expecting current income taxes to come in at approximately $3 million as well. As in prior years, Granite may realize a credit to current income taxes of approximately $1.8 million in Q4, due to the reversal of prior year tax provisions. However, we cannot confirm the certainty of such credit until December 31, and our guidance does not factor any tax provision reversals. Regarding the '25 outlook, Granite is increasing its 2025 guidance and narrowing the ranges relative to estimates previously provided. Granite's current outlook reflects lease renewals and new leasing of vacant space completed year-to-date, which have increased overall NOI estimates. The current outlook reflects the Florida acquisitions, but does not include any assumption for a potential property dispositions. In addition, the current outlook reflects year-to-date financing and NCIB activity completed in the first half of 2025, and embeds the year-to-date positive impact to FFO of the weaker Canadian dollar relative to the euro and U.S. dollar. So for FFO per unit, we are raising guidance from last quarter to the range of $5.83 to $5.90 representing an approximate 7% to 9% increase over '24. For AFFO per unit, we are raising guidance to the range of $5.03 to $5.10, representing an increase of 4% to 5% over 2024. Granite's balance sheet remains strong. Investment properties totaled $9.1 billion at the end of the quarter, which excludes $370.7 million of 6 assets held for sale, consistent with Granite's messaging last quarter on its disposition program. The increase in investment properties from last quarter was primarily due to $156.5 million of foreign exchange translation gains on Granite's foreign-based investment properties, driven by a 2.3% increase in the spot U.S. exchange rate, and a 1.9% increase in the spot euro exchange rate relative to Q2, partially offset by net fair value losses of $34.6 million. The Trust's overall weighted average cap rate is 5.6% on in-place NOI, increased 5 basis points from the end of Q2, and has increased 32 basis points since the same quarter last year. Net leverage ratio at the end of the quarter was 35%, a decrease of 100 basis points from last quarter. Net debt to EBITDA was 7x, a slight decrease from the 7.1x in Q2, and consistent relative to the same quarter last year. Granite's key leverage ratios remained slightly elevated due to the classification of the 6 assets held for sale as they are excluded from investment properties, resulting in a decrease in the denominator for the net leverage ratio. In addition, Granite has increased unsecured debt due to drawing on the credit facility to fund the Florida acquisitions resulting in an outstanding balance of $78 million at the end of the quarter. Granite does expect these ratios to normalize when the asset sales are completed. The trust liquidity is approximately $1 billion, representing cash on hand of approximately $109 million, and the undrawn operating line of approximately $918 million. As of today, Granite has $79.5 million drawn on the credit facility and $3 million of letters of credit outstanding. Granite does expect to reduce the balance on the credit facility throughout '26 with free cash flow from operations or with proceeds from disposition of certain properties, barring any other major transactions. I'll now turn over the call to Kevan. Thank you. Kevan Gorrie: Thanks, Teresa. As usual, I'll be brief with my comments and hopefully provide some helpful context to our results. As Teresa mentioned, our Q3 results were in line with expectations, driven by strong leasing momentum and NOI growth. And as you can see from our updated year-end guidance, we expect our financial performance to continue to strengthen over the remainder of the year. Firstly, strong leasing momentum continued as the team executed on over 400,000 square feet of new leases in the quarter, and extended 6 leases related to expiries in the fourth quarter of 2025 and in 2026, representing just over 2.3 million square feet. In this quarter, as you can see, the increase on renewals in the third quarter was extremely strong at 88% of 1.85 million square feet of Q3 expiries in the GTA and the U.S. We have now renewed 81%, roughly, of our 2025 expiries at a weighted average increase of roughly 47%. And that excludes the increase on the new lease in Atlanta where the team achieved an increase in rental rate of 58% over expiring rents at the end of the first quarter. Staying on leasing a few comments on relevant market data. 8 of our 16 markets in North America reported flat or decline in market vacancy from the second quarter, and all of our portfolio markets reported positive net absorption in the quarter, led by Dallas-Fort Worth, Indianapolis, Savannah and Houston. With respect to market rents, asking rents fell year-over-year in 4 of our portfolio markets in North America and, increased in 11 led by Houston at 10.3%, Nashville at 8.3% and Louisville at 6.3%. Our weakest market was once again the Greater Toronto area as asking rents fell roughly 5.5% year-over-year. So while leasing conditions steadily improve across our portfolio and our leasing performance continues to be strong, net absorption overall remains below the 10-year average and conditions are competitive. But I would highlight at this time that modern, functional, well-located portfolios are as expected, clearly outperforming the general markets. I will provide a detailed update on our European portfolio markets in the fourth quarter as we receive the data. And in viewing our leasing performance and NOI growth over a longer term, over the past 3 years, we have generated cash NOI growth per unit of 44%, a CAGR of 12.9% over a period, which most of you would characterize as challenging for our sector. I provided an update on our last call regarding the publication of our 2024 corporate ESG report. But I did want to mention at this time that Granite was recognized for the second consecutive year with the top ranking in our industrial peer group by GRESB for overall score and public ESG disclosure. I'll comment briefly on the changes to our IFRS values. As Teresa mentioned, we made minor negative adjustments to capitalization and discount rates broadly across our U.S. and European portfolios, which was partially offset by positive gains from recent renewals in our GTA portfolio. And our overall IFRS value was obviously positively impacted, as Teresa mentioned, by the favorable movement in the USD and euro against CAD in the quarter. Moving on to capital allocation. I'll begin with an update on the planned dispositions. Of the $370 million of assets held for sale, we have agreed to terms on roughly $190 million of those assets in the U.S., and the transactions are progressing well, and we expect to provide a more fulsome update on the dispositions with our Q4 results at the very latest. In terms of capital deployment so far in 2025. We have acquired roughly $145 million in Granite units through our NCIB, as well as funding roughly $10 million year-to-date on our development projects, and $50 million related to our recent acquisition in the Miami market. So to fund over $200 million in these areas and finish the quarter, with only 70 -- I think it's $79 million drawn on our line of credit and roughly $128 million in cash, you can see the power of our low payout ratio and free cash flow. We have also agreed to terms on approximately $240 million in new acquisitions in our target markets in the U.S. and Europe, and expect to close on those transactions in late Q4 or early Q1 2026. Staying on capital allocation. Our $0.15 distribution increase represents the 15th consecutive annual increase since our inception in 2011, and marks the first above $0.10, as we believe the incremental increase is merited at this time and sustainable, supported by the strength of our cash flow growth over the past number of years, and the conservative nature of our capital structure and correspondingly low AFFO payout ratio. We are able to fund the increased distribution while continuing to reinvest strongly in our business without compromising the strength of our balance sheet and capital ratios. So looking out to the remainder of the year, our leasing pipeline remains quite strong at well over 500,000 square feet currently under lease negotiation. And although we'll provide specific guidance in conjunction with our Q4 results, we are confident that the achievements made by the team in 2025 have positioned us well to execute on our financial, operational and strategic objectives for 2026 and beyond. Operator, I'll now open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Brad Sturges of Raymond James. Bradley Sturges: Just on the transaction, I want to clarify there, Kevan. the transactions that you were talking about U.S. Europe, I think that was referring to the dispositions or assets held for sale. Would all that, everything that's held for sale now, could that close by early '26? Or how are you thinking about the time line to those transactions right now? Kevan Gorrie: If you're referring to the dispositions, Brad, I think that -- yes, all of the $370 million would be expected to close as we sit here today by the end of 2026. Bradley Sturges: Okay. And how is -- in terms of redeploying that cash, obviously, I think you've talked about opportunities -- you're even looking at on the acquisition side. How does that pipeline look today? And how do you think about sort of capital allocation priorities once the cash comes back beyond, I guess, repaying the line? Kevan Gorrie: Well, as I mentioned, we have $240 million in acquisitions that we're currently working on. I would estimate probably another $100 million that we are currently looking at, not pursuing in earnest, but looking at. So that's what the pipeline of acquisitions looks like. And as I mentioned before, particularly in the U.S., we have to balance the acquisitions with the dispositions or the pace of those. So that -- obviously, the pace of our acquisitions will rely somewhat on the pace of dispositions. Bradley Sturges: Okay. Just last question, just on the leasing front. I think last call on the -- I guess, within the Indianapolis market, you had the larger facility, you're still looking at lease, you're looking at RFPs, or reviewing them for the entire building there in Indianapolis. Is there any update on that front? Kevan Gorrie: I don't want to update on particular markets. I may sound a little paranoid, but I don't want to do anything that will compromise our efforts on the leasing front, acquisition front or disposition front. So just to say I mean at over 0.5 million square feet under lease negotiation that obviously involves some of our large spaces, and those deals are progressing well. Operator: Your next question comes from the line of Kyle Stanley of Desjardins Capital Markets. Kyle Stanley: So you've made great progress on the '26 maturities already as well. With most of the expiries happening in the U.S., is there any kind of early nonrenewal concerns that you might have? And generally, what kind of leasing spreads would you expect overall and then maybe more for the U.S. portfolio specifically? Kevan Gorrie: I think other than the Samsung space in the U.S. next year, nothing that really stands out to us. But I think we've had some very high levels of renewals. We were over 90% in '24, over 80% at '25. I would expect us to be sort of in that traditional range of 70% to 75% renewals for next year, partly because of the Samsung nonrenewal. In terms of spreads, I think it would be -- look, I wouldn't expect anyone to expect a repeat of 2025, i.e., 47%. I think it would be closer to our range in 2024, which is more in that 20% range for 2026. But I'll have more details on the next call. Kyle Stanley: Okay. No, that's very helpful. I mean leasing activity seems to have remained quite strong or improved even since our last update. What's changed in the last maybe 4 to 6 months that has allowed for this improvement in demand more broadly in the market? And then specifically, within your portfolio to convert leasing tours to and RFPs to signed leases at this point? Kevan Gorrie: I don't know if there's anything specific. I think the two trends that sort of come to mind to me that I think I've mentioned is, one, I think tenants have put off their leasing decisions for a long time. And I think that, that is -- they're reaching sort of a point in time where they have to make a decision to move forward. And two, I do think we are seeing a flight to quality. I think a strong location and assets are really starting to outperform the market. I mentioned that in my remarks and I would certainly highlight that. So I think in terms of our portfolio, and I've said this on calls before, look if the market vacancy rate in the U.S. overall or across our portfolio markets is 7%, we expect to outperform that. So our vacancy is expected to be lower than that. And I think we are seeing that. So I will tell you, I think the activity across our specific portfolio is quite strong relative to the overall market and maybe some of our competitors. But I think that, that's a testament to the quality of the platform and the quality of the real estate that we own. It's starting to show. Kyle Stanley: Okay. I appreciate that. Just one more question. With the fundamentals across the U.S. firming up, are you seeing any new development start to percolate, particularly, I guess, on spec? And has your outlook towards development changed at all in the last several months? Kevan Gorrie: No, I think we're continuing to see a gradual decline. Like in the U.S., it's never going to go to zero in terms of new supply. There has been a gradual decline. I think, 2026, if you look at some of the expectations from CBRE and others, they're expecting the lowest, I think, development pipeline in well over 10 years. So it's never going to go to zero. And I think we've seen pre-leasing in the sort of 30% to 35% range, which is pretty consistent with pre-COVID levels. So we're not seeing an uptick in development, if that's what you're asking or new supply. If there is, it's usually build-to-suit. In terms of speculative, I think it continues to slow down. We expect that trend to continue in 2026. Operator: Your next question comes from Himanshu Gupta of Scotiabank. Himanshu Gupta: So first on capital allocation. Distribution increase was a bit higher than the last couple of years. Just wondering what led to that decision? And is that a reflection of your stronger expected FFO growth next year? Kevan Gorrie: It's a great question. I think -- look, we've been at $0.10 since inception in 2011. And I think our first distribution was $2. So $0.10 represented the first year would have been 5%. And so on a percentage basis, the increase was declining every year. And if we had stayed with $0.10 this year, it would have been sub 3% increase. I think it would have been 2.91. And so I think we thought long and hard about what the right distribution increase was for Granite. I don't think we would have been in this place if we didn't have such strong FFO and AFFO per unit growth over the past 5 years. But where we sit today, I mean, obviously, we want to prioritize reinvestment in our business. But when you have a payout ratio, and AFFO payout ratio in the mid-60s, and you have $100-plus million in free cash flow, the $0.10 to $0.15 only represents $3 million in incremental distributions on an annual basis. And we feel we can do that and continue to reinvest in the business and not compromise our liquidity, and not compromise our free cash flow. So that's why we made the decision. What was really important is if we move to [ $0.15 ], we have to be able to sustain it. And I think all of us on the management team and the Board are very confident we can sustain that level of increase. Again, there's no guarantee. We have to review it every year, but the sustainability of the distribution increase was an important consideration for us when we made this decision to move to $0.15. Himanshu Gupta: Got it. Very helpful. And then on the capital recycling. So you're selling in markets like Indianapolis, Columbus and you're looking to buy in core markets. How tight is the CapEx spread now versus historically speaking, which encourages you to make that move from selling these assets and buying on the other side? Kevan Gorrie: Well, it depends on the market, but we -- I think what we've signaled is, look, as we are continuing this rotation into the Tier 1 markets that we believe are going to be the strongest markets over the next decade. A spread of 75 basis points to 100 basis points is probably something the market should expect. It may not be the case all the time, but that's sort of what we're seeing right now in terms of our dispositions versus our acquisitions. Now keep in mind, that's a year 1 yield. We're certainly targeting assets where we feel we can drive that yield over the next 3 to 4, say, 5 years. So when you look at it on a year 1 basis, yes, you might see a spread of 75 to 100 basis points. But we certainly expect to eat into that spread over the near to medium term, if that makes sense. Himanshu Gupta: Got it. That's helpful. And then as you kick start the disposition program, did you consider adding Magna to the mix as well? And any of the Magna assets to that list? Kevan Gorrie: Yes. I mean it depends on the market. I certainly think we look at all of our noncore assets as part of this disposition program. So the short answer to your question is yes, we do. And I would think in 2026 and 2027, as we look at further dispositions, certainly Magna assets could form part of that disposition program. Operator: Your next question comes from the line of Tal Woolley of CIBC. Tal Woolley: Actually, just following up on Himanshu's question. Now that we're sort of 6-plus months out from when the tariff drama sort of began. You've got a little bit of time to assess how things have shaken out. How are you feeling overall just about automotive exposure in the portfolio period? Kevan Gorrie: I think one thing -- I've talked about this, Tal. I think one thing that really gets missed here, and I don't know really it's interesting to me reading some of the analyst reports on Magna and other automotive parts providers is you don't see tariffs mentioned in their analyst reports. You see tariffs mentioned more with respect to Granite. Let's not forget that the automotive parts industry is covered under [indiscernible]. And that is an important piece. That's an important trade agreement for sure and something that we monitor. And in listening to Magna's calls and Magna's disclosures. They've been very clear. There hasn't been a lot of noise around the tariff side. So I certainly don't think that it merits any immediate action on our part. Those assets continue to perform well. And hopefully, the trade agreement that's in place continues in its current form, or as close to it as possible. And if that's the case, then these assets will, in our opinion, continue to perform well. Tal Woolley: And actually, you're just sort of leading me into where I wanted to go next was just with the [indiscernible] negotiation -- renegotiation coming up, given what you sort of saw this year, do you have any insight for us on how to think about leasing velocity going into 2026? Like how you would expect your clients to respond? Kevan Gorrie: Are you talking about overall in the portfolio in 2026? Tal Woolley: Yes. Kevan Gorrie: Well, I think we've talked about Canada. And if there are any changes to the Magna portfolio specifically in our view, it's not related to tariffs at all. For the U.S. portfolio, it's hard for us to see how it's actually hurt our U.S. portfolio at all. I'm not -- I can't say with any sort of certainty that it has helped the U.S. portfolio. But certainly, we have seen an uptick in manufacturing demand. And not in all markets. If you look at -- looking at a stat the other day, if you look at construction spending on manufacturing facilities in the U.S. the last 12 months, 80% of it has occurred, the Midwest through the South and Southeast. So there's an awful lot of investment, particularly in the manufacturing side going into those markets. And that has benefited our portfolio for sure. So I have no concerns with the U.S. market. With respect to Europe, it has not affected our leasing that we can see anyway at all. So I don't anticipate any impact on our 2026 leasing as a result of the trade sort of narrative that's going on right now or tariffs, if that helps. Tal Woolley: Okay. And just lastly if you look sort of over the last maybe a decade or so, there's been a big change in rent levels in some of your markets. Have you now sort of any long-term kind of implications around, like, for industrial development with occupiers preferring to build their own stuff, given that the rents have risen? Or any sort of changes in terms of whether potential tenants decide to own on their own versus decide to lease? Kevan Gorrie: No. And I mean, we did go through this. There was a period of time where companies like Amazon wanted to own their facilities and then they wanted to not own all of their facilities because they probably have a better use of funds within their own business. So I don't think we -- as I'm looking at the team here. I don't think we've seen a trend of ownership. Now the legislation in the U.S., I think, and the pending legislation, the budget in Canada, I think, certainly incentivizes capital spending. I don't think we anticipate that there will be a big impact on tenant decisions regarding ownership of their facilities. And I mean, we've certainly seen it. There's always a percentage of tenants that will want to own mission-critical facilities, but we haven't seen an uptick in that trend, and we don't expect to see it in the next couple of years. Operator: Your next question comes from Matt Kornack of National Bank. Matt Kornack: Just a follow-up to Tal's questioning there is through this kind of capital recycling that you're anticipating to do, is there a theme that you're trying to play that you currently aren't playing or something in those markets that you see that would be different than where you are? Because to your point, it seems like the markets you're in are actually the ones that have been kind of net beneficiaries of some of the changes in industrial. Kevan Gorrie: Okay. So we should invest more in the Midwest. Is that the point? Matt Kornack: Well, just -- is there something outside the Midwest? Or where -- like what are you trying to get at in going into these new markets relative to your... Kevan Gorrie: I think -- look, I'm not trying to be facetious, but I think we've been clear that it was always our intent. We like the markets that we're in. And I agree with you. And certainly, when you look from a tenant demand perspective, [ Indiana ] and other markets in the Midwest have performed as well as any markets in the U.S. Dallas would be in there. Houston would be in there. Savannah had a terrific year last year despite high levels of supply. They seem to sort of continue to absorb that. So we like the markets that we're in. But as we said, it was always our intent to continue to rotate into Tier 1 markets. And there are markets that we feel are going to perform very well, and we like the pricing in those markets as we sit here today. And so it's not so much looking at an [ Indiana ] Columbus and saying, we just like the market. It's that we have a relatively high level of concentration in those markets. And if we are very interested in moving into Miami, for example, or the U.K. or France, or certain markets in the U.S., we have to use our existing assets to move into those markets. And that's what we're doing. So I hope that that's coming through clear. It is really more a concentration play than anything else, and this allows us to enter the markets that we've been monitoring closely and coveting for years at prices that we think make a lot of sense to us, both from a ingoing yield perspective and from a total return perspective. Matt Kornack: And in terms of the type of industrial building that you'd be getting in these markets, it's consistent with what you own large bay, high-quality taking tenants, et cetera, value-add or anything along those lines? Kevan Gorrie: Well, I mean -- but it has to be modern. It has to be modern is something that we can make modern. We are never going to play in the small bay older generation assets. It's just not what we do. And if you're truly a logistics company, you want to try to the best of your ability to stay with logistics tenant. It doesn't have to be large-bay. We're certainly looking at some very attractive opportunities that involve some mid-bay tenants in there, but the point is they have to be very functional logistics type of assets for us. So it doesn't have to be large-bay. That's not -- we're rather agnostic about whether it's multi-bay or a single tenant large-bay. It's just the functionality of the asset. That's a top priority for us and location within the market. Matt Kornack: Okay. And of course, this is not to say that you need to be there, but have you not caught the data center bug at this point that some of your peers are chasing? Kevan Gorrie: I think -- well when you look at -- if you look at portfolios where companies have converted assets to data centers, we're one of them. We actually have converted an asset in the GTA to a data center. So we have a data center within our portfolio. With respect to the new generation data centers, they are extremely capital intensive. And so it's an area that our team has been paying more attention to, both from a converting existing assets at some point to data centers, if feasible, or looking at new builds. But I would just -- they're very capital intensive and certainly not something that I think would be in the immediate radar of Granite as we sit here today. Matt Kornack: Okay. Fair. Last one for me. Wayfair moved up your tenant list, which presumably was part of the really strong leasing spread that you got this quarter. Can you give us a sense, obviously, the Toronto market, you said, has been a little bit more challenging, but why they would have needed to stay in that space and pay a much higher rent relative to what they were paying? Kevan Gorrie: Yes. I think that that's one of the top 3 assets in the country, to be honest with you. 40-foot clear excess trailer parking, literally across the street from the GTA. It's on 2 bus routes, Mississauga and Brampton, large labor pool. It is just an absolutely fantastic asset. And so I don't think Wayfair had any intentions of moving. And we certainly -- although we were confident in our ability to re-lease the space, it's a large base, and we are happy to keep them in that space. So I think there's a lot of things that were going for that billing that Wayfair recognized in terms of value. And so we were able to get a very strong renewal done in a relatively short period of time. Operator: Your next question comes from the line of Pammi Bir of RBC. Pammi Bir: Just back to the $240 million of acquisitions in progress. Are these all stabilized assets? Or are you perhaps willing to take on some vacancy, maybe create some value in that way? Kevan Gorrie: For the most part, there's stabilized assets. One that we're looking at would be a redevelopment play with income in the short term. I just don't want to provide too much more detail than that, Pammi, but all of them would be stabilized assets at this time. Pammi Bir: Okay. And sort of the mix between the U.S. and Europe. Can you provide some context there? And what sort of cap rates are you kind of seeing these deals come in at? Kevan Gorrie: Well, it is a mixture of the U.S. and Europe, predominantly in the U.S. And as we've said, I think we're targeting ingoing yields in the low to mid-5s. Pammi Bir: Okay. And then just -- sorry. And just coming back