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Operator: Ladies and gentlemen, thank you for standing by. Welcome to Talen Energy Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Sergio Castro, Vice President and Treasurer. Please go ahead. Sergio Castro: Thank you, Michelle. Welcome to Talen Energy's Third Quarter 2025 Conference Call. Speaking today are Chief Executive Officer, Mac McFarland; and Chief Financial Officer, Terry Nutt. They are joined by other Talen senior executives to address questions during the second part of today's call as necessary. We issued our earnings release this afternoon, along with the presentation, all of which can be found in the Investor Relations section of our website, talenenergy.com. Today, we are making some forward-looking statements based on current expectations and assumptions. Actual results could differ due to risk factors and other considerations described in our financial disclosures and other SEC filings. Today's discussion also includes references to certain non-GAAP financial measures. We have provided information reconciling our non-GAAP measures to the most directly comparable GAAP measures in our earnings release and the appendix of our presentation. With that, I will now turn the call over to Mac. Mark McFarland: Great. Thanks, Sergio, and welcome, everyone, to today's call. We appreciate your ongoing interest in Talen. Before we review the quarter, I'd like to start with where we are as Talen and talk about the broader landscape as we implement the Talen flywheel. Sitting here today, the overall market continues in the same trajectory as we've discussed in prior calls. AI and data center capital budgets continue to impress and expand. It seems like every day, there is another announcement, investment or idea floated on how to power growing data center demand. Demand for power keeps coming, and we will need an all-of-the-above approach to solve the growth from the supply side. Pennsylvania continues to drive economic growth through data center development and remains a pro-business place to invest. Governor Shapiro, the Pennsylvania PUC and the local communities have embraced these investments and recognize the advantages Pennsylvania brings to developers, including speed to market, while at the same time, they recognize the need to properly allocate cost, build new generation and keep residential rates in check. We are doing our part by evaluating options to solve short-term capacity questions and longer-term resource adequacy. It's why we recently signed an MOU with Eos Energy to partner on battery development in Pennsylvania and PJM using Pennsylvania manufactured batteries. As I've said in the past, for the next five years, we are going to need to solve a capacity issue, not necessarily an energy issue, and we believe batteries and peaking plants can solve this need much more readily than CCGTs and at overall lower cost. CCGTs will be needed, too, and we will look to build them in collaboration with the right partners and customers, but that is further off on the horizon. And while I have focused on Pennsylvania in these comments, we continue to be excited about the prospects in Ohio, given load there already exists, but more on that in the coming quarters. At Talen, we have a number of things in flight. First, we continue to execute under our existing agreements with AWS and the Susquehanna site continues to be built at an amazing speed and has been electrified. Second, we are working diligently to close the Freedom and Guernsey acquisitions, which will add to our baseload fleet and to our large load contracting strategy. As you know, we refiled our HSR application at the Department of Justice for a second time, restarting the 30-day time line, which now runs through November 17. We believe it was prudent to give the DOJ additional time because the transaction fails zero market power screens. We remain confident that we will close these acquisitions. I do note that this might take a little longer and bleed into Q1 of 2026. That said, we are pressing to get these deals closed as soon as possible and might be able to get them done as early as late this year. We are optimistic that FERC can then act on our 203 filings in short order. In addition to pushing our regulatory approvals or pushing them along, we also recently closed on a highly successful financing package. And lastly, with respect to the acquisitions, Dale and the fossil team are well underway on the planning to add both Freedom and Guernsey to the fleet, and Chris and the commercial team are ready to fold them into the portfolio when they can. We are truly excited to get going with these assets and want to thank the Caithness team on the professional transition to date. Third, we continue to pursue additions to the flywheel through large load contracts and additional megawatts for the portfolio. On the contracting side, there has been a fair amount of noise in the markets about our ability to contract, when we might be able to contract, how we might do so and how we will manage the so-called gas risk. Trust me, when we hear all of that, we just go about our business. We built a good comprehensive playbook with the Amazon Susquehanna contract and our focus currently on execution. Our strategy remains the same. Our efforts have only been redoubled and our focus has sharpened and our commercial learnings continue to expand. We have been working on the next thing since we signed the first AWS contract in early 2024 and gained a lot of commercial knowledge by changing that contract to front of the meter. Refiling of our HSR on Freedom and Guernsey does not change our path. Let me be