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Operator: Good day, and welcome to AIG's Third Quarter 2025 Financial Results Conference Call. This conference is being recorded. Now at this time, I would like to turn the conference over to Quentin McMillan. Please go ahead. Quentin McMillan: Thanks very much, and good morning. Today's remarks may include forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. AIG's filings with the SEC provide details on important factors that could cause actual results or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. Today's remarks may also refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at aig.com. Following the deconsolidation of Corebridge Financial on June 9, 2024, the historical results of Corebridge for all periods presented are reflected in AIG's consolidated financial statements as discontinued operations in accordance with U.S. GAAP. Finally, today's remarks related to net premiums written are presented on a comparable basis, which reflects year-over-year comparison on a constant dollar basis and adjusted for the sale of the global personal travel and assistance business as applicable. We believe this presentation provides the most useful view of our results and the go-forward business in light of the substantial changes to the portfolio since 2023. Please refer to Page 27 of the earnings presentation for reconciliations of such metrics reported on a comparable basis. With that, I'd now like to turn the call over to our Chairman and CEO, Peter Zaffino. Peter Zaffino: Good morning, everyone. Thank you for joining us today to review our third quarter 2025 financial results. Following my remarks, Keith will provide more detail, and then Jon Hancock and Don Bailey will join us for the Q&A portion of our call. This has been an exceptional third quarter for AIG and an incredibly busy one. We achieved tremendous EPS and ROE results as we continue to execute on our strategy to deliver sustainable, profitable growth. Last week, we had several announcements involving Convex Group, Onex Corporation and Everest Group. The key takeaway is that they are all expected to be earnings, EPS and ROE accretive in the first year post closing. We believe each will accelerate AIG's progress and create long-term value for our company and our stakeholders. And this was made possible due to our strong balance sheet, prudent capital management and financial flexibility. It's simply been an outstanding quarter, and I'm very proud of our colleagues for all they've accomplished together. For our call this morning, I will share a high-level overview of our third quarter results, provide a perspective on our strategic investments in renewal rights acquisition, give a brief update on our GenAI initiatives and conclude with an overview of our capital management strategy and the progress against our Investor Day financial objectives. In the third quarter, we delivered adjusted after-tax income per diluted share of $2.20, which is an increase of 77% year-over-year. Adjusted after-tax income for the quarter was $1.2 billion, an increase of 52% year-over-year, driven by our General Insurance business. Underwriting income was $793 million, an increase of 81% year-over-year. Net investment income on an adjusted pretax basis was $1 billion, an increase of 15% year-over-year. The accident year combined ratio, as adjusted, was 88.3%, in line with the prior year quarter and our 16th consecutive quarter with a sub-90% result. The calendar year combined ratio was 86.8%, an improvement of 580 basis points from the prior year quarter. Now let me provide some detail on our performance across the three business segments. Let's start with North America Commercial Insurance. Net premiums written were flat year-over-year. It's worth noting, which we mentioned on our third quarter 2024 earnings call, that we had a closeout transaction in our casualty portfolio that benefited overall growth in the prior year quarter. Adjusting for this, net premiums written would have increased 3%. This growth was driven in targeted areas, notably Programs, which increased 27%; Western World, which increased 11%; and Excess Casualty, which increased 8%. This was partially offset by Retail Property, which declined 10%; and Lexington Property, which declined 8%, where rate pressure has been most prevalent. We spoke about Property quite a bit last quarter. Keith will go into more detail in his prepared remarks, and we can discuss further in Q&A. Despite pressure on rates, the accident year and calendar year combined ratios remain exceptional for the Property portfolio. North America new business was very strong. While Lexington's new business was flat year-over-year, it was the biggest nominal contributor to new business in North America. Its submission count was up 18% year-over-year, following significant increases over the last 2 years of 34% in the third quarter of 2024 and 47% in the third quarter of 2023. Financial Lines new business was up 16%, led by M&A. Turning now to International Commercial Insurance. Net premiums written increased 1% year-over-year, driven by Marine, which increased 11%; and Property, which increased 6%. This was partially offset by Financial Lines, which declined 6%. International Commercial had an outstanding quarter for new business led by Specialty, which increased 17% year-over-year driven by Marine, which increased 35%; and Energy, which increased 30%. Property increased 24%, and Financial Lines increased 12%, driven by higher M&A activity in the quarter. In Global Personal, net premiums written decreased 4%, driven by the high net worth quota share reinsurance treaty that we entered into at 1/1/25. While this continues to improve profitability in the portfolio for 2025, it negatively impacted Global Personal net premiums written. We expect to see this premium trend reverse in 2026. Overall, it was a great quarter of performance for AIG, and it positions us for a strong finish to 2025. Last week was a momentous one for AIG. We announced strategic investments with Convex Group, Onex Corporation and a transaction with Everest Group. These will strengthen AIG's long-term value and strategic positioning, and we expect they will be earnings, EPS and ROE accretive 1 year after closing, aligned with the objectives we outlined at Investor Day. This is in line with my previous comments that we would look for compelling opportunities to deploy capital in ways that would be accretive to our financial metrics and to further build our business. As a point of reference, over the last 3 years, we've returned a total of $19 billion of capital to shareholders through approximately $16 billion of share repurchases and $3 billion of common stock dividends. In addition, we reduced debt by $4.5 billion. We now believe we have a capital structure that's optimal for our current business. When you look at the global insurance industry, there's a scarcity of high-quality insurance assets. We've been fortunate to secure a long-term investment in one of the very best global specialty and reinsurance companies, Convex Group. I know Convex Group extremely well and have known and traded with its Chairman, Stephen Catlin and Chief Executive Officer, Paul Brand, for over 20 years. I have deep respect for their expertise, leadership and the culture they have built. With Convex, we will gain access to a world-class underwriting platform for complex specialty risks with a strong underwriting culture, a growing premium base and a proven track record of outstanding performance and profitability. Stephen and Paul have earned a reputation for building exceptional underwriting teams, and this is reflected in the company's impressive performance. Convex was founded in 2019 and has consistently delivered very strong underwriting and financial results, with a combined ratio in the high 80s, no historical reserve issues, no legacy technology debt, a highly scalable platform and significant potential for continued growth. Over the last 3 years, Convex delivered a 25% compound annual growth in gross premiums written and an 18% average return on equity, demonstrating the strength of their business model and ability to produce sustainable long-term value. Last week, AIG agreed to acquire a 35% equity interest in Convex, while Onex Corporation took a 63% ownership position to be held directly on their balance sheet rather than through one of their investment funds. In addition, to benefiting from the ongoing success of Convex through an equity investment, AIG will also participate in Convex's portfolio through a whole account quota share, which enables us to share directly in Convex's underwriting growth and expected profitability over the short, medium and long term. The agreement gives AIG the opportunity to participate in 7.5% of Convex's portfolio on January 1, 2026, and that will progressively increase to 10% by 2027 and 12.5% by 2028. The Convex transaction is expected to close in the first half of 2026. As part of our discussions with Convex management, we were presented with an opportunity to acquire a minority ownership stake in Onex Corporation. With headquarters in Toronto, Onex is a leading private equity and credit investor with $56 billion of assets under management and 120 investment professionals based across Canada, the U.S. and the U.K. Our strategic relationship with Onex presents a unique opportunity for AIG to partner through an equity investment with a global asset manager with a strong record of investing in the insurance sector. Onex has made a number of notable and highly successful strategic investments in specialized insurance platforms, including Convex, Ryan Specialty, OneDigital and USI. Let me unpack the details of our investment in Onex. We've agreed to acquire a 9.9% equity interest. Additionally, in line with our investment guidelines, we've committed to invest $2 billion over 3 years across Onex's broad asset management platform, which will provide us with a broader view of opportunities and deepen our market position within the global insurance industry. Keith will provide more detail in his remarks, but just to give you a brief overview, these investments have the potential to deliver a higher yield for AIG, supporting earnings growth and enhancing return on equity. We have evaluated investment opportunities in several fund managers in the alternative asset space over time and believe this is the right opportunity for us. Post transaction, over 40% of Onex's total balance sheet net asset value is expected to relate to its majority ownership of Convex. The Onex transaction is also expected to close in the first half of 2026. Finally, last week, we also announced our acquisition of the renewal rights for the majority of Everest's core retail commercial property and casualty portfolios, representing approximately $2 billion of gross premiums written across multiple geographies. We greatly appreciate Everest's willingness to engage in a bilateral discussion to structure a transaction that further strengthens both companies and our mutual business relationship. We purchased the renewal rights for approximately $300 million with a potential downward adjustment of up to $70 million, depending on how much of the portfolio is renewed with AIG. Under the terms of the transaction, AIG did not take any of the in-force portfolio or unearned premium for policies with effective dates prior to December 31, 2025, and we will not assume any liabilities for any of the policies previously underwritten by Everest. Everest employees will remain with Everest Group, though in certain geographies and businesses, we will work with Everest to offer opportunities to select staff members. We've also entered into a transition service agreement with defined service levels to ensure continuity for clients and brokers as the portfolio is transferred to AIG. In terms of the portfolio, it's well diversified across geographies and classes of business. The largest portion of the in-force eligible gross premiums written is in the United States at $1.3 billion, followed by Europe at $400 million, the U.K. at $150 million, Australia at $80 million and Singapore at $70 million. Approximately 60% of this portfolio will renew in the first half of 2026. Canada, Latin America and certain lines of business, including aviation, surety and wholesale are specifically excluded. From a business mix perspective, the portfolio is approximately 40% Casualty, 30% Property, 25% Financial Lines with the balance being Specialty classes. Everest's view, as stated on their earnings call, is that there was no further re-underwriting of the Casualty portfolio required and 80% of the adverse development in their Casualty portfolio in the back years are from policies that have not been renewed. We will complete our own assessment, but believe they've done a very good job of remediating the portfolio. We have extensive experience repositioning portfolios, particularly in Casualty. It's my view that we have the best casualty underwriters in the business. And when combined with stricter underwriting standards that Everest implemented over the last 12 months, we are confident that the portfolio will be positioned for success. AIG can absorb the business in our current infrastructure with no additional capital, and we will deliver an improved offering to clients and our distribution partners. The reaction from our broker partners to the transaction has been incredibly positive. They're very excited to work with us and committed to converting the book to AIG, providing welcome continuity to their clients. We anticipate being able to add this portfolio into our 1/1 reinsurance treaty renewals with no change in terms and conditions. This transaction adds further scale to AIG's upper middle and large account retail insurance book, providing an opportunity to drive premium growth without adding meaningful costs. The actions we have taken over the past several years have positioned us with the balance sheet and liquidity to pursue compelling opportunities when they materialize. Convex, Onex and Everest are unique opportunities that came to AIG first because of our strong brand, strong performance and the personal relationships that we've developed over time. As a result of these transactions, we are enhancing our earnings potential, driving incremental ROE and putting our capital to work to drive long-term sustainable profitable growth. Now I want to provide a brief update on GenAI and how we are strategically embedding it into our core underwriting and claims processes. Each quarter, and especially since Investor Day, we have meaningfully advanced progress, and now we're deploying GenAI solutions on a more accelerated basis. In my career, I've never seen anything progress at the pace and scale like I've witnessed in the last 6 months with GenAI and compute. We at AIG want to be in a position to be able to adapt to these changes as effectively as possible. As a reminder, our objective has always been to provide more insight on the data that we receive from distribution partners through the submission process to enhance our underwriting, supplement that data with reliable and verifiable additional sources and significantly reduce cycle time for our underwriters to make informed decisions in a fraction of the time. That is our future. We started late last year with the rollout of underwriting by AIG Assist in our North America Financial Lines business, and we continue to see strong results. For our private and not-for-profit business today, we're processing 100% of the applicable submissions using underwriting by AIG Assist, which has increased our submit-to-buying ratio. This quarter, we deployed underwriting by AIG Assist in our Lexington middle market property and casualty business. In the E&S market and for Lexington, in particular, speed drives growth. As I outlined earlier and in prior calls, the middle market submission counts are growing dramatically. We have nearly 200,000 submissions year-to-date. We simply cannot get to all the submission activity, and this is a problem that's not going to be solved by simply adding underwriters. We are accelerating the rollout of underwriting by AIG Assist and we'll deploy across the rest of our Lexington business by the end of 2025. We've also moved up the rollout to the rest of North America, U.K. and EMEA commercial lines by 6 months. As a reminder, we've also been piloting claims by AIG Assist since last quarter, and we're seeing terrific results. We're reducing the time it's taking our claims teams to receive first notice of loss reports and to issue coverage letters. One of the main challenges in implementing GenAI solutions is the time and effort needed to build an accurate source of data from a heterogeneous population of documents. To make it easier, we developed a patent-pending approach called [ Auto Extract ]. Auto Extract is a capability that uses large language models to pull specific structured information from unstructured text such as documents in multiple formats, websites and conversations. It works by developing a content-specific large language model that generates prompts containing instructions on what to extract and then analyze the text and returns, the requested data in a structured format. This solution makes it easier to process, analyze and use large amounts of data that would otherwise require extensive manual effort. Another use case we've developed is a capability to ingest the Schedule P information for over 225 U.S. insurance companies. We leverage this information for a variety of insights to determine correlations among loss ratios over certain development periods, specific reserve development and other insights across specific lines of business such as other liability occurrence. We gathered over 4 million data points, augmented the data with publicly available information, created an ontology and trained an agent in the ontology to identify trends. We use this in our portfolio management efforts to support our business and provide unique insights. I'll now shift to capital management. In the third quarter, we continued to execute against our disciplined and balanced strategy, while maintaining our financial strength. Keith will take you through the specifics. As we look to the future, subject to market conditions, we intend to continue our share repurchases in 2026, albeit at a normalized level. And over time, we will also look for more compelling opportunities to deploy capital to drive long-term strategic value. Before I close, let me give you a little more specificity on how we're tracking to our Investor Day metrics. We set very aspirational objectives at Investor Day. And through the first 9 months of the year, we are ahead of what we outlined at the beginning of the year, which is an enormous achievement. As I noted earlier, EPS has been very strong in 2025. We achieved a core operating ROE of 13.6% in the third quarter, up 430 basis points year-over-year. Year-to-date, our core operating ROE is 10.9%, which is well within the 10% to 13% range we stated at Investor Day and believe we can maintain and grow this metric through 2027. We are continuing to make progress towards an expense ratio below 30% for General Insurance, and believe we have further opportunities to streamline our expense structure going forward. Finally, we grew our dividend per share by over 10% in 2025. And subject to Board approval, we expect to be in a position to do the same in 2026. In summary, we had an outstanding third quarter, made significant advancements in our strategic deployment of capital with three unique opportunities, and we're very committed to delivering on our 3-year guidance. I'll now turn the call over to Keith. Keith Walsh: Thank you, Peter, and good morning. I'm going to expand on the financial highlights for the quarter. Adjusted pretax income, or APTI, was $1.6 billion, an increase of 51% from the prior year quarter. This was driven by strong results from the business and execution of our investment portfolio strategy. General Insurance gross premiums written were $8.7 billion in the third quarter, an increase of 1% from the prior year. Net premiums written were $6.2 billion, a decrease of 1%. As Peter discussed, we had strong new business and retention in the quarter. I will comment on the rate environment later in my remarks. For the third quarter, General Insurance accident year combined ratio as adjusted was 88.3%, which is the same as the prior year quarter. Accident year loss ratio was 57.4%, a 100 basis point increase year-over-year. This was primarily driven by the reapportionment of unallocated loss adjustment expenses, and we had more favorable actual versus expected recognized in Specialty in the prior year quarter. This was partially offset by underlying improvement in Global Personal. Our General Insurance expense ratio was 30.9%, a 100 basis point improvement year-over-year. For the first 9 months of 2025, the General Insurance expense ratio was 30.8% compared to 31.7% for the prior year period. This demonstrates our operational excellence and discipline in driving efficiencies as we have shifted expenses from other operations into General Insurance while investing in underwriting capabilities, technology and infrastructure. For context, since 2023, the business has absorbed an additional $400 million of parent costs that used to be in other operations. We expect to be at $350 million of other operations expense for full year 2025. Our teams have done a fantastic job of managing expenses, and we expect to achieve our target of below 30% by 2027. Total catastrophe losses for the quarter totaled $100 million or 1.6 loss ratio points, an excellent result. Prior year development, net of reinsurance, was $205 million favorable, which included $174 million of favorable loss reserve development and $31 million of ADC amortization. North America Commercial was favorable $139 million across our Property, Casualty and Financial Lines. International Commercial was also favorable by $47 million, primarily driven by shorter-tail lines in Global Specialty, partially offset by movements on select longer-tail lines, largely driven by auto trends and adverse development on pre-2018 general liability reserves. Global Personal was $19 million favorable. These results include a reapportionment of the remainder of our uncertainty provision across all three segments, predominantly into longer tail lines. Similar to last quarter, this was not related to any observable deterioration in our book. We continue to build on our strong balance sheet and have a high level of confidence in our reserve position, supported by the favorable actual versus expected trends we continue to observe. Overall, General Insurance calendar year combined ratio was outstanding at 86.8%, a 580 basis point improvement compared to the prior year quarter. Now moving to the segments. North America Commercial accident year combined ratio as adjusted was 85.4%, an increase of 30 basis points over the prior year quarter. The accident year loss ratio of 62.1% was up 30 basis points, owing to changes in business mix as we continue to earn in Casualty business and reduce certain property lines, and a partial onetime offset due to last year's Casualty closeout transaction. The expense ratio was flat to last year at 23.3%, including a 60 basis point improvement in the acquisition ratio, offset by a higher GOE ratio due to the movement of expenses into the business from other operations. The quarter included 310 basis points of catastrophe losses and 590 basis points of favorable prior year development. North America Commercial calendar year combined ratio was 82.6%, an improvement of almost 13 percentage points. Turning to International Commercial. The accident year combined ratio as adjusted was 86.0%, an increase of 260 basis points. The accident year loss ratio was 54.4%, a 170 basis point increase year-over-year, largely from reapportionment of unallocated loss adjustment expenses and less favorability in Specialty, as we mentioned earlier. The expense ratio rose 90 basis points to 31.6%, driven by movement of expenses from other operations. This quarter included 80 basis points of catastrophe losses and 190 basis points of favorable prior year development. The International Commercial calendar year combined ratio was 84.9%. This is the 10th consecutive quarter of a sub-90% combined ratio for the International Commercial segment, which speaks to the quality of our portfolio. Turning to Global Personal. The accident year combined ratio as adjusted was 95.5%, a 330 basis point improvement year-over-year, adjusting for the divested travel business. The accident year loss ratio improved 90 basis points to 55.3%, driven by underwriting actions leading to stronger underlying profitability and lower reinsurance costs. The expense ratio improved 240 basis points to 40.2%, driven by the acquisition ratio, which is benefiting from a combination of improved commission terms in the U.S. high net worth business, operational efficiencies and changes in business mix. This quarter included 80 basis points of catastrophe losses and 110 basis points of favorable prior year development. The Global Personal calendar year combined ratio was 95.2%, an improvement of 520 basis points year-over-year. We continue to make steady progress increasing the profitability of Global Personal as outlined at Investor Day. Moving to rates. In North America, market conditions for pricing have remained largely stable. Excluding the Property business, our North America Commercial renewal pricing increase was 5%. In North America Casualty, the overall pricing environment remains favorable with Retail Excess Casualty up 13% and Lexington Casualty up 14%. In North America Financial Lines, pricing was down 2%, in line with the second quarter. The pricing reductions have moderated, and we continue to focus on our differentiated offering and leadership position. North America Property continued to see pricing pressure with the overall portfolio showing improvement from last quarter, largely as a result of mix. The property market rate environment remains challenging, and we continue to have strong profitability across our retail and wholesale business, while prioritizing underwriting discipline. International Commercial overall pricing was down 2%. Across our International Property portfolios, pricing was up 4%, driven by 16% rate increases in Japan. Global Specialty pricing was down 4%. Since 2018, the cumulative rate increases in our Global Specialty book have been very strong, with over 100% increase in Energy where rates are currently challenged. Overall pricing remains above our technical view. Talbot and Financial Lines pricing was also down 4%. AIG's well-diversified global portfolio allows us to manage across geography and products, prioritizing lines of business that offer the best risk-adjusted returns. Moving to Other Operations. Third quarter adjusted pretax loss was $116 million versus the prior year quarter of $135 million. This reflects a significant reduction in general operating expense and lower interest expense, partially offset by lower net investment income as we reduced our Corebridge Financial stake. Total GOE across both General Insurance and Other Operations was $866 million in the third quarter, up 1% from the prior year adjusting for Travel. For the 9 months of 2025, total GOE was $2.5 billion, down 2% year-over-year, while net premiums earned grew by 5%. This is an impressive outcome, reflecting positive operating leverage, allowing us to create bandwidth for future investments. The third quarter net investment income on an APTI basis reached $1 billion, an increase of 15% year-over-year. General Insurance net investment income was $945 million, growing 22% year-over-year. The increase was driven by fixed maturity securities, owing to the optimization of our lower-yielding portfolios, asset growth and higher reinvestment yields in addition to improved alternative returns. During the third quarter, the average new money yield on the fixed maturity and loan portfolio was roughly 95 basis points higher than sales and maturities. The annualized yield was 4.58%, a 69 basis point improvement over the prior year. Alternative investment income was also very strong this quarter at $137 million, yielding 13.6% compared to $43 million and 4.3% in the prior year quarter. Our well-diversified private equity portfolio contributed to this excellent performance. At Investor Day, we talked about opportunities to optimize our core portfolio, particularly in some lower-yielding geographies as well as prudently increasing the allocation to private credit when we see attractive premiums over public credit. As part of the reshaping of our portfolio, we have reduced hedge funds and global real estate by $1.5 billion collectively since 2021. We largely have completed the rebalancing of public credit across multiple geographies. Yields are now more consistent with where we believe we should operate, and we expect net investment income growth going forward to be more in line with asset growth given the current and projected level of global interest rates. Over the next few years, we will opportunistically allocate funds to private credit, which currently stands at $6.4 billion at the end of the third quarter or 8% of the GI portfolio. Overall allocations to private credit have not materially changed since Investor Day. As stated at Investor Day, we intend to take that up to 12% to 15% over time, subject to market conditions. Private credit is a large and diverse asset class. We expect to participate in the highest quality assets where we will get paid for the risk. We have private credit mandates with a small group of strategic partners who follow strict investment guidelines. We do a detailed review of every transaction we enter into and are very thoughtful about deployment and aggregation. We are pleased Onex will be one of those strategic partners. We have committed to invest $2 billion over 3 years across Onex's broad asset management platform, including insurance co-investments outside of Onex' funds, which will provide us with a broader view of opportunities in the industry. We are in the process of divesting some noncore legacy private assets, mostly in real estate, and we will look to deploy some of those proceeds in Onex managed strategies over time, such as CLOs and broadly syndicated loan portfolios where Onex has a strong track record. Our expectation is that our investment opportunities with Onex will be accretive to our investment yield. Turning to Other Operations. Net investment income of $77 million declined $43 million over the prior year quarter and largely reflect income from our parent liquidity portfolio of roughly $50 million and Corebridge Financial dividend income of $20 million. This quarter, we updated the investment portfolio disclosure in our financial supplement to more clearly show the split between our General Insurance portfolio and the assets sitting within Other Operations. Turning to capital management. In the third quarter, we continued to execute against our strong, disciplined and balanced strategy while maintaining our strong ratings and financial flexibility. We completed the sale of another 31 million shares of Corebridge Financial for proceeds of approximately $1 billion. This brings our ownership in Corebridge to roughly 15.5%. We returned $1.5 billion of capital to shareholders in the third quarter through approximately $1.25 billion of share repurchases and approximately $250 million of common stock dividends. Through the first 9 months of the year, we have repurchased $5.3 billion, reducing shares outstanding to roughly 544 million. We continue to actively repurchase shares at what we view as attractive levels. Subject to market conditions, we intend to continue our share repurchase in 2026, albeit at more normalized levels. As we stated at Investor Day, we generate roughly $3 billion of ordinary dividends from our insurance subsidiaries annually. We expect share repurchases up to $1 billion for 2026. We maintained our outstanding financial position in the third quarter with strong parent liquidity and a debt to total capital ratio of 18%. Over time, we will also look for ways through additional investments and acquisitions to drive long-term strategic value for the company and our shareholders. Book value per share at September 30 was $75.45, up 6% from September 30, 2024, reflecting strong growth in net income as well as the favorable impact of lower interest rates on investment AOCI. Adjusted tangible book value per share was $70.07, up 3% from September 30, 2024. In summary, we delivered an excellent third quarter with annualized core operating ROE of 13.6% and 10.9% through the first 9 months of 2025. While the macro and insurance market remain dynamic, we are well positioned with multiple levers to drive continued strong performance. With that, I will turn the call back over to Peter. Peter Zaffino: Thanks, Keith. Michelle, we're ready for questions. Operator: [Operator Instructions] Our first question comes from Alex Scott with Barclays. Taylor Scott: I was hoping you could talk about the expected underwriting profitability from both the quota share as well as the renewal rights. And just hearing some of the things Everest was talking about on their call, it sounded like maybe the profitability is -- I'm sure it's improved from the underwriting actions they've taken, but it sounded like probably closer to 100% combined ratio type stuff right now. So just wondering what that on both kind of sides of the deals will look like out of the gate and where you expect it to get it to over time. Peter Zaffino: Yes. So Alex, I just want to clarify that you're talking about the quota share with Convex? Taylor Scott: Yes, the quota share with Convex and then also the renewal rights with Everest, maybe if you could comment on them separately. Peter Zaffino: Okay. First of all, on Convex, it's a whole account quota share. It's a great company with a tremendous track record of profitability, and we are so pleased to be participating at 1/1 with a 7.5% share. That will grow to 10% in '27 and then 12.5% in the subsequent year. So that's really positive across the entire book, and we will benefit from that because of the combined ratios that they run. In terms of Everest, I'm going to make some comments, and I'm going to ask Jon Hancock to make a couple of comments because Jon ran the business process for the renewal rights for AIG. It's a $2 billion portfolio. You have to take it in pieces. And so the International portfolio has performed very well. I mean when we look at the combined ratios of their International business, it's similar to ours and would expect the conversion for the combined ratios to be at ours and maybe even a little bit better over time because of the scale that can help the expense side. When you look at the U.S., I'll give you just in the spirit of time, the three pieces. First is Property. Property portfolio runs very well. Attritional loss ratios are similar to ours. We may put a little bit more cat load on their portfolio, but AIG's cat load for our funded AAL will not go up. We've been doing an exceptional job on our gross book as well as reinsurance. And so that will be at our combined ratios, which have been exceptional. If you look at Financial Lines, I think their loss ratios for their book run a little higher than ours, but the expense ratio with the conversion of the portfolio will run lower. So I would think on the Financial Lines, the overall combined ratio will be at ours. So there'll be very similar conversion in terms of overall economics on a combined ratio basis. And then the one that gets all the attention is the Casualty. So the Casualty, when Everest reports out, they're doing it on their back book, the earned book, not necessarily on a written basis. And so I think it's really important to take a look at that as to how it's run. I put in my prepared remarks because it was their own comments in terms of the further reserve strengthening required was from a part of a portfolio, 80% that doesn't exist anymore. And then the other piece, and I'll get to the reinsurance in a second, is that I think it's my view that we have the best casualty underwriters in the marketplace led by Barbara Luck. We've done this before. We've looked at a portfolio and said, this is what we think the structure needs to be in terms and conditions and pricing. And so I think we have a really strong track record of delivering that. Even if we deliver, the majority of the Casualty portfolio will still be less than 20% of our overall casualty. And we have a very sound, attractive and one of the best structures, I believe, in casualty reinsurance, which means we protect it from volatility. The ceding commission will absolutely be a tailwind and accretive to the combined ratio. We have a low 30 seed. We're bringing very little expense over. The acquisition expenses are at or slightly below ours. I would look to forecast them at ours. But we would expect even on a written basis, same-store sales with the way we're structured, the way we underwrite and the way we structure reinsurance that the combined ratios are going to improve in a meaningful way. Jon, do you want to just give a quick overview in terms of how you look to the book when you're doing diligence? Jon Hancock: Yes, I will. Thanks, Peter. I mean I'd start by saying I think this is a great deal for everyone, for us, for Everest and critically for those brokers and clients. And we're getting great reaction from all of them. It's a strong AIG with a global footprint in lines of business that we like, we know and we already like a lot of, and where we've already got big and existing relationships with everyone. So this is about building on that rather than start from scratch. And I'd love the fact we did the deal at pace. We both decided very early on, it was the right thing for us. Hence, that bilateral discussions that you talked about, Peter. We wanted to do it, but we did it thoroughly, and we did it quickly. And everybody knows AIG's commercial business is incredibly strong. You see that through our results every quarter, and we want it to grow faster. And I think this is a great opportunity to help do just that. AIG and Everest, we've got to know each other pretty well through this transaction. And as you say, we think they've done a really good job of building their business, re-underwriting where they need to be. But I would stress, I agree with you, it's not everywhere, it's in certain places. And it's a great fit for our existing business to add to it. It's a sort of business we like. And being the incumbent is important in our industry. It's important for us, for the broker and client. It means we don't have to re-underwrite all over again. We do have that continuity. We renew together rather than starting again. And a renewal rights deal like this brings that into play. So there's an advantage to all of us. And as you say, we're determined to renew the whole portfolio. We've looked at the portfolio carefully. And I want to say as well, we know there are some overlaps. Of course, there are. Sometimes they're on the same risks, same or different layers, and we're really comfortable with that. We've looked at the portfolio. We've been managing our limits and exposures waiting for growth opportunities like this. So we know we've got plenty of capacity and everything will be well within our risk appetite. So that's how we looked at it. Now we'll get it renewed by making it seamless, straightforward, given that continuity that is so important. And we've already reached out to thousands of brokers and hundreds of clients as have Everest, we started those conversations. And we've got tremendous support from all of those brokers and clients. We're very grateful for that, and we're totally focused now on getting this business into the portfolio. Peter Zaffino: Thanks, Jon. That's great. Alex, do you have a follow-up? Taylor Scott: Yes. As a follow-up, I noticed the comments suggested you're continuing to look for further opportunities. And so I just wanted to get a feel for how much more capacity do you have to go continue to do deals like this? What type of stuff are you looking at? Peter Zaffino: Well, I said it at Investor Day, I've said it on these calls in the past, and I'll reiterate it now, which is that we look for opportunities that are strategically enhancing to AIG. We've laid out financial metrics in terms of earnings, EPS and ROE accretion. I think the really important point to think about is Convex, Onex and Everest were all bilateral negotiations, meaning it was just us involved. And there wasn't a process. And we're getting more reach outs for that just based on our capability, speed to execution, just the quality in terms of how we position the business. And as Jon said, we've managed our gross and net limits. As Keith outlined in his prepared remarks, we have a lot of financial flexibility. And so we will continue to look at opportunities that fulfill sort of that strategic intent. I would expect to see more. We saw quite a bit before we did these deals. I mean this wasn't the first opportunities that were presented to us. And we'll make sure that it's very additive to AIG and that there is alignment with whoever we're working with. I think we just have to have confidence that we will execute and we do on the sort of financial metrics that we've outlined. Operator: Our next question comes from Brian Meredith with UBS. Brian Meredith: First one, just back on the capital situation. If I look at what you said about $5 billion of holdco liquidity at quarter end and you've got the Corebridge deal, and you've got a fair amount of holdco liquidity right now. I'm just curious what your thoughts are and what's kind of the minimum level of holdco liquidity you want to keep on your balance sheet? Peter Zaffino: Yes. Thanks, Brian. I'll have Keith fill in the details. But I mean, of course, the quarter end liquidity didn't contemplate that we're going to have to use that for some of the investments we've just outlined and the strategic acquisitions. We did -- Keith just kept in his prepared remarks before the Q as to our ownership within Corebridge. We exercised last night a sale of around 32 million shares. So that's another $1 billion of proceeds to fund the acquisitions, but also our continued capital management. And we will be very consistent in what we outlined at Investor Day. We returned so much capital to shareholders, and that was the right thing to do based on the liquidity and the divestitures of Corebridge. But I think we're in a more normal state now where we're going to have those balanced investments and continue to build inorganic opportunities. Keith? Keith Walsh: Yes. Thanks, Peter. Brian, as you stated, we have about $5.3 billion of liquidity at the end of the third quarter. We are well capitalized. We're also very patient, and we are going to keep several billion dollars of liquidity always at the company for just prudently as we measure it. As we look through how we deploy capital going forward, we're going to be patient, balanced and consistent, right? And it's got to make sense for shareholders and for growing the company. And so I think that's the way to think about this as we go forward. As we stated in our remarks, we think about $1 billion of run rate as far as the share repurchase is a good indication for 2026, and I'll leave it at that. Brian Meredith: That's helpful. And then second question, I'm just curious, I want to hit on your expense ratio target of 30% below. I'm just curious, given what's going on with the Everest transaction, which obviously is going to be beneficial to your expense ratio and these AI investments that you're making, which I'm assuming you're already seeing some productivity improvements from the underwriters. Is that 30% just kind of a starting point? And is there meaningfully more -- we could see improvement in that ratio? Peter Zaffino: I'm not a big fan, Brian, of giving guidance on guidance. But I think to try to address the question is let me go with GenAI first. I do think that's going to give us a benefit in terms of growth and operational efficiency. But we just rolled it out to private not-for-profit, one of our smaller businesses. We're going to be sort of rolling that out to bigger business and do expect exactly what you outlined, but I don't really have exactly the time frame. 30% with Everest and other ways in which I think we can grow. We have the Everest conversion on the renewal rights. We have a whole account quota share with Convex. We think that organic growth is -- this quarter is not indicative of where we think we can drive organic growth. We are going to have some operating leverage. And our focus like the 10% to 13%, like the 10% increase in the dividend is to get to the 30%, and we're going to do everything we can to accelerate that and then we'll revisit what we think is the appropriate expense ratio for the business that we have at that time. Operator: Our next question comes from Meyer Shields with KBW. Meyer Shields: Peter, I was hoping you could talk through, I guess, the earnings power of Convex or, I guess, the whole account quota share in the context of, I guess, both volatility and price declines in property catastrophe reinsurance. In other words, without getting too specific in numbers, how vulnerable are its earnings to what we think will be weakening pricing at 1/1? Peter Zaffino: They have a -- thanks, Meyer, for the question. They have a very diversified portfolio, balanced in insurance and reinsurance. Reinsurance is not just property, that's a percentage of their overall, but they're very prevalent in the specialty classes, casualty. They're like an exceptional underwriting group. I don't think that -- look, do they have property cat in the portfolio? Yes. But it's not -- if you look and compare and contrast it to like a Validus, which had significant property cat and was exposed to the big regions within the United States, it's apples and oranges. Also, in the U.K., companies are particularly like a Convex, very smart in terms of how they buy ILWs, how they buy cat bonds and how they reduce their overall volatility to a single loss. So I think, look, we look at it. It's well within our risk appetite for our own assumed property. And as I mentioned, we don't expect AALs to go up. And we will manage those exposures to have not big volatility, and it's not something I would be concerned about. Meyer Shields: Okay. That's very helpful. And I just wanted to confirm that the renewal rights deal like is already active. In other words, that doesn't have to wait for any sort of regulatory approval for you to start looking at the renewal book. Peter Zaffino: Jon, maybe you could just give a very quick overview of where we are in terms of Meyer's question. Jon Hancock: Yes. So it is active, yes, Meyer. There's one important point here that in the EU, we're in the process of seeking regulatory approval. And so when we get that, and we expect it fairly soon or we hope for it fairly soon, we're in active conversations. Everywhere else, this is live. And let's say, we are having active conversations with the brokers, the clients and with Everest underwriters and other folks to get this going as quickly as possible. Peter Zaffino: We are up and running, Meyer. We are working incredibly hard with the distribution and clients and showing continuity and a huge commitment to this portfolio. Operator: Our next question comes from Michael Zaremski with BMO Capital Markets. Michael Zaremski: I guess a broad question on the competitive dynamics in the industry. The #1 question we've been getting for a while, and I'm sure it's up there on your list, too, has just been the pricing power environment in commercial insurance being softish or soft depending how one must define it and whether we, as analysts should start embedding some -- a bit of loss ratio degradation as a result into our models. And I know Peter, you've done a good job explaining to us in recent quarters kind of why you feel you're -- it's not a great -- that's not a great way to model. But any update would be helpful. Peter Zaffino: Yes. Thanks for the question. I have gone through it at length in some of my prior comments on these calls. And what I would think about as you're modeling whether it's rate, loss cost, all the different variables that drive combined ratio is looking at the mix of the portfolio is really important because large companies, in particular, like an AIG, we give you an index on rate, but there's so much that's underneath that. As Keith outlined, Casualty was strong, Property had headwinds. The difference between E&S and retail can be different depending on what's going on with the quarter, cyclicality. And then, of course, I think it's really important. We don't put out cumulative rate increases to be defensive on the current environment. We do it because we've delivered a significant amount of margin over time that gives us the ability to cycle manage. And I spent a lot of time like on Property with the cost of goods sold as to how you actually build up the loss cost. But yes, we're in a competitive environment. We're going through a shift. Property has been the one outlier this particular year. But I think it's a combination of a lot of factors. I still think it's a very profitable segment if you underwrite it well and you protect volatility. The other place that's seeing a little bit of price headwind is Specialty where we're sizable. But again, it has the same underlying dynamics, which has been very profitable, setting terms and conditions, being a lead underwriter, structuring opportunities for clients. You can see even in a market that has headwinds, flight to quality matters. We see new business up, submission count up. And I think you just have to differentiate between companies as well just to see who's going to sustain versus being an index in the market. That's some high-level commentary. Michael Zaremski: Got it. And if I can ask a pivot to ask my follow-up on the update you gave us on AIG Assist and the exciting things you all are doing using technology and AI. Specifically on the submission response stats you gave out about almost 200,000 submissions year-to-date in one area of middle market. I just want to make sure we're thinking about this correctly and that over time, as this technology is deployed throughout the entire organization that it will likely result in kind of a material change to the top line revenue trajectory relative to market conditions. Is that fair? Peter Zaffino: Yes. A few comments. I mean, of course, when we talk about GenAI, it could go in a variety of different directions. But what I would say is that we are focused on the example I've outlined in earnings and the example I've outlined at Investor Day is about getting more effective in digesting data and actually accessing more data points to make the underwriters more constructive and allowing them to make better decisions. So like when we talk about like the example I gave now with Lexington is that if you can ingest broker data faster and take unstructured, structured PDFs, all different formats and getting into an underwriting process and then have large language models accelerate that to the underwriter, that's why I said speed matters. I mean that's what will drive growth. And it's not about driving more like underwriting appetite, it's about getting to things that are within our appetite and being able to service that business faster and at scale. The other thing to think about is, are you prepared in a market turn? And it will happen. And so when there is parts of our business that there's going to be either supply issues or there's not going to be the same capacity, can you take advantage of those opportunities by servicing clients and brokers and scaling significantly? We are prepared to do that. And then the last comment I would make is that we are preparing this company to compete in the environment that's going to exist across the world. When you think about the technology, I'm not saying it because it's a sound bite of things are progressing over the last 6 months. This happens to be true. Like what's happening with like advancements in large language models or the orchestration in the future of agents that exist within organizations and different functions and different parts of underwriting, how do you manage through that? We are trying to accelerate implementation. So we're prepared for the changes that are happening at a rapid pace based on the capital expenditures from the large tech companies. And feel very good about what we've done, actually feel like we have advanced our guidance from Investor Day and want this to be a big part of how we talk about our business in the future. So it's going to be better quality data, more data sources, speed to execution is going to be accelerated and the underwriters are going to be able to make decisions faster and make more effective decisions. So that's where I want to be and feel very good about it. Okay. Thank you very much for the questions. I mean, as I said at the top of the call, it's been an exceptional quarter for AIG. The progress, the announcements that we made are just great examples of how we're moving the company forward with purpose and executing on our strategy. I'm incredibly proud of all of our colleagues. Without them, none of this happens. And so I want to thank all of my AIG colleagues for working at pace. And I want to wish everybody a great day. Thank you. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good day, and thank you for standing by. Welcome to the Fidelity National Information Services Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Georgios Mihalos, Head of Investor Relations. Please go ahead. Georgios Mihalos: Good morning, everyone. Thank you for joining us today for the FIS Third Quarter 2025 Earnings Conference Call. This call is being webcasted. Today's news release, corresponding presentation and webcast are all available on our website at fisglobal.com. Joining me on the call this morning are Stephanie Ferris, our CEO and President; and James Kehoe, our CFO. Stephanie will lead the call with a strategic and operational update, followed by James, who will review our financial results. Turning to Slide 3. Today's remarks will contain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to the safe harbor language. Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share and adjusted free cash flow. These are important financial performance measures for the company but are not financial measures as defined by GAAP. Reconciliation of our non-GAAP information to the GAAP financial information is presented in our earnings release. And with that, I'll turn the call over to Stephanie. Stephanie Ferris: Thank you, George, and good morning, everyone. I'm very pleased to report we delivered strong third quarter results that exceeded expectations across our key operating metrics. Our performance demonstrates real momentum across the business with adjusted revenue growth of 6.3%, adjusted EBITDA margins of 41.8% and adjusted EPS of $1.51, up 8% year-over-year. These are great proof points that our Future Forward strategy is working by leveraging our strong foundation, executing to deliver profitable growth and allocating capital with discipline. Let me walk you through what's driving our strong performance. This quarter's 6.4% recurring growth demonstrates the success of our commercial excellence initiatives. We achieved sequential margin improvement of approximately 200 basis points, driven by strong segment profitability across both Banking and Capital Markets. Adjusted free cash flow conversion was 142%, enabling us to increase our share repurchase target to $1.3 billion for the year. These results demonstrate the strength of our execution and validate the strategic investments we've been making to position FIS as a technology company at the forefront of financial services innovation. During the quarter, we returned $509 million to shareholders across share repurchases and dividends. Most importantly, we're entering the fourth quarter well positioned to achieve our full year 2025 financial goals and move into 2026 with real momentum. Based on our performance and visibility, we're raising our full year outlook for revenue, EBITDA and cash conversion. Turning to Slide 6. Now let me talk about what we're seeing in the marketplace. Bank technology spending remains strong, and our clients are prioritizing spend across our high-growth verticals, digital solutions, payments innovation and lending modernization. We anticipated that AI would transform financial services, but the pace and depth of adoption have exceeded our expectations. In fact, industry surveys indicate that more than 3 out of 4 banks have actively launched or piloting Gen AI and Agentic solutions, a marked increase from just a year ago. Our clients are leaning in and asking us to help shape their AI journeys, viewing us as a strategic partner. Data powers the algorithms that underpin AI. And for this reason, FIS holds a foundational advantage with over 200 petabytes of data, powering on average 20-plus products per client across the money life cycle. This advantage will grow significantly post acquisition of the credit Issuer Solutions business, adding almost 1 billion additional accounts to our platform. As the operating environment for banks continues to improve, they are investing with confidence. Consumer spending patterns support this optimism. Debit and credit card spending remains resilient year-to-date, and we're seeing strong account growth across our bank clients. Year-to-date, FIS core accounts are up mid-single digits as our clients continue to grow. We are also seeing an acceleration in bank M&A across the market. The third quarter had the highest level of quarterly bank consolidation in 4 years, driven by a more favorable regulatory backdrop. We expect industry consolidation to continue to be a long-term tailwind for FIS. We're the vendor of choice for financial institutions, positioning us to benefit as the industry consolidates and acquirers seek scalable enterprise-grade technology partners. The acquisition of credit Issuer Solutions, which we now expect to close in the first quarter of 2026, will further strengthen our offerings, providing us with scaled credit processing capabilities. Finally, let me address pricing directly. The pricing environment remains stable. Net pricing has been a tailwind for us year-to-date across both Banking and Capital Markets, supported by a continuous product, feature and functionality enhancements that strengthen our value proposition with clients. We operate in a rational market, and we're confident in our ability to continue to price for value. Let's turn to Slide 7. Our strong execution and laser focus on helping our bank clients is translating into high-quality sales performance across our business. Our sales pipeline annual contract value, or ACV, has expanded 13% annually since 2023. And we're deploying AI early in the marketing sales cycle for lead generation, making our go-to-market motion smarter and more efficient. Renewal retention has also shown steady improvement of approximately 3% in 2024 and 2025. This is a key driver of the accelerating banking growth we are delivering. Net pricing has contributed 60 basis points of growth on average over the last 2 years as we continue to price for value. And in 2025, both segments will have a positive pricing contribution for the year. Recurring ACV, the fuel for future revenue growth has compounded annually at 11% with particular strength in verticals such as payments, where our network solutions and Money Movement Hub are driving outsized sales growth. Our strategic investments are paying off. Taken together, all these improvements across our sales engine are fueling the durable recurring revenue growth acceleration we're seeing across our business. Now turning to Slide 8. We are translating this market momentum into sustained growth in our Banking segment, which remains the cornerstone of our business. At Investor Day, we outlined 3 strategic priorities to drive sustainable, accelerating growth: operational excellence, core and digital, and payments. On Operational Excellence, we're maintaining our relentless focus on client experience and sales execution. Happy clients renew, expand and advocate, and the numbers I just shared on retention prove we're getting this right. We're achieving this through our investments in AI, which are fundamentally transforming how we operate and improve everything from client support to risk management to product development, modernizing our solutions to help our clients run, grow and protect their businesses more effectively. We're helping clients run their business through intelligent automation, predictive insights and operational efficiencies of the back office that reduce costs and improve service delivery. We're helping them grow through AI-powered personalization and intelligent decisioning that drives revenue and deepens customer relationships. And we're helping clients protect their business through advanced fraud detection, real-time risk scoring and behavioral analytics that stop threats before they impact customers. Let me next update you on the progress we're making in 2 of our key high-growth vectors: Digital and Payments. Beginning with Digital on Slide 9. Our digital business is performing very well with growing traction across both our retail and commercial offerings. The U.S. TAM for digital solutions is $10 billion, growing at approximately 12% annually through 2028. Banks are spending aggressively on digital capabilities and open banking adoption is accelerating. We're capitalizing on this by embedding AI-powered capabilities such as predictive insights and hyper-personalized recommendations into our Digital One platform to deliver a more seamless, intelligent digital banking experience. Clients are also prioritizing solutions with seamless integration and robust API connectivity, which are core strengths of our platforms. We've seen over 30% growth in users across our digital platforms, and we see this as a growth engine for our Banking segment for years to come. We also had significant competitive takeaways this quarter. SMBC MANUBANK, a U.S. subsidiary of Sumitomo Mitsui Bank Corporation, selected our commercial online banking offering, Dragonfly, to help the bank better service enterprise customers. This win displaces a monoline digital competitor and underscores the rationale behind our targeted M&A strategy. As year-to-date, our sales in commercial digital solutions have nearly tripled with our win rates improving by 13 points with Dragonfly. During the quarter, we completed the acquisition of Amount, an AI-powered platform providing seamless unified digital account opening capabilities. This acquisition is a perfect example of how we are using AI to help clients grow their business. Amounts platform fundamentally changes how banks acquire and onboard customers while helping to grow revenue and reduce friction and risk. And we've hit the ground running, signing 7 new deals since closing the acquisition and expanding our relationship with a top 10 U.S. bank. Now let's turn to Slide 10. Payments is the other major growth driver, and the momentum here is equally compelling. We're operating in a $53 billion U.S. TAM that is growing 5% annually. Card issuing debit transactions remain robust at 6%, providing a steady foundation. But the real market acceleration is in instant payments and digital currencies, which represent the future of money movement and areas where FIS is strategically invested. The complexity of this growing market is creating new opportunities for FIS as banks increasingly rely on us to help them navigate the changing landscape. And we're seeing this in our sales performance. Our payment sales have been outstanding, 50% recurring sales growth year-to-date and a 5% improvement in win rates. In addition to traditional debit and credit offerings, we are leading the way in alternative payments with modernized cloud-native solutions like our Money Movement Hub, which is our core agnostic real-time payment gateway for our clients. Launched just a quarter ago, we're already seeing strong traction with over 40 new clients signed. Additionally, the NICE network has been a particularly bright spot, with sales more than doubling and a pipeline growth of 3x versus last year. Here again, AI is a critical differentiator. Fraud is one of the biggest threats facing financial institutions today. We're using machine learning and behavioral analytics to detect and prevent fraud in real time across billions of payment transactions daily. We also continue to expand our capabilities and geographic presence. We recently acquired Everlink to strengthen our payments offering in Canada. And the credit issuer acquisition will add scale in both U.S. and international credit processing, and significantly higher cash flow when we closed that deal in the first quarter. In closing, let me bring this all together. FIS delivered a very strong quarter that exceeded expectations. We're seeing favorable market conditions, and we're executing on our strategy as a technology company at the forefront of financial services innovation. This isn't a 1-quarter story. We're building sustainable, profitable growth on a foundation of operational excellence, product leadership and client partnership. We're confident in our trajectory and are raising our full year outlook. With that, I'll turn it over to James to walk through the financial details. James Kehoe: Thank you, Stephanie, and good morning. I'll begin on Slide 12 with a summary of our financial results. We had a great quarter, exceeding our outlook on revenue, EBITDA and EPS. Revenue grew 6.3% to $2.7 billion, driven by outperformance from our banking business and strong recurring revenue growth across both segments. Adjusted EBITDA grew 7.1% with margins expanding by more than 50 basis points. Margins were up nicely in both segments, led by strong execution across our cost-saving programs. Adjusted EPS increased 7.9% to $1.51, led by strong operating growth. Turning now to free cash flow. Moving forward, we will report on both adjusted and unadjusted cash flow measures, and I'm happy to report that both are performing well. As we have messaged on prior calls, we are running extensive cash optimization programs, and we drove significant improvements in the third quarter. Free cash flow was $800 million in the quarter and more than doubled year-over-year. Adjusted free cash flow was approximately $930 million with cash conversion coming in at more than 140%. While we anticipated a cash conversion of over 100%, the outperformance was driven by accelerated working capital actions with particularly strong results from our accounts receivable initiatives. Capital expenditures were 7.9% of revenue, in line with our expectations. On a year-to-date basis, cash conversion was 91%, and we now expect full year cash conversion of more than 85%, and we are well positioned to deliver on our 2026 Investor Day goal of 90%. Leverage remained steady at 3x or 2.9x, excluding the impact of currency fluctuations. We returned over $500 million to shareholders, including $300 million of share repurchases, and we recently increased our annual target for share repurchases from $1.2 billion to $1.3 billion. In summary, we outperformed across all key metrics. Strong execution is driving high-quality growth, and this gives us great confidence as we look forward to 2026. Turning now to our segment performance on Slide 13. Adjusted revenue and recurring revenue both grew 6% with strong recurring revenue growth from both segments. Banking exceeded our expectations in the quarter. Revenue growth of 6.2% was well above the high end of our range, reflecting strong core growth and an M&A contribution of 150 basis points. The performance was led by recurring revenue growth of 6% with strong transaction growth across our payments business in addition to strength in digital banking. Nonrecurring revenue increased 8%, mostly due to card personalization and deconversion fee timing. Professional services accelerated the 6% growth and net pricing was positive in the quarter and on a year-to-date basis. Banking EBITDA margin expanded by 68 basis points, primarily due to a rising contribution from cost-saving programs. We expect these positive trends to continue into the fourth quarter and drive even stronger margin expansion. Turning now to Capital Markets. Adjusted revenue growth of 6.4% came in close to the high end of our expectations. M&A contributed 130 basis points, consistent with prior quarters. Recurring revenue grew 7.6% as we saw a rebound of lending activity and stronger momentum in our treasury and risk businesses. Nonrecurring revenue increased 12.6%, reflecting strength in license sales. Lastly, professional services declined 5.6% due to the timing of some engagements. Capital Markets EBITDA margin expanded 60 basis points, reflecting higher cost savings, accelerating growth in high-margin recurring revenue and higher license sales. As with banking, we expect segment margins to expand in the fourth quarter. Moving now to Slide 14. Year-to-date results are strong with both adjusted revenue and recurring revenue growing over 5%. Banking growth of 4.8% is in line with our increased outlook, and we are confident in delivering a strong fourth quarter. It's a similar story in Capital Markets with year-to-date growth of 6.6% aligned to our full year outlook. Overall, we delivered good results across both segments, and we are executing well on the second half revenue acceleration and margin expansion that we guided to earlier in the year. Turning now to our increased full year outlook on Slide 15. We are raising our ranges for revenue and adjusted EBITDA to reflect the stronger operating results and the recently closed Amount acquisition. We are raising our revenue range by $65 million at the midpoint, resulting in an adjusted revenue growth of 5.4% to 5.7%, well ahead of our Investor Day outlook. For Banking, we are increasing our revenue growth range from 4% to 4.5% to 4.9% to 5.3%, an increase of almost 1%. The recently closed Amount acquisition is expected to contribute around 20 basis points of additional growth, with stronger operating performance driving the remaining 65 basis point increase. For Capital Markets, we are updating our outlook to approximately 6.5% to better align with the performance we have seen year-to-date and reflecting a tough comparison in the fourth quarter. We are raising our full year EBITDA outlook to reflect our third quarter performance, and we are updating our margin outlook to include the impact of M&A. Importantly, we are confident in delivering margin expansion across both segments in the fourth quarter. Lastly, we are tightening our EPS range by $0.02 and reiterating double-digit growth of 10% to 11%. Consistent with prior quarters, we have provided updated modeling assumptions in the appendix. Before closing, I wanted to reiterate some points related to the coming year. While tuck-in M&A tends to weigh on margins in the short term, the M&A deals signed in 2024 and 2025 will be accretive to FIS margins in 2026, with further margin benefits in the out years. Because of this and combined with the underlying margin profile of the business, we are confident in delivering margin expansion of greater than 60 basis points in 2026. As you can see, we are driving improved cash conversion, going from 77% in 2024 to over 85% in 2025, and we are on track to deliver 90% conversion in 2026 as our cash optimization initiatives continue to bear fruit. Overall, we are seeing positive revenue trends across the business, and we have good momentum as we exit the year. Lastly, we're excited the credit issuing acquisition is expected to close in the first quarter of 2026 and continue to expect the transaction to be accretive in the first year and add $500 million of free cash flow in 2026 rising to $700 million post integration. I'll conclude on Slide 16. In summary, our third quarter results were ahead of expectations, driven by strong recurring revenue and margin expansion from both segments, and we are increasing our revenue and EBITDA outlook for the year for the second time. Free cash flow was exceptional in the quarter, and we are increasing our 2025 cash conversion target to over 85%. We returned over $500 million to our shareholders, and we've increased our full year target to $2.1 billion. With that, operator, could you please open the line for questions? Operator: [Operator Instructions] And our first question will come from the line of Jason Kupferberg with Wells Fargo. Jason Kupferberg: Nice to see these numbers. Your commentary clearly on the health of the end markets for banking sounds quite positive across the subsegments, both from a demand and pricing perspective, definitely reassuring. So I'm wondering if that translates to a more bullish view on how fast you can grow the Banking segment structurally over the next couple of years. I think at the Analyst Day, we talked about approximately, call it, 3% organic growth for banking as a medium-term target. But clearly, you're performing above that level currently. Stephanie Ferris: Yes. Thanks, Jason. Yes, we are feeling very good about technology spend in banking, as I talked about. Banks are spending money on technology in the places that are important to them. And we've been very focused on ensuring that our product sets and solutions are in those right places like digital, for example, like payments, like bank modernization. You're exactly right. We are exactly on or actually ahead in our banking business from an organic basis and with M&A in 2025. It gives us a lot of confidence as we go into 2026 around the banking business. Not sure I'm ready yet to call a higher midterm guidance on banking, but it certainly gives us a lot of confidence as we go into 2026 in terms of the step change we've seen in revenue in banking. And that's multiple things happening at the same time. The end markets are very strong. We're the beneficiaries of large-scale M&A, but most importantly, around commercial excellence and we gave some of the stats here of how important and how successful that's been as we really have changed our sales force, not in terms of -- not only in terms of the leader, but also how we're focusing and where we're focusing there in terms of recurring, highly profitable revenue, which is driving both our banking revenue growth as well as helping us change the mix on our margins. So overall, feeling really good about 2026, but I'm not yet ready to call higher midterm guidance there. Jason Kupferberg: Okay. Well, fair enough. But let me ask a follow-up on 2026 specifically. You touched on margins going up over 60 basis points. But from a revenue perspective, should we feel comfortable modeling the numbers consistent with the medium-term guide from the Investor Day? And just, James, any one-off headwinds or tailwinds on revenue we need to be mindful of either at the segment level or for total company for 2026? James Kehoe: No, I think as Stephanie said, our banking is sizably outperforming and capital markets. The only thing I think you should consider is our guide longer term included the impact of acquisitions. So effective once credit issuer closes, we won't be doing any tack-on acquisitions. So that will kind of pull down a little bit the capital markets. But I think you hit the nail on the head. The banking business right now is clearly outperforming, and we've now had 3 quarters of above. I would say on an organic basis, the recurring is around 4.5 plus percent, so that's a really positive one. And I think -- so I think, overall, we're super comfortable on the revenue trajectory. I think capital markets is probably a little lighter and banking just generally stronger. And I think the overall business, what I think you will see is, our recurring revenue is much, much stronger. And Stephanie has covered it in prior occasions. There's a big shift in quality as we work through driving the ACV in the current year. So think about a business model now that is -- we're currently above 80% recurring. The focus going forward is more and more recurring, less nonrecurring and professional services. And then within the recurring a much greater tilt to higher margin products such as the payments category, digital, the core business. So I think it's a strong quality discussion for next year. Operator: One moment for our next question. And that will come from the line of Darrin Peller with Wolfe Research. Darrin Peller: It's good to see the organic banking trends in that mid-4s, mid- to high 4s range we're seeing now this quarter, and I think embedded in your guide for next quarter, if I'm not mistaken. Maybe just Stephanie and James, if you could just give us a little more on the building blocks. You started touching on it in your slides around issuing and digital payments and then core. A little more color on what you're seeing in each of them, specifically in terms of growth that's driving that trajectory, just to ensure we know that's somewhat sustainable going forward would be helpful. Stephanie Ferris: Sure. You're exactly right. We're feeling really good about the organic banking revenue in the mid- to high 4s in Q3 and then the guide expresses that in the fourth quarter. And like we talked about, feel good about that going into 2026. I think the way to think about it is really around making sure that we are selling. So our net new sales is delivering about 100 basis points every year of growth for us. As we think about where that growth comes from, we're really taking advantage of our investments that we've made, both in terms of organic and inorganic and driving new sales into the higher quality. So I think bank modernization and continuing to drive growth out of our core business, really leaning into our digital business as banks continue to invest in their digital capabilities to drive both new business into the bank as well as service and then in payments. So if we focus there and we think about that on an annual basis on a net new sales perspective, driving about 100 bps in those categories, then it fully supports what we would typically see around organic, the organic overall base of the banking business, which, as you know, is a combination of transactions going across the platform from a payments perspective and then accounts on file, so think about more accounts coming across on core and digital. And that gives us a lot of confidence around what we've historically seen with organic in terms of 2 to 3 points of growth every year. So you start with your new sales and make sure you're selling in the categories that are higher quality, higher recurring with higher organic growth in them. And you get a net new sales number of about 100 basis points, you get organic growing for you on 2 to 3 points per year. And then you come down to a net pricing capability, which we've been talking about anywhere from 0 to 50 basis points per year, and we're really starting to see a tailwind in that. So overall, if you think about the basic building blocks of banking to support kind of a 3.5% to 4.5% range, that's how we think about it. And for us, it's really been about making sure we focus on the mix of what we're selling so we can get that really strong organic growth and we can deliver the profitable margins that go down at the segment level. Darrin Peller: Okay. Stephanie, that's helpful. I guess one quick follow-up, James, on free cash. You're talking constructively about what we're seeing now and into next year, 90% plus. Obviously, that's adjusted when you consider the deal you're going to be closing soon in first quarter. And so just help us understand how you're going to think about segmenting out what, I guess, will be some restructuring charges and how close we can get to that, let's call it, 80% plus even with some of those restructuring? Just want to know the quality of free cash that we're hoping for next year. James Kehoe: Yes. I think it's a little bit early to give precise numbers on the acquisition, we didn't give them before. But the way I think about it is, we -- on the core business, we're going to exit this year. And I think if we hit the 85% guide, we're talking about free cash flow growing roughly 15% to 16% year-on-year, so outpacing EPS. And on a GAAP basis, it's the same number. So GAAP is trending in line with adjusted. So that's the first thing. And we'll exit with a healthy 85% conversion. And then I'll get into some building blocks on the base FIS, so I'll cover that first. One is a slightly lower capital intensity next year will drive incremental cash conversion. And then the other thing is this year, we've been hampered all year by higher cash taxes in the current year compared to last year, but pulled down conversion. That normalizes next year. So literally, by addressing capital intensity and the tax rate just naturally flows through, we're really comfortable about a 90% cash conversion. There is probably even slight upside to that because our working capital programs, you've see in the third quarter, we significantly outperformed. We pulled a little bit from prior quarters, and we executed strongly against the programs themselves. So we're feeling really, really comfortable on the deal on the base. During diligence, we went through their business. They're roughly at a 90% conversion as well. So we're going to add two 90s together. I think it's a little bit early on the onetime expense, but think about, you could take our cash flow today on an adjusted basis. You increase it probably at a faster pace, increase it at a faster pace than the EPS growth. You add on $500 million of adjusted cash flow coming from the issuer business. And you're going to get a substantial step-up in cash flow. We do need to absorb some incremental onetime expenses coming from the integration. It's too early to call that number. So -- but I think you will see a strong year on both adjusted and GAAP free cash flow next year. Operator: One moment for our next question. And that one from the line of Tim Chiodo with UBS. Timothy Chiodo: I think the 2 of the key numbers, at least for next year, the 60 bps plus on the margin expansion and then the free cash flow conversion, both on the adjusted and the non-adjusted. I think we just covered the free cash flow quite well. Maybe we could dig into the margin expansion a little bit in terms of the moving parts. We know there's kind of a lower exit run rate of costs this year. There's the TSA headwind this year, which I believe is 70 bps or so to margins. That will be a lesser headwind next year. Maybe you could give an update on that and then the associated cost savings. And then you already mentioned, but maybe dig into a little more on the accretion from the past few years, smaller M&A deals and starting to contribute a little bit more to EPS -- or sorry, to EBITDA next year. Stephanie Ferris: Yes. So thanks, Tim. I'll start, and then I'll let James kind of get into the nitty-gritty of the numbers. You're exactly right. So in 2025, we have had some dilution overall on an EBITDA margin standpoint, even though we've been able to care for it in the absolute dollar from M&A, which we've been very clear about, and we feel really good about that becoming accretive in 2026. So we will not have that headwind feeling really good about that. So that's number one. The second is, you're right, the TSA this year for us, and both of these were very well known as we went into the year, the impact of Worldpay separation and the TSA revenue going down is impacting our margin because as those revenues go away from us and the costs go away from us, we have -- it takes us a little bit of time to get the cost out of the system. So we're going to benefit as we move into 2026 from no longer having those grow-overs. We'll have moved the M&A into an accretive position. We'll have taken the cost out from a TSA standpoint. And then you can see in the third and fourth quarter, we've moved significantly in terms of margin expansion in both the banking and the capital markets businesses in Q3 and what we're guiding for Q4, which is exactly what we had expected as we're executing against our Future Forward savings in terms of both making sure that we're selling high-margin recurring revenue, so we have quality of revenue and then also making sure that we are taking out cost as we reposition the company as we have separated on Worldpay. So those are very strong tailwinds for us as we move into 2026. James, any other comments you might make? James Kehoe: Yes. I think, Stephanie kind of covered them. So principle one, and it's easy to conceptualize the M&A tack-ons this year, that cost -- that pulled us down by about 45 to 50 bps this year. Rough numbers, it will probably be slightly accretive next year, probably 10 bps. So a headwind disappears completely, and that gives you a lot of confidence in next year because we're not doing tack-on M&A next year. The TSA is like 50 bps negative this year. That's not going to change very much next year -- sorry, this year was 50 bps. It's roughly the same number next year. So that doesn't change anything. Where the change is coming from is what Stephanie said, it's the quality of the mix of the ACV that sold already this year has substantially pivoted, and there is a stronger pivot to core digital and the payments business, and those margins are north of 50 compared to some of the categories that are growing slower. So we're going to see a natural favorability coming from revenue mix. And I want to emphasize that the banking margins are -- you've seen it in Q3, the banking margins have recovered strongly. It will be even stronger in Q4. And then the final one, the biggest lever we actually have and the one that's been pulled quite strongly in the second half of this year. And what we said this at the beginning of the year would have been a first half, second half story. You're seeing it come true now. There's a reason why the margins are up in both segments in Q3, and we're projecting in Q4, that's the strength of the cost programs. So they're second half loaded, which means we'll start next year very strongly out of the gate with the level of cost reduction. So 3 drivers: The M&A less dilutive, the natural product mix and the quality of the ACV sold this year. And then the third one is the cost programs will probably give you even more tailwind next year compared to this year. Timothy Chiodo: Stephanie and James, if you don't mind just a brief comment on any of the debit network pricing environment, just given it's been a little bit of an investor topic over the past week or so, if there's anything you could comment around pricing environment related to NICE. Stephanie Ferris: Well, I would say on a pricing standpoint broadly, you heard me say, and I do want to reiterate that we live in a rational pricing environment. I know there's been a lot of commentary around it. And I really -- we really tried to give some good stats from us. I think overall, we are in a rational pricing environment, whether it's new business and whatever product. We obviously -- and we have some great competitors. And we obviously all compete with each other. But I don't see an irrational pricing environment, whether it's in any of the products and in particular, in NICE. So we're happy with NICE's performance. Generally, as we've talked about the strong performance for us, it's been more around adding more account volume to the platform, which is about winning more merchants onto the NICE network. That's not a pricing per se issue. That's how do you deliver value out to those merchants and least-cost routing. So the pricing comment, I can't really make in terms of what's going on in the competitor. But I can tell you, we feel really good with where we are with NICE, the value prop it provides out to the merchant community and the issuer community in terms of delivering value there. And it's not something that you can just immediately drive price up or down and create a onetime benefit, but I'll leave it there. Operator: One moment for our next question. That will come from the line of Trevor Williams with Jefferies. Trevor Williams: I wanted to ask on some of the competitive dynamics in core processing. One of your major competitors is consolidating the number of cores they're running down by about 2/3. With a process like that, is that potentially a catalyst for banks to open up to an RFP where I'm just wondering how much of a potential opportunity that's either presenting -- could present for you guys to win new business. Stephanie Ferris: Yes. So I think overall, you've seen across the industry a bank modernization trend. And this is really being driven by the end markets who are really looking for banks to modernize, drive digital capabilities, account open capabilities, real-time transaction capabilities. And these capabilities in order for them to deliver new products and services need to be able to be delivered in a componentized way. So that bank modernization trend is in market and continues to be really important. And everybody in the industry is at different places in where they are delivering their products and solutions there. Yes, we have heard about the platform consolidation. As you guys know, we went through that several years ago. We have effectively 3 strategic platforms, and we're really happy with how those are performing. Spent a bunch of money to make that modernization happen. We saw that in increased capital, and we've brought that down over time. Obviously, anytime anyone does anything in the market, it becomes a competitive opportunity. But as you know, overall, there's not a lot of core transitioning every year. It's pretty small. There's a lot of stickiness in this business. So we're really happy with our renewal rates. I think we talked about those in the year and increasing how much we've been able to retain our existing clients. So do we think it's an opportunity? Of course, we do. Do we think it's a -- we expect to see a massive swing? It's a competitive market, and I think it's a place where there's a lot of renewals and a lot of stickiness to it. So we're happy to compete and continue to focus for our own clients on our bank modernization journey. But we are at the tail end of that in terms of going from many to few and really investing now in terms of making sure that what we're doing is focused on helping our banks deliver products to their clients faster. Trevor Williams: Okay. All right. And then just for my quick follow-up, I wanted to ask on the EBT exposure that you have within banking, if it's possible to give us a rough sense for how big that revenue pool is and if the shutdowns having any impact on that in Q4? And then with the changes in eligibility requirements that are being made at the federal level, just how you guys are potentially thinking about the downstream impact in '26 and beyond to that revenue pool? Stephanie Ferris: Yes. I don't think we've ever given the size of the EBT revenue. It's not overall material to FIS. It is a nice piece of business for us. We don't expect the shutdown to have an impact on the EBT business. And if it does, we would expect to care for it within the guide we provided. We generally get paid on a number of cards, and so it's not necessarily how much is funded on a card. And generally, thus far, we're seeing cards continue to be active. I think as we think about 2026 and the criterion, it's a wait and see in terms of how much that really impacts the overall business. Again, it's based on number of cards. So if there's fewer cards, we'd obviously earn less revenue. But at this point, we're sizing that out and don't expect it to be a material impact for 2026. Operator: One moment for our next question. And that will come from the line of Dan Dolev with Mizuho. Dan Dolev: Stephanie, great results here as always. Stephanie, you initiated your Future Forward strategy 3 years ago. And I want to know like how much confidence do you have in your investing strategy and rationalizing the business appropriately? And maybe just as a follow-up to that is like how is AI shaping into the investment road map that you put together? And then I have a very quick follow-up. Stephanie Ferris: Yes. Thanks, Dan. So we're very pleased with our Future Forward strategy. You've seen the benefit of it, both in terms of commercial excellence and you're seeing -- we're seeing really strong pivoting there in terms of driving high-value recurring revenue, so been focused there. Continue to focus on making the commercial excellence part of the company even better with AI. We spent a little bit of time in the prepared remarks talking