to, I think, one of the earlier questions on Samsung. Have you started marketing that space? And any color you can provide in terms of where the re-leasing prospects are? Kevan Gorrie: Yes. No, there was -- we have started marketing the space for lease. The only thing I would say is I would remind people that the in-place rents, or the expiring rents are roughly 25% of the market. And we don't have anything to update you on at this time. Pammi Bir: And is it fair -- and can you remind me, when does that -- that lease is due a year or so, basically before the end of Q3 in '26? Kevan Gorrie: At the end of Q3 '26. Pammi Bir: Great. And I guess it would be fair to assume that there's going to be some downtime there, probably if it does get re-leased, let's say, to 2027? Kevan Gorrie: Yes, I think that's fair. Pammi Bir: Yes. Okay. And then just lastly, on the 500,000 square feet of leases that I think you mentioned were in progress or in discussions. Whats the mix there between new leasing versus renewals? Kevan Gorrie: It's all new leasing. Pammi Bir: Sorry, can you repeat that? Kevan Gorrie: All new leasing. Operator: The last question comes from the line of Sam Damiani of TD Securities. Sam Damiani: So obviously, most of my questions have been answered, but I just wanted to get your sense, Kevan on -- at this point in the cycle, if you see cap rates more likely to be moving in a meaningful way in the next year or so? And if there's any markets in particular where you see potentially some bigger moves? Kevan Gorrie: I don't want to discuss specific markets. Those would be markets that we're paying a lot of attention to. I can assure you of that. Certainly, we've seen more capital come off the sidelines. There is still more of a focus on value-add assets. And by the way, we probably put ourselves in that category with a probably a more refined focus on modern assets. So core assets are still -- they're catching a bit, but it's not that deep. But looking at the dispositions that we're going through, it does feel like momentum is picking up. And if you were to ask me, do I think that there's -- is there a greater chance that cap rates are rising [ and ] falling? I would say absolutely not. Our expectation is cap rates will fall in 2026. Just based on the activity that we're seeing, the competition that we're seeing on our acquisition targets, et cetera. It certainly feels like it's going in a favorable direction. Operator: There are no further questions at this time. I will now turn the call over to Mr. Kevan. Please continue. Kevan Gorrie: Thank you, operator, and thank you, everyone, for joining us on our Q3 call, and we look forward to speaking to you in the new year on our fourth quarter results. Have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Tourmaline Q3 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Scott Kirker. Please go ahead. W. Kirker: Thank you, operator, and welcome, everyone, to our discussion of Tourmaline's financial and operating results as at September 30, 2025, and for the 3 and 9 months ended September 30, 2025 and 2024. My name is Scott Kirker, and I'm the Chief Legal Officer here at Tourmaline. Before we get started, I refer you to the advisories on forward-looking statements contained in the news release as well as the advisories contained in the Tourmaline annual information form and our MD&A available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Mike Rose, Tourmaline's President and Chief Executive Officer; Brian Robinson, our Chief Financial Officer; and Jamie Heard, Tourmaline's Vice President of Capital Markets. We will start with Mike speaking to some of the highlights of the last quarter and our year so far. After his remarks, we'll be open for questions. Go ahead, Mike. Michael Rose: Thanks, Scott, and thanks, everybody, for dialing in. We're pleased to go through Q3 and then answer questions that you may have. A few highlights. Q3 '25 average production of 634,750 BOEs per day was at the high end of our anticipated guidance range of 625,000 to 635,000 BOEs per day despite storage injections and shut-ins during the quarter. We're pleased to announce that we have entered into a long-term natural gas storage agreement with AltaGas at their Dimsdale storage facility, and we view the addition of another large storage position as a strategic opportunity to enhance financial performance and strengthen operational flexibility in volatile natural gas price environments like we just went through this past summer. We've also entered into 2 short-term and long-term LNG gas supply contracts which complement our existing extensive portfolio. Looking specifically at production, fourth quarter production is expected to average between 655,000 and 665,000 BOEs per day with a '25 exit volume of 680,000 to 700,000 BOEs per day. Our third quarter liquids production of a little over 147,000 barrels per day was up 4% quarter-over-quarter. And our '26 average production guidance of 690,000 to 710,000 BOEs per day remains unchanged as does the current multiyear EP plan, which is forecast to yield 30% high-margin production growth to 850,000 BOEs per day by 2031. Third quarter 2025 cash flow was $720 million and third quarter '25 earnings were $190 million. Our third quarter realizations were impacted by unusually large natural gas export maintenance outages, both the East Gate and the West Gate. As a result of these outages, AECO and Station 2 pricing averaged $0.64 and $0.48 per Mcf, respectively, during the quarter. And while we curtailed gas supply during the weakest local price days, the sustained low local prices were the primary reason for lower than our expected third quarter cash flow. The curtailments on export pipelines reduced our volumes accessing downstream markets as well, and that includes our premium markets, such as the Gulf Coast and the Western U.S. by approximately 155 million cubic feet per day. So instead, these volumes were sold into AECO and Station 2 spot prices, and that meaningfully impacted our September natural gas revenue. On a positive note, the force majeure on the Great Lakes pipeline ended in early October and East Gate exports are at normal levels and the West Gate maintenance ends during this month of November. Looking ahead, with the benefit of LNG Canada demand creating additional capacity on local egress pipelines, second and third quarter 2026 AECO pricing is currently averaging $3 an Mcf compared to $1.18 for the same period in 2025. And we think additional upside should be created if AECO basis tightens further, and that is what we anticipate happening. Third quarter 2025 EP expenditures were $825 million. The full year EP capital budget remains unchanged at $2.6 billion to $2.85 billion. We closed a $71.7 million transaction with Topaz Energy Corp., whereby Topaz purchased a GOR on the recently acquired Saguaro and Strathcona Groundbirch Northeast BC Montney development lands. And in addition, on October 28, we completed a secondary offering of Topaz common shares for gross proceeds of approximately $230 million. Moving to marketing. Lots of activity as we continue to vertically integrate our gas business and maximize future realized prices. We have an average of 1.2 Bcf per day of nat gas hedged for the remainder of 2025 at a weighted average fixed price of CAD 4.33 per Mcf. This includes 57 million cubic feet per day hedged at a weighted average price of CAD 20.13 per Mcf in international markets and 109 million cubic feet per day at a weighted average price of $6.86 per Mcf in the Western U.S. markets. Q3 '25 AECO and Station 2 nat gas prices were the weakest in over 30 years. And as mentioned, that negatively impacted cash flow. However, prices are improving thus far in the fourth quarter and the 2026 strip price outlook continues to migrate upwards. We are pleased to enter into that Dimsdale storage deal. We'll have access to 6 Bcf of storage capacity starting in April for a 10-year term with the ability to increase to 10 Bcf in the event that AltaGas takes FID on Phase 2. And we view the addition of another large storage position as a really strategic opportunity to enhance financial performance and provide operational flexibility with these very volatile prices. On the LNG front, we've entered into several new supply contracts as detailed in the release, and I won't go through them, but they're there for you to read. In aggregate, we'll have an average of 213,000 MMBtus exposed to international pricing in '26. That will grow to 250,000 by exit '27 and 330,000 by exit '28. So a very attractive progression. Turning to the capital budget and the EP plan. As mentioned, spending in the quarter was $825.5 million as we executed capital projects deferred from Q2, along with the original Q3 budgeted items really to prepare for incremental production volumes in advance of higher anticipated winter gas prices, which are materializing. Our full year EP spending remains unchanged for 2025 and 2026. The '26 EP capital program is $2.9 billion, and that is unchanged from the release on July 29, 2025. Utilizing current strip pricing, our EP plan anticipates '26 cash flow of approximately $4 billion and free cash flow of approximately $0.9 billion. The strip pricing includes a '26 AECO basis of $1.66 per Mcf, and we anticipate that basis tightening towards USD 1 as the basin dynamics adjust for LNG Canada's demand. And for every USD 0.10 per Mcf that AECO basis tightens, our '26 cash flow and free cash flow would increase by approximately $50 million. And should natural gas prices weaken in 2026, we certainly have the option to reduce capital spending as appropriate to optimize free cash flow and our planned shareholder returns. Approximately $200 million to $250 million of currently planned capital spending could be deferred in such a low price scenario, and that would really have only a minor impact on '26 production guidance. On our cost reduction focus and margin improvement initiatives, the ongoing Northeast BC development project and infrastructure build-out will provide both significant growth and margin expansion by improving all of our operating metrics. Q3 2025 corporate OpEx of $4.80 per BOE was down $0.34 a BOE from the first half of this year, so approximately a 7% improvement. And early components of the Northeast BC build-out have been completed, and that has initiated the cost reduction progression and is contributing to the reduction in OpEx in the third quarter, and this process will really accelerate going forward. The Northeast BC development project is anticipated to systematically reduce combined corporate OpEx and transportation costs by at least $1 per BOE as it is put in place over the next 6 years. And we see the opportunity for meaningful progress on this target in 2026 and all subsequent years. And there is potential to increase the overall total long-term target moving forward. We have a comprehensive corporate focus on reducing all aspects of the cost equation as well as our per well EP capital costs in 2026. So we're targeting a 5% OpEx reduction in the Deep Basin next year and targeting a further 5% reduction in D&C costs over currently budgeted levels. And these reductions are not captured in the multiyear EP plan yet because we'll make sure we realize them first. And we've always had a very strong cost structure, and we plan to make it even stronger going forward. We have elected to pursue the potential sale of our Peace River High light oil and gas complex, so the Charlie Lake Play, which we actually pioneered back in Duvernay Oil Corp days. If completed, this sale would further lower corporate OpEx and provide proceeds that could be reinvested into our higher-margin BC growth assets or emerging EP opportunities that we've assembled in the Deep Basin. So this initiative is just a subset of the significant internal value creation opportunities that exist within the company's overall portfolio. Specifically on E&P in the quarter, we drilled 68 wells, completed 88 wells and entered the fourth quarter with 38 DUCs, the majority of which are expected to be completed in the near term should gas prices continue to improve. We were very pleased our 25 Northeast BC Montney IP90 well performance to date is up 26% over the 5-year average performance as we drill steadily longer horizontal wells in that complex and the percentage of plug and perf style stimulations has been increased. And despite these more expensive completions, our 2025 Montney D&C costs are trending down on a per lateral foot basis. Our new pool new zone exploration success continues across all complexes, and we have 12 to 15 new pool or follow-up delineation wells currently in the Q4 '25 and 2026 drilling program. So lots of exciting opportunities on that front. On the dividend, our Board has declared a special dividend of $0.25 per share. That will be payable on November 25 to shareholders of record on November 14, 2025. And the company intends to declare the quarterly base dividend of $0.50 per share in December. We commenced paying special dividends in September of 2021, and that special dividend has varied between $0.35 per share and $2.25 per share until this quarter where it's $0.25. And while the '26 free cash flow outlook continues to improve, we will continue to find the balance between the planned EP growth program and the size and cadence of the special dividend. And I think that's enough for formal remarks, and there's 4 of us here ready to answer questions you may have. Operator: [Operator Instructions] Your first question is from Kale Akamine from Bank of America. Kaleinoheaokealaula Akamine: I want to start by asking on the Peace River sale. I'm wondering if you can give us any clues as to how you're thinking about the value of that asset. And I guess, fundamentally, if you don't see the price that you want, would you consider retaining the asset? And the part B of the question is, this is essentially a fully developed position that comes with midstream, gas processing, et cetera. Is there any chance that you would hold on to certain assets? Michael Rose: I'll kind of -- thanks, Kale. Not going to give you what our price expectations are at this point because the process is going on. I think you would appreciate that. If it doesn't hit a certain value, we're not going to sell it. You're right, it is a fully developed asset, and I think it's very attractive to people that are looking for new opportunities like that. It would be a great way to start a company. And I think we'd sell it all together rather than break it up. And I did mention in the formal remarks, I mean, it's -- this is a play that we actually invented, started it vertically in Duvernay Oil Corp. days, created a company called X Shaw, ended up buying it back when Tourmaline was in existence. And then the play at a reverse where we had a different application of horizontal multiphase fracking drilling for the Charlie Lake, and it's worked extremely well. So why are we selling it? Well, the reality is that the returns from investing in our 2 very large gas complexes kind of always outstrip the returns from growing the Peace River High asset in a material way. And so it's been essentially on maintenance capital for 4 to 5 years. And we think we have a whole gamut of opportunities in both gas complexes, and we can use the proceeds to kind of more profitably grow with lower OpEx in those 2 gas complexes. So that's kind of the rationale behind it. Kaleinoheaokealaula Akamine: That's great, Mike. I appreciate that. And for the second question, in the release, you called out a handful of what I'll call cash management items. And given the recent price environment for AECO Gas, I think that's prudent, although things seem to be on the mend today if we're looking at AECO prices. We just talked about the Peace River sale, but there's also Topaz equity and there's CapEx deferrals that you have in your back pocket. I'll leave the Topaz question for someone else, but I'm wondering how you would characterize the CapEx deferral of $200 million to $250 million. Is that drilling related? Or is that infrastructure related? Michael Rose: It would be primarily drilling related if we exercise on that in a weaker price environment than we're in today, we would carry on with the BC infra buildout. And I think you can see the rationale for that, that if prices are significantly weaker, we hold the volumes back. And so that would mean the D&C budget would be reduced. Operator: Your next question is from Patrick O'Rourke from ATB Capital Management -- sorry, ATB Capital Markets. Patrick O'Rourke: Maybe just a follow-on with respect to the $200 million to $250 million in potential reductions here. Just wondering what's sort of the time frame for those decision points rolling out into 2026? And then is there any sort of quantification on '27, '28, et cetera, from a volume perspective? Or would this -- my thought is being a company with such a large defined inventory, really well-defined growth on the back of that inventory, would at any point, you consider sort of gearing back on exploration in the near term to preserve capital? Michael Rose: We could do that, although the exploration program has generated opportunities that should we proceed with the sale of the Peace River High complex that over 2 or 3 years, we think would fully replace the volumes from that complex. And as far as timing on when we make those decisions, I think we see if the Peace River High sells first because obviously, there's a maintenance capital budget item associated with that complex in the current '26 budget. So we'd be adjusting the '26 budget at that point. And by year-end, I think we'll have a pretty good look at where the '26 strip is going to be, where basis gets to. And I think it was referenced already that AECO is starting to repair itself. The West Gate is back open today, but there is another restriction in a week or so, and then it's free and clear. So we should be switching to or flipping to withdrawals from storage now. And then that will drive price and receipts were a little higher in the basin over the past week and a good portion of that was due to gas backed up because of storms on the West Coast and LNG Canada was not picking the same volumes west that they have been, which I think has gotten up as high as [ 800,000 ]... Patrick O'Rourke: And then just thinking about sort of the interplay between the balance sheet and potential for special dividends. I know -- I don't want to call it caution, but obviously, it's been a sweep of free cash flow. Debt was a little higher. You've got the proceeds coming in from the Topaz share sale. So that will help. But how do you think about above and beyond the base dividend free cash flow allocation between that special dividend and maybe a little bit more debt reduction in the current environment? Michael Rose: Yes. I mean we're thinking about all those things. And I think we said it reasonably clearly in the press release, we do not intend to use the balance sheet to fund special dividends. I think having 2 quarters of the lowest AECO prices in 30 years is a rare circumstance. And for Q3, paying the special using the balance sheet was one of those rare circumstances. But we will continue to look at the growth capital and the special dividend potential and find that balance. Operator: Your next question is from Sam Burwell from Jefferies. George Burwell: Just another question on the CapEx flexibility. Just curious like what drives that decision? What's -- how do you frame it? Is it based on not wanting to outspend after paying the base dividend? And then like what sort of time frame in terms of like viewing the strip or your view on gas prices are we looking at? Is this like months, some sort of medium-term time horizon? Just curious about how you're thinking about potentially flexing down the CapEx? Michael Rose: Yes. I mean the main control, of course, is the gas price and then everything flows from that. This winter, we're already seeing cash gas prices recover. We're seeing very strong November, December, January, we think there's potential for that to get stronger still. I think all operators are reacting to that. We wouldn't expect any curtailed volume today. So you're kind of seeing fully loaded receipts, and it's not scary. Year-over-year growth is very modest, and we think that will allow this winter strip to improve. Tourmaline has a natural recalibration every spring and breakup. So as we come out of this winter and look ahead to what summer and winter following strip looks like in the months of March, April, May, that's a very natural time to calibrate the intensity of drilling for the back half of the year. And I think that would be a good time for us to also calibrate on free cash and make sure we're still delivering what we've always planned, which is that 5% growth and in excess of $1 billion a year of free cash flow. George Burwell: Understood. And then sort of tying into that a little bit on the Canadian gas macro, like supply has come up a bit, granted that shut-ins coming back and it's sort of typical seasonality and the prices come up. But do you think that there's more room for supply to come on? And just asking this because we are going to get more demand from Train 1 pulling more consistently and then Train 2 pulling another Bcf a day next year. So just curious about your view on supply-demand balance and how much supply can realistically come on to fill the incremental demand from LNG Canada Train 2? Michael Rose: Yes. We regularly refresh this work. And as I was saying, November looks relatively flat to last year, and we don't believe we're curtailed much at all as a basin today. Our expectation is next year grows well shy of 1 billion cubic feet a day on an annual per annum basis. Our number would be around 0.6, 0.7 exit over exit growth. We think actually might even be shy of that, around 0.5 Bcf a day. And to your point, LNG Canada will go from not doing anything in the first half of this year to doing close to and up to 2 billion cubic feet a day, we think as early as the first quarter of 2026. So that's a very meaningful demand change. And the basin will need to react to that with less exports to the United States, and the mechanism to achieve those less exports will be a tighter basis. And we think that will transpire over the next several months. We think there's other tailwinds at play. We believe the Biden expansion on the Northern border is a benefit to the Canadian export picture. It tightens up our basin Erestill. And we also think there's going to likely be power consumption and power announcements over the next 12 months that helps spur long-term demand thinking and tighten up '27, '28, '29 basis picture as well. So from our perspective, everything we are looking to see for this winter and the year ahead is transpiring. We are not seeing a wall of gas answer stronger cash prices. We are seeing LNG Canada ramp very well, and we continue to see lots of green shoots in local demand, whether it be power or [indiscernible]. And I think it will take Canada and Alberta specifically getting a little cooler here in the next 3 weeks to see what the draws ultimately look like on a year-over-year basis. And I think when we look at draws per week in December and compare them to what we were drawing last year, it could be almost a double. And I think that starts to wake the market up. Yes. And the last time the basin had a demand increment like LNG Canada adds to 2 Bs a day was start-up of Alliance. And I think that's flipped the differential for 3 years. Operator: Your next question is from Aaron Bilkoski from TD Cowen. Aaron Bilkoski: I have another question on the Peace River High. If you do ultimately sell it, should we expect you to use the proceeds to add capital to the multiyear plan? Or is the plan to simply redirect some of that maintenance capital that was being spent on the Charlie Lake into the Montney and the Deep Basin? Michael Rose: Yes. More of the latter, Aaron, at this point. I think in order for us to add capital in the EP plan, we want to see strong commodity prices provide that signal. So at this point, it's going to delever the balance sheet. And it's another source of funding for this infrastructure growth that's going to start to add that incremental cash flow and free cash flow that, frankly, we're going to see -- we saw some of it this quarter. We're going to see more of it in '26. And then as Aken comes on and Groundbirch comes on over the years ahead, you're going to see that structural cash flow and free cash flow start. So it's funding that build. Operator: Your next question is from Jamie Kubik from CIBC. James Kubik: Aaron sort of asked the question I was going to ask her, but I'll ask a little bit of a different one. Can you just talk about how you're thinking about debt levels in the business? Is there a target in mind that you're driving to? Is it a function of forward cash flow? Just a bit more color on your thought process around this would be great. Michael Rose: Well, I think we hit our kind of peak debt metric right now at 0.5x to 0.6x at the bottom of the cycle. So that will drive down to 0.2 to 0.3 as we move towards, we think, a more sustainable long-term price cycle. So we're going to keep that pristine balance sheet focus that we've always had, Jamie. James Kubik: Okay. And can I ask maybe is the peak debt level where you're at sort of right now, is that a bit of a driver on the Peace River High disposition? Or is it more a function of just capital allocation between your various assets? Michael Rose: It's for sure, the latter, it's capital allocation. I mean we've been thinking about selling the Peace River High complex for 2 or 3 years, to be honest, simply because it wasn't getting rewarded with growth capital because we had more attractive projects in the 2 gas complexes. And so it feels like this is probably the right time, and there's considerable interest in it. And worth flagging, Jamie, the interest is also what helps spur the process. There is interested parties that are looking to enter this basin, and they have unsolicitedly given us indications of value or interest in acquiring the asset. And so now running the process allows all of them to come to the table with their best number at the same time. Operator: Your next question is from Josef Schachter from Schachter Energy Research. Josef Schachter: Two of them. First thing, you guys have a great track record of making acquisitions in the past. When you look at your 2 core areas versus the M&A market, we just saw the NuVista deal, do you see M&A as part of the growth opportunity? Or is your internal opportunities just that much better? Michael Rose: Yes. We went through like 5 years of putting primarily the BC Montney gas complex together through or expanding it through a whole series of acquisitions from COVID on. And we have put in place now the BC build-out infrastructure for the next 5 or 6 years. Now we're going to go realize all the upside and all the value from those really well-timed acquisitions. So we'll always look at perhaps small asset tuck-ins. But right now, it's -- the focus is much more on organic growth from the extensive inventories we have really in both gas complexes. Josef Schachter: Super. Second question, the Topaz question, did a big sell-down here. Do you see using more sales and then get below 10%, which then allows you to move without market fluctuations? Michael Rose: We have no plans in the short or medium term to dispose of any more of the Topaz shares. But we're super excited how that the whole Topaz story has unfolded and grown. And I think it's just been great all the way along. So we're happy to be shareholders. Operator: Your next question is from Fai Lee from Odlum Brown. Fai Lee: You just touched on it a little earlier about, I guess, growing power demand. There's obviously some bullish projections for gas demand to meet growing electric demand from data centers, artificial intelligence. And I'm just wondering how this on a longer-term basis could maybe possibly affect your strategy for marketing gas? And if you've had any consideration of specific steps you could take to capitalize on these opportunities. For example, do you think you'll ever have like direct gas supply agreements with data center builders? Or I'm just wondering how you're thinking about that. Michael Rose: Yes. We're evaluating that opportunity, Fai. And we would look at it as just another sleeve of our overall gas diversification. But we do have lots to offer. I mean we have many plant sites. We have water. We have power redundancy. We're close to fiber. We're close to the grid. We can provide the CCUS solution, although we have very low CI gas to begin with. And so yes, we're assessing whether that's an opportunity to further diversify our very diversified marketing portfolio already. Fai Lee: Okay. So you're looking at that. And I'm just wondering on the other side, have you been approached from data center builders or people saying, looking at the advantages that you can offer and say, maybe working with them. Is that kind of -- have we gotten to that level? Or it's just kind of just too preliminary at this point? Michael Rose: Yes, there's been lots of conversations, I would say, early in stage, where people are trying to understand how this is all going to work. One of the first things that people were trying to understand first was what the ASO allocation would be and who would be a recipient of that ASO allocation. So that's happened. And we would be the first to cheer on projects like greenlight because that will help consume gas in basin. And the reality is we can build a lot of these. 