more explicit as to why the exact closing of these deals doesn't impact our near-term strategy. In the rest of the portfolio, excluding Freedom and Guernsey, we have approximately 4 gigawatts of gas-fired generation between Montour, Lower Mount Bethel and Martins Creek as well as 300 megawatts of carbon-free power at Susquehanna remaining. Our efforts at Montour continue, and I'm sure you have seen that we are working on zoning and permitting at the site, which, by the way, if you were with us back in 2023, was the same activity we were undertaking at Susquehanna then. All of this activity goes on, all well before we close the acquisitions. And as I've said, we remain confident that we will still close the acquisitions in short order. So timing of closing of Freedom and Guernsey is really irrelevant to our contracting power strategy. We feel good about our ability to look at further expansion of the portfolio through acquisitions and continue to explore free cash flow accretive deals. And we are constantly challenging ourselves to reshape the portfolio. And I'm sure someone will ask when we might expect to announce the next part of the flywheel. And I'll say the same thing that we always say, which frankly, is next to nothing. You'll be the first to know when we're done. We want the right deals, not any deals and not on anyone else's time line. In the meantime, 2026 is setting up well. We are reaffirming '26 guidance, and we are starting to see forwards tick up. Gas is up, sparks are expanding and load continues to be strong. All factors that continue to impact commercial positioning on long-term transactions. Terry and Chris will walk you through what we are seeing in the markets in just a bit. Moving to the present and Q3 on Slide 2. As we said during our Investor Day call, we saw limited volatility and limited opportunity to capture incremental value in the third quarter, and the quarter was a little light of our internal expectations. but we already knew that and acknowledge that in September at our Investor Day. Going into the summer, we were looking to regain some of the lost opportunity from the spring outage at Susquehanna, but it just didn't materialize. Both July and August experienced fewer peak load days when compared to June, and we experienced incremental forest outages as our fleet continues to run with higher capacity factors and longer run times between maintenance. Terry will provide a few more details on this later. During the quarter, we delivered $363 million of adjusted EBITDA and $223 million of adjusted free cash flow. So far, in Q4, things are a bit better given the market move up, but we are still projecting to be at the lower end of our guidance range as we previously stated at that September Investor Day. Before I turn this over, I'd like to thank our entire Talen team for their hard work and dedication, and I'm happy to let you know that we have reached a five-year extension of our Local 1600 contract with the IBEW. So a special thanks to Rusty and the IBEW leadership team. At Talen, we are powering the future together. With that, Terry? Terry Nutt: Thank you, Mac, and good afternoon, everyone. Turning now to Slide 3. Mac covered the regulatory process, but let me provide an update on the financing of Freedom and Guernsey. Last month, we successfully executed several financing transactions at attractive rates to fully fund the acquisitions, including $2.7 billion of senior unsecured notes and a $1.2 billion senior secured term loan that contains a delayed draw feature. The pricing we received exceeded our initial expectations as the credit market continues to demonstrate demand for Talen paper. We also received commitments from our bank group to increase our existing revolving credit facility to $900 million and to increase our existing letter of credit facility to $1.1 billion, while also extending the LC maturity date by one year to December 2027, all to further support the impact of the acquisitions on the financial operations of the business. Congratulations to the treasury and legal teams for a successful set of transactions. We are currently earning interest on the senior unsecured note proceeds and will not draw on the term loan until the closing of either the Freedom or Guernsey acquisition. Turning to Slide 4. As Mac said earlier, nothing has changed thematically. The underlying fundamentals for Talen's value proposition remains strong. Macro fundamentals and AI demand remain intact. Last week, we continued to observe the trend of hyperscalers seeing tremendous growth in their cloud and AI businesses, which in turn has led them to continuing to raise or affirm their capital investment plans. As you can see in the chart on the upper left, the projected growth of spend from hyperscalers continues in earnest with total CapEx projected to be $700 billion in 2027. Not only is the capital commitment growing, but the acceleration of demand for power continues. For example, Amazon noted on their earnings call last week that they have accelerated capacity additions over the past 12 months by adding 3.8 gigawatts and expect to add over another 1 gigawatt in the upcoming fourth quarter. Further, they expect to double their overall capacity by 2027, which would add in excess of 10 gigawatts of capacity in North America alone. We see significant load growth coming over the next decade from hyperscalers as well as reshoring of manufacturing and the ongoing electrification of the economy. But what about the current load conditions? Q3 2025 provides a clear example of the change in the load growth in the PJM market. Overall, Q3 weather was flat compared to the same period in 2024 