about how Nasser and his team are using AI to not only increase top of funnel and the sales pipeline, but also to deliver higher productivity in terms of the sales teams. So I feel really good about the commercial excellence pillar. Then when you come to the client pillar around making sure that we're doing a better job serving our clients and making it easier to do business with us, we are using AI there. So our Chief Client Officer is very focused on in the back half of this year, using AI to make a much better experience, not only internally for our folks who serve our clients, but also putting tools into the hands of our clients so they can self-serve. And with that, we're obviously getting not only cost savings, and we're feeling really good about those coming into '25, but also really levering up in 2026, but more importantly, much better outcomes for our clients and making happier clients, and we're seeing the returns of that in higher levels of retention. And then finally, around innovation, we are really pivoting hard in terms of our overall investment strategy around where we see the opportunities in AI from a product standpoint. And just to spend a little bit of time thinking about that, the base level of AI and what everybody is wanting to do with AI is you do need to have access to your underlying data. And as you know, given our base systems are primarily ledgers, we do -- and then with the payment systems that have tons and tons of data in them and then very excited about adding the credit issuing business. we're working with our bank customers who really want continued access to their data faster, cleaner and more secure. So we're spending a bunch of time there in terms of investing in our underlying data infrastructure and piloting out capabilities in terms of how we deliver that data infrastructure up and down the stack. I think when you go to regional community banks, we're working with them and really turning our focus on Agentic workflows to help them automate their back-office operations. We have a major product launch that we're planning at Emerald, which is incremental to our banking assist solution that we rolled out last year. So focused on helping our banks automate and really drive down back-office costs. And then in the capital markets space, focused in our treasury business, we see a significant amount of clients adopting our neural treasury product with almost 700 clients live now, which is bringing AI to cash forecasting, risk management, payment optimization. So we're seeing through our Future Forward strategy, both -- or all around in terms of commercial excellence, client excellence and then really making sure that we can innovate and deliver best-in-class products. And we're seeing AI through -- we're using AI through all of that. Admittedly, we're at the beginning stages of that. And so it also makes us really confident in terms of how we end the year and where we're focusing in terms of our investment strategies, whether it's in making the back office more seamless, creating more capacity in technology for us to invest or to make some significant investments in continuing to make our products AI-enabled, we're feeling really good about where we are right now. Dan Dolev: That's great. Amazing. And really quick follow-up, maybe just housekeeping and sorry if this is redundant for James. Like we're getting a lot of questions about M&A contribution, like organic, inorganic towards the end of the year and then into '26. Can you maybe help just make some order there in terms of what to expect from stuff that's been acquired thus far, that would be great. James Kehoe: Yes. We added some disclosure to the current charts that have laid out what's the impact in the quarter and on the full year in both of the businesses. So just to reemphasize that the banking contribution from M&A was 150 basis points in the quarter, and it's 110 basis points on the full year. And I believe we gave the Q4 guide as well for M&A contribution in banking. That a 120 basis points. So capital markets then full year is 130 basis points and roughly the same in Q3 and Q4. So we've increased the disclosure going forward. And then as you look at on the -- our call on the guide, so we called up 85 bps midpoint versus midpoint. The impact of the Amount acquisition, which wasn't in the previous guide was about 20 bps. So the majority of the increase on the full year guide in banking, 65 bps, that's coming from operational execution and strong execution, particularly in the third quarter. Operator: One moment for our next question. And that will come from the line of Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Good quarter here. Just wanted to ask about the bank consolidation. Stephanie, you mentioned it's going to be -- there's quite a bit there. Do you have pretty good visibility or line of sight into being on the right side of the larger deals here? When do you expect to get more clarity on that? Could it be enough to impact growth next year, that kind of thing? Stephanie Ferris: Yes. Great question. I mean, clearly, everyone's seen bank consolidation has certainly picked up in 2025. We tend to be, as you know, we serve the larger financial institutions. So when we are the -- with the bank that's being consolidated, we have a very high win rate where they pick us in terms of consolidating over to us. And then we have a really good win rate as well when we're battling with the incumbent provider on the other side. I think we have a pretty good visibility in terms of the 2026 M&A. But to be fair, Tien-Tsin, it feels like every Monday, we have a new announcement. So I say that, but I don't have a crystal ball into what's going to happen through the rest of the year with M&A, but I think we're feeling pretty good as we sit here today. Tien-Tsin Huang: Yes. Well, history says you guys are usually on the right side. I know you got it. A couple of questions on AI. So going to different conferences, Stephanie, I just want to ask you on digital assets and deposit tokens, things like that. Any interest in investing more there or doing more there buying infrastructure? Is that on the road map for FIS in the near term? I know there's a lot on your plate with the deal coming soon. Stephanie Ferris: Yes. No, I'm glad you asked that. We're doing a lot in digital assets and stablecoin. So in just a couple of comments. One is, in money motion -- Money in Motion, as you know, we announced last quarter a strategic partnership with Circle, which is enabling money to move across the Circle platform, and it's connected into our Money Movement Hub. Our Money Movement Hub continues to have and take a lot -- has a lot of demand in the market. We view ourselves to be agnostic there in terms of whether you want to move money across Circle or a payment network, ACH real-time payments, et cetera. So that capability is driving a ton of demand, and we tend to be agnostic there in terms of -- we're not a part of a digital asset. And per se, our job is really to enable financial solutions and financial technology. So we've done that in Money in Motion. Money at Work, in terms of tokenizing assets in the commercial loan and securitization space, we have a first pilot going on with a client to move close to about $0.5 billion on chain to create balance sheet capacity for them via some new technology. So around tokenizing assets, we're investing there and spending some time in terms of how to make that happen for our clients. Again, we're not looking to do something for us ourselves only. And then in terms of tokenized deposits, lots of activity there. We're spending a bunch of time there. And we're actively working through what our tokenized deposit solution needs to be in conjunction with various of our clients. We are hearing a lot of demand here, and we see -- we're looking to figure out how to enable that capability again. So our strategy in the digital space is really around enablement. You're not going to see us take a position in terms of issuing a stablecoin, FIS issuing a stablecoin. We're not going to compete with our banks in that way. We want to make sure that we're creating and providing the technology, whether we partner for it, buy it or build it to make sure that we have the capabilities we can deliver out to our financial services clients to enable it. We're not going to take a competitive position there. But lots going on, and we have a lot of folks that are keeping a close eye on it. Operator: And we do have time for 1 final question, and that will come from the line of Bryan Bergin with TD Cowen. Bryan Bergin: So cap markets looks like it's back on track here. Can you comment on what you've seen in the loan syndication area and then the latest in some of the nontraditional vertical demand? I'm curious if you're seeing the underlying backdrop in those areas as healthy as banking or somewhat more mixed? Stephanie Ferris: Yes. We are. We're pleased to see the capital markets loan syndication is back on track as we had expected in the second quarter. So that's good. So don't see significant trends negative there as we move into the end of the year. In terms of nontraditional demand, we're seeing the same thing that you're seeing. Private credit continues to be in high demand. The underlying markets, the nontraditional markets continue to be strong. Overall, we see strength in all of the non-traditionals. And as you know, it's been really important for us to make sure that we have our capabilities enabled there, whether you're traditional or nontraditional. So nothing new, Bryan, really to report there. Demand remains healthy. Bryan Bergin: Okay. Understood. And then in advance of the Issuer Solutions acquisition, can you just comment on how prospective banking client conversations are trending? I'm just curious if there's any updated views on the potential pipeline opportunities just as you bring broader credit into the fold. And particularly if you're seeing any incremental opportunities amid other challenges to move quickly on those opportunities post-close? Stephanie Ferris: Yes. We continue to remain very excited about the opportunities. I would say, we're, in particular, excited about enabling a couple of products at the time that we closed the transaction that can really excite the existing base in terms of cross-sell. But as you know, we know each other's clients really well. We think there's a lot of opportunity to cross-sell. And we're getting a lot of positive feedback about Issuer Solutions. They like the team there. They think it's a great product. It served these financial services very well. And as you know, this has been a product for us that we have not had. So people are pretty excited about what we can do with it. And just to share a little bit, if you think about the number of accounts that come on file, thinking about bringing it back to AI enablement and doing something with Agentic commerce, et cetera, it's pretty exciting the amount of accounts and transactions we'll be able to see going across credit debit in all of our cores. So we're really bullish about that opportunity as well. And then on their modernization program, excited about getting our hands on that and what that can deliver for clients. So all positive. Looking forward to getting them on board with us and getting them in the team and getting going, but feeling really good about it. Operator: That is all the time we have today for question and answers. This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Hello, everyone. Thank you for attending today's Hippo Third Quarter 2025 Earnings Call. My name is Ken, and I will be your moderator today. [Operator Instructions] I would now like to pass the conference over to our host, Charles Sebaski, Investor Relations of Hippo to begin. Please go ahead. Charles Sebaski: Thank you, operator. Good morning and thank you for joining Hippo's Third Quarter 2025 Earnings Call. Earlier today, Hippo issued an earnings release announcing its third quarter 2025 results and a financial results presentation, which will be webcast during today's call, both of which are available at investors.hippo.com. Leading today's discussion will be Hippo President and Chief Executive Officer, Rick McCathron; and Chief Financial Officer, Guy Zeltser. Following management's prepared remarks, we will open the call for questions. Before we begin, we'd like to remind you that our discussion will contain predictions, expectations, forward-looking statements and other information about our business that are based on management's current expectations as of the date of this presentation. Forward-looking statements include, but are not limited to, Hippo's expectations or predictions of financial and business performance and conditions and competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results and/or our forecast, including set forth in Hippo's Form 10-Q filed today. For more information, please refer to the risks, uncertainties and other factors discussed in Hippo's SEC filings, in particular, in the section entitled Risk Factors in our Form 10-Q. All cautionary statements are applicable to any forward-looking statements, and we make whenever they may appear. You should carefully consider the risks and uncertainties and other factors discussed in Hippo's SEC filings. Do not place undue reliance on forward-looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating, offering or otherwise revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During this conference call, we will also refer to non-GAAP financial measures such as adjusted net income and adjusted EBITDA. Our GAAP results and descriptions of our non-GAAP financial measures with full reconciliation to GAAP can be found in our third quarter 2025 earnings release, which has been furnished with the SEC and available on our website. And with that, I'd like to turn the call over to Rick McCathron, our President and CEO. Richard McCathron: Thank you, Chuck, and good morning, everyone. Thank you for joining us. This was a very strong quarter for Hippo. We maintained our momentum from last quarter and delivered another set of impressive results, achieving adjusted net income of $18 million while growing our gross written premium by 33% year-over-year. These results underscore the strength of our model and our continued ability to generate meaningful incremental improvements across the core drivers of our business. As we shared at our June Investor Day, Hippo is doubling down on what we do best, building a technology-native insurance platform that drives profitable growth across both our owned and partner MGAs. This quarter, we are introducing a new way of looking at our business, one that aligns our reporting with a new unified way of managing our business. We now manage the business and allocate resources as a single carrier platform that underwrites a broad spectrum of insurance products across homeowners, renters, commercial multi-peril and casualty lines. Our continued evolution aligns squarely with the 3 strategic pillars that guide our business with the goal of positioning Hippo for continued profitable growth over the long-term. First, strategic diversification. We continue to broaden our premium base across both personal and commercial lines, building a more balanced and resilient portfolio. Second, unlocking market growth. Our programs deliver a differentiated technology-driven customer experience that sets Hippo apart and expands our reach into attractive markets. Third, optimize risk management. We are leveraging our diversified portfolio and deep risk management capabilities to continuously optimize performance across market cycles. And this quarter, we continued to execute on all 3. Investors can now better see not only where we are going, but just as importantly, the risks we are retaining within each line of business. We continue to rebalance and diversify our portfolio, supported this quarter by 6 new programs who joined our platform, bringing our total up to 36. These programs further diversify our premium base across commercial and casualty lines, and our new reporting format should better showcase the progress we're making in this area. During the quarter, we also focused on integrating our new homes product and infrastructure with Baldwin's industry-leading Westwood Insurance agency, which will triple our access to annual new home closings, fueling both premium growth and additional geographic diversification. I'm pleased to share that we bound our first new policies with Westwood last month, and it's worth noting that there is typically a 3- to 6-month lag between quote and bind in this channel as quotes are frequently made preconstruction, so we expect volume from this partnership to accelerate in the coming months. While unlocking market growth opportunity remains central to our strategy, we do not pursue growth at the expense of underwriting discipline. This quarter, our underwriting results improved significantly, highlighting Hippo's potential as we continue to scale. For example, on a gross written premium basis, commercial multi-peril and casualty grew by $80 million, more than offsetting the slight decline in E&S homeowners. This reflects our underwriting discipline, maintaining pricing standards amid increased competition in homeowners, while optimizing our portfolio by increasing participation in lines that align more closely with our underwriting appetite. As part of our updated disclosures, we are now reporting both our net loss ratio and our combined ratio, both of which improved meaningfully year-over-year. Our net loss ratio improved by 25 percentage points year-over-year to 48% and our net combined ratio improved 28 percentage points year-over-year to 100%. While we benefited from lower cat loss activity this quarter, we also saw continued improvement in both our expense ratio and the attritional loss ratio. This progress reflects our disciplined approach to risk, including underwriting and rate actions, diversification as well as the benefit of scale and expense efficiency, all of which continue to strengthen our foundation for sustainable profitability. Collectively, these results and our focus on operational excellence continue to make Hippo an attractive home for world-class talent. I'm proud to highlight several important additions to our leadership team this quarter. Robin Gordon joined us as our Chief Data Officer, bringing deep expertise that will help us manage our portfolio holistically. Robin's appointment underscores Hippo's position as a technology-native platform, leveraging advanced data and analytics to sharpen risk management, expand and diversify our portfolio and deliver superior customer experience. We also welcomed 2 new members of our Board of Directors, Laura Hay and Susan Holliday, both accomplished leaders with distinguished careers in insurance. Having the right insurance talent across the organization is critical to any organization's success over the long-term, and these additions will further strengthen Hippo's capabilities, culture and resiliency. Q3 was yet another clear demonstration of the strength of our platform, the caliber of our team and the momentum we're carrying into the future. I'm immensely proud of all we've accomplished and look forward to building on this trajectory as we move towards 2026 and beyond. Now I'd like to turn the call over to our Chief Financial Officer, Guy Zeltser, to walk through the highlights of our third quarter 2025 financial results and our expectations for the remainder of 2025. Guy Zeltser: Thanks, Rick, and good morning, everyone. As Rick mentioned, this quarter, we updated our reporting structure to align with how we're now managing the business. We have transitioned to reporting consolidated P&L in a way that emphasizes gross and net premium by line of business. And as part of this change, we have eliminated segment reporting. We have also begun reporting consolidated expense and combined ratios and as discussed previously, changed our core profitability metric from adjusted EBITDA to adjusted net income. To help analysts and investors model our business, we have also prepared a supplemental financial package that provides the details of the past 6 quarters under the new reporting structure and made this available on our Investor Relations website. In the third quarter, we once again delivered top line premium growth while maintaining underwriting profitability and gained meaningful operating leverage as premium growth continued to outpace fixed expense growth. Q3 gross written premium grew 33% year-over-year to $311 million, up from $234 million in Q3 of last year. Growth in the third quarter was driven by strong performance across most of our lines of business, more than offsetting a small contraction in homeowners as we continue to prioritize underwriting discipline over premium growth in that line of business. This mix shift demonstrates early progress towards our strategic goal of diversifying the portfolio beyond historical concentration in homeowners. I'll highlight a few more details of this diversification. Casualty increased to 25% of gross written premium, up from 14% last year. Commercial multi-peril increased to 21% of gross written premium, up from 13% last year. And homeowners, which was 47% of gross written premium in Q3 of last year, decreased to 32% this quarter. On a net basis, renters increased to 22% of net written premium, up from 10% last year. Commercial multi-peril increased to 12% of net written premium, up from 3% last year, and homeowners, which was 86% of net written premium in Q3 of last year, decreased to 64% this quarter, fantastic progress and more to come. Speaking of net written premium, this key metric was up 30% year-over-year to $118 million, up from $91 million in Q3 of last year. Net written premium was 38% of gross written premium, a slight reduction from 39% in Q3 of last year. Our net written premium growth was driven by continued strength in our renters line of business, which increased by $18 million or 203% year-over-year. This growth was primarily the result of a higher premium retention, which rose from 16% a year ago to 45% this quarter, supported by the renters program's long track record and a loss ratio in the low 30s. In Q3, revenue grew 26% year-over-year to $121 million, up from $96 million in Q3 of last year. The increase was driven by net earned premium growth of 41% to $100 million, up from $71 million in Q3 of last year. The net earned premium growth more than offset the $5 million reduction in commissions following the sales of First Connect in the homebuilder distribution network over the last year. Q3 consolidated net loss ratio improved 25 percentage points year-over-year to 48%, driven by improvement in both cat and non-cat loss experience. The biggest driver of the year-over-year improvement was the very low level of cat losses during the quarter, which provided a 23 percentage point benefit compared to Q3 of last year. As discussed in previous quarters, we have largely completed our efforts to reduce the wind and had exposure in the portfolio that drove some of the historical volatility, but this quarter's results were even more favorable than our target levels. We also improved our non-cat loss ratio by 2 percentage points year-over-year to 48%, driven by continued rate improvements, refined policy terms and conditions, enhanced underwriting processes and stronger claims operations. Our accident year non-cat loss ratio, which excludes the impact of prior year development, improved by 5 percentage points year-over-year to 48.5%. Following the reporting change this quarter and our intention to manage exposure by line of business holistically, we do not intend to disclose program level performance going forward. However, during this transition period, we are providing an update on Hippo Home Insurance program, our owned MGA. The HHIP net loss ratio improved 29 percentage points year-over-year to 50% this quarter, driven by the same factors that supported improvement in the consolidated net loss ratio. Our Q3 consolidated net expense ratio improved by 3 percentage points year-over-year to 52%. As we scale, we expect the expense ratio to continue to improve, though not necessarily linearly. Together, improvements in our loss and expense ratios resulted in a consolidated combined ratio of 100%, a 28 percentage point improvement versus Q3 of last year. Q3 net income came in at $98 million or $3.77 per diluted share, a $107 million improvement year-over-year. This improvement was driven by $91 million net gain from the sale of the homebuilder distribution network, materially better underwriting performance and continued top-line growth. Q3 adjusted net income came in at $18 million or $0.70 per diluted share, a $19 million improvement year-over-year. The same factors that drove the net income improvement also contributed to the increase in adjusted net income with the exception of the net gain on the sale, which does not impact adjusted net income. Total Hippo shareholders' equity at the end of the quarter was $422 million or $16.64 per share, up 14% from $362 million or $14.56 per share at year-end 2024. The increase was driven primarily by the gain on sale of the homebuilder distribution network, which more than offset first quarter operating losses from the California wildfires and the repurchase of 514,000 shares for approximately $15 million. As we look ahead to the remainder of the year, we are raising our full year 2025 outlook based on this quarter's strong results. For gross written premium, we are raising the midpoint of our full year guidance by $15 million to a range of $1.09 billion to $1.11 billion. This reflects our expectation that growth in new lines of business will continue to more than offset the short-term intentional stabilization in homeowners, which we anticipate will begin to grow again in 2026. For revenue, we are raising full year guidance from a range of $460 million to $465 million to a range of $465 million to $468 million, in line with our premium guidance raise. For our consolidated net loss ratio, we are improving our full year guidance from a range of 67% to 69% to a range of 63% to 64%, driven by the positive loss trends reflected in our Q3 results. For net income, we are raising our full year guidance from a range of $35 million to $39 million to between $53 million and $57 million, driven by the stronger top-line growth, improved net loss ratio trends and continued expense discipline. And finally, for adjusted net income, we are raising guidance from our previous range of a loss of $0 million to $4 million to a new range of a profit of between $10 million and $14 million, also driven by stronger top-line growth, improved net loss ratio trends and continued expense discipline. And with that, operator, I'd now like to open the floor to questions. Operator: [Operator Instructions] We have our first question from Andrew Andersen from Jefferies. Andrew Andersen: Just looking at some of the new premium disclosures by line of business and recognizing it's off of a small base, but the casualty growth was pretty sizable. Can you just give us some color on kind of the growth there and what type of business you're writing within casualty? Richard McCathron: Andrew, thanks for the question. I'll have Guy talk a little bit about the numbers. But one thing to keep in mind, and we've emphasized this before, but I think it's a very important piece of the equation. When we grow premium in any of our fronted lines, we have the option to take risk or to not take risk. Generally speaking, until we have strong comfort and a historical reference point on the profitability of any particular program, we generally opt not to take risk. So even though we've grown that number fairly significantly as a premium line, we take very little risk initially until we gain that trust and confidence in the individual program. Guy, do you want to go over some of the make up? Guy Zeltser: Yes. So Andrew, this is Guy. In terms of what lines, then it's a combination of -- we have some cyber commercial general liability, which spends across small businesses, real estate investors, construction. As Rick mentioned, and what you can also see with the net written premium disclosure is that the net retention on that is relatively small. We like to start usually with the fully funded. And then as we get some traction, then we like to increase the risk retention over time, especially if we are happy with the underwriting performance. Andrew Andersen: And then on homeowners, I think you talked about some increased competition on E&S. Are you seeing the admitted market come back to take some share of homeowners or more competition within the E&S world? And can you maybe just remind us like what kind of rate need do you have left in that book? Or is it just kind of the competition is pricing too aggressively right now? Richard McCathron: Yes. I think there's 2 different components in your question, Andrew. So if I don't answer it, please ask it again. First, where we're seeing softening of the E&S market is predominantly price softening and customers that are going to the admitted market as the admitted market has started to rebound over the last few quarters, and we expect that rebound to continue. From a price adequacy perspective, we actually feel very good that the rate we need, we have in the portfolio, and we do not anticipate other than taking some occasional inflationary trend increases, we do not anticipate any repricing of the book or the portfolio in the foreseeable future. Operator: We have our next question from Thomas McJoynt from KBW. Unknown Analyst: This is Jean on for Tommy. My first question is on business mix. So as Hippo diversified away from homeowners, just curious on by 2028, what is the reasonable business mix that you expect? Richard McCathron: Yes. Thank you for the question. I think it's probably worth sharing a little bit of history on our homeowners line and where we're looking at it on a go-forward basis. So when we went through the portfolio correction over the last couple of years, we intentionally exited portions of the homeowners market that was non-new build, non-new construction. And as we've mentioned in the -- in our presentation that we've actually tripled the size of the funnel for new homes through our Westwood partnership. So the shrinking that you have seen in the homeowners line was an intentional effort to diversify into less cap-prone states and to make sure that we had correct underwriting pricing going forward. On the go-forward basis, we expect to increase the number of writings for new construction. We expect to continue to open our manufactured HHIP homeowners program. And we expect growth within our fronted partners that are also on our carrier platform because when you look at the homeowners numbers, it's a combination of what we do at HHIP and the partnerships that we have with our fronted programs. So we anticipate growth in the homeowners market over the next 3 years. Likewise, we anticipate growth in the entire portfolio over the next 3 years. So I refer back to our Investor Day 3-year pro forma and we anticipate over $2 billion in premium, which is nearly doubling our current premium basis. And I do think that $2 billion will be further diversified, but homeowners will grow in the absolute. Guy Zeltser: And this is Guy. The one thing I would add on what Rick said is that you can see that we made great progress on both gross and net diversification. You're still seeing the -- there's still some lag. I would say that as we get into 2028, you'll also see more diversification in the net written premium. And if we look closer to how the written premium -- the gross written premium pie looks like [ indiscernible ]. Unknown Analyst: Got it. Very helpful. My second question is on share repurchases. Just curious about kind of forward-looking buybacks intended to be like going forward as a use of capital. Richard McCathron: Yes. I think the use of capital -- and I'll reiterate what we said during Investor Day. From our perspective, the use of capital will be a combination of continuing to grow our portfolio and the necessary surplus to facilitate that more than $2 billion of premium in 3 years. We've also indicated that we will be opportunistic if there are opportunities for us to acquire entities that will further diversify the portfolio and accelerate that diversification, that is a potential use of additional funds. But we feel very good with our cash position. We feel very good with our with our ratios in terms of the car. And we think we're well positioned not only to grow to the $2-plus billion premium in 3 years, but also to take advantage of things that might help us accelerate that further. Operator: We currently do not have any questions. [Operator Instructions] We do not have any questions at the end. We will hand over to Rick McCathron, the CEO, for any further remarks. Thank you. Richard McCathron: Well, first of all, I'd like to thank all of you for joining us this morning. We're very excited about the quarter that we posted, and we believe that this is just the beginning. So thank you again. We look forward to speaking next quarter. Operator: Thank you. That concludes today's call. Thank you for your participation. You may now disconnect your lines.
Operator: Good morning, everyone. Thank you for joining Acacia Research's Third Quarter 2025 Earnings Conference Call. My name is Kelly, and I will be your conference facilitator for today. [Operator Instructions] I would like to remind you that this conference call is being recorded today and also is available through audio webcast on Acacia's website. [Operator Instructions] I would now like to turn the conference over to Mr. Brent Anderson of Gagnier Communications. Mr. Anderson, you may begin the conference. Brent Anderson: Thank you, Operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer; and Michael Zambito, Acacia's Chief Financial Officer. Before MJ and Mike begin their prepared remarks, please be reminded that certain information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts, and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives, and expectations for future operations and are based on current estimates and projections, future results, and trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors described in Acacia's most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. Earlier this morning, Acacia issued a press release disclosing its third-quarter 2025 financial results. The press release may be accessed on the company's website under the Press Releases section of the Investor Relations tab at acaciaresearch.com. The company also posted its Q3 2025 earnings presentation to its website, which includes detailed GAAP and non-GAAP financial disclosures and can be found under the Quarterly Results tab. On today's call, the team will discuss certain non-GAAP financial measures, including adjusted EBITDA for the company and each of its operating segments. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, can be found in the press release disclosing third quarter 2025 financial results available under the Press Releases section of the Investor Relations tab at aaciaresearch.com. I'll now turn the call over to Acacia's Chief Executive Officer, MJ McNulty. Martin McNulty: Thanks, Brent, and thank you to everyone for joining us for our third quarter 2025 earnings call. Acacia delivered good results in the third quarter with significant increases sequentially and year-over-year across many key metrics. Despite persistent macroeconomic and geopolitical headwinds, our team executed well against our disciplined and operationally focused strategy. While our businesses are not immune to these headwinds, we're using this as an opportunity to accelerate our value creation plans swiftly and decisively across our portfolio. These include the implementation of pricing strategies, cost savings initiatives, operational efficiencies, and plant consolidations to mitigate tariff pressures and to position our companies for continued growth. These ongoing initiatives and the team's consistent execution drove our strong quarterly results with Acacia delivering total revenue of $59.4 million, up 16% sequentially and up 155% compared to the prior year quarter, the year-over-year comparison primarily driven by our third full quarter of Deflecto. The company's total company adjusted EBITDA was $8 million, and Operated segment adjusted EBITDA was $12.6 million, while free cash flow for the quarter was $7.7 million, with the net result being a GAAP loss of $0.03 a share or a loss of $0.01 per share on an adjusted basis. Book value per share at the end of the third quarter was $5.98, and book value per share to Acacia, excluding our noncontrolling interests, was $5.57, both essentially flat versus last quarter. Acacia's performance in context, in spite of the macroeconomic and geopolitical headwinds, the businesses we own are still delivering attractive return characteristics. As you've heard me say before, Acacia is focused on identifying and acquiring underloved, under-managed, and undervalued businesses where we believe we can leverage our significant capital base and experienced leadership teams to streamline operations, materially improve performance, and drive long-term growth. As a result of our actions on a year-to-date annualized basis, Benchmark is generating a roughly high teens free cash flow yield. Deflecto is generating a high single-digit free cash flow yield prior to the impact of our in-flight operational improvement initiatives, and Printronix is generating a high teens free cash flow yield. With strong and improving cash yields at each of our operating companies and disciplined cost control at the parent, we believe we're creating significant equity value, which is not yet reflected in our share price. As we approach the end of the year, we remain focused on driving revenue, EBITDA, and free cash flow growth at each of our operating businesses, while at the same time, growing our extensive pipeline of actionable M&A opportunities. With approximately $332 million in total cash, equity securities, and loans receivable at September 30, our strong balance sheet positions us well to pursue accretive organic and inorganic growth opportunities across our businesses to create differentiated value for our shareholders. I'd now like to discuss our operating segments. Within our energy operations, we continue to view Benchmark as an attractive platform to allocate capital within the oil and gas industry. As you may recall, we acquired the business in 2 steps. First, through our partnership in November 2023 with McArron and the company on a small package of wells; and second, through the acquisition, the Revolution assets in Q2 of 2024. At that time, we underwrote the business based on acquiring existing flowing production at a high teens discount rate, and we continue to evaluate comparable opportunities within our existing geographies. Since our acquisition of Revolution, the Western Anadarko Basin has seen a meaningful increase in investor interest. As a result of the renewed interest in the basin, we've seen high-quality, well-capitalized operators enter the basin with rig counts increasing despite declining rig count activity in many other plays. This has pushed the value of high-quality producing assets in the basin back towards historical evaluation metrics. While this is positive for the value of our business, it does mean that we need to be more cautious on valuations for additional producing assets we may want to acquire, and we have focused those efforts on asset packages where we can maximize strategic overlap with our existing fields. To that end, as you may remember, in addition to the large producing acreage we acquired as part of the Revolution acquisition, the deal came with a significant undeveloped acreage position in an emerging play called the Cherokee, which you've heard us discuss in the past. This year, we've continued to strategically develop this position within the Cherokee, most recently highlighted by 2 small but very strategic acreage acquisitions. As we continue to build our undeveloped acreage position, we're actively considering additional monetization opportunities as well as potential capital partnerships to finance a targeted drilling program for our acreage in this play. During the quarter, Benchmark continued to perform well with stable operated production and strong cash flow. While oil and natural gas prices remain at low levels, Benchmark's hedging strategy continues to perform as expected. As a reminder, benchmark hedges over 70% of its operated oil and gas production with hedges currently in place through the beginning of 2028, protecting a significant amount of our cash flow from downside price risk. Further, our diversified production profile provides us with significant optionality as we're able to prioritize projects that are more gas and NGL focused in a weaker oil price environment. As of the third quarter, approximately 52% of Benchmark's LTM commodity revenue and 78% of LTM production on a BOE basis was driven by gas and natural gas liquids, which have remained much more resilient from a pricing perspective. Looking ahead, we see a variety of ways to create significant value in expanding our oil and gas platform, and we're fortunate that our operations in the Anadarko Basin provide us with access to some of the highest quality reserves and management team in the country. We remain excited about the value generation opportunities at Benchmark, and I look forward to keeping you updated as we continue to scale this business. In our Manufacturing segment, Deflecto delivered another quarter of sequential revenue growth and improved adjusted EBITDA versus last quarter. We're continuing to progress our operational initiatives at Deflecto, including strategic price increases across each business unit, reshoring and consolidation of certain manufacturing operations, overhead and G&A cost reductions, and improving go-to-market motions, all of which are aimed at creating a more streamlined business positioned for future growth. While the current tariff and macroeconomic environment has impacted several of Deflecto's end markets, I'm encouraged by the strong progress and significant improvements we have made across the business. To address some of the trends we're seeing across Deflecto's business units, I'll start with the Class 8 truck market, which continued to experience demand headwinds throughout the third quarter. Recent industry data indicates that Class 8 net orders for September represented the weakest September since 2019. We expect the Class 8 market to remain under pressure in the near term. Further tariff and macro clarity, along with lower interest rates and gradual fleet capacity normalization into 2026, should support a rebound in activity. Moreover, Deflecto remains focused on selling essential nondiscretionary products such as mud flaps and emergency warning triangles that are mandated by key regulatory authorities, which puts the business in a strong position when the cycle turns. Within the office products business, tariff and global trade uncertainty has caused many customers to pause or delay purchasing decisions. While we expect these headwinds to persist in the coming quarters, our operational initiatives are helping to mitigate these impacts and position the business for future growth as macroeconomic conditions normalize. As a reminder, the Deflecto office products business sells basic necessities for everyday use, such as sign holders, document organizers, and flomats for the home and commercial office markets. Within the Air Distribution business, our sales have remained resilient in the face of a soft construction market, largely a result of interest rate pressures, which we believe will subside in the coming quarters. We continue to work to offset tariff cost pressures in this segment through product line relocations, pricing actions, and working with our distribution partners to optimize delivery routes. Within this business unit, Deflecto's core product offerings include dryer vents, air ducts, and air vent deflectors, all of which are essential in nature. Very excited about Deflecto's long-term growth potential, supported by its substantial market share, diversified customer base, and industry-leading products. Turning now to our Industrial segment. Printronix continues to deliver strong performance, and we're seeing positive momentum across the business. Our operational improvements over the last 12 to 18 months have resulted in an attractive mix of hardware and higher-margin consumable revenue streams that generate consistent free cash flow. The team continues to use our advantageous channel position and market share to add new product lines, which we expect to provide incremental contributions over the coming quarters. Now to our Intellectual Property segment. We recorded $7.4 million in total paid-up revenue from multiple settlements and licenses during the third quarter, which resulted in total revenue and adjusted EBITDA of $7.8 million and $3 million for the quarter, respectively, a significant increase sequentially and year-over-year. In the year-to-date period through September, our IP business generated $78 million in revenue and $44.2 million in adjusted EBITDA versus $19.4 million in revenue and $6.3 million in adjusted EBITDA in the prior year period. As a reminder, the quarterly fluctuations within the IP business are largely the result of the episodic nature of the business and timing of future settlements. With that, I'll pass it over to Mike to discuss the details of our financial results. Michael Zambito: Thank you, MJ, and hello, everyone. Acacia recorded total revenue of $59.4 million during the third quarter. Our energy operations generated $14.2 million in revenue for the year -- revenue for the quarter compared to $15.8 million in the same quarter last year, reflecting a softer oil price environment year-over-year. Manufacturing operations generated $30.8 million in revenue for the quarter, representing a third consecutive sequential increase compared to $29 million in the second quarter. Given we acquired Deflecto in October of last year, there is no comparable prior year period. Our industrial operations generated $6.7 million in revenue during the quarter compared to $7 million in the same quarter last year. Our intellectual property operations generated $7.8 million in licensing and other revenue during the quarter compared to $0.5 million in the same quarter last year. Total consolidated G&A expenses were $16 million during the third quarter compared to $11.2 million in the same quarter of last year. The increase was primarily driven by the addition of Deflecto as part of the company's new manufacturing operations. Deflecto G&A expense for the third quarter of 2025 was $4.6 million, which declined from $5.1 million in the prior quarter. Of the $4.6 million of Deflecto G&A expenses, approximately $1.1 million was related to depreciation of fixed assets and amortization of intangibles. Our energy operations G&A expense was $1.2 million for the third quarter of 2025, compared to $1 million for the prior year quarter in 2024. G&A at the parent level increased by $0.5 million year-over-year from $6.1 million to $6.6 million in the quarter ended September 30, 2025. Parent G&A on an adjusted basis decreased by $0.6 million year-over-year from $5.2 million to $4.6 million in the quarter ended September 30, 2025. The company reported a third-quarter GAAP operating loss of $6.4 million compared to a GAAP operating loss of $10.3 million in the same quarter last year. This was primarily due to the inclusion of Deflecto in 2025 with no comparable operating income in 2024, along with a lower GAAP operating loss in the IP business in 2025 compared to the prior year. Energy operations contributed $1.1 million in GAAP operating income during the quarter, which included $3.8 million in noncash depreciation, depletion, and amortization expense, and does not reflect the realized hedge gain of $1.2 million during the quarter. Adjusted EBITDA for our energy operations was $6.1 million in the quarter and $21 million year-to-date. Free cash flow for our energy operations was $4.3 million in the quarter and $11.9 million year-to-date. Manufacturing operations contributed $1.1 million in GAAP operating income during the quarter, which included $1.1 million in noncash depreciation and amortization expense and $0.3 million in nonrecurring transaction-related expenses and severance costs as part of our operational initiatives at Deflecto. Adjusted EBITDA for our manufacturing operations was $2.6 million in the quarter and $6.3 million year-to-date. Free cash flow for our manufacturing operations was $2 million in the quarter and $3.7 million year-to-date. Industrial operations contributed $0.3 million in GAAP operating income during the quarter, which included $0.5 million in noncash depreciation and amortization expense. Adjusted EBITDA for our industrial operations was $0.8 million for the quarter and $2.5 million year-to-date. Free cash flow for our industrial operations was $0.7 million in the quarter and $4.1 million year-to-date. GAAP net loss attributable to Acacia Research Corporation in the third quarter was $2.7 million or $0.03 loss per share, compared to a net loss attributable to Acacia of $14 million or a $0.14 loss per share in the prior year period. This decline in net loss was primarily due to the significant year-over-year increase in revenue and EBITDA, in addition to gains from our public equity portfolio and lapping the legacy legal fees from the prior year period. Included in GAAP net loss for the third quarter was $0.9 million in unrealized gains related to changes in the fair value of equity securities at September 30, 2025. Adjusted net loss attributable to Acacia in the third quarter of 2025 was $1.1 million, or a $0.01 loss per share. Further details on these adjustments can be found in our press release. Now turning to the balance sheet. Cash and cash equivalents, equity securities measured at fair value and loans receivable totaled $332.4 million at September 30, 2025, compared to $297 million at December 31, 2024. The parent company's total indebtedness was 0 at September 30, 2025. On a consolidated basis, Acacia's total indebtedness as of September 30, 2025, was $94 million, consisting of $58.5 million and $35.5 million in nonrecourse debt at Benchmark and Deflecto, respectively. Since closing the acquisition of the Revolution assets in April 2024, Benchmark has paid down approximately $24 million in total debt, underscoring the strong free cash flow generation of the business. Additionally, since acquiring Deflecto in October 2024, the company has paid down approximately $13 million in total debt. These capital allocation decisions have significantly reduced our consolidated debt and interest expense, providing further operational flexibility. More information on Acacia's third quarter results, please see our press release issued this morning and our quarterly report on Form 10-Q, which we will file with the SEC later this week. I'll now turn the call back over to MJ. Martin McNulty: Thanks, Mike. Just as a reminder, we've got a Q3 earnings presentation and an investor presentation on the website that goes through the reconciliations that Mike just talked through, and I think is helpful disclosure. But just in conclusion here, as you've heard, despite ongoing tariff headwinds, Acacia delivered solid financial and operating results in the third quarter and for the first 9 months of the year. Looking ahead, our near-term focus remains on leveraging our diverse portfolio and developing targeted pricing strategies and cost savings to mitigate the ongoing impact of tariffs and related uncertainties and drive value creation for our shareholders. While our approach remains measured and thoughtful, we're not letting volatility in the market stand in the way of building our pipeline and identifying opportunities for organic and inorganic growth across our businesses. The inherent value of our assets is strong, and I'm confident that our value-oriented strategy and experienced management team will enable us to continue to build our momentum across our business through year-end and into next year as we continue to generate long-term value for our shareholders. With that, I'll turn it back over to you, Kelly. Operator: [Operator Instructions] Your first question is coming from Anthony Stoss with Craig-Hallum. Anthony Stoss: I wanted to focus on -- Deflecto was a bit better than what we were modeling, even in a tougher environment. MJ, when you look at a so-called normal environment down the road, what percent of free cash flow do you think you'll use to pay down debt? And where do you think those EBITDA margins can go to? Martin McNulty: I mean in terms of the amount of free cash flow that we use to pay down debt, we paid off some debt this quarter as a capital allocation decision, really to bring the leverage down, create more -- even more flexibility as we look at a handful of initiatives, and also to reduce the interest drag. We like to have leverage in our underlying businesses; just given our cash balance, it's not entirely necessary, but there is some strategic benefit to having credit facilities in place there. And so we decided to bring that down a little bit. In terms of EBITDA target percentages, I would think about it in like kind of a low to mid-teens type margin. We are going through a lot of operating initiatives in all 3 of those selective businesses that should help to drive that. But look, we're in a pretty tough part of the cycle in the safety business. It's still performing. But with the changes that are being made there as that cycle normalizes and kind of runs back up, the margins there should be really attractive. Our air distribution business is doing well. And then the office products business, kind of the same type of target. Anthony Stoss: And then on the benchmark side of the business, especially on the Cherokee properties, can you maybe update everybody where you stand on that? How -- I guess, how many oil heads have been tapped? And what are your plans going forward over the next year or so? Martin McNulty: Yes. I mean -- so if we look at the base business, it's performing -- our operated production is performing how we want it to perform. Commodity prices could be stronger, but we've got the hedges in place, which is exactly why we did that. So we are protected to a large extent from the hedges. In terms of the Cherokee, what I can say is that we have not yet drilled any wells. We have spent a considerable amount of time optimizing our acreage position through, as I mentioned earlier, 2 small but really strategic acquisitions and some land swaps and non-op working interest swaps that get us to great blocks that we think are very attractive to monetize. Operator: Your next question is coming from Brett Reiss with Janney Montgomery Scott. Brett Reiss: Very impressive, the increase in the free cash flow on Deflecto in a challenging environment. But just another free cash flow question. In Printronix, the first quarter, you had $2.5 million of free cash flow. Is that a seasonality thing? Or that seemed kind of an aberration? Martin McNulty: Yes, it is a seasonality thing. Brett Reiss: I have a question. The valuation of the AMO Pharma, when you poke around their website, they have a Phase III drug in trial, Phase II. Can you refresh my recollection? What do we -- what is our carrying value on that? And when you look at the total addressable markets that AMO Pharma talks about on their website, it just seems that could, in the future, be a possible positive potential surprise for us? Martin McNulty: Yes. I mean, so we don't disclose the carrying value of it. We do think that -- it's attractive. The company has -- just as a reminder, this is a drug for myotonic dystrophy. It's actually a pretty novel drug. There's a reasonable amount of interest in this space right now. There's a couple of research reports out there and some commentary on 2 companies, Dyne and Avidity, that target a similar end market. Those are probably worth taking a look at, Brett. We continue to work with the company. They're making good progress with the regulatory authorities in terms of working towards an approval. We inherited these businesses, and so we continue to work them. But these are early-stage biotech companies. And so we're pretty -- we're cautiously optimistic, I would say. Brett Reiss: TP Link systems seems to be in some sort of embroglio with the United States government. Does anything that's going on between them and the U.S. impact the value of our patent portfolio in that area? And also, does that change the timing on collecting our judgment we have against them? Martin McNulty: Yes. So that's a great question. Obviously, there's a lot of geopolitical tension around -- not that in particular, but around the nations. I would say one thing, the U.S. appears to be more IP-friendly in the new administration than it was previously. So I think that's a positive. We are -- we have been awarded the judgment in the TPLink case. The next step there is that the Federal Circuit wants to hear some oral arguments because TPLink is trying to exercise all of their legal rights here. And so we still feel really good about it. I think the process is a little bit longer than we had hoped, but it doesn't change our views on the prospective outcome here. Brett Reiss: Last one for me. There were some pretty high-profile bankruptcies recently in the private equity space. Do you think these are canaries in the coal mine with more to follow, or these are one-offs? And I ask that because if there are canaries in the coal mine, you may hold off on buying anything in the private equity space, or if they're one-offs, will you be more aggressive in pursuing acquisition opportunities in private equity? Martin McNulty: Yes. I mean I think you're talking about First Brands and Tricolor, which they are certainly one-offs for different reasons. I think it's drawing more attention to the private credit space than it is in the private equity space. We are seeing different developments in the private equity space, for example, and a handful of other industries. But this is why we keep our leverage low at Acacia. We come from private equity backgrounds. We've all put significant amounts of leverage on businesses. And this type of an environment is exactly why we are very cautious and judicious with leverage. We are seeing an increasing number of private equity businesses being marketed because they have high levels of debt. We are starting to see multiples come down relative to the highly elevated multiples that sponsors were buying assets at 4 in, call it, 2021, 2022. So I think the price discovery is getting better. We still have a lot -- there's still a lot of uncertainty. Interest rates are still high for guys that are putting 5, 6, 7 turns of leverage on businesses. And it's still unclear for a lot of these companies what the current administration and some of the trade policies mean for those businesses. So we are being very cautious about what we evaluate and how we evaluate it. We're seeing a lot of deal flow, and we've kind of dug in on a handful of deals that maybe we're not fully there on price discovery, but where our expectations and sellers' expectations were 4 to 5 turns a year, 18 months ago, maybe we're within a turn, 1.5 turns, maybe 2. So it does feel like it's getting to a more normalized environment. Operator: Your next question is coming from Todd Selter with 88 Management LLC. Todd Selter: Well done in Q3. Leveraging off Brett's question, in terms of the IP portfolio, we noticed a settlement after Q3 on Vantiva. I think it happened somewhere in Q2 in the second week of October. Would that number be reflected in our Q3 patent $7 million to $8 million top line or no? Martin McNulty: Yes, that's part of that $7.4 million settlement, Todd, that I mentioned earlier. Todd Selter: I thought it might be. Great. So Brett did expound on a couple of thoughts that I had. And what I really want to discuss with you, gentlemen, now is really proud of the operating job everyone is doing, but so disappointed and disturbed at the lack of any reach out from the IR team to try to generate some interest in what we all consider a very attractive undervalued equity. Why has there been such little initiative put forward in that area? And what do you guys plan on doing moving forward to try to raise Acacia's profile amongst the appropriate buy-side vehicles out there that might be involved or interested in investing in microcap value? Martin McNulty: Yes. Look, Todd, it's a great question, and we were actually very deliberate in the way that we approached this. When -- roll back a year ago, we didn't want to put our hands up in the air and say, "Hey, look at us, look at us. Here's what we're going to do." And so we held off on IR, admittedly, so that we didn't look like Carnival Barkers. Subsequent to now Benchmark with some quarters under our belt, Deflecto with some quarters under our belt, Printronix having been turned around, showing you all that we can manage the parent company G&A to a level that allows us, with each incremental acquisition, to really scale that and scale the earnings over the parent company G&A, we have started reaching out. So we're having a lot of conversations with new investors. We presented at a couple of conferences. We're continuing to get scheduled on the conference circuit to go tell the story and meet people. And we found that having conversations in person, even more so than over Zoom, really engages people. And like you, people are interested in the story. It just takes a little bit of time with them in person to help them understand it. So we've been allocating a lot of time to that initiative, not just through conferences, but through Todd, folks that you know that you think would be interested in the story, other shareholders. And so we do talk to existing shareholders a lot. We actually spent a lot of time talking about ideas with them for new acquisition opportunities. And we've gone on a pretty good outreach journey here to tell the story to new shareholders. Todd Selter: That's encouraging. Now how about on the sell side? How far are we away from maybe onboarding 1 or 2 other analysts from other firms to try to get a better sense of who we are, so they could also communicate our story and gain some more momentum in this direction? Martin McNulty: Yes. We're -- we've talked to several research groups about the story. What we don't want to do is force it because we want to make sure that it's a natural fit. People are excited to pick us up. But there are -- there are a handful of folks that we're talking to about that. As you know, with research, there's -- our stock has some volume in it, which is great. I think our volume is bigger on an average daily basis than it was certainly a year or 18 months ago. But those guys want to get paid just like anybody else. And so we're working through that. Michael Zambito: Yes. The ace in the hole that we have, MJ is the Starboard relationship since they own 60-plus percent. You would think that some of these sell-side firms would want to maybe engender some goodwill, and the Acacia Starboard Association should serve our best interest in that area. Martin McNulty: We're arm and arm with our brothers over at Starboard on that point. Todd Selter: MJ, you guys are doing a great job on the operating side, but as shareholders, we're suffering. Martin McNulty: We're working on that for you, Todd. Operator: Your next question is coming from Shelley Anthony with Formidable Asset Management. Shelley Anthony: I'm filling in for Adam this morning. So we actually have a somewhat tangential question about your stake in AMO Pharma. The company AMO has recently announced several positive advancements and results in the last few months. And in light of that, can you tell me if that has changed your estimated valuation in any way or prompted any interest from outside buyers? Martin McNulty: That's a good question. Great. So we've not changed our valuation as a result of the news. I agree with you that AMO has been active publicly on helping people understand the positive developments in the company. We have not changed our valuation. As I mentioned earlier, I think we're cautiously optimistic. We've been around the biotech space, and we've seen things work, and we've seen things not work. I think AMO has a really interesting and necessary drug for a patient group that doesn't have a lot of other options, and both safety and efficacy of their product are great. There -- as I mentioned earlier, there's some news out there around Dyne and Avidity, which have similar solutions. And so that makes us cautiously optimistic as well. But all in all, we share the excitement, but we're not marking our asset up as a result of that excitement. Shelley Anthony: And so can you tell me if there's been any interest from potential outside buyers? Martin McNulty: No, I can't. Operator: There are no questions in the queue at this time. I would now like to turn the floor back over to MJ McNulty for closing remarks. Martin McNulty: Thanks, Kelly. Thanks again to everyone for joining us this morning. We look forward to talking to everyone after Q4. Operator: Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, everyone, and welcome to the Third Quarter 2025 Parsons Corporation Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Dave Spille. Please proceed. David Spille: Thank you, Carmen. Good morning, and thank you for joining us today to discuss our third quarter 2025 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our third quarter financial results as well as a review of our 2025 guidance. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year end December 31, 2024, and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call, and we remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. And now I'll turn the call over to Carey. Carey Smith: Thank you, Dave. Good morning. Welcome to Parsons Third Quarter 2025 Earnings Call. This quarter, we continued to deliver strong performance in a dynamic global environment as an advanced and differentiated technology leader that's aligned to the administration's and global priorities in national security and infrastructure, our portfolio is strategically positioned to continue to capitalize on long-term macro environment trends. In addition, we operate with speed in delivering operationally relevant solutions at a time where our customers need companies that can deliver rapid results. During the quarter, we continued to achieve industry-leading organic revenue growth, excluding our confidential contract, significantly expanded our adjusted EBITDA margins, exceeded our cash flow expectations and won strategic contracts. In addition, our win rates and hiring retention remained strong and we completed another accretive acquisition after the quarter ended in the fast-growing and profitable water market that strengthens our capabilities and enhances our Florida presence. Turning to our third quarter financial results. Our adjusted EBITDA, adjusted EBITDA margin, and cash flow results exceeded our expectations, and our total and organic revenue growth rates, excluding the impact from our confidential contract remained strong at 14% and 9%, respectively. This includes 18% total revenue growth in critical infrastructure and 9% in Federal Solutions. This strong growth in both segments highlights the strength and synergies of our diversified portfolio, our strong hiring and retention, the successful integration of our acquisitions and our alignment to priority spending areas. During the third quarter, we also delivered 60 basis points of margin expansion to 9.8%, $163 million of cash flow from operations and reported a book-to-bill ratio of 1.0x for the quarter and trailing 12 months. This continues our streak of having a quarterly trailing 12-month book-to-bill ratio of 1.0x or better since our 2019 IPO. Finally, we are reiterating our 2025 adjusted EBITDA and cash flow guidance ranges at the midpoint and we're modifying our revenue outlook to reflect delays in sole-source task order awards products and material procurements. In addition to delivering solid financial results, we won 4 contracts over $100 million in the third quarter with 2 representing new work. Significant third quarter contract wins included a new large 10-year single-award task order contract as an exclusive subcontractor for design and modernization on the Holston Army ammunition plant government-owned contractor operated contract. We booked $50 million on this contract during the quarter. This win continues our success of winning industrial-based upgrades as per the $18 billion modernization plan and is our fourth contract win supporting the Army customer that's valued at more than $100 million. A 6-year $133 million authorization to continue serving as the lead designer for the Georgia State Route 400 Express Lanes. This project will add new Express Lanes and use state of-the-art traffic, incident management and digital twin systems. As a Tier 1 focused state for persons, this expands our Georgia Department of Transportation presence with the state of Georgia expected to spend more than $20 billion over the next 5 years. We were awarded 2 new multiyear single-award defense and security contracts by Middle East government customers. One contract valued at more than $100 million represents new work to lead the design review and project and construction management of national security infrastructure. While the second contract is to design border security infrastructure and facilities. These contracts reflect the strength of Parsons synergistic portfolio and our ability to bring comprehensive national security, critical infrastructure protection and program management capabilities to our Middle East and critical infrastructure customers. And during this quarter, we booked $107 million for these 2 contracts, MPA delivery partners, a joint venture of 3 companies, including Parsons is the managing partner was awarded a $665 million, 4.5-year contract extension by the Gateway Development Commission to continue managing the successful delivery of the Hudson Tunnel project. This project will build a new two-tube rail tunnel under the Hudson River and rehabilitate the existing 115-year tunnel as well as 9 miles of new passenger rail track between New York and New Jersey. We were awarded an $88 million task order under the Air Base Air Defense contract. Parsons will provide integration, upgrades procurement and training across the Europe and Africa areas of responsibility for the United States Air Force. This contract includes a 1-year base period and two 1-year option periods, and we booked $82 million during the quarter. For the first 9 months of 2025, we've been awarded over $190 million in task orders on this IDIQ vehicle. Air Based Air Defense is increasingly important around the globe to safeguard military operations and Parsons is an industry leader in this domain with innovative solutions designed to rapidly detect, alert, deny or defeat threats, ranging from low-cost unmanned vehicles to sophisticated hypersonic weapons. Parsons was also awarded 3 PFAS contracts with a collective value of $23 million. These wins span both our Federal Solutions and Critical Infrastructure businesses and expand our portfolio in the highly strategic and rapidly growing PFAS market. Year-to-date, we've won nearly $70 million in PFAS contract awards, and the PFAS market represents a $40 billion addressable market for Parsons. These wins represent revenue synergies with our TRS Group acquisition. In addition to these large and important wins, we continued our successful track record of acquiring strategic companies in high-growth markets that strengthen our portfolio and have revenue growth and adjusted EBITDA margins of 10% or more. After the third quarter ended, we acquired Applied Sciences Consulting, a Florida-based engineering firm that specializes in water and storm water solutions for cities, counties and water management districts across the state. Water is our fastest-growing and most profitable market within our North America infrastructure business unit. This acquisition positions us to capitalize on Florida's significant investments in water infrastructure, resiliency and quality. We continue to deploy capital across both business segments to take advantage of the significant tailwinds in our markets and 4 of our last 6 acquisitions have been in our Critical Infrastructure segment. During the quarter, the company was recognized as one of the world's best companies by TIME and one of the best led companies by Glassdoor, we're particularly pleased with the Glassdoor rating since we were selected by our employees. Parsons also received the prestigious Diamond Award in the Structural Systems category from ACEC New York for our work on the Brooklyn Bridge Rehabilitation Project. Looking forward, we are excited about our growth opportunities. Our relentless focus on strong program execution and our delivery reputation provides customers with the confidence they need to choose Parsons as their contractor of choice for their large, most complex and mission-critical challenges. In addition, our unique and synergistic critical infrastructure and Federal Solutions portfolio which consists of 6 growing, profitable and enduring end markets is expected to drive mid-single digit or better organic revenue growth, excluding the confidential contract for the foreseeable future. This growth outlook excludes the FAA brand-new air traffic control system contract. Regarding this opportunity, we believe a decision is imminent, and we felt we offered a compelling bid given we're the #1 program manager in the world offered a transformational approach strategically partnered with IBM, have strong past performance and assembled a team that is vendor-agnostic and understands the FAA. In Critical Infrastructure, we continue to win some of the largest and highest priority projects in our geographies and are expanding into high-value adjacent markets by leveraging our entire portfolio with long-term tailwinds and 20 consecutive quarters of greater than 1.0x book-to-bill. We expect continued growth into the next decade. In the United States, our focus on hard infrastructure such as roads and highways, bridges, airports and rail and transit is aligned to spending priorities. The infrastructure investment and Jobs Act provided states with the confidence they needed to move forward with major infrastructure projects and discussions on the next surface transportation bill are underway. This bill is expected to provide additional budget for increased U.S. infrastructure spending. Our Middle East infrastructure business also continues to excel. Our more than 60-year history in the region, outstanding reputation and Saudi joint venture has positioned us as a trusted partner to our customers and is a competitive advantage in the region. We see significant demand for our engineering and program management solutions across the region as governments implement their strategic visions and prepare for upcoming world events. In addition, our expansion into the defense, security, hospitality and industrial manufacturing sectors has contributed to our recent growth as these markets are receiving major investments. In Federal Solutions, Parsons has a strong position and differentiated capabilities in aviation modernization, integrated air and missile defense, space superiority, counter unmanned air systems, cyber operations, electronic warfare, industrial-based modernization and border security with a strong alignment, the administration's priorities and budget Parsons is well positioned to immediately capitalize on opportunities in these areas. In summary, I am very pleased with our strong execution. We continue to deliver industry-leading growth with 14% total revenue growth and 9% organic growth, excluding our confidential contract. We expanded margins by 60 basis points, exceeded our cash flow expectations, won defense contracts in the administration's priority areas, and our Critical Infrastructure segment continues to hit on all cylinders by delivering double-digit organic revenue growth and adjusted EBITDA margins. Our win rates and hiring and retention remains strong, and we continue to leverage our balance sheet for strategic accretive acquisitions. We also have a total backlog of nearly $9 billion, of which 72% is funded, approximately $11 billion of contract wins that we have not yet booked, a $58 billion pipeline that includes more than 115 opportunities of contracts worth $100 million or more and 15 opportunities worth $500 million or more. We believe our healthy forward-looking metrics, strong operating teams and industry tailwinds positions us to outpace industry growth rates and continue to deliver significant long-term shareholder value. With that, I'll turn the call over to Matt to provide more details on our third quarter financial results. Matt? Matt Ofilos: Thank you, Carey. Q3 financials were highlighted by strong revenue growth, adjusted EBITDA margins and free cash flow ahead of expectations. In addition, we continue to leverage our balance sheet and completed our third accretive acquisition of the year in the strategic water market. Turning to the details of our third quarter results. Excluding our confidential contract, total revenue grew by 14% and 9% on an organic basis. These increases were driven by double-digit growth in our critical infrastructure protection, transportation and urban development markets. Total revenue, including the confidential contract decreased 10% from the prior year period and was down 14% on an organic basis. SG&A expenses for the third quarter increased 6% from the prior year period. This increase was primarily driven by the inclusion of recent acquisitions and focused investments in bid and proposal activity and critical hires in support of our large strategic pursuits and pipeline aligned to the administration's priorities. Adjusted EBITDA margin expanded 60 basis points to 9.8%, driven by improved program performance and accretive acquisitions. Adjusted EBITDA of $158 million decreased 5% from the prior year period, driven by the revenue decline on our confidential contract. I'll turn now to our operating segments, starting first with Critical Infrastructure, where third quarter revenue increased by $129 million or 18% from the third quarter of 2024. This increase was driven by organic growth of 13% and inorganic revenue contributions from our BCC and TRS acquisitions. Organic growth was driven primarily by the ramp-up of recent contract wins and growth on existing contracts in both North America and the Middle East. Critical Infrastructure adjusted EBITDA increased 83% from the third quarter of 2024, and adjusted EBITDA margin increased 360 basis points to 10.3%. These increases were driven primarily by improved program performance, the ramp up of recent awards and our accretive BCC acquisition. Moving to our Federal Solutions segment, where third quarter revenue increased 9% and 5% on an organic basis, excluding our confidential contract. These increases were driven by growth in our critical infrastructure protection, transportation and space and missile defense markets. Total Federal Solutions revenue, including our confidential contract, decreased 29% from the prior year period and 31% on an organic basis. Federal Solutions adjusted EBITDA decreased 40% from the third quarter of 2024 with an adjusted EBITDA margin of 9.2%. The adjusted EBITDA was primarily impacted by lower volume on the fixed-price confidential contract. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q3 2025 was 62 days, an 11-day increase from the prior year period but still favorable to historical averages. This increase was primarily driven by lower volume on our confidential contract and the timing of collections in the Middle East. During the third quarter of 2025, we generated $163 million of operating cash flow, which was better than expected and drove free cash flow conversion of 135% for the quarter. Capital expenditures totaled $13 million in the third quarter, relatively consistent with the prior year period. For fiscal year 2025, CapEx is expected to remain in line with our planned spend of approximately 1% of annual revenue. Our balance sheet remains strong, and we ended the third quarter with a net debt leverage ratio of 1.4x. During the quarter, the remaining $85 million balance on the 2025 convertible senior notes was settled with cash on hand. Additionally, we repurchased approximately 323,000 shares in Q3 at an average price of $77.36 for an aggregate purchase price of $25 million. On a year-to-date basis, we have repurchased approximately 966,000 shares at an average price of $67.28 for an aggregate purchase price of $65 million. Turning next to bookings. For the third quarter, we reported contract awards of $1.6 billion, representing a book-to-bill ratio of 1.0x on an enterprise basis. which continued our streak with a trailing 12-month book-to-bill of 1.0x or greater in every quarter since our IPO. In Critical Infrastructure, we achieved a book-to-bill ratio of 1.1x which is the 20th consecutive quarter with a book-to-bill ratio of 1.0 or greater. In Federal Solutions, we reported a book-to-bill ratio of 0.8x. Our backlog at the end of the third quarter totaled $8.8 billion, a 1% increase over Q3 2024. Additionally, our funded backlog is the highest since our IPO at $6.4 billion, a 10% increase year-over-year. In terms of our guidance, we are reiterating the midpoint of adjusted EBITDA and operating cash flow. However, we are updating revenue guidance to reflect the impact of federal customer capacity constraints impacting timing of sole-source task order awards, products and material procurements, and the inability to recover in Q4 due to the extended government shutdown. We expect total revenue to be between $6.4 billion and $6.5 billion. This guidance represents total revenue growth of 14% and 10% on an organic basis, excluding the confidential contract. Including this contract, total revenue is anticipated to decline 4% at the midpoint of the range and 8% on an organic basis. Adjusted EBITDA remains between $600 million and $630 million. At the midpoint of our revenue and adjusted EBITDA guidance ranges, our margin increased to 9.5% from 9.3%, this represents adjusted EBITDA margin expansion of 50 basis points from 2024 and a 100% -- a 100 basis point increase since 2023. Operating cash flow is expected to be between $380 million and $460 million. While the midpoint remains the same, we did want to widen the range to incorporate any potential impacts from the extended government shutdown. Other key assumptions in connection with our 2025 guidance are outlined on Slide 11 in today's PowerPoint presentation located on our Investor Relations website. With that, I'll turn the call back over to Carey. Carey Smith: During the third quarter, we delivered double-digit revenue growth, excluding our confidential contract, 60 basis points of margin expansion, free cash flow conversion of 135% and we completed a strategic acquisition while maintaining our strong balance sheet, which will enable us to make future accretive acquisitions. We remain optimistic about our future, given our team's proven execution, the tailwinds we have in both segments, our strong total and funded backlog and the robust pipeline of large opportunities we have to pursue. With that, we'll now open the line for questions. Operator: [Operator Instructions] Our first question comes from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: So Carey, and Matt, just -- it looks like there was some revenue from the confidential contract in 3Q. I know it was a much smaller number than the previous run rate. So I was kind of wondering if there was some included in your 4Q guide as well or if you're still presuming that it's going to be 0? Carey Smith: Yes, there was some revenue included in our third quarter guidance. At this point, it's very small and immaterial. The program is in a wind-down state, so we're basically demobilizing. Sangita Jain: Got it. And on C&I margins, it's three quarters in a row now that you've done 10%-plus margins. I know you were expecting a softer second half as you close out some legacy projects. So kind of I just want to get some more color on what may have driven the 3Q strength and if we should expect a 10% to 10.5% as the new run rate heading into '26. Carey Smith: Yes, I'll start, and Matt will jump in. But I would say, first and foremost, critical infrastructure has had outstanding program execution. We'd always indicated that we expected this business to be double-digit margins, and we weren't sure how quickly we could get there. And obviously, we've had 3 consecutive quarters to your point. So I would say continuing that solid execution looking forward. We've got some higher-margin business that will be coming in as we have been winning some new bids based on the demand that's out there, both in North America as well as the Middle East and then any acquisitions that we do are going to be accretive as well. Matt Ofilos: Yes. And to give some numbers on a year-to-date basis, to your point, CI is at 10.4%. So really great performance out of the CI business. Q4, we have modeled in kind of the high 9s, low 10s for a total year in kind of the low 10s, as I mentioned, but again, to Carey's point really strong margins out of the CI business, north of 10% throughout the year. And so really excited about the stability throughout the calendar year. Operator: Our next question is from Andrew Wittmann with Baird. Andrew J. Wittmann: I wanted to ask about the top line here in the quarter and in the fourth quarter guidance. I think maybe it was a little bit lighter than you expected in the third quarter. I was wondering if you could Carey, talk about what was the variance there? And then just as it relates to the fourth quarter guidance, I heard your comments in the prepared remarks, you talked about federal customer capacity, some things about the material. I just thought maybe you could elaborate on some of that. When you talk about like materials procurement, was that like you couldn't procure because the government was shutdown? Or was there something else behind that? When you talked about customer -- federal customer capacity, is that again shutdown related? Or is there something else behind it? I think just understanding kind of what's changing or what you're seeing in the top line performance is an important topic for today. Carey Smith: Yes. Thanks, Andrew. I appreciate the question. So first, our challenge in this quarter was strictly due to timing. So we've had things move to the right. These were actually on contracts that were already awarded to us. Most of the work was our Air Base Air Defense contract had a task order that was awarded later than anticipated. And then we're still awaiting on some of our defensive cyber threat hunt kit awards, and that is impacted by the shutdown. We indicated in Q2 that we did -- we knew we had a second half that was going to be higher than the first half. And that we were optimistic that things will get moving. But I would say, unfortunately, we are still seeing delays and so we wanted to make sure that we were going to achieve our guidance. And so setting for the rest of the year, we had to assume that the shutdown may last as long as until the end of the year. Matt Ofilos: Yes. And Andy, I'd just add, if I look at Fed and I'll talk excluding the confidential contract, call it, 9-ish percent growth for Q3, we are forecasting about 15% for Q4. So to Carey's point, some was a slide to the right from Q3 to Q4. We do expect acceleration in Q4, just with the government shutdown, the timing on task order awards, approvals on material purchases, things like that. All those things are kind of impacting our ability to recover before the end of the calendar year, but should be obviously first half next year. Andrew J. Wittmann: Got it. Okay. Great. And then I guess from my follow-up, I wanted to just drill in and get a little bit more from you on FAA. Obviously, the government has shutdown. This one notionally had a October 31 award target date. Obviously, the government controls that and can slide. But I was just wondering, you said imminence on the call. Like are the contracting personnel at the FAA on staff? Is there a dialogue happening there? What can you tell us a little bit more detail on that one in particular? Carey Smith: Yes. Fortunately, the FAA brand-new air traffic control system is not impacted by the shutdown and an award is imminent. This program, again, is going to use the $12.5 billion of funding that was awarded under the reconciliation bill. This is a critically important program to our country. We need to improve the safety, reliability, redundancy and efficiency of the National Aerospace System. And in parallel, we have to transform that for the future. I feel that our team has offered a very compelling offer. Parsons, again, as the #1 program manager ranked by Engineering News-Record. This is the type of work we do for a living. We partnered with IBM as our strategic technology partner, and both we and IBM have very deep system engineering expertise. We also have the right team and a team that knows the FAA and has excellent past performance with the FAA. I mean, our motto has been right team, right time. We're ready now. We certainly look forward to partnering with the FAA on this brand new air traffic control system and achieving the results by December 2028. Andrew J. Wittmann: Got it. So just as an addendum to that, then, I think in the past, you've talked about like the dollar amount of awards that you're awaiting notice on. I think in the quarter, this one, among others, many others, went in as awards that you're awaiting notice on. What does that metric stand out here at the end of the third quarter? Matt Ofilos: Yes. So awaiting notice of award right now is just under $10 billion, Andy. And that compares to prior years of an average between 4 and 6. So obviously, a big part of that is FAA, but all in all, just under $10 billion awaiting notice of award. So bids submitted awaiting adjudication. Carey Smith: Yes, I'd also highlight the strength of our pipeline. $58 billion is a record pipeline for the company. And the number of awards that we have potentially greater than $500 million being over 15 is also a record for the company. So we're really seeing a lot of needs and demand for our business across both segments. Operator: Our next question is from Tobey Sommer with Truist. Tobey Sommer: Given the slightly lower top line exiting the year, I'm just wondering how we should think about modeling next year based on the midpoint of the new top line guidance, it looks like consensus is around 8% total revenue growth, which I know wouldn't necessarily be an organic number, but any color you could provide there without specific guidance, of course, at this stage would be helpful. Matt Ofilos: Yes. Obviously, we'll provide full year 2026 guidance during the February call. But to your point, solid run rate in Q4 positions us well for 2026. We've said previously mid-single digit or better organic growth, excluding the confidential contract. So that's the number that we're holding to. That would exclude any what I'll call binary large items, think FAA or others that Carey mentioned, Southern border or Golden Dome that are obviously large items. So mid-single digit or better organic, excluding confidential contract and supported by a solid Q4 run rate. Tobey Sommer: And Matt, what would the total contribution this year be from confidential contract just so we have that math equation squared away? Matt Ofilos: Yes. It's about $350 million, so just 5-ish percent. Tobey Sommer: And Carey, you highlighted water as an area with the recent acquisition in critical infrastructure, you talked about the growth, et cetera. Are there any verticals within critical infrastructure that you would like to sort of further fortify or maybe gain exposure where you might not have it currently? Carey Smith: I would say water and environment, which is one of our 6 end markets has been rapidly growing. We expect this year for that market to be around $650 million. And I mentioned the water portion of that is also our most profitable. So we have been kind of doubling down there. The acquisition of Applied Sciences Consulting was critical for us because Florida is spending billions of dollars and making sure that they have resiliency. And this company is very well positioned to help us capitalize on it by combining our collective capabilities. So it has been an area of focus for M&A. Tobey Sommer: Okay. And then during the shutdown, there's been kind of a new wrinkle with the administration halting funding of various things in states. Have you seen any impact from this particular facet of the shutdown. And in particular, maybe a comment on Gateway would be interesting. We have our offices nearby and it looks like there's plenty of equipment and workers still plugging away, but would love your perspective. Carey Smith: Yes. And you're absolutely right there, Tobey. So the Gateway program continues, as I mentioned on the call, we were awarded $665 million follow-on effort for that. We have 5 major construction projects that are underway on the Gateway program as we speak and the state funding that's available for Gateway is $5 billion. So we continue to work. Operator: Our next question is from Gautam Khanna with TD Cowen. Gautam Khanna: I was wondering if you could comment on the EBITDA contribution from the confidential contract in Q3 and for the year, just so we have a sense for what the comp to overcome is in '26? Matt Ofilos: Yes. Round numbers, Gautam, when you think about this as a fixed price international contract. So it would be accretive to our Fed business, I think kind of low double-digit margin. Gautam Khanna: Okay. And then I know on the FAA modernization opportunity, there was -- it sounded like there were just 2 bidders yourselves and Peraton. And there's some anecdotes that there might be some risks associated with the terms of the contract. I just wanted to get your view on how to kind of insulate the company from some risk? And how you may have gone about that bid in a way that doesn't -- is a good thing if you win it as opposed to something we should be concerned about? Carey Smith: Yes. First, as a company, we will not take that business. And the FAA brand-new air traffic control system is not a bad contract. It's a good contract. There are only 2 bidders. There were various reasons for that. I think we got off the dime very quickly, announced our partnership with IBM back in June. We tend to be a very agile company that delivers operationally relevant solutions. And so we kind of got out pretty fast. And I think some of the competitors were worried about that. Other competitors dropped out due to potential organizational conflicts of interest because if you want to provide systems, it's kind of hard to sit in an integrator role where you may be selecting and evaluating and acquiring those systems. So we're very excited about the FAA contract. It's going to be a good contract, and we look forward to an imminent announcement. Operator: Our next question comes from the line of Mariana Perez Mora with Bank of America. Mariana Perez Mora: You highlighted space and missile defense as a growth driver for FS. I was wondering if you could talk a little bit more about that, [indiscernible] what can you expect [indiscernible]. Carey Smith: Yes, you're breaking up a little, but I think I caught the gist of it. So space of missile defense being a growth driver. First, I would start with our missile defense contract. We are the system engineer and integration contractor for the Missile Defense Agency on the team's contract. That work will lead into Golden Dome efforts, and we are starting to ramp up in anticipation of that. We expect some of the Golden Dome funds, there was $25 billion in the reconciliation bill to start hitting around the December time frame, and we've been closely working with the Missile Defense Agency on areas like architecture. Relative to our space business, we're involved in space situational awareness, an area that's seen uptick as there's been a lot more activity going on in space, we're also involved in space ground systems. We've delivered over 170 different ground systems for a variety of customers. And then an area of space we're particularly excited about would be our assured position navigation and timing solution. We've partnered with Globalstar. We're using their constellation and our software-defined radio capability to be able to get location information in the case of GPS' jam. A great example is we just deployed it over in the Ukraine and European theater and our timing results and location results were better than anticipated and additional units have now been purchased for the INDOPACOM region. So exciting business. We have seen growth there, and that's an area that we project to continue to be strong, particularly as it relates to the Golden Dome program. Operator: [Operator Instructions] Our next question is from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe if we could talk about 2 questions. First on FS growth. How do we think about the FS growth given the order decline in the quarter? How much of it was attributable to the shutdown? And I know, I think, Matt, you said mid-single-digit growth outlook for '26. How we could think about the order flow and the pipeline selling together to get that growth outlook? Carey Smith: Yes. I'll start. Matt will jump in. So on the growth, how much attributed to the shutdowns, it's a little hard to tell because we're -- I think we're dealing with 2 things at one time. One is federal contracting capacity. There's been some delays in getting things signed off. And the second is the shutdown, which I would say the big impact there that we saw was kind of limiting our recovery in the fourth quarter not knowing how long the shutdown is going to continue. So we plan for it to continue for the rest of the year. But the big issue for us has been material procurements on existing contract awards. I want to reiterate this is not new business we have to go win. It's not about any program losses. It's strictly a timing issue. Matt Ofilos: Yes. And the only thing I'd add, Sheila, if I look at total year 2025 Fed, excluding confidential contract, the outlook is high single-digit growth, 11% total growth. So it's a -- the business is performing quite well. If we can kind of maintain that run rate, it's kind of above market and taking share. So we're happy with those kind of rates. Sheila Kahyaoglu: Got it. And then maybe if I could ask one on CI, please. The performance there has been pretty good. Margins are now hitting this 10% stride, what's driving that? How do we think about mix going forward? Carey Smith: Yes. CI definitely has had an excellent year, I'd say on all fronts, winning new business for the last 20 quarters, also the strong margins throughout the year. And we're -- this quarter to be able to do 18% total and 13% organic is excellent. We're seeing strong growth in both North America and the Middle East, and that growth is going to continue for as long as we can see. The IIJA, again, funding has not peaked yet. It won't peak until the 2028 time frame. It's going to have a 6- to 8-year tail after that. The next surface transportation 5-year bill is expected to be passed by November of 2026. So that's going to be additive to what we're seeing. In the Middle East, our expansion there continues. We've had 4 years of double-digit growth in the Middle East. We've not just been growing in our core market of urban development and transportation, but we've now moved into 3 new markets, which are receiving significant investments, defense, security and tourism and hospitality. So critical infrastructure, we've got great long-term tailwinds. We've been able to capitalize on it with very strong win rates, both in North America and in the Middle East. When you look at split between the businesses, though, I would have to say the real large jobs are in the federal business as you look to the near future. We talked about the $12.5 billion that the FAA is receiving for the reconciliation as we await that imminent award. There's $25 billion for Golden Dome. We're well positioned, not just in the area I mentioned earlier for system engineering and integration, but we also have nonkinetic effects capability and command and control capacity. There's $25 billion for Pacific Deterrence -- or I'm sorry, $25 billion for more for border security, $161 billion in total, but a lot of that's addressable to us. We do border security all over the world. So we've got currently 2 very large opportunities that are in bid within the border security area. And then Pacific Deterrence got an additional $12 billion in new funding and we're well positioned there with our presence on Kwaj and Guam, and that we're able to capitalize on that from the Federal group. So CI rapidly growing, I'd say the big game changer opportunity is largely in federal. I should mention one that kind of passes both groups too, which would be rebuilt. We expect to be involved in Syria, first in eliminating the chemical weapons and then the rebuild of Syria, which is being very much supported by the Gulf countries. We're looking at the rebuild of Ukraine and also the rebuild of Israel Gaza. And then a final area just to hit that I put in that game changer category is our position in critical minerals and leveraging our processing and refining capabilities as we start to onshore our critical minerals in the United States. Operator: Our next question is from Louie DiPalma with William Blair. Louie Dipalma: Following up on your recent answer, it seems you've made significant progress with providing defense services to some of your Middle East customers. What types of solutions are gaining traction on the defense side? And what's the long-term outlook there? Carey Smith: Yes. So I'd say the areas that we've gotten into are kind of a combination leveraging our entire portfolio. So we're basically doing work for the Ministry of Defense that is infrastructure work due to the proprietary nature of it, I can't go beyond that. But if you think about infrastructure builds for the Ministry of Defense. Also on the security side, we're doing border security work. We've been involved in border security for a long time through our work with Defense Threat Reduction Agency Armenia, Lebanon, Georgia, other locations. We do work with customs and border protection down on the southern border, we've been involved a little bit with immigration and customs enforcement, and we do the counter nuclear smuggling detection and deterrence program for Department of Energy. So we've been able to take those competencies now and expand them, and we were awarded a job through the Ministry of Interior for border security in Saudi Arabia. Louie Dipalma: Excellent, Carey. And in addition to the FAA brand-new air traffic control systems contract that you're pursuing, you already have an existing FAA facilities contract and should that contract also benefit from the reconciliation bill funding? And related to this, are you starting to already receive awards in October? Or did you receive awards in October that were funded from the reconciliation bill funding? Is that funding starting to flow? Carey Smith: Yes. So I would say, to your first question, that contract will also benefit. That contract's technical support services contract. We've supported the FAA for 50 years as a company. We've been on the TSSC contract for 24 years, excellent past performance. And it will benefit from the brand-new air traffic control system separate from our integrator work that we're looking forward to receiving. As far as reconciliation funding, I would say it's going to start to flow, we think this month and next. Matt Ofilos: And Louie, just the numbers on your question around FAA. As we've mentioned previously, that is a growth driver for us. I mentioned transportation is a key driver. We're expecting that FAA contract to grow 25% to 30% this year in 2025. So to your point, it's a great growth driver for us with or without. Operator: Our next question comes from Jonathan Siegmann with Stifel. Jonathan Siegmann: So maybe just back on the shutdown, you've made some really helpful comments on that. But maybe if you could talk a little bit about the other side, when the government is open, can we expect a surge of activity? Or is the backlog so great at this point that we might still be talking about capacity problems next year assuming the government opens in the next couple of weeks? Carey Smith: Yes, thanks. And one thing I should mention is 50% of our business, again, is not impacted by the shutdown because 50% of our business is not federal government-related work. But I would say as far as when the government's open, I do expect that we're going to see a surge because they are backlogged with contracting actions. Matt Ofilos: Yes. And so as I mentioned earlier, John, as I think about almost $10 billion of awaiting notice of award typically in the Middle East, processes quickly. So the majority of that is within the Federal group, that being 40% or 50% above the norm is evidence that there's a building backlog and hopefully, they'll transact quickly so that we can get working on these jobs. Carey Smith: They almost have to when you look at the reconciliation funds and the fact that the government would like to spend those upfront over the next few years. So to be able to accomplish things if you look at the brand-new air traffic control system, as an example, we need to achieve those milestones by December 2028 with no excuses. We've got to deliver. And when you look at the -- a lot of the other funding that's in that build, there's a lot of milestones that have to be achieved. So I think things are going to have to get moving forward. Jonathan Siegmann: As we think about next year, you've already quantified the headwind from the confidential contract. Is there anything else that you'd highlight today that we should be thinking about maybe a larger recompetes in the classified area that we should be contemplating as we think about next year? Carey Smith: No. Fortunately, going into next year, our recompete rate is about 6% to 7%, so it's pretty small and there are no major contracts that are in that recompete. We secured our 4 contracts that are greater than $2 billion in July of 2021 is when the last one was won. So those have been secured for the next 7 to 20 years, respectively. That would be the 2 mine jobs, the FAA TSSC job in the Missile Defense Agency system engineering and integration job. So our big recompetes are still a ways out like 2029 time frame. Operator: And our next question is from Noah Poponak with Goldman Sachs. Noah Poponak: Matt, can you just level set me or remind me the numbers on Federal Solutions organic growth, excluding confidential. What was it in the first half? What was it in 3Q? And what do you now have for 4Q? Matt Ofilos: Yes. So first half, we're looking at -- the total is just about 10%. Second half, we're looking at 12%, driven by Q4 at almost 15%. So a little bit of a ramp in Q4, but something as I mentioned, a lot of the things that slipped from Q3 are on track for Q4. So that's really what's driving the Q3 to Q4 sequential. Noah Poponak: Okay. Yes, I guess, how did you think about building that? I mean it's 1 quarter, but just given how that's progressed? how did you think about building that acceleration in 4Q versus 3Q or first 9 months in a government shutdown? Matt Ofilos: Yes. Obviously, we went through -- we don't take lowering top line guide without a lot of effort going into exactly what the outlook is. So we went through line by line, every program, material that's been ordered, timing on those deliveries products. So I would say we're highly confident in the midpoint. I would say, if we see an extended government shutdown through the end of the calendar year, as an example, Noah, I would say it would be biased towards the lower end of the guide. But I think a lot of the story we're hearing is, over the next couple of weeks is likely to come out of the shutdown. Noah Poponak: Okay. And Matt or Carey, I guess, we've been in this environment with lower outlays in some of your government customer markets, but you've still had that 10% federal core. If next year, some of the things that have gummed up the system get better, can that core accelerate? Or is that too optimistic just given the overall backdrop? Carey Smith: I would say that we have the opportunity to accelerate. I mentioned the very large programs that we have in front of us, and I feel we're well-positioned. Noah Poponak: Just curious if I was sort of thinking of that, excluding like putting FAA aside or -- maybe you have so many large opportunities that putting them aside, is not a relevant question, but excluding any one large program totally changing the growth rate, just thinking more about the diversified core FS ex-confidential? Carey Smith: Yes. So this year, we'll deliver for federal for the full year, about 8.3% organic growth, again, which is industry leading. So I would say we're in all the right markets, not even talking about any of the game changer programs, and we've indicated that we would deliver mid-single-digit or better, excluding the confidential contract as we go into next year. That's excluding game changer contracts. Noah Poponak: Okay. Can you frame for us for whoever wins FAA, approximately how large it could become on an annual revenue basis and then what the margins would look like roughly? Carey Smith: Yes. Unfortunately, because we're in a competition and the award is imminent, I can't share financial information at this time. Noah Poponak: Okay. Last one, Matt, just on the FS margins because you had talked about confidential was accretive to the margin. And then as that came out, the margins came down a bit, but back up sequentially here nicely in the third quarter despite that. So as we move forward, what's your latest thinking on where the FS margin lands? Matt Ofilos: Yes. So if I look at Q3 specifically, cost type represents about 60% of the federal business. So in an environment where cost type is greater than 50%. There's always going to be a little bit of pressure on the margin, so we're comfortable in kind of the high 8s, low 9s, Noah. Acquisitions will help with long-term expansion as we always target 10-plus percent EBITDA on our acquisitions, a shift to fixed price. We haven't necessarily seen it as of yet. We're obviously open in a lot of cases to that. And so I think high 8s to low 9s is a good a good target based on the existing mix. And we do have some great opportunities. We've talked -- Carey mentioned in her script a little bit about the Joint Cyber Hunt kit, things like that, where a little bit more product, a little bit more materials that are accretive could also benefit. In Q3, we did have that benefit from the incentive fee that we talked about in Q2 and then Q4 will help from the products. So all those things add up to kind of a high 8s, low 9s is a good number, opportunities around expanding products and acquisitions. Operator: And ladies and gentlemen, this is all the time we have for your questions. I will pass it back to Dave Spille for final comments. David Spille: Thanks again for joining this morning. If you have any questions, please don't hesitate to call, and we look forward to talking to many of you over the coming days. Have a great day. Thank you. Operator: And this concludes our conference. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the OPENLANE, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Bill Wright, Vice President of Investor Relations. Thank you, and over to you. William Wright: Thank you, operator. Good morning, everyone. Welcome to OPENLANE's Third Quarter 2025 Earnings Call. With me today are Peter Kelly, CEO of OPENLANE; and Brad Herring, EVP and CFO of OPENLANE. Our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that may cause our actual results or performance to differ materially from such statements. Factors that could cause such differences include those discussed in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under the SEC rules will be discussed on this call. Reconciliations of GAAP to non-GAAP measures are provided in our earnings materials and available in the Investor Relations section of our website. Please note that all financial and operational metrics presented during the call are on a year-over-year basis unless otherwise specifically noted. With that, I'll turn the call over to Peter. Peter Kelly: Thank you, Bill, and good morning, everyone. I'm pleased to be here today to share OPENLANE's strong third quarter results. Let me begin by welcoming Bill Wright to his first OPENLANE earnings call as our Vice President of Investor Relations. As detailed in our press release, Bill is a seasoned financial leader with strong industry relationships and a proven track record of driving stockholder value. And we look forward to introducing him to you more broadly in the months ahead. Moving to our results. OPENLANE's strategy and the investments we've made to accelerate it produced another strong quarter of organic growth and profitability. The OPENLANE brand continues to gain momentum, customer preference and market share. And our focus on making wholesale easy is further differentiating our marketplace across the industry. On a consolidated basis, we grew revenue by 8% and delivered $87 million in adjusted EBITDA, representing 17% growth. As a reminder, these results were achieved against the prior year that included contributions from the automotive Keys business that we divested during the fourth quarter of 2024. In the Marketplace segment, while commercial vehicle volumes were down as expected, we grew dealer-to-dealer volumes by 14% year-over-year, representing the fourth straight quarter of double-digit volume increases. We also generated a 20% increase in auction fee revenue and a 22% increase in Marketplace adjusted EBITDA. Our Finance segment also had a great quarter, growing loan transaction units and average managed receivables while holding the loan loss rate to 1.6% and increasing adjusted EBITDA by 12% year-over-year. In summary, I believe our third quarter results further reinforce the strong scalability characteristics of OPENLANE's asset-light digital operating model. We are executing our 2025 plan with precision and leaning into investments that will help position us for long-term growth, profitability and shareholder value. Based on these factors, we are further increasing our 2025 guidance, and Brad will discuss those specifics in just a few minutes. So now let me turn to OPENLANE's strategy and our outlook for the business and our industry. As a reminder, our strategy for growth is anchored in our purpose, which is to make wholesale easy so our customers can be more successful. And we are making wholesale easy by focusing on 3 enabling priorities. First, by delivering the best marketplace, expanding to more buyers and more sellers and offering the most diverse commercial and dealer inventory available; second, by delivering the best technology, innovative products and services that help our customers make informed decisions and achieve better outcomes. And third, by delivering the best customer experience, keeping our marketplace fast, fair and transparent, making it easy for customers to transact and making OPENLANE the most preferred marketplace. So let's start with more detail on the marketplace, where we increased our gross merchandise value to $7.3 billion while organically growing overall volumes, auction fee revenue and gross profit. This was driven by another standout performance in dealer-to-dealer, particularly in the United States. But before I turn to that, I want to spend a few moments on commercial. As expected, Q3 commercial volumes declined year-over-year, but the rate of decline was less than what we saw in Q2. We remain confident that off-lease volumes will begin to inflect during the second quarter of 2026. And given our clear market leadership position, our long-standing customer relationships and our deep integrations with OEM, captive finance and financial institution customers, OPENLANE remains best positioned to capture this reemerging opportunity. In dealer-to-dealer, OPENLANE executed very well across the business. The U.S. drove the majority of OPENLANE's double-digit volume increase in dealer with Canada also contributing solid mid- to upper single-digit growth. In the U.S., we also conducted a record number of dealer vehicle inspections during the quarter and the year-on-year growth in unique vehicles offered for sale exceeded the year-on-year growth in vehicles sold. We continue to expand our customer base, enrolling thousands of new dealers on to OPENLANE and had another record quarter of customer engagement with double-digit increases in unique buyer and seller activity. We also continue to make solid progress in our efforts to increase our market share with North America's largest franchise dealer groups. Based on our analysis of AuctionNet and other publicly available data, OPENLANE's dealer growth in North America during the quarter significantly outpaced the industry and resulted in meaningful market share gains. On our last call, we received a few questions about the why behind our accelerated growth and specifically what OPENLANE has been doing differently. And while I believe our success is a result of our strategic focus on delivering the best marketplace, technology and customer experience, I believe there are several primary drivers that are fueling our growth and fortifying our competitive position for the future. First, our brand and platform consolidation work has dramatically simplified our company and clarified our purpose. That simplification enables us to focus our investments and resources on growth and prevent any distraction from pursuing non-core activities. Second, I would highlight the uniqueness of our inventory and marketplace participants. Our leading private label programs directly connect us to the majority of franchise dealers in North America. And in dealer, our go-to-market investments are helping us increase market penetration and wallet share. This combination of franchise and independent customers with a broad selection of inventory is highly differentiating for OPENLANE. Third, we are empowering our marketplace with innovation and technology, injecting AI and OPENLANE intelligence into key areas such as vehicle recommendations, pricing and condition report transparency. During the quarter, we released our new Audio Boost feature, which allows dealers to visualize and listen to actual engine recordings, easily identify AI detected anomalies and even compare that audio to other ideal or healthy engine reporting. Next, I want to credit our ongoing work to leverage AFC and their extensive network of local independent dealers to power the OPENLANE marketplace. AFC is a category leader and contributes meaningfully to our financial results. Additionally, there remains a significant opportunity to cross-register dealers, integrate our technology and bundle new products and services, all efforts that we are actively advancing. During the third quarter, we increased the number of AFC dealers registered on OPENLANE by over 900 basis points. And now nearly half of all AFC dealers can directly transact on our marketplace. Additionally, we introduced a new AFC recommendations carousel that suggests OPENLANE vehicles to AFC dealers whenever a floor plan loan is paid off. Though still in the early stages, this feature has already driven several hundred new OPENLANE registrations and more than 300 unique OPENLANE marketplace engagements each week. And we have grown both AFC floorings on OPENLANE and OPENLANE purchases floored on AFC by double digits year-to-date. And finally, we continue to invest in people and technology to deliver an exceptional customer experience. OPENLANE is a digital marketplace leader in a relationship business, and our relationship-first approach is helping the OPENLANE brand growing preference and keep our transactional NPS scores in the great to excellent range. So when you add all this up, I believe OPENLANE offers a very compelling value proposition to our customers. It provides a fast, easy and efficient platform to buy and sell, one that delivers better outcomes for buyers and sellers at a highly competitive price point. As one of our dealer customers recently commented on our NPS survey response, OPENLANE has made wholesaling much easier. I used to have to pay a lot of freight to get to the auction, and now you guys come to me. Thanks for making my job easier and more profitable. I think that customer statement sums up very nicely what we're trying to do for all of our customers, which is to make their jobs easier and their businesses more profitable. Looking beyond OPENLANE, there are also a number of industry and economic trends that we are monitoring that may impact our business going forward. First, we continue to track new vehicle affordability, loan delinquencies and general economic uncertainty. These could have positive short-term side effects as consumers turn to used vehicles, but potentially longer-term challenges if retail new vehicle sales were to meaningfully decline or consumer retail credit tightens. Next, the tariff situation remains relevant and may still be a headwind, though there is more clarity today than there was 6 months ago, and manufacturers and consumers appear to be adjusting. New lease origination rates were healthy in the third quarter and consumer lease equity is declining. So I remain confident that the commercial vehicle volume recovery will begin early next year and extend through 2027 and beyond. And according to our analysis, the wholesale industry continues to shift from physical to digital channels, a positive for both our dealer and commercial customers. So just to summarize, we had another strong quarter of financial and operating results. We're executing our strategy with focus and discipline, and that strategy is resonating with our customers. Because of that, I believe the key elements of our value proposition for investors remain very compelling. OPENLANE is an asset-light, highly scalable digital marketplace leader, focused on making wholesale easy for automotive dealers, manufacturers and commercial sellers. There is a large addressable market in North America and Europe, and we are uniquely well positioned in both dealer and commercial. Our customer surveys and third-party research suggest we are the most preferred pure-play digital marketplace in the industry. Our technology advantage is a competitive differentiator. Our floor plan finance business, AFC, is a high-performing business that is highly synergistic with the marketplace. We are cash flow positive with a strong balance sheet, and we believe our business has the capability to deliver meaningful growth, profitability and cash generation over the next several years. So with that, I will turn the call over to Brad. Bradley Herring: Thanks, Peter, and good morning to everyone joining us today. Starting with consolidated revenues, we're reporting revenues in the quarter of $498 million, which represents growth of 8%. Just as we reported last quarter, the key driver of our revenue growth was in our Marketplace segment, which we'll dive into a bit more shortly. Consolidated SG&A for the quarter was $111 million, which is up 14%. The year-over-year increase was split nearly equally between higher incentives related to 2025 performance and targeted investments we've made in our go-to-market and marketing efforts. Excluding the incremental incentives and our growth investments, our core SG&A actually declined 1 percentage point as we continue to monetize efficiencies in our back-office functions. Consolidated adjusted EBITDA for the quarter was $87 million, which represents an increase of 17%. The resulting adjusted EBITDA margin for the quarter was approximately 17%, which reflects margin expansion of 130 basis points over the same period last year. Consolidated adjusted free cash flow for the quarter was $5 million, which represents a conversion rate of 5%. I mentioned on the call last quarter that we'll be talking about free cash conversion more on an LTM basis given the volatility and timing considerations across quarters. On an LTM basis, our conversion rate was 61%, which is lower than our previously mentioned expectation of 75%. The main driver for the lower conversion rate was strong growth in our financing segment that used cash on hand to fund a portion of the $140 million increase in our loan portfolio. This increase typically shows up in Q4 as dealers build inventory for the spring tax sales season. However, this year, we pulled forward that growth into Q3 with some initiatives targeted to opportunistically grab share in selected markets. We anticipate that the timing of portfolio expansion and contraction will return back to more normal pattern in the next few quarters, and we continue to expect a rolling 12-month conversion rate of 75% or higher. Moving to the results in our business segments. I'll start with the marketplace. GMV processed over our digital platform was $7.3 billion, which represents a 9% increase. GMV growth is broken down as 19% growth in the dealer category and 4% in the commercial category. As Peter mentioned, the primary source of GMV growth in the dealer category was in the U.S., where we continue to win share by taking advantage of the migration to digital platforms and providing favorable outcomes for our customers. Auction fees in the marketplace grew by 20%, driven mostly by the previously mentioned volume growth in the U.S. dealer business as well as some modest pricing adjustments that were put in place over the last 12 months. Services revenues dropped 3% due to a comp that included the automotive keys business, which we sold in Q4 of last year. Excluding the impact of that divestiture, our services revenue was up 4% tied mostly to the transport revenue from higher volumes. Adjusted EBITDA for the Marketplace segment was $44 million, representing an adjusted EBITDA margin of 11%, this reflects growth of 22% and 110 basis points of margin expansion. Excluding the divestiture of our keys business in Q4 of 2024, the year-over-year comparisons would have been 27% growth and 150 basis points of margin expansion. We continue to have a high degree of confidence in our ability to grow our Marketplace segment while simultaneously expanding margins due to the structural scale characteristics that generate high pass-through rates off of our technology platform. We look for this dynamic to continue with the resurgence of U.S. lease returns in 2026. Turning to our financing segment. Our average outstanding receivables managed in the quarter was $2.4 billion, which is up 11% year-over-year. Year-over-year growth was driven by a 5% increase in the average balance per transaction and a 5% increase in transaction counts. These are both positive for our business. Net yield for the quarter was 13.4%, which is down 30 basis points year-over-year. The decrease was driven by lower yields generated from transactional fees, partially offset by higher net interest yields. The yield driven by transactional fees declined solely to the increase in the underlying asset values. The Q3 provision for credit losses was 1.6%, which is consistent with our results from last quarter and 50 basis points lower than last year. We remain highly focused on our proprietary underwriting and dealer level monitoring efforts that enable us to grow our floor plan portfolio while maintaining relatively low credit losses. With regard to our loan loss provision, we reiterate a target loss rate in the 1.5% to 2% range. With a fair amount of news in the markets about credit quality, I want to make a few comments about our financing business. First and foremost, we do not see any red flags or credit concerns across our floor plan portfolio. To help with those new to the story, I'll make 2 distinct points about our financing segment. First, we offer secured floor plan financing to independent dealers that meet our strict underwriting and ongoing monitoring requirements. We do not offer consumer financing for purchases that are made through our dealership customers. Second, our secured dealer loans are less than 60 days duration, which limits our exposure for losses generated by short- and medium-term fluctuations in consumer sentiment or macro conditions. That said, any extended deterioration in consumer credit could potentially impact new and used car markets over the long term. The net result and the changes of the portfolio balance, the net yield and loss provisions are an adjusted EBITDA for the finance segment of $44 million, which was up 12%. Moving to capital considerations, we had a few items to highlight in the quarter. Most notably, in Q3, we announced our intent to repurchase approximately 53% of our outstanding Series A convertible preferred shares. This purchase was funded through a term loan offering that was completed in early Q4. With the capital raise complete, the purchase of Series A convertible preferred shares was subsequently closed on October 8. Assuming the conversion of the remaining preferred shares, this transaction reduces our fully diluted shares by approximately 19 million shares from 144 million shares to 125 million shares. The transaction also increases our debt outstanding by $550 million. In addition to the repurchase of the convertible preferred shares, we continue to selectively repurchase common shares in Q3. Year-to-date through the end of the third quarter, we have repurchased 1.5 million shares of common stock at an average price of $24.35 per share. With regard to liquidity, we ended the quarter with a cash balance of $119 million and capacity of over $400 million on our existing revolver facilities. Now let's talk about full year guidance. When we guided to the back half of the year on our Q2 call, we mentioned a number of uncertainties that were still looming at the time of our print. While many of those uncertainties are still not completely resolved and may linger into next year, it's clear that the headwinds did not materialize in the quarter to the degree that they could have. That said, with our strong Q3 results and factoring the Q4 seasonal patterns, we are revising our full year estimate for 2025 adjusted EBITDA to $328 million to $333 million. This is up from our previous guidance of $310 million to $320 million. The main drivers of this increase are continued strength in our North American dealer business and prudent portfolio growth and credit management in our Finance segment. To summarize, we're very pleased with the performance of both our Marketplace and financing segments and continue to make progress unlocking the cross-pollination value between the 2. As we look to the future, we remain confident in our ability to expand our share in the very large U.S. dealer space as well as capture our market-leading share of a commercial category that is poised for growth after being largely dormant for the past 24 months. Before we take Q&A, we hope to see many of you over the next few weeks as we will be attending several conferences in November and December. Specifically, we will be attending the Wells Fargo Annual TMT Summit in Rancho Palos Verdes on November 18, the Stephens Annual Investment Conference in Nashville on November 20, the UBS Global Technology and AI Conference in Scottsdale on December 3 and the BofA 2025 Auto Dealer Day Conference in New York City on December 10. Now I'll pass the call back to the operator for questions. Operator: [Operator Instructions] We have the first question from the line of Jeff Lick from Stephens. Jeffrey Lick: Congrats on an awesome quarter. Peter, I was wondering what do you think the -- when you talk about the AuctionNet data, what's your guys' take on how the actual market growth was units year-over-year? And then if you could just talk about where you guys see yourself either taking share or the new relationships with new dealers onboarding and how that kind of ramps over time? Peter Kelly: Yes. Thanks, Jeff. I appreciate the comments there and the question. So -- yes, so the question -- we were talking specifically dealer-to-dealer volumes. Our volumes were up 14%. We're very pleased with that. But again, the nuance was largely driven by the U.S., Canada was in the mid- to upper single digits, which puts the U.S. sort of in the high teens year-on-year level of growth. So we're very pleased with the strong U.S. growth in dealer-to-dealer. We're still a relatively small market share player in U.S. D2D, and it's obviously the biggest TAM that's available to us. So that's an important growth opportunity for us, and we're very focused on that. So we're pleased with that, again, high teens growth there in the U.S. And the AuctionNet dealer volumes, I believe, were up low single digits. So that kind of gives you a comparison of the relative growth rate. So we feel good about that. In terms of what's behind -- what's driving that? Well, we -- I think some of it is -- we believe this industry is transitioning from a principally physical model to a more digital model, 70-plus percent of the volumes are still physical, but the digital share is growing, and we're a leader in digital. So that's an important aspect. And then I think, Jeff, the things we're focused on, making the platform very easy to use, very intuitive for sellers and buyers, the innovations and the technology that we've talked about, Audio Boost, making the condition reports better. Those are things we're doing all the time. There's a lot of focus on that. The increased go-to-market investments that we started in the first half of last year, and we've been, I think, with discipline, adding to those resources in areas where we think there's opportunity, and I'm very pleased with how that's going. I think that's helping drive growth. And then I think we've talked in the past and again on this call, we've got 2, I think, unique advantages that are very differentiating for our company. On the franchise dealer side, we do all these private label programs for the OEMs. And what that means is the majority of franchise dealers out there are customers of ours through those private label programs. And that creates a sort of an entry point and a starting point where we can start the conversation and then hopefully migrate those customers into our open sale as buyers and then as sellers. So that's an advantage we have on the franchise side. And on the independent side, we've got AFC, which is a leader in the floor plan business for independent dealers. And we've now got to a point where 50% of AFC dealers are at least registered on the OPENLANE marketplace. That doesn't mean they're actively buying yet. So you can tell from those numbers, Jeff, there's a lot of opportunity to increase that 50% and then obviously, to increase the wallet share with the dealers that are in the marketplace as well. So these are all the things we're working on. This is now our fourth consecutive quarter of double-digit growth in dealer. So obviously, I'm pleased with that, and we're staying very focused on continuing to execute that plan and continuing to gain share in that dealer-to-dealer category. Jeffrey Lick: Awesome. And just a quick follow-up. Any update on the -- you're onboarding the additional OE customer in the captive finance customer and lease returns. I think you had mentioned that should hit sometime in Q4. Just curious, any update on the timing? And then just kind of how do you see that ramping up in terms of magnitude? Peter Kelly: Yes. So update on the timing is actually going to be Q1. It's going to be early Q1. And I spent a little bit of time with that customer actually this week, Jeff. Technology is essentially ready. It's ready to go live. They're just -- customer felt they wanted to derisk, not do a December launch, they'd rather do a launch right at the beginning of the new year. So I think that's going to be in early Q1, but we're excited to get that across the line and up and active, and we're working closely with the customer on an onboarding and migration process for all of their dealers. So we're excited about that. Jeffrey Lick: Awesome. Well, congrats on the results and best of luck in Q4. Operator: We have the next question from the line of Craig Kennison from Baird. Craig Kennison: I'm looking at Slide 7, and I'm just wondering if you can provide any tangible examples that illustrate how OPENLANE and AFC are able to cross-pollinate each other's platform. Peter Kelly: Yes. Thanks, Craig. I appreciate the question and the comments there as well. I guess at the highest level, when I think about our marketplace, we serve commercial customers, obviously, there's relatively fewer commercial customers. Then we serve dealers and dealers break down into franchise and independent. And both of those constituencies are really important customer groups for us. Franchise dealers are the buyers typically for our commercial cars and they're principally sellers in the D2D market. And then independent dealers are largely the buyers of the D2D cars. They buy some commercial cars, too, but they're obviously important customers of AFC. So that independent dealer category is a core customer group for us, very important for us. And obviously, we've got those 2 different offerings, the marketplace and AFC. So actively working to find those cross points and points of synergy is important. At a minimum, Craig, when that independent dealer is in the marketplace looking for inventory -- and by the way, they source most of their inventory in the wholesale market because independent dealers don't get as much sort of retail trade-in traffic in their business model. So when they're in the marketplace, we want to make sure they've got financing that they've got the capital to go and find vehicles and fund vehicles on their lot for the 60 days or so that takes before they retail that car. So AFC provides that dealer with liquidity, with capital in the marketplace, enables them to purchase and stock their inventory. So that's obviously important to us. And one stat we look at there is of the vehicles that, that dealer group constituency buys, what percentage do they floor using AFC. They have other floor plans. They have cash in some cases as well. So we look at that as an attach rate and obviously trying to drive that up. But I think the bigger one is the one I alluded to on the call. AFC in the U.S. has about 12,000 dealers with floor plan relationships. Most of those dealers are still not buying cars on the OPENLANE marketplace. At this point, about half of them are registered to buy and a good number of that half are actively buying, but half of them is still not registered. And some of those are still maybe from a business model perspective, still buying heavily at physical auction. So over time, we're going to be talking to that customer group and educating them on the benefits of our online system, the time benefits, the speed, the convenience, the lower buy fees, the purchase guarantees, the peace of mind you get and obviously trying to increase that sort of adoption of our marketplace with that customer group. And that's proving very successful. I was very pleased, 900 basis point improvement. So it went from 40% to 49% in 1 quarter. We're aggressively focused on that. We actually -- today, we're running an independent dealer advisory board with a number of these customers to really hear what they have to say, how can we better serve them, help make wholesale more easy for them, improve their business operations, et cetera. So we're very focused on that, Craig. Operator: We have the next question from the line of Gary Prestopino from Barrington Research. Gary Prestopino: Peter, you gave some AuctionNet data. You said units were up single digits. Is that the entire market? Or is that just the dealer-to-dealer? And if it is dealer-to-dealer, what was the entire market up in the quarter? Peter Kelly: Yes, I don't have the exact number. That was dealer-to-dealer, Gary. But I think dealer was up lower single digit. I think commercial was up mid- to higher single digit. And I think the market overall that physical was up mid-single digit. Is my -- I'm going a little bit from memory here, but that's what I think it was. And obviously, we compare across category, dealer-to-dealer and commercial to commercial. Yes. And that is not the entire industry because, as I mentioned, some of the industry is digital, so that's not included in that number. And then there's -- particularly in the dealer-to-dealer space, there is, I think, a substantial volume of dealer-to-dealer transactions that happens, so I'll call it through an informal marketplace, through wholesalers, directly from one dealer to another, that's not really accurately measured or reported anywhere. So we don't include that in any sort of numbers that we run because it's just you can't kind of get a firm published number. Gary Prestopino: Okay. And then just my second question would be this. If your dealer-to-dealer units were up about 14% in the quarter, correct, could you give us some idea, and I think this would be real helpful from showing the progress that you're making in market share gains. How much of that was a same store versus new conquest in that 14% unit growth? Peter Kelly: Well, I don't have a precise number to give on this call, Gary, but obviously, we do look at that when we were talking about that here this week as well. Here's what I would say, our overall dealer volumes were up 14%, but our U.S. number was more like a high teens number. Coupled with that, we saw growth in vehicles offered for sale. Actually, as I said in my remarks, vehicles offered for sale grew by a little bit more than sales. So you could put that in the 20-ish kind of range. And then we looked at a number of active sellers and buyers, and we saw strong double-digit growth in both of those metrics as well, the number of active buyers, the number of active sellers in our marketplace, double-digit growth, all-time record levels in Q3. We also saw growth in large dealer groups and the share we have with the largest franchise dealer groups. So listen, a lot of positives there. And then in terms of the growth, it was driven by 2 things: growth or the cohort of customers that were there and active a year ago, their volume grew. So they contributed some growth to the number. And then the rest of the growth was driven by new dealers that we'd added since a year ago. And typically, what we find when we launch a new dealer, the adoption curve tends to -- it tends to be a ramp. We rarely get in and we're selling all of their cars on day 1. They're testing us out with maybe 10% of their inventory or maybe they're giving us a little bit more, but their conversion rate is low. And then over time, as they learn the benefits of the system and the ease of use and the peace of mind they get when they sell or buy through us, we find that their same-store volume tends to start to creep up over time. So that's kind of typically what we see, Gary. Operator: We have the next question from the line of Rajat Gupta from JPMorgan. Rajat Gupta: Congrats on the good execution here. Maybe just to follow up on some of the questions earlier today. I wanted to see -- I mean, obviously, you have pretty strong growth here on the U.S. D2D side, consistently strong market share gains in the last quarter and better than last quarter, I would imagine. I'm curious like have you seen any change or reaction from your physical competitors or maybe even digital competitors? Manheim recently, they acquired their inspection business, you're taking it in-house. It seems like they are fine-tuning their digital strategy recently. I'm curious if anything has changed when it comes to just the reaction from competitors? And I have a quick follow-up. Peter Kelly: Thanks, Rajat. I appreciate the question, and I appreciate the comments there, too. I don't know that I'd say I've seen anything that's sort of massively notable in the recent quarter on that front. Obviously, our principal focus is on what we offer and what we do for our dealers and what the feedback we're getting directly from dealers. We try and put the principal focus there, and I alluded to -- I spoke to some of the things we're doing on -- in my comments. Obviously, we do pay attention to what our customers are doing as well. We saw Manheim buy 2 physical auctions. I think it was maybe not in the last quarter, but the quarter before. We see some rebranding of their digital platforms. But I'd say the competitive environment has been, I'd say, on the whole, fairly stable. I'd say one thing that's notable, Rajat, we saw some of the small -- and this is maybe over the last 12 months, some of the smaller digital disruptive business models exit the market. So I'm thinking specifically of CarOffer, which is owned by CarGurus and EBlock in California. So I think the market has somewhat consolidated. I think there's -- dealers are very aware at this point, if I want to be digital, what are the platforms that are available to me. I think OPENLANE is a leader there. And I think our presence and our preference as well with dealers has improved a lot over the last 12 months and over the last 24 months, even more. So I feel good about that. But nothing specifically I can point to in the last quarter, Rajat, that I'd say is worth highlighting on this call. Rajat Gupta: Understood. So you attribute a lot of this to like obviously, your own like product and penetration, but like a pretty -- an incremental shift towards digital auction continuing. Peter Kelly: Absolutely. Absolutely, Rajat -- yes. That's where our focus is, Rajat, for sure. Sorry, I know you said you have a follow-up. Rajat Gupta: Yes. Just one on SG&A. I remember like last quarter, you had mentioned that you want to have some more flexibility for investments. If I look at the marketplace, SG&A, it actually went down sequentially. I know seasonally, volumes are down, so it explains some of it. But I would imagine SG&A to tick up given this seems like an interesting time and opportunity for you to just capture more share. I'm curious if this is just more like a timing thing? Or are you just like seeing a lot of leverage? Or is it both? Just any more color there would be helpful on how we should think about SG&A going forward as well. Bradley Herring: Rajat, this is Brad. I'll take that. I appreciate the question. Yes, you're going to see some timing fluctuations within a quarter. We're making some targeted investments when those present themselves. And at the same time, I mentioned some of the cost synergies that we're able to monetize in our back office. So some of those could be a little bit lumpy in terms of timing as well. So when I really target my SG&A numbers going forward, I'm really looking on an annual basis because you could see some quarterly alignment or misalignment between when the investments get made or when the synergies offset. So I'd like to look at that on a 12-month basis. Operator: We have the next question from the line of Bob Labick from CJS Securities. Bob Labick: Congratulations on strong results. I wanted to start with a question we haven't talked about in a little while. And purchased cars, I think it's the highest it's ever been, the revenue from purchased cars is certainly in a long time. And the trend for the last several quarters, it's been increasing. So maybe -- I know in the past, you've said that's a kind of breakeven proposition, but it seems unlikely that you would continue to grow that if it's actually breakeven. So maybe just remind us of what's the kind of motivation behind growing purchased cars and profitability there and things like that? Peter Kelly: Yes, Bob, let me start. If Brad wants to offer any context from a CFO perspective, he can as well here. But first of all, you are right, it has been growing. There really are 2 sources of purchased -- what drives that growth in purchased vehicles. One is our European business. We don't talk about that a lot on these calls. More than 90% of our volume is North American. We do have a nice business in Europe, which is largely cross-border. And from an accounting and regulatory standpoint in Europe, when we -- when we're moving a vehicle cross-border, we need to take ownership of that vehicle. So it kind of appears on our books for a short period of time as we're sort of taking the vehicle, say, from France to Romania, to give you an example. So as our European business grows, purchased vehicle volume and revenue grows alongside it. Now we do -- that business is profitable. We do make a margin on that. Personally, as CEO, I'd rather if we could account for it on a net-net basis because it's kind of -- I think of the value of the car itself as kind of low calorie, where the car has been sold for EUR 17,000, and we've -- we're recognizing EUR 17,000 of purchased vehicle revenue. Now we're making some fees alongside, okay? So Europe drives probably more than half of the volume. But another driver of the growth has been our North American business. And in the calls in the past, I've talked about how we've created these guaranteed products for buyers and sellers. So if a seller -- or let's say, I'll put it in the context of a buyer, a buyer purchases a vehicle, they can purchase an as-described guarantee for the vehicle. And then if the vehicle is delivered, if they don't like it or find something miss with it, they can return the car to us. Now we don't return the car to the seller. We, at that point, are taking ownership of that vehicle. So that now also goes into the purchased vehicle category. And on that vehicle, we may end up making a small loss because the buyer bought it for a certain price, discovered some issue. But the way we think about the economics there, Bob, is we look at the aggregate, okay, we sold in the month, 10,000 of those policies, right, generating X amount of revenue, which is recognized under auction fees. And we incurred -- we took 300 cars back, and we lost X hundred thousand dollars on those vehicles. And how do those 2 -- the revenue pool wash out against the losses. And again, we try to manage that in a way that it's at least neutral or slightly positive for us. But really what we're trying to do is generate peace of mind for the buyer to enable them to win and purchase with confidence in the marketplace. So those are the things that drive it. I do think of it as kind of low-calorie revenue. So it doesn't have a lot of sort of inherent gross profit in it for those reasons, Bob. But it's more of an accounting issue, but it's obviously something that also supports the marketplace business when you think of those -- the way it interacts there. Bradley Herring: And Paul (sic) [ Bob ], I'll just add -- this is Brad. I'll just add to that. About 70% of that number in the quarter was Europe. So think of a split 70-30 between Europe and U.S. Bob Labick: Super. All right. And then just for my follow-up, just shifting. In terms of off-lease, you mentioned obviously stabilization in institutional down less each quarter this year. Lease equity, I think, is now below 1,000, but it's still not 0. So my question is kind of where are cars falling in the funnel now in terms of lessee grounding dealer closed open? And then as the market shifts next year and more off-lease come, how will that impact the P&L? I imagine it's higher gross profit -- gross margin rather, lower ARPU, but maybe walk us through kind of as off-lease comes back next year. Peter Kelly: Thanks, Bob. Let me take the first part of that, and then I'll let Brad comment on the P&L impacts, okay? So first of all, in the off-lease category, I'm going to start actually with lease originations. Lease originations are continuing to be quite strong. And that doesn't have an immediate impact on our business, but it's a positive sign as we think about the growth of off-lease -- the growth of lease portfolios and off-lease vehicles 2.5, 3 years from now. So lease originations continue quite strong. I'm seeing more and more sort of lease adds on the TV, strong lease offers. That is a good thing. I'm seeing inventory at dealerships increase. That typically is correlated with increased incentives and increased lease originations. So all that to say is I think leasing is going to be an important feature of the automotive retail landscape in the United States and in Canada, just as it always has been, except for the last few years. So leasing is coming back is my view. Then we look at the off-lease side. So we know that off-lease maturities, 2025 is a low point. That's well documented. They're going to increase next year. They're going to increase again in 2027. But coupled with that, we're also seeing lease equity decline. You said it's below $1,000, Bob. You're right about that. I think it's going to continue to decline, okay? Because used vehicle values are going to come a bit more under pressure and the residual values in those portfolios, if anything, is trending up because the MSRPs and the average retail price has been trending up. So I think we're going to see the consumer, the less equity in the lease, fewer consumer buyouts, meaning more cars getting returned. And we're starting to see some evidence of that already. And then we're going to see those cars flow a little deeper in the funnel. So I'll let Brad comment on the financials here, but I'll just say, in the quarter we just had, the commercial volume sold in our open channel in the U.S. was up almost 2x over last year, okay, even though the top of the funnel was down, okay? So what you can tell from that is there are few vehicles at the top of the funnel, but they're flowing deeper in the funnel and OPENLANE is converting a higher percentage in that bottom of the funnel, which is our most lucrative channel, the open sale. So that's very exciting for us as we think about '26, '27. Obviously, that's a big part of our strategy is having a very liquid marketplace with thousands or tens of thousands of buyers on there. And obviously, this very differentiated pool of off-lease vehicles flowing into it and hopefully, those volumes increasing here in 2026. Brad, I'll let you comment on the ARPUs. Bradley Herring: Yes, Paul (sic) [ Bob ]. So if you think about how do you translate that kind of into numbers, what you'll see when the commercial recovery comes back in, you will see kind of a blended tick down in our ARPUs because you'll see the yields or the ARPUs on the commercial side are going to be less than they are on the dealer side. So on a blended basis, that's going to come down some. But what you're also going to see is that gross margin in the marketplace in the high 40s, call it, around 50%, you'll see that number start to tick up slightly because the commercial vehicles do come in with a higher gross margin with kind of a lower incremental cost attached to them because of the scale that we get in these private label platforms. So I hope that helps. Bob Labick: Yes, very helpful. And the info from Peter on the commercial open channel up 2x year-over-year is super. That's a great trend for you. So congratulations on that. Peter Kelly: Thank you, Bob. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Kelly, the CEO, for any closing remarks. Peter Kelly: Thank you very much, Maron, and thank you all for your questions for joining us on the call today. We look forward to seeing you at the upcoming conferences in November and December and remain confident in OPENLANE's ability to deliver meaningful growth, profitability and cash generation over the next several years. Look forward to talking to our next call in early 2026. Thank you very, very much. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Humana Third Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead. Lisa Stoner: Thank you, and good morning. I hope everyone had a chance to review our press release and posted remarks, which are available on our website. We will begin this morning with brief remarks from Jim Rechtin, Humana's President and Chief Executive Officer; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session, where Jim and Celeste will be joined by George Renaudin, Humana's President of the Insurance segment; and David Dintenfass, President of Enterprise Growth. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our third quarter 2025 earnings press release as they relate to forward-looking statements, along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements in future filings or communications regarding our business or results. Today's press release, our historical financial news releases and our filings with the SEC are all also available on our Investor Relations site. Call participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP. Management's explanation for the use of these non-GAAP measures and reconciliations of GAAP to non-GAAP financial measures are included in today's press release. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, the call is being recorded for replay purposes. That replay will be available on the Investor Relations page of our website, humana.com, later today. With that, I will turn the call over to Jim. James Rechtin: Thanks, Lisa, and good morning, everyone, and thank you for joining us today. Before we get started, I just want to take a second to acknowledge the tragedy that occurred here in Louisville last night, it's had quite an impact on the community, and our thoughts go out to the community and all the families who are impacted. With that, let me turn to the quarter, and let me hit the headlines. As you have already seen, we delivered a solid third quarter in line with our expectations. Our third quarter medical cost trends continue to be in line with expectations, and we also continue to anticipate our full year 2025 EPS outlook of approximately $17. We remain committed to achieving individual MA pretax margin of at least 3% over time, and the external environment continues to evolve largely in line with expectations, and we are executing against our plan. I'll now briefly describe the progress we are making operationally. And as usual, I will frame my comments today around the 4 drivers of our business. The first of those is product and experience, which drive customer retention and growth. Second is clinical excellence, which delivers clinical outcomes and medical margin. Third is highly efficient operations. And fourth is our capital allocation and growth in CenterWell and Medicaid. I'm going to spend most of my time today on product and experience as well as clinical excellence. Let me start with our Medicare product and experience. So first, I want to emphasize that it's very early in AEP. We have roughly 2 weeks of incomplete data. And while we will provide a sense of what we are seeing, this is very much subject to change. Second, I want to reinforce how we think about growth. Our focus is on maximizing customer lifetime value and customer NPV. That's our focus. The way we do that is delivering an exceptional experience that fuels member retention. Other key growth levers like benefit design and member and product mix and channel mix are all tightly aligned with our operational capacity so that we can absorb, onboard and serve members in a way that maximizes lifetime value in NPV. Third, I want to reinforce again that we are confident in our pricing, and we're pleased that we expect to return to growth. We will take as much growth as possible from improved retention. This is unquestionably desirable growth, and we welcome new sales. However, we are prepared to take targeted actions to slow new sales if we reach the point where the volume risk is negatively impacting member experience. We do recognize that you want us to provide a specific growth target. We do not think that focusing on a net growth target is the right metric because as I just shared, growth through retention is desirable, and we will take as much of it as we can. We also will not give a specific number around new sales targets because the amount that we can absorb is dependent upon member product and channel mix. So now as to what we are seeing new sales are at the high end of the range -- the high end of the anticipated range of outcomes that we expected in AEP. Channel mix has meaningfully improved relative to prior years. We have greater volume in our own distribution channel with select high-performing partners and in digital distribution. This channel mix tends to be correlated with customer segments that have a higher lifetime value and are more engaged. We are also seeing favorable product mix, including higher than initially expected sales in plans with 4 stars and greater. We are not seeing outsized sales in areas where competitors have exited plans. We are experiencing significantly reduced Humana plan-to-plan mix with plan-to-plan sales down year-over-year. We believe that this is likely an early indicator that our stable benefit strategy and changes to our customer service approach are working to reduce voluntary attrition, though we need more time to validate this assumption. So while it's early, we feel good about what we are seeing so far in AEP. And as we have said previously, we will continue to monitor new sales volume and manage it dynamically. We are prepared to take further mitigating actions as we did heading into AEP if it appears that new sales will put member experience at risk. We do recognize that there's a lot of interest in our overall growth strategy and the ongoing AEP. So I'm pleased that David Dintenfass will join Celeste, George and I for Q&A today. David joined the company nearly 2 years ago as President of Enterprise Growth. He came to Humana with 30 years of experience across a range of industries, including financial services, where he was focused on customer segmentation, acquisition, driving an experience that fuels retention to ultimately drive sustainable and profitable growth. David's consumer-focused experience and perspective has been and is instrumental to our journey to become a consumer health care company. Now to turn to clinical excellence, I will focus on Stars performance. Just to recap the key messages from our 8-K and audio file released in early October, we are disappointed, but we are not surprised by our bonus year '27 Stars results. The results are consistent with our baseline planning scenario and our outlook remains the same as we previously communicated at our investor conference in June. We have -- we did see operational gains in Q4 of 2024 that have continued into 2025, and we feel good about our operational progress this year. More specifically, in our current measurement year, bonus year '28, we are seeing meaningful year-over-year improvement across the vast majority of metrics. We also continue to see week-over-week improvement as recently as October, and we are showing 600,000 more gaps closed year-over-year as our momentum continues to remain steady. Given the Stars program is measured on a curve, it would not be prudent to share additional results at this time. However, once the hybrid season is complete in the second quarter of next year, we will provide some additional visibility into our final operating results. However, we will not speculate on thresholds. All in, the takeaway remains that we continue to be confident that we are on the right track to return to Top Quartile Stars results in bonus year '28. Now I'm going to turn to our highly efficient operations we are making -- where we are making meaningful progress. I'm going to share a couple of examples. We recently partnered with Genpact to outsource elements of our finance capabilities. This will both improve our capabilities and it will reduce cost. We also have a newly introduced agentic AI platform, which is helping deliver capabilities like Agent Assist that help our call center advocates and agents focus on supporting our members. This is helping to improve call accuracy and deliver faster response times, which drive better outcomes and experience. Collectively, we expect these items to generate greater than $100 million of savings over a few years while also improving the quality of our operations. These changes are a small sample of our multiyear transformation, which will include near-term tactical cost programs, but also longer-term efforts that change how we operate. Now turning to capital allocation. We have freed up capital by selling a non-core asset, the Enclara Pharmacia business and are working to sell additional non-core assets. We also agreed to deploy capital to a deal that is expected to close this month in Florida, the Villages Health, which provides primary and specialty care services at the fastest-growing retirement community in the country. We also continue to feel good about our CenterWell Pharmacy strategies. We continue to develop our direct-to-consumer capability, and we are also moving into direct-to-employer opportunities. So in conclusion, we are pleased with our solid performance year-to-date, and we continue to have confidence in the full year 2025 outlook. We feel good about our pricing and the outlook for AEP 2026. Bonus Year '27 Stars results were disappointing but consistent with our expectations and the outlook for Bonus Year '28 Stars continues to trend in the right direction, and we remain confident in a return to top quartile results. With that, I will turn it over to Celeste for a few remarks before we go to Q&A. Celeste Mellet: Thank you, Jim. Our third quarter results reflect solid execution and underlying fundamentals, including membership and patient growth, revenue and medical cost trends that continue to develop consistent with our expectations. In addition, we experienced some favorability in the quarter, which enabled higher than previously anticipated investments. These investments were focused in areas that both accelerate our transformation and where we have seen strong returns to date, such as Stars and clinical excellence as well as in areas such as network management, which position us well for the future. We are pleased that our year-to-date performance and outlook support reaffirmation of our full year adjusted EPS outlook of approximately $17, while also making an additional approximately $150 million in incremental investments, including the higher investments in the third quarter. As a reminder, we included the Doc Fix in our guidance for '25. If it is not implemented for '25, we may invest all or a portion of the onetime savings into items that position the company for long-term success. Now turning to the balance sheet and capital deployment. I would first like to comment briefly on the days in claims payable or DCP metric. Our DCP changes, both sequentially and year-over-year were largely driven by items that are generally timing in nature and not related to claim reserve levels, including changes in process claims inventory and provider payables. And as previously discussed, the year-over-year comparison was further impacted by changes related to the Inflation Reduction Act. Importantly, the estimate for claims Incurred But Not Reported, or IBNR, remain largely consistent in these periods, even with our year-over-year decline in individual MA membership. As we have previously shared, we believe this serves as a better indicator of the consistency in our reserve methodology and the relative strength of our claims reserves. Now moving to our ongoing efforts to increase the efficiency of our balance sheet. As Jim mentioned, we completed an asset sale during the third quarter and are continuing to pursue the sale of additional non-core assets while also making significant progress on capital optimization, the details of which we will share when we complete the execution. With respect to capital deployment, we will remain prudent in our near-term approach, taking a balanced view to evaluating capital investments and returns. Accordingly, our '25 outlook does not contemplate additional share repurchase activity beyond the buybacks in the second quarter, which offset dilution from stock-based compensation. From an M&A perspective, we see significant opportunities to take advantage of the current market dislocation and acquire attractive small to midsized provider businesses, such as our pending acquisition of the Villages Health, while remaining focused on managing our debt-to-cap ratio. Our debt-to-cap ratio at the end of the quarter was 40.3%, down from 40.7% as of June 30, and we continue to target a ratio of approximately 40% over the longer term. Looking ahead, I echo Jim's message that we feel good about our '26 pricing and the outlook for AEP. In addition, we are executing on the plan that we laid out at our Investor Day in June, managing the levers within our control with a focus on delivering best-in-class clinical excellence, transforming the company to enable scalable growth and driving enhanced operating leverage. We believe that these efforts will allow us to return the business to its full earnings power while driving better outcomes and experiences for our members, patients and associates. With that, I will turn the call back to Lisa to start the Q&A. Lisa Stoner: Thanks, Celeste. Before starting the Q&A, just a quick reminder that fairness in those waiting in the queue we ask that you please limit yourself to one question. Operator, please introduce the first caller. Operator: Our first question comes from Andrew Mok with Barclays. Andrew Mok: I understand that it's too early to share any membership growth projections, but I was hoping you'd be able to offer a framework for the level of new growth that you're comfortable with before it starts to impact your operational capacity. And based on your prepared remarks, are you already starting to pull some of those levers you mentioned? David Dintenfass: Andrew, thanks for the call. So this is David Dintenfass. First of all, it's good to be on my first Humana earnings call, I'm really glad to be part of this team. So Andrew, let me just take a step back and I'll answer your question, but let me just make sure the approach to growth is really clear, and Jim touched on this. Our focus is increasingly on the lifetime value and NPV of our membership. And so growth is an outcome of that, but also our current membership and retaining them is a primary objective. How do we do that? How do we drive lifetime value and our margin objectives that we shared at Investor Day? So number one, we have to have appropriate pricing. We have to price for risk, and that is a very collaborative process working with underwriting. It goes to number two, which is that there's been a bit of a cycle, right, which is why there's all this question about is growth good or is growth not good. And that really comes from an approach that says, we're going to grow on plans that, frankly, don't have a very attractive margin. They're attractive for the customer. We bring them in and then those plans can degrade over time. The problem is if you overgrow in those low-margin plans, you say growth might not be good. We don't think that's the right long-term strategy. We know that our customers don't want their plans to be changing constantly. So instead, what we've done is try to stabilize the margin across all of our plans. So that matter where growth might come from, that growth is attractive for the long term. That goes to number three, which is a focus on the customer. So increasingly, we're saying, how do we design our plans, and we're saying, let's start with what the customers most want, which is stability, especially on their core medical benefits, and we've tried to provide that this year. Now this is in the context that we've had 2 years where we've been cutting benefits, and we've also exited markets where we didn't think the margin profile is where we needed to be. That's put us in a really good position this year to follow the customer and have more stability. And that goes to number four, the final part, which is what we talked about at Investor Day and Jim touched on as well, which is we need to differentiate the experience in the long term. Product is important, but it's only part of the equation. If we have products that have appropriate pricing for risk, then it's about attracting members, retaining them, getting to do all the things clinically and on Stars that drive true lifetime value. So with that approach, you asked how much growth can we handle from an operations perspective. We are working through that very dynamically. We're not sharing a number in part because we are working on operations. The principle we have is that, first of all, let's make sure that all of our members have a great outcome, and we're retaining them at a better rate. We committed to much better retention at Investor Day, and we are fully committed to make progress on that next year. But as far as new membership, we want to make sure that every new member comes in has a great experience as well and that we're able to retain them. And we're working very dynamically across all parts of the operation to make sure that we're balancing the new member growth through our ability to consume the volume. Operator: Our next question comes from Ann Hynes with Mizuho. Ann Hynes: I know you don't want to give a growth number for MA membership, but can you give an update on your diversification strategy? I know you're trying to shift some members out of H5216. Can you give us an update how that strategy is going? James Rechtin: Yes. Let me touch on that. And I'm going to start by just being very clear about what our intent is around the diversification strategy. What we are trying to do, first and foremost, is deconsolidate 5216. So I think as many of you are aware, roughly 43% to 45% of our membership has been in 5216 over the last few years. That is putting too much risk in a single contract. We should be thinking about this from a portfolio standpoint. We should have a portfolio of contracts. We should have reasonably even membership across that portfolio so that if any one contract does not perform in a given year, there is less risk to the entire business. So that is goal #1. And we feel good that we've taken a step in that direction. It's not something you can fully accomplish in a year, but we feel good that we have taken a step in that direction, and you should see us take incremental steps really over the next 2 or even 3 cycles of product. Along with that, as you deconsolidate 5216, of course, you're going to look to contracts where you have 4 and 4.5 stars to try to create that balance. And so that is what we have done this year. We've looked to some of our contracts that have 4 to 4.5 stars to create that balance. And right now, we feel good that we are making real progress. We are not at a place after 2 weeks of data that we're going to want to talk about numbers or get super specific about it. But this was always part of the plan, and we have made good progress from what we can see in the first couple of weeks, and we'll share more as we better understand what that is -- where that's going to land in January. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: Just a quick follow-up first. You talked about membership growth at the high end of expectations. Can you share with us what that expectation range is on new membership? And then my question is, can you give us an update on your percentage of MA individual membership in fully capitated agreements this year? And what do you expect it to be next year? And are you seeing any pushback from providers in terms of giving you these lives back because they're having economic issues making a margin on these benefits? James Rechtin: Yes. Justin, let me hit the first half of that, and then I'm going to hand it to George for the second half of that. On the first half, and I know you expect this answer, but we're not going to give a number. I will just go back to why we're not going to give a number. We are truly looking at multiple things. We are looking at member mix. We are looking at product mix. We are looking at channel mix because each of those impact our operations in slightly different ways. We are also ramping up operations because that's what you do when you're headed into a solid growth year. And so we are looking at all of those dynamics, and we will make adjustments along the way based on the collective set of things that we're looking at. And when we say that we will make adjustments, we made adjustments going into AEP. I think people recognize that. There have been reports out on that fact. And we will continue to monitor in AEP, but we'll also be looking at, hey, do we want to think about OEP differently? Do we want to think about rest of year differently? So all those factors are in play, and it just makes it really hard to say, "Hey, here's a number at this point in time." With that, I'll hand it off to George. George Renaudin: Thanks, Jim. So we have taken measures such as taking Part D risk back where we saw the IRA shift cost in a very significant way. As David mentioned, we have been reducing benefits for 2 years to reset the product so that it is a product that we and our value-based partners want to grow. And so we've taken those actions. In addition to those 2 major actions, we're also -- because of the Stars program, we are also implementing Stars mitigation programs that mitigate the impact of the Stars revenue hit based upon their success and their performance in the Stars program. So we are taking very specific mitigation tactics, working with our value-based partners, looking for ways to help mitigate any headwinds that they face, work with them every day. We are out in the field talking with them about contract changes that are necessary, and we feel good about the progress we're making there. So I would just remind you that we've taken actions in the past couple of years. We also, in addition to that, have a Stars mitigation program that's going on. So when you combine those factors, we feel good about where we are with the value-based partners. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: And I know you're not providing 2026 guidance today clearly, but would love if you could give some initial thoughts on the type of margin that you'll assume for the new to Humana sales growth. Is it reasonable to think that, that would be comparable to the 2% roughly you're targeting ex the Stars headwind for the overall book? And then obviously, I'm sure it's dependent on mix, but just based on what you know today. Celeste Mellet: Yes. Thanks for your question. So as Jim said in the opening remarks, most importantly, we're on track for the plan we laid out at our Investor Day for 2028. And it is too early to provide guidance for 2026, particularly given where we are in AEP. As we think about the margin of the new members to some extent, it will be driven by which contracts they are sold on. So obviously, those that sell on to the 4, 4.5 star contracts will come in at a higher margin. But in aggregate, we continue to expect that our margin for individual MA, excluding Stars World double in 2026 over 2025, and then we'll continue to make progress in 2026. So it's going to be really, again, like how it comes in is a question of what contracts they're sitting on. But based on all the work we did going into AEP in terms of our product design and our channel mix, we are happy with the margin we're seeing and expect it to be relatively consistent with our overall margin, although some will be above and some will be below. Operator: Our next question comes from Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: I was hoping to hear a little bit more about some of your Stars recovery efforts. You noted last month that the latest round of scores did not fully reflect some of the improvements that you've implemented. And now that we've seen how 5216 has performed across the member experience and chronic conditions measures. Can you talk a little bit about the measures or general categories where you feel like you've made the most tangible progress versus the latest data? James Rechtin: Yes. So the operations in this current year are obviously focused on HEDIS and patient safety metrics. And as I kind of referred to in my opening remarks, we're actually seeing strong progress pretty much across the board in those metrics. And look, again, we remain confident, optimistic, positive about the operating progress that we've made across those range of metrics and the position that will put us in next year as we obviously have another set of metrics that we have to work through in the first and second quarter of next year around CAHPS and HOS and the TTY metrics. So right now, based on the things that we can control this year, it's been broad improved performance that makes us feel good about our overall trajectory. Yes, George, do you want to add? George Renaudin: Yes. Jim, the only thing I would add to that is part of the strategy that David laid out is including the stability. Stability will also help us as we continue to make progress in our termination rates and as well as how our members perceive us through the experience we're delivering through stable benefits. So those are also positive factors to contribute to not just the administrative measures and the health outcome measures that Jim mentioned, but overall to the CAHPS as well. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: I guess you mentioned 3 things, I guess, that were giving you comfort in the, I guess, quality of the membership growth that you're seeing so far. I think better channel mix, fewer plan-to-plan sales and then, I guess, lower voluntary disenrollment. Can you just kind of remind us what the MLR or margin differential is between good channel, bad channel, plan to plan, new to plan and then retention versus new membership so we can kind of better think about what it means to have those buckets growing faster? And then just on the disenrollment comment, you talked about better enrollment. Is it back to normal? Is it better than normal that you're thinking about? James Rechtin: Yes. Let me touch on 2 things. And then, David, if you have anything you want to add, jump in here. So we're not going to give explicit margin information here, but let me give you a little bit about the dynamics across the channels that we watch that make us feel better. The biggest one is actually going back to NPV and long-term value. We see better attrition rate in some channels than others or retention. So that is one piece. We have a different cost of acquisition depending on the channel. So that is another piece that we look at. And then we tend to find that we have different engagement rates. So when you think about things like Stars, accurate diagnosis, individuals managing their medical care, we see a different engagement rate across channels. And so we look at all of those things when we're then trying to understand what the economic impact is of any given channel. So those are kind of the pieces that we look at. And then the one other thing I do want to touch on, we do not know right now that we are seeing better retention. What -- we just don't have the data, right? The data is not available at this point in the year. But when we see reduced plan-to-plan sales, that tends to be correlated with better retention. So we don't know what that retention number is going to be right now, but the reduced plan-to-plan sales is correlated with better retention, and we are seeing reduced plan-to-plan sales year-over-year. So that -- so those are kind of the components. Did I miss anything there, David, do you want to throw in? David Dintenfass: Yes. I think you got it exactly. I don't know if you mentioned, I think there's also different complaint to Medicare Stars outcomes we see by channel. This has been a big factor, especially if you look at the broker channels, and you've seen us take some actions. That's largely based on the quality of how those customers are experiencing that relative to how the Stars outcomes are going to look. Operator: Our next question comes from Joshua Raskin with Nephron Research. Joshua Raskin: I guess I wanted to focus on this LTV and NPV focus that you're talking about. I guess, is this long-term value member as the North Star a strategic shift for the organization? Meaning, are you willing to accept different margin levels in, say, your insurance segment because you can create more margin through CenterWell? I just want to understand how this impacts long-term margins and if this is, in your view, a shift in how you've thought about things in the past as an organization. David Dintenfass: Yes, Josh, thanks for the question. I think it's an evolution. I think this has always been part of how the company has thought about this. But as I said, part of this question about is growth good, is it not? It comes down to the margin of that growth. And what drives lifetime value? You need to have margin to drive lifetime value. You need to have retention to drive lifetime value. And we are trying to get to a place where all of our products on the insurance side have a reasonable margin, trying to get out of the cycle of having low-margin products that are high growth and then you worry about overgrowing in them and then having to drive margin in the out years. We don't think that's great for our sustainability. We don't think it's great for the customers. You also brought up the enterprise value. That's absolutely part of the play here. We know that integrated health is a big part of what we think differentiates Humana and looking at the lifetime value of a customer across the entire enterprise is becoming how we look at all of our activities. George Renaudin: Josh, if I could just add one other thing to that is as the long term are here, I can just tell you that what I've seen over the past couple of years, and we've actually talked about this directly during the investor conference, which is we're taking a multiyear view towards lifetime value. And that longer-term view is having us approach products in a different way in this way that leads to better stability and I think better long-term value for the company. Celeste Mellet: Can I just add the pile on here. While we are focused on LTV and NPV, we are -- we recognize can't have a long term without the short term. So we are balancing the long-term value, the long-term value creation with delivering on the next year or the next quarter. So we are balancing those things. We're not just looking 3 and 5 years out. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: Just maybe on the MA market overall, there was some data out from CMS early before open enrollment that they were forecasting the market might not even grow this year. I wonder -- I know you're not commenting on your specific situation, but do you have any feel for where the overall market is? You said in your comments that where there's planned exits, you're not picking up disproportionate numbers of those. Are we finally at an area where the market has been disruptive enough that some people are just choosing fee-for-service again? Is that possibly happening? And then maybe if I can just ask you on your mitigation efforts during this open enrollment. I know -- I believe there's some notice period on commission adjustments that would probably make it tough to do that during the open enrollment. So I'm just trying to understand what are the mitigation factors that you can push on if you see too much growth in a particular area? James Rechtin: Yes. Let me hit the first of those, and then I'll hand it over to David for the question around plan exits and commission growth. On the market growth, I would just point out a few things. One, the forecasts are never right, right? Like they're never right. You can go back and you can look at the 5, 6, 7 years historically, they're never right. Second, we don't see a reason that the market should grow materially different than the way it did last year or the way it has historically. And so our expectation is it's going to be somewhere in the mid-single digits growth. And again, this is forecasting. So CMS is not going to be right. We're not going to be exactly right. But we don't see what the big difference is from last year in terms of where the market is at as a whole when you look across all plans. And so our expectation is growth is going to look somewhat like last year at the end of the day. And we will obviously know come January, February, but that's kind of what our expectation is at the moment. David Dintenfass: Yes. And A.J., the second part of your question about commissions, you've all seen we've already decommissioned a number of plans. That is a potential lever, but there are other levers. Keep in mind that we own a big part of our own distribution, including our own marketing. So we're able to do other levers beyond commissions if we want to have volume match our operational capacity in the back half of the year. James Rechtin: And actually, I'm going to go back to the [ plexus ] real quick. The bottom line on the [ plexus ], we don't know if people are going to fee-for-service or if they're going to other plans. But what I would just point out, and we've said this a few times, we are at parity or below the richest plan in the market in many, many geographies. And it just so happens that in a lot of the [ plex ] geographies, we tend to be below or behind other plans in terms of benefit structure. And so that could be playing into it. But again, we don't have enough data to know that for sure. Operator: Our next question comes from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I was wondering if you could comment on this year's MA enrollment. Obviously, that number -- the decline in membership is coming in not as much as you had originally suspected. Given the sort of short-term dynamics with this year with that membership change, I'd be curious on that. And with all of your comments on retention for next year, how that plays into your plan to sort of double the margin number for 2026? James Rechtin: Can I just ask you to repeat the first part of that? What are we not seeing? Elizabeth Anderson: No, I was just saying sort of the change in MA membership numbers for this year? Like how are you sort of seeing that impact the short-term numbers? Does that sort of make any big differences versus your original assumptions in terms of maybe the fourth quarter MLR? And then as we think about 2026, given your focus on retention, how does that play into and contribute to your doubling of the margin number for next year? James Rechtin: Okay. Got it. I missed the 2025 point. So yes... Celeste Mellet: Yes. Elizabeth, it's Celeste. The -- in terms of our better-than-expected or lower-than-expected declines in membership this year, the pickup has been driven by 2 things. One, the retention is better; and two, sales have been on the margin better as well. But in particular, as we've gotten later in the year, the increase in the numbers has been driven by better retention. As it relates to MLR, we don't see an impact to our prior expectations based on what we picked up at the end of this year. Operator: Our next question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: Obviously, knowing that there's still a lot more to play out in the AEP. Just based on the initial comments that you made around the sales tracking to the high end of the scenarios, can you maybe give us some insights into -- in terms of from a product mix perspective, how you're seeing new sales tracking between PPO, HMO and then, I guess, maybe D-SNP products? And then also on the LIS PDP commentary around most of the growth coming from the LIS. Just any observations you can give us in terms of where you're seeing that growth coming from in terms of from either competitor exits or other existing plans in the market? Just any observations around that as well. David Dintenfass: Yes. I'll take the first part. I think it's really early to be able to project at that level of detail on the growth. We're just a few weeks into AEP. And what we're seeing is that across the board, we're seeing healthy growth on all segments, but not disproportionate in any one segment. We're also not seeing disproportion in any geography at the moment, including the [ plex ] markets from our competitors. So it's too early to parse it apart, but it looks like it's much more even than it is choppy. George Renaudin: Thanks, Scott. So on the PDP side, what we're seeing thus far is some strong growth there. And what it's come -- where we expect the majority of it to come from is from our basic and value plans. On the basic side, which I think was your question around the low income, what we saw is that we are below the benchmark in about twice the number of states as we were in '25. And so that will lead to a significant pickup in auto enrollees, and that will include, of course, competitor reassignments. What we've generally seen is that, that is good business in the PDP. And so we are thinking that, that is a very positive development. Operator: Our next question comes from Ryan Langston with TD Cowen. Ryan Langston: Great. I'm sorry if I missed this, but what drove the decision to not crosswalk the group MA members from H5216? Is that just you're thinking you're going to get that back to an appropriate star rating for 2028 or other logistical reasons you didn't make that move? James Rechtin: Yes. I'll jump in on that one. It goes back to 2 things. One is -- well, really 3 things. One is our attitude towards having a balanced portfolio of contracts. The second is the desire to provide stability to our members in order to drive retention. And then third is the outlook on Stars. And so it's all 3 of those things combined that led to that decision. George? George Renaudin: Yes, I would just say that another part of that because it's multifactorial, as Jim said, and we've been saying since we've been talking about the group business. So we remain focused on improving the group MA margins through the various renewal cycles to reflect the reimbursement environment as well as the cost environment. And our business so far, we've renewed 91% of our current group members along that line of recovering margin. So we are making good progress there in the recontracting to improve the margin. We expect fairly solid growth in 2026 with some key new business, including a major airline, a large group in Kentucky as well as Alabama. So as far as Stars go, our plan is to move the group members away from 5216 is not to move our members away at this time because we're making good progress both on the Stars side as well as the margin recovery through the renewal cycles. Celeste Mellet: And if I can pile on again, this is again an example of not crosswalking these. It's balancing the short term and the long term. We could get a bump in the short term, but risk the longer term on Stars, and we're not willing to do that. So it's a balance of what we deliver in '26 versus what we deliver in '28 on that front. Operator: Our next question comes from Jason Cassorla with Guggenheim. Jason Cassorla: Just it sounds like medical and pharmacy trends coming in line with your expectations for 2025. I think looking back at the Investor Day, you previously assumed trend would remain elevated for '26. There's obviously the mix elements you've talked about, but any early thoughts on how 2026 cost trend development coming in relative to 2025? And then any way to help quantify how you're thinking about the trend vendor opportunity specifically for next year? Celeste Mellet: Yes, we have talked about in the past that we expect a continuation of the same growth levels in medical and Rx cost trends into 2026. So the mid-ish -- on the higher end of mid on the medical cost side and low double digits on the Rx side of things. So we're not seeing anything that would suggest it should be different than that at the moment. And then sorry, what was the second part of your question? Jason Cassorla: Yes. Yes. Just any way to help quantify how you're thinking about the trend vendor opportunity -- clinical excellence opportunity for next year? Celeste Mellet: Yes. So if you think back to our Investor Day, we talked about the levers of transformation and the clinical excellence trend vendor opportunity is one of our larger ones. We expect to make progress versus what we delivered this year. I'm not ready to size that yet. Some of that will be driven by the size and mix of our membership and then make progress again in '27 and '28, but it's too early to say where that will be just given the number of dynamics that are -- that still need to settle down. Operator: Our next question comes from Lance Wilkes with Bernstein. Lance Wilkes: Great. Could you talk to some of the margin characteristics and long-term margin targets you've got? In particular, in Medicaid, if you could talk to the differences between traditional and duals where you see long-term margins and how you perceive year 1 margins in that sort of business? And then over in the group MA business, what sort of J curve do you expect as you get new business in there? And maybe just a quick clarification. You'd mentioned a direct-to-employer opportunity, I think, in CenterWell Pharmacy. So if you could just clarify that as well. James Rechtin: Do you want to kick off, George? George Renaudin: Yes, I'll start. On the dual opportunity, just keep in mind that when we think about that, and we think about Medicaid since you combine those 2, I'll try to hit on both of them. We prioritize our Medicaid business based upon where we think there is a great linkage to duals, including some of the changes that are currently slated for the dual integration states. And so we have had an industry-leading win rate in procurements and Medicaid. And the reason for how we've targeted those is really to where the dual opportunity remains. And the overall reason for that, of course, is that the duals do have outsized margins compared to the traditional or MA business. And so we see that those do deliver margins in the first year. Unlike some of the core products all year along, those dual products tend to perform well from a financial standpoint. We have -- we're seeing that. We continue to see that happen. We have won a number of Medicaid states. It allows us to increase our dual penetration in a few key markets. I would just point out that in 2026, we'll be moving into the Michigan HIDE program in Illinois, which is, as we've talked about before, a very new dual marketplace. We are also going to be growing into Illinois this year in '26 and we also have an opportunity in South Carolina, where we're carving in the dual eligible. So there's lots of great opportunity in the dual market in Medicaid that we feel very good about. James Rechtin: Yes. And let me just quickly hit the direct-to-employer. I think people are familiar with the direct-to-consumer work that we've been doing in CenterWell Pharmacy, the partnerships, particularly around some of the GLP-1s. We have also seen some interest in similar programs, but through employers and we've been exploring that space. It's too early to know exactly what that's going to look like, but it is potentially another interesting opportunity for us to take advantage of the capability that we have in our pharmacy business. Operator: Our next question comes from Michael Ha with Baird. Michael Ha: I know it's a bit early to think about '27 advanced rate notice, but yesterday, we learned a key data point. And maybe it's unsurprising, but if your reach fee-for-service cost trend for '25 is 8.5%, usually a pretty strong leading indicator for the rate notice and clearly much higher than what was implied for the '26 final notice, I think, over 300 basis points. So when you couple that with CMS' estimate on '27 trends, it feels like you have a starting point in the advanced notice that could be north of 9% on the effective growth rate alone. Clearly, very strong for MA and very strong for Humana. So -- and again, I know it's early to think about it, but does this roughly make sense and jive with your internal expectations? And wondering if there are any other important variables you think we should also consider heading into the rate notice? Celeste Mellet: Yes. Look, I think it's -- as we've learned over the last few years, speculating on where the rate notice will land has been a very much more imprecise answer than we would like. So we're not going to comment on sort of where they are, where they're starting, what the headwinds and the tailwinds are. And we'll obviously get a first look at that in the beginning of next year. Operator: Our last question today will come from Whit Mayo with Leerink Partners. Benjamin Mayo: All right. I was just wondering if you guys had any views on the changes to the reward factor to EHO for all, whatever it's being called next year and implications on your Stars or more broadly, what you think this means for the industry? I don't think you have any challenges with your duals mix low income or disabled population, but just not sure yet what this actually means. George Renaudin: Yes. With regard to the social risk factors that go into that, we're seeing great progress. We're tracking that on a weekly basis as we're tracking all of our Stars progress. And we know that we are making very good progress there. We're seeing week-over-week improvement. So we feel that we're on track for where we need to be to have that factor be positive. We have a good mix of low income within our product mix, including our dual and even products that don't have as large of a specifically dual population with our group being on 5216, as we've talked about before, we're seeing progress there and having a good mix of membership on 5216, even with the deconsolidation, we should still be in good shape with the social risk factor members. James Rechtin: Yes. I'd just say, operationally, we feel good. And obviously, it's hard to tell where the thresholds are going to come in exactly. So this is just one of these things that will be difficult to forecast. With that, I just want to thank everybody for joining us this morning and for your interest in Humana. And I will say again that we're extremely appreciative of our 65,000 associates who are driving the performance that we talk about on these calls and who are serving our members and our patients every day. And so we appreciate your support, and we hope you have a great day. Thanks. 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 Innospec Third Quarter 2025 Earnings Release and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Jones, General Counsel and Chief Compliance Officer. Please go ahead. David Jones: Thank you. Welcome to Innospec's Third Quarter Earnings Call. This is David Jones, and I'm Innospec's General Counsel and Chief Compliance Officer. The earnings release for the quarter and this presentation are posted on the company's website. During this call, we will make forward-looking statements, which are predictions about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ from the anticipated results implied by such forward-looking statements. These risks and uncertainties are detailed in Innospec's 10-K, 10-Qs and other filings with the SEC. Please see the SEC site and Innospec's site for these and related documents. In today's presentation, we have also included non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure is contained in the earnings release. The non-GAAP financial measures should not be considered as a substitute for or superior to those prepared in accordance with GAAP. They are included to aid investor understanding of the company's performance in addition to the impact these items and events had on financial results. With me today from Innospec are Patrick Williams, President and Chief Executive Officer; and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that, I turn it over to you, Patrick. Patrick Williams: Thank you, David, and welcome, everyone, to Innospec's Third Quarter 2025 Conference Call. This was a mixed quarter for Innospec with continued strong operating income growth and margin expansion in Fuel Specialties, offsetting lower results in Performance Chemicals and Oilfield Services. Performance Chemicals continued to deliver sales growth over the prior year, where gross margins declined as expected on higher cost, price management and weaker product mix. These combined factors drove results below our expectations, but we are executing on multiple top line cost and other margin improvement opportunities identified in the business. Late in the third quarter, we began to see a positive impact from our initial actions, and we are optimistic that we will deliver sequential operating income and margin improvement in the fourth quarter. Over the medium term, we have a strong pipeline of margin-accretive opportunities across all our end markets, and we are working to accelerate these actions. Fuel Specialties had another strong quarter with double-digit operating income growth and improved margins. Margins continue to track at the upper end of our expected range, and our outlook is for steady performance in the fourth quarter. Oilfield Services operating income declined sequentially and versus the prior year on lower-than-anticipated Middle East activity due to customer timing and phasing. We are optimistic that we will deliver sequential operating income and margin improvement in the fourth quarter as Middle East activity returns and our new DRA expansion comes online. We remain focused on margin improvement in all segments. Our outlook does not assume any resumption of Mexico sales. Now I will turn the call over to Ian Cleminson, who will review our financial results in more detail. Then I will return with some concluding comments. After that, Ian and I will take your questions. Ian? Ian Cleminson: Thanks, Patrick. Turning to Slide 7 in the presentation. The company's total revenues for the third quarter were $441.9 million, similar to the $443.4 million reported a year ago. Overall gross margin decreased by 1.6 percentage points from last year to 26.4%. Adjusted EBITDA for the quarter was $44.2 million compared to $50.5 million last year, and net income for the quarter was $12.9 million compared to $33.4 million a year ago. Our GAAP earnings per share were $0.52 compared to $1.33 recorded last year. Our headline results for the quarter include $24.4 million in charges, which had a negative EPS impact of $0.57. These charges are composed of $42.9 million of assets and intangible impairments and restructuring charges related to the expected lack of near-term recovery in our QGP business in Brazil, our Mexican oilfield production business and our U.S. oilfield stimulation business. These charges were offset by an $18.5 million reduction to the fair value of contingent consideration associated with the 2023 acquisition of QGP. Excluding these and other special items in both years, our adjusted EPS for the quarter was $1.12 compared to $1.35 a year ago. Turning to Slide 8. Revenues in Performance Chemicals for the third quarter were $170.8 million, up 4% from last year's $163.6 million. Volumes fell by 2%, offset by a positive price/mix of 3% and favorable currency impact of 3%. Gross margin of 15.1% decreased 7 percentage points compared to 22.1% in the same quarter in 2024 due to higher costs, price management and weaker product mix. Operating income of $9.2 million decreased 54% from $20 million last year. Moving on to Slide 9. Revenues in Fuel Specialties for the third quarter were $172 million, up 4% from the $165.8 million reported a year ago. Volumes were down 7% with price/mix up 7% and a positive currency impact of 4%. Fuel Specialties gross margins of 35.6% were up 2 percentage points above the same quarter last year, benefiting from a stronger sales mix and disciplined pricing. Operating income of $35.3 million was up 14% from $30.9 million a year ago. Moving on to Slide 10. Revenues in Oilfield Services for the quarter were $99.1 million, down 13% from $114 million in the third quarter last year. Gross margins of 30% increased 1.7 percentage points from last year's 28.3% due to a better sales mix. Operating income of $4.8 million decreased 32% from $7.1 million a year ago. Turning to Slide 11. Corporate costs for the quarter were $18.2 million compared with $11.8 million a year ago, which included an $8.4 million recovery of historic pension costs. The adjusted effective tax rate for the quarter was 22.5% compared to 24.6% in the same period last year due to the geographical mix of taxable profits. We expect the full year adjusted tax rate to be around 25%, moving on to Slide 12. Cash flow from operating activities was $39.3 million before capital expenditures of $22.2 million. In the third quarter, we bought back almost 123,000 shares at a cost of $10.7 million. As of September 30, Innospec had $270.8 million in cash and cash equivalents and no debt. And now I'll turn it back over to Patrick for some final comments. Patrick Williams: Thanks, Ian. We continue to prioritize gross margin and operating income actions in Performance Chemicals and Oilfield Services, and we expect to deliver sequential growth in the fourth quarter. We remain focused on a combination of sales, price cost actions, new technology, commercialization and other opportunities to drive sustainable improvement. In addition, we expect Fuel Specialties to continue to deliver strong results. Operating cash generation was again positive in the fourth quarter, and our net cash position closed at over $270 million. We have significant balance sheet flexibility for M&A, dividend growth, organic investment and buybacks. This quarter, our Board approved a further 10% increase in our semiannual dividend to $0.87 per share, and we continued our record of returning value to shareholders with $10.7 million in share repurchases. Now I'll turn the call over to the operator, and Ian and I will take your questions. Operator: [Operator Instructions] And your first question comes from the line of Mike Harrison from Seaport Research Partners. Michael Harrison: I wanted to start with a couple of questions on the Performance Chemicals business. I was hoping to start that you could give us a little more color on what's going on with the gross margin there, a couple of hundred basis points of sequential decline there. Did the oleo chemicals raw material headwind get incrementally worse this quarter? Did mix get worse sequentially? Were there other factors? And I was hoping you could also address what you mean by price management as one of the issues impacting margin in Performance Chemicals. Ian Cleminson: Yes. Let me take that first, Mike, and Patrick will come over the top with some comments. What we saw in July and August was the continuing headwinds from the oleo chemicals. That's put pressure on our pricing and our pass-through ability. I think what's important is that as we've moved through September and into October, the actions that we talked about on the last call have started to take effect. We've seen the business improve from the gross margin perspective, and we're expecting the Q4 gross margin to be much closer to 18%. So that's up a full 3 percentage points sequentially Q3 to Q4. Also, I think it's worth remembering that in Q3, we do have a slower period in July and August, particularly in Europe with the shutdowns and the holiday season. So it's always a little bit weaker. I think the important thing is that our demand remains really strong. Volumes remain good. We've got a lot of work that we need to do internally. We've done some of that. We've got more to do. The team are on it, and we're starting to see the positive impacts of that coming through. Patrick Williams: Yes, Mike, we talked about it in the previous quarter, actually previous 2 quarter calls that we had a lot of actions that we had to take to manage margins better than we have in the past. And as Ian alluded to, all these actions have really come to forth right. We've really done a good job in the last month of this quarter, and we're starting to see it even better going into Q4. So the actions the guys have put in place, whether it's pricing, manufacturing efficiencies, new product, product mix, raw materials, it's just being managed better than it has. And I think we've learned a few lessons along the way, and we should see those improving as we go forward. Michael Harrison: All right. And then can you specifically talk about what are some of the commercial actions you're looking at in Performance Chemicals? I think you referenced some top line opportunities maybe across multiple different end markets. Can we just get a little more detail there? Patrick Williams: Yes. I mean we continuously have a lot of products run through our disruptive technology group that we introduced to the market. There was a little lull over probably the last year, hence, why our product mix was off a little bit. But we are introducing new products to the market probably this quarter and throughout next year, which will help with the balance. So it's more -- and it's technology, Mike, across all the sectors, whether it's agriculture, mining, personal care, it's really all sectors that we have new product technologies coming through. There was a general lull in the market because instead of looking at the big trends were 1,4-Dioxine-free, sulfate-free, nitrosamine free, that market has now stabilized out and other competitors have jumped in. We're now looking at what's the new move on the horizon. And these are products that we should be introducing over the next 3 to 6 months. Michael Harrison: All right. Very helpful. And then in the Fuel Specialties business, seasonally, you would typically see better margin performance as you start to get some cold flow improvers and the mix just kind of shifts seasonally. It sounded to me like you're saying you expect that business to be more steady in terms of earnings from Q3 into Q4. So I was just hoping that you could address whether we should see that normal seasonal pickup or if something else is going on. Ian Cleminson: Yes, Mike, we've had a really good year in Fuel Specialties. The business has executed extremely well on pricing, on top line initiatives, and we've seen the benefit of that coming through in a very strong gross margin performance. As you remember, in Q2, the gross margins were 38%. In Q3, they're at 35%. We expect that 35% to be about the same in Q4, maybe a little bit up, maybe a little bit down, but certainly around that mark, and that's really a function of where the pricing and the timing of that pricing works. As you know, there's a lag up and down. We're seeing a pretty stable environment in terms of raw materials there right now, and as you're right, we'll start to see a pickup in those winter businesses, and we're going to hit around about that $35 million of operating income in Q4, and we feel pretty good about that. That will top off an extremely strong year for Fuel Specialties. Michael Harrison: And maybe just to ask a little bit more broadly on the outlook. It sounds like you expect sequential improvement in Performance Chemicals as well as Oilfield Services and then maybe flattish in Fuel Specialties. So is the expectation that EPS gets into the, I don't know, $1.20, $1.30 range. It doesn't seem like maybe you have enough tailwind to get up to that 140-ish level that you were at last year. Ian Cleminson: No, we won't be up at $1.40, mark. Will be above $1. You said sort of that $1.20 to $1.25 range. I think as we sit here right now, we'd be disappointed not to get there. We feel comfortable about October. November is looking good. December, as you can imagine, with year-end customer actions, weather, it can be a little bit variable for us, but that's certainly the range that we're aiming for. Operator: We will now take the next question, and the question comes from the line of John Tanwanteng from CJS. Jonathan Tanwanteng: I was wondering if you could touch more on the timing in the oilfield business as it pertains to your Middle East clients and how that runs through in Q4. Is your expectation for the second half the same as it was previously and it just catches up in Q4? Or does everything just push out to the right maybe because there's not enough time to catch up to what was happening? Patrick Williams: Yes. There's not enough time to catch up. We saw activity starting to pick back up in Q4. It's just timing. There's no loss of customers. It's just timing with customers. It's all Middle East. And... Jonathan Tanwanteng: To the right as opposed to a catch-up occurring in Q4. Patrick Williams: Correct. Correct. Jonathan Tanwanteng: Okay. Understood. And then in Q3, could you just give a little bit more detail as to what drove the underperformance in Performance Chemicals? And then as you go into the Q4, we expect on the pricing to catch up, which is what I think you've been saying all along. Will it catch up to the degree you had previously expected? Or is there more of a headwind there now incrementally in Q4 compared to what you expected before? Patrick Williams: Yes. There were a lot of issues, and we talked about the last quarter, and those issues remained. I mean it was pricing issues to the customer. It was raw material actions, spike in raw materials. It was a lag in contracts up or down. At this point, we got caught on the downside. It was flexibility of assets. It was product mix. It was the introduction of new technologies, which we'll start seeing in Q4. It was manufacturing efficiencies. There were a lot of things. We had a big spike in growth and sometimes you forget about the internal issues you have to manage. And so all the actions have been in place. And as Ian alluded to, the last month of this quarter showed a very strong quarter or a very strong month, I should say, and we should have some nice momentum going into Q4. Jonathan Tanwanteng: Okay. Great. Can you speak to the momentum you expect heading into Q1 of next year in that business as you fix all these things and maybe speak a little bit to the underlying customer demand you expect? Patrick Williams: Yes. Customer demand is strong. We've had no issue with customer demand at all. It's quite frankly, it's just all the things that we just talked about that we had to get internally fixed and obviously, the contracts had to catch up too on pricing. So you've had pricing catch up and then all of a sudden, raw materials spike again and you're now another 3-month delay. And so you get the benefit on the downside, but the upside it hurts you a little bit. But I think for all of us, we're seeing a lot more stability going into Q4, and it should really carry over into Q1 next year. Jonathan Tanwanteng: Understood. And then lastly, could you just speak to capital allocation? It looks like you bought back some shares. It looks like your stock price might be giving you opportunities here. I'm just wondering if you're more biased there or you're saving your firepower for M&A or other activities. Patrick Williams: It's still a nice balance. I think you're right at the share price, we're still buying back. You saw that we also increased our dividend. I think that we are seeing some stressed assets out there. So we want to have some dry powder. Obviously, we have to have our internal house managed appropriately as we are going into Q4. But I think for next year, we do want to have dry powder. We are going to continue to buy back at this price, and we are going to continue to increase our dividend. And we've done, I think, a very good job on all ends. But having the dry powder will be key moving into next year. Operator: That concludes the Q&A session. I will now hand the call back to Patrick Williams for closing remarks. Patrick Williams: Thank you all for joining us today, and thanks to all our shareholders, customers and Innospec employees for your interest and support. If you have any further questions about Innospec or matters discussed today, please give us a call. We look forward to being up with you again to discuss our fourth quarter 2025 results in February. Have a great day. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon. Welcome to Establishment Labs Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I will now turn the call over to Raj Denhoy, Chief Financial Officer. Please go ahead, sir. Rajbir Denhoy: Thank you, operator, and thank you, everyone, for joining us. With me today is Peter Caldini, our Chief Executive Officer. Following our prepared remarks, we'll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs' financial outlook and the company's plans and timing for product development and sales. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. For a discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent annual and quarterly reports on Form 10-K and Form 10-Q as well as other SEC filings, which are available on our website at establishmentlabs.com. I'd also like to remind you that our comments may include certain non-GAAP financial measures with respect to our performance, including, but not limited to sales results, which can be stated on a constant currency basis or EBITDA, which we disclose on an adjusted EBITDA basis. Reconciliations to comparable GAAP financial measures for non-GAAP measures, if available, may be found in today's press release, which is available on our website. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, November 5, 2025. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. With that, it's my pleasure to turn the call over to Peter. Filippo Caldini: Good morning to everyone and thank you for joining today. Q3 2025 was a standout quarter for Establishment Labs. We grew global revenue 34% with the total revenue of $53.8 million, including $11.9 million in the U.S. We also exceeded 70% gross profit margin for the first time, coming in at 70.1%, and we achieved the first quarter of positive EBITDA in our company's history with $1.2 million in Q3. Getting to positive EBITDA ahead of the fourth quarter was an important goal for our company, and we now turn our focus towards reaching cash flow positive next year. While optimizing our business, we had meaningful revenue growth in the U.S. and our other direct markets. I'd like to thank all the employees that made this a priority and a reality and the sense of accomplishment has all our employees eager for our next milestone of cash flow positive. The U.S. business is our most important growth segment right now, and it continues to outperform. Q3 revenue was $11.9 million, up 16% sequentially in what is a seasonally slower quarter in breast procedures. Markets can be down 20% to 30% sequentially in Q3, making our results all the more impressive. For the first three quarters, U.S. revenue totaled $28.3 million, so we are clearly going to do quite a bit better than the $40 million we committed to last quarter. We are expecting considerable acceleration of the U.S. business in Q4, and we are already seeing a significant shift from Q3. But as it's our first full Q4, we are going to be prudent by raising our 2025 revenue guidance to exceed $210 million, where we previously had a range of $208 million to $212 million. Most interesting is what these results imply for 2026 because we should finish 2025 at an approximate 20% share in U.S. breast augmentation market and the momentum has not slowed. While 2026 will be a continuation of our growth in the breast augmentation segment, we are looking forward to our approval in breast reconstruction, which is a similar in market size to augmentation, and we are preparing for the U.S. launch in this segment. Outside the U.S., we saw good growth and remain on track for single-digit growth this year. Accelerating growth in our direct markets has been a priority, and we are seeing the benefits of the changes we have implemented. Excluding the benefit of currency and the acquisition of our Benelux distributor, our European direct market sales increased approximately 20% this quarter over Q3 2024. In our distributor markets, Asia-Pac had a strong rebound from the second quarter as the ordering cadence normalized. Our U.S. business is performing at a very high level. The number of surgeons using Motiva continues to increase. We now have over 1,300 surgeons using Motiva, including some of the highest volume and best-known practices in the country, and we are attracting additional waves of adopters as the benefits of Motiva in both clinical and commercial practice resonate. We are as focused on surgeons making Motiva their primary implant of choice as we are at attracting new surgeons to our business. We continue to bring groups of surgeons down to Costa Rica for training and surgery. Over 50 surgeons attended our September and October classes and more than 250 surgeons have come to Costa Rica since launch. We are expecting a similar pace in 2026 with 7 sessions already scheduled, there is no shortage of surgeons that want to make the trip. Surgeons learn about the science behind our implant technology, see the best-in-class standards employed throughout our facilities and experience our commitment to driving innovation in the category, including discussing and offering input to our R&D pipeline. While some surgeons come already enthused about Establishment Labs, almost every surgeon returns to their practice as a fan of our company. Social media continues to play an important role as plastic surgeons advocate Motiva to their audiences. Plastic surgeons consistently tell us that if they offer patients a choice between Motiva and legacy implants, it's almost unanimous that patients will choose Motiva. This puts us in a position of strength, and we win if we convince plastic surgeons to give patients a choice. Every legacy brand has a much more challenging proposition. They have to convince plastic surgeons to offer only their products. Championing women's health and advocating for patients' choice should accelerate us to take a majority of the U.S. market over the next several years. In Q3, we conducted a survey of surgeons that are early adopters and advocates of Motiva to understand the impact of Motiva on their practices. While industry sources point to a market that has not experienced much growth, the practices offering Motiva in our survey increased their procedures by 14.6% so far this year. Surgeons tell us that patients are coming in and asking for Motiva by name, and we hear from surgeons as well that many women are entering the category because of Motiva. We regularly hear that women are abandoning their warranty of their legacy implants and choosing to pay out of pocket for Motiva. As many of you know, this is incredibly rare in healthcare, but it's happening now as our entry is changing the industry. There isn't just one single reason for this. Some women cite the improved safety profile offered by Motiva and others cite the benefits of having an above-the-muscle procedure without compromise. And yet for others, it's the increased awareness from our marketing efforts. Whatever the reason, it's clear the conversation around breast augmentation is changing. This is a powerful combination. We are not only capturing share, but we are expanding and accelerating the market for breast augmentation. A major driver for market expansion is our minimally invasive portfolio. As we have noted, we trained a group of U.S. plastic surgeons in July as part of our early experience group for Preserve to gain insights prior to going to market more broadly. Preserve is a breast tissue-preserving procedure that can be done without the need for general anesthesia, offering smaller scars and fast recovery. Preserve can be used in a wide cross-section of cases surgeons see in their day-to-day practices. As these surgeons have taken Preserve back to their practices and started to perform procedures, the feedback has been very positive, not only from surgeons, but also from the women who have received the procedures. I encourage you to seek out the videos and testimonials that have been posted on our social media to see the early responses. Surgeons have embraced the fundamental changes Preserve brings to breast augmentation. It is not just a new way to do an existing procedure. It is an entirely new concept in how a breast procedure can be done. Preserve has the potential to drive category growth and improve the economics for surgeons. We are seeing as much as a 40% price premium to a standard breast augmentation for these early experienced surgeons. The group of surgeons that came for Preserve training where each supplied a small number of kits in August. A majority of the kits we provided have been used and surgeons consistently ask us for more to alleviate growing waitlist. From just our early experience launch, we would estimate that 300 Preserve cases have been performed in the U.S., and there are at least 100 women on waitlist around the country. Not expectedly, there is a groundswell of surgeons that have asked to be trained on Preserve, and we will begin these trainings in January. We have two such trainings planned for the first quarter alone and would expect a similar cadence throughout the year. In breast reconstruction, our Flora Tissue Expander is now in use at over 150 hospitals in the United States. This bodes well for our expected launch into reconstruction, and we remain on track to file our PMA supplement by the end of the year. We also remain on track for the approval of our small sizes in the U.S. in early 2026, and this should help accelerate growth both with new doctors as well as increasing the usage of our current doctors. Outside the U.S., excluding the benefit of our Benelux acquisition and currency, direct markets globally grew 15% versus last year. We believe this performance is well above the underlying market growth rates in these regions. In our Latin American direct markets, we continue to see stabilization in Brazil and strong growth in Argentina. European direct markets are being led by strong performances across the continent with standouts in the UK and Spain. The number of accounts in many of our direct countries continues to increase, a positive sign and a reflection of the increased focus on performance in direct markets. We are taking advantage of our strong growth in direct markets to make sure that the O-U.S. business as a whole is prime for growth. We are engaging with our distributor partners regularly. We are working to raise standards globally around payment terms, inventory forecast and market share expectations. In our minimally invasive portfolio, Mia remains on track to achieve $8 million to $10 million in revenue in 2025, and Preserve continues to see good adoption in international markets. Surgeons globally are seeing the benefits of breast tissue preservation made possible by our minimally invasive platform. The successful rollout of Preserve and the continued growth of Mia has resulted in above-market growth and proves its potential for market expansion. Globally, we expect the portfolio of Mia and Preserve will exceed $30 million in 2026. I will now turn the call over to Raj. Rajbir Denhoy: Thank you, Peter. Total revenue for the third quarter was $53.8 million, an increase of 33.7% from last year. Excluding the positive impact of foreign exchange in the quarter, growth would have been approximately 31.4%. Sales for Motiva in the United States were $11.9 million. On a geographic basis, sales in Europe, Middle East and Africa were 35.6% of the global total. We saw strong sales in our direct markets in the region, while sales to distributors were lower on the timing of orders. Sales in the United States were 22.1% of the global total. Latin America was 21.7% of sales. Brazil remained stable, and we saw strong growth in our other direct market in the region, Argentina, as well as from our distributors. Asia-Pacific was 20.6% of sales. Results in the quarter rebounded sharply from last quarter as expected orders from our distributors were realized. Sequential growth in the region was 46%. Our gross profit for the third quarter was $37.7 million or 70.1% of revenue, a 620 basis point increase compared to 63.9% of revenue last year and 130 basis points higher than the 68.8% in the second quarter of this year. This is the first time we have crossed 70% gross margin, and the increase is primarily the result of the higher margin sales in the United States. We expect gross margins in 2025 will be approximately 300 basis points higher than in 2024. As it relates to tariffs, goods imported from Costa Rica to the United States are subject to duties. However, as we saw in 3Q, we are managing their impact and do not meaningfully change our trajectory for gross margin improvements this year. SG&A expenses of $37.2 million were approximately $3.1 million higher than the third quarter of 2024. R&D expenses for the third quarter were $4.6 million. Total operating expenses for the third quarter increased approximately $2.9 million from the year-ago period to $41.7 million. Operating expenses have been approximately $45 million to $46 million on average per quarter, which is what we guided to at the start of the year and what we continue to expect. As we saw in this quarter and in the second quarter, there can be fluctuations based on the timing of expenses. Adjusted EBITDA was positive $1.2 million in the third quarter. This compared to a loss of $8.5 million in the second quarter and $12.1 million in the first quarter. This is our first EBITDA-positive quarter as a company, and there are a couple of things to highlight. While the improvement results are being supported by the strong sales and the higher gross profit in the United States, we have been very focused on managing our operating expenses. While operating expenses in the third quarter increased approximately $3 million from a year ago, they were down over $5 million from the third quarter of 2023. Over the time, we have invested significantly in our U.S. commercial operation and launched our minimally invasive portfolio. We were able to do this by finding efficiencies across all parts of the organization and making structural changes where needed. We expect EBITDA will continue to improve, including in the fourth quarter and expect to remain EBITDA positive from here on. For 2026, we will continue to expand our commercial infrastructure in the United States. However, the investments we make overall as a company will be at a rate well below expected top line growth. We've been investing with the expectation of global market leadership and have built an organization that can take full financial and commercial advantage as that occurs. Most of our spending in this regard has already happened. For example, the facilities we have today can produce more than half the world's implants. We expect revenue to grow more than 20% for at least several more years, and our business should start to show meaningful and increasing earnings in 2027 and beyond. Cash increased $16 million in the third quarter to $70.6 million from $54.6 million at the end of the second quarter. The increase was primarily the result of drawing the remaining $25 million tranche of our credit facility, offset by our operating cash use. Excluding the net proceeds, cash use would have been $8.5 million in the third quarter. This compares to $14.5 million in the second quarter and $21.2 million in the first quarter. We expect cash use to improve further in the fourth quarter and expect to reach cash flow positive in 2026 without the need for any further equity raises. Our credit facility [indiscernible] last year of its term in April, and we are considering a number of refinancing options that could further reduce our cash use. We're also working to make ESTA eligible for inclusion in a number of indices, most notably the Russell. There are a number of things we can do to affect this, and we believe we will be eligible for future rebalancings. As Peter noted, we now expect our revenue in 2025 will exceed $210 million, an upward revision from our previous guidance of $208 million to $212 million. Our updated outlook represents growth of at least 26%. The U.S. remains a primary engine of growth this year. We have seen very strong results over the first three quarters of 2025, and this has continued into the fourth quarter. Our direct markets outside the U.S. are also doing well and demand globally for our products remains good. Gross margins are improving, and we are managing our operating expenses, which allowed us to achieve positive EBITDA a quarter early. We expect to see continued improvements in profitability and remain confident we'll reach cash flow positive in 2026. I will now turn the call back to Peter. Filippo Caldini: Third quarter of 2025 was in many ways, a turning point for our company. We achieved positive EBITDA for the first time, and we achieved this in a quarter where we grew revenue 34%. These results show that we can efficiently invest in and grow our business, and we will continue to do so. The next step is to achieve cash flow positive, which I am confident we will do next year. We expect our top line growth to remain above 20% for the next several years, and our profitability should expand at a much faster pace. I am looking forward to having conversations with our shareholders about our increasing EPS and how we can keep that momentum going for the next 5 to 10 years. Operator, we're ready to take questions. Operator: [Operator Instructions] The first question comes from Anthony Petrone with Mizuho. Anthony Petrone: Congrats to the team all around here on strong execution. Maybe Pete and Raj, you could start with the comments on 2025 and just the implied outlook as we head into the end of the year. Just looking for some more inputs, puts and takes on the 4Q number, specifically, how should we think about O-U.S. trends? Obviously, there's strong momentum on the U.S. side, but maybe a little bit more detail on what we're thinking about for new account openings from here, Preserve uptake? And then lastly, just the EBITDA-positive, well ahead of expectations. How do you think about EBITDA trending from here just given the momentum on the U.S. side? Filippo Caldini: Yeah. Thanks for the question, Anthony. Clearly, a lot of momentum in the business heading into the fourth quarter. And as we noted, we're planning to exceed $210 million now for the year. And as it relates to the fourth quarter, the U.S. has quickly become our largest market, and we have a lot of momentum in the U.S. For us, though, we haven't yet seen a fourth quarter, right? And there are some nuances in the fourth quarter around reconstruction and some of the holidays and things. And so we just want to be prudent in terms of how we set the midpoint for the fourth quarter. But clearly, we have a lot of momentum, and we expect to meaningfully exceed the $40 million we previously provided. And so the U.S. is doing very well. Outside the U.S., we also have a lot of momentum, specifically in direct markets where we're seeing very strong growth. In Europe, we were north of 20% in direct markets this quarter. We have a really strong order book for the fourth quarter from our distributors. And so we're expecting a very strong finish to the year. And I think importantly, that sets us up really well for 2026, right? The momentum we're carrying in the business that will play forward in next year really is a nice place to be as we're entering the new year. As it relates to EBITDA, again, we're all very proud of what we've achieved here a quarter early, the $1.2 million. But as we also noted, it's just the beginning here, right? We have a lot of leverage we can still bring to this business as we're investing, and you'll see EBITDA continue to expand in the fourth quarter, and we expect to continue to show nice improvement overall in 2026. And so I think the business, again, has a lot of momentum. You're starting to see the profitability and the leverage in the model, and we expect that's going to continue from here forward. Operator: The next question comes from Josh Jennings with TD Cowen. Joshua Jennings: Congratulations on arriving in the EBITDA positive era a little bit earlier than expected. Pete and Raj, I was hoping to just start on thinking about 2026 and the international business, but specifically China. Any updates just in terms of the outlook there and the distributor relationships and when reordering could start to kick in? Should we be expecting Q1 2026? Is there any chance that there could be some China orders in the fourth quarter? Filippo Caldini: Yes. So thank you, Josh. In terms of the O-U.S. markets, I think in general, we've seen stabilization for the most part across all the markets. Our focus going into this year, Josh, was really driving growth in our direct markets. And I think we've been very successful in doing that. We have better economics. We have more upside potential in those markets. And as Raj mentioned, we had 20% growth, and that's following a quarter where we had 27% growth in our European markets. So we're [ gaining ] accounts. A lot of that growth is being fueled by Preserve, but very strong performance, and we're going to continue to focus on that going into 2026. And we see good momentum in the fourth quarter, and that's just going to continue into next year. Yeah, as it relates to China, I think we're working very closely with our partners there. We've actually seen some good progress, especially from a sell-out standpoint, and we're going to continue to work closely with them, and we're going to keep you updated, but we want to make sure we build the business there the right way. Operator: The next question comes from Allen Gong with JPMorgan. K. Gong: I have one on the broader market. When we look to some of your peers in aesthetics, I think some of the body language we were getting from them was definitely a bit more cautious on market dynamics, especially heading into fourth quarter, looking at your results and listening to your confidence, definitely sounds like you're not seeing that -- so I guess, are you not seeing that weakness? Are you just growing through it or is there a reason why those challenges are more company-specific than for the broader market? Filippo Caldini: Yeah. Thanks. First off, I mean, we can't really comment on their perspective in terms of the market. I can just tell you how we're seeing the market in the U.S. specific to breast aesthetics. I think we've created a lot of momentum in the marketplace. And I think what we mentioned in the prepared remarks in some of the accounts that have early adopters of Motiva, we're seeing an increase in the number of procedures. So what we are seeing and as it relates to our business, we're seeing growth. We're very positive in terms of the momentum we've been able to build in the Q4, and that's just going to continue into next year. Operator: The next question comes from Sam Eiber with BTIG. Sam Eiber: Maybe I can shift over to the minimally invasive platforms. You talked about the $30 million in revenue for next year. Can you just maybe help frame contribution this year, if there's any way to parse out Mia versus Preserve? And then what market development work needs to happen to get to those -- the at least $30 million target for next year? Filippo Caldini: Yeah. Thanks, Sam. We're -- I mean, we're very, very happy with the progress we're making with Preserve and the minimally invasive platform. Speaking specifically on Mia, we've doubled the number of accounts this year, and that was our goal. And then with Preserve, we're off to an outstanding start in Europe, and we're really focusing primarily on the direct markets, but we're also expanding it to some of our distributor markets. And that momentum is going to continue into 2026. We mentioned also that in the U.S., we're going to be launching early part of next year. So we're looking at the end of the first quarter. There's already significant demand. We've seen that with the early experienced surgeons. They're very excited. And I think once it's launched, I think it's going to be a pretty quick ramp-up. So we're very pleased with that platform and how it's performing. Operator: The next question comes from Joanne Wuensch with Citi. Unknown Analyst: This is [ Anthony ] filling in for Joanne. Is there any chance you could provide -- either quantify or maybe provide a little bit more granularity around your expectation to -- for U.S. sales to meaningfully exceed $40 million this year? Filippo Caldini: Yeah, Anthony, as I tried to answer the first question, right, the fourth quarter, again, is we have -- we're carrying a lot of momentum into the fourth quarter, right? And so we will do quite a bit better than the $40 million we previously talked about. However, it is the first time we've had a fourth quarter in the United States, right? And so there is some holidays, some other elements to the quarter that make it difficult to kind of tell you exactly where we're going to land. And so again, it's a difficult question, but I think the reality is we're doing very well in the U.S., the number of accounts, the orders we're getting, all of it is really pushing in the right direction, and we just -- we think we have a lot of momentum that we're carrying right now. Operator: The next question comes from Mason Carrico with Stephens. Mason Carrico: So reiterating the single-digit growth in international revenue, it seems like you're seeing strength across a handful of markets, stability in others. Are you willing to quantify how at least preliminarily you're thinking about growth in the international market next year? Filippo Caldini: Yeah. I think, Mason, it's a good question, right? We haven't yet provided the 2026 outlook. But from a high-level standpoint, we're seeing very good demand in our direct markets. It's been an area of focus for us. We spent a lot of time making sure we have the right team there, the right structure there. And you are seeing that play out now, and we don't expect that momentum will slow. And so that is going to carry us into 2026. The other part of the business is distributors. We don't have perfect visibility into how the distributor markets are doing. But generally, the tone in those markets remains very good. The end markets seem very similar to what we're seeing in our direct markets. And so overall, we're expecting in 2026, our international markets will perform well. And then you marry that with what we're seeing in the United States, and we commented that we expect to finish it at approximately 20%, which provides a very good stepping off point in the U.S. for 2026. And overall, we're expecting another year of very strong growth for the company. Mason Carrico: Got it. Okay. And in terms of Motiva accounts in the U.S., what are you guys seeing in terms of trends among customers after adoption? How quickly are you seeing them ramp up? Is there an average amount of their practice they end up converting? Just any incremental detail you can provide there? Filippo Caldini: Yeah. I think as we mentioned before, I mean, the growth in the U.S. is really exceeding all our expectations. We've kind of overdelivered on most of the internal KPIs that we have. So we're very pleased with that. We continue to add additional accounts. The utilization rate continues to pick up, especially as a lot of the accounts are going through their scheduling process. What also helps quite a bit in terms of the utilization and also the penetration is the number of patients that are entering the accounts asking specifically for Motiva. So we're seeing a really good growth in the Q4, and it's somewhat of an inflection point for us, and we believe that momentum will finish this year, and then it's going to continue to grow next year, especially when we start layering over some of the Preserve launch, also the small sizes as well. Operator: The next question comes from Mike Matson with Needham & Company. Michael Matson: So I wanted to get some clarification on the commentary around getting to 20% share exiting the year. So we had estimated that the U.S. market -- augmentation market is around $600 million, so about $150 million a quarter, if you flatline it and 20% of that would sort of imply about $30 million. I mean, is that math reasonable or am I missing something? Maybe you mean like as of the very last day of the quarter, you'll be ramping through the quarter, you'll be at 20% as of the very tail end of the quarter or something like that? Filippo Caldini: Yeah, Mike, I think just to level set, I think your expectation for the size of the market may be a little bit off. If you look at some of the data from the clinical societies, the market in the United States is estimated at approximately 300,000 procedures a year. Our ASPs, we've talked about are around $1,300, a little north of $1,300 per case. That puts you at a little bit below $400 million for the augmentation market. The reconstruction market is a market about that same size, right? So if you just think about the augmentation market, you're looking at a market closer to $390 million, $400 million in that range. And that is the market against which we expect to exit at about 20%. Michael Matson: Okay. So more like a $20 million number then. Filippo Caldini: But again, that's also an exit rate, right, as we're leaving 2025 and '26. Michael Matson: Okay. All right, understand. And then just as far as the fourth quarter goes, how much visibility do you feel you have? I mean we're over a month into the quarter now or I guess, sorry, two months into the quarter now. And then I know you have orders that you get. And so I don't know how much lead time there is between an order and a shipment and things like that, but. Filippo Caldini: We do. I mean we do see the daily orders, right? We know the number of customers we have. And so we have very -- we have quite a bit of visibility on how the business is tracking. And as we've noted, there's a lot of momentum right now. Those metrics all continue to go higher. And as we're leaving the third quarter and we've entered the fourth quarter here moving out of that seasonally slow period, there's a lot of acceleration in this business. Again, it's our first fourth quarter as a company in the United States. And so we just want to be prudent in terms of where we set the midpoint of where we think we end up. But you shouldn't think that there's anything behind that, right? The business is doing extremely well, and we're going to have a very strong finish to the year. Operator: The next question comes from Matthew Taylor with Jefferies. Unknown Analyst: This is [ Matt ] on for Matt Taylor. I just wanted to ask a quick question on 2026. And assuming you're exiting 2025 with around 20% market share, looking at your kind of strategy into next year, do you anticipate driving your expansion primarily through penetration with these existing accounts or is it mainly blocking and tackling going after new accounts? Filippo Caldini: Yeah. So I mean, as we mentioned before, I mean, we're exiting 2025 with tremendous momentum. We keep on adding existing accounts or adding accounts, the utilization rate continues to pick up. And that momentum is going to continue into next year. Now what we're also doing is we -- and we mentioned this on the previous call, we're going to be adding additional reps up to about 15 reps for next year. And that will help increase the utilization, also the reach in some of those accounts that we can add into next year. We're also going to be launching Preserve at the end of the first quarter, and then we also have the launch of the small size, which we anticipate at the beginning of next year. So I think you're going to see a combination of continued growth in the accounts that we are in and as we continue to increase the utilization rate, we're going to be adding additional accounts. And then you also have with the expansion in terms of filling out our matrix as well as with the Preserve launch. So I think you're going to see a combination of both. Unknown Analyst: Okay. That's helpful. So I'd say like looking at your 5-year plan, you're still fairly confident in kind of reaching that goal of, I don't know, 40% to 70% that you've seen in other markets. Is that fair to assume? Filippo Caldini: Yes. Yes. Operator: Thank you. This is all the time we have for questions today. I will now turn the call back over to Peter Caldini for closing remarks. Filippo Caldini: Okay. Thank you, everybody, for joining. Look forward to the next call and thank you very much for attending. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Corteva Agriscience Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Kim Booth, Vice President of Investor Relations. Please go ahead. Kimberly Booth: Good morning, and welcome to Corteva's Third Quarter 2025 Earnings Conference Call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and David Johnson, Executive Vice President and Chief Financial Officer. Additionally, Judd O'Connor, Executive Vice President, Seed Business Unit; and Robert King, Executive Vice President, Crop Protection business unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, included, but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press releases and related schedules along with our supplemental financial summary slide deck available on our Investor Relations website. It's now my pleasure to turn the call over to Chuck. Charles Magro: Thanks, Kim. Good morning, everyone, and thanks for joining us. Before we get into our solid third quarter results, I'd like to address our October 1 announcement on our intent to separate into 2 public companies. This proactive strategic decision is rooted in our belief that separating our Seed and Crop Protection businesses now allows both to be better positioned to achieve their maximum long-term growth potential in the future. Bringing these businesses together 6 years ago, was undoubtedly the right thing to do as demonstrated by our strong track record, including this most recent quarter. We have clearly been among the market leaders, but we have an obligation to look ahead past the short term and ensure both companies are able to pursue their distinct opportunities to the fullest extent. So it's not that we believe things aren't going well today. They are. It's that we believe things could be even better in the future as 2 separate companies. It's really that straightforward. As we said last month, the seed genetics landscape is changing due to new technologies like gene editing and artificial intelligence, which opens new markets and opportunities for companies with scalable ag science capabilities. At the same time, rising pest and disease pressures and changing weather patterns have driven a shift from single to multiple modes of action in crop protection, including biological solutions. As a result, the market has gradually transitioned away from integrated proprietary models to more open-source licensing with collaborations now driving innovation success. As a result, industry players are increasingly open to working together, which also allows them to share resources and reduce risk. And importantly, it allows us to get affordable top technologies into the hands of farmers. So we are looking ahead with excitement and optimism, comforted by the fact that both of these businesses are leaders in their markets today and will remain so in the future. It's early days, but the process remains on schedule for a second half 2026 separation. Our Board has initiated a global CEO search for Corteva and we will provide updates on the separation along the way, but our goal right now is to deliver a strong 2025 and 2026. So let's now move to our current financial performance. Our results for the third quarter were largely in line with our own expectations, with the exception of outperformance on our controllables and strong early safrinha seed demand in Brazil. Operationally, we continue to execute well with double-digit operating EBITDA gains in both businesses, and we're now expecting to deliver over $600 million in controllable benefits this year, a notable improvement from our prior estimate of $530 million. In fact, this year's 9-month earnings performance is already ahead of full year 2024. Our Seed business is performing well again this year, including $200 million of productivity and deflation benefits as well as $90 million in royalty improvement, reflecting our leading position in North America corn and progress in soybean out-licensing in Brazil. Importantly, we now expect to cross double-digit trade penetration for Conkesta next year in Brazil, the largest soybean market on the planet. Capturing price for value in most regions as well as meaningful share gains in North America is a testament to the high return on investment our technologies provide to farmers. In 2026, we will roll out several hundred new hybrids and varieties around the world, once again, helping farmers increase yield and productivity. Finally, let me remind you that seed is the only crop input that gets better and better every year, allowing the farmer a solid return on their investment. The Crop Protection business has also delivered solid earnings and margin growth so far this year. Led by demand for our differentiated technology, we are expecting full year EBITDA to be up high single digits this year. We continue to see volume gains and we remain committed to our strategy of focusing on differentiated and new technologies, which carry a premium in the market. Today, we're also announcing a brand name for our new next-gen insecticide active, Varpelgo, for chewing pests in fruits and vegetables, row crops and rice. Expected to launch in the early 2030s and cross $750 million in revenues at its peak, this represents the latest addition to the Corteva portfolio of trusted crop protection active ingredients inspired by nature and globally recognized for their more environmentally friendly profiles. Included in our $9 billion Crop Protection Technology pipeline are billion-dollar product families and biologicals in all 3 chemistry indications as well as what we view to be a significant value unlock in our Seed Applied Technology business as a result of the separation. In like seed, our Crop Protection business is generating substantial value through its focus on controllables which drove over $250 million of benefits in the first 9 months of the year. From an industry perspective, the overall ag market fundamentals remain mixed. We're still seeing record demand for food and fuel and major crop inventories are within normal ranges despite large crops in Brazil and North America. Farmers continue to prioritize top-tier seed technologies while managing tighter margins. In the crop protection market, although we continue to experience competitive pricing dynamics in some major markets, underlying farmer demand in terms of applications remain on track with historical levels. In other words, when farmers have crop problems, they spray with the best solution they can find. So what does all this mean for the remainder of the year? We are raising our full year operating EBITDA range to $3.8 billion to $3.9 billion, which at the midpoint translates to 14% growth versus the prior year. This update reflects growth of our new technologies, our outperformance on controllable levers, a more favorable currency impact and our latest expectations on our fourth quarter performance in Brazil. One quick note. We look at our business by halves, not quarters. It's one reason why we don't provide quarterly guidance. Farmers plan their purchases and business by halves and weather or other uncontrollable factors often move orders, sales and shipping between quarters. Looking at this year, the halves really do tell a story. In the first half of this year, our operating EBITDA was up 14%, while our second half is expected to be up 17%, both really strong performances. On full year EBITDA margin, we're now expecting improvement of over 160 basis points and a solid step towards our goal of 24% at the midpoint by 2027. A quick reminder. When Corteva launched in 2019, our margins were below 15%. Finally, it's also important to note that we're still expecting a free cash flow conversion rate in the range of 50% for the year as well as $1 billion in share repurchases this year. Now let's move to the first look at how we're thinking about 2026. From a macro perspective, we're anticipating a continuation of record demand for grains, oilseeds, meat and biofuels. On-farm demand is expected to remain steady, and farmers will continue to prioritize top-tier technologies in order to maximize their yields. A farmer seed selection is particularly critical and is nondiscretionary when compared to other crop inputs. Given the high corn area in the U.S. this year, it's logical to assume we'll see a couple of million acres shift back to soybeans in 2026. With the overhang of global trade uncertainty, it would be premature to discuss how large a shift might be, but we do not consider it to be disruptive to our planning assumptions given our market-leading position on both crops now. Global trade discussions remain dynamic. However, last week, China committed to buying 12 million metric tons of soybeans this season, followed by at least 25 million metric tons per year for the next 3 years. We will continue to monitor the situation, but this should be welcome news for U.S. farmers. Perhaps most notable is that we are now expecting low single-digit growth in the crop protection industry including high single-digit growth in biologicals. This would be a good first step in the overall return to a healthy CP market. With the exception of Latin America, where we expect competitive pressure to keep prices flat to modestly down, we see overall CP market pricing stabilizing in 2026. Turning back to Corteva. What continues to set us apart is the strength of our portfolio, a continued focus on execution and increased investment in innovation. The introduction of hundreds of new products is expected to continue to drive solid returns for farmers and thus, a premium in the market and contribute to our volume growth. We're also expecting a continuation of sizable productivity benefits in both businesses, a defining characteristic of our margin enhancement journey. Overall, when considering the market backdrop in 2026 as well as the growth opportunities we have in motion, we're currently anticipating full year operating EBITDA in the range of $4.1 billion which translate to mid-single-digit growth year-over-year, and we'll provide a more detailed view in early February when we issue formal guidance. Let me wrap up by saying that we built a foundation of strength that gives us the ability to shape the next chapter of value creation on our own terms. Our intended separation is about sharpening focus, accelerating innovation and unlocking value that's been earned through performance. And we are committed to delivering results like this past quarter throughout this transition period. And with that, let me turn it over to David. David Johnson: Thanks, Chuck, and welcome, everyone, to the call. Let's start on Slide 7, which provides the financial results for the quarter and year-to-date. Sales and operating EBITDA for both the quarter and year-to-date were up versus prior year driven by continued execution on controlling the controllables and an early start to the Latin America safrinha season. Briefly touching on the quarter, organic sales were up 11% compared to prior year with gains in both Seed and Crop Protection. Value capture remains steady overall as improved execution in seed was balanced by continued pressure in Crop Protection. Third quarter volumes were up 12%. We see gains in Latin America and EMEA, coupled with Crop Protection volume growth led by North America and Latin America. Top line growth and meaningful cost improvement translated into positive operating EBITDA in the quarter versus a loss in prior year and over 600 basis points of margin expansion compared to prior year. Focusing on year-to-date, organic sales were up 6% over last year, again, with growth in both Seed and Crop Protection. A continuation of the price for value strategy along with increased corn acres in North America and Latin America drove seed price mix and volume gains of 3% and 4%, respectively. Crop Protection price was down 2% year-to-date as expected, driven by competitive market dynamics, mostly in Brazil. Crop Protection volume was up 7%, but gains in nearly every region. Notably, new products and biologicals delivered double-digit volume gains compared to prior year. Operating EBITDA was up 19% over prior year, operating EBITDA margin of over 25% was up about 320 basis points driven by organic sales growth, coupled with significant benefits from lower input costs and productivity. Moving on to Slide 8 for a summary of the year-to-date operating EBITDA performance. Operating EBITDA was up more than $550 million to just over $3.4 billion. Price and mix, volume gains and cost benefits more than offset currency headwinds. Seed continues to make progress on its path to royalty neutrality with about $90 million in reduced net royalty expense. This improvement was driven by increased out-licensing income in North American corn and lower royalty expense in soybeans. By the end of the year, we expect our net royalty expense position to be around $120 million. Season Crop Protection combined to deliver over $500 million in productivity and cost benefits, including lower seed commodity costs, raw material deflation and continued productivity actions. Year-to-date SG&A was up compared to prior year, driven by higher commissions and compensation expense. The increased investment in R&D aligns with our target and is on track to reach 8% of sales for the full year. As expected, currency was roughly $170 million headwind on EBITDA, driven by the Brazilian real, Turkish lira and Canadian dollar. Both Seed and Crop Protection continue to have an impressive year-to-date performance, expand on their double-digit EBITDA growth while providing meaningful margin expansion over prior year. In addition, free cash flow has improved over $917 million from the prior year. This was driven by our increased EBITDA, lower cash taxes and lower capital expenditures. With that, let's go to Slide 9 in transition to the updated outlook for the full year. Our updated '25 guidance reflects the strength of our year-to-date performance and continued confidence in delivering the fourth quarter. As a reminder, in the second half of 2024, we delivered $425 million of EBITDA, with all of that earned in the fourth quarter when we achieved $525 million, largely due to a near record crop protection quarter. This year, that risk is reduced as a portion of those earnings have already been realized in the third quarter. For the second half of 2025, we still expect approximately 17% growth over prior year. As Chuck mentioned, we now expect operating EBITDA in the range of $3.8 billion to $3.9 billion, representing 14% growth at the midpoint. This increase is driven by broad-based organic sales growth and incremental cost improvement benefits across both businesses. As a result, we now expect operating EBITDA margin expansion of approximately 165 basis points. We are also raising our operating EPS guide to $3.25 to $3.35 per share, up 28% at the midpoint versus last year. This reflects stronger EBITDA performance and lower-than-expected net interest expense and foreign exchange losses. Finally, we are reconfirming our free cash flow guidance of approximately $1.9 billion with cash conversion rate of about 50%. This improvement is primarily driven by earnings growth. With that, let's go to Slide 10 and summarize the key takeaways. First, while we still have an important quarter of the year left to go, we delivered a strong third quarter and year-to-date performance ahead of expectations. Organic sales growth was driven by our leading corn portfolio in North America and Latin America, combined with broad-based volume growth for Crop Protection. We delivered about $500 million in cost savings from lower Seed and Crop Protection raw material costs along with productivity gains. The combination of organic sales growth in both business units, $90 million in net royalty improvement and enhancements in product mix contributed to about 320 basis point margin expansion over prior year. In addition, free cash flow has improved over $970 million from the prior year. This was driven by our increased EBITDA, lower cash taxes and lower capital expenditures. With that, let's go to Slide 9 in transition to the updated outlook for the full year. Our updated '25 guidance reflects the strength of our year-to-date performance and continued confidence in delivering the fourth quarter. As a reminder, in the second half of 2024, we delivered $425 million of EBITDA. With all of that earned in the fourth quarter when we achieved $525 million, largely due to a near record crop protection quarter. This year, that risk is reduced as a portion of those earnings have already been realized in the third quarter. For the second half of 2025, we still expect approximately 17% growth over prior year. As Chuck mentioned, we now expect operating EBITDA in the range of $3.8 billion to $3.9 billion, representing 14% growth at the midpoint. This increase is driven by broad-based organic sales growth and incremental cost improvement benefits across both businesses. As a result, we now expect operating EBITDA margin expansion of approximately 165 basis points. We are also raising our operating EPS guide to $3.25 to $3.35 per share, up 28% at the midpoint versus last year. This reflects stronger EBITDA performance and lower-than-expected net interest expense and foreign exchange losses. Finally, we are reconfirming our free cash flow guidance of approximately $1.9 billion with cash conversion rate of about 50%. This improvement is primarily driven by earnings growth. With that, let's go to Slide 10 and summarize the key takeaways. First, while we still have an important quarter of the year left to go, we delivered a strong third quarter and year-to-date performance ahead of expectations. Organic sales growth was driven by our leading corn portfolio in North America and Latin America, combined with broad-based volume growth for Crop Protection. We delivered about $500 million in cost savings from lower Seed and Crop Protection raw material costs along with productivity gains. The combination of organic sales growth in both business units net royalty improvement and enhancements in product mix contributed to about 320 basis point margin expansion over prior year. Given our strong year-to-date performance and continued confidence in the fourth quarter, we raised our full year 2025 outlook across our key financial metrics. And finally, we remain on track for $1 billion of share repurchases in 2025. This, along with the dividend, translates to roughly $1.5 billion of cash returned to shareholders during 2025, a testimony to the strength of our balance sheet and cash flow outlook. With that, let me turn it back to Kim. Kimberly Booth: Thanks, David. Now let's move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Operator: [Operator Instructions] Your first question comes from the line of Chris Parkinson of Wolfe Research. Christopher Parkinson: Chuck, I thought you guys have a pretty interesting setup between Slides 25 and -- through 27. In terms of the why now and your preliminary remarks even on this call, what do you think is the most missed of what you've laid out? Is it the baseline CPC pipeline where you've got the new actives? Is it the balance between the plant health and biologicals? Is it the Spinosyn franchise as a percent of the insecticides, which has been pretty successful? I mean what would be the things that you would say like, "Hey, this is what the independent company actually needs to focus on and further differentiate itself from both a growth and a margin perspective on a go-forward basis?" Charles Magro: Chris. So look, I think we've been pretty consistent with our messaging. If you look at the last 5 years, our Crop Protection business has been among the leaders. We're up about 200 basis points. I'm rounding, I think it's about 160 basis points, a little bit more after the third quarter now. And we have one of the best and the deepest R&D pipelines out there, and we put the number out actually at our last Investor Day of $9 billion. And then we just announced today some new products, some new actives coming into the marketplace. And if you referenced Spinosyn. So Spinosyn is a franchise product for us. It's still growing. It's a microbial and it will get close to $900 million in revenue this year. And so we like that product a lot. But we also have these newer products that are really driving the landscape, I think, for our business. But look, I think that it's more of the same. Our strategy for Crop Protection was defined 4 years ago. And it was really simple, right? It was really to drive differentiated technology in the hands of farmers. And so we made decisions back then to reduce the more commoditized part of our portfolio. We exited some geographies. And I think the proof has been pretty evident of the results there. As a separate independent company, so to get to your question, what we think will happen now is that there's simply going to be more doors that will open for this business. And the example that we gave even on my prepared remarks this morning is on Seed Applied Technology, which is a $0.5 billion business for Crop Protection. But we know that there will be some more seed companies that will do business with our Crop Protection -- independent Crop Protection business when they separate. The other thing I would say is that when you look at how we go to market with the different channels, we think that there'll be more retailers and co-ops around the world that will do more business. So the strategy for Crop Protection will not change. The formula is working, and we're winning when it comes to that formula. But I think there'll simply be more opportunities. And then when it comes to margin, as I mentioned, we're already up a couple of hundred basis points, and we've already committed in terms of 2027 to have that business at 20% EBITDA margins. And then just before we separate, there's going to be 2 Investor Days, one for each business. And I would expect at that meeting, we will give you kind of a margin trajectory post 2027 for each business, and we would expect continued growth. But don't forget, this is an innovation company, and we're also committed to keeping our R&D at that 6% to 7% of revenue because we think that, that has been a winning formula. So hopefully, that helps you. Operator: Your next question comes from the line of Vincent Andrews of Morgan Stanley. Vincent Andrews: Maybe just sticking on Crop Protection and ahead of the separation next year. Chuck, do you think there's any further pruning of the AI portfolio that you want to do? Or is there anything you want to maybe add into it? Whether it be on a wholly owned basis or a JV basis? Or just are you comfortable with everything that you have at this point or areas that you'd want to add to or subtract from? Charles Magro: Yes. So good morning Vincent. We like our portfolio a lot. We've invested in it heavily. I think if you look at what's been coming into the market with our new products, Rinskor, Arylex, Reklemel, these are all new actives within the last few years or so and then the new products that we're bringing into the market in late this decade, early next decade. But look, we're always looking at partnering with other companies whether that's full M&A or collaborations or R&D relationships in terms of joint ventures because I think that more is needed in the industry. And I've said that many times that this is an industry that needs to work together because, look, we've got real issues when it comes to disease and insect resistance in terms of what we're seeing around the world, and it is getting more expensive to bring new actives into the marketplace. So collaborations help everyone. They help each company and they actually help the farmer in terms of bringing affordable next-generation technology to the marketplace. So we would be open, but that's not because we don't like our portfolio. In fact, we think that our portfolio, as I've mentioned already this morning is quite strong. Operator: Your next question comes from the line of Kevin McCarthy, Vertical Research. Kevin McCarthy: Chuck, can you discuss how credit market conditions are evolving for growers in Latin America and what that means for Corteva in the industry? One of your peers highlighted this issue recently, and I'd love to get your perspective on it. David Johnson: Yes, this is David. I'll probably take that call. So when you look at overall, and I'll say, Latin America, primarily Brazil and Argentina, we are seeing an industry that's seeing higher cost to borrow and leverage customers, and there are increased bankruptcies. I think when you look at Corteva, we're managing this risk very well, and our losses have been very minimal. So when you look at our past dues, for instance, this year versus last year, as a percent of AR, we're actually a couple of hundred basis points better than we were last year. And we've also spent a lot of time really de-risking our overall AR balance. So when you look at our exposure to folks like the national distributors is very minimal compared to perhaps the industry. And then in addition, we're a pretty big user, and I think we have a very robust barter system, which helps us yet again reduce our exposure and about 40% of our total sales in Brazil is on the barter system. So I think when you look at the mitigation actions we've made, I think our exposure and our actual, so far, our performance has been very strong. Charles Magro: Yes, Kevin, maybe if I could. So I think David hit these points, but it's worth saying again, I think our go-to-market strategy, especially in Latin America, as well as how we barter to risk manage. I think those are 2 differentiating factors for Corteva that we found as part of our overall risk management framework for that part of the world. Operator: Your next question comes from the line of Joel Jackson of BMO Capital