1 gigawatt on a high-efficient power plant will only consume roughly 150 million cubic feet a day. So we think you could do 10 in short order, and you would still find the basin in balance, and we'd be able to answer that call. And so as operators understood how much ASO allocation they might get, now we're starting to move to that kind of Phase 2 where it's a bring your own power effort and operators are looking to add generation to their projects, and then they need gas supply for that generation. So we would fit naturally into all those conversations. We're having them. As Mike was saying, one of the areas I think we were probably most interested in is those colocation opportunities because it allows us to offer more than one service. And when you offer multiple services to a counterparty, you can enjoy that business. And so we have great sites across our asset base that many of them actually are very, very suitable for this kind of activity. And I think over the next 12 months, we should see all sorts of different data center announcements, some of which should be in the Heartland and we connect to ASO and some of which will be closer to the resource and have a behind fence strategy. And I think we're working hard on making sure we're positioned well to participate in those that are attractive to us. Operator: Your next question is from Neil Mehta from Goldman Sachs. Neil Mehta: Talking through 2026 as well. And as we think about '26, maybe you could talk about cyclical versus structural cost deflation. We continue to be in a relatively favorable oil services environment for the E&Ps. And so just you're curious if you're able to capture some of that cyclical deflation as opposed to maybe some of the structural benefits as well. So just the cost environment going into '26. Michael Rose: Yes. It is -- you're right, Neil. It is a little bit more favorable on the service cost side and D&C costs through this winter. And I think we kind of eyeballed 5% reduction in the press release from where we were mid-2025. We're most excited about the operating cost reductions that we've started to achieve already, and they're structural and repeatable, and they will accelerate over the next couple of years, and they marry up well to base dividend increases. Neil Mehta: And you talked a little bit about the LNG ramp in Western Canada, but maybe you could spend a little bit more time talking about the Shell ramp specifically and how you guys are thinking about that as the driver that could potentially tighten AECO because the counter to that is there just seems to be a lot of gas behind pipe. And so do you actually get the price response with the LNG pulp? Michael Rose: Yes. We think we will. I think Jamie outlined that we really don't think there is a lot of gas behind pipe right now. We think we're seeing pretty much everything that's available on stream at this point. We expect another Bcf plus of intra-basin demand when we get cool weather. We're not cold at all yet here, but that is coming in the second half of November. You've got another 1.2 Bcfs yet to come from LNG Canada when they get Phase 1 and both trains fully on stream. And I think we're eyeballing Q1 of for that. And you still have, although, as I mentioned, for a few days here, the West Gate is fully open, but that's an extra 550 million a day that's still being backed into the basin. That's going to go away when the maintenance is done at the end of November. So in aggregate, you're well over 2 Bcf a day flip. And that's why Jamie was referencing it will be very instructive to see what the actual draws are from our storage during December because we think they're going to really drive a basis tightening once people figure out what's really happening. And as far as refilling from the supply side by our gas industry, kind of the best we seem to be able to deliver on an annual basis is that 0.6 to 0.7 Bcf per annum. So it's going to be close to 3 years to replace that sink. And a lot of that relates to getting on to the system and basin hydraulics and getting meter stations and the long queues that are there already before you can bring new gas on the system. You want to bring gas on the system today or in 2026, you had to be organizing your firm service 4 years ago. Operator: [Operator Instructions] There are no further questions at this time. Please proceed with closing remarks. W. Kirker: Thank you, everybody. We'll talk to you next quarter. Michael Rose: Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the Core Natural Resources, Inc. Third Quarter Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead. Deck Slone: Good morning from Canonsburg, Pennsylvania, everyone, and thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at corenaturalresources.com. Also participating on this morning's call will be Jimmy Brock, our Chairman and CEO; Miteshkumar Thakkar, our President and CFO; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. After some formal remarks from Jimmy and Mitesh, we will be happy to take questions. With that, I'll now turn the call over to Jimmy. Jimmy? James Brock: Thank you, Deck, and good morning, everyone. I am pleased to report that Core Natural Resources had a solid performance in the third quarter despite some operational headwinds. During Q3 '25, we once again generated free cash flow despite weak commodity prices, deployed cash toward our share buyback program, secured 26 million tons of future business and nearly finalized plans with MSHA to recover and reposition the longwall equipment at the Leer South mine. Furthermore, we received the first tranche of insurance recovery for the Leer South fire mitigation efforts. I am also excited to announce that we have verified the presence of noteworthy levels of rare earth elements and critical minerals at our flagship operations in both the Eastern and Western United States. Now let me dive a little deeper into our operational results. Coal production within the High CV Thermal segment came in at 7.6 million tons in Q3 '25 compared to 8 million tons in the prior quarter. During the quarter, our High CV Thermal segment reported realized coal revenue of $59.78 per ton and cash cost of $40.53 per ton. Segment cash costs were slightly elevated compared to Q2 '25 due in part to operational challenges we faced at the West Elk mine as it transitioned to a new seam within the reserves. We believe these initial challenges will continue partly through Q4 '25. However, the B-Seam at the West Elk mine will allow us to take advantage of a much thicker coal seam and better quality characteristics, which will ultimately drive more favorable productivity, realizations and cash costs. During the quarter, the Pennsylvania Mining Complex outperformed versus expectations, which partially offset the challenges at West Elk. Moving forward to Q4, we expect 1 to 2 longwall moves at the Pennsylvania Mining Complex, depending on its level of outperformance relative to our guidance level for the rest of the year. Let's move on to the metallurgical segment. Coal production within the segment came in at 2.3 million tons in Q3 '25 compared to 2.4 million tons in Q2 '25. During the quarter, our metallurgical segment reported realized coking coal revenue of $112.94 per ton and $101.60 per ton across the segment as a whole when factoring in the 372,000 tons of thermal byproduct sales. Cash costs for the quarter came in at $94.18 per ton. Additionally, the metallurgical segment incurred $18 million of costs associated with the Leer South fire and idle-related expenses, offset by $19 million of advanced payments on the Leer South insurance claim. Although the cash margins are depressed compared to recent years, I am very proud of the Core team's ability to manage and continually work toward reducing costs through this market downturn and to continue to realize positive cash operating margins. Now let me provide a brief update on the Leer South mine. After we temporarily resell the mine in July, we have further advanced our continuous mining sections. At the same time, we have continued to work with the federal and state agencies for reentry plans that will involve recovering, repositioning and restarting the longwall system. As we approached our entry date in October, the government shutdown resulted in the unavailability of MSHA personnel needed for the reentry efforts, and we have been in a holding pattern ever since. Our operating team remains confident that the longwall equipment is largely unaffected and that the mine is ready for reentry into the longwall section as soon as the MSHA personnel are available to participate in the process. Now to the Powder River Basin segment. Coal production within the segment came in at 12.9 million tons in Q3 '25 compared to 12.6 million tons in Q2 '25. During the quarter, our PRB segment reported realized coal revenue of $14.09 per ton and cash cost of $13.04 per ton. Both were lower compared to the prior quarter, mostly due to the federal royalty rate reduction in conjunction with provisions in many of Core's existing contracts requiring that cost savings associated with certain policy-related changes be passed along to the customer. From a consolidated perspective, despite operational headwinds, uncertainty surrounding the timing of reentry at Leer South and weak benchmark prices, we still returned more than 60% of our Q3 '25 free cash flow to shareholders. We deployed $19 million towards share repurchases and an additional $5 million to dividends. In addition, we announced this morning that the Board of Directors have declared a $0.10 per share dividend payable on December 15 to stockholders of record on November 28. From a year-to-date perspective, we have returned $218 million to our shareholders or approximately 100% of our free cash flow generation through our robust capital return program. As stated in prior quarters, Core will continue to follow a measured approach to shareholder returns by targeting around 75% of our free cash flow to be utilized primarily for share buybacks as well as a small sustaining dividend, leaving the potential to flex that percentage up depending upon market conditions. With that, let me now turn to a topic that could provide potential future optionality for Core, rare earth elements and critical minerals. Over the last several months, we have completed exploration and sampling at our PRB mines and Eastern operations to analyze the concentrations of critical minerals within our reserves. We are intrigued by our findings across both our PRB mines and Eastern operations. The result in the PRB demonstrated elevated ash-basis concentration of certain rare earth elements and critical minerals, particularly at the top and bottom of the coal seam. In the East, while measured ash-basis concentration were somewhat less elevated than in the PRB operations, the very large flow rates at the PAMC, Leer and Leer South operations could offer unique opportunities for further upgrading. As a result of these findings, we are engaging with several subject matter experts to explore feasibility in advance of potentially launching an RFP process. Now let me touch on some of the early operational successes we've had in integrating our 2 legacy companies and creating a stronger Core Natural Resources. We've executed several best practices across the operations, such as implementing more standardized production schedules to optimize our run time and labor expense, sharing equipment and resources for special projects such as longwall moves and leveraging our scale with suppliers to secure discounts on equipment and services. We continue to leverage our strong logistical network and diverse quality characteristics to create value uplift opportunities for our products through product blending. These are just a few examples of the merger-related synergies that positively impact our bottom line and why we are confident in our ability to create value across the market cycle and to capitalize in a very substantial way when the market turns. Our focus for the fourth quarter is to execute operationally. We are prepared and ready to breach the seals at Leer South as soon as MSHA personnel are available. We have a solid plan in place and expect to have the wall up and running before year-end. However, certain aspects of the timing are out of our control. We remain in close contact with state and federal agencies. At West Elk, we continue to work through the transitions to the B-seam and are optimistic about the operational benefits that we will realize from this thicker coal seam. We expect these efforts during the fourth quarter will set us up for a performance step change in 2026. Due to our low-cost asset base, advanced logistics network and diverse product quality, we are uniquely positioned to generate strong cash flow and shareholder value in all parts of the commodity cycle. Now let me turn the call over to Mitesh to provide the marketing and financial updates. Mitesh Thakkar: Thank you, Jimmy, and good morning, everyone. Let me start by providing an update on our financial results for the quarter. This morning, we reported a strong third quarter 2025 financial performance despite operational challenges at 2 mines within our footprint. We achieved net income of $32 million or $0.61 per diluted share and adjusted EBITDA of $141 million. The reported adjusted EBITDA includes $19 million of insurance recovery advancements for Leer South, offsetting $18 million in Leer South fire and idle costs that were incurred in the quarter. Furthermore, we generated $88 million of operating cash flow and spent $49 million in capital expenditures to generate $39 million of free cash flow. Our operating cash flow was impacted by negative working capital changes of $52 million, mostly related to increases in our accounts receivable and coal inventory balances versus the prior quarter. However, both of these are timing related. At the end of the third quarter, we had total liquidity of $995 million, an increase of $47 million compared to the end of the second quarter. This increase was driven by higher cash balance plus the increased availability on our combined securitization facility. As a reminder, we completed a successful refinancing transaction during the third quarter, whereby we combined the legacy AR securitization programs into one facility. This combination provides greater availability on the facility due to a broader and more diverse customer base, which in turn improves the risk profile of our overall receivables. We'd like to thank our banking partners for their continued and expanding support. Let me update you on the marketing front. In the domestic market, recent policy shifts under the Trump administration have created more support for domestic coal by lowering production and royalty-related costs, providing a more stable regulatory environment and allocating funds to extend the life of coal-fired power plants, effectively keeping coal plants operating and reinforcing the central role of coal in the U.S. energy mix. Through September, U.S. power demand has remained robust with coal-fired generation increasing by approximately 12% year-to-date. However, some of the specific markets we serve are up even more. For example, the PJM RTO is up approximately 16% on a year-to-date basis. Not only has energy demand continued to increase this year, but it is expected to increase for years to come. Data center build-out has been a large part of this increased power demand. And by the end of 2025, the data centers in the U.S. will require 22% more grid power than last year. Furthermore, it is estimated that U.S. data centers will consume nearly 3x as much power by 2030 than they do today. As such, U.S. data center demand is expected to rise to almost 76 gigawatts in 2026, 108 gigawatts in 2028 and 134 gigawatts in 2030. This data center demand boom has caused many electric utilities to look at their long-term load capacities, which has driven a significant shift in how they think about contracting future energy supply. We have seen a noticeable shift to longer-term deals for our thermal products and our low-cost operations allow us to proactively layer in term business cost competitively. On the international thermal front, a prolonged monsoon season and weakness in the Indian rupee have dampened near-term demand. However, longer-term fundamentals remain unchanged. Cement demand in India is expected to grow approximately 50% by 2030 versus 2024 levels and our High CV Thermal product, coupled with our strategic logistical network while the ownership of our Baltimore terminal is well positioned to take advantage. In addition, in late September, India removed a special compensation cess tax, which will support demand growth. Looking ahead internationally for coking coal, global steel prices continue to face pressure due primarily in our view to macro conditions. However, we remain highly constructive on the longer-term fundamentals given the build-out of blast furnaces across Southeast Asia to support strong projected increases in steel demand and infrastructure build-out. At the same time, momentum behind Europe's green steel transition is slowing as governments face significant cost barriers, particularly related to hydrogen supply and energy infrastructure. On the supply side, we continue to believe that years of underinvestment as well as degradation and depletion of the global reserve base will act to constrain global metallurgical supply while exerting a foot pressure on prices. This market landscape lays the backdrop for our contracting progress. Due to the desirability of our products, our marketing team was able to expand our contract book for 2026. On the thermal side, we increased our High CV book by approximately 4 million tons to a sold position of nearly 17 million tons in total. For the Powder River Basin, we increased our sold position by approximately 8 million tons, raising our 2026 contracted book to more than 40 million tons. Due to the nature of the metallurgical segment, long-term contracting is less prominent and pricing in the international arena is generally index-linked. However, our current metallurgical segment has nearly 3 million tons contracted for 2026 with approximately 500,000 of those tons slated for delivery to North American customers. Furthermore, we remain in negotiations with additional North American customers for potential contract volumes and expect to provide more color on our next earnings call regarding pricing. Now let me provide a quick update on our outlook for the remainder of 2025. For the High CV Thermal segment, we are maintaining our guidance for sales volumes while reducing our price range to $60 to $61 per ton. Additionally, we are raising our cash cost guidance by $1 to a range of $39 to $41 per ton. This increase is primarily a result of the West Elk operational challenges that Jimmy mentioned earlier. On the metallurgical front, due to the timing of the Leer South longwall restart, we are lowering our coking coal sales volume guidance to a range of 7.4 million to 7.8 million tons. On the cash cost side, we anticipate a similar cost structure in the fourth quarter as incurred in the third quarter. Therefore, we are decreasing our cash cost guidance for the segment to a range of $93 to $97 per ton. We also anticipate spending $15 million to $25 million in idle and fire mitigation costs during the fourth quarter as we work to restart the Leer South longwall. For the PRB segment, we are again increasing our sales volume guidance to a range of 47 million to 49 million tons, and our committed and price position has increased to 48 million tons at a realized coal revenue of approximately $14.46 per ton. We are maintaining our cash cost per ton guidance range. On the capital expenditures front, we took advantage of attractive equipment financing throughout the year and are lowering our capital expenditure guidance by $40 million to a range of $260 million to $290 million. Now let me pass it back to Jimmy for some quick closing remarks before we open the call for Q&A. James Brock: Thank you, Mitesh. In closing, for the remainder of 2025, we will be focused on a few key areas that we believe will set us up for success moving forward. First, continue to work with MSHA and focus on the restart of the longwall at Leer South at the earliest possible date. In addition, we will drive forward with the completion of the transition at West Elk. Second, we will continue to focus on running our operations as safely and efficiently as possible. The PAMC, Leer, PRB and continuous miner operations ran very efficiently during the third quarter. Third, we will continue to focus on managing our spending levels to maximize our cash margins throughout the cycle despite the weaker benchmark prices we are experiencing today. Fourth, we are prioritizing filling out our sales book in 2026 and beyond. We have layered in nearly 26 million tons of forward contracts, which provides significant revenue visibility as we move into 2026. Finally, let me finish by recognizing our employees. All of our employees are working well together to ensure we develop Core Natural Resources into the premier coal company we envision it to be. Despite the government shutdown, the team has continued to focus on the controllables and stands ready to execute our longwall recovery plan. The core team is adept at navigating the cyclical nature of the coal markets. And we have successfully managed our costs while focusing on our core values of safety and compliance, continuous improvement and financial performance. With that, I will hand the call back over to the operator to begin the Q&A portion of our call. Operator, can you please provide the instructions to our callers? Operator: [Operator Instructions] First question is from Nathan Martin from Benchmark Company. Nathan Martin: Maybe just start on West Elk. Obviously, you guys had the move to B-Seam. Just looking for a little more color there, some reports out that there may have been some elevated methane levels, should there be any ongoing cost or production impacts from that? And then how should we think about cost and production from that mine heading into 2026 at a full run rate? James Brock: Nate, yes, it's a good question. So West Elk, as we said earlier, we did have some methane issues there. It was not any safety concerns. We just had to keep it that way for our employees. So we -- the team went out, managed some ventilation. We made a few control changes there. And we believe that we have the methane situation put behind us. We haven't had any elevated methane reading since we did that. And then fast forward after we were running, we ran up against what we was calling our safe zone or stop margin to whereas we had to dewater the [indiscernible]. So that was overlay and the same we were mining. The team got started on that as quickly as they could. And that's what slowed us down here [ segfort ]. The good news is, I believe by early next week, we will have West Elk back up and running, and I look forward to what we can get done there. I think it will be a low cost as we talked before. I really like the quality of the coal and excited about what we can do with that in the marketplace. So in short, very excited about the future of West Elk. And I think we'll have most of those problems behind us for the remainder of the year. Of course, mining is mining. Some little things could come up, but those things that stopped us from mining, I think we have those under control now. Nathan Martin: Appreciate those thoughts, Jimmy. Maybe one for Bob on the marketing side. Bob, could we get a breakdown of the now it looks like 17 million tons of committed and priced High CV for '26? And then any commentary on the pricing of those tons as well as the 40 million tons of PRB coal you guys called out? Robert Braithwaite: Yes, Nate, no problem. One thing I will say is I certainly am pleased with the team and their efforts in the last quarter, as Mitesh mentioned in his prepared remarks, we had 26 million tons of new sales. And what I like about that, too, is we're looking at sales on the High CV segment alone going all the way out through 2030. So it's certainly providing us a lot of good visibility as we move forward. And the other thing that's very encouraging is these utilities are contracting out longer-term duration. So I think that they are seeing the benefits of the data center demand coming online and they're contracting forward. But for 2026 alone, of the 17 million tons of High CV, 14 million of that is PAMC, about 10 million domestic, 4 million export. Majority of that export is index-linked. So again, we have some upside there if API2 prices continue to rise as we've seen in the coming -- or in the recent weeks and about 3 million tons of that is West Elk. From a pricing standpoint, we're looking at upper 50s right now basis of $105 API2 price. So if we see that rise in Cal '26, that certainly is going to afford us the ability to increase that price. And then on the PRB side, as we mentioned, approximately 41 million tons, and we're seeing pricing in the low to mid-14s on that. Nathan Martin: Okay. Great, Bob. And then any comments -- I mean, I think what Mitesh mentioned roughly 0.5 million tons of fixed price domestic coal for '26. Any comments around the pricing there would be helpful as well. Robert Braithwaite: Yes. We'll provide that on the next call, Nate. Again, we're still in the middle of negotiations, but I'm very encouraged of what we're seeing there. A lot of that is high-vol coal that we've put to bed domestically. But again, we'll give a better update, a clear update on the next call, but I would anticipate that number increasing as when we do report next. Nathan Martin: Okay. Great. And then maybe just one final question before I pass it on. The first tranche of insurance proceeds received, how should we kind of think about the potential range from that insurance and business interruption recoveries from Leer South, Mitesh. I think you mentioned previously maybe around $100 million, but it would just be great to get an update there. Mitesh Thakkar: So I think, Nate, if you look at year-to-date, we have spent about $75 