as measured by cooling degree days. However, the average electricity demand was higher. During the quarter, we saw approximately 3.4% of incremental power deliveries on a weather-adjusted basis in PJM when compared to the same period in 2024, a clear sign of demand growth in the market that is expected to continue. Furthermore, for the first time in over a decade, we experienced two of the top peak demand days at PJM during the heat event in June. These two demand peaks registered in at the third and fourth highest summer peak demand readings in the history of the market, further evidence of demand growth. Let me now turn it over to Chris to cover some additional market fundamentals on Slide 5. Christopher Morice: Thanks, Terry. This quarter, while relatively uneventful from a dispatch and weather perspective, did help validate our driving thesis that data load is here and more is coming. As Terry mentioned prior, below the surface, incremental load is beginning to manifest. We are seeing relative price strength in the face of very benign weather conditions. As cash markets are starting to feel this tightening, so too are the forwards. Looking at the chart on the right, you can see the market response over the past couple of weeks. And as you can see further, it has been a recent phenomenon, but one that we have been anticipating. Power is up, sparks are widening, and it remains a good time to be in power. And further, a really good time to be an IPP focused on being an IPP. Our native position is long several thousand megawatts of generation spread across the supply stack. Outside of the PTC and the data PPA, we have no other natural hedges. This informs our commercial strategy and allows us to participate meaningfully when we take a view on the market. And you can reference the appendix in back for those specific percentages. Similar to the forward, PJM capacity markets have been reflective of these tightening fundamentals as well, expressed through the all-time high BRA clears. PJM shrinking reserve margins continue to be a topic of discussion, both inside and outside of the RTO. PJM and the DOE have flagged potential supply shortfalls by 2030 if the trend isn't reversed. In addition to needing new supply resources, PJM's existing asset base will have to be relied on heavily to ensure grid reliability moving forward. The average amount of uncleared megawatts in the last two auctions was less than 1 gigawatt, and the recent released 27, '28 auction parameters show further evidence of continued tightening fundamentals. This auction is the final auction with capital floor in place. I'll note, we remain active participants in ongoing stakeholder discussions with PJM and other governing bodies, and we will see the results from that capacity auction on December 17. Back to you, Terry. Terry Nutt: Now to Slide 6, which covers our year-to-date financial and operating results. For the nine months ended 2025, we are reporting $653 million of adjusted EBITDA and $232 million of adjusted free cash flow. Our liquidity remains substantial with $1.2 billion of liquidity available for working capital, including approximately $490 million of cash available. Once we close on the Freedom and Guernsey acquisitions, we'll have $200 million more of liquidity as our revolver capacity will increase to $900 million. Excluding the acquisition financing, our leverage ratio is still within our 3.5x net debt to adjusted EBITDA target. Year-to-date, we generated 28 terawatt hours with over 40% of this generation coming from our carbon-free Susquehanna nuclear facility. Our year-to-date forced outage rate is higher than we have experienced in the past. This higher outage rate was largely driven by outages at our Martins Creek plant, which experienced prolonged outages due to induction fan repairs. These issues have been resolved, and the plant continues to serve as a peaking unit across the fleet. However, the outages did contribute to our inability to capture some upside as previously noted. Safety remains our first priority across the fleet, and our year-to-date recordable incident rate was 0.64. While higher than prior quarters, this remains well below the industry average. The commitment of the team to operate in a safe and reliable manner is an important part of Talen's value proposition. Now turning to the financial results on Slide 7. For the third quarter 2025, Talen reported adjusted EBITDA of $363 million and an adjusted free cash flow of $223 million. This quarter, our earnings include the higher 2025, 2026 PJM capacity pricing of approximately $270 per megawatt day and an increase in energy margin. Adjusted free cash flow includes higher CapEx associated with the extended Susquehanna refueling outage. Additionally, we also have higher solar energy pricing, which resulted in increase in generation across the fleet. Moving now to guidance on Slide 8. With three quarters behind us, we are narrowing our 2025 adjusted EBITDA as we are trending towards the low end of guidance, as mentioned at our Investor Day, due to the lack of volatility in prices in the third quarter and the extended outage at Susquehanna that offset our strong first half of 2025. Adjusted free cash flow remains near the middle of our original range, driven by our continued focus on generating the most cash flow per share as possible. We are affirming our 2026 guidance and remain confident in both our adjusted EBITDA and adjusted free cash flow numbers. All of this remains consistent with our Investor Day. Turning now to Slide 9. We remain committed to returning capital to shareholders. In September, we announced another upsizing of our share repurchase