Markets. Joel Jackson: Maybe a 2-parter. Have you had any time or ability to get or better take on what your dis-synergy cost -- dissynergies might be? I think you projected early on, maybe a sub-hundred million dollars dissynergies. And then have you thought about what you might do into the split? Might you look at what you may do for buybacks, would you continue the current rate in the first half of the year or into the split -- next year into the split? What are you thinking about that? Or do you want to keep the balance sheet sort of, I don't know, stable is the right way to say up until the split? David Johnson: Yes. So this is David. Maybe I'll handle the second question first. When you look at our expectations for cash flow this year, we said $1.9 billion. I would say, as a lot of people know that it's really that fourth quarter that's critical to see how our full year ends up. And I would say that if we end up having a typical credit mix situation in this year vis-a-vis other years, we'll likely be north of that $1.9 billion number. So again, strong cash flow, strong position. I think whenever it comes to any capital deployment items for 2026, we'll update everyone during our February call when we go into more detail around our guide for 2026. And I think it's reasonable to expect. We'll also want to make sure that we have the proper capital structures for both businesses as we go into the split. When you look at where we are regarding our separation, our separation management team is up and running. So we have numerous teams looking at every function. And again, looking at exactly detailed plans around what those dis-synergies might be, our initial estimates were, as you pointed out, $80 million to $100 million. And the teams are working very hard to make sure that we minimize that number. So again, we'll be providing more details in February. And again, that's only because we'll have much more detail at that point in time to share with everyone. Charles Magro: Yes. And then, Joel, just on the 2025 share buyback, we're committed to complete the $1 billion that we communicated earlier this year. Operator: Next question comes from the line of David Begleiter of Deutsche Bank. David Begleiter: Chuck, just on biologicals, they will be a key part of the new CP story. Year-to-date, your sales are up about 7%. So why are they growing faster for you guys right now, do you think? Charles Magro: Yes. So David, thanks for the question. First of all, I'd say we're very pleased with the growth and the progress in biologicals. When we first entered the market and when we did the M&A, we were in that neighborhood of about $400 million of revenue. And I think this year, it's going to be closer to $600 million of revenue. So very strong growth considering the overall market backdrop in crop protection. The other thing that we're very pleased with is that some of these products now are moving nicely around the world. And we've just launched the biologicals business in a branded way in North America, and this spring was the first year that we've done that, and we're seeing really good success, I think, for U.S. farmers trying this new technology. And then also progress with some new technology actually going into Brazil and in Europe. So I think it takes a little bit of time to move these products around the world, and that probably is some of the reason why we've seen the growth rates the way they are. But overall, I'd say we're very pleased with our biologicals performance, what farmers are seeing on the field and how we're moving these products around the world. So we would expect to see next year continued strong, high single, low double-digit growth rates in biologicals for the foreseeable future. Operator: Your next question comes from the line of Josh Spector of UBS. Joshua Spector: I was wondering if you could just dial in a little bit on crop chems and pricing specifically. So you relative to your peers, it doesn't seem like you're changing your expectation on crop chem pricing in the second half. So I wanted to confirm that first. And then second, just thinking about your comments around '26, is it too early to call that we're going to see low single-digit growth in crop chemicals? Or why do you have the confidence to be doing that now? Charles Magro: Okay. I'll have Robert talk about second half pricing, and then I can come back with 2026. Go ahead, Robert. Robert King: Yes, second half pricing is, as you've seen, year-to-date, where we are down low single digits. We expect we'll finish about there overall as we finish the year. But the big driver in the second half is Brazil. And actually, there's an improvement or good news story happening here because we expect Brazil to be mid-single digits in the rest of the year and that's in comparison to high single-digit loss last year. And so continuing to improve there, and we expect to continue to do that as it gets into '26. By and large, the rest of the regions are running about flat. And so thinking about crop price into the future, we think these trends continue to move in that direction as we continue to get more and more new products into the channel, as Chuck talked about. Charles Magro: And then just, Josh, on your question on '26. So yes, look, it is a little early. We need to finish 2025 in Latin America. But here's how we're viewing it. I guess it's an early look on Crop Protection globally. '25 we expect to be flat, which is better than the last few years. Robert already mentioned. So LatAm, Brazil specifically, probably down mid-single digit, but that's much better than being down high single digits the year before. And then next year, as we move into 2026, we expect Brazil still to be down, but low single digits. So the trend line is improving. Overall, though, for the Crop Protection market for 2026, we think it's going to be better than 2025, and it's really going to be driven by volume growth with pricing stabilizing everywhere around the world, perhaps except for Brazil, which we've already talked about. So what gives us confidence? It's a really good question. And the way I think about this is, look, on-farm applications around the world are strong. We can see it. We can see the product coming out of the channel consistently around the world. And channel inventory is more or less are in healthy normal ranges. And then China. So China from a generic or commoditized product perspective, prices have been stable now for some time. So there is stability in the crop protection industry. The area that gives us less confidence, we've already called it out, is Brazil, in Brazil pricing. Volume has been pretty healthy because there's been new acreage put into production and farmers have a need for the product, and they're using it. We just need to see the trajectory on pricing sort of stabilize and hopefully return to some sort of positive growth in the future. So when we put it all together, I think it's -- right now, it's a reasonable assumption to say that 2026, the global crop protection industry will return to, we'll call it, low single-digit growth. Operator: Question comes from the line of Jeff Zekauskas of JPMorgan. Jeffrey Zekauskas: Diamide pricing is falling and your insecticide pricing seems to be moving lower. I'm wondering about how do you see the effect of price pressure in chemicals like Rynaxypyr affecting your Spinosyns. And how do you see that price pressure affecting your volumes? Did Spinosyns grow this year in volume terms? And is that the area where you're most worried about price pressure next year in crop chemicals? Charles Magro: Yes. So maybe Robert can talk about volume and then I can come back and give you some thoughts on sort of the pricing dynamics. So go ahead, Robert. Robert King: Jeff, good question in relation to how our portfolio fits into the overall market and specifically insecticides. We've had some setbacks this year around weather in some areas and our portfolio is not immune to pricing pressures, albeit it's a premium products. And when you think about the generics, right, they set the floor. And so we do feel pricing pressures, but our volumes continue to grow. And some really good things happening in this area that I'll call your attention to and you brought up Spinosyns. We expect Spinosyns to finish up near $900 million for a single molecule this year. That's a 5% organic growth in a market that's flat. And so we continue to see good things out of our Spinosyns. Specifically for Spinosyns versus some of the other generics is, it's a rotation partner. Resistance builds quickly in some of these areas. And so the demand for Spinosyns, we expect to continue because of that. A few other things happened in this area that I just should bring your attention to. New products at Pyraxalt, Reklemel, these things are up a 30% combined on a year-over-year basis year-to-date. And we expect these things to continue from a growth in our insecticide portfolio, and Spinosyns will lead the way. Charles Magro: Yes. Jeff, just a few more comments. So I think Robert covered it well. If you think about what happens on the field, the diamides and the spinosyns are actually complementary. Farmers usually rotate them because of insect resistance issues. So we don't really think that there are competitive products. Now Robert said, our Spinosyns business is growing, and we like the trajectory. But from a pricing perspective, the floor is set by more commoditized insecticides. So we're not immune to that dynamic. But the one interesting thing about spinosyns to just differentiate it from some others, this is a microbial. It's not chemical. So what that means is it's a living organism, and it's very difficult to replicate. In fact, if you don't have the strain, you would have to go find the strain inside of nature, and it won't have the same efficacy because we've been engineering that microbial for almost 20 years. So even though that this product family has been off patent, we've been able to command a premium into the marketplace because it's a microbial that's used in a rotational application usually for farmers around the world. So hopefully, that helps. Operator: Question comes from the line of Laurence Alexander of Jefferies. Daniel Rizzo: This is Dan Rizzo, on for Laurence. You mentioned that free cash flow is being driven by earnings growth. I was just -- going to ask how we should think about working capital and particularly as maybe a percent of sales over the long term kind of on an annual basis? David Johnson: Yes, it's a good question. And when you look at so far, our performance this year, you will see that a lot of our year-over-year improvement has been driven by working capital. You'll see a little bit more increase in receivables, obviously, due to our volume and sales increases and then the little decline in inventory. Typically, in Q4, we will end up building some inventory, and we expect that to be again this year. And that's why we're in that $1.9 billion, perhaps north of that for our free cash flow. When you look at the overall working capital as a percentage of sales, I would say that if you take probably an average over the last couple of years is a pretty typical area for us to be. Maybe if you go back further than that, it isn't. So I would say if you take the last couple of years, the working capital sales is a good indication of what our plans will be going forward. Operator: Your next question comes from the line of Duffy Fischer of Goldman Sachs. Patrick Fischer: Question on seeds. Now that we're kind of through the season, I was hoping you could give me a view on how you did market share-wise in the northern hemisphere on the big crops: corn, soy, cotton, canola. And then I thought I heard you make a comment about Conkesta in Latin America, but I missed that. How fast is that growing? Or how big do you believe that will be next year? Charles Magro: Go ahead, Judd. Judd O’Connor: Yes. Thanks, Duffy. So from a market share perspective, we do feel very confident that we were able to pick up some share. At the same time, we held price mainly through mix here in corn, did that across brands and feel very good about our product performance going into '26. On soy, we picked up even more share than we believe we did in corn. We need to finalize all this yet with acres. But directionally, we're very confident that we've had a strong year. And it's really based on germplasm and the performance of our products. Now in terms of Conkesta, as we think about where we're at with that today in 2026 -- or 2025, 8% to 10% of the market; 2026, we're going to get we're going to get into double digits; and as we get to 2030, we could be 1/3 of the market in Brazil with E3 and Conkesta. So like the growth, like what the next few years looks like in that space. Operator: Your next question comes from the line of Arun Viswanathan of RBC Capital Markets. Arun Viswanathan: I guess just focusing on the margins. It looks like you've had very strong performance. When you started this journey, you were in the mid-teens across both businesses and then we hit the high teens and low 20s and now you're kind of mid-20s across the whole company with up to 30% in Seed. So I guess, do you see continued margin growth as you move into '26? And what will be driving that? Is it kind of across the board price volume and cost gains? Or would it be mostly driven by cost? And maybe you can also weave in if there's any royalty considerations we should take in there? Charles Magro: Yes. Thank you. Yes, look, we're very proud of the margin journey. It's been a company-wide effort and initiative for several years. And just to get to the point of your question, we do think that the journey will continue. In fact, we've set public targets out to 2027 of about 24% at the midpoint. So we still got some room to go. We've been on that trajectory of, I'll say, at 100 to 150 basis points per year, and we think that's as good of approximation as we can give you. It will be across both Seed and CP. And the drivers are sort of spread. Our new products, whether it's new seed hybrid and varieties or if it's new products in Crop Protection will be a major driver. I'd say seed out-licensing as well, very high-margin opportunity in business. And as we move towards royalty neutrality and then royalty income post 2028, we think that will be a major contributor to our margins over time. And then cost and productivity. When you think about -- when we laid out our targets for 2027 of $1 billion of EBITDA growth in 3 years, about $700 million with cost productivity and deflation, and we're trending a little better than that, and we probably will do better than the $700 million on a net basis. So I think that, that is also a major focus for the company. And one of the core competencies that I think we have as an organization is to always strive for improved cost efficiencies across the company. Operator: Your next question comes from the line of Aleksey Yefremov of KeyBanc. Aleksey Yefremov: So you're showing in your CP business, 65% of the portfolio is differentiated. Could you talk about the remaining 35%? How are these products competitively positioned in this possibly more competitive world? Robert King: Yes, Aleksey, thanks for the question. The portfolio, as you know, we started in 2022, beginning to work on getting it to where we are today with about 2/3 of it differentiated. And that does drive a premium in the market, and it's higher technology that's adding value to the farmers. The balance of that is what we call not differentiated, but that doesn't mean it's commodity generic. It is still a formulated product that is normally in the price ladder, brand ladder type of setup to where it's sometimes a lower price point, not the premium product, but it still is bringing value on the farm. So our overall scheme for our portfolio and how we shape it is we don't intend to play in the commodity generic type molecules. We want to play in that upper end because as an innovation company, that's how we fit into this overall agricultural economy. So I'll leave it there. I hope that helps a little bit. Operator: Your next question comes from the line of Kristen Owen of Oppenheimer. Kristen Owen: Nice dovetail into a more strategic question that I wanted to ask you. Just ahead of the split next year, I did want to talk about maybe some of the digital assets that you've compiled over the last several years, whether it's the things that you've built yourself like CARL or the ones that you've acquired and built on like the granular assets. How integrated are those platforms when we think about seed versus CP? And are there investments that you need to make in your digital infrastructure over the coming 6 to 9 months to support those stand-alone businesses? Charles Magro: Yes. Thanks for the question, Kristen. So yes, this is a very good focus area for us. Our digital support systems are integrated. And so we are going to have to -- and it's part of the $80 million to $100 million of dis-synergies that David has already called out, but a percentage of that will be to separate those businesses to ensure -- to separate that business to ensure that both Seed and CP have the AI and the digital support that they need because I think one of the major reasons we've been able to drive productivity and cost reduction as well as the speed of innovation and the high return on investment we have with our R&D dollars is because we've made strategic investments in this area, and we don't want to lose that capability. So right now, inside of Corteva, that is in one group, and we'll have to separate that quite carefully. We're confident we've already done a lot of work in this area, and it is included in the $80 million to $100 million of dis-synergies, but it will be an area that we'll have to make sure that before we launch both companies, that they have the digital assets that they need to continue with their strategic journeys that they're both on. Operator: Your next question comes from the line of Matthew DeYoe of Bank of America. Matthew DeYoe: Two ones for me, I guess. First on CP. Even if we assume pretty chunky margins for price/mix, it seems like incremental margins on volumes for chems were really strong. I guess why may that -- I guess, why would that be? And then I have a feeling -- I know how you're going to answer this, Chuck. But if we look like, I don't know, call it, 15 years down the road for seeds, given the lower barriers to entry with gene editing, is it possible that the seed company business model just looks over time more similar to like a CPG company like L'Oreal or Pepsi that becomes an acquirer and marketer of smaller technology brands? And like how do you -- or how does that kind of jive with R&D and how you think about budgeting, but I'll leave it there? Charles Magro: Yes. Matt, so we only caught -- sorry, the second part of your question on gene editing, which I can certainly answer. Was there a CP question before that? Matthew DeYoe: Yes. I was just looking at the incremental margins in -- for volumes because obviously, CP EBITDA was up a lot and price/mix was a bit of a headwind, but it seems like the volume incrementals are big? Charles Magro: So let me take the gene editing question, I'll have Robert deal with the incremental margin volume question. So look, looking 15 years out, for me, is very exciting when it comes to this technology. In fact, we put a slide in the appendix of our first gene-edited corn hybrid, which we call a disease super locus on Slide 29. I'd encourage you all to have a look at it. This is just scratching the surface, I think, on the full power of the technology. But we do not think that it will become a disruptive technology beyond sort of what can be done inside of the lab. What do I mean by that? If you look at what is going to be needed to be successful, the gene editing capability, we believe, will be readily available. In fact, we license our gene editing tools to many companies around the world, and we encourage that kind of competition. It is important from an innovation perspective. I think where the differentiation will be will be on the germplasm because you need something great to edit. And so the capability to gene edit plus the germplasm, plus if you think about how we go to market around the world, we have to be able to produce seed in every region around the planet where we're going to sell. And that capability is really expensive and very difficult. And so when you start thinking about this, where I think that this leads is that there could be great new technology that's being invented, and we really hope that there is. But then what it will lead to is probably more partnerships because of access to germplasm and then just the sheer supply chain production capability that's going to be required. But it is going to be, I think, a very powerful technology in the future. And I think it will transform how farmers actually farm and what we're able to do to help farmers. So that's the question on gene editing. Maybe Robert, on incremental margin volume, if you can answer that. Robert King: Yes, thanks. Our journey, as Chuck stated earlier, started back in 2022 when we began to change our strategy and focusing in on profitability and overall financial health of the CP business. And we've had some great inroads there of improving the financial health of this business to where it is today. And that was on the backs of a couple of areas. One, you touched on it of mix, price volume trade-offs and what that -- how that impacts us. And I'll draw your attention to 2 areas there that we've talked about quite extensively around our growth levers, but let me go into how that impacts margin. Our new products and our biologicals portfolios is 2 areas that typically have a 10% to 15% margin advantage over your traditional portfolio. And these are areas that are growing faster than the rest of our business. They're both in the double-digit growth year-to-date. And as Chuck talked earlier about biologicals into the future, we're excited about the continued growth there. And then our new products that we've recently put into the market, Rinskor and Arylex are growing at a rapid rate. These 2, just to put in perspective, will be larger than Enlist. In 2027, we expect the 2 combined to be about $1 billion in revenue, and that's not their top side. So when you look at our mix of the portfolio, that will continue to help our margins because of this differentiation that we supply and that price for value that we're adding to that farmer. The second thing around it is just the great work, the operations teams and the network optimization that has been taking place when we talk about our footprint optimization, year-to-date, we'll have delivered about $200 million in productivity for this year alone. And that work has a work plan that will carry us out past 2027, and we are on track to deliver the commitments that we gave Investor Day for the cost savings as well. So you put those 2 together and those compound to get to the bottom line of impacting that margin and continue to grow our EBITDA, and we're excited about the future of it. Operator: Your next question comes from the line of Patrick Cunningham of Citi. Patrick Cunningham: Could you provide an update on hybrid wheat or double cropping systems, whether it's progress in commercialization, expanded pilot programs or any milestones that we should be modeling over the next 1.5 years? Charles Magro: Yes. So as you know, we're pretty excited about our hybrid wheat technology. And the way I think about this is this could certainly be the third leg to our stool. We're already market leaders in corn and soybeans. And if you add wheat over the next decade or so, it's a pretty powerful combination. We have said that we believe this is a $1 billion revenue opportunity in the next decade. So this is kind of the year 3 of our plant trials. I'd say all systems go for a launch in 2027. We're seeing consistently a 10% to 15% yield improvement, which will be really exciting for farmers. And don't forget that the first hybrids we put into the market will probably be the worst ones we put into the market because they're coming first into the pipeline. So what I'd say is that there'll be, I think, small amounts of availability in 2027 ramping up. But as we get out to the next -- the middle of next decade, we think that this will have a similar margin profile as corn and soybeans for us. So pretty exciting for us, a yield improvement for farmers overall. And this is an important crop, right? It's the largest row crop in the world, and it still accounts for 20% of the calories we consume. So very important for society when it comes to food security. Operator: Your next question comes from the line of Edlain Rodriguez of Mizuho. Edlain Rodriguez: Chuck, so as farmers are likely to shift some acreage from corn to soy, can you please remind us of the potential impact on Corteva? And do you feel that you're well positioned to easily offset any headwind from there? Charles Magro: Yes. Sure, Edlain. So the sensitivity that we've normally given is about $10 million of EBITDA for every 1 million acres that shifts from corn to soybeans. It's included in our thinking of the $4.1 billion. It's a little too early for us to say exactly how many acres are going to shift because we've got lots of time here for farmers to make that choice. But it would be logical to assume that from the 98-or-so million acres of corn, we're going to see less than that in 2026, assuming the trade routes and the export markets still stay open. So there's still some uncertainty there. But overall, what we've given you in terms of our first look when it comes to 2026 EBITDA, that's all factored in, but it's about $10 million of EBITDA for every 1 million acre shift. Operator: Your next question comes from the line of Ben Theurer of Barclays. Benjamin Theurer: Just coming back to the spin. And obviously, we've talked about the seed business and the opportunities from growing through gene editing and M&A, et cetera. But when we look at the Crop Protection business, how would you see -- with biologicals within that segment, how would you see the opportunities and the likelihood of you being as well active here on potentially M&A to add to the portfolio without just sticking to the internal pipeline? Charles Magro: Yes. Very good question. So this is an area where I think we have been active over the last couple of years in terms of M&A. The biologicals industry just as a whole is more fragmented, and there are smaller companies doing really great things. It could be that we would get more active from an M&A perspective and just outright acquire them or it could be either commercial or R&D collaborations because we already do a lot of that through our R&D and our commercial organization. So all of those options are on the table. I would suspect that as the company separates, they will even be more focused on growing their biologicals portfolio because it's been such an important part of that business that I think you're going to see all of these things kind of accelerate over time, M&A and technological and commercial partnerships. Operator: There are no further questions at this time. And with that, I will turn the call back to Kim Booth for closing remarks. Please go ahead. Kimberly Booth: Great. Thanks for joining and for your interest in Corteva, and we hope you have a safe and wonderful day. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp.'s Earnings Call for the Third Quarter of 2025. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on November 5, 2025. I will now turn the call over to Christine D'Sylva, CFO. Christine D'Sylva: Thank you. Good morning, everyone, and welcome to Pizza Pizza Royalty Corp.'s Earnings Call for the Third Quarter ended September 30, 2025. Joining me on the call today is Pizza Pizza Limited's Chief Operating Officer, Philip Goudreau. Just a quick note, our discussion today will contain forward-looking statements that may involve risks relating to future events. Actual events may differ materially from the projections discussed today. All forward-looking statements should be considered in conjunction with the cautionary language in our earnings press release and the risk factors included in our annual information form. Please refer to the earnings press release and the MD&A in the Investor Relations section of our website for a reconciliation and other disclosures related to non-IFRS financial measures mentioned on this call. As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers, media and shareholders can contact us after the call. With that, I'd like to turn the call over to Philip to introduce himself and provide a business update. Philip Goudreau: Thank you, Christine, and good morning, everyone. As Christine mentioned, my name is Philip Goudreau, the Chief Operating Officer at Pizza Pizza Limited, and I'm standing in today for Paul Goddard, our Chief Executive Officer, who was planning on being on today's quarterly call, as always, but due to a delayed and diverted flight overseas, he will still be in the sky during our call today. So he's unable to join. Paul sends his regrets for not being here today. I've been with Pizza Pizza Limited for 14 years in various senior roles, including Senior Vice President of Operations and Development out West, leading the Pizza [ W2 ] brand since 2011. And in 2019, I was promoted to the Chief Operating Officer at Pizza Pizza Limited working closely alongside Paul Goddard for many years, along Christine D'Sylva, our Chief Financial Officer; and the rest of our elite and senior management team. Like Paul and Christine, I'm also an executive management representative, Pizza Pizza Limited and each of the Pizza Pizza Royalty Corp. Board meetings. I'd like to start this call off by stating how proud we are of our network of franchisees, our partners and our entire team and staff of Pizza Pizza for their unwavering support resilience working tirelessly in this ultra-competitive environment. Working together, we remain laser focused on improving speed and quality of service and delivering favorable new options -- sorry, incredible new offerings that will continue to differentiate our brands and drive growth. This quarter, our brand reported a compound same-store sales growth of 0.1%, with Pizza Pizza restaurants reporting 0.3% growth and Pizza 73 restaurants reporting a decline of 1.1%. For the second consecutive quarter, we're happy to see growth in Pizza Pizza's organic delivery channel, which has helped increase our average check. However, at both brands, we saw an overall decrease in transactions as we faced heightened competition and we saw the impact of reduced consumer spending, mainly and earlier in the quarter in July. The trend is impacting much over much of the QSR industry, but since we can't control the macroeconomic environment, we're staying proactive and focused on our fundamentals or sharpening our value messaging, optimizing partnerships and promotions and continuing to invest in digital and loyalty to drive customer frequency and retention. The third quarter is always a busy quarter for our nontraditional locations and special events partnerships. As a reminder, our nontraditional sales typically account for 10% of our total sales and it has been exciting to see the special events in nontraditional locations active again this summer. We saw Pizza Pizza and Pizza 73 brands come alive in communities across Canada via our best-in-class sponsorships and marketing program. In addition to record sales at critical events like the CNE in Toronto and the Calgary Stampede in Calgary, our team innovated our product offerings at both this year, and we introduced a deep fried pizza on a stick. This fun promotion drove national media attention and helped double our sales at the CME versus previous years. Pizza 73, we employed a layered approach to Stampede this year to leverage our strong brand position with the key annual cultural event in Calgary. The partnership that was brought to life in restaurants on the festivals grounds and across social media channels, our digital presence, partnering with content creators highlighted our food innovation. And as a brand, we developed something that was a lot of fun, the pony express where we had a real cowboy on real horse delivering with saddle bags, delivering pizzas in Calgary. This media campaign garnered over 1 million social impressions and brought the event to life in our stores through a Stampede special combo in partnership with our partners at Coca-Cola. Speaking of brand-building promotions and engagement, we also build our brand engagement through exciting menu innovations. As interest in fried chicken items continue to grow, when we introduced our new chicken tenders at Pizza Pizza and new wing flavors at Pizza 73. The chicken tender offering posed an opportunity to deliver more individual stackable options within our existing chicken assortment, and it also provided an opportunity to speak to our well-known and loved assortment of dips. Additionally, at Pizza 73, we leaned into our brand's best-in-class 100% fresh wings with 2 new delicious flavors. We continue to see success promoting our key value offerings as Canadians look for ways to save on food and without comprising quality. This quarter, we continue to promote our differentiating 18-inch, double XL, 2 Topper Pizza deal at $19.99. This is one of Canada's best deals on pizza and has become a core stone of our menu from coast to coast. We continue to support this deal with broadcast, out-of-home and digital and have been seen a significant shift in our assortment of customers trade up to the higher and larger size. To further solidify our value credentials this quarter, while staying relevant and topical we brought back early on in the quarter, a reverse tariff discount supporting the deal with a new TV and digital video. This offer was once again a hit and it help support not only the volume messaging, but our credibility as being truly Canadian, authentically Canadian, because we truly are. All of our promotions and activations would not be successful from the time of placing your order to receiving your pizza, if not for an array of ordering channels from placing an in-store order, to calling in, ordering online or in-house developed website apps and order taking platforms that really support the business 24 hours a day, 7 days a week for both brands. And with the rollout of our visual delivery tracking feature, similar interface that we would see on third-party platforms, we're able to improve our customer experience and the average speed of delivery this year is significantly better than a year ago. As we look towards rebuilding our loyalty program and improving our customer ordering experience, we are currently redesigning and enhancing our web and app extensions for customers. These enhancements will not just improve the speed and simplicity of ordering, they will improve our loyalty functionality and data-driven insights. We'll continue to further distance ourselves from the competition with our ongoing tech advantage with more customer-focused capabilities as time goes on, please stay tune for future updates earlier next year. Before I turn things over to Christine, I just wanted to discuss our restaurant network growth. We ended the second quarter with a total of 811 locations in Canada, we're really excited for achieving the 800 location milestone. 706 of are our Pizza Pizza sites and 105 are Pizza 73s. We opened 4 traditional and 10 nontraditional Pizza Pizza locations during the quarter. Meanwhile, at Pizza 73, we opened up 2 traditional locations. We also closed 1 traditional and 3 nontraditional Pizza Pizzas and 1 traditional Pizza 73. While our growth has been a little slower than in the past, we're also being a lot more discerning about where we grow and how we grow. That said, we do expect to pick up the pace of growth in the last quarter of this year as we still expect to grow our traditional business of traditional network by 2% to 3%. While we continue our restaurant development, we also continue the exciting renovation programs and refresh programs with our traditional core business. We have over 95% of our traditional Pizza Pizza stores having the new look. Our restaurant features have a refresh on the interior and exterior and significant upgrades made in regards to equipment such as more efficient ovens, digital menu boards and further in-store technology. As I close off here, we are now in our busiest quarter of the year, and we'll see us continue to leverage our brand assets, our strengths as we implement new and timely promotions, backed by our core product propositions, ongoing menu innovations, conveniently located restaurants and an award-winning tech platform and a fully staffed and led customer contact center. We look forward to closing off the year in strong fine form. Thank you for listening in. And now I'll hand things over to Christine D'Sylva, our Chief Financial Officer, and she'll provide an update on our details on our financials. Christine D'Sylva: Thanks, Philip. As a reminder, Pizza Pizza Royalty Corp. is a top line restaurant Royalty Corp. that earns a monthly royalty through a license agreement with Pizza Pizza Limited. In exchange for the use of the Pizza Pizza and Pizza 73 trademarks in its restaurant operations, Pizza Pizza Limited pays the partnership a monthly royalty as a percentage of Royalty Pool sales. Growth in the Corp is derived from increasing same-store sales of restaurants in the Royalty Pool and by adding new restaurants to the Pool each year. As previously announced, on January 1, 2025, the Royalty Pool increased by 20 restaurants. So for fiscal 2025, there are 794 restaurants in the Royalty Pool comprised of 694 Pizza Pizza and 100 Pizza 73. So with that brief information, let's turn to the financial results for the quarter. As Philip mentioned, same-store sales, the key driver of yield growth for shareholders increased 0.1% for the quarter, with Pizza Pizza restaurants reporting sales growth of 0.3% and Pizza 73 restaurants supporting a decline of 1.1%. The combination of the 20 new restaurants added to the Royalty Pool and the same-store sales resulted in an overall increase to Royalty Pool system sales and the corresponding royalty income. Royalty Pool System Sales for the quarter increased 2% to $158.8 million from $155.8 million in the same quarter last year. By brand, sales from the 694 Pizza Pizza restaurants in the Pool increased 2.3% to $138 million for the quarter, while sales from the 100 Pizza 73 restaurants was unchanged at $20.8 million for the quarter. The partnership's royalty income earned as a percentage of Royalty Pool sales increased 1.9% to $10.2 million for the quarter. Beyond royalty income, the partnership also earns interest income on its cash and short-term investments. For the quarter, the partnership earned $37,000. This decrease from the prior year as the overall balance decreased and the rate applicable on that balance decreased. Now turning to partnership expenses, administrative expenses, including listing costs as well as director, legal and auditor fees, were consistent with the prior year. This quarter, they totaled $181,000 compared to $176,000 in the prior year. In addition to administrative expenses, the partnership is making interest-only payments on its $47 million credit facility. Interest paid in the quarter was $444,000 and as a reminder, in March of 2025, the company renewed the facility for 3 years with maturity now set for April 2028. The balance of the facility remains unchanged, however, the credit spread table increased slightly, with the lowest tier increasing from 0.875% to 1%. Additionally, in April of 2025, the partnership entered into a new 3-year forward swap. The new 3-year swap commenced when the existing one expired. The locked-in rate is now 2.51%, which is an increase in the maturing swap of 1.81%. The overall all-in rate for the credit facility for the next 3 years will be 3.51% compared to the maturing rate of 2.685%. And after the partnership received royalty and interest income, pays administrative and interest expense, the resulting net cash was available for distribution to its 2 partners based on their ownership. After the 2025 vend-in, Pizza Pizza Limited's ownership increased to 26.2%. Pizza Pizza Royalty Corp. shares in the remaining 73.8% of the partnership. It pays taxes on its share of the partnership earnings and any residual cash is then available for dividends to company shareholders. The company declared shareholder dividends of $5.7 million for the quarter or $0.2325 per share, which was consistent with the prior year. The payout ratio for the quarter was 111% and resulted in the company's working capital decreasing $800,000 to end the quarter at $4 million. The $4 million working capital reserve is available to stabilize dividends and fund other expenditures in the event of short- to medium-term variability in sales and thus royalty income. The company historically has targeted a payout ratio at or near 100% on an annualized basis. And we continue to do so. That concludes our financial overview. I'd like to turn the call back to our operator to poll for questions. Operator: [Operator Instructions] The first question comes from Derek Lessard of TD Cowen. Derek Lessard: Philip. Nice to meet you, who needs Paul anyway, right? The 1 question I had was I was curious if you saw a change in, I guess, consumer behavior from Q2 where you guys reported a nice modest same-store -- positive same-store sales print to the current quarter where it was kind of flattish. Christine D'Sylva: I think, Derek, in terms of overall consumer behavior, we're definitely seeing a shift. We're seeing customers reducing their frequency of visits, and that's now been increasing the competitive landscape because everyone's fighting for those visits. We're also seeing them continue to be more discerning in how they're spending their dollars. They're managing their overall spend, so they might not be adding the dips and the pop to their orders, the to get their pizza from us. So we are seeing that aspect happening. And we're also continuing to see a shift in how they're getting their pizza. I think we've talked about in the past where we've seen an increase in our pickup channel, and we continue to see a pickup increase this year at both brands. And in fact, at Pizza 73, where we used to be 90% delivery and 10% walk-in pick up. We're seeing a shift to where the walk in and pick up at that brand is almost 25%. So that is definitely something we are seeing overall. But I think in terms of this quarter, we were definitely impacted by weather in the early part in July. Additionally, the fact that there was a Canada Post strike. So we made the decision to not issue flyers in July, definitely did impact the business at that point.. Derek Lessard: And whether in what way, Christine, was it -- remind me, we are... Christine D'Sylva: Yes. If it was poor weather in July, so a lot of our outdoor events were definitely impacted and in Alberta, so Philip can speak more to this, they were impacted by tourism and the fact that BAM and those kinds of locations were not getting as many tourists from the U.S. So that definitely did impact our July month. We did see, though, that as the quarter progressed, then did pick up in the right direction. Derek Lessard: Okay. And maybe just a follow-up to that, Christine. You guys are, I'd say, the environment is, obviously, it's not necessarily I guess, conducive for delivery sales, but it looks like you guys did get some pretty good organic growth there and you're punching above your weight. Just maybe talk about the drivers behind that? Christine D'Sylva: Definitely, so -- go ahead, Phil. Philip Goudreau: Yes. On my end, Derek, what we've been seeing is just year-over-year, where we have a customer tracking system that is really helping our franchisees and our team just control and making sure that we're exceeding customers' expectations. And we're about a minute quicker this year than we were last year on deliveries, and we could tell exactly where the delivery driver is at any given moment and it just helps plan things out. So I do feel that we're seeing less third-party business. But internally, we're getting our organic deliveries. And we've basically been seeing improvements week after week, period after period for the last few, which we're pleased with. Christine D'Sylva: We're also doing a lot more specials like the XXL, where you're ordering a bigger item and typically, that would lead to people having others over so they want to deliver to their house. And to talk more to the tech that Philip was mentioning, we're alerting customers via SMS when their order is being delivered, so that they know to go in and track their orders. So we're trying to engage customers more on our organic platform to keep them there and we want them to stay on that platform. It's just more profitable For our overall [ value ]. Derek Lessard: Okay. Okay. Makes sense. And I guess last quarter, you had, if I recall correctly, some timely I think, sports-related marketing campaigns, curious if any of that carried over into Q3? And maybe just a comment on any traction from the long Blue Jays run. Christine D'Sylva: Yes. So the long Blue Jays will definitely impact our Q4, definitely the October baseball is something we did. And I think you would see in the market over the last few weeks, we actually partnered with Vladimir Guerrero Jr. for our XL pizza, so that's a Q4 impact that we would be seeing from that one. But definitely, it's the love of baseball across Canada and the fact that we are a Canadian pizza brand, and we have locations across the country, definitely will be at Q4. Derek Lessard: Well, there was definitely a lot of eyeballs, right? I think there was 10 million Canadians who tuned in to Game 7? Christine D'Sylva: Yes. And I think right away, as Vladimir hit his first home run, we had a XXL commercial on, so it was great. So timing was perfect. So yes, Q4 is definitely a big sports quarter for us with October baseball and then the start-up, our partnerships with all of the NHL teams across the country and the [ roster.] So we're excited for sports. A big driver for us. Derek Lessard: Okay. Awesome. Maybe one last one for me. You get on the 800 stores. Just maybe talk about -- we don't talk about it often, but maybe just -- could you just talk about the progress on the Mexican initiative? Christine D'Sylva: Yes. So we currently have 4 locations in Mexico. It's our first foray into that international expansion. It's slower than we would like, but we know that the partners down there are very much committed to it and so is our management team here at Toronto. There are a few more in the hopper towards the end of the year. But it's definitely a market where we see significant amount of potential. The Mexican pizza market is actually greater than the American pizza market. So once we get this region of Guadalajara up and running, it will definitely be gravy for all of our PPC investors. Operator: Ladies and gentlemen, there are no further questions at this time. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jones Lang LaSalle Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to Sean Coghlan, Head of Investor Relations. Please go ahead. Sean Coghlan: Thank you, and good morning. Welcome to the Third Quarter 2025 Earnings Conference Call for Jones Lang LaSalle Incorporated. Earlier this morning, we issued our earnings release along with a slide presentation and Excel file intended to supplement our prepared remarks. These materials are available on the Investor Relations section of our website. Please visit ir.jll.com. During the call, as well as in our slide presentation and supplemental Excel file, we reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures to GAAP in our earnings release and slide presentation. We also referenced resilient and transactional revenues, which we defined in the footnotes of our earnings release. As a reminder, today's call is being webcast live and recorded. A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our annual report on Form 10-K and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements. Finally, a reminder that percentage variances are against the prior year period in local currency, unless otherwise noted. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer, for opening remarks. Christian Ulbrich: Thank you, Sean. Hello, and welcome to our third quarter 2025 earnings call. This morning, we reported strong results with our sixth consecutive quarter of double-digit revenue gains and eighth consecutive quarter of double-digit adjusted EPS growth reflecting the strength and resilience of JLL's diversified platform. At the consolidated level, revenue grew 10%, adjusted EBITDA increased 16% and adjusted EPS was up 29%. Top and bottom line growth was led by a reacceleration in our Transactional businesses after market recovery, which began building momentum late last year, further progressed. Transactional revenue grew 13% in the quarter, led by 26% growth in investment sales, debt and equity advisory. Though the macro environment remains dynamic, the economic outlook and forward indicators for Transactional markets have stabilized and improved during the quarter. Both occupier and investor clients are motivated to transact. Looking at our largest market, the U.S. This was reflected in broad-based activity across Capital Markets, office and industrial leasing as well as an improvement in large deal activity. Investors in particular, are increasingly shifting to risk-on mode supported by healthy and robust debt markets. We continue to invest in the people and platform to drive long-term revenue and margin growth across our resilient business lines, positioning each of them for sustainable, profitable growth. The result of our investments was evident in the seventh consecutive quarter of double-digit revenue gains in real estate management services. Data, technology and AI are central to JLL's overall strategy, differentiated platform and financial performance. We continue to create a suite of impactful and transformative technology products that drive revenue growth and increase the profitability of JLL anchored in both an AI forward approach and one that enables us to deliver the most valuable outcomes for our clients. Over the past 6 years, we have accelerated the pace of innovation at JLL. Today, our platform is driving significant value by enabling the core businesses. Our people and clients are leveraging our data technology and AI to derive unique insights, informed decision-making and drive productivity. We were an early adopter of generative AI in our industry and are now building Agentic AI capabilities into our products to address complex problems and needs. We are scaling rapidly across both adoption and frequency of use. More than 41% of our addressable population are now using our proprietary AI tools daily up from 35% weekly adoption earlier this year. We would not have been able to achieve these milestones, if not for the combination of our people, global footprint and culture. Of our broader technology suite, the direct revenue-generating software products and our Technology Solutions business comprise the Software and Technology Solutions segment. The segment allowed JLL to incubate a portfolio of revenue-generating products including Corrigo and Building Engines, primarily serving clients in our Real Estate Management Services business. Since being formalized as a segment in 2022, Software and Technology Solutions have matured strategically and operationally, and the segment has meaningfully progressed in its path to be profitable in full year 2026. Given its maturity and focus on serving clients in our real estate management services businesses, effective January 1, Software and Technology solutions will run as a fifth business line within the Real Estate Management Services segment alongside Workplace Management, Project Management, Property Management and Portfolio Services. Going forward, this new structure will allow us to further scale the business align on the most effective and client-centric go-to-market approach and fully realized top and bottom line synergies. With that, I will now turn the call over to Kelly Howe, our Chief Financial Officer, who will provide more details on our results for the quarter. Kelly Howe: Thank you, Christian. I'm pleased with our third quarter results overall, highlighted by an acceleration in top line growth, robust profit and margin increases and strong free cash flow generation. The revenue growth, which came on the back of a tougher comparison, reflects the strength of our platform and people as well as the continuation of our strong momentum in driving client success across multiple services. Growth was led by our Transactional businesses, which outpaced a slight deceleration in resilient revenue growth that was in part the result of our active decision to exit certain contracts that didn't align with our desired long-term margin profile. Our profit growth materially outpaced the increase in revenues despite headwinds from a few discrete items. We continue to invest to drive long-term growth in the context of the ongoing market recovery and long-term secular tailwinds for our industry. At the same time, we remain very focused on enhancing our platform leverage and see ample opportunity ahead to drive further margin expansion. Now a review of our operating performance by segment. Beginning with Real Estate Management Services, client wins and mandate expansions continue to drive strong performance in Workplace Management as incremental pass-through costs augmented mid-single-digit management fee growth. On a 2-year stack basis, Workplace Management revenue increased nearly 30% for the quarter, consistent with the prior 4 quarters and reflective of both the value we bring to clients and the significant market opportunity. New and expanded contracts largely in the U.S., Australia and India drove double-digit Project Management revenue growth with low double-digit management fee growth, supplemented by higher pass-through costs. Within Property Management, revenue growth was tempered by the anticipated elevated contract turnover we mentioned last quarter. The overall segment revenue growth, along with a notably lower gross receipts tax expense, more than offset headwinds from the favorable prior year impact of incentive compensation accrual timing and certain discrete items, leading to higher adjusted EBITDA and margin. Looking ahead, we remain confident in the trajectory of the Workplace Management business as our sales pipeline is strong and contract renewal rates are stable. Given the time to onboard new business wins and as we lap tough comparisons, the near-term growth is likely to moderate. Within Project Management, client activity remains healthy, positioning us for continued momentum into the fourth quarter. In Property Management, we anticipate the elevated contract turnover we are actioning to continue to dampen revenue growth through the middle of next year, offset by an improved margin outlook. From the segment overall, we continue to target healthy annual margin expansion, though the quarterly progression is not likely to be linear as we balance investing to drive long-term growth and profitability with near-term business performance. Moving next to Leasing Advisory. Revenue growth accelerated despite a tougher comparison. On a 2-year stack basis, Leasing revenue grew nearly 30%. Growth was broad-based across major asset classes led by office with continued momentum in the U.S. Globally, office leasing revenue growth accelerated to 14% and notably outpaced the 2% increase in market volume, according to JLL Research highlighted by U.S. outperformance from both higher volume and deal size. Industrial leasing revenue grew 6% globally, driven by continued strength in the U.S. The increase in Leasing Advisory adjusted EBITDA was primarily driven by Leasing revenue growth, mostly offset by the year-over-year impact from the timing of incentive compensation accrual. Absent this phasing impact, the incremental margin would have been much closer to our historical norm, which we continue to target on a full year basis. Looking ahead, we entered the fourth quarter with a healthy Leasing pipeline as client demand for high-quality assets continue. Business confidence as measured by the OECD has been resilient over the past year in the face of a dynamic macro backdrop providing reason for cautious optimism for continued growth in the near term. Shifting to our Capital Market Services segment, growth trends accelerated across each business line, most notably within Debt Advisory, Investment Sales and Equity Advisory. Strength in debt markets and an improvement in bidder dynamics drove a 47% increase in Debt Advisory and 22% growth in Investment Sales on the back of more challenging comparisons. On a 2-year stacked basis, Debt Advisory revenue grew 68% and Investment Sales increased 37%. The increase in Capital Markets Services adjusted EBITDA and margin was largely attributable to the higher transactional revenues, partly offset by the $7.2 million of incremental expenses associated with loan related losses. The majority of these expenses were related to the closing of the loan where fraud was associated with the borrower that we discussed in prior earnings calls. Looking ahead, our global Investment Sales, Debt and Equity Advisory pipeline remains strong, and we are encouraged by the highly liquid capital markets, increased fundraising activity and improving bidder momentum. The strength of our differentiated data-driven global platform positions us to continue to gain market share globally. Turning to investment management. Revenue growth was driven by higher incentive fees. Strong growth in our U.S. core open-end funds mostly offset the impact of the large client asset dispositions in fourth quarter 2024, resulting in largely unchanged advisory fees from a year ago. We've raised $3.4 billion of private equity capital year-to-date compared with $2.7 billion for the full year 2024, reflecting continued strong demand for credit and core strategies. Capital raising and valuation increases led the sequential quarter increase in assets under management. As it takes several quarters to deploy new capital, we expect a gradual recovery in advisory fee growth over the coming year. Moving to Software & Technology Solutions. Double-digit growth in software revenue was mostly offset by reduced discretionary technology solutions spend from certain large existing clients. We remain focused on attaining sustained profitability of our direct revenue-generating technology businesses. And as an extension of Christian's earlier remarks, driving closer alignment as well as top and bottom line synergies between our technology products and core businesses. Of note, we no longer include carried interest in the segment performance and have recast historical financials accordingly. Shifting to free cash flow, balance sheet and capital allocation. The higher free cash flow in the quarter was largely due to improved collections and earnings growth. Year-to-date free cash flow achieved its highest level since 2021 and in part reflects our ongoing efforts to drive working capital efficiency and approve upon our long-term average free cash flow conversion ratio of 80%. Our free cash flow generation contributed to a reduction in net debt, which, along with higher adjusted EBITDA over the trailing 12 months, led to the improvement in reported net leverage to 0.8x. We continue to manage to a full year average leverage ratio of 1.0x, the midpoint of our 0 to 2x target range. Capital deployment priorities remain focused first on driving organic growth and productivity across business lines. Our acquisition pursuits remain focused on augmenting organic initiatives that enhance our capabilities and deepen our client relationships across multiple business lines, particularly within our resilient businesses. Returning capital to shareholders remains a high priority. In the quarter, share repurchases totaled $70 million, bringing the year-to-date total to $131 million, notably above expected full year stock compensation dilution and full year 2024 repurchases of $80 million. Looking ahead, we intend to continue to at least offset annual stock compensation dilution with the total repurchase amount depending on the broader operating environment, other M&A or investment opportunities, valuation and leverage outlook. Regarding our 2025 full year financial outlook, the market backdrop overall remains constructive despite mixed economic indicators in the evolving policy environment. Given our strong year-to-date performance, pipeline and underlying business trends, we increased the low end of our full year adjusted EBITDA target range by $75 million, resulting in a new range of $1.375 billion to $1.45 billion. Additionally, our consistent progress in margin expansion and focus on operating efficiency has put us on track to achieve this year, the low end of our midterm adjusted EBITDA margin target range. This is in line with our original time line provided in November 2022 and consistent with our expectation of achieving the margin ahead of the top line target, reflecting our continuous commitment to drive stakeholder value. Christian, back to you. Christian Ulbrich: Thank you, Kelly. Back in 2017, we communicated our Beyond strategy backed up with a financial target for 2025. Since then, we have demonstrated a consistent ability to both raise and achieve our margin targets as a company. As we near the end of 2025 and approach our midterm target margin range, we are actively developing the next evolution of JLL's strategy charting the path to top and bottom line growth to 2030 and refreshing our financial targets, which we will share with you all during the first quarter of 2026. We are encouraged by improving tailwinds for our industry as well as the opportunity to fortify and scale the contributions of our resilient and transactional businesses. There's significant runway ahead for our company to continue to drive long-term value creation. I would like to once again thank all of our colleagues around the world for their resilience and collective focus on delivering for our clients and shareholders. We're excited to continue building an even stronger leading business with you all in the years to come. Operator, please explain the Q&A process. Operator: [Operator Instructions] Our first question will come from the line of Anthony Paolone with JPMorgan. Anthony Paolone: My first question revolves around Property Management and REM, just more broadly. You talked about moderating growth there. And I just wanted to make sure I understand, was that for the broader business segment? And can you put some brackets around what that means? And just also like what is the reason for the churn and on Property Management and what's kind of the drag there? Christian Ulbrich: Anthony, it's Christian. As we explained, we have taking our Property Management business into a global business line last year, and we are evaluating now all the different country businesses, the profitability of those businesses and we are really focused on driving margin in that business. And so we are getting out of some of those contracts, most notably in Asia Pacific, and so when you look at the overall growth ratio, it is muted, but there are still areas, especially here in the U.S., where we still show nice single-digit growth in that business. Anthony Paolone: So I guess if we move away from Property Management and just think more broadly around like traditional outsourcing and facilities, I think is there any real change in what's happening with the growth rate there? Christian Ulbrich: No, not at all. That business is still striving ahead very strongly. As you saw, we had really strong growth in the quarter and our Project Management business was plus 24%, and our Workplace Management business was plus 8%, and we see that continue going forward as we have said multiple times. This is a long-term trend, and we don't see any kind of barriers to that trend. So what you see within the Property Management business, it's still a result of us taking a very localized business within JLL now into run as a global segment and we have seen just contracts, which we don't want to pursue longer term, but these are all pretty much exclusively down in Asia Pacific. Kelly Howe: Yes. Thanks, and maybe I'll just layer a couple of thoughts on top of that. For our Facilities Management business, as Christian noted, we do expect continued growth over the medium and long term. That's, of course, not linear. And just given timing of some contract ramping and things like that, we do expect a little bit of moderation on top of some particularly strong comps in prior year as well over the next couple of quarters. On the Property Management side, as Christian noted, we are taking a hard look at a set of contracts and intentionally making choices in order to drive margin. We expect that process to continue through the first 2 quarters of next year as well, at which point we expect to have kind of turned the corner on that and be looking at on a more global basis, a positive growth outlook. Anthony Paolone: Okay. Got it. And then just my follow-up is just as it relates to free cash flow, it seems like the conversion there is tracking and you're just inside your leverage target. So just trying to bridge like the buyback and whether or not that ramps up more dramatically in the next couple of quarters or not? Christian Ulbrich: Well, as you have seen, we have ramped it up already in the third quarter, and you can probably assume that this is describing a bit of a trend. Leverage ratio is now very low. And as long as we don't identify any really strong M&A opportunities, which will add immediately value to our shareholders, we will continue to see the repurchasing of our shares as a very attractive use of our cash. Operator: Our next question will come from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Christian, on your Agentic AI solutions, I guess as we think about that from an investor standpoint, where could we start to see some of these solutions impacting financials? Is it a combo of both producer productivity gains that could help top line growth along with efficiency gains and the cost structure. And then is there any detail you can share on where you've seen the biggest benefit so far as you look across the organization? Christian Ulbrich: Yes. For the time being, the main benefit is around efficiency gains. What we are doing is we are going thoroughly through all our processes within the organization and define those processes, if possible, move those processes in one of our shared service centers and then within the shared service centers within a couple of months, they are trying to replace some of that by using AI tools in order to take those efficiencies up. And that goes across the board that is within our support services, but it is also within our business lines. So we see productivity, for example, going significantly up in our Capital Markets business where the revenue per head is going up very significantly. And it's not only because the market is more supportive, but we have a whole load of tools, which are supporting our brokers to drive their efficiency. Stephen Sheldon: Got it. Very helpful. Maybe then on Capital Markets, I guess, how are you thinking about trends there heading into -- I guess we're talking more than a month through the seasonally important fourth quarter. I know deal closings can always shift the timing of revenue recognition out some, but we think you have decent visibility given the time it takes for deals to close. So just how are you thinking about it? What have you roughly factored into the guide for the year? And what does the pipeline look like as we think about heading into 2026? Christian Ulbrich: Well, as you have seen, the pace of growth accelerated in the third quarter quite significantly. And there is good momentum while we moved into the fourth quarter and frankly, we don't see that changing. The healthy bit about that is we don't see a hockey stick recovery. We see a very steady recovery of the capital markets transaction volumes in the U.S. but also around the globe. And so overall, our outlook for that business is very positive. Stephen Sheldon: Got it. Good to hear. And maybe can I sneak one more in, just in. I am -- I might be wrong on this, but I think this is the first time in a long time where AUM was supported by modest valuation increases. So does it seem like we've maybe started to bottom out for CRE valuations just I thought that was really interesting to see. Christian Ulbrich: Yes. Indeed, what we have seen is that we have had a small increase in underlying value. So we should read that as that the values have bottomed out, and we are now going on a slight increase again going forward. Overall, the outlook for that business is healthy. We specifically, within our own organization, we had a strong equity raise in the third quarter. And as you know, that will then translate over the coming quarters into more assets under management and so it's a very predictable and therefore, a nice income stream for us. Operator: Our next question comes from the line of Alex Kramm with UBS. Alex Kramm: Just maybe coming back to the first questions on the Property Management and the exiting. If I heard you correctly, Christian, you said that this is primarily in APAC and the U.S. still grew 2%. So if I heard the 2% correctly, without being disrespectful, that still sounds like a pretty soft number. So just wondering if some of the kind of changes are also weighing in that business? Or if there's anything else going on and what do you think the growth of that business once you get through all this could ultimately be again? Christian Ulbrich: I don't think I said 2%, if I'm not mistaken. I said mid-single-digit growth in the U.S. So not that, that is super exciting, mid-single digit, but it's at least more than 2%. So the decline is coming from -- the overall decline is coming from APAC only. Alex Kramm: Okay. And in terms of whether the business could ultimately be in terms of growth, again, sorry if I misheard you, but mid-single digits, like you said, is still probably upside to that over time? Christian Ulbrich: Yes. I mean we have higher ambitions than that. But just when you bring a business like this together, there's a lot of structural work to be done. And we don't want to get ahead of ourselves. We want to deliver exceptional services to our clients. And so you have to be mindful of how much new business you are taking on in a period like that. And we are very focused that we are getting to the right clients and delivering that outstanding service, what they would expect from JLL while we do that restructuring within that business. Alex Kramm: Okay. Fair enough. And then secondarily, just quickly on industrial leasing, it sounds like good increase. But if I look at that slide that you have on it still fairly much below where we were in the last few years. So anything that you're observing to get kind of back to normal in that business? Yes, any trends you can share? Kelly Howe: Yes, I can take that one. Industrial leasing actually performed better than we would have expected. Our Leasing revenue globally in industrial was up 6%, up 9% in the U.S. The U.S. number comes on the back of very strong growth in the first half. I wouldn't read too much into kind of a quarter-by-quarter change. We feel really good about the pipeline. The other thing that I would just note is that if you look at our industrial leasing growth on a 2-year stack basis, we feel really good about that performance relative to the overall market performance. Operator: Our next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: Capital Markets historically is the industry's highest margin business. I remember HFF margins were always in the 25% range. So how much upside in margins do you expect that business to have. And if you could put any parameters around it and say, the near to medium term, that would be great. I see a lot of opportunity to further scale that business. Kelly Howe: Thanks, Jade. I'll take that one. We don't provide, as a reminder, kind of segment-specific margin outlook. That said, given your question, we see a lot of upside in that business as well. As a reminder, as we went through kind of the downturn over the last couple of years, we really did not let go of our producers. And so we maintained that very strong cohort of producers and there is more productivity within that cohort that we believe we could achieve. And then to your point, there is a lot of leverage on the platform in that business. And so we see plenty of runway for margin expansion in our Capital Markets business. Jade Rahmani: On the multifamily loss, we've now seen multiple real estate services companies take broad charges and increase their reserves. Greystone, which is owned in joint venture by Cushman & Wakefield, had large charges. So I think that in your comments, you alluded to one instance of fraud, which was a legacy issue. It didn't sound like the charge was related to newly uncovered issues. So could you provide any commentary around the credit trends in multifamily and the context for that charge? Kelly Howe: Sure. So we actually had 2 loans with confirmed fraud. So one of those loans, we completely closed out this quarter, the loan with the enhanced loss sharing that we've spoken about in prior quarters, completely closed out in the third quarter, a very, very small portion of the charge was associated with closing that out. There was a second loan with confirmed fraud as well, that as you will recall, we repurchased from Fannie. The underlying property and loan was sold in October 2025. We believe that's in very good standing at this point. We did take a portion of the charge to cover the sale of that property and loan. And then we just have a normal course of business. We're constantly evaluating the portfolio of loans. And so we adjust our CECL reserves quarter-over-quarter. There can be volatility in those CECL reserves quarter-over-quarter, just depending on what we're seeing in the macro environment and with specific loans. And so a portion of the charge was associated with the CECL reserve change. If you look at our CECL reserve, again, like I said, that can be volatile quarter-to-quarter. We took a bit of a charge this quarter. But if you look at it on a trailing 12-month basis, we're up $700,000 in net CECL reserves. Jade Rahmani: Okay. So that sounds fairly modest to me and not indicative of broader deterioration. So is it safe to assume most of these charges related to the fraud instances? Kelly Howe: I'm sorry, could you repeat the last part of your question? Jade Rahmani: Is it fair to assume that the predominance of the charges related to the fraud issues rather than the general CECL reserve? Kelly Howe: Yes. It's about a little more than half is associated with the 2 loans that we previously discussed. Operator: Our next question will come from the line of Mitch Germain with Citizens Bank. Mitch Germain: The low-margin contracts that you're exiting, is this happening as the contract concludes. So is it safe to assume that we've got a couple more quarters and then that they all burn off. Is that the way we should think about it? Kelly Howe: That's exactly right. So as we've gone through and done a pretty intensive portfolio review in our Property Management business. As we noted, we've identified some contracts that just don't make sense for us over the medium and long term, it takes a bit of time to exit those contracts. There are a lot of people associated with them. As you know, we want to make sure that there is a smooth exit from any situation where we've been actively serving a client. And so I would expect continued contract churn, again, very intentional in the Property Management business probably through about the first half of next year. Mitch Germain: Got you. That's helpful. And then Christian, maybe broadly speaking, I know that there is some really good momentum across fundraising and also your investment sales business. But we're hearing about some pullback from institutions in terms of their real estate allocations. Are you seeing any of that with regards to your discussions and across the board with your -- either your customers or your talent? Christian Ulbrich: Not really, to be honest. We have -- as we saw -- as we spoke about earlier, in the second quarter, we saw a little bit of hesitation from overseas investors with regards to the U.S., but that has smoothened and we are now back into the longer-term allocations of their investments to the different geographies. We see pretty healthy interest from Asian and Middle Eastern investors to increase their real estate allocation. And so overall, I don't think that there's anything material changing to the long-term trend there that we have roughly 12% being allocated to real estate. The challenge, which may be there is that there is just too much little -- too much product coming to market. I mean, the new build is at a very low level. And so the scarceness of institutional graded product is just becoming more notable, and that is one of the reasons why for the best products, prices continue to rise. Mitch Germain: Just as a follow-up, are you -- is that a suggestion that you think the cross-border capital allocation is going to start to improve? Christian Ulbrich: Directionally, yes. Especially when you look at relative attractiveness, there were some hopes that Europe would come out of the woods faster, which hasn't materialized so far and therefore, the relative attractiveness of the U.S. has increased over the last couple of months, and we can immediately see that by the interest from overseas investors to invest into the U.S. Operator: Our next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: Yes. I guess first just on margins. I mean, Leasing top line growth is strong, but I guess the incremental margins were relatively subdued. And I think you called out the timing of incentive compensation accrual timing. I guess just taking a step back, does it feel like the compensation environment for leasing brokers is getting more competitive and making it may be more difficult to realize some of the incremental margins we would otherwise expect. Kelly Howe: I think -- I'll take that. I think the market for talent is always competitive, to be quite honest. We continue to -- I feel really good about our broker talent. We get a lot of interest, and we have a lot of stickiness around the brokers that we do have because of some of the investments that we've made in the platform that we provide. And I would say the same on the recruitment side, we get a lot of people who are quite interested in coming over to JLL because of the platform investments that we've made. I don't see retention and recruitment as a significant headwind to profitability in the Leasing business or incremental margins. Julien Blouin: Got it. Okay. And then maybe stepping back, just margins more generally, do you still feel like you're on track to get to your sort of midterm margin targets that you've touched on in the past? I think there were sort of 16% to 19%. And also, is the plan when you sort of come up with these 2030 targets to update those sort of margin targets as well, and more generally, I guess, why sort of persist with giving these longer-term targets when the longer-term visibility can be challenging in your business? Kelly Howe: So on the first part of your question, we do believe that we are on track to achieve the lower end of those margin targets that we had put out in 2022. So we feel quite good about that. Christian, perhaps I'll turn it over to you to talk about kind of the 2030 targets and longer-term visibility. Christian Ulbrich: When we did the work for our strategy up to 2030, we were very encouraged when we went into the detail of the different service lines how much organic growth opportunity we are able to identify and you pair that with the opportunity AI is offering to our industry, which will help us to become even more efficient and on a continuous basis going forward. So I think we have good reason to believe that the margin trend, which we have shown over the last couple of years will continue going forward. Operator: [Operator Instructions] Our next question comes from the line of Seth Bergey with Citigroup. Seth Bergey: I kind of want to go back to your comments on AI. How does it change the way you think about kind of your current head count needs and your future head count needs across kind of the business? Christian Ulbrich: Well, as you will have observed, our overall head count is still growing, and we expect that to continue to grow, but that is very much driven by on-site colleagues who are working directly on the build environment of our clients. We also have a very strong growth of head count within our shared service centers, because the more you are able to define processes, you are able to move them into centers of excellence is. Where we see a more flattish development around head count is in our front offices, because the people working in those front offices are so strongly supported by the technology which we are offering that they are all becoming significantly more productive in what they are doing. Seth Bergey: Okay. Great. And then if I could just go back to kind of the comments on the REMS kind of growth business. And just a point of clarification. I think kind of on the prior call, you had talked about kind of expecting it to grow in the high single-digit, low double-digit range kind of for revenues on an organic basis. Is the comments on the Asia Pacific, is that -- and kind of the growth being kind of high single digits. Is that specifically for the Project Management revenue? Or is that kind of the overall REMS business as well? Christian Ulbrich: That comment was meant to be for what we historically called our Work Dynamics business, which is growing all in all, high single digits, low double digit and then with the impact now of the Property Management coming into the REMS segment that brings it then overall more towards the high single digit, but the impact is not that dramatic. So you take 1%, 1.5% of the overall growth rate, while we are restructuring that business. And as Kelly alluded to, this will go over the next couple of quarters, but then -- but in the second half of next year, we will see growth coming back into that business. And longer term, we don't believe that the Property Management business will be dilutive to the overall growth of the REMS segment. Kelly Howe: And just to clarify, it's our Property Management business where we are seeing some intentional contract churn, not the project Management business. Operator: And that will conclude our question-and-answer session. I'll turn the call back over to Christian Ulbrich for closing comments. Christian Ulbrich: Thank you, operator. With no further questions, we will close today's call. On behalf of the entire JLL team, we thank you all for participating on the call today. We look forward to speaking with you again following the fourth quarter. Operator: This concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Perrigo Q3 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 5, 2025. I would now like to turn the conference over to Bradley Joseph, Vice President, Global Investor Relations. Please go ahead, sir. Bradley Joseph: Good morning and good afternoon, everyone. Welcome to Perrigo's Third Quarter 2025 Earnings Conference Call. I hope you all had a chance to review our 2 press releases issued today. A copy of both releases and presentation for today's discussion are available within the Investors section of the perrigo.com website. Joining today's call are President and CEO, Patrick Lockwood-Taylor; and CFO, Eduardo Bezerra. I'd like to remind everyone that during this presentation, participants will make certain forward-looking statements. Please refer to the slides for information regarding these statements, which are subject to important risks and uncertainties. We will reference adjusted financial measures that are non-GAAP in nature. See the appendix to the earnings presentation for additional details and reconciliations of all non-GAAP to GAAP financial measures presented. A few items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Second, organic growth excludes acquisitions, divestitures, exited products and foreign currency fluctuations in both comparable periods. Third, regarding the strategy reviews discussed today, we will not provide further updates unless and until the company determines further disclosure is appropriate or required. And finally, Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. And with that, I'm pleased to turn the call to Patrick. Patrick Lockwood-Taylor: Thank you, Brad. Good morning, good afternoon, and thank you for joining today's call. I'd like to begin by addressing recent category consumption trends across consumer health, which remains soft, reflecting broad short-term market pressures. Against this backdrop, Perrigo has delivered sustained share gains and advanced key initiatives under our Three-S plan to Stabilize, Streamline and to Strengthen. These efforts are enabling us to navigate the challenging landscape while making steady progress on our strategic priorities and reinforcing our long-term value proposition. With that context, let's turn to how these trends influenced our year-to-date performance and our outlook going forward. Let's start with U.S. OTC, where Perrigo continued to outperform despite a challenging market. While total OTC volume consumption has recently declined versus the prior year, Perrigo store brand has delivered 6 consecutive months of share gains. These gains were driven by strong execution, consumer trade across from national brands, new distribution and business wins against key store brand competitors. Diving in a bit deeper, you can see on the right-hand side of the slide that over the last 13 weeks, Perrigo gained volume share of 90 basis points and across nearly every OTC category we compete, most notably smoking cessation, allergy and women's health. Sustained volume share gains in this environment underscores our winning OTC strategy and validates the strength of our value proposition to retailers and consumers. In the EU, total OTC euro consumption has also recently declined. Despite this, Perrigo's key brands have gained dollar share for 5 consecutive months, driven by our strong brands with unique value propositions, our highly focused A&P investments in innovation and targeted activation strategies. These durable gains highlight the strength of our category-led approach and the resilience of our key brands, including ellaOne, Jungle Formula and our cough/cold products, Physiomer and Coldrex. Though our remaining brands in the EU have been impacted by similar trends to the broader market, our key brands illustrate the strength of our portfolio where we have concentrated our resources. In total, Perrigo share gains across the U.S. and Europe, particularly in the current challenging environment, underscores the strength of our execution and the relevance of our unique multi-price point OTC portfolio. Building on our share gains in both the U.S. and Europe, let's turn to the progress we've made against our Three-S plan, Stabilizing, Streamlining and Strengthening, which continues to guide our actions and priorities. We have stabilized our U.S. OTC store brand business and are outperforming the market in the categories we compete. As I just mentioned, we have gained volume share for 6 consecutive months. This success in consistently growing share in a challenging market results directly from disciplined execution and is clear evidence that this business is winning in the market. In infant formula, store brand has also gained share. And operationally, we are consistently delivering safe, affordable formula to parents and caregivers. We also continue to streamline our organization, delivering as One Perrigo. Initiated in 2022, our supply chain reinvention remains on track to deliver between $150 million and $200 million in benefits by the end of this year. Project Energize, which has generated $163 million in gross annual savings above the midpoint of our $140 million to $170 million range. Also, as part of our streamlining, we have been positioning our portfolio to become a more strategically scalable TSR-attractive portfolio. These efforts are leading Perrigo back to our core strength, which is consumer health. The sale of our Dermacosmetics business remains on track to close in the first quarter of 2026. As announced this morning, we are now actively reviewing the infant formula business, and I'll give more on this in a moment. We also continue to strategically review our Oral Care business, which we announced at our February Investor Day. We have made meaningful strides to strengthen the organization. Our new leadership team is in place. We are scaling new brand-building capabilities, and we have an improved and highly focused innovation process. Implementation of our commercial growth model is expected to unlock the full potential of our portfolio, enabling teams to scale more molecules more efficiently to more consumers across more markets. Finally, we are leveraging consumer insights and deepening our retail partnerships in ways that differentiate Perrigo versus competition. This is a new way of operating, and the team is energized about the possibilities ahead. Now to our quarter 3 and year-to-date results, where our diversified portfolio continued to demonstrate resiliency in a challenging environment. For the third quarter, organic net sales declined 4.4%, impacted by 1.6% from our global OTC business due primarily to soft OTC category consumption and 2.8% from businesses under review, both Oral Care and Infant Formula. Gross profit and margin were down year-over-year, reflecting net sales performance. Operating profit and margin were partially offset by prudent cost management. And as projected, the Infant Formula scrap expense experienced in quarter 2 did not repeat, which drove meaningful sequential gross and operating margin expansion of 180 and 380 basis points, respectively. Collectively, these factors led to a third quarter EPS of $0.80, up $0.01 versus the prior year. Year-to-date, organic net sales declined 1.7%, primarily driven by 0.8% from the businesses under review that I just mentioned, in addition to 0.5% from the absence of last year's Opill launch stocking benefits. Our remaining OTC business accounted for the balance. Despite marketplace challenges, year-to-date gross and operating margins expanded and organic operating income grew 13%, driven by continued execution of our accretive initiatives, recovery in Infant Formula and prudent cost management. Year-to-date EPS grew 21% or 27% organically to $1.97. Year-to-date consumption across consumer health has been dynamic and unpredictable. Quarter 1 saw year-over-year growth. Quarter 2 moved from growth to decline in June, and this decline significantly accelerated in the third quarter. The drivers appear transitory and do not look structural in nature. Combined with updated assumptions for our Infant Formula business, these factors have led us to revise our 2025 outlook. This is the right decision for the long-term stewardship of Perrigo and our shareholders. In U.S. store brand OTC, Perrigo increased dollar unit and volume share in 5 of the 7 categories where we compete. In Europe, our key brands, including ellaOne, Jungle Formula, Compeed and our cough and cold franchise also outperformed expectations. To capitalize on this momentum, we reallocated additional A&P investments in both regions, generating approximately $30 million in sales over and above our initial forecast and delivering a solid return on investment. At the same time, market consumption trends have been softer than anticipated. Over the latest 13-week period, U.S. OTC volume as a total category declined 3.2%, while Europe grew just 0.6% falling short of our original assumption by roughly 700 and 500 basis points, respectively. This represents an estimated $150 million to $170 million impact to our 2025 net sales outlook. Lastly, while Infant Formula has stabilized operationally, store brand share recovery will take longer than expected, which in addition to lost Good Start brand distribution is contributing an additional $100 million impact. Continuing with Infant Formula. Today, we announced a strategic review of this business as we assess its long-term role within the Perrigo portfolio. While we have stabilized this business, the external environment has quickly shifted, which