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Operator: Good day, and thank you for standing by. Welcome to Nano-X Imaging Ltd.'s Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note today's conference is being recorded. I will now hand the conference over to your speaker host, Mike Cavanaugh, of Investor Relations. Please go ahead. Mike Cavanaugh: Good morning, and welcome to the Nano-X Imaging Ltd. Third Quarter 2025 Investor Call. Earlier today, Nano-X Imaging Ltd. released financial results for the quarter ending September 30, 2025. The release is currently available on the Investors section of the company's website. With me today are Erez Meltzer, Chief Executive and Acting Chairman, and Ran Daniel, Chief Financial Officer. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements regarding the company's financial results, research and development, manufacturing and commercialization activities, regulatory process and clinical activities, and other matters. These statements are subject to risks, uncertainties, and assumptions that are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing the company's views as of any subsequent date. 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. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of the non-GAAP to GAAP measures is provided with our press release, with the primary differences being non-GAAP net loss attributable to ordinary shares, non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, and non-GAAP gross loss per share. With that, I would now like to turn the call over to Erez Meltzer. Good morning, everyone. And thank you for joining Nano-X Imaging Ltd.'s Third Quarter 2025 Earnings Call. Erez Meltzer: While many companies talk about global expansion, Nano-X Imaging Ltd. is delivering on it. It is important for us to share not only where we stand today, but also the path we are shaping for 2026 as we work to fulfill our mission and strengthen Nano-X Imaging Ltd. as a leading company in the medical imaging industry. We are building a comprehensive medical imaging portfolio focused on increasing revenues and accelerating our path to profitability. Our strategy includes reinforcing our position in the Medical AI Sector, deepening our foothold in the US healthcare system, and driving meaningful change in the standard of care for medical imaging. We are entering into our second execution phase. We plan to further expand the ARC deployments and pipeline, grow our AI presence through the acquisition of Vaso Healthcare IT that is being contemplated, and explore further opportunities in imaging equipment with potential acquisitions and collaborations. While not every element is fully within our control, we believe it is the right time to share our growth roadmap for 2026. We are guiding for more than $35 million in revenues. Coming back to 2025, the third quarter brought progress across the organization, including our technology expansion, market scaling, AI infrastructure, and operational efficiency. Today, I am excited to share with you the progress we are making across our strategic three pillars where we are demonstrating real momentum in moving from innovation to commercial scale with measurable results. Our first pillar focuses on technology expansion and market scaling, where we see momentum in our commercial deployment efforts. Nano-X ARC is now entering a growth phase in the retail imaging segment, expanding access to advanced imaging in community and outpatient settings where patients need it most. We recently signed two new agreements in The Czech Republic and in France. That represents an important milestone in Nano-X Imaging Ltd.'s European strategy and follows recent distribution agreements in Greece and Romania, demonstrating the rising demand for Nano-X Imaging Ltd.'s ecosystem and strengthening its presence across Europe. We are progressing toward our goal of 100 systems worldwide in various stages for clinical demo and commercial purposes by the end of 2025. A number of systems are pending regulatory approval and site preparations. As we scale our current ARC deployment, we are simultaneously working on unlocking even greater market potential through regulatory advancement. In the US, we continue to work with the FDA to remove the adjective use limitation, which will allow us to market the Nano-X ARC as a standalone modality. Building on both our deployment momentum and anticipated regulatory progress, we are preparing to launch our next-generation platform that will further accelerate market penetration. The new Nano-X ArcX system, which is to be unveiled at the RSNA annual meeting in less than two weeks, will extend our commercial reach even further with its smaller footprint and simplified installation process. Importantly, it has the flexibility to support additional clinical indications in the future. This enhanced platform is designed specifically to meet the diverse needs of our growing customer base and expand our addressable market significantly. I would like to highlight another example of how we are working to expand the market for Nano-X ARC. The Nano-X ARC x is AI-ready, which means it is compatible with future AI solutions that are currently under development to interpret the ARC images. Ultimately, the clinical output will be an AI-enhanced 3D digital tomosynthesis series with annotated pulmonary nodules, which may be an innovative new tool in the arsenal of lung cancer detection. Our second pillar, AI infrastructure, and integration represent the technological heart of our strategy, connecting all the pieces of our ecosystem and driving new revenue opportunities. Artificial intelligence is part of our core value proposition, transforming us from a hardware company into a comprehensive imaging platform. In a key move to advance our AI business, we recently reached an agreement to acquire Vaso Healthcare IT or VHC IT, a wholly-owned subsidiary of Vaso Corporation, which provides best-of-breed healthcare IT solutions from various technology partners. Specifically, imaging information technology solutions, which support imaging workflow for providers. Nano-X Imaging Ltd. and VHC IT together create a powerful synergy that connects Nano-X Imaging Ltd.'s FDA-cleared imaging AI solution with VHC IT's deep expertise in IT integration, implementation, and customer operation. This will potentially help us deliver improved customer service to our growing US customer base. This acquisition will align with our ongoing progress on multiple fronts as we expand our network and collaborations with prominent organizations such as Cedars-Sinai, 3DR, Covera Health, and others. More details are included in my remarks below. Now for an update on our third strategic pillar, which focuses on operational efficiency and sustainable growth. We are building a leaner, more focused organization to support long-term success. Our workers' compensation and retail imaging initiatives continue to grow, creating scan-based revenue opportunities that strengthen our financial foundation. Additionally, we are strengthening our production capabilities through our partnership with Fabrinet, preparing to manufacture hundreds of systems. In parallel, we continue to enhance our tube manufacturing infrastructure as well. Nano-X Imaging Ltd. remains dedicated to accelerating the development of a highly efficient manufacturing operation. Let's now review the progress we made during the quarter in our US deployment progress, which demonstrates the strong commercial traction we are building across multiple channels. Currently, we have a growing number of ARC systems actively scanning, showing consistent utilization and clinical adaptation. One of the most active sites is an imaging center in California. During the third quarter, it achieved above-average scanning levels, and the feedback from them has been very positive. Our installation plan provides us with a solid foundation for revenue generation and market presence. Another example is our recent collaboration with Kaiser University, where the Nano-X ARC has been integrated into their radiological technology graduate program. This flagship training and demonstration site is already actively scanning, giving future imaging professionals hands-on experience with Nano-X ARC early in their careers. The full engagement of our business partners and the upcoming retail infrastructure reinforces our confidence in the next year's guidance. I also want to let you know that Nano-X Imaging Ltd. will have a strong presence at the Radiology Society of North America, or in short RSNA, annual meeting which begins on November 30 in Chicago. There we will provide more detailed insights into our commercial progress and future strategy. We welcome you to visit our booth if you are attending the event. In a recently announced partnership, we entered into a distribution agreement with X-ray, a leading Czech distributor of medical imaging systems, to introduce Nano-X Imaging Ltd.'s advanced imaging solution to healthcare providers across The Czech Republic. Under the terms of this agreement, X-ray will lead the market sale and service of Nano-X Imaging Ltd.'s Medical Imaging Solution, the Nano-X ARC. Founded in 2013, X-ray is recognized as the number one supplier of digital radiography systems in The Czech Republic, with installations in more than half of the country's 200 healthcare facilities, and nationwide sales and service coverage. Additionally, this week, we signed off a distribution agreement in France with Alphea France SARL, part of Altair Group, one of Europe's largest independent providers of managed medical technology services. As part of the agreement, Altea France will lead the introduction, distribution, installation, and service of Nano-X Imaging Ltd.'s Medical Imaging solution, the Nano-X ARC, across France's public and private healthcare sector. We have stated before that our initial foray into many European countries will be best served by commercial partnerships such as this. And rest assured, we are working on others. These partnerships are just some of the steps we took in the third quarter to better position us to scale globally and redefine the standard of care through innovation that makes imaging more accessible and efficient. As we scale our current ARC deployment, we are simultaneously working to unlock even greater market potential through regulatory investment. In the US, the company has submitted the TAP 2D software module to the FDA through the 510(k) program. TAP 2D is a 2D view image output for the Nano-X ARC systems, a practical tool for radiologists to enhance their diagnostic confidence as they become more experienced evaluating digital tomosynthesis images. TAP 2D, once cleared, will be part of a wider vision held by Nano-X Imaging Ltd. to alleviate adjunctive use limitations in the future. For perspective, use limitations do not apply for the CE Mark, Nano-X ARC in the European market. This remains one of our top priorities, and we believe that removing the adjunctive use limitation will be a critical milestone that may unlock significant new market opportunities for the Nano-X ARC platform. This regulatory advancement represents a potential key catalyst for accelerated adoption across healthcare systems. Outside of the US, our regulatory efforts continue, but it is worth noting that these efforts will not be as streamlined as those in the US, where FDA clearances allow distribution in the entire country. The rest of the world by nature is very fragmented, and we are working with many different countries which have their own processes and regulations. In some instances, regulatory progress is slower than we would like. Nevertheless, we have not stopped pushing ahead with our regulatory efforts, which continue to be of paramount importance to Nano-X Imaging Ltd. Now I would like to discuss some of the extensive clinical work we are undertaking that supports all of our commercial efforts by generating robust data supporting the use of our solution across multiple clinical applications. Mike Cavanaugh: I'm happy to report the Erez Meltzer: Cedars-Sinai Medical Center is joining the trial of Nano-X Imaging Ltd.'s AI for a new AI model for aortic valve calcification measurement solution that is under development. The solution is intended to quantify the level of aortic valve calcium, which is an important measure of risk for aortic valve disease. We are very pleased to be partnering with Cedars-Sinai, one of the nation's premier medical institutions. We also have begun a collaboration with MDS Wellness, an independent provider of wellness screening programs located in Michigan, with whom we are engaging in clinical trials to further assess the clinical value of Nano-X ARC in the context of lung cancer detection, management, and screening. Last month, we attended the Early Lung Cancer Action Program's (ECLIP) 40th conference in New York, focused on lung cancer screening and early detection. Among several presentations about the advantages of digital tomosynthesis in lung cancer screening, Dr. Lauren Stannenbaum delivered an inspiring talk about how he believes that Nano-X ARC can be utilized in lung cancer screening and disease management protocols. Outside the US, we are excited about a recent collaboration with All Up Imagery, which is a group of independent radiologists who practice at several sites in Île-de-France, utilizing high-performance technical facilities. Through this collaboration, the Nano-X ARC system has been deployed at Hôpital Privé Jacques Cartier, one of the leading private hospital groups in the Paris Metropolitan Area, for a clinical trial designed to further assess the value of the Nano-X ARC in supporting lung cancer detection, management, and screening. This collaboration advances our clinical evaluation effort in the second-largest country in the EU. The data derived from this trial is intended to demonstrate the ARC's potential to improve patient outcomes through early screening for lung cancer, which is the deadliest cancer worldwide. Mike Cavanaugh: We continue to engage with research partners globally Erez Meltzer: to execute a comprehensive clinical evidence generation strategy. I mentioned we will have a large presence at RSNA this year, and I encourage you to visit our booth. All details regarding our participation were published last week. As I mentioned in my opening remarks, we are acquiring Vaso Healthcare IT or VHC IT, a wholly-owned subsidiary of Vaso Corporation, which provides best-of-breed healthcare IT solutions from various technology partners. Specifically, imaging information technology solutions, which support imaging workflow for providers. Nano-X Imaging Ltd. and VHC IT together create a powerful synergy that connects Nano-X Imaging Ltd.'s FDA-cleared imaging AI solutions with VHC IT's deep expertise in IT integration, implementation, and customer operation. Under the terms of the proposed transaction, Nano-X Imaging Ltd. will acquire VHC IT for a total consideration of $800,000, consisting of a $200,000 cash payment at closing and up to $600,000 in performance-based earn-out payments over a period of up to two years, contingent upon revenue retention targets with respect to existing customers. This transaction is intended to accelerate the deployment of Nano-X Imaging Ltd.'s AI solutions across US healthcare facilities and is expected to be executed and completed within a couple of weeks. Given the rapidly evolving nature of medical imaging technology, it is a challenge to keep up with these changes and informatics. And Vaso Healthcare IT serves as a trusted adviser to address and solve these issues. We expect this partnership to accelerate the commercialization of Nano-X Imaging Ltd.'s AI solutions and help generate scalable recurring revenues. Key synergies include cross-leveraging our organizational shared expertise, active accounts, sales funnels, and product offerings. We believe this acquisition immediately expands the value we deliver to customers and shareholders. We recently entered a commercial partnership with 3DR Labs, one of the largest and most trusted providers of 3D medical imaging cross-processing services in the US. 3DR Labs offers Nano-X Imaging Ltd.'s FDA-cleared imaging solution to its network of more than 1,800 hospitals and imaging centers across the US. The partnership enables 3DR Labs to market Nano-X Imaging Ltd.'s AI software solution to its client-based network of more than 1,800 hospitals and imaging centers across the US. The agreement positions Nano-X Imaging Ltd.'s AI technology to support initiatives to drive early disease detection and improve clinical outcomes at scale across the United States. We are also expanding direct-to-clinician Nano-X Imaging Ltd.'s AI solutions and launching new AI applications that have the potential to improve diagnostic accuracy, early detection, and patient management. I'm happy to report that we have closed our first deal under this new direct-to-clinician business model. This approach enables AI at the clinic level, equipping clinicians with value-added tools on-site and eliminating the need to send patients to other locations for CT scans. I am particularly excited about our current lineup of advanced AI solutions that analyze routine medical CT scans for any clinical indications to help identify patients with asymptomatic or undetected findings correlated with chronic conditions in cardiac, liver, and bone, promoting preventive care management where AI assists clinicians in generating numerical indications for further decision support. We are in the process of developing more innovations to add to our offering, and I look forward to announcing new AI developments as they become available. In other AI-related news, we have successfully expanded our existing agreement with Covera Health. This new agreement builds upon our initial collaboration, which focused on retrospective analysis to identify care gaps and support their platform. Our expanded agreement now includes prospective use cases such as opportunistic screening for improved care outcomes. We've also expanded our AI footprint to India, having recently signed a distribution agreement with an Indian commercial partner, and we're already running two pilot projects with several more in the pipeline. A key element of the third pillar is the creation of a sustainable and efficient supply chain to ensure we can meet anticipated future demand. With that in mind, we continue to engage with third-party manufacturers and suppliers for the commercial production of our digital X-ray tubes and other components for use in the Nano-X ARC. Based on, among other things, cost-effectiveness, etcetera. We are currently developing glass-based digital X-ray tubes for use in the Nano-X ARC. As previously disclosed, we are working with third parties such as CEI and Varex to build tubes and a system-on-a-chip maker located in Switzerland for our chips. Our work with our manufacturing partners is a key component of the third pillar of future success. We will continue close collaboration with our technology suppliers to secure the supply of components needed as our ARC deployment continues. As of today's call, we have fabricated enough emitters and begun scaling tube production to support the initial launch of our next-generation Nano-X ArcX. Specifically, with Varex, we are well underway with reforming all the necessary tubes and ARC-level testing to add them as an approved supplier early next year. We have additionally taken Mike Cavanaugh: receipt from them Erez Meltzer: of multiple MDX multi-source demonstrations to advance our testing and the development of stationary digital tomosynthesis and stationary CT-type solutions. Varex's NBX or multibeam X-ray combines the precision of traditional X-ray with the detailed insight of CT imaging and enables faster, higher-quality scans with reduced radiation exposure, offering clearer images and better patient outcomes. Varex personnel will visit our lab in Israel soon to support these efforts. We're also working in partnership with a novel imaging technology company to explore the utilization of our emitter with their specialty detectors. These efforts toward low-dose single-exposure dual-energy capabilities significantly enhance visualization for medical, security, and inspection applications. On the OEM business development front, in response to requests from the security materials analysis and high-resolution inspection market, we are in the process of fabricating several novel emitter layouts, each with unique functionality to specifically address pain points or add requested capabilities as compared to their current offering. We've also recently delivered two of our developer kits. One is to a leading US academic institute for medical solution development for medical application development, and another to one of the largest global providers of industrial X-ray NPT inspection sources developing their next-generation system. Regarding our project with Oak Ridge National Laboratory, we are now working towards material acquisition and fabrication of the second-generation prototype to be utilized in their novel and compact mobile X-ray technology development. As previously reported, we have entered into a multiyear volume supply agreement with Fabrinet, a leading global electronics manufacturing services provider, to support the scalable manufacturing of Nano-X ARC systems. We believe this collaboration will drive down our manufacturing costs over time, which will, in turn, support our mission to expand access to innovative, affordable imaging technology worldwide. Looking ahead, Nano-X Imaging Ltd. is dedicated to accelerating the development of a highly efficient and scalable manufacturing infrastructure. We will always be looking for ways to extract more efficiencies and may include future strategic collaborations. As we look ahead, we would like to provide our investors with some financial guidance for the coming year. Given our current business trajectory, sales funnel, new partnerships, and the Vaso acquisition, we expect to generate a minimum of $35 million in revenue in 2026. Furthermore, we project the AI business segment, with the addition of VHC IT, will achieve EBITDA breakeven on a quarterly basis sometime in 2026. We expect Nano-X Imaging Ltd. as a whole to reach EBITDA breakeven on a quarterly basis in 2027. These projections reflect our beliefs in an achievable path to sustainable profitability driven by our expanding commercial deployments and recurring revenue streams. We are executing a clear and consistent strategy across all three pillars, moving forward with confidence while systematically expanding our market presence and strengthening our foundation for long-term success. With that, I would like to hand the call to Ran Daniel for a review of our financials. Ran, over to you. Thank you, Erez. We reported a GAAP net loss Ran Daniel: for 2025 of $13.7 million, which is the reported period, compared with a net loss of $13.6 million in 2024, which is the comparable period. Revenue for the reported period was $3.4 million, and gross loss was $2.9 million on a GAAP basis. Revenue for the comparable period was $3 million, and gross loss was $2.8 million on a GAAP basis. The increase of $400,000 in revenue stems from an increase of $600,000 in our revenue from our teleradiology services, a decrease of $300,000 in our revenue from our AI solutions, and an increase of $100,000 in our revenue from the sale and deployment of its imaging systems and OEM services. Non-GAAP gross loss for the reported period was $300,000 as compared to a gross loss of $200,000 in the comparable period, which represents a gross loss margin of approximately 8% on a non-GAAP basis for the reported period, as compared to a gross loss margin of 6% on a non-GAAP basis in the comparable period. Revenue from the teleradiology services for the reported period was $3.1 million, with a gross profit of $100,000 on a GAAP basis, as compared to revenue of $2.6 million with a gross profit of $300,000 on a GAAP basis in the comparable period, which represents a gross profit margin of approximately 25% on a GAAP basis for the reported period as compared to 13% on a GAAP basis in the comparable period. Non-GAAP gross profit of the company's teleradiology services for the reported period was $1.3 million as compared to $900,000 in the comparable period, which represents a gross profit margin of approximately 43% on a non-GAAP basis for the reported period as compared to 35% on a non-GAAP basis in the comparable period. The increase in the company's revenue and gross profit margins in the teleradiology services was mainly attributable to customer retention, increased rate, and increased volume of the company's reading services during the weekends and weekdays. During the reported period, the company generated revenue through the sale and deployment of its imaging systems and OEM services, which amounted to $175,000 for the reported period, with a gross loss of $1.7 million on a GAAP basis and a non-GAAP basis, compared to revenue of $29,000 with a gross loss of $1.5 million on a GAAP basis and a non-GAAP basis in the comparable period. The company's revenue from its AI solution for the reported period was $100,000 with a gross loss of $1.9 million on a GAAP basis, compared to revenue of $400,000 with a gross loss of $1.6 million in the comparable period. Non-GAAP gross profit of the company's AI solution for the reported period was $75,000, compared to a gross profit of $370,000 in the comparable period. Research and development expenses net for the reported period were $4.6 million compared to $4.7 million in the comparable period, which represents a decrease of $100,000. The decrease was mainly due to a decrease of $400,000 in share-based compensation and $500,000 in expenses related to our development activities, which were mitigated by an increase of $500,000 in salaries and wages and a decrease of $300,000 in grants received. Sales and marketing expenses for the reported period were $1.5 million compared to $900,000 in the comparable period, which represents an increase of $600,000 mainly due to an increase of $500,000 in salaries and wages, $500,000 in marketing activities with connection to the commercialization in the US market, which was mitigated by a decrease of $100,000 in share-based compensation. General and administrative expenses for the reported period were $5.3 million compared to $5.7 million in the comparable period. The decrease of $400,000 was mainly due to a decrease of $600,000 in share-based compensation, a decrease of $200,000 in the company's legal expenses, and a decrease of $200,000 in MVNO insurance expenses, which were mitigated by an increase of $500,000 in salaries and wages and recruiting fees. Erez Meltzer: Non-GAAP net loss Ran Daniel: attributable to ordinary shares for the reported period was $9.9 million, compared to $8.7 million in the comparable period. The increase of $1.2 million in the non-GAAP net loss attributable to ordinary shares was mainly due to an increase of $100,000 in the non-GAAP gross loss and an increase of $1.1 million in the non-GAAP operating expenses. Turning to our balance sheet. As of September 30, 2025, we had cash, cash equivalents, and marketable securities of approximately $55.5 million and $3.2 million in short-term loans from a bank. We ended the quarter with property and equipment net of $46.7 million. As of September 30, 2025, and December 31, 2024, we had approximately 65.4 million and 63.8 million shares outstanding, respectively. With that, I will hand the call back over to Erez. Thank you, Ran. The 2025 was transformative for Nano-X Imaging Ltd. Erez Meltzer: As we evolved from a hardware company into a comprehensive imaging platform. With our acquisition of Vaso Healthcare IT, new partnerships with 3DR Labs, Altea, and X-ray, and the upcoming launch of our AI-ready ArcX system at RSNA, we are building the infrastructure for sustainable recurring revenue streams that will define our future growth. Together, with our recent collaboration in Greece, Romania, The Czech Republic, and France, we are strengthening our European footprint. In parallel, our collaborations with Cedars-Sinai and our ongoing clinical trials in France continue to advance the clinical validation of our technology and contribute to the global momentum behind our platform. Through our three strategic pillars, we are executing a comprehensive commercial strategy that combines innovative technology with robust clinical evidence generation and systematic market deployment. Although some elements are beyond our direct control, we believe this is the right moment to present our growth roadmap, and for 2026, we are guiding to revenues of over $35 million. Our purpose remains unchanged: to redefine medical imaging by uniting innovation, intelligence, and accessibility, creating meaningful impact for patients, clinicians, and healthcare systems worldwide. The momentum we are building across our commercial deployments and clinical evidence generation positions us well for continued growth and market leadership. Thank you for your continued support. Operator, please open the call for questions. Operator, just before the question, Erez. One comment regarding what actually was said that last night, we have actually closed the Vaso Healthcare IT acquisition. So actually, it's done. With that, you can go ahead and open for the Q and A. Operator: Thank you. And wait for your name to be announced. To withdraw your question, simply press 11 again. Please stand by while we compile the Q&A roster. Now, the first question is coming from the line of Ross Osborn with Cantor Fitzgerald. Your line is now open. Ross Osborn: Hi. Good morning. Thanks for taking our questions. Congrats on the progress. So starting with the quarter, would you walk through how many systems were in the field and performing scans that resulted in your revenue of $175,000? Erez Meltzer: A few dozens out of all together. A few of them are being installed as we speak. And a few will be installed in the next few weeks. And as mentioned, we are counting on the expansion of the retail, expansion of the business partners, the expansion of the salespeople that are closing deals right now. We have a few, as mentioned, some of them are waiting for regulatory approvals for physics approval, for site preparation, but altogether, this is gonna move. Ross Osborn: Okay. Yeah. Sorry if I wasn't clear. Looking back during the March, so your reported revenue, how did you generate $125,000? Not for the rest of this year, but during the quarter. Ran Daniel: It was a combination of revenue from scans and our OEM services. I assume that we are regarding the paragraph in the script and the PR that describes the revenue from deployed systems and OEM services. Correct? Ross Osborn: Yes. So just curious how many systems were deployed. So I'll refer you to this paragraph, and I don't think in general, it's saying that the answer is changing. With regards to the system. Erez Meltzer: Okay. Ross Osborn: And then looking to the balance of 2025 and meeting 100 units in various stages of deployment. You know, what types of agreements should we be thinking about in terms of those being at least versus capital sales? Erez Meltzer: Most. I would say the majority of the majority are ancestors. Ross Osborn: Okay. Thanks for taking the question. But we still see increased activities in the CapEx arena. Okay? So we do expect to have some CapEx over here. Erez Meltzer: And the retail. Got it. Ross Osborn: I'll jump back in queue. Thank you. Erez Meltzer: No problem. Take your help. Operator: Thank you. Our next question is coming from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open. Jeffrey Cohen: Oh, hi, Erez and Ran. Thanks for taking our questions, and nice to see the company at Medica this week. So a few from our end. It seems like we got a good sense of the top line from where you're talking about for the balance of this year and certainly for 2026 with the many partnerships and Ran Daniel: Jeff, I'm sorry. Can you raise your voice, please? Because you are a little bit far away from the Sorry. Could you talk about how OpEx could look over the next four to six quarters as you talk about Destiny Buch: achieving these, 2026 targets. Versus currently? Erez Meltzer: You generally say, what you would expect to see is that Ran Daniel: our investment in the deployment efforts, namely the sales and marketing expenses, will increase, of course. Because we need to invest in all the activities that are related to the deployment of the systems and the sales. On the other end, you should see more tamed R&D expenses. As the focus is going towards commercialization and less on development activities. And we are trying our best to be more, as you know, to be as efficient as we can be, and you should see the same level of G&A. With some fluctuations. Destiny Buch: Okay. Got it. Ran Daniel: Could you talk about Don't forget that the major portion of our G&A expenses are related to us being a public company. And know, sometimes those expenses increase. Destiny Buch: Got it. Could you talk about Vaso? I saw in the press release, is a mention of approximately 100 customers. Could you talk about what types of customers that they currently have? And the opportunity for those customers into the Nano-X Imaging Ltd. family. So Erez Meltzer: the 100 customers of Vaso are all of them are medical-related. Mike Cavanaugh: They are actually serving hospitals Erez Meltzer: Imaging Centers, Across The United States. From our point of view, we have a lot of cross-selling that can be achieved. They can of the Vaso acquisition the the the majority of the I would say the main purpose will be to serve the operational and the customer base the the growing customer base of of Nano-X Imaging Ltd. AI. But the more we go into, into the the details what we see right now, what's in the PMI and the post-merger integration, that they will be able to expand our sales force to the ARC systems to those institutions. To expand the services of the IT services that they are providing because many of the of those customers are modality-related Mike Cavanaugh: customers. Erez Meltzer: In addition, what we see is that customers a few of the customers already mentioned an interest that USA Rod, the pillar radiology business, will be provided by our teleradiology services. And in addition, the teleradiology the the the those customers are are saying that they can actually refer a few of their customers to teleradiology services to be obtained. The I would say that this will actually strengthen our IT and software, which is one of the major pillars of our growth. And and and we definitely can see their network and their customer base as a as a way to grow our business. Our existing business. Got it. And one more, if I may. Destiny Buch: I did hear you mentioned breakeven 2027 EBITDA levels. But just prior to that, you mentioned something about '26 Could you reiterate that? Erez Meltzer: Yeah. We mentioned this is already the second time that we say that what we are aiming that on a run route basis on '26 where the AI business will be breakeven In fact, this was even before before Vaso acquisition. So right now, Ran Daniel: we believe probably that it will accelerate the Erez Meltzer: probability of this to be breakeven sometimes at at the end of the 2026. And the other thing that we said that the ARC hardware business will will shoot for a breakeven and in 2027. This is something that we already mentioned in the past. And what you can see right now based on the wide and the the what what you see here is the that we are making progress in all the fronts. In technology and the regulation and the commercialization of the business, And we strongly believe that the retail business, the business partners, and our facility with with the actually enable us to be there. Ron, would you like to add anything? Ran Daniel: Yes. Let me fine-tune it. What we have said in the past that, the AI business will be breakeven on a quarterly breakeven during sometimes during 2026, didn't specify any quarter. We do we do emphasize that the growth of the AI division by their expansions of their B2B2B to B to C model, enter into new geographics, and, of course, with the acquisition of Vaso, which expands their operations and the potential for growth and achieving the quarterly breakeven on the one on the quarterly run rate. And while we also have said that we expect that sometimes to during 2027, we may be breakeven in the ARC division. All in total, it will bring us sometime in 2027. We may be break breakeven on a wide company range. Just to be more accurate. Destiny Buch: Okay. That's perfect. Thank you for taking our questions. Erez Meltzer: No problem. Thank you, sir. Ran Daniel: Hopefully, you enjoy the Medica. Erez Meltzer: Conference. Yeah. Operator: Thank you. Next question coming from the line of Scott Henry with HEP. Your line is now open. Scott Henry: Thank you, and good morning or afternoon depending on your location. I want to talk a little bit about the 2026 number. $35 million, that's a pretty big number. So my question is, how should you think about the cadence of the year? Do you expect that to start in Q1 and ramp up? Or should we think about that in the second part? And then as well, do you have any preorders or or any just trying to gauge your confidence in that number. Thank you. Erez Meltzer: So first of all, I would start with the second comment. Most of what we say we are based on not most, but I would say major part, are based on on preorder And the Operator: and the the outcome of what Erez Meltzer: we are doing right now, the the the those three elements, the the business partners, the retail which is a major part, and the and the sales force that we currently have. Not to mention the the new position. Ran Daniel: Second, Erez Meltzer: I would say that it will start slowly from Q1 and ramp up over the quarters and and achieve the the the number at the fourth quarter. If I have to say something about mathematics, I would say that's probably the line will be kind of an exponential one. And not the linear. Okay. Scott Henry: Great. Thank you for that color. And and in terms of levers, Ran Daniel: Just to add a follow-up question is that we do we do see some more activities there. I'm I'm going to refer to the ad of just what we said in the in the last questions for Jeffrey. Of Jeffrey. Don't forget that the current census and your estimates are based without the Vaso position. So when you add the Vaso positions, you're already going up you have to account for the $4 million in revenues that approximately that Vaso have. So other than this, the the growth may come probably organic. And email. Scott Henry: Okay. It I think, Ron, did you say that Vaso would Jason Kolbert: contribute $4 million in revenues? You broke up. You broke up the Erez Meltzer: Yes. Approximately. Jason Kolbert: Okay. And as far as the levers, in 2026, what about teleradiology? It reported a strong growth rate in the third quarter. Is that growth increasing? I mean historically, it's been kind of a 10% grower Are you looking for kind of a breakout in that category? Certainly, it was strong in Q3. Erez Meltzer: The answer is, if if you look at the at the numbers that, we gave as guidance, The numbers are not based on on a major quantum leap growth the teleradiology. We We hope that it will grow, but based on the indication that we gave it's based on the sort of the existing plus-minus numbers. The all the growth will come from the other business that we have, namely the ARC business and the, especially the deployment of the ARC X and especially the hopefully, the elimination of the adjunct device of the FDA and the other business that we said, and the AI business that that we're talking. I think that OEM also will grow slowly and we will see a major growth from 2027. Based on the indication that we currently have. From our existing customers and potential customers of the OEM business. Okay. Scott Henry: Yeah. The first Both and both will be the AI and the R. Ran Daniel: K, and the hardware and the product. Jason Kolbert: Okay. Great. Thank you for taking the and I look forward to seeing you down at the RSNA conference. Ran Daniel: See you there. See you. Erez Meltzer: Thank you very much. Operator: Thank you. And that's the end of our Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. And you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Allot's third quarter 2025 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Allot Investors Relations team at EK Global Investor Relations at +1 212378040 or view it in the News section of the company's site at www.allot.com. I would like now to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin please? Kenny Green: Good day to all of you, welcome to Allot's conference call to discuss its financial results for the quarter. I would like to thank Allot's management for hosting this conference call. All participants are present. Following the formal presentation, instructions will be given for the question and answer session. As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com. With me today on the line are Eyal Harari, CEO, and Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question and answer session. Both Eyal and Liat will be available to answer those questions. You can all find the highlights of the quarter, including the financial highlights and metrics, in today's earnings press release. Before we start, I'd like to point out the following safe harbor statement. This conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are early predictions, and Allot cannot guarantee that they will, in fact, occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, delays in the launch of services by Allot's customers, reduced demand, and the competitive nature of the security services industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. Also, the financial results in this call will be presented mainly on a non-GAAP basis. Allot believes that these non-GAAP financial measures provide more consistent and comparable measures to help investors understand Allot's operating performance. For all the data, please refer to the financial tables published in the results press release issued earlier today, which also include the GAAP to non-GAAP reconciliation tables. And with that, I would now like to hand the call over to Eyal Harari, CEO of Allot. Eyal, please go ahead. Eyal Harari: Thank you, Ken. We are pleased with our excellent third quarter 2025 results. We reported double-digit year-over-year revenue growth for the first time in multiple years. Continued strong CCaaS momentum and our highest level of operating profitability in over a decade. We saw strength across all parts of our business, both in cybersecurity as well as network intelligence solutions. Revenue for the quarter was $26.4 million, up 14% year over year. Our profitability has likewise expanded strongly, and we reported solid operating profit in the quarter versus a loss last year. Our Cybersecurity as a Service growth engine continued with its excellent performance. As of September 2025, our CCaaS ARR was up 60% year over year, which demonstrates very strong traction for our service among end customers. As each quarter passes, CCaaS is becoming an ever more important part of the revenue pie, and it made up 28% of our revenues for the quarter. We ended the quarter with over $80 million in cash and no debt. Allot is back to a very strong financial position with the resources to further execute on our growth strategy. Overall, our results demonstrate that we are executing exceptionally well on our cybersecurity-first strategy and renewed go-to-market focus. Looking at some of the trends within the business, I first want to discuss our biggest growth engine. We are seeing increased traction among major telcos for cybersecurity as a service solutions. As we progress, we are starting to see the fruits of our long-term investments in this solution. The recent customer launches of our cybersecurity service are going very well. We are actively supporting our customer launches and offering gaining traction with their end customers, driving our strong sales momentum. During the quarter, we gained our first customer for our newly released Ofnet Secure solution. Ofnet Secure will allow the extending of network-based cybersecurity protection beyond the operator's infrastructure to subscribers using any network or Wi-Fi connection. It allows operators to better seamless always-on security experience that travels with the user without requiring complex installations or device-level configuration. For the operator, Ofnet Secure strengthens their customer loyalty, increases subscription-based revenue opportunities, and reinforces the role as a trusted provider of digital security backed by Allot Technology. The pipeline of new potential business continues to increase. Our CCaaS offering is gaining traction not only with new CSPs and telcos but also among the end customers of our existing partners. The positive momentum is allowing us to show accelerated growth and is providing us with strong forward visibility. As you can see, we are working hard to successfully bring new CCaaS customers to Allot. Our smart product network intelligence continued to perform well and was also a contributor to our growth in the quarter. We are winning new customers, which are driving higher revenues, stronger backlog, improved visibility, and we have a robust pipeline. Today, our smart product is being sold as part of our Unified Cybersecurity First platform. This integrated solution, with best-in-class technology and innovation, is enabling us to generate increased demand. We are actively executing on the various projects we have recently won, including new Terra three deployments and upgrades, where we are working closely with the customers to roll out the platform. We are investing to bring new capabilities and functionality to maintain our technology leadership, and our recent enhancement around visibility is creating new opportunities for us. Overall, our efforts to grow the business and product line continue to progress well, and the backlog that we have built over the past few months provides us with solid visibility heading into next year. In summary, we are very pleased with our third quarter 2025 results, driven by strong performance across all parts of our business, namely accelerating CCaaS traction and increased Network Intelligence solution sales. Looking ahead, we have good visibility. Our backlog is strong, and our pipeline continues to be broad with many opportunities. I am increasingly optimistic about our long-term future, and I am excited to continue progressing on our cybersecurity-first strategy. Given the continued accelerated CCaaS growth, our solid visibility, and high level of backlog, we are increasing our guidance. We expect 2025 year-end CCaaS ARR to show an exceptionally strong year-over-year growth surpassing 60%. We are also raising our full-year 2025 revenue guidance to between $100 and $103 million. As we move into 2026, Allot is exceptionally well-positioned for the year ahead, and we see ourselves at the inflection point of a longer-term trend of ongoing profitable growth. And now I would like to hand it over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead. Liat Nahum: Thanks, Eyal. Revenue in the third quarter was $26.4 million, up 14% year over year. Revenue from our growth engine CCaaS was $7.3 million in the quarter, up 60% year over year and comprising 28% of our revenue in the quarter. Our CCaaS annual recurring revenue, ARR, as of September 2025 was $27.6 million. Our revenue increase was driven by growth in both our CCaaS and our Smart products. From a geographic perspective, I want to point out that in the third quarter, we had an increased level of Americas sales, in line with our strategy to increase business in this region. Specifically, we recognized revenue on a relatively large smart order, and on the CCaaS front, we experienced a growing contribution from the U.S. Finally, I want to point out that recurring revenue continued to grow as a percentage of our overall revenues, standing at 63% in Q3 2025 versus 58% in Q3 2024. I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures, and the various other breakdowns of our revenues, please refer to the table in our results press release. Non-GAAP gross margin in the quarter was 72.2% compared with 71.7% in the third quarter of last year. Non-GAAP operating expenses were $15.4 million compared with $15.6 million in the third quarter of last year. During the quarter, we received a grant of approximately $1 million for research and development funding. This grant was also received in the third quarter of last year. We reported non-GAAP operating income of $3.7 million compared with $1.1 million in Q3 2024. The growth in revenue and improved gross margin on a similar operating expense base led to significant growth in our operating income. Allot had 497 full-time employees as of 09/30/2025. In terms of non-GAAP net income, we reported $4.6 million in the quarter, or a profit of $0.1 per diluted share, as compared with $1.3 million or $0.03 per diluted share in the third quarter of last year. During the quarter, we completed a $46 million follow-on share offering, of which $40 million in gross proceeds were received during the second quarter and the remaining $6 million in gross proceeds received this quarter. Our shares issued and outstanding as of September were 48.4 million shares. We reported $4 million positive operating cash flow in the third quarter, representing the third quarter in a row that we are generating positive operating cash flow. We added over $10 million to our cash balance, and we are well-positioned to drive profitable growth. Cash, bank deposits, and investments as of September 30, 2025, totaled $81 million versus $59 million as of 12/31/2024. Allot has no debt. That ends my summary. Eyal and I are now happy to take your questions. Operator: Thank you, ladies and gentlemen. At this time, we will begin the question and answer session. If you have a question, please press 1. If you wish to cancel your request, please press 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Nihal Chokshi from Northland Capital Markets. Please go ahead. Nihal Chokshi: Good morning. Congratulations on a good quarter. You mentioned that you are seeing increased traction with the major telecom customer. Can you outline whether or not that's coming from higher attach rates or is that coming from more bundles potentially now bundled at the default base premium bundle here? Eyal Harari: Thank you, Nihal. So overall, we are seeing good progress with all of our new customer launches. I think we are seeing positive trends both on attach rates as well as we have good progress with the new services we launched with our customers. This quarter, we updated on a mass mobile in Panama that launched our CCaaS service and expanded our customer base. Overall, we are seeing good results with all of our customers that drove this very significant growth on both CCaaS revenue and ARR and supported our highest revenue growth for the company in a while. Nihal Chokshi: Okay. Great. You also mentioned that you secured your first customer for Ofnet Secure. Can you give a little bit more detail on what is the customer profile of this first customer here? Eyal Harari: So we have Ofnet Secure as a product we launched a few quarters ago with an aim to enhance our security protection for our end customers not only when they are connected to the operational network but also when they are leaving the network and using other ways to connect to their services. With the new product starting to build pipeline, we are in multiple sales opportunities with both new and existing customers that are looking to enhance their service with this option. I do not want to go too much into the specifics of this first launch, but I would say that the main value for these specific customers is that they really want their customers to be protected 24/7, and they wanted to combine our unique network security with the off-net so no matter where the customer is connected, they are always using our cybersecurity services, and they do not have to mitigate the risk or minimize the risk of being under security threats. Nihal Chokshi: Is it fair to say that this is a customer of materiality to Allot? Eyal Harari: We appreciate the customer and its event for that. I do not want to go into specifics. As I said, it is the first customer that we already had this service, but we have additional multiple opportunities with both new and existing customers that are looking to further enhance our cybersecurity service with Ofnet. Nihal Chokshi: Okay. Great. My final question is that in the past quarters, you have commented on a strong smart pipeline. Do you continue to see that? Eyal Harari: Yes. We announced earlier in the year that we won several multimillion-dollar deals as well as very large deals we announced, I believe, in July or August. We still see a strong pipeline with opportunities both with existing customers looking to further expand their platforms. We see good demand for the Terra three new product, which is a very high-capacity service gateway solution. We have a good mix of new and existing customers in the pipeline. So overall, as commented earlier by Liat, we see in this quarter strong results not only from the CCaaS but also from the smart product line. We are hoping for this trend to continue. Nihal Chokshi: Great. Thank you very much. Operator: Thank you, Nihal. The next question is from Jonathan Ho from William Blair. Please go ahead. Jonathan Ho: Hi, good morning and congratulations on the strong results. Starting with CCaaS, can you maybe unpack for us a little bit more what the drivers of the growth were? How much of this growth is maybe coming from newer contracts that are now coming online versus adoption and growth in existing contracts? Eyal Harari: Thank you, Jonathan. So our main growth is coming from the last year's contracts we announced in the last few quarters that onboarded, launched our service, and continue to onboard new and additional customers. Overall, we are very pleased with the results of most of our strategic accounts that are continuing to add new subscriptions and supporting the service. We announced this quarter about one new launch, mass mobile in Panama. Some of the new projects and activities are going to support our longer-term growth. But when we look at short-term quarterly changes, this is mainly by new customers joining on the services we already launched. Jonathan Ho: Got it. And in terms of your network intelligence offerings, can you talk a little bit about the competitive landscape and pricing environment? It looks like this has inflected back to growth, but I just wanted to understand sort of the sustainability of that growth opportunity. Eyal Harari: Our networking technologies are part of our core assets. We have a very large and significant installed base of customers. Overall, the competitive landscape is less, I would say, easier these days due to some of the changes in the dynamics. We see that overall telco CapEx spend is still tight, and the telecom industry is still challenging, but we believe we have unique technology, and with the Terra three product that is very unique, we are able to get the best price performance in the market and by that get a really competitive edge. I believe that in the next few quarters, there is definitely a potential to continue to grow well with this product. This still continues to be a significant part of our plans. While in parallel, as you could also see, the CCaaS starts to be very meaningful. We passed more than 25% of our business from the cybersecurity, and if we continue with this pace, we are going to about 30% of our business with the cybersecurity CCaaS service. This positions us very well to continue the growth next year. Jonathan Ho: Got it. And maybe one last one for me. Can you talk a little bit about the drivers of growth in some of your larger CCaaS contracts and whether some of the ad campaigns that were launched that were pretty public have had an impact in terms of adoption? Any way to measure that or anything that you've taken away from a learning perspective? Thank you. Eyal Harari: So, Jonathan, we are seeing four drivers for our CCaaS growth. One is obviously when we have new customers that are expanding our TAM into new subscriber bases. This is what we are busy with our expanded go-to-market team that is going after new accounts. On accounts that we already work with, usually we start with certain services. But we are continuing with our customer success teams to further offer additional services. For example, start with a mobile network, we are offering the fixed security. In some areas, we are doing the business customers. We are looking into the consumer and vice versa. So every account definitely does not stop once. It has a lot of potential to do more. So the services that are already launched, we are working closely with our marketing team and our consultants that bring best practices on what is the best way to go to market for our partners to reach their customers. We are trying to help them with marketing materials, marketing campaigns, and really more on a consultancy supporting mode. We are really relying on their go-to-market efforts. Typically, new services once launched are peaking between after two to three years. We see strong double-digit attach rates in many of our customers. This is why this growth is usually sustainable along this time. Lastly, we are looking to further upsell and cross-sell some new innovations, new products. We are very pleased that our latest release of the off-net is now part of the portfolio. This is helping us to get more revenue from the same customers that are already attached to the cybersecurity service. We are continuing to work on additional innovations and bring more value to our customers to further help them to protect their customers. So all of those are working together. Some are more longer-term growth, some of them are more shorter-term growth. Because we are investing in all those in parallel, we are seeing very good results in the 60% range year over year, which we are very pleased with. Jonathan Ho: Excellent. Thank you. Eyal Harari: Thank you, Jonathan. Operator: The next question is from Matthew Ryan Calitri of Needham and Company. Please go ahead. Matthew Ryan Calitri: Hey guys, this is Matt Calitri over at Needham. Thanks for taking our questions. On the CCaaS side, how is Verizon-like penetration trending versus expectations? Are you seeing fairly linear scaling here, or is it more of an exponential path? Eyal Harari: So we cannot refer to specific customers. But as commented before, we are overall very pleased with our progress with all of our customer base. We see the results in the quarterly numbers. As you saw, we raised our expectations to surpass 60% on a yearly level. Overall, we are very happy with the progress. Matthew Ryan Calitri: Okay. That makes sense. And then a cleanup here. When you said CCaaS revenue going to about 30% of the business, was that expectation like by the end of the year? Liat Nahum: Yes. So if we continue the current trend, then as we gave already guidelines for the remaining of the year to reach 60% and above year over year, then this is indeed the expectation. Yes. Matthew Ryan Calitri: Okay, great. And then last one for me. On the product revenue strength you are seeing, how is Terra three playing a role in customer conversations? And what kind of color can you give there as far as new opportunities that's opening up and how other segments are changing there? Thank you. Eyal Harari: So we do see a good mix in our pipeline of new opportunities as well as discussions with our existing customers. Overall, we are putting a lot of focus on our customer success and making sure we are helping to support our customers' business goals. A lot of the growth and a lot of the potential we see is already within a very impressive installed base. We have some of the best carriers in the world that are working with us both on the smart and secure product lines. We are trying to continue and improve and delight our customers to maximize the business value they get from our solution. Overall, in the telco industry, this is the best way to provide longer-term sustainable growth. We also see every quarter additional new customers that are adding to the potential. As we mentioned in the previous comments, we saw part of the quarters new logos joining in both product lines, and we are trying to keep the investment on hunting and going after new accounts. We are maintaining a healthy mix in our pipeline between the two. Matthew Ryan Calitri: Great. Thank you. Eyal Harari: Thank you, Matt. Operator: There are no further questions at this time. So that ends our question and answer session. In the next few hours, this call will be made available on Allot's IR website. I would like to thank everyone for joining this call today and especially to Allot's management for hosting this call. And with that, we end our call. Have a good day.
Operator: Good morning. Welcome to ODDITY's Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. We have allotted time for prepared remarks and Q&A. At this time, I would like to turn the conference over to Maria Lycouris, Investor Relations for ODDITY. Thank you. You may begin. Maria Lycouris: Thank you, operator. I'm joined by Oran Holtzman, ODDITY's Co-Founder and CEO; and Lindsay Drucker Mann, ODDITY's Global CFO. Niv Price, ODDITY's CTO, will also be available for the question-and-answer session. As a reminder, management's remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations or estimates, including statements about ODDITY's business strategy, market opportunity, future financial performance and potential long-term success. Forward-looking statements involve risks and uncertainties, and actual results could differ materially due to a variety of factors. These factors are described under forward-looking statements in our earnings press release issued yesterday and in our most recent annual report on Form 20-F filed with the Securities and Exchange Commission on February 25, 2025. We do not undertake any obligation to update forward-looking statements, which speak only as of today. Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business. Additional information about these non-GAAP financial measures, including their definitions are included in our earnings press release, which we issued yesterday. I will now hand the call over to Oran. Oran Holtzman: Thanks, everyone, for joining us today. We delivered an outstanding third quarter with strong financial performance while achieving major milestones in our growth initiatives, including new brands, new markets, ODDITY LABS and tech innovation. Even in a challenging industry backdrop, ODDITY continues to deliver on its near-term financial commitments while building our future growth engines. Our financial performance once again exceeds our targets as we have done every quarter for the last 10 quarters as a public company across revenue, profit and earnings, including 24% revenue growth and 24% growth in adjusted diluted earnings per share year-over-year despite category challenges. We are also once again raising our full year guidance. We achieved a huge milestone this week with the official launch of METHODIQ, the third brand in the ODDITY platform. METHODIQ is our most ambitious endeavor. Our long-term goal for METHODIQ is not just to launch another great brand and a telehealth platform, but to transform a broken medical care system using the best treatment and the highest standards of care available to everyone. Our objective is to address medical issues with customized high efficacy treatment without the need of going to a doctor's office or getting lost in a drugstore. Achieving our planned time line for METHODIQ is a great accomplishment and speaks to what makes ODDITY and our culture so strong. This is 4 years of heavy R&D in the making, supported by 2 acquisitions, including Voyage81 and Revela developed with what we believe is an unprecedented scale of over 20,000 real user trials for our product line. METHODIQ is starting in dermatology, but our long-term goal is to expand into new medical domains in the future, and these are in development as we speak. Our launch into dermatology takes on a massive problem. Industry data shows that nearly 50 million Americans suffer from acne, nearly 30 million from hyperpigmentation and more than 30 million from eczema, and many of them are unsatisfied with the current options on the market. Drugstore products lack efficacy and personalization, going to a dermatologist is a high friction and the standard of care for these conditions has declined. At the same time, dermatologists will tell you that issues like acne are curable. You only need to ensure that the person has the right products and that they stay compliant. To tackle this big challenge, we built an ambitious and complex brand. METHODIQ is expected to feature a huge line of 28 prescription and nonprescription products, which combine for more than 100 unique treatment combinations or precision personalization. We have aimed to optimize these products to balance between maximizing efficacy and minimizing side effects at the same time to provide the best-in-class beauty experience using the same standards for things like texture and scent that we have at IL MAKIAGE and SpoiledChild, while beating top benchmark competitors in their category based on internal data. Our launch portfolio spans oral topical supplements and medical grade makeup that conceals whiteheads. Within the first 6 months of launch, we will be live in the market with 4 METHODIQ products formulated with ODDITY LABS molecules that are proprietary to us, addressing a range of skin conditions that include dark spots, papular scarring, eczema and skin filament. METHODIQ suites of vision tools was developed alongside our team of dermatologists to analyze visible skin features like breakouts and pigmentation to help our doctors' networks understand its user conditions. These vision models were built drawing on more than 1 million image of real individual with no facial skin condition, which we believe is the largest image data set of its kind and was curated from over 13 million facial images in ODDITY's database. Users are delivered continuous care through METHODIQ's first-of-its-kind tracking app for weekly check-ins where our vision technology quantifies progress and gives update to the clinician, ensuring compliance and success. We soft launched METHODIQ in Q3 and went live with our formal launch earlier this week, exactly as planned. This launch includes a major media campaign showcasing METHODIQ's distinctive brand voice and inspires consumers to commit to the care. We are running a large-scale out-of-home takeover in New York City and a massive TikTok activation partnering with the biggest medical and skin influencers to create brand awareness and to build trust. This is the biggest TikTok activation in ODDITY's history. And as we have said, dermatology is just the beginning. We are working on additional medical domains for expansion, and we expect to have more to announce for METHODIQ's in the future. Turning to IL MAKIAGE. Q3 were once again strong. IL MAKIAGE revenue grew double digit online. The brand remains on track to achieve our target of $1 billion revenue by 2028. We continue to show healthy expansion in international. At the ODDITY level, international revenue increased around 40% year-over-year in the first 9 months of 2025. We have successfully scaled in existing markets like U.K. and Australia, while conducting larger scale tests in new markets like France, Italy and Spain. We see huge opportunity in international markets and plan to further scale those across the board in 2026. Skin remains a standout growth area and is on track to be around 40% of IL MAKIAGE brand revenue this year. Successful product innovation has been a key driver of skin, and we expect this will continue in 2026 with our solid lineup of new product launches. Turning to SpoiledChild, which is having a strong year. We now expect the brand to cross $225 million of revenue in 2025. We are excited about our innovation lineup for 2026, including new product tests. Moving to ODDITY LABS, where our very hard work over the last 2 years is starting to bear fruit. We have made significant improvement over the last year to our systems, infrastructure and teams, which we believe will translate into strong commercial discoveries. The near-term commercial impact for ODDITY LABS is increasing. We plan to have at least 8 products with labs molecule on the market in 2026 for our existing brands, including 4 products for METHODIQ and 4 for IL MAKIAGE and SpoiledChild. Beyond these 8, we have additional products planned for our brand launch, lastly on tech product innovation, which is the backbone of our business and an area of continuous investment. Artificial intelligence has been a centerpiece of our tech platform since we first launched in 2018. Advances in large language models and generative AI, together with our large and growing proprietary data sets allow us to push the frontier of how we can use machine learning to drive direct-to-consumer. We have a range of initiatives in development on this front, including commerce agents that drive conversion and satisfaction, integrating these state-of-the-art models into our advertising creative and other customer-facing initiatives. With that, I will hand it over to Lindsay. Lindsay Mann: Thanks, Oran. Turning to our third quarter financial results, which I'll refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. Q3 was another good quarter for us, setting us up for a record-breaking full year results in 2025. ODDITY's strong financial results continue to stand out relative to our competitors. This outperformance has been driven by the strength of our direct-to-consumer model and exposure to what we see as the key durable growth vectors in the industry, which are the consumer shift online and the migration towards high-efficacy products. We grew revenue by 24% in the third quarter to $148 million, exceeding our guidance for revenue growth of between 21% and 23%. The strength was driven by double-digit online growth at both IL MAKIAGE and SpoiledChild. Net revenue was driven by an increase in orders, while average order value declined around 1%. Average order value was impacted by mix, including faster growth in international markets, which carry lower AOV. Repeat increased as a percentage of sales year-over-year, and our 12-month net revenue repeat cohort trends remained strong at north of 100%. Gross margins of 71.6% expanded 170 basis points versus the prior year and exceeded our guidance of 68%. We did experience some gross margin impact from the flow-through of higher tariffs during the period, but this was offset in part by cost efficiencies and favorable mix relative to our plan. We continue to expect tariff headwinds will remain manageable for the balance of 2025 and into 2026. And while we have the flexibility to take pricing as needed, we have no specific price increases planned to offset tariff-related inflation. We delivered adjusted EBITDA of $29 million in the quarter, above our guidance of $26 million to $28 million. We continue to invest in our long-term growth engines, including our METHODIQ brand launch and other future brands, ODDITY LABS and our tech platform. We had higher-than-planned media costs in the quarter and have seen the media backdrop improve as we progressed into the fourth quarter. We delivered adjusted diluted earnings per share of $0.40 compared to our guidance of $0.33 to $0.36. Adjusted diluted earnings per share exclude approximately $9 million of share-based compensation expense. We delivered strong free cash flow of $90 million for the first 9 months of the year. This included around $16 million of outflows related to inventory as we built inventory from METHODIQ and modified our inventory shipment timing for tariff planning purposes. We ended the quarter with $793 million of cash, cash equivalents and investments on our balance sheet with an additional $200 million available on our undrawn credit facilities. Turning to our outlook for 2025. After a strong first 9 months, we're on track for another record-breaking fiscal year and are once again raising full year guidance. We now expect full year 2025 net revenue will be between $806 million and $809 million, representing between 24% and 25% year-over-year growth. We expect gross margin will be approximately 72.5%. We expect adjusted EBITDA will be between $161 million and $163 million, and we expect adjusted diluted earnings per share will be between $2.10 and $2.12, assuming no share buybacks in 2025. This full year outlook includes our expectation that revenue in the fourth quarter will increase between 21% and 23% year-over-year. You can find more details on our Q4 outlook in our press release. With that, I'll turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question is from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: So Oran, on the base business, can you just help us unpack the 40% year-to-date growth you mentioned in international markets? Obviously, that's been a greater focus for you guys year-to-date. What have been the key geographic drivers of growth there from a country standpoint? And then just as you look out to 2026, you mentioned further scaling the international business. Is that around further country penetration? Is it SpoiledChild expansion? Just the key expansion or white space opportunities as you look going forward? Oran Holtzman: Sure. So the first 9 months, just to put things in perspective, still 83% of revenue came from the U.S. So although international grew 40%, it is still tiny comparing to the U.S. while for others, as you know, international is approximately 2/3 of their business. For us, it's still 17%. Our plan is to continue to responsibly grow across the board in international markets. But as we said in our remarks, it's a huge revenue and profit opportunity for us, and we see that it's strategically important for us. We scale international when we think it makes sense. We don't run and spend in user acquisition just because we want to grow international or because we see softness in the U.S. The opposite. Where we see opportunity, this is where we push and we get more revenue. This year, we grew 40%, but like the objective is not just to grow the international market. And in terms of countries today, existing countries, Canada, U.K., Germany, Australia, Israel and France. New geographies are Italy, Spain, Netherlands, Ireland and Sweden and Denmark. Markets that we are adding as testing are Japan, Mexico, Korea, Belgium and a few others. But this year, only 2% of revenue came from new countries and the 15% came from existing countries. So basically, the majority of the growth came from countries that we already were active in. Dara Mohsenian: That's very helpful. And then just one on METHODIQ. Just high level, any thoughts after you've done some testing there on how much ability the platform has to bring in new customers to the ODDITY franchise and perhaps over time, indirectly drive beauty sales and cross-sell? And just as you see initial interest in the platform, how much of that is coming from your existing consumer base versus a new consumer base? Oran Holtzman: Every new country is completely new because we don't have users there. So that's why it's -- in terms of cost, it costs more because like we don't have any existing users. Lindsay Mann: Oran, his question is on METHODIQ. The question is on METHODIQ, right there. Oran Holtzman: Sorry, I couldn't hear you. Yes, sorry. In terms of METHODIQ, yes, of course, like SpoiledChild, when we started, the majority of revenue came from IL MAKIAGE, and we expect that a decent percentage will come from IL MAKIAGE and SpoiledChild for METHODIQ. Of course, we are also doing user acquisition because we want to expand our user base. So it will be mixed. Over time, of course, when the brand grows, then we will have more acquisition, but we are doing both. Operator: Our next question is from Anna Lizzul with Bank of America. Anna Lizzul: On METHODIQ, just wondering in terms of how we should be thinking about this brand for '26. Just wondering if you can continue to elaborate on how you're thinking about new customer acquisition for METHODIQ. Just how can we think about it incrementally versus SpoiledChild and IL MAKIAGE? And just in terms of the investments that you're making, we previously expected, I guess, a larger headwind on the second half in SG&A and the guidance for Q4 implies that this might not be as bad as we previously expected. So was wondering if you can comment on this also for the beginning of '26 in the context of the new brand launch. Oran Holtzman: I will start with high level. Our expectation from METHODIQ Brand 3 is to scale faster than SpoiledChild, which was one of the best D2C launches of all time. And our expectation here is to see even bigger numbers. In terms of contribution due to the fact that it's like relatively small, like SpoiledChild did $25 million in year 1. And even if we do a bit more, still comparing to our next year revenue goal is still tiny. So Lindsay, if you want to touch regarding contribution for both top line and bottom line and METHODIQ. Lindsay Mann: Yes. No, that's right. We haven't given -- we're not ready to give any specific plans for 2026 for METHODIQ. But of course, as we look long term, we're extremely bullish about the brand. This is a telehealth platform that is really reimagined what medical care would look like if it was built entirely around the customer. Oran talked about the world-class treatments we've put together, highest standards of care, truly personalized to the individual and broadly available to everyone available online. We're starting in dermatology. That's a focus for us right now, a market that we understand really well because we've got around half of our IL MAKIAGE and SpoiledChild users on the ODDITY platform that tell us they have issues like acne and dark spots and eczema. And so it's a nice place for us to begin, as we said with the earlier question. And there's truly nothing like it on the market. So we're very, very bullish, but we are in very early stages. We had our soft launch on time in the third quarter. We just launched formally this week. A lot of very strong early signals, but still lots of work for us to do before we figure out our plans in terms of timing of scaling, et cetera, but we're really excited. As far as the SG&A implied guidance for Q4 versus prior, I guess what I would say is, historically, we like to guide to revenue and EBITDA. And then from a gross margin perspective, we always give the team a lot of flexibility. So we try to guide conservatively that allow them to kind of chase whatever products from a DC margin perspective, that's gross margin after media spend. That's how we evaluate the business. We want them to have lots of flexibility to go after the right DC margin or other products that from a strategy perspective, we're focused on. So gross margin is not an internal focus metric. And as a result for our guidance, we try to walk you guys to a place where we feel really comfortable we can deliver, and we've historically delivered a bit better, but we're always managing towards that revenue and EBITDA figure. So I wouldn't read too much into that. We still have some nice investment planned for all of our growth initiatives, including METHODIQ in the fourth quarter, and we talked about the growth investments in the first half of 2026 on our prior call. Operator: Our next question is from Youssef Squali with Truist Securities. Youssef Squali: I have 2, maybe just starting with one, Oran. We've seen a pretty mixed bag of earnings from various consumer-oriented companies this earnings season. I think you alluded to that a little bit in your prepared remarks. Can you maybe speak to your views about the health of the U.S. consumer right now and some of the things that you guys are doing in particular, just to help ODDITY buck that trend? And I have another question. Oran Holtzman: Sure. Yes, like we see what you guys see regarding softness from like from the outside. But internally, as you can see based on our results, revenue is still like according to plan, even better. Margin was strong. This is despite the fact that we see like higher acquisition costs. And the main reason that we can offset it is just like the massive repeat that we have. And when I try to think about the way like to think or to answer regarding softness, the first thing that I look at is obviously acquisition, but the second part is repeat. So yes, acquisition is higher, but repeat is getting way higher every quarter. And therefore, we are not impacted. Youssef Squali: Okay. Okay. That's great to hear. And then Lindsay, I know you're not guiding quite yet to 2026. But is the growth algo for 2026 any different from what we've expected or what we've heard from you guys up until this point, which is committing to basically 20% top line, about 20% adjusted EBITDA margins. And maybe within that, maybe just talk about the marketing efficiency in the business that you're seeing. Lindsay Mann: Yes, we're not ready to give 2026 specific guidance. We'll give that when we issue our Q4 earnings results, but there's no change to our algorithm of 20% revenue growth and 20% adjusted EBITDA margin. And you heard Oran reiterate in his remarks earlier that the other sort of medium-term guidance that we've given for IL MAKIAGE to deliver $1 billion by 2028, there's no change to that either. So business continues to be on a very healthy footing. As far as media efficiency goes, you heard Oran comment, we did have some higher acquisition costs. In my remarks, I mentioned the environment has actually improved for us as we've gotten into the fourth quarter. Overall, SG&A in the third quarter was up around 30%, and that's including some of the increased spending initiatives that we have, for example, for METHODIQ, ODDITY LABS, et cetera. So it's been very manageable for us, and we're feeling really good as we head into Q4. Operator: Our next question is from Andrew Boone with Citizens. Andrew Boone: Lindsay, as we think about METHODIQ being added to the model, is there anything that we should keep in mind in terms of the different financial profile, whether that be different AOVs, whether that be different margin profiles? Is there anything we should be considering as we think about the next 3 years and layering in that brand? And then on ODDITY LABS, it's great to see molecules start to contribute to the portfolio in 2026. Can you guys just help us understand what the expectation is of proprietary molecules? It feels like a step function change in terms of what you guys can bring to market. How do we think about that? And then what's the path beyond those 8 initial products? How do we think beyond this first step? Lindsay Mann: Oran, you want me to start? Oran Holtzman: Yes, please. Lindsay Mann: So in terms of financial profile for METHODIQ, over the long term, we see this brand in a very similar framework that we think about with both IL MAKIAGE and SpoiledChild, and those are brands that will support long-term compounding 20% revenue growth and 20% adjusted EBITDA margin. So very healthy unit economics that we see for the category in general and that we think METHODIQ will deliver, especially as it relates to repeat and other KPIs that build into LTV. I think for the prescription product, in particular, we will have lower gross margins, especially at first. We'll be -- we're always quite inefficient on the gross margin side when we launch a business. But in the case of prescription for METHODIQ, because you have the third-party physician network and also