program, and we will have $2 billion of capacity remaining through year-end 2028 once we close on the acquisitions. We are supportive of targeting $500 million of annual share repurchases during the post-acquisition deleveraging period. Once we reach our targeted leverage of 3.5x or less, we intend to return to allocating 70% of adjusted free cash flow to shareholders on a significantly higher free cash flow base. Lastly, during the quarter, we sold nuclear PTCs for approximately $190 million. We were able to monetize the credits due to the additional benefits from tax reform implemented this summer, along with the tax benefits from the upcoming acquisitions, which will significantly reduce our cash tax burden for the next several years. The monetization is just another example of Talen's focus on producing bottom line cash flow. The liquidity addition from these sales provides us more options on our deleveraging activity, share repurchases and other strategic transactions. Turning to Slide 10. As of October 31, our forecasted 2025 year-end net leverage ratio is approximately 2.6x, well below our target. We will be focusing on debt paydown after the acquisitions to reach our targeted net leverage ratio by the end of 2026. And our pro forma net leverage is expected to remain below 3.5x by year-end 2026. With that, I'll hand the discussion back to Mac. Mark McFarland: Great. Thanks, Terry, and thanks for everyone for joining us on the call. We look forward to your questions. We'll turn it back to the operator, Michelle, and open the lines for questions. Operator: [Operator Instructions] And our first question is going to come from Angie Storozynski with Seaport. Agnieszka Storozynski: So my question is, as you said, Mac, every day, we seem to be getting announcements about new power deals, just not from IPPs, it seems. I mean we have conversions of Bitcoin miners, oil and gas companies are jumping in, companies that completely had nothing to do with power until yesterday. seemingly building new nooks and gas plants and yet we're still waiting for public and private IPPs to monetize their assets. So you're probably the last person I should push back against because you have been doing your share and some. But are you concerned that existing assets are losing the time to power benefit to the new build and those conversions? Mark McFarland: Angie, I appreciate the push actually. So no, we're not concerned. Look, we're going about our business, and we have been. As I said during some of the remarks there at the opening, we've continued to work to execute. I think that one of the things that we've done over time has learned a lot of commercial knowledge. We still think that's very applicable. We still think that we offer speed to market solutions. But I would note that these things are complicated. They will come. They just take time. And as I said during my comments, we want to do the right deals, and we want to do them on our time line and counterparties that we're working with time line to find the appropriate point by which to execute. That, to me, doesn't change the overall thesis nor does it change our thought process around this. It's just things take time. I mean if you think about it, we've gone from a behind the meter to -- we all know the history, but the behind-the-meter deal with the ISA being kind of thrown in the air, rejected and then being working to solve that and then we went to work on a commercial solution, moved it to the front of the meter, a lot of commercial learning there. We've always said we think that gas is the capability, a gas portfolio to be specific, not just single gas units that using a portfolio like we have the ability to backstop things in front of the meter type transactions that they're coming. And we continue to make progress. I mentioned, for example, and I'll let Cole jump in here in a second. But like we're advancing things. I mean you saw what's going on at the Montour site with the rezoning. We think that that's a good opportunity. We've described that in probably maybe too much detail over the past six months so that everybody wants to know when we're going to announce a deal there. But we're moving that forward in a positive fashion. we're going to get there. These things just take time. Cole? Cole Muller: Yes. I would just add that I think the deals that we've done, Angie, and continue to focus on our advantage from a speed to market, and we do provide an advantage there and probably on a different time frame than some of the deals that you're referring to being announced recently. And so we're really focused on those kind of deals that can get sites up and running and powered in the near term, like in our next year, 2-, 3-year window. And as Mac said, they're a little complicated, and we like to go for the gigawatt scale as well. And so it just takes some time, but we're pleased with where we're at and where we're progressing and where we're going. Agnieszka Storozynski: Good. And just one follow-up. Mac, you mentioned expansion of your portfolio. So I mean, I know that you have the 3.5x net debt-to-EBITDA leverage limit. I mean, is that a real limit? Or could you, for example, address it by, I don't know, securitization of the revenues that are coming from the Susquehanna contract, just being a little bit more creative to give yourself more of a balance sheet mom? Mark McFarland: Well, I'll let Terry jump in here after he kicks me on the table because I'm always telling that managing the balance sheet and credit is his problem, not mine. That's a joke, Angie, and for anybody on the credit side. Terry is now kicking me literally under the table. But the 3.5x, look, and