will require sustained investment and disproportionate management focus, making its long-term fit alongside our faster-growing, higher cash-yielding consumer health OTC portfolio less strategic. As a result, the team will consider a full range of options in addition to pausing our previously announced investment of $240 million. No matter the outcome of this review, our corporate priorities are unchanged: reduce leverage, sustain our dividend, deliver for customers and shareholders and focus on our high potential OTC portfolio to expand consumer access and household penetration. During this review, the business will continue to operate as normal, ensuring consistent and reliable supply of high-quality formula to customers and consumers. In summary, we are executing our Three-S plan with discipline, growing share in U.S. store brands and gaining share in our key European brands. These results show the resilience of our unique business model and validate our value proposition even in a soft consumption environment. At the same time, we are delivering benefits from the supply chain reinvention and from Project Energize. We are also sharpening our focus on consumer health with the announced sale of Dermacosmetics and are actively reviewing both Infant Formula and Oral Care. While soft OTC consumption and Infant Formula are prompting a revision to our 2025 outlook, the momentum from our Three-S plan and our share gains reinforce our confidence in Perrigo's ability to capture the durable demand for trusted consumer health solutions. With that, I'll now turn the call over to Eduardo to walk through the financials. Eduardo Bezerra: Thank you, Patrick, and hello, everyone. Looking at the third quarter financials, starting with the GAAP to non-GAAP summary. Primary adjustments to our non-GAAP financial results were: first, amortization expense of $56 million; second, restructuring charge of $21 million, primarily related to Project Energize and supply chain reinvention; and third, unusual litigation of $15 million. Full details can be found in the non-GAAP reconciliation tables attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted. As Patrick noted earlier, softer OTC category consumption in both the U.S. and Europe weighted meaningfully on top line performance this quarter. Since he already provided detail on those drivers, I will begin my commentary with gross profit. Third quarter gross profit of $417 million declined $30 million year-over-year, primarily due to the impact from lower net sales and divestitures and exited products. These factors partially offset benefits from our supply chain reinvention and favorable currency translation. Gross margin for the quarter declined 110 basis points due to the same factors and included higher sales from relatively lower-margin store brands versus our branded product portfolio. Year-to-date, gross profit of $1.2 billion decreased $27 million year-over-year, including a $40 million impact from divestitures and exited products. Organic gross profit was flat to prior year, while organic gross margin was up 60 basis points, stemming from infant formula recovery and accretive initiatives. I will discuss operating profit and earnings per share in just a moment. Turning to net sales performance by segment, starting with CSCI. Third quarter organic net sales decreased 5.3%, impacted primarily by soft OTC category consumption trends, partially offset by share gains in key brands and new products. Year-to-date, CSCI organic net sales grew 0.7%, driven by restored product supply in the Pain and Sleep category in addition to growth in Healthy Lifestyle driven by key brands, including Jungle Formula and NiQuitin. These drivers were partially offset by decelerating category consumption beginning in the second quarter. CSCA third quarter net sales declined 3.8% with U.S. OTC growth of 0.6%, driven by sustained share gains across 5 of 7 store brand categories and growth in our contract business. Growth was led by Upper Respiratory, Skin Care and Women's Health, which were partially offset by Digestive Health and Healthy Lifestyle. Third quarter growth in OTC was more than offset by a 4.4% decline from business under strategic review, 3.8% from Infant Formula and 0.6% from Oral Care. Year-to-date, CSCA net sales declined 3.1% due to an impact of 1.1% from business under strategic review and the absence of the prior year Opill launch stocking benefit of 0.8%. The remaining OTC business was down 1.2% as continued soft market consumption was partially offset by store brand share gains. Third quarter operating income of $173 million decreased $9 million. Operating income was down 4.9% due primarily to lower net sales flow-through and higher operating expenses in Infant Formula. This impact was partially offset by growth from the rest of the business, including benefits from Project Energize and prudent cost management. Divestitures and exited products were fully offset by favorable currency translation. Year-to-date, operating income of $455 million increased $41 million, driven by global OTC, benefits from accretive initiatives, Infant Formula and favorable currency translation, partly offset by divestitures and exited products. Organic operating income grew 13.2% in the period. Despite clear marketplace challenges, third quarter 2025 EPS was $0.80 compared to $0.81 in the prior year. Year-to-date earnings per share of $1.97 was up almost 21% or 27% organically. Turning to balance sheet and cash flow. Third quarter operating cash flow was $52 million, bringing year-to-date operating cash flow to $63 million. Year-to-date, we invested $67 million in capital expenditures and returned $119 million to shareholders through dividends. And cash on the balance sheet at the end of the third quarter was $432 million. Given our updated outlook, which I will detail in a few minutes, we now expect year-end net debt to adjusted EBITDA of approximately 3.8x versus our prior target of 3.5x due primarily to our updated net sales expectations. We remain on track to close the Dermacosmetics divestiture in the first quarter of 2026 and expect to use the net proceeds to advance our deleveraging goal. As part of our announced strategic review of the Infant Formula business, we have paused the previously announced $240 million investment until we determine the best path forward for the business. As a quick update, our Oral Care business is still undergoing a strategic review. Taking all of these into account, as outlined by Patrick, we are updating our fiscal 2025 outlook from the low end of our previous organic net sales outlook range to minus 2% to minus 2.5% organic net sales growth due to softer-than-expected OTC category consumption in both the U.S. and Europe as well as lower-than-anticipated Infant Formula share growth. As a result of the top line update, we now expect gross margin of approximately 39% for the year. We are, however, reaffirming operating margin for the year of approximately 15% as benefits from accretive initiatives and prudent cost management offset the gross margin adjustment. We also expect a slight improvement to our full year tax rate to approximately 18.5%. These updates translate to a 2025 earnings per share range outlook of $2.70 to $2.80, equating to 5% to 9% growth versus 2024. A few comments on our year-over-year Q4 expectations before I close my remarks. On the top line, we expect organic growth in our global OTC business of approximately flat to 1%, while sales in our Nutrition category are expected to be down year-over-year due to lower contract volumes and the comparison against restocking activity in the prior year quarter. Q4 margins are expected below prior year levels due to the impact of lower volumes and tariff-related costs. Operating expenses for the total company are expected to be relatively flat year-over-year. Finally, we are lapping a prior year Q4 tax rate of 14.9% versus our expectation of approximately 18.5% on a full year basis for 2025. In closing, this quarter reflected both the resilience and the pressures in our business. Softer OTC consumption and slower Infant Formula recovery weighted on sales, but we still delivered year-to-date earnings per share growth of more than 20% and double-digit organic operating income growth. Margins are holding through disciplined cost management and the benefits of our efficiency programs, and we remain committed to returning cash to shareholders while reducing leverage supported by the pending Dermacosmetics divestiture. We adjusted our 2025 outlook to reflect current realities, but our actions to streamline the portfolio, manage costs and focus investments on high-performing brands give us confidence that Perrigo is positioned to navigate near-term challenges and deliver stronger, more durable performance over time. Thank you, and I will now turn the call back to Brad. Brad? Bradley Joseph: Thanks, Eduardo. Operator, can we please open the call for questions? Operator: [Operator Instructions] With that, our first question comes from the line of Susan Anderson with Canaccord Genuity. Susan Anderson: I guess maybe just a follow-up on the Infant Formula. There seems to be, I guess, a pretty wide spread between the sell-out data and your sell-in. Just curious, was that mainly destocking by retailers in the quarter? And I think you did say that your share was up in the quarter. And then I was curious how the new SKUs that you introduced, how those were doing? And then just in general, what kind of drove the miss versus your original expectations? Eduardo Bezerra: Susan, Eduardo here. So a couple of comments here. So first of all, yes, we're seeing a pickup in our store brand share. It's been at a slower pace than we originally anticipated, right? So remember, we were expecting to be at the low 20s at the end of the year. Given the competitive environment, we still continue to see significant imported formulas coming to the marketplace. We're seeing a growth in our store brand share. So in Q3, we did several actions in terms of rollbacks and promotions to make sure that we meet the consumers on where they need. And so that has evolved, and we're seeing significant -- we've seen an improvement in our share, but below our original expectations. And then to that point, because of that, we are revisiting our net sales guidance. Remember, we said in Q2, we were expecting about 25% growth in the second half of the year. Because of that competitive pressure and also we're seeing a slower market development there, we're seeing a reduction on that side in terms of the overall market that's impacting our share. Another important component, as you may remember, Q4 last year, we had a significant contract volume sales. And then as originally expected, those are not materializing as well because of the new imports, the imports that are getting to the marketplace today. Patrick Lockwood-Taylor: Susan, you also asked about SKU velocity. You actually hit the nail on the head. The distribution buildup of our new SKUs has been per plan. The velocity we're seeing on those SKUs is below expectation. The reasons are clear and being fixed, its position on shelf and its amount of shelf space given to Infant Formula store brand is below what it historically was. That's impacting business for retailers and of course, for us and is being addressed. Susan Anderson: Okay. Great. I guess maybe just a follow-up on the CSCI business on a couple of the segments. I think in Women's Health, you talked about some supply constraints. I guess just curious what drove that there, and I think it's been resolved now. And then also in VMS there, I think you mentioned deprioritization of nutraceuticals. So curious kind of what's driving that. And then I think you also said consumption was a little weaker in VMS in international. Just curious if the consumer is kind of pulling back on that category. Eduardo Bezerra: Yes. So a couple of things there. As we compare to last year, right? So last year, we had a stronger Q3. There was also some early signs of cough and cold last year different than what we're seeing this year. So we expect a shift between Q3 and Q4 in CSCI. Specifically to your question regarding Women's Health, that were some supply issues on our L1, which is the key brand that we have there in Europe, but those have been resolved, and we expect that to pick up back in Q4. Also in VMS, yes, the nutraceuticals portfolio is something that we have been deprioritizing overall versus some of our brands that we have, both in the Netherlands and Germany that are performing relatively good. And then the last piece on the soft OTC consumption, that's something that we're seeing more broadly. But as we look into Q4, when we highlight our expectation to be flat to 1%, we expect a significant pickup in CSCI as compared to what we saw in Q3. So again, last year, we saw a stronger Q3 versus Q4. This year, we expect a shift because of seasonality as well as we expect more taking place in Q4 versus what we saw in Q3 this year. That's why we're expecting an important growth sequentially in CSCI that's about 5% to 6% of net sales. Operator: And your next question comes from the line of Keith Devas with Jefferies. Keith Devas: I'm curious if you guys can just provide maybe a little bit more color on what changed intra-quarter on both OTC and Infant Formula versus the original plans. You guys have given a lot already, but I guess the volatile consumption we're seeing across a lot of categories in staples, and it doesn't feel normal. So I'm curious what you think is driving it, whether it's added consumer pressure or maybe mitigating to lower pack sizes and maybe how your conversations with retailers have also evolved over the years. Patrick Lockwood-Taylor: Yes. Keith, on OTC consumption, we're back reviewing this data yesterday. In quarter 1, we saw consumption growth actually ahead of expectation between 3 and 3.5 points. quarter 2, I remember this, we get this data like you retrospectively. Quarter 2, we started to see a slowdown then moving into slight decline with actually June appearing to be flat to a year ago and sort of past 3 average. That then continued and actually accelerated really from August onwards and October consumption was weak as well, okay. So this has been dynamic and highly unpredictable and obviously softer than we and many others had anticipated. On Infant Formula, and I just talked to this with Susan, the velocities that we've seen have been below expectations. That's obviously affected revenue and that's affected our share build, but we believe is addressable. To your question on drivers, there is a multitude of tactical drivers, be it future levels, display levels, some changes in distribution, some changes in pricing effect. We've seen over the last 2 to 3 years, very strong price inflation in this category, which was building category value. That seemed to come to an end in quarter 1. You have seen though trade across into store brand. You're aware that store brand OTC is growing share, and we're growing our share within that as well. This doesn't appear to be structural. There is no real change in incidence levels across these treatment categories, changes in consumption habits across different generations. There is some effect of that, but I don't think that, that is material and certainly not some. I think there is some speculation that people -- consumers are burning through pantry stock to a greater extent than they historically have done. I haven't seen data personally confirming that, but I have heard that hypothesis. And the cough/cold season is definitely down on a year ago through now, but we are still out looking an average season for cough/cold. So again, a multitude of tactical factors, no evidence that we've seen that this is a structural change, and we would expect, therefore, normalization of the market, as I think you've heard some of our competitors say. Eduardo Bezerra: And also, Keith, just to complement what Patrick said, right? So different than what I mentioned about CSCI that we expect the Q4 is stronger than Q3, right? So as compared to what happened last year, we expect to see some trends continue in U.S. OTC. So we expect a normal season in cough and cold. But as compared to last year, we expect Q4 to be down. So the net effect of being 0 to 1%, it's positive on the CSCA side of about 5% to 6% and negative on the U.S. despite all the share gains and distribution that we're seeing on that side in the U.S. Also, the important thing is the reduction that we're seeing in Infant Formula that helps contribute significantly with that because of, as I mentioned, lower contract volumes and also a slower pace of regaining our store brand share on the Infant Formula business. Keith Devas: Got it. That's very helpful. If I could squeeze in a follow-up, but I'm curious how you guys are also just thinking about reinvestment plans. Just given the pullback in consumption on OTC and now pausing the Infant Formula investment. Are there any areas where you're looking to increase spending? There's obviously some green shoots with new business wins and then obviously, international. So interested in how you're thinking about maybe potentially reallocating spend going forward. Patrick Lockwood-Taylor: Yes. I'll comment first, Keith, and then Eduardo. As you heard me say in my comments, our priorities remain the same: deleverage, maintain our dividend. But we will revisit investment in organic growth, okay? We see increasing evidence of performing businesses, U.S. store brand. You're right to mention the acceleration of share growth we're seeing in our key international branded business and our brands in the U.S. There is opportunity probably to accelerate the revenue on those, okay? But we need to look across all business cases and all our priorities and determine what's best, obviously, for the asset long term, but also for shareholders. So yes, we will be undertaking another look at capital allocation given that decision we've made on Infant Formula. But the priorities won't change. We just may increase the level of some of those allocations. Eduardo? Eduardo Bezerra: Nothing else to add here, Keith. Operator: And the next question comes from the line of Chris Schott with JPMorgan. Ethan Brown: This is Ethan on for Chris Schott. Just to start off, maybe following up on some of the previous questions. I was just wondering where Infant Formula share now sits. And then as we look ahead to 2026, maybe how you're thinking about the business' ability to recapture share and just priorities for that? Patrick Lockwood-Taylor: Yes. Thanks for the question. My view is we have seen -- we're at about a 16% share. We have clear building blocks to continue growing that in '25 and into '26. And I would expect over the next 12 months with those building blocks that we have, you're getting to the sort of 18% to 20% area in terms of share. Eduardo Bezerra: And again, important there to mention is, as we announced this morning on our infant formula strategic review, right? So we're looking to multiple options of how we want to look into that business to make sure we optimize that and both on our near term but also long term and make sure this is going to be the best result also for shareholders. Ethan Brown: Perfect. And then just 1 more question for me. Just overall looking to 2026, I appreciate that it's still early, but I was just hoping you can maybe provide how you're thinking about the different pushes and pulls in the business as well as maybe the ability to grow EBITDA looking ahead to next year. Eduardo Bezerra: Yes. So a couple of comments here. So we're still early stages on the planning process, right? So it's too soon to provide the details, but there are some headwinds and tailwinds that we're looking at right now, right? So again, as Patrick highlighted, we do not believe the OTC market has been impaired structurally. We're seeing it's basically a short-term consumption impact there. So we believe there is a stabilization expected for 2026. So more expecting to be like a flat to a small percentage growth. With that said, we continue to expect our share gains to continue there and also translate into growth slightly ahead of the market. On the Infant Formula side, foreign manufacturers have grown U.S. share. And so we're looking at that to make sure we continue our plans to recover our share, but at the same time, acknowledging there will be more idle domestic capacity in the U.S. impacting absorption for domestic players. And also, we're addressing the stranded cost impact of our Dermacosmetics divestiture, right? So we expect to close that by end of Q1. And so we expect about 9 months of inorganic headwind of approximately $100 million on our top line. And depending on the timing of the close, that will have some net EPS impact on our bottom line. Patrick Lockwood-Taylor: The other is tailwind. We have a strengthening innovation pipeline versus this year fairly significantly. We also have improving brand programs in terms of new advertising, packaging and rollouts to more markets. So what has been driving that share growth for us, we see accelerating across more categories, brands and geographies with even more innovation. Operator: And the next question comes from the line of Daniel Biolsi with Hedgeye. Daniel Biolsi: So regarding the 110 basis points of gross margin pressure in the quarter, it sounds like it was mostly sales deleverage and mix, and it doesn't sound like it was related to input costs or competitive price changes. Is that right? Eduardo Bezerra: Yes, that's correct. Daniel Biolsi: And then the margin impact that you're expecting from tariffs of $40 million to $50 million, is that -- and that's before mitigation efforts, but will there be a lag in terms of like when you're taking higher prices and when you're going to incur those costs? Eduardo Bezerra: Well, so we do not expect a lag. So as we highlighted, we have already, since the beginning of the year, been working on that, and we expect 1/3 of that coming from price and the remaining through different manufacturing actions that we're doing either in sourcing or looking for other suppliers there. So that has been in flight already. So we already see some impact on the margin taking place in Q4, but offset a significant portion on pricing and that also continuing into 2026. Daniel Biolsi: Okay. And do you think that there's going to be any changes in that competitively where certain manufacturers imported or source it domestically? Or will that have any sort of share changes that you expect in '26? Eduardo Bezerra: Well, it's been a very dynamic scenario with the recent -- also, announcement on the China tariffs, right? So we continue to evaluate that. But as we continue to see our strong position and significant U.S. manufacturing, you can see that translating into our share gains, right? So because of our strong position that we have in the marketplace, we continue to expect that to accelerate into 2026 as we drive more strategic partnerships and joint business plans with our key retailers because they want us to help them grow in a moment like that where consumers are trading down. They want to make sure there is enough optionality with store brand, and that's where we believe we can really add a lot of value to that. So I don't know, Patrick, any comments there? Patrick Lockwood-Taylor: No. Operator: And that is all the questions that we have at this time. I would like to turn it back to Patrick Lockwood-Taylor for closing remarks. Patrick Lockwood-Taylor: Thank you very much, and thank you for those questions and again for joining us today. So just a few closing remarks from me. Obviously, first of all, this is a very difficult market condition with much softer consumption than anyone could have reasonably predicted. We've had to pivot within that. Within that context, though, we're starting to win. This is the first time in many years that we're growing share, and we're growing it at a rate that's ahead of our expectation. But our financial performance in the context of soft market conditions and our Infant Formula position and performance is frankly not where we want it to be. We will continue to make adjustments to address that and set up a successful 2026. We've launched and announced today a strategic review of our Infant Formula business. This is to sharpen focus on our scalable OTC platform. And of course, any impact to our 2027 outlook given that strategic review will be shared once the review concludes. As I've mentioned, we remain committed to deleveraging, targeting below 3.5x with the Dermacosmetics proceeds going to debt reduction. We have a significant growth opportunity ahead of us by expanding our unparalleled molecule asset base across more price points, brands and markets. We are further deepening our strategic retail partnerships to drive mutual demand and our investments in brand building, innovation, digital and analytics are fueling our increasingly winning formula. Our aim is to continue to grow share through superior consumer propositions and brand experiences and disciplined execution, focused on driving cash flow and total shareholder return. Again, many thanks for joining us today. Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Hello, and welcome to the Astec Industries Third Quarter 2025 Earnings Call. As a reminder, this conference call is being recorded. It is my pleasure to introduce your host, Steve Anderson, Senior Vice President of Administration and Investor Relations. Mr. Anderson, you may begin. Stephen C. Anderson: Thank you, and good morning, everyone. Joining me on today's call are Jaco van der Merwe, our Chief Executive Officer; and Brian Harris, Chief Financial Officer. In just a moment, I'll turn the call over to Jaco to provide his comments, and then Brian will summarize our financial results. For your convenience, a copy of our press release and presentation have been posted on our website under the Investor Relations tab at www.astecindustries.com. Turning to Slide 2. I'll remind you this morning that our discussion will contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor liability established by the Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions. Factors that could influence our results are highlighted in today's financial news release and others are contained in our filings with the U.S. Securities and Exchange Commission. As usual, we ask that you familiarize yourself with those factors. In an effort to provide investors with additional information regarding the company's results, the company refers to various U.S. GAAP and non-GAAP financial measures, which management believes provide useful information to investors. These non-GAAP measures have no standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to the calculation of similar measures of other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures. A reconciliation of GAAP to non-GAAP results are included in our news release and the appendix of our slide presentation. And now turning to Slide 3, I'll turn the call over to Jaco. Jaco van der Merwe: Thank you, Steve. Good morning, everyone, and thank you for joining us. We were pleased to post another solid quarter, evidencing our focus on delivering consistent profitability and growth. Before we start, I would like to thank our combined Astec team as we continue to execute. As a reminder, our results now include TerraSource, which we completed on July 1. On Slide 4, we present a summary of our third quarter performance. This quarter, we continued our positive momentum with increased net sales, increased adjusted EBITDA and adjusted earnings per share. Adjusted EBITDA was $27.1 million, up $9.7 million or 55.7% from the third quarter of 2024. Adjusted EBITDA margins increased to 7.7%, a gain of 170 basis points, while adjusted earnings per share reached $0.47 for a year-over-year increase of 30.6%. Our backlog at quarter end was $449.5 million, representing a sequential increase of $68.7 million, $64.1 million of which was due to the addition of TerraSource, while the backlog in our legacy Infrastructure Solutions and Materials Solutions segments both increased slightly. We continue to see customers order closer to their desired delivery dates due to a combination of our shorter lead times and finished goods inventory on hand. Within the Infrastructure Solutions segment, asphalt plants, concrete plants, heaters and burners delivered strong results and contributed to margin expansion, while forestry and mobile paving equipment faced headwinds due to challenging end market conditions. Parts sales for the Infrastructure Solutions segment were strong, posting a 14.8% quarter-over-quarter increase. The Material Solutions segment includes the successful integration of TerraSource. Backlog in this segment has been stable for the past 5 quarters. We have noticed improved customer sentiment due to the recent movement in interest rates, and our parts sales mix increased 670 basis points with the addition of TerraSource. Lastly, you may recall, our normal third quarter experiences seasonality as our customers are busy in the field. We were pleased to drive enhanced year-over-year performance, resulting in a 170 basis point increase in our adjusted EBITDA margin, our best since the third quarter of 2017. On Slide 5, we outlined the third quarter highlights and present our updated outlook for the full year. As previously highlighted, higher net sales contributed to year-over-year increases in adjusted EBITDA margin and adjusted earnings per share, and we posted adjusted ROIC of 12.3%. Given our solid performance through the first 3 quarters of the year, we are raising the lower end of our full year guidance from $123 million to $132 million, while maintaining the upper range at $142 million. Our updated outlook is based on the current operating environment, which I will cover on the next slide. Slide 6 provides an overview of the current operating environment. There are several external factors affecting the markets in which Astec operates, including potential opportunities as well as challenges. One opportunity is the ongoing funding provided by the current federal highway bill in the United States. Multiyear commitments for federal road and bridge projects provide stability for Astec's customers, many of which have reported substantial backlogs of work. In addition, the demand for aggregate, concrete and asphalt use and other public residential and nonresidential construction projects is encouraging. All of these are good examples of projects requiring materials processed with the equipment we build at Astec. Astec's recent acquisition of TerraSource demonstrates the potential of further inorganic growth within our disciplined financial framework. And the One Big Beautiful Bill enacted in the United States earlier this year extended expiring provisions from the 2017 Tax Cuts and Jobs Act. The reinstated business tax benefits such as accelerated depreciation and R&D tax credits are expected to benefit many of our customers. Lastly, the increased mining activity of rare earth minerals in the United States presents an opportunity for Astec's Material Solutions products as minerals are embedded in ore bodies, which must be crushed, screened and conveyed. Current challenges include fluctuations in tariffs and any related uncertainty they create. We expect that last week's Federal Open Market Committee decision to reduce interest rates will further improve customer sentiment. On Slide 7, we remind you that Astec operates in favorable markets. Within the United States, contract awards from state and local governments serve as key predictors of upcoming construction projects. Those projects typically break ground within 30 to 60 days of being awarded, although the actual construction time line can extend over several years based on the project size and complexity. As of August 30, 2025, approximately $230 billion or 66% of Infrastructure Investment and Jobs Act funds have been committed with $150 billion or 44% already allocated. ARPA reports that obligation rates remain strong, indicating that significant funding will continue to flow even after 2026. The current surface transportation law is set to expire on October 1, 2026. On September 18, Astec team members participated in Hill Days, cosponsored by the National Asphalt Paving Association; National Stone, Sand and Gravel Association; and National Ready-Mix Concrete Association. After the event, they confirmed federal transportation leaders remain optimistic about passing a new transportation bill next year and are committed to securing presidential approval well before the deadline. These developments are promising for Astec. As a specialized provider in the Rock to Road sector, ongoing infrastructure upgrades fuel stable, long-term demand for our capital equipment, aftermarket parts and digital solutions. Our strong reputation in the infrastructure market, especially in aggregates and the road and bridge construction, positions us well for the future. Slide 8 provides a summary of how we actively manage the ongoing shift in the current tariff landscape. Astec maintains a proactive approach to minimizing tariff effects. For example, our OneAstec procurement team requires suppliers to justify any price increases, and we are actively negotiating every purchase. We have also implemented new pricing measures when necessary and we'll continue to evaluate this situation to safeguard our margins. We are consistently pursuing dual sourcing and alternative sourcing options and are working to realign our supply chain, including reshoring to the U.S. when possible. Ongoing management of our manufacturing footprint is also a priority. So far, our mitigation strategies have neutralized tariff-related impacts on our margins. These efforts are evident in our results, and we anticipate our initiatives will remain effective throughout the rest of the year. As you know, the tariff environment is fluid and creates an element of uncertainty for future periods. That said, we will continue to be proactive with our mitigation strategy in order to neutralize the impact of tariffs and to limit potential impacts to manufacturing inefficiencies. As such, our revised full year adjusted EBITDA guidance noted on Slide 5 reflects our current perspective on our operating environment, including the impact of tariffs. Slide 9 provides an update on our TerraSource integration. I could not be more pleased with how our team members are working together. Step 1 of onboarding of TerraSource employees was to ensure a seamless transition to the Astec payroll and benefit system. That has been completed successfully. Additional steps are listed on the slide and include harvesting synergies, including procurement opportunities. We have also made investments in high-turn inventory to further drive enhanced parts fill rates. As a reminder, we define fill rates as having the part ready to ship within 24 hours of receiving the order. Although it has only been a few months since welcoming TerraSource to the Astec family, our combined team is already in the process of adding to our parts sales force, aligning our sales channel and cross-selling efforts, developing and funding new products and identifying factory utilization opportunities. We expect most synergies to show up in 2026 and are very satisfied with our progress thus far. On Slide 10, we show our historical backlog information. On a sequential basis, backlog continued to evidence stability in the Infrastructure Solutions and legacy Material Solutions segment. TerraSource contributed $64.1 million to Material Solutions and was the primary growth driver to our consolidated backlog. The backlog in our Infrastructure Solutions segment reflects a combination of strong invoicing for asphalt and concrete plants, partially offset by weaker demand for mobile paving and forestry equipment. In the Materials Solutions segment, backlog net of TerraSource remained steady at approximately $126 million. Looking ahead, we anticipate growing demand for Material Solutions products in the upcoming quarters. Slide 11 is presented net of TerraSource and shows sequential and quarter-over-quarter increases in consolidated implied orders and our book-to-bill ratios. Both segments contributed to the quarter-over-quarter improvement, while the Infrastructure Solutions segment drove the sequential increase on a consolidated basis. We are pleased to show book-to-bill exceeded 100% in both the Infrastructure Solutions and Materials Solutions segments. With that, I'll hand the call over to Brian, who will share further insights into our third quarter financial performance. Brian Harris: Thank you, Jaco, and good morning, everyone. The next 3 slides provide both Q3 and trailing 12-month data, which we feel provide an excellent view of the underlying financial trends in our business. Turning to our consolidated financial results presented on Slide 13. Net sales increased by 20.1%, which was due to strong demand for asphalt and concrete plants and the inclusion of TerraSource. Demand for forestry and mobile paving equipment continues to be soft due to a relatively high interest rate environment and an extended global slowdown in end markets. Over the trailing 12-month period, net sales increased 6.7%. We are pleased to report an adjusted EBITDA of $27.1 million for the third quarter, up 55.7% from $17.4 million in the same period last year. Looking at the trailing 12 months, adjusted EBITDA margin grew 49%. Our third quarter adjusted EBITDA margin grew 170 basis points over the same period in 2024. And on a trailing 12-month basis, adjusted EBITDA margin grew 300 basis points to 10.5%. Adjusted earnings per share for the third quarter were $0.47, a 30.6% increase over the $0.36 reported in Q3 '24, while adjusted earnings per share grew by 48.7% on a trailing 12-month basis. Turning to the Infrastructure Solutions segment outlined on Slide 14. The third quarter came in strong with a 17.1% increase over the third quarter in 2024. Growth was generated in both equipment and parts sales for the quarter. Solid demand for asphalt and concrete plants helped drive increased domestic sales, while international sales were stable. However, forestry and paving remain somewhat depressed. Net sales for the trailing 12-month period grew 8.8%. Segment operating adjusted EBITDA and EBITDA margin grew quarter-over-quarter and on a trailing 12-month basis. Our adjusted operating margin for the Infrastructure Solutions segment grew to 12.4% when compared to the same period in 2024 for an increase of 290 basis points. Segment operating adjusted EBITDA margin on a trailing 12-month basis reached an impressive 17.2% versus 12.7% in 2024. The 450 basis point improvement was primarily the result of strategic pricing, operational excellence initiatives and effective expense management. Moving on to Slide 15. As previously mentioned, the Materials Solutions segment now includes TerraSource. Net sales for the quarter increased $30.5 million or 24.1%. Adjusted EBITDA for the segment increased 6.2%. However, adjusted EBITDA margin showed a 170 basis point decline due to elevated profitability in the third quarter of 2024, stemming from the onetime release of $1.9 million of litigation reserves. On a trailing 12-month basis, increases were seen in net sales, segment operating adjusted EBITDA and segment operating adjusted EBITDA margin. As shown on Slide 16, our balance sheet remains strong, supported by substantial liquidity. At quarter end, we held $67.3 million in cash and cash equivalents and had $244.8 million in available credit, resulting in total liquidity of $312.1 million. Our net debt to adjusted EBITDA of approximately 2x is well within our target range of 1.5 to 2.5x. This provides us with the capacity for continued organic and inorganic growth. For modeling purposes, you should take into account the following full year ranges: adjusted EBITDA of $132 million to $142 million, effective tax rate between 24% and 27%, capital expenditures between $25 million and $35 million. And the following ranges for Q4: adjusted SG&A of $65 million to $73 million, depreciation and amortization of $37 million to $42 million. And I'll now hand the call back to Jaco. Jaco van der Merwe: On Slide 17, we provide a glimpse of our recently released 2025 Corporate Sustainability Report. As you will see in the report, we are committed to innovate our products and technologies to help our customers achieve their efficiency and cost reduction goals through sustainability investments, respect our natural resources, ensure the safety and well-being of our employees and uphold employee satisfaction by demonstrating our devotion to our core values. Slide 18 provides an overview of the key investment highlights for Astec. We take pride in Astec's ongoing reputation as a reliable provider of world-renowned brands and top-tier solutions for our customers. We continue to maintain a high level of engagement with our customers. While they remain somewhat cautious, their outlook is positive and customers are optimistic about the ongoing activity in the construction markets. We are also proud that our focus on operational excellence is yielding results with many benefits still ahead. Efforts in manufacturing and procurement are enhancing efficiency, and we are seeing favorable trends in adjusted EBITDA. Our business is driven by several exciting growth opportunities, including expanding our reoccurring aftermarket parts business, which remains a key focus for the Astec team, advancing our strong pipeline of new products. Please mark your calendars to visit the Astec booth at the 2026 ConExpo-Con/AGG trade show in Las Vegas from March 3 through March 7, 2026, where we will showcase various new products. The reliability offered by multiyear federal and state funding for interstate and highway projects in our primary market, the United States, multiple opportunity for expansion in both existing and emerging international markets, strategic inorganic growth prospects that align with our financial objectives. As Brian mentioned, our solid balance sheet gives us flexibility to support growth initiatives and effectively manage our leverage. With that, operator, we are ready for questions. Operator: [Operator Instructions] Your first question comes from Steve Ferazani with Sidoti. Steve Ferazani: Appreciate the detail on the call this morning. First one, general question -- first general question in terms of your raising the low end of guidance. Was there any worries you saw that sort of dissipated in 3Q? Or are you seeing something particularly better in 4Q that gave you the confidence to raise that low end? Jaco van der Merwe: Yes. No, Steve, good question. As a reminder, when we did the Q2 earnings call, we spoke about the fact that we still had quite a bit of gaps in our capacity to fill at the end of -- or when we had the Q2 call. Fortunately, for us, that filled in very nicely. And with our short lead times, our teams have the ability to deliver those in Q4. So we have the capital orders to deliver Q4 sales that we need to deliver that new range. Steve Ferazani: When I look at your book-to-bill and order rates in 3Q, at least even the last 2 years, there was a change this quarter versus the last 2 years in terms of orders and even in IS. Did something change this year? Because typically, this has been seasonally weaker for the last 2 years? Jaco van der Merwe: Yes. So I don't think we've noticed anything specific. We definitely saw a later or a different booking process from our customers. As I said, if we look at where we were in Q2, we still had substantial gaps in our capacity to fill. And obviously, that came through during the third quarter. Steve, I think the other thing is we are getting to the tail end of what I want to say, the uncertainty around tariffs. And I think customers are just getting to a point where they know they need to make a decision. And obviously, we were the beneficiaries of that. Steve Ferazani: That's helpful. The one to me was a negative surprise that even if I back out the litigation expense from the year ago MS, margins still would have been somewhat flat. Our expectation was TerraSource would have -- would be accretive to margins. Can you tell us if they were in 3Q and your expectation on the timing of synergy realization now that you're working through the integration? Jaco van der Merwe: Yes. No, absolutely. So first of all, I want to say we could not be happier with what we're seeing of the TerraSource team now that they're part of our organization. We are excited about the work that our legacy team is doing. Obviously, last year, we had that one release that gave the benefit to that. Quarter-over-quarter, obviously, you will always have some swing, Steve. We are pretty excited about the underlying trends that we're seeing. And I think you will see the margins come. Remember, this was the first quarter that TerraSource was on our side. The legacy MSE sales was a little bit lower compared to last year. So obviously, that has an effect. But it's early days. We're excited about the work the team is doing. The TerraSource margins were accretive. So there's nothing that we have seen that raises our eyebrows now that we own them for the last 3 months. So yes, I think in the next coming quarters, the full effect of TerraSource will show up. Steve Ferazani: And your expectation, any changes in what you expect can be realized synergies and the timing of realizing them? Jaco van der Merwe: No. No, we have good visibility of the synergies that we communicated during the deal announcements. Some of the synergies are realized already. So we've seen some benefit. Obviously, they will flow through over a 12-month period. And we expect to see quite a bit of the synergies next year already. Steve Ferazani: Okay. You may not have this number, but any -- the breakdown of how much parts as a percentage of revenue per segment now? I'm assuming it's much -- it will now be at least higher on the MS side. Jaco van der Merwe: Yes. So we -- I think we mentioned that in the release that MS have jumped about 670 basis points. So as a company now, I think we bounced to 32% or so. So I think that number is going to consistently pick up as it reflects in our rolling numbers. So it's definitely having the effect that we were hoping for, Steve. Steve Ferazani: Great. And if I could get one more in, in terms of tariff uncertainty on your end, given the addition of the Section 232 tariffs. Is that getting a little bit harder to offset or no changes? Jaco van der Merwe: Yes. I mean it's complicated. I can tell you that. But we feel that we have a very good understanding of it. Our raised lower end of the range takes into consideration how we think we can deal with the tariff, Steve. So one thing I will say is that the flow-through is real. And the actions that our teams have taken on pricing and taken on looking for alternative supplies have really positioned us well to mitigate the tariff increases. And I think we're pretty well positioned for next year. Operator: [Operator Instructions] your next question comes from Steven Ramsey with Thompson Research Group. Steven Ramsey: I wanted to start with the parts results within the Infrastructure segment. Good results there. Can you maybe parse out a bit the volume and price contribution to that 15% growth and maybe kind of the push-pull dynamics there of better internal execution and reaching customers versus just natural demand that comes from the plants? Jaco van der Merwe: Yes. Yes. No, good question, Steven. One thing I will say is we've been working on driving our parts business for quite a while now. And those efforts are starting to pay off. So obviously, that's a big piece of that growth. I mean, Brian, pricing-wise, I don't think we have broken that out specifically. But I will say, if I look at it, we've basically adjusted for inflation over the last year or so. And then obviously, Steven, where we have seen tariff increases coming through, that have been reflected. And overall, I will say probably 4% to 5% cost of goods sold effect that show up partially in that number. But I will say the majority of that is due to the work the teams are doing to grow that parts business. Steven Ramsey: Okay. That's excellent. That's helpful. And you called out asphalt and concrete plant strength in the quarter. On a percentage basis, was one a bigger driver than another? Jaco van der Merwe: No, I won't say that. We're very fortunate that both those segments are very strong. So no, I will not say that. Obviously, asphalt plant sales, when you sell an asphalt plant, depending on the size, it can be $8 million, $10 million. So we just have one additional one, and it makes a big swing in the quarter. So -- but no, I don't think there's a trend more to the one versus the other. Steven Ramsey: Understood. Understood. Flipping to the Materials segment, you've talked about the dealer inventory dynamic. Can you maybe share the incremental changes that you're seeing there? And is this something that you expect to be washed out in the fourth quarter? Or is this more of a 2026 dynamic? And then maybe one more that would be good to get insight on is TerraSource within the dealer channel, are they experiencing the same dynamics? Jaco van der Merwe: Yes. Yes. So let's talk legacy first. We've now said for the last 2 quarters, we've actually, I think, reached a period where our dealer inventory for MS is pretty healthy. The type of inventory that our dealers have are the right level. We've actually started to see some dealer stocking again. So I think we're in a pretty good position, Steven, when it comes to dealer inventory. Obviously, there's always some movements that takes place dealer to dealer. But we're in pretty good shape. And the other thing that I'm excited about in the MS side is, historically, we were very strong in our system sales. So a system is where you put a significant amount of equipment together and provide a customer a whole solution. And there was a period in time where Astec lost the focus on that. We brought that focus back here in the last 2, 3 years. And that is starting to show up as well. And obviously, that is something that doesn't necessarily get consumed out of inventory. So you have more of a flow-through effect from us to the dealer. So as that business starts to flow through, I think the dependency we have on dealer inventory for the pure mobile units should become less and less. On the second question, TSG. So TSG has a channel that uses, I want to say, all the channels possible. They sell direct in some areas. They do go through dealers in some areas. We have some agents in some areas. So we're busy working through that. There's a possibility that some of their sales in the future will go through our dealer channel. But the product is a little bit different. It's more project related. So I don't expect besides spare parts that our dealers will stock a lot of TerraSource equipment going forward. Steven Ramsey: Okay. Okay. That's helpful. I wanted to get some more details on the fill rates with TerraSource that you talked about synergies coming in, in 2026 for that business and their parts fill rates, clearly a lot of upside for them to reach core Astec levels. Can you talk about the timing on how you expect TerraSource fill rates to improve over the coming quarters and years? Jaco van der Merwe: Yes, absolutely. I mean that's an effort that started day 1. As you know, I'm personally very passionate about that and fortunately, the TerraSource team as well. They know having parts on the shelf makes a big difference. There's a big gap between what they have as performance versus what we are having today. And if I look back for Astec, it took us 18 to 24 months to get to where we are today. I think this is going to be a lot faster than that. So I will say within the next 12 months, we're going to get them very close to our fill rates. And obviously, we believe that, that will have a good effect on their performance going forward. So -- the team is engaged. The work has started. We've identified where to go, and I will continue to keep the market updated on the performance there. Steven Ramsey: Excellent. That's good. Last one for me. You called out rare earth mining as a potential demand catalyst. Have you seen any of this to date or in conversations? And are there internal moves you're making within product development or within channels to take advantage of this? Jaco van der Merwe: Yes. Yes, we actually received our first orders. One of the companies has been in the news a lot lately because the government took a stake in that. We got a nice order from them just here recently. So it's real, Steven, it's coming. Investments are happening. And the good thing for us is our equipment can do the work today. So there's not a need for a major redevelopment that needs to take place. So our dealer network are very entrepreneurial. So they are very aware of all the opportunities that's coming up in their markets, and they're taking advantage of that. And we are seeing it. So it's not just talk, it's actually orders. Operator: That concludes our Q&A session. I'll now turn the conference back over to Mr. Anderson for closing remarks. Stephen C. Anderson: Thank you, Carla. We do appreciate your participation in our conference call this morning, and thank you for your interest in Astec. As today's news release states, this conference call has been recorded. A replay of the conference call will be available through November 19, 2025, and an archived webcast will be available for 90 days. The transcript will be available under the Investor Relations section of the Astec Industries website within the next 5 business days. This concludes our call. I'm happy to connect later if you have additional questions. Thank you all. Have a good day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the Emerson Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Colleen Mettler, Vice President, Investor Relations. Thank you. You may begin. Colleen Mettler: Good morning, and thank you for joining Emerson's Fourth Quarter and Full Year 2025 Earnings Conference Call. This morning, I am joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Mike Baughman; and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please turn to Slide 2. This presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the safe harbor statement and note on the non-GAAP measures. Before we begin the presentation, I would like to highlight our upcoming 2025 investor conference on November 20. We are looking forward to presenting on our transformed company, a global automation leader set to deliver a differentiated value creation framework. We will discuss the drivers of our 4% to 7% organic growth framework, detail our plans for additional margin expansion and outline our capital allocation priorities. Additional information about this event is now available on our website. I will now pass the call over to Emerson's President and CEO, Lal Karsanbhai, for his opening remarks. Surendralal Karsanbhai: Thank you, Colleen. Good morning. 2025 marked the 135th anniversary of our company. The Emerson Electric Manufacturing Company was established in St. Louis, Missouri in 1890. The development of a reliable electric motor was the vision of 2 Scotland born brothers, Charles and Alexander Meston, made possible by the financial backing of John Wesley Emerson, a former union army officer, judge and lawyer. Throughout nearly 1.5 century of economic cycles, The Great Depression, 2 World Wars, significant technology innovations and a handful of iconic industrial leaders who navigated uncertain waters, our company completed 2025 stronger than ever. We have transformed. We have momentum in our markets. We have great people, and we are optimistic about our future. Thank you to the 70,000 Emerson employees around the world, to our management team, our Board of Directors and our investors for your trust. I am honored to work alongside each and every one of you in our value creation journey. Please turn to Slide 3. Emerson continues to see resilient demand as customers invest in automation technologies to drive digital transformation and enhance efficiency, reliability and safety in their operations. Underlying orders grew 6% in the fourth quarter, driven by sustained demand in our growth verticals and accelerating orders growth in Test & Measurement up 27% and exceeding our expectations. We had a robust finish to the quarter, and I will discuss more details on demand on the next slide. 2025 was another solid year from Emerson. Underlying sales in the fourth quarter were up 4%. Execution was strong in the quarter with adjusted segment EBITDA margin of 27.5% up 1.3 points. We delivered $1.62 adjusted earnings per share in the quarter, at the top end of our guide. For the full year, underlying sales grew 3%, slightly below expectations as Europe and China were softer than initially expected. Emerson delivered strong profitability with adjusted earnings per share of $6 up 9%; and free cash flow of $3.24 billion up 12% year-over-year. Annual contract value of our software grew 10% year-over-year and ended the year at $1.56 billion. For fiscal 2026 we are guiding sales growth of 5.5% with underlying sales growth of approximately 4%, supported by sustained investment in our growth verticals and robust performance in Test & Measurement. We expect to deliver adjusted segment EBITDA margin of approximately 28% and adjusted earnings per share of $6.35 to $6.55, reflecting strong operational execution. ACV is projected to grow 10% plus as customers further invest to advance their digital transformation ambitions. We plan to return approximately $2.2 billion of capital to shareholders, $1 billion in share repurchases and $1.2 billion in dividends including a 5% dividend per share increase. Please turn to Slide 4. Emerson delivered 6% underlying orders growth in the fourth quarter. marking our third consecutive quarter of mid-single-digit growth. This reflects sustained momentum across key geographies, and we are seeing broad-based strength in North America, India and the Middle East and Africa. However, demand in Europe and China continues to be soft. MRO spend across our $155 billion installed base remains resilient, supporting a healthy pace of business led by strength in North America. The capital cycle remains constructive and large project bookings in power, LNG, life sciences and aerospace and defense contributed to a better-than-expected finish to September. Momentum in power continues to build and orders in our Ovation business were up 18% in the quarter and 30% in the year, driven by greenfield projects and modernization. Test & Measurement orders were up 27% in the fourth quarter with robust growth in all regions led by semiconductor, aerospace and defense and a broad-based portfolio business. Please turn to Slide 5. Emerson continues to see success in our growth platforms. Our technology leadership and ability to deliver differentiated solutions are enabling us to capture large-scale opportunities and drive sustainable growth. And I'd like to highlight a few key wins from the quarter that supported our 6% orders growth. First, I will highlight 2 projects in power demonstrating strong adoption of our Ovation 4.0 Distributed Control System. In August, we talked about Ovation winning 2 greenfield combined cycle plants with Entergy. Ovation 4.0 has now been selected by Entergy to automate 3 more power generation facilities. Entergy today provides electricity to 3 million customers and the 5 facilities will provide approximately 3.1 gigawatts of generation capacity. In another win, Ovation 4.0 was chosen to replace the existing excitation system at the dual nuclear power station in Belgium, unifying the control systems across the site. Doel provides around 15% of the country's electricity, and Emerson will help ensure the delivery of safe and clean baseload power. Next, Emerson is excited to announce its support to Bechtel Energy and Woodside Energy in the automation of the Woodside Louisiana LNG project. The liquefaction and export terminal in Calcasieu Parish is a premier LNG project designed for safe, reliable and efficient operations, delivering LNG to global markets. This development can produce 16.5 million tons per annum with a permitted expansion capacity of up to 27.6 million tons per annum. Emerson is proud to be chosen as a key automation partner for Bechtel Energy. Last, Emerson was selected as the automation provider for 3 manufacturing facilities being built in Indianapolis by a large U.S.-based life science customer, a major step forward in their near-shoring initiatives and in advancing innovation and efficiency. Emerson will provide our leading DeltaV Control Systems & Software portfolio to enable reliable, scalable and data-driven automation. Through this collaboration, Emerson will deploy state-of-the-art DeltaV technologies designed to accelerate the time to market of next-generation weight management drugs, enhanced production performance and ensure regulatory compliance. These wins reinforce our position as a global automation leader and demonstrate the strength of our portfolio in addressing the challenges our customers face today. Our continued success is driven in part by our industry-leading innovation, and we are consistently investing to advance our technology, including investing 8% of sales in 2025. In the fourth quarter, we launched 2 AI-powered applications to unlock productivity and workflow automation. First, we launched Guardian Virtual Adviser to enhance our DeltaV life cycle management software. This solution combines Emerson's deep domain expertise and decades of data with conversational AI to help customers quickly resolve issues, optimize system performance and reduce downtime. Currently available for DeltaV, we are innovating it to expand across Emerson's automation platforms to support smarter decisions and operational excellence across the plant life cycle. We also introduced AspenTech's subsurface intelligence, a cloud-native AI-powered platform that accelerates decision-making for seismic interpretation. This AI platform automates workflows and improves collaboration across disciplines to help customers optimize production and reduce operational silos. Please turn to Slide 6. Emerson executed well in a fluid macroeconomic environment and continues to deliver excellent operational performance. Growth reflected sustained momentum in North America, India and the Middle East and Africa, offset by persistent softness in Europe and China. LNG, power and life sciences continue to attract significant investment globally and collectively were up 11% year-over-year. Sales in Test & Measurement accelerated sharply as we exited the year up 12% in the fourth quarter with broad-based strength. Our Test & Measurement business continues to gain market share driven by innovation and channel optimization. MRO for the company represented 65% of sales. Emerson achieved annual records for both gross profit margin of 52.8% and adjusted segment EBITDA margin of 27.6%. Margin expansion was driven by strong price cost, higher mix of software and the benefit of cost reductions in synergy realization offsetting a 20 basis point impact on gross profit from tariffs. We made meaningful progress integrating AspenTech, realizing $50 million of synergies in 2025 and now plan to achieve $100 million in run rate synergies by the end of 2026, 2 years ahead of plan. Earlier this year, we completed all the actions to achieve our commitment of $200 million of run rate synergies for Test & Measurement. Adjusted earnings per share of $6 was consistent with our guidance. Finally, we generated $3.24 billion in free cash flow, exceeding our August guidance of $3.2 billion and in line with our initial guidance as we offset approximately $200 million of acquisition-related headwinds. Our 2025 performance underscores our commitment to operating results and positions us well to continue investing in growth and returning capital to shareholders. Emerson's alignment with secular trends, leading technology and improving orders momentum reinforce our confidence in our 2026 plans. I will now turn the call over to Mike Baughman to discuss our 2025 results in more detail and expectations for 2026. Michael Baughman: Thanks, Lal, and good morning, everybody. Please turn to Slide 7 for a more in-depth look at our 2025 financial results. Underlying sales growth was 3%. Growth was led by Software and Control, which grew 5%; and Intelligent Devices grew 2%. Our process and hybrid businesses were up 4% and were resilient throughout 2025. Our discrete businesses finished the year up slightly at 1% with lingering weakness in automotive and factory automation. While our discrete businesses accelerated through the year, year-over-year volume was down and represented about a 1 point headwind to Emerson sales growth. Pricing contributed 2.5 points to growth as expected. Underlying growth was 5% in the Americas and 3% in Asia and the Middle East and Africa, while Europe was down 2%. Our backlog ended the year at $7.4 billion. Backlog was up 3% year-over-year due to second half orders growth of 5%, which positions us well for 2026. Adjusted segment EBITDA margin of 27.6% exceeded expectations and was up 160 basis points year-over-year. 50 basis points of this expansion was due to a favorable software contract renewal year in 2025 and the remaining 110 basis points of improvement came from positive price cost, the benefit of cost reductions and synergies from the Test & Measurement and AspenTech acquisitions, which more than offset inflation and tariffs. Adjusted EPS came in at $6, a 9% increase year-over-year, and I will provide more details on the next slide. 2025 free cash flow exceeded our expectations. The free cash flow growth was driven by higher earnings and improved working capital efficiency, which helped offset approximately $200 million of transaction-related costs. Our 2025 free cash flow margin was 18%, up 140 basis points from the prior year. Overall, these results underscore the strength of our portfolio, the resilience of our end markets, and our ability to execute in a dynamic macro environment. Please turn to Slide 8, where I will bridge 2025 adjusted EPS from the prior year. Operations delivered $0.62 of incremental EPS in 2025, which included a $0.15 benefit from higher software renewals in the year. Excluding this benefit, solid execution from operations contributed $0.47 reflecting continued margin expansion, segment mix and synergy realization from Test & Measurement and AspenTech. Nonoperating items were an $0.11 headwind due primarily to pension of $0.09 and stock-based compensation of $0.02. Please turn to Slide 9, where I will discuss our 2026 sales outlook by region. The resilient demand environment we are seeing informs our view for 2026 underlying sales. The Americas, India and the Middle East and Africa are expected to remain strong drivers of growth in 2026 with muted demand in Europe and China. The Middle East and Africa is planned to grow high single digits, supported by a healthy capital cycle and significant greenfield investments. The Americas are projected to be up mid-single digits driven by sustained strength in our growth verticals and MRO. Asia is forecasted to be up low single digits led by robust growth in India and momentum in Southeast Asia and Japan offsetting a flat China. Europe is expected to be flat year-over-year. We expect growth to come from the trends that are benefiting the power, LNG, life sciences, semiconductor and aerospace and defense markets, which comprise approximately $6 billion of our $11.1 billion large project funnel. Power, including nuclear, is projected to see robust growth as electrification, modernization of the grid and data center trends drive substantial investment. Energy security and self-reliance as well as energy transition commitments are supporting global LNG projects. Life sciences growth is projected to continue across greenfield projects and capacity expansions to meet demand for biologics and GLP-1s. Semiconductor is also expected to perform well in 2026, with expansions in North America driven by nearshoring investments and government incentives. Lastly, aerospace and defense is set to benefit from investments in new space projects and increased government spending commitments. Please turn to Slide 10 for an overview of our 2026 guidance. For the full year, we expect sales to be up approximately 5.5% with underlying sales up approximately 4%, supported by a healthy pace of business, meaningful growth in Test & Measurement and approximately 2.5 points from price. We project Europe and China to remain weak. The year-over-year growth is also negatively impacted by about 1 point due to a software contract renewal dynamic, which I will discuss in more detail on the next slide. Full year adjusted segment EBITDA margin is expected to be approximately 28% reflecting strong execution and continued margin expansion. Tax rate is modeled at 21.5% for the full year. We are guiding adjusted earnings per share of $6.35 to $6.55 and free cash flow of $3.5 billion to $3.6 billion. Turning to the first quarter. Sales growth is expected to be 4% with underlying sales growth of 2%. Adjusted segment EBITDA margin is guided to be approximately 27%, and we expect to deliver adjusted earnings per share of approximately $1.40 in the first quarter. Please turn to Slide 11 for additional details on 2026 guidance. I would like to take a few minutes to provide further granularity on sales growth and to explain some dynamics affecting margins and EPS growth rates. Our Test & Measurement segment is planned to have high single-digit growth in both the first half and full year, while the Control Systems & Software segment is expected to be down low single digits in the first half due to a $110 million headwind from a lower value of software contracts up for renewal in 2026. This headwind is projected to be $120 million for the full year. The underlying health of our Software businesses remains robust with ACV expected to grow 10% plus in 2026, but having fewer contracts up for renewal adversely affects GAAP revenues. This accounting dynamic does not affect cash flows and reverses through 2027 and 2028 when we expect to see tailwinds from renewals. The Intelligent Devices business group is projected to grow 3% in the first half and 4% for the full year with sustained strength in MRO across core verticals. Second half growth is supported by backlog phasing and the timing of project shipments. Overall, Emerson expects to grow approximately 2% in the first half and 4% for the full year. Excluding the impact of software contract renewals, Emerson's growth rate is approximately 4% in the first half, 6% for the second half and 5% for the full year. Please turn to Slide 12 for additional detail on adjusted segment EBITDA margin and EPS guidance. Our Q1 adjusted earnings per share guidance of approximately $1.40 reflects strong operational execution despite a softer sales growth quarter and a tough comparison to Q1 2025. We expect EPS contributions from operations of about $0.05 and nonoperating items of approximately $0.04, offsetting a $0.07 impact from the software contract renewal dynamic just discussed. As a reminder, Q1 2025 adjusted EPS of $1.38 included the benefit of several dynamics such as discretionary cost containment and favorable project closeouts in Control Systems & Software. It's also important to note that lower volume from renewals impacts Emerson's adjusted segment EBITDA margin by approximately 80 basis points in the quarter. For the full year, the renewal dynamic reduces adjusted EPS by approximately $0.15 and adjusted segment EBITDA margin by approximately 40 basis points. Operations is expected to generate about $0.50 of incremental EPS in 2026 with approximately 80 basis points of margin expansion from positive price/cost and the continued benefit of synergy realization from AspenTech and Test & Measurement. Please turn to Slide 13 for a few comments on cash flow and capital allocation in 2026. As mentioned earlier, we are expecting free cash flow of $3.5 billion to $3.6 billion in 2026, representing approximately 10% growth, which will come from higher earnings and working capital efficiency. During the portfolio transformation, our capital allocation was weighted towards M&A. Increasing the dividend has been a priority for the last 69 years, but the annual increases to dividend per share were minimal during the transformation. Now that the transformation is complete. In 2026, we plan to raise our full year dividend per share $0.11 or approximately 5%, which is a significant increase compared to prior years. This raise marks the beginning of our 70th consecutive year of increasing dividends and underscores that long-standing commitment. During the transformation, we consistently completed base share repurchases of $400 million to $500 million per year. 2023 and 2025 were significantly higher because we allocated a portion of proceeds from divestitures to share repurchase. For 2026, we intend to return approximately $1 billion to shareholders through share repurchase, which we have planned to be ratable throughout the year. We previously communicated our intention to pay down approximately $1 billion of debt in 2026. That is still the plan and reflects our commitment to maintaining our strong A2A credit ratings. We ended 2025 with a net debt to adjusted EBITDA ratio of 2.3x and expect to end 2026 at approximately 2x. With that, we will now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: Maybe just start with some clarification on the software renewal. Is this an accounting change that was impacting the guide here? Or is it really like the timing of your contracts that are up for renewal? And then related, you called out a benefit in your 2025 bridge of $0.15. Is that related to this? Or is that separate? Because you are expecting to recoup this in '27 and '28 that you called out? Michael Baughman: Yes. I'll start with the second half first, which is to say your understanding is correct. And thanks for the question on this contract renewal issue. It's an important dynamic that I want to make sure everyone understands. So we have a portfolio of multiyear term license contracts that have renewal dates over several years. And each year, there are so many that are up for renewal. And this year, we had more than normal that were up for renewal, and that's what drove the $120 million increase that we're calling out on the bridges. Next year, we revert to something more normal, but it represents about $120 million headwind in 2026, and it is an accounting dynamic. And remember, since these are multiyear term licenses, you recognize multiyears of the revenue at the time that you execute the renewal. And that revenue recognition pattern is one reason that the ACV or the annual contract value is so important, because ACV has the effect of smoothing out that accounting dynamic. And the other important reason to measure ACV is that it more closely approximates the cash that we can expect out of that portfolio in the next 12 months. So as ACV grows, the cash flows grow. So you have it right. That is the item that we're talking about. It's not a change in our accounting. It's not a change in the accounting rules. It's just an accounting dynamic that exists in revenue recognition for these multiyear term license contracts. Deane Dray: That's really helpful. And just to make sure I heard it correctly, there's no impact on free cash flow. Is that correct? Michael Baughman: That is absolutely correct. And you made another point that I would like to reiterate, which is that this is a dynamic that will reverse in '27 and '28 relatively ratably over those 2 years. Deane Dray: Great. And then just as a follow-up on the Test & Measurement. This was above expectations in terms of orders. You called out some of the verticals. Is there anything else in terms of -- have you really turned the corner here because this was an expectation that you would start to see this, and you did highlight some share gains. But just any other color on the dynamics of that business would be helpful. Surendralal Karsanbhai: No, Deane, there's significant momentum certainly across the 3 categories that I described: semiconductors; aerospace and defense, which has been relatively robust over the last 2 years to begin with. And then most encouraging has been the broad-based portfolio business and that's where the multitude of tens of thousands of customers sit. It touches just about every industry macro that you can name. And seeing that resilience in that business and the return to growth there gives us -- and broad-based geography gives us the confidence that momentum continues and that our guide on Test & Measurement for 2026 is solid. Operator: Our next question comes from the line of Andrew Obin with Bank of America. David Ridley-Lane: This is David Ridley-Lane on for Andrew Obin. Just a quick numbers question. Could we get the orders growth by process and hybrid, discrete, and Safety & Productivity in the quarter? And any color that you could give on how first quarter orders are shaping up? Ram Krishnan: Well, I think from an orders perspective, process fibrin orders, to your point, I mean, they stayed resilient at mid-single digits. Discrete recovered to driven by Test & Measurement, which exposed in the discrete markets into a high single digit and weights to that 6% orders growth that we reported. S&P orders remained flat to low single digits in the quarter. And we expect good momentum to carry through into the first quarter of this year. David Ridley-Lane: And then in fiscal '25, excluding this timing dynamic, which I completely understand is driven by ASC 606 and was a long-standing driver of how AspenTech's results were reported. But excluding that impact, you had core ops of 110 basis points margin expansion in fiscal '25. You're guiding for 80 basis points in fiscal '26. It would seem like you have faster revenue growth, less tariff impact, further Aspen synergies. Are there any offsets to consider thinking about for margins in '26? Michael Baughman: No, I don't think so. You've got it right. As we look ahead, we've got the drag of the renewals that's about 40 basis points. We've got some synergies and the operations continue to drive about 60 basis points, which is what the operations have been driving for really the last 2 years, right in that 50 to 60 basis points range and that's the margin expansion that we consistently talk about driven by the Emerson Management process and what we expect to continue into the future. Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Lal or Mike, just digging a little bit more into that first half versus second half organic guide for '26. The growth in mechanics are what they are, but you also talked about the timing of shipments and how they support the second half growth. Are you expecting any sort of larger project order recovery and or change, for instance, in process markets to get you there? Or is it really just you have the visibility already in the back of the pipeline and everything is -- just talk about the visibility there? Ram Krishnan: Yes, Andy, Ram here. Yes, we absolutely have the visibility and the momentum that we had in terms of orders in the second half phases that backlog into the second half of 2026. That's point number one. Secondly, if you take out the software renewal dynamic, as Mike explained, the first half growth is 4%, the second half growth and for an overall growth of 5% minus the software renewal dynamic, which is the core growth you've got to look at and that sequential growth second half to first half versus that is about 11%, which is what we executed this year, albeit with a better backlog phasing going into the second half of next year. So we feel relatively comfortable around the second half, first half guide and the software renewal dynamic is what shows up as the 2% and 6%. But in reality, it's 4% and 6% for a weighted average 5% through the year. Andrew Kaplowitz: Thanks for that Ram. And there's obviously a lot of excitement about power markets. You gave us the data up almost 20% in orders in Q4 in Ovation, 30% for the year. But maybe you can give us a little more color on what you're expecting for '26. Obviously, there's a particular focus on nuclear. You guys have pretty good share there. Maybe you could remind us of that. And order growth was a little bit lower in Q4 than for the year, but do you expect acceleration in '26 in that end market? Surendralal Karsanbhai: Yes, Andy. Lal here. No, certainly, we're excited about what we're seeing broadly, not just across generating capacity, but transmission and distribution investments, which, as you know, impacts our Aspen business. We expect to continue to see investments across combined cycle in the United States. Coal and nuclear in China and nuclear broad-based across Eastern Europe and the U.K. I think the underlying dynamics of demand driven, of course, by data centers and by the age of the capacity that's in place today should give us a good, and we project a very good 3- to 5-year run in this segment of the business at high single digits to low double-digit growth. Operator: Our next question comes from the line of Steve Tusa with JPMorgan. C. Stephen Tusa: Just wanted to clarify. So is the first quarter -- the first quarter orders should kind of sustain this, I don't know, like the 5% to 6% type of momentum that you saw in the 4Q? Is that the messaging? Ram Krishnan: Yes. C. Stephen Tusa: Okay. Okay. Great. And then just on the bridges, it's hard a bit to parse out the software impact. But I think you have $0.50 of ops for the year, which I think is probably, I don't know, a 45% to 50% kind of core incremental. Am I getting into the right ballpark there? And then in the first quarter, you only have $0.05. Is there a reason why those incrementals may be a little bit weaker, kind of putting the software impact aside? Michael Baughman: Yes. I think your leverage expectation is about right when you look at the quarter that way. When you look at first quarter, it's really this dynamic of last year being as strong as it was with that discretionary cost and some of the project closeouts and the EBITDA margin that quarter, I believe, was 28%, and so it's sort of a comparison dynamic. Ram Krishnan: Yes, and Steve. Yes, we leveraged the 265% in the Q1 of '25, and it just puts us in a -- it's just a tough comparison, not just -- even if you take out the software renewal dynamic, it's a tough comparison for our base operations, just given the dynamics Mike described. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: I just wanted to follow up a little bit more on the trends in Test & Measurement and discrete, automation. So I think in Test & Measurement, you're guiding still for high single digit growth later in the year despite the sort of pretty tough comp there. Maybe help us understand the visibility on that business. And then in the discrete world, any updates on some of the different end market trends, please? Surendralal Karsanbhai: Julian, Lal here, and I'll start and I'll have Ram add some color as well. Now certainly, we have a high degree of confidence in what we're seeing in 3 of the 4 test and measurement markets, aerospace and defense, semiconductor and then the broad-based portfolio business. However, and this bleeds over into your discrete question, the automotive business continues to be very weak. We're continuing to see weakness in the packaging machine making business, which is very Western Europe dependent, Italy, Germany and of course, impacted in China and the U.S. as well. So that segment, what has been a traditional discrete market has -- is in the flat to low single-digit range, and you've got Test & Measurement in the high range that brings up our broad discrete orders. Ram? Ram Krishnan: Yes. And you said it. And I think from a geographic cut on the Test & Measurement side, very, very strong Asia driven by semicon and portfolio; a very, very strong North America driven by aerospace and defense, semiconductors and portfolio business; and Europe is probably our most muted region because that's where we have a disproportionate exposure to automotive and the EV side. Though, the aerospace and defense piece in Europe as well as the portfolio business is strong. And then in the core discrete business, as Lal described, North America is probably the market where we have good low to mid-single-digit growth in the core discrete business, but Europe and China remain weak in the factory automation and automotive space, as Lal described. Julian Mitchell: That's great. And then just my follow-up question would be around, I know in the past, you'd mentioned some of the project funnel was tied to elements such as hydrogen, clean fuels, carbon capture and so forth. And I suppose domestically in the U.S., the outlook there is worse today because of the subsidy environment changing. I just wondered if that type of activity, if you are seeing pushouts there yourselves and if it represents much of your backlog or it was just something that was in the prospective funnel and never really came into the orders or backlog more fully? Surendralal Karsanbhai: Julian, thanks for the question. Nothing impacted in the backlog. These were projects that we've been highlighting as part of our funnel. there's been a significant reduction in the outlook of projects in this category on a forward basis. So we have adjusted our funnel accordingly, but none of it has been impacted in any backlog in the business. So to give you perspective, the funnel that we showed today at $11.1 billion has approximately a $1.5 billion reduction in S&D projects. And so we've removed a large number of carbon capture and energy management projects. We retained those customer engagements that are still relevant at that point, but that's a very significant reduction in the value of the funnel related to S&D. And that's broad-based across North America, Europe and Asia. Ram Krishnan: And then just to add to that, Julian, the reason the funnel stays flat as we have seen a significant uptick in power generation, certainly LNG, and then continued build-out of the funnel in aerospace and defense and certainly life sciences. So overall, the funnel remains flat. But to your question, appropriately adjusted for the slowness in sustainability and decarbonization project, mostly in North America, but some in Europe as well. Operator: Our next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: I'm going to probably ask a steeper question on the accounting for AspenTech, so please bear with me here. Can you just explain why this is a onetime issue? And just confirm that this is more of a first half '25 renewal issue comping that as opposed to something this year. So that's my main question. And really, just maybe just talk about the difference in accounting for renewal versus a new contract and why renewals would have this kind of headwind? Michael Baughman: Yes. Nigel, it's not necessarily a onetime event. It's, again, just how the renewal dates stack up in the portfolio of these multiyear term contracts. And when you go into a particular year, there's going to be a number of contracts that are up for renewal. And whatever that is, is sort of the revenue opportunity for that year. And we are certainly, in fact, working a bit to smooth that out. But historically, AspenTech was not concerned with the wrinkles that happened because of this accounting dynamic. Again, I want to stress it's nothing new, and it's not a different accounting. It's just the gap that is used on accounting for these contract renewal dynamics. Ram Krishnan: And Nigel, Ram here. Just to add to that. Now as you rightly pointed out, this dynamic is largely driven by the software renewals within AspenTech. And one of the initiatives we will continue to drive going forward is to manage the renewal dates as we renew these contracts to smooth them out in a fashion where we don't see these dynamics repeat as we move forward. It's certainly going to be a tailwind in '27 and '28 given the reset in '26, but we want to make sure that going beyond '28, we don't have another year where we see these renewals build up in a favorable fashion to reverse in the next year. So it's an initiative now that we're driving the integration of AspenTech that Vincent Servello and the team at Aspen are driving. But it's a good question. Nigel Coe: No. It's a dumb question, I'm sure. And then just thinking about that in the plan, the acceleration within ID from 3% to 5%, first half, second half. You called out some backlog timing. Clearly, with that kind of timing, we're talking here about longer cycle projects. So I'm wondering, are these greenfield projects? And if you can give any details on some of the end markets that's driving that acceleration? Surendralal Karsanbhai: Yes, Nigel, Lal here. Again, I'll reiterate a point that Ram and Mike made earlier. It's important to note that adjusted for the renewals the first half to second half ramp is actually consistent with what we executed in 2025, which is a sequential 11% ramp-up. It would be 4% growth in the first half and 6% in the second half of 5% a year. So that renewal dynamic because it is first half, predominantly first half loaded, really impacts and skews that ramp-up on the underlying business. But to your point, we feel great about the backlog situation. We have good visibility in our Intelligent Device business to execute this plan that we put forward. Ram Krishnan: And just the projects that you referenced that are loaded into the second half that we won in the second half of '25 are in life sciences, in power and LNG, many examples that Lal had in his script. But these are the very same projects, primarily power, LNG and life sciences that will phase into the second half of '26. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Amit Mehrotra: Sorry, I dialed in a little bit late, so excuse me if this has been asked. But I wanted to talk about power gen, how that funnel is progressing. I imagine there's obviously a lot of electricity demand. Wondering if you could just talk about that and how much visibility you have and kind of at what point does Emerson enter kind of that power gen life cycle versus, say, a turbine? Surendralal Karsanbhai: Yes, thanks for the question. We are certainly energized by what we see in the power generation, distribution and transmission markets. Just in context of the funnel and the visibility that we have to the business, we added approximately $1 billion of projects into the $11.1 billion project funnel. That is capturing broad-based modernization and new capacity coming online over the next, let's say, 3 to 4 years. The activity is very robust, not just in the United States, but broad-based into Europe and into China in this segment. That's one area of China growth that we did experience in 2025, and we expect that to continue into 2026. And just to give you perspective, Ovation today controls approximately 30% of all the power generated in the world: over 50% in the United States, over 30% in China, over 30% in Europe. And we have great visibility well ahead because, obviously, we're upstream around turbine and boiler controls to the construction cycle. So we're in those conversations today early with the utilities around the world as they plan out their investments. Amit Mehrotra: Great. That's helpful. And just one quick follow-up on software. I know you have this renewal dynamic happening. But I guess I just wanted to ask how software annual contract value is trending versus your installed base? How do you expect that to kind of perform going forward? How do we think about like attach rate trends there? Ram Krishnan: Yes. Our ACV, we shared the data -- finished the year at $1.56 billion, up 10%. We expect that to continue into another double-digit year next year. So very, very solid in terms of adoption of software and the cash flow trends are trending with ACV with double-digit growth, and we're operating at a Rule of 45 when you look at cash flow and ACV growth from a software perspective. So very positive trends and consistent with the long-range plan we laid out when we brought AspenTech in. Operator: Our next question comes from the line of Brett Linzey with Mizuho Securities. Brett Linzey: Just wanted to come back to the power discussion 1 more time. So you gave some great examples on the traditional side and talked about nuclear being robust. I know Emerson's valve and instrument content is about 90% of the world's nuclear reactors. Is there any way you can sensitize the content per new reactor or anything you can add on the aftermarket side that you can capture there? Ram Krishnan: Yes. So in a nuclear reactor or a nuclear power plant, I mean, Emerson, typically, if you get the full scope, which is obviously the control system, the instrumentation and the valves, we get $40 million of content for a complete greenfield nuclear reactor with an opportunity to deliver more than $40 million, $40-plus million over a 10-year annuity from an MRO life cycle services perspective. So that is kind of the scope we operate in nuclear, a lot of valves, instruments and control systems as part of that automation scope. Brett Linzey: Okay. Great. And then maybe shifting back to Ovation. You saw the strength in orders this year, greenfield modernization. Is this predominantly the power vertical driving this or are you starting to see some sales synergies between Aspen and the legacy Emerson as you mine that installed base? Surendralal Karsanbhai: No. Certainly, it's a good question. Certainly, as you may recall, in the GGM business, there are absolute synergies between Ovation, which is inside the valves to generating valves in the distribution and transmission networks that utilities owned throughout the world. So we are managing these on a broad account basis, covering both opportunities because very honestly, the distribution and transmission network is in a state of upgrade as well. And if you're going to put the generating capacity onto the grid that we're talking about, we certainly see the investments going into the data systems and the software systems to manage those loads within the grid. Ram Krishnan: Absolutely. And I think from a customer perspective, a lot of synergies of the same customers we deal with on the generation side are investing Monarch to upgrade their transmission and distribution systems. And then from a product perspective, we're developing Ovation, for example, in substation control that extends beyond generation into transmission and distribution and symbiotically works with monarch to deliver value for our customers. Operator: Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: Yes. I wanted to drill down a little bit on the LNG side of the story. Are you able to quantify what portion of that backlog is LNG? And then do your broader comments around Europe and China weakening impact your view of what's likely to move forward in 2026? Ram Krishnan: Yes. Your first question was what portion of our $7.4 billion backlog is LNG? Andrew Buscaglia: I'm thinking -- yes, that the -- am I confusing with the $11 billion you've put out there? Ram Krishnan: Okay. Of the $11 billion, I think LNG is what, about yes, $2 billion is LNG since you asked of the $7.4 billion of backlog, about $350 million is LNG. And then your second question was dynamics around Europe and China? Andrew Buscaglia: Yes. The kind of the weakening... Ram Krishnan: At this point, obviously, when you talk about China, the core business that we do today, chemical, petrochemical, refining is really what's muted. But we're seeing pockets of opportunity. Certainly, power has remained strong. Our export business in China has remained strong. Shipbuilding and marine, which is a unique market for us, has remained strong. And then T&M, which has a decent-sized business in China, has seen strong recovery. So there are pockets of opportunity. I would say we're prudently and conservatively planning for a flat China. I think it's a wildcard on China recovery. There is a possibility it could recover into the second half of '26, but we haven't built that into our plan. Similarly, in Europe, I think the concerns around sustainability, decarbonization, bulk chemical, automotive and factory automation remain. We haven't seen a catalyst to indicate that those will turn in Europe. So again, a plan for a flat Europe. But certainly, activity around LNG, which is EPC driven in Europe, life sciences, power and specialty chemical is where we will see the opportunity going forward in aerospace and defense. Andrew Buscaglia: Got it. Maybe one more on your capital allocation in that pretty robust cash flow. Your stock is rather cheap probably relative to what you'd expect heading into the new year. So maybe can you talk about your balance between repo and expectations for M&A? Michael Baughman: Yes. We laid out the $1 billion expectation around repo. As far as M&A, that's opportunistic, and there's nothing right now that's in sight that we would say we're going to allocate to. So that's what 2026 looks like. Operator: Thank you. Ladies and gentlemen, this does conclude our time allowed for questions and will conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.