million on fire and idling cost, and we are guiding to another, let's call it, $15 million to $25 million for the fourth quarter. So if you add that up, I think just from firing and idling cost, we're approaching $100 million. And then on top of it, you have to apply the residual business interruption claim as well. So I think we are definitely in 3 digits here. So I think we'll continue to track that. And as we submit the claims, we'll keep you apprised. I think we are not waiting for the full claim to play out. We are starting to put advanced claims in as we incur cost as a starting point. I think our next step is to go ahead with the business interruption claim as well, and you're going to start trickling that in as well. So we are very optimistic of where we will end up with the overall insurance claim. Operator: Next question comes from Nick Giles of B. Riley Securities. Nick Giles: Just wanted to follow up on the High CV cost side and really gauge your level of confidence in your PAMC Longwall operations maintaining their low costs and if there's any room for improvement. I think I -- if West Elk costs were to improve around $10 a tonne, I would back into a benefit of around $2, which would keep the segment cost maybe slightly more elevated than recent years. So just appreciate any color there. James Brock: Nick, I think when you look at cost, it's something, as you well know, that we work on continuously all the time. But one thing that got the High CV segment a little bit out of line was the unfortunate production shortfall we had from the West Elk mine, which obviously would be a little higher cost. I think you're in the ballpark with the numbers. I mean, I'd like to see the Pennsylvania Mining Complex running cash costs where we ran in the past, somewhere around $37 to $39. We think we can stay there. And then when I look at the West Elk, we got to see what that mine does when we're running it very consistently full out all the time with no delays. But I do really believe that I can get it somewhere down and somewhere we should be low 30s, somewhere in there for cost for West Elk. So obviously, that will help the overall cost structure of our operations there on the High CV side. Deck Slone: Nick, it's Deck. Listen, another point, I think that's interesting is, as Bob discussed, for the 17 million tons of High CV thermal, we've committed, maybe a small step down in terms of average price at this point when we look at 2025 versus 2026. But the cost reduction should be with West Elk now being sort of pulling average cost down as opposed to being sort of a force to pull those costs up, sustaining that margin, maybe even improving upon that margin in 2026 is probably entirely realistic in what we're targeting. So that contribution from the High CV thermal segment could, at a minimum, stay sideways even with a little bit of a diminution on the price and perhaps could expand a bit. Nick Giles: I appreciate that. I wanted to ask a similar question on the met side. As we look to 2026, when Leer South is back up and running. How should we think of costs at that mine specifically? And how does that translate to the entire segment? James Brock: Well, obviously, Leer South is really hurting us on the metallurgical side at this time. We get it back up and running. We've had a schedule change there, Nick, as well. I think the mine is going to run a lower cost than what's been there. We'll have to see how that turns out. But I would think it would be very similar to what we're running at our Leer mine and perhaps even a little better with the schedule change that we've made there. So we have to wait and see on that. I really want to get that mine back up and running. We've got to recover the shields, get the face set up. The team there has done an outstanding job and hasn't been in the best possible environment there where they couldn't run the longwall, but they have advanced our mining sections, and they've got the new phase set up and ready. So I'm really excited what Leer South can bring to the table in 2026. Unknown Executive: And Nick, if you think about the broader metallurgical coal portfolio, we are going to have more tonnes coming out of longwall mines compared to CM mines. So there's going to be some tailwinds tied to that as well. Nick Giles: Great. One last one on that, if I could. Do we have any clarification on the total number of met tonnage that will be subject to the 45x credits in '26? Deck Slone: So Nick, it's Deck. And listen, I would say this, that is very clearly a capabilities test when you look at sort of how the legislation is written. So certainly, all of our metallurgical coal and metallurgical segment should qualify. But when you also consider the tons being produced at PAMC, what we're sending into the metallurgical market and selling to steel producers is really a standard blend. So across that full 26 million tons, all of those tons are suitable for use in the production of steel. So we certainly believe that those tons should qualify. Again, it's fairly clear that this is about capability, not end market. We would say this, if the coking coal market were large enough, we could sell all 26 million tons of PAMC into that market. So that's our belief that we would get -- we would qualify on that front. So we can talk further about it offline, but just an initial reaction. Operator: Next question comes from George Eadie at UBS. George Eadie: Can I firstly just ask about the rare earths. So just sort of for Core specifically and financially speaking, do you think it's more prospective in the PRB or East Coast? And maybe also remind us what are the latest on discussions with the government. Jimmy spoke about before subject matter experts, but are the government getting involved here potentially too into underwriting financing and/or prices? James Brock: Well, we've been diligently evaluating the potential to recover rare earth elements and critical minerals from our Eastern and Western mining operations, as we said in the script. That work is ongoing, but it's still in the early stages. But I will say the question is not whether rare earth elements and critical minerals exist at these operations. It's rather the question is, can we cost effectively segregate, upgrade and extract the feedstock that we have available. I mean our studies have shown that we have them in the coal seams out of our Western operations, and it's very similar to what others have said out there. So we do have them. One of the key advantages that we bring to the table is the massive scale of our already permitted active operations that we have. We run the largest underground mining complex in the U.S. at PAMC and the second largest operations in the PRB. So these operations generate huge quantities of material every day. And the angle we're evaluating is whether we can leverage our scale and creating a business case for the rare earth elements and critical minerals. The work is being led by our innovation group, which has a team of highly competent scientists and engineers and work a lot of strong -- and they work with a lot of strong technical partners. So stay tuned for more on that, but we will have everyone involved as we get out into more details about the rare earth elements and critical minerals. George Eadie: Might we get a more material update next -- the full year earnings potentially? Or is that too soon? James Brock: I'm sorry, I didn't understand the question. What was it? Robert Braithwaite: We would expect to comment to some degree on it next quarter. But in coming quarters, we'll continue to provide updates as we move forward, George, but work to do. George Eadie: Yes. Okay. And then maybe moving to the U.S. domestic thermal picture, Mitesh and Bob, perhaps, could you help me understand better the upside here? Looking at those charts and a lot of people speak to this now, the U.S. coal fleet capacity factors are at 50%, which is climbing higher. But can you sort of help ballpark if that got to, say, 60%, given there isn't really much volume upside in the PRB or Northeast without material CapEx. How do we triangulate 5% or 10% higher capacity factors to your margins and pricing in the PRB, PAMC? And then just lastly on that, is there potentially more upside in the PAMC given there's more demand growth in the Northeast for that domestic market versus the PRB? Robert Braithwaite: Yes. I would sit there and tell you, George, couple of things. First, we are encouraged, as I mentioned before, that we are seeing a lot of investment now in the coal fleet. You might not hear about it so much publicly, but we are talking to our customers, and we are seeing them invest in their coal fleet in anticipation that they are going to be running at much higher capacity factors for a period of time here. And a lot of that has to do, again, as you mentioned, with the data center and AI build-out. We think that in total, we could see domestic coal-fired generation increase by 20%, 30%. And if you look at, call it, 400 million tons of coal being burned today, your additional 60 million, 80 million tons potentially not so far in the distant future. We can continue to invest in our operations. I think we always say 26 million tons is our base case at PAMC. We do have the ability to ramp up if the market is there. And I'll tell you that we may get there, right? As I mentioned earlier, 26 million tons of new sales last quarter all the way out through 2030. So it is encouraging. We're starting to get a lot of visibility on the fact that these domestic utilities are going to continue to run. We'll see here as more data centers are committed for build-out. There's a lot on the docket here. And if that comes to fruition, I think, yes, we will continue to invest to see if we can grow production not only at PAMC but also out in the PRB. Mitesh Thakkar: And George, if you look at where all these data centers are getting built out, a lot of them are in the East, and I think PAMC is sitting right on top of all those, right? So I think you're going to obviously see some competition from natural gas. But if you listen to some of the earnings call of industrial companies, they are saying like if you want a new gas turbine, you're going to have to go back in line 2029, 2030, right? So there's going to be this period where you're not going to get a lot of incremental juice out of the gas plants and coal is a natural pivot here, 24/7 consistent power dispatch, and that's what these data center and AI applications need. So I think we are very excited about it. And PAMC as well as our Western operations are going to continue to benefit. I think we're seeing increasing interest from Eastern utilities on our West Elk coal as well. So I think that supports that trend. Robert Braithwaite: And George, just to comment, I mean, we would say at this point, you're already seeing this. To your point, we're already running at 50% capacity factor, but coal consumption year-to-date of about 35 million tons could be up as much as 45 million tons depending on how weather goes for the full year. That's a big step up. So in terms of implications for pricing, we'll see. But obviously, another year or 2 of that is going to put some stress on supply without a doubt. So it could have positive implications there. George Eadie: Yes. Okay. And last one, sorry, maybe Mitesh again. I think this was Nate's question before, but can you remind us potential time lines of when these insurance proceeds will come in? Should we expect all of the funds to be in sort of middle of next year potentially? And also just remind on the Baltimore bridge proceeds, too, please? Mitesh Thakkar: Yes. So I wish I can give you an exact time, George, but I think this is one where we are starting to submit claims as we get the receipts and everything in place as the first line of action on Leer South, which is what we have been doing. So the claim that we just received, we submitted that claim probably 3, 4 months ahead. So there's that lag. We submitted another claim in October. I hope we can get this early next year. So we'll continue to do that, and I think it's going to trickle down. I wish I can give you like an end point. The business interruption claim tends to be a little bit longer gestation period, so to speak. It takes a while going back and forth on assumptions and stuff like that. So I think we are working through that. I think we have made a lot of progress on the Baltimore claim as well, we'll see. I hate to give you like an end date, but I think we expect most of those to be collected next year. Operator: Next question comes from Matthew Key of Texas Capital Bank. Matthew Key: In 2Q, the guidance on merger-related synergies were increased to $150 million to $170 million. I was wondering what percentage of that target have you guys achieved kind of at the end of 3Q? And if there's any other kind of incremental cost savings that you see kind of as you play this out? Mitesh Thakkar: This is Mitesh here. I think we have made a lot of progress on that front, and that number is a little bit higher on an annualized run rate as well. And we'll continue to grind it up. There are a few other things that we are working on. But just in terms of what we have actually achieved, I think if you look at our SG&A trend Q4, Q3 versus what you saw in Q1 and Q2, it kind of reflects some of it. You're seeing that also in the byproduct sales revenue as well. I think on an aggregate, I think we are probably 50% that's probably flowing through the current year, but a lot of that is going to flow through next year. For example, SG&A is going to have full run rate next -- starting second quarter of next year. We have some systems on the IT front that are rolling off. Some of them rolled off in September. So you haven't even seen that impact in the September numbers yet. I think you'll continue to see that and the final system roll-off happens, I think, sometime in April. So I think you will see those numbers flow through. So I think the way to think about full run rate, I would say, sometime second quarter next year, but we are making a lot of progress on that front. Matthew Key: Got it. Appreciate that. That's super helpful. And assuming work at Leer South, the restart there goes as planned. I was wondering if the company would incur any additional fire extinguishment idling costs that kind of bleed into 1Q '26? Or would 4Q kind of be the end of that dynamic? James Brock: I think 4Q will be the end of it, particularly if we get some help here from the government. Like I said, we're ready. The team is ready to go recover these shields. So we don't -- we think what will be left will be the idle expense that's left that will obviously carry through Q4 here. But if we get to recover our shields, -- the longwall face is already mined and set up and ready to receive the new shields. So we'll have all that done in Q4. And there is a possibility if we were turn loose in time and we can't get all the sales that we could actually have production late in Q4 out of Leer South. So it's all based on timing now, but I do think we will have this put to bed in Q4 of this year as far as the fire-related costs. Operator: Next question comes from Nick Giles of B. Riley Securities. Nick Giles: I just wanted to ask about High CV volumes as we look to the fourth quarter. I think your annual guide, the midpoint might imply a slight tick up. But can you just give us some color on what could take us to the higher low end of the range? Are there any longwall moves? Mitesh Thakkar: Yes. I would say that right now, contracted wise, we're in that 7 million to 7.5 million tonne range. PAMC is running very, very well right now. There's a potential we could have a longwall move hit sometime in December. A lot of -- we originally anticipated that in Q1 of next year. But based on the mine running very well, it could funnel in. The big driver there to get to the top end of the guidance will be the return of West Elk, which, as Jimmy mentioned earlier, we're anticipating next week. So all goes well, longwall runs very well, you could see us creep up toward that upper end of the guidance range. James Brock: Yes. And we do have 2 long-haul moves remaining in Q4 for PAMC. Mitesh Thakkar: And just a minor point, too, right? Like we provide sales guidance, not production guidance, right? So we have inventory at the end of the third quarter, which you saw probably in the working capital, too. So it depends sometimes on how many boats show up in the last couple of weeks of December and destock the inventory. So that could drive a little bit of an upside, downside as well. Nick Giles: Got it. Guys, just while I have you, I mean, in recent years, you've spoken about what's the maximum number of volumes that you could send into the seaborne market. But today, just with how robust the domestic market is, what would kind of be the limitations on those volumes? Unknown Executive: I think you just -- you said it right. I mean we are now forecasting, I will tell you, for 2026, we believe our domestic volumes will increase year-on-year. Now again, then the question becomes how is the international market and if we can get more volume out of PAMC. So sitting here today, as I mentioned, 14 million tons we have contracted right now, 10 million of it is domestic. We're still in negotiations for additional business next year. So we'll see how that all plays out. But PAMC is running very well. So we continue to keep on that pace. We certainly could increase some more volumes and get them export. But I would say domestic is going to be year-on-year improved. James Brock: But it works well for us, Nick, compared to -- we've always said in the past that we run to the market. So here's another opportunity, and we run to highest arbitrage. So wherever that may be, if it's domestic or international, we certainly have the ability to get it there. Unknown Executive: And Nick, you talked about the High CV thermal segment as a whole, but West Elk also selling more power gen coal today. And as the story comes to fruition, we could continue to direct more tons into the domestic power gen market from West Elk. And plus, oh, by the way, it's in the B-Seam, we certainly have the ability to run at much higher levels in that thicker coal seam. So additional opportunity there. Operator: There are no further questions at this time. I'd now like to turn the call back over to Jimmy Brock for final closing comments. James Brock: Yes. Thanks, everyone, for joining our call today. We look forward to speaking with you in the future, and we're excited about where Core Natural Resources can be. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
Operator: Good day, and thank you for standing by. Welcome to the Crane NXT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matt Roache, Vice President of Investor Relations. Please go ahead. Matt Roache: Thank you, operator, and good morning, everyone. I want to welcome you all to the third quarter 2025 earnings call for Crane NXT. Before we begin, let me remind you that the slides we will reference during this presentation can be accessed via the Investor Relations section of our website at cranenxt.com and a replay of today's call will also be available on our website. Before we discuss our results, I encourage all participants to review the legal notice on Slide 2, which explains the risk of forward-looking statements and the use of non-GAAP financial measures. Additionally, we refer you to the cautionary language at the bottom of our earnings release and in our Form 10-K and subsequent filings pertaining to forward-looking statements. During the call, we will also be using non-GAAP financial measures, which are reconciled to the comparable GAAP measures in the tables at the end of our press release and accompanying slide presentation, both of which are available on our website in the Investor Relations section. With me today are Aaron Saak, our President and Chief Executive Officer; and Christina Cristiano, our Senior Vice President and Chief Financial Officer. On our call this morning, we'll discuss our third quarter highlights and our operational and financial performance. We will also provide an update on our 2025 financial guidance as well as some initial thoughts on our 2026 outlook for each segment. After our prepared remarks, we will open the call to analysts for questions. With that, I'll turn the call over to Aaron. Aaron Saak: Thank you, Matt, and good morning. I appreciate everyone joining today's call to review our third quarter results. I'd like to start by recognizing our NXT team members around the world for their continued dedication and for delivering another quarter of strong execution. As shown in the highlights on Slide 3, our third quarter performance was in line with our expectations with sales growing approximately 10% year-over-year and adjusted EPS of $1.28. Our strong free cash flow resulted in a conversion ratio of 115% in the quarter, which puts us on track for our full year target range of 90% to 110% conversion. In Q3, we continue to build momentum in strategic growth areas. Growth in our international currency business continues to exceed our expectations. And in the third quarter, we saw several new customer wins, including a prominent country in Latin America. This raises the total number of new denominations that specify our micro-optics technology to 9 year-to-date, putting us on track to achieve the high end of our target of 10 to 15 new denominations for the full year. Additionally, our international currency backlog remains at near record high levels, and our third quarter sales were stronger than our original forecast. As we continue to see growth in orders, we're taking several co-actions to increase production to support our customers. Given this sustained momentum, we're raising our full year sales guidance for SAT and NXT overall. In our U.S. currency business, the Federal Reserve recently released its print order for 2026, including a significant increase in demand for higher denomination banknotes containing our advanced security features. Based on this favorable mix, we expect this business to grow in the high single digits next year. Additionally, we're excited for the release of the new $10 bill with the redesign program advancing as planned. In CPI, our service business continues to expand its offerings outside of traditional cash equipment. And in the quarter, we achieved 2 significant wins with customers for installation and ongoing service of kiosk. These wins are contributing to mid-single-digit ARR or annual recurring revenue growth in service and building a resilient business for the long term. We're also continuing to execute our strategy to expand upon our market-leading positions. In September, we signed an agreement to acquire Antares Vision, a global leader in detection, inspection and track and trace technologies for the life sciences and food & beverage sectors. The acquisition of Antares Vision is another important step, building out our portfolio with differentiated technology offerings and aligning NXT to markets with secular tailwinds. We also continue to make strong progress in our integration efforts within the authentication business. As part of our planned product rationalization and 80/20 actions, we're in the process of upgrading several existing customers from the legacy De La Rue Authentication offerings to our micro-optics technology, improving our margins and our customer stickiness over the long term. Finally, like many other companies, we continue to manage the impact that tariffs and broader macroeconomic uncertainties are having, particularly in our CPI short-cycle businesses. Balancing the strong performance in SAT with the outlook for demand in CPI, we're narrowing our full year EPS guidance to a range of $4 to $4.10. Moving to the next slide, I'd like to spend a few minutes discussing the significant announcements we made since our Q2 earnings call. First is our announcement to acquire Antares Vision, providing Crane NXT with a leading position in the $2 billion life science and food and beverage track and trace and detection technologies market. These markets benefit from strong tailwinds driven by the continuous rise of counterfeiting and the need for greater quality assurance and compliance with government regulations. Antares Vision brings to NXT a differentiated portfolio of advanced detection and inspection systems. It also offers field and remote service capabilities for new equipment, commissioning and aftermarket services, very similar to our service business in CPI. Finally, the company offers market-leading track and trace software to ensure the safety and authenticity of products to consumers, brands and governments. We're moving forward with customary regulatory approvals and expect to close the first phase of the transaction in December. In this first transaction, Crane NXT will acquire an approximate 30% stake in Antares Vision from its largest shareholders. After this closing, we will launch a mandatory public tender offer to all remaining shareholders. Now as a reminder, Crane NXT has secured voting agreements with the largest shareholders of Antares Vision, which assures our ability to take the company private after the completion of the mandatory tender process. Antares Vision is another key milestone in our journey as we continue to build a resilient company through our disciplined M&A process. Over the past 2.5 years, we've taken significant actions to reduce our exposure to cash-centric end markets. And with the acquisition of Antares Vision, we'll have approximately 60% of the portfolio focused on cash-related products and services, down from approximately 80% at the time of separation. These steps strengthen the long-term durability of Crane NXT and align our portfolio to secular tailwinds to accelerate growth. Moving to Slide 5. Another key announcement we made in September was our outlook for the U.S. currency business based on the Federal Reserve Board's release of their annual currency order for 2026. We're very encouraged by the projected increase in volumes for higher denomination banknotes, specifically $10s, $20s, $50s and $100 bills. These notes contain higher levels of security features in the substrate and in the case of the $100 bill contain our proprietary micro-optics technology. The expected order volumes of these notes, partially offset by a reduction in volumes for lower denomination banknotes will result in our U.S. currency business growing at high single digits in 2026. Additionally, we continue to move forward with scaling up for the launch of the new $10 bill with production scheduled for mid-2026 ahead of the expected public launch. Finally, I'm excited to announce our team has made significant progress working with the Bureau of Engraving and Printing on the design of the new $50 bill scheduled for release in 2028. As a reminder, the design of each bill is a multiyear process, starting with design and pilot production before moving to full-scale production ahead of the release to the public. More to come on these developments as we move into 2026. So with that, let me now hand the call over to Christina to review our third quarter performance in more detail. Christina Cristiano: Thank you, Aaron, and good morning, everyone. I'd also like to start by saying thank you to our associates around the world and to express our appreciation for your continued efforts. Starting on Slide 6, we delivered third quarter results that were in line with our expectations. Sales were approximately $445 million, an increase of approximately 10% year-over-year, driven by the impact of acquisitions, favorable FX and continued strong performance in currency. Core sales increased approximately 1%, reflecting accelerating growth in SAT, partially offset by expected softness in CPI. Adjusted segment operating profit margin of approximately 28% was up approximately 