the compounding pharmacies, those are extra costs for us. The business we expect will be mostly not prescription, but you do have some of the prescription cost input that will impact on the gross margin side. However, we think you're going to have a really nice repeat business there that drives healthy DC margin. Probably too early to say much else, but we look forward to sharing a bit more as we progress post launch in 2026. As it relates to ODDITY LABS, maybe I'll start and Oran, if you want to add additionally. As you guys know, in 2024, we made a strategic pivot with Labs where we decided to extend our development time lines in order to focus on delivering molecules that had much higher efficacy and far superior performance characteristics than what was on the market today. And so we knew that would delay some of the timing of certain launches, but we thought it was a really smart trade-off to make because we believe that we could produce things that were way better. And now you're starting to see the fruits of that labor. So as we said, we expect in '26 that just for our existing brands, we'll have 8 products on the market, including 4 for METHODIQ. I would describe the METHODIQ brands products as some of them extremely innovative, addressing very important needs for the consumer. So we're really, really excited about that. And we have even additional -- we have a lot in the pipeline, including some molecules that we expect will be delivered with Brand 4 and more beyond. So I would just say super happy to see how the level of improvement that we got out of the work that we put into ODDITY LABS. Oran Holtzman: I would just add that like when we started labs, we built it -- we started and we built it again. It was hard because the first time that we've done something like it. And the fact that you see so many products and so many molecules coming to market this year just shows like that what we've done was the right thing, and there is a real progress in labs. So we expect to see the same pace and even higher in the next few years. The fact that both METHODIQ and our IL MAKIAGE and SpoiledChild brands are going to get molecules this year is very encouraging. And again, just shows like the strength and the progress that we've done, which is significant in the past 1.5 years. Operator: Our next question is from Cory Carpenter with JPMorgan. Cory Carpenter: I have 2, Lindsay, probably both for you. Just hoping you could expand on the comments around the media environment and higher acquisition costs now going a little lower. And anything in particular to call out on the search channel? And then capital allocation, you have a healthy cash balance. You have not purchased shares since the convert earlier this year. So maybe if you could just refresh us on your capital allocation priorities. Lindsay Mann: Sure. On the media side, media costs, as we've said before, they tend to get more expensive every year, but we are able to offset them really effectively with higher repeat and also other unlocks across our KPIs, including conversion and other things that we focus on. So this has allowed us to deliver a very healthy, sustained profitable business and repeat is running at around, call it, 2/3 of our overall business. And we were really -- are really pleased to see that the -- I discussed the net revenue repeat cohorts, like the 12-month cohorts and the cohorts that we examine are all continue to be really, really strong. So we think you're still seeing a healthy consumer environment and a solid environment for us to continue to deliver. As far as our cash position goes, we're in a very strong position, almost $800 million of cash equivalents and investments on our balance sheet today. We post the convertible earlier this year, we view this as really efficient, patient capital for us that we have flexibility to do what we want with. So we, of course, have the opportunity to deploy it for buybacks. We have the opportunity to deploy it for M&A, and we feel like we're in a really strong position where we can be patient and selective about what we use it for. Operator: Our next question is from Ryan MacDonald with Needham & Company. Ryan MacDonald: Congrats on a great quarter. As you look at the international success into the test market, can you talk about how replicable like the data model in terms of targeting subscribers and new users and then sort of identifying maybe more local or geographic differences in terms of what their needs product-wise might be just as you continue to scale that international efforts? And then is your intent to immediately go international with METHODIQ right away? Or are you going to take sort of a more measured sort of region-by-region approach like you've done with other brands in the past? Oran Holtzman: Sure. So first of all, regarding METHODIQ, we thought only U.S. It's complex enough without international. So by the way, SpoiledChild was the same for the past -- for the first almost 3 years, we didn't even test international. So we plan to do the same with METHODIQ. I'm not sure it's going to be 3 years, but I don't think it's going to be way less than that. Regarding international and what we -- exactly what you said, that's the reason why we do tests. And when I said test, like we open market with a localized website and starting to put -- to spend media against new users in those countries and to ship products based on that, we see satisfaction, we see repeat, we see unit economics, then we decide if this market is suitable for us or not. And that's how we -- that's what we have done for the past 2.5 years. Operator: Our next question is from Scott Schoenhaus with KeyBanc Capital Markets. Scott Schoenhaus: METHODIQ here. Lindsay, you mentioned the majority of revenues were going to be -- volumes are coming from the nonprescription side versus prescription. Are the molecules, those 4 molecules also going to be for nonprescription versus prescription? And then as a follow-up, on the prescription side, the physician network that you've built, there's clearly a shortage of dermatologists. And so this is an asset. How are you thinking about deploying technology to leverage more dermatologists on your network for patients? Lindsay Mann: Thanks, Scott. So the 4 products are not prescription. They're a combination of OTC and cosmetic. And again, we're really excited to have them out there, but those are not prescription products. And in fact, for ODDITY LABS, we're not -- for the most part, and certainly, in the near to medium term, you won't see anything that's prescription coming from ODDITY LABS that will all be either OTC or cosmetic. In terms of our physician network, we are currently plugged into third parties to help us with that. We have not brought that in-house, but we have the opportunity to do so for cost efficiency reasons down the road if we decide to do it. We -- the networks we're using now, we're using all physicians at the moment, not all dermatologists, but all board-certified physicians. And we can, of course, scale that to NPs and other medical care practitioners down the road. There's the opportunity for that, but we're starting with all physicians as we build that and learn. And I think from a technology standpoint, it's really us building capabilities that allow the network of clinicians to get the strongest signals possible to help inform treatment decisions based on the inputs that we take, basically, when you're going through the METHODIQ intake and onboarding funnel, we're picking up on the contextual real pathways and real signals that -- the same thing that you would look for if you were in an office, right? So you're looking at questions about demographics, hormonality, history and that kind of stuff. Meanwhile, the vision tools are picking up signals like number of lesions, intensity and those kinds of signals that are really helpful for a clinician when making a decision about treatment outcomes. So that's a really important part of our technology and then also just integrating our records directly with the provider systems that help the -- operate the clinician interface and help them to integrate with our tools. And then I think finally, like within the METHODIQ app, the ability to get feedback, progress tracking and to chat directly with your clinician to help drive things like confidence and most importantly, compliance and success, those are enormous ways we're using technology to drive the outcomes that we want. Operator: Our next question is from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I just have a question on IL MAKIAGE and SpoiledChild. Growth in the U.S. remains strong double digits for these brands, but it has moderated year-to-date versus last year. So could you talk about what's driving this? And if the low 20% growth in the U.S. for these 2 brands is doable over the next few years? Or should we expect a continued slowdown? I guess I'm asking especially for IL MAKIAGE. Also, could you touch on repeat rates for the brands and if these rates are also moderating? Oran Holtzman: I will start by saying... Lindsay Mann: Go ahead. Oran Holtzman: Yes, I would just start by saying that as I mentioned before, we manage growth across brands and geographies. So like I don't wake up tomorrow and say, today, I need to see 25% IL MAKIAGE in the U.S. We see we look more broader and we maximize the potential based on what we see in real time. So if Germany is working better at a specific day, this is where we push more and vice versa with SpoiledChild. Lindsay, do you want to touch repeat? Lindsay Mann: Yes. I mean just to add on that, like we are driving growth at the ODDITY level and our growth targets we're managing growth towards 20%. We don't want to grow faster than that. And so ever since our IPO, we have been very clear and explicit about our plans to sustain 20% compounded durable growth. And that's exactly what we've been delivering on, and we're managing it at the ODDITY level, and we'll pull different levers within the different brands. Specific to IL MAKIAGE, our target is to get to $1 billion by 2028, and we've always talked about international being an important piece of that. And so you're seeing us flex on the international part now. At the same time, we want to make sure we're feeding SpoiledChild and now we have a third baby to give oxygen to. So we're managing it as a portfolio in order to deliver an overall ODDITY level growth. I think in terms of repeat, no, repeats continue to be very, very strong. Operator: Our next question is from Georgia Anderson with Evercore ISI. Georgia Anderson: I was wondering if you could talk a little bit about the TAM for METHODIQ. Are you guys kind of defining this as all chronic skin sufferers in the U.S. or globally? Or is it a narrow cohort, acne or eczema patients are willing to pay out of pocket? And then just kind of in terms of measuring success of the brand, do you have any milestones or KPIs that would give you confidence that METHODIQ is scaling towards its full TAM? Oran Holtzman: Lindsay, I'll start with the KPIs and you'll talk about TAM. Lindsay Mann: Yes. Oran Holtzman: So like we soft launched in September, official launch this week. So of course, very early. But based on what we see early, the demand is there. The KPIs that we look at now are user acquisition, repeat, up downloads, open rates, weekly check-ins. And like when we see that those KPIs as we envision they are, then we will start scaling. Lindsay Mann: In terms of the TAM, the right way we think to look at this is number of people rather than dollar size. And the reason for that is because it's such a high friction market and one that hasn't been run well that we think if you actually can unleash some technology that leads to better outcomes and easier outcomes for people to access, you're going to see the overall market grow. And for these chronic skin conditions like acne and hyperpigmentation and eczema, I mean, your solutions are, number one, go to a dermatologist. Oran talked about 2/3 of U.S. counties don't even have a dermatologist. Your average wait times are over a month. People spend hours commuting to from plus sitting in the waiting room and waiting for a doctor's office. So it's a real pain in the neck, and it's not a great experience. So it's something people avoid. And then your alternative of going to the drugstore, bouncing around with low efficacy products that don't really work, it's overall stifled the total potential size of the market. We think that by really opening up this much better user experience, highest standards of care, world-class treatments made available easily to everybody online, you're actually going to see the overall market size grow. And that's why we're unleashing we think it's like probably the biggest wave of innovation to dermatology in decades and maybe ever. So we're really excited about it. And then if you look at just the number of the people, which is what we think is the right way to look at it in America, you've got 50 million Americans, around 50 million with acne, around 30 million with dark spots/hyperpigmentation, around 30 million with eczema. And just on our platform alone, we see the deep prevalence of these issues. A lot of people are buying foundation from IL MAKIAGE already to cover them up. So it's a natural place now that we have new tools and an effective way to address it for us to expand into. Operator: Our next question is from Lauren Lieberman with Barclays. Lauren Lieberman: I was just curious to talk a little bit about launch plans for METHODIQ and sort of learnings maybe from spoils because you did -- I recall that you did billboards for spoils. I see that you're doing it from METHODIQ. You talked about it being sort of the biggest -- I think you said biggest TikTok activation. So just curious about how you made decisions around the non-online portions of the launch and for how long you expect to have these kind of big TikTok activations going on because it's something right, you get lots of attention if days, but how should we think about that ongoing TikTok activation to get the brand's awareness up? Oran Holtzman: Sure. So it's the third brand that we are launching, and we've done the same more or less with all 3 offline activation out of the gate for IL MAKIAGE, SpoiledChild and now in New York, we have the same with METHODIQ. Regarding TikTok, it's the biggest campaign that we've done so far. And we started now, and we plan to continue until end of Q1. Operator: Our next question is from Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on the quarter. Maybe I'll follow up on Bonnie's question from earlier. As I think through the makeup of the growth rate for the quarter, very strong growth, obviously. How should we be thinking about volume versus pricing versus mix in that growth rate for the different product lines? Lindsay Mann: The biggest driver of the vast majority of our revenue is driven just purely by orders. AOV was down around 1%, so essentially flat and order growth historically and in the future will be the dominant driver of our revenue growth. Brian Tanquilut: Understand. And if I may ask a follow-up, my follow-up question would just be, as we think about METHODIQ, is this going to be primarily a compounded drug product offering? Or is there a noncompounded version here? And how should we be thinking about like margin differentials between the 2, if that was the case? Lindsay Mann: So the business today is a combination of nonprescription and prescription. Like we said, we think the prescription will be the smaller part of the business. And within the prescription, we're contemplating compounded products today with potential in the future, of course, to evolve, but that's the business model now. Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to Oran for closing remarks. Oran Holtzman: Thank you very much for joining us today. See you next quarter, guys. Bye-bye. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Greetings, and welcome to the Fiscal 2025 Fourth Quarter and Year End Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Francis, Vice President of Investor Relations. Good morning and thanks for joining us. James Francis: With me today is Bruce Caswell, President and CEO, David Mutryn, CFO, and Jessica Batt, Vice President of Investor Relations. I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Item 1A of our most recent Forms 10-Q and 10-Ks. I encourage you to review the information contained in our recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances except as required by law. Today's presentation also contains non-GAAP financial information. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-Ks. And with that, I'll hand the call over to Bruce. Bruce Caswell: Thanks, James, and good morning. I'll begin by recapping fiscal year 2025, which was notable not only for the financial results but for our team's ability to remain focused on serving our customers amidst a period of significant change in the government services sector. I'll then cover our priorities for fiscal year 2026, aligned with our strategic vision and current and anticipated future market conditions, including investments that are designed to prepare Maximus, Inc. for what we believe are meaningful growth and market expansion opportunities. Investments in AI capabilities are an important priority and reflect our evolution as a technology-driven partner to governments. Fiscal year 2025 was a year of significant achievement for Maximus, marked by success across multiple domains. We entered the year with strong visibility into the underlying portfolio of the business both in terms of revenue and backlog and certain programs returning to more steady-state levels following post-pandemic upticks. We guided with prudent judgment given the changing political environment. In what emerged as a markedly different approach by the current administration, following the transition, we carefully navigated an uncertain environment that brought new priorities and opportunities that developed as the year progressed. Looking back at where we started, I'm pleased to report that revenue and profitability came in higher than projected, reflecting both the strength of our core operations and the disciplined execution of our strategy throughout the year. The organic growth rate of the consolidated business was 3.9%, with 12.1% organic growth and the Outside The U.S. Segment delivering 4.1% organic growth. This outcome is attributable to the dedication of our teams across the enterprise in delivering on customer priorities. Equally important, our contractual relationships remained stable and secure throughout the year, with cancellations or impacts at just 1.5% of fiscal year 2025 revenue, a figure that is unchanged from our prior earnings call. This underscores the essential nature of the services we provide and the trust our customers place in us to support their mission and deliver outcomes that matter in a dynamic operating environment. Even as policy and technology continue to evolve, we believe that maintaining and expanding these long-term commitments is a testament to the value we deliver and the quality and reliability of our services. Taken together, the strong fiscal year 2025 financial results, the durability of our customer relationships, and the strategic investments we are making give us confidence in our future as a tech-enabled mission-critical partner to government. We are proud of what we accomplished and we are energized by the momentum we're carrying into fiscal 2026. Our focus remains on delivering consistent performance, maintaining trusted partnerships, and utilizing our increased customer presence and evolving capabilities for future growth. Looking ahead, I want to share three strategic priorities on which we are executing during fiscal 2026 that we believe are favorably positioning the business for opportunities to accelerate growth in fiscal year 2027 and beyond. These priorities include first, expanding in U.S. Federal markets; second, policy-driven initiatives mainly around the One Big Beautiful Bill Act actionable in our U.S. Services segment; and third, deployment of AI and related tech-enabled automation. Our commitment to advancing this third priority is driving an important transformation across Maximus. From how we execute internal functions and support our employees to the delivery of our performance-based contracts and also to the expansion of our technology-based solutions for governments. I'll note that these and other investments were made possible by our earlier focus on what we called Maximus Forward, an organization-wide commitment to rethinking critical business functions and their cost. Starting with our U.S. Federal business, our commitment to delivering even greater value to our customers is unwavering. We also believe the investments we made through both inorganic and organic means have expanded capacity, enhanced our competitiveness, and created platforms that we believe can provide durable organic growth. In prior quarters, I've spoken about our efforts to strengthen our infrastructure. For example, rapidly achieving CMMC level two certification and capabilities through what we call mission threads that tie directly to the pipeline we are prosecuting over the next several years. We believe our foundation for sustained growth is robust, and that we are aligned with and in many cases ahead of the evolving needs of our customers. We are confident in the opportunities ahead and our ability to continue to create long-term value for shareholders. Our federal leaders and teams are aligned strategically to civilian, health, and defense and national security markets. I'll speak briefly to each. We are recognized for having a distinguished portfolio of civilian work, delivering essential services for student loan management, the IRS, and the SEC as examples. We occupy a vital corridor of the civilian space and have deliberately aligned to bipartisan priorities that are fundamental to the government's role of supporting its citizens. We continue to see opportunities to deliver on the administration's priorities for modernized, accountable, and cost-effective citizen services while recognizing how budget priorities are increasing the importance of blending deep program expertise with commercial innovation. Many modernization needs remain unaddressed and we believe that Maximus is well-positioned to address these priorities. With an earned reputation in the delivery of performance-based contracts and tech modernization, we are regularly engaged as trusted advisors. Leveraging our investment in solution architects, we are favorably positioned for the opportunities we are tracking. To our knowledge, Maximus is the only public company in our sector that has formally documented its mix of contracts that are performance-based, which stands at 54.4% for fiscal year 2025. We believe this distinction reinforces our leadership in driving accountable and measurable results. I've commented previously that the timing of procurements is less certain in the civilian pipeline than we've historically experienced, which highlights the importance of supporting our customers and delivering our current programs with a continued emphasis on quality and efficiency. Additionally, we've noted our investment in further differentiating Maximus as a leader in enabling the citizen experience or CX of the future. Our total experience management or TXM solution, which I've mentioned on prior calls, is a FedRAMP secure, modular, flexible, scalable, and configurable platform that helps enable federal agencies to deliver smarter citizen-centric services. AI-infused and packaged and sold as a cloud-based service, which is rapidly becoming the preferred procurement method of government agencies. We believe that TXM is well-positioned to replace end-of-life on-premise systems. I'm proud of what our team has developed, as evidenced by a recent demo where TXM was said to be one of the most advanced and integrated demonstrations of AI in a CX platform for government yet experienced by the customer. We believe TXM is a strong fit for the pipeline of contact center consolidations we see in the market. On to the health market, which we define as including defense and non-defense related programs and opportunities. After setting a deliberate course in this market with the 2021 acquisition of Veterans Valuation Services, we are pleased to see synergy pipeline opportunities for new customers coming to bid and Maximus well-positioned with what we believe are competitive solutions. Compared to the civilian pipeline, I'm encouraged by the procurement tempo of health opportunities, with key procurement milestones largely on track. Given current conditions and the nature of the programs we're bidding, we anticipate that outcomes could be consequential for fiscal 2027 and beyond. In the defense and national security area, our strategic pursuit of certain opportunities has been affirmed by the highly credible wins with new customers we've seen seeking a change from traditional providers. Let me share one example. Most recently, Maximus was awarded a new Joint Cyber Command and Control Readiness contract by the United States Air Force Lifecycle Management Centers Cryptologic and Cyber Systems Division. This award, with a potential value of $86 million, marks our second major engagement with the Air Force under this program and represents meaningful expansion of our technology services portfolio within the defense sector. Through this contract, Maximus will lead engineering analysis, software modification, maintenance, and enhancement as well as the maturation of existing architecture and infrastructure. The period of performance includes a base year, four one-year option periods, and an optional six-month extension. We believe this award reflects the depth of our technology expertise and delivery capability, underscoring our ability to support the Air Force's defense readiness mission. It highlights our capabilities in software engineering, development, and modernization, and reinforces our position as a trusted partner in advancing mission outcomes. Our highly skilled technology professionals will deliver modeling and application analysis to help enable mission execution, further strengthening our role in supporting national security objectives. I'm proud of the progress we've made overcoming barriers that make expanding in this business area challenging. We believe that recent directives emphasizing speed, outcomes, access to commercial tech, and streamlining contracting fit our strategic offerings well. In support of this strategy, expanding our participation in other transaction authorities or OTAs, which the Department of War increasingly favors as a faster and more flexible acquisition path. David Mutryn: Collectively, we believe these actions suggest an evolution in contracting that will accommodate newer entrants like Maximus and support longer-term defense national security policy objectives. In further support of this strategy, we've formed and are investing in our first Cooperative Research and Development Agreement or CRADA, providing a mechanism for developing, maturing, and retaining Maximus intellectual property through collaboration with the Department of War. This agreement supports hosting of recurring hackathon events, capability demonstrations, and technology experiments in a Maximus operated sensitive compartmented information facility, or SCIF. This CRADA positions Maximus closer to the men and women in uniform that conduct global operations for the department and positions Maximus at the center of advanced research and development. These activities align directly with the department's evolving acquisition strategies for rapid prototyping, IT, and modernization. Recent commentary from department leadership has signaled the desire for greater investment by the industry. While this may present challenges for some competitors, Maximus is actively demonstrating on contract innovation as part of our technology forward strategy. More than four months on, the landscape around the One Big Beautiful Bill Act remains largely unchanged, but the priorities it established continue to be front and center for our state customers within our U.S. Services segment. The legislation creates meaningful opportunities for Maximus in both Medicaid and SNAP. And we remain actively engaged with clients to prepare for the requirements ahead. On Medicaid, administration continues its focus on managing federal spend, with new rules requiring twice-yearly eligibility determinations for the expansion population and codifying work requirements beginning in early 2027. States must review and adjust their processes to comply, and our U.S. Services team is working closely with clients to ensure readiness. As we noted previously, we believe Maximus is well-positioned as a conflict-free partner to support these compliance efforts, having done so for similar requirements in TANF and SNAP for almost thirty years. While the Medicaid changes are significant, states' foremost priority at the moment based on active discussions is around SNAP. The budget implications of the new payment accuracy requirements are far greater as states with higher payment error rates will be required to absorb more of the program's expense. This shift is driving strong interest in technology-led solutions that can improve efficiency and payment accuracy. As I mentioned on the last call, Maximus already has an expanded role with a longstanding state customer, and we expect SNAP to remain a focal point of engagement given potential state budget implications. Although the policy environment has not materially shifted since our last call, these initiatives continue to be priorities for our customers. In our view, we are the right partner to help states navigate the changes, mitigate risk, and deliver high-quality outcomes across both SNAP and Medicaid. I'll close my discussion of strategic priorities with AI, where Maximus is proud to be a leader for government customers in this unprecedented era, demonstrating the art of the possible and transforming public service delivery. Our role is not only to provide solutions but to show what is achievable when innovation is combined with decades of deep program knowledge, policy experience, and operational data. By embedding AI directly into our business processes, we are enabling customers to benefit from advanced automation, AI-powered quality monitoring, and real-time insights. These capabilities are helping agencies operate more efficiently, make better decisions, and deliver improved outcomes for the people they serve. We have already successfully deployed AI-driven tools across enterprise programs where these solutions have accelerated service delivery, strengthened compliance, and enhanced customer satisfaction. In addition to our AI-powered TXM solution I mentioned earlier, we are also serving as customer zero for our own large-scale deployments of AI solutions in ITSM, or service management, and HR help desk support, as well as knowledge management. This first-to-deploy experience provides us with deep insights, enabling our solutions to be tested, refined, and proven before being extended to our customers. Maximus' AI guiding principles form a robust framework for responsible innovation, grounded in ethical governance, human-centric design, and mission-aligned outcomes. Our governance structure is designed to ensure that our innovation is both responsible and sustainable. Looking ahead, we have approximately 30 AI-related deployments either planned or in process across Maximus. These initiatives vary in scale from small pilots to large enterprise implementations, with further full deployments expected in fiscal 2026. This pipeline reflects both the demand for AI-enabled solutions and our commitment to investing in the future of government services. Let me turn now to our award metrics and pipeline. For fiscal year 2025, signed awards total $4.7 billion of total contract value. Further, at September 30, there were $331 million worth of contracts that have been awarded but not yet signed. These awards translate into a book-to-bill of approximately 0.9 times for the trailing twelve-month period and reflect ongoing progress toward increasing this metric, a previously stated goal of ours. As a reminder, we continue to view book-to-bill as a relevant forward indicator to pipeline conversion over the broader horizon, but not the sole determinant of the business' ability to grow organically. Also, in periods of lower than normal rebid activity, as we've experienced recently, the TTM book-to-bill is expected to be below 1.0. Then in periods of greater rebid activity and given our larger contract lengths and values, the metric tends to show outsized performance. It's worth noting that the improvement to TTM book-to-bill of 0.9 was driven by more dramatic quarterly sequential improvement. The quarter ended September 30 book-to-bill was 1.0 times compared to 0.3 times for the June 30 quarter, a marked improvement in the pipeline conversion of both recurring and new work. Our pipeline at September 30 was $51.3 billion compared to $44.7 billion reported in 2025. The September 30 pipeline is comprised of approximately $3.4 billion in proposals pending, $1.4 billion in proposals in preparation, and $46.6 billion in opportunities tracking. Of our total pipeline of sales opportunities, approximately 64% represents new work. Additionally, 66% of the $51.3 billion total pipeline is attributable to our U.S. Federal Services segment. Notably, in this latest pipeline view, U.S. Services segment opportunities tied to the One Big Beautiful Bill Act remain in the development stage, with potential revenue in fiscal 2027, and therefore are not yet captured in the pipeline. And with that, I'll turn the call over to David. Thanks, Bruce, and good morning. David Mutryn: I'd like to recap our strong fiscal year 2025 with a few financial highlights and then walk through results in our typical fashion. I'll close with formal fiscal year 2026 guidance and commentary. First, I'm proud of the team's strong execution to enable finishing fiscal year 2025 right on the mark for revenue, which totaled $5.43 billion. This equates to organic growth of 3.9% over the prior year. From an earnings standpoint, the full-year adjusted EBITDA margin was 12.9% and adjusted earnings per share were $7.36. The fourth quarter included a higher level of severance charges related to ongoing cost management efforts. Second, the fourth quarter was also notable for its strong cash flows as we anticipated, enabling us to deliver $366 million of free cash flow for the full fiscal year 2025. Third, from a capital allocation standpoint, we stayed focused on debt pay down and opportunistic share repurchases. At September 30, our net leverage was 1.5 times. Looking back across the full fiscal year, we repurchased approximately $457 million worth of shares, including $151 million in the fourth quarter. Finally, our official guidance for 2026 aligns with the early color we provided in August. The midpoint of $5.325 billion of revenue reflects our current view of volume dynamics on some of our variable work that I will discuss in more detail. Meanwhile, the $8.1 midpoint of adjusted EPS guidance reflects ongoing margin expansion and 10% growth over fiscal 2025. Continued adoption of technology and careful cost management are key enablers on the bottom line outlook. While the recent share repurchase activity further benefited diluted EPS by lowering the weighted average shares outstanding. Last, the midpoint of our free cash flow guidance is $475 million, representing about 30% year-over-year growth. Those are the key highlights, so let's turn to total company results. For the full fiscal year 2025, revenue increased 2.4% to $5.43 billion. As I mentioned, organic revenue growth was 3.9% and aligned with our long-term target of sustainable mid-single-digit organic growth. The U.S. Federal Services segment drove the growth thanks to several programs in the clinical and natural disaster support domains, experiencing high demand for our services. Our profitability improved to deliver a 12.9% adjusted EBITDA margin for the full fiscal 2025 as compared to 11.6% for the prior year. This was attributable to the higher demand in the U.S. Federal Service segment coupled with technology and cost initiatives. Fiscal 2025 adjusted EPS was $7.36 as compared to $6.11 for the prior year, representing a healthy 20% increase. While most of it was improved profitability, as evidenced by the higher adjusted EBITDA margin, a portion of the year-over-year improvement stemmed from the share repurchase activity this year. I would like to make a note about our just completed fourth quarter earnings. During the quarter, we took deliberate action to yield cost savings in future periods, which included severance charges totaling approximately $16 million. These were booked within the two domestic segments and had a more pronounced effect on the operating margins of the U.S. Services segment. Let's go to segment results. Starting with the U.S. Federal Services segment, revenue increased 12.1% over the prior fiscal year to $3.07 billion. All growth was organic and driven by a combination of expected and unexpected volume growth across several programs, primarily in the clinical domain. In addition, this segment includes contracts to rapidly stand up support in the wake of natural disasters, which generated higher revenue than a typical year. The higher volumes in both areas extended across several quarters this year and by the fourth quarter had settled back to more typical levels. The operating income margin for U.S. Federal Services was 15.3% in fiscal 2025 as compared to 12.2% in the prior year. The same demand that drove the segment's top line also benefited the margin since incremental volumes often provide operating leverage. Another reason for the margin expansion is greater implementation of technology initiatives that increase the productivity of staff on the programs. For the U.S. Services segment, revenue decreased to $1.76 billion as compared to the prior year revenue of $1.91 billion. As we've noted on recent quarterly calls, across fiscal year 2024, we were successful with helping our state customers process unprecedented engagements tied to the Medicaid unwinding exercise. This was essentially the last of the pandemic-related impacts to the segment. By this year, fiscal 2025, the effort was complete and Medicaid engagements reflected both normal course assistance to states and a more typical Medicaid population. The U.S. Services operating income margin was 9.7% as compared to 12.9% in the prior year. As a reminder, last year's margin benefited from the overperformance and we anticipated that it would not reoccur. Also, the segment's margin in the fourth quarter of this fiscal year was impacted by a meaningful portion of the $16 million total company severance costs that I referenced earlier. We expect this cost management effort to lift full fiscal 2026 margins in this segment. For the Outside The U.S. Segment, revenue decreased year over year to $600 million due to divestitures of multiple employment services businesses in prior periods. The related decrease in revenue was partially offset by positive organic growth totaling 4.1% and a small currency benefit. The operating income margin for the Outside The U.S. Segment was 3.7% as compared to 1.2% in the prior year. We have stated previously that we intend for the segment to reliably deliver in the 3% to 7% margin range and over time move up in that range and closer to the profitability of the domestic segment. We are pleased with progress so far. Beyond that, we continue to see a healthy pipeline of opportunities to deliver higher value services, which could support margin improvement. Turning to cash flow items. As expected, we had strong collections in the fourth quarter. Fiscal year 2025 cash flows from operating activities totaled $429 million and free cash flow was $366 million. The fourth quarter alone had free cash flows of $642 million. Our days sales outstanding or DSO improved substantially from the third quarter's ninety-six days landing at sixty-two days at 09/30/2025. We ended fiscal year 2025 with gross debt of $1.35 billion and we had unrestricted cash and cash equivalents of $222 million. At September 30, our debt ratio was 1.5 times. As a reminder, this ratio is our debt net of allowed cash to consolidated EBITDA for the last twelve months as calculated in accordance with our credit agreement. We achieved our goal of ending the year comfortably below two times and one quarter ago at June 30 the ratio was 2.1. The improvement came from expedited pay down after catching up collections on two contracts that had created a temporarily higher DSO in prior quarters. During fiscal year 2025, we repurchased approximately 5.8 million shares totaling about $457 million, which was enabled by two Board of Directors authorization announcements. Following an additional $31 million of repurchase subsequent to year-end, we have approximately $250 million remaining as of today on the current $400 million authorization granted by the Board of Directors in September. Moving to capital allocation, our framework for priorities is unchanged. We first make organic investments, most of which flow through the income statement. We also maintain a $0.30 per share quarterly dividend that we intend to grow over time with earnings. Following these, we prioritize strategic acquisitions intended to accelerate organic growth. We also repurchase our shares opportunistically depending on current market conditions. As we move further into fiscal year 2026, we continue to evaluate suitable M&A targets, which could bring new or enhanced capabilities and new or expanded customer sets or a combination of both. We will maintain our disciplined approach to evaluation of deals and we intend to stay within our two to three times target debt ratio range. Given our high annual cash conversion and current 1.5 times debt ratio, we believe that there is ample capacity for a transaction of varying sizes ranging from more of a tuck-in style deal to a larger deal proportional to our balance sheet capacity. If we do not conduct a transaction in fiscal year 2026, and do not complete any further share repurchases, we anticipate a debt ratio of roughly 1.0 times at 09/30/2026. Let's go to official guidance. For fiscal year 2026, revenue is projected to be between $5.225 billion and $5.425 billion with a midpoint of $5.325 billion. Adjusted EBITDA margin is estimated to be approximately 13.7% and adjusted EPS is projected to be between $7.95 and $8.25 per share, giving a midpoint of $8.1. Free cash flow for fiscal year 2026 is projected to be between $450 million and $500 million. This guidance is aligned with the early thinking we provided on the Q3 earnings call where we acknowledged that fiscal year 2026, particularly revenue, had wide-ranging scenarios. Fortunately, this year is coming into sharper focus as we typically expect at this point. With the revenue guidance reflecting how a portion of the excess volumes in fiscal 2025 are not anticipated to recur in fiscal 2026 along with seasonal natural disaster support that is inherently difficult to forecast. Those components are responsible for a year-over-year revenue headwind of approximately 3%, which we expect to partially offset with 1% of organic growth netting to a 2% year-over-year delta at the midpoint of guidance. We acknowledge that in prior periods, we have benefited from higher volumes that increased guidance multiple times but the circumstances causing them were not forecastable at the start of the fiscal year. For example, once into fiscal 2025, there emerged a clear and stated priority to reduce backlogs across multiple programs. By the fourth quarter, the temporary extra work requested by our government customers for us to collectively meet those priorities had moderated. Another positive development on our top-line forecast is that some of the risks we had contemplated in the early color on the Q3 call, such as possible budget constraints from customers, are not believed to be as large a threat to fiscal year 2026. We also see opportunities tied to new work that if awarded in fiscal year 2026, could contribute to the year but given the difficulty in predicting the timing, we expect would be a more meaningful driver of revenue in fiscal year 2027 and beyond. We believe that we remain on target with our goal to achieve a mid-single-digit organic growth rate over the longer term. Of note, the compound annual growth rate from fiscal year 2023 to the midpoint of fiscal 2026 guidance is 4% on an organic basis, which is not impacted by excess volumes we experienced in both fiscal years 2024 and 2025. Turning to the bottom line, since the early color in August, our adjusted EBITDA margin expectation has improved to 13.7% for formal guidance. The projected improvement stems from numerous areas such as the U.S. Federal Services segment where the benefits of our technology initiatives combined with stable volumes are resulting in opportunities to increase profitability. This applies to our clinical work and our tech-enabled customer service programs where small efficiency improvements can result in meaningful cost avoidance. Notably, the margin guidance exceeds the company's target range of 10% to 13% that I stated at this point last year. Our intent is to leave this range intact and target the high end for the periods following fiscal 2026 to account for the prospect of a higher share of new work in the business. Often new programs at Maximus begin at a lower margin and improve over time, with the profile depending on the nature and pricing structure of the work. Walking down to the EPS level, the $8.1 adjusted earnings per share midpoint reflects both the improved profitability and the denominator benefit from the share repurchase activity throughout fiscal year 2025. It's worth noting the three-year compound annual growth rate using the adjusted EPS guidance is 28%, demonstrating not only the post-pandemic recovery but our ability to gain significant earnings improvement through pursuit of higher value work and disciplined management of the business. A quick word on estimated segment operating margins for the full year fiscal 2026. We expect the U.S. Federal Services margin to range between 15.5% and 16%. We expect our U.S. Services segment margin to be in the 10% to 11% range. And for Outside The U.S., we estimate a margin between 3% and 5%. For the free cash flow guidance, the midpoint of $475 million represents year-over-year growth of 30%. We typically have a negative free cash flow in Q1, a result of seasonality and timing of certain payments. We are expecting a temporary delay of payments from some customers, including expected lingering impacts from the recently concluded government shutdown, which would further impact Q1. We then anticipate strong cash flows across the remainder of the fiscal year, effectively catching up from the expected low first quarter. Other assumptions around fiscal year 2026 include an estimated $81 million of intangibles amortization expense, and $58 million of depreciation and amortization tied to PP&E and capitalized software. Interest expense is estimated to be about $69 million. Finally, the full-year effective income tax rate should be around 25% and weighted average shares should be about 55.5 million on a full-year basis. I'll conclude by reiterating our belief in a favorable outlook for Maximus beyond the formal guidance we have laid out today. Underpinning this is our strong visibility to our portfolio of programs, ongoing attention to cost management, and focus on delivering operational excellence increasingly with more automation. Our proposal activity continues to build notably in the U.S. Federal Services segment, which successful conversion could have positive implications for fiscal year 2027 and beyond. On the state side, we believe that the business is poised to respond to fast-evolving needs of customers required to be more diligent in their administration of Medicaid and SNAP. We currently anticipate that fiscal year 2026 will be defined by shaping efforts with actual work and associated revenue coming to bear beginning in fiscal year 2027. And with that, we'll open the line for Q&A. Operator? Operator: Thank you. We'll now be conducting a question and answer session. Our questions are coming from Charlie Strauzer with CJS Securities. Please proceed with your questions. Charlie Strauzer: Hi, this is Will on for Charlie. Congrats on the strong quarter. Bruce Caswell: Thanks, Will. Good morning. Charlie Strauzer: Morning. Looking at the guidance, the EBITDA margin is for 26% a lot stronger than we expected. Can you give some more color on what's driving that expansion even with the expectation for flat revenue? Is it related to mix shift or all productivity and efficiency initiatives? Thank you. Bruce Caswell: David is going to start out with that and I may add some color commentary. Thanks. David Mutryn: Yes, if you look at the margin guidance we laid out for each of the segments, all three are actually slightly higher than where they finished fiscal year 2025. For U.S. Services, it's worth pointing out, as I did in the prepared remarks, that the portion of severance that they incurred in the fourth quarter hurt their margin in that quarter and the related savings are supporting the guide for 2026 there. I think the theme across all three segments really is the continued deployment of technology and automation as well as cost management. And on the cost management front, you may notice on the P&L total company SG&A, if you consider that there was $40 million of divestiture charges in the first year in 2025, the rest of SG&A is essentially flat from 2024 to 2025 despite the revenue growth. So we're very focused on continuing to stay competitive on the cost side. And then maybe one other detail I'll point out that related to the EBITDA and also the cash flow for that matter is that a number of capitalized software projects that have been driving CapEx the past couple of years are now operational and therefore amortizing. So you can see in our in the various FY 2026 guidance metrics a higher forecast for D&A and a lower forecast for CapEx. Charlie Strauzer: That is super helpful. Thank you. And then looking at the revenue guidance, can you add any more color detail around growth by segment? David Mutryn: Sure. Yes. Without maybe going all the way to specific guidance by segment, I'll point out that both U.S. Federal and U.S. Services may see mild contraction. We expect a little bit more erosion on the U.S. Federal side given their overperformance in 2025. And what I had called out on the call specifically was clinical work and disaster response work for context there. The clinical work is in both U.S. Federal and U.S. Services. And the disaster response is on the federal side. Bruce Caswell: So federal has a little bit more of what we called out as headwinds, but also the strongest pipeline in the near term as well. So those are kind of the commentary between the segments. Charlie Strauzer: Thank you. And then switching gears a little bit. How are you thinking about the effects of the government shutdown on your results both in Q1 and the full year? Bruce Caswell: Sure. It's Bruce. I'll take that. We really don't anticipate any negative impacts on our delivery on our contract portfolio in Q1 FY 2026. Nearly all of our programs were deemed essential services by the government. And in some cases, some of those programs had received sufficient funding prior to the shutdown through other legislative vehicles like the IRA, for example. And my top comment there would be that this really reflects the very deliberate strategy of the company over the years to develop a very durable contract portfolio that fares well in these types of situations. So to put a little more color on it, I believe that across our base of nearly 40,000 employees, we were very fortunate to have fewer than a dozen that were impacted by funding curtailments in the portfolio. And we, of course, kept those staff on salary and employed and gave them an opportunity to do some refresher training and some upskilling training and so forth during that period. Of course, now certain departments and agencies could be impacted going forward because the CR presently only extends funding for those through January 30. So like others in our sector, we're going to continue to monitor that. But prior shutdowns, including the most recent one, are any indication, we all remain optimistic that any impact for us would be minimal. I did want to note that the Department of Veterans Affairs and the USDA, which includes SNAP funding, both have full-year funding in place already. Therefore, they'd be unaffected by any potential further shutdown, potentially in January. So it's also our understanding as we come into this that funding for essential entitlement programs like Medicaid would continue for an additional thirty days after January 30. So should any subsequent partial government shutdown come to pass? So David, anything you'd add further to that? David Mutryn: Yes, just on the a little commentary on the cash flow front. As I mentioned in the prepared remarks, we've seen some payment delays from a portion of our federal customers. So I'll point out, also we have we've had several federal customers continue to pay us through the month of October. So the month of October was really in fairly good shape considering that the government was shut down the whole month. But nonetheless, we do expect currently that December 31 will have an elevated DSO. Bruce Caswell: Hope that helps. Further questions, Will? Charlie Strauzer: That helps. And then along those lines, you guys collected a lot of receivables in Q4 and leverage is down to 1.5 turns. So what are your priorities for allocating that capital in the short term? And you briefly talked about M&A. Could you add some color on the type of things that you're looking for? Bruce Caswell: Sure. Happy to do that. Fundamentally, well, our criteria that we apply remain the same as they've been for some time, meaning that we'll be disciplined in deploying capital to combine with high-quality companies that can create new growth platforms for Maximus. That's the fundamental. We've been fairly explicit with our investors in the marketplace noting that our priority in the near term is growth in the U.S. Federal market. And within that, we do have a bias toward the defense and national security space. Our research suggests that the CAGR in that area over the next several years is north of about 9%. We also believe from our research that the overall services marketplace and software spend in the defense community is well in excess of $150 billion and we believe the addressable component for Maximus to be nearly $50 billion. So an excellent market and one that's growing and one candidly that we've now established, our ability to win in on an organic basis. So if we think about how we would further accelerate our growth potential as a business, there are three categories, if you will, that we've been considering. The first is access to customer relationships, because qualified past performance is just so important in this market to win in this market. And in some cases, there would be contract vehicles that we could potentially gain access to through a combination with another company. The second category is technical capabilities to augment what we are already bringing to bear in the marketplace through the mission threads and the accelerator work that I mentioned in my prepared remarks. And the third is business systems capabilities. While some of those can be and certifications, if you will, while some of those can be achieved organically like the CMMC level two certification that we've mentioned, others like having a certified purchasing procurement system, the faster path to those is sometimes through a combination or an acquisition. So from that perspective, in terms of criteria, that's what we'd be focusing on in terms of priorities. But I'll let David add to that in terms of any other metrics or criteria he'd like to share. David Mutryn: Sure. Maybe I'll just add, we certainly consider other uses of capital, including repurchases, which as you've seen, we've done a fair amount over the past year, especially in this environment. But I do want to emphasize that our primary reason for M&A is to unlock organic growth potential, which we believe can deliver significant value over the longer term. So that's really what we look for is revenue synergies and organic growth acceleration. Charlie Strauzer: That is helpful. Thank you. I think just one more for me. Thanks for the update on the opportunities related to Big Beautiful Bill. What phase of the opportunity would you say we are in right now and what are you actively working on with states? And then can you provide any detail on the timing of RFPs coming out from the states? Bruce Caswell: Sure. I'm happy to do that. So as I mentioned in the prepared remarks, there's been no real update from a policy perspective and not surprisingly, no regulatory updates either. Our understanding is that if we're going to see implementing regulations, for example, related to work requirements, those wouldn't be coming out until this summer. States are working with imperfect information, but in our view, they're in a situation where they can plan out an awful lot of what it's going to take to be compliant with these requirements, think about the impacts on their business process and on their state systems and how they're going to go about engaging the beneficiaries. And of course, for Medicaid, are the beneficiaries in the expansion population. That's estimated to be about 21 million people on a national basis. So there's a lot of pre-planning that can be done. And in fact, there have been articles out there saying from notable consultants saying if states started planning, they're already behind. The update for this quarter, based on our engagement in the marketplace, and it makes sense when we think about the timeline, is that SNAP is being taken very seriously. And why is that? The SNAP payment error rate issue as it's addressed in the bill can lead to a significant financial lift for states who don't bring their error rates down below 6%. The federal payments related to SNAP will be affected in federal fiscal year 2028. So beginning in October 2027, those payments could be affecting. Those payments payment impacts can take two forms. The first is on the benefit component of the SNAP funding and the second is on the federal administrative component, which would drop from 50% to 25%. The assessment of the error rates that will affect that payment impact in October '27 is based on federal fiscal year '25, or '26. So work has to begin ASAP to start addressing those error rates so that the measurement period, within that measurement period, states can bring them into alignment and be able to avoid, in many cases, hundreds of millions of dollars of lost federal benefit and administrative cost reimbursement. So we're out there very much engaging with our customers, doing demonstrations, having conversations about what we believe from our research and are the main causes of error rates in the SNAP payment process. And I think I've mentioned on a prior call, if not, I'll mention it now. From our analysis, we believe that we've got the ability to help states address about 90% of the causes of error. How do we do that? It's a combination of our historical program knowledge and business process expertise and interpretation of how policy can be implemented in an operational environment more effectively. Sometimes, quite frankly, that's as simple as improving training. One of the sources of error, just as a brief anecdote, is sometimes a caseworker might enter semimonthly income as if it were biweekly. Or the opposite. And candidly, I think a lot of people out there, including myself, would struggle to immediately define what the difference is. So with that said, technology can play a big part in this and we've developed AI-driven tools that can help states go through their database and their systems of record and identify likely sources of error in their cases. And then put plans in place to address that, both for existing cases to improve the error rates there, but also for new incoming cases that come into the system. I mentioned in my prepared remarks too that we have thirty years of experience already helping state customers with the federal regulations pertaining to work requirements. And I wanted to amplify that just a little bit. And interestingly, folks may not be aware that there have been really a work requirement component to the SNAP program and the TANF program for many years. In the SNAP program, it's known as FSET, which is the Food Stamp Employment and Training Program, whereby able-bodied adults without dependents or referred to in Washington policies speak as ABODS have to meet certain work requirements. TANF's requirements actually go back to their legislative heritage to the early 1990s. I think probably the welfare reform bill under Bill Clinton known as PERWARA. In both cases, those programs have requirements for beneficiaries to demonstrate and states to demonstrate compliance of the beneficiaries in a far more complicated way than other programs classically have like unemployment insurance, where it's really just a brief self-attestation. We've built technology and deployed technology to enable our customers to meet those complex federal requirements over the course of decades. So we feel like the similarity between that requirement and what we'd expect to see in the Medicaid work requirements is substantial and should position us well to address those needs. To close, we're cautiously optimistic that this increased urgency around SNAP will lead to procurement activity already. For example, I'm familiar with one state that's put a request for information out to the vendor community asking for how they would assist in addressing the SNAP payment error rates. RFIs usually lead to RFPs that then lead to awards and engagement. And I've been very bullish on this market because many states have, as we've been referring to, bought and paid for infrastructure with Maximus, already established where we, every day, engage many of the beneficiaries who are going to be impacted by these programs, both in Medicaid and SNAP because there is shared eligibility often among this population between those two programs. So Will, that is, I'm sorry to go on to quite a bit there, but this is an area we're obviously quite passionate about. I would say in summary, we think it's the most significant expansion opportunity for our U.S. Services business that we've seen since the Affordable Care Act. Charlie Strauzer: There you go. Thank you very much. Operator: Okay. Thanks, Will. Operator, back to you. Thank you so much, everyone. This does conclude today's question and answer session. And with that, we will bring the call to a close. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Qazi Qadeer: Hello. Good morning, and welcome, everybody. I'm Qazi Qadeer, Panoro's Chief Financial Officer. Thank you for joining us. This is our third quarter and first 9 months of 2025 trading and results update. We have this morning released a press release and an accompanying presentation, which we'll go through now, which shows the progress we have made during the course of the year. Joining me on this call today are Panoro's Executive Chairman, Julien Balkany; and our Chief Operating Officer and President, Eric d'Argentré. As a reminder, today's conference call contains certain statements that are and may be deemed to be forward-looking statements, which include all statements other than statements of historical fact. Forward-looking statements involve making certain assumptions based on company's experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. Although we believe the expectations reflected in the forward-looking statements are reasonable, actual events or results may differ materially from those projected or implied in such forward-looking statements due to unknown or known risks, uncertainties and other factors. And for your reference, our press release is available on our website, panoroenergy.com. Next slide, please. So we have our Chairman, Julien Balkany here, who is going to take you through the key messages. Julien Olivier Balkany: Thank you, Qazi. Good morning, everyone. Before we move to our Q3 results and operational update, I would like to say a few key words on the business, our recent achievement and our objectives. In terms of production and reserves, within the last 5 years, we have rapidly grown through both organic and external growth. And today, we have a stable and well-diversified production and reserve base across three African countries. In 2026, we will actively continue developing our assets at Dussafu with first MaBoMo Phase 2 drilling as well as progressing the Bourdon discovery to FID. Moving on to exploration and appraisal. We have an exciting portfolio that will provide us with some very good catalyst. We have strategically positioned our E&A portfolio with Block EG-23 in Equatorial Guinea and Niosi and Guduma Offshore Gabon close to existing infrastructure, so that in a success case, we can seek to rapidly and cost effectively monetize any discoveries. As an example of this, in the Hibiscus South and other discoveries we made in the last Dussafu drilling campaign where new barrels that were put on stream within 6 months of discovery at a finding and development cost of just $5 per barrel. On the corporate side, I want first to come back and address the recent announcement that our friend and very dear colleague, John Hamilton, long-time Panoro CEO that usually walks you through the quarterly results, has taken a temporary leave of absence for family reasons. John has our full support and best wishes during those difficult times. While John is absent, let me reassure you that under my leadership, we have an extremely talented, focused and committed management that provide continuity in the delivery of our strategy and an entire team of colleagues who are experts in their respective fields and very excited by the potential of our assets. It brings me now to Panoro DNA that has been acquisition, which has, over the years, played a major role in our growth story. In order for us to achieve our ambition and increase our size and scale, we will remain focused on M&A opportunities and are constantly evaluating new accretive deals that would deliver immediate free cash flow to the company and create shareholder value. Our successful bond issuance last year has diversified our access to capital and support our overall growth strategy. Underpinning all this and our core objective remain to maximize shareholder return. And I clearly want to reemphasize that shareholder return is at the center of all decision-making in Panoro. Since March 2023, including to the declared cash distribution of NOK 80 million, we have returned in total around 33%, 1/3 of our current market cap, to shareholders. It demonstrates our strong commitment to create value for all our shareholders while maintaining a very disciplined approach. I would now hand back over to Qazi, who will take you through our Q3 results. Qazi Qadeer: Thank you very much, Julien. And on this slide, you will see that we have assembled the highlights for this quarter and the year-to-date numbers. For the first 9 months, we are showing a revenue of almost $150 million and EBITDA of $70 million. CapEx is just under $30 million, the majority of which was incurred in the early part of 2025 in relation to the successful bolt-on discovery offshore Gabon. Then we have the third quarter revenue, which was $63.5 million, EBITDA of $19.3 million. It should be noted that Q3 EBITDA includes a noncash effect of negative $14 million worth of inventory movement arising from the expensing of Q2 inventory buildup, which was lifted and sold in Q3. So you would expect to see swings like that if liftings happen quarter-on-quarter. On the balance sheet, we have around $44 million in cash at bank at September 30, $150 million of gross debt, and net debt to trailing 12-month EBITDA ratio of about 1.04x. We have maintained a very solid and good balance sheet throughout this period. On the right, we have announced a quarterly cash distribution of NOK 80 million, which will be paid as a return of paid-in capital. Once paid, that will bring us to a cumulative cash distribution of NOK 660 million since March 2023. And including all share buybacks to date, we have returned approximately NOK 790 million to the shareholders, which, again, as Julien mentioned earlier, around 33% of our current market cap. On the next slide, that builds up our distributions for 2025. We have followed our policy for the calendar year 2025 to distribute NOK 80 million quarterly in cash distributions, and that honors our commitment what we set out at the start of the year. Year-to-date, we have purchased NOK 83 million worth of our own shares from the market as of close yesterday. We have been out of the market in the recent weeks because of close periods, but we still have some room left this year. If you look at the right, we have a limit of NOK 500 million of total distributions in the calendar year 2025, which is about $45 million. It's a key figure that we distribute in Norwegian kronas. As you can see, we have some headroom over the remainder of the year and have adhered to our quarterly schedule, again, underlining our commitment to shareholder distributions. This covers a bit of production update. In terms of group production, we break it down by quarter, so everybody can see that what is going on at our assets and broader trends over time. Dussafu continues to perform brilliantly with all wells available and performing in line or even ahead of expectations. The Q3 rate doesn't quite tell the story, as in the period, the operator successfully completed 3 weeks of planned annual maintenance, which limited production availability to about 80% in the quarter. You can see in the graph what impact this has on our group production in the gray shaded box. Tunisia has been quite steady. But in EG, the previously communicated downtime at the Ceiba field has impacted group production over the last 2 quarters. As a result, we expect group production for full year 2025 to average slightly below 11,000 barrels of oil per day. CapEx guidance for 2025 is unchanged at $40 million for the full year. On the next slide, we'll talk about the liftings a little bit. Those that are familiar with our business know that while we produce oil every day, we do not sell oil every day. It is sell in -- sold in parcels over different dates throughout the course of the year. We keep this slide updated each quarter and refine as necessary what's the logistical and commercial factors that drive our lifting allocation firm up. Our lifting in the first 3 quarters have been in line with our expectations. The first 9 months, we have lifted and sold just over 2 million barrels at an average realized oil price of $67.49 per barrel. In Q3, we realized a premium of around 1% over the average Brent oil price of the period 863,000 barrels or thereabouts, which is in line with previously communicated guidance at almost $69.5 per barrel. In Q4, we expect to lift around 1.1 million barrels of oil. It could be a bit higher as well, given that we have some inventory available to be lifted at the end of the year. Notwithstanding this, Q4 remains our busiest quarter from a lifting perspective with around 35% -- 2025 liftings occurring in the period. We have already lifted around 950,000 barrels in Gabon during mid-November. So the vast majority of Q4 has already locked in. On the next slide, this is a busy slide, but it summarizes a few key points. But just taking it from the top right, there is a reconciliation on our top left rather, there's a reconciliation of our cash at the start of the year and cash at September. On the left, we show our bond amortization, noting that we do not have any repayment during the year, and it only starts in the late part of 2026. On the right, we have our capital expenditure guidance for the year. As I said, it is going to be in line with previously communicated USD 40 million for the year. As everybody knows, we had a very heavy CapEx last year. This year, it's more around $40 million. We have just spent up to $30 million in September, and we are in line to meet our target of $40 million. I will now hand over to my colleague, Eric d'Argentré, who is going to take you through the operations. Thank you. Eric d'Argentré: Thank you, Qazi, and good morning, everyone. I am Eric d'Argentré, Panoro's CEO and President. I have -- I'm delighted to join Panoro early September, coming from 29 years at Perenco in operational and senior management position globally and in particular across Africa. So I am indeed very familiar with Panoro area of operations. This being said, on Dussafu operation update. So as Qazi mentioned, the production delivery remains strong and steady since the beginning of the year. And the 3 weeks annual maintenance operation on Dussafu was very well executed by the operator BW Energy in time with no extra days, but it does impact indeed the uptime in the period. On the project side, we have FID-ed and already planned mid next year, the exciting MaBoMo Phase 2 development coming around June '26. That will be a four-well drilling campaign, horizontal wells with long drain as we successfully did in the past. So applying the same techniques and strategy for those four wells. This -- those four wells will bring us back to the maximum surface capacity in terms of production on the MaBoMo and Adolo FPSO. The other exciting news on the Dussafu block is the Bourdon discovery. You heard about it earlier this year. This is roughly 50 million barrel in place and 25 million barrels to be recoverables. We are maturing with BW Energy, the FID for this project. The full development plan will include a first phase with three wells being drilled from a platform or a jack-up conversion and the pipeline to tie back to the existing facilities. And that will come in future and help us to extend the production plateau at the Dussafu block. And there is other exciting prospect around the Dussafu area, which we will come in the next slide. Again, you have heard about Niosi and Guduma block in the past. This is clearly a potential to repeat the Dussafu success story. And I'm very excited to say that we have started the seismic survey, which we discussed in the past this week on Niosi and Guduma as well as on Dussafu. We have two area of interest, which you can see on the slide in blue gray. One, including the top corner of the Dussafu block on the east part, where the seismic will help us to understand better and map better the Walt Whitman discovery and other prospects in the area, as well as the Niosi area, which you don't need to be a subsurface expert to realize that the Niosi area of interest is very well positioned between the Dussafu field and the Etame field operated by VAALCO in a very well-known and productive petroleum system here. So the partnership of BW Energy, VAALCO and Panoro is very well positioned in terms of knowledge in the area, and there is no better joint venture to understand the potential of Niosi and Guduma field. Next, please. Okay. On Equatorial Guinea operation, we have on Block G, two fields, the Ceiba field and the Okume field, tied back to the FPSO. While the Okume production has delivered as per expectation this year, we have suffered low delivery in Ceiba. This was explained earlier this year due to subsea and equipment issues. The operator, Trident Energy has worked hard and is working hard and diligently to restore production on the Ceiba field. One subsea cluster is already back on production. The second one is in operation. Marine and subsea operations are ongoing as we speak. We expect to have cluster 2 back on production sometime end of November, early December. And the rest of the production will -- should be back online early 2026. Next, please. In Equatorial Guinea, we also have a very exciting and one of our best asset, actually Block EG-23, which is located, as you can see in blue, in between the Niger Delta and the Rio Del Rey in Cameroon. So a very prolific petroleum system, well known, lots of oil and gas fields in the area. And you see Block EG-23 just up north of the Alba field operated by Conoco, which has already delivered above 1 billion barrel as well as the Zafiro prospect -- development with, again, over 1 billion barrel production. So we are at the moment in reprocessing of seismic data on this block. And we should have a better image within mid of 2026. Just a zoom on Block EG-23 and the Estrella discovery, which is a very [ want ], a very important, very much interesting for us. Estrella was -- Estrella-1 was drilled in 2001 and discovered 60 meters of reservoir. The well was tested above 6,700 barrels of oil per day and almost 50 million standard cubic feet of gas. As you can see, it's very close to the Alba infrastructure. It's 7 to 10 kilometers away. So it's an easy tieback and an obvious one, and then going onshore to the Punta Europa gas plant that has spare capacity. And we can see on the map, the dotted line shows you the 20 kilometers radius, which shows that most of the prospect identified and discoveries on our block are within tieback distance. And the idea is once we have one field tied back, then the next one will be in short distance, and we can repeat the same strategy as we've done in South of Gabon. Coming to Tunisia. Tunisia asset, as I mentioned, is producing steadily around 3,500 barrels as of today. So we have seen in the recent months, an increase in production of 10%. I was -- I visited myself the site a couple of weeks ago, and I was very impressed by the dedication of the team in maintenance, integrity and uptime. So we have a good asset base in Tunisia, and we are working on new -- on productive project and investment to increase production and extend the plateau on the TPS asset. Next, please. So as discussed in the previous slides, we have a very exciting pipeline of organic growth within our existing field with robust 2P reserves and a very good above 300% replacement ratio. That's a very good performance. Bourdon discovery will -- is not yet included. But as soon as FID is done, we should be able to book those reserves. We have other 26 million of 2C as of December '24 of discovered resources. And on Block EG-23, you see above 100 million barrel potential which is the Estrella field and other identified prospect I discussed earlier. And we will work towards transforming those 2C into 2P and then in production. On top of the Block EG-23, the Niosi, Guduma and the Dussafu, the EEA has clearly potential to increase substantially our resources. Again, the first step is happening as we speak with the seismic survey on the two exploration blocks, Niosi and Guduma, and that will be -- that will feed the pipeline of organic growth in coming years. Coming back to the key messages, I will leave you with those messages on the screen and move to the Q&A session. Qazi Qadeer: Thank you very much, Eric. We will now take question and answers. If you will be able to raise your hand or post your questions via the chat box on the bottom, which should be available to you. If you have a question, please raise your hand and we'll try to unmute your line and take your questions live. Andrew Dymond: Thank you very much, Qazi. We will now open up to Q&A. The first question has been submitted online. You have honored the quarterly cash distributions for 2025 with the NOK 80 million declared today. Can we expect to see continued buybacks under the program? Julien Olivier Balkany: As mentioned by our CFO, Qazi Qadeer, we have been in close period, and we intend to restart and restore our buyback program when we will be able to do so. We have headroom of just under NOK 100 million under our maximum priority distribution. And once again, our core focus is to deliver shareholder return. Andrew Dymond: Thank you, Julien. The next question is from Christoffer Bachke. Christoffer Bachke: This is Christoffer from Clarksons. So I have two questions today, if I may. The first question relates to Block EG-23, where investors currently seem to assign limited value. Can you comment on how you view the potential of this asset and what strategic options such as partnering, farm down or alternative development pathways you're evaluating for the block going forward? And the second question is on M&A. Given your history and track record on accretive acquisitions, how are you thinking about further growth and M&A at this stage? Eric d'Argentré: Okay. Thank you, Christoffer, for your question. Concerning Block EG-23 we see has presented a lot of potential, not just on Estrella-1 discovery, but on the global picture of this block, which is ideally positioned. We have 80% of the block. We are the operator. We are in Phase 1. We need to get our seismic reprocessed, get -- clarify the volume in place, and then we will most likely be looking for partners. There is already a lot of interest in our block because we believe this is clearly the best block in EG, in shallow water with lots of potential and very close to a infrastructure tieback. So yes, we will be looking for partnership in the future. Julien Olivier Balkany: Thank you, Christoffer. I will address the second part of your question. As I mentioned earlier, M&A has been at the roots of Panoro, it has been part of our DNA. And clearly, in the current oil prices environment, we are remaining focused on M&A opportunities. And we are constantly permanently evaluating, assessing new accretive deals. And those transactions need to be accretive starting day 1 and immediately generate free cash flow for the company to benefit all the shareholders. Andrew Dymond: The next question is from David Messer. Unknown Analyst: Andy, two questions from me. First, on the EG-23 block. From the presentation, you can see there's been a number of smaller oil and gas discoveries. So I suppose my question is why were those discoveries appear to be subscale compared to, I imagine, what the original driller assumed them to be predrill? And why was this block not -- or why were these discoveries not developed since they've been discovered by another operator, maybe? And then just secondly, on Trident and its operational issues. Can you just give me a bit more color on what the facility issues have been on Ceiba and how Trident has gone about ensuring that these are not recurrent operational issues that happen going forward? Eric d'Argentré: Okay. Well, thank you very much. Concerning Block EG -23 and the discoveries of the well drilled. And yes, those wells have indeed penetrated reservoirs, some tested, some not tested. But in fact, it's -- depending on what the previous operators were exploring for, whether they were looking for gas or looking for oil. On the Estrella, for example, it was a gas play with a lot of oil. It was deemed to be marginal at the time versus bigger, what I would call the elephant or the giant field. Estrella might not be a multibillion field, but it's clearly a multi-hundred million in place. And the nearby exploration, the problem is when you have no infrastructure or just one not bad close, it's difficult to make a small discovery commercial. And that's a strategy we will develop in EG-23. Once we have a platform and a mean of evacuation from Estrella, for example, any small discovery not material from major in the past will become clearly material and commercial forest with easy tieback. So that will be a step-out approach from one to the other on EG-23. Just to your second question on Ceiba field. What has been the issue is, as discussed, it was a subsea. In a development like this, you have your well producing to the seabed and from the seabed, you have flow lines or umbilicals, risers going to the surface on your FPSO. It's deep and long. So there is multiphase pumps installed on the seabed, what we call on different clusters with X number of wells arriving at each cluster. And we had a combination of a series of failure of multiphase pump earlier this year, which obviously without the pump, the well cannot deliver to surface. It's too high, okay, with back pressure on the well, without going too technical. So the operator has, with one subsea, worked very hard and diligently to get those multiphase pumps shipped back, turned around and sent back to Equatorial Guinea. The first one has been installed. The second one is on the support vessel with the ROV and should be installed in a couple of weeks, and the third one earlier next year. On the long-term plan with Trident, the operator is looking at a quick turnaround of multiphase pump system with one subsea, but as well with internalizing a bit more the maintenance of the pumps in country. They have done that successfully with one already. So we expect to see a quicker turnaround of any maintenance issue on those subsea equipment. Andrew Dymond: The next question is from Ntebogang Segone. Ntebogang Segone: Can you guys hear me? Eric d'Argentré: We can. Ntebogang Segone: Ntebogang Segone from Investec Bank Limited. I have got a few questions around production. If you could provide us with more color around OpEx per barrel for me. I mean, production, even management is saying that for FY '25, we'll be tracking below guidance. However, if you look at guidance for FY '25 in terms of OpEx per barrel at a consolidated basis, it still remains unchanged. So if you can maybe provide more color on that as to why it is that there is no increase or increase in your OpEx per barrel? And then in relation to the Gabon asset where there's been the 3 weeks planned annual maintenance, how should we then be looking at production, particularly in the fourth quarter? Should we be looking at it relative to operating at similar levels as in 1H 2025? Or will it be tracking below that? And then in relation to CapEx, on the exploration side, I do see that there's a lot of projects that you have in place. I mean, you've got the discovery, the Bourdon discovery coming up. If you could please just provide us with more guidance around how we should look at CapEx from FY '26 as well? Andrew Dymond: Thank you, Ntebogang. Just there's been a couple of questions as well online just about 2026. I mean we issued 2026 guidance once we've been fully through the budgeting cycle with our partners at our assets. So we're going to continue to do that. So as we have always done, we'll be providing 2026 guidance early in the new year. Obviously, Ntebo, I think in terms of the production question that I think we set out, kind of what that impact had in terms of deferring volume in Gabon from the planned maintenance, which was successfully completed in the quarter. If we hadn't had that impact and if you just would look at it on producing days, we'd have been fairly stable. So I think you can extrapolate that sort of into the fourth quarter. I think Tunisia production is pretty stable as well. Equatorial Guinea, as Eric has already gone through, we are seeing some restoration and expect to see that and normalize into Q1 2026. So I think from that, that kind of builds the picture as to the guidance that we've set for the full year at just under 11,000 barrels a day. The capital expenditure at Bourdon, we made the discovery in Q1 of this year. And so there's still a lot of work going on. It's a bit premature to start sort of speculating because there's various concepts under evaluation and it's being matured towards FID. And once we have sort of a firm picture on the basis for FID, we'll obviously communicate that. But what I would say is, look, the intention is to follow the sort of MaBoMo strategy. So as a starting point, you can look at the kind of costs that we've developed and the strategy we've developed the Hibiscus area with the operator. Just on the OpEx per barrel, I mean, obviously, what we try and show there is the actual cost of producing the barrel of oil out of the ground. There are some timing things. So what I'll do with that is I'll -- rather than go into so much detail right now, I'll follow up with you separately, Ntebo. And that will conclude our Q&A for today. Thank you very much, everyone.