Operator: Hello, and welcome to McDonald's Third Quarter 2025 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Dexter Congbalay, Vice President of Investor Relations for McDonald's Corporation. Mr. Congbalay, you may begin. Dexter Congbalay: Good morning, everyone, and thank you for joining us. With me on the call are Chairman and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to 1 question and then reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now I'll turn it over to Chris. Christopher Kempczinski: Good morning, everyone, and thank you for joining us. In the third quarter, McDonald's delivered global comparable sales growth of more than 3.5%, with growth across all segments. In addition, for the second quarter in a row, McDonald's delivered global system-wide sales growth of more than 6% in constant currency, reflective of the increasing contribution from new unit openings. Our performance is anchored in our Accelerating the Arches business strategy and exceptional execution to provide the value our customers want for the food they love. Our combination of great tasting menu innovation, exciting marketing and reliable value and affordability succeeded in a highly challenged consumer environment and drove traffic share gains in a majority of our top markets. In the U.S., we continue to see a bifurcated consumer base with QSR traffic from lower income consumers declining nearly double digits in the third quarter, a trend that's persisted for nearly 2 years. In contrast, QSR traffic growth among higher income consumers remained strong, increasing nearly double digits in the quarter. We continue to remain cautious about the health of the consumer in the U.S. and our top international markets and believe the pressures will continue well into 2026. Delivering industry-leading value is part of McDonald's DNA. It's a foundational expectation of our brand to bring consumers through our doors and keep them coming back. And especially in today's difficult macro environment, it's more important than ever. On our last earnings call, I previewed the close collaboration with our U.S. franchisees to improve consumers' value perceptions of our core menu offerings. We heard our customers loud and clear on the need to deliver everyday value and affordability across their favorite items on our menu board. In September, we introduced Extra Value Meals or EVMs with a nationally advertised $5 Sausage McMuffin with Egg meal and an $8 Big Mac meal. And for the month of November, we're back with a $5 Sausage egg and Cheese McGriddles meal and an $8 10-piece Chicken McNuggets meal. As we've said before, we will measure success of our EVM program in 2 ways: first, by gaining share of lower income consumer traffic and second, by improving value and affordability experience scores. I'm pleased with how our EVM program is performing since relaunch. We're still in the early stages of the program and expect that the associated comp sales lift and traffic improvements will continue to build as awareness of the program increases over the coming quarters. Outside the U.S., our performance has remained strong with our large markets continuing to execute disciplined value, menu and marketing programs. The value platforms we've had in place for several quarters in our IOM markets are resonating with our customers and continuing to improve value and affordability scores. While these programs are working, we're remaining agile and will evolve them along with the needs of our customers. In Australia, for example, we locked in pricing on our McSmart meal and lose change venue value offerings for 12 months beginning in July, giving customers confidence and consistency in a volatile economic environment while helping us maintain relevant, drive traffic and gain share. Time and again, we've proven that when we execute well, we outperform. And that has also been the case in Japan, where we've had market share gains for 6 quarters amid consistently strong performance. Just a couple of weeks ago, I visited our restaurants in Tokyo and my first-hand experience confirmed the momentum supported by strong local marketing and innovation. This included several exciting Happy Meal campaigns that drove significant traffic and social engagement, highlighting the power of local relevance and the strength of our brand in connecting with consumers. Along with both value and marketing execution, our new category structure is laying the groundwork to deliver more menu innovation to support long-term growth. We've stood up dedicated teams with deep expertise and focused attention on the high potential growth categories of chicken, beverages and beef. At the outset, we promised increased speed of innovation and scale, and we're already introducing new solutions into the system. Let's begin with beverages, a global category of more than $100 billion that's growing much faster than the broader IEO industry. In the U.S., we launched a beverage test in more than 500 restaurants across Colorado and Wisconsin at the beginning of September. The product mix includes cold coffees, fruit and refreshers, crafted sodas and energy-based drinks. Initial results are exceeding expectations with strong satisfaction scores across the board and the new beverage offerings are driving incremental occasions across different dayparts as well as higher average check. We're excited to see progress continue with the test as we deepen our understanding, drive innovation and evaluate how these offerings could enhance our long-term beverage strategy in the U.S. and abroad. Turning to chicken, a global category that is 2x the size of beef and faster growing, we're driving good progress on our chicken offerings and continued to gain share in our top 10 markets in the quarter. In the U.S., we brought back Snack Wraps in early July, much to the delight of our most vocal fans at a nationally advertised price point of $2.99. The strong customer reception to this highly anticipated launch highlights the importance of pairing the right product with the right value proposition. In our IOM markets, innovation standouts like the Chicken Big Mac in the U.K. and McWings in Australia exceeded expectations in the quarter and we'll continue to go after the broader chicken opportunity by expanding our portfolio and pulsing in limited time offers to meet evolving consumer tastes. Investing in these high-growth categories to align with consumer trends reinforces our broader strategy to drive guest count-led growth, win and taste and quality and outperform competitors over the long-term. With that, I'll turn it over to Ian. Ian Borden: Thanks, Chris, and good morning, everyone. As Chris mentioned, McDonald's continues to deliver solid results by focusing on what we can control: value, menu innovation and outstanding marketing execution while also driving consistent operational improvements across nearly all of our top markets. In the third quarter, global comparable sales increased 3.6% despite a challenging consumer environment and a difficult QSR industry backdrop. In the U.S., comp sales increased 2.4% for the quarter and we delivered another quarter of positive comp sales and guest count gaps to our near-end competitors. We started Q3 with the national launch of Snack Wraps and the initial 4-week window exceeded our expectations. Snack Wraps were the most popular new chicken product launch in the U.S. in recent history, with nearly 1 in 5 McDonald's customers purchasing a Snack Wrap during that period. Although easing somewhat after the exceptional initial launch period, Snack Wraps continued to deliver strong unit performance throughout the quarter, helping us gain share in the U.S. chicken category and drive high levels of customer satisfaction. We're also continuing to see positive results from the McValue platform as we continue to evolve our value offerings. In mid-July, we introduced the Daily Double, a third meal deal as a companion to the McChicken and the McDouble meal deals. Overall, our McValue platform continues to serve distinct needs with little overlap of customers across the meal deal and Buy One, Add One constructs, both of which continue to drive incrementality to the business in the quarter. And as Chris described in early September, we brought extra value meals back to the menu to ensure fans can find everyday affordable pricing across our menu boards. Getting the EVM formula right is important because they account for about 30% of our total transactions in the U.S. And so far, results have been in line with our expectations as we build consumer awareness and drive behavior changes. While not a benefit to our third quarter results, in October, we reintroduced MONOPOLY in the U.S. for the first time in nearly a decade, and we're pleased with the performance. This year's campaign includes digital engagement through our app, similar to what we've done successfully in international markets. MONOPOLY is one of the biggest digital customer acquisition events we've ever had driving downloads and registrations and reinforcing the role of digital in our broader strategy. With about 45 million 90-day active users in the U.S., we're excited about how MONOPOLY is helping more customers discover our strong value offerings available through our app. Turning to our internationally operated market segment. Comp sales were up 4.3%, marking consecutive quarters of growth above 4% despite a challenged industry backdrop. Just like last quarter, each IOM market delivered positive comp sales growth, led by strong performances in Germany and Australia. In Germany, we delivered our strongest comp sales results in 2 years, extending the trend of market share gains to nearly 4 years despite persistent industry traffic declines, McDonald's Germany has consistently outperformed driven by disciplined execution of our value menu and marketing playbook. A standout in the quarter was the Taste of the World campaign, which showcased the global strength of the McDonald's brand by offering customers a curated selection of international menu favorites at their local German McDonald's restaurant. Taste of the World exceeded expectations and was complemented by an optimized mailer and strong local marketing, demonstrating our ability to deliver value and innovation simultaneously. In addition, it provided a campaign blueprint, which we plan to replicate across more international markets in 2026 and which is currently live in the U.K. In Australia, we're encouraged by the momentum that the new management team and our franchisees are building across the entire system as we've gained market share for a second straight quarter by executing a full suite of initiatives across value menu and marketing. And as Chris noted, we locked in value prices for 12 months starting in July, providing consumers with predictability and confidence. The launch of the Big Arch burger and breakfast McGriddles added excitement to the menu, while the return of MONOPOLY now fully digital and available exclusively through the MyMacca's app, drove increased app downloads and registrations and contributed to digital sales growth. In our international developmental license markets, comp sales grew 4.7% led by Japan, which has delivered consistently positive guest count growth for nearly 2 years. In China, while near-term performance continues to reflect macroeconomic pressures, we remain confident in the long-term opportunity. We're investing in the future, including adding 1,000 new restaurants this year. We're also updating our Hamburger University in China, which we believe will support talent development and reinforce our commitment to the market. We have the right partner in place and remain confident in our ability to drive sustainable, profitable growth over time. Turning to the P&L. Adjusted earnings per share was $3.22 for the quarter. which includes a $0.04 benefit from foreign currency translation. Adjusted earnings per share on a constant currency basis declined 1% versus the prior year primarily due to the impact of a higher effective tax rate, more than offsetting an increase in adjusted operating income. Total restaurant margin dollars were over $4 billion, a 4% increase in constant currency and the first quarter in our history that we've surpassed the $4 billion mark. This performance is a true reflection of the strength of our business model in a pressured consumer and inflationary environment. G&A increased versus the prior year quarter, reflecting $40 million of incremental marketing spend to support the relaunch of Extra Value Meals in the U.S., higher incentive-based compensation expense and the timing of investments in our strategic transformation efforts and growth opportunities. Our year-to-date adjusted operating margin is 47.2%, up meaningfully from the 46.7% in the prior year period, reflecting top line growth and strong execution across our system, including portfolio management. Below the operating line, our effective income tax rate for the quarter was 22.8%, we're projecting our full year effective tax rate to be between 21% and 22%, which is tightening the range from our previous estimate. We currently estimate that the impact of foreign currency translation on adjusted earnings per share for the fourth quarter will be about a $0.05 tailwind based on current exchange rates. As always, our estimate is directional guidance only as rates will likely change as the year progresses. We're on track to deliver our financial targets for the year, which include the expected impacts from tariffs currently in place, and remain focused on executing our Accelerating the Arches strategy to create long-term value for our stakeholders. With respect to capital allocation, our priorities remain unchanged. First, we invest in opportunities to grow the business and drive strong returns. Second, we return remaining free cash flow to shareholders over time through dividends and share repurchases. In line with investing in the business, we believe our development pipeline is healthy, and we're on track to deliver our current year targets and our 50,000 restaurants globally by the end of 2027. Whether through new restaurant openings, digital innovation or menu enhancements, we're continuing to build a business that is positioned to win in any operating environment. With respect to capital returns, in October, we announced a 5% increase in our dividend, which is our 49th consecutive year of dividend increases. That's a testament to the strength, resilience and long-term value that McDonald's delivers and expects to continue to deliver to our shareholders. Our ability to consistently return capital while investing in the business reflects the durability of our model and the confidence we have in our future. With that, let me turn it back over to Chris. Christopher Kempczinski: Thanks, Ian. Each fall, McDonald's celebrates our Founder's Day with reflections on the pride and passion that fuel our system. It's a privilege to recognize the everyday actions of our crew members, franchisees and teams around the world. This year is particularly special given it's our 70th anniversary. The resilience we've built across generations and geographies reminds us that our strength lies not just in our global scale, but in the local actions we take day in and day out to feed and foster communities everywhere McDonald's operates. Founder's Day is also a time to look ahead to the next chapter of innovation, growth and impact. From our digital transformation to our commitment to value and affordability, we are building on our legacy in ways that matter most to today's consumer, and we're doing it together as 1 McDonald's system. As we look to close out the year, our focus remains on executing what we can control. We're committed to delivering for our customers, especially in the challenging environment we navigate today. As is often the case, Ray had great advice for the moment we face today when he said, adversity can strengthen you if you have the will to grind it out. That's exactly what we're doing. With that, we'll take your questions. Operator: [Operator Instructions] Dexter Congbalay: Our first question today is from David Palmer from Evercore. David Palmer: Great. I wanted to ask you about the U.S. business and perhaps the twin goals of improving company restaurant profitability and your system restaurant profitability but also improving the value perception gap versus your competitors in the U.S.? How can you achieve both? I see some big AUVs for you guys bigger than your competitors, over $4.5 million for your company restaurants and trailing restaurant margin is 11.5%. So I just could -- I could imagine higher margins than that and -- or perhaps even more of a value perception gap versus competitors? And I have a feeling you have some ideas about how you're going to grow that value perception gap and probably have your cake and eat it too and improve the restaurant margins over time as well. I'd love to hear about that. Christopher Kempczinski: Sure. Thanks, David. Well, I think the formula for us is pretty well established over time, which is basically, if you do what you need to do to let your customers and serve them well, you're going to attract more people to the business, and ultimately, that's going to drive unit economics. And so I think for us, the focus is always on getting more people through the door, getting them to be buying larger items and ultimately, that drives AUVs that you were talking about. I don't think that related to that, that it's at all incompatible that improving value scores actually is also part of improving unit economics. And that's very much our focus right now. As we think about the full year, our U.S. franchisees cash flow is going to be solid. The cash flow performance is going to be solid. At the same time that we're making these investments that we talked about on our last call around EVM. So I think for us, the test of time, just get more people through the door, get them buying more and everything seems to take care of itself. Ian Borden: David, I just might add a bit to what Chris said. And obviously, what he said, we've talked about pretty consistently that we've got to get after guest count-led growth. And I think nothing certainly from my lens has changed in terms of over time if we keep driving more volume and more customers through our doors, which is obviously what we're always focused on. Nothing fundamentally has changed, I think, in our belief that we can drive margin accretion over time. I mean I think obviously, as you know well, a bit of the dynamic right now is inflation levels are still elevated from, I think, kind of what I would say are the historical norms. The pricing environment is challenging. And so I think in the short-term, that continues put pressure on margins. But again, I think we're focused on what do we need to do to meet the needs of our consumers in the environment, and we certainly believe value and affordability is right. And if we get that right, that will pay off both in the short and long-term, as Chris just talked about. Dexter Congbalay: Our next question is from David Tarantino from Baird. David Tarantino: My question is on the value strategy in the U.S. And I believe, at least in the near-term, you're offering some support or co-investing in that strategy with your franchisees. And I was wondering, Ian, if you could kind of frame up what the level of that support looks like on an aggregate basis? And then I guess, Chris, the second part of the question is franchisees at some point, will need to decide whether to continue this or not without your support, presumably. So just wondering what -- how you would frame up the thresholds and how the system is thinking about what success looks like from a financial perspective? Do they need to see the traffic growth covering the de facto price investments? Or are they more focused on the metrics you mentioned, which is the value scores, et cetera. So any thoughts around that would be helpful as well. Ian Borden: David, it's Ian. Let me kick off, and then I know Chris will jump in and address the second part of your question. I think just from a support standpoint and maybe a bit of the framing, which I touched on in my opening remarks is you've heard Chris and I talk a fair bit about -- we felt really good about the value that we were offering both through the McValue platform and then through, I think, the digital value that is available to members of our loyalty program. And if you put those 2 kind of components or programs together, that addresses about 40% of our total sales in the U.S. business. I think -- the purpose of the EVMs, as we talked about in September is really that 60% of the menu, which we would call kind of the everyday core part of our menu, the everyday core consumer. We felt we had an opportunity to strengthen value in that part of our mix and EVMs represent about half of that 60% or about 30% of our overall portfolio in the U.S. that was really important to address that, which was what we targeted with our EVM relaunch in September. I think to kind of support, there's a few elements of support that we're providing. We've talked already about the $40 million of incremental corporate marketing support we provided to support the relaunch of EVMs in September. As you will have seen already, we've got a rehit of that, that Chris talked about in his opening remarks in November. That's being funded through our normal advertising co-op in the U.S. that the franchisees contribute to. So there's no incremental support behind the November activity, but we are providing a co-investment from the launch in September through the end of 2025 at 50% of the kind of effective menu price reduction. And I think before we relaunched EVMs, the average discount level across the U.S. business was about 11%. Obviously, what we've targeted now with our kind of 8 core EVM meals is a minimum discount level of 15%, and we're co-investing half of that reduction. That was about $15 million in September of McDonald's support, and we only had about 3 weeks of activity, and we expect that support in Q4 to be about $75 million. The last piece is Q1 2026, where we are continuing to provide a level of support, but it is different support. That support is basically to address, again, I'll call it a co-investment or 50% of the net negative cash flow impact that's associated with kind of the EVM reintroduction. And that is net of any lift in EVM units in individual restaurants. And because the nature of that support is different, we expect that to be significantly less in Q1 than what we're providing in Q4 this year. And then at the end of Q1, all of our corporate support will stop. And then with that, I'll turn it over to Chris to maybe kind of address part 2. Christopher Kempczinski: Sure. Thanks, Ian. So on value, as you know, and as Ian just referenced, we put in place McValue now it's well over a year ago, and we feel very good about our McValue platform. But what we also talked about was that consumers' value perception, the #1 driver of consumers' value perception is actually what's going on in the menu board. It's not meal deals or offers, it's what's going on in the menu board. And we, along with our U.S. franchisees recognize that we had an opportunity there. And that through kind of a number of things that had happened over time, we have gotten out of whack on EVMs, and that was having a drag on our value perception. And so we went to the U.S. franchisees with a path forward on how we're going to fix EVMs. And the good news is the vast, vast majority, and I'm talking like 98%, 99% of our franchisees recognize that we had an issue with EVMs that we needed to address. And so the support that we came in with was to design to give them a pathway on how we can get this corrected but also protect on what was going to be, we knew in the short-term, a drag. I mean that's a challenge when you do some of the pricing actions that we're doing with EVM is in the short-term, it's going to be a drag until you can get the incrementality and then thereafter, it becomes more sustaining. So that's exactly what we did. And what we expect is going to happen is that by the end of Q1, our system is going to be a position here where it's actually going to be a better decision to continue with the EVMs than it is to go back to where we were and create the problem all over again. So my expectation is that we're going to see the system continue with this EVM program because we've essentially bridge them through the most difficult part of this and any move backward would actually, I think, be self-defeating. Ian Borden: And maybe just a final hook to that, David. I just would say, I mean, again, when we put this in place in September, you heard us say this wasn't a short-term decision. This is going to take at least a couple of quarters, I think, to kind of get the momentum and the lift and the repetitive activity that you need. I would just say we're obviously still early days in, but we're pleased with the progress, and we're on track to what we would have expected at this point a few weeks post launch in September. Dexter Congbalay: Our next question is from Dennis Geiger at UBS. Dennis Geiger: Great. Kudos on the solid sales momentum in the U.S. in the quarter in a tough backdrop. I was wondering if you could talk a little more about how you're thinking about the U.S. sales trajectory looking out over the coming quarters, given a bunch of the key sales drivers that you identified? And also kind of curious if you think sort of the underlying guest count baseline trends that you've kind of touched on in the past a bit, if you think that, that's improving for the business or sort of if those underlying baseline trends are set to improve in '26, if you feel good about the direction of those baseline trends? Christopher Kempczinski: Well, I'm not going to get into trouble with giving any forecast. So I'm going to let Ian handle that one. Ian Borden: Dennis, good question. Thanks. So let me touch on it, I'm sure Chris may want to weigh in here at the end and just build. But I think what we would say is we feel like we've had 2 kind of consistent consecutive quarters now of solid growth. And we certainly feel like we're developing good momentum across each of our 3 business segments. I think as we've talked a fair bit about by obviously focusing on what we feel we can control in a continued challenging external environment. And I think we would say we certainly still feel cautious about the consumer. And I think, I mean, you've heard from many others, obviously, the conditions still remain challenging in the U.S., and we certainly see that as well in many of our top international markets. I think we saw that in the U.S. kind of get a little bit worse through Q3 and into the start of Q4. I'm talking about from an external perspective. But we certainly believe we're positioned to deliver another solid quarter of growth in each of our segments if we look forward to Q4. And I think that's anchored in -- and I think Chris talked about this last quarter, in this environment, you really got to be what we call 3 for 3. You can't be just strong on value individually or you can't just be having a great marketing execution quarter or a great menu news quarter, you've got to get all 3 of those things to come together. And I think we feel we're doing a better job of really strong execution across the business. I think a little specifically maybe to get into the segments. I think in the U.S., we actually expect our comp sales growth will accelerate in Q4 versus the 2.4% that we delivered in Q3. And there's some obvious reasons for that. Obviously, we're lapping the food safety incident in last year's Q4. We've had a decent start to the quarter based on MONOPOLY running in October, as you heard us talk about in our upfront remarks. And we feel we've got a really good quarter of activity, obviously, MONOPOLY in October. And then as you heard Chris talk about the kind of rehit of our EVM $5 and $8 price points in November. We also expect in the U.S. that we'll see a notable step-up in comp sales growth for those reasons in Q4 and expect -- I think our comp sales growth on a 2-year stack base will accelerate modestly from the 2.7% that we saw in Q3 on a 2-year basis. On the international segments, I would say, I think we expect operating conditions across our top markets in Q4 will be pretty similar to what we've seen in the last couple of quarters. I think we believe that our Q4 comp sales in each of our international segments may decelerate sequentially, but that's largely a reflection of the lapping of more difficult prior year comparisons. And so on a 2-year stack basis, we expect Q4 comp sales growth for both segments will accelerate meaningfully and sequentially. So that would be a bit of a texture, I think, on the looking forward. I mean I think the external conditions remain challenging, but I think what we've really done, and you've heard us talk pretty relentlessly about this, just on value and affordability and then getting the power of great marketing and great menu news to come together is what's driving results. And I think to your point, what is giving us a positive baseline momentum in a difficult external environment. And I think that's highlighted by some of the markets that we called out like Germany and Australia, where the external conditions remain challenging, but I think our performance has been really, really strong. Christopher Kempczinski: All I would add to that is it's still a difficult environment and inflation is proving to be sticky. I mean we're expecting to see there's going to be above average inflation next year. You've heard about others referencing what's going on with beef prices. Certainly, we're seeing very, very high inflation around beef prices versus what we're used to historically. And so I think all of that just keeps putting pressure on the industry. And I referenced it in my opening remarks, but it's very much kind of how we're feeling, which is this is an environment where you've just got to grind it out. I mean that was an expression that Ray Kroc always love to talk about. And it kind of feels like that's sort of how we're having to operate, which is just grinding out and getting growth. And fortunately, our system is executing well. We've got good alignment with our franchisees. So I think we're going to continue to do well, but I don't want to minimize some of the pressures as well that exist in the industry today and that we're expecting to continue into next year. Dexter Congbalay: Our next question is from Greg Francfort of Guggenheim. Gregory Francfort: I'm wondering if you can maybe just give some more detail on the beverage tests that you've been running. I think you're running 2 kind of very different tests in terms of breadth of product and including the energy drink and not including the energy drink and just what that sales mix looks like? And if there's any just consumer behaviors that you can call out? Christopher Kempczinski: I'll let Ian start and then I can add. But as we referenced, we're pleased with it. We're not trying to make too much of an inference around what it's going to do from a comp standpoint. It's more about the operations and I think getting a sense of the mix, but I'll let Ian talk about that and then close out anything else. Ian Borden: Yes. Thanks, Greg. Well, look, I mean we're running that test in a couple of regions in our U.S. business. It's about 500 restaurants. I think there is a very purposeful construct to the different lineup. I mean there's some overlap between what the product portfolio in both regions, but there's also some differences. I mean I think as you've heard us talk about before, the beverage test is really -- has come out of the learnings we had from the CosMc's stand-alone restaurants that we stood up last year. That test told us that we could get after the majority of the opportunity without creating a manageable level of complexity that would impact our ability to execute in the restaurant. So I think there are a couple of purposes of the task. One is just to gauge the consumer demand, the consumer reaction, the consumer kind of feedback on the portfolio. One is obviously to test at a little bit greater scale. Our assumptions on kind of the complexity that those lineups are adding to our business manageable. I mean, I think we've seen, from a complexity standpoint, what we expected, which is we're able to kind of manage that in the restaurants. Obviously, the purpose of any test is you're learning and adapting I think we've seen a really positive consumer reaction, both in the portfolio and kind of is it meeting the needs and kind of the on-trend expectations for what consumers are looking for from a beverage standpoint. And so again, early days. And as Chris said, we've got more work to do, but I think we're certainly encouraged by the reaction that we've had to date. Christopher Kempczinski: The only thing I would add is on this test, one of the things that we're also looking at is we're being very thoughtful and purposeful about where we price these products. And we have a variety of different items, but we think the opportunity for us is to be actually able to bring value into this segment as well. And so with our franchisees, we've been very thoughtful about where these products are priced relative to the competitors that would have similar offerings. And I think what we're seeing here is, for us, should we roll this out nationally, being very disciplined on pricing and making sure that we're delivering value on these beverages versus the competitive set is going to be the way that we're successful in this segment. Dexter Congbalay: Next question is from Sara Senatore from Bank of America. Sara Senatore: Great. Just maybe 2 clarifications. The first is just -- on the high-income traffic being up double digits, is that an acceleration from what you've seen, I guess, trying to figure out if there's kind of evidence of trade down happening now? And then on IDL, I know you mentioned strength across all regions, but that China was still seeing some pressure. Does that mean China -- the market was perhaps not positive? I feel like we've seen some signs of improvement being reported from other consumer companies. So I just wanted to understand if China perhaps is an exception in that region. Ian Borden: Sara, it's Ian. So let me try and touch on those 2 things. I think high-income consumer, it's certainly not a change in trend. I mean we've talked pretty consistently for quite a while now about the bifurcated consumer environment in the U.S. And I would just say that the Q3 data only continued to emphasize and maybe even showed that bifurcation, I would call it extending because as we said, low income consumer was down in terms of visits to QSR, high single digit and high income consumer was up high single digits. So that just, I think, is kind of extenuating that bifurcation. Obviously, the whole point of what we're trying to do with value and affordability is make sure we're meeting the needs of all of our consumers and continuing, obviously, to be well positioned on that. I think on IDL, I mean, again, I think on China, nothing new, I think, from what we've been talking about for several quarters. I mean, I think the macroeconomic environment continues to remain challenging in the short-term. We haven't changed our view on the mid, long-term opportunity and our confidence level. And I think as we said in the note, all of the geographic regions in IDL and I would include China in that were positive, at least from a comp sales standpoint. Christopher Kempczinski: Yes. The only thing I would add on China, we're pleased with how the China business is performing. We're still gaining share there. There's just -- there's overcapacity in China and what you're seeing is you're seeing a delivery war that's going on there, which is putting pressure on pricing. Pricing is down in that market because of what's happening between kind of the 3 different delivery guys all duking it out there. And so I think that's -- it's great for consumers. It's putting a pressure on the business. But net-net, as Ian said, we're growing comp sales. We're still on track with where we need to be on new units. It's just -- it's a more deflationary environment in China than I think we would want to see normally. Dexter Congbalay: Our next question is from John Ivankoe at JPMorgan. John Ivankoe: I like the way that you framed Australia value is having -- giving consumers in that market, predictability and confidence. And I did want to put that in the context of the U.S., broadening the typical EVM discount from 11% to 15%, does that give consumers price certainty across that EVM platform? Obviously, it's 30% of your sales, it's very important, whether it's local, regional or national, where consumers can come in and know that they, for example, can get a Big Mac combo meal at a certain price. Do you think having specific price certainty in the U.S. over time to achieve that predictability and confidence is something that perhaps we can migrate the brand to, obviously, with some exceptions, but moved the brand more to kind of a sustainable national pricing type model on the EVM side. Christopher Kempczinski: I think you're exactly right. Part of why we wanted to address the discount on the EVMs is because through a lot of our work over history, I think we've certainly conditioned the consumer to expect that there's going to be a certain amount of value that you get when you go and you buy an EVM item. And as we've talked about before, we had drifted a little bit away from that. And so the move that we did is very much meant to reestablish. And then to the earlier question around whether we expect it to continue, we would expect it does need to continue because it's what the consumer expects. And I think once we've kind of gotten through sort of the medicine they have to take for a couple of quarters to get the incrementality, once you've got that back in place, you don't want to lose it. So I think this was very much meant as an idea to give us that predictable value. And then you're going to have the McValue platform that will pulse in and out with various deals and offers, and that's going to just sort of be something that goes and it evolves over time. But the EVM is that foundation, along with being disciplined, not just your regular menu boards. Dexter Congbalay: Our next question is from Brian Bittner of Oppenheimer. Brian Bittner: Chris, you said in your prepared remarks that while you're taking share in the U.S., the low-end consumer cohort does continue to be down double digits. It's a theme that's been in place for almost 2 years now. And you said you expect this dynamic to linger into 2026. And the question is, at this point, what do you think it's going to take to turn this lowering consumer from a headwind to a tailwind. It seems like that's the main unlock for comps to really inflect. You've thrown a lot of industry-leading value at this low-end consumer, yet they remain pressured, so just additional thoughts on what you think it's going to take into 2026. Christopher Kempczinski: Sure. I think if you think about the low income consumer and you think about the pressures that they face, I mean, right now, you're seeing across the country, rents are at pretty high levels you're seeing food prices, whether it's in restaurants or grocery, you're seeing food prices are high, you're seeing child care is high. There's just a lot of things that when you think about nondiscretionary spend, there's some significant inflation there that the low-income consumer is having to absorb. And I think that's affecting their outlook and their sentiment and their spending behavior, not just in QSR, but across a number of other product categories as well. If you're not in that segment and your higher income, you maybe not -- you don't feel it as acutely, but lower income for sure, you're feeling it acutely. And I think some of what's going on most recently with Snap and other things might be additional pressure on that. So what's going to change, I think, is that consumers will need to feel some relief around cost of living and need to feel like real incomes are growing. And how that changes, I think that's more of a macroeconomic question. There's probably a variety of things that need to happen there. But I think so long as that consumer cohort is feeling like real incomes are under pressure, I wouldn't expect to see significant change there. Dexter Congbalay: Our next question is from Brian Harbour at Morgan Stanley. Brian Harbour: I guess to that point, though, are you seeing yourselves take share across different income cohorts? I mean, do you think that the value push has sort of worked and then I guess more at the higher end, do you think some of the digital initiatives, some of the other product stuff that you've done, have you seen that be effective across different income cohorts? Christopher Kempczinski: Sure. Well, we're gaining share with upper income, and as we referenced, upper income industry traffic is up almost double digits there. And even in that environment, we're gaining share with upper income. And I think there's a variety of things that go into that digital, our marketing programs, the strength of the brand, all of those things are attractive to that consumer. So I think that, that's very much continuing. And then how we think about that over time, value certainly has a play. I think sometimes there's this idea that value only matters to low income. But value matters to everybody, whether you're upper income, middle income, lower income, feeling like you're getting good value for your dollar is important. And so I think for us, continuing to do what we're doing with EVMs, continuing to make sure that our McValue platform is competitive. Those are things that benefit not just the low-income consumer, but they also continue to attract that upper income consumer who is still looking for good value, they just maybe have more discretionary dollars in their pocket that they can go spend. Dexter Congbalay: Our next question is from Lauren Silberman at Deutsche Bank. Lauren Silberman: I have a quick follow-up and then a question. On the high income side, fast casual has been a weaker segment this year, tends to lean a bit more higher income. Is there any evidence of share shift from fast casual into QSR from that higher income consumer? And then if you could just talk about what you're seeing across dayparts. I know you guys have talked about breakfast being weaker. Have you seen any pickup with the everyday value meals? Ian Borden: Well, Lauren, it's Ian. Let me maybe just start with the higher income consumer, and I can let Chris do the second part there. But look, I think, as I said earlier, we've been talking about the bifurcated consumer in the U.S. for quite a while, and we've been talking, I think, about the strength of the higher income consumer. So I don't think we've seen any fundamental change in trend with that consumer. As you said, I know a number of others have talked about seeing some weakness there. Certainly, as Chris said, we continue to gain share with that consumer. And so I think -- as we've talked about a fair bit today, our goal is to make sure we're positioned strongly on value and affordability for all 3 consumer groups. I think we did a really good job on that from the McValue platform standpoint and the loyalty and kind of digital offer component. But as you've heard us talk about, we felt we were missing the strength of value that we needed on that core menu, the 60% EVM being half of that. So that's what we're now trying to address. And as we've talked about before, I think our unique positioning is that we've got the financial strength to make these types of investments when maybe others are going to have to be a bit more defensive. So I think we're doing the right things for the consumer. And as you've heard both Chris and I say, I don't think we see any near-term kind of change in the environment. And so we just want to make sure we're well positioned to do as well as we can in a kind of a continued external challenging landscape. Christopher Kempczinski: And then on your breakfast question, we have talked about in the past how breakfast tends to be one of the more -- well, it tends to be the most economically sensitive daypart. It's an easy daypart to either skip the meal or to eat the meal at home. Breakfast continues to be under pressure as a daypart industry-wide. We're holding share in breakfast. So we're doing okay in that segment, but we are still seeing that daypart is under pressure for the reasons that we've already talked about. And when that changes, I think that goes with the broader macroeconomic things that we've talked about. Dexter Congbalay: Our next question is from Jeff Bernstein over at Barclays. Jeffrey Bernstein: Great. Just thinking about that value push maybe from a 30,000-foot view, I know 12 months ago with signs of a U.S. economic slowdown, we assumed fast food broadly and McDonald's specifically would benefit on both ends of the consumer spectrum, retaining the low income with value and perhaps seeing trade down from middle and upper income. Obviously, that didn't transpire from much of this year. But it seems like it's set up well as we look to '26. Wondering if you believe it's reasonable to assume that we could see this play out, especially as you now have a more compelling value offer to bring back the lower income, and you're lapping that weakness now. And on the other hand, again, signs of middle and upper income perhaps being a little bit more vulnerable and trading down. So perhaps on a 1-year lag, but do you see that scenario playing out where you could actually benefit from both ends kind of converging back on the quick service segment. Christopher Kempczinski: I'd love that scenario to play out. I'm not going to predict whether it does play out that way. I think what we've said, and I would reiterate on this call is McDonald's, its -- value is in our DNA. And we absolutely are going to make sure that we are protecting our leadership position in value. And you've seen us take the actions where we felt like we had some opportunities there. We're not going to lose as a brand, we're not going to lose on value. And so what you outlined is maybe one scenario. Again, that would be great if it played out that way. But if there's any opportunities for us, it's not going to be because we were offsides on value. I think we learned our lesson on that, and we're going to make sure that we're set up well for 2026 on that. Dexter Congbalay: Our next question is from Andy Barish over at Jefferies. Andrew Barish: Yes. I actually wanted to kind of dovetail on that question. And I was intrigued by your comments, Chris, on the inflationary environment, which may continue to bring about difficulties in margins. How do you see that kind of playing through to the industry promotional environment in '26, which has kind of been relentless for the last 18 months or so. Christopher Kempczinski: I think it's going to continue to be a kind of -- you're trying to thread a needle here because you're trying to be able to push through some pricing to offset the inflationary pressures that are going to continue. At the same time, you've got a consumer, particularly a low-income consumer, who's really resistant to any additional pricing. And so then you've got to try to figure out what is that sort of right combination there where you're able to get some pricing to offset that inflation at the same time that you're delivering a great value message. And there's no easy answer to it. I think everybody in the industry is trying to figure that out. But the worst answer would be to be losing traffic because you're just not getting people through the door. That's not going to be a winning formula. So I think different people will approach it different ways. You've certainly seen an uptick in a lot of digital offers as well. The challenge with that, of course, is that you don't have the majority of your customers on the digital app. And so that can only go so far. So I think different players are going to have different approaches. We've obviously got our plan on how we plan on approaching it, but I do expect you're going to continue to see people are going to need to be having compelling value offers because they're also going to be trying to figure out ways to be capturing some of the pricing due to the inflation. Ian Borden: And the only thing, Andy, maybe I would just add to what Chris said, and we touched on it on an earlier question is I do think consumers are looking for a little bit of predictability. And so I think there will be the tactical price wars or digital offers or kind of short-term efforts by people to kind of win in a difficult environment. If you believe the environment is going to continue to remain challenging for a while, which I think certainly as good as our crystal ball is, we would say that certainly seems to be what's on up over the next at least several quarters. I think the predictability is really important, which gets back to certainly, our view, which is why platforms like McValue and having predictable components to that, the EVM which is a, again, a more predictable outcome for consumers is really important because I think the certainty and the predictability, I think nothing frustrates consumers more right now when they come in and they don't get what they expect. So as Chris said, we're going to make sure we're positioned to win across all the spectrums of value and try and make sure we do that in a way that has a level of consistency and predictability for our consumers. Dexter Congbalay: Our next question is from Jon Tower at Citi. Jon Tower: Great. Chris, you had mentioned in the prepared remarks, the idea that you're thinking about expanding the beverage platform, the CosMc's stuff globally or beyond the U.S. And I know in the U.S. you had also commented on the idea of keeping that kind of value-centric price point here in the states. So how are you thinking about expanding it globally? Obviously, still in test now, but I think outside the U.S., the platform is positioned differently to consumers across different markets. Are you continuing to think about that in the same manner if you were to roll CosMc's globally, or do you think you'll kind of use it as a value platform across the globe? Christopher Kempczinski: So we will be testing what we've got in the U.S. You're going to see that in some international markets where it will get tested. It may look a little bit different from what we're doing in the U.S., but we'll test that and see how that resonates in a few other markets. And let me just be clear, beverage is an exciting incremental opportunity for us that we like because of its ability to drive incremental traffic. It's check add-on. It's got a lot of benefits. And to do that, it needs to be also I think priced at a competitive value for us to win. We're not seeing it though as a value platform per se. And so when we talk about what it's going to be in the U.S., it's very much designed to drive margin. It's very much designed to drive check. But how we do that is also being mindful about where it's priced vis-a-vis the competitive set. Well, I think, take that same approach as we test it in some of the international markets and whether that rolls out beyond the U.S. or not will obviously be dependent on how it performs in some of those other markets. Dexter Congbalay: Our last question today is from Andrew Charles from TD Cowen. Andrew Charles: Ian, can you talk more about the U.S. McOpCo margin contraction in 3Q and help unpack as a bigger headwind this quarter was general inflation for customers seeking lower margin value. And also, if you can just touch on your outlook for beef within that response as well. Ian Borden: Sure. Andrew. Well, look, I think as you've certainly heard from me say, pretty consistently. I mean, obviously, the kind of fundamental driver of margin growth is strong top line growth. And we see -- we need a certain let's call it, minimum level of top line growth to drive margin accretion. And while we had a good quarter in the U.S. at 2.4%, I would just say it wasn't enough top line growth in the quarter to offset some of the inflationary pressure we saw in areas like wages and food and paper costs. So I think as you've heard, both Chris and I talk about, I mean we have no change in our view that we're going to be able to drive margin accretion and margin growth over time as we drive that top line growth. But obviously, we continue to operate in an environment where sales have been a little bit more subdued, and inflation has been a little higher than what I'll call kind of the historic norm. I think on food and paper in the U.S. We've said this year, we expect kind of our basket of food and paper inflation to be in the low to mid-single-digit range for the year. Obviously, beef inflation is up. a fair bit. I think the strength of our supply chain means our beef costs are, I think, certainly up less than most. They're still elevated, but I think our basket of goods means we still have confidence in that kind of low to mid-single-digit range. I mean, obviously, what we're trying to focus on, as we've talked a fair bit about today is how do we make sure we've got that baseline momentum, obviously, value and affordability across all parts of the menu is a really important component of that. And so that's -- I think what we're focused on is kind of getting that stronger top line and growth in place as we look forward. And as we said earlier, certainly, we've had a decent start to Q4, and I think we're getting through things like our EVM relaunch, some of those may be missing components back firmly in place. Dexter Congbalay: That concludes the call today. Thanks for joining us. If you have any follow-up questions or would like to have a meeting, please send me an email, and we'll do so. Thanks again, and have a good day. Operator: This concludes McDonald's Corporation Investor Call. You may now disconnect, and have a great day.
Fabian Joseph: Hello, everyone. This is Fabian Joseph from Investor Relations. On behalf of my entire team, I would like to welcome you to our Q3 2025 conference call. Joining me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk; and our CEO, Americas, John Ganem. They will guide you through the presentation. And afterwards, we're happy to answer your questions. [Operator Instructions] With that, I'd like to hand over to you, Guido. Guido Kerkhoff: Yes. Thank you, and welcome to our Q3 '25 conference call. Looking back at a quarter characterized by a persistently challenging market environment and decreasing steel prices in the U.S. Despite these developments, we delivered another solid performance. This confirms our strategic path and our successful development. I will now begin with the financial highlights of the quarter. Shipments came in at 1,440 tonnes, showing a slight year-over-year improvement. This development was mainly driven by the continued positive performance of our segment Kloeckner Metals in Americas but still supported by shipments in our segment Kloeckner Metals Europe, which increased slightly, which is pretty different to what the market outcome overall is in Europe, but we could increase slightly after a couple of quarters where we were shrinking. Sales came in at EUR 1.6 billion, which is a slight decrease year-over-year despite the positive shipment development. This was due to a lower average price level compared to the same quarter last year. We achieved a considerable year-over-year increase in gross profit, whereas gross profit of last year's quarter was particularly affected by windfall losses due to the significant steel price correction in Q3 '24. Gross profit margin also improved considerably compared to the previous year's quarter. EBITDA, therefore, before material special effects came in at EUR 43 million, a considerable increase year-over-year and results in line with our guidance. Despite the ongoing challenging market environment in Europe, our segment Kloeckner Metals Europe generated a positive EBITDA contribution for the first time since 2023. We'll take a closer look at the segment's performance afterwards. Due to a temporary net working capital increase, especially at our segment Kloeckner Metals Americas, operating cash flow came in negative at EUR 118 million in the third quarter. I would like to highlight that this negative OCF is driven neither by weak operating business nor by higher inventories. This development is rather driven by trade payables and trade receivables to some degree, which we expect to reverse in Q4. It was largely driven by orders on material end of Q2 where the payables and the cash outflow came in, in Q3. So Q2 was comparatively a bit overstated and Q3 is weaker. So, you should look at the quarters rather together than just look on Q3. And you'll see in our guidance for Q4, it will reverse and will be on a track like in our guidance so far. Consequently, our net debt financial -- net debt increased compared to level in Q3, but will come down then in Q4 again. Let's have a look at our performance in Q3 '25 by segment. Now segment Kloeckner Metals Americas shipments increased slightly year-over-year in Q3. After reaching a record level in Q2, shipments decreased slightly quarter-over-quarter, which is largely attributable to seasonality. Nevertheless, the volume was the highest we've ever achieved in the third quarter and would be even stronger if we excluded shipments from our divested Brazilian entity in Q3 '24. We're moving on a constant high level, demonstrating that our North American growth strategy really works. However, due to the lower average price level year-over-year, sales Q3 came in slightly below previous year's quarter. Prices have decreased significantly compared to the temporary repeats in Q2 and remain volatile. EBITDA before material special effects came in at $44 million in Q3, which is a considerable increase compared to last year's quarter. In our segment Kloeckner Metals Europe, shipments came in slightly increased sales slightly down compared to previous year's quarter. For the first time since '23, our Kloeckner Metals Europe segment achieved a positive EBITDA contribution despite the persistently weak demand and increased economic uncertainty. This clearly demonstrates that our consistent strategy implementation and optimization efforts are really paying off strongly in the U.S., but even to see in Europe. We're on a better track and again, our self-help measures help us to get out of it. Now let's have a look at our strategy implementation during the third quarter. We further intensified our focus on higher value-added and service center business as becoming the leading metal processor and the leading service center company in North America and Europe by 2030 is our strategic goal. First, let's have a look at our segment Kloeckner Metals Americas. United States, we announced divestments of 8 distribution sites of Kloeckner Metals, 7 of which we intend to sell to Russell Metals and 1 to Service Steel Warehouse. For the 7 sites intended to be sold to Russell, we agreed on a purchase price of approximately USD 119 million based on a net working capital as of June 30, '25, which would result in a book profit of over $20 million. The final purchase price remains subject to closing net working capital and other normal course adjustment. We've mutually agreed not to disclose details of the sale of Service Steel warehouse. The fact that we are able to sell business at a premium that are on group level on the lower end of profitability demonstrates the underlying value of our assets. In the fiscal years '23 and '24, the 7 sites contributed an average annual EBITDA before material special effects of around EUR 9 million per year to our consolidated financial statements. As this number roughly matches the future EBITDA contribution planned internally for these sites, we believe this should represent a performance indicator for them as well. Divestment not only allows us to reduce our group debt level but also creates the opportunity to reallocate capital towards our higher value-added and service center business. We expect to close the deals in December of this year. Segment Kloeckner Metals Europe, we further expanded our defense and infrastructure footprint. We received an official certification for processing armor materials for the German Federal Armed Forces at our site in Kassel, Germany. By doing so, we complete our existing approval for Ambu Steel, successfully integrating the company after its acquisition earlier this year. With that, we're preparing for upcoming large-scale defense orders in Europe by leveraging our capabilities and also our financial strength, providing a clear advantage over smaller competitors. Now let's have a closer look at our improved earnings profile following the closure of 8 U.S. distribution sites. Following recent successes, the U.S. divestments marked the next step in our transformation to the leading service center company in metals process in North America and Europe, positioning us for higher profitability and sustainable growth. Over the past years, we have strengthened our higher value-added and service center business to lower our exposure to steel price developments and thereby reduce the volatility of our results while increasing our underlying profitability. We improved our earnings profile by increasing the share of our higher value-added and service center business. The acquisition of specialized North American companies such as NMM, IMS, Sol Components and Amerinox enhances our capabilities in precision metal processing, component supply and service center operations, making them strategically valuable additions. NMM complemented our already existing footprint within the automotive industry in North America and also gave us access to electrical steel. With IMS, we significantly expanded our metal fabrication business in the U.S. Sol Components is a U.S. market leader in integrated structural solutions for solar installations. The acquisition positions Kloeckner Metals to play a bigger role in North America's transition towards renewable energy. Further, we extended our service portfolio with Amerinox and polishing and high-drose finishing in order to support the development of more competitive global supply chains. Also, we divested part of our European distribution business, which by the time of the divestment accounted for 10% of group sales, but 20% of our FTEs. Our latest achievement on our way was the aforementioned divestment of the 8 sites in the U.S., with which we focus on selling distribution sites with a low EBITDA contribution throughout the cycle. Our portfolio optimization is complemented by organic initiatives. Targeted investments, we have developed selected sites from sole focus on distribution to high-quality processing and metal working. Our strategic shift towards higher value-added and service center business is clearly reflected in the numbers. 2019, 63% of our sales came from these businesses. And as of the first 9 months of '25, the share has increased to 81%, a significant increase of 18 percentage points. If we exclude the sites in the U.S. that we've agreed to sell, the sales share of higher value-added and service center business would be at 87%, an increase of 24 percentage points compared to the starting base in 2019. These businesses offer higher profitability while significantly reducing our exposure to steel price developments together with the volatility of our results. With that, over to you, Oliver, for further financial insights. Oliver Falk: Yes. Thank you. As Guido said at the beginning, steel prices in the U.S. were subject to a considerable decrease during the quarter as illustrated in the upper part of the slide. At the beginning of the year, hot-rolled coal prices in the U.S. increased significantly following the introduction of new tariffs. After reaching a temporary peak in the second quarter, they started decreasing due to weak underlying demand. In Europe, new tariffs are currently awaiting approval by the European Commission. The measures will have the tariff-free import quotas and double tariff rates for quantity exceeding these quotas. Prices could therefore continue to increase. As part of our local-for-local business model, we do not import significant volumes from third countries. Therefore, we do not expect direct effects from those tariffs. Coming to our EBITDA before material special effects, we achieved a considerable increase year-over-year. In total, we generated EUR 43 million in the third quarter. In the first 9 months of '25, EBITDA before material special effects came in at EUR 150 million, which also represents a considerable increase year-over-year. As Guido mentioned beforehand, our strategy continues to focus on higher value-added and service center business with increased profitability and reduced dependence on the volatile steel prices as demonstrated by our latest divestment. Our net working capital came in elevated quarter-over-quarter. According to IFRS 5, positions linked to the planned sale of 8 distribution sites in the U.S., amounting to EUR 68 million, are already excluded. The temporary high net working capital, especially in the segment Kloeckner Metals Americas, is the main driver for our negative OCF of EUR 118 million in the third quarter of '25. Nevertheless, we expect a significantly positive operating cash flow for the full year '25, driven by a strong cash flow in quarter 4 of this year. As part of our operational excellence pillar within the Klöckner & Co, leveraging strength Step 2030 strategy, we continue to leverage our extensive expertise in automation and digitalization. With our efforts, we have been able to increase the number of our digital quotes by 8.9% year-over-year in the first 9 months of '25. Let's take a look at our shipment sales, gross profit, and gross profit margin for the third quarter of '25. Shipments came in slightly above previous year's quarter, mainly driven by our segment Kloeckner Metals Americas. Sales decreased slightly year-over-year due to the overall lower average price level and came in at EUR 1.6 billion in quarter 3. Gross profit came in at EUR 295 million in quarter 3 after EUR 262 million in quarter 3 2024, a considerable increase year-over-year. Also, gross profit margin increased considerably year-over-year from 15.9% to 18.3%. We will now turn to the EBITDA development in quarter 3. The volume effect was positive, contributing EUR 5 million in the third quarter as shipments increased slightly year-over-year. We also benefited from a positive price effect of EUR 36 million compared to the same quarter last year, which contributed significantly to the result, as negative windfall effects of last year's quarter have not recurred. OpEx increased by EUR 16 million year-over-year, mainly driven by higher personnel and transportation costs. We experienced negative FX effects of EUR 3 million year-over-year, mainly driven by the weaker U.S. dollar, which impacted the translation of earnings from our U.S. operations. Consequently, EBITDA before material special effects came in at EUR 43 million. Material special effects of minus EUR 7 million mainly relate to restructuring initiatives. Therefore, EBITDA after material special effects came in at EUR 36 million. We are now coming to cash flow and net development. In the third quarter of '25, we had a net working capital increase of EUR 144 million year-over-year, mainly due to trade payables and trade receivables in our Americas segment. I would like to highlight again that this net working capital buildup is temporary and will reverse in quarter 4. Taking into consideration interest, tax payments, and other items totaling to EUR 10 million, our cash flow from operating activities came in negative at EUR 118 million in quarter 3. Including net CapEx of EUR 23 million, free cash flow was negative at EUR 141 million. Let's have a look at our net financial debt. Positive effects were visible for leasing and FX translation. Taking our negative free cash flow into account, our net debt consequently increased from EUR 870 million at the end of the second quarter to EUR 1.03 billion in quarter 3. Nevertheless, we continue to possess a diversified financing portfolio with a total volume of EUR 1.3 billion, excluding leases, with more than EUR 0.4 billion unused lines available. In July 25, we renewed the European ABS program ahead of schedule, extending it until 2028 with improved terms and an adjusted volume reflecting the sale of parts of the European distribution business. This improved our maturity profile further. Additionally, we expect a significantly positive operating cash flow for the full year '25, which will be further supported by the proceeds from the sale of the 8 U.S. distribution sites, leading to a reduction in net debt. I'll now hand over to John to have a closer look at our end markets in North America. George Ganem: Thank you, Oliver. Let me start with a general overview of the market situation in North America. The U.S. economy is forecasted to have expanded again in the third quarter of 2025, but the forward outlook remains somewhat uncertain and difficult to assess. Stubborn inflation, weak consumer confidence in a slowing labor market, all pose risks for short-term economic growth prospects. Despite a still expanding economy, the metals-intensive manufacturing sector continues to face significant pressure, with the ISM index indicating contraction now for 8 consecutive months. As such, demand for metals in both the U.S. and Mexico has been constrained over the first 9 months of 2025, and this is likely to persist through the end of the year. This is evidenced by the latest industry benchmark third quarter service center industry shipments declined by 2.9% year-over-year and 4.3% quarter-over-quarter. These negative trends are likely driven by aggressive destocking across most metal supply chains as OEMs and other major steel buyers work to rebalance supply better align with expected future demand. As a result, we now expect North American real metals demand, excluding the temporary impact from destocking, to be generally flat year-over-year. Now, looking at the expected development in specific market segments. Construction activity is moderating, and both residential and nonresidential building square footage are forecasted to be generally stable to slightly down in 2025. However, nonbuilding investment and infrastructure are forecasted to grow strongly and will continue to provide an offset to the flat year-over-year trends in the building sectors. All segments are expected to return to a positive growth trajectory heading into 2026 by lower mortgage rates. Manufacturing activity continues to be under pressure, as previously mentioned. We expect the situation near term. New orders for industrial and off-highway equipment are expected to be down up to 5% in 2025, depending on the specific segment. However, current forecasts from key large OEMs are actually improving modestly in the second half of 2025 as supply chains now appear well-balanced after a significant destocking cycle that began in the second half of 2024. Trade policy clarity and lower interest rates should help these key steel-consuming segments regain even more positive momentum in 2026. Turning to transportation. This segment has been the most impacted by changing trade policy as well as the removal of EV tax credits. As a result, North American production has been declining and is now expected to be down by approximately 1% year-over-year in both the U.S. and Mexico. Auto sales have been fairly resilient, so we expect positive growth in production to return once automakers can adjust tariff-impacted supply chains and implement new production strategies in response to changing consumer demand and trade policy dynamics. On the defense shipbuilding front, activity remains very positive with Klöckner's current defense programs set to grow strongly with large contract commitments recently awarded. We also continue working closely with key mill partners to position ourselves strategically to support and benefit from what is expected to be a massive increase in defense shipbuilding investments over the next decade. Demand from appliance, HVAC, and electrical, which are key segments for KMC Americas, has come under some pressure in Q3 2025 due to destocking after holding somewhat steady through the first half of the year. For the full year, these segments are now expected to be stable to down slightly. We'll note, however, that 2024 was a very strong year for these industry segments, meaning that despite the flat growth expectations for 2025, overall demand will remain at strong levels in absolute terms. Energy continues to be the most active steel-consuming segment with positive growth expectations for extraction activity and a solid pipeline of both renewable power and power transmission projects. While renewable growth may come under pressure in future years due to recent changes in government policy, it continues to be a significant growth driver in 2025. Additionally, power transmission-related growth is expected to remain extremely strong and should be up approximately 20% year-over-year. Modernizing and expanding the North American transmission infrastructure is critical to support the expected demand increase for electricity across North America, especially in support of data centers. I will end with a few final comments. Despite short-term market demand headwinds, the Klöckner Americas business generated record 3-quarter shipments, as Guido previously mentioned, as we continue to grow and gain share in a market where service center shipments have been consistently declining. Excluding discontinued operations, our third-quarter year-over-year growth was greater than 6%. These strong growth trends are driven mainly by large energy projects and new automotive and industrial contractual programs, which required a prebuild of inventory in the late second quarter. This caused a temporary increase in third-quarter accounts payable and receivable, which both Oliver and Guido mentioned earlier, and this negatively impacted operating cash flow temporarily. The new projects and programs are now ramping up to full production, and inventories have already been reduced by greater than 10% and more significant reductions are planned. This positive development will generate a strongly positive operating cash flow in both 4Q and the full year, as previously mentioned. So, in conclusion, despite recent market challenges, we remain very optimistic about the long-term demand fundamentals in both the U.S. and Mexico. Our positive and resilient year-to-date results are clear proof that our high value-add investment strategy is working and has allowed KMC Americas to deliver a solid overall performance despite weaker-than-expected demand and continued price volatility. We are confident our positive results will continue and even accelerate as we head into 2026 as already approved investments come online and begin contributing in a more meaningful way. I will now turn it back over to Guido for some final comments. Guido Kerkhoff: Thanks, John. Overall, here in Europe, short-term, we don't see a significant change in expected wheel steel demand in Europe. Therefore, we reiterate stable to slightly negative development of around minus 1% in '25, which is unchanged from our last conference call. However, if we take a look -- a slight look into '26 and the sentiment and outlook there, based on the slight improvements we've seen on our self-help measures and growing, it seems that the underlying sentiment here in Europe and especially in Germany is slightly improving and doesn't continue to be as negative as we've seen. So it might be that we've seen the bottom right now and can start to develop from the market and especially from our own position as it seems we are slightly growing again here on volumes. Together with that, as we mentioned before, the European Commission proposed doubling import tariffs on steel and reducing the duty-free import quarter. Approval from the European Parliament and EU member states is still pending, but let's continue, therefore, with an outlook on our core industries, but the price hikes that are coming out of that and the stabilization of the tariffs should help on the market to develop a bit better going forward as well. And now coming to the sectors, starting with construction industry. We continue to expect a broadly stable development into '25, consistent with the outlook provided on our last call. Effects of past monetary easing are beginning to feed through while weaker economic conditions continue to weigh on construction activity. However, structural growth drivers remain supportive of German infrastructure spending, providing mid-term growth. Manufacturing, machinery and mechanical engineering continue to expect a slightly negative sector outlook for '25, which is consistent with the Q2 call, reflecting market contraction as uncertainty and softer external demand weigh on activity. Tariffs and ongoing competitive pressures from Asia are dampening production and investment, particularly in Germany's export-oriented machinery industry. Monetary easing provides some short-term support, but elevated uncertainty limits firms willingness to invest. Germany's fiscal stimulus package and rearmament initiatives will support medium-term growth in defense-linked sectors. We continue to position ourselves to benefit. Transportation. Let's first focus on automotive sector, where we also see no major change since our last call. We continue to expect slightly negative development in '25 uncertainty remains elevated and consumer confidence at low levels. The export ban on the next period ships from China pose a threat to supply chain with the potential for short-term production costs and rising input costs in the automotive sector, downside risk to our outlook. Now coming to shipbuilding. While the outlook for the commercial shipbuilding segment improved slightly compared to last quarter, substantial upturn is not expected until late next year. For the great ship sector, we are well-positioned to benefit from upcoming defense-related demand, but no notable uptick is expected before late '26, and we anticipate German defense spending will begin to increase. Household and commercial appliances segment with marginal impact on our European businesses, no major changes since the last call and continue to expect a slightly negative development. The energy industry, this sector is expected to have constant development in '25 with no major changes since our last update call. However, long-term demand remains supported by the electrification of transport and heating. Let's now turn to the financial outlook for the full year '25. We still expect EBITDA before material special effects to come in between EUR 170 million and EUR 240 million, a considerable increase year-over-year. The guidance is unchanged compared to our Q2 call. However, given the performance that we are now on the lower end of the guidance, we would expect for the full year in line with the quarter to be there. Further, we continue to expect operating cash flow to be significantly positive, driven by a strong operating cash flow in Q4. We're now happy to answer your questions. Fabian Joseph: [Operator Instructions] There's no questions. So, I will then give to it Guido for final remarks. Guido Kerkhoff: Yes. Thank you all for listening. It obviously looks like we've answered everything in advance. But in case it is not, don't hesitate to call us or Fabian and the whole IR team. So, thank you very much, and talk to you soon.