I think we said this before and the way that we do capital allocation as well, the way we think about hedging and cash flow hedging and how that ties into making sure that we have appropriate cash flows, et cetera, all of that ties into our overall strategy. We set net leverage at 3.5x. We said that we're willing to toggle it. We are toggling it for a short period of time as we take on this new debt, as we close the Freedom and Guernsey acquisitions, but we've made a commitment to return to the 3.5x net leverage by the end of 2026. So we all pull on all those strengths. I think that when you looked at the appetite, and Terry mentioned that there was an appetite when we went through this financing for our paper, I think it was well subscribed. We got good rates that beat what we were anticipating, which is great to exceed that. And there is an ability to do things. But when it goes to the creative securitizations, I go back to -- and I'm going to let Terry jump in here and clean up this. But like doing the securitizations and doing project level financings and those types of things, we've made a concentrated -- concerted effort over the last several years to clean up the balance sheet taking out project-level debt, taking out sponsors, taking out other people at lower levels in the projects and put things on a corporate balance sheet, which allows us to manage across the portfolio. And we think that having a portfolio, having the commercial knowledge on how to structure long-dated large contracts, but having that portfolio and having that corporate debt at that level provides us the opportunity to backstop it across the entire fleet, not just a project finance type level entity that you get into when you start securitizing things. We have people -- and Terry can speak to this, but -- and Sergio as well, people come in and talk to us and want to put a contract over there with an asset over there and securitize it and offer debt in that form, but that has a different -- you start to having to quarter off credit. You have to start ordering off things as you deal with PJM. And all of those things to us don't make sense as much as having a portfolio that can provide long-term contracting solutions. Terry Nutt: Yes. Angie, this is Terry. Just to add on to Mac's comments, a couple of things. The 3.5x leverage ratio, it's a target. For the right opportunity with the right return, we would be willing to push past that. The other thing to elaborate on is as we think about serving our debt, serving our interest and just serving the operations of the business. As long as we've got contracted cash flows that have limited risk, we feel really comfortable around that. And this goes back to Mac's other comment is when we think about the balance sheet and we think about the leverage with respect to, okay, how are we hedged, how comfortable do we feel about those cash flows? And how does that sort of near-term outlook sort of all work together. And so we'll continue to do that. The other thing I'll add to it as well is as we've grown the business and as we've added on the initial AWS transaction and the second one, and then hopefully, here in short order, the Freedom and Guernsey assets, we're growing the earnings base. We're growing the cash flow base, which obviously has resonated with the credit market. And so when I got here 2.5 years ago, we had just issued some senior secured notes at like [ 8.625% ]. And here, we just get off the back of issuing two sets of unsecured notes that have a 6 handle on the interest rate. And so our cost of debt is going down in recognition of how well the business is performing and how we're growing. So we think those things are all positive. They give us a lot of options as we think about growing the business, and we'll utilize it as we move forward. Mark McFarland: And that balance sheet just gets stronger over time as we grow into the contracted aspect as the ramp ramps up with the existing AWS contract stand-alone. But as we add more contracts to that, right, it's going to further strengthen the balance sheet and provide for visible visibility to those cash flows. So maybe later, but not now. I think we like the position we're in and -- it gives us the flexibility to toggle things for short periods of time and then get back to our net leverage target of 3.5x net debt to EBITDA. Operator: And the next question comes from Shar Pourreza with Wells Fargo. Shahriar Pourreza: So, Mac, just in Maryland, there's obviously a vocal IPP around supporting solutions to add incremental capacity in the state's expedited CPCN solicitation process. I guess what's your thoughts around offering up alternatives and maybe again, your view on the construct in that state and then you can kind of be supportive of RA efforts there? Mark McFarland: Yes. Thanks, Shar. Look, first, I'd say we're actually doing our part through the RMR. Those are units that were slated to shut down under basically an agreement with the environmental firms, et cetera. And so we've worked hard to execute those RMRs. We are looking at would it make sense to get more gas to that site and prolong and convert. But you got to be able to get gas to that site, and we're working with the local utility, but that's going to take some time. I think that -- but where we have assets and where we're located there, it probably doesn't lend to sort of redevelopment in the size that you could do further on the eastern side of the Bay, which is over towards Chalk and that area, Chalk Point, where there's a couple of CCGTs, there's open land, et cetera. And getting gas across the river or the Lower Bay or Upper Bay, however you want to talk