Thomas Pevenage: Hello, and good afternoon, good morning. Welcome to our conference call for the Third Quarter Trading Update. We are pleased to welcome you and take this opportunity to have a dialogue with you. So we have prepared a short presentation considering it's just a third quarter update and the full update that we provide in the full year and half year results. So basically, we'll cover the presentation together with Catherine and Olivier. [Operator Instructions] So you'll see our usual disclaimer on this slide, today's speakers, so Catherine Vandenborre, Chief Financial Officer of IBA. Olivier Legrain, our Co-CEO in charge of IBA Technologies, he is also joining us and happy to take questions and myself, Tom Pevenage, taking care of Investor Relations. So we'll start with the highlights -- key highlights on the business side. And then that's a specific topic for this trading update, we'll cover the corporate refinancing that you could discover as part of our press release earlier today. So I will now leave the floor to Catherine for the first section. Catherine Vandenborre: Yes. Good afternoon or good morning, everyone, and thank you very much for attending this trading update call. Like Thomas mentioned, we hold this call today basically to provide you with qualitative trading update. We will again confirm the trends in our operational activities, ensure that they remain fully aligned with our guidance. We will briefly discuss the trends we see in the markets, and we will present our new financial structure before, of course, answering any questions you may have. So first element that I would like to stress is that IBA remains fully confident and highly confident to meet this year guidance, being EBIT at least EUR 25 million, and that's supported by well under control OpEx, which remain below our long-term target of maximum 30% of sales and an already positive EBIT contribution from Proton Therapy. This is for us a very important milestone resulting from the scale-up of Proton Therapy activities and favorable project mix. Of course, it underpins our commitments in the profitability improvement trajectory that we set ourselves at the beginning of the year. In terms of equipment order intake, this one amounts to EUR 195 million. It's an increase of EUR 11 million versus Q3 2024, thanks to a strong contribution from IBA Technologies, which increased by 22% and more specifically RadioPharma solutions. To give a little bit more flavor and details, FPS has an excellent commercial momentum in high energy Cyclone IKON and Cyclone KIUBE systems in both emerging and more mature markets and applications. And in this we have a quite active pipeline in China. In PT, we have sold 4 Proteus ONE at the end of Q2 -- Q3, sorry, 2025. If you remember last year, same period, we had sold 3 Proteus One. And the sales includes 2 Proteus One orders from our existing customer, Apollo in India, which is expanding beyond its already operational multi-room facility in Chennai. In dosi, we see decreasing level of activity versus last year. We faced some headwinds in the U.S. and the Chinese markets. So in conclusion on the order intake, I would say that it's a very encouraging one, confirming the added value of all solutions to all customers and the positioning of the IBA Group portfolio of activities. Of course, '25 is not ended yet, and we will keep you informed on the order intake progresses that we will realize in the next weeks. In terms of backlog of equipments and services, it is maintained at EUR 1.3 billion, a slight decrease of -- decrease of EUR 0.1 billion versus Q3 2024. Let's say, it's more or less stable after the strong accelerated backlog conversion that we have observed in the first half of 2025, and that is due to the higher order intake in Q3. Finally, our net financial position amounts to EUR 60 million as working capital has continued to be impacted by the customer delays in delivery of large Proton Therapy projects in Spain and China. That being said, we see this amount as a peak and our net financial position is expected to gradually improve as from December '25, while we have secured a solid refinancing package on which we will come back in a few minutes. To give you some view on the progress that we have made across the different business segments. First, on the clinical side, PT more specifically, we signed a memorandum of understanding with Varian at ASTRO and this memorandum aims to strengthen interoperability, enhance clinical workflow and we went also to co-develop some technologies together, including technologies in connection to our road map on DynamicARC and FLASH therapy. We see also a very good momentum for Proton Therapy supported by the growing clinical evidences. In particular, we have seen an exciting first ever Level 1 clinical evidence provided by MD Anderson that demonstrates Proton Therapy's benefit in head and neck cancer versus conventional radiation therapy, offering same tumor control with reduced side effects and most importantly, improved survival rates. We see also strong commercial traction in APAC, which is reflected in our order intake and the pipeline in the U.S. remains quite active as well. Regarding NHa, our partnership in carbon therapy, the installation works of the first system are progressing and the financing efforts are ongoing in parallel to cover related costs. Going to dosimetry, like I said, we face some regional-specific challenges in the U.S. due to local competition. We have also some headwinds in China. We have closed the acquisition of the Berlin-based PhantomX company at the end of October '25. As you may have seen in our press release, PhantomX is a commercial stage company recognized for its advanced anthropomorphic phantoms, which are used in quality assurance for AI solutions in medical imaging. Now going to IBA Technology side. In the industrial segment, we see a continuing regulatory pressure on ETO sterilization, supporting the long-term shift towards e-beams and X-ray technology. We see also sustained progress on new applications like polymers, like PFAS with IBAs increased presence at specialized conferences and workbooks. On Radiopharma solutions, there are strong commercials and good commercial traction, which is reflected in sales, both in emerging and mature markets. We see very exciting times in Theranostics with increasing industry interest in nuclear medicine and especially from major pharma companies with particular focus on alpha emitters such as Actinium-225 and Astatine-211. Now I propose to discuss the financing package that we concluded in its rationale. Maybe first, as a reminder, we had undertaken a review of our financial structure considering 3 elements: first, the past and expected evolution of the business. Second, the expected evolution of working capital; and 3, possible investment opportunities. This review resulted in the closing of a refinancing package, including a EUR 125 million bank club deal with different tranches and a EUR 10 million subordinated loan from Wallonie had performed. The refinancing addresses 3 objectives. First one is the consolidation of IBA's balance sheet, acknowledging that past investment in long-term assets like PanTera, like NHa, like mi2, that those investments had been funded by operating cash flows and not long-term financing. Second, we want to increase our resilience in a volatile context. And third, we want to build firepower to capture possible inorganic growth opportunities, of course, opportunities meeting our investment criteria and especially being related to IBA markets and being accretive. Out of the EUR 135 million financing package, EUR 60 million has been drawn so far. Thomas will now further detail the current and intended use of funds as well as the key terms and conditions of the facilities. Thomas Pevenage: Thank you, Catherine. So you will see on this slide our intended allocation of the use of these credit facilities. So on the right-hand side, you find the different tranches of funding. On the left-hand side, potential uses for this. First of all, starting at the top, you will see the EUR 10 million subordinated loan and basically EUR 30 million drawn under the EUR 50 million 5-year term loan immediately reinforcing the long-term funding components of the balance sheet, which is the first item highlighted by Catherine in our financing strategy. Then we have an unused portion under this 5-year term loan amounting to EUR 20 million, which is available to cover more structural working capital over the medium term, let's think, for instance, of our Spanish Proton Therapy projects as well as to fund investment opportunities, while the latter will also benefit from specifically dedicated M&A term loan, that's the EUR 15 million tranche you see on the right-hand side. But then at the bottom, we have EUR 60 million of revolving credit facilities aiming to address short-term working capital fluctuations. Note that they can also play a usual role considering that some geographies in which we operate do not allow straightforward cash management solutions, namely India and China, for instance. And this from time to time can create imbalances between group entities having excess cash, while IBA SA in Belgium, where manufacturing, R&D and SQ activities take place may have some needs. And so those revolving credit facilities can accommodate for those intragroup cash management opportunities or challenges as well. So you see on this slide, basically, again, an overview of the different tranches of funding and the amounts already drawn versus what remains available. So EUR 61 million drawn so far, leaving EUR 74 million available. Time-wise, we have 6 months to consider drawing additional tranches under the EUR 50 million term loan and still 24 months under the acquisition term loan facility. We will regularly review the use of these credit lines going forward in function of the evolution of working capital, temporary and structural and as well as business opportunities. Now a few words on the terms and conditions. Bank facilities are based on a floating rate, so typically EURIBOR plus the margin and that margin is in line with our previous credit lines. Financial covenants also follow our previous standards and consist in a maximum net leverage ratio and a minimum level of corrected equity, corrected because equity then in this case includes subordinated loans. The net leverage is calculated on the net debt, excluding subordinated debts and the last 12 months of EBITDA. The net leverage covenant provides for a maximum of 3x. Besides, as customary within the club deal documentation framework, IVS to comply with certain undertakings related amongst others to M&A disposal assets or others. Now moving to the conclusion. We have in place a financing structure that is secured with a 5 years commitment from the financing partners, optimized. As Catherine said, the idea was definitely to have a package addressing an adequate mix of long term versus short term on the liability side and funding versus the asset side. Flexible to be able to address working capital volatility and as well to be able to flexibly in an agile way to capture investment opportunities and as well robust given the support of strong financing partners that you see listed on the right-hand side of the slide, so a pool of 4 banks and as well Wallonie Entreprendre, our long-standing financing partner. So we see the opportunity really to thank all of them for their trust and long-term commitment to IBA success. We are now ready to take your questions. Thomas Pevenage: [Operator Instructions] So first question is from David. David Vagman: Maybe first, on the refinancing, I didn't hear it. So can you come back on the covenants and maybe give us details about the cost of the financing? And can you confirm that you're actually not planning to use -- so in your budget to use to draw the [ FCM ] as in Slide 7. That's my first question, and then I have 2 more. But maybe we can start with this one. Henri de Romrée: Okay. Thank you, David. So first part of the question is related to the covenants. So basically, and it is currently the case today, we have 2 covenants, 2 financial covenants. First one is the net leverage ratio. So comparing the net debt excluding subordinated debt and the last 12 months EBITDA, so it's calculated on a rolling basis. And we have to comply with a level of maximum 3x. The second covenant is a minimum level of corrected equity. And why is it corrected? It's because it's including the subordinated debt as banks consider its equity from -- for that purpose. So I assume it's clear. So on the cost, then of course, as you can imagine, it's the exact level of margin is a confidential element from a bank perspective as well. And so we can only comment that we stay with a similar level of interest rate and margin basically as the current credit lines. So if you look at the average use of those credit facilities over the last period of time versus the interest charges on our P&L, you will have an idea of what you can expect for the future. The last question relates to the use of the revolving credit facilities specifically. So currently, we have drawn EUR 20 million out of the available EUR 60 million. We've commented on the expected treasury trajectory with improvements indeed versus the current position starting from the end of this year and improving over the next year, most of is tied to the delivery of our large Proton Therapy projects, namely in China and Spain. So definitely, use should reduce over time. I also commented on intragroup cash allocation that may require from time to time use of this credit lines. So this should not come as a surprise, if you maintain some use. But the idea that these are used a shorter-term type of buffer. David Vagman: And my second question, you anticipated a bit. It's on the Ortega contract deliveries for the year and for next year. Maybe you can also comment on the Chinese contract. What is reasonable to expect maybe to give us a range, not necessarily precise, but a rough indication of how many project you expect basically for which you expect payment actually this year and then next year? Catherine Vandenborre: Yes. I think on this one, we remain quite aligned with what we already mentioned at the moment of the publication of Q2 results. So -- to summarize, we have guarantee manufacturers 3 machines out of the 10 that have been ordered, 1 has been shipped. That's something that we already mentioned in Q2 results that we intended to ship in October. It has been done by the end of October, beginning of November. And so we expect to receive the payment on this machine in December conform to the terms we have in the contract. The second and the third machines will be shipped next year in the course normally of Q2 for 1, end of Q2, beginning of Q3 for the third one. And in terms of payments related to all these 10 machines, you may remember that we mentioned that's the working capital impact linked to the delay was close to EUR 30 million. It is a [ 1/3, 1/3, 1/3 ] by machine, let's say. David Vagman: Do you mean that above the 7, the remain -- your talking about the remaining 7 or... Catherine Vandenborre: So that was on the first 3 that we already manufactured. On the remaining 7, we will change a little bit the way we manufacture them. And so instead of starting to manufacture as soon as we can to be ready to ship from the moment that the customer is ready with the building of the hospitals. We will wait before doing the manufacturing, we will wait to have strong signals that the building will be at the moment that we can ship the machine, so there must still be some kind of delay at certain point of the time, and we want to remain a little bit flexible in the interest, of course, of the patient, but the general principle is that we will not start building the machine as long as we don't have very strong signals that the hospital can accommodate the equipment to avoid this strong working capital impact that we had on the first 3 machines. David Vagman: And is it fair to say then that the remaining 7 will be for beyond 2026? Catherine Vandenborre: It's -- so it will be spread over the entire term of the contract. But indeed, it's fair to say that the shipment of the remaining 7 will be after 2026, yes. David Vagman: And last question from my side is on the PT, the Proton Therapy services. With a question of how you've been monitoring, I would say, more the credit risk aspect of your customer. My question is also a bit related to the recent controversy in the Netherlands that some centers would be underutilized and 1 was facing more acute financial difficulties. If you can comment on this, it's a bit too different topic, but I think they're related? Catherine Vandenborre: So maybe on the credit risk linked to the customers. That's, of course, something that we monitor at the moment that the contracts closed. Where we do a number of analytics on this sort of ability of the customers, the ability to pay for the equipment on the 1 hand and then later for the services that the hospital intends to consolidate. Of course, during the course of the year and depending on the evolution of the revenues of the hospital we might see some volatility compared to what the first rate assessment that we did then we managed together with the customer, relatively proactive way and we try always to find solutions that could benefit all the parties. So in the best interest of all the stakeholders. So that's on the credit, let's say, question. On the fact that some hospital not necessarily let's say, fully booked the availability of the rooms in which big equipments are installed. So it's true that sometimes it can take a little bit more time. So it's a little bit longer for a hospital to build a room, but of course, it's in the best interest of everyone to try to maximize the use of the room. And so that's something in which we can possibly advise hospitals, what they can do, how long it takes to take 1 patients or it can, let's say, or the installation can use a bit maximum capacity. But at the end, of course, it's something that the hospitals have to implement. I think in some cases, we're seeing these hospitals are having full use of the capacity. In other case, we see a hospital having a very high use. I think that the maximum, which has been reached until now is 64 patients being treated over 1 day. So you see it's very much depending on 1 hospital to another. David Vagman: Any comment on the lines on your performance? Catherine Vandenborre: And what is -- you mean on the study, which was published on the Proton Therapy. David Vagman: Not the study, but that one center was I'm just quoting the article. And so I don't know, if it's correct, but that one center was particularly in the difficult financial situation? Catherine Vandenborre: I must admit that I didn't see the article honestly. So I can't comment, because it's a specific question, but I would be happy if you can send to the team the link of the article, and I will come back to you maybe with any specific comments to be provided. Thomas Pevenage: So David, thank you for your questions. We have further questions from Laura. Laura Roba: I have 3. So first of all, could you comment on backlog conversion for H2. Because it was very strong in H1. So I was wondering how did it look like then in Q3? And what can we expect for the remainder of the year? Then you mentioned in dosimetry that you were facing some headwinds? I was wondering to what extent this would impact the full year performance of that division? And then the last one on CGN. Do you have any update from them? Do you expect any until the end of the year? That's it. Thomas Pevenage: Okay. Laura. So I will address the first question, and then Catherine and Olivier will answer the other 2. So the first question relates to backlog conversion over H2 and it was a very active H1, and we are increasing the pace in H2. Definitely, so far, it should be visible in the numbers. And this being said, it will be less imbalanced as last year in terms of H1 versus H2 weighting. So yes, we're definitely on the right trajectory to reach ultimately the targets that we have reconfirmed as part of our press release, today. Catherine Vandenborre: Okay. If you don't have any further question on the backlog, I will continue on dosi. So like I was indeed mentioning, we saw some kind of headwinds in this mainly due to, let's say, competition that we see coming with some product that we don't have yet. So in order to come back to the level that we internally anticipated, we might have to do limited acquisitions. That's the reason why we started with 1 PhantomX, but we might have to do a few and very limited others. On your question whether we expect an impact, I understood on the guidance that we have provided. The answer is clearly no. So it's, let's say, headwinds compared to internal targets that we had. But all in all, and having in mind all the segments in which we operate and all the activities we have we don't expect any impact on the guidance that we communicated to the market. Olivier Legrain: Could you specify your question on CGM? I'm not sure I see an immediate answer. So it would be great if you could spell it out again. Laura Roba: Yes. I was just wondering, if you has any update from them, any contracts, if you see any activity from their side? Olivier Legrain: Nothing outstanding, Laura. I think there are a few public tenders for the moment in the Chinese market, where we are active, but there is nothing meaningful to mention at this stage. So nothing really different compared to what we have said so far. Thomas Pevenage: I think, lastly, we confirm that they are as part of the partnership agreement. So they have basically executed the technology transfer part, and they have the facility, the factory for local manufacturing that is ready to go. Now the main area of focus is on the market developments and getting the sales convergence. At this stage we don't see any product open questions. So we have, I would say, last chance slots, if anyone willing to show the question. In the meantime, we can already tell you so the presentation will be available on our website in the same link shortly after this call. Catherine Vandenborre: So I think, if there are no more questions, I would like to thank you again for your attendance to this call. It was a pleasure for us to have the opportunity to answer your questions. And we wish you a good evening/good afternoon/end of morning. Have a good day. That might be -- thank you very much. Thomas Pevenage: Thank you.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Sunlands Technology Group Third Quarter 2025 Earnings Conference Call. At this time, participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host today, Yuhua Ye, Sunlands Technology Group IR representative. Please go ahead. Yuhua Ye: Hello, everyone, and thank you for joining Sunlands Technology Group's Third Quarter 2025 Earnings Conference Call. The company's financial and operating results were issued in our press release via newswire services earlier today and are posted online. You could download the earnings press release and sign up for our distribution list by visiting our IR website. Participants on today's call will be our CEO, Tongbo Liu, and our financial representative, Hangyu Li. Management will begin with prepared remarks, and the call will conclude with a Q&A session. Before I hand it over to the management, I'd like to remind you of Sunlands Technology Group's harbor statement in relation to today's call. Except for the historical information contained herein, certain of the matters discussed in this conference call are forward-looking statements. These statements are based on current trends, estimates, and projections. Therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission. With that, I'll now turn the call over to our CEO, Tongbo Liu. Tongbo Liu: Thank you, Yuhua Ye. Hello, everyone. Welcome to Sunlands Technology Group's Third Quarter 2025 conference call. Prior to commencing, I would like to kindly remind all attendees that the financial information referenced in this release is presented on a continuing operating basis, and all figures are denominated in RMB unless specified otherwise. We are pleased to see that the company has now entered a phase of steady and healthy growth. Our performance in this quarter once again demonstrates the resilience of our model and the effective execution of our strategic roadmap. We delivered net revenue of $523 million, coupled with a pronounced acceleration of profitability, as net income surged 40.5% year over year to $125.4 million. This achievement validates the durability and stability of our operations. Our strategic pivot towards high-margin, demand-driven course categories continues to yield tangible financial benefits. The net margin expanded significantly to 24%, primarily attributable to optimized revenue mix and disciplined cost management. Now let's turn to the performance of our major course programs. Our next degree and diploma programs continued to play a stable, supportive role, accounting for approximately 15% of total revenue. The strategic allocation of resources away from this segment has empowered us to aggressively capture growth in more dynamic markets. Moving to our non-degree offerings, including professional certification and interest-based courses, collectively accounted for approximately 73% of total revenue in the third quarter. In this sector, we continuously optimize our services and expand our offerings by launching new programs tailored to diverse user groups. These initiatives aim to provide engaging and interactive experiences, improve learning outcomes, and ultimately create value for our users. Building on this momentum, we continue to deepen our presence in one of our most distinctive segments: senior learning. As an early mover in this space, we have established a strong foundation, particularly in arts education, where our curriculum and pedagogical depth remain unmatched. As the market evolves and competition intensifies, we have deliberately shifted from reactive scale to quality-driven growth, ensuring the long-term resilience of our business. In a recent feature, several of our senior learners shared their enthusiasm and renewed sense of vitality, reaffirming the social and emotional impact of our mission to make lifelong learning both enriching and transformative. We have also successfully cultivated a vibrant private ecosystem for this cohort, which continues to demonstrate exceptional engagement. Our senior learners are not only embracing online learning as a lifestyle but also forming vibrant social ecosystems through our platform. Courses have become gateways to renewed identity and connection. To further enrich this experience, we actively pioneer innovative collaborations across industries. Last quarter, we partnered with a leading television channel to co-host a cultural initiative celebrating traditional arts. They applauded the immersive learning journey that allows senior learners to explore the origins and beauty of Chinese calligraphy. Our pipeline for the coming quarter remains robust, with a series of integrated learning and lifelong enrichment initiatives already in motion. We are launching charity programs in rural schools, participating in the New Year's expos, organizing collaborations, and preparing for Spring Festival events. These activities are designed to help older users rediscover purpose, foster social connections, and shine in every aspect of their lives. This holistic approach not only activates the intrinsic value of our educational offerings but also fuels a powerful and sustainable competitive moat. Parallel to the offline initiatives, we are elevating the learning experiences through an AI-driven transformation of our platform. In response to learners' key needs, extending post-course engagement, preventing knowledge loss, ensuring 24/7 personal support, and bridging the gap to everyday practice, we have introduced two intelligent assistant models powered by large language models. The course intelligence assistant provides real-time reinforcement and precise explanations, while the AI agent enables natural language interactions to transform knowledge into actionable insights. As we continue to advance integration across operations, the results have been encouraging. Our internal data shows that AI-assisted automated grading now covers over 17% of assignments, increasing review efficiency by more than eight times and achieving an accuracy rate above 95%. This has significantly reduced the repetitive workload of instructors and enhanced teaching quality. Looking ahead, the adult education sector is entering a new phase driven by high-quality growth. For Sunlands Technology Group, success is no longer measured by sheer scale but by the balance of efficiency, innovation, and long-term value. We believe that healthy cash flow, organizational agility, and learner-centered product benefits will remain the core pillars of Sunlands Technology Group's competitiveness in the future. We extend our gratitude for your presence today and the continued support that you provide. Thank you. We look forward to your valuable engagement. With that, I will turn the call over to our financial director, Hangyu Li, to run through our financials. Hangyu Li: Thank you, Tongbo Liu. Hello, everyone. The third quarter results reflect the company's focus on profitable growth and operational excellence. Net revenues for the quarter increased by 6.5% year over year to $523 million, primarily fueled by the strong performance of our interest-based courses. A key highlight was the substantial growth in profitability. Gross profit rose 13.1% to $462.7 million, outpacing revenue growth. This, together with a 5.5% reduction in total operating expenses, drove net income to $125.4 million, with the net margin reaching 24%. The company's balance sheet remains robust, with ample cash and cash equivalents and short-term investments. We have also maintained our streak of generating positive net cash from operating activities, underscoring the health of our core business. In 2025, the gross billings per new student enrollment for interest, professional skills, and professional certification courses grew 11.7% year over year, reflecting steady user acquisition momentum despite a more selective marketing approach. This growth indicates that we are attracting more committed users and achieving better monetization from each new cohort. The combination of enrollment growth and improved unit economics demonstrates the effectiveness of our refined strategy, focusing not merely on scale but on sustainable, high-quality growth. Looking ahead, we are uniquely positioned at the confluence of demographic tailwinds and technological innovation. Our leadership in serving the silver economy, backed by a profitable and scalable model, sets the stage for continued value creation for our users and shareholders alike. We extend our sincere gratitude to our team and our shareholders for their continued support. Now let me walk you through some of our key financial results for 2025. All comparisons are year over year, and all numbers are in RMB unless otherwise noted. In 2025, net revenues increased by 6.5% to $523 million from $491.3 million in 2024. The increase was primarily due to a shorter average service period in 2025, resulting in increased revenue recognition year over year. Cost of revenues decreased by 26.5% to $60.3 million in 2025 from $82.1 million in 2024. The decrease was mainly due to declined cost of revenues from sales of goods, such as learning materials and books. Gross profit increased by 13.1% to $462.7 million in 2025 from $409.2 million in 2024. Sales and marketing expenses decreased by 7.7% to $279.7 million in 2025 from $303 million in 2024. General and administrative expenses increased by 4.3% to $36 million in 2025 from $34.5 million in 2024. Product development expenses increased by 48.2% to $8.7 million in 2025 from $5.8 million in 2024. The increase was mainly due to increased compensation expenses related to the expansion of the company's product development personnel. Net income for 2025 was $125.4 million, as compared to $89.3 million in 2024. Basic and diluted net income per share was $18.64 in 2025. As of December 30, 2025, the company had $601 million of cash, cash equivalents, and restricted cash, and $176.5 million of short-term investments, as compared to $507.2 million of cash, cash equivalents, and $276 million of short-term investments as of December 31, 2024. As of September 30, 2025, the company had a deferred revenue balance of $695.5 million, as compared to $916.5 million as of December 31, 2024. And now for our outlook for 2025, Sunlands Technology Group currently expects net revenues to be between $440 million to $460 million, which would represent a decrease of 4.9% to 9% year over year. The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of market operating conditions and customer demand, which are all subject to change. With that, I'd like to open up the call to questions. Operator: Thank you. To ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Thank you. Please standby while we compile the Q&A roster. And once again, if you would like to ask a question, you will need to press 11. And to withdraw your question, please press 11 again. And once again, that's 11 for any questions. At this time, we are showing no questions coming through, so this would conclude the question and answer session. And at this time, I would like to turn the conference back over to Yuhua Ye for any closing remarks. Yuhua Ye: Once again, thank you, everyone, for joining today's call. We look forward to speaking with you again soon. Good day, and good night. This concludes the conference call. You may now disconnect your line. Thank you.
Operator: Greetings. Welcome to Walmart's Third Quarter Fiscal Year twenty twenty six Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to Steph Wissink. Senior Vice President, Investor Relations. Thank you, Steph. You may begin. Stephanie Wissink: Welcome, everyone. Thank you for your interest in Walmart. Joining me today from our home office in Bentonville are Walmart's CEO, Doug McMillon; and CFO, John David Rainey. Doug will begin with remarks about our upcoming leadership transition. Then we will hear from John Furner, recently named as CEO of Walmart, Inc. beginning February 1, 2026. Doug and John David will then share their views on the third quarter and our business trends. Thereafter, we'll open the line for your questions. During the question-and-answer portion, we'll invite segment leaders to join in responding to your questions. John for Walmart U.S., Kath McLay for Walmart International; and Chris Nicholas for Sam's Club U.S. We will make every effort to answer as many questions as we can in the hour we have scheduled for this call. As a courtesy to others, please limit yourself to 1 question. For additional detail on our results, including highlights by segment, please see our earnings release and supplemental presentation on our website. Today's call is being recorded, and management may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Please review our press release and slide presentation for a cautionary statement regarding forward-looking statements as well as our entire safe harbor statement and non-GAAP reconciliations on our website at stock.walmart.com. That concludes my introduction. Doug, it's my privilege to turn the earnings call over to you one last time. Doug McMillon: Good morning, and thanks for joining us. The team delivered another strong quarter. Our associates have us well positioned to finish the year with momentum. It's been an honor to serve them as CEO, and I'm as excited about the future of this company as I've ever been. John's ready. He knows our business so well and he has the characteristics to lead us into the future. I couldn't be happier for him and for our company. Congratulations, John. John Furner: Thank you, Doug. I'm excited about our future. I'm appreciative and humbled by this opportunity and look forward to accepting the responsibility to serve Walmart more broadly as President and CEO. I love this company and I love our associates. I believe in our values and in our purpose to help people save money and live better. I believe we're well positioned to fulfill our purpose. Doug McMillon: You'll be great. Back to the quarter, the team delivered strong sales and profit growth across each of our segments. Sales grew 5.9% overall in constant currency, and adjusted operating income grew even faster at 8%. We drove positive transaction counts and unit volumes, and we're gaining market share in grocery and general merchandise, including here in the U.S., where we saw strength across income cohorts and especially with higher income households. It's great to see the positive general merchandise sales across the company, and I'm excited about what we're seeing with our fashion categories in Walmart U.S. in particular. E-commerce was a highlight again in Q3, up 27% in total. Each segment delivered growth in e-commerce above 20%. The way we're driving growth on the top line is helping us strengthen and differentiate our bottom line. Globally, advertising grew 53%, including VIZIO, and membership income was up 17%. Let's talk about each segment. I'll start with International, which continues to lift the growth rate for the company. International drove the strongest performance with a sales increase of 11.4% in constant currency and adjusted operating income grew 16.9%. We continue to benefit from business mix changes and lower losses in e-commerce. Transaction counts and unit volumes are up across markets, and we're gaining market share. E-commerce sales for international were up 26%. That included our Flipkart team in India executing a record big billion days event. Almost 1/3 of our business outside the U.S. is digital with e-commerce in China at 50% penetration. And the team in China is delivering orders fast. Nearly 80% of digital orders arrived in under an hour. In October, I got to visit 3 Chinese cities. In Hefei, a city of about 10 million people, we visited a relatively new Sam's Club that was outstanding. We now have 60 Sam's Clubs in the country and a healthy pipeline of new clubs coming. China is more advanced in terms of digital retail than anywhere we operate, and there's always a lot to learn that helps inform what we do around the world. I also got a chance to visit our team in Canada last month. I'm excited about the leadership team and the opportunity we have to grow market share, reinforced by EDLP and tapping into our omnichannel advantages. For Walmart U.S., we drove comp sales of 4.5%, and we grew e-commerce by 28% with marketplace sales growth of 17%. We continue to deliver the value people are looking for with healthy growth in both transactions and units sold. Comps were good across each month of the quarter, and share gains were consistent with what we've seen this year. Delivery speed matters, and we're delivering faster than ever. For Q3, 35% of digital orders were delivered in under 3 hours. At a category level, sales in general merchandise were positive with fashion, home and automotive leading the way. Grocery performed well with good unit growth and health and wellness was up low double digits. For Sam's Club here in the U.S., the team delivered comp sales of 3.8% with strength across categories. The comp was driven by transaction counts, and we're gaining market share in grocery and general merchandise. Sam's continues to do a great job of engaging our members digitally. We have a profitable e-commerce business that outpaced our expectations again this quarter, up 22% in sales. For Sam's membership, we see good growth in member count, renewal rates and plus member penetration. As we look at our customers and members here in the U.S., they're still spending with upper and middle income households driving our growth. We continue to benefit from higher income families choosing to shop with us more often. Middle income households have been steady, and while lower income families have been under additional pressure of late, were encouraged by how our teams are meeting them with greater value across necessities and doing what we can to help them stretch their dollars further. For the quarter, like-for-like inflation in Walmart U.S. was 1.3% with food and general merchandise up low single digits. We continue working to resist the upward pressure on our cost of goods and to manage our mix. We have about 7,400 active rollbacks in Walmart U.S. right now, with more than half of those in the grocery category. Often, our 90-day rollbacks lead to a permanent price reduction, a new EDLP. Since the beginning of the year, more than 2,000 rollbacks have become the new everyday price. We'll keep strengthening our ability to save people time and money, and we'll keep finding ways to keep our prices as low as possible and being strategic in our pricing actions. Everyone wants value. Inventory management is always important, and it's especially important in this environment as we reduce markdown risk to help fund stronger price gaps. Our team continues to do a great job. The ability of our Walmart U.S. team in particular, to make good quantity decisions and manage pricing and mix well has been impressive. Both Walmart and Sam's U.S. delivered strong seasonal sell-throughs for back-to-school and Halloween. The results we're delivering today are powered by our people and by technology. We continue to get better at putting our data to work, building more capable tech products and platforms and by deploying physical automation. The investments to automate our supply chain continue to go well. The team is delivering according to plan, and it's helping our associates and our stores receive and manage inventory better than before. As it relates to AI, we continue building towards an e-commerce experience that is one, more personalized and relevant; two, multimodal, meaning a voice, text, image and video experience that is more conversational. Interacting with our app will include improved imagery, short-form video, live streaming and interaction with influencers. Ads will still be present, but in a more contextual and helpful way. Surfacing as recommendations or sponsored bundles that add value. There'll be attention, capture and decision influence through data. And three, the new experience will be contextual, understanding customer intent and anticipating needs to save them time. As we think about new tech products and capabilities, sometimes we build our own tech and sometimes we partner. Our recent announcement with OpenAI as an example. This new partnership will allow customers and members to purchase items from Walmart and Sam's Club directly through ChatGPT. This starts relatively simplistically with the checkout process. It will become more immersive, integrated and seamlessly connected experiences that bring Walmart closer to customers in new ways. We're adopting artificial intelligence in its various forms across the company. Take software development, for example. When AI is used for software development, more than 40% of the new code is either AI-generated or AI-assisted. We're helping our associates build the skills they will need to thrive in an AI-powered workplace through things like embracing OpenAI certifications, enrolling out ChatGPT enterprise licenses. I'll wrap up by saying thank you and conveying my excitement about our future. Our strategy is clear, and we're focused on innovating and consistently executing to deliver greater sales, margins and returns. Our associates continue to impress. They care, they learn, they step up and change. They're moving forward. They bring our purpose and our values to life. This company and our team's ability to change should not be underestimated. That ability enables us to adapt and thrive. Our timeless purpose and values, combined with the ability to innovate, ensure our strong future. John David, over to you. John Rainey: Thanks, Doug. We're pleased with how the team executed this quarter and with the strength of our business across markets, continued share gains and disciplined cost control. Our results were better than expected on the top and bottom line and reflect the advantages of our omnichannel model and the diversified nature of our profit streams. As we indicated earlier this year, we're playing offense. Accelerating our growth, reinforcing our customer and member value proposition, evolving our model and diversifying our profits. Importantly, we're delivering on our financial framework of growing profit faster than sales. Our strategy of offering everyday low prices while leveraging our physical and digital assets to provide greater convenience is clearly resonating. Now I'll get into some of the details of our third quarter performance. Consolidated revenue in constant currency increased 6% or more than $10 billion, led by continued e-commerce momentum with 27% growth. In all of our markets, we're getting faster with delivery speeds, reaching more households across a broader assortment and improving execution. For example, in Walmart U.S., approximately 35% of store-fulfilled orders were expedited or delivered in under 3 hours. And sales through these expedited channels increased nearly 70% this quarter. The notable thing about our e-commerce growth is the consistency of it across our markets. In Walmart U.S. comp sales grew 4.5% with traffic growth both in stores and online. E-commerce sales grew 28%, led by strength in pickup and delivery and advertising. This was the seventh consecutive quarter of e-commerce growth above 20%. We're encouraged by the share gains across grocery, health and wellness and general merchandise categories. Fashion in particular, has been a bright spot with improving comp trends throughout this year. The U.S. team continues to do an excellent job balancing price and mix to reinforce our value proposition. We're leaning into price rollbacks and making both everyday essentials and seasonal celebrations more affordable for customers and members. Walmart's Thanksgiving mill basket is a great example. It will feed a group of 10 people for less than $40. The International segment delivered over 11% sales growth in constant currency, led by strength in Flipkart, China and Walmex. Flipkart had strong results aided by the earlier timing of the Big Billion Days or BBD sales event. The BBD event saw strong customer engagement with sales growth led by mobile devices, electronics and fashion. At our peak, we delivered 87 orders per second with the fastest delivery in about 3 minutes. Sales in China increased 22% in Q3, reflecting ongoing strength at Sam's Club and more than 30% growth in e-commerce. Sam's Club U.S. comp sales ex fuel increased 3.8%. Recall that we're lapping a multiday period of strong comps in Q3 last year related to a port strike that equated to an approximate 120 basis point benefit to comp sales in last year's period. Members continue to engage more digitally, both inside the club using Scan & Go as well as through the convenience of curbside pickup and delivery options. Member adoption of Scan & Go reached 36% in Q3, an increase of 450 basis points versus last year, and club fulfilled delivery grew triple digits again this quarter. The Sam's team continues to enhance member benefits related to e-commerce. Curbside pickup is now free for all members with no minimum purchase requirements, and we've accelerated the speed of delivery by leveraging Walmart's Spark driver platform to pick and fulfill delivery orders. These actions have contributed to stronger e-commerce sales and improved average delivery types. Consolidated gross profit was relatively flat year-over-year. Walmart U.S. increased 19 basis points as a result of disciplined inventory management and favorable business mix. This was offset by pressure in the international segment from channel and format mix due in part to Flipkart's BBD event as well as ongoing price investments in Mexico. Merchandise category mix in Walmart U.S. remains a headwind to sales growth in grocery and health and wellness outpaced general merchandise. Across the enterprise, our business model continues to evolve with operating income increasingly influenced by improved e-commerce economics, particularly in Walmart U.S. and Flipkart, with growing contributions from business mix, most notably in higher-margin areas like advertising and membership fees. This quarter, the combination of advertising and membership fee income represented approximately 1/3 of our consolidated adjusted operating income. With continued strong momentum in e-commerce, our advertising business globally increased 53%, including VIZIO. Walmart Connect in the U.S. ex VIZIO grew 33% as we continue to grow advertiser counts, including through our third-party marketplace. We also saw 34% growth in international advertising led by Flipkart. Membership income increased 17% across the enterprise, led by 34% growth in international, primarily due to Sam's Club China. In the U.S., Walmart+ membership income continued to grow at double-digit pace. Across all income cohorts, we saw membership income growth accelerate with overall Q3 net adds our strongest on record, supported by new benefits like our One Pay Cash Rewards credit card and expanded streaming services. Sam's Club U.S. membership income grew 7%. We're encouraged by the strength of new member acquisition at Sam's globally, particularly among younger demographics. Adjusted SG&A expenses leveraged slightly in Q3. Expenses are being well managed across the business. Technology and AI have been enablers of efficiency gains. We're using AI across the organization to manage cost effectively and to accelerate our growth. As we continue to invest in supply chain automation, we're also seeing improved efficiency and fulfillment economics. In Walmart U.S., more than 60% of our stores are now receiving some freight from automated distribution centers, and more than 50% of our e-commerce fulfillment center volume is now automated, which is driving better unit productivity and helping to lower the cost to serve. Enterprise adjusted operating income increased 8% in constant currency, growing faster than sales across each of our operating segments. International delivered strong operating income growth of nearly 17%, reflecting contributions from business mix, improved e-commerce economics and growth of membership income, while we saw mid-single-digit growth from both of our U.S. segments. Adjusted EPS was slightly better than we expected, up nearly 7% to $0.62. Our third quarter GAAP results include a charge of approximately $700 million related to our PhonePe subsidiary in India. This was a discrete noncash charge related to share-based compensation expense and contemplation of a potential IPO. Our teams continue to do a great job managing inventory in this dynamic environment. Inventory levels increased approximately 3% for the total company, with Walmart U.S. inventory up 2.6% despite higher costs from tariffs. With our growing 3P marketplace, we have the ability to better balance owned and third-party inventory, improving our working capital efficiency, while still offering the customer a broader assortment. Return on investment is measured over the last 12 months declined slightly, primarily due to the PhonePe charge discussed earlier. Underlying ROI performance continues to improve, supported by capital discipline and operating cash flow strength. The business continues to generate strong cash flow with year-to-date operating cash flow of $27 billion, up $4.5 billion compared to last year. This provides flexibility to reinvest in the business while at the same time returning significant capital to shareholders. Year-to-date, we've returned nearly $13 billion through dividends and share repurchases. Overall, Q3 results demonstrate the underlying strength and resiliency of our business model. Our diverse portfolio of businesses are scale and our commitment to innovation give us confidence in our ability to deliver sustainable growth. Now turning to guidance. Recall at our Investor Day in April, on the heels of the tariff announcements, we said that we're going to play offense. We said that we would look to gain share. And we said that despite some of the obvious headwinds, we're not giving up on our goal of growing profits faster than sales. Given the year-to-date performance and our outlook for Q4, we're raising our guidance for sales and operating income for the year. Full year sales in constant currency is expected to grow between 4.8% and 5.1%, up from 3.75% to 4.75% prior. This reflects our confidence in our team's ability to continue driving share gains in Q4. Fourth quarter constant currency sales guidance is for growth of 3.75% to 4.75%. Notably, if currency exchange rates stay where they are today for the entire fourth quarter, we would expect a $1.1 billion benefit to reported sales growth. For operating income, we expect full year growth in a range of 4.8% to 5.5% on a constant currency basis, with Q4 growth in a range of 8% to 11%. Currency is expected to be an approximate 100 basis point benefit to fourth quarter reported operating income growth. Importantly, despite 150 basis points of headwinds from the VIZIO acquisition and lapping leap year, as well as higher-than-expected claims expense, we still expect to grow operating income faster than sales for the year, which aligns with our longer-term financial framework. For Q4, our operating income guide reflects the timing shift of Flipkart's BBD event as well as the lapping of wage investments in Sam's Club U.S. Business mix will continue to be a margin benefit and we expect merchandise category mix to continue to be a headwind. For adjusted EPS, we expect the full year to be in a range of $2.58 to $2.63 with Q4 in a range of $0.67 to $0.72. The consumer environment remains dynamic, and we continue to monitor customer member behavior alongside tracking the macro environment. We're entering Q4 with strong momentum, healthy inventory and a clear focus on our value proposition. Price, convenience and a broad assortment. I'd like to extend my gratitude to our associates who are serving our customers and members every day during a busy holiday season. I'd also like to share that we're excited to announce that our stock listing will be moving to NASDAQ, aligning with the people-led tech-powered approach of our long-term strategy. Walmart is setting a new standard for omnichannel retail by integrating automation and AI to build smarter, faster and more connected experiences for customers while enabling our associates to deliver even greater value at scale. We are appreciative of our long partnership with such a story institution as the New York Stock Exchange. But we're excited about partnering with NASDAQ on this next chapter of our growth story. Lastly, I'd like to say a couple of comments about our leadership change. I think I speak for many people at Walmart when I say that it has been the honor of my career to work alongside Doug. His mark will forever be on Walmart. This company would not be what it is today without his leadership. Doug, we will miss you. At the same time, I can't think of a better leader to hand over the reins to then John. John was the first person on the Walmart management team that I had the opportunity to meet several years before coming here, and he's a big reason why I am at Walmart today. Every company should be so fortunate to have such a capable and qualified leader to transition to. John, you have 2.1 million associates standing behind you as you lead us in this next chapter. We're now ready to take your questions. Operator: [Operator Instructions] And our first question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: Congratulations, Doug and John. So I have 1 question and there might be a part A to it. The question is, do you think Agentic will supercharge Walmart's e-comm growth? And in that answer, talk about the advantages that can uniquely help Walmart. And the Part A, I know, John, you just mentioned that you feel strong heading into the good start -- I think strong heading into the fourth quarter. Do you have enough read from Q3 and Q4 to date to predict how the consumer may perform over the holiday? Doug McMillon: Thanks for the question, Simeon. I'll kick off this agentic discussion, but I invite my colleagues to chime in with me. I'm really excited about what's possible. We're always trying to find ways to serve customers better. And I think the advantages that we have include our breadth of assortment being so close to people, which will help us with delivery speed and, of course, everyday low prices. I wouldn't underestimate the physical aspects that kind of underpin the advantages that we have. But at the same time, we've gotten so much better with technology that we have the ability to execute a vision that will be multimodal, more personalized, understand context, and it will help people save time and have more fun shopping. And I think when we put all those things together, it will be a very important growth aspect or channel for us. It won't be the only one. We say omnichannel these days, and I think people frequently think of just stores and e-comm, but social commerce and all kinds of forms of shopping are happening today. And I think we're well set up to be able to participate in all those channels going forward. John Furner: Simeon, this is John David. That's really well said. And we're really excited about some of the capabilities that our customers are engaging in with what we call Sparky today, our digital agent that's live in the app. We continue to hit new milestones. I'm also really excited about some of the new capabilities coming over the next few months as Sparky, you can take more action on behalf of our customers. And when you put that on top of this platform that Doug described with physical assets with 4 deployed inventory all around the country, increasing the speed of delivery, we're using agentic AI to help people think about the things that they may want to reorder or in other words, give them nudges about staying in stock. There are so many ways that we can serve customers, which is very different than where we were 5 to 10 years ago. We can serve people in minutes. We can keep you in stock at home. We have a really broad assortment and having a digital agent that is there working for you, we think it's going to be really powerful. And then there are a couple of things behind the scenes that agentic AI and other types of technology are helping with things like maintaining the accuracy of our catalog, helping us know where there are gaps in our assortment so that we can serve people however they want to be served or whatever is going on in their lives. I'm really excited about how this is all coming together. I think it's going to be a really strong enabler. And I think it will take a lot of time and friction out of the customers' lives as they shop with us. Kathryn McLay: I would just add to that. So we have all of the data from our customers who shop with us in-store every day. And all of that transactional data is really helpful for us to be able to predict baskets for our customers. One of the things that's useful about having an international segment is that we have markets where we can trial new capabilities. And we've been trialing something called [ Corredo Listo ] down in Chile, where we actually create customers' orders for them, send them Whatsapp prompt to ask them if they're interested in buying that basket. They go into the app, and they can see we've created a basket for them that actually has all the brands that they normally buy in the kind of intervals that they like to buy it. And they have full agency over whether they want to accept that basket, whether they want to add to the basket, whether they want to take from the basket. And what we're seeing is that it's really attractive, and it's become up to about 20% of our e-comm business in Chile already. And so we're excited about that capability. We're bringing it to other markets. But I think we know our customers, we know what they want, and we can anticipate that and make their lives easier. Unknown Executive: Yes. And for Sam's Club, I think there's probably just 2 quick points to make. The first is it looks like a really smart decision that we leverage the Walmart Enterprise capabilities so that Sam's Club gets access to everything you just heard about. And the way you should think about Sam's Club is that the member data that we have is richer than any other form of data we have across the enterprise because we have complete understanding of what the member wants and that allows us to personalize at an even deeper level. John Rainey: Simeon, this is John David, on the second part of your question regarding the read on the consumer in Q4. We'd say that overall, the environment feels pretty consistent. There's certainly some pockets of moderation that we're keeping an eye on. But if you look at our guidance for 4Q, it would indicate that we have an expectation that it's going to look pretty similar to the other quarters this year. Holiday is off to a pretty good start. Back-to-school tends to be an early indicator for how that goes, Halloween, likewise for Thanksgiving and everything that we've seen far makes us optimistic and encouraged about customers and members leaning into the seasonal events and holiday shopping period. There is one thing to note as it pertains to our business. The maximum fair pricing legislation that was enacted and goes into effect in January, will affect our health and wellness business, specifically our pharmacy business. That will influence the comp in January a little bit, but all in, if you look at our revenue guidance, it's very much in line with the first part of the year. Operator: Our next question is from the line of Greg Melich with Evercore ISI. Gregory Melich: First, Doug, I just want to thank you for all your leadership, not just to Walmart the last decade, but I would say society. It's been a while time and you've been great to have there. So thank you. And John, congrats, you'll get sick of us soon enough. So I'll launch into my question that way. If we -- I do want to unpack Walmart+ membership, it's that nice growth. It seems like an acceleration. I guess what are the constraints to getting that to grow even faster? Is it logistical? Is it -- what do we have to do to see that really take off? John Furner: Greg, it's John. Thanks for the question. We're excited about the momentum in Walmart+, and you heard in the comments earlier, John David noted, that this is the best quarter we've had in terms of net addition since we launched the program. There are really a couple of things that are driving that, and I want to congratulate the team for. The first is delivery and delivery speed. You heard this morning also that about 35% of our deliveries that are coming from our stores are sub 3 hours and our fastest growth channel is sub an hour, and that's holding up and it's growing at a fast pace. So providing this flexibility to our members is really important. The second thing is our NPS levels on total delivery and shipping are the highest we've seen. That's highly correlated to speed and accuracy. These investments we've made over the last few years that we're excited about in terms of supply chain and inventory accuracy, the digital agents that are helping us understand how our assortments can improve, all of that is working to help people be able to find the things that they're looking for, the things that they need, and they can have those delivered whenever they want, whether that's keeping in stock or it's really quick. The second, we're really proud of the launch of the One Pay credit card that's featured prominently on our homepage even this morning, where members can earn 5% back on all their purchases. We've had really good uptake with the program. So I think it's an exciting time when there are customers who are, of course, always looking for a value. We're proud of our price position with 7,400 rollbacks. So that's another way to reinforce that there are great values at Walmart. And then the third is we did add a streaming option for customers to be able to choose. We think that's important as well. But I'd really pull it back to the work and the progress that we've made with delivery, with speed, accuracy and then the launch of the credit card. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Katharine McShane: Doug, I just wanted to thank you for some really great years here. It's been a lot of fun covering Walmart under your leadership. And John, just wanted to wish you a really big congratulations as well. With regards to our question, you mentioned the level of inflation across the store was about 1.3%. Can you talk about how you've managed higher cost through price increases and what elasticity impacts you've seen? And how should we think about where prices should go in Q4 and early 2026? John Furner: Kate, it's John. First, we are seeing inflation in the low 1% range. That's pretty consistent across the business, including food and slightly higher in general merchandise. I would first point to, I think the team has done a really nice job managing inventory, and that's been a consistent trend for a few years. Inventory closed the quarter up 2.6%. So roughly half the rate of what we're growing sales and we feel good about where the inventory is positioned in categories like fashion, where we've seen higher growth rates in the quarter. We're really proud of our fashion business. Our inventory is in good shape. So what that does is it allows flexibility and takes pressure off any end-of-season markdowns. We've been disciplined over the last few quarters of ensuring that at the end of each season, whether it's back-to-school or back to college, Halloween that we in clean and we move on to the next season. The third thing, I think the last thing I would say is the team has also done a nice job of managing mix throughout the last couple of quarters. We've been thoughtful about how we adjust our buys in terms of what we think people will buy in seasons. So where things that are for kids, obviously, have run strong. People tend to prioritize their families in times where there could be cost pressure. So all those put together have put us in a good shape to where we can keep our inventory in line, we can maintain margins with low markdowns on the backside. Operator: Our next question is from the line of Seth Sigman with Barclays. Seth Sigman: Doug, John, congrats to both of you guys. So I wanted to talk about operating leverage and how you're thinking about the fourth quarter. It does imply an improvement in the operating leverage here. Can you just bridge that -- how much of that is the shift in Big Billion Days versus other drivers? And then related, you guys have done a really good job of managing tariffs. How are tariffs starting to show up in the model? And should we assume that the tariff impact continues to increase, but you are able to offset that. Maybe walk us through how you're doing that? John Rainey: Sure. This is John, David. I'll take the first part of that question, and maybe a couple of us will address the second part of it. We are really pleased to be able to demonstrate that we had leverage in the business this quarter. I believe that's the first time in 2 years, given some of the mix changes that have been happening with our shift of e-commerce to -- shift from in-store to e-commerce. There's a number of areas where the team is really performing well. And I talked about the use of AI and technology. But an example I would give you, I'd point to our supply chain. Roughly 50%, in fact, more than 50% of our volume from fulfillment centers is coming from automation. And that translates into lower shipping costs. Our shipping costs have been down consistently for many quarters in the 30% range. This was another quarter where we saw double-digit improvements. And that really helps our e-comm economics, but also helps the overall SG&A of the company. I think there's sometimes a bit of a sense of there needs to be a trade-off between value and convenience. And I think that's a false choice at Walmart. We've demonstrated for years that we can provide value through everyday low prices in the items that we sell. We're doing the same thing now with convenience by continuing to lower our cost of delivery, that helps customers have the ability to have the value that they want with the convenience that they expect. And what we're seeing is that customers are willing to give their business to those companies that, one, provide value; two, give the convenience they expect; and three, are executing consistently well. And so we feel good about going into the fourth quarter. Costs are always going to be an issue that we're trying to be more efficient and bring them down. But I think we're in a better place right now than we have been at some point. John Furner: Yes, John David, I think those are really important points. The point you made on value, convenience and execution. Hopefully, it's just building trust, trust that customers can depend on us for whatever it is they're looking for in their lives. In terms of the impact of tariffs, certainly, I think we have seen less impact than what we thought we would have expected early in the year. There has been some relief on some key food categories, which certainly is helping. You also heard earlier the 7,400 rollbacks, -- about half of those are in food. Really, the only price pressure that we're seeing in food generally right now is in the beef category, which is largely a reflection of the commodity and the cyclical nature of the herd size in the U.S. So commodities do what they tend to do, but the team has done a nice job all across the business at creating great value on particular items like the price of turkeys for Thanksgiving. And we have the ability to sell customers up to 10 people, $4 a person for their meal. We have a VIZIO television that's 50-inch for $128. So really proud of the value that exists all throughout the assortment. And I think we can become and continue to be a great place for customers to find what they need for the holiday season. Doug McMillon: Really impressed with how the team has managed through tariffs this year. If you look at it holistically, the job they've done to manage inventory, to manage price gaps to improve our mix with categories like fashion being so strong. That, combined with the business mix shifts in the company have enabled us to get through this year and become even stronger as we've done it. And then I'll just also add our appreciation on the relief we're seeing on things not growing in the United States. That's really appreciated. I think our customers will appreciate that, too. Kathryn McLay: Can I take a little tangent on that, too, because you did mention BBD. And I think it's worth noting that BBD is housed within our Q3 result this year, and our operating income was up 16.9%. So it's quite a change in kind of what we've seen at the impact of BBD in a quarter. We also saw a lot lower losses from e-commerce in international, and probably the best BBD that we've experienced in the history of the company. It was reflected in the other day that we did over $1 billion of sales in the first day. And I think we did something like 700 orders per second during the first hour of the event. So, it's an extraordinary event. And yet despite that, we had lower e-commerce losses, and we had an opt-in for growth for International adjusted at 16.9%. Doug McMillon: It took Walmart a lot longer to get to $1 billion a day. Christopher Nicholas: This is also relevant to Sam's Club too. I do need to take this opportunity to thank our associates though for a really strong quarter. And maybe just touch on something John David talked about, which is the headline comp for Sam's Club may look a little off, but we're lapping a lot from last year. We talked about it 2 storms and the port strike that impacted us disproportionately. So what I'd ask you to do is look through that. Our 2-year stack is consistent with Q1 and Q2 around 11%. So it's consistent good momentum. I think just to push in, Seth, into your question, we're working really hard to -- every single day to take cost out through using AI, using leverage, taking the benefits we're getting from ads, and we are going on the offense on things like price and on experience. We've seen really incredible growth in e-commerce, too. And the innovations that the team are landing every single day. So leveraging the Walmart app has increased conversion materially. We've changed the value proposition again because we are restless on behalf of the member. We reduced basket minimums for our club members for curbside pickup, and we saw a 20%-plus pickup, which is just great. And the fourth quarter now of -- from a delivery point of view, is the fourth quarter in a row that we've seen triple-digit growth. And I think some of that is how easy it is and how sharp we are on price, but some of it is just great items, too. I would just touch on -- we've got some great GM items coming through Pokemon, LEGO Gameboy, Disney Princess Parade, and the [indiscernible] set, which I don't know if you will know, but [ Marjan ] is the new pickable, so please go out and invest in that item too. John Rainey: Yes. Just one thing to add to what Chris said because I think it's important to note, I think it's fair to say, and the team could disagree with me here if they feel differently. But I think we're better leveraging the assets of the various segments than at any time in history. Whether you look from a technology perspective, a supply chain perspective, even from a people perspective. We -- there are synergies with what we're doing in leveraging some of these platforms and technologies, and that's really starting to translate into improved financial results. Operator: Our next question is from the line of Kelly Bania with BMO Capital Markets. Kelly Bania: And Doug and John, I just want to echo the comments from my colleagues and add my congratulations to both of you. I think we've all learned a lot from your leadership, Doug. My question and more observation, I guess, is just how incredibly consistent, so many of the key metrics are really across the board. And I think it's just particularly notable at a time when there are more complaints about the U.S. consumer signs of pockets of weakness. And so I was wondering if you could just maybe talk a little bit about how much month-to-month volatility you're seeing, if there's any signs of trade down or changes of behavior underneath the hood? And if you can add to that how much flexibility are in your plans to be more aggressive with pricing or other elements of your model, if there is, by chance, any delayed consumer reaction to either the tariffs or the cost of living dynamics not only in the fourth quarter but into next year? John Rainey: Kelly, this is John David. I'll hit on that and maybe start with the last point. I think the team here feels really good about where our relative price gaps are right now and the value that we're providing to our customers and members. We have over 7,000 rollbacks in place in Walmart U.S. John talked about the value of a basket of items for Thanksgiving dinner and how that compares to prior years. It's -- I think we're feeling really good about this. And we're seeing that customers are moving their business to companies that provide that value with that convenience. In terms of the month-to-month volatility in the business, the quarter was actually quite consistent. When we look across the entire business, there wasn't necessarily 1 month that was an outlier. There are pockets of moderation when we look by income cohort. And I don't want to sound alarmist in any way here because, again, overall, the business is very consistent, and that's our outlook into the fourth quarter. But when we look by low-income cohort versus middle versus higher income, we have seen some moderation in spending in the low income cohort, and that's consistent with things you've seen from a macro perspective, an October wage growth, the disparity in wage growth between those cohorts was as large as it's been in almost a decade. And so we're seeing the same things that others are, and we're keeping a watchful eye on it. But again, I think Walmart is better insulated than just about anybody, given the value proposition that we have. If pocketbooks are being stretched and kind of consumers are being choiceful and value seeking, it stands to reason. If there's more pressure on the consumer, they're only going to become more so. And so we like the value proposition that we're offering for our customers, and you see that's why we're gaining share. John Furner: And John David, something you said earlier is important that more than one thing can be true at a time. The flexibility that we are offering the breadth of assortment helps us have an appeal to a lot of customers all around the country. And while everything you said is true, it's also true as we saw accelerated games with higher income customers throughout the quarter. And I think you can see that in the categories with categories like apparel that grew over 5% every month of the quarter and continues to be one of our best categories. Other categories like home hardlines are in that mix. So we're seeing a lot of growth in general merchandise that has a wide appeal to a lot of income levels. It is interesting that all income levels are participating in delivery and faster delivery choices. And I think it's just great to see that whatever it is the customer is looking for, we built capabilities over the last few years that can help them experience our great assortment and great value however they choose to. John Rainey: One of the things with our marketplace business, it's really allowing us to provide a much broader assortment than we have historically. And if you look on a category-by-category basis, there are places in our marketplace business like automotive, toys, electronics, apparel, that are all growing north of 40% year-on-year. And so it really shows that customers are coming to us with this broader assortment, and it's allowing us to cater to a broader set of customers than we have historically. Christopher Nicholas: I think it's really worth pointing out that this is the moment for a business like ours. So Sam's Club, we are trusted for great value. And when we give people and have great value, but with incredible assortment and incredible experiences, people really value that. And when they do have to make choices where the place they're coming to. Really great items that -- where you drop the price, you do see a response. So I'll give you an example. We reduced our incredible, very big box of [indiscernible], a bit of fresh baked in club by $1 from $5.98 to $4.98 and the volume doubled is incredible. We had to remove the shelf that we put them on because the volume that we were selling was so -- was so huge. I think people really respond to great items at great prices. Operator: The next question is from the line of Michael Lasser with UBS. Michael Lasser: Best wishes to everyone. How do you respond to those who say, the timing of this leadership succession is a signal of an inflection point where Walmart will usher in another phase of investments that will pressure the company's profitability, either because of the need to support the top line growth or be prepared for the