Operator: Greetings, and welcome to the Orion S.A. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Chris Kapsch, Vice President of Investor Relations. Please go ahead. Christopher Kapsch: Thank you, Carrie. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our conference call to discuss third quarter 2025 earnings results. Joining the call are Corning Painter, Orion's Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. We issued our third quarter results after the market closed yesterday, and we have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call. Before we begin, we are again obligated to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, November 5, 2025. Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations. All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck. Any non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP. And with that, I will turn the call to Corning Painter. Corning Painter: Good morning. Thank you, Chris, and thank you all for taking the time to join our conference call. Before getting into the Q3 review, I'm excited to announce that we've hired a new CFO, a replacement for Jeff, who previously announced his intention to retire. The formal announcement will be made shortly. We had a strong slate of candidates, both internal and external. We chose a candidate with 30-plus years of financial and business leadership experience, including the past 15 years in the chemical industry. He will start on December 1. Jeff has agreed to stay with Orion through the end of the year, and will be available for further transition support through Q1 2026. In today's call, I'll touch on Q3 results at a very high level, not the performance we expected, and certainly, we possessed much greater earnings power. Still, there are some constructive points for investors to consider. Then I want to discuss the business environment, including recent headwinds. Cutting to the chase, our biggest challenge has been soft demand in our key markets. Various Specialty end markets are being impacted by global industrial activity malaise as reflected in soft PMI readings. In our normally resilient Rubber segment, and despite solid tire sell-through, tire production in our key markets is down. When compared to what we would consider more normalized levels, tire production in the U.S. is down about 29%, and the decline is 20% across Europe over the same time period, but closer to 35% in Western Europe. While there are reasons to believe demand will inflect positively, we are in no way counting on improved conditions. We are taking action based on the current reality. Accordingly, we're continuing to focus on self-help actions, the things we can control, some significant, that are intended to improve Orion's structural cost and overall competitiveness. I'll discuss more on this shortly. One key goal of these efforts is to ensure the company is generating positive free cash flow, should the headwinds persist. I'll then hand the call to Jeff, who will review the third quarter financial results in more detail and discuss our free cash flow, [ revised ] guidance and some other items. Then I'll have some concluding remarks before opening up the call to Q&A. On Slide 3, we broadly touch on the factors contributing to our Q3 performance. Adjusted EBITDA of about $58 million was slightly better than what we had conveyed in our mid-October preannouncement, but still well below expectations. The largest factors were reduced Rubber segment demand in key Western regions, soft premium Specialty markets and fixed cost absorption variances across both segments, resulting from inventory control efforts. Because of lower oil prices, we also absorbed another inventory revaluation in the third quarter. Notably, our operating teams again delivered strong plant reliability throughout the third quarter. The sustained improvement in our operating performance is beneficial on a number of fronts, which I'll touch upon in a moment. In our Rubber segment, our customers have been feeling pressure from elevated levels of imports. Tire imports, coupled with surplus channel inventories, have affected their production rates, and thus our carbon black demand. Meanwhile, overall industrial activity softness has weighed on our Specialty business, and particularly end markets that usually consume our highest margin grades. In terms of the specific impact of this on Orion, remember, we are -- historically, we've been over-indexed to both Western markets as well as to premium tire makers. While beneficial in prior cycles, this has not been ideal during 2025, but there are signs of change. Tier 1 players are adjusting their strategies to adjust -- to defend share, including more innovation at the higher end, plant modernization efforts and more vigorously promoting their second-tier brands. The most recent 232 proclamation is another positive. Bigger picture. Western markets have been structurally dependent on tire imports for many years, if not decades, but at like half the tire sell-through at most, not the 70-plus percent from which imports have recently been seen. As the channel rebalances towards historically more normalized level of imports, we will be very well positioned to benefit from a reversion in demand for our carbon black. In our Specialty segment, we have disproportionately deployed resources to drive customer qualifications with some of our newest and most differentiated conductive carbon products, and these efforts are bearing fruit. On this slide, we highlight a couple of qualifications now in place, with leading supply chain players in both the high-voltage wire and cable market and the battery energy storage space. Both applications are placed on the strong data center demand growth for power. This conductive portfolio, including our high-purity acetylene blacks, is our fastest-growing group of products, and their potential relevance in applications beyond traditional EV batteries is particularly encouraging. On Slide 4, we share some updated data related to the key tire end market. We surmised the monthly import data for July was not unnoticed, given the volatility, there's one data point spurred. Unfortunately, this is still the most recent U.S. import data available because of the government shutdown. Parsing this by category, one sees the largest contributor to the July increase was substantially higher truck and bus tire imports, which surged over 50% year-over-year in the month of July. We point this out because this import surge could reflect an effort by certain exporting countries to beat impending tariffs. Thailand, for example, is the largest exporter of truck and bus tires to the U.S. That country's export data shows tire exports to the U.S. declining in August, the month when the country tariffs went into place for Thailand. Meanwhile, the U.S. just invoked a new 25% Section 232 tariff on diesel truck parts that will unequivocally include truck and bus tires as of November. As Section 232 proclamations are uncontested, they should prove durable, and they supersede any country-specific reciprocal tariffs. In Europe, the tire industry continues to believe the EU's investigation into exports by China into that region will result in an initial finding of dumping in December with some retroactive implications. Preliminary U.S., Canada and Mexico negotiations have begun around the USMCA trade agreement, which is poised for a reset effective July 1, 2026. As a reminder, Canada and Mexico are both net exporters of tires and carbon black to the U.S., and Orion does not have any production in either of these 2 countries. Finally, we continue to believe the millions of dollars of capital commitments from major tire companies, focused on adding net unit capacity and modernizing existing production facilities, bodes well for North American fundamentals over the next few years. The implied production capacity growth of 3% through 2030 would be helpful, but their reshoring intentions are more telling. And obviously, the normalization in tire local production rates would be a more substantial driver of an earnings recovery for Orion. On Slide 5, we highlight actions that we have taken or are taking to navigate the current environment, 3 points here. First, while we believe tire manufacturing will rebound, we are not assuming any recovery in our key end markets. Second, to enhance our competitiveness, we're implementing actions to further improve Orion's overall cost structure. Last quarter, we announced 3 to 5 underperforming production lines were being rationalized. Those actions will take place by the end of the year. We are looking more creatively at further optimization moves within our production network. Third, we've also reexamined our non-plant headcount, work processes, engagement with outside contractors, consultants, the company's aggregate discretionary spend, amongst other things, and are in the process of further rationalizing costs across the board. Savings from this competitiveness effort will start to build in the current quarter and achieve a run rate savings in mid-2026. We'll share more on the expected benefit when providing next year's guidance in February. In parallel to this competitiveness issue, we're also taking actions that benefit cash flow now. A highlight for sure is the sustained improvement in our overall plant operating performance. This helps on a number of fronts. In addition to improved on-time customer service levels, better quality and reduced scrap, we're also able to comfortably run our business with lower inventory levels, which in turn unlocks working capital. You can see the progress here in the past 2 quarters, and we expect a strong seasonal Q4 release, including, but not limited to, receivables, which should enable working capital to be a source of cash by approximately $50 million in 2025. The improved operating performance at our plant reflects our organization's focused efforts on this front, but it's also a function of our having worked down a backlog of previously deferred maintenance projects. With the improved operating performance and with 3 to 5 fewer lines competing for maintenance capital, we'll be able to further prioritize our maintenance spending and focus that spend on projects that ensure reliability at our most important production sites. This all feeds into our conviction around free cash flow generation despite the decline in EBITDA. Jeff will touch upon cash flow in more detail after his Q3 review. With that, I'll turn the call over to Jeff. Jeffrey Glajch: Thank you, Corning. On Slide 6, we show the overall company performance, both year-over-year and sequentially in the table, and compared with last year in the EBITDA bridge. Revenue was down 3% compared with last year despite 5% higher volumes. This was mostly a function of the contractual pass-through of lower oil prices, which have declined progressively throughout the year. Gross profit was 20% lower compared with last year despite the higher volumes. The most meaningful volume gains occurred in our lowest margin markets, while volumes declined in our more profitable Western regions. As a result of this dynamic, the lower demand in key regions and associated adverse fixed cost absorption were the biggest drivers of the profitability decline. The fixed cost absorption had an effect of improving our working capital and increasing our free cash flow by reducing inventories. Also, an inventory revaluation tied to lower oil prices impacted gross profit as did adverse pricing. Finally, we had some favorable one-offs last year that did not repeat. On Slide 7, the Rubber business KPIs were directionally consistent with the overall company performance. Volumes were up 7%, but revenue was lower due to the oil-related pass-throughs. Gross profit declined compared with last year, primarily a function of the adverse geographic mix, reduced fixed cost absorption in key Western regions, pricing and customer mix as well as the aforementioned inventory revaluation. Higher volumes in the Asia Pacific and South American regions were related to our improved operational performance and annual contract outcomes, respectively, but these gains contributed minimally to EBITDA because our high-margin regions experienced lower volumes. Compared with last year, costs increased due to inventory-related cost absorption, oil price-driven inventory revaluation and other timing effects. Slide 8. In Specialty, we had year-over-year and sequential volume gains, but the improvement was skewed towards lower-margin applications and products. In the coatings market, for example, a premium segment, demand was impacted by soft OEM vehicle builds and particularly with dispersion houses that can serve as swing capacity for the major coating companies when demand is stronger. More generally, we believe hesitant customer demand behavior, including continued just-in-time order patterns, reflect overall uncertainty. The biggest cost factor in Specialties EBITDA bridge was the adverse fixed cost absorption, largely a function of our inventory control efforts. On Slide 9, we touch on a few other noteworthy items in the quarter. We recorded an $81 million noncash goodwill impairment charge. Our book value, which includes goodwill, is compared to the implied value of those assets when considering our enterprise value. On a positive note, we recovered $7.3 million of the 2024 fraud-related losses through legal actions and around $11 million to date. We continue to aggressively pursue recovery through a variety of legal means and insurance coverages. Finally, we completed an amendment to our credit agreement during the quarter, which increased our RCF capacity back to its prior level, expanded our bank group and gives us more overall flexibility in navigating the current business environment. On Slide 10, we depict our latest 2025 guidance including, the EBITDA range conveyed in mid-October and the corresponding adjusted EPS expectations. Reflecting our current EBITDA guidance, along with better visibility on our progress with our working capital efforts, we expect positive full year free cash flow in the $25 million to $40 million range. Slide 11 shows our historic capital spending, including spending expectations for 2025. Notably, we do not have a figure for 2026 on this slide as we anticipate updating investors on this spend when providing a broader outlook in February. One fluid aspect is our ability to flex maintenance capital given our improving plant reliability. On Slide 12, you can see that we have achieved positive year-to-date free cash flow and expect further working capital improvements in Q4. As mentioned earlier, we expect full year free cash flow of $25 million to $40 million. With that, I will hand the call back to Corning. Corning Painter: Thanks, Jeff. I just want to close by reiterating a few key takeaways. While the case can be made that our business is at or close to trough conditions, or that a demand inflection should materialize, we are not depending on such a scenario. We are taking action. We have reduced working capital and expect a further progress in Q4 and into '26. We're taking additional cost out and working to further optimize our assets. Our objective is to increase Orion's overall competitiveness and agility. This will serve us in combating the current headwinds, and when demand conditions normalize, we'll be positioned to achieve even greater operating leverage. We'll share more detail -- a more detailed review on these initiatives in February. Underpinning all of these activities is our resolute focus on generating free cash flow. That is our highest priority. And with that, Carrie, let's open up the line for our Q&A discussion. Operator: [Operator Instructions] And our first question will come from Josh Spector with UBS. Christopher Perrella: It's Chris Perrella on for Josh. Corning and Jeff, when I think about your volumes for 4Q and into 2026, what are your expectations there? And then a follow-up on how far along are you in the contract negotiations for next year? And what is that -- so far, what does that imply for pricing and spreads in '26? Corning Painter: So our expectations for Q4, like the decline, if I'm comparing it to prior years, that's pretty much all volume largely in that area. So we're expecting people to take longer seasonal shutdowns, that kind of thing, and be managing down their own inventory in Q4. That's the signal we have there. I think for next year's volumes, in terms of manufacturing, as I indicated, there's a case to be made that inflection is upon us, but we're not counting on that. And I would say, in terms of negotiations, there, as we said and predicted last quarter, we didn't see settling quickly in our interest. They continue to drag on. And I would say all in all, the negotiations are behind schedule compared to a more typical year. So I think in terms of exactly what's going to be out there for next year in terms of volume, we're really going to have to wait until we conclude the negotiations. Christopher Perrella: I appreciate that. Anc can you just -- what's the impact of La Porte on volumes and earnings in 2026? Corning Painter: I mean, volume-wise, it's not a high-volume plant to begin with. And I think overall, with the start-up costs and all that, I would expect it to be negative in 2026. Operator: And our next question comes from John Tanwanteng with CJS Securities. Jonathan Tanwanteng: My first one, just assuming that import tire pressure is sustained through '26 at '25 levels, what is the potential for earnings improvement into '26 in RCB just between -- with all the movements you're making in costs, your customers moving to more value positioning? Just help us understand what's possible, the volumes are flat. And if you have any commentary on pricing spreads, that would be helpful. Corning Painter: Yes. So I think the big question in 2024 is -- or I'm sorry, 2026, is going to be the outcome of the negotiations, both the volume a particular company wins and the margins that come with that. I think that's sort of like the big unknown. We will be working hard on some of the efficiency projects that I mentioned. But I think a big impact for next year is going to be the outcome of the negotiations. And it's obviously commercially sensitive, and we are like in the middle of it right now. Jonathan Tanwanteng: Okay. Great. And then do you have any expectations for Specialties next year, whether it's market improvements, mix improvements? Just help us understand what your thoughts are on the Specialty side. Corning Painter: All right. Well, we'll do our -- look, we'll give our official guidance for next year in February. I think what will be guiding our views on that are, of course, what we hear directly from customers. I think you can get a sense of that by looking at how general manufacturing is going, where PMI goes. I would also say, OEM builds, right, that's an important market for that space. So those will be -- I think things you could look at that would give you a sense of how we see that business developing. Operator: [Operator Instructions] Moving on to Laurence Alexander with Jefferies. Kevin Estok: This is Kevin Estok on for Laurence. Just curious if you could give your thoughts around maybe what an industrial rebound would look like, I guess, let's say, in 2026 or 2027? And I guess just curious what you think it takes to get us there? Corning Painter: Sure. I mean -- I think industrial recovery would say taking us back to things that looked more like pre-COVID. And I would think in that kind of environment, we'd find that we're essentially nearly sold out in our key markets at that point, with strong demand coming from OEMs, strong demand from tire manufacturing, more normalized trade flows. I think the really positive thing here is that tire sell-through remains really solid. Tire sell-through is at the conditions I just mentioned, right? So it's not like that is the fundamental challenge here. Yes, shipping, trucking activity is off a little bit, but passenger car is really quite strong. The big question is the success of our customers in the west around their own market share. And of course, they're being helped by trade policy right now. I think that's a big one. I would say in the Specialty area, a pickup in construction, a pickup in automotive, those are things that would be very helpful and constructive in that area. Basically, the industrial economy getting back to a more normalized level. Operator: I'm moving next to John Roberts with Mizuho Securities. John Ezekiel Roberts: John Roberts for John Roberts again. Do you think the tire importers into the west are receiving government support or maybe lower raw materials, I don't know, Russian rubber or Russian oil for carbon black that allows them to continue to import into the U.S. in spite of the tariffs? Corning Painter: Well, I think if you look at it, the 232 tariffs, let's say, of 25%, to be clear, that's not going to be enough to totally price out imported tires. The U.S. and Europe cannot possibly make all the tires they need, right? Before all this happened, it was about 50% of the tires were imported to the U.S., very similar into Europe. So we're never talking about, it has to get to a point where they are pushed out. What I think it has to get to the point where customers are more returning to their normalized brands. So one magazine recently published that just in October of this year, Tier 2 tires had the greatest demand. That's more like normal conditions. The last -- or so far this year, it had been Tier 3 tires that had the highest demand of the 4 tiers that they track. So there's a little bit there of customer sentiment moving back to a different value proposition in the tires they buy. And then number two, like the help in the tariffs is enough to like close the gap. So the gap between the Tier 2 and the Tier 3 and most Tier 1 companies have a Tier 2 brand. But that closes up to where people choose that value proposition. It's -- again, it's like there's no effort here. There's no dream of pricing them all out, that's impossible. But it's a matter of just can you close the gap enough, the consumers will shift back. And I think that's a concrete sign that, yes, this is all possible. This is all doable. And I think things tend to revert to their norm and perhaps this is the beginning of it, but we're not going to count on that. Jeffrey Glajch: John, I think you also -- depending on the results of the antidumping situation in Europe, you may also see an impact from that. And that might give you some insight into either the profitability that they're dealing with in the short term or even their willingness to operate at a very low or negative return. John Ezekiel Roberts: Is it fair to say, it sounds like the recovery is more dependent on the lower-end consumer improving than it is on the tariffs? I mean the tariffs help, but it sounds like we need higher tire prices. Corning Painter: Well, I think it's 2 things. The point I would like to make, it's not just relying on government action, right? There's an element for industry, and there's some certainly plus in the trade policy to overcome some of the, perhaps unfair disadvantages that are there that you mentioned earlier. I think the 2 of those together are important. But I would like to stress, I think industry and our customers, there's a role there for self-help. They can continue to innovate on their top brands, make them more attractive, continue to approach their -- to promote their second-tier brands, perhaps shift some production from one to the other. These are all things within their control and that you see some signs of them taking action in that direction, some more than others. Operator: And we'll take a follow-up question from Josh Spector with UBS. Christopher Perrella: It's Chris again on for Josh. From -- as I think about next year, what are some of the recurring costs in 2025 that won't be there in 2026? Corning Painter: Well, so I think one thing that's been with us all year long, I'll let Jeff go into this, Chris. But I think one thing that's been with us all year long has been the inventory adjustments. And that's really a factor of the trend of oil pricing, and we pass that through, but there's always an element of that. Should we just assume stable oil prices, then that would go flat for us. I mean if they went up, it would revert and go the other way. But I mean that's certainly been a drag this year. Jeffrey Glajch: Yes. If you think about it to date, we've taken our inventories down by $34 million. So that's a pretty significant reduction in the inventory, and associated with it is the cost absorption related to pulling that inventory off the balance sheet and running it through the P&L. I think that's the biggest thing. Going the other way, obviously, we've taken some cost out this year. Many of them are permanent, but there's a variable comp component that's not permanent, so that would have to add back in. But as Corning mentioned earlier, we have some pretty aggressive cost actions that we are going at currently and going into early 2026, that will help us reduce our costs next year and become more competitive. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Corning Painter for closing comments. Corning Painter: Well, I'd like to thank you all for your time and attention today, and to thank everyone for their questions. They were insightful and useful, and I think, added value for all our investors. So thank you very much for that, and we look forward to be speaking with investors during the balance of this quarter. Thank you all. Have a good rest of your day. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the Marks and Spencer Analyst Call. This meeting is being recorded. At this time, I'd like to hand the call over to your host, Archie Norman. Please go ahead, sir. Archie Norman: Well, good morning, everybody. It's Archie here, and I'm joined by Stuart and Alison, obviously. Thank you for joining us today. I was going to say, great to see you,, but I can't see any of you. So look, I think this is a set of results where we slightly feel we've said all there is to say about it, but I'm sure you'll think of some interesting questions. So let's crack on. Stuart is going to make a brief introduction, and then we'll take whatever questions there are. Thank you, Stuart. Stuart Machin: Well, good morning, everyone. Thank you for joining us. As Archie said, Alison joins me in the room today. We've also got Fraser and Helen, so they're on hand for any follow-up questions you may have throughout the day. I'm going to start with a look back at the half from April to September before moving on to give you some detail on where we are today. I will then look ahead to Christmas before finishing with the outlook for the rest of the year. I want to cover 3 objectives that we set out a couple of months ago, which were, firstly, to regain momentum; secondly, get back on track with growth; and thirdly, accelerate the pace of our transformation. So let's start with the last 6 months. The first half, as I've said, was an extraordinary moment in time for M&S. I'm not going to go over all the old ground today because I briefed everyone on the incident during our call in May. But everything regarding the incident has been well documented, and we are now getting back on track. Our customers have been fantastic as always, and I want to thank them again for their continued support and loyalty during the period. I also want to thank our supply partners and of course, our colleagues across the whole of M&S, who showed real determination and grit. This support, together with the underlying strength of our business, our healthy balance sheet and robust financial foundations gave us the resilience to face into the incident and deal with it. At the prelims in May, we anticipated the material impact of the incident on group operating profit to be around GBP 300 million this financial year, and we are broadly in line with that. I can confirm that this is mitigated by GBP 100 million of insurance that we claimed and received during the period. This is the first set of results where we have consolidated Ocado Retail into our numbers. This is just an accounting change as part of the original joint venture, and it has no impact on our share of the business. Now let me just touch on the headline numbers because across M&S, group sales grew 22% versus last year, but that was driven mainly by the accounting inclusion of consolidating Ocado Retail. Excluding the consolidation of Ocado Retail, M&S sales were broadly flat with last year. Group profit before tax and adjusting items was GBP 184 million. And excluding lease liabilities, we are still in a net funds position. Now we put customers first and prioritize availability, which did drive waste and therefore, increased costs in our food business. With our systems off, we didn't have a clear stock view. And of course, we were using manual processes, but we took the decision to allocate stock out, fill the shelves, and that was the right thing to do for our customers. Despite the disruption in food, the business was resilient with robust sales growth of 7.8% in the half. Fashion, Home and Beauty sales in the half were down 16.4%. We had a particularly tough time here due to 3 key challenges. Firstly, we paused the online operations for just over 6 weeks and then brought them back gradually. Secondly, this impacted click and collect, which affected footfall into stores. And thirdly, supply chain disruption caused availability issues. As I said, this incident was an extraordinary moment in time. But change, on the other hand, is not a moment. And in M&S, change is a constant. We have a clear plan to reshape M&S for continued growth, and we have never lost sight of this despite the disruption. That is why we accelerated our transformation during the half with investment in our 3 priority areas of store rotation and renewal, supply chain modernization and technology transformation. On store rotation, we opened 15 new or renewed stores in the first half and we will open more than 20 in the second half. This includes opening 2 flagship full-line stores, Bristol Cabot Circus, which opens next week, and Bath open in February. On supply chain, in August, we announced a new 1.3 million square foot automated food distribution center in Daventry, which opens in 2029 to boost capacity for future growth, lower our cost to serve and improve product availability. A new regional food depot also opened in Bristol in 2026, increasing the proportion of stores served from their nearest depot. These investments are helping us get ahead of the growth curve and build a bigger, better food business. And on technology, we use the incident as an opportunity to strengthen our technology foundations and fast track some time lines, including the new Fashion, Home and Beauty planning platform. Our job is to ensure we continue to transform and grow M&S while maintaining a strong investment-grade balance sheet. That means being disciplined in our investments and their hurdle rates. Let me add a little color to each of our businesses. In Food, sales and market share growth are back on track. With 3 years of consecutive monthly volume growth outperforming the market, more customers are filling up their basket to M&S more often. In fact, the latest Kantar figures show that M&S is the fastest-growing store-based retailer in volume over the last 4-week period. In the last 12 weeks, we served 800,000 more customers year-on-year. In the half, customers made 14 million more shopping trips to M&S Food than the same period last year, demonstrating more people are shopping with M&S Food more often. You've heard me talk about our strategy, protecting the magic and modernizing the rest. In food, the magic means going to great lengths to ensure the absolute best quality, the leading on innovation and delivering trusted value. Our obsession with delivering world-leading quality continues to drive sales. Take our upgraded Italian meals range with sales up 1/3, for example. And our focus on innovation brings new products and new customers to M&S. Our viral Strawberry Sandwich sold 1 million units in just 4 weeks. In fact, we launched 700 new more quality upgrade products in the first half of this year alone. At the same time, offering trusted value is at the very heart of what we do. Sales of our value ranges are up 29%. Alex and the Food team have made good progress, but we have so much opportunity ahead of us as we work towards becoming a full shopping list retailer and doubling the size of this food business. Now turning to Fashion, Home and Beauty, where the recovery curve in this part of the business has been slower than in Food, as I said, due to the pause in online sales and stock flow disruption. But now with online back up and systems running, we're making progress every day. And over the coming weeks, we expect stock flow to settle into a more normal rhythm. Despite this, we used the period to make further progress in improving our product ranges because outstanding product sits at the very heart of our strategy for Fashion, Home and Beauty with the M&S magic being a combination of quality, value and style. We consistently lead the market in value and quality. And now I can say for the first time, based on YouGov report yesterday, we're #1 for style too. And the latest Kantar figures just out show M&S #1 in fashion market share in the last 12 weeks. This includes leading the market for womenswear and lingerie. So look, we're making progress, and this is encouraging, but there is so much opportunity in this part of the business, and there's lots for us to go after. John, as the MD has been here now 6 months and has started to accelerate the strategy, being laser-focused on the big rocks that we haven't yet really tackled, mainly the foundations of the business from sourcing through supply chain, through merchandise planning and accelerating our online performance. In international, sales were down 11.6% due to our international websites being offline and shipment disruption. However, during the second quarter, performance improved as we restored systems and websites. Mark and the team have now made encouraging progress resetting commercial terms with some of our franchise partners, which has helped enable investment in trusted value. We expanded our partnerships with Zalando and Amazon and put in place new wholesale arrangements, for example, launching lingerie in David Jones, Australia, already performing ahead of plan. The summary for international is we continue to -- it continues to be a growth opportunity in the medium term, but performance over recent weeks has been encouraging. Touching on Ocado Retail, sales were strong with growth of 14.9% over the half, driven by sales of M&S products, which grew faster at 20%. Sales growth has been encouraging, but we know there's lots to do to the path to profitability. Key opportunities include improving delivery efficiency with more same-day slots available, extending picking hours and rolling out further automation. These initiatives will boost capacity over the next few years and support the path to profit. To finish, I will turn to the outlook. As we enter the second half, the consumer environment remains as uncertain as ever. As always, our priority is to offer the best product value, quality, innovation and of course, in fashion, style. We will continue to drive our transformation and to structurally reduce our costs to offset external headwinds. For context, during the first half alone, the increase in national insurance contributions and packaging tax cost an extra GBP 50 million. But there is much in our control and the increase in our cost reduction ambition will help to address this. We're confident we will be recovered and fully back on track by the end of the financial year. In the second half, we therefore anticipate profit at least in line with the prior year as residual effects of the incident continue to reduce in the coming months. Our plan to reshape M&S for sustainable long-term growth is unchanged. Our ambitions are undimmed and our determination to knuckle down and deliver is stronger than ever. To date, we have delivered meaningful progress, but that's what's exciting because there remains so much more to do. And for us, it's all to play for. I'll hand back to Archie for questions. Archie Norman: Brilliant. Thank you, Stuart. Okay. We've got a few hands up for questions. So let's just crack on Frederick Wild from Jefferies. But by the way, could you be helpful if just one question at a time because our memory is not very good. And -- we take a couple each. All right, Frederick? Frederick Wild: So first of all, I'm going to ask a terrifically boring question, I'm afraid. Could you give us a few more details on October trading in Fashion, Home and Beauty, what sort of the overall sales growth was have you seen versus the market? Stuart Machin: Well, look, I mean, top line, as you can see, the market has been soft. You can look at the graphs in the RNS because we put those in to help people understand. And there's a couple of things. I do think people are holding back a bit because of the budget, but also the market is soft because the weather -- I'm looking here, I mean water side and it's bright sunshine. Autumn hasn't even hit yet, never mind winter. So the market is somewhat soft, and the market is very promotional. I think the latest stats I saw was high promotional participation averaging 50% already. For us, look, it is behind the curve slightly. I think there's some good news because we're not quite where we want to be yet on Fashion, Home and Beauty, but every day is getting better. And I think by the time the cold snap arrives, we will have pretty good availability, especially around fashion. So I think it's working in our favor at the moment. Frederick Wild: And then beyond that, with the -- at least in line guidance for half 2, can you help me understand the sort of moving parts within that, what could get you above be in line? And is it the consumer backdrop? Is it the speed of your availability? How should we measure that and think about that? Stuart Machin: I'll give a high level and hand over to Alison for some detail on this. But Look, in half 2, if you just compare last year, I think in Food, we're on track. I mean it could be a bit better. We're planning for a good Christmas. But I never like to overpromise and underdeliver, but we're getting back to stronger growth in food, and it's all to play for, as I say in my opening. In Fashion, Home and Beauty, we are concerned about the weather. It is something that I don't like to talk about internally, if I'm honest. I always say don't blame the weather. But on an analyst call, it is helpful just to bring it to life because if we do have a cold snap, I think we'll be pretty well set up. So my summary, Food could be a bit better and Fashion & Home could be a bit softer, but we're planning for a good Christmas, and we'll see. I'll hand over to Alison for some detail. Alison Dolan: Thanks, Stuart. So really, I would say it's all about the pace of recovery in both businesses. As Stuart has already said, we're gearing up for a strong Christmas in Food and then a good new range to launch in the fourth quarter. All of the systems that we need now to manage waste and stock loss are fully back and each week sees an opportunity -- season improvement, sorry, in waste, and we are getting to grips with it. In Fashion, Home and Beauty, I think for the third quarter, as the systems come back online, they are now all back, but stock is not in the right place everywhere. If you think about all the moving parts in our distribution network, getting stock out of ports into the right DCs that allow us to fulfill online orders as well as dispatch stock into stores. That is still being worked through in the third quarter. We expect it will be fully done, certainly by the financial year-end, but operational in the fourth quarter as well. And then Ocado, we expect to continue with their strong sales. International really to have a good strong year. And as far as cost is concerned, we continue to focus on cost elimination, as you've already heard. So really, that is all playing into an expectation that at least we will be flat in the second half to the comparable period last year, and then you'll have a judgment to make as to where to take us up from there. Archie Norman: I think Alison and [ Fredrik ] just quickly raises a good point on food waste. We're getting back now online. Clothing, we're just mindful we're holding a bit more stock for the second half. So we need to manage that. There is some good news on new stores in H2. We've got 10 new food halls, 4 food store extensions, 7 renewals and 2 new full-line stores. So there's some positives. I think my summary would be we're confident we're going to start FY '27 in a good place. Okay. Good questions. Thanks, Fred. James Anstead. James? James Anstead: So you've had this cost of GBP 324 million in the first half of the year. I just wonder, you're clearly now getting very close to being back to normal, but how much more do you think that might tick up in the second half? And associated with that, and I do appreciate fully that you rarely give PBT guidance for the current year, let alone next year. But if effectively, you're guiding for PBT of at least GBP 652 million this year and the cyber impact, which is probably going to tick up a bit from GBP 324 million. Is there anything wrong with starting my spreadsheet for next year with a PBT of about GBP 1 billion. I appreciate there's a consumer outlook that we have to take a view on, and there's hopefully some underlying growth in the core M&S business. But are there any technical bits, Alison, you would say that's far too naive a starting point? Alison Dolan: Well, I'll start with the first question, James. So above the line in terms of any lingering impact on trading, you've already heard all the detail there. There's nothing beyond everything that we've set out, which is largely about the pace of recovery, particularly in FH&B and making sure that stock is in the right place. And that is in relation to the GBP 324 million impact. Below the line in adjusting items, there will be about GBP 30 million of incremental cost in the second half as we finalize standing down all of the incremental resource that we've talked about earlier, largely replacing offshore E&P colleagues with onshore resource augmentation. That will carry through into the first couple of months just as we stand that resource down. But beyond that, there's nothing. And then with respect to your second question, James, no, not really. The only thing in addition to, there's nothing technical from our side. As Stuart already said in relation to the last question, our expectation is that we are fully back to normal by the fourth quarter of this year, so that FY '27 is a clean, unimpacted year. And the forecast that you had previously in place are good for FY '27. There's nothing beyond that. Stuart Machin: I think, James, just to build on that, only a couple of summary points, a bit cheeky question on the numbers. But there's no change to our view for next year. We're in line with sort of where the consensus is currently, free to take your own view on that. But I would say we've got quite a bit of recovery in the next 6 months in Fashion, Home, Beauty and the consumer outlook is still uncertain. We're getting a lot of feedback about the sort of nothing presentation yesterday. Everyone's waiting for the 26th of November. And so the next 6 months is going to be a bit uncertain. We're hoping to start fresh, as I said, in FY '27 and be back by then. But I wouldn't overdo the ambition. Archie Norman: Okay. Thank you, James. And -- if you need help with your spreadsheet, Fraser can help -- you got a computer program. Let's go to Anne Critchlow and then we'll see Clive Black has joined us. So we'll go to Clive afterwards. Anne? Anne Critchlow: I just wanted to ask about the spring/summer fashion stock from this year. Is there any stock overhang as into the not marked down or sold through? Anything you're overwintering, anything that might need to be written off or down in the future, please? Stuart Machin: Well, it's a good question, Anne. I mean we have provided for that in the numbers. If you look at our stock cover, I'm a few days out, but as of a few days ago, we had 13 weeks stock cover. So that was 2 weeks more than last year. So we have provided for some of that in H1 already and we are holding more stock as of the half year. So it's in the H1 gross margin, you can see where we provided for it. And unfortunately, my whole strategy about not having a sale is not going to be achieved this year because when John joined us as the new MD, I said one of the key objectives is everyday pricing, let's get rid of sale and not do it. And then obviously, within 1 week of him joining the incident happened. So there's a lot to go after, though, and it is a bit uncertain, but we provided in H1. And now we'll see how winter trades, and we are going to make sure we sell our way through in H2. And that's a bit uncertain as we sit here today in the sun. Anne Critchlow: Okay. That's helpful. And could I ask -- could I ask a second question, please, on systems. So just wondering to what extent there's been a temporary fix that will perhaps need redoing. And to what extent the cyber incident might have accelerated? What you're going to do anyway and perhaps even made it simpler and better, and any examples you can give? Stuart Machin: Well, I'll start and maybe Alison has some thoughts as well. Our biggest priority for technology is recovery. And as part of that, there are some things, by the way, that we didn't bring back up. I mean there's a system in food called RTA that was very old, very clunky. It used to basically give better split of products in our DCs in different price. But actually, we haven't brought that up because we're going to buy a more simpler modern system. But really, it's all been about recovery. And now if I'm honest, it's all about resilience for Christmas. So there are some things like that food system. In John's business, he's taken a fresh look at the o9 planning platform and has actually sped that up. I mean it's going to take half the time of what it was going to take. And there are some other things we're doing like investing in loyalty, which really we're playing catch-up on. So my summary is, we haven't really accelerated a lot. We haven't really opened some systems that we didn't think -- either we thought we didn't need. But really, our transformation is going to get back on track by the end of the financial year. And we'll also talk about this at the Capital Markets Day. Archie Norman: Clive, we assume that you -- I didn't want to apply your late meeting, by the way, but we assume you're celebrating in Liverpool. Clive Black: Indeed, Archie, I was actually on time, but your systems clearly haven't got up to speed yet. But -- and also, Archie, it's great to know that you're going to be hanging around Paddington for a little bit longer than they have been the case, which is good news for everybody in my book. So first question, if I may. I'm going to try and stay away from everything from the spring. And I know you have a Capital Markets Day coming up. But Stuart, in your video this morning, you talked about M&S being a shopping list grocer. I just wondered what does the firm need to do to reach that aspiration? And what does it actually mean to M&S? Stuart Machin: I mean, Clive, in simple terms, what we're realizing in our bigger food halls, where we've got more of a grocery range that includes frozen food, our customers are relying on us to do a fuller trolley shop. I see this in my local store in [indiscernible] where over half of the shopping trips are in big trolleys and the other half of baskets. And if you look at all of our data, not just recent, but the trend in the recent years, more customers shopping more frequently and our spine of the basket, which we call center of plate, the key commodities customers buy and could buy elsewhere, that has actually grown in this half by 12%. So the key to this is the store rotation program. As you know, we're only 4% market share. I will say to Alex, it's still piddly, is the term I use, it's still small, which really just encourages us because we've got more than 50 food stores in the pipeline already approved. And that means that gives confidence. Now one of the key investments that we made during the last 6 months was -- which I called out in my opening and it's in the RNS, which is our Daventry new distribution center. Now that's 2029. But the reason we needed to commit and invest in supply chain is so we get ahead of that growth and enable that growth. So I think we're well on track. The food business is in a strong position, whether it's building a better supply chain, the work Alex and the team are doing on what we call factory resets and fortress factories, the strategy about really close partnerships and the work we're doing on range, importantly, the work we're doing on value. And we're tracking all of those top 200 items every day. Inflation is a challenge for us to manage with the extra costs headwinds that not just us, our suppliers have had, that all gets passed through to us and it becomes a challenge. But our value lines are up 30% in the year, and our value perception has the greatest increase of any other grocer in the last 3 years. So all of that added together should enable the food business to be more of a bigger shopping list retailer. Clive Black: And of course, I think you also said you still plan to double your market share in your statement this morning. And then in a similar vein, if I may, you talked about also seeing the opportunity to double your online sales in Fashion, Beauty and Home. And I guess, again, what are the mechanics by that? And just as a sub-question, I presume you still have ambitions to build, to grow your in-store activities in this respect as well. Stuart Machin: Well, I think the key thing, online sales, I mean, we said double the online sales, I think, from FY '22, which were GBP 1.1 billion. And our plan is to double that. At the moment, only 1/3 of our Fashion, Home and Beauty sales are online. And of course, that's been impacted in the last few months. But we have not lost sight of that long-term ambition. And that's very clear. Don't forget in Home and Beauty, our participation is actually very small. It's not going to be the biggest part of our strategy, but there is opportunity to grow and improve our home offer, and we will be doing that over the coming years and resetting our beauty categories, which is under review now. I think the biggest thing, just to go back on Food, just to clarify, we said double the food business. We really mean sales hopefully, that leads to a much bigger market share, of course. I think we're in a good place online. We serve over 21 million customers, but let's be really frank, we have got to do a better job online. We want to do much better on service, much better on availability, much better on personalization. There is no short of demand when it comes to our customers wanting more, whether it's in store or online. So we've got to be quite ambitious, but there's quite a lot to go for over the coming years. Clive Black: Do you see a switch out of in store into online, sorry, Stuart, just to finish as part of that process? Stuart Machin: Well, I'm hoping not, but I'm hoping we hold a lot of our stores flat at the same time. I mean online market share for us is 7% stores is higher at 12% and obviously, the focus is going to be online. If we could hold the stores, that would be good news. Clive Black: Sorry to interrupt you, Archie. Archie Norman: No, no. Thank you, Clive. Good clarification. Just to be clear, the doubling of the online is from 2022. So that would take us to 50%, the objective to get to 50% of total sales. Thanks, Clive. That's great. Let's go to Georgina Johanan, and then we'll move on to Richard Chamberlain. Georgina? Georgina Johanan: I've got 3, please. I'll ask them one at a time. The first one was just in terms of the Fashion, Home and Beauty sales, obviously, I appreciate the consumer environment and so on, but it would be good to understand what you've got planned in terms of any activities to sort of reengage that consumer and also the time line on that because presumably, you don't want to be sort of overly reengaging at a time when availability is still a little bit below where you'd like it to be. That's my first one, please. Stuart Machin: I mean, Georgina, in simple terms, I mean, where you're dead right is we could probably say we reengaged our customers too quickly before we were really ready with availability online. But we've got no issue with customers' engagement, but we have got to get the stock flowing better. And the only thing working in our favor, by the way, is that, as I said, it's very sunny here in Waterside. I don't know where you are, and we're hoping the cold snap will arrive just in time when our winter product arrives and we're ready to serve. But we don't have an issue with demand, but we are a bit slower than we would like in getting the stock from supply through to our ports, through to supply chain, through to stores, through to online. And this is John's priority as we plan for Christmas. Georgina Johanan: And perhaps just a follow-up one there, Stuart. When you're saying you don't have an issue with demand, is there something that you can sort of point to for that? Like, for example, is web traffic a lot stronger than we can see in terms of the actual sales data and perhaps conversion is down? Is there anything sort of tangible that we can point to there? Stuart Machin: Well, it's a good point. The reason I don't say there's a problem with demand is we're holding our own. In fact, our market share has improved in the last 4 weeks, if you look at Kantar. If you look at the YouGov results yesterday, it's encouraging. We're back to #1 on brand buzz. And as I said, for the first time ever in history, we're #1 on style. Now that doesn't mean we'll always be #1 on style, but it is the first. And if you look at traffic, I haven't got the number. I can't remember it, and [ at the start, ] but we'll get someone to find the number, but traffic is actually sharply up on last year. To your point, online sales are up over recent weeks. Transactions are up, but we have got to get a better availability. By the way, a session I had with Maddy and Helen just last week, you will probably notice this, but we do have a bigger demand for smaller sizes. And that's been a trend over the last 3 years. But actually, it's one of our biggest problems today online. I've just been given a scribbled note from Fraser that says September traffic was -- September traffic was up last week, 17% on last year. Traffic September up 21% in September, last week up 17%. Another one? Georgina Johanan: Yes. If that's right, please, it was just on CapEx. I guess just understanding if I was understanding right in the release that it's actually going to sort of GBP 650 million to GBP 750 million for this year, what we should be looking for in the outer years and why we're seeing that increase, please? Stuart Machin: Okay. It's a good question. I'll hand to Alison. Alison Dolan: Georgina, thanks. So you'll be aware that we have continued through the half with our strategic programs investments, so in supply chain, in stores and in D&T. Obviously mindful to protect our investment-grade rating, and that is a key priority. But as the cash generation comes through, our ability to maintain that investment, see the returns coming through, invest, as Stuart said, in the online experience, both on the website and on the app behind growing that traffic means that we can increase the envelope slightly. Depending on a particular year, there will be some disposals that we can offset that with. But we are a growth business. We have opportunities to invest behind, and we'll talk a lot more about the details behind that at next week's CMD [indiscernible] just all while aiming to grow the dividend as you've seen today. Stuart Machin: I think that's right. I mean, I would say strong discipline. We've got clear hurdle, right, Georgina. But as you know, some of the big bumps in that CapEx will be things like the NBC, which we've already announced as well. And the focus areas of stores, supply chain, D&T, and that includes online as well. Archie Norman: All right. Thank you, Georgina. We're eating up the time. So I just ask people to go at a bit of a cliff if we can. Richard Chamberlain from RBC, and then we'll go to Adam Cochrane and Deutsche. Richard? Richard Chamberlain: I'll stick to 2. I know you've got your CMD next week. So both on the clothing side, please. What's the timetable now for upgrading Sparks next year, I think you're talking about and what needs still to happen for that to take place? That's my first one. Stuart Machin: Thank you, Richard. Well, it's a short answer because in Sparks, we had a plan 6 months ago that we literally just paused and said we will come to it when we're through these last 6 months and the incident. And we've only just started to put resources from D&T back onto that program. What that will focus on is real personalization. It will focus on experience, but it won't be a big bang relaunch. There will be some good news, some good partnerships, but it will be a better way of engaging with customers and giving them a more personal service. It won't be a rewards, i.e., a different price architecture for those customers. I've never been a fan of loyalty card pricing. We research this all the time. But for us, to stand out from the crowd and try and deliver better value and value every day is an important underpin to our strategy. But really, this is all a way of getting closer to customers. It's not going to be one big bang. It will be a relaunch in March or April. And then basically, every 6 months, we will continue to improve loyalty over the coming years. Richard Chamberlain: Got it. Okay. And my other one is just on marketing spend. I'd just be interested in what's been happening on that and thoughts on whether you need to step that up now to continue sort of regaining the top line momentum in clothing. I think you rephased some marketing from sort of earlier in the summer to early autumn, if I'm not mistaken, I mean, for obvious reasons. But just wondered, yes, thoughts on sort of marketing, whether that needs to go up a bit now. Stuart Machin: I mean my summary for this, it won't be more spend. I'm not giving our marketing team any license to spend more, but it is about relooking on how we spend it. I mean, for example, there is no big fashion Christmas advert this year. We have decided to do more product ads more through social. There's different ways, we want to use YouTube and social media. So I think it's about spending it differently. The thing we've been conscious of and we're watching is making sure we spend it in line as product availability improves constantly, and that's across Fashion, Home and Beauty mainly. In Food, we're on track, and we're spending in line with the budget we laid out. Archie Norman: Thank you, Richard. Okay. We'll go to Adam at Deutsche, and then I'll take a couple more. I think we're going to run out of time. So I know everybody has been waiting very patiently. But Adam, crack on. Adam Cochrane: Just the first one, you talked about the confidence of clothing being back on track. I know over the summer, you possibly lost some customers to other retailers. Is it apparent that you're already regaining those customers who have shopped to other retailers and are now coming back to M&S? Stuart Machin: Thank you, Adam. Well, I'm saying getting back on track. So I haven't said we're back on track. We are planning that by the end of this financial year, our Fashion, our Home and Beauty business will be back on track. I mean, I think the biggest issue we had, obviously, through the incident was the lack of availability and the online business being paused. And therefore, that obviously did set us back. But as I said at the start, we're back to #1 market share in the last 4 weeks when you look at Kantar out this morning. So we're back to #1. Our product is definitely resonating. Our value is resonating. And as I said, we're #1 for style on YouGov, which came out yesterday for the first time ever in our history. So you would have seen in Kantar the improvement every month. And I think we put some of that in the RNS. So the reason I don't want to get overpromising is there is a tendency for us to say, isn't this great? We're all back to normal. But actually, it takes a bit longer in Fashion for the stock to flow, for the systems to reconcile the stock, so we know exactly where it is. And we are carrying a bit more stock than we would like. We've got to get through that. We've got to look at what's going to happen over autumn/winter. There's no autumn yet. It's not an autumn yet. Let's hope for a cold snap winter. And then we need a really clear plan as we get into the Q3, Q4. So I think it's all to play for. There's no short of demand, but stock flow has to catch up, and it's on John and his team's priority list. We go through it daily. Adam Cochrane: Okay. And on the international. And just very quickly, the expanded agreements with Amazon and Zalando, what proportion of the range are they able to access? How excited are you about increasing the growth internationally by the aggregators? Stuart Machin: I think it's a very good question. What I would say is it's very, very small. It's really testing and learning. If you look on there, you'll see on Zalando and Amazon. It is encouraging because the brand resonates, so we know that, and it's slightly ahead of our plan, but it's very small in the grand scheme of things. But I think in a year from now, this will be a good opportunity for our international business as we get more of our range on both of those sites. And I think more broadly, what Mark and the team are doing with our partners will set us up for future growth. The reset with our franchise partners in terms of how we do the agreement encourages our partners to invest. It encourages our partners to deliver better value. And in some markets, I mean, last week, I was looking at the UAE and Food is very small and the volumes are small. But just by right pricing, that business was already up 70%. Now I will say 70% up on things that never really sold much volume. I think resetting all of that is good news. And the third, the wholesale partnership, it's not just about Percy Pig in Target, although the sales of Percy Pig in Target U.S. are way beyond what we expected. So we're now putting more runs of Percy Pig on. But the wholesale partnerships, I do think in the medium-term is a growth opportunity, whether it's David Jones Lingerie, we're going to launch womenswear as well soon, then menswear. So I think there's good opportunities in the medium- to long-term for us to be this global brand that we set out last year. Archie Norman: Okay. Thank you. Well, now look, we're over time, but I'm going to go to Monique Pollard because you've been waiting very patiently. And then Warwick Okines and then we [indiscernible]. Monique? Monique Pollard: The first question I had was just on this availability issue. So what I understood that you were saying, Alison, is that the -- am I right to understand that the availability issue is more acute in online for Fashion, Home and Beauty than it is in store? If you could just give us some color on the sort of the differences in availability store versus online? Alison Dolan: Not particularly, Monique. Availability was affected by the slower stock flow, and that applied to both businesses. In online, it's slightly compounded because we don't fulfill online orders from all of our DCs. So there was that additional complication, but really both businesses were impacted. Stuart Machin: I think the summary, Monique, is we're about 5% off at the moment where we want to be. But every day is getting a bit better. Our online availability this morning, for example, was down 1% on last year. So every day is getting better, but it is split between stores and online. Your second question, Monique. Monique Pollard: Yes. The second question, just a quick one. It's on the U.K. budget and the potential for business rate increases. So if we do see business rates increase for ratable values over GBP 500,000, what kind of impact does that have on your cost base on an annualized basis, please? Stuart Machin: Well, that's a complicated one. I'll hand over to [ Alison Dolan. ] I think the -- a couple of things to just summarize, as you probably know, is this half year, with a GBP 50 million. And that's only on 2 things: one, the packaging tax; and two, the increased, what I call the double whammy on national insurance. So that was GBP 50 million for the half. When you add that to living wage, which for us, we already plan to increase wages for frontline colleagues. So we look at that as a good cost, but that is GBP 150 million for the year. I think what really worries us is what's coming down the line. We have this deposit return scheme, which is a huge headwind, a challenge in stores operationally. The setup of that is nearly GBP 30 million. Running that is a GBP 7 million cost every year for these huge monstrosities of this unit in every store for customers to bring plastic back. And by the way, in the Republic of Ireland, they break down every 5 minutes. And on top of that, you've got other big impacts because it's not just about us. All of these impact our farmers, impact our suppliers and then all of those costs get transferred to us, and then we try and mitigate them in order to provide value. So -- and I think it's not just that it's other regulatory stuff. So we've been working quite closely with people in government, talking to them about these challenges every day, hoping to influence in some way. I've met Rachel Reeves a few times now, but it is top of our mind, and we're hoping. Well, we're preparing for the worst on the 26th because everybody -- it's a bit of a nothing speech yesterday. We all sort of finished it saying, well, what did that really mean? But we're sort of planning for the worst and hoping for the best. Alison, on our particular numbers. Alison Dolan: Yes. So I would just say that at the moment, our business rate still is about GBP 180 million a year. So it's clearly material talking about that one specific item. And obviously, any increase also has the potential to be material. About 60% of our properties have a ratable value of over GBP 0.5 million. So the rumored break for larger stores would clearly be welcome for us. But that's about the scale of the bill right now. But I think... Stuart Machin: About GBP 7 million benefit. Alison Dolan: It's about GBP 7 million saving if we were to get that break, yes. But I think the bigger point really is in the aggregate of all of this new government-induced incremental charges. The EPR, for example, alone that Stuart talked about was a GBP 40 million charge for the year. The deposit retention scheme, big one-off upfront. NIC business rates, the apprenticeship levy, we can only use about 20% of it, and that cost us about GBP 7 million a year. So it's a combination really of all of these official regulatory costs. Stuart Machin: I think the only good news, Monique, for us is there's a lot in our control. Our investment in things like supply chain automation will help give better productivity. So that's why we've increased our cost saving program -- so there's a lot for us to go after as well. Archie Norman: Okay. All very good points. Thank you, Monique. Right. Look, apologies for those who haven't got in. I appreciate people have been waiting, but we're running down the clock. And we will make sure we get back to you those of you've been waiting. So I appreciate that. Last one, last shout from Warwick Okines at BNP. Alexander Richard Okines: Just 2 quick ones to finish off, and I'll do them both at once and test your memory actually. These are quick ones. Firstly, on costs, you may have answered this already, Stuart, but you've raised the structural cost savings target to GBP 600 million. So is there anything particular to call out on where those savings have come from? And then secondly, could you give us a bit more detail about what your customer barometer is telling you? Stuart Machin: Okay. I'll kick that off. On GBP 600 million, we set by FY '28, mainly through end-to-end supply chain. There's quite a lot in our plans for that and also some of our factory to floor programs and store productivity programs. By the way, we've never really got under store-friendly deliveries, which means our stores spend a lot of money unpacking things 3 or 4 times. And the good news is it's the first thing John Lyttle raised when he did his first month in stores. So whether it's supply chain or end-to-end through our stores. Look, it's a challenge, but there's plenty of us to go after on the cost side. That's why we set the GBP 600 million to start to mitigate some of the extra headwinds coming our way. In terms of customers, I mean the good news is we talk to quite a few customers every month. We have a collective where we talk to about 40,000 customers, and we ask their view, and we have 1,000 customers in Fashion, Home and Beauty and we get their views. There's never big changes, I have to say. The October survey really calls out customers talk more about rising costs. They talk a lot about the budget. There was a lot of questions, why does it take so long to set the budget. There's a lot of emotion in there about blaming the past all of the time that this is going to be a break in the manifesto and therefore, does it mean I'm paying more tax. Pension -- slightly older customers have pensions on their mind. and capital gains on their mind. So there's no doubt that takes the big part of the feedback we get. But at the same time, it's not all doom and gloom because when you get those issues on the table, what actually comes out is, well, we're looking forward to a bigger, better Christmas. And actually, we measure what we call excitement and positivity about Christmas and how you plan to celebrate. And that for our customers, of which now there's a few thousand in that pot, as I said, that's been the highest it's been. And if we just look at the early indicators, Christmas food to order is already up 7% on last year. We launched third-party food in stores. It's always an introduction, but that exceeded our expectations. And even if we look at some of the other things like Christmas decorations or the gift shop, I still think we need to relaunch this in a much better way in the years to come. But even that's trading 20% up. The softness is in fashion, but that's because of the weather and us catching up. But that's really the summary. I hope that helps. Archie Norman: Good. Well, look, thank you so much, everybody. All good questions, and there's a lot we could still talk about. But I think we should draw a line there. There's a lot of work to do, obviously. And just to remind you, those of you who are coming or able to watch, we have got a Capital Markets Day next week. By the way, we're not really expecting to mention the C word on that day at all. Stuart looking at me grinning. And there's going to be a forward-looking event and a chance to able to meet the management team. So I hope those of you who are coming will enjoy that. So we look forward to seeing you all there or thereabouts shortly. Stuart Machin: I thank everyone for your support and questions, and please shop with us this Christmas. Thank you. Operator: Thank you so much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day, and goodbye.
Operator: Good morning. Welcome to Flowco Holdings, Inc.'s Third Quarter 2025 Earnings Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Andrew Leonpacher, Vice President, Finance, Corporate Development and Investor Relations at Flowco. Thank you. You may begin. Andrew Leonpacher: Good morning, everyone, and thanks for joining us to discuss Flowco's third quarter results. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at ir.flowco-inc.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings. Joining me on the call today is our President and Chief Executive Officer, Joe Bob Edwards; and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Joe Bob. Joseph Edwards: Thank you, Andrew, and good morning, everybody, and thank you for joining us today. I'll start today by reviewing our third quarter results and operational performance, along with an update on the integration of the assets we acquired in August. Jon will then provide additional detail on our financial and segment results, our balance sheet and thoughts on capital allocation. I'll wrap up with our perspective on the current market environment and our outlook for the remainder of the year before we open up the line for your questions. In the third quarter, Flowco delivered another period of strong operational and financial execution. We generated adjusted EBITDA of $76.8 million, exceeding expectations, and we saw a 382 basis point expansion in our adjusted EBITDA margin quarter-over-quarter. Excluding the capital associated with our recent asset acquisition, we generated approximately $43 million in free cash flow, underscoring the durability of our cash flow generation and our disciplined execution across the business. Our performance reflects a shift toward our high-margin rental portfolio, which is growing through targeted investment and incremental customer demand for high-pressure gas lift and vapor recovery systems. On HPGL, our solutions are delivering measurable improvements in production efficiency, uptime and reliability, helping operators enhance recovery and returns. Customers continue to value the consistency and economic uplift these systems provide, particularly in an environment that rewards capital efficiency and sustained performance. On VRU, we are seeing continued momentum as operators recognize the financial and operational benefits of capturing and monetizing natural gas that would otherwise be vented or flared. Together, our HPGL and VRU fleets provide contracted recurring cash flows that offer visibility and consistency across cycles. These technologies are strengthening Flowco's leadership in production optimization, and we believe there remains substantial runway ahead as customers broaden deployment across their assets and recognize the long-term value of these solutions. Our high-margin rental portfolio was further bolstered by the acquisition of 155 high-pressure gas lift and vapor recovery systems, which we completed in August and discussed on our second quarter call. The integration of these assets has gone extremely well and is now complete, with the units performing in line with expectations and contributing to our enhanced margin profile. The acquired systems all deployed in the Permian have also enabled us to establish new relationships with several blue-chip customers while strengthening service to existing accounts. We will continue to evaluate inorganic opportunities within production optimization that complement our portfolio and align with our disciplined capital allocation framework. Spending a moment on sales and consistent with what we discussed in our second quarter call, revenues declined sequentially in both our Production Solutions and Natural Gas Technologies segments. Jon will expand on this in his remarks, but much of this impact was driven by our Natural Gas Systems business unit, which is our lowest margin business but remains a critical part of our internal supply chain, and it also provides us operational flexibility. Within Production Solutions, product sales were also impacted, but performance remained resilient considering the environment, and they exceeded our expectations for gross margin performance. This result underscores the sustained demand for our differentiated high-quality products and highlights the emphasis operators continue to place on reliability and performance in the current environment. Overall, I am pleased with our operational and financial performance in the third quarter. We continue to execute well across the organization, expanding margins, generating strong free cash flow and strengthening our high-margin rental portfolio through both organic growth and the integration of our acquired assets. These results highlight the resiliency of our business model and consistency of our execution in a dynamic market environment. With that, I'll turn it over to Jon to provide more detail on the third quarter. Jon? Jonathan Byers: Thanks, Joe Bob. Before reviewing some of the key financial metrics and results for the third quarter, I'd like to provide a reminder on our historical financial information given the combination of Flowco, Flogistix, and Estis in June of 2024. For clarity, note that any financial information presented prior to June 20, 2024, business combination, such as the third quarter 2024 financials reflects only the historical performance for Estis. Financial information for the second and third quarters of 2025 reflects the financials for the consolidated entities. Turning to our financials. Third quarter performance exceeded expectations, reflecting continued growth in our rental fleet and stronger-than-anticipated profitability within our sales business units. We reported adjusted net income of $37.3 million on revenue of $176.9 million. Total revenue declined 8% sequentially, driven by lower product sales activity in both our Production Solutions and Natural Gas Technologies segment. Despite lower revenue, adjusted EBITDA increased sequentially supported by the continued growth of our rental portfolio and its higher margin profile. As a side note, rental revenue, most of which is recurring, increased to $107 million versus $102 million last quarter. Adjusted EBITDA margin expanded by 382 basis points quarter-over-quarter, reflecting the benefit of our portfolio mix shift and the operating leverage we continue to capture across the business. In our Production Solutions segment, third quarter revenue decreased 2.1% to $126 million, while adjusted segment EBITDA increased 3.6% from the second quarter to $55 million. Adjusted segment EBITDA margin expanded 240 basis points quarter-over-quarter. The decline in revenue was primarily driven by lower downhole components product sales and partially offset by higher rental revenue from both our existing fleet and the recently acquired assets. The increase in adjusted EBITDA margin was largely attributable to improved operating leverage within our surface equipment rental business and an improvement in gross margin performance in downhole components. In our Natural Gas Technologies segment, third quarter revenue decreased 21% to $51 million compared with the second quarter, while adjusted EBITDA decreased 7.6% to $25 million over the same period, which were attributable to a decrease in natural gas systems and vapor recovery system sales in the quarter. Adjusted segment EBITDA margin increased by 714 basis points due to a favorable revenue mix shift towards vapor recovery from natural gas systems. Turning briefly to corporate costs. Third quarter corporate expenses were $3.8 million, down from $4.3 million in the second quarter, primarily reflecting lower third-party professional service costs during the period and a reduction in G&A. Overall, consolidated third quarter adjusted EBITDA was $76.8 million. Since becoming a public company, we've delivered consistent EBITDA growth while expanding margins and sustaining top quartile profitability even against a more challenging macro backdrop than when we entered the public markets. In the third quarter, we deployed $39.7 million of organic capital with the majority of capital allocated to expanding our surface equipment and vapor recovery rental fleet to support sustained customer demand at attractive returns. As we look to the remainder of the year, we expect only modest adjustments to organic capital spending and anticipate fourth quarter CapEx to decline relative to the third quarter. As noted last quarter, we accelerated a portion of our 2026 capital plan into 2025 in connection with the asset transaction, and we are assessing market conditions and customer activity levels to determine the appropriate pace of capital deployment for next year. We will continue to prioritize opportunities that enhance growth while meeting our return thresholds in alignment with our broader capital allocation strategy. Our typical investment lead time is approximately 6 months, which, combined with our vertically integrated manufacturing provides flexibility to adapt spending as we gauge customer demand and market conditions. On return on capital employed, our annualized adjusted ROCE for the quarter was approximately 16%. The sequential decrease reflects lower product sales in the period and the incremental capital deployed for the asset acquisition. As an update on our assessment of the One Big Beautiful Bill Act, in the third quarter, we benefited from the reinstatement of 100% bonus depreciation for certain fixed assets applicable to both our current year capital expenditures and the acquired assets. As a result, we've had a reversal of income tax expense in the quarter and anticipate minimal federal income tax burden for the remainder of the year. Turning to our balance sheet, liquidity and capital allocation. We ended the quarter in a strong financial position. As of October 31, 2025, we had $205.2 million of borrowings outstanding on our credit facility. With a borrowing base of $723.5 million, we had $518.3 million of availability under the facility. On October 31, Flowco declared a quarterly dividend of $0.08 per share payable on November 26. In addition, during the quarter, we returned $15 million of capital to shareholders through share repurchases. Our ability to pursue both organic and inorganic growth while returning capital to shareholders and maintaining low leverage highlights the durability of our business model and the strong cash flow generation across our business units. In summary, we delivered a solid third quarter, outperforming our expectations with adjusted EBITDA above our guidance range. We executed well despite a softer upstream backdrop that weighed on product sales. And based on current visibility, we expect sales to improve in the fourth quarter. Joe Bob will speak shortly to the market environment and our outlook as we close out the year. Looking ahead, we expect our rental fleet to continue delivering consistent, predictable performance, supported by strong demand and contracted cash flows. We also anticipate continued resilience and strong free cash flow generation across our sales business units. Our disciplined capital deployment and differentiated business model give us confidence in our ability to continue delivering strong results. Back to you, Joe Bob. Joseph Edwards: Thanks, Jon. Turning now to the market outlook. As we noted last quarter, the North American upstream landscape remains dynamic. with operators continuing to balance production growth with capital discipline in a lower commodity price environment. While macro uncertainty and commodity price volatility persists, activity levels have generally stabilized and customers are increasingly focused on maximizing returns from their existing production base. We continue to see a shift toward prioritizing operating expenditures over capital expenditures to sustain or grow production, an approach that aligns directly with Flowco's core strengths in production optimization. Considering this market backdrop, our growth expectations for the remainder of the year are unchanged, and this is reflected in our fourth quarter guidance. In the fourth quarter, we expect adjusted EBITDA of $76 million to $80 million. This outlook reflects continued momentum and growth in our surface equipment and vapor recovery rental fleets, inclusive of a full quarter contribution from the assets acquired in August. Within Production Solutions, we anticipate a small incremental seasonal slowdown in product sales that will lead to an overall decrease in revenue in the Production Solutions segment. For the Natural Gas Technologies segment, based on current visibility, we anticipate a rebound in sales across both natural gas systems and vapor recovery systems, resulting in segment revenues slightly above second quarter levels. Finally, we expect SG&A to remain broadly consistent with the third quarter. I am pleased with the solid performance of our business this quarter, and I want to thank all of our employees across Flowco for their continued dedication and disciplined execution. While we are encouraged by our positioning, we remain focused on strengthening the business for the long term. We are committed to continuously improving our operations and advancing our strategic priorities. Within Natural Gas Technologies, we are seeing positive early returns from the use of machine learning to improve efficiency, reduce maintenance expenditures and enhance margins through an internally developed proprietary system. Across our manufacturing and operational footprint, we are evaluating opportunities to further streamline processes and increase profitability. As we strengthen collaboration across the organization, we are identifying ways to more fully service customers through our complete suite of products and solutions. And we continue to assess both organic and inorganic opportunities to enhance our technology and service offerings, positioning Flowco to further support our customers in maximizing their production and profitability. 2025 has reinforced the value of our strategic focus on production optimization, where advancing artificial lift technologies within Production Solutions and improving vapor recovery performance across Natural Gas Technologies is creating meaningful value for our customers and for Flowco. We believe the next phase of value creation will be driven by technology-enabled efficiency, continued innovation across our offerings and deeper collaboration with our customers to unlock value over the life of the well. Flowco is well positioned to continue advancing our strategy and to deliver meaningful long-term value for our customers and shareholders. And with that, I'll turn it back over to the operator for Q&A. Operator: [Operator Instructions] Our first question is from Derek Podhaizer with Piper Sandler. Derek Podhaizer: Just wanted to start with Natural Gas Technologies, more specifically, the progression of optimizing natural gas systems. It seems like that drove some of the top line decrease, but we've also saw 700 bps margin expansion there. I know, this was a point of emphasis last quarter. So maybe just update us on your progression optimizing that business unit because it seems like you made a lot of progress in the quarter and how we should think about it moving forward as you continue to optimize NGS? Joseph Edwards: Yes. Certainly, Derek. Thanks for the question. Good to hear from you. So, remember, the natural gas systems business unit is our supply chain, right? Its primary function is to build vapor recovery systems as well as the conventional and high-pressure gas lift systems for our rental fleets. In addition to that, from time to time, we will sell systems to customers that would prefer to own versus rent. Again, we do not sell high-pressure gas lift systems, but we will sell conventional gas lift packages as well as vapor recovery systems when the stars align and the price is right, okay? So, with that said, we did take in the earlier part of this year, the step to optimize that part of our supply chain by consolidating one of our facilities into our center of excellence in El Reno. I think you've been there. It's a world-class manufacturing facility, very proud of that facility. We took the painful step to close down one of our sister facilities in Pampa, Texas and reallocate the capacity to El Reno, Oklahoma. One particular point that we're particularly proud of is the fact that with all of the redundancy that took place in Pampa through various job placement exercises and career fairs that we hosted, we placed almost 100% of those employees in neighboring facilities in the Pampa region. So even though it was a painful step, it was a necessary step for our shareholders, but we did right by the community that we operate in every day and taking care of those employees. There might be more to go there. We have additional capacity elsewhere in the system. We continue to evaluate it as we look at the demand profile going into 2026. But yes, we're happy to get that behind us this year and move forward in a leaner way. Derek Podhaizer: Got it. Okay. That's helpful color. And then I guess just on the rentals, right, like we're up to 60% of revenue now. We were 50% in first quarter. Is this where you expect the run rate to kind of be going forward as we move into 2026? Or are you continuing to target rentals of HPGL and VRUs that we could see something north of 60% as we move into next year? Joseph Edwards: It will largely depend on the capital deployment pace, Derek. The shift from 50% to 60% this year is really due to the capital we've deployed as well as the softer product sales, okay? So, it's a mix shift coupled with growth CapEx kind of phenomenon. Heading into next year, we see -- and we'll talk on this. I think Jon will probably address this in a minute. We see capital deployment roughly in line with what we're deploying -- what we have deployed in 2025. There will be some mix shift within the capital deployment, of course, depending on the demand profile we see. But we fully expect product sales to be largely consistent with where they are in 2025, absent some sort of industry activity boost. Remember, the product sales are a function of both what happens downhole as well as the surface equipment, and we've seen particular weakness in the surface equipment sales business in 2025. So yes, look, hard to tell if 60% is going to be the new norm or if it's going to go down. My guess is it's probably going to go down a bit as sales recover heading into the end of the year and then going into '26. Anything to add to that? Jonathan Byers: No, I agree. I think, I mean, 60% is almost a flip from a couple of years ago because of all the investment we've made in our rental fleet, but Q3 was particularly low in terms of product sales. We expect that to recover a little bit in the next quarter. So I think you'll see that kind of bump back down a little bit. And overall, that will have an impact on margins as well as we sell more than we ramp. Operator: Our next question is from Philip Jungwirth with BMO Capital Markets. Phillip Jungwirth: You've operated the Archrock assets for the last couple of months, can you give a bit more detail on the customer response and feedback to date as they work with the Flowco team? And is there any cross-selling potential or increased HPGL penetration that can be done across the new blue-chip customers? Joseph Edwards: Certainly. To answer the second question first, yes, we inherited a couple of accounts that we, for a variety of reasons, had trouble penetrating, specifically with HPGL, Phil. And we think that the -- and it's early, but we think that those accounts are going to be open to the broader commercial discussions that our teams can have as they progress through the Wells progression from HPGL to another form of lift, most likely traditional gas lift. So those conversations are happening. We're starting to see some good early returns there, and that's just a daily part of the battle on our commercial efforts. In terms of the first part of your question having to do with really the integration of the systems into our fleet, it was seamless, okay? The reception that we got from customers of us really the leader in the space and what we do is focus on production at the wellhead, customers were very pleased that we were the buyer of these assets and are now the custodian of their early production efforts. So I'd say all around, it was very positive. I certainly hope all future M&A is as seamless as this. This is a particularly unique one, though, I think. But no, it's gone really well. Phillip Jungwirth: Great. Great to hear. And then can you talk about recent trends in VRU adoption across maybe both upstream and midstream? And just given that captured methane is put back into the sales pipeline, I mean one of the big themes we've seen is just the amount of Permian pipelines and construction FID-ed in the last couple of months and what the strip is implying from Waha post 2026. Does this at all make you any more optimistic on increased VRU adoption after you see higher in-basin gas prices? Joseph Edwards: No question. We are as optimistic, if not more, based on the fundamentals of the natural gas build-out. You mentioned pipeline capacity. It seems like any time you have a new pipeline announcement, it just inevitably gets filled with all of the associated gas that's coming out of the Permian. And then the massive amount of data center power build-out that's taking place, a very large portion of that will be fueled by natural gas. So, I think the demand profile for natural gas, the fundamentals for natural gas coming out of the Permian in particular, just continue to strengthen. And vapor recovery is becoming ubiquitous with pad design and with the undeniable economics that it provides to an operator to deploy our systems, we remain confident in additional system deployment. We really track a couple of key KPIs on a month-by-month basis. And one of the most critical ones is the number of units that we set every month net of those that come back to us in terms of returns. And I'm pleased to say that, we just continue to see positive months as we build more systems, as customer demand improves, that net set number continues to trend in the right direction. So we see no reason to back away from the capital deployment that we plan for 2026 in VRU, and look forward to hopefully providing more positive data points in the quarters to come. Operator: Our next question is from Sean Mitchell with Daniel Energy Partners. Sean Mitchell: Joe Bob, you kind of mentioned technology in the opening comments. But just are you guys building out kind of proprietary software tools in-house? Are you partnering with kind of digital specialists to accelerate kind of AI and automation capabilities? Joseph Edwards: Good question, Sean. We actually have built out over the last 10 years, if you can believe it. In-house proprietary software systems that have helped manage and operate our vapor recovery systems more efficiently, more profitably than our competitors, okay? So, this is a legacy of previous investments we've made as a private entity pre-IPO. We're in the very early stages of leveraging that internal capability of software development, specifically software development to help optimize surface equipment more efficiently. We're in the early phases of deploying that capability across the rest of our businesses. And then obviously, from there, integrating data that we can collect downhole, either with our own equipment or with third-party equipment into more efficient operation of a system that marries downhole lift techniques with surface drive that will enable the lift technique to take place. So, this is largely an in-house effort. We alluded to it in some of our prepared remarks, but we are starting to see some very positive early returns from years' worth of investment and hopefully more to come there. I think the ultimate end goal is to work with customers who have more data than we do, right, to integrate what they see in their production information with what we can provide with our lift and VRU techniques to help optimize their production on a field-wide basis, not just well by well. But that's the end goal. We're on the journey and look forward to hopefully sharing more good news over time. Sean Mitchell: Congrats on the quarter. Operator: [Operator Instructions] Our next question is from Jeff LeBlanc with TPH & Company. Jeffrey LeBlanc: I wanted to see if you could help frame the tailwind for your HPGL and VRU businesses as operators start to target gassier benches. I know you just talked about the tailwind for natural gas demand, but it actually seems like at least you're starting to see the shift on phase windows in the Anadarko and Eagle Ford and then probably over time, you can also see it in the Permian. So, I would just appreciate any color there. Joseph Edwards: For HPGL, what you're really -- what we're really looking at is oil production, right? So, as we look at big picture production data for the country, oil production continues to hang in there. And we haven't seen the meaningful decline in production that I think folks feared earlier this year might take place as commodity prices corrected and activity levels started to be curtailed. So, I think high-pressure gas lift certainly plays a part of that, and we're going to continue to invest in that effort. We've really seen no change from customers' demand for our systems, in particular, in the Permian, which is our largest concentration of units in the U.S. So, we expect to continue to generate positive growth out of that specific product line over the next few quarters and really have not seen any kind of demand profile shift. So hopefully, that answers your question. I know, there's not a ton of detail in there, but that's how we see it. Operator: Our next call is a follow-up from Derek Podhaizer with Piper Sandler. Derek Podhaizer: I wanted to ask about the buyback. Nice to see $15 million for this quarter. Maybe just updated thoughts on how you're thinking about that as far as your capital allocation strategy. Obviously, we have the dividend for a couple of quarters. Now we have the buyback. I know you have an authorization out there. You're balancing your capital deployment. Will this just be opportunistic? Will this be more formulaic, returning over 50% of free cash flow, which is really nice to see. Just maybe some more thoughts around the buyback, just given that you just kicked it off. Joseph Edwards: Yes, certainly, Derek. Listen, we've been very, very careful to not be prescriptive in telegraphing to the market how our capital allocation framework will be period full stop. We've been much more opportunistic in looking at ways to deploy the free cash flow that we generate every day. As we look during the quarter at our internal opportunities as well as every day how we're valued, it just became increasingly more clear that we're undervalued. And so, we leaned into share repurchases during the quarter, and we will continue to as long as we feel like we are not valued where we feel like we should be, certainly, that in relative terms against the opportunity set that we have to deploy capital in our existing business and, of course, in M&A. So, look, we'll remain opportunistic. We were happy to start the process during the quarter. to buy back stock opportunistically, and we'll just continue to evaluate it as it hits the screen every day. Derek Podhaizer: Got it. No, that makes sense. And then maybe just looking out to 2026, I appreciate that it's early. But how do you start to think about that kind of where you're comfortable, where estimates are today for next year? And just thinking about the progression of obviously kind of these weaker product sales. We have some seasonal dip in 4Q, but we should have some recovery next year. So maybe just some early thoughts as you look out to 2026 and kind of where numbers are shaking out right now. Joseph Edwards: Listen, we're a brand-new public company. We've started to and have been consistent in guiding quarter-by-quarter. I think we're going to continue that cadence, Derek. We provided you some guidance for Q4. We obviously have a view on '26, but we're going to see how the planning process goes between now and the end of the year. What I can tell you is that the opportunity set that we are investing in today, and remember, we're kind of a 6-month lead time kind of organic CapEx organization. The opportunity set looks strong. And we are making capital decisions out through June. And I'd say, they're largely consistent with the opportunity set that we've seen this year. So I don't see any reason why we're going to curtail capital spending certainly through midyear next year. The form of the capital may be different, moving from electric to natural gas drive or conventional from HPGL. It will move around within the systems that we operate. But I'd say as we see it today, it's pretty steady. The product sales, as you point out, are shorter cycle. And you tell me what the price deck is for next year, and we can pontificate on what the year could be? But we're just not comfortable enough to give you any kind of full year guidance just yet. But as we look into Q4, things look good, and we're optimistic that we're going to deliver another good quarter with some growth and positive free cash flow and returning capital to shareholders, just as you pointed out. Operator: This will conclude our question-and-answer session. I would like to turn the conference back over to management for closing remarks. Joseph Edwards: Thank you, everybody. Look forward to talking to you again in 90 days. I hope everybody has a great Thanksgiving and good rest of the year. Thank you. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.