about it, is -- that's a difficult proposition. So, but we're working to try to get incremental gas there to see if we can take that coal unit and convert it like we did convert Brandon like we did at Montour and as we have done and we have the ability to do at Brunner. Look, if there was an ability to figure something else out, we'd look at it. But right now, that's how we see us contributing to Maryland. Shahriar Pourreza: Got it. Okay. That's perfect. And then just lastly, shifting gears to Pennsylvania. I guess, Mac, what do you need to see to build there? I mean, have you had any discussions with the utilities on their views of resource adequacy solution? And is there a common ground there that you can strike? It just seems like when you're hearing from Exelon and PPL, there's discussions to be had, but I just want to get a sense from you where the bid ask is there. Mark McFarland: Sure. Well, first of all, there's the whole [indiscernible] that's going on about how do we solve that, and we've been active in that, and we've got a couple of things that we're working up is to provide solutions there. We worked up a proposal with a consortium that included a couple of hyperscalers as well as some other IPPs and trying to be constructive there. I think the real issue is that we are concerned about the so-called rate shock of capacity prices going to $330 in this last clear and $270 before, but those prices do not support new build. If you look at any of the economic analysis done as part of the quadrennial review, it's $500 a megawatt day, okay? And then you get into the debate of will one capacity clear incentivize that build. We think that there needs to be some structural changes to provide a longer-term perspective there for new build. There is talk about building in rate base, but it's always done if there's the right contract or the right ability or the right returns, and even if you do that, it's at $2,500 a kW. And if you -- even though the energy curves have ticked up and the capacity markets have moved up, they do not equate to what is necessary for a new build CCGT. We actually think that CCGTs are a solution that are needed in the future when overall energy demand rises, but there's plenty of energy on the grid. We can run mid-merit and peaking units more. We're setting our units up to do that. We mentioned Martins Creek, and we're running them harder and have less time for maintenance offline, et cetera. And we're making adjustments in CapEx and O&M, as Terry mentioned earlier in the remarks, those can sop up a lot of energy demand. But it goes back to solving the 50 to 100 hours a year of capacity that needs to be solved. And we just think that, that is -- lends itself better to things like batteries or peakers rather than CCGTs and at lower overall cost and should be utilized. But to do those, a lot of people are sitting around thinking, okay, well, if we're not there yet, then and it's easy for us to say, right? We'll do something if someone provides us the right level of return for the investment over a long-term contract. Well, that's true, too, but the energy and capacity markets aren't there yet. But I do think you're going to see them get there over the next period of time, year two, but it's going to be solved by something other than CCGTs because it's just a speed to market thing. You cannot get a CCGT built by this time. And the question that preceded you here talked about all these other solutions. Well, all of those other solutions are high-cost solutions that people are not grasping at, but they're proposing but they're very high-cost solutions because of the technology that's being used, but people are looking at it as a speed to market. And so we need to get CCGT goings in the long term, but we've got to solve this 50 to 100 hours in the near term. And we just think that we're going to be able to participate in that by adding to our fleet and peakers batteries if we can get the right return mechanisms or if we can integrate it right with contracts, things of that nature. So I hope that answers your question, Shar. Shahriar Pourreza: It does. It does. Yes, there's obviously some more wood to chop there, but I appreciate it. Operator: And our next question will come from Bill Appicelli with UBS. William Appicelli: Just wanted to build upon some comments you just made there. You mentioned earlier about energy prices moving up. What are your thoughts on what's driving that? And where can that go, right? I mean if you discuss what you just mentioned there around the mid-merit and the peakers running more, right? I mean that's going to drive up the marginal cost on the energy side a bit. So I mean, is it driving to the upper $80s, $90 in terms of cost of new entry on an energy level? Or how do we think about sort of what the backdrop is for the wholesale power markets? Mark McFarland: Yes. Good question. Let's see if I cannot mix metrics here. Look, on a megawatt hour basis all in, I think you're looking at 120 plus for CCGT on a greenfield development and you're looking at a 2030 plus delivery time frame of COD. I do think that you can find ways to add so-called additionality to the grid that are cheaper than that and quicker than that. And those -- I've already mentioned that. I do think that -- and to your point, and this is a little bit about what Chris mentioned when he talked about the curve and the recent phenomenon of going up the curve, some of that's gas driven a little bit, but some of it's also people looking at it and saying sparks are expanding because you're getting to higher cost units filling the energy demand. This overall energy demand is going up. So energy prices