next phase of retail, which [indiscernible] commerce. And this is anywhere near the case, could it delay the potential acceleration in operating income growth over the next few years as alternative revenues gain scale and make up a growing portion of the company's overall profitability? John Furner: Michael, it's John. I want to say a couple of things. First, I'm really excited to be a 32-year Walmart associate. I'm proud of that. I'm proud of the work that our associates have done for so many years around the country. We have a strong purpose, and I love our core values. As far as the strategy, I've been here at this table with this team for a long time. I'm in my seventh year in the role of Walmart U.S. CEO. I've been a part of developing our strategy on capital for automation, the transformation from having a store business and an e-commerce business to becoming omni. We have a lot of momentum, and I think that strategy is solid. We're looking forward to make improvements to the strategy as we go. And just specifically on capital, we take a really disciplined approach to capital. Over the last few years, we've been really transparent about the things that we're developing. A lot of those investments are going to remodels and stores. We're on about a 7-year cycle. I think that's about right, and we want to maintain that. And then second, the capital investments we've made in our supply chain, we're even more optimistic about the returns that those can create, which leads to the final point. When it comes to capital investments and operational investments in the business, will take a disciplined measured approach to those investments and will ensure that they provide the right returns for our shareholders. John Rainey: I'd like to add one thing. Just my perspective as a CFO. I've been in finance for 3 decades and in a role like this for about half of that. I've never worked on a management team that has more alignment around the financial metrics on how to run the business, focusing on the top line, making sure that those sales are profitable and also focusing on ROI. And so we're going to continue to do that. We recognize that we spent more capital than we have historically, but there is a universal alignment on the -- with this management team that we need to make sure that those investments pay off for investors. And so the goal that we have or the metrics that we hold ourselves to is we need to make sure that ROI is going up every year. And you've seen that performance been demonstrated here after some of the important investments that we made a decade ago, those were starting to pay dividends. And so I hope I can lay any concerns that there's going to be some dramatic shift in our posture on this. Operator: The next question is from the line of Christopher Horvers with JPMorgan. Christopher Horvers: Congratulations to Doug and best wishes in the next part of your journey and John as well as you take over the reins. A bit of a multipart U.S. grocery question. The low single-digit performance in Walmart U.S. in the quarter, to what extent did the port strike and snap impact the trend. Would you expect this to revert back to mid-single-digit range? Or does this inflation on eggs and perhaps tariff changes inhibit that? And on a related question, it's clear that you've been investing in price, grocery inflation of around 1% versus what's being reported externally, you're driving price gaps. Is that because you felt they were narrowing or you were intentionally widening the gap in anticipation of some disinflation? John Furner: Chris. Let me take part of the question -- or the first part of the question on grocery. In terms of where we are pricing, we're always looking for ways that we can keep prices as low as we can and invest in price. Walmart has provided an everyday low price value for many, many years and that certainly is relevant now for food pricing. For the holiday season, we're proud of the offer that we have. You can feed 10 people for just under $4. I think that's really exciting. Items like Turkey, butter wall turkeys will be $0.97 a pound. That's the lowest price we've had in Turkey since 2019. So our strategy has always been -- the philosophy has always been to keep prices as low as we can on a basket of goods over time, and we will continue to do that. And then as far as how the mix is coming together, our merchants, they start every week talking about unit growth. And we focus heavily on how we're growing units. We think about unit share in food, particularly in fresh food, where there are commodity prices that do what commodity prices do over time, we want to ensure that we have a value, but we look at unit share. So our unit share growth has been strong. It was stronger in the quarter than our dollar share. And so over the long term, we'll take the units, and we'll focus on that and then the dollars will tend to work their way out. The last thing I'll say, there likely is some egg deflation right ahead of us. That is in our forecast, and we're thinking about that. And then we do have some inflation in the beef category that we think will take a bit longer to work out. Operator: Our next question is from the line of Robby Ohmes from Bank of America. Robert Ohmes: Doug, congrats, you will be missed. I will miss you personally. And John, congrats. I mean I honestly can't imagine anyone better to follow, Doug. So just congrats to both of you. My question is on merchandise category mix, you guys mentioned that you expected merchandise category mix to still be a headwind in the gross margin in the fourth quarter. You've got really good commentary on early holiday spending. You've got good performance in apparel and home doing better. I mean just what will it take for merchandise category mix to not be a headwind to gross margin, like what's the secret sauce? John Furner: I think the comment is reflective of the fact that health and wellness has been stronger and our pharmacy business has been stronger, and we think that will continue into the fourth quarter. You did hear John David mentioned some impact we may see in January related to the top line in health and wellness. So the comment is really reflective of that overall category mix. We are very encouraged by the fashion business. The fact it grew over 5% in the quarter, and we see more and more customers choosing Walmart for their source of fashion and the unit growth across basics for kids, men's, women's, the growth was really consistent across the categories, I think, is encouraging. And then overall business mix, it is also encouraging that e-commerce has shifted from lost profitability. And so over time, we think the mix -- we will definitely see improvements amongst the -- between the channels. John Rainey: Robby, if you were to go back and pinpoint when we started seeing merchandise or the merchandise category mix pressure, it really goes back to a couple of years ago when we were seeing inflation in the high single digits. And so I think it's reflective of the macro environment, much more so than anything that's happening at Walmart. As pocket books have been stretched, you're seeing more consumer dollars go to necessities versus discretionary items. I think, fortunately, for us, we've done a great job of improving our assortment. And the example I gave earlier with some of the categories that we're selling in our marketplace, you're seeing that we're doing a great job there of growing some of these categories where there's been pressure. John noted, if you just take apparel, apparel grew over 5% each of the 3 months of the quarter on a unit basis. So that's -- if you go back a year ago, that was an area that we were really pressured with. So Walmart is doing the things that it can to influence this. But I think what's happening here from a merchandise category mix is really more of a macro phenomenon than anything. Operator: The next question is from the line of Paul Lejuez with Citigroup. Paul Lejuez: Doug and John, congrats. We'd love to hear a little bit about elasticity. Any early signs based on price increases that you've taken, which categories you might be seeing greater elasticity or lower elasticity than you might have thought? And then just a quick one, maybe you can give an update on marketplace. Number of SKUs that you're at right now, where do you expect that to go next year? And how important will marketplace be this holiday season compared to the first 3 quarters of the year? John Rainey: Well, I was just going to address elasticities. It really differs by category, but maybe one category that is a little more pronounced for us is electronics, toys and seasonal, where we've seen some higher AURs and think of that being in the high single digits and units are kind of in the flattish range. So that's been one where I think you've seen higher price increases overall, where other parts of the basket we've done, we've not had the same pressure from tariffs, and we've been able to mix out the baskets in a way that have minimized the impact on consumers. John Furner: And on marketplace specifically, it is important that we -- as we've noted, that customers can find a really broad assortment at Walmart, whatever you're looking for. And we've been focused on ensuring that customers can trust us for a broad assortment. So we're still in that $500 million or north of range. It fluctuates month-to-month, quarter-to-quarter. But we're really focused on ensuring that now that we use things like AI to determine where their gaps in the assortment to ensure that customers can get their entire basket from us. And that could include whether it's an item for a specific event or part of a basket or regimen, we want to make sure that the assortments are complete. So over the next few quarters, we'll really be focused on ensuring that it's the right number of items and the right quality of SKUs that are listed in the assortment. Christopher Nicholas: Great innovation is so important, along with price and where we see growth in general merchandise, for example, and higher AUR items, it's where we see great innovation too. And I think we just need to keep our foot down on the gas on driving really great innovation with greater great items. Operator: The next question is from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh: Congrats to Doug and John. So I guess for me, the international side of your business, continued significant strength. It's trending above, I think, the algorithm that you guys laid out earlier this year. Just how do you feel about the sustainability of the top line momentum you're seeing in your key markets there? Kathryn McLay: Thanks for the question. So I think we've just seen really consistent results in international from a top and a bottom line -- or sorry, from a top line perspective. We took a moment in the first half of this year to invest into convenience and speed and into price, and we're seeing that kind of come back in this back half. So we continue to feel really strong about the top line trajectory that we have in international. And it's a mix of being in high-growth markets, like India and China, as well as really truly kind of maturing our omni playbook in other markets like Mexico and Canada and Chile. So really good things to say in international. Operator: Our final question is coming from the line of Chuck Grom with Gordon Haskett. Charles Grom: Congrats, Doug. Great career and John [indiscernible] when you ran Sam's Club. This what happened. So congrats to you as well. With greater visibility here on tariffs than a few months ago, have you made any changes to assortments for the holidays? And then one follow-up for John David. On the maximum fair pricing change in January, any idea how much that could potentially cap health and wellness sales, not necessarily for 4Q, but also into 2026? John Furner: It's John. Thanks for the question. No big changes on assortment for the holiday. I think many customers will follow-through traditions. I think many customers are looking forward to a great holiday. Throughout the summer, we did make some adjustments on the quantities that we decided to purchase and prioritize things like gifts or backpacks, back-to-school things for kids. We, in some cases, even increase though. So it was really more of a shift in the quantities that we bought, but no big change in assortment plans. John Rainey: And on maximum fare pricing, I believe that there's still information coming in on this in terms of which drugs they're applied to. So probably a little premature to give you a number on the impact. But overall, the health and wellness business is still going to continue to grow. It's been the part of our business that has seen the most growth over the last couple of years, and we still expect that. Operator: Thank you. At this time, this concludes our question-and-answer session. I'd like to turn the floor back to Doug McMillon for closing comments. Doug McMillon: Thanks, everybody. I really appreciate the relationships that we developed over the years. I appreciate how closely you follow the company, the pressure, healthy pressure you put on us, the critical thinking test you've given us and I think the company is better off because of your engagement and I just want to say thank you, all miss you guys. As it relates to the company, what a great business this is. In any environment, you've seen times when the customer has more money and how Walmart is well positioned and times when people are pressured, they come to us. And now the business is stronger in terms of our ability to make it more convenient to shop with us. I think that's been a big development. We're not just known for price, we're known for more than that now. And the runway looks like a long one to me. I have a high degree of confidence in the potential and what this company will deliver with John's leadership and with this leadership team, and I'll be cheering them on and helping in any way that I can. Thank you all. Operator: Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.
Operator: Good morning, and welcome, everyone, to Jacobs Solutions Inc.'s Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. On your telephone keypad. At this time, I would like to turn the conference over to Bert Subin, Senior Vice President, Investor Relations. Please go ahead. Bert Subin: Thank you, Audra, and good morning, everyone. Our earnings announcement and 10-Ks were filed this morning, and we have posted a slide presentation on our website which we will reference during the call. I would like to refer you to Slide two of the presentation for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Now let's turn to the agenda on Slide three. Speaking on today's call will be Jacobs Solutions Inc.'s Chair and CEO, Bob Pragada, and CFO, Venkatesh R. Nathamuni. Bob will begin by providing comments on the business, as well as highlights from our fourth quarter and fiscal year results and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end market trends, cash flow, balance sheet data, and our FY 2026 outlook. Finally, Bob will provide closing remarks, then we will open up the call for questions. With that, I turn it over to our Chair and CEO, Bob Pragada. Bob Pragada: Good day, everyone, and thank you for joining us to discuss our fourth quarter and fiscal year 2025 business performance. We delivered strong results for Q4 and are pleased to end FY 2025, the first year of our five-year strategy, on a positive note. Both the quarter and the fiscal year, we drove strong double-digit growth in adjusted EPS supported by solid revenue growth and robust margin expansion. Our consolidated backlog grew 6% to $23.1 billion, setting a new record to close out the year. PA Consulting capitalized on strong demand, delivering double-digit revenue and operating profit growth in 2025. Overall, we are very pleased with our results and we see great runway as we enter FY 2026. Turning to Slide four, we provide a detailed overview of our quarterly and full fiscal year results. We grew Q4 adjusted EPS by 28% year over year, and this was primarily driven by 6% net revenue growth, a record quarterly adjusted EBITDA margin of just over 14.4%, and better below-the-line performance. For the full year, we grew adjusted EPS 16%, largely as a result of mid-single-digit net revenue growth and strong margin expansion. We have also seen a solid EPS tailwind from share repurchases, which we increased significantly during FY 2025. Reflecting on our expectations, last quarter we guided to an adjusted EPS range of $6.00 to $6.10 for FY 2025, and we were able to finish the year above the high end of that range at $6.12. Turning to Slide five, I would like to highlight a few notable infrastructure and advanced facility project awards from Q4. These wins highlight the power of our strategy to redefine the asset lifecycle as we prioritize expanding our addressable market with core clients. We continue to see a positive outlook in water and environmental, particularly in the water sector, which remains one of our most resilient and high-growth areas of our portfolio. Our full lifecycle delivery model, enabled by deep domain expertise and leading digital capabilities, helps our clients address aging infrastructure, scarcity issues, and regulatory changes around the world. Demonstrating the trust our clients place in Jacobs Solutions Inc. to deliver long-term outcomes, we extended our operational intelligence agreement with United Utilities, the largest listed water company in the UK, through 2030. Using our AI-powered Aqua DNA platform, we are helping modernize utility operations and deliver measurable sustainable benefits for millions of people. In the life sciences and advanced manufacturing end market, data centers and life sciences continue to be two of the fastest-growing sectors in our portfolio. Additionally, revenue growth in these sectors is now being complemented by new semiconductor investment. As an example, we were awarded the design for a commercial-scale fabrication facility by a confidential customer. Our scope encompasses the design and engineering of a greenfield semiconductor manufacturing plant along with its related infrastructure and manufacturing support facilities. We are also seeing strong demand across the critical infrastructure end market, with all verticals performing well during Q4. In the UK, together with PA Consulting, we were named to the Crown Commercial Services Management Consultancy Framework. This appointment expands our role advising public sector clients on delivering cleaner, smarter infrastructure and maximizing value from public investment across transportation, cities, defense, and clean energy. In the US, we continue to build on strong momentum in the transportation sector. In New York, we were selected by the MTA, North America's largest transportation network, to deliver the 14-mile transit line connecting Brooklyn and Queens. The project will enhance mobility, reduce travel times, and promote sustainable transit-oriented growth for New York City communities. In summary, these awards reflect our continued momentum and highlight the broad secular tailwinds driving growth across our business. As I reflect on FY 2025, we met or exceeded all of our annual targets, continue to drive robust bookings, stay true to our disciplined capital returns policy, and now enter year two of our strategy cycle on track to achieve our long-term outlook. Now I will turn the call over to Venk to review our financial results in further detail. Venkatesh R. Nathamuni: Thank you, Bob, and good day, everyone. During fiscal year 2025, we delivered on our commitment to drive profitable growth, which consisted of double-digit growth in both EBITDA and adjusted EPS, as well as a 7% free cash flow margin. We are demonstrating our differentiated business model through strong margin expansion, and we see continued opportunity to increase our margin profile moving forward. Now please turn to Slide number six, I will walk through our results for Q4. We finished fiscal year 2025 on a strong note. In the fourth quarter, gross revenue increased 7% year over year, and adjusted net revenue, which excludes pass-through revenue, grew by 6%. Q4 adjusted EBITDA was $324 million, growing 12% year over year. Our adjusted EBITDA margin during Q4 came in strong at 14.4%, which is an increase of 79 basis points versus the same quarter last year. As a result, adjusted EPS rose to $1.75, a 28% increase year over year. Our disciplined cost management contributed to a new record adjusted EBITDA margin both during the quarter and for the full fiscal year. And we are well positioned to build on this momentum in fiscal year 2026. Consolidated backlog was up 6% year over year to a record $23.1 billion, putting our trailing twelve-month book-to-bill at 1.1 times. Notably, gross profit and backlog increased over 13% year over year during Q4, highlighting our strong sales performance. Moving on to Slide seven, I will recap fiscal year 2025 results. Fiscal year 2025 total gross revenue increased about 5% year over year, with adjusted net revenue rising more than 5%. Revenue growth and higher margins resulted in adjusted EBITDA and adjusted EPS increasing by 14% and 16%, respectively. We are pleased to end fiscal year 2025 in a strong position with mid-single-digit organic revenue growth, mid-teens adjusted EPS growth, and a backlog that sets us up well for the future. Regarding our performance by end markets and infrastructure, and advanced facilities, let's now turn to Slide number eight. At a high level, net revenue growth across our three end markets was fairly consistent in fiscal year 2025, with water and environmental and life sciences and advanced manufacturing growing just over 4%, and critical infrastructure about 6%. Focusing on Q4, net revenue increased more than 9% year on year in Critical Infrastructure. Our strong growth was a function of several key programs ramping up in the transportation sector, and continued momentum in energy and power with favorable trends in both the US and internationally. As we look ahead, we believe continued tailwinds in the transportation and energy and power sectors will be underpinned by improvement in cities and places. In our life sciences and advanced manufacturing end market, net revenue grew a little more than 5% in Q4, a modest improvement from Q3. During the quarter, we saw strong net revenue growth in the life sciences and data center sectors, but had tougher comps in the industrial portion of the portfolio. Positively, we are on track to fully lap these tougher comps and are seeing semiconductor programs ramp up, which we believe will benefit our setup in fiscal year 2026. Net revenue for our water and environmental end market was roughly flat year on year in Q4. Demand across this end market was mixed, with continued strength in the water sector offset by softer revenue performance in environmental, particularly in the US, where both public and private clients moderated spending more than anticipated. Looking ahead to fiscal year 2026, we expect water to remain a key growth driver, and on the environmental side, opportunities are reemerging as we position for a return to growth. In summary, we are seeing favorable trends in each of our end markets and believe we are entering the new fiscal year with solid momentum. Moving on to Slide nine, I will provide a brief overview of our segment financials. In Q4, Infrastructure and Advanced Facilities operating profit increased 16% year on year, with a modest tailwind from FX. In fiscal year 2025, operating profit increased 13% year over year and on a constant currency basis. Infrastructure and advanced facilities results were aided by both revenue growth and margin expansion. Now moving to PA Consulting's performance. Revenue increased 10% year on year in Q4. This contributed to a 17% increase in operating profit, or 13% in constant currency, on a strong operating margin of 23%. PA continued to benefit from rising demand for services in the public and national security sectors, driving double-digit growth in their backlog. For fiscal year 2025, operating growth for PA was in line with Q4 performance. As we look ahead to fiscal year 2026, we anticipate PA's revenue growth will be similar to our consolidated growth rate. Turning now to Slide 10, we provide an overview of cash generation and our balance sheet. For fiscal year 2025, free cash flow generation came in at $607 million. As a reminder, this does not add back the impact of restructuring or other charges. Good free cash flow generation and our high-quality balance sheet enabled us to repurchase $754 million of our shares and pay out $153 million in cash dividends. As a result, we returned approximately 150% of our free cash flow during the fiscal year. Adding in our dividend of Momentum shares distributed in May, we returned $1.1 billion to shareholders in fiscal year 2025, a company record. We also paid down debt, ending the year with $1 billion in net debt, yielding a net leverage ratio of 0.8 times on LTM adjusted EBITDA, which is below our 1.0 to 1.5 times target range. Our balance sheet strength supports continued investment in the business, along with continued returns to shareholders through share repurchases as well as long-term dividend growth. Our commitment to return capital to shareholders is evidenced by a recently approved $0.32 per share dividend, representing 10% year-over-year growth, and our material increase in share repurchase activity this year. Finally, please turn to Slide number 11 for our fiscal year 2026 outlook. We expect adjusted net revenue to increase 6% to 10% year over year, adjusted EBITDA margin to range from 14.4% to 14.7%, adjusted EPS to range from $6.90 to $7.30, and free cash flow margin, which is free cash flow divided by adjusted net revenue, to be in the range of 7% to 8%. Notably, our outlook for fiscal year 2026 implies 16% year-on-year growth in adjusted EPS at the midpoint. We provide relevant assumptions on the right side of the page to help with your modeling. One item to be mindful of is the fact that fiscal year 2026 will include an extra week during Q4, adding just over a point and a half to our net revenue growth rate. Additionally, as it pertains to Q1, we are forecasting 5.5% to 7.5% net revenue growth and a low to mid-thirteen percent margin. Note that Q1 is typically our seasonally slowest quarter due to holiday timing. In summary, fiscal year 2025 was a great first year in our strategy cycle. We executed to our 13.9% EBITDA margin target, which puts us well on our way to reaching 16% by fiscal year 2029. We grew the top line mid-single digits, demonstrating resilience in a dynamic macro environment. In addition, we returned record amounts of capital back to our shareholders. As we enter fiscal year 2026, we believe we are very well positioned to build on our fiscal year 2025 performance. With that, I will turn the call back over to Bob. Bob Pragada: Thank you, Venk. In closing, we are proud of our continued strong execution in FY 2025. With a record backlog, expanding margins, and healthy demand across sectors we serve, we are entering FY 2026 with significant momentum. Operator, we will now open the call for questions. Operator: Thank you. We will now begin the question and answer session. Keypad to raise your hand and join the queue. We ask that you please limit yourself to one question and one follow-up to allow everyone an opportunity to ask a question. We will take our first question from Sangita Jain at KeyBanc. Thank you for taking my questions. Can I start with the federal government shutdown? And if you think that had any impact on your fiscal 2026 bookings to date? Bob Pragada: Fiscal 2026? Or '25? Sangita Jain: Well, the fiscal 2025 ended and the shutdown started. So I am trying to see if you had any impact in the early part of this year from the shutdown. Bob Pragada: No. We did not. The bookings trend was those awards in the federal government happened before the shutdown. So short answer is no, Sangita. Sangita Jain: Alright, great. And then can you give us an update on PA and how that process is unfolding? Bob Pragada: Sure. Sure. So our negotiations continue and I would say they are progressing. We have said from the beginning that we would be making a decision on that on or before March '26. And we are on track to do so. Sangita Jain: Great. Thank you. Appreciate it. Bob Pragada: Thank you. Thank you, Sangita. Operator: We will move next to Andrew John Wittmann at Baird. Andrew John Wittmann: Yes, great. Thanks for taking my questions. I guess my first question is just on the water and environment portion of your business. Obviously, we saw some deceleration here, Bob. You mentioned the environmental business has been a little weaker. I was hoping maybe you could just drill into that. It seems like the water side is strong, but what was it about the environmental side that caused a little bit of softness? Would you tie that to anything? Maybe the administration change or something else? Venkatesh R. Nathamuni: And then what are the indications that you have today? You made some comments that you see that improving going forward, and I am just wondering kind of what that is based on. So you could drill in a little bit more there. Thank you. Bob Pragada: Yeah. Absolutely, Andy. Maybe just I will start with the positive. So the water sector continues to be strong. The pipeline is up double digits as well as our booking trends. So we still see high single-digit growth in the water sector moving forward into FY 2026 and beyond. And that is global, all major geographies are participating in that. In the environmental sector, kind of two dynamics that played out during the year, well, actually during Q4, accentuated in Q4. One was we did have a one-time event, a positive on last year's comp. So that was one. But from kind of the core of the business, the regulatory volatility right now within the environmental world has put a bit of a pause for our private sector clients. And so until those kind of settle down, our private sector clients are tending to pull back a bit of spend that we saw traditionally, and these are some of the larger industrials as well as chemical folks. On the public sector, it really was about disaster relief. The traditional, the kind of the switch of FEMA funding and application down to the state level. There was a bit of a pause on how the states were going to, especially after the O triple B was passed, how states were going to reorganize their budgets. And so we saw some delays in awards as well as a pullback in FEMA. Andrew John Wittmann: Was the FEMA the one-time item for the prior year, or you are saying that affected this quarter? Bob Pragada: No, prior year, the Q4 of FY 2024 one-time event was a federal agency outside of the US that we had a one-time event. Andrew John Wittmann: Got it. Okay. And then just for my follow-up, maybe for Venk. Saw the guidance here on free cash flow. Just the bridge, you are now doing it a percentage of revenue, but if you convert it back to the old way of doing it, it is under the 100% targets. And I was wondering what the items in the '26 outlook are that bridge you because obviously the business fundamentally is equipped to deliver at a 100% or greater. And so that means something is kind of unusual or included in this number that we should know about it. I thought maybe you could expand on that a little bit more. Venkatesh R. Nathamuni: Yeah. Thanks, Andy, for the question. I would say, you know, first of all, I would point out that as we stated at Investor Day, cash flow margin of 10% target, we are well on track for that. 7% this year and we are guiding to between 7-8%. What we have imputed in that guidance is that there is a kind of a one-time tax event unrelated to our continuing operations that we are expecting sometime in '26. So we just want to, you know, give transparency to that. And then on top of it, you know, as Bob alluded to in response to Sangita's question, you know, we are expecting resolution on our combination with PA, and we are just assuming some cash expenses associated with that. So those are the things that we want to factor in. We feel really good about our free cash flow margin expansion. And we think that will be a true indicator of the efficiency of business. And you are absolutely right. Our efficiency has been improving and we see continued growth in that in fiscal 2026 and beyond. Bob Pragada: Okay. Thank you. Andrew John Wittmann: You are welcome. Operator: We will move next to Jamie Cook at Truist. Jamie Cook: Hi, good morning and congrats on a nice quarter. I guess my first question with regards to the margin performance in Infrastructure and Advanced facilities, we saw a nice improvement there. Anything unusual in the margins and how to think about cadence of margins in that segment as in 2026? And then my second question, Bob, to you sort of more strategically, your peer, one of your public peers, came out this week talking about their competitive advantage on AI and what that means for margin for them over the longer term. You have similar business models. Just wondering how you are leveraging AI? And is there a margin opportunity outside of what you have already announced given your peers came out with much more bullish margin targets longer term? Thank you. Bob Pragada: Great. Thanks, Jamie. On the first part with regards to margins in I and AF, I will let Venk take that and then I will address the AI question. Following. So Venk, please. Venkatesh R. Nathamuni: Great. Hey, Jamie, thanks for that comment. So I would say in terms of our margin performance in I and AF, continues to go up into the right, really solid performance across the entirety of our business. Also a good job of improving our cash collections and so forth. I would say as we guided to in the prepared remarks, when it comes to Q1, there will be a sequential slowdown and a seasonal slowdown. By a couple of factors. One is fringe as it relates to things like medical insurance costs and health benefits that typically have an impact in Q1, but you get the recovery in subsequent quarters. So we will see a linear progression in margins throughout the rest of fiscal year 2026. But we wanted to make sure that we were transparent in terms of how to model it for fiscal Q1. So that is number one. And as it relates to the overall free cash flow margin target of 7% to 8%, imputed in that as I mentioned earlier is the fact that we are continuing to see operational improvements in the margin performance combined with some of the one-time items we expect to happen in fiscal 2026. And all of that is imputed in our margin guidance. Bob Pragada: And then on the AI question, Jamie, we have been very vocal about this since dating all the way back to 2021. In fact, if you remember in our '19 and 2022 strategy, we and it was the origins of the partnership with PA Consulting as well. This is a journey we have been on for over five years. How it has transpired? We see it as an accelerant, a differentiator, a space that we continue to use to primarily provide greater solutions externally for our clients. And that has realized itself, and these are things that we have highlighted in the past. All the way back to 2021, being able to deliver a transformational effort for Intel as they were expanding their business model into a foundry model back in 2021 that was done through machine learning. And digital replication. That then led to our partnership with Palantir and all of the water platforms that we have developed since 2022 in reference one in Aqua DNA as well as intelligent O and M that is really creating differentiated position to gain efficiencies for our clients. Most recently, we announced a partnership with NVIDIA, where we are utilizing AI enablement platforms as well as digital cleaning technology. To simulate gigawatt plus type data centers and creating a reference design for NVIDIA clients and even going all the way up to today where streetlight data is providing unbelievable transportation analytics for major metropolitan areas around the country. In fact, over 26 state DOTs are utilizing the Streetlight platform. And so kind of you look at that portfolio and it is creating a differentiated position for growth in the market. And it is contributing to our margin expansion as we continue to go up the value chain. Jamie Cook: Thank you. Congrats on a nice quarter. Bob Pragada: Thank you. Operator: We will move next to Andrew Alec Kaplowitz with Citi. Natalia Bach: Hi. Good morning. This is Natalia on behalf of Andrew Alec Kaplowitz from Citi. Bob Pragada: Andrew? Natalia Bach: Congrats on the quarter. Maybe first question I will start off with, you cited that transportation was a contributor to growth. I am just curious how the funding visibility under IIJ is progressing? Are you seeing any delays or accelerations as new money flows through the states? Bob Pragada: We are not. Not. That continues to be a catalyst. But I would say, you know, that that transportation number we are seeing globally. It is not just in the US. But nice growth that we experienced in Europe, Middle East as well as in Australia and New Zealand. So it is something where and again, it goes to the previous question too, differentiated position utilizing strong transportation analytics and driving mobility concerns. So it is I would say, IHA is a component. Budget clarity in the UK is another component. Growth in the Middle East as well as Australia continues to be a really strong market for us in the transportation space. Natalia Bach: Got it. That is super helpful. Maybe just continuing on the strength that you see globally in transportation. More maybe more so just curious about the regional performance across your end markets, which regions outperformed expectations and which ones are you expecting maybe to be a little into 2026? Sunny? Bob Pragada: Yeah. We are seeing growth across the board, Andrea. It is our business domestically in the US has got some strong tailwinds behind it. But we are not seeing let me say it in the positive. Our business outside the US and internationally is in growth mode. We have got double-digit growth going on in the Middle East. Europe is going through a nice recovery. And Southeast Asia and Australia and New Zealand are really being buoyed by strong transportation and water growth. So it is pretty uniform for us across the globe. Venkatesh R. Nathamuni: And if I could add to just what Bob said, I mean, that is true of the PA business as well. We are seeing some good solid momentum in the PA business, especially in the UK and Continental Europe. Natalia Bach: Got it. Thank you. Helpful. Congrats on the quarter. Bob Pragada: Thanks. Venkatesh R. Nathamuni: Thank you. Operator: We will go next to Steven Fisher at UBS. Steven Fisher: Thanks. Good morning. Wonder if I could just follow-up on Jamie's on the margin in terms of bridging the expansion in margins between fiscal 2025 and fiscal 2026. You can kind of be a little more specific on some of the major puts and takes, be it cost savings, operating leverage, any specific investments that you are making to support AI and digital, anything that you can help us sort of bridge within? Thank you. Venkatesh R. Nathamuni: Yeah. Thank you, Steve. So as we mentioned, in the prepared remarks, fiscal 2025 solid performance in terms of 110 basis point margin expansion and we are guiding for between fifty and eighty basis points for fiscal 2026. A lot of what happened in fiscal 2025 was driven by some of the operating leverage and cost actions as well as some early improvements in margin. As it relates to gross margins, we see a much bigger contribution especially on the gross margin line going forward, by three things that we outlined at Investor Day. Global delivery being a big component of it. As we look at the mix of business across the globe, we see that there is tremendous adoption of global delivery across our various end markets. So that should be a meaningful driver of margin expansion for us this year. And then we talk about commercial models and how, you know, with the adoption of AI that is increasing, across the multitude of end markets that Bob talked about that also makes a meaningful contribution to margin expansion. So I would say multiple levers on the gross margin front. And then we are committing to maintaining our operating leverage, meaning we want to grow our OpEx at a slower pace than our revenue growth. And that is driven by both efficiencies as well as what we do internally as well as externally for our clients. So a multitude of factors, we feel really good about our margin expansion story and we are guiding for 65 basis points at the midpoint. After 110 basis point expansion in fiscal 2025. Steven Fisher: Very helpful. Thank you. And then Bob maybe on the data center side, since I think you guys have a pretty interesting perspective and role in the industry. Being on the front end of things. I am curious if you could talk about the changes in the assignments that you are getting this year versus a year ago. What are your customers you that is different this year? What are the proud of project is different? Is there anything more international or more domestic? Any changes there? Just curious your perspective on how things are different entering '26 versus '25? Bob Pragada: Sure. Well, let me start with the geography and then go to how our scope is expanding in that area. We are seeing interest now in data center starts in the Middle East and in Europe. In addition to the US. The US continues to be the strongest of the three. So but it is expanding into Europe, into the Middle East. As well. From a scope standpoint, our scope has traditionally been within the white space. The white and the gray space are now merging. And so this especially the work that we are doing now for NVIDIA is translating into more innovation happening within the server rack in that white space area. And then broadly, solutions around the power requirements behind the meter. As well as reclaimed water that we are expanding our scope on that front too. So all of that put together has really been a net benefit. Just another data point, Steve, in the last quarter, our pipeline in the data center space has gone up 5x. And so we are actually being selective on how we deploy that talent and growing that talent not just in the US but in the Philippines and in India as well. Steven Fisher: Very helpful. Thanks a lot. Operator: We will go next to Michael Stephan Dudas at Vertical Research. Michael Stephan Dudas: Good morning, gentlemen. Venkatesh R. Nathamuni: Morning, Mike. Michael Stephan Dudas: Bob, maybe tailing off your last comment on pipeline, which is important. Maybe you could share, you have put out, I guess, in your investment, a two-year pipeline outlooks and you of the segments, maybe you can refresh on that, how that looks today versus a year ago. What areas should we be looking at as monitor on bookings and progress as the year goes through? Is there a certain couple areas? I mean, just touched on some of them, but well, for the pipeline and whether the conversions are going to happen sooner rather than later that might drive the fixed percent to 10% range of the 26 numbers? Bob Pragada: Sure. Maybe I will kind of segregate it into two categories. One, by sector and then second by geography. By sector, I would say the fastest growing pipelines and I can quote some numbers here in the data center world just mentioned pipeline is up 5x. In the semiconductor world, we are seeing more growth there after some flatness over the course of last year. And it is really centered around high bandwidth memory for the American client. In the US, semiconductor pipeline is up 20%. Life sciences continues to be strong. And in all those areas, that we mentioned before. That is really been driven in the US. That pipeline is up 50% and the water sector. Water sector continues to be a strong sector for us globally and that is up 50%. So overall, the pipeline is looking really, really strong as we go into FY 2026. The reason why I mentioned those four sectors is because that is where we will see fastest conversion of that pipeline. In 2026 and in early 2027. From a geography standpoint, it is the Middle East. You know, we just announced the award for a new Merabah, specifically the Mukab component of that. That is a huge really good job for us. We are now on the Expo and we have got a few opportunities at Abu Dhabi and if you had rail that could convert here shortly. So across the Middle East region, we are seeing good growth leading up to not just the Expo but also the World Cup coming up too. Michael Stephan Dudas: Took me the visit in Washington to speak, from the Saudi certainly can add to that visibility, I would assume. Venkatesh R. Nathamuni: It did. It did. Second yeah. Michael Stephan Dudas: Course. The second question, Venk, just as we think about cadence through 2026 on free cash and share repurchase, just 2025 had a lot of opportunistic one-time issues. But how do we think about as you allocate that cash relative to share repurchase and whatever, maybe target on relief or what have you as we look through '26? Venkatesh R. Nathamuni: Yeah, Mike. Thanks for the question. So on I will answer the margin question first, which is and as we guided to expecting a linear progression in margins, Q1 being probably the slowest in terms of margins and then a steady increase right through the rest of the year. Such that we feel good about the 50 to 80 basis points for the full year. As it relates to our use of cash, as we pointed out, our net leverage ratio is right now at 0.8x. We do want to maintain the optionality for additional deployment of cash for a potential increase in our stake in PA. As we have been stating all along. But outside of that, we want to be regular buyers of our stock. We truly believe in the value of being predictable in terms of buying back shares. And we will do it at a regular quantum. And it will not be at the same level as it was last year 150%. But we made the commitment at Investor Day to return at least 60% of our free cash flow in the form of share repurchases and dividends and we are committed to that. Bob Pragada: Excellent. Thanks, John. Michael Stephan Dudas: Thank you. Operator: And we will take our final question from Jerry Revich at Wells Fargo. Jerry Revich: Yes. Hi, good morning, everyone. Kurt. Thank you. Hi. Given the top line outlook you have for the year and Uvenk, what you shared for the first quarter, you could be exiting if you hit the high end of the range. With, call it, 13% type pipeline growth in the fourth quarter. Can you just talk about if you do hit the high end of the range given the color you provided earlier, Bob, which end markets I think we need to see that pipeline turn into bookings if we are talking about the high end of outlook being feasible and exiting at that teams growth rate in the fourth quarter if that plays out? Venkatesh R. Nathamuni: Yes. Jerry, I will take the first part of the question and then Bob can add a lot more color. I would say in terms of the sequential nature of the growth profile as well as the margin profile, you expect we expect to see, you know, continued momentum right through the year. And as we stated, Q4 is the one which will have the extra week. So that will have an extra oomph, if you will, in terms of both revenue contribution as well as margin contribution. But in terms of the end markets, it is pretty broad-based and maybe Bob can add more color on how we expect that to play out? Bob Pragada: Yes. The ones that would drive the high end of the range, Jerry, would be life sciences and data centers clearly. And really, that is a matter of those sectors moving at pace. That would not have to be accelerated. Just need to move at pace. And that would be a big contributor. We are seeing semiconductor fabrication facilities start to move. And so if that were to accelerate, that would definitely be a tailwind. Momentum, I think on Citi's question with regards to transportation that international transportation market would provide some momentum as well. And then major prospects, we are seeing major prospects in cities and places in the Middle East, but also we are now starting at the LA Olympics as well as FAA and a few other kind of larger initiatives that would drive the higher end. Jerry Revich: And then Bob, on data center specifically, you mentioned a fivefold increase in that pipeline for you. Obviously, that market is very hot, but I do not think it is 5x. Are you folks expanding the scope of what you are doing within data centers? Or is it people are looking further out to lock in services? Can you just expand on that fivefold comment? And if you are willing to share off of what base from a Jacob's standpoint? That would be helpful. Bob Pragada: Yeah. Just to put in perspective, it is about a $200 million business for us today. And over time, I will not be specific on time, that business could be as big as our life sciences business today in a few years. So that is kind of where it is headed. I would say it is across the board. It is hyper scalers. It is what we call kind of the neo cloud providers as well as multi-tenant players as well. And it is in just sheer numbers of people that are coming into the market. Our scope has expanded from a content standpoint. Going within the battery limits of the data center into the water requirements as well as power needs. And that is a nice kind of adjacency with our energy and power group. And then alternative delivery. So similar to what we do in the life sciences sector where we as well as in the water sector where we do not just design but program management for the delivery of the facility. We are now in that mode in the data center space. As well. Jerry Revich: Super. Thank you. And anything you could do to improve traffic in the New York area? A lot of us on the call would be grateful. So everyone. Okay. Bob Pragada: We are working on it, Jerry. Operator: And that concludes our Q and A session. I will now turn the conference back over to Bob Pragada for closing remarks. Bob Pragada: Well, thank you. Thank you everyone for joining our earnings call. We look forward to engaging with many of you over the coming days and weeks as we go on the road. And I hope all that are celebrating the US Thanksgiving have a happy holiday. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Construction Partners Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you. You may begin. Rick Black: Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review fiscal fourth quarter and year-end financial results for fiscal 2025. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today, 11/20/2025. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. I would also like to remind you that statements made in today's discussion are not historical facts, including statements of expectations, or future events or future financial performance, are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to our earnings press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. Reconciliations to the nearest GAAP measures can be found at the end of our earnings press release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. And now I would like to turn the call over to Construction Partners' CEO, Jules Smith. Jules? Jules Smith: Thank you, Rick, and good morning, everyone. We appreciate you joining us on the call today. With me this morning is Greg Hoffman, our Chief Financial Officer, and Ned Fleming, our Executive Chairman. I'd like to begin today by thanking the more than 6,800 employees in our family of companies for their hard work and dedication in fiscal 2025. A truly transformational year at CPI. Early in the year, we entered the states of Texas and Oklahoma through strategic platform acquisitions, and in May, we established a platform company in Tennessee. We also acquired two substantial subsidiary brands in the dynamic markets of Mobile, Alabama, and Houston, Texas. These five acquisitions, along with organic growth of 8.4%, transformed our top line with 54% total revenue growth. Even more importantly, we transformed our bottom line with a 92% increase in EBITDA year over year and a record EBITDA margin of 15%. Finally, we ended fiscal year 2025 with a record project backlog of $3 billion. Our people and the culture they create and maintain are the key to our business and the primary differentiator for CPI in our more than 100 local markets, and as a buyer of choice for new acquisitions. As a family of companies, we strive to live out our core values: family and respect, which create an incredible place to work together each day. In addition, our growth strategy delivers on our core value of opportunity by providing numerous pathways for teammates to advance their careers and build better lives. Our final core value is excellence, the daily challenge to do ordinary things extraordinarily well. And our entire team truly delivered excellence in 2025. Turning now to the New Year, I'm pleased to report that fiscal year 2026 has commenced at full speed with two large and significant acquisitions completed in the month of October. On October 20, we announced the acquisition of P and S Paving in Daytona Beach, Florida. P and S has dominant market share in a very fast-growing part of our country, the East Coast of Florida. They're led by a great management team, Tim Phillips and Curtis Long. Under their leadership, we are well-positioned to grow organically north and south along Florida's dynamic East Coast. P and S is a great example of our strategy to get into the right markets with the right partner. Now let's shift and talk about Texas. We began fiscal 2025 with the acquisition of Lone Star Paving, which was clearly a big step for CPI to enter Texas. Lone Star is a platform company that has an excellent management team who is ready to take advantage of the growth opportunities in the fastest-growing state in the country. In August, we entered the Houston market with the Durwood Green acquisition. Durwood Green is led by an excellent management team whose President, Brad Green, along with Jonathan and Daniel Green, are all third-generation leaders and owners of the company. The Houston Metro Area population is more than many states. In addition, the geography is broad, and its growth rate is number two in the country. Again, we invested in the right market with the right partner. In October, we were able to significantly expand our Houston operation under Durwood Green by acquiring eight hot mix asphalt plants and construction crews and equipment from Vulcan Materials. This transaction builds scale in the market and provides the ability to have even more throughput and margin at the liquid asphalt terminal in Houston. In the span of three months, we entered and then tripled our relative market share in Houston, creating an excellent opportunity to grow margins in that market. Last month, on October 22, we hosted our second-ever Analyst Day in Raleigh, North Carolina. The webcast and presentation from that event are still available on our site. During our presentation that day, we reported that CPI eclipsed the Roadmap 2027 goals set forth in our five-year plan just 24 months prior. We achieved our goals two years earlier than planned, and we felt it was important to provide updated goals to the market. A five-year strategic plan called Road 2030. Same strategy just as it was for Roadmap 2027. Road 2030 positions CPI for continued growth and margin expansion. After a 23% budgeted growth year in 2026, we target to double the company again to more than $6 billion in revenue by 2030. We expect to expand EBITDA margins by 30 basis points in fiscal year 2026 and 30 to 50 basis points annually thereafter, reaching a 17% EBITDA margin by the end of the plan period. With margins expanding and the top line compounding, our adjusted EBITDA is projected to grow from $423 million in fiscal year 2025 to more than $1 billion by 2030, an 18% compound annual growth rate. Road 2030 more than doubles the size of our company while staying in the Sunbelt reflects the strength of our business model, the demand across the Sunbelt, and the opportunities we continue to unlock through pursuing both operational excellence and strategic growth initiatives. Looking ahead to 2026 and supporting our five-year plan, our four macro trends that you've heard us talk about but they're still powerful, and we believe will continue to drive growth for our company. The first is the continued migration to the Sunbelt that has accelerated since COVID. Both people and businesses moving to CPI states. This drives demand for private construction, including not only factories and corporate campuses but numerous data center projects. That CPI is well-positioned to build out a complete site infrastructure. As the private economy grows, our states are making sure that public infrastructure investment keeps up with the growth. This week, I attended a panel discussion of Sunbelt state governors talking about the importance of infrastructure staying ahead of the growth and the proactive measures they were taking to successfully support and fund the infrastructure of a growing economy for the foreseeable future. The second macro trend that is driving this growth is the reshoring of companies moving their manufacturing facilities and business to the Sunbelt because they want to strengthen their supply chains and avoid tariffs. This reshoring trend in America will mean continued growth in the Sunbelt, and CPI is well-positioned to build those projects. The third macro trend is related to funding. Both the federal and state governments are investing in infrastructure, and that's going to continue. We see strong public contract bidding throughout our eight states and over 100 local markets. Expect contract awards in FY '26 to increase approximately 15% over FY 2025. This is particularly true for the small recurring maintenance projects that represent a large majority of the company's work. Supporting this strong environment are healthy state infrastructure budgets, including many supplementary state programs as well as local city and county infrastructure programs and the IIJA federal program funds that will still take a few more years to be spent. On Capitol Hill, both houses of Congress continue to work with Secretary Duffy on the five-year reauthorization of the surface transportation program. We expect this bill to be voted on by Spring as this administration continues to prioritize hard infrastructure investments and decreased permitting delays, necessary to support a growing economy. And the final trend is part of our acquisition strategy. Which is we operate in a very fragmented industry of local market players composed primarily of family-owned companies. And this industry is going through a generational transition. As many private owners are getting to retirement age, CPI's opportunity to have conversations with sellers throughout the Sunbelt continues to grow. Before turning the call over to Greg, to review the financial results for FY 2025, I want to emphasize that as we begin in fiscal year, we remain focused on executing our record backlog in the field and evaluating growth opportunities throughout our Sunbelt footprint. We also remain focused on the crucial long-term challenge of attracting and retaining the best workforce. We will continue to create a competitive advantage by providing our employees with both attractive career growth and a distinct family of companies culture. At CPI, we know that our people are the key driver to grow our business and create outstanding shareholder value. I'd now like to turn the call over to Greg. Gregory A. Hoffman: Thank you, Jules. Good morning, everyone. As Jules mentioned, we had a strong finish to our fiscal year with a great fourth quarter that represented revenue of $900 million, an increase of 67% compared to the same quarter last year, of which 10.4% was organic revenue growth. Adjusted EBITDA in Q4 was $154 million, which was twice as much as Q4 last year. Adjusted EBITDA margin for Q4 was 17.1%. Now I will review our key performance metrics for the fiscal year before discussing our outlook for fiscal 2026. Revenue was $2.812 billion, an increase of 54% compared to last year. The breakdown of this revenue growth for the year was 8.4% organic growth and 45.6% acquisitive growth. Gross profit in fiscal 2025 was $439.1 million, an increase of approximately 70% compared to last year. As a percentage of total revenues, gross profit was 15.6% compared to 14.2% last year. General and administrative expenses as a percentage of total revenue in fiscal 2025 decreased to 7.1% compared to 8.1% last year. Net income was $101.8 million, an increase of 48% compared to last year. Adjusted net income was $122 million, an increase of 73% compared to fiscal 2024. Adjusted EBITDA was $423.7 million, an increase of 92% compared to last year. Adjusted EBITDA margin was 15%, compared to 12.1% in fiscal 2024. You can find GAAP to non-GAAP reconciliation of net income and adjusted EBITDA financial measures at the end of today's earnings release. Turning now to the balance sheet. We had $156 million of cash and cash equivalents and $303.5 million available under our credit facility at fiscal year-end, net of a reduction for outstanding letters of credit. As a reminder, on June 30, we amended our credit agreement by providing for a total facility size of $1.1 billion consisting of a term loan in the amount of $600 million and a revolving credit facility in the amount of $500 million. We utilized the proceeds from the increased term loan to pay down the then-outstanding balance on the revolving credit facility, realizing the full availability on the facility as of June 30. In addition, the amendment extended the facility maturity date to June 2030. As of the end of the quarter, our debt to trailing twelve months EBITDA ratio was 3.1 times. We remain on pace with our strategy of reducing the leverage ratio to approximately 2.5 times by late 2026 to support sustained profitable growth. In fiscal 2025, cash flow from operations was $291 million, up from $209 million in fiscal 2024. We continue to expect to convert 75% to 85% of EBITDA to cash flow from operations in fiscal year 2026. Capital expenditures for fiscal 2025 were $137.9 million, within the range we provided of $130 million to $140 million. We expect total capital expenditures for fiscal 2026 to be in the range of $165 million to $185 million. This includes maintenance CapEx of approximately 3.25% of revenue, with the remaining amount invested in high-return growth initiatives. Turning now to our outlook. As we reported last month, here are the ranges for our fiscal year 2026. Revenue in the range of $3.435 billion. Net income in the range of $150 to $155 million. Adjusted net income in the range of $158.1 to $164.2 million. Adjusted EBITDA in the range of $520 million to $540 million. Adjusted EBITDA margin in the range of 15.3% to 15.4%. Consistent with historical seasonality, we anticipate the first half of the fiscal year to contribute approximately 40% to 42% of annual revenue and 30% to 34% of adjusted EBITDA. In the second half of the year, during our peak construction season, we expect to deliver the remaining 58% to 60% of revenue and 66% to 68% of adjusted EBITDA. Lastly, as Jules mentioned, we entered the New Year with a record project backlog of $3 billion at 09/30/2025. We have approximately 80% to 85% of the next twelve months' contract revenue covered in backlog. And with that, we will open the call to questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset. Our first question is from Kathryn Thompson with Thompson Research Group. Please proceed. Kathryn Thompson: Good morning. Jules Smith: Good morning. Kathryn Thompson: You've done a very nice job of meeting the financial goals that you outlined in your previous investor day and late 2030 goals out in late October. And part of that is M&A, which you talked about several acquisitions that you completed recently. So as you build momentum with your growth trajectory and consolidation of the market, could you talk a little bit more about what you're doing in terms of integration and maybe what's different today versus, say, five years ago as you're going down this growth path? In terms of smooth integrations? Thank you. Jules Smith: Yes, Kathryn, 2025, as you noted, was a transformational year for us. And a lot of that was the acquisitions we did. We've been busy, but the strategy that we talked about in October hasn't changed. We're gonna look for the right markets with the right partners. The sellers continue to be a generational consolidation. You know, one thing I will say has been busy this year. And Ned, who's with us, he's been right there with us on a lot of these acquisitions. So I'd love just to turn that question over to him and get his thoughts on just our acquisitions and strategy. Kathryn, thank you. Thank you for your support. I think that a couple of things start at the big picture. We've got a great team that really looks at all the acquisitions. They understand the strategic benefits of each acquisition. They know how to do diligence so that we end up generally knowing more about the business than the people we've purchased it from. They understand the organizational fit and the financial fit. So I think it all begins with having a really a from the opportunity standpoint, we see more opportunities today than we did five years ago. I think it's important to note that. I think that has to do with the generational transition that's happening. But the opportunities today, we actually, as we look at it through our acquisition working group, we see more opportunities now than we did five years ago, three years ago, and four years ago. And that in large part is directed because we have a great team that's out there in the marketplace that people trust. From an integration standpoint, we've always had a theory that if we buy the right companies that have a good cultural fit with management teams that are, I think, good listeners and good learners, that's easier to integrate. But the other thing that we've always done, and we're better at it today than we've ever been, is we've included people throughout the company in that integration. It's not just one group. These people will get to know people that they're gonna work with through the integration. They'll get to have people they can call to answer questions in the integration. So for us, I think not better at integration, it's smoother today than it ever was. It's also become a real honor for people to get to work on the integration team throughout the company. So you may have somebody that's gonna do the same position that you are as we acquire you that you'll get to know in the process, and you'll have somebody that actually does that job that you can call and get to know. The last piece of it is that Jules and Greg have done a terrific job of making sure that all the leaders of these businesses have gotten to know each other. They get together quarterly throughout the year to make sure it differs and with different focuses so that everybody knows each other. So when there's an issue or a problem, it's not just solved by corporate. It's solved throughout the organization. And that's been a real important piece of it as we've gone there. But I would just say I am so impressed with the team that Jules put together that acquires these businesses and how we've incorporated people throughout the company to integrate it. Greg and Jules are happy to talk more about that, but I think as a board, or to speak for the board, I would just say we see it being smoother and better than it's ever been, and we see more opportunities than we ever have. Kathryn Thompson: Thank you for that. It sounds like you've been building your muscle, had a good footprint, but also are building that muscle for integration with the companies you acquire. One follow-up question, then I'll hop back in the queue. Is just with, you know, the government was shut down for a regular amount of time, but just confirm did that impact your business? Where do you see it going forward in terms of how you plan your business? Thank you. Jules Smith: Yeah, Kathryn. The government shutdown, you know, we're glad that everything's over and we're back to normal. But the reality is it didn't really affect our industry because the funds go through the Highway Trust Fund. So we didn't really see any revenue impact or bidding impact for the forty days that the government was shut down. Kathryn Thompson: Okay. Perfect. Thanks so much, and best of luck. Jules Smith: Thank you. Operator: Our next question is from Tyler Brown with Raymond James. Please proceed. Tyler Brown: Hey, good morning, guys. Jules Smith: Morning, Tyler. Gregory A. Hoffman: Good morning, Tyler. Tyler Brown: Hey, Jules. I know you addressed it a little bit upfront, but what is the confidence level around getting to a vote on that reauthorization bill by spring? I'm just curious if you're hearing that from lawmakers. Just it sounds like there's some real momentum there, but just any other color would be really helpful. Jules Smith: Sure. Yeah. Tyler, the reality is, as we've often said, is the most bipartisan thing in Washington. So that continues to be true. In September, I would have told you that, and this is something I've heard from politicians on the hill, they were running ahead of schedule compared to where they historically are on the five-year reauthorization. They were well ahead of schedule. There was momentum. I think the government shutdown has gotten that lead back to where they normally are. So what I'm hearing is that both chambers are working on in committee the bill. They then will turn to, you know, what the pay fors. How they get it paid for, highway trust funds, the major thing, and then the question is how they make up the difference. They're working with this administration. You know, I've heard good things about just what this administration is prioritizing. They know that they need to spend the money wisely on infrastructure projects that are gonna support the economy. So from what I reported in my prepared remarks is just what I'm hearing is that they're now shooting for voting to be, you know, done this spring in anticipation of, you know, an October 1 new fiscal year that this five-year plan will start to fund. Tyler Brown: Okay. That is extremely helpful. Thank you for that. Greg, quick modeling or housekeeping item. But how much rollover M&A revenue should we be modeling just again based on deals that are done to date? And will those be neutral, accretive, or dilutive to margins broadly speaking? Gregory A. Hoffman: Yeah. So let's kind of break it down by 2025 acquisitions and then 2026 acquisitions. So the 2025 acquisitions will carry over about $240 to $250 million in revenue. And then acquisitions that occurred here in '26 will be another $200 million. And I would say that the combined impact of those are neutral to our current margin position and what we projected for '26. Tyler Brown: Okay. I would say so. The, you know, just as we said at our Analyst Day, Tyler, you know, the reason our margins have grown, you know, in addition to what our legacy business would have done, these acquisitions we made in 2025 had good margins. And I would say that, you know, we had continued to expect that the businesses we closed in 2026 will be the same way. Tyler Brown: Okay. Yep. No. Very helpful. And then just if I can squeeze the last one in here on cash flow. So I think it was a little bit slow maybe here late in the fiscal 2025. But it sounds like, Greg, you expect cash from ops to be, again, roughly 80% of EBITDA or in that 75% to 80% range. Right? Gregory A. Hoffman: Yeah. That's right. 75% to 85%. As a matter of fact, the last three years on average, were 80% when you total those up. You know, the positive '25 due to really great weather, really great performance. All also caused really large billings and large cash outflows. So, you know, the cash will come. It's just, you know, being pushed into the following year. Tyler Brown: Okay. Great. And then conceptually, and I know we'll get the detail in the K, but do you still expect to be kind of a de minimis cash taxpayer over the next few years? Is there any change in that big picture? Gregory A. Hoffman: No. There's not. You know, we talked a little bit about maybe in the last call, about the one big beautiful bill and what that did to our cash taxes. We talked that maybe that was, like, a $15 to $20 million dollar savings for us this year. And yeah, when you see the 10 K, you'll see that it was about $5 million in cash taxes where we thought it was gonna be higher because we projected maybe not having, you know, some relief there. But, obviously, we got it. And, yes, going forward, be more of the same. Tyler Brown: Okay. Alright. Thank you, guys. Appreciate it. Jules Smith: Thanks, Tyler. Operator: Our next question is from Michael Feniger with Bank of America. Please proceed. Michael Feniger: Yes. Thank you, gentlemen, for squeezing me in and taking my question. I apologize if I missed it. You guys have done some transformational M&A. Just Jules, is 2026 a little different in terms of the type of M&A? Is it more bolt-on versus platform? I guess the genesis of the question is, you know, is the focus on '26 to get that leverage to that two and a half by late '26, and then you rev up the M&A engine back up again? Or are you kinda trying to fly two planes at once? I think that's kind of the genesis of the question. You know, given some of the strong M&A you guys have done in the last year or so? Jules Smith: Yeah, Michael. Good question. I don't know if we're trying to fly two planes at once. That sounds a little dangerous. We're just trying to execute on our strategy. Yeah. Fair. But the reality is 2025 was a, when we say a transformational year, you know, that's not a normal M&A year. It was a great year. I mean, to do three plus platform acquisitions in one year, that's not typical. But we just saw the opportunities present themselves with Lone Star, Overland, and PRI. And so, you know, frankly, our guidance for 2026, some of this transformational year is carrying over and affecting our new year in a positive way. You know, for us to be growing 23% already. Our M&A strategy, we continue to talk with a lot of sellers. I would say right now, we're having conversations in all eight of the states we're in at different stages. We'll continue to try to make good decisions. You know, we don't close every deal or that with the people we talk with. We try to study and pick the best ones. I would say for 2026, you're gonna see us continue to do bolt-on acquisitions where we think that the strategy is, the strategic positives are just too much to pass up on. At the same time, as Greg said, we are focused on deleveraging. As the cash flow and the EBITDA rolls through, that should naturally happen. The goal is by late 2026 to be back around that two and a half times leverage. Michael Feniger: Perfect. And, Jules, just my follow-up, just you kinda talk about what you guys are seeing on the cost inflation side? I would think liquids have been pretty tame. And really, you're seeing on the pricing side, so that price-cost spread, as you guys kinda roll over into 2026, how you guys are feeling about that? Thanks, everyone. Jules Smith: Yeah. You know, Michael, it's 2025, you know, after a couple of years a few years ago of record inflation, 2025 was about the most benign inflation year, you know, we've seen in a long time. The construction material cost went up a normal amount, but that's stuff that we put in our estimates as pass-through, and there were no surprises. There were no real spikes. And then, I'll let Greg answer for energy. He tracked that pretty closely, but it was really just a very normal year, I would say. Gregory A. Hoffman: Yeah. I would say that, you know, when you said it, Jules, when you're talking about inflation and if you see spikes, those are difficult to pass through, but it was pretty steady all year. And energy was no different. Liquid AC, a pretty big component of our cost, was pretty stable all year. Diesel was relatively stable all year. So I think that it was a pretty stable year overall. Jules Smith: Right. And Michael, I know we've talked about labor costs. You know, our labor costs now are going up what you would think in a typical year. That three to 4% that we can easily put in our estimates and predict. Michael Feniger: Thank you, Jules. Jules Smith: Alright. Thank you, Michael. Operator: Our next question is from Adam Thalhimer with Thompson Davis and Company. Please proceed. Adam Thalhimer: Hey. Good morning, guys. Jules Smith: Morning, Adam. Adam Thalhimer: Actually, I wanted to continue on Michael's pricing question. When you look at recent bids, does it feel like your competitors are pretty full and pricing still healthy? Jules Smith: I would say so. Yes. You know, the bidding environment, we're always in a competitive market. And that's not that's been the case since we were founded 22 years ago. I will tell you it helps to be in growing markets. And so that's why when we say we wanna get to the right markets with the right partner, we'd rather be bidding in a growing market where everyone has a chance to fill their backlogs and to bid, you know, patiently. And so feel like that continues to be the case. You know, have a record backlog. But at the same time, you can tell in our guidance that we're expecting margins to expand and grow. And you can't do both of those if you don't have healthy markets to bid in. Adam Thalhimer: Sounds good. And then, Jules, when you pull your operating guys, what do you hear back from them on private construction demand? How uniform are their responses on that? Jules Smith: Yeah. The private economy, Adam, I would say, you know, when Greg and I look at the backlog each quarter and we say, okay. What's the revenue split? I would say, you know, it's been pretty consistent. Maybe it's ticked up a little bit a percent or two toward public versus private, but we still got a very healthy, you know, 34 to 35% of our backlog is private. In all 100 of our markets, they're different economies, microeconomies, to speak. But we still see a lot of demand, as I said, you know, from people and businesses migrating to the Southeast. So we get a lot of opportunities to bid commercial projects. So that really hasn't changed a lot. You know, we monitor it. We know we're gonna get asked. But we're blessed to be in the Sunbelt where there's still the private economy is growing. Adam Thalhimer: And just lastly for me, the other thing happening in the Sunbelt is just massive data center construction, and we're hearing that some of these campuses are just getting larger and larger. And it's a bit off the wall for you guys, but I'm just curious if those are big enough to actually pull some paving work. Jules Smith: Oh, yes. You know, I mentioned that in my prepared remarks. You know, we get asked about data centers a lot. That's not something that we go around specializing in. You know, we're organized in local markets. But there are data centers being built in a lot of our markets, and we participate in those. We put in the site infrastructure. We build the roads. And you're right. Some of them are pretty large projects. But for us, they're similar to, Amazon warehouse or, you know, a distribution facility. The site has to, you know, be cleared, graded, the utilities have to go in, the stormwater has to be maintained, and they have to have a good access road. So, you know, for us, data centers are a good opportunity to build when we can reach them in our local markets. Adam Thalhimer: Thanks, Jules. Good luck in Q1. Jules Smith: Alright. Thank you, Adam. Operator: Our next question is from John Valises with D. A. Davidson. Please proceed. John Valises: Good morning. Jules Smith: Morning, John. Gregory A. Hoffman: Morning, John. John Valises: Outside any reauthorizations coming from Washington, are there any potential revenue-raising initiatives or ballot measures like a gas tax or sales tax you guys are monitoring across your core markets? Jules Smith: Yeah, John. I was just, you know, studying that this week. Every one of our states, all eight states in the last year have had multiple ballot initiatives to fund infrastructure. Tennessee had probably the most. We had eight different initiatives. I was just talking to the governor of Tennessee a few days ago about just what his state saw and with the growth and the need to get ahead of it. So they passed the Transportation Modernization Act, which, you know, put billions of dollars toward transportation. They did a one-time transfer of a billion dollars from the general fund this past year. And then things like, they put a tax, like a 1¢ tax or some percent tax on the sale of new and used tires to go toward transportation. And all of our states in some way have taken steps to fund infrastructure to invest in it. And that's why I mentioned just in the Sunbelt, they see the growth coming there. They don't wanna fall behind. And so they're taking supplemental measures to what the gas tax gives them and what Washington through the surface transportation program gives them. John Valises: Makes sense. Thank you. And sorry if I missed this. Because you guys talked a little bit about energy pricing and all. But can you perhaps provide a little more color about oil mix prices? And what sort of levels are you guys currently seeing now? And what do you guys expect for fiscal 2026? And is that in any way contemplated in your outlook? Jules Smith: John, could you repeat that? You broke up a little bit. What specifically were you asking about as far as pricing? John Valises: Yeah. No problem. I was just asking about what sort of asphalt mix prices are you guys currently seeing today? And what are you expecting in 2026? And then is that in any way contemplated in your fiscal 2026 guidance? Gregory A. Hoffman: Yeah. So our asphalt, you know, we manufacture it. And so, you know, for us, we're going to raise prices as we get higher input costs. And, you know, as we can pass that through in our projects. I'll let Greg speak to what he's seeing in terms of liquid asphalt, which is a major input cost and aggregates. But for us, hot mix asphalt is, you know, the key thing we produce. Gregory A. Hoffman: Yeah. As Jules said, we will pass through as we understand what pricing does. With liquid asphalt specifically, the, you know, obviously a pretty big component of our asphalt mix. Most of our states have a liquid AC index that's pegged to the day you bid the job. So certainly, gives us some cost stability there that we can count on. But, certainly, we're escalating costs as needed based on, you know, the extent and duration of the job in order to make sure that we've got our costs covered in a bid or if we're pricing out to a customer that's buying our asphalt third party. Operator: We have reached the end of our question and answer session. I would like to turn the call back over to management for closing remarks. Jules Smith: I just wanna thank everyone for being with us. We're excited that FY 2026 is off and running. Thank you. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Morning, everyone, and welcome to the MediWound's Third Quarter twenty twenty five Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. To withdraw your questions, you may press star and 2. Please also note today's event is being recorded. And at this time, I'd like to turn the floor over to Dan Ferry of LifeSci Advisors. Please go ahead. Daniel Ferry: Thank you, operator, and welcome, everyone. Earlier today, pre-market opened, MediWound issued a press release announcing financial results for the third quarter ended September 30, 2025. You may access this press release on the company's website under the Investors tab. I would ask you to review the full text of our forward-looking statements within this morning's press release. Before we begin, I would like to remind everyone that statements made during this call, including the Q&A session, relating to MediWound's expected future performance, future business prospects or future events or plans are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from expectations and are described more fully in our filings with the SEC. In addition, all forward-looking statements represent our views only as of today, and MediWound assumes no obligation to update or supplement any forward-looking statements, whether as a result of new information, future events or otherwise. This conference call is the property of MediWound and any recording or rebroadcast is expressly prohibited without the written consent of MediWound. With us today are Ofer Gonen, Chief Executive Officer of MediWound; and Hani Luxenburg, Chief Financial Officer; Barry Wolfenson, EVP of Strategy and Corporate Development, is also participating on today's call. Following our prepared remarks, we will open up the call for Q&A. Now I would like to turn the call over to Ofer Gonen, Chief Executive Officer of MediWound. Ofer? Ofer Gonen: Thank you, Dan, and good morning, everyone. The third quarter was another strong period for MediWound, as we executed across our strategic clinical and operational objectives and continue to position the company for its next phase of growth. The three strategic priorities I'd like to emphasize today are our EscharEx VLU trial, our NexoBrid manufacturing expansion and our ability to fund our strategy. We have made meaningful progress on all those fronts. EscharEx Update (Chronic Wounds) Ofer Gonen: Let's start with an update on EscharEx, our late-stage enzymatic debridement therapy for chronic wounds. Enrollment in the VALUE Phase III trial in venous leg ulcers (VLU) continues to progress, with a target of 216 patients across roughly 40 sites in the United States and Europe. U.S. site activation proceeded as planned, while several EU sites required additional adjustments to meet ancillary-related regulatory requirements. Overall, the majority of sites are now active and enrolling. At this stage, we cannot yet assess whether these EU-related adjustments will impact the overall study timeline. We are actively monitoring enrollment trends, and we'll update our guidance, if needed, as visibility improves. The trial's co-primary endpoints are the incidence of complete debridement and the facilitation of wound closure, both measures in which EscharEx demonstrated strong results in previous Phase II studies. A prespecified interim sample size assessment will be conducted after 65% of patients complete the treatment. We have also made progress on the diabetic foot ulcer (DFU) program. We have received positive FDA feedback and we are now awaiting EMA scientific advice. The company plans to initiate the study in the second half of 2026. As our VLU and DFU programs move forward, the market around us is also shifting in ways that highlights EscharEx's potential. Medicare recently lowered reimbursement rates of skin substitute products which is expected to put significant pressure on that category and close a long-standing payment loophole. In contrast, EscharEx is a biologic regulated under the BLA pathway and aims to enter the enzymatic debridement segment, where a single legacy product generates roughly $370 million annually. Together, these market changes makes EscharEx increasingly attractive to potential strategic partners. To quantify this opportunity, we completed an updated U.S. market access and pricing assessment with an independent global consulting firm, incorporating also input from health care professionals and payers. The analysis supports a higher potential U.S. price per course of therapy and estimates annual peak sales of about $831 million. These updated estimates reflect EscharEx's robust clinical data, along with modeled health economic benefits derived from earlier wound closure. So with the VALUE study advancing a clear regulatory path for DFU and strong commercial validation, EscharEx is positioned to drive MediWound to the next phase of growth. NexoBrid Update (Severe Burns) Ofer Gonen: Now let's turn the attention to NexoBrid, our innovative enzymatic therapy for severe burns. Most notably, we completed the commissioning of our expanded NexoBrid manufacturing facility, a major milestone that strengthens our ability to meet the rising global demand and maintain reliable supply. The process was not simple. We worked through a 2-year war, drafted personnel and import delays on specialized equipment, but the result is transformative. Our production capacity is now 6x larger, providing a strong foundation for future growth. We expect to reach full operational capacity by year-end 2025, with regulatory review and approval, determining the timing of commercial output. In the United States, our partner, Vericel, reported NexoBrid's record quarterly revenue since launch, up 38% year-over-year and 26% sequentially. Vericel noted broad utilization across more than 60 burn centers and plans to pursue a permanent CPT code, which would take effect in 2027. Internationally, the TGA in Australia approved NexoBrid for use in both adult and pediatric patients, bringing the total number of approval market to 45 countries worldwide. This approval, together with NexoBrid's prominent presence at the recent European Burn Association Congress, where it was featured in 36 scientific presentations, highlight its expanding clinical recognition and global momentum. Regarding the collaboration with BARDA, on an RFP covering stockpiling, development of room temperature stable formulation and evaluation of an enzymatic debridement product for trauma and blast injury indications. This multiyear program was scheduled to begin on October 1. As Vericel noted in the recent earnings call, the government shutdown caused all related activities to pause. Now that the shutdown has ended, we expect BARDA to resume normal operations and move forward with the planned development and procurement activities. The pause also created some uncertainty around the exact timing of BARDA and DOD-related revenue in Q4. We are actively working on these components, but the final outcome will depend on how activities progress through the remainder of the year. Overall, the advancements we have made with NexoBrid position us as a durable and meaningful growth driver for MediWound. Financial Summary Ofer Gonen: From a corporate standpoint, we recently strengthened our balance sheet with $30 million of equity financing from high-quality health care investors. This transaction provides us with the resources and flexibility to execute on our long-term growth strategy with focus and momentum. Given the discussion around the recent financing, this is a perfect point to transition the call to the financials. Hani? Hani Luxenburg: Thank you, Ofer, and good morning, everyone. Let's turn to our financial results for the third quarter of 2025. Revenue for the quarter was $5.4 million, up 23% year-over-year compared to $4.4 million for the same period in 2024. The increase was primarily driven by higher development services revenue, including additional contracts with DoD. Gross profit for the quarter was $0.9 million or 16.5% of revenue compared to $0.7 million or 15.5% in the prior year period. R&D expenses were $3.5 million versus $2.5 million in the third quarter of 2024, reflecting increased investment in the EscharEx VALUE Phase III study and related clinical activities. SG&A expenses totaled $4 million compared to $3.2 million in the same period last year. The increase was primarily due to marketing authorization holder expenses. Operating loss for the quarter was $6.5 million compared to $5.1 million in the third quarter of 2024. Net loss was $2.7 million or $0.24 per share compared to a net loss of $10.3 million or $0.98 per share in the prior year period. The improvement was mainly driven by noncash financial income from the revaluation of warrants this quarter compared to noncash financial expenses from warrant revaluation in the third quarter of last year. Adjusted EBITDA loss was $5.4 million compared to a loss of $3.7 million in the third quarter of 2024. Hani Luxenburg: Looking at our performance for the first 9 months of the year. Revenue for the period was $15.1 million compared to $14.4 million in the same period of 2024. Gross profit was $3 million or 19.7% of revenue compared to $1.7 million or 12% in the first 9 months of last year. The margin improvement was driven by a more favorable revenue mix. R&D expenses were $9.8 million compared to $5.9 million in the same period of 2024. SG&A expenses were $10.6 million versus $9.1 million in the first 9 months of 2024. Operating loss for the period was $17.5 million compared to $13.3 million last year. Net loss for the first 9 months of 2025 was $16.7 million or $1.53 per share compared to $26.3 million or $2.72 per share in the same period of 2024. The reduction in net loss was primarily driven by noncash financial income from the revaluation of warrants in 2025 compared to noncash financial expenses from revaluation of warrants in the same period of 2024. Adjusted EBITDA loss for the first 9 months was $13.9 million compared to $9.9 million in the prior year period. Hani Luxenburg: Now turning to our balance sheet. As of September 30, 2025, we had $60 million in cash, cash equivalents and short-term deposits compared to $44 million at year-end 2024. During the first 9 months of the year, we used $15.8 million in cash to fund our operating activities. In addition, our balance sheet reflects the completion of a $30 million registered direct offering and $3.5 million in proceeds from Series A warrant exercises. We believe our current cash position provides the financial flexibility needed to advance our key programs and continue executing on our strategic priorities. That concludes my review of the financials. Ofer, back to you. Ofer Gonen: Thank you, Hani. To summarize, the third quarter was defined by consistent execution and strategic progress across our programs and operations, clinical advancements with EscharEx, commercial expansion with NexoBrid and operational readiness for manufacturing infrastructure. With these accomplishments and a solid financial foundation, MediWound is well positioned for 2026. Operator? Question & Answer Session Operator: [Operator Instructions] Our first question today comes from Josh Jennings from TD Cowen. Joshua Jennings: Congrats on continued progress. I have two questions on EscharEx. Just first on the -- just new U.S., I think peak sales estimate $830 million range, up from $725 million. Can you just share any more details just in terms of some assumptions that are baked in there? Is any pricing changes or, I guess, just volumes or patient opportunity assumption deltas from the prior calculation? Ofer Gonen: Yes. So Josh, really good to speak to you. Barry, can you address that? Barry Wolfenson: Yes. Josh, thanks for the question. So this analysis that we did was more market access focused. So the respondents are skewed more towards payers than they did health care providers as opposed to the previous assessment that we did. Because of that, the focus was really specifically on pricing. So nothing changes with regard to the number of patients, the adoption rates, none of that changes in the model, it all remains the same. The only thing is the pricing. . And really, what we focused on was incremental pricing that we would be able to take relative to HEOR benefits. So in the initial assessment that we did where we landed at $725 million for revenues. The price that we used was the baseline price, which was a 15% increase over SANTYL. And we had heard that previously. We had heard it [ earlier ], and we heard it in this most recent market research as well that, that base case without any HEOR benefits of 15% over SANTYL would stand when we add in the HEOR benefits, however, it changes a bit. And what we found is that the max could go up to as much as 50% over the price of SANTYL, and this is the price of the total cost of therapy per patient. And what we've done is basically taken what we consider to be a conservative kind of slice of it, somewhere in between the base case and the top case. And when we put that into the model, it yields this $831 million of peak sales. Joshua Jennings: Understood. And the DFU study looking to kick off enrollment in the second half of next year. You mentioned over some constructive feedback from the FDA. And anything to share just on any nuanced design -- trial design updates? And will the same centers that are enrolling the VLU study be investigator sites for the DFU study? Ofer Gonen: Yes. So let me address that. So we are not -- the easy part is that we are not addressing the same centers. We are working on centers that are specializing with -- for VLU and there are centers for DFU that we are looking at different ones. As for the protocol, as I said in my prepared remarks, we are waiting for EMA feedback with the scientific advice and we will ultimately ensure alignment in both regulators as we finalize the study design. We expect it to happen in weeks. And therefore, we will be able to update about that in the next call. Operator: And our next question comes from RK from H.C. Wainwright. Swayampakula Ramakanth: This is RK from H.C. Wainwright. So I'll go back to the question Josh asked a minute ago, but a little bit different nuance. So of that $830 million that you're projecting now, just trying to understand the breakdown between DFU and VLU opportunities, so that we and the market understand what and how much weightage you're giving to each of these 2 indications. Then I have a couple more questions. Ofer Gonen: So Barry, maybe you will start with that and let's see what RK has else to ask. Barry Wolfenson: Sure. RK, there are more diabetic foot ulcers than there are venous leg ulcers. But the reason why we're doing venous leg ulcers was first is, frankly, because of the pain issue. They're very, very painful, and it makes it so that they're less likely to be debrided with surgical debridement. And so our alternative provides a really good solution. We do believe even though DFUs could be debrided with surgical debridement and they more often than not have peripheral neuropathy and so the pain is not an issue that because EscharEx reduces the time to complete debridement dramatically versus the enzymatic debrider that's in the market right now that there will be share gain there as well. I think if you look at the split with the puts and the takes, it comes out to roughly even with a little bit of an advantage -- a little bit of a weighting on the venous leg ulcer side. Swayampakula Ramakanth: Then Ofer in your remarks, at least the way I understood your commentary on the RFP with BARDA is it looks like you're almost met with success or it has been successful. Is that true? And then now I understand the U.S. government has not been helpful having had the shutdown. But is there any indication as to how soon this could start for you folks? And then the last question for me is on the CPT code itself. Any nuances you can give us about how not having a CPT code, is it impacting any adoption at all? Or this just adds more help once you get the CPT code on board? Ofer Gonen: So let me break down the answer into two parts. I will start with BARDA and Barry will speak on the code. So in BARDA, I'll tell you the maximum that I'm allowed to share. So as you all know that in August 2025, BARDA issued an RFP covering stockpiling, room temperature stable formulation and trauma blast injury solutions. We were ready to start the program on October 1. It's a program that is supposed to extend for up to 10 years. Vericel holds the commercial rights of NexoBrid in the United States. So they are leading the effort in the United States, and MediWound is providing a full support for that. Now when the shutdown ends, we expect BARDA to resume the normal operations and move forward with the planned development and procurement activities. Other than that, I cannot tell you a time, hopefully very soon. And Barry, do you want to speak about the CPT? Barry Wolfenson: Yes. From a CPT code perspective, RK. I guess, first, let me preface this by saying that Vericel, while they mentioned the fact that, a, they have a temporary CPT code that went into effect, I think it was July 1 and that based on the utilization that they're having, which has been strong, they believe that they'll be able to in 2026, apply for a permanent CPT code that would then be activated in 2027, if all goes well. They haven't really talked about what those benefits are and provided those nuances that you're looking for. So these are just our thoughts on it, how those could be helpful. And I guess what I would say is, generally speaking, we all know that these procedures are done inpatient, which is through the DRG. But CPT codes do help in a couple of different areas, really about providing legitimacy. One is, it provides legitimacy nationally, at the national level, which can drive physician adoption. And what I mean by legitimacy, it provides those CPT codes provide a standardized language for the procedure, it helps with internal approval pathways, credentialing frameworks and also just with workflow legitimacy, all of that, this legitimacy boosts physician acceptance. And so when the physicians are more confident that they could do a procedure and that it's going to have the right coding associated with it, it could increase patient use, again, even though the payment mechanism is DRG based. Secondly, it drives institutional acceptance. So having these CPT codes in place -- I mean, without them, institutions might hesitate to put on contract any new technologies. And so they're helpful, having them in place with the P&T committees, the value analysis, EMR pathway creation. And so having the CPT codes just makes it easier for burn centers to approve NexoBrid. I know that Vericel talked about 60-plus burn centers, and there are around 100 of these sort of Grade A burn centers that they're targeting. So there's a little bit more to go. And maybe as they get a permanent CPT code, it will just make things easier to get the laggards on board and have NexoBrid on contract. So that's the way that we see it is they've got a temporary but a more permanent CPT code just adds to that legitimacy and would help drive both physician adoption and institutional acceptance. Operator: Our next question comes from Jeff Jones from Oppenheimer. Jeffrey Jones: A couple from us. Is -- can you provide any additional visibility on the breakdown of the $5.4 million in revenue? You noted increased margin based on Vericel sales, I assume, but just the breakdown between product services and revenues. Hani Luxenburg: Jeff, thank you for the question. So in the third quarter, we only give the press release with the condensed numbers of P&L. We do not give a full financial statement. Only in the second quarter and of course, at the end of the year. So I cannot tell you more than that. But anyway, I can tell you that the gross margin is a much -- as you know, the gross margin this quarter was around 20%. It was up from 12% last year. This improvement is reflecting a more favorable change in our revenue mix. And in any way, our gross margin also affected by a mix of revenue from product sales and the R&D services. And we expect that our gross margin to move, as you know, gradually towards the 25% in full capacity. Jeffrey Jones: Appreciate that, Hani. Two additional questions. Just on the U.S. government contract discussions, with BARDA, obviously, that is with Vericel. Just for clarity, the BARDA contract hasn't been awarded correct, the second quarter... Ofer Gonen: Yes. There was an RFP for a 10-year contract covering stockpiling, room temperature stable formulations and trauma blast injury solutions. Vericel disclosed in their previous earnings call, they submitted a proposal to the U.S. government, and we are waiting for the contract to be signed. Jeffrey Jones: Great and look forward to finding out about base options and sort of period of work there. Just any update on the commercialization plans and expansion into Europe? Ofer Gonen: So currently, as you know, we are capped by our ability to manufacture. We have much more demand that we can basically manufacture and ship towards the territories. Having said that, we expect that by year-end 2025, our manufacturing facility will be fully, fully operational, and we can start actually manufacturing for the markets. As the demand is extremely higher, we believe that after that, we can disclose our commercial plans for that. . Operator: [Operator Instructions] Our next question comes from Michael Okunewitch with Maxim Group. Michael Okunewitch: I guess to start off, I just wanted to follow up on some of the previous questions around the pricing and the new health economic analysis. And in particular, what endpoints are most relevant to the health economic benefit? And then are there any specific thresholds in the Phase III that we should look to that could justify that upside pricing? Ofer Gonen: Michael, thank you for joining the call. I see that Barry wants to answer that. Right, Barry? Barry Wolfenson: Yes. That's a great couple of questions there. So let me do the best I can to answer. The -- basically, all the HEOR that we've looked at in this assessment or that, frankly, the payers guided us to really think about, is this benefit that will be associated with early wound closure. And so when you think about it, if you've got a wound that's open for 6 to 10 weeks longer, whatever the time frame is, there's all sorts of whether it's the nursing time, physician time, the product time and then all the risks that are associated with it, infection, hospitalization, anything else that needs to be done, any kind of corrective treatments that come up due to the wound not progressing well. So all of those costs bundled together represent some amount of savings. There's already a pretty good publicly available published information on what is considered to be the average cost per week of an open venous leg ulcer. And so between what we generate in our -- from our endpoint of early closure data that we generate because we will look to create our own set of data around the cost of an open leg ulcer. That in combination with what's already been published will drive this total amount. As far as the cap is concerned, I will say that consistent feedback that we got from payers is that the product that's -- the legacy product in the market right now, SANTYL, has taken a price increase very consistently. I don't know that it's been every year, but it's been somewhat consistently such that, for example, a 30-gram tube has gone from roughly, again, an estimate around $100 for a 30-gram tube to around $300 over the course of these last 10-plus years. And so there was some feedback that there would be a cap at this roughly 50% premium over SANTYL even though that additional amount might only be a small portion of the actual HEOR benefits that are derived. So that's how we're modeling it. And again, what I said earlier is we're taking a conservative approach to that even. And for our own modeling and this number that we've pushed out at $831 million, it really isn't that top price. It's a price that's in between that top price of 50% premium over SANTYL and the 15% premium over SANTYL. Michael Okunewitch: And then just one more for me and I'll hop back into the queue. Just in light of the recent updates to your market research, I want to ask a bit of an opposite question. We all on this call know the significant benefits that would draw converts over to EscharEx. But what are the factors that would lead people to -- or lead physicians to opt for other methods like sharp or autolytic, I'm trying to understand if there are any hard limits for EscharEx in this setting beyond that 22.3% conversion estimate that you use? Ofer Gonen: So Barry take this as well. Barry Wolfenson: Yes. Yes, thanks. Listen, I think that there are still going to be situations, in particular, as I mentioned earlier, due to peripheral neuropathy in the diabetic foot ulcer segment where it just might be easier for physicians to clean up a wound once or twice with a knife as opposed to several days of drug application. So on the sharp side, it is the standard of care now. We do estimate taking around 10% and of that of the utilization from sharp debridement, but there's still going to be a market for sharp debridement. This is not as one-to-one analogous as NexoBrid is in -- with burns where it can completely obviate the need for surgery. This is a little more soft in the chronic wound space. And so again, that's why I say we estimate around 10% on the sharp side. On the autolytic side, it's just -- autolytic debridement is so much less expensive that it depends on the setting, the case situation, the patient's insurance. There's still going to be a market for autolytic debridement. Again, we believe that we're going to take a significant share from current autolytic debridement. Right now, the legacy product relative to autolytic debridement, you can look it up in the published literature, whether there's an advantage or not, but there's certainly a significant pricing differential. We believe on that sort of ratio of price per clinical efficacy that we're going to hit a sweet spot and that it's going to encourage much more widespread adoption. But there'll still be a market for autolytic. Michael Okunewitch: I really appreciate the additional insights. Once again, congrats on all the progress this quarter. Operator: And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Ofer Gonen for closing remarks. . Ofer Gonen: So thank you, everyone, for joining us today, and we look forward to updating you again on our next quarterly call. Operator: And with that, ladies and gentlemen, we'll be concluding today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.
Operator: Greetings, and welcome to the CULIC and SOFA Fourth Quarter twenty twenty five Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgindy, Senior Director of Investor Relations for Kulic Ensafa. You, Mr. Elgindy. You may begin. Thank you. Joseph Elgindy: Thank you. Welcome, everyone, to Kulicke and Soffa's Fiscal Fourth Quarter 2025 Conference Call. Lester Wong, Interim Chief Executive Officer and Chief Financial Officer, also joins me on today's call. Non-GAAP financial measures referenced today should be considered in addition to, not as a substitute for or in isolation from our GAAP financial information. GAAP to non-GAAP reconciliation tables are included within our latest earnings release and earnings presentation. Both are available at investor.kns.com along with prepared remarks for today's call. In addition to historical information, today's discussion contains forward-looking statements regarding our future performance and outlook. These statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that may cause actual results to differ materially. For a complete discussion of the risks associated with Kulicke and Soffa that could affect our future results and financial condition, please refer to our latest Form 10-K and upcoming SEC filings for additional information. With that said, I will now turn the call over to Lester Wong for the business overview. Please go ahead, Lester. Lester Wong: Thank you, Joe. Good morning, everyone. Before discussing this quarter's business performance and outlook, I want to briefly discuss recent organizational changes we announced on October 28. I have taken over as Interim CEO due to Fusen Chen's recent retirement and will continue my existing duties as the Company's Executive Vice President and Chief Financial Officer. Fusen is actively recovering and doing well, and we appreciate everyone's thoughts and concerns. While a search for a permanent successor among external and internal candidates is underway, we are fortunate to have a deep bench of talented leaders in the executive team and an involved Board of Directors who are committed to ensuring the continuity of leadership, stability and strategic focus of the Company. We expect this transition to be seamless and customers can expect continued innovation, global support and strong commitment from K&S to serve the evolving needs and to enable next-generation devices. I want to thank Fusen for his leadership over the past 9 years. Under his guidance, we pursued meaningful new business opportunities and expanded our market access by securing a foothold in several high-potential technologies. We have also dramatically increased the volume of customer engagements and improved time-to-market execution. In doing so, we have accelerated the growth of our advanced portfolio of solutions, which enabled meaningful share gains in leading edge logic and has paved the path for additional expansion in DRAM, power semiconductor and advanced dispense. Fusen's legacy is an organization defined by growth, agility and close customer focus. We appreciate that he has agreed to provide advisory support over the coming year and believe his vast experience and industry knowledge will be a useful resource to the company as we extend our leadership in advanced packaging and adapt to industry transitions such as the rise of chiplet architectures and heterogeneous integration. I, along with the entire organization, would like to wish Fusen a happy and healthy retirement. I am confident we will continue to win market share and grow the business over the long term. As all of our end markets are showing signs of improvement, we have recently begun to prepare for higher production while continuing to aggressively drive several exciting technology transitions. Additionally, in my role as Interim CEO, I am grateful to have met many customers in person over the past month and look forward to meeting with many others over the near term. We are fully committed to consistently providing customers with best-in-class capabilities and high-performance solutions they expect from K&S. Turning to our recent business results. We are encouraged by improved order activity, supported by favorable utilization trends in general semiconductor and memory end markets while we continue to execute on key initiatives. Within our fourth fiscal quarter, we generated revenue of $177.6 million, GAAP earnings per share of $0.12 and non-GAAP earnings per share of $0.28. We remain focused on operational efficiency as we expand our reach within thermocompression, vertical wire, advanced dispense and power semiconductor transitions. From an end market standpoint, utilization rate for high-volume general semiconductor and memory applications continue to improve, while dynamics within the automotive and industrial markets are now showing early improvement. General semiconductor revenue increased by 24% sequentially, driven by technology and capacity needs, which increased thermocompression and ball bonder demand during the September quarter. We estimate utilization rates are currently over 80% for this key end market. Memory has also improved sequentially, similar to general semi in both utilization and revenue. Memory-related revenue increased by nearly 60% sequentially to $24.4 million and was driven predominantly by NAND-related capacity additions. Historically, our memory solutions were tailored for high-density NAND assembly, although we remain closely engaged in supporting advanced packaging transitions within DRAM. We continue to expect the growth in high-performance edge application like on-device AI or AI on the edge will begin to accelerate this trend. Order hesitation within automotive and industrial has continued into the September quarter with a relatively sharp sequential decline. While the broader automotive market has been softer, we anticipate a sequential improvement during the current December quarter and are pleased to report a more positive outlook through fiscal 2026. As a reminder, we remain an active technology partner, providing many new innovations within power semiconductor, which are supporting long-term transitions within the EV and other clean tech markets. Last, APS has increased by 17% sequentially, which aligns with improving utilization data and more distinctly highlights increased production activity across our high-volume installed base. We are optimistic about fiscal 2026 and remain encouraged by improving end market dynamics along with strong traction we are seeing across our growing set of advanced packaging, advanced dispense and power semiconductor opportunities. Within advanced packaging, we continue to support the industry adoption of advanced thermocompression and vertical wire applications and remain closely engaged with multiple leading customers on these exciting initiatives. First, within Fluxless thermocompression or FTC, we continue to directly address the needs of advanced heterogeneous logic applications. We are pleased to see growing demand across our customer base, driven by the increasing capacity needs of IDM, foundry and assembly and test customers. Our operational and supply chain teams are actively preparing for a production ramp through fiscal 2026 as adoption for our FTC process begins to accelerate. Additionally, we are preparing to ship our first HBM system within the current December ending quarter. Within the HBM market, we continue to anticipate advanced thermocompression capabilities such as FTC, provides an attractive assembly alternative as bandwidth requirements increase with future HBM standards. On the mobility side of DRAM, we continue to expect on-device AI applications to demand high level of bandwidth and increase the need for new vertical wire-based assembly over the coming years. This is a great example of how advanced packaging techniques are directly supporting power efficiency, performance and form factor improvements, helping to offset the rising costs of traditional transistor shrink. We remain engaged with a broad group of memory customers who are actively preparing for this transition. Our vertical wire market expectations into fiscal 2026 remain consistent, and we continue to anticipate a shift to higher-volume market production by the end of the year. Longer term, we anticipate stacked DRAM or mobile HBM will continue to grow aggressively with high-volume edge-related applications. Next, with advanced dispense, we are pleased to release our recent dispense system, ACELON during Semiconductor Taiwan in September. ACELON leverages our unique and high-precision dispense capabilities with a highly robust architecture platform, which has been proven in critical production environment. Transitions in many of our end markets are increasing demand for high precision and more capable dispense systems. We continue to receive recurring purchase orders as well as new customer purchase orders for our growing line of advanced dispense systems. Finally, while the current automotive and industrial market remains dynamic, we continue to develop innovative solutions to address increasing level of assembly complexity surrounding power semiconductor applications. In summary, we continue to expand our market presence on multiple fronts and remain cautiously optimistic as key regions and end markets show signs of cyclical improvement. We are pleased to see ongoing general semiconductor capacity digestion and expansion within our key regions as well as memory technology transitions and pricing improvements, which are all promising indicators and that increases our confidence in the outlook. We continue to navigate a uniquely exciting time in semiconductor assembly with the potential to capitalize on a wide set of opportunities in the industry. With that said, I will now provide a brief financial update. My remarks today will refer to GAAP results unless noted. We delivered revenue above guidance, continue to execute on close customer engagements and maintain an ongoing focus on cost control. Gross margins came in at 45.7%, and we delivered $0.28 of non-GAAP earnings. Total operating expense came in at $80.3 million on a GAAP basis and just below $70 million on a non-GAAP basis. We continue to remain focused on operational efficiency while we support a growing set of opportunities. We continue to anticipate non-GAAP operating expense to be around $70 million over the coming quarters, which provides a strong foundation for operational leverage as demand for our solution ramps. Tax expense came in at $0.3 million, and we continue to anticipate our effective tax rate will remain above 20% over the near term. During the September quarter, we continued our repurchase program and deployed $16.7 million to repurchase 464,000 shares. Over fiscal year 2025, we repurchased 2.4 million shares, representing nearly 5% of shares outstanding for $96.5 million. Looking ahead, end market improvements within general semiconductor and memory are becoming more evident, supported by regional utilization improvement and a strong sequential increase in APS demand. While automotive and industrial was previously expected to create an ongoing headwind into fiscal 2026, we are pleased to now anticipate sequential improvement into the December quarter. For the December quarter, revenue is expected to increase by approximately 7% sequentially to $190 million with gross margins at 47%. Non-GAAP operating expenses are expected to be $71 million with GAAP earnings per share targeted to be $0.18 and non-GAAP earnings per share of $0.33. While we remain focused on production readiness and key growth opportunities, we have also strengthened operational and development efficiencies over the past few quarters. We are confident that these efforts position us to emerge from the extended soft demand period, a leaner and more growth optimized organization. Today, we're either a dominant incumbent leader or are aggressively taking share in every key markets we serve. We continue to ensure our highest potential opportunities are well resourced and our customer development efforts are on a positive trajectory. Looking into fiscal 2026, we anticipate that half of our incremental growth will stem from technology transitions and share gains in new markets. At the same time, the other portion of sequential growth is increasingly encouraging due to the anticipation of ongoing cyclical recovery over the coming quarters. We look forward to ongoing execution and progress on advanced packaging, advanced dispense and power semiconductor opportunities as we prepare for the broader core market recovery. In closing, we remain focused on executing our strategic priorities, are confident in our capabilities and technology leadership and prepared to navigate the near-term macro environment. This concludes our prepared comments. Operator, please open the call for questions. Operator: Today's first question is coming from Krish Sankar of TD Cowen. Sreekrishnan Sankarnarayanan: Good luck to Fusen and definitely going to miss him. I have 2 questions left. The first one, it looks like based on your guidance, pretty much sequentially all your 3 segments, general semi, memory and auto industrial should grow. Is that the right way to think about it? And how to think about it into the March quarter and any kind of seasonality effects? And then a follow-up. Lester Wong: Thanks, Krish, and I appreciate your sentiment Fusen, I will definitely pass it on. As far as the 3 segments are concerned, I think as we said, general semi and memory are actually very strong. Utilization for both is over 80%. Auto and Industrial is still lagging a little bit, but we do -- we're very optimistic about it because we do see improvements, and we think there will be sequential growth into Q1. So I think as far as how we want to look at the March quarter, we think March will probably be -- probably flat to Q1. So we don't see any seasonality into the March quarter. Sreekrishnan Sankarnarayanan: Got it. And then as a quick follow-up, one of your Taiwan competitors spoke about their FTC plasma solution for chip-to-wafer has passed final call as being used with a leading foundry. So I'm kind of curious, what is your status there? And do you think they could split the business or you're not in pole position anymore? Lester Wong: Well, Krish, I think we're still the only one at the foundry doing high-volume production, right? I won't comment on our competitors. I mean we were qualified a long time ago. So I think we continue to feel very strongly about our solution. Our solution now has both formic acid and plasma. So it gives the customer a lot more optionality to do it. We have single head, we have dual head. So we think our FTC solution is basically best-in-class, and we feel very, very competitive at the foundry as well as anywhere else we compete against the competitors. Operator: The next question is coming from Charles Shi of Needham & Co. Yu Shi: Lester. Maybe the first one. You talked about shipping a system to the HBM customer. I know the team has worked on this for a while, and it's finally shipping. So it's definitely going to be good news I think by most of the investors. But kind of wondered if you can provide a little bit more color on this shipment. What's the nature of the shipment? Where -- I mean, as much as you can provide color where you are shipping the system to? And what's the next milestone? Lester Wong: Thanks, Charles. Well, we're shipping the system to the -- somewhere in the United States, right, without being too specific. As far as the next milestone is once it's installed, they're going to start running wafers through it, and we're going to look for qualification. So we hope to get -- share some news a few months after the system has been installed at the customer. Yu Shi: Do you have any insight into which generation of HBM this qualification is targeted at? Lester Wong: I would say it's probably 4E. Yu Shi: Okay. So maybe the next question, you talked about growth for fiscal '26. Half of that is coming from tech transitions, share gains, the other half from cyclical recovery. But wondering if you can put some quantitative color into that, like how much -- how many percentage points do you think can come from both areas? And any directional -- I mean, hopefully, it can be a little more quantitative that would be great. Lester Wong: Sure, Charles. As you know, we don't guide beyond the quarter. But I think we're very comfortable with the -- for FY '26, we're very comfortable with the consensus number, which I believe is around $730 million, $740 million. And then again, as I said in my remarks and as you just repeated, we think half the incremental growth will be from technology transition like FTC, like vertical wire, like advanced dispense as well as power semiconductor. And then the other one would be from the cyclical recovery led by the very high utilization rate, which we see out there, which is about 80% right now. Operator: The next question is coming from Tom Diffely of D.A. Davidson. Thomas Diffely: Lester, I was wondering if you could talk a little bit more about the NAND market. We're hearing obviously strength in high-bandwidth memory, and that's using up some of the DRAM capacity. But I haven't heard anybody talk about strength or improvements in the NAND markets until you mentioned it earlier today. Maybe just a little more comment on the NAND market. Lester Wong: For sure. I mean I think we -- what we're seeing is we're seeing very high utilization rates in memory. It's over 80%, about 82%, 83%. We're also seeing, I guess, purchase orders increasing in that market as well, particularly in China. Again, China itself, it's driven by general semi and memory and China utilization is actually close to 90%. So that's basically what we're seeing in the field, Tom. Thomas Diffely: Okay. And would you still -- you said there wasn't much in the way of normal seasonality, but would you still expect more of a ramp to happen post Chinese New Year kind of the normal cycle as far as incoming new orders? Lester Wong: Well, we're actually, again, already seeing orders now into Q2. So I think it'll probably be flat. I think this year, FY '26 probably would be a little more linearity throughout the entire year. So I think, again, I don't see a huge uptick after Chinese New Year, but it'd be nice if it happened. Thomas Diffely: Yes. And I do want to echo your comments on Fusen. I've been covering the company on and off for 25 years. And when he came in several -- many years ago, there was really a sea change in the productivity of the company and the outlook of the company. So I wish him all the best. Lester Wong: Thank you, Tom. Thank you. As I indicated, Fusen transformed K&S and expanded our portfolio of advanced products. And a big part of this incremental growth from technology transition is due to his vision and his strategy. So we all wish him well in his retirement. Operator: [Operator Instructions] Our next question is coming from Dave Duley of Steelhead Securities. David Duley: Please relay my best wishes on retirement to Fusen as well. Lester Wong: We do, Dave. David Duley: First question, I think in your slide deck, you talked about increasing market share in the HBM market. Could you just elaborate a little bit further on that? Is that just what you were referring to is shipping an HBM tool for thermocompression bonding? Or is there something else to that commentary? Lester Wong: So Dave, I think actually the slide referred to increasing market share in DRAM, not specifically HBM. As I think I said in my remarks as well as responding to Charles' question, we are going to ship our first HBM machine to a customer in the U.S. for qualification. David Duley: Okay. So that commentary is just wrapped around the HBM shipment to a thermocompression bonding tool, nothing else? Lester Wong: Yes. For now, we are very -- as you know, we started our thermocompression focus on logic. We are the market leader in logic for thermocompression. But again, we're just entering the HBM market now. But we're very optimistic. We believe the tool is very well suited to HBM. And we think as standards change and as well as density increases, I think the tool -- the [ Fluxless ] thermocompression compression tool will do really well. David Duley: Now do you think at this customer, you'll be trying to displace a Fluxless -- a standard thermocompression tool? Or will you be -- are you up against a hybrid tool? Or what do you think kind of the -- how this unfolds as far as the qualification goes and what you're competing against? Lester Wong: Well, I think we're basically competing against other thermocompression bonders, right? Not so much hybrid for now. I think hybrid still, as we've spoken before, for HBM, hybrid is a little bit off for now. So I think mainly the competition will be other TCB. David Duley: Okay. And then you mentioned vertical wire ramping in the -- I think, in the back -- in 2026. Could you just elaborate a little bit more on what exact -- why is that ramping now? Is it tied to specific handset model or some end market? And then maybe help us understand what expectations you have for that new business in 2026? Lester Wong: Sure. Well, I mean, we've been working on vertical wire for a while. And now we've had calls and we have tools at many customers, both in China as well as outside of China. As the calls progress, we believe that the first high-volume production will be in the latter part of CY '26, which means we start shipping tools in the latter part of our fiscal '26, right? So I think that's basically sort of the color around what we think. And as far as our expectations, we still think FY '26 is going to be the beginning. So I think somewhere around the neighborhood of $10 million, and then we think it will ramp significantly in '27 and beyond. David Duley: Okay. And do you have -- as far as your core business goes, usually, it's somewhat tied to unit volume growth in the general semi market. I was just wondering if you had an idea about how fast units are growing in 2025 or a prediction for unit growth in 2026? Lester Wong: Well, yes, we have used that before, and I think it's probably 5%, 7%. But again, I think what is really giving us confidence is the utilization rate, which is, as I said, over 80% in both memory and general semiconductor and then 80% overall. Also, again, a lot of our core business is in China, and that utilization rate is almost close to 90%. Operator: The next question is coming from Craig Ellis of B. Riley Securities. Craig Ellis: Lester, good luck in the role and good luck to Fusen as well with health issues. I wanted to start and admittedly, I missed the first part of the call, but I wanted to start better understanding the dynamics that you're seeing in the memory market. Lester, do you think this is just a steeper slope that you're seeing in memory as utilization and orders have improved? Or is it really just a different timing for what might be a typical seasonal move up in memory ahead of second half build. So the question is really on the trajectory of the recovery that you're seeing. Lester Wong: Well, as -- so Craig, I think right now, memory utilization is very high. I mean sales are increasing there. They're still obviously lagging general semi. So I think right now, I do think this is a ramp in memory, and it will continue into FY '26. Craig Ellis: Yes. And can you talk about the potential for memory in '26 to get back to historic revenue levels? And then because general semi is rebounding and it's doing so against a slightly improved but not significantly improved high-volume PC and smartphone market. What do you think is really driving the improvement in general semi? Lester Wong: Well, I think it's still smartphone and high-performance computer, right? I mean it's cyclical. I think for a long time, we've -- as you know, we've had almost 3 plus 4 years of a downturn, right? And this is the digestion of the tremendous amount of inventory that was built up in '21, '22. So I think actually, this is almost back to a normal cycle, right? And it is the beginning of the recovery, which I think we've all been waiting for. Craig Ellis: Okay. And then lastly, I think you did mention in prepared remarks that we're not yet seeing any signs of uplift from the auto and industrial market. But as you talk to customers in those end markets, are you getting any indication that they could begin to see an upturn sometime in the first half of calendar '26? Or is it still just very low visibility and an absence of any signs of improvement? Lester Wong: So Craig, I think when we talk to customers, we actually get a sense of optimism, right? I think while there is still a little bit of headwinds, it's definitely improved significantly. And we expect our auto industrial revenue to increase sequentially in Q1 from Q4, right? And then I think going forward, we do see -- it's lagging general semi and memory a little bit, but we do see it coming back, right, particularly maybe our customers in Southeast Asia as well as in China. So -- and one thing I think, Craig, as you know, we are sort of involved in sort of a technology transition on power semi, which is basically, again, for cleantech as well as for EV. So I think with all those factors, we definitely think FY '26 will be a much better year for auto industrial. Operator: At this time, I would like to turn the floor back over to Mr. Elgindy for closing comments. Joseph Elgindy: Thank you, Donna, and thank you all for joining today's call. Over the months, we'll be participating at conferences in New York and Phoenix. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a great day, everyone. Operator: Ladies and gentlemen, thank you for your participation. You may now disconnect your lines or log off the webcast. Have a wonderful day.
Operator: Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited Third Quarter 2025 Earnings Conference Call. At this time, I would like to turn the call over to Ms. Jessie Zheng, Vipshop Holdings Limited's head of investor relations. Please proceed. Jessie Zheng: Thank you, operator. Hello, everyone, and thank you for joining Vipshop Holdings Limited Third Quarter 2025 Earnings Conference call. With us today are Eric Shen, our cofounder, chairman, and CEO, and Mark Wang, our CFO. Before management begins their prepared remarks, I would like to remind you that discussion today will contain forward-looking statements made under the safe harbor provisions of The U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our safe harbor statement in our earnings release and public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made. Please note that certain financial measures used on this call, such as non-GAAP operating income, non-GAAP net income attributable to Vipshop Holdings Limited shareholders, and non-GAAP net income per ADS, are not presented in accordance with US GAAP. Please refer to our earnings release for details relating to the reconciliations of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen. Eric Shen: Good morning and good evening, everyone. Welcome and thank you for joining our third quarter 2025 earnings conference call. Our third quarter results demonstrate tangible progress on our path back to growth. We are pleased with the clear top-line expansion, led primarily by notable improvement in customer trends across our core categories. Total active customers regained year-over-year growth. Super VIP membership continued to deliver double-digit growth. In the third quarter, active super VIP customers grew by 11% year-over-year, contributing 51% of our online spending. This sustained growth was primarily driven by continuous upgrades to SVIP exclusive product and service benefits, coupled with more targeted engagement initiatives, which effectively convert regular customers. In terms of category performance, we saw accelerated momentum in apparel-related categories throughout the quarter. Our team successfully delivered a powerful blend of quality, value, and style. This was achieved through a merchandising strategy that highlights high-value brands, trending categories, and popular selling points, all of which are deeply aligned with customer priorities. Against the dynamic industry backdrop, we are navigating this operational environment with agility and efficiency. We are strategically realigning the organization for long-term success, implementing changes to strengthen our unique position as an off-price retailer for brands. We focus on reinforcing the flywheel from merchandising, customer engagement, to operation. At our core, we are a merchandising-led company. We compete through offering affordable and differentiated assortments, continuing to enhance our leadership in deep discount product offerings. We are deepening our category specialization to curate product offerings that deliver great relevance and distinct value. We start to see new momentum in customer and sales by acting upon engaging bright spots and customer performance. As an example, we are rebuilding our maternal and child care division to better integrate relevant apparel and non-apparel categories. This reshaped assortment is designed to foster cross-category growth and create lasting value for customers as they journey through different life stages. We are bringing this level of specialization across each category in our business. Additionally, we have an opportunity to scale through our differentiated product portfolio. One is Made for Vipshop Holdings Limited, which again delivered strong sales growth in the quarter. We are deepening our collaboration with more high-value brand partners. The team is capitalizing on our category insights to motivate brands to allocate and create more in-season and on-trend supply at competitive prices. A compelling case in point is a leading running shoe brand, which drove 50% of its September sales on our platform from Made for Vipshop Holdings Limited after making select popular items exclusive to us. Another case is a leading women's apparel brand, which built sales momentum by customizing more deep discount, high-demand offerings from its inventory fabrics. The other line I would differentiate is a carefully curated portfolio of popular items, which we proactively source from both domestic and global brand partners. We see strong momentum when we offer the right brand of quality, value, and style, giving fashion relevance to young and middle-class customers who increasingly come back to enjoy the fun of flash sales and treasure hunts. Beyond merchandising is how we do better to appeal to customers. In addition to sustaining strong mindshare with our core customer cohorts, we are actively experimenting with new marketing formats such as in-app content and short-form dramas. By adopting an integrated strategy across marketing, growth, and engagement, we are seeing early wins. This approach enables a differentiated balance of cost efficiency and strategic reinvestment, improving our performance in acquiring, activating, and retaining customers. To further engage our customers along their journey, we focus on facilitating the broadening and discovery of a broader range of new and existing offerings. A notable area of improvement is search and recommendations. Our systemic upgrade of relevant models, algorithms, and product operations have translated into measurable gains. In the third quarter, enhancements in our search and recommendation systems led to a tangible increase in conversions, directly contributing to sales growth. We also continue to elevate the experience for our SVIP customers. We want them to feel special, valued, and delighted with every visit, and we are delivering on this promise more consistently. In the third quarter, we launched a series of by-invitation private sales. SVIP customers were granted exclusive access to a curated selection of major brands at deep discounts, which delivered a powerful sense of value and successfully boosted membership loyalty. Lastly, we expect technology to play a strong role in tapping into the potential of growth and efficiency. We are clear on the path to accelerate AI application across our business. Our immediate focus is on deploying AI agents to enhance key areas including search, recommendations, customer service, external marketing, and business analytics. We expect these innovations to create more engaging customer experiences, empower brands with advanced tools, improve marketing efficiency, and generate actionable business insights. As an example, we are seeing good adoption of our try-on AI feature. Customers really enjoy using it to virtually try on clothes, save looks, and share with friends before buying. We are also gaining traction with AI ads, as a growing share of campaigns now leverage AI to upgrade marketing creatives and media placements, boosting customer acquisition efficiency. We are encouraged by the momentum in our business. Our operations are better aligned, and our teams are collaborating at new levels to unlock synergies. We continue to adapt to stay ahead of market trends and customer expectations. The entire organization is leaning into the opportunities ahead of us. We have great confidence in our long-term roadmap for sustainable profitable growth. At this point, let me hand over the call to our CFO, Mark Wang, to go over our financial results. Mark Wang: Thanks, Eric, and hello, everyone. I am pleased to report a set of healthy financial results for the third quarter. Total net revenues turned to growth and exceeded expectations, along with solid earnings expansion. This performance validates our disciplined model to balance growth investment with value creation, upholding our long-stated goal of achieving high-quality growth. Our strategic yet prudent growth investment focuses on value-driven opportunities in merchandising expansion, especially into the differentiated portfolio, consumer-facing marketing, better engagement with customers, as well as AI-centered technology advancements throughout our operations, all aligned with our long-term roadmap for success. We make sure everything we do should be powering our virtual flywheel within a business that translates into sustainable and profitable growth. As Eric stated, we are seeing the benefits of recent strategic changes. We are encouraged by the progress made so far and expect to see the impact of our initiatives build into the rest of the year and beyond. We have great confidence in our long-term outlook and our capabilities to deliver value for all stakeholders. Again, I would like to reaffirm our commitments to shareholder returns in 2025, which is no less than 75% of the RMB9 billion full-year 2024 non-GAAP net income. So far this year, we are firmly on track with that. We have returned a total of over $730 million to shareholders through a combination of dividend payments and share buybacks. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented below are in renminbi, and all percentage changes are year-over-year changes unless otherwise noted. Total net revenues for 2025 increased by 3.4% year-over-year to RMB21.4 billion from RMB20.7 billion in the prior year period. Gross profit was RMB4.9 billion compared with RMB5 billion in the prior year period. Gross margin was 23% compared with 24% in the prior year period. Total operating expenses were RMB3.9 billion compared with RMB3.8 billion in the prior year period. As a percentage of total net revenues, total operating expenses were 18.5% compared with 18.2% in the prior year period. Fulfillment expenses were RMB1.9 billion compared with RMB1.7 billion in the prior year period. As a percentage of total net revenues, fulfillment expenses were 8.7% compared with 8.4% in the prior year period. Marketing expenses were RMB667.2 million compared with RMB617.8 million in the prior year period. As a percentage of total net revenues, marketing expenses were 3.1% compared with 3% in the prior year period. Technology and content expenses were RMB438.6 million compared with RMB454.2 million in the prior year period. As a percentage of total net revenues, technology and content expenses were 2.1% compared with 2.2% in the prior year period. General and administrative expenses were RMB984.6 million compared with RMB957.8 million in the prior year period. As a percentage of total net revenues, general and administrative expenses were 4.6%, which remained stable as compared with that in the prior year period. Income from operations was RMB1.26 billion compared with RMB1.33 billion in the prior year period. Operating margin was 5.9% compared with 6.4% in the prior year period. Non-GAAP income from operations was RMB1.6 billion compared with RMB1.7 billion in the prior year period. Non-GAAP operating margin was 7.5% compared with 8.2% in the prior year period. Net income attributable to Vipshop Holdings Limited shareholders increased by 16.8% year-over-year to RMB1.2 billion from RMB1 billion in the prior year period. Net margin attributable to Vipshop Holdings Limited shareholders increased to 5.7% from 5.1% in the prior year period. Net income attributable to Vipshop Holdings Limited shareholders per diluted ADS increased to RMB2.42 from RMB1.97 in the prior year period. Non-GAAP net income attributable to Vipshop Holdings Limited shareholders increased by 14.6% year-over-year to RMB1.5 billion from RMB1.3 billion in the prior year period. Non-GAAP net margin attributable to Vipshop Holdings Limited shareholders increased to 7% from 6.3% in the prior year period. Non-GAAP net income attributable to Vipshop Holdings Limited shareholders per diluted ADS increased to RMB2.98 from RMB2.47 in the prior year period. As of September 30, 2025, the company had cash and cash equivalents and restricted cash of RMB25.1 billion and short-term investments of RMB5.9 billion. Looking forward to 2025, we expect our total net revenues to be between RMB33.2 billion and RMB34.9 billion, representing a year-over-year increase of approximately 0% to 5%. Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A. Operator: Thank you. We do ask you to translate your question into Chinese if you are bilingual. And our first question will come from Thomas Chong with Jefferies. Your line is open. Thomas Chong: Thanks, management, for taking my question. My first question is about the online shopping competitive landscape. Can management comment about the latest trend as well as the potential impact coming from quick commerce? And my second question is about the monthly GMV momentum quarter to date. How is the performance we are seeing in October and November? And how should we think about the 2026 outlook? Thank you. Eric Shen: Okay. So first, in response to your question on quick e-commerce, I think we are definitely not going into quick e-commerce. But we are looking at what appeals to those attracted to quick e-commerce. Convenience is something that matters, but that matters more in grocery shopping, food delivery, and some household essentials that are not apparel-related categories, which consumers typically do not care so much about fast delivery. But, anyway, we have made progress with convenience as part of our value proposition to customers. I think, for example, there are a few notable things. One is the delivery metrics. Next-day delivery has been rolled out for certain standardized categories of products in some cities. Second is accelerating the delivery of apparel products in some key cities. And lastly, the logistics trajectories are actually optimized for customer returns to our warehouse, etc. So these efforts are still focused on driving refined supply chain management to support business growth as well as operating efficiency. Secondly, in terms of the recent GMV sales trend, if we look at October and November to date, actually, we are seeing a decent growth momentum. During the entire 11.11 promotional period, we actually recorded a decent year-over-year growth. So we are reasonably positive on the business performance of the fourth quarter, which we have guided to 0% to 5% revenue growth. And for 2026, we do see there are opportunities in off-price retail for brands. On the other hand, we do expect consumer sentiment to normalize a bit more. So we will still have reasonable expectations for growth, but we are preserving a roadmap for balanced growth and profitability. So that is the roadmap for our long-term success and distinctly high-quality development. Operator: Thank you. And our next question is going to come from Alicia Yap with Citigroup. Your line is open. Alicia Yap: Hi. Good evening, management. Can you hear me okay? Mark Wang: Yes. Yes. We can hear you. Alicia Yap: Okay. Yeah. Thanks for taking my questions. The first question is, can management elaborate on the details, changes, and restructuring of your merchandising team, and do these changes help the latest quarter performance? Are these mainly on improving your predictions of customer preferences, or is it for improving your relationship on securing better merchandise that fits the super VIP members? And how do you anticipate the changes could help the financial performance? And the second question is, can you also elaborate on how AI has been helping Vipshop Holdings Limited in terms of your financial growth? Can AI help to target churn users and also attract them back to the Vipshop Holdings Limited platform? Thank you. Eric Shen: Okay. So first, the recent organizational changes, simply put, we have realigned the entire organization for the long-term environment. Actually, it is not one department change; it is across the entire organization, among different teams, including merchandising, customer operation, and technology, etc. I think the major purpose of this organizational change is to infuse more agility and efficiency into our business model, especially as our founders are much more hands-on in daily operations. So the team can make quick decisions and turn these decisions into action. Also, we have replaced some of the senior leaders of the major merchandising team with new talent. So, basically, we have refreshed the entire organization and made consistent upgrades so that teams can collaborate at new levels to unlock synergy. For example, on the merchandising side, as we mentioned on the call, for some of the divisions, we are trying to build reshaped assortments, including apparel and non-apparel categories, to bolster cross-category purchases and customer engagement. We have actually adopted an integrated approach from marketing, growth, and engagement so that we can become more efficient in attracting, activating, and retaining customers through a series of adjustments. On the technology side, we focus on building the teams into the next phase of technology advancement, etc. So we are implementing all these changes so that we can always stay ahead of market trends and customer expectations. On the second question about AI, definitely, we are trying to accelerate AI across our business. It is just a simple fact that AI application can be very vital to driving business growth and efficiency. For example, we have added a lot of visualized model backgrounds to facilitate customer experience in virtually trying on clothes and making better choices, etc. So, actually, AI has brought benefits to conversion, directly contributing to sales growth. Also, we have made a lot of effort on AI advertising. A growing share of our marketing campaigns actually leverage AI-generated content to upgrade marketing creatives and media placement. This has actually improved customer acquisition efficiency. Of course, we are also experimenting with AI agents to be used in solving problems like customer churn or how to keep customers engaged on our platform, how to improve their customer experience with our platform. We do believe AI has a lot of potential in driving efficiency as well as supporting our long-term growth. Operator: Thank you. And our next question will come from Andre Chang with JPMorgan. Your line is open. Andre Chang: Thank you, management, for taking my question. I have two questions. The first question is about the operation. We noticed the company delivered decent net profit growth in the third quarter. However, the operating profit and the operating margin still delivered some decline year-on-year. Now management mentioned before that increasing the GMV and the revenue should help economies of scale in the margin recovery. So we want to know when and whether management expects that the operating margin and the operating profit can return to positive year-on-year growth. The second question is about the recent news talking about the management of the company thinking about a Hong Kong listing. We wonder if there is anything management can share on this front. Thank you very much. Mark Wang: Hello, Andre. Thanks for your question. Your first question is regarding our gross margin. Actually, our gross profit margin declined in the third quarter and reflects our efforts to provide more customer incentives, especially for SVIP and other high-value customers and standardized products, to maximize sales and revenue growth. For the longer term, we expect gross profit margin to be comparable to the level in 2024 and largely stable around 23%, depending on the change of product mix from the third quarter. Regarding marketing expenses, we also increased a little bit to attract more customers. We think that in the future, those merchandising capabilities, AI technology applications, and marketing expenses will be the main triggers for our GMV growth. For your second question, we have been closely following the changes in the capital market. If there is any progress, we will update the market. Thank you. Operator: Thank you. And our next question will come from Wei Xiong with UBS. Your line is open. Wei Xiong: Thank you, management, for taking my question. Firstly, we have seen the active customer number and revenue growth have turned positive this quarter. Should we expect continued sequential improvement in the fourth quarter? What are our investment plans and operational focus for users and customers at the moment? How should we think about user growth and revenue growth for next year? Secondly, just wondering, what are our latest thoughts on the shareholder return program for next year? Thank you. Eric Shen: So let me first translate your response to your question on customer and revenue growth for 2026 and beyond. For the longer term, we always stay focused on achieving steady growth in customer revenue and earnings. We believe the sustainable and profitable revenue growth model should be driven by high-quality growth in customers as well as ARPU. For the near term, we do expect customer growth will accelerate. For example, in Q4, as compared to Q3 in terms of year-over-year growth. For 2026, we continue to believe that revenue growth should be driven by growth in customer numbers and in addition to ARPU. We have made a lot of efforts in driving customer growth and have been experimenting with a lot of new ways, whether it is marketing formats or channel investment, etc. All these efforts are oriented towards acquiring new high-quality customers, activating dormant or inactive customers, as well as continuing to expand our SVIP high-value customer base. We do have confidence that for the long term, we can drive top-line growth on the basis of both customer growth and ARPU expansion. Mark Wang: Okay. For the second question regarding the total return to shareholders, our return to growth demonstrates our disciplined capabilities to manage the business to achieve balanced goals. We are more confident that we can achieve relatively stable and healthy profit and cash flow levels. In the past, we have returned over $3.4 billion to shareholders since April 2021 in the form of buybacks and dividends. For 2025, we are on track with our commitment to returning no less than 75% of the full-year 2024 non-GAAP net income to shareholders. As of the date we published the third quarter results, we have returned a total of over $730 million through dividends and buybacks. For next year, we will continue to invest in our business to grow, improve profit, and generate cash to support our dividend payment and buyback. We will evaluate the appropriate level next year. Thank you. Operator: Thank you. And I show no further questions in the queue at this time. I would now like to turn the call back to Jessie Zheng for closing remarks. Jessie Zheng: Thank you for taking the time to join us today. If you have any questions, please do not hesitate to contact our IR team. We look forward to speaking with you next quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2025 Earnings Conference Call for VNET Group, Inc. After the management's prepared remarks, there will be a question and answer session. Please note the Chinese line is in listen-only mode. If you wish to ask questions, please dial in through the English line. Participants from our management include Mr. Ju Ma, Rotating President, Mr. Qiyu Wang, Chief Financial Officer, and Ms. Xinyuan Liu, Head of Investor Relations of the company. Please note that today's conference call is being recorded. I will now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please go ahead. Xinyuan Liu: Thank you, Operator. Hello, everyone, and welcome to the Third Quarter 2025 Earnings Conference Call. Our earnings release was distributed earlier today, and you can find a copy on our website as well as on newswire services. Please note that today's call will contain forward-looking statements made under the safe harbor provisions of The US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC. VNET does not undertake any obligations to update any forward-looking statements except as required under applicable laws. Please also note that VNET earnings press release and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNET earnings press release contains a reconciliation of the unaudited non-GAAP matters to the unaudited GAAP measures. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at ir.vnet.com. Next, I'd like to alert you that we will be utilizing text-to-speech technology powered by neulink.ai, to deliver this quarter's prepared remarks by Mr. Ju Ma, our Rotating President, and Mr. Qiyu Wang, our CFO. The management team will join the Q&A session in person. Additionally, this conference is being recorded. A webcast of this conference call will also be available on our IR site at ir.vnet.com. Now let's get started with today's presentation. Mr. Ma, please go ahead. Ju Ma: Good morning, and good evening, everyone. Thank you for joining our call today. I'll start with an overview of our major accomplishments during 2025. Let's turn to slide four. We delivered another strong quarter demonstrating our strategy's effectiveness in capturing opportunities. On the operational side, our wholesale IDC business sustained its robust growth trajectory driven by our rapid delivery capabilities and customers' fast-moving pace. As of 09/30/2025, our wholesale capacity in service grew by 16.1% quarter over quarter to 783 megawatts, an increase of around 109 megawatts. Wholesale capacity utilized by customers rose by 13.8% quarter over quarter to 582 megawatts, an increase of around 70 megawatts while the utilization rate was 74.3% reflecting customers' continuous demand for our high-quality high-performance AIDC services. Our retail IDC business continued to progress smoothly, benefiting from growing AI-driven demand. This quarter, our retail MRR per cabinet increased for six consecutive quarters, reaching RMB 8,948. On the financial side, our total net revenues increased by 21.7% year over year to RMB 2.58 billion for the third quarter. Wholesale revenues remained our key growth driver reaching RMB 956 million, a significant year-over-year increase of 82.7%, fueled by the rapid growth of our wholesale IDC business. Our adjusted EBITDA for the third quarter also increased by 27.5% year over year to RMB 758 million. In addition, building on the increase we announced to our full-year guidance before Q2 earnings this year, we are further increasing our full-year revenue and adjusted EBITDA guidance this quarter. Thanks to faster than anticipated move-ins among wholesale IDC customers and ongoing operational efficiency gains. Supported by our premium wholesale and retail IDC services, we continue to capitalize on strong customer momentum and secure new orders in the third quarter. I'll share more on the next slide. Moving on to our new order wins on Slide five. In the third quarter, we secured three wholesale orders totaling 63 megawatts. Specifically, in addition to the 20-megawatt order from our JV project we mentioned on our last call, we won a 40-megawatt order from an Internet company as announced in September and a three-megawatt order from an intelligent driving company. All four data centers in the Greater Beijing area. Entering the fourth quarter, we are seeing continued order momentum, including a 32-megawatt wholesale order we just secured from an Internet company for a data center in the Yangtze River Delta. Furthermore, driven by growing demand from customers for intelligent deployment, we secured a combined capacity of approximately two megawatts in new retail orders across multiple retail data centers from customers in the cloud services, local services, and financial services sectors. During the quarter, rapid AI development and a broader adoption of AI applications continued to fuel growth in China's IDC industry. We saw sustained momentum in AI-related investments, especially from hyperscalers that are executing strong CapEx expansion plans. This has further accelerated demand for high-performance data centers driven by AI training and inference needs. AI has become the core growth driver of the IDC industry, propelling the industry's business model evolution from project-based resource delivery to platform-based services that provide integrated AIDC solutions. Meanwhile, customer demand and critical resources such as power are increasingly concentrated among leading IDC players. As an industry pioneer in AIDC development, we are leveraging our acute insights, strong resources, and premium reliable services to seize these structural growth opportunities by quickly meeting customers' needs. Now let's delve into our business updates, starting with our wholesale business on slide seven. Our wholesale business maintained strong growth momentum, with capacity in service increasing by around 109 megawatts quarter over quarter to 783 MW, and utilization rate remaining stable at 74.3%, mainly attributable to our delivery capacities at our NOR Campus 02 and NHB Campus 01a and faster than expected move-ins at our NOR Campus 01. Our mature capacity utilization rate also reached 94.7%, a relatively high level. We have a clear growth path for our wholesale data center capacity. Let's move on to Slide eight. As of the end of the third quarter, our total wholesale resource capacity was around 1.8 gigawatts. Specifically, our capacity under construction was around 306 megawatts. Capacity held for short-term future development was around 414 megawatts, and the capacity held for long-term future development was around 291 megawatts. These secured resources represent a significant advantage in light of the IDC industry's limited effective supply and are in line with our optimistic view of AI-driven demand's long-term growth potential. Moving to our retail IDC business on Slide nine. Our retail business continued to progress smoothly in the third quarter. Retail capacity in service was 52,288 cabinets with the utilization rate increasing slightly to 64.8% as of September. As I just mentioned, our retail MRR per cabinet has increased for six consecutive quarters, reaching RMB 8,948. Turning to our delivery plan on slide 10. With our strong and efficient delivery capabilities, we successfully delivered a total of around 109 megawatts in 2025, bringing our total deliveries around 297 megawatts as of September. We currently have seven data centers under construction, with six in the Greater Beijing area and one in the Yangtze River Delta. We plan to deliver around 306 megawatts of capacity over the next twelve months, or around 132 megawatts during 2025 and 2026, and around 174 megawatts during 2026. This delivery plan reflects our view as of September, but we may update these estimates as we gain greater visibility over the next couple of quarters. In conclusion, our strong third-quarter results showcase our ability to identify opportunities and our readiness to seamlessly meet evolving market demand. Our visionary hyperscale 2.0 framework has positioned us to lead under the new global AI-driven paradigm, supported by advantages across high-density deployment, delivery speed and quality, and cutting-edge sustainable technology. As AI-related demand grows, we will continue to advance our effective dual-core strategy and hyperscale 2.0 framework, seizing opportunities to further unleash our growth potential in the AI era. Now I will turn the call over to our CFO, Qiyu Wang, for further discussion of our operating and financial performance. Thank you, everyone. Good morning and good evening, everyone. Qiyu Wang: Before we start the detailed discussion of our third-quarter performance, please note that unless otherwise stated, all the financials we present today are for 2025 and are in renminbi terms. Furthermore, unless otherwise specified, all the growth rates I am reviewing are on a year-over-year basis. Let's turn to slide 12. In the third quarter, we continued to pursue high-quality business. Our total net revenues increased by 21.7% to RMB 2.58 billion, mainly driven by the rapid growth of our wholesale business. Our adjusted cash gross profit rose by 22.1% to RMB 1.05 billion, while our adjusted EBITDA also grew year over year by 27.5% to RMB 758.3 million. Let's look more closely at our top line. As you can see on slide 13, in the third quarter, wholesale revenues, our key revenue growth driver, increased significantly by 82.7% to RMB 955.5 million, and the rapid growth was mainly attributable to the NOR Campus 01. Retail revenues increased by 2.4% to RMB 999.1 million. Our non-IDC business revenues increased by 0.8% to RMB 627.1 million. During the third quarter, we maintained solid margins thanks to our continuous efforts to enhance overall efficiency. As shown on slide 14, our adjusted cash gross margins improved to 40.7% from 40.6% in the same period last year. Our adjusted EBITDA margin rose to 29.4% compared with 28% in the same period last year. Moving on to liquidity on slide 15. We maintain robust and healthy liquidity bolstered by a net operating cash inflow of RMB 809.8 million during the third quarter, bringing our net operating cash flow for the first nine months of the year to RMB 1.37 billion. Our cash position remains solid, with total cash and cash equivalents, restricted cash, and short-term investments reaching RMB 5.33 billion as of 09/30/2025. Next, let's take a look at our debt structure on slide 16. We maintained our prudent approach to debt management. As of 09/30/2025, our net debt to the trailing twelve months adjusted EBITDA ratio was 5.5 and total debt to the trailing twelve months adjusted EBITDA ratio was 6.7, both remaining at healthy levels. Our trailing twelve months adjusted EBITDA to interest coverage ratio was 6.5. We prioritize long-term debt maturity planning in our debt and strategic management to ensure the security of debt repayment. Currently, the company's short and medium-term debt maturing in 2025 to 2027 comprises 41.4% of our total debt. Turning now to CapEx spending. As you can see on slide 17, for the first nine months, our CapEx was RMB 6.24 billion, with the majority allocated to the expansion of our wholesale IDC business. We still expect our CapEx for the full year 2025 to be in the range of RMB 10 billion and RMB 12 billion. The increase is mainly to support our planned delivery of 400 to 450 megawatts in 2025. Now moving to our full-year guidance for 2025 on slide 18. As we expect faster than anticipated move-ins among wholesale IDC customers and ongoing operational efficiency gains through the end of the year, we have further increased our full-year revenue and adjusted EBITDA guidance. We now expect total net revenues to be in the range of RMB 9.55 billion to RMB 9.867 billion, a year-over-year increase of 16% to 19%, and adjusted EBITDA to be in the range of RMB 2.91 billion to RMB 2.945 billion, representing a year-over-year increase of 20% to 21%. If the RMB 87.7 million of disposal gains on the EJS 02 data center were excluded from the adjusted EBITDA calculation for 2024, the year-over-year growth rate would be 24% to 26%. Please note our updated guidance factors in the impact of the private REIT transactions we issued early this November and excludes the target IDC project's financials from our consolidated financial statements. Before I conclude, I'd like to briefly update you on our ESG efforts. Our outstanding sustainability performance has once again earned recognition from a leading global rating institution. In 2025, our ESG score improved to 73 from 70 last year, ranking among the top 8% of the IT service industry globally. We stand out in areas including risk management, information security, environmental management, and customer relations, underscoring our comprehensive capabilities in sustainability development. This quarter's strong growth and enhanced profitability are yet another testament to our high-quality growth strategy. Looking ahead, we will continue to consolidate our core strengths and capture growth opportunities, delivering sustainable long-term value for all stakeholders. This concludes our prepared remarks for today. We are now ready to take questions. Xinyi Wang: Thank you. We will now begin the question and answer session. If you wish to ask a question, please press 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press 2. If you're on a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please ask your question to management in English and then repeat in Chinese. Your first question comes from Tom Tang from Morgan Stanley. Please go ahead. Tom Tang: Thanks, management, for this opportunity to ask questions, and congrats again on a very strong quarterly result. I have two questions. So first question is more on the 2026 outlook. So we're hearing that there has been some expansion in the domestic chips and capacities. Just wondering what is our current outlook for the overall auto tendering in 2026. Second question is about private REITs. So we noticed that we have filed another private REITs with a size of almost RMB 10 billion. So just wondering what will be the timeline of this private REITs execution, how much cash flow is going to recycle, and what will be your impact on the financial statements. Ju Ma: Thank you very much. You know, as we are approaching the end of the year, we are engaging our customers and trying to learn about their development path. This would put us in a well-positioned to plan our resources accordingly. So according to our communications with the clients and also the current status quo of the pipeline, we believe that the market will be fairly stable with a moderate increase for the year 2023. According to our conversations with our clients, we feel that they are having very detailed expansion plans or growth nationwide. Therefore, we have to plan carefully in order to accommodate the user's needs. Because they are requiring us to deliver the capacities at a faster pace with a higher requirement. So that's why we are planning accordingly as well. And so the overall rating for the next year is that the market is going to be stable with a moderate increase. And with regard to your second question on the domestic chip, so we, VNET, are tracking and monitoring the development of the domestic chips very closely. We know that the sector is evolving very quickly, with a lot more options available. And we believe that in 2026, you know, we're going to see intensive competition among domestic chip players other than the two to three major players, there are more upcoming players coming into the market. So we're going to see significant growth and development in this sector. So that will give us give the customers a lot more choices with more certainty again, that would push the development or, in return, drive the development of our business. Qiyu Wang: Thank you. I will take your second question with regard to the REITs projects. So these two REITs projects followed on the heel of our first private REITs projects. So the underlying project for our first REITs project was retail IDC, whereas the underlying project underlying assets for these two REITs projects are wholesale IDCs. So this would be the first time that we have scaled private REITs issuance with the underlying assets of wholesale. So if these issues were too successful, this would officially mark so that we have completed the full closed-loop financial capital cycle of development holding, partial exit, as well as the long-term operation. These two REITs projects are currently being reviewed by the exchanges. And the expected valuation multiples would be better than the first REITs project. Once the two REITs projects were successfully issued, we will, unlike the first REITs project, we will consolidate the financial statements of these two projects into the group level financial statements. So therefore, it wouldn't impact the group level financial statements, specifically the revenue or EBITDA data. We are planning to adopt a similar approach with future private REITs projects with underlying assets of wholesale IDCs. And our goal is to complete the issuance by Q1 next year. Xinyi Wang: Next question, please. Thank you. Your next question comes from Timothy Zhao from Goldman Sachs. Please go ahead. Timothy Zhao: Great. Thank you, Madam, for taking my question. And congrats on the very solid results. Two questions here. One regarding I think this earlier mentioned that ran I think so receive more orders for hello? Xinyi Wang: Yeah. We can hear you now. Timothy Zhao: Okay. Yeah. So I was in the appears to be we need more orders in your wholesale campuses in Hebei and Jiangsu. From the geographical location perspective, how do you think about the customer preferences, and what kind of does each campus serve differently? That's my first question. My second question is regarding the pricing. It's just for the wholesale business. I noticed that for this quarter, there is some fluctuation in the wholesale and MRR. Just wondering how do you think about the pricing trend into the fourth quarter and next year? Ju Ma: I'll take your first question. Actually, the client takes specific considerations with regard to their orders for their business across different regions, they do not have very particular preferences. I think the major considerations on their end are first, the type of business and product offerings. Second, the distance or proximity to their headquarters. And the third is how convenient it is to scale up the existing capacity that they have with us. And take VNET Us For Example. So We Have Observed That The Client Have Different Types Pays With Regard To Their Requests Across Different Regions. And It Would Vary Quarter By Quarter. We Have A Lot Of The Demand Coming From The Greater Beijing area as well as the Yangtze Delta area. However, we do have upcoming new demand from customers for campuses in Hebei province as well as the Wuhan Chapel campus. Like I said, the major considerations on the client side are their type of current product offerings and the proximity to their headquarters as well as how convenient it is to scale their existing capacity with us. So that's the major considerations on their end. And based on that, they are varying their requests quarter by quarter. And with regard to the pricing of our wholesale IDCs, according to what we have observed, the pricing for Q3 was fairly stable. Qiyu Wang: I would like to elaborate on that. First, customers are moving in faster than we expected. Therefore, the IRR of these projects is better than we expected. And number two, frankly speaking, in areas where the dynamics of the supply and demand is in tight balance, VNET does not engage in the beatings with the low prices. Therefore, we are able to secure fairly stable order or contract price. Thank you. Next question. Xinyi Wang: Thank you. Your next question comes from Daley Li from Bank of America. Please go ahead. Daley Li: Hi. Management. Thanks for taking my question. Congrats on the strong results. I have two questions here. First one is, in our last earnings call, we mentioned we have a few projects, and we are participating in the tendering. And, could you update us on the progress and, how we complete, you know, all the, projects ongoing, or are we how many projects we are dealing with our clients? And in future, how do you see the, seasonality of mold tendering in future? My second question is about the new land and the power resources. You need to call with the our total resources on hand. Is likely stable. And, in future, where would we to which area will be our focus to, find more resources? Land, and power? Ju Ma: Thank you for your questions. You know, as we have observed for the first three quarters, that different customers are coming up with different requests at different paces. And for us, we follow their paces closely. And I have done a very brief summary of what we have achieved, in terms of the new orders that we have secured for the past twelve months, that was 331 megawatts. Looking ahead to 2026, based on the services we are offering to our client as well as the understanding of our clients, we are confident that we are able to sustain this growth momentum. And so with regard to the wholesale ID we have been, you know, following closely, the client AI development trend. We have noticed that customers are actually balancing their inferencing and training demand. And we have captured that change the customers are pivoting more towards the inferencing, and we are deploying resources accordingly to meet that customer's needs. So therefore, we are repurposing some of our cabinets and acquiring GPUs in advance. So this would put us in a good position to accommodate our users' needs. And you know, particularly with these orders from the key clients, we are confident in that with the efforts on our end, are able to accommodate users' needs as the AI growth momentum continues to unleash. And with regard to your second question on resources that we're planning to acquire in the future, that's something that the company values a lot and put a lot of thoughts in. Based on the service that we offer to our clients as well as the understanding that we have, on them, we are planning our resources for the next year. On top of that, we have extended our planning over to a five-year horizon rather than on a yearly basis. So this would allow us to plan more strategically to accommodate users' needs. And to break it down, we carefully weigh three factors. One is the split the demand split between generic computing power versus the smart computing power, and the second is the geolocations and the third is the AI-related chips development. And more specifically, with regard to next year, we are going to focus number one, the Greater Beijing area, particularly Wulan Chabu, Hebei, and Beijing surrounding areas. Second, number two, the Yangtze River Delta areas. We are starting to acquire resources for the next five years. To accommodate our users' demand. And, additionally, we are exploring the resources outside of these two major areas that I've mentioned. Thank you. Xinyi Wang: Thank you. Your next question comes from Sara Wang from UBS. Please go ahead. Sara Wang: Thank you for the opportunity to ask a question. I actually only have one question. So I recall earlier this year, management had shared that one of the top priorities from Habitco customer is the time to market. So has that changed? And, also, as interest demand is going to be the growth driver into next year, is there any change in the like, customer's consideration in terms of new order release? And if we talk about more workloads by inference, that that mean maybe user latency will be a relatively more important configuration factor going forward. Ju Ma: I would take I'll answer the second half of your question. Yes. We have observed that inferencing will become a major growth driver for next year. So that means that the customers have higher requirements in terms of latency. So the lower latency the better. Therefore, we are in a very good position to meet customers' needs with our campuses in the Greater Beijing area, particularly Hebei province as well as the Wuhan Jiangbo campus. And with regard to the first half of your question, yes, it is quite a trade-off that we have to face. So we are facing significant challenges in terms of how fast the customer wants to move in with the capacity that they have secured with us. And there are three approaches that we are taking to meet customers' demand. Number one, we are planning early in terms of civil engineering and external power supply. Number two, we are consolidating our capacity in terms of supply chain management. Number three, we are adopting electromechanical modularization as well as other standardized construction solutions to meet customers' needs. As you know, the general timeline that the customer expects is t plus six, which means they want to move in within six months after signing the contract. Yes, we are able to accommodate user needs in terms of the horizon. In one particular case, we're even able to accommodate or deliver within three months after signing the contract. Just so you know. Xinyi Wang: Thank you. Next question, please. Shuyun Che: Thank you. Your next question comes from Shuyun Che from CICC. Please go ahead. Shuyun Che: Hi. My name is management. Congratulations on the company's strong earnings, and thank you for taking my question. My first question is about the wholesale IDC and the delivery piece for the IDC business is very fast and has the company set the utilization rate target for the next two years? My second question is about the retail IDC business. We have seen the retail business IDC business, MRR has been grossing for several quarters. And what are the main drivers behind this trend, and how to view this sustainability in the future. Ju Ma: With regard to the utilization rate, of course, the customers are demanding to move in at a faster pace. For our mature IDCs, the utilization rate is inching closer to 95%. And with regard to the specific target on the utilization rate, I think it's partly that depends on the capacity that's going to be delivered in the next two years. We will disclose more information in the Q4 financials, and we are in the long run, we are confident that the utilization rate will steadily increase. And thanks for your attention on our retail ID business. As you know, the wholesale IDC business has been growing fairly quickly in contrast to the Retail IDC. We are very pleased to see the MRR of our retail business continue to grow quarter over quarter for several consecutive quarters. As you know, the competition landscape in this sector is fairly intense. I think the growth hardly boiled down to a couple of factors. Number one, in terms of the needs of customers, they are adding a smart computing on top of storage plus generic computing. And we are proactively repurposing our cabinets in order to meet their demands, in order to capture on this growth momentum and need. And the factor number two on our side, on top of the hosting service we offer to clients, we are providing incremental value-added services on the software level. Let's say, networking, as well as storage networking, services? And another factor is the initiative of repurposing the retail cabinet into higher density cabinets. And clearly, we are benefiting from these efforts and initiatives. Last but not least, should the demand from customers in terms of storage generic computing plus value-added services sustain, we're confident to sustain the growth momentum of our retail business. Thank you. Xinyi Wang: Next question, please. Andy Yu: Thank you. Your next question comes from Andy Yu from DBS. Andy Yu: Hi. You, management, for taking my questions, and congratulations on the solid results. So I have two questions. So your key peer has announced plans to expand into regions with lower electricity costs to capture AI training demand. So how do you see the supply-demand dynamics will evolve in these regions where VNETs currently have a first-mover advantage? And secondly, the government stand on data center CVITs has become more positive with a shorter timeline for new asset in post IPO. Do we expect our serial application to accelerate? And apart from these projects, what will our funding strategy be going forward? Ju Ma: Thank you. I'll take your first question. I think different companies are adopting different strategic growth approaches with regard to their own reading on the market dynamics as well as their development legacy. So they are actually deploying resources, you know, based on all of these factors. However, I would like to elaborate on how we go about it. Like, we iterated many times, over the next three to five years, AI is going to be an increasingly more important growth driver. On the corporate level, our reading is that the training of foundational models that type of demand will be increasingly concentrated to one or few top capable deep-pocketed players. So that's the first reading that we have on the market. And number two, we believe that inferencing and private deployment will continue to sustain its growth momentum. As you know, it can be avid or confirmed from Jensen Huang's remarks. And number three, we believe over the course of the next five years as the GPU grows domestic GPU chips grow, there is going to be more demand from the inferencing private deployment, as well as many emerging group intelligent agents. So these are the growth areas or customer demands that we are paying closer attention to. So in a nutshell, we, VNET, will adhere to the principle of a coordinated balanced development. So using our resources, to meet users' varying demands. Thank you. So our C rate is still underway. However, I am not in a position to disclose any information at the moment, and we wish to update you later as we see more progress. So other than the C rates or public rates, we are proactively advancing the holding type ABS, also known as private REITs. And we have successfully issued one. And we are hopeful that this would allow us to recycle a major sizable asset fund. Or capital. From such types of issuance. And, additionally, I am happy to share that one of the operating entity domestic operating entity, Beijing VNET, has just got a triple-A rating from a domestic rating institution. Which is rare among private-owned companies. Non-state-owned companies. So with this rating, favorable rating, so we are actively advancing the issuance of domestic corporate bond particularly the Science and Tech Innovation Bond which comes with a very favorable interest rate. So should it be pulled through, we are going to benefit from a lower interest rate with a widening channel of financing. Xinyi Wang: Next question, please. Edison Lee: Thank you. Your next question comes from Edison Lee from Nomura. Please go ahead. Edison Lee: Okay. Thanks, management, for taking the question. So only one quick question. So how do you see the trend for our unit CapEx spending? Because I noticed that for the first nine months, the total CapEx plan, there was around RMB 6 billion versus our full-year guidance of RMB 10 to 12 billion. So it looks a bit behind schedule versus our capacity delivery schedule. And so just wondering if management can provide some colors on this and also for next year's CapEx, what's our outlook? And potential sources for funding our next year's CapEx? Ju Ma: So the majority of our CapEx is on the wholesale IDC. And the CapEx per unit megawatt for our wholesale IDs campuses are gradually trending down. And we are still in the process of putting together our CapEx for next year, and we are preparing a similar size of funding and the proceeds or the sources of the funding would mainly come from asset securitization as well as the issuance of corporate domestic corporate bonds. So a quick number that I want to share with you. So through the pre-REITs, private REITs, and development fund, that issued in 2025, we have successfully recycled RMB 2 billion to the equity assets. And our goal is that we're going to beat this number in 2026. There are a lot of tools in our toolboxes. Financing toolboxes, I would say. And we are confident that we're able to fund our CapEx while keeping the leverage ratio within a secure range. Safe range. Xinyi Wang: Next question, please. Anthony Leng: Thank you. Your next question comes from Anthony Leng from JPMorgan. Anthony Leng: Hello. So I have two questions regarding the full-year update 50 guidance. So the full-year guidance is five four q on revenue. Appears to be down a little bit. So they should based on the midpoint. And on the what's be the potential reasoning given the strong fat customer moving rate, is there a potential upside to the full-year guidance further? Second question is regarding the three q reported take the margin. This be there was a sequential decline versus two q despite a very strong customer moving rate. What's the potential driver to cost this decline? And what would be the next few quarters EBITDA margin trend? Ju Ma: Let me take your question. As always, we have been consistently prudent in terms of offering our full-year revenue guidance. I think we are going to watch closely, the pace of our customers moving in as well as the electricity used by them. Because they are closely related to the revenue. Looking to the quarter-over-quarter growth, I think there's very little likelihood that the Q4 revenue will decline sequentially. I would advise you to refer to the upper end of our full-year revenue guidance range. And with regard to the EBITDA margin, I would say it's within a reasonable range because the majority of our offerings is, you know, revenue is from the wholesale IDC business. And because of the rising temperatures in Q3, therefore, we are seeing more tariffs for Q3. Given that these are actually reflected in our P and L, in terms of the tariffs that we pay. However, with regard to our costs, they are consistent. We do not see huge fluctuations. And with you know, so I would see this is reasonable seasonal fluctuations. Xinyi Wang: Thank you. Operator: Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the ZIM Integrated Shipping Services Ltd. third quarter 2025 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Elana Holzman. You may begin. Elana Holzman: Thank you, operator, and welcome to ZIM Integrated Shipping Services Ltd.'s third quarter 2025 Financial Results Conference Call. Joining me on the call today are Eli Glickman, ZIM's President and CEO, and Xavier Destriau, ZIM's CFO. Before we begin, I would like to remind you during the course of this call, we will make forward-looking statements regarding expectations, predictions, projections, or future events or results. We believe that our expectations and assumptions are reasonable. We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ, including materially. You are kindly referred to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2024 annual report on Form 20-F filed with the SEC on March 12, 2025. We undertake no obligation to update these forward-looking statements. At this time, I would like to turn the call over to ZIM's CEO, Eli Glickman. Eli? Eli Glickman: Thank you, Elana, and welcome, everyone. Thank you for joining us today. Q3 2025 unfolded against a backdrop of continued uncertainty driven by geopolitical and trade tensions. While the shipping industry has always been characterized by volatility, we are now experiencing events and changes with greater frequency and intensity than in the past, amplifying the challenges and requiring us to be even more agile than ever. Despite these headwinds, our team has navigated a volatile rate environment with resilience, maintaining service reliability, optimizing our cost base, and delivering solid Q3 results. Slide number four. Consistent with our expectation, we generated revenue of $1.8 billion and net income of $123 million. Q3 adjusted EBITDA was $593 million, and adjusted EBIT was $260 million. We suggested an EBITDA margin of 33% and an adjusted EBIT margin of 15%. We maintain total liquidity of $3 billion at September 30. Slide number five. ZIM's board of directors continued to prioritize returning capital to shareholders and as a dividend policy in 2021 and 2022 aiming to reward long-term shareholders. Additionally, when financial results have exceeded expectations, the board has promoted the special dividend distribution to further reward shareholders. Accordingly, under this policy, the board of directors declared a dividend of 31¢ per share or a total of approximately $37 million, representing 30% of third-quarter net income. Throughout 2025, ZIM distributed a total dividend of $9.09 per share, including the dividend declared today, or a total of approximately $1.1 billion. Since the IPO, we distributed a total of approximately $5.7 billion as dividends of $47.54 per share, including the dividend declared today. Turning to our guidance, the fourth quarter is trending weaker than originally projected when we provided guidance in August. However, despite the considerable uncertainty, our nine-month results have enabled us to refine our full-year guidance, regions, and increase midpoints. As such, based primarily on our performance year to date, we now expect to generate adjusted EBITDA between $2 billion to $2.2 billion and adjusted EBIT between $700 million and $900 million. Xavier, our CFO, will provide additional context in our underlying assumption for our 2025 guidance later on the call. Slide number six. In a highly dynamic environment, we continue to take proactive steps in line with our strategic objectives during the third quarter and into the fourth quarter. Capitalizing on the versatility of our fleet, we have been able to adjust capacity quickly as market conditions have evolved. On the Transpacific, we have continuously adapted our network to account for changes in cargo flow patterns resulting from the ongoing US-China trade standoff. The recent US-China trade agreement marks a positive development potentially reducing market uncertainty and enabling our customers to plan with greater confidence. The tariff reduction on Chinese goods announced as part of this trade agreement could support demand going forward, though the extent of its impact remains uncertain. Nonetheless, the long-term trend toward economic decoupling between China and the US is likely to persist as both countries continue efforts to diversify their export and import markets. ZIM's long-term strategy, which we have previously discussed, is closely aligned with this trend. Expanding and diversifying our network so we can capture new opportunities as global trade patterns evolve. Two critical focus areas for us are Southeast Asia and Latin America. As manufacturers diversify production away from China, countries like Vietnam, Korea, and Thailand have increased their share of US imports. Our expanded presence in Southeast Asia continues to be an important strategic advantage for ZIM. By establishing a strong foothold in this market, we have been able to capture new trade flows and partially offset the reduction in transpacific cargo from China to the US. We have also strategically focused on expanding our presence in Latin America over the last two years. In Q3, we continue to grow our volumes and still see meaningful opportunities in this region, supported by the steady expansion of trade between Latin America and key markets, including the United States and China. Overall, regional diversification enhances our network flexibility, broadens our customer base, and reduces our dependence on any single trade lane. Our ability to capitalize on this opportunity is a direct result of our cost-competitive fleet and agile deployment strategy. Following the delivery of 46 new builds in 2023 and 2024, which significantly improved the efficiency of our operated capacity with a transformed fleet of larger modern vessels well-suited to the trades in which we operate. We remain diligent in keeping our fleet modern and competitive. Earlier this year, we secured a significant charter agreement for 10, 11,500 TEU LNG dual-fuel vessels scheduled for delivery in 2027 and 2028. This continued investment in our fleet is central to our growth strategy, enhancing both the sustainability and competitiveness of our capacity. The versatile size and design of these vessels will further enhance our operational flexibility and support long-term profitable growth. In addition to strengthening our core fleet, we continue to prioritize flexibility and optionality in our fleet strategy. As part of this approach, we actively manage our operated fleet to align with evolving market conditions. During the third quarter, we continued to redeliver vessels to owners, which Xavier will discuss in more detail. Our approach to renewing charters this year signals a cautious outlook, particularly as the market fundamentals still point to supply growth outpacing demand moving forward. As such, we anticipate continued pressure on freight rates during the remainder of the fourth quarter and into 2026. Overall, we remain confident in our strategy and competitive position. Today, approximately 60% of our capacity is new build, and 40% of our fleet is LNG-powered, reflecting our early investment in cost and fuel-efficient vessels and commitment to sustainability. With the addition of the ten 11,500 new LNG-powered vessels by 2028, we expect to operate not only the youngest fleet in our segment but also the greenest, with the largest proportion of LNG-powered capacity, further strengthening our leadership in sustainability and operational efficiency. Looking ahead, we intend to build on our progress to date, maintaining and further enhancing our competitive advantages while capitalizing on attractive opportunities that will ensure our fleet remains modern and cost-effective. We believe our nimble commercial approach, coupled with prudent investment in fleet equipment and technology, continues to drive resilience across ZIM's business and position us to deliver long-term value for our shareholders. Before turning the call to Xavier, I would like to address our view on the Suez Canal. Ensuring the safety of our crew, customer cargo, and vessels remains our highest priority. While the current ceasefire in Gaza is encouraging progress, a return to the Suez Canal will require further assurance regarding the durability of this ceasefire, and we are monitoring the situation closely. Having said that, we believe that a return to the Suez Canal in the near future now appears increasingly likely. Therefore, we are preparing an operational plan to support this transition once the security situation is stabilized. Resuming passage through the Suez Canal represents both opportunities and risks. While it will allow improved fleet efficiency and generate operational cost savings, it will also increase effective supply currently tied up by longer routes around the Cape of Good Hope, adding pressure on freight rates. With that, I will turn the call over to Xavier, our CFO, for a more detailed discussion of our financial results, 2025 guidance, as well as additional comments on the market environment. Xavier? Please. Xavier Destriau: Thank you, Eli. And again, on my behalf, welcome to everyone. On Slide seven, we present our key financial and operational highlights. We delivered solid profitability in Q3 despite a volatile operating environment. Third-quarter revenues were $1.8 billion, down 36% compared to last year, reflecting both lower freight rates and lower volume. Total revenues in the first nine months of 2025 of $5.4 billion were down $840 million, or 13% year over year. The average freight rate per TEU in the third quarter was $1,602 compared to $2,480 per TEU in the third quarter of last year. Q3 carried volume of 900,000 TEUs was 4.5% lower year over year, mostly due to lower volume in Crossways and Atlantic, but 3.5% higher sequentially. Revenues from non-containerized cargo, which reflects mostly our car carrier services, totaled $78 million for the quarter. That is compared to $145 million in 2024, attributable to both lower volume as we operated two fewer vessels in the current quarter, as well as lower rates. Our free cash flow in the third quarter totaled $574 million compared to $1.5 billion in 2024. Turning to the balance sheet, total debt decreased by $369 million since the prior year-end. As previously noted, total debt is expected to continue to trend down as repayment of lease liabilities exceeds lease additions and extensions until we start receiving new build charter capacity in 2026. Next, the following slide provides an overview of our fleet. Eli covered key aspects of our fleet strategy, but I would like to add a few more data points that we believe are important to consider. ZIM currently operates 115 container ships with a total capacity of 709,000 TEUs. This reflects a decrease of approximately 80,000 TEUs lower than our peak after having received all 46 newbuild vessels in early 2025. Approximately 70% of this capacity we consider as our core fleet, and it includes the 46 newbuild vessels which were received throughout 2023 and 2024, with the last vessel delivered in January 2025. These vessels carry charter durations from five to twelve years, and another 16 vessels are owned by ZIM. To remind you, we opted to secure these new builds and long-term duration contracts rather than continue to rely on the short-term charter market. And this accomplished multiple key objectives. First, we ensured access to larger vessels better suited to the trades in which we operate, thereby improving our competitive position. These vessels are generally not available in the shorter-term charter market. Second, the longer-term charter periods contribute to improved predictability in our cost structure. Moreover, for 25 of the 28 LNG vessels, our core strategic capacity, we hold options to extend the charter period, as well as purchase options giving us full control over the destiny of these vessels very much as if we were the vessel owners. We also have an option to purchase the 10, 11,500 TEU LNG vessels that Eli mentioned earlier following the twelve-year charter period. The remaining 30% of our fleet, approximately 192,000 TEUs, allows us to maintain important flexibility. By the end of 2026, there will be a total of 20 vessels up for charter renewal, with three vessels of 5,600 TEUs still up for renewal in 2025, and 17 vessels or 55,000 TEUs of capacity up for redelivery in 2026. This optionality to keep the capacity already delivered to owners allows ZIM to adjust its capacity according to changing market conditions or shifts in our commercial strategy. We have opted to redeliver 22 vessels this year based on our cautious outlook moving forward, as spot freight rates have come under pressure during the second half of the year. With respect to our car carrier capacity, we currently operate 14, down from 16 car carriers last year, and we expect to redeliver another vessel by year-end. As we previously communicated, we expanded our car carrier capacity in the past few years to benefit from favorable market trends, but we maintain optionality with no long-term commitments on our chartered tonnage. We continue to assess our level of participation as car carrier market dynamics evolve. Moving on to slide nine, we present ZIM's third quarter and nine-month 2025 financial results compared to last year's third quarter and first nine months. We delivered solid profitability in Q3. Adjusted EBITDA in this year's third quarter was $593 million and adjusted EBIT was $260 million. Adjusted EBITDA and EBIT margins for the third quarter were 33% and 15%, respectively. That compares to 55% and 45% in the third quarter of last year. For the first nine months of 2025, adjusted EBITDA margin was 34%, and adjusted EBIT margin was 16%. This is compared to 44% and 30% in 2024. Net income in the third quarter was $123 million, compared to $1.1 billion in the same quarter of last year. Next, on Slide 10, you see that we carried 926,000 TEUs in the third quarter compared to 970,000 TEUs during the same period last year, a 4.5% decline. Compared to the prior quarter, so Q2, carried volume was up 3.5%. The year-over-year decline was mainly attributable to weaker volume on Crossways and Atlantic. Transpacific volume this quarter stayed robust, down just 1.5% compared to the same period last year, which saw exceptionally strong demand in the US. Sequentially, transpacific volume increased by 17%. In Latin America trade, we also continued to see growth with a 2.4% increase in volumes year over year. Next, we present our cash flow bridge. So for the quarter, our adjusted EBITDA of $593 million converted into $628 million net cash generated from operating activities. Other cash flow items for the quarter included $451 million of debt service, mostly related to our lease liability repayment and a dividend payment of $37 million. Turning now to our outlook. We have narrowed ranges and increased 2025 guidance midpoints. Specifically, we are raising the lower end of our adjusted EBITDA range by $200 million and now expect to generate adjusted EBITDA between $2 billion and $2.2 billion. We have also updated adjusted EBIT guidance to reflect a narrower range, lowering the high end of our prior outlook. Today, we expect to achieve adjusted EBIT in the range of $700 million and $900 million. To reiterate Eli's earlier comment, these increased midpoints reflect primarily our performance year to date. We note the continued high degree of uncertainty related to global trade and related to the geopolitical environment. With respect to our assumptions, our view on freight rates has softened since our August guidance, while our assumptions about operated capacity, carried volume, and also bunker rates remain unchanged. Before we open the call to questions, just a few more comments on the market. The outlook for container shipping remains cautious, as growth in supply is expected to outpace the growth in demand in the foreseeable future. The order book has continued to grow and now stands at 31%. While the growth in supply is expected to slow down in 2026, when we compare to 2025, deliveries are projected to surge again in 2027, to more than 3 million TEUs of capacity, exceeding the record set in 2024. There are, nevertheless, mitigating factors to consider even if their impact may not be immediate. First, vessel scrapping has been minimal over the past five years, this trend cannot last forever, and at some point, vessel deletion will increase. Second, the industry's decarbonization agenda. Carriers will move forward to meet their own emission targets and expectations from customers to offer greener shipping solutions, even if the regulatory framework has met a roadblock, and these efforts may also accelerate scrapping of older vessels, which will become increasingly less economically viable, especially in comparison with the significant new build deliveries in the post-COVID era. On the other side of this supply-demand equation, global container volume is forecasted to grow by about 4% this year, largely driven by robust Chinese exports. However, the question is whether this growth is sustainable into 2026. It's also important to note that the increase in Chinese exports has not been uniform as US imports from China were negatively affected by the tensions between the two countries. Looking into 2026, it remains to be seen whether the trade agreement announced earlier this month will lead to a recovery in cargo flow on this trade lane. The supply-demand imbalance in 2026 will likely be exacerbated by the industry's return to the Suez Canal, which will, after a period of adjustment, significantly increase effective capacity. And as Eli mentioned, the reopening of Suez offers some benefits, allowing for improved fleet efficiency and operational cost savings, but it will also most likely add pressure to freight rates. On that note, we will open the call to questions. Thank you. Operator: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Omar Mostafa Nokta with Jefferies. Your line is open. Omar Mostafa Nokta: Hi, Eli and Xavier. Really good commentary. Lots, I think, to discuss. I have a few questions, but you know, just maybe first off, on ZIM and maybe just the broader governance side of things. Can you give a comment on, obviously, the market chatter regarding a management buyout? Is that something still being explored? And related to that, how should we be thinking about the changes to the board composition you disclosed yesterday? I recognize a lot of this is sensitive, but is there anything you can share? Eli Glickman: Hi, Omar. First, the board is managing the process of board member changes. Two of the board members decided to resign, and as such, the board has chosen two new highly professional board members that meet the requirements, and we have a full scale of eight board members in the company. What was the next question? What is the next question, please? Omar Mostafa Nokta: Yeah. Just in terms of, I guess, the broader management buyout potential. If that's something that's still being explored. Eli Glickman: For this, we have no comment. Going to be a comment for sure. The board will decide when, how, and no comment for discussion. Omar Mostafa Nokta: Understood. Thank you. And then just wanted to ask about the Red Sea. You made some very interesting comments on that. And wanted to ask in terms of how you're viewing the return. I know you're in the early planning stages in the process of that. I guess for ZIM, you know, the Asia-Europe routes had not been really a major focus. Do you see this shifting as a Red Sea return or at least what you're evaluating? Is this an opportunity for you to grab market share and build a presence that you haven't had before in that leg? Eli Glickman: The answer is yes. We are actually waiting for the insurance company to approve our return into the Red Sea. So it's. And we're looking forward to going for shorter trade than the Cape of Good Hope as fast as we can. Omar Mostafa Nokta: Okay. Thank you. And then just a final one, and I'll pass it over. Xavier, you were kind of highlighting the shifts you've returned this year. We can see the cost coming down as a result of that. Are you able to give any quantification or some expectations on, say, 2026, how you think costs would look relative to what they've averaged this year? Xavier Destriau: Look, I think from a vessel or fleet profile perspective, depending, of course, as to what 2026 will look like from a rate dynamic perspective, but maybe there are risks in this respect. It is likely that we will return and continue to return vessels that are coming up for renewal and focusing on, at the end of the day, continuing to operate the larger ships, the more efficient tonnage, the newer and greener capacity that we have received over the course of the past couple of years. So today, I think 2025 was clearly a downward trend in terms of operated tonnage. We started the year at around 780,000 TEUs. We say that today, we are 710,000 TEUs, and we need to acknowledge that the charter market is still to date elevated, so it's expensive to reach out to tonnage. At a time when the revenue per TEU carried is under pressure. I think for as long as this situation continues, it is more likely than not that we will redeliver the vessels that come up for renewal as opposed to trying to recharter them. Omar Mostafa Nokta: Got it. Okay. Thank you, Xavier, and thank you, Eli. I'll turn it over. Operator: Your next question comes from the line of Marco Limite with Barclays. Your line is open. Marco Limite: Hello. Thank you very much for taking my question. My first question is on the dividend. So implied Q4 for your guidance implies that the income in Q4 will be negative. And given the outlook you're providing, probably we're going to have negative income for a few quarters at least. So can you just remind us what is your dividend policy? So as long as the net income date is negative on a quarterly basis, does that mean that you won't pay dividends? So this is, let's say, maybe the last CV for a while? Second question, so on this Red Sea reopening, you've been very helpful in giving your view. But if you want to dig out a little bit more in how much visibility you have got on timing over there at sea, have you got any strong conviction or visibility? I don't know. Have you been discussing with authorities? Or other companies? So, yeah, what is the kind of visibility you have got there? And the third question is a bit more technical. You haven't changed the upper end of the EBITDA guidance, but you have reduced the upper end of the EBIT guidance. What's that? And so sorry to stick another one, but when we think about 2025, clearly, there have been issues with the US ports and the Asian ports, China ports in Q4 probably, so is the China port fee included in your Q4 guidance? And are you able to estimate how much have you got in terms of one-off this year that are now recurring next year from all the issues with the US and Chinese ports? Thank you. Eli Glickman: I will begin with the first two questions and then we'll go. Since the IPO, we have distributed about $5.7 billion in dividends. The last two years, more than $1 billion. And this is about and more than 25 times the amount we raised in the IPO in January 2021. ZIM's dividend policy is to distribute 30% per quarter from the net profit and once a year, in the end of the year, this coming March, with a catch-up up to 50% of the net profit of the year. As for your next question, about the next quarter, we haven't published results yet. But hopefully, this quarter will be profitable as well. So we have the policy. And I just want to mention here that the board has the ability to decide on a special dividend as we did two times two special dividends. First one, on September 2021, $2 per share. And then again, December 2024. So the board has the authority on top of the policy to decide on a special dividend. And this is its authority. I cannot speak for the board. I believe in the end of the next quarter, the board will take a decision. Or anytime, it can decide to take a decision on a special dividend. As for the Red Sea, we are according to the announcement of the Houthis and the Egyptian authorities, as I said before, Omar Mostafa Nokta, willing to go as fast as we can to change the direction of vessels to go through Bab el-Mandeb and the Suez Canal. According to our policy and according to our responsibility, first, we have to have approval by the shipowner and insurance company. And this is what we are going to do. Bottom line, as soon as we can, we'll go through the Suez Canal. Xavier Destriau: Right. And I will take maybe the last two questions, Marco. If you allow me. So you're correct in terms of EBIT guidance. The original guidance range suggested a $1.25 billion difference between the two metrics, EBITDA and EBIT. So $1.25 billion of depreciation and amortization. And it was there's a little bit of rounding going on here. Now we say 1.3. It was obviously not exactly 1.25 to start with. It was a little bit more than that. Now we are tinting towards the rounding of 1.3 billion. A few things explain it. First, the two vessels that we acquired in the course of 2025 have some effect on the amortization in the tail of the year, in the second half of the year. Also, some equipment and we have taken the opportunity of maybe the equipment in terms of boxes, containers, are cheap to acquire today, and it's a good opportunity to continue to renew our fleet and maintain a very efficient fleet of equipment and let go of the older boxes. And there is also on top of that a bit of IT cost that got capitalized and finds its way in terms of depreciation towards the end. That's the reason. A mix of quite a few small things that add up to rounding to the 1.3 as opposed to 1.25. With respect to the last part of your questions, now that we are in a situation, and we've been in a situation since the announcement from both the US administration and the Chinese Ministry of Transport, there is no such thing as an extra levy that we are subject to in any jurisdiction when we call in the US or in China. Eli Glickman: I would like also to take the opportunity because of the question about the dividend. I want to emphasize to the best of my knowledge, didn't check it solely. So there's no company in history that returned in two years more than 20 times the amount that we raised in the IPO in January 2021. And by today, more than 25 times the amount that we raised, $204 million net dollars in the IPO. So in this, we made history. Maybe it's our company who raised more money. But there are no other companies that return such high or distribute such high dividends in such a short time. Please, next question. Operator: Your next question comes from the line of Alexia Dogani with JPMorgan. Your line is open. Alexia Dogani: Yes. Good afternoon. Thank you for taking my questions. Just firstly, on cost savings. In the previous downturn, you looked at kind of resizing the network, taking kind of some more efficiency measures. Is this something that you are currently considering? And what could be the potential scope? And secondly, can you give us an update on your CapEx commitments in terms of cash, but also new lease inceptions? And based on your comment that you are not looking to renew charters or are expiring, how much of the asset base do you expect will kind of roll off in the next twelve to eighteen months? And then finally, are there any financial leverage parameters that your team works towards even if there's a potential downturn, mindful that most of your debt is kind of lease debt or kind of charter debt? Thank you. Xavier Destriau: Thank you, Alexia. I'll try to take your questions in the orders that you raised them. First, you were asking about the cost savings and resizing potentially the network. Clearly, the company is always looking at trying to respond with agility to the changing market conditions. What I think is very important again, to reemphasize, and I think that links with your third question, is that the vessels that we are committed to in terms of a long-term charter are the most efficient ones today that we operate. And so we will keep those ones and those the ones that potentially we will let go again depending on what the markets look like. We'll de facto be the ones that are less efficient, older, you know, not LNG-powered, and more expensive. So I think this is very important when we think about the capacity that we end up operating. The efficient tonnage is with us for the longer term. And in terms of percentage, we need to link again with your third question, how much does it mean in terms of asset base or right of use asset? As you indeed rightly said. When we look I don't have the exact number, but maybe to assist here in trying to get the picture. We, in terms of total capacity today, out of the 710,000 TEU that we operate. You know, 70% of that capacity, even maybe closer to 75%, of that capacity is either long-term charter or owned. Leaving 25% of the amount of our right of use asset give or take on our balance sheet. Being the one capacity that can be returned. In terms of next year, 2026, this is we have, again, two hundred ninety thousand TEUs of capacity that is chartered on what we define as short-term charter out of which I think we said we have something like 80,000 TEUs that could be redelivered in 2026. So that's the way, I mean, I think to look at the math and come up with the best assessment of the asset base that could be redelivered. With respect to your second question, so we had not ended up taking them in the order as you raised them. The second question on the cash CapEx, we don't have much commitment in this respect. Very much because we are chartering as opposed to anything else. So very limited. The cash CapEx that we have is more related to sometimes equipment, but we've been as I just mentioned in the prior comment, we've been very active in already renewing our fleet of containers. So there is limited need especially if we do not grow our fleet in the coming years. I think we are set in this respect with regards to our fleet of equipment, by the way, including the reefers that we operate. So very limited cash CapEx. It's always high and maybe there will always be some from an equipment perspective, but limited in the years to come. Alexia Dogani: And if you allow me to ask a follow-up question on the point about chartered vessels versus owned. You hopefully put the chart around oversupply in the deck. We've clearly noticed that in the past four to five years, a lot of operators have increased the shared part sorry. The part of ownership of their vessels compared to charters. How does that kind of impact you think competitive dynamics and discipline in the market? Does it make it easier for people to take capacity out or harder? Thank you. Xavier Destriau: I think it depends on the capacity, and there is not, I think, one straight answer to that question because then I think we need to deep dive into the vessel segment. So whether we're talking about the large capacity vessel or the smaller one. And then also with respect to their age, and finally with respect to their environmental footprint. As well. So but by and large, I think what we are seeing and what has been, I think, very much motivating the company to shift its strategy, you know, after the IPO of the 12/21, 2022, the COVID era days. Is that, we felt that we could no longer rely on the, you know, short-term charter market to source the vessels that we needed. And, hence, we had to go seek that capacity for ourselves. And, we went through the avenue of partnering with vessel owners to go to shipyards, order the ships that were the ones that we needed, and agree with those vessel owners on a financing solution. At the end of the day, that's one way of looking at it. And I think nowadays, when we look at the order book, for the new tonnage that is on order, it is very much carrier orders that we can see, or if it is not carriers and non-vessel operators, there is very often already at the time of placing the order a charter attached. So a pre-agreement between that vessel non-vessel operator and the potential lessee that will take those vessels on charter. So we feel that we did operate the transition timely. In 2021-2022, got the vessels in 2023-2024, and now we feel much more confident in our ability to continue to operate the right tonnage in the years to come, having less dependency on the short-term charter market. Alexia Dogani: Thank you. Appreciate it. Operator: Your next question comes from the line of Chloe Xu with Citi. Your line is open. Chloe Xu: Hi. Thank you for taking my questions. My first question is on the route diversification. You have mentioned that you're adding to the Southeast Asia and LatAm markets. And I just wanted to ask, in the current rate environment, which looks like sub-breakeven overall, which route is more profitable for you at the moment and which is less profitable? And how quickly can you adjust those capacities as you see opportunities appear? And my second question is that obviously, you mentioned that you anticipate rates pressure in Q4 and 2026. As we know that the new capacities are coming in the next five years, where do you see that the rates will recover? And what do you think will be that pivoting moment in your perspective? Thank you. Xavier Destriau: Thank you. The diversification that you are referring to, and it's true that we've been, historically, and we continue to be very exposed to the transpacific trade. We are no stranger to the trend that was initiated between the two countries, China and the US, and we have taken actions already over the past years to increase our footprint in Southeast Asia to capture the cargo that is moving from China to the neighboring country in Southeast Asia. And whether those find their way in terms of countries of destination, to the US or elsewhere. And you're right in saying that also outside of this pure Southeast Asia market, we do see and believe that there is a growth opportunity on the Latin America trade. Now which one are the most profitable trade? You know, this is a very question that depends on when we ask the question. The volatility of our environment and trade by trade, the dynamic may differ as well. You know, we see positive signs in one trade in a given week or given period, maybe a couple of weeks, and then we see something else happening and the trend changing. So it is really much a moving environment, and I don't think we can look at it that way. I think it is also important for us to when we build the position in a trade where we may we were maybe not such a significant player in the past. We need to do it gradually. We need also to make sure that when we come and open a service we guarantee to our customers the reliability that they need. So, we need to provide a service that is reliable. Sometimes it means investing a little bit, irrespective of what the market dynamic does. In order to capitalize on that. And I think a very good illustration of that is the success that we've had on the Pacific Southwest with our expedite service that we initiated in 2020, June 2020, and which now is highly recognized by the market as a very reliable and successful service. So we need to really look at it as well. I think from a customer vantage point. And then to your next question, I think very difficult for me to answer when the rates or dynamic will change. Clearly, what we can see today are the threats, which come most specifically with the order book and the capacity that is about to hit the trade with the market, the water. We also talked about the Suez Canal reopening and emphasizing that this comes with opportunities and risk. And the risk is indeed clearly an influx of tonnage that may not be absorbed by the market. And as a result, putting additional pressure on the freight rates, on the rate environment. In front of that, at the end of the day, the liners always have capacities to manage the end of the day, the capacity that is being deployed to better adapt to the demand and to the changing demand. We are clearly also leveraging the, you know, operating together in order to reduce cost at the end of the day. We also will need and we need to see at some point, as we mentioned, vessels being retired, aging capacity being taken out of the trade. So that has yet to start. And I think when the situation changes on that front, we should start to see rates stabilize and potentially come back to higher levels. Operator: Thank you. This concludes our Q&A session today. I will now turn the call back over to Eli Glickman for closing remarks. Eli Glickman: Slide number 17. To conclude, despite continuing uncertainty in the market, our solid Q3 results reflect the agile nature of our commercial strategy, as well as the advantages of our modern upscale fleet of cost-efficient vessels. We remain disciplined and proactive, navigating headwinds with resilience and maintaining service reliability for customers while optimizing our cost base. We continue to share our success with investors and declare a dividend of $0.31 per share for a total of $37 million, consistent with our dividend policy and capital allocation priorities. Looking ahead, the first quarter is trending weaker than originally projected. However, based on our strong performance year to date, we've increased the midpoints of our 2025 guidance ranges. Overall, we are confident even against the backdrop of a highly volatile rate environment. That our differentiated strategy and enhanced industry position will drive sustainable growth over the long term. I would like to thank ZIM employees around the globe for their professionalism and dedication, as well as our customers and shareholders for their continuous trust and support. We look forward to sharing our continued progress with you all. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the ATRenew Inc. Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. We will be hosting a question and answer session after management's prepared remarks. Please note today's call is being recorded. I would now like to turn the conference over to your first speaker today, Mr. Jeremy Ji, head of corporate development. Please go ahead, sir. Jeremy Ji: Thank you. Hello, everyone, and welcome to ATRenew Inc.'s Third Quarter 2025 Earnings Conference Call. Speaking first today is Kerry Chen, our Founder, Chairman, and CEO, and he will be followed by Rex Chen, our CFO. After that, we will open the call to questions from the analysts. The third quarter 2025 financial results were released earlier today. Earnings press release and investor slides accompanying this call are now available at our IR website ir.atrenew.com. There will also be a transcript following this call for your convenience. For today's agenda, Kerry will share his thoughts on our quarterly performance and business strategy, followed by Rex, who will address the financial highlights. Both Kerry and Rex will participate during the Q&A session. Please note our Safe Harbor statements. Some of the information you will hear during our discussions today will consist of forward-looking statements. And I refer you to our Safe Harbor statements in the earnings press release. Forward-looking statements that management makes on this call are based on assumptions as of today, and ATRenew Inc. does not take any obligations to update our assumptions on these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings press release, which contains a reconciliation of non-GAAP measures to GAAP measures. Finally, please note that unless otherwise stated, all figures I mention during this conference call are in RMB, and all comparisons are on a year-over-year basis. I would now like to turn the call over to Kerry for business and strategy updates. Kerry Chen: Hello, everyone, and thank you for joining ATRenew Inc.'s Third Quarter 2025 Earnings Conference Call. We are pleased to update you on our strengthened operating results, share the progress of our three-stage development strategy, and address key topics of interest. In the third quarter, we once again achieved new breakthroughs across multiple operational measures. Total net revenue reached a new record high of RMB5.15 billion, representing 27.1% year-over-year growth. Our 1P product revenue sustained strong growth momentum, rising 28.7% year-over-year to RMB4.73 billion, while 3P platform service revenue increased 11.6% year-over-year to RMB420 million, demonstrating continued healthy growth. Non-GAAP operating profit reached a record high of RMB140 million, up 34.9% year-over-year, with our non-GAAP operating profit margin achieving 2.7%, demonstrating steady improvement both year-over-year and quarter-over-quarter. During each third quarter, we strategically prepare for the mid to late September launch of flagship devices from leading manufacturers while building operational capacity to support uptake in new device shipments throughout October, providing users with better reflecting and trade-in experiences. Looking closer to our third quarter performance, within our 1P business, we have successfully expanded our product acquisition through trading programs and our AHS Recycle brand. We have effectively leveraged our proprietary combined refurbishment capabilities to deliver premium curated products to consumers through retail channels, including AHS Selection and Pipai. This strategy delivered impressive results, with compliant refurbished product revenue surging 102% year-over-year in the third quarter. 1P2C revenue sustained robust growth of over 70% year-over-year, and the 1P2C proportion expanded to 36.4%. We believe that strengthening our retail capabilities will enhance our pricing power in the recycling end and effectively strengthen end-to-end value throughout the industry's supply chain. On the supply side, we focused on building stronger customer awareness and recognition from the AHS Recycle brand. Orders through the AHS official website maintained a solid 30% growth, while JD.com's trade-in program continues to be a preferred choice for users looking to recycle and upgrade their devices. We also significantly expanded our offline fulfillment capabilities, building customer trust through personalized face-to-face services that offer both convenient and competitive pricing. Our AHS store network grew to 2,195 locations across both self-operated and joint-operated sites, supplemented by a workforce of 1,962 team members who either provide full-time or part-time two-door service. This comprehensive approach ensures that recycling and trade-in services are easily accessible to customers. In top-tier cities, we are positioning AHS Recycle as China's leading recycle brand, promoting AHS Recycle through our self-operated stores. We have extended our asset-light platform to high-value categories like luxury goods, gold, and premium liquor, creating more user value while improving store unit economics. In mid to lower-tier cities, we partner with local merchants who understand their markets, helping them evolve from single-store franchisees into city partners with multiple AHS stores. We support these partners with standardized quality inspection and pricing tools, official traffic, and social media guidance to build a local customer base. This collaboration drives mutual success. Stronger store performance enables franchisees to expand locally and scale their business, creating a win-win effect that benefits everyone. Our commitment to win-win collaboration with merchants is evident in the performance of our platform business. In the third quarter, service revenue maintained strong double-digit growth with an overall take rate of 4.89%. Breaking this down across three key platform segments. Kerry Chen: First, in B2B, PJT Marketplace continues to provide an inclusive trading environment for small and medium-sized merchants. By the end of the quarter, the number of contracted merchants on the platform quickly surpassed 1,370,000. This was driven by two factors. On one hand, the number of sellers representing product supplies continued to grow rapidly, thanks to PJT Marketplace's strong infrastructure and merchant service capabilities. On the other hand, with the rapid onboarding of small-sized merchants, such as those leveraging the specialty buyer model of the win, accelerated supply chain enhancement for these merchants. To ensure a positive buyer experience during this expansion, we temporarily allowed more flexible post-sale rights and made a strategic adjustment to PJT Marketplace's take rate. We remain confident in PJT Marketplace's long-term monetization potential, not only because of its maturing trading infrastructure but also because of its flexibility to innovate, expand user reach, optimize services, and create more value over time. Second, in B2C, Pipai's user service and monetization capabilities achieved another year-over-year improvement. While maintaining POP open platform functionality further strengthened consignment services for small and mid-sized merchants. Under this model, merchants no longer need to worry about product management, store operations, traffic, or after-sales as Pipai provides standardized end-to-end operational solutions. In the third quarter, GMV for consignment grew 180% year-over-year, and the take rate continued to trend upward in the high single-digit range, reflecting strong merchant recognition of our service value. Third, our asset-light platform for multi-cash flow recycling services sustained rapid growth, with transaction volume increasing by 95% year-over-year, and user experience continues to improve. As of September, 878 self-operated stores and 131 franchisee locations had activated multi-category capabilities, expanding geographic coverage. Newly enabled stores typically stabilize performance within two to three months after allocating front-end and fulfillment costs. Multi-category services deliver an average monthly contribution profit of RMB7,000 per store, optimizing the unit economics of AHS stores. This model supports customer acquisition, repeated orders, and the disciplined rollout of additional high-quality stores. We continue our strategic adoption of automation and AI technologies to drive excellence in operation and experience. As our business scales, automated inspection systems at both the recycling and operational centers generate significant economies of scale and help optimize our fulfillment expense ratio. Beyond the AI-powered automation inspection capabilities for recycling of secondhand luxury goods discussed last quarter, we have also deployed AI applications in customer service inquiry handling and training. These initiatives are enhancing the user experience and building robust capacity to handle peak demand areas, such as major promotional events. That concludes our review of third-quarter operating results. Next, I would like to take this opportunity to continue sharing our three-stage development strategy for the next two to three years. Kerry Chen: The first stage is to continue translating the core capabilities of the second-hand consumer electronics. ATRenew Inc. has already become China's largest platform for second-hand consumer electronics transactions and services. We have interpreted the entire industry chain across C2B, B2B, and B2C, industry-leading end-to-end capabilities, and maximizing value for both users and the industry. Going forward, we will reinforce this foundation in four ways. First, by enhancing scenario capabilities and deepening trade-in collaboration in new device sales channels with partners such as JD.com and Apple, enabling low-cost, high-efficiency access to firsthand supply. Second, by strengthening fulfillment capabilities through our nationwide AHS store network and through our service teams to ensure a superior user experience. Third, by enhancing the capabilities of retail sales, combined refurbishment, and a high proportion of retail sales, to achieve an end-to-end loop and improve supply chain value. And fourth, by advancing technology capabilities, leveraging automation and AI technology, to unlock scale efficiencies over the long term. The second stage is to accelerate the growth of AHS Recycle as China's leading recycling brand. By combining our in-store-based fulfillment capabilities with an asset-light platform model for multi-category recycling, we aim to increase user engagement and frequency of service usage. At the same time, the ecosystem extension of AHS Recycle is expanding into extensive community scenarios across major cities. The AHS Recycle brand will partner with more consumer brands to promote REVIVE initiatives based on high-frequency scenarios, using brand incentives to encourage broader participation in recycling and the circular economy across China, so that everyone can benefit from the sustainable consumption model we advocate. With this, we strengthen consumer awareness of our recycling capabilities, improve our active user base of consumer electronics with high-frequency daily grain disposal activities, and promote a closed loop of grain recycling and grain consumption. We are dedicated to building differentiated competitive edges for AHS Recycle. The third stage is to prepare for an international strategy that shares China's green story globally. Over the past fifteen years, we have built deep expertise in standardization, automation, and platform capabilities for second-hand consumer electronic products. The rapid increase in domestic recycling penetration is driving a growing flow of used smartphones to overseas markets, representing a clear trend. On the one hand, we are actively engaging in the development of export standards and international mutual recognition for China market products. For instance, we participate in the expert committee for the cross-border export standard for secondhand goods, a joint initiative of the China Quality Certification Center and the International for Standardization. On the other hand, we are channeling high-quality China-sourced devices of earlier generations into the international market. Hong Kong, among others, as a key global trade hub for used electronics, facilitates this flow, allowing us to successfully address the demand abroad. Recently, the monthly export of China-sourced devices has exceeded 10,000 units. Looking forward, as domestic recycling penetration rates increase and standards become further clarified, we believe there will be more exports. We also look forward to replicating our efficient platform capabilities abroad to create an international version of the PJT Marketplace, connecting global sources of premium consumer electronics with global merchants. Simultaneously, we will, at the appropriate time, integrate with the international layout of our strategic partners to provide solutions and jointly explore the broader retail opportunities in the global markets. Looking forward to 2026, we remain confident in the healthy development of the second-hand industry and the strong growth trajectory of our company. We are also proud to share international recognition. This year, ATRenew Inc. is a finalist for the prestigious Earthshot Prize, a global environmental award founded by His Royal Highness Prince William. The prize recognizes outstanding contributions across five categories aimed at repairing our planet. ATRenew Inc. was highly recommended by the committee in the "Build a Waste-Free World" category for its practices in advancing the circular economy through pre-owned product transactions and services. Moving forward, we remain committed to our founding mission of giving a second life to idle goods and will continue to contribute to the circular economy in China and globally. Now I would like to turn the call over to CFO, Rex Chen, for financial updates. Rex Chen: Hello everyone. We are pleased to report outstanding financial performance in 2025. We continue to capture opportunities from targeted trading scenarios, enhanced fulfillment and supply chain capabilities, and elevated AHS Recycle brand presence. Total revenue in the third quarter was at the high end of our guidance, increasing by 27.1% to RMB5.15 billion. Adjusted operating income grew by 34.9% to over RMB140 million. Before taking a detailed look at the financials, please note that all amounts are in RMB, and all comparisons are on a year-over-year basis unless otherwise stated. In the third quarter, total revenue growth was primarily driven by continued net product revenue growth. Net product revenues increased by 28.7% to RMB4.73 billion, largely attributable to the growth in online sales of pre-owned consumer electronics. Net service revenues were RMB420 million in the third quarter, representing an increase of 11.6%. The increase was largely driven by Pipai Marketplace and multi-category recycling business. The overall take rate of our marketplace was 4.89% for 2025. During the quarter, our multi-category recycling businesses contributed nearly RMB53 million of revenue, accounting for 12.5% of service revenue. Now let's discuss our operating expenses. To provide greater clarity on the trends in our actual operating-based expenses, we will mainly discuss our non-GAAP operating expenses, which better reflect how management views our operating results. The reconciliations of GAAP and non-GAAP results are available in our earnings release and the corresponding Form 6-Ks furnished with the U.S. SEC. Merchandise costs increased by 26.3% to RMB4.1 billion, in line with the growth in product sales. Gross profit margin for our 1P business was 13.4% compared with 11.7% in the same period last year. The gross margin improvement in our 1P business was primarily driven by high-efficiency C2B recycling scenarios, compliant refurbishment capabilities incorporated in our supply chain, and an increasingly diversified retail channel mix. This allowed us to increase the proportion of higher-margin retail sales. 