50 basis points year-over-year, driven by higher SAT volume and improved mix in currency. Free cash flow conversion was approximately 115% in the quarter, and we continue to expect full year conversion to be in the range of approximately 90% to 110%. Finally, we delivered adjusted EPS of $1.28. Moving to our segments and starting with CPI on Slide 7. Sales of approximately $216 million were down approximately 4% year-over-year as double-digit year-over-year growth in gaming was more than offset by declines in other short-cycle end markets, primarily vending, where like other companies, we continue to face headwinds related to the ongoing macroeconomic and tariff uncertainty. Even with this lower volume, we were able to maintain an adjusted operating margin of approximately 31%, reflecting the benefits of cost reduction measures, pricing and productivity. Looking ahead, we expect sequential margin accretion in the fourth quarter, driven by continued operating discipline, resulting in CPI's full year adjusted operating margin to be between 29% and 30%. Turning to Security and Authentication Technologies on Slide 8. In the third quarter, sales were approximately $229 million and grew approximately 28% year-over-year, including acquisitions. Core sales increased approximately 9% year-over-year, driven by higher volumes and favorable product mix in currency. The volume growth in currency was driven by our ability to optimize our supply chain to produce more banknotes. We are also benefiting from the recent investments we made in our facilities to increase production. Adjusted segment operating profit margin of approximately 24% increased by approximately 250 basis points year-over-year, reflecting the benefit of acquisitions and strong performance in currency. We continue to outperform in currency, maintaining record high backlog levels with approximately 20% organic backlog growth year-over-year. This, along with our strong supply chain execution and ongoing investments to increase production gives us confidence to raise our full year sales guidance. Moving to our balance sheet on Slide 9. We ended the third quarter with net leverage of approximately 2.3x, which we expect will be approximately 2.9x at the full close of the Antares Vision transaction. As we mentioned earlier, we are on track to achieve adjusted free cash flow conversion of approximately 90% to 110% for the full year. This strong free cash flow generation will enable us to pay down debt while continuing to invest in organic growth. Now I'd like to provide an update to our 2025 guidance as shown on Slide 10. Given our continued momentum in SAT, we are increasing our full year sales growth guidance to a range of 9% to 11% from the previous range of 6% to 8%, reflecting the outperformance in currency, partially offset by a reduced sales outlook for CPI. We are also updating our adjusted segment operating profit margin to approximately 25% for the full year from approximately 25.5% to 26.5%, primarily driven by the flow-through of lower CPI volumes and additional costs we are incurring as we increase our international currency production. With these updates, we are narrowing our adjusted EPS guidance to a range of $4 to $4.10. Looking ahead, I'd like to provide our early thoughts on 2026 sales. In SAT, we expect mid-single-digit core growth, driven by favorable product mix in our U.S. currency business and continued strong performance in international currency, supported by our robust backlog and investments to increase our production. We expect core growth in the Authentication business to be mid-single digits, benefiting from increased pricing discipline and cross-selling opportunities. In CPI, we expect flat to low single-digit growth overall with service growing in the mid-single digits. In our hardware products business, where we serve the gaming, retail and financial services markets, we expect flat to low single-digit growth. Finally, we expect vending to be approximately flat year-over-year, reflecting the ongoing impact of tariffs on demand. We'll provide additional guidance for 2026 during our Q4 earnings call early next year. Now I'll turn it back to Aaron for his closing remarks. Aaron Saak: Thank you, Christina. In closing, I want to reiterate a few key points from our call today. First, our Q3 performance was in line with our expectations with strong revenue growth, healthy margins and excellent free cash flow conversion. Second, we continue to build momentum in our strategic growth areas. International currency continues its strong performance, and we're taking actions to maintain our momentum. We're very excited about the trajectory of the U.S. currency business with high single-digit growth expected in 2026, along with the launch of the new $10 bill. Our authentication integration is on track, and we're converting more customers to our advanced micro-optics technology. In CPI, we're making good progress growing ARR in our service business into new higher-growth end markets. And finally, we're taking meaningful steps to expand NXT into adjacent markets with growth tailwinds with our recent announcement to acquire Antares Vision. Well, we've been busy, and we're focused on executing our strategy to be a market leader, providing trusted technology solutions that secure, detect and authenticate our customers' most valuable assets. With all of these actions, we are well positioned to accelerate growth in 2026 and beyond. And I'm excited to share that we'll host an Investor Day on February 25 in New York City, where we'll share more details on our strategy, growth opportunities and financial priorities. And I look forward to seeing many of you there. In closing, thank you for your time this morning, and I'd like to again thank our dedicated team around the world for their commitment to our customers, our communities and all of our stakeholders. And so with that, operator, we're now ready to take our first question. Operator: [Operator Instructions] Our first question is from Matt Summerville of D.A. Davidson. Aaron Saak: Matt, a couple please. Matt Summerville: So first on the currency side of the business, if you're booking in the '27 is it safe to assume you're effectively sold out for '26? And if that's the case, how does this inform what you're doing from a capacitization standpoint in currency overall, whether it be in Malta, whether it be in Sweden or whether it be in New Hampshire? And I guess how much more factory floor flexibility do you have today to accommodate the growth? Aaron Saak: Thanks for that question, Matt. And you're right, currency and particularly international currency has just been a standout for us here in 2025. And we're really bullish on the outlook as we look forward. Some customers are wanting orders now shipped into '27. So we're taking that. So I wouldn't quite say to use your words, we're sold out for '26. I would say we are very confident in the backlog and the position it's put us in, in '26 to actually take some of these actions you're referring to. And it's really due to a combination of things. It's both customers reordering their current micro-optic designs. It's also customers moving forward faster to redesign their currency to get ahead of counterfeiting and specking in our micro-optics. And so where we're at today is we're looking at both organic investments in the near term. That's primarily OpEx in terms of adding people and optimizing our own production. It's also working with outside partners. And to your question, that's procuring substrate materials where that makes sense for us, that's a lower margin part of the business. So that's where we'd want to go out to the market with partners. And then also looking at partners as they would do some printing of banknotes for us as well. I believe as we look forward, and as you know, Matt, we're going to look at continued investments in those core micro-optic facilities where we've already made investments and have the ability and space to increase production. And that's something we're certainly looking at for 2026 and beyond. And quite frankly, it's a great investment and a great return for our shareholder investing in core growth. So we're really excited about that as well. So I think we're in a very good place. But as you can appreciate, we're taking it very seriously our role here of keeping governments fully loaded with their currency. And that's really coming in our international business and through primarily emerging markets. And while the backlog is high, the funnel and the sales outlook is equally high, which gives us high confidence in this business as well. Matt Summerville: As a follow-up, maybe just touch on if USD is growing high single digits, I guess why wouldn't -- if you have all this international goodness, including volume and value rising, market share gains, new redesigns with micro-optics coming faster and the backlog and the order trends you're talking about in the funnel, how does that not equate to a healthier organic outlook for SAT in 2026? Aaron Saak: It's really 2 things, Matt, and it's a good question. It's the balance of your first question, which is looking at how we're optimizing the supply chain and just overall production. So those are trade-off decisions that we're making. And then the second, and it's simply the math is, we're going to have really strong comps to compete against in 2026 just due to this overperformance and how international currency is exceeding our expectations. So in that way, it's just simply the comps. And we just want to have a very prudent, balanced approach as we're setting this outlook going into 2026. Operator: Our next question is from Bob Labick of CJS Securities. Bob Labick: So I wanted to start with CPI. Could you maybe dig a little further into what was the delta versus expectations in vending? Kind of what happened now between now and a few months ago in expectations? And is this a kind of signal of a larger change? Or is this just a lumpiness cyclicality? Or how should we think about that change? Aaron Saak: Yes. Thanks, Bob, for that. And maybe I'll just put that in context the CPI overall to give you some added color. And I think the real point we want to make is we're taking just a very prudent approach to the outlook going forward, particularly in Q4 and to Christina's prepared remarks for 2026. To your question, when we think about vending, this has just been ongoing order softness after the price increases that we enacted due to tariffs. And in Q3, that business was down in the high single digits. And so we expect it to be down in Q4 as well. And it's just continuing delays of customers sweating the assets, pushing out the decisions to buy as we raise prices. So our assumption here, and again, to take a prudent approach is that's not going to change into Q4. At some point, that dynamic does have to change. But again, we just want to level set for 2026. I think the real standout here for us in the quarter when you back up the CPI is gaming with strong double-digit growth in Q3, performed as expected and good order growth in gaming as well. And then our services business, where we've done a lot of investments to improve productivity and add some new service tools in is growing at mid-single digits. and we expect that for the full year. We expect full single-digit growth next year as we're winning new service contracts, improving our ARR outside of the legacy CPI equipment. And that's very optimistic outlook than we have for our CPI service business going forward. I think the other hardware businesses and vending will continue just to have a very balanced, prudent approach to the outlook based on what's happening macroeconomically. Bob Labick: Okay. Great. And then just, I guess, for my follow-up, you mentioned in your prepared remarks, you're starting the kind of upgrading De La Rue sales by adding micro-optics versus their previous security products. Can you maybe dig into that, talk about how that works, what the opportunity is and how it impacts P&L and margins over time? Aaron Saak: Yes. Yes, Bob, and I appreciate that. This is an area and I'm really excited where we're heading and appreciate the hard work the team in authentication has done since we closed De La Rue in May. So through Q3, it's really just 4 months that we had De La Rue in the portfolio. And from day 1, really pre day 1, we've always focused on synergies and executing those, both operational and commercial. And this one that we're talking about here is a little bit of a combination of both, where we originally came in and identified some legacy De La Rue holographic products and went in and did our CBS approach here using our 80/20 toolkit to decide to sunset some products and transition customers to micro-optics. That will be complete as we exit midyear next year. And what we're finding is very good success, moving these customers from a very good technology that De La Rue had, but into really the leading, most differentiated anticounterfeiting technology in our micro-optics. And with that, we're going to see a significant lift in gross margin with those customers as well as increased stickiness because they moved into a very proprietary product. When you put that all together, Bob, we're on track for our synergies that we have communicated. In fact, this program is slightly ahead of schedule and feels very good in the traction that we're getting. And we expect to your question on margins, as we get into the fourth quarter, our authentication business is going to be in the high teens in the fourth quarter in terms of OP. And for all of next year, we're going to be exiting the year approaching 20% operating profit on track to what we said we were going to do last quarter. Operator: Our next question is from Damian Karas of UBS. Damian Karas: I wanted to ask you guys for a little bit more clarity on the redesigns of the -- in the U.S. currency business. So you mentioned the $10 will ramp production kind of in the middle of next year. So are you basically in kind of wait-and-see mode until you get the green light on launching or kind of anything else on your plate until then with respect to the $10? And then on the $50 note that you mentioned you're starting to work for which will ultimately launch in 2028. Help us just understand like the financial model around these redesigns on that $50, is that just like a cost item for you guys right now as you're spending on R&D and I guess, SG&A? Or would you actually start capturing some revenue in these early stages? Aaron Saak: Yes. Thanks, Damian. And again, we're just -- I appreciate the question, incredibly excited about what's happening in this U.S. currency business. As you know and have been following us for a while, which we appreciate, it's been a long time coming, but we're at that inflection point as we get into 2026. The $10 program is just really on track. We have upgraded our equipment, as you know, in the first quarter. We've been running qualification pilot runs as we're exiting this year and working closely with the BEP on the order forecast. So we're all ready mid next year to go in what I would just call full-scale production mode of the new $10 bill. That's going as planned, right on target. And I had the opportunity just a week ago to visit our facility in Dalton, Massachusetts with the team, and they've just done a phenomenal job getting ready for the launch of the $10. So again, I would just say going as planned. We consider that in the outlook Christina mentioned for 2026. As it relates to the new $50, I think this is just an important milestone in the continued decade-long progression of this new U.S. currency series and another key proof point in what it's going to mean as we progress for the SAT segment. In terms of where we're at right now, Damian, I don't expect or should you expect or anyone any real financial impact from it in 2026 or even as we get a little bit into '27. What's important here is that we're in the design phase, working with the Bureau of Engraving and Printing and the Fed on incorporating more advanced security features into that bill than currently exists today in the 50, very similar to what we did with them for the 20. And I think that will be more apparent once the BEP and the Fed announces the new design, which we would expect sometime, let's say, in the middle part of 2026. In terms of just what it means for us, I always go back as we've discussed to you just look at the variable printing cost of the current denominations where the current $100 cost about $0.10 in variable cost. The $50 and $20 are somewhere between $0.05 and $0.06. That delta, while it's just a few pennies, obviously, on several billion banknotes is a material number, and most of that is due to advanced security features, some of which are ours. So that just gives you some bookends on how to think about it. As we get into certainly '26 and in our Investor Day, we'll provide a little more context on what that means for us when you look out these next few years. We feel very good, very excited about where this is headed, Damian. Damian Karas: That's really helpful. And then I'd like to follow up on CPI. It sounds like really it's just vending that's kind of the incremental source of weakness in the lower guidance there. Would you happen to be able to give us a sense on your CPI orders in the third quarter? Like if you excluded vending, what were the rest of the orders overall trending on a year-over-year basis? And I guess just kind of thinking about as we get past these vending headwinds, do you think that the CPI overall is kind of back in growth territory when we get into the first quarter of the next year? Aaron Saak: Yes. That's a good question, Damian. I think I'd go back to Christina's comments that we just want to be prudent on the outlook to your last point there in 2026 with kind of a flat to low single-digit growth dynamic in CPI. More specifically, when you think about the orders that came in, again, our service business, I'll start with that, is going well. There's always a backlog of service orders that's growing commensurate with the mid-single-digit growth that we're seeing in the business. We expect to fully see that and keep investing in it going forward. Gaming, which is part of our hardware business, up double-digit orders, which, again, is consistent with where we were expecting and how that market is playing out. So that feels good. So really the balance is -- and the biggest to the point you made is vending. So again, if we see some positivity, whether that be from tariffs or just generally needing to trigger buys for normal wear and tear, that will have some positivity for us, but we're, again, being prudent on that outlook. And then I think retail for us has been a little bit of a mixed results with the OEMs. Some are performing better than others, and you could see that in some public results this week, still strengthen our customs go-to-market, but net-net, that OEM business is the biggest and the results are mixed, making them down for us to be specific here in Q3. And financial service in terms of the equipment orders down a little bit in Q3 as well. And we think that's just what a lot of other companies are seeing in some shorter cycle businesses just a little uneasiness in the macro environment, and that's playing out in just some incremental delays in ordering in those 3 areas. Operator: Our next question is from Michael Pesendorfer of Baird. Unknown Analyst: This is [indiscernible] on for Mike. So I just wanted to follow up on the upgrading of some of the De La Rue to micro-optics. Are you -- and part of the 80/20 application there, is there walkaway revenue that we need to be considering as we move into next year? What kind of pushback are you getting from customers? And maybe a little bit of color on the receptivity from kind of the sunsetting of the holographic product and moving toward the micro-optic and more proprietary technology? Aaron Saak: Yes. Thanks, [indiscernible]. I think this is a really good area to your question of just how we're executing the integration as we had expected. In terms of the 80/20 process, which I think you're very familiar with, -- in terms of material impact on revenue, there is none. It rounds to 0 effectively because we're seeing not only most customers transitioning to the new technology, which comes at a better price point and better margins, those who won't be, again, nets out effectively for us. So the beauty here is we simplified the offering. We have a better and more simplified supply chain, higher margins and create stickiness with the customers. Generally, with very few exceptions, the receptivity is excellent. And most customers are happy for us to be bringing more advanced technology to them and walking them through what it can mean for their products. And that's been true of the entire authentication integration from the first acquisition of OpSec to now putting OpSec and De La Rue together to form a holistic one company. The customer receptivity to this has been very good, and that gives us a lot of confidence that the thesis here is correct as we've created a true market leader in authentication technologies. Unknown Analyst: Got it, Aaron. That color is super helpful. Maybe switching gears to CPI. Just based on the pieces that you gave us for the 2026 framework, how should we be thinking about the impact to margins as we move into 2026, given the elevated contribution from service in terms of growth rate relative to some of the other pieces of that portfolio and obviously, what's going on with vending. How should we be thinking about the margin trajectory in that segment as we move into 2026 and that mix impact? Christina Cristiano: Well, maybe I'll start and then I'll turn it over to Aaron. And just -- it's worth repeating that we have high confidence in our full year target of 29% to 30% margin for CPI. So continuing to have very disciplined operating execution even with the lower volumes that we're experiencing. And as we said in our prepared remarks, we expect that softness to continue. We're taking a prudent approach to our outlook for next year. But we also expect to continue driving this very disciplined CBS cadence. And so you can expect to see our margins in the same range, if not just a little bit higher with accretion from the synergies that we're driving and the execution of pricing and productivity initiatives. Aaron Saak: Yes. Thanks, Christina. Just to add a little more to what she said. As a service business is very profitable for us. And so that is a positive impact for us in and across CPI as well as it's a very sticky ARR business. So we like that very much, and we're going to keep growing that, as you can see in our results and our outlook. The focus for the hardware business and our vending business is really about maintaining the high operating margins that we have in that 29% to 30% range. As Christina said, I think this is excellent work by the team despite some softness in the top line that we're maintaining this near 30% margin. And that's execution of productivity, cost, CBS toolkit, et cetera. And then I'd be remiss not to say that another hallmark of this business that comes from hardware and bidding is great free cash flow, really an excellent free cash flow profile. And that's another key metric as we look at CPI to maintain the high margins, continue to generate this very strong free cash flow and continue to invest and grow our service business and drive recurring revenue. That's really the playbook of CPI as we get into '26. Operator: Our next question is from Bobby Brooks of Northland Capital Markets. Robert Brooks: In your expectation of the high single-digit revenue growth for the U.S. currency business next year, does that bake in the uplift of what I think is safe to assume a content uplift in the new $5? I'm just trying to get a gauge on if there could be upside to that outlook when the new design is initially revealed. Christina Cristiano: Bobby, I'll start on that one. And let me just for a point of clarification, it's the $10 note that we're redesigning right now that will be launched next year, that we're super excited about. And so the high single-digit guidance is really based on the order that came out earlier in the quarter from the Federal Reserve, which had that favorable product mix, as you remember, toward the higher denomination notes. And that includes the $10 note in there as well as increased volumes for the $20, $50 and $100 bill. So we're super excited for that program to launch next year. And as a reminder, the timing of that is out of our control. We're not controlling that release, but we are prepared to do our production, as Aaron said in the prepared remarks, towards the middle of the year. And so we'll expect to start seeing that production happening in the back half of next year. Robert Brooks: Got it. So it seems like it doesn't necessarily bake in what an uplift in content might look like on $10? Christina Cristiano: Yes. No, it does include the $10 note based on that order. And it's -- remember, it's a small piece of what's happening next year just based on the timing of the launch, right? So if we bring in production in the middle of the year, it's not a full year. But we have high confidence in that sales guidance range that we gave of high single digits for U.S. currency. Robert Brooks: Got it. I appreciate the color. And then -- so on the international currency sales, obviously, that remains red hot. And in your prepared remarks, you had mentioned that 3Q was stronger than you had forecasted. And I was just curious, is that really a result of just timing like countries saying what we wanted in November, we actually want delivered in September? Or is it them having ordered, let's say, 100,000 notes and then they're coming back to you and say, "Hey, we actually want 100,000, 110,000 notes." I'm just trying to understand the drivers of the upside there intra-quarter. Aaron Saak: Yes. Bobby, I'll take it and hand it over to Christina. It's a little bit of customers wanting the currency faster, and we've been working to find ways to get it to them earlier. And that goes back to my comments, I think, in one of the questions around the different actions we're taking to just improve shipments or increase shipments, both using our own internal productivity tools and adding resources and also increasingly working with some partners, which come at a little bit of a higher cost, which is what you're seeing in the segment financials. We don't think this is changing. And it's simply based on the facts of this backlog remaining. And as you can see, we're getting more orders to fill the backlog that we're shipping and our sales funnel is incredibly strong. So -- what's happening here, we strongly believe is a dynamic where more customers, particularly in emerging markets, are needing more currency to the first part of your question. At the same time, they're accelerating the redesign process to add more anti-counterfeiting features. And that was a key reason for the big win that we announced in our prepared remarks in Latin America was to help a country that was motivated and accelerated the redesign to get our very high-end anti-counterfeiting features. And we're seeing that play out in particularly emerging markets all over the world. I hope that helps, Bobby. Robert Brooks: Extremely helpful. I appreciate the color. And if I could just squeeze in one more. Of the 8% core sales growth in SAT, that was really strong, but was that really entirely driven by the increase in international currency? Or were there any authentication wins or expansions that were a part of that core sales growth as well? Christina Cristiano: Yes. Thanks for that question. It's primarily international currency, Bobby, but we did see some favorability in volume and mix in the U.S. currency side of the business and authentication continues to perform as we expected. Operator: Our next question is from Damian Karas of UBS. Damian Karas: Just a few follow-up questions. First, I wanted to ask you about Antares. What's -- how should we be thinking about the business organization in a world in which you have Antares, just thinking about like future segmentation. And would you expect to include Antares in your initial 2026 guidance when you report fourth quarter earnings in a few months? Aaron Saak: Thanks, Damian. And I'll answer the first part and hand it over to Christina for the second. I'd tell you, I just am incredibly excited by the announcement we made a few weeks ago on Antares. I think it's a very key milestone that I think you know in this evolution of the company that's further strengthening our position and it's not only expanding our TAM, but aligning us in the markets with very clear secular tailwinds with a clear technology leadership position in both equipment services and software. So we're on track to the normal process of regulatory approvals that we discussed. When that comes to an end, we'll make our first tranche of investment that will be about 30% of the company. We want to wait, see that through and really not get ahead of ourselves into any segment or alignment discussions, just let that process naturally play out, as you can probably appreciate. And as we get into certainly early next year in our Investor Day and our Q4 earnings call, as that progresses, we'll solidify the alignment as well as some of the guidance. But Christina, I'll let you take the other half of that. Christina Cristiano: Yes. And I'll just reiterate how excited we are to bring Antares into our portfolio. In terms of guidance, I think we will not include Antares in our initial guidance. We'll wait until the close happens at some point in 2026 after that public tender process is completed, and then we'll do an update to the guidance at that time. Damian Karas: Okay. Great. That all makes sense. And then, Aaron, I wanted to ask you a little bit about the strength you're seeing in the service business in CPI and building out that service footprint. Could you just remind us, are these kind of like generalist service contractors that are kind of doing service across the various end markets and customer base? Or are there any particular end markets where you're seeing a lot of this service stand out? Aaron Saak: Yes. Thanks, Damian. I would say these are not -- perhaps based on the definition, general service technicians. These are very highly skilled and trained not only in CPI equipment, but in ancillary equipment, other people's equipment, typically in the front end of stores, checkout areas, kiosks and things of that nature. When you look at our service business today, again, it's about 15% of CPI growing mid-single digits. It's actually spread across many end market verticals. So -- and that's the key to the margins and the optimization of the business that we have good density in a geographic area where we're deploying the service technicians. So today, based on the legacy of that business, about 60% of it is concentrated in financial services. That's really aligned to the legacy CPI and Cummins-Allison products that came into the portfolio in 2019. The rest, though, are in other areas like gaming, retail, vending even end markets. So it's really a nice breadth of offerings that we have kind of with the same type of equipment. And our key wins this -- that we announced this quarter are all with kiosks. So these have nothing to do with cash and coin operations. These are the type of kiosks you see, whether you're at a doctor's office or a retail establishment, a checkout in a particular restaurant, et cetera, that just being normal service contracts and maintenance. And so it's an ARR type business for us now, growing and actually diversifying with all of these wins, which is why I'm particularly optimistic about what the team is doing. Operator: I am showing no further questions at this time. I would now like to turn it back to Aaron Saak for closing remarks. Aaron Saak: Thank you very much, operator. Well, as we conclude today's call, I'd just like to again thank the entire Crane NXT team for all of their hard work and their dedication over the past quarter. As you've seen today, we've taken and continue to take significant steps to evolve the company, and that will continue as we go forward. And as a reminder, we look forward to telling you more about this in our journey ahead during our upcoming Investor Day on February 25 in New York, and I look forward to welcoming you all there. So thank you again for your time this morning and all of your questions, and I hope you have a wonderful week. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnerSys, Inc. Q2 [ Quarter ] 2026 Earnings Webcast and Conference Call. [Operator Instructions] Now I would like to turn the call over to Lisa Langell, Vice President of Investor Relations and Corporate Communications. Please go ahead. Lisa Langell: Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal second quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys Executive Vice President and Chief Financial Officer. Last evening, we published our second quarter results with the SEC, which are available on our website. We also posted slides that we will be referring to during this call. The slides are available on the Presentations page within the Investor Relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated November 5, 2025. Now I'll turn the call over to EnerSys CEO, Shawn O'Connell. Shawn O'Connell: Thank you, Lisa, and good morning. Please turn to Slide 4. During the call today, we will provide an overview of our second quarter results, share progress on our EnerGize strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our third quarter. Please turn to Slide 5. Our performance in the second quarter was strong, with net sales up 8% year-over-year. Earnings growth outpaced revenue growth, driven by favorable price/mix more than offsetting higher costs, resulting in both adjusted operating earnings and EBITDA being up 13%. Excluding 45X benefits, adjusted diluted EPS on our base business was up 15% versus prior year on the higher earnings as well as our lower share count. Our net sales and adjusted diluted EPS both marked new Q2 records driven by strong growth in data center, industrial and A&D. We are seeing positive trends in the majority of our markets, albeit with some lumpiness. Energy Systems led the way this quarter with year-over-year sales growth seen across all end markets, data center, industrials and communications as well as continued margin improvement. Motive Power improved sequentially, but was lower versus prior year as expected on suppressed volumes. Specialty delivered notable performance improvement, nearing double-digit AOE margins on A&D revenue and margin expansion. Free cash flow in the quarter was particularly strong, and we are pleased to return $78 million in capital to our shareholders this quarter through share repurchases and dividends. Please turn to Slide 6. Through our EnerGize strategic framework, we are optimizing our core, invigorating our operating model and accelerating our growth. We are reallocating resources to higher impact projects, and we are focusing on where we have a right to win. We're putting in place the structure that enables our people to focus, specialize and execute with agility and speed. We've made great progress over the past 2 quarters, and I'm excited to update you on these recent highlights. First, the reduction in force actions we announced in July are nearing completion and support our efforts to rightsize the organization. Early benefits are materializing from the $80 million annual cost-saving initiative and the realization of these savings will grow in the third and fourth quarters. Next, we launched our 3 centers of excellence: lead-acid, power electronics and lithium, which are leveraging innovation and best practices across these critical areas to deliver products faster and lower costs. We are already beginning to see ensuing benefits. As an example, our exceptional performance in Energy Systems was bolstered by improved agility from our Power Electronics Center of Excellence. The CoE cut validation time on new components from weeks to days using in-region audits and smarter collaboration. This effort, along with other optimization improvements in our Missouri plants and SIOP helped to support a major communications customer. We delivered a solution within 1 quarter on an initiative that previously could have taken up to 18 months. This is just one instance of how our transformation initiatives are improving execution and accelerating revenue growth. We are also leveraging AI to drive increased efficiency. For example, our lead-acid Center of Excellence has implemented AI-trained inspection cameras and software. This tool enables us to identify defects in battery plates faster and lower scrap rates. We are increasing our rigor around new product introductions and CapEx investments, reallocating resources to focus on higher return opportunities and executing with greater speed. As a data point, our capital spending in the quarter was reduced to 30% to $21 million from $30 million in Q2 '25, even with much of the spend this quarter coming from projects we started last fiscal year. Aligned with our new product road map for lithium technology, we are evaluating our make versus buy options for our lithium cell supply, which includes our planned lithium cell factory. Recent discussions with relevant government officials have been constructive, and we expect to provide an update to you on our new lithium factory plans next quarter. Please turn to Slide 7. In the second quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies. As we've previously shared, approximately 22% of our U.S. sourcing is from countries affected by direct tariff costs. Our estimated direct tariff exposure is now some $70 million annualized for fiscal year '26. This has improved from our prior estimate of $94 million as a result of supply chain mitigation activities. While we anticipate ongoing volatility and further policy shifts, we remain confident we will be able to fully offset the impact of tariffs to our P&L. Our task force continues to proactively mitigate direct and indirect exposure of tariffs, enhance supply chain optionality and assess impact on demand. Please turn to Slide 8. Market uncertainty abated somewhat in the quarter. However, our order book does not yet reflect normalized market conditions. We expect that improving macro conditions and increasing clarity on public policy will continue to support more stable dynamics in the coming quarters. Q2 orders [ pared ] back sequentially after strong orders in Q1, which illustrates the dynamic conditions we are currently seeing in the market. In Q2, backlog in Specialty was up, supported by strong demand in A&D. However, backlog was down in Motive Power on a mix of tariff uncertainty and a return to pre-COVID buying patterns, with levels of book and ship business continuing to increase. Energy Systems backlog is stable. In communications, we are seeing more spending on network refreshes than network expansions. We remain encouraged by the opportunities these customers are reviewing to replace large inventories of older equipment out in the field. Data centers continue to be a key growth vector for EnerSys. While deployment timing can vary by project, demand in this market remains strong. As part of our strategy to accelerate our growth, we are focusing on opportunities to leverage our leading lead-acid market share and expand our share of wallet through new product introductions in this segment. The data center market is in the early phase of a multiyear growth cycle driven by the rise of AI and the increasing need for energy resilience. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies for both tactical and mobile soldier applications. A&D activity in the quarter was robust with visibility to increasing sales for upcoming quarters as the government personnel and spend disruptions settle. Although the Class 8 market remains soft, we saw some improved demand signals in transportation with significant order inflection both sequentially and year-over-year. Please turn to Slide 9. We are proud to have published our fiscal year 2025 sustainability report in October, highlighting how we are delivering measurable energy savings, improving efficiency and reducing costs for EnerSys and our customers. It emphasizes our commitment to communities, operational excellence and our role in supporting global energy resilience. The report reflects the progress we've made and how our sustainability journey aligns with EnerGize, demonstrating how strategic improvements in energy usage, data and systems management drive both efficiency and financial performance. My vision for EnerSys is clear: to embed sustainability, resilience and operational excellence into every part of our enterprise. These principles are not just strategic. They are foundational to delivering long-term value to our customers, communities and shareholders. Please turn to Slide 10. We are excited to announce that we plan to hold our next Investor Day on June 11, 2026, in New York City. We look forward to sharing more details and progress on our strategic road map and longer-term financial targets with you then. In summary, our progress this quarter reflects not only strong execution, but also a shared commitment to continuous improvement and collaboration across the company. We are positioning EnerSys for long-term sustainable success in delivering solutions for our customers and generating value for our shareholders. Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi? Andrea Funk: Thanks, Shawn. Please turn to Slide 12. Net sales came in at $951 million, up 8% from prior year and a record high for our second quarter, driven by a 3% positive impact from organic volumes, 3% positive price/mix, a 1% tailwind from FX and a 1% benefit from Bren-Tronics. The sales growth was driven by strength across most of our end markets. We achieved adjusted gross profit of $277 million, up $23 million year-on-year and up $16 million, excluding 45X benefits. Q2 '26 adjusted gross margin of 29.1% was up 70 basis points sequentially and up 40 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 80 basis points sequentially and mostly flat versus the prior year. Our adjusted operating earnings were $130 million in the quarter, up $15 million versus prior year with an adjusted operating margin of 13.6%. We had a $40 million benefit from 45X in the quarter. Excluding those benefits, adjusted operating earnings increased $8 million, or 10% with an adjusted operating margin of 9.5%, up 20 basis points versus the prior year. Adjusted EBITDA was $146 million, an increase of $17 million versus the prior year, while adjusted EBITDA margin was 15.3%, up 70 basis points versus prior year. Adjusted diluted EPS was $2.56 per share, an increase of 21% over prior year. Excluding 45X, it was $1.51 per share, up 15% versus prior year, both representing record highs for our fiscal second quarter. Our Q2 '26 effective tax rate was 10.5% on an as-reported basis and 23% on an as-adjusted basis before the benefit of 45X compared to 19.4% in Q2 '25 and 21.4% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20% to 22%. Let me now provide details by segment. Please turn to Slide 13. In the second quarter, Energy Systems revenue increased 14% from prior year to $435 million, primarily driven by stronger volumes, along with favorable price/mix and a slightly positive FX impact. Adjusted operating earnings increased 38% from prior year to $34 million, reflecting the benefits of the increased volume and favorable price/mix. Adjusted operating margin of 7.7% increased 130 basis points versus prior year. As Shawn mentioned, we saw unique wins in this business during the quarter that we expect to normalize next quarter. We remain confident in our margin trajectory with upside from here as data center demand and ongoing communications recovery should allow us to generate operating leverage and higher margins with additional support from our structural cost reductions. Motive Power revenue decreased 2% from prior year to $360 million, as anticipated, with lower volumes from macro headwinds more than offsetting favorable price/mix and FX tailwinds. Motive Power adjusted operating earnings were $48 million, down $10 million versus prior year, primarily on those lower volumes. Adjusted operating margins were 13.3%, down 240 basis points versus the prior year. Maintenance-free product sales increased 14% year-on-year and were 29.9% of Motive Power revenue mix compared to 25.8% in Q2 '25. Looking forward, we expect Motive Power volumes to regain year-over-year growth in the third quarter as the macro settles. We expect lithium sales to make up a bigger portion of this growth, which will temporarily pressure margins on higher cost pass-through from both China tariffs as well as elevated costs, which we will experience until lithium sales reach higher volumes. Longer term, Motive Power is well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions. Specialty revenue increased 16% from prior year to $157 million, largely driven by a 7% increase in organic volumes and a 7% benefit from the Bren-Tronics acquisition as well as a 1% increase from FX and price/mix. We remain impressed by the contributions from Bren-Tronics and the cultural fit between our companies, both of which have surpassed our initial expectations. As we acquired Bren-Tronics in the second quarter of our fiscal '25, the results will be included in our ongoing operations in future quarters. Q2 '26 adjusted operating earnings of $15 million were nearly double that of the prior year when we entered the transportation down cycle. Adjusted operating margin of 9.2% was up 380 basis points. We continue to see the near-term opportunity of margin expansion in specialty, driven by robust A&D demand and ongoing TPPL cost and delivery gains from automation under our lead-acid CoE. Please turn to Slide 14. Operating cash flow of $218 million, offset by CapEx of $21 million, resulted in strong free cash flow of $197 million in the quarter, an increase of $194 million versus the prior year same period. This increase was bolstered by the receipt of our U.S. federal tax refund. Free cash flow conversion in the quarter was 288%. Excluding the benefit of 45X to earnings and cash, free cash flow conversion was still an impressive 196%. Primary operating capital increased slightly to just over $1 billion during the quarter on higher sales, with our working capital efficiency measured internally by primary operating capital as a percentage of annualized sales, improving 120 basis points versus prior year and 130 basis points sequentially. As we invigorate our operating model, we will continue to focus on delivering value from enhanced working capital discipline enabled by our CoEs. As of September 28, 2025, we had $389 million of cash and cash equivalents on hand. Net debt of $842 million represents an increase of approximately $61 million since the end of fiscal '25. Our leverage ratio remains well below our target range at 1.3x EBITDA. Our balance sheet is very strong and positions us to invest in growth and navigate the current economic environment. During this period of heightened geopolitical uncertainty, we anticipate maintaining net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation choices and to absorb any macroeconomic dynamics that may impact us. Please turn to Slide 15. During the second quarter, we repurchased 636,000 shares for $68 million at an average price of under $107 per share. We also paid $10 million in dividends. Since quarter end, we repurchased an additional 325,000 shares for $37 million, leaving approximately $960 million in a buyback authorization as of November 4th. We continue to be opportunistic in our share buyback activity, particularly as market conditions remain volatile. Our buybacks, in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders. We continue to evaluate accretive bolt-on acquisitions such as Bren-Tronics and Rebel, that align with our disciplined strategic and financial criteria and are focused on strengthening customer intimacy, expanding share of wallet with our leading positions in exciting end markets and advancing our transformation progress. Please turn to Slide 16. As we navigate the current environment of mixed end market demand trends, we are optimistic but cautious about the near-term outlook. Year-over-year, our Q3 outlook reflects OpEx improvement from realization of our restructuring efforts, healthy demand in data center and A&D, improvements in Motive Power and relatively flat communications revenue following a particularly strong Q2. For the third quarter of fiscal 2026, we expect net sales in the range of $920 million to $960 million, with adjusted diluted EPS of $2.71 to $2.81 per share, which includes $35 million to $40 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.64 to $1.74 per share, up 46% at the midpoint of the range. Our CapEx expectation for the full fiscal 2026 is approximately $80 million. As a reminder, we expect to realize $30 million to $35 million of net savings in fiscal year '26 related to our cost reduction initiatives. While we are pleased with the EnerSys' overall trajectory and are seeing positive momentum across several growth areas, we believe it remains prudent to keep full year quantitative guidance paused due to the dynamic macro environment and its downstream effect on customer buying patterns. That said, we reaffirm our expectation that full year adjusted operating earnings growth, excluding 45X, will outpace revenue growth. We remain confident in the earnings power of our business and our ability to navigate through evolving policy and macroeconomic conditions. With this, let's open it up for questions. Operator? Operator: [Operator Instructions] And your first question comes from the line of Sherif Elmaghrabi with BTIG. Sherif Elmaghrabi: When you talk about demand pull-ins and customers shifting their spending as they manage tariffs, can you tell us what end markets are most impacted? And what do you need to see from some of these customers that would give you more long-term visibility? Shawn O'Connell: Sherif, this is Shawn. I think the big pull-in that we had was in the communications sector. But I don't think it was relative to tariff activity. It was more that customer front-loading their year and opportunity because they were involved in a large acquisition that was going to dominate the second half of their year. So we -- the good news with that is with our centers of excellence, we were able to accommodate them and move very quickly to help them do that. And it provided a little lumpiness in our order book in that front-loading did have a result of a higher Q2. But beyond that, it's not that difficult for us to manage. I will also say in Motive Power, what we're seeing is a restoration of our book and ship business which incidentally was sort of the character of that business for decades where you have a higher percentage of book and ship in the period and a lower percentage of backlog. And as we mentioned in our prepared remarks, [ we're ] started seeing a restoration back to that, which really supports our ability to do quick ship out of our factories. We've spent a lot of time putting that in place. So we don't see a lot of volatility in terms of tariff activity with these pull-ins, as we did in the first quarter. It's more just customers reacting to their localized order demand patterns. Andrea Funk: And Sherif, if I could just add one comment on to that. Shawn is absolutely correct. But the only other comment I'd make with the tariff environment is our customers, particularly on the large capital spending. So buying motive power forklifts or buying Class 8 trucks, that's where we think there's some, I would call it, hesitation in the market. I don't know if you saw the Hyster-Yale release yesterday, they called out a 4% reduction year-on-year on lower forklift truck volume, and they specifically said from ongoing economic uncertainty dampening customers' bookings over the past several quarters. We feel that also. And fortunately, our business isn't affected as much because we have a diversity of end markets. And also we do the replacement cycle as well as the initial battery in the first truck. Sherif Elmaghrabi: Got it. And when we think about lithium driving elevated costs, is that about operating leverage as sales ramp? Or is this kind of an interim phenomenon until the new cell plant comes online? Andrea Funk: Yes. There's actually 2 aspects to that. First of all, obviously, most of the lithium cells right now come from China across the market. So that elevates the cost of lithium batteries in the U.S. in particular. And so we've got that higher cost pass-through, which affects the value proposition. And then we're still in early -- we're ramping up right now, but we're still in early innings. Our lithium battery sales, for example, in the Americas were up 45% in Motive Power. But because we're not yet at full out one, 2 shifts, we're not able to operate at the maximum efficiency that you have when you reach a certain volume level. So even independent of the sourcing of the cells, our pack assembly costs are elevated for the short time until we reach more standardized volumes. Operator: And your next question comes from the line of Brian Drab with William Blair & Company. Brian Drab: Could we first just talk about gross margin? And I think you mentioned it somewhat on the call, but the step down somewhat sequentially and like what are the main drivers of that? I think it's some of the absorption issues, Andi, that you just mentioned. But going forward, how should we think about gross margin at least directionally? And are we going to get back to the levels that we saw in the second half of '25? Andrea Funk: Brian, thanks for the question. Just to clarify, sequentially, we had a pickup in gross margin, both with and without 45X. Are you referring to a specific segment? Brian Drab: No. I'm probably looking at a model that we're just in the process of updating. But can you just comment on the outlook then, how we should think about gross margin from here? Andrea Funk: Yes. So we certainly have price/mix improvements happening across all of our lines of businesses, as you saw in this quarter as well. We've got some mix improvements. There's some dynamics segment by segment. For example, we talked about Motive Power, depending on how quickly lithium ramps, that does put some pressure on gross margin because you have higher cost pass-through as with tariffs in general. But there's no reason to not expect ongoing continuous improvement in gross margin similar to what we've been seeing. Brian Drab: Okay. Got it. Yes. No, I'm looking at updated numbers now. I'm just seeing -- I'm seeing 28.7%. Is that right? Andrea Funk: So if I look at actual reported gross margin, we're at 29.1% versus 28.4%... Brian Drab: Adjusted... Andrea Funk: Adjusted, excluding -- yes, adjusted, maybe that's right. If you exclude 45X, we're at 25% versus 24.1% in Q1. So we look at it both ways. Brian Drab: Okay. It was just much higher in the second half of fiscal '25 unless I'm really off. And I'm wondering, are we going to get -- with some of the cost cutting and all these initiatives and as the capacity -- as the utilization ramps up, these levels that you saw in the second half of '25, is my main question. Andrea Funk: Sure. Good point, Brian, because you bring up an important aspect. In Q3 of '25, it was a 33% reported gross margin. But if you recall, we had the 45X electroactive material catch-up that had prior periods in it. If you look at gross margin, excluding 45X, it was at 24.7%. So again, Q2 was at 25%. Q4, we