should go up. We -- as Chris said, we've been waiting to see that and people often ask us. And even until recently, I mean, if you look at that chart that Chris was talking about, it's only been like the last three weeks that this thing has gotten a bid. And -- but we were anticipating that it was going to go there. We set the portfolio up on that to think about when we go in and layer cash flow hedges. Obviously, there's some timing that you can apply there, but there's also, as Terry mentioned, managing the cash flow hedges to protect the downside. as we look at security for having cash flows for debt service, et cetera, share buybacks, all the like. So we do think that energy markets are going to go up. I don't know if it's 80, 85, but we're starting to see on-peaks go up. And quite frankly, for the first time in a decade, we're starting to see summer on peak start to beat winter on peak. And that hasn't been a phenomenon for a decade in PJM. And as I think Terry mentioned the third and fourth highest peak days in June that we've seen. So a lot of this stuff is starting to manifest itself. I think the tip of the iceberg was the 270 and then the 330, and that's the capacity market because it's further out in time. But now you're starting to see it in the '26 and '27 forwards. And we just think that, that thesis is continuing. Terry Nutt: Yes. And maybe, Bill, to add to Mac's comments, really your second part of your question, I think what you're seeing in the forwards is really driven by what we're seeing in the fundamentals, right? We've seen this demand growth. We've gone, I mean, effectively a decade with sort of flat to no growth in the PJM market from a load standpoint. And now we're starting to see tangible load growth on a year-over-year basis, and that expectation is going to continue. I think the recent peaks that we hit during the summer are other good indicators of it. And then also just people rolling forward and actually really thinking about how they're going to handle their wholesale power cost in '27 and '28 and beyond. So we've seen more activity in the market. We do think it's fundamental based, and we think it's constructive. And to Max's earlier point, to get to the level of value to where you can build a CCGT or anything else, right, the devil is in the details of what is that total cost and then what return are you solving for. But we're still far away from that point. To Mac's comment, right, we think that, that number is well over $100 per megawatt. And so we've got quite a bit of ways to go before we can hit that point. William Appicelli: Okay. All right. No, that's very helpful. And then as far as additional asset acquisitions or can you just speak to what's out there? And are there things that you would still consider folding into the portfolio at this point when you kind of are making the evaluations around capital allocation? Terry Nutt: Well, I think on that, we'll continue what we always say is, obviously, we're always in the market looking for things. When we find something that we like and we think fits where we want to go, we'll definitely let the market know about it. As you've seen, generally, right, there's still a lot of M&A activity in the space. It varies from one asset to small portfolios. Obviously, there's been several larger M&A deals done this year across the IPP space. But still a lot of activity. I think there's still a lot of holders of assets that have held them for a while that are probably in a spot where they're looking for an exit. And then obviously, you've seen Talen and others engage from a buyer standpoint. So, still active, still looking at things as they come around across our desk. And as we get to a place where we find something, we'll talk about it then. Operator: And the next question comes from Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to pivot to battery storage, if we could. And wondering if you could talk a bit about why you chose the partner you chose. And do you have any thoughts specifically on long-duration energy storage for AI data center applications? Mark McFarland: Yes. Look, first of all, we're working with EOS and looking at the deployment there. And there's something that we talk about long duration, which obviously the technology provides for long duration, but it also can be discharged for 4 hours, can be discharged for up to 12 hours. You can go across that spectrum and you can dispatch it over time and reload the battery. And I think that, that is critical because managing load that helps in managing load. And when we think about batteries, we kind of think of them as net load, if you will, which is reducing peaks, which goes back to the 50 to 100 hours, and can you do that across time. So we think that there's a good match up there. I will also tell you that because of the technology that EOS uses, it has a distinct advantage in that the fire protection needed is not the same as lithium-ion or other batteries. And so because of the technology doesn't have the same components and doesn't need that, that allows them from a -- and I think Cole can probably expand on this. But as we think about load and we talk about colocation, but I want to talk about just like colocation relative to the grid, being able to have batteries next to data centers or next to a nuclear unit or next to one of our other generating units, you don't want to have to worry about fires there and that associated. So it has that incremental advantage as well as the advantage of being able to match up on a time duration at different intervals. Obviously, efficiencies go down depending upon what you choose, et cetera. But those are the two