1P2C revenue accounted for 36.4% of product revenue in 2025, up from 26.4% in the same period last year. Meanwhile, our international business operation efficiency has improved with continued improvement in both scale and gross margin. Fulfillment expenses increased by 25.9% to RMB440 million. Non-GAAP fulfillment expenses increased by 25.6% to RMB430 million. Under the non-GAAP measures, the increase was mainly driven by higher personnel and logistics expenses, reflecting a greater volume of recycling and transaction activities compared to the same period last year in 2024. Additionally, operation-related costs rose as we expanded our store network and enhanced operation center capacity in 2025. Non-GAAP fulfillment expenses as a percentage of total revenues decreased to 8.4% from 8.5%. Rex Chen: Selling and marketing expenses increased by 15.4% to RMB360 million. Non-GAAP selling and marketing expenses increased by 40.6% to RMB360 million. The increase was primarily driven by higher advertising and promotional campaign-related spending, as well as an increase in commission expenses associated with channel service fees. As a result, non-GAAP selling and marketing expenses as a percentage of total revenues increased to 7% from 6.3%. General and administrative expenses increased by 6.9% to RMB74.1 million. Non-GAAP G&A expenses also increased by 17.7% to RMB5.2 million, primarily due to an increase in tax and surcharges, as well as an increase in consultant fees. Non-GAAP G&A expenses as a percentage of total revenues decreased to 1.3% from 1.4%. Technology and content expenses increased by 19.5% to RMB61.1 million. Non-GAAP technology and content expenses increased by 23.2% to RMB61.1 million as well. The increase was primarily driven by elevated personnel expenses. Non-GAAP technology and content expenses as a percentage of total revenue remained stable at 1.2%. As a result, our non-GAAP operating income was over RMB140 million in 2025 compared to non-GAAP operating income of RMB100 million in 2024. Non-GAAP operating profit margin was 2.7% for this quarter, compared to 2.6% in 2024, representing an increase of 16 basis points. During 2025, we repurchased a total of 4.5 million ADSs for approximately USD2.1 million. We will continue to evaluate our overall profitability and update the shareholder return programs at the appropriate time. As of September 30, 2025, cash and cash equivalents, restricted cash, short-term investments, and funds receivable from third-party payment service providers totaled RMB2.54 billion. Our financial reserves are sufficient to support reinvestment in business development and shareholder returns. Now turning to the business outlook. For 2025, we anticipate total revenues to be between RMB6 billion and RMB6.18 billion, representing a year-over-year increase of 25.4% to 27.4%. For the full year 2025, we estimate total revenues to be between RMB20.87 billion and RMB20.97 billion, representing a year-over-year increase of 27.8% to 28.5%. Please note that this forecast only reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions. Operator: Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. When asking a question, state your question in Chinese first. Then repeat your question in English for the convenience of everyone on the call. And the first question will come from Wan Jiao with CICC. Please go ahead. Wan Jiao: Thanks for taking my questions. My first question is we know that recently we are having some changes to the national subsidy policies. Could you please share the impact on your business? And the second one is, could you please give us more color about the outlook for Q4 and next year? Thank you. Kerry Chen: Thank you for your question. The first question is about national subsidy. That is a very good question. Let me address it by analyzing the growth drivers of our 1P business in the context of the national subsidy. The national trade-in subsidy directly promotes the sales of new devices. However, these subsidies are only applicable to new devices priced under RMB6,000. Therefore, a significant portion of consumers purchasing premium models do not utilize these subsidies. Given that our 1P business primarily focuses on premium brands, the proportion of trading orders utilizing national trade subsidies was actually quite limited this year. Nevertheless, the national subsidies have effectively stimulated upgrades within the pre-owned consumer electronics industry. Benefiting from our mature trade-in supply chain this year, we collaborated with JD.com to create the best-in-class trading user experience. We also worked with brands like Apple, Huawei, and Xiaomi, facilitating device upgrades for more users through trade-in offsets. This approach, combined with specific subsidies offered by e-commerce platforms and manufacturers in trading scenarios, helps users upgrade their devices at a lower cost. We estimate that AHS Recycle achieved a trade-in penetration rate exceeding 10% on JD.com this year. The penetration rate is consistently increasing, driving precise conversions within JD's core human electronics business. Furthermore, we see significant potential for further growth in this penetration rate. As the retail prices of new devices from brand manufacturers continue to trend upwards, trading programs are gaining favor among users as a more cost-effective upgrade path. Simultaneously, these programs help manufacturers protect the retail pricing of their new devices, creating a win-win situation. The scenario of new device retail presents an important source for us. We will continue to collaborate closely with our e-commerce and manufacturing partners to optimize the trading pricing algorithm, operational processes, supply chain, and user experience, increasing the penetration rate of trade-in services over the long run. Regarding the second question, we expect total revenue growth in the fourth quarter to be between 25.4% and 27.4%. The major electronics brands we serve have launched more attractive products this year and achieved considerable sales, stimulating stronger consumer demand for device upgrades. Based on our fourth-quarter outlook, we forecast total revenue for the full year 2025 to be between RMB20.87 billion and RMB20.97 billion, representing a year-over-year increase of 27.8% to 28.5%. This suggests a possibility for us to grow faster than our internal budget at the beginning of this year. We anticipate accelerated revenue growth this year compared to last year, primarily driven by three factors. First, the national trading initiative has promoted e-commerce platforms and brand manufacturers to actively build or enhance their trade-in service capabilities. An integrated trade-in supply chain can efficiently provide users with a best-in-class operating experience. Second, we are rapidly expanding our fulfillment network, having established a more granular presence in nearly 300 cities across China, ensuring a superior user experience. Third, we are actively building the AHS Recycle brand, recognizing that brand influence delivers long-term value. For 2026, we are actively preparing our internal annual budget. We expect to maintain a relatively rapid year-over-year growth rate, driven by increased penetration of trading programs, enhanced brand power and fulfillment capabilities of AHS Recycle, and the improvement in our overall supply chain efficiency. Thank you for the question. Operator: The next question will come from Wei Fadi with DBS. Please go ahead. Wei Fadi: I will recap in English. So good evening management and congratulations for the astonishing third-quarter results. So two questions from our side. The first one is what is the store opening pace for the fourth quarter and for the year for ATRenew Inc.? Thank you. Kerry Chen: I will take the first question. For the full year 2025, we maintained our target of accelerating store openings. As shown in our store structure and capabilities, the number of self-operated AHS Recycle stores in Tier one and Tier two cities has grown steadily. For self-operated stores, we prioritize quality development, focusing on delivering a superior user experience through enhanced fulfillment capabilities. Nearly 88% of these self-operated stores are now equipped with multi-factor services. Regarding joint-operated standard stores, to build capabilities together, we actively collaborate with local market partners. Based on empowering them with our capabilities and traffic support, we work with city partners to serve local users and rapidly advance our store opening goals. In some franchised store scenarios, we are prudently exploring service capabilities for high-value categories, with gold reduction already taking initial shape. Moving forward, the pace of new store openings will be dynamically balanced with the expansion of our two-door service team to ensure the efficiency of both our physical locations and personnel. Wei Fadi: So my second question is what are the plans and targets for the multi-category business in the future? Thank you. Kerry Chen: In terms of the multi-category business, it has maintained a record development trajectory this year, benefiting from our quick improvements in several metrics, including service coverage, baseline pricing capabilities for various categories, and user experience. Our multi-category recycling business operates on an asset-light platform model, which is less susceptible to policy changes and emphasizes compliant operations. It focuses on core user experience metrics such as transaction efficiency and pricing within the C2B model. In the third quarter, against the backdrop of rapidly rising gold prices, we prioritized user transaction experience by reducing our take rate. This approach provided users with tangible value and benefits while also ensuring the rapid growth of our transaction volume. Looking ahead, leveraging the strength of our AHS Recycle brand and our store network, we will prioritize developing high-value categories that are convenient for users to bring to our store for transactions. We aim to integrate user demographic profiles, including age and gender, to solidify the consumer mindset of AHS Recycle's go-to destination positioning. Wei Fadi: Thank you. Operator: The next question will come from Michael Kim with Zacks Small Cap Research. Please go ahead. Mr. Kim, your line is open. Michael Kim: Hi. Can you hear me? Kerry Chen: Yes. We can hear you. Michael Kim: Okay. Curious to get your perspective on the uptake of enhanced services across your marketplace businesses and how maybe a more favorable mix might impact take rates? And then just related to that, how has the mix trended more recently as it relates to multi-category transactions? Thanks. Kerry Chen: The take rate for PJT Marketplace remained stable at over 6%. The slight variation in the platform take rate in the third quarter was primarily due to phased adjustments in our merchant service policy, where we allow buyers more flexible return exchange options. PJT actively introduced innovative transaction models such as the specialty buyer model and expanded platform supply chain connectivity to Douyin. This provides more influencers and small business owners with access to industry supply sources, simplifies secondhand transactions, and offers consumers better products and greater value. Within the Pipai Marketplace, the consignment model has shown initial success, driving its take rate into the high single-digit range to 9%. There remains room for optimization in both the sales categories and take rate structure for consignment. This standardized model effectively addresses operational challenges for small merchants by offering a simpler store setup experience, higher transaction efficiency, and better pricing and sales channels. As the consignment business scales, both the revenue structure and take rate of the Pipai Marketplace have the potential for further optimization. Our report volume comes from gold reflecting, which is more standardized and operates with a low single-digit take rate. The service take rate for the secondhand luxury category comes to exceed 10%. For future category expansion, we will prioritize high-value categories that offer greater service value and potential for higher take rates. Michael Kim: Got it. Thanks for taking my question. Operator: As there are no further questions at this time, I would like to turn the conference back over to management for closing remarks. Jeremy Ji: Thank you. Thank you all again for joining us. A replay of today's call will be available on our IR website shortly, along with a transcript when ready. If you have any additional questions, please feel free to email us at ir@atrenew.com. Have a good day. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the Third Quarter 2025 Investor Call for Pershing Square. Today's call is being recorded. It is now my pleasure to turn the call over to your host, Bill Ackman, CEO and Portfolio Manager. William Ackman: Thank you, operator. So welcome to the third quarter conference call. We've had a strong year-to-date, certainly through Q3 and even up to the present, north of a 20% return and nicely in excess of the S&P for the year. But despite overall strong performance, we don't get them all perfectly right. So I thought we'd start the call just focusing on a couple of investments that have not performed well this year. And why don't I turn it over to Anthony to talk -- let's talk about Chipotle. Let's start there. Anthony Massaro: Thanks, Bill. So we actually sold our remaining shares in Chipotle this year following the company's third quarter earnings report. This concluded an investment in the company that was over 9 years old. So a very disappointing conclusion to what had long been a very successful investment for us. The stock IRR from our inception to exit was just under 16% versus just over 15% for the S&P 500. But fortunately, we have previously sold 85% of our initial 10% stake in the company at various times over our 9-plus year holding period. That resulted in a realized IRR on the position of just under 22% and $2.4 billion in cumulative profits. So the big question is, obviously, why did we decide to sell the rest of it this year after a stock decline of nearly 50%. So just to give you kind of some context for our thinking, from the first full quarter that Brian Niccol was CEO of Chipotle, that was the second quarter of 2018 through the end of 2024, quarterly same-store sales averaged 9% and no quarter outside of one quarter that was impacted by COVID was below 3%. And if you look under the prior management team, in the 10 years prior to the 2015 food safety scandal that predated our investment, same-store sales also averaged 9%. So as the company started to report weak quarterly same-store sales this year, we believed based on the various sales-driving initiatives they had in the pipeline and also the remarkable long-term historical performance since the company went public, that trends would eventually improve. And unfortunately, underlying trends progressively worsened throughout this year including another step down during the current fourth quarter that was disclosed on the Q3 call. We do believe that macroeconomic weakness amongst low- to middle-income consumers and younger consumers is the primary cause of this same-store sales slowdown as evidenced by similar trends that peers are experiencing. But we don't know how long this weakness is going to last. We don't know if it's going to worsen before it gets better. And it's pretty clear that Chipotle and competitor management teams don't know either. They're doing the right thing by reinvesting in the customer value proposition by not taking price despite mid-single-digit food cost inflation, and they're, therefore, accepting kind of lower near-term margins. But we don't know if this will be sufficient, and there might be more kind of to come there. Year-to-date, of the kind of nearly 50% stock decline, forward earnings are only down 8%. Now that's not good, right, because they're supposed to actually grow. But forward earnings are down 8%, but the PE multiple is down 44%. So the vast majority of the year-to-date stock decline is due to multiple compression. While the current valuation of about 25, 26x forward consensus earnings is cheap if the company can quickly get back to achieving its long-term growth goals, we just didn't have enough confidence to underwrite this at this time. So the business has a high degree of operating leverage. So it's possible that if sales weakness persists for however long it persists, that consensus margin levels will be below even current levels. And this investment now has a much wider range and dispersion of potential outcomes around the company's near- and medium-term earnings power. That's just much wider than we had foreseen at the beginning of the year and frankly, at any time since we own our investment in Chipotle. And this made it a lot more difficult to continue holding the investment despite the fact that the company is now trading at one of its lowest multiples ever. And there's a new CEO running the company since Brian left for Starbucks in August. He's a talented operator, but he's certainly off to a rocky start as a first-time CEO. And in light of this, a return to the company's historical premium valuation multiple is uncertain. We do have tremendous respect for Chipotle, and we wish the company all the best as it navigates what's proven to be quite a challenging environment for them and for the industry. William Ackman: Yes, we wish the company well. We think highly of Scott. We think he's a very good leader. He did a great job running COO of the company for a long period of time. So we wouldn't bet against Chipotle. And maybe someday, we have an opportunity to become a shareholder again. Anthony Massaro: Totally agree. William Ackman: So on the topic of less than successful investments this year, let's talk about Nike and maybe feel free to jump in as well, Manning, if you'd like. But Anthony, go ahead. Anthony Massaro: Sure. So we also exited our investment in Nike Options earlier this month. Unlike Chipotle, Nike was an unsuccessful investment for us. So much shorter holding period. We first invested in the company this time around in June -- or sorry, in the spring of 2024. The cumulative return on Nike since we first invested was negative 30% versus the S&P, which is up 33% and the cumulative P&L was over negative $600 million. So the big mistake here was the initial underwriting. So as we've previously communicated, we underestimated the degree of near-term revenue declines and operating deleverage, aka margin declines that would be necessary to effectuate a turnaround here. So the prior CEO had lost the organizational focus on sport. They overemphasized direct-to-consumer sales at the expense of wholesale relationships, and they failed to create innovative performance products while overproducing big lifestyle franchises, and this really damaged brand heat in the eyes of the consumer. The prior CEO had admitted to kind of these mistakes in early 2024 and outlined a series of corrective actions, which is why we thought that the ship had kind of been set in a better direction, but the magnitude of the corrective actions that were required were far greater than we anticipated. Fortunately, for Nike, the company's controlling shareholder, Phil Knight, and the Board of Directors made the ideal management change in September of 2024 by bringing back long-time Nike veteran, Elliott Hill. We believe Hill is a fantastic CEO. He has an excellent strategy to return to profitable growth by renewing Nike's obsession with sport, accelerating innovation, creating bold marketing and rebuilding wholesale distribution, which he led for a very long time. At the start of this year, we converted our Nike common stock position into a deep-in-the-money call option position. We did this to preserve the upside potential of owning the stock while unlocking capital to make new investments. Since the start of this year, the turnaround is progressing a bit below where we projected for revenues, but materially below for margins. And the reasons for that are twofold. About half of that margin decline versus what we projected at the beginning of the year is due to tariffs, which were new this year and the other half is due to more aggressive clearance activity of legacy inventory. So Nike is down about 17% year-to-date. Most of that is forward earnings, which are down 15% and the multiple is effectively unchanged, down 2%. While we have confidence that Nike has the right CEO and the right strategy, we grew more uncertain of what long-term margins would look like as this year progressed. Can the company really get back to pre-COVID margins in light of tariffs, which don't seem like they're going away anytime soon and in light of the more competitive nature of the industry. It is a more fragmented competitive landscape in athletic footwear and apparel now than it was kind of for most of Nike's history. And to meet our return thresholds for a turnaround at the time of our sale would have required us to assume stabilized margins of at least 13%, which is consistent with what they did pre-COVID. And we didn't have enough confidence to make this assumption kind of in light of these new margin headwinds. We do believe that Nike's turnaround will be successful, but we don't know what success will look like from a margin perspective. The company has articulated confidence in getting back to double-digit margins, very different outcome for shareholders if that's closer to 10% than 13%, 14%. So we have tremendous confidence in Elliott, a tremendous admiration and respect for what he's doing at bringing Nike back to greatness, and we wish him and the team at Nike the best of luck. William Ackman: Obvious question would be with respect to Nike. It's a company we've owned before and got right in the past in a meaningful way. Any sort of overarching lessons from either the Nike or the Chipotle experience that will help us avoid similar mistakes in the future, either a better exit from a Chipotle or a miss -- a better timing on our acquisition of shares of Nike. Anthony Massaro: Yes. Look, I think we're still reflecting on kind of lessons learned, but I think I would point 2 high-level ones, one for each. On Chipotle, I think high PE multiple stocks can be dangerous when things turn. I think that if everything is going right and you have a very proven leader running the company, you can afford to hold it for a while longer. But I think with a high multiple stock, if kind of the trends slow for any reason, it's better to exit faster than to give management the benefit of the doubt. For Nike, I think one lesson that I and we, I think, have learned there is return thresholds for turnaround situations, even if the turnaround doesn't look like initially that it's going to be that severe, should be higher. So I think had we gone in with kind of a higher required -- had we had a higher required IRR for that one, perhaps we would have avoided making the initial investment. William Ackman: Great. Why don't we focus on one other underperformer for the year, and then we'll get to why we're actually having a good year, but I think it's good. Let's focus on the negative first. Universal Music. Let's talk about that. Ryan, go ahead. Ryan Israel: Sure. So Universal Music, the business performance has continued to be strong. In their most recent quarter reported a few weeks ago, the company showed, for example, that revenues grew at about a 10% rate on a constant currency basis and their adjusted EBITDA profit metric actually grew a little bit in excess of that about 12% rate. Those levels of business performance are actually very consistent with what the company has done since we helped facilitate a public listing nearly 4 years ago. So the business performance remains quite strong operationally in our view. But as you mentioned, Bill, the stock has underperformed this year. And in particular, it's really underperformed since the summer. So the share price was in July, a little bit above EUR 28 per share. And as of earlier this week, it was as low as about EUR 21.50, which is about a mid-20s percent decline in the share price. And actually, at one point earlier this week, the company was down to a 20x PE multiple based on consensus analyst earnings for the next year, which is the lowest multiple that the company has ever traded at in our little over 4 years of ownership. And we think the primary reason for the decline in the share price over the summer to now really due to technical factors. So for example, the largest shareholder of the company, the Bollore Group, there was a ruling in July by a French court that they would need to buy out another publicly traded company. And so there was a fear or perception in the marketplace that Bollore, who is the largest owner of UMG would be a forced seller for a chunk of -- a very large chunk of their shareholdings in order to fund this buyout that a French court was requiring. And so that forced seller dynamic, in our view, made it difficult for other people to want to buy the stock ahead of what could be a forced seller in somewhat unknown time frame and potentially unknown quantity. As we transition from that happening in the summer to the fall, the U.S. government shut down. And so the SEC was unable to kind of fulfill any sort of request for a U.S. listing and UMG's example, which we think created potentially further technical headwinds. Stepping back a little bit, our view has been that the business performance remains very strong, as I mentioned on the quarterly basis, this quarter as well as really over the last 4 years. And we think that a share buyback really could address the technical concerns that would have happened. So for example, the market perception that there is a forced seller that could be around the corner, hard to get market participants to want to buy shares in advance of that. Yet if the company is buying their shares, that could provide somewhat of an offset for the technical demand. And in general, for a company that has very strong operational performance, we think a buyback at the lowest multiple that it has traded at for the last 4 years would be a good idea as well. But maybe I can turn it back to you, and you can talk a little bit more about the upcoming U.S. listing. William Ackman: So one of the package of rights we received when we became a shareholder of Universal Music was the ability to catalyze a listing in the U.S. And we felt strongly that it's a U.S. headquartered global business, but half -- even more dominant in the U.S. and a very significant percentage, effectively half of their business is a U.S. company. It is listed in Euronext that has limited the universe of people who can own the stock. Many U.S. investors by mandate are not permitted to own Euronext listed securities. And our view, materially more demand can come into the stock with the U.S. listing. We also think the kind of cadence of quarterly reporting and the kind of information that becomes available when a company is registered in the U.S. will provide -- enable better analyst coverage. The fact that the peers are U.S. listed companies will make, I think, easier, I would say, comparisons and I would say, better understanding of the company. And so we catalyze that listing by exercising our registration rights. Our registration rights require in order for the company to be obligated to register our shares in the U.S. and create a listing here for us to actually sell some stock. So we've agreed to sell $500 million of shares as part of the listing of the company. Now in light of the share price, we are not a -- we're a very reluctant seller, but we believe the value in terms of improved transparency as well as the improvement in the supply-demand dynamic overwhelms the cost to us of selling a portion of our position at the current share price. Now we've approached the company, and we've asked the company to simply seek a listing in the U.S. without the requirement for us to sell stock. At this point, the company has been unwilling to let us withhold the $500 million of stock in the offering. So we're going to go ahead with the offering, selling a portion of our stock at whatever the price is at the time the listing in order to catalyze what we think is a value-creating transaction for the company. Just further to Ryan's point, this is a company -- I've been on the Board -- I was on the Board for a number of years. I think it's an excellent management team that understands the music industry, where there seems to be a gap in understanding is in how the company approaches the capital markets and using -- taking advantage of the company's balance sheet, the free cash flow it generates and optimizing the company's use of capital. This is a business that's not going to require billions and billions of dollars of capital for acquisitions. The company has made that, I think, very clear. The nature of the company's dominant position in the marketplace also makes clear that it's very difficult for the company to do acquisitions of any kind of meaningful size in the industry. So we remain puzzled really as to why the company is not a more aggressive buyer -- or actually why it doesn't buy back stock at all and why in addition to pointing out that the stock is trading at the lowest multiple it traded at, it's also approaching the highest valuation for Spotify, a significant asset on the balance sheet. The company has intelligently held on to it at this point in time. But again, another opportunity for monetization and returning capital to shareholders. So that's our strong view on that topic. Okay. Let's focus to the positive. We are actually having a very good year. Let's talk about our largest investment at this point, Alphabet. And that's Bharath, who's going to take that on. Go ahead, Bharath. Bharath Alamanda: Sure. And maybe to rewind back to when we originally initiated our position in Alphabet more than 2.5 years ago, our investment thesis was that Google's leadership position in AI was being severely underappreciated. And our view then was the company had a unique full stack approach to AI that came with several structural advantages, namely frontier research capabilities, world-class technical infrastructure, scale distribution and the access to immense training data. And you could argue then that the main open question was around execution and whether the company would be able to harness all those inherent competitive strengths into their product road map. I think since we made our investment and one of the reasons the share price has appreciated meaningfully both this year and over the life for our investment, but we still continue to remain very optimistic shareholders, is they've really stepped up to that question and done an excellent job on the execution front and leveraging their strengths. And maybe to just provide a few recent examples of that. Earlier this week, Google released their latest and very widely anticipated Frontier AI model of Gemini 3.0. Not only did it immediately jumped to the top spot on all of the benchmark evaluation leader boards, more notably, they integrated Gemini 3.0 directly into search and the Google apps the same day that it was released, kind of highlighting the company's focus on improving the product velocity. Gemini 3.0 was also led by the DeepMind team, which was a start-up that the company had very presciently acquired all the way back in 2014, and that lab continues to be the leading kind of frontier research lab. On the hardware side, the company has spent the better part of a decade optimizing their technical infrastructure to specifically run machine learning and AI workloads. And as a result of that, they can now run those workloads at sort of industry-leading lowest cost per token. And they've developed their own proprietary TPU semiconductor chips, which has not only reduced their reliance on NVIDIA's GPUs for running internal workloads, but I think what we've seen more so over the last year is they're gaining increasing traction from third-party Google Cloud customers. On the scale distribution front, Google has incredibly valuable digital real estate and consumer mind share. And that's probably best seen through the rollout of AI overviews, which are the summary AI search responses that are directly embedded in search. AI overviews is now being served to more than 2 billion users. And if it were to be considered its own stand-alone app would be by far the most widely used AI app. And then lastly, kind of on the data front, we believe Google's ability to train kind of on a wide corpus of first-party data, including YouTube videos for image and video generation as this is a very valuable long-term differentiator. Tying all those advantages to the operating results, those advantages are now being clearly reflected in the company's ability to grow at scale. So for context, Google generated $100 billion of quarterly revenue in Q3, and those revenues grew at a 15% rate, right? Just their core search and YouTube franchises, despite their maturity, are continuing to grow at a low teens rate, and their cloud business, which is now a very scaled $50 billion run rate business, growing at an incredible 32% rate. So while the share price has appreciated meaningfully this year, we still think that the valuation is quite reasonable in light of the business quality, their leadership position in AI and their ability to continue to grow earnings from this point on at a high teens rate for a very long time. William Ackman: Great. Thank you so much. Why don't we go to Uber, Charles? Charles Korn: Sure. Thanks, Bill. So as a reminder for everyone, we invested in Uber early this year, what we believe was a very highly dislocated valuation with extremely strong fundamental and operational performance overshadowed by concerns regarding disintermediation risk. And big picture, we feel increasingly confident that the market structure is evolving consistent with our underwriting hypothesis. And over the course of 2025, basically, what Uber has done is they've advanced a number of partnerships with various autonomous vehicle and technology companies. And taken together, they're strategically advancing geographically focused commercial pilots with line of sights to thousands of autonomous vehicles covering major metro cities on their network within the coming years. And since our last update, one notable call out is a marquee partnership Uber announced with NVIDIA this past month. The partnership is interesting. It coalesces around NVIDIA's DRIVE AV platform as a reference compute and sensor architecture to make any vehicle an autonomous vehicle, i.e., L4 ready, which enables OEMs and developers to accelerate their AV technologies, respectively. And it offers an extremely credible counterpoint to Waymo and Tesla's respective architecture. So you essentially have what was looking like a potentially 2-player market developing to a credible third alternative, which can help some of these small long tail of AV players kind of accelerate their respective technology developments. And Uber's role here is they're going to be contributing valuable training data to an NVIDIA data factory, which will support a foundational model upon which others can draw. And the partnership overall, it's designed to lower cost of development and accelerate commercialization efforts for our industry participants. Now against this backdrop, Uber continues to operate commercial operations for Waymo in several markets, including exclusively in Austin and Atlanta with strong utilization data reinforcing Uber's unique value proposition. We expect the market structure will continue to evolve over time to maximize vehicle utilization and operating profits. And we believe basically Uber is positioning itself to become a technology and hardware-agnostic partner of choice for the AV ecosystem. Transitioning to discuss operating performance. In short, financial results continue to be excellent. Notwithstanding their market-leading scale, growth is actually accelerating with operational metrics achieving new all-time highs in users, engagement, frequency and trip growth. And so top line results also notably this growth is actually balanced across both the Mobility and Delivery business segments with 19% and 23% growth in the most recent quarter, respectively, which just gives you some scope of the scale and growth here. And that roughly 20% blended bookings growth translates to 33% adjusted EBITDA growth and more than 50% growth in earnings per share as the company is scaling margins off a relatively low base, which is very impressive. Notably, the company is achieving this level of operating -- attractive operating leverage and earnings growth while continuing to make investments to see the next generation of products and geographies, which we believe will sustain Uber's high rate of growth over the coming years. And to just kind of double-click on this concept of investment, so the stock has been relatively weak the last few weeks. And part of this, I think, was actually -- some people may have seen DoorDash, which is a primary competitor in the delivery space, announced an unexpected round of major investments, which caught investors off guard. The stock was down nearly 20% in response to that, and that's their primary competitor in delivery in the United States. So I think there was some concern, is Uber also going to need to make a similar round of investments? Or is the competitive intensity of the business increasing. And our perspective on this is basically DoorDash. They -- basically, the company has grown very rapidly. They're very strong operators, but they didn't have amazing kind of forward-looking vision on the product architecture. And so their technology stack kind of became slightly more outdated at a faster rate than one would anticipate for a newer, relatively speaking company. They've also done a number of acquisitions, and so they're using this as an opportunity to kind of integrate these acquisitions and rebuild their tech stack. But primarily, this seems like it was a miscommunication around the kind of IR and external communications from DoorDash, and we don't think this represents a fundamental shift in the competitive intensity or kind of a desire for DoorDash to lean in. And importantly, we don't think that Uber has to make these same kind of investments. They're making such investments while simultaneously achieving their multiyear financial targets. And so we think this is kind of a unique issue to one of their competitors. And so big picture, taking a step back, Uber is basically trading at a mid-20s multiple today, which we think is an extremely cheap valuation considering their high rate of earnings growth and attractive outlook. William Ackman: When does the Tesla overhang lift, if you will, the fear that Elon will -- there will be 10 million taxis driving around, charging people $5 to go unlimited distances. Charles Korn: What's interesting, what I'd say is a factual statement, right, is that Waymo is far more capable today from a technology standpoint than Tesla, right? Tesla has grand ambitions. But if you just look at the facts, the issue is it's hard to -- it's impossible to scale a business if you don't have unit economics that work, and it's a bit of a catch-22 where until you have a technology, until you have a cost structure that works, you can't scale. So it's hard to say. I think 2026 is likely to be another year of kind of experimentation and kind of evolution rather than revolution. I don't expect to see kind of a major breakthrough. I think the nature, too, of scaling in robotaxis is there's a requirement to kind of validate and evaluate the models you're creating to make sure they're performing in real-world scenarios consistent with your modeled expectations. And that, by its very nature is kind of a slow methodical approach because if you released 100,000 robotaxis without knowing how the models perform in real-world settings, there's real-world consequences and people can die. And I think actually, Elon has been pretty measured and thoughtful around making sure that they are cautious in terms of their rollout of the products to make sure that they're performing as expected. In this regard, we'd say Waymo is clearly -- has best-in-class data, best-in-class disclosure around safety, disengagement, et cetera. I think it will be positive if kind of Tesla demonstrated more of that. Ryan Israel: If I could add maybe one thing to that. I think the Tesla risk or the Tesla overhang is really centered on 2 variables. Number one, that Tesla itself will be the dominant market player in AVs and that if it is the dominant market player in AVs, it will not choose to partner with Uber. And so I think the way that this can resolve itself is that either one of those 2 premises shows to not be correct. So to Charles' point, if there are more AV companies such as Waymo and there's actually a handful of other potential AV companies that are showing very strong progress aside from Waymo, if those companies start to become more dominant in the space and/or they start partnering with Uber, I think the perception will be that this will not be owned by any one company for AVs, and therefore, it would be a much more balanced marketplace, which I think will help resolve some of that overhang. That may be knowable within the next, I would argue, 12 to 24 months, although the timing is a little uncertain. Secondly, to the extent that Tesla does become further along in actually deploying robotaxis at scale, which, to Charles' point, does remain to be seen. They're certainly behind a lot of the targets that they have suggested over the last several years. But once they start scaling up, to the extent they are more willing to talk about partnerships, that could be the other way that this overhang results. So I think there are multiple ways that will become clear over the next year or 2 in which this could resolve in the way that we think, which will ultimately be beneficial for Uber. William Ackman: In short, we basically think the Uber platform is enormously valuable to Tesla and to all the other sort of AV companies and it's becoming even more valuable over time, embedded in the mind share and the consumer experience, a bit like Google's presence in search. Okay. Let's talk Brookfield. Charles, go ahead. Charles Korn: Sure. So Brookfield, they've had a very active 2025 with strong operating performance, significant business building and corporate development activity, particularly in recent months, including the pending acquisition of Just Group, which is a U.K. pension insurer that they're going to be acquiring early next year and the recently announced buy-in of the 26% of Oaktree that they don't already own. To start, maybe I'll provide some perspectives on their financial performance, and I'll focus primarily for now on Brookfield Asset Management or BAM, which is, as a reminder, kind of comprises roughly 75% of the value of BN Corporation, i.e., the parent entity, which we own. BAM is generating very strong results. So they're seeing roughly 15% growth in fee revenues with particularly strong growth in their credit and renewables businesses. In renewables, they closed on their second transition fund earlier this year, which is driving some of that strength. That roughly mid-teens rate of fee revenues is translating into fee earnings growth at a slightly higher kind of 16% to 17% rate, which is basically strong operating leverage on the core BAM business, offset by lower margins at Oaktree, which we think is kind of a transitory development, which will reverse itself next year, setting the stage for even stronger kind of operating leverage. And so as we look to 2026 for BAM, we think they're poised for an excellent year with accelerating organic fundraising, further step-up in capital from BN Wealth Solutions. Again, part of this is that acquisition of Just Group and then efficiencies, which they'll garner from fully consolidating Oaktree within BAM. And so of note also, as you think about BAM for '26, they're going to be in market with multiple flagships next year, including their next-generation infrastructure and private equity funds and their recently launched artificial intelligence fund. And each of these flagships, these are large, chunky $10 billion, $15 billion, $20 billion, $25 billion funds, which drive step function increases in fee-bearing capital, fee revenues and, of course, operating profits. Now moving beyond BAM to the broader kind of Brookfield ecosystem and the cash flow streams that roll up to the parent BN, 2 kind of call outs. So one, carried interest is beginning to meaningfully accelerate at BN, growing roughly 150% the last few quarters off a relatively low base. Earlier this fall, the company provided a forecast for $6 billion of carried interest over the next 3 years, which should begin to meaningfully kind of show up in 2026. It may be somewhat back-end weighted, but it's basically setting the stage for very significant growth next year. And then second, I'd touch on Wealth Solutions, which is their annuities -- primarily the annuities business, that grew 15% this quarter, which was -- saw a strong earnings contribution from the relatively small P&C business they have within their wealth solutions portfolio, which is offset by lower growth in their annuities business. And here, what's happening is we believe they're repositioning the asset book for higher long-term yields, but it's driving some temporary dislocation, which we think will reverse itself in the near term. Taken together, so BN is tracking towards low to mid-teens distributable earnings growth this year, which we believe will meaningfully accelerate next year with step function changes, increasing both the earnings contributions from Wealth Solutions and a step-up in net carried interest realizations. Also of note, the company hosted their Annual Investor Day this past September, and they established a target for nearly $7 of earnings per share in 2030 or 25% compounded growth from here. And in that context, we note that -- we think Brookfield stock is extremely cheap. It's trading at roughly 15x our assessment of forward earnings, and we anticipate accelerated share price performance tracking with kind of the rate of earnings growth we anticipate to see from them over the next few years. William Ackman: Thank you, Charles. So Fannie, Freddie, was it yesterday? It seems like a long time ago that we gave a presentation on our thoughts for a path forward for Fannie and Freddie. The President and members of -- Treasury Secretary and others have talked and posted on Twitter about potential plans for an exit from conservatorship and/or an IPO for Fannie and Freddie. We think someday, a public offering of shares by the government may make sense, but we do think there's an important step that should be taken beforehand. That's a much lower risk alternative. So what we've proposed both privately to the administration, we had the opportunity to share these ideas with the President with Secretary Ludnick, Secretary Bessent as well as Director Pulte in the recent past, which we then shared in a public forum that the administration could get a sense of the market as well as the various commentaries view of this -- of our, let's say, trial balloon is really a very simple next step. If you think about the Trump administration's first term where the President started to put Fannie and Freddie on a path to removal from conservatorship, the most significant step was reversing the theft or stopping the theft, I guess, I would call it, where Secretary Mnuchin basically ended the net worth sweep and allowed these entities to start building capital. That was a very important step for actually reducing risk in our housing finance system, making -- putting Fannie and Freddie in a position where they could, on a stand-alone basis, support the guarantees that they had outstanding. I think that was a critically important step. But we think the next step should be an acknowledgment, really, it's an accounting for the payments that have been made to the government. So basically, U.S. government injected $191 billion into these companies after the financial crisis and extracted an appropriate pound of flesh, which is a 10% return on that capital as well as warrants on 79.9% of both companies. They basically took -- it was a distressed bail out with very onerous terms, the most onerous terms of any of the banking financially related companies, only, I think, tied maybe even -- actually, ultimately, the amended version of AIG, I think, was even less onerous than Fannie and Freddie. Now the administration -- the companies have paid back $301 billion of the original $191 million, which is more than the 10% return they're entitled to. But from an accounting perspective, the preferred remains outstanding on the balance sheet. That's really a function of the net worth sweep previously -- never-seen-before transaction. So what we're recommending is that the payments to the government have to be accounted for. The result would be eliminating the preferred line item from the liability section or the equity section of the company's balance sheet. And the next step, of course, will be exercising the warrants. The government will become now very large shareholders of both companies and then the businesses are in a position to be listed on the New York Stock Exchange. Importantly, we think they should stay in conservatorship. What that means is we're now -- there's literally 0 risk to mortgage rates. The government is still completely in control of both enterprises. And now the necessary next steps can take place over however long they take in a very measured, thoughtful manner. And we believe this accomplishes all of the administration's goals, at least the stated goals of showing how much value has been created for taxpayers. The President did the right thing in not selling these entities in his first term and they've increased in value probably fourfold or so from the $100 billion offer that was apparently made to take these businesses private, I guess. And we think there's still a lot more room to run. So we think it's not a good time to do a public offering of shares because it would be dilutive to the taxpayers' ownership of both entities, but the government will be able to show a mark-to-market value and demonstrate incremental important progress without taking a risk to mortgage rates, and we shall see. The good news is that transaction -- again, the President has got a lot on its plate, and we're approaching Thanksgiving, but it's actually theoretically possible. We've spoken to the exchange about a relisting. They're obviously prepared to do whatever is required to get that done. So it could be a nice Christmas present for the long-suffering shareholders of Fannie and Freddie, which include more recently some institutions. I mean, Pershing Square has been around here a while, but other institutions have bought stock over the course of the past year, and there are literally millions of small shareholders who are cheering for the President to save them, and this would be a very nice Christmas present for that group of owners. Why don't we go to Amazon? Bharath, why don't you update us? Bharath Alamanda: Sure. So earlier this year, we were able to opportunistically build a position in Amazon during the April market drawdown. It's a company we followed for a long time, and I always admired the fact that it operates... William Ackman: What price did we pay in the drawdown? Bharath Alamanda: Our average initial cost was around $175, which is a 25x entry multiple on forward earnings, the lowest multiple that the shares had ever traded at in their history. William Ackman: Thank you. Bharath Alamanda: So yes, it was a company we've been following for a long time, and we always admired the fact that they built and operate 2 of the world's great category-defining franchises between their cloud business, AWS and their e-commerce retail operations. Our view is that both of those businesses are supported by decades-long secular growth trends, occupy dominant positions in their markets and share the kind of core tenets of the Amazon ethos of focusing on the consumer value proposition and leveraging their scale to continue to reinvest and be the low-cost provider. Despite those compelling attributes, there were concerns around the growth trajectory of AWS and then coupled with the broader tariff-related market volatility, that kind of provided us the attractive entry point. And our view was that those concerns underestimated the resiliency of the business model as well as the duration of its growth runway. And while it's still early days, the company's operating results since then have kind of helped validate our thesis. So starting with the Cloud segment, AWS today is a $120 billion business that continues to grow at a high teens rate. And in fact, last quarter, the growth rate accelerated from 17% to 20%. Notably, that impressive growth rate was actually limited by capacity constraints as consumer demand for compute vastly exceeded the pace at which AWS is able to bring new supply online. William Ackman: Is that constraint driven by just the time to build the new facility or GPUs or... Bharath Alamanda: Yes, I think it's a combination of the above. So to that end, the company has been very focused on accelerating that build-out. So in the past 12 months, they brought online 4 gigawatts of power, which is more than any other cloud provider. And for context, Amazon has doubled their data center capacity since 2022 and are on track to double it again by 2027. So in light of the kind of supply-constrained nature of AWS' growth, we actually think those investments today to accelerate the build-out are very efficient and high return use of capital. And then kind of shifting to the retail business, they've seen very minimal, if any, impact from tariffs. And over a longer time frame, we're very encouraged by the potential for significant margin expansion in that segment. So if you were to look at peer margins and adjust for Amazon's business mix as well as taking into account their much higher margin and faster-growing advertising revenue stream, we estimate that Amazon's structural retail margins could be several hundred basis points above the 6.5% margins they're expected to realize in 2025. And in addition to that, they're also extracting a lot of productivity gains from their warehouse automation initiatives and their one-of-a-kind logistics network. And as just a proof point on that latter point, per unit shipping costs have been steadily declining for the last 8 quarters in a row. So stepping back, while it's still early days and while Amazon's share price has appreciated about 30% from our initial cost in April, it still trades at a very attractive multiple relative to peers like Microsoft and Walmart and especially in light of its ability to grow earnings at a nearly 20% rate for the next few years. William Ackman: Thank you. Let's go to Restaurant Brands. Feroz. Feroz Qayyum: Sure. Thanks, Bill. So Restaurant Brands actually continues to execute at a very high level, and its most recent results reinforce both the strength of its brands and the resiliency of its business model in what can only be described as a fairly tough economic backdrop for consumer businesses. During the quarter, the company-wide same-store sales grew at 4%, units grew by 3%, leading to 7% system-wide sales growth and operating income grew by 9%. So looking at their biggest businesses, Tim Hortons in Canada, they increased their same-store sales by about 4%, which outperformed the broader Canadian QSR industry by 3 whole percentage points. This now marks the 18th straight consecutive quarter of positive same-store sales. And that, by the way, has primarily been driven by underlying traffic growth. For several years now, Tim has been laying the groundwork in its Back to Basics plan with new innovation, both in cold beverage as well as afternoon foods while still maintaining their lead and providing good value for consumers in its core beverage, coffee and breakfast segments. Tim Hortons actually is also now growing its unit count in Canada for the first time in years, a market that many consider too mature. And these units are actually a lot more impactful to the company's bottom line than their units abroad because they're obviously higher unit volumes and Tims Canada has higher unit take rates as well. In the international business, same-store sales grew by 6.5%, also above the primary competitor, McDonald's, which has also been the case for actually several quarters now. The company also brought on a new partner to manage the Burger King China business, who will actually invest $350 million into the business shortly, and that will allow that BK China business to double unit counts over the next 5 years, and that will help restaurant brands, the total company achieve their 5% unit growth algorithm in the coming years. At Burger King in the U.S., same-store sales were up about 3%, again, also ahead of burger peers and one -- the results actually have also outperformed the broader U.S. burger category for multiple consecutive quarters. And that's really due to all the initiatives they've done under their Reclaim the Flame program. While investors were worried that competitors are pushing deeper into value, Burger King has actually done a really nice job striking a nice balance between innovation and premium offerings, doing nice tie-ins with movies and also providing everyday value with their Duos and Trios platforms. In what is -- can be best described as a very challenging economic backdrop, as Anthony alluded to, we think Restaurant Brands' results highlight the very nice defensive qualities of its business. So while low-income consumers have pulled back from spending many often skipping breakfast, Restaurant Brands has still continued to grow its sales as it's benefiting from the trade down for middle and higher-income consumers trading down. William Ackman: So are Chipotle customers becoming Burger King customers? Feroz Qayyum: Look, that's a question we've been discussing at length. I'm not sure it's specifically from Chipotle to Burger King, for example. But we do think what's happening, it's really a twin economy. So people that own stocks that are wealthy are doing incredibly well, and they're continuing to spend where they used to. At the same time, the low end of the economy is doing very poorly, and they're basically pulling back. So I think a brand like a Burger King or a Tim Hortons that caters to everyone is benefiting -- obviously losing those low-end customers, but it's benefiting from the mid-end trading down. But the fast casual space broadly, which obviously Chipotle is a member of, is missing that middle sort of demand vacuum where the high end isn't trading down, but the mid-end is trading down to the quick service category broadly. So that's certainly probably happening. What's also notable about restaurant brands is that it's obviously primarily franchise business model. And so it's also not as directly exposed to the labor and cost inflation to the same extent as others. And so thanks to its consistent growth and defensive business model, we expect that Restaurant Brands will actually still grow operating income at 8% this year, which is in line with its long-term algorithm. And the business still trades at a discount to its primary peers. So it's trading at about 17x earnings, whereas McDonald's and Yum! are trading at about 23x next year's earnings. We think a business of this quality with these characteristics should trade at a much higher valuation. So we're optimistic about the prospective returns from here. William Ackman: Okay. Great. So I'll just cover Howard Hughes. The short story here is the underlying real estate business of Howard Hughes is performing extremely well. The company reported an outstanding quarter really on every metric of net operating income, land sales, profits from their MPC business and the appreciation of their existing land portfolio. The management teams at Pershing Square and Howard Hughes are working very well together, which is great. And we are working, as we've publicly disclosed on a transaction to acquire an insurance company that would become really the beginnings of our diversified holding company strategy for the business. Our goal is to complete a transaction as early as the -- at least announce a transaction as early as year-end or perhaps in the early part of the new calendar year. We'll have a lot more to say about that if and when we are successful in completing a transaction that makes sense. But the short version of the story is that, we intend to by a good insurance platform with an excellent management team that can run a profitable insurance operation with Pershing Square managing the assets of that insurance company, I would say, akin to the way that Warren Buffett has managed his insurance company's assets and the way really he's managed the insurance company operations itself. Why don't we go to Hilton? Ryan, why don't you give us an update? I'll just point out, Hilton has been an excellent investment for us over many years now. We have enormous respect for the management team, and it's one of the best businesses that we've ever owned. It's become a smaller part of the portfolio, unfortunately, because -- or fortunately, because everyone else has recognized the qualities of the business. So we still think it's an attractive investment from here, but lower on the IRR thresholds than obviously when we originally acquired our position. But go ahead. Ryan Israel: Yes. So I just wanted to make a quick point that I think this quarter's results are really emblematic of why we think Hilton's business model is unique and incredibly resilient. So for example, the company same-store sales metric RevPAR actually declined about 1.5% this quarter as there were some macro softness, which clearly has impacted some of our restaurant businesses, but that actually impacted some of the travel businesses as well. And typically, what you would expect when a company has declining same-store sales, you would expect a decline in the profitability of the business. Hilton actually grew its adjusted EBITDA, its profit metric, 8% this quarter despite the decline in same-store sales, which is very unique and really reflects the 2 fundamental drivers of the business that are incredibly attractive to us, which are they have an enormous opportunity to grow their unit or hotel count around the world because the brands that they have are able to take advantage of the increased travel trends, and they are better than a lot of the alternative brands. And other people put up the capital for that because it's a good return for them and Hilton is able to earn a very high franchise fee. And that is really adding 6 to 7 points a year of growth to the business, and that's a trend, I think, will continue for a while. And the second factor is just incredibly strong cost control due to just overall great management. So the company is able to really limit the growth in its expenses despite having a very strong steady revenue growth base. So profits still grow even when same-store sales decline, which is a typical anomaly in business, but it's part of Hilton's core model. And then on top of that, this company has just superb capital allocation. So it continues to buy back about 5% of its shares on a year-over-year basis. So with a kind of consistent underlying tax rate, the company would have grown earnings at a low teens percent this quarter despite not growing same-store sales due to some macro softness. And so I think to your point, one of the reasons why we continue to hold Hilton is those unique characteristics where if the business performs in a normal macro environment well, we think there's a clear line of sight to 16%, 17% earnings per share growth annually for a very long time. If the macro is a little weaker and same-store sales don't even grow, we're still able to get pretty comfortably above a 10% rate of earnings per share growth, which is very unique. And so the market has recognized, as you pointed out, that this quality of the business and the growth characteristics should be deserving of a higher multiple, and the company trades at about 30x next year's consensus earnings, which is part of the reason why we've reduced our position is we think that the growth profile will offer us a reasonable return, but there's less opportunity for an accelerated annual return beyond the earnings per share growth when the multiples, I think are reasonable at 30x. But we still think it's very unique and a very strong management team, which is why we continue to hold the position even though it's somewhat smaller as you've been trimming as the share price and the multiple has increased over time. William Ackman: Let's do an interesting compare and contrast. Let's compare Universal Music to Hilton. They have some fairly analogous economic characteristics, and let's compare the trading multiple of one versus the other. And why is Hilton traded at 30x earnings and Universal traded 20 or 21x earnings? Ryan Israel: So I think you're entirely right, which is that while they obviously operate in different industries, the economic characteristics are very similar. They are both royalty-like companies that are very capital-light with very strong operating margins. In Hilton's case, we believe over time, the company is likely to grow at something along the lines of maybe 8% to 10% a year for revenue and that adjusted EBITDA is probably going to grow a little bit in excess of that. Those will sound very similar because that is exactly what UMG is growing at. Its revenue is about 10% right now. William Ackman: And management guidance -- let's stick with the management guidance on those numbers. Ryan Israel: Correct. And that is in line with the guidance over time. So it's interesting that they look incredibly similar on the operational performance, if you will. The key difference, as we pointed out earlier, is UMG has not bought back a single share, whereas Hilton pretty much like clockwork buys back about 5% of its shares. They allocate all of their free cash flow -- the substantial majority of free cash flow to share buybacks. And because of the high margins and the significant degree of predictable revenue growth, they have a nice amount of leverage, which the business can support. And obviously, UMG has an unlevered balance sheet when factoring in its stake in Spotify. I think the U.S. investor base, U.S. listing of Hilton, combined with the capital allocation has given investors a lot of confidence, which has allowed them to price in a multiple of something like 30x. And as we mentioned earlier this week, UMG was trading at 20x, which is a very large gap between the 2 despite very similar economic characteristics and growth characteristics currently. William Ackman: Let's go to Hertz on the other end of the balance sheet spectrum. Feroz Qayyum: Yes. We're not unlevered, in fact, very levered and also has some operational leverage. But look, the interesting thing about Hertz is that it's actually making a lot of progress on its turnaround efforts, and the results in the third quarter showed those. So it was the strongest quarter in years. It actually generated their first positive EPS for the first time in 2 years and they demonstrated meaningful traction on the operational levers that we've discussed previously as our investment thesis. Number one, the fleet refresh. When we invested, they basically had an upside down fleet. Now they've completely refreshed it. The average vehicle in the Hertz fleet is now less than 12 months old. As a result, depreciation per unit per month DPU, which is their metric, was $273 during the quarter, well below their long-term target of $300. And importantly, next year's vehicle purchase negotiations, which some investors are worried about given some of the tariffs and inflation, they're also nearly complete. And the management team is confident that, that will also support strong unit economics with depreciation of less than $300. Operationally, the company is also making big strides. So this quarter, utilization was 84%, the highest level the company has ever delivered since 2018. Revenue per day or RPDs were down low single digits, but they continue to improve and improved in October as the company has been implementing changes and modernizing its pricing systems. On the cost side, they also continuing to make progress through automating processes, lowering headcount and rationalizing some of their footprint. And we expect both SG&A and DOEs, which is their measure for expenses per day to decline from current levels. So the company is well on its way to delivering sort of a mid-single-digit EBITDA margin next year and has line of sight into delivering $1 billion of EBITDA in the coming years. What makes Hertz very interesting from these levels... William Ackman: $1 billion. It means $1 billion of annual? Feroz Qayyum: Exactly. $1 billion of annual EBITDA in the coming years. They have a target for 2027 actually. What makes Hertz really interesting from these levels is that it also has a number of upside levers or call options available to the company. So first, the company has been setting up infrastructure to sell more used cars through its own retail channels as well as its partnerships. The company actually has a partnership with both Amazon as well as Cox, and it's now live with their rent-to-buy program in over 100 cities where you can rent a car, try it out and if you like it, you can buy it. We believe the company can turn this into a meaningful profit center that can lead to structurally lower depreciation costs because obviously, you sell a car to the retail channel at a much higher profit than the wholesale channel. And then it also allows an opportunity for them to sell additional F&I revenues. Second, we believe Hertz also has the potential of being a significant partner to the various mobility companies that are rolling out autonomous vehicles. Hertz has an expertise in vehicle maintenance, servicing, and it has a very significant scale of -- with its parking facilities that make it an ideal partner to help manage as folks try to roll these out. Both these revenue streams have the potential of being large businesses for Hertz in the future and helping it further leverage its fixed cost base and brand. On liquidity, the company is also now in a much stronger position. Recall when we invested, some investors were speculating the company may need to declare bankruptcy again, and that is definitively not the case today. It has more than $2.2 billion of total liquidity. We actually helped facilitate a convertible bond issuance earlier this year and actually increased our exposure to the company. And the company also entered into a capped call transaction, which means that the convertible bonds are not dilutive unless the stock essentially triples from current prices. So with its current liquidity, as I mentioned, of over $2 billion, they have ample liquidity to address their near-term maturities and to help grow their fleet next year, which will again help them lever their fixed cost base. So stepping back, Hertz today is a much more leaner, more efficient company with, frankly, an enviable young fleet that its peers don't have. And on top of the core rental business, the company is also developing multiple new profit streams, as I mentioned, such as the retail used car sales, servicing AVs as well as serving the broader mobility segment. So we continue to believe that Hertz has asymmetric upside from current prices. But obviously, in light of the fact that it's going through an operational turnaround, we have sized this as a smaller investment than our typical holdings. William Ackman: Why is the stock so cheap in light of all of the above? Feroz Qayyum: So it's not immune to some of the consumer issues that we're seeing in the broader space. What's also notable is that the government shutdown has obviously had an impact on travel broadly. And so people are traveling a little bit less. Hertz does benefit to an extent as people have been taking out what are called one-way rentals. So instead of flying, you just take a car. But certainly, I think it's probably a net negative if the consumer environment is weaker and then people are traveling as much. And there's also -- there's been broader concern around RPDs. We think that's a little bit misguided. The way Hertz sort of reports RPDs, it's really burdened by the fact that they have mix towards smaller cars, which certainly have lower prices, but they're EBITDA accretive. And so next year, that should be a tailwind. And candidly, I think these car rental companies are generally misunderstood. There isn't a lot of market cap for long investors to dig into and to get excited. And so both Hertz and Avis have the potential to gather some of these long-only investors as they come out of the turnaround starting next year. And I think Hertz specifically has a very interesting opportunity to grow its EBITDA from basically nothing today to $1 billion in the coming years. William Ackman: Okay. Good. Thanks, Feroz. We've always received questions in advance of the call. We do our best to answer them during the pendency of the call. Just a couple that we didn't kind of get to. One is since both Howard Hughes and the Pershing Square funds are managed by Pershing Square, how should investors think about investing in Howard Hughes versus Pershing Square's core strategy? The answer is these are, I would say, different investments with some overlap. Howard Hughes, of course, the core business today is a master planned community business. It's a business we like. It's a business that we expect to generate a lot of cash over the next years and decades, and we think provides a very good base to build our version of a diversified holding company. With the acquisition of an insurance subsidiary or insurance company that becomes a subsidiary of the company, over time, as that business scales, that will become a more important part of the operation of the company. We intend to manage that insurance company portfolio, the float in U.S. treasuries, the equity and common stocks using the same kind of investment philosophy we have at Pershing Square. So there are clearly some similar elements. But it's an operating company. It's a C-corp. We intend to take the cash that the business generates over time and to deploy that capital in acquiring -- principally controlling interest in most likely private businesses. So the portfolio will look different. It's not a large cap or mega cap minority stake investment vehicle. It will be an operating company that will buy for the very long-term various businesses. Today, you're buying Howard Hughes at about a 15% discount to the price we paid for shares and an even bigger discount to kind of the, I would say, the NAV of the real estate portfolio. So that's a nice place to start an investment. But ultimately, the success of Howard Hughes will depend on how we do with our various initiatives there. I like Howard Hughes a lot, excited about what we're going to do there. An entity where you have -- that's a public company, we have access to the capital markets, may create some flexibility over time for us to do some things that we can't do in the Pershing Square funds. So over time, I would say they will be different entities, but the same investment principles will be applied and shareholder, I would say, orientation will be applied to both. And then I would -- the other thing I would say is that the Pershing Square management team has a very large investment in all of the above. So about approaching 30% of the AUM that we manage today is -- or I guess, 28% or so today is employee capital in the funds. And then on a look-through basis, therefore, the employees own an interest -- a meaningful interest in Howard Hughes. And then on top of that, the Pershing Square management company made a $900 million investment in the company. So we have, I would say, a very high degree of what you might call skin in the game in both the funds as well as Howard Hughes. I think Howard Hughes itself is at this point, still not well recognized. I think if and when we are successful in beginning to make this business look less like a real estate master planned community and more like a diversified holding company, we expect we deliver results and we expect the market to notice. With respect to hedging, our approach, as you likely know, is, one, we pay careful attention to what's going on in the world from a macro perspective, from a geopolitical perspective, from a political perspective, all these things can have an impact on markets. And we focus -- our first priority is what are the risks in the system that could cause a massive market decline. And to the extent we identify risks like that as we did pre-financial crisis or pre-COVID crisis or pre-Fed interest rate inflation, I wouldn't quite call it a crisis, but where the Fed was forced to raise rates very aggressively, we were able to hedge those risks because of the sort of surveillance of what's kind of going on in the world. Today, we really have no hedges in place. We don't try to hedge short-term kind of stock market declines or what some people might think of as a periodic -- the overall multiple, the market is above normal. There are lots of reasons why a market cap weighted index today appropriately should be trading at a higher multiple. If you think back to '09, we didn't warrant businesses, frankly, like NVIDIA, and we didn't have this massive growth driven by a major change in technology. We are seeing interesting places to put capital. We're doing due diligence. And our approach is to -- as we say, we sort of build a library of businesses that we get to know pretty well. Occasionally, new companies emerge, go public, get spun off. We track as many of them as we can in terms of ones that meet our criteria for business quality, and then every once in a while, they get really cheap. Amazon being kind of a recent example of a company we admired for years. It was always a little too expensive, but a business we want to own. And I think we started buying stock at something like $161 a share, which seem to be a really kind of unique opportunity. With that, I just want to thank you for joining the call, and we look forward to updating you. I think our next event will be our Annual Meeting that we will stream at some point in January or an Analyst Day. Thanks so much. Operator: Thank you, everyone. This concludes your conference call for today. You may now disconnect, and have a great day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Third Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on November 20, 2025. I will now turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may begin. Daniel Tapia: Thank you, Michelle, and welcome, everyone, to our third quarter earnings call. Joining me today are Pedro Heilbron, CEO of Copa Holdings; and Peter Donkersloot, our CFO. Pedro will begin with an overview of our third quarter highlights, followed by Peter, who will walk us through the financial results. After that, we'll open the call for questions from analysts. Copa Holdings' financial reports have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures which are reconciled to IFRS figures and our earnings release available on our website, copaair.com. Our discussion today will also contain forward-looking statements, not limited to historical facts that reflect the company's current beliefs, expectations and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report filed with the SEC. With that, I will turn the call over to our CEO, Mr. Pedro Heilbron. Pedro Heilbron: Thank you, Daniel. Good morning, and thank you for joining us today. Before we begin, I want to thank all of our coworkers across the organization. As always, the dedication and hard work are instrumental in our financial and operational success. Copa delivered another strong quarter reinforcing the strength of our business model and our competitive advantages in Latin America. During the quarter, we achieved industry-leading profitability with an operating margin of 23.2%, up 2.9 percentage points year-over-year and a net margin of 19%, up 1.9 percentage points year-over-year. These results are driven by our continued focus on cost discipline and a healthy demand environment in the region. Now over to the key highlights for the quarter. Capacity in ASMs increased 5.8% compared to Q3 '24. Load factor increased by 1.8 percentage points to 88%. Passenger yields came in 2.6% lower year-over-year. Unit revenues or RASM increased 1% to $0.111 compared to Q3 '24. And unit cost, our CASM decreased 2.7% to $0.085 compared to Q3 '24, while CASM, excluding fuel, decreased 0.8% to $0.056. Operationally, Copa Airlines delivered an on-time performance of 89.7% and a flight completion factor of 99.8%, maintaining our position among the best in the industry. During the quarter, we started flights to Salta and Tocumen in Argentina. And as mentioned in our previous call, in the next few months, we expect to add service to Los Cabos, Mexico, Puerto Plata and Santiago in the Dominican Republic and Salvador, Bahia in Brazil, further strengthening our position as the most complete and convenient connecting hub for travel in the Americas. With regards to our fleet, during the quarter, we took delivery of five 737 MAX 8 aircraft. We added a second Boeing 737-800 freighter under an operating lease and Copa transferred an aircraft to Wingo, growing its fleet to 10 Boeing 737-800 NGs. We closed the quarter with 121 aircraft and we have since incorporated 2 additional MAX 8, bringing our fleet to 123 aircraft. We expect to receive 1 more MAX 8 before year-end finishing 2025 with 124 aircraft. For 2026, we anticipate adding 8 more 737 MAX 8, 2 of which we previously expected to receive in December 2025, ending 2026 with a total projected fleet of 132 aircraft. To conclude, in the third quarter, we again reported strong operational and financial results. Going forward, our guidance demonstrates confidence in our future performance, driven by healthy demand in the region and the strength of our business model, which consists of the best geographic position with our Hub of the Americas in Panama, structurally low unit cost and a strong balance sheet and a passenger-friendly product with industry-leading on-time performance. Our focus on these pillars enables us to consistently deliver industry leading results. Now I'll turn the call over to Peter, who will walk us through the financials in more detail. Peter Donkersloot Ponce: Thank you, Pedro, and good morning to all. I'd like to start by reinforcing Pedro's recognition of our team's continued dedication to achieving industry-leading performance. Let me provide some detail on our financial results for the quarter. Net profit came in at $173 million or $4.20 per share compared to $146 million or $3.50 per share in the third quarter of 2024, representing a year-over-year increase of 18.7% and 20.1%, respectively. Operating income reached $212 million or 22.2% higher year-over-year, and an industry-leading operating margin of 23.2%, 2.9 percentage points higher than the third quarter of 2024. On the cost side, CASM decreased 2.7% year-over-year to $0.085, driven primarily by lower fuel cost and maintenance expense. CASM, excluding fuel, came in at $0.056, down 0.8% compared to third quarter 2024. This figure reflects a realized gain from engine exchange transactions and a benefit related to the extension of 1 leased aircraft. Regarding our balance sheet, we ended the quarter with $1.3 billion in cash, short-term and long-term investments, representing 38% of the last 12-month revenues. Further demonstrating our financial strength and flexibility, we also have approximately $600 million in predelivery deposits for future aircraft. Additionally, we currently have 45 unencumbered aircraft. Total debt stood at $2.2 billion, entirely related to aircraft financing. Our adjusted net debt-to-EBITDA ratio came in at 0.7x and our average cost of debt continues to be highly competitive at 3.5%. Regarding the return of value to our shareholders, I'm pleased to announce that the company will make its fourth dividend payment of the year of $1.61 per share on December 15 to all shareholders of record as of December 1. As for our 2025 outlook, we remain confident in our full year performance. We are reaffirming our guidance and narrowing the operating margin range to the upper end now expected between 22% and 23%, with a full year capacity growth projected at approximately 8%. This outlook reflects a healthy demand environment in the region as well as our continued cost discipline. Our outlook is based on the following assumptions: load factor of approximately 87%; RASM of approximately $0.112; ex-fuel CASM of approximately $0.058; and an all-in fuel price of $2.40 per gallon. Looking ahead to 2026, we preliminary expect full year ASM capacity growth in the range between 11% to 13%, with an ex-fuel CASM in the range of $0.057 to $0.058. To conclude, we remain confident that our proven business model, robust balance sheet and disciplined execution provides a solid foundation to continue delivering consistent growth, strong financial results and industry-leading margins. Finally, I'd like to remind everyone that our Investor Day will take place at the New York Stock Exchange on December 11 at 11:00 a.m. Eastern Time. We look forward to sharing more about our company during this event. Thank you, and we'll now open the call for questions from the analysts. Operator: [Operator Instructions] Our first question will come from the line of Savi Syth with Raymond James. Savanthi Syth: Could you talk a little bit about the timing and nature of the kind of co-branded credit card renewal that you noted in third quarter? And just about the opportunity that you see in loyalty in general? Peter Donkersloot Ponce: Yes. Thank you, Savi. And yes, we had a renewal of our Visa agreement during the third quarter, and that's part of what you see, an 86%. We cannot disclose too much on that due to the confidentiality of the deal. But if we take that out, if the growth of the loyalty program would have been similar to the second quarter, there was over 30% growth year-over-year. Savanthi Syth: Great. Anything around the loyalty program initiatives? Is that just kind of the normal renewal? Any other kind of thoughts on how that program can kind of contribute in the future? Peter Donkersloot Ponce: So it's an important growth, 30% year-over-year over a small basis. We continue to grow. The program is maturing. We expect the program to continue to grow. There's a lot of new non-air partners in the program, and we expect the program to continue maturing and to continue growing at a decent rate going forward. And it's one of the priorities that we have for coming years. So the 30% growth, I mean, it's over a smaller base, and we expect that growth to continue and go -- slightly going down as the program matures. Savanthi Syth: Got it. And if I can ask just a clarification question on the growth next year. Could you tell like the 11% to 13%, how much of that is kind of [indiscernible] versus [ seat ]? Peter Donkersloot Ponce: Yes. So the full year growth that we are projecting between 11% to 13%, I would first say that half of that growth comes from the full year effect of the backloaded aircraft that we received this year. Of the other half, I would say, that 50%, 40 percentage points of that will come from adding frequencies to current destinations. And then the other 10% will come from adding new dots on the map. Some of them Pedro alluded to during his intervention. That's more or less the breakdown of our 11% to 13% growth in ASM for next year. Operator: Our next question comes from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Yes. Just -- Peter, maybe to pick up on Savi's question on that growth for next year, sort of half of it is just the annualization of 2025 and then another large chunk of that remaining half, 40 points is frequencies. As we see that type of growth, what is the view on unit revenue trends? Normally, when we see a step-up in growth, we tend to see pressure, especially when you move into new markets. But it seems like if you're just focused on really strengthening what is already a strong position in the region, we should assume that unit revenue next year could be maybe somewhat flattish. What -- any thoughts on that or how you think about it for 2026? Pedro Heilbron: Mike, it's Pedro here. Yes. So I think in a way, you helped us answer the question. I mean we're not giving yet guidance on unit revenues. But you're right, most of the growth comes either full year effect or from adding frequencies. And of course, we're adding those frequencies in high-demand routes. When we average 88% for a quarter like we did in Q3, that means that many, many routes, many markets are above 90%. And that's where we're adding frequency. So the impact on unit revenues should be much less than one we would expect from double-digit ASM growth. Michael Linenberg: Great. And then just second question, since it is frequencies, when we look at the number of gates at Panama City and how full up you are and the number of banks, where are you when we think about banks and connectivity? I see some markets like you have 8 flights a day to Miami, you have 10 flights to Bogota. I recall where it was 2 banks, 3 banks, 4 banks. How many defined banks are you -- do you have today? And how much actually additional room do you have to add these additional frequencies because presumably, they're all in and out of Panama City. When do you start