had -- there was a lot of -- it was a great quarter. But of course, we had also mentioned there were a lot of onetime items that wouldn't repeat. That was at 26.7% and was on much higher volume as well. So the 24.7% in Q3 '25 and then we were at 25% last quarter, and 25% this quarter, I think it's a nice, steady trajectory. And the additional tariffs will certainly give a little bit of pressure with the higher cost pass-through. And there's a nice trajectory in front of us. So I think it's a bright spot. Brian Drab: Okay. And then can you just talk about data center for a second, just how much revenue are you generating in data center? What was the growth rate specifically in data center? And what products are you winning the most with there? And is this including like lead-acid batteries that are being sold in conjunction with generators? Or is it more your stand-alone UPS products? And would love an update there. Andrea Funk: Sure. I can give some of the numbers and then maybe Shawn can follow-up a little bit with the specific products. As you know, in data centers, it is mostly lead-acid and some UPS systems that we have right now with, again, work underway, with Mark leading our engineering efforts for some new product introductions, which we're excited about. That's not yet in the current quarter. Current quarter data centers year-on-year were up 29%. And in the first quarter, they were up 14%. So obviously, it really continues to be a bright spot for us with a lot of opportunities going forward. And Shawn, I don't know if you have anything to add. Shawn O'Connell: Yes. I would just say -- I would say, you have the same thing occurring in the data center environment that we have in Motive and other places and that our TPPL products are resonating very well. We have a leading lead-acid market share that is quite compelling. So most of the products, to Andi's point, are like our HX product line that is valve-regulated technology. And then TPPL is growing at a similar CAGR to what you would have seen in Motive Power and NexSys. And then to Andi's point, I just want to give a little shout out to Mark Matthews. We have a very commercially minded CTO, who's also a lithium expert. And today, the business that he comes from, A&D, we deal in 9 chemistries of lithium, very advanced technological applications. And so Mark's applying that knowledge. Also, our lithium CoE is moving so much faster than it ever has. And he's quickly -- we have some -- we will update you in future quarters on some NPI activity, that's very encouraging to expand that lead-acid market share into other products like lithium. But today, it's lead-acid. Operator: And your next question comes from the line of Chip Moore with ROTH Capital Partners. Alfred Moore: I want to ask -- on communications outside of that large customer that was front-loading, just maybe you can speak to what you're seeing in that end market in terms of less break and fix, but more network build-out and some pull-through on power electronics? It sounds like you think margins should go higher from here, but just any more color? Shawn O'Connell: Yes, Chip, I didn't want to over-index on the pull-in there. The pull-in is just a good sign of what's going on. And the reason for the pull-in, we talked in the prepared remarks about network refresh. And what I'd like to point out is with all of the rise in data and data that -- whether it's the AI or other use cases, the overall aggregate volume of data that has to move around the planet is increasing. And so when we talk about network refresh, it isn't just about updating aged equipment. It's about putting equipment in that can handle the traffic and handle the increase in data traffic. And when we do that, it's also -- that equipment tends to be more power hungry and require more advanced solutions. So I would tell you that we're seeing fairly encouraging demand signals across that marketplace. And while it may not be the 2G or 3G or 4G consistent build-out that we've seen in the past, what we see is users sort of picking -- our customers picking their spots and how they're going to participate in that next evolution in demand. So I would tell you, it's very good. It's not a -- we're seeing singles and doubles. We're not seeing network build that I would call the home run. But again, very encouraging demand signals across communications. Alfred Moore: Great. Very, very helpful color. If I could ask one more, probably more specialty A&D, but just the government shutdown is -- any impacts there or any risks as we look forward? And it doesn't sound like it, but I'd be curious to get your thoughts. Shawn O'Connell: Yes. I would tell you that we've had -- it's sort of a mixed bag. We've had good discussions with our government counterparts relative to our lithium plant and the DOE folks seem to be in the office and working. On the other hand, we saw some of the impacts of the shutdown are main defense type warehouses that aren't as active. But generally, across the board, I'll tell you that the impact has not been substantial. And we're seeing just extraordinary activity in what Andi mentioned the Bren-Tronics folks and how pleased we are with that acquisition. They're doing a great job. They're seeing quite a bit of demand. And then I'll also tell you, we have -- because of our technology position in thermal batteries -- there's only about 3 companies in the U.S. that make thermal batteries, and we have a leading position in advanced technology for thermals. And we're just seeing excellent demand signals across about 12 programs. And what those -- just so you can conceptualize what that is, those are the types of batteries that are used for all -- when you hear talk about hypersonics and advanced defense applications, it's being powered by EnerSys lithium cobalt technology. And so we're very encouraged by that. So I would tell you, overall, A&D demand for us in spite of the lumpiness and the shutdown looks very good. Operator: And your next question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: So it seems like restructuring benefits starting to hit their run rate here, some additional levers being pulled as well on productivity and just overall increased focus on thoughtful resource allocation. So as we think about how that translates to operating margins, what's sort of a fair way to think about the trend in Energy Systems and kind of overall operating margins, even on a sequential basis for what's implied for 3Q, but just sort of directionally, where should they be heading? Shawn O'Connell: Well, I'll start, and I'll give it to Andi to talk more specifically on numbers. But I would tell you that what we're seeing in the CoE realignment is that we have a target-rich environment to continue to work on our costs and gain efficiencies. There's a lot of positive momentum in Keith's business in Energy Systems. I will tell you that they have more opportunities to continue to increase their efficiency there. So we're going to stay on that path. And one of the reasons we're excited to have Keith join us is just because he has that strong operator background, and you're seeing it in the numbers. But we continue that -- we fully expect that trend to continue. And then what I'll also tell you, along the lines of the CoEs, I've been making a concerted effort to get down to Missouri once a month personally and work with the team and walk the factory floor there. And every one of our metrics is improving from OEE to decreasing scrap rates to increased productivity. So the team is doing a fantastic job. You're seeing the evidence of the focus that people aren't too spread thin. They can specialize focus on doing what matters, and that's our bread and butter. So again, we expect that those efficiencies continue. It's early days. We're very encouraged. Andi, do you want to add to that? Andrea Funk: Yes. Thanks, Shawn. As we said on the last call, we had expected that Q1 would be the low point of the year. And in fact, with our dramatic improvement in Q2, that just demonstrates that. Obviously, Q-on-Q adjusted EPS, excluding 45X, was up $0.41 or 37%. Our underlying business is really good. It's actually more compelling than we would have even said a quarter ago. We anticipate full year AOE growth, excluding 45X, will continue to outpace revenue, which obviously implies, Noah, that we'll continue to have margin expansion. I'll give you a little bit of color for each one of the segments of what we're expecting. But as a reminder, our cost reduction program, which was $80 million, $70 million of OpEx and $10 million of manufacturing will start kicking in more. We had a couple of million dollars this quarter, but it's really going to start ramping up in Q3 and Q4. Energy Systems, we're on the path to continuing to improve the margins there. Cost actions have been taken, and there's more work that's central to the strategy. We're seeing steady volume growth for data centers. The comms network refresh is continuing. And while we don't think that might happen this year, but we're confident a build-out has to happen to be able to get all of that AI data delivered into users' hands like you and I. So we think that's going to be more at a measured pace, but ongoing. And the services area is also a key focus for us and has been improving. And Motive Power, as we mentioned, market conditions, hesitant is probably the best word to describe it. But from a positive standpoint, maintenance-free conversions are going great, although lithium might be a little bit of a headwind on margins in the near term. Our soft book-to-bill is a little bit of a concern, I'll be honest. We're not sure how much of that is return to pre-COVID buying patterns versus just this hesitancy that we're talking about. So we're keeping an eye on it. But if you recall, longer term, we've got the Monterrey closure happening next year. We've got our new TPPL and lithium offerings coming online, new chargers, the BESS on the horizon. So we feel really good longer term. And if you look at some of the industry data on Motive Power, I think what you're seeing is very consistent with what we're seeing as well, a little bit of hesitation near term, but no concerns longer term for that business. Specialty, not unreasonable to expect double-digit AOE by next quarter and beyond as our A&D business continues to gain strength. The aftermarket and transportation is starting to pick up, right, from a low starting point. The lead CoE is driving cost improvements, that Shawn mentioned when he's visiting Missouri, it's going well through the automation. And then just as clarity, we don't expect Class 8 to pick back up this year yet. So, I think generally speaking, I'd say the margin improvement, bottom line you saw this quarter is not unreasonable to expect that same level on an ongoing quarterly sequential basis near term. Noah Kaye: That's perfect and comprehensive color. And I'm glad you mentioned the Class 8 aftermarket, which is something that we thought of as a great growth lever for the company and kind of watching for inflection. It sounds like you do expect some growth even this quarter. Maybe just frame up for us where that business stands now? What's sort of driving now improved traction? Any way to think about magnitude of contribution, how meaningful a growth driver this can be? Andrea Funk: Yes. No, we don't give -- we don't specifically guide down to those -- that seg markets. But I will say that we -- the aftermarket business is picking up double-digit. It's just off a slow starting point, and some of that's being offset by the OEMs. But if you look in the aggregate for Specialty, we did have some nice order books for our transportation. Q3 orders sequentially were up 26% and 20% year-on-year. Again, a lot of that is coming from the aftermarket. But you have to remember, it's coming off a low base. So it's not an area that we're -- we expect is going to make a meaningful movement to our bottom line numbers in the short-term. Manufacturing improvement is helping that as well. And the lead CoE will also help us with, I think, more success in transportation longer term. Shawn O'Connell: Yes. And I think Andi mentioned it earlier, and it's just something to just sort of, I think, repeat a bit. If you think of new trucks in Class 8, if the new trucks aren't being built at the same rate, then fleet operators are going to have to do more to keep old trucks on the road or existing fleets on the road, and that bodes well for us. So just like in the forklifts, Andi mentioned that if you're looking at material handling order rates for new trucks, it's more suppressed than we are because we have the replacement and the ability to help them keep those fleets in the warehouse and fleets on the road. So we -- that's part of our -- this renewable component of battery where we'll get a second bite or third bite at the apple with the fleet that -- when new trucks aren't being sold. So I think that's a piece of it. Noah Kaye: Okay. Perfect. If I could sneak one more in. Just outstanding cash generation this quarter, even exclusive of the tax refund, leverage back down to 1.3x. A lot of dry powder for that buyback. Just how are you thinking about repurchase activity here? And maybe kind of update us on your M&A opportunity set as well? Andrea Funk: Yes, sure. Thanks, Noah. We are really pleased with the cash flow generation. And I will say that's an area with invigorating our operating model that we are being intentionally more disciplined and focused on as a management team. So I'm very excited about the outcome of the effort that we've had. So it's a $1 billion buyback, we intend to continuing buying back stock. It's part of our ongoing basis. We generate a lot of cash, and we're committed to returning value to our shareholders. And I would say in periods of dislocation between our stock price and intrinsic value, which we believe is the case now, we're going to continue to buy back at elevated levels. We do want to keep a portion of our available capital capacity to be opportunistic with M&A activities. M&A will continue to be part of our growth strategy going forward. But we don't have anything specific to announce right now. Shawn, I don't know if you want to add any color to that? Shawn O'Connell: Yes, I would just say generally, we -- with all of the focus on operating rigor, I want to make sure we're not giving the impression that we're not going to deploy capital. We're just going to deploy it for high-quality investment opportunities. We have a few M&A opportunities in the pipeline that we think are compelling. But again, for us, it's going to be free cash flow margin and increasing free cash flow margin and then deploying that for the right ROIC, and we're going to stay opportunistic. So I think you can expect us to deploy that discipline and rigor to those opportunities. But definitely, we're going to put that cash to work. And to Andi's point, whether that's buying our own shares when they're undervalued or investing internally in our business for the right opportunities and certainly M&A. Operator: There's no further questions at this time. I will now turn the call back over to Shawn O'Connell for closing remarks. Shawn? Shawn O'Connell: Thank you, Mark. I'd like to thank everybody for joining us on the call today. We look forward to updating you again next quarter. Hope you have a great day. Operator: That concludes today's call. You may now disconnect.
Operator: Hello, and welcome to the Privia Health Third Quarter 2025 Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd like to hand the call over to Robert Borchert, SVP of Investor and Corporate Communications. Please go ahead. Robert Borchert: Thank you, Chris, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of priviahealth.com, along with today's financial press release and slide presentation. Following our prepared comments, we will open the line for questions. Please limit yourself to one question only and return to the queue if you have a follow-up so we can get to as many questions as possible. The financial results reported today are preliminary and are not final until our Form 10-Q for the third quarter and 9-month periods ended September 30, 2025, is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of November 6, 2025. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered along with the cautionary statements in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now I'd like to turn the call over to Parth Mehrotra, our CEO. Parth Mehrotra: Thank you, Robert, and good morning, everyone. Privia Health continued to execute very well across all aspects of our business through the third quarter of 2025. This momentum positions us for continued success in 2026. Today, I'll summarize our business and financial highlights, and David will discuss our financial results and updated 2025 guidance before we take questions. Privia Health's consistent results, operational execution and differentiated business model have clearly demonstrated our ability to perform in all types of market environments. We delivered very strong results across our value-based care book, including the Medicare Shared Savings Program for 2024. New provider signings and implementations remain strong across all of our markets, which provides great visibility for 2026. Implemented Provider growth of 13.1% and value-based attribution growth of 12.8% year-over-year helped support practice collections growth of 27.1% in the third quarter. Adjusted EBITDA increased 61.6% with EBITDA margin as a percentage of care margin expanding 720 basis points to reach 30.5%. This outstanding performance gives us confidence to raise our 2025 outlook above the high end of our previous ranges. In September, Privia Health agreed to acquire an accountable care organization business from Evolent Health for $100 million in cash, plus an earn-out of up to $13 million based on 2025 MSSP performance. This business will add over 120,000 value-based care attributed lives across existing and new states in MSSP as well as various commercial and Medicare Advantage arrangements. The transaction offers a compelling synergy for Privia as the ACO participating providers will have an opportunity to join Privia's medical groups for a full technology and service platform. The transaction is expected to close by year-end 2025, pending regulatory approvals, and we expect it to positively contribute to adjusted EBITDA in 2026. Privia's national footprint now includes 5,250 Implemented Providers caring for over 5.6 million patients in more than 1,340 care center locations operating in 15 states and D.C. Our balanced and diversified value-based care organization now serves over 1.4 million patients through more than 100 commercial and government programs. Our total attributed lives increased close to 13% from a year ago. This was broadly driven by new provider growth and our entry into Arizona. Commercial attributed lives increased more than 12% from last year to reach 864,000. Lives attributed to CMS Medicare programs were up 12%. Medicare Advantage and Medicaid attribution increased more than 12% and 18%, respectively, from a year ago. This diversified value-based care book gives us the confidence to build scale and profitability without depending on any one particular contract. With the ACO business acquisition, Privia's total attributed lives will expand to more than 1.5 million. We remain highly focused on generating positive contribution margin in our value-based contracts as we pursue attribution growth, manage risk and implement clinical and operational enhancements in our medical groups. Our consistent performance over the past few years is a testament of our approach to value-based care and the strength of our actuarial underwriting, physician-led governance structure and clinical operations. Our physicians and providers continue to strive to reduce costs, improve patient well-being and deliver value to our commercial and government payer partners. Now I'll ask David to review our recent financial results, balance sheet strength and our updated 2025 guidance in more detail. David Mountcastle: Thank you, Parth. We continue to see very strong performance across our value-based care book, especially in the Medicare Shared Savings Program. Across our 9 ACOs and MSSP in 2024, Privia managed over $2.5 billion in medical spend. Our aggregate savings rate of 9.4% was up from 8.2% in 2023. Total shared savings of $234.1 million increased 32.6% from a year earlier. This demonstrates our continued success in increasing savings and profitability while adding value-based and downside risk lives and contracts. After CMS' share, Privia's gross shared savings was $160.1 million, a 36% increase over 2023. This is the amount recognized in practice collections and GAAP revenue. In the Mid-Atlantic region, we operate one of the country's largest ACOs caring for about 60,000 patients. We delivered savings of 11%, which for the fifth year in a row was the highest savings rate of all ACOs with greater than 40,000 attributed lives. Privia Health's strong operational execution and growth continued through the third quarter. Implemented providers grew 125 sequentially from Q2 to reach 5,250 at September 30, an increase of 13.1% year-over-year. Implemented provider growth, along with strong value-based performance and solid ambulatory utilization trends, led to practice collections increasing 27.1% from Q3 a year ago to reach $940.4 million. Adjusted EBITDA, which is reconciled to GAAP net income in the appendix, increased 61.6% over the third quarter last year to reach $38.2 million, representing 30.5% of care margin. This is a 720 basis point margin improvement year-over-year as we posted better-than-expected results across our value-based care book, which helped generate significant operating leverage across both cost of platform and G&A. For the first 9 months of 2025, practice collections increased 19.6% to $2.6 billion. Care margin was up 16.7% and adjusted EBITDA grew 43.5% to reach $94.1 million. Our business continues to generate very strong free cash flow. Pro forma cash at the end of the third quarter was $409.9 million with no debt. This assumes the deployment of $100 million by year-end for the ACO business acquisition and the net cash received from CMS for the 2024 MSSP performance year. Year-to-date pro forma free cash flow, excluding cash deployed for business development transactions, was $104.4 million. Assuming no further deployment of capital for business development, we expect to end the year with at least $410 million in cash. This continues to position us with significant financial flexibility to take advantage of opportunities in the current market environment. Our outstanding year-to-date performance positioned us to once again raise our 2025 outlook. Using the midpoints of our new 2025 guidance, implemented providers are expected to increase 11.2% year-over-year to reach 5,325 by year-end. Attributed lives growth is expected to be approximately 12.5%. We expect practice collections to grow 17.1% and care margin 13.2% at their respective midpoints. We are also guiding to adjusted EBITDA growth of 32% at the midpoint and expect more than 80% of full year 2025 adjusted EBITDA to convert to free cash flow. Privia's consistent long-term growth and profitability across economic, health care and regulatory cycles validates the strength of our differentiated business and economic model and consistent execution by our provider partners and our employees year after year. Our momentum and diversified book of business has positioned us well to drive organic provider growth and increase operating leverage for long-term adjusted EBITDA and free cash flow growth as we build our national footprint. We look forward to continuing to serve our physicians, providers and health system partners and their patients on our long-term journey together. Operator, we are now ready to take questions. Operator: [Operator Instructions] And your first question comes from the line of Joshua Raskin with Nephron Research. Marco Criscuolo: This is actually Marco on for Josh. Actually, I had one on your MSSP performance. So given the very strong results for that program in 2024, I was just wondering how you plan to guide to that in the future. Does the outperformance in 2024 now just get factored into the baseline for future planning? Or are there any reasons why we should consider that year to be above the go-forward run rate? Parth Mehrotra: Yes, I appreciate the question, Marc. So I think we're going to be pretty consistent with how we've done it over the past 7, 8 years. We take into account all the data we received from CMS, look at our attribution, see any changes to the program structure, fee rates, et cetera, just factor all that in. We look at the results and if we perform well relative to benchmarks, all that just does get factored into the next year. So every year when we report, we are updating for prior year and then also updating current estimates for the current year. So all that's factored into the guidance. So you can see with our outperformance, that includes both factoring in for '24 actual results as well as updated view on '25. Operator: Your next question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Congrats on the quarter and the good MSSP results. Could you talk to us about the one, the sort of go forward for the 4Q? I know you obviously had the outsized gains in the third quarter, but sort of how are you seeing the core business performing as we go into the fourth quarter? And on prior calls, you talked about over $130 million of EBITDA for 2026. I don't know if you could comment on sort of where you're seeing that number now. Parth Mehrotra: Yes. Thanks, Elizabeth. Appreciate it. So look, I think we continue to see very strong trends. There's no reason to believe the momentum changes in Q4. We don't give quarterly guidance. We're just focused on annual results, given when value-based care results flow in into the year. There's a very specific reason we just avoid the quarterly guidance or implied outlook and so on and so forth. I think we're being our usual prudence in terms of implied guidance for Q4. So I think we'll just see how the year goes. We just didn't want to get ahead of ourselves given we've had a pretty outstanding year, year-to-date Q3. And then I think, look, I mean, the updated guidance, we are sitting close to $120 million for 2024. I think we're going to keep targeting 20% growth off of that where we closed this year into next year. We'll just see how we close the year, hopefully strong and then close the Evolent transaction like we noted, factor all that in, see updated results on the value-based book across all categories as we enter later this year, early next year, factor all that in and give guidance in February like we do. But there's no reason to believe. I mean, we've had one of our best years, and I think the momentum should help us take that forward like we noted in our prepared remarks, that positions us exceptionally well for a pretty strong '26. Operator: Your next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: Okay. When I look at revenues or practice collections per provider, it's just up a ton this quarter. And I know it's just a metric, but can you just talk about the factors influencing the strong fee-for-service growth? I know you don't give same-store volumes, but just the revenues are growing so much faster than the implemented provider growth. Parth Mehrotra: Yes. Thanks for the question, Whit. So I think it was pretty broad-based. We saw that across the fee-for-service book, utilization trends and then also value-based book where if the actual results come in ahead of accruals, all that gets factored in the practice collections. We added a couple of markets. Arizona is now fully factored in. When we give original guidance, we don't include BD like we noted. And once we close the