topping off or where do you start running out of connecting banks? Pedro Heilbron: Yes. Pedro here again, Mike. And so 2 things I'll say. First is that the airport is already working on its next phase of expansion. They're coming out with bids by the end of this year or early next year to expand the new T2 terminal and also to do some work on the taxiways and runways, one of those contracts actually has already been assigned. And then our civil aviation authorities is also bidding a redesign of the airspace. So all of this is going to happen in the next 3 to 4 years, and it's going to be done in a very pragmatic, I would say, way. That's going to be very good for the airport and for our hub. So we're really happy with that. In terms of frequencies, we're running 6 defined banks today, 6. Our first arrivals are like at 6 in the morning and our last departures are nearly at 11:00 p.m. And we do run wingtips, sometimes even triple wingtips at certain times of the day, like early in the morning, we run wingtips to the Caribbean, to Miami and places like that. And depending on the banks, we might run wingtips to maybe South America and other points. So they're still -- with this new phase of expansion that we're very, very involved with the airport authorities and the design even, and there's an international institution also very involved. We're going to have plenty of room to add wingtips if needed or even if it comes to adding banks, there will be room for that also. Operator: Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Jacob Gunning: This is Jake Gunning on for Duane. To ask a question about next year a little differently, not looking for guidance, but could you maybe talk about how you're preliminary thoughts on 2026 margins and earnings have changed over the last quarter? Pedro Heilbron: Yes. Again -- Pedro again. They haven't really changed. I mean in terms of our -- what we expect for unit cost, unit revenues, et cetera, we are kind of in the same place. Maybe the only wild card is what happens to fuel. And we've seen in the last few weeks, an increase in the crack spread for jet fuel, but that could change again in the next 2 weeks, and it has a lot to do with the conflict in Russia and mainly that and a few other reasons. So I would say that, that's the only wild card, and we haven't modeled how yields would react to that when there's -- when jet fuel is higher, usually, there's more pressure for everyone to adjust fares, but we haven't really modeled that. Jacob Gunning: Okay. And then just given the really healthy leverage, is there any debate or discussion on leaning more heavily into share buybacks versus dividends? Peter Donkersloot Ponce: Yes. So Peter now, and thank you for the question. And I'm going to talk a little bit about all the capital allocation plan that we have. And basically, we have, after this year around 46, 47 planes pending delivery from the order book we have. And given the fact that we are performing as Pedro said, 88% load factors, pretty decent margins. One of our top priorities right now is continue to reinvesting in the business. We believe the business can continue delivering healthy margin and growth. So that's one of our priorities for the capital allocation. And secondly, of course, we'll continue returning value to our shareholders as part of our capital allocation plan, and we have 2 ways to do that. One is our dividend policy that, as you know, it's 40% of last year's net income. We will maintain that dividend policy and maintain those quarterly payments. And then the second is we have a buyback -- a share buyback program open that was approved by the Board. It was approved around -- for $200 million. We have executed half of it, and we'll continue executing on the other half on an opportunistic basis. We don't have an end date for the plan. We will just continue delivering when we see the opportunity to do so. Operator: Our next question comes from the line of Filipe Nielsen with Citi. Filipe Ferreira Nielsen: I have 2 questions on CASM Ex. Looking at this year, you're continuing guiding to $0.058. And just trying to understand what are the moving parts after this quarter's one-off, positive one-offs if maybe you're being too conservative on this assumption? And the second one, looking for 2026. Maybe if we could -- you could like guide us on the moving parts of this expectation. Maybe for us, sounded a little too conservative given that you potentially could increase fixed cost dilution from the capacity expansion. Just trying to understand those points. Peter Donkersloot Ponce: Thank you, Filipe. Peter here. So yes, on the CASM Ex, we're guiding to approximately $0.058 for the quarter, of course, [ we're up ] for the year. We only use 1 decimal. So there's a range to that [ $0.058 ] that we are alluding to, it's not necessarily going to be exactly [ $0.0580 ] for the full year. And I would say that a -- I would also like to comment on the 2 items that we highlighted on our earnings release yesterday. First, we did highlight those 2 items more to make it easier to compare. And to give some color, the return conditions, it's every time we do a lease extension, what happens is we spread the provision for a longer period of time. So we did execute one, a lease extension during the quarter, and that's what you see that. That's around 1/3 of the effect of what we call out there. And the other 2/3, which I may say that are not necessarily one-offs, is the engine exchange and mainly due to the longer turnaround time that we have been seeing, the team is sending some engines to do engine exchange instead of sending into engine restoration. This transaction usually see some accounting benefits due to the difference between the book value and the transaction price. This transaction is something that we're doing this year, and most will continue doing next year. So I wanted to highlight that it's not necessarily a one-off transaction for the engine exchange. And for the year -- for the 2025, I address, it's a range of the [ $0.0580 ]. So we would need to model what is within that range of that decimal. And for 2026, we feel pretty comfortable what we wanted to guide is that we have enough levers in our tool of cost initiatives to offset inflation at the least and push the CASM even lower. So I think that's the guidance we're giving to CASM. It's directionality of the CASM that we have enough initiatives to address inflation and push the CASM at least even lower. That's the main point we want to address. Operator: Our next question comes from the line of Daniel McKenzie with Seaport Global. Daniel McKenzie: A couple of questions here. First, going back to the script, the healthy demand backdrop in the region. I'm wondering if you can elaborate on that. Macro has been especially volatile this year. And Latin America, just seems to be completely disregarding it, plowing through it. And so I'm just wondering, what is driving that? And -- or is it just that the demand is inelastic, given the wealth demographic of your customers. I'm just wondering if you can break it apart for us? Pedro Heilbron: Okay. So Pedro here, Dan. And it's -- I'm not going to say we have all the answers or that we can share all the answers we might have. There might be something with demographics, as you will explain. We have a lower percent of people that travel in Latin America versus what you would find in Europe or the U.S. but the traveling class does have, on average, the resources to travel so. And they're traveling more than before, I must say, and before the pandemic, that's noticeable and that's very clear. So an analysis of the demographic is not going to be easy. But demand remains healthy, we -- it continues to grow. There's a lot of capacity coming in, but load factors are holding up. And I would say that, that's what we're seeing in most regions and the regions where maybe that won't be the case are easy to point out. For example, we had the strong devaluation in Brazil last year, starting in mid last year, but the currency has been stable and even recuperated some ground since. So we see Brazil slowly coming back, maybe not all the way back to what it was in 2023, but it's on its way. The rest of South America looks fine, the [indiscernible] looks fine. The U.S. is pretty stable. Maybe just slightly down, but with a lot more capacity. So -- and I'm saying load factors, of course, demand is up. It's up double digits. Argentina has seen a lot of capacity come in. So still a strong market, but not nearly as strong as before because of all that capacity. But I think that's going to taper down. We ourselves are going to grow. We've grown quite a bit in Argentina. We won't be growing that much, if at all, in the future. So we're also adjusting our capacity and putting our capacity where it makes the most sense. So yes, I mean, in general, it's a healthy demand environment. Sometimes the additional $0.08 hit on yields a little bit, but even that has not been significant. Daniel McKenzie: Yes. Very impressive. The second question here. I'm wondering if you could speak to the durability of growth opportunities beyond 2026. So should we be thinking low double digits for the foreseeable future? Or how should we be thinking about growth longer term, say, 3 years out or so? Pedro Heilbron: Yes. I'll go with our aircraft order, which I think is the better way of understanding our growth plans. And as you know, we've always been very rational, very pragmatic. We never do crazy things. But for -- yes, you know us well. Like for the last 3 years, we have delivered plus 20% margins every quarter. One quarter we missed, we were 19.5%. So okay, we're right there. And that's because we're really careful. I mean, we focus on our business model. We focus on our low-cost and we grow capacity by what makes sense to us, not necessarily in response to anything else. So if you look at our fleet plan, it follows that same pattern. And it points to somewhere between 7% and 8% per year consistently. We have a little bit over 40 planes pending delivery for the next 4 years. And if you do the math, it's going to be around 7%, 8% average growth CAGR for that period. And I think that we have the opportunities, given the strength of our hub and network, our leading unit costs and customer service, on time performance. When we put everything together, we think that's really reasonable growth that we can sustain in a profitable way. Peter Donkersloot Ponce: And I would just add that, as Pedro alluded to, that's our plan of growth and should be around the 6%, 7% as Pedro alluded to the next couple of years. But Pedro said it very well, we're not obsessed with growth. We will only grow if there's profitability in that growth. We'll be more focused on making sure we can get the most profitability. And we have a lot of flexibility for that growth on the downside. And we have the lease aircraft. We have 4,500 unencumbered aircraft. We have the 700s that by any point, demand softens, we can decide to park, harvest the engines and even help us grow in the CASM. So there are a lot of tools we have to address whatever market comes to us, and we'll try to make the best out of it. Operator: Our next question comes from the line of Alberto Valerio with UBS. Alberto Valerio: One more on my side in terms of yields was, you see a healthy environment, but I think market was expecting a little bit more in terms of yields for this quarter as well for the next one, maybe a revising -- revision on the guidance. If there is any specific detail that make you guys be a little bit more conservative? And another one, if I may, in terms of competition in the region, we see an IPO in Mexico, we may see another IPO next year in Latin America and also in Brazil, Azul come back from Chapter 11. What is the perspective? And how is the market in the region, if you can take some details in terms of competition? Pedro Heilbron: Okay. A few things. So I think we already spoke quite a bit about 2026 yield. You're asking about fourth quarter. We do not give a quarter-by-quarter yield guidance but we did narrow our operating margin guidance to somewhere between 22% and 23%. So we narrowed it to the higher end of our previous guidance. So that's what we can share now. In terms of competition, it's something that we've lived with for a long time, always, I would say, but even more so in the last 4 years, in the last 4 years or 3 years, and we work on the -- on our competitive advantages to make them stronger. And that's our product, our unit costs and the strength of our network. So we're confident that we can continue delivering in 2026 and beyond the strong margins you've seen before. And the IPOs you alluded to, well, those are companies that were public before. So they're going back to where they were before they went through bankruptcy and all the other troubles they got into. We work hard to avoid that kind of situation and try to be a little bit more steady on everything we do. Operator: Our next question comes from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: Just kind of going back to the high-level conceptually for next year. How do you think about like how -- from the incremental frequencies and then the 10 points for the new dots, just like in a normal year, how would you think about how those should theoretically compare to like system RASM? Peter Donkersloot Ponce: Yes. So normally, in a regular year, most of our growth goes to adding frequencies and then we always have a little of that growth to put on new markets. And then for those new markets for the next year, normally mature, and then they go in the first category of adding frequencies to those new markets as we normally open markets with 3 to 4 daily -- weekly flights and then we go building up. So that's more or less how we have deployed growth in the past years and how we've done it. Most of it going to frequencies and then a smaller portion go into new markets. Thomas Fitzgerald: Got it. Okay. I mean, normally just thinking about the like the -- just thinking about like the maturity ramp for like the incremental like departures, do you think that like is a decent discount like a 10-point discount to system average or pretty much in line with the system that you're producing? Pedro Heilbron: I would say it's pretty much in line. And kind of a related factor is that as we all know, Boeing deliveries were -- have been delayed quite a bit for the last 2 years. This year, they've been on time even earlier so there's a noticeable improvement there. But overall, we're still behind where we thought we were going to be if we had talked 3 years ago. So these are kind of overdue deliveries and we feel we have the demand for those aircraft, especially that we're adding frequencies as Peter mentioned. Thomas Fitzgerald: Okay. That's really helpful color. And then just as a follow-up, I was wondering if you could talk -- you've talked in the past about some of your -- some of the kind of lower-hanging fruit you guys have with technology and your ability to maybe price better, whether incorporating more dynamic pricing or upselling products like Economy Extra. I'm just wondering if you could -- maybe it's more of a preview for Investor Day, but I love the latest thinking there. Pedro Heilbron: Yes, we have to keep something for the Investor Day, you're right. You just helped me answer that question. There's still a lot of opportunities. We continue investing quite a bit in our digital tools and especially -- actually not necessarily in new digital tools, but making better what we already have. And there's an opportunity we have in doing better merchandiser -- merchandising, I'm sorry, better UX, better user experience. Those products we're offering make them more visible to our customers, especially in the booking flow and in the check-in flow. We're working on that and focusing on 3 things and 3 ancillary categories. Baggage, of course, upgrades to business class, and we're having a lot of success there. And also our premium economy cabin, which we call Economy Extra. We haven't given that enough visibility and there's nice upside there. So yes, that's where we're focusing, and we expect to continue increasing revenues in those categories. Operator: Our next question comes from the line of Guilherme Mendes with JPMorgan. Guilherme Mendes: First one is just a follow-up on the competition. Pedro, you mentioned about Argentina being especially competitive and you also mentioned about Brazil, but which other regions do you see, let's say, higher-than-average competitive environment? And the second one, Pedro, you also mentioned about fuel being in the white card for 2026. Given that a potential environment, do you see Copa changed its hedging policy in some way? Pedro Heilbron: Okay. Yes. So yes, what I said in general terms is demand is healthy. It's growing at the pace of capacity in all of Latin America. So load factors are holding up well. I highlighted a few regions. Brazil got hit hard last year and at the beginning of this year because there was a sudden devaluation of the currency and a lot of capacity had come in because of that success, that was during the first half of 2024. Since the currency, and you know that very well, the currency has been stable, actually has improved since 12 months ago. And that market is coming back little by little. Less capacity has come in compared to the first half of last year. So we're seeing an improvement in our Brazil -- load factors and in our Brazil PRASM. So we're seeing improvement in those. And Q4 should be better in Q3 and Q3 was better in Q2. So it's going in the right direction. Not all the way back to where it was at the end of 2023, but it's in the right direction. And then Argentina has been booming, has been quite a market with all the economic changes that the new government has implemented in Argentina has been booming in general terms. The devaluation has been more predictable and not as significant as before. Inflation has been a lot more under control and traveling public in a country that loves to trouble -- loves to travel, it has been growing at a very strong pace. That has attracted a lot of capacity from us and from everyone. And when that happens, well, yield soften a little bit, but they're still very strong. And what I said is that we will not be growing so much in Argentina as we've done in the past, let's say, 12 months. And that's probably going to be the case with most other airlines serving the country. So it's going to stabilize, I would say. Guilherme Mendes: Pedro, maybe on the hedging policy? Pedro Heilbron: Oh, okay, the hedging policy. I forgot about hedging because we haven't done hedging in so long that it's -- yes, no, that's not going to change. What -- and usually the hedges -- many hedges are on WTI or Brent. And this what has shut up lately is the crack spread, so as jet fuel. And I don't know for how long that's going to happen and that's going to stay up there. So we're not planning to change our hedging strategy. We're happy with not hedging. It has worked well for us and it's going to remain that way. Operator: Our next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: Just can I give an update on the densification plan, just how many aircraft are yet to go and just curious on how much of next year's unit costs might be driven by that and if there's anything kind of further that it will drive in '27? Peter Donkersloot Ponce: Yes. Thank you, Savi. We've done around half of the densification that we've planned to. And that was one additional row. So around 6 more seats per plane. We've done half of it. So around 25 of the -- let's call it, 50 that we said we were going to do, and we have another 25 left that we are planning to do during 2026. Savanthi Syth: Great. That's helpful. And just a clarification on the credit card benefit this quarter. Is that something that's just onetime this quarter? Or is that something that now is layered on and kind of continues going forward? Peter Donkersloot Ponce: So the -- again, on the credit card benefit, we saw 2 separate pieces and let's call it, to oversimplify half and half. Half is related to the extension of our agreement with Visa, and that is onetime every x amount of years. And then the other one is the growth of the program by itself, and that's the other half, and that's similar to what we saw in the second quarter, and that should be continued -- that growth should be continued and stable in that program. Operator: And our last question will come from the line of Jens Spiess with Morgan Stanley. Jens Spiess: Sorry, I joined late, so if you already answered this question, please disregard. I just wanted to get a sense of how much conservatism is built into your guidance. So backing out like fourth quarter at the midrange of your annual guidance for 2025, we get to an operating margin of around 22% and yields of 11.4%. So I just wanted to get a sense of how comfortable you feel with that number in the fourth quarter? And how much at the end, conservatism is built into it? Pedro Heilbron: So our hedging. Our fourth quarter 2025 guidance was narrowed down to between 22% and 23%, which was like the upper part of our previous guidance, which was 21% to 23%. And we're very comfortable with that range between 22% and 23%. Jens Spiess: All right. Perfect. And just in terms of yields, it does imply a deceleration of yields versus this third quarter. So I just wanted to get a sense of that and how you're looking into the next few quarters maybe? Pedro Heilbron: Yes, that question was asked before, and the response was that we do not guide a yield on a quarterly basis. Jens Spiess: Sorry, yes. I mean, looking at your RASM guidance for the full year, we are able to back out like the fourth quarter RASM, right, which does imply, I think, [ 11.4 ]? And does imply deceleration quarter-over-quarter. So I just want to get a sense of -- do you think there's potential upside to that or you feel quite comfortable with that number? Pedro Heilbron: I believe that our RASM guidance for the year is [ 11.2 ], and we haven't changed that guidance. Jens Spiess: Got it. So you feel comfortable with that guidance. All perfect. Operator: I would now like to hand the conference back over to Pedro Heilbron for closing remarks. Pedro Heilbron: Okay. Thank you all for your questions and for joining us today. We appreciate your continued interest and support. Of course, I look forward to seeing you in person at our Investor Day and answer even more questions. So as always, you can feel confident that we will keep working really hard to strengthen and develop our competitive advantage, and I'm confident we'll continue delivering very strong results in years to come. So thank you, and have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Magnera Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised today's conference being recorded. I would now like to turn the conference over to your speaker today, Robert Weilminster. Please go ahead. Robert Weilminster: Thank you, operator, and thank you, everyone, for joining Magnera's Fourth Fiscal Quarter 2025 Earnings Call. Joining me I have Magnera's Chief Executive Officer, Curt Begle; and Chief Financial Officer, Jim Till. Following our prepared remarks, we will have a question-and-answer session. To allow everyone the opportunity to participate we ask that you limit yourself to one question with a brief follow-up, then fall back into the queue for any additional questions. A few things to note before handing over the call on our website at magnera.com, you can find today's press release and earnings call presentation under Investor Relations. You can also go directly to ir.magnera.com to review the investor presentations from our recent conference attendance. As referenced on Slide 2, during the call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures in our earnings press release and in the appendix of the presentation available on our website. Additionally, a reminder that we will make certain forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company therefore, are subject to risks and uncertainties. Actual results or outcomes may differ materially from those expressed or implied in our forward-looking statements. Some factors that could cause the results or outcomes to differ are in the company's latest SEC filings and our news releases. These statements speak only as of today, and we undertake no obligation to update them. I will now turn the call over to Magnera's CEO, Curt Bagle. Curtis Begle: Thank you, Robert. Good morning, and thank you for joining our call. I am pleased to present our fourth quarter results and discuss the significant progress achieved as we marked our first anniversary as Magnera. During this update, I would like to emphasize 3 key takeaways: First, our strategy to establish ourselves as a leader in advanced specialty materials is yielding positive results. Our global stature as an innovative organization with substantial scale and strategic geographic presence has enabled us to consistently succeed in the current bid cycle with top tier customers. We've been able to gain share in markets and product segments of our choosing. Second, the macroeconomic conditions across our operating regions remain challenging with a cautious outlook as we begin fiscal year 2026. Third, our focus remains on controllable factors. We have made measurable improvements in our synergy run rate performance and have already demonstrated substantial advancement with Project CORE introduced last quarter. The Magnera team delivered robust results to close the fiscal year, achieving $839 million in sales and adjusted EBITDA of $90 million for the quarter. For the full year, revenues reached $3.2 billion with an adjusted EBITDA standing at $362 million. We generated $126 million of free cash flow, representing a yield exceeding 30%. I wish to express my gratitude to our teams who have collaborated effectively, stabilized our organization, developed optimization plans and taken decisive actions positioning us for continued success. These financial outcomes were underpinned by several notable successes with our customers. In a subdued personal care market, we experienced ongoing product mix enhancements as consumers increasingly opted for premium softness and comfort. Our adult incontinence products experienced mid-single-digit growth through increased adoption rate and our customers increasingly seeking innovative features similar to those found in baby care items. Within consumer solutions, Increased demand for wipes and infrastructure contributed to our segment's portfolio increasing from 51% to 53% of our total revenue. Our consumer solutions portfolio utilization is tracking nicely with growth projects and targeted asset upgrades. Sales of infection prevention wipes rose 10% year-over-year, with balanced growth from both branded and private label customers. Demand for convenience surface cleaning and disinfecting remains strong across households and institutional use. Our strong positioning in cable wrap and specialty solutions has benefited from ongoing electrification and infrastructure growth worldwide. In response to growing sustainability requirements, we have provided advanced material solutions for wipes, tea and coffee filtration and compostable offerings for in-home and away from home usage. Looking forward to 2026, we anticipate an earnings improvement of approximately 9% and driven by synergy realization, project CORE initiatives and further advances in product mix and innovation. The company has successfully completed its stabilization phase following our formation and maintained uninterrupted delivery of premium products to our customers over the past year. Now entering the optimization phase of our transformation, we are cultivating an innovative culture aligned with our commitments to our customers. Our commercial teams have been integrated to ensure consistent service. Operational metrics and processes are being standardized and efficiency initiatives are underway throughout the organization. We continue to be action-oriented with our purpose, promise and beliefs providing our guiding compass. At this point, I will conclude opening remarks and invite Jim to provide a detailed overview of our financial performance. James Till: Thank you, Curt, and good morning, everyone. Before we dive into our results, I want to remind everyone that when we compare our performance to the prior quarter, all the prior period figures are adjusted on a constant currency basis to eliminate the impact of exchange rate fluctuations. Additionally, last year's results incorporate the full impact of the merger. For those interested in the details, the reconciliations between our adjusted and reported results are included in the appendix of today's presentation. Now turning to our financial results on Slide 9. We delivered performance that aligns with the expectations that we shared during the previous quarterly call. Volumes and earnings came in as anticipated, while cash flows exceeded our projections, reflecting the strong execution and discipline of our global teams. Our teams have done an exceptional job advancing synergy realization since the merger, implementing new robust cost reduction initiatives and optimizing our product mix capacity and allocations across the portfolio. During the quarter, these efforts helped offset softer baby demand in South America as well as general market softness in Europe. Despite the external challenges, adjusted EBITDA remained essentially flat for the quarter. Looking at the full year results, fiscal 2025 was a year of disciplined execution, strategic progress and solid cash generation. Our teams delivered strong operational performance, advanced merger synergies and maintained financial discipline. Free cash flow for the year exceeded the high end of our originally provided guidance range, reflecting an intense focus on CapEx and prudent working capital improvements. This strong cash generation is a testament to the dedication of our operational focus of our teams worldwide. Since the merger, we generated $126 million of free cash flow, representing a free cash flow yield of more than 30% relative to our year-end market capitalization. This performance has allowed us to strengthen our balance sheet and reduce our debt leverage to 3.8x at the end of the fourth quarter. We concluded the year with approximately $600 million of available liquidity, providing a solid financial foundation to support strategic investments, pursue growth opportunities and maintain flexibility in a dynamic market environment. Moving forward, we will continue to prioritize strengthening the balance sheet and maintaining operational agility. Moving on to my fourth quarter segment reviews, starting with Rest of World on Slide 10. Revenue declined 3% for the quarter as stronger performance in the select consumer solutions categories was offset by the pass-through of lower raw material costs and weaker consumption levels in Europe. Adjusted EBITDA for the segment increased $4 million, reflecting operational efficiencies, rigorous cost reduction programs and continued synergy benefits from the integration. These improvements underscore our resilience of our business model and effectiveness of our disciplined global operations. Turning to Americas on Slide 11. Revenues were down 9% for the quarter as a result of the pass-through of lower raw material costs and competitive pressures from imports in South America. For the full year, headwinds were partially offset by stronger demand in infrastructure and wipes end markets, which helped stabilize our overall annual results. Adjusted EBITDA in the Americas segment declined $5 million for the quarter, largely reflecting the volume and product mix challenges in South America. Despite the decline, we are confident that our ongoing improvement initiatives and synergy realization will support margin recovery in the coming quarters as operational excellence remains a central focus. Looking ahead to fiscal 2026. Our guidance assumptions are shown on Slide 12. At the $395 million midpoint, we are expecting EBITDA growth of approximately 9% year-over-year. This growth reflects continued synergy realization and ongoing benefits from Project CORE, including cost reductions and capacity rationalization. In terms of the free cash flow, we expect a range of $90 million to $110 million, including $80 million of capital investments which includes $10 million from the IT conversion related CapEx. This guidance reflects a prudent assessment of the near-term environment and a disciplined execution of our operational and financial strategies. This concludes my financial review, and I'll now turn it back over to Curt. Curtis Begle: Closing 2025, I'm pleased with the progress we made as a new company. We over-delivered on our free cash flow, delivered on our updated EBITDA guidance and CapEx commitments and strengthen our balance sheet. Looking forward to 2026, we are forecasting an increase in earnings as we continue to leverage our scale, unique value proposition and reliability to deliver for our stakeholders. We are confident in our ability to drive value creation through both EBITDA growth and robust free cash flow generation. Our priorities are clear: operational excellence; balance sheet strength; disciplined capital allocation and strategic investment in growth opportunities. These actions position us to continue building long-term shareholder value while maintaining flexibility in a dynamic global environment. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Richard Carlson with Wells Fargo. Richard Carlson: Congrats on the progress and happy anniversary. Curtis Begle: Thanks, Richard. Richard Carlson: So I actually have several questions, but I'll ask the first one, it's a big one and then I'll get back in the queue for the rest. But I just want to dig in a little bit more to EBITDA and some of the puts and takes. I think your range is plus 5% to plus 13%. So what are some of the moving parts there? What's maybe the underlying volume assumptions mix, price, things like that. And then it seems like -- and also a lot of this is from EBITDA margin expansion. So what's driving that, too? James Till: Thanks, Richard. Thanks for the questions. As we think about the guide for next year, the margin expansion is really -- the continued synergy realization that we've highlighted kind of throughout the year, it starts hitting more of a full run rate next year. So we've talked about kind of realizing 75% -- or 70% to 75% of the remaining outstanding unrealized synergies next year as well as Project CORE that we highlighted last quarter. So that will begin to ramp up here in the back half of Q1 and then we'll begin to get full realization in Q2, 3 and 4. So that's the lift on the EBITDA side in terms of margin expansion. In terms of the volumes, we're expecting sort of flattish for the overall business as we look at it today with some puts and takes between the regions. And that's really the driving factors. And so as you go to the bottom end of the range, the top end of the range, volume is going to be kind of the outstanding question for us and is the reason for the little bit wider range than you may expect. Curtis Begle: Yes. Richard, the other comment I would make is, we've highlighted in previous calls and commented again on this quarter, we'll be lapping some of the South America comes from prior year in the first 2 quarters. And so that's being offset by some of the positive signals of growth that we're seeing in the U.S. and a cautious outlook on Europe. Operator: Our next question comes from Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: Yes. Thank you, and good morning, everyone. Curt, in listening to your prepared remarks, it sounds like you're having some success here in bid season. Can you just elaborate on where you're targeting share gains and having success and maybe just put that into the context of what you see unfolding mix-wise within the portfolio in '26. And the volume trends that you foresee globally? Curtis Begle: Yes. Thanks, Kevin. Appreciate you joining. As we've talked about historically, we had -- going into this year, obviously, there were contracts that we needed to see through and then we needed to understand from a cost profile and a differentiation, where we stood from an organization as we realized synergies and make sure that we were getting the value for the products that we were selling, also maximizing throughput and output on our most contemporary line. So as we've gone through the season, and we're probably 70% to 75% through. Typically, some of this carries into Q1 or Q2 of our fiscal year. We feel very good about how we position not only our ability to service our customers. As you can imagine, when there's a large combination of this size. One of the risks that a customer may see is how will they be treated and we'll be able to deliver for them with the quality and service that they deserve and expect. And I'm very proud of what the group has been able to accomplish. So that that certainly provided us with the right discussions at the highest levels inside of those organizations. And I will say that all of our customers are living in a very competitive environment as well. So finding ways to help them optimize their cost structure, but more importantly, provide some differentiated features through products such as lamination and some of our soft applications within the nonwoven segment, is really giving a good mix lift, particularly in our personal care side. We're seeing healthcare recover a little bit as well, which is a positive signal. And in some cases, seeing some growth in geographies that we hadn't historically looked at, and that's been a good job by our sales forces across the globe. And we look at consumer solutions, we comment on the fact that the mix of our portfolio is shifting from 51% to 53% in consumer solutions. As you look at -- it's difficult sometimes to see the forest through the trees. And so we try to really bucket those into major segments. We've talked about wipes. We have a great franchise inside of our consumer solutions space, both our own branded products for dry wipes that goes into institutional services and distribution channels with Sontara and Chicopee. But also, as you look at our broad portfolio globally within differentiated substrates inside of our portfolio, our spinlace technology continues to be preferred by the consumer and a great product and delivery for our customers as well as we round out with airlaid and spunlace technologies, which I think you have a little bit of an idea now that you've had a chance to visit 1 of the sites. So we're able to kind of capture general surface cleaning, general personal care cleaning and then also the institutional dry wipes goods. So we're excited about that. I talked about electrification initiatives. Our cable wrap business continues to build momentum through projects, green energy projects and high-voltage cable needs. That product line, and we believe, is, again, another great niche application where we have some unique value propositions there. And then on the infrastructure side, while you may see some softness in different parts of the world, the broad part of our portfolio is not just the building construction wrap, but in some of the other products that we've highlighted is a nice complement to those kind of total systems solutions for contractors and various distributors alike. So we continue to lean in on that front. And I don't want to be remiss if I didn't talk about some of the filtration projects we have, particularly in -- when you think about the beverage space, the 1 thing that we've really grown to appreciate over the past year is how significant and how trusted the sites that we had acquired are in that space, very high-quality demand, as you can expect. But more importantly, our ability to service and deliver for those customers is something that we really pride ourselves on and look to continue to improve in certain areas. And then there's demands on being on the front end of the ever change needs in the markets on compostable opportunities and addressing the customers' requirements from their ESG metrics, but more importantly, the safety and security of the products that they're putting in the market. Make no mistake across the board, we are -- we have to maintain the highest quality levels, highest service levels, not only who we do business with, but the applications, the end-use applications that we supply to. We are touching skin. We are in the operating room. We are protecting babies, adults, et cetera, and that's something that we take very seriously, but also something that, again, is a differentiation for us in a space that, again, can be competitive at times, but we are the trusted and reliable player in the geographies that we serve. Kevin McCarthy: Curt, my second question relates to free cash flow. I thought you did a nice job generating cash and deleveraging in the quarter. Specifically, can you unpack the forward-looking free cash flow range of $90 million to $110 million in 2026. Just looking for your thoughts on things like cash cost for integration and Project CORE, what you're baking in for working capital, cash taxes and other items you may care to call out? James Till: Sure. Thanks, Kevin. Absolutely. So when -- obviously, you start at the top of the house with the EBITDA. and then we've highlighted the $80 million of capital expenditures, which is $10 million of IT-related integration costs. On the integration and tax question, there's roughly $20 million of CORE, and then we have in the range of $30 million to $35 million for cash taxes. We've sort of highlighted that 10% to 11% of EBITDA, but we have some projects we think can offset that next year to help lower that number a little bit. And then the remaining is just our normal integration is we're in year 2 of a sort of a 3-year path. And so that -- the overall total of that category is roughly $80 million. And we highlighted that on Slide 12 to help you with the walks. Kevin McCarthy: Okay. And is working capital, Jim, expected to be smallish number? Or how would you characterize that? James Till: I apologize, right. In working capital, we assume flat. We have some items that were -- came in at the end of the quarter this year. There were onetime benefits. Roughly $10 million of that benefit will offset in next year. But we do have some items as we go off of legacy GLT terms, the remaining portion that should offset that. So we would assume flat for next year. Operator: Our next question comes from Roger Spitz with Bank of America. Roger Spitz: Maybe I missed it, but for fiscal 2025 overall, on a pro forma basis, what was the volume growth? Curtis Begle: Yes. Thanks, Roger. I think we finished right about 3% negative, 3.5%, and that was -- for the Americas, the decline was really because of the South America challenges that we have faced from a competitive standpoint. And then Europe was roughly 4%. So in total tonnage sold, right about the 3.5%, 4% negative for the year. Roger Spitz: Got it. And then for thinking about fiscal 2026, you're up 9% year-over-year. How should we think about the quarterly tempo of outperforming the 2025 fiscal quarters? Curtis Begle: Yes. So we don't provide quarterly details, but what I will tell you is we've highlighted, we are on a good trajectory into the synergy realization on the procurement side. I'm really proud of what the group had and the team has been able to do from offsetting the stand-alone costs from the SG&A front. We continue to make good progress from our overall BECCS programs inside of the facilities to offset other inflation. But Project CORE as we have communicated, will continue to ramp up throughout the year. We're going to see most of that benefit come in Q3, Q4, but we'll see that phased-in in a little bit of an impact this quarter and in Q2. So that's in terms of what we see, not a tremendous hockey stick going into next year. But in general, South America, the big kind of initial lap that we have for Q1, Q2 just because of the business that we were doing last year, and we've highlighted that in previous quarters, and that was -- those are the negotiations that are taking place right now. We feel like we're very well positioned going into 2026, back half of 2026 in particular. Operator: Our next question. Our next question comes from Edward Brucker with Barclays. Edward Brucker: congrats on the quarter. The first one, would you be able to just dive into the demand environment? It sounds like you're being cautious, which is prudent given what we've seen from a bunch of other packaging companies. But is it something where it's cyclical, where the consumer is just weaker right now and buying less product? Or do you think there's something more structural going on? Curtis Begle: Thanks for the question. I mean if you look at the portfolio that we have, these are products that are needed every day, essential goods and products, both on the disposal and durable side. Yes, we listen very intently and closely to our customers and even through various negotiations of what we can do to help them, not only secure business on the shelf, but find ways to cost reduce. So that comes from a number of different areas, whether it's new materials that we can provide, a new platform that we can run it on, but also down-gauging as they look for high-performance materials at lighter weight. So that's been a major point of emphasis. But in general, I would say that the European market is -- certainly has more caution to it based on what you're hearing, what everybody is talking up in the space. As we communicated before, we sell to both branded and private label. So again, as consumers make choices on the shelf, we're there. The 1 comment that I would make on the personal care front, there's always the concern about baby and whether birth rates are going to negatively impact this business long term. Fortunately for us, we highlighted at our adult incontinence products continue to really expand in terms of the acceptance rate and the need as aging populations are going on across the world. And when you talk about form, fit and function. That's a really important part of our developments with our customers, both from a discretion standpoint, but ultimately a performance standpoint. I could go into a number of different chemistries. We just reviewed some pH levels and helping to avoid rashes, things like that. But in terms of overall demand, I would say, consumption rates in various product lines, maybe a little bit softer in certain geographies with a little bit more positive demand than others, and we see that really by region. Even in the South American markets, where we've had more challenging run from import price pressure, which we've highlighted. What our customers have, I think, grown to appreciate is our ability to service them and be able to respond in very short order. And so we're there to service and take care of customers when they need us, but at the same time, making sure that we're getting the value for the products that we're manufacturing and selling. So in general, Asia, albeit small for us, pretty stable. Europe, definitely some concerns and that's why we provided some of that range. And then the Americas we'll see that. North America being positive and offset initially by some of the South America comps, but [ evening out ] throughout the year. Edward Brucker: Got it. That's helpful. And then the debt paydown on the term loan was a pleasant surprise. Would you be able to explain the rationale behind paying down that debt? And do you expect to use excess cash flow next year to do the same? Curtis Begle: Yes. Look, that was part of the capital allocation priorities that we've laid out, that we review with the Board every quarter. So that was just doing what we said we were going to do. At this point, we'll continue down that path with a focus on deleveraging and making sure that we're appropriately managing our cash and liquidity. As you can appreciate, working with our vendors and negotiating the best terms that we possibly can, the best prices we possibly can, proving that we have a very sound and solid liquidity and robust balance sheet. And so we'll continue to evaluate with our Board of Directors. But we believe that at this point, we'll continue down the path of the focus on deleveraging and debt reduction. Operator: our next question comes from Richard Carlson with Wells Fargo. Richard Carlson: Thanks for the follow-up. And actually, just piggybacking on that last question with the delevering. Of course, this is something you've been telling us that you plan on doing, but just wondering based on where your stock price has been recently, did the thought of spending that cash on repurchases come up at all or the thought of buying your debt in the open market? Curtis Begle: Richard, thanks for the question. As I mentioned, this is something that we have -- we review every quarter with our Board of Directors. And certainly, it's part of the conversation. But again, for us, we continue to believe that sticking to our original plan of debt reduction. As we talked about before, this is an opportunity for us to do what we say we're going to do and focus on the deleveraging portion. In terms of buying back debt. Again, I would say, I'm not really in a position to answer that other than I can fall back on the fact that we continue to keep all of those discussions in front of our Board of Directors and have robust dialogue each quarter. Richard Carlson: Understood. And then a couple of modeling questions, Jim. I think D&A was down quite a bit in the fourth quarter. How should we think about that? Is this a new run rate going forward? Or is that just some catch-up in the year? And then I don't think there is a share count in your press release. So is it safe to assume it was flat quarter-over-quarter? James Till: Yes. Share count was flat, correct on that. And then for the D&A guide, if you look at the year-to-date, there was some just purchase accounting finalization that got caught up for the year, as you highlighted. So I'd look at our year-to-date number as a better representative of the go forward. Richard Carlson: Got it. And then just 1 more if I could squeeze it in. CapEx is running in line with what you guys have been telling us for a year now. But I guess we're still just a little wondering if that 2% to 3% of sales, how long does that last? And are you able to properly capitalize the business at that level? I think there was a mention of eventually stepping that up a little bit. But I guess, maybe just remind us maybe from what you told us a year ago as far as how you see your CapEx projecting over a multiyear period? Curtis Begle: Yes. Thanks. Very good question. We -- again, coming into the combination of the 2 organizations, we had the opportunity to review and do a number of site visits. There was I think some expectation that plants or sites or lines were undercapitalized, and that certainly wasn't the case. We felt very comfortable coming into the year that we both had well-capitalized facility, capitalized businesses. And so the one thing that we'd be able to put into our overall spending discipline is a capital committee that we have internally, that review projects, both on stand-alone from an ROIC standpoint, but also our maintenance and our safety CapEx which I will tell you with 100% certainty, we've not sacrificed in any of those areas. So the normal maintenance PM programs, site maintenance, but more importantly, the safety guarding, et cetera, is the top priority. As you look at growth projects inside of the businesses as well, we have a large fleet of contemporary assets and also niche assets. And so our ability to upgrade some of those lines falls within the CapEx spend where we're not having to go out and buy a new line for $50 million or $90 million. We can take with what we have and provide that. The other thing that has been a really, really good work by the teams, understanding where we had like vendors or things such as belts on our lines that we process through every year from an expense standpoint, but also from spare parts on the capital side. So lining up vendors on that front, coordinating that with our procurement team and making sure that, again, offsetting that inflation that normally takes place. In equipment supply, the team has done an excellent job there. So in terms of the foreseeable future, as we've highlighted before, there will be a time that will pivot to large growth investments, new lines as the market warrants it and as we pick our places to put that capacity. But it goes back to our initiatives with Project CORE and prioritizing where we're going to spend that CapEx and where we have the greatest -- what business has the greatest right to win, opportunity to win and take care of our sites and ultimately, the safety of our employees. Operator: Our next question comes from Kevin McCarthy with Vertical Research. Kevin McCarthy: Appreciate you taking the follow-up. I was wondering if you could review and elaborate on the integration process? Maybe provide a little bit more color on what you've accomplished to date and what still lies ahead for fiscal '26 with regard to procurement, G&A and on the operational side as well? Any additional color there would be helpful. Curtis Begle: No. Thanks, Kevin. As we talked about early on, culture s a big thing, right, and putting organizations together and identifying the Magnera culture and then implementing that is a day-to-day job and making sure that we're touching and getting our 9,000 employees walking lockstep with us. So that journey will continue on and employee engagement is going to continue to be a main focus for us going into 2026 and beyond. But get good momentum from that front. Great work from the HR team on benefits and things like that as we peeled off of the need for some of the transition services agreement with Berry. The procurement team is well ahead from where we had anticipated. We've staffed that organization well with very key talent, done a fantastic job of really taking on the reins and going out and making sure that we're getting our best cost analysis and coordinating that with our innovation team. So good progress made there. And as I think we highlighted in the script or in the call, we're already seeing a little bit of that. We've experienced some of that procurement savings in Q4, a little bit in Q3. And that run rate coming into this year as part of our overall walk and range. So we continue to build momentum, and we continue to increase that pipeline. We're going to be moving away from, hey, this is synergy realization to just the savings programs and productivity savings that we look for every year. The one thing that I would say that, we've made also good progress on. It's just understanding and really putting together the right key operating metrics that we've populated throughout the organization. Some facilities are further along than others. And so as we're ramping them up and they're looking at the metrics that make the most sense for our business, that's been encouraging to see, again, the engagement, not only from the shop floor itself, but the entire team, especially when you can see some of the benefits of the run rate. Project CORE is certainly something that has a lot of attention on it internally. We review that quite frequently. And it does, as a reminder, it does impact all regions, the exception of Asia. And the purpose of that, again, from the capacity optimization standpoint is, the work that was done throughout this year, and we talked about the ability to cross qualify not only other raw materials with competing vendors, but more importantly, building flexibility in our network to be able to shift product from 1 asset, 1 site to another to make sure that we're getting the appropriate load that's a benefit to the customer, but it provides us with the lowest cost scenario. And as we continue to progress on the separation with the TSA needs, transition services agreement with Amkor, Berry Amcor now. We're going to be doing that through the systems changes throughout this year. And I would say that we're well ahead of schedule in terms of what our expectations were coming into the combination, and encouraged by what we've seen in -- over the course of the last month. Operator: I'm not showing any further questions at this time. I'd like to turn the call over to -- turn the call back to Curt Begle for any further remarks. Curtis Begle: We appreciate everybody joining the call today and your interest in Magnera. We continue to be very excited about the business, the future. And despite all the noise that goes on throughout the world, we're in a great position from having the best products and best capabilities to service not only our customers but the end consumers as we continue to protect the world. I look forward to speaking to many of you through our investment calls and investor calls as well as some of the investor conferences coming up. So everybody have a great day, and we look forward to connecting on our next quarter earnings call. Operator: Thank you. Ladies and gentlemen. This does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources Fiscal 2025 Fourth Quarter and Year-End Financial Results Conference Call. [Operator Instructions]. Thank you. And I would now like to turn the conference over to Adam Prior, Director of Investor Relations. You may begin. Adam Prior: Thank you. Welcome to New Jersey Resources Fiscal 2025 Fourth Quarter and Year-End Conference Call and Webcast. I'm joined here today by Steve Westhoven, our President and CEO; Roberto Bel, our Senior Vice President and Chief Financial Officer; as well as other members of our senior management team. Certain statements in today's call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions and beliefs forming the basis of our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations as found on Slide 2. These items can also be found in the forward-looking statements section of yesterday's earnings release. Furnished on Form 8-K and in our most recent Forms 10-K and 10-Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. We'll also be referring to certain non-GAAP financial measures such as net financial earnings or NFE. We believe that NFE net financial loss utility gross margin, financial margin, adjusted funds from operations and adjusted debt provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item 7 of our 10-K. The plan for today's presentation are available on our website and were furnished on our Form 8-K filed yesterday. Steve will start with this year's highlights and a business unit overview beginning on Slide 5. Roberto will then review our financial results. Then we will open it up for your questions. With that said, I will turn the call over to our President and CEO, Steve Westhoven. Please go ahead, Steve. Stephen D. Westhoven: Thanks, Adam, and good morning, everyone. I hope you all had a chance to review our earnings materials, which include detailed disclosures on our growth prospects. I wanted to start by discussing a few highlights. We delivered excellent results in fiscal 2025, driven by strong execution and performance. For the fifth year in a row, we exceeded initial earnings guidance and long-term growth targets. After a successful 2025, there are a few key themes as we look ahead for fiscal 2026 and beyond. First, consistency and execution. We're guiding to NFEPS of $3.03 to $3.18 per share in fiscal 2026. The range is consistent with our long-term 7% to 9% growth rate, while leaving additional room for upside. Second, targeted capital deployment. We expect to invest roughly $5 billion over the next 5 years across the whole company with roughly 60% allocated to our utility New Jersey Natural Gas. To put the $5 billion in the context, this represents a 40% increase compared to the CapEx spend over the last 5 years. Third, a healthy balance sheet anchored and disciplined financial management. We expect credit metrics to remain strong with healthy cash flows, ample liquidity and a balanced debt maturity profile that supports long-term stability. Importantly, NJR requires no block equity issuance to execute on its capital plan. On the next slide, we highlight a few of the key drivers of our business segments. To begin, New Jersey Natural Gas is positioned for high single-digit rate base growth through 2030. S&T is expected to more than double net financial earnings by 2027, driven by favorable recontracting of both Adelphia and Leaf River. Looking ahead, we recently filed with FERC, a plan to increase working gas capacity by over 70% at Leaf River. And in Clean Energy Ventures, we expect to expand capacity by more than 50% over the next 2 years with a robust pipeline of safe harbor projects. In short, through a disciplined capital investment strategy, we have visibility to deliver sustainable growth well into the future, supported by a solid balance sheet. And we are able to achieve all this with minimal dilution to shareholders. Let me turn to a brief discussion of each business units, starting with the New Jersey Natural Gas on Slide 7. Our planned investments at New Jersey Natural Gas are expected to drive high single-digit rate base growth through 2030. The New Jersey Natural Gas operates within a constructive utility framework and continues to make responsible investments in safety and reliability while prioritizing affordability for our customers. Natural gas is by far the cheapest option for customers to eat their home. Energy efficiency programs such as SAVEGREEN further reduce usage and costs while aligning with environmental goals. For example, residential customers who fully participate in say agreeing a whole home offerings see a reduction of up to 30% in their energy usage, saving hundreds of dollars in utility costs every year. Moving to the next slide. Storage & Transportation is emerging as a key earnings growth driver for NJR. Over the next 2 years, we expect NFE to more than double at S&T, and this is largely driven by strong recontracting in both the Adelphia and Leaf River. These are fixed-price contracts with quality and creditworthy counterparties. When we recently reached a settlement in our FERC rate case Philadelphia, this constructive outcome enables recovery of the substantial investments and operational improvements made in recent years. While near-term earnings are set to double, we are actively pursuing organic growth opportunities for additional upside of Leaf River, which we outlined on the next slide. When we acquired Leaf River in 2019, we positioned NJR as a leading service provider in the Gulf Coast, one of the highest growing energy demand centers in the United States. In addition to the prime location, the long-term value of the asset was enhanced by expansion options beyond the three existing operating taverns. Since our purchase of the asset, market demand has strengthened. Throughout fiscal 2025, we conducted a number of nonbinding open seasons, which confirmed the high level of commercial interest and capacity expansion. Following this favorable response we filed a FERC application at the end of October that included several complementary investments to increase Leaf River's working gas capacity by over 70%. They include the expansion of our existing caverns to working gas capacity of 43 Bcf by 2028, and the development of an additional for cabin that will bring total capacity to 55 Bcf. Each phase of the investment is expected to be backed by long-term fee-based contracts, building on our already strong entity growth. This phased approach has an inherent speed to market advantage that positions NJR ahead of greenfield development options. To conclude, we see considerable upside in both the near and long term as S&T becomes a greater contributor to NJR's earnings profile. Moving to Clean Energy Ventures on Slide 10, we expect to grow in service capacity by more than 50% over the next 2 years. Looking ahead, we have a strong project pipeline designed to maintain investment tax credits through strategic safe harboring. This position CEV to deliver continued growth in high single-digit unlevered returns. So with that, I'll turn the call over to Roberto for a financial review. Roberto? Roberto Bel: Thanks, Steve. Fiscal 2025 was an excellent year with strong even growth, a solid balance sheet and continued investment across our businesses. Slide 12 highlights a few fiscal 2025 accomplishments. New Jersey Natural Gas achieved a constructive outcome in its recent rate case and deliver record investments for Leaf Green. Clean Energy Ventures added record new capacity. In fiscal 2025, CV placed 93 megawatts of new commercial solar capacity into service, expanding our portfolio to 479 megawatts. In addition, CD secured investment options for years to come through effective safe harboring. In Storage & Transportation, Adelphia received approval settlement on its third rate case we levering our advanced expansion initiatives. Energy Services achieved strong cash flow generation and our Home Services business was named a road top 20 ProPartner for the ninth consecutive year. We also marked an important milestone, 30 consecutive years of dividend increases and reporting confidence in our long-term plan. On the next slide, we finished the year at the top end of our guidance range, which was raised earlier this year. We deliver financial results ahead of expectations, roughly 2/3 of total EPS came from the utility. And when you exclude the net impact of the sale of our residential solar assets, that figure raises over 70% underscoring the stability of our earnings. Drivers of our performance include the completion of our rate case and a record year of saving investment. Additional drivers include approximately $0.30 per share from the sale of our initial solar portfolio, improved performance from our storage and transportation business and a solid winter results from Energy Services. Moving to a discussion of CapEx on Slide 14. We deployed $850 million across our businesses, which I'll highlight in the next few slides. On Slide 15, New Jersey Natural Gas represented approximately 64% of total CapEx with investments directed towards strengthening core infrastructure, enhancing system safety and reliability and supporting customer growth. Almost half of these investments are recovered with minimal lag. As shown on Slide 16, fiscal 2025 CapEx for CV came in well above expectations, reflecting accelerated progress. Importantly, our capital deployment target is fully safe harbor securing tax benefit for future capital expenditures. Building on this from 2025, I wanted to shift our CapEx outlook on Slide 17. We're sharing a 5-year CapEx outlook of $4.8 billion to $5.2 billion through fiscal 2030. This represents a 40% increase over the previous 5 years of capital spending across our businesses. We expect that more than 60% of our total projected CapEx will be dedicated to the utility with CV and S&P representing the balance. Together, these investments support our 7% to 9% long-term NFEPS growth target while maintaining a solid balance sheet as discussed in the next slide. Strong cash generation across our businesses translate into an adjusted FFO to adjusted debt ratio that is projected to remain at around 20% for the next 5 years with no block equity needed. Additionally, ample liquidity and a well laser debt maturity profile minimize near-term refinancing risk and preserve financial flexibility. And finally, we're initiating fiscal 2026 and EPS guidance with a range of $3.03 to $3.18 per share. The range is consistent with our long-term 7% to 9% growth rate, while leaving additional room for upside. The utility is expected to contribute approximately 70% of fiscal 2026 in the CPS complemented by earnings growth from CB and S&P and a baseline outlook for Energy Services. With that, I'll turn it back to Steve for concluding remarks on Slide 21. Stephen D. Westhoven: Thanks, Roberto. Over the last 25 years, we've delivered industry-leading returns, reflecting both the quality of our utility investments and disciplined contributions from our nonutility businesses. While our infrastructure investments have been the foundation of this performance energy services that complement that strength, enhancing consolidated returns and providing flexibility to reinvest in our infrastructure businesses. To recap fiscal 2025 was another year of solid execution, marking 5 consecutive years of exceeding initial earnings expectations. Our long-term growth remains anchored by our regulated utility with clear visibility into capital spending at New Jersey Natural Gas. Storage and Transportation is set for accelerated growth with earnings expected to more than double in the near term before we even begin to factor in those capacity expansions we highlighted earlier. Over the next 2 years, Clean Energy Ventures expects a 50% increase in installed capacity, and our project pipeline is secured into the future through proactive safe harboring. As they are today stands as a balanced diversified energy infrastructure company built for long-term stability and value creation. The outlook for fiscal 2026 and beyond is clear, well-funded and utility anchored. As we all know, New Jersey recently had a gubernatorial election electricity prices and affordability issues were front and center. We understand the challenges this data is facing today, and we look forward to working with you coming governor to meet your call for swift deployment of clean energy solutions and to continue providing affordable natural gas service to families and businesses. And finally, a sincere thank you to all NJR employees for your dedication and hard work throughout the past year. Your commitment is the foundation for our continued success. So with that, let's open the line for questions. Operator: [Operator Instructions]. And our first question comes from the line of Gabe Moreen with Mizuho. Gabriel Moreen: Good morning, everyone. Just a question maybe to start off on S&T here and Leaf River. It seems like a lot of positive developments. One, can you just talk about contract renegotiations and the extent to which, at this point, maybe all the original contracts have rolled over on a remarketed or resigned at market rates at this point? Or is there still more to go on that front in the years ahead? And then secondly, around the FID of some of the bigger expansions that you may be looking at, can you just talk about potential timing for FID-ing those projects given the customer interest that you've seen in some of the nonbinding open seasons? Stephen D. Westhoven: Yes, sure. So talking about the contracts the contract tenure at Leaf River, they've got various terms. So we've always got contracts that are coming on and off. I would say there's probably a bias towards the longer-term contracts currently. And certainly, the way the market is moving, any contract that you're signed enough for in the future is higher than ones in the past. Remember, when we purchased that deal, the average contract rate was probably about $0.09 a dekatherm per month. We're now up to almost $0.20 dekatherm per month on average. So big contract upgrade there. And that's really driving the doubling of the net from S&T over the next few years. And then moving forward, further constructive story, the open season provided for about 3x the amount of capacity that we had available. And if you look at the first filing we've got a few stages or phases of investment and expansion at that facility. I would say that before we make any investment, we've got contracts to back it. That's something we've talked about for a long time and we're not going to deviate from that. So we've got signed contracts in certain really quite a bit of clarity on where the revenues are coming to support those investments. So you can make that assumption moving forward. So as we make these investments, first two, we've got a expansion of the compressor station. We've got the enlargement of some of the existing facilities those -- we're starting to spend money and put this in motion. You can see this in our capital plan moving forward. Those are going to lead really nicely into a fourth cavern expansion in the out years, we'll make that idea as we get closer to that. But like we said, the open season certainly supports it, and it's very instructive for that business moving forward. Gabriel Moreen: And maybe if I can turn to CV, and I think a little bit more confidence in terms of the growth outlook there. Can you just talk about has anything shifted on the ground in terms of your ability to start construction, how much of the 50% increase here has actually started construction or waiting on interconnects and why you think you may be past some of the delays, I think that you may have seen in the past at this segment? Stephen D. Westhoven: Yes, we certainly have spent quite a bit of money. As you can imagine, the construction cycles are a little bit longer and they go across fiscal years. So we're spending money now for products that are going to be coming into service in the next fiscal year and then the fiscal year afterwards. When we talked about in the last call, we've safe harbor a little bit of projects, a large amount of megawatts. So we've got great options moving forward. I think the other thing to consider as well is that the capacity electric capacity shortfall, the State of New Jersey and PJM the quickest way to bring capacity to the market? Are those projects that are shovel-ready and we have a number of those. So we feel well positioned going forward. That combined with the fact that we've got mature positions within the PJM as well. So everything is moving forward. We've got a good position, a great number of options. And you can see by our capital plan and the extension of that capital plan out 5 years, the confidence that we have in our investments moving forward. Operator: And our next question comes from the line of Jamieson Ward with Jefferies. Jamieson Ward: Congrats on another strong result, and thanks for the extra visibility with the 5-year look on CapEx and on CEV, which I'll maybe build on Gabe's question here. With the favorable treasury guidelines and then, of course, all the planned investment in safe harbor, what's the realistic deployment time line. It's probably the most common inbound question we get. But as we think about that pipeline, how should we model the earnings cadence? Stephen D. Westhoven: So for the investments, we've got the capital plan that we put out there. Certainly, I just talked about it with Gabe from a policy perspective, we believe that there's going to be a lot of pressure to add as much capacity as great as possible, and that's favorable for our business. If you look at the amount of safe harbor projects we have especially over the next 2 years, we've got projects that are safe harbor that are far in excess of what we need in our capital plan. So you've got some ability to accelerate that. But the capital plan that we have is the most accurate picture of what we're going to be able to achieve. And I think looking at that, you can take your guidance from there. Jamieson Ward: That's terrific. I'll skip S&P because it was a very thorough answer before. I'll just ask one more quick one on CEV and then on the overall plan. So as we think about SREs, TREs, et cetera, what's the weighted average contract life? How should we be thinking about the time frame. That's the second most common question we get and it's CEV related. I think you're going to find a lot less questions after this deck. So thanks for all the information. But I'll just ask that one. Stephen D. Westhoven: So you say from a time-related perspective, the amount of time allotted into kind of TREs and SREs and how long they live? What's the -- I'm trying to get to the specifics of what you're asking. Jamieson Ward: Yes. So just at a high level, so we modeled like roll off over the next few years. And the question that we get is just how confident are you in basically the numbers that you've got there. So just looking for a very high level, just a weighted average life remaining, right? Because, of course, the strike sort of trimmed down or tailored down over the last few years, and you're going to have SMT, which you were speaking to earlier. Obviously doubling and picking up a lot of that lag there. So just a quick question on that and then one on the overall 2030 CapEx plan. Stephen D. Westhoven: So I'll talk about solar just from a kind of a broader perspective. We just talked about it was the quickest way to bring capacity to the market, and you can see the capital that we're able to deploy over the next 2 years being significant and potentially maybe be able to accelerate with certain policy adjustments. The process that we have, we've got the schedule for TRECs, SRECs, everybody knows the longevity of those I would also add that as infrastructure becomes harder to build in each of these facilities you've got the ability to repower or put in battery. You've already got an interconnect that's there as well. You've got kind of increases in Class 1 RECs that have been having over time. So speaking to just the long-term value of these facilities. As we need more capacity, it's not going to be constructive to retire capacity. So there's going to be some expectation that you continue to operate these facilities and moving forward? And then how do you make improvements in them as well. So we really view this as a long-term business, one that's supportive of the growing energy need that is certainly in the east, but over the entire U.S. as well. And you're going to see us looking to enhance whatever we can do with these facilities move forward, just like you'd expect, organic growth is important to us and how do we organically improve and grow those facilities as well. So hopefully, that answers your kind of long-term view of how we're how we're thinking about these assets. Jamieson Ward: Actually, that's terrific. I think actually, I'm good on the 4.8% to 5.2% through 2030 as well as I go through here. I was going to ask one on affordability, but saw your slides towards the end of the deck in the appendix there. You want to throw it down because that's the other -- as a final question. It's the other one we get, of course, just given everything in New Jersey, you spoke to it in the prepared remarks, you've got some great slides here, but anything else you'd want to add as we think about the next rate case. Of course, we just got new rates November of '24. But as we look ahead, how should we think about your affordability efforts in New Jersey specifically. And that's it for me. Stephen D. Westhoven: Thanks, Jamieson. So natural gas is the cheapest way that you can keep your home in business. So we like our position when the affordability conversation comes up. And like I said in the presentation, we've got energy efficiency programs and SAVEGREEN, we're able to save customers' money as well. And we look forward to working with the new administration and seeing ways that we can keep the affordability story going from our company and helping our customers reduce costs as much as possible. Operator: And our next question comes from the line of Eli Jossen with JPMorgan. Elias Jossen: Just wanted to start on the EPS growth outlook. Seeing some kind of drivers within the Leaf River storage capacity and overall S&T earnings upside. Are there any kind of headwinds elsewhere in the business to keep the growth rate largely the same possible decline in CEV contributions? Or can you just kind of frame tailwinds and headwinds for the overall range? Stephen D. Westhoven: Yes. I'd say that we're an energy infrastructure energy services company, and this country needs more energy. So we're going to make investments in order to grow that. And you can see that reflected in our capital. So it's all positive at this point. And we're at this point, just looking to execute on that plan in order to increase our earnings going forward. So confident in all those things. Elias Jossen: Got it. Maybe just to frame it differently. Is there sort of material upside from this S&T business within the growth range should you execute on some of the projects that you outlined? Stephen D. Westhoven: I mean there's always upside in our business. We're the same business that we were last year and the year before, and we've always been able to grab some upside in these markets. We certainly kind of normalize our expectations on basis, there's an ability to accelerate any of these infrastructure projects given the right policy initiatives. So there's always an ability to upside, but we put together a plan that we believe is executable. And we hope for the best. So hopefully, some of those things will come through, and we'll be able to execute maybe more quickly. Operator: [Operator Instructions]. The next question comes from the line of Travis Miller with Morningstar. Travis Miller: Kind of a combined question here on Slides 8 and 9. How much of that increase from fiscal 2025 to '27 on 8? Is the Adelphia rate case versus the recontracting and leaf River and then going to Slide 9, is that capacity expansion trajectory also earnings trajectory I guess the crux in both of those is the recontracting element. So first, that split between Adelphia rate case and the recontracting. And then is the recontracting and extra above that capacity addition. That makes sense? Stephen D. Westhoven: But there's probably more coming on Leaf River recontracting at sectors numbers. But the bottom line is that for existing assets and no capital investment we've been able to double the earnings coming from those assets, and that's really driven by better contracts, higher contracts coming from the customers. So great story. As far as looking at your forward growth opportunities, you're stating the beginning of expansion at Leaf River. We didn't talk about it, but you still got the ability to expand a little bit at Adelphia Gateway and add more customers in that pipeline as well. So depending on how far this market goes, and I believe it is going to go forward is going to need more and more energy and expansion of organic infrastructure. It's hard to determine where it will stop, right. But certainly, because we've got existing assets, we're able to expand that, and we're also able to make the investments that you see, at least in the short term. And then I would guess it is going to continue in the longer term as well. Travis Miller: Okay. Is that recontracting assumption based on today's rate at $0.27 -- at $0.20 dekatherm that you mentioned? Or is there another assumption you're making on the recontract? Stephen D. Westhoven: Yes. It's not assumption, Travis. These are contracts that we have in hand. So these aren't estimates of what forward value are. These are contracts that we've got signed in our hands and are driving our earnings over the next 2 years in that business unit. Travis Miller: The one high-level question. With all the CapEx you have and obviously the Leaf River, et cetera, how much capacity might you have to do more M&A in organic growth, either logistical, operational or financial. Stephen D. Westhoven: Yes. I mean we're always looking to kind of bolt-on acquisitions and things in happen or assets that are available. we're building these businesses. So if something comes along and it happens to fit and fits organically, we would take a look at it. So we've got the capacity on our balance sheet, and we like these businesses, the infrastructure business. So we'll continue to pursue it like we have in the past. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Adam Prior for closing remarks. Adam Prior: Thanks, Abby, and I'd like to thank all of you for joining us. As always, we appreciate your interest and investment in NJR and we look forward to talking to all of you at Utility Week in a couple of weeks, and thanks so much. Have a good rest of your day Operator: And this concludes today's call, and we thank you for your participation. You may now disconnect.