transaction, all that gets factored in. Indiana has got implemented, that got ramped up. So I think you're seeing the momentum across the business, same-store new provider growth, new markets, good value-based book, and it just speaks to the momentum in the business. When all of these things hit, you get results like this and it flows down EBITDA free cash. So I think we're really pleased as to how it's played out. Operator: Your next question comes from the line of Matt Gillmor with KeyBanc. Matthew Gillmor: Parth, I wanted to ask about the synergy opportunities with the Evolent Health ACO. How are you thinking about the pathway to enhancing the savings rate from Evolent's ACO up to previous performance? And then also, can you provide a couple of comments about the physician base, which I think is relatively large, around 1,000 physicians. Just give us a sense for what those practices look like and the appetite to join the Privia Medical Group. Parth Mehrotra: Yes. Thanks for the question, Matt, and kudos to calling the deal out like a year ago when we hadn't even started conversations. Look, I think you noted all of them. I mean our thesis is this is a core part of our business. We've done MSSP for 10 years. We think we can offer a lot more to these provider groups. Obviously, there's a synergy opportunity in our existing states where we have medical groups, we have a full infrastructure. We'll have a pretty tangible ROI for many of the practices that can join us. And so there's that cross-sell opportunity. I don't think it plays out just in the next quarter or 2. I think this thing takes a few years to play out as practices -- some of the larger practices make that fundamental decision to join our medical groups. It's an entirely different business value proposition. And then I think it gives us good opportunity to -- we're now going to enter 6 new states with a lighter model with just in the ACO, but then there's an opportunity for us to find anchor providers and others that we can actually establish our medical group and then implement our full suite and enter these states. And so I think we're going to focus on both of those. And then obviously, improving the performance of the ACO at hand is kind of job #1. So they are at a certain level of shared savings rate with CMS. You've seen our performance across our other ACOs as we've consistently improved that. We have 4 or 5 ACOs that are now close to double digit or higher than double-digit savings rate. So I don't think, again, that plays out in the near term. But over time, our hope is we can improve performance. So there are multiple levers to get synergies out of the business. We haven't closed the transaction yet. So we'll just go through that. And hopefully, that gives us good tailwinds over the next 2, 3 years as we play out that thesis. Operator: Your next question comes from the line of Andrew Mok with Barclays. Thomas Walsh: This is Thomas Walsh on for Andrew. Hoping you could discuss some of the moving pieces in the capitated business this quarter, including the step-up in revenue, prior year claims development and any change in membership? Parth Mehrotra: Yes. Thanks, Thomas. So I think we have a pretty small capitated book, about 20,000 to 22,000 lives. So I think that's just to note that. And then this was a small book that we retained on a capitated basis when we kind of restructured these contracts a couple of years ago, given our view on the broader MA environment. And our hope was that we would perform well in the book that we are keeping. So I think you're seeing that play out. I think it's effectively the factors that you would expect on the revenue side, given attribution, risk adjustment and then obviously, performance relative to that on the cost side with all our programs just performing a little bit better than what we expected, which was the hope. So you're seeing that play out. I don't think it fundamentally changes our view on capitation and how that plays out going forward. We continue to believe having shared risk model with payers, providers, Privia, like we've said on our previous calls. We just think that's the most optimal structure. All the pressures in MA continue to persist as most of the analysts on the call have written pretty extensively about V28 and star scores, utilization trends, none of that is changing fundamentally. So I think we're going to be pretty cautious on capitated MA, but we're really pleased with the book we have, and we'll continue to optimize it for profitability and continue to give that value to both our payer partners and our providers. David Mountcastle: Yes. And just to add to that, for the quarter, there was a little bit of timing of data and a little bit of retroactivity back to 1/1. So I would say we're looking at probably Q3 is the high mark for the year and wouldn't expect that exact trend to continue into Q4. Operator: Your next question comes from the line of Matthew Shea with Needham & Company. Matthew Shea: Congrats on the nice quarter here. I wanted to ask about kind of the go-forward growth algorithm. Historically, you've stuck to a cadence of 1 to 2 markets per year. You demonstrated that this year. Evolent obviously adds more than 1 to 2 markets immediately. So curious, how does the acquisition change the cadence of new markets? Is it fair to expect you will pause for a bit while you process through integrating those assets? Or just how does the deal change the growth algorithm? And then you also commented on the flexibility, the cash position gives you at this point. So just curious what your appetite for incremental M&A is? Parth Mehrotra: Yes. I appreciate the question, Matt. So I don't think anything changes fundamentally. We continue to have a pretty good business development pipeline. Evolent gives us access to 6 new states, but it's not with the full model as we just were talking about. So I think -- when we talk about a new state, it's implementing the full model with our medical groups, risk entities, full services platform. So I think that will be the cadence. I think we have a pretty strong cash balance, $400-plus million even at the end of the year despite spending $200 million this year. I think we're going to continue to take advantage of all the dislocation in the market. A lot of companies that got started public, private have struggled for different reasons. I don't think new money is chasing some of these models, which is great for us. A lot of TAM opens up as some of these models struggle, physicians come out. So I think we're going to continue to be pretty aggressive with BD and try to take advantage of this opportunity and window and keep growing our TAM, keep growing our business and compounding it. So again, but we're going to be disciplined on price, on the types of deal we do as we have been in the past. So I think we'll just continue with the cadence all across. So there's no fundamental change in how we think about our growth algorithm. Operator: Your next question comes from the line of Jailendra Singh with Truist Securities. Jailendra Singh: Congrats on a strong quarter. I want to stay on the topic of MSSP, clearly, strong results there. But the landscape in general, I mean, we have come across multiple companies who were previously only focused on the ACO REACH program and now exploring ways to shift MSSP given all the uncertainties in the ACO REACH program. Is that -- how does that change the landscape for you guys? I mean, on the same topic of M&A, do you think that could be an opportunity for you to look at some of these entities who might have done okay on ACO REACH but now are uncertain about the future? Just give us a flavor about the landscape this might be having some impact on. Parth Mehrotra: Yes. Thanks, Jailendra. I think it ties to the previous question. I think there's a lot of dislocation the barriers to entry to start a REACH or an MSSP ACO were pretty low. But then executing on it and scaling it and making it profitable is where I think all the secret sauce is. I mean there's no IP in health care services. So I think as new money does not flow in and people are not willing to put in good money behind bad money and some of these models struggle to get profitable or scale, I think all of those give us good opportunities. I mean, at the end of the day, if you look at Slide 12, like we are chasing 2 units that drive this business, providers, the patients they cover our lives and then how many of those are in some value-based arrangements. So as I think some of these entities struggle, the physicians come out or we have an opportunity to buy some of these entities at a reasonable price, I think we're going to look at all of those. The transaction we did with Evolent is an example of that. I mean they didn't do REACH, but I mean, there was a pretty big value-based care book available. And I think the transaction was good for both parties. We got it at a reasonable price. They had something that was noncore to them. So I think we're going to look for those kind of opportunities. But I think, like we said, we're going to be pretty aggressive across the Board in looking for opportunities to keep growing. Operator: The next question comes from the line of Jeff Garro with Stephens. Jeffrey Garro: I want to ask how we should be thinking about the evolution of your relationships with payers as we head into the next calendar year and you might be finalizing any of the negotiations or contractual arrangements with those counterparties towards year-end. Has your execution on value-based care from both the cost and quality perspective changed those conversations dramatically? Or should we continue to think about it as kind of incremental gains towards value-based care as you show the high level of service that your providers offer? Parth Mehrotra: Yes, I appreciate the question, Jeff. I think it's a great question. Given the breadth of our relationship across commercial, MA, Medicaid, our -- these are ongoing discussions. It's not like we have contracting discussions at one point of the year because like we said, we have over 100 VBC contracts, they're close to 200 commercial contracts, including commercial value-based. So the discussions are really broad-based. And these happen at the state level, just given how the industry works. But then as we really perform well in one state, we have case studies, we have a history of performance. The payers understand what we've done for them in one state. And so as we enter a new state or we have some of the younger states, I think those conversations help us. So there's a local level discussion. There's a national level discussion. We include multiple aspects to contracting. So when we go and negotiate a fee-for-service contract, it includes a value-based element to it, even on the commercial book, the MA book, the Medicaid book. So I think it's a differentiated value proposition that very few companies in the space have at the scale and breadth that we do. And so I think we continue to work with the payers. They are seeing strong results. We offer them a very low-cost provider network, a delivery network, and that's the right side of history in terms of where -- what you have to do to reduce cost, improve outcomes, improve patient well-being, so on and so forth. So I think it's great to see that play out over 4, 5, 6, 7 years. So you have empirical tangible results to show. And I think that continues to differentiate us. And I think it's not only with the payers, it's with provider groups, it's with the government. So I think all of that bodes pretty well for us as we continue the momentum. Operator: Your next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: On the MA CAP performance, I think I heard you say there was some favorable retro pickup. I guess, could you maybe help us frame how much of that was sort of core performance versus onetime in nature? And then just on the current number of MA lives, 20,000 to 22,000, if you wanted to, is there an opportunity to increase the number of those lives in the current contracts that you have? Or would you sort of have to move outside of those and sign additional contracts to grow lives? Parth Mehrotra: Yes, I appreciate the question. So I think it was a bit of both on the first part. It's also relative to our accruals, what the actual results are. I mean we've been very, very prudent and thoughtful on how we accrue just given the environment, given everything you heard from the payers. So we were fairly prudent in our assumptions. But then at the same time, we just don't take a step back on actually performing in those contracts and then we hope for the best. And I think what you saw was the team did a pretty good job. Now it's a pretty small book. It's like we said earlier, it's 20,000 to 22,000 lives, 1 or 2 states, a couple of payers. So we really focused on what we needed to do to reduce cost, improve outcomes and then have the results we did. So I think it was a bit of both in terms of great performance in the year. Now like we said, I don't think we're going to continue to assume that some of the headwinds in MA just go away. So I think we'll continue to be prudent in our accruals going forward. And if results are better, then you'll see the outperformance again, but I think that's the tactic we're just going to keep. And then I think in terms of increasing attribution, look, I think it's going to be both things. I mean we're looking to increase same-store attribution growth in existing states with existing contracts with existing doctors. We add new providers in the same state, so -- and in the same geography. So if we have an MA contract in a few ZIP codes, we add new providers there, that attribution adds to it. And then we're going to obviously try to enter into new MA contracts in existing and new states as well. So I think you'll see a combination of all of that. Our approach is to continue to increase lives across the value-based book, MA, MSSP, Medicaid, commercial and because that's the chassis for the business and the economic model. So I think you're going to continue to see us just increase lives as fast as we can. Operator: Next question comes from the line of A.J. Rice with UBS. Albert Rice: You have a unique window on a bunch of different payer classes, coverage categories. And I wonder, there seems to still be quite a bit of disruption in underlying utilization trends. Is there anything you're seeing to call out there? There's also been speculation that as people base coverage changes going into the new year, there might be some acceleration on utilization during the fourth quarter. Are you seeing any of that in how people are approaching your primary care operations and so forth? Parth Mehrotra: Yes. Thanks for the question, A.J. So as we've done previously, I think it's important to distinguish between ambulatory utilization, physician practice offices in the communities versus in the hospitals and post-acute and so forth. And so I think we continue to see elevated trends across the Board. I don't think there's any reason to believe that those trends reduce. We'll just see how Q4 plays out and whether all the changes in some of the programs and whether attribution might change with Medicaid or exchange population. It's not really big for us. But I think that impacts more of the post-acute and acute side of things versus ambulatory. But we'll see how that plays out. But I think our underlying assumption is going to be pretty elevated. And so we plan for that in the value-based book. It bodes well for us on the fee-for-service side. So I think that's our view. Operator: Your next question comes from the line of Constantine Davides with Citizens. Constantine Davides: Maybe just Parth changing gears a little bit here, but you've more than doubled the number of providers on the platform in the past 5 years. Can you maybe talk about Privia's ancillary capabilities and how they've evolved over this time frame as you've added new markets and particularly new specialties and increased density in more mature markets. So just again, how your ability to continue to scale the platform is maybe driving your thinking about some of the ancillary services you provide to your groups? Parth Mehrotra: Yes, I appreciate the question, Constantine. So it's a really good point. I think, look, our strategy is enter a state, get density of providers and then run the entire playbook for the whole line of business, all patients, all payers, all lines. And as we develop that density, there's a lot of opportunity for us to get into things like labs, pharmacy benefits, ASCs potentially, clinical research, anything that goes through our practices because we are operating integrated medical groups, risk entities, full tech and services platform. We've got all the data. The medical groups make the decisions collectively with the Privia team. And so there's a lot of saving opportunities that we can offer to the payers, incremental revenue opportunities we can offer to our medical groups and our provider practices. And so you'll see us pursue all that. Now it varies by state depending on density. So it's not going to be homogenous. But across all of those lines, we look to monetize the platform and scale it. So -- and I think that leads to the great economic model where incremental revenue just flows down the P&L as we monetize the network. And I think that's one of the underappreciated parts of our business as to how we can -- how well we can do that. So you're seeing that play out in the thesis. Again, like Slide 12 speaks for itself. If you look at the provider growth, collections growth, care margin, EBITDA, free cash flow, and that's a fully expensed P&L for all sales, marketing, BD, software development, everything. And we are approaching close to target margins. Overall, as a company, we're at 26% EBITDA to care margin. When we went public 5 years ago, we said we're going to target 30% to 35%. I mean, we're pretty much there over the next few years. So I think you're seeing the whole thesis play out as a result. Operator: Your next question comes from the line of Jessica Tassan with Piper Sandler. Derek Gross: This is Derek Gross on for Jess. I had one on Evolent Care Partners. We believe that they had a $220 million a year partial capitation contract with Blue Cross Blue Shield of North Carolina. Do they have any other contracts like this? And did the acquisition include management of this contract or just the MSSP business? Parth Mehrotra: Yes, I appreciate the question. So like as we noted in our press release, when we did the deal, we bought the entire business, all contracts that included commercial and MA as well in addition to MSSP. And so yes, we assume that contract. We're not going to get into details of any specific contract and lives in it or revenue dollars and so forth, like we don't do it for the rest of our book. We'll include them as part of our whole entire platform and how we report it on Slide 6. But yes, we've inherited those contracts, and it's part of our core strategy to just add to lives in each of the circles that you have on Slide 6, and that will add to the MA lives there, and we'll continue to hope to perform as expected or better over time. Operator: Your next question comes from the line of Daniel Grosslight with Citi. Daniel Grosslight: Congrats on another strong one here. If I look at the implied guide for 4Q on a year-over-year basis, it seems like you're projecting limited profitability growth. It's about low single digits and some margin compression. Parth, I know you mentioned that just given where you are in the year, you do continue to guide conservative. But I'm just curious if there's any investments that you're making in 4Q that may be weighing on margin. And I also just wanted to confirm if IMS contributed anything to profitability this quarter? Or are you still expecting that to start contributing in 4Q? Parth Mehrotra: Yes, I appreciate the questions. Yes. So there's no investments. There's nothing -- there's no anomaly. We're just being prudent. We don't want to get ahead of ourselves just given the strong results. If all that momentum continues, hopefully, we'll close the year pretty strong. And so IMS -- and to your second question, IMS will contribute in Q4 and going forward once they were implemented in September. So I think that hasn't contributed. So I think -- look, we expect Q4 to be strong. We'll see how it plays out. Hopefully, it's better than expected. We just had the magnitude of outperformance in the first 3 months -- first 3 quarters that -- like we said earlier, like we don't give implied guidance. We don't guide by quarter. I think we're just looking at the full year. On each of our operating metrics, we are well above the high end. So if it continues at the trend that we expect it to, hopefully, you'll see all that outperformance continue. Operator: Your next question comes from the line of Jack Slevin with Jefferies. Jack Slevin: Congrats on the quarter. Most of my questions have been asked already. So maybe just a tidying up one on the numbers. In previous years, when you've had significant outperformance or a strong lead in? I know you've had sort of higher variable comp or bonuses that have come through in either the fourth quarter or on a cash basis hitting early in the following year. Is there anything we should be looking out for on that front as we look at 4Q and 1Q coming up? Parth Mehrotra: Yes, I appreciate it, Jack. So yes, that's all factored in the guidance. So as we look at our scorecard that you can see in the proxy every year based on the metrics, we accrue for that level of outperformance and bonus accruals and so forth. So that's all in the accrued bonus line on the balance sheet. That's reflected in the P&L. So that's all fully expensed already. And despite that, you're seeing the outperformance. So yes, that will lead to some increased cash outflow in Q1. So you'll expect that. But I mean, that's a result of great business. So the interests are pretty aligned with the shareholders here in terms of how much free cash and EBITDA we generate. Operator: Your next question comes from the line of David Larsen with BTIG. Jenny Shen: This is Jenny Shen on for David. Congrats on a great quarter. I just wanted to ask about the New Big Beautiful Bill Law. Any thoughts on impacts to Privia, any impact on your Medicaid book, even though it's small? Parth Mehrotra: Yes. Thanks for the question, Jenny. So as you noted, I mean, the 2 main areas there were Medicaid and the exchange populations, and both of those are pretty small for us. We don't take any downside risk on Medicaid. It's a pretty small percentage of collections for our practices. We'll see how the patient mix changes, but we don't expect any big changes, any fundamental issues. Practices run at capacity, lives move. I don't think people give up their primary care. It's pretty essential to their well-being and getting back to work and things like that or kids going to school with pediatricians or women getting their care with our OB. So I don't think all of that changes much for us. We'll just see how the shifts happen, but it's happened in the past. But -- so we don't expect any meaningful impact to us given just our business model and mix. Operator: Your next question comes from the line of Ryan Daniels with William Blair. Ryan Daniels: Congrats on the strong year-to-date performance. Parth, I wanted to go back to some of your comments on ancillary services. And I'm curious in particular, I know a few years ago, you signed a partnership with surgery center chain. We've got some potential changes to the inpatient-only list. I'm curious if that, in particular, would be a bigger growth opportunity in kind of managing referrals and point of care for the organization going forward. Parth Mehrotra: Yes, I appreciate the question, Ryan. I think absolutely, as we build out, I mean, we're consciously focused to building a multi-specialty medical group for that reason. Downstream, 80% of the costs are downstream from the PCP, give or take, as you know. So I think as we continue to build out density in different states, that's a core focus for us. I think that comes with opportunities for outpatient surgeries, ASCs, managing more of the total cost of care and partnering with these physicians. So I think as we continue to build out our network in each state, get density, I think you'll expect us to continue to expand in that area. Again, I don't think we're going to be very surgical heavy just given the nature of our business. But I do think folks being taken chronically ill patients, whether it's cardiology, pulmonology, CKD, things like that, I think we're going to keep looking at it selectively. Ortho is another big area. So I do think you'll expect us to continue to do it. It's -- again, it's not going to be homogenous by state. But as we build out the medical groups, that's a big lever to control cost of total care. Operator: And your last question comes from the line of Craig Jones, Bank of America. Unknown Analyst: This is [ Joaquin ] on for Craig. So you have astutely shifted down risk in MA during the first 2 years of V28. What are the odds you think we could see some kind of V29 in the next few years? And what would make you more comfortable taking more risk in MA? Parth Mehrotra: Yes, I appreciate the question, [ Joaquin ]. I mean it's pretty much similar to what we've said earlier. I think we just have to see how it plays out. It's just tough to predict when V29 comes, it doesn't come, what are the specifics on it. We've continued to believe that a shared risk model between the payers, the providers, somebody like a Privia in the middle is the right approach. You have to be thoughtful. These are long-term contracts. The patients don't change their PCPs. You're trying to manage their total cost as they are growing older, they're growing sicker. I don't think any one entity can perform well at the expense of the other on a long-term sustainable basis. So I think you can get anomalies in the middle when somebody is trying to grow their business with some benefit design changes on the payer side or provider enablement entities throwing a lot of money to just get physicians in some risk contracts. And you then see blowups happen like we did in the last 2, 3 years. So we just think the best long-term sustainable model is alignment of interest and everybody having share in the game. And that's what we're going to focus on. I think everybody got too infatuated with this how capitation work and does it have to be 100% downstream at the provider entity level versus the payer. And we just believe in a different approach, and I think that's just more sustainable. So the job to be done is not going to change. You're going to have an aging population that is growing sicker, older and ultimately dying. I mean that's the truism of humanity, unfortunately. So I think if that's the problem at hand, you need doctors in the community to do the work on behalf of the payers. Like the payers, unless they have a care delivery arm, they're not taking care of people. So I just think you need interest aligned and you need to have contracts that reflect that. Physicians need to be paid to get that job done, and that's the lowest cost setting first point of contact. So I think for all those reasons, no matter what the changes are, once we get some equilibrium over the last 2, 3 years, excess has won down, benefit design is getting more normalized. And so we'll just continue to work with our payers to have a sustainable contract to do our job and get paid for it. Operator: And there are no further questions. Please go ahead, sir. Parth Mehrotra: Thank you for listening to our call today. We appreciate your continued interest and look forward to speaking with you again in the near future. Operator: This concludes today's conference call. Thank you all for joining, and you may now disconnect.