benefits I see. And then the ability -- again, that goes back to colocation. I don't know if there's anything you wanted to add there, Cole. Cole Muller: I think it's an interesting technology and opportunity for us that we're exploring and better understanding the value that the battery solution may provide to data centers is something that is certainly core to why we want to kind of proceed with some kind of partnership like -- and so we're exploring it and having discussions around what that value stream is. And as those solutions present themselves, I'm sure we'll be kind of talking more about that. Jeremy Tonet: Got it. And just wanted to pick up, I guess, with the forward curve moving up a bit here, as you touched on before. I'm just wondering, granted it's recent, the moves you're talking about here, has that started to, I guess, filter into conversations on long-term contracts, just these upward moves, has that changed anything in conversations? Mark McFarland: Power is not getting any cheaper. So I think it informs things. But when we think about long-term contracts, I'm looking at Cole here to jump in. We're thinking about things over the long term. And we like matching that load over the long term, as Cole said, in the gigawatt size and the large size over time. And when you think about long-term contracts, the markets have gone up, they've gone down, et cetera. We like the ability to take our assets, contract them provide the appropriate level of return, reduce risk, therefore, we would contend would generate effectively the ability to have a lower free cash flow yield because it's lower risk and higher valuation. And that's the Talen flywheel that we're trying to implement. But... Cole Muller: Yes. And I think as energy prices go up, it informs us on the terms, not just the pricing, but the overall terms, as Mac is talking about of any future deals. And also, I'm sure, informs the counterparties on what their views are and what term and pricing and risk and so forth. So, look, I mean, I think as Mac said, we're going to do deals on our time line. And I think as power prices are continuing to push higher, it continues to give us conviction that we're going to look at the right deals in size and pricing and all the terms. And there's no need to go rush to contract, but obviously do them prudently at the right time. Mark McFarland: And -- but I also think I would just add that you can't see -- there's no visible curve for 10 years, whether capacity or energy. And so we're sitting back thinking about what is appropriate returns how do we think about counterparty, how do we think about gas? How do we think about backstopping with the portfolio as I manage, -- all those different things get into that. And then what does that do to our credit ability that Terry was talking about earlier in managing our leverage ratio. There was a question earlier about could you do different things with your balance sheet. As you grow into having a higher contracted portfolio over time, you could certainly do different things, but we're just not there yet. But we think that this is an overall -- we've got to embed the right risk and the right premium for taking these longer-term views and the counterparty has to do the same thing, as Cole was saying, and then it just takes two to tango. Operator: And our next question will come from Steve Fleishman with Wolfe Research. Steven Fleishman: Maybe following Angie's initial question, just in terms of the customer interest, how much is kind of the desire for additionality in any way impacting demand for more contracts for you? And do you see likely -- I mean, the Sus deal had potentially adding SMRs? And do you see some type of new investment likely being part of any deals that you do? Mark McFarland: Steve, it's Mac. Team can jump in. Look, I definitely think that the so-called additionality, I'm not even sure that there's a standardized definition of that, but incremental megawatts to serve incremental load is kind of how I'm going to frame it. But I do think that over time, we're not out of energy right now. We're actually not capacity short. Markets are clearing at the administrative caps and the things, and we clear closer to the real caps if left uncapped. But we're starting to get to the point, and these are in the out years of needing megawatts, but there's also the ramp of data centers over time. And the two of those things at some point, you're going to have to say, all right, how do we make sure -- and it's the so-called BYOP or BYOG, bring your own power, bring your own generation, et cetera. Those things are going to intersect later in the decade. And we're supportive of thinking about how do we solve that in a market construct in our contracting strategies, et cetera. It just hasn't ripened yet. I think that there's just been a lot of talk about it. I think there's a lot of people out there with a lot of solutions trying to bring -- offering power without saying we can do certain things, but there's no offtakes associated with those yet. That just hasn't ripened. I don't think -- and Cole can jump in here, but I don't think the demand or the desire for quickly to connect power or to have power towards the end of the decade is changing. It's just how do you solve that. And we're actively thinking about that. Cole Muller: Yes. And I would just say that the data center hyperscalers and everyone in the data center build-out space is really thinking about the problem in multiple, I guess, lanes. As Mac talked about before, different phases of power and there's like the near, medium and longer term. I think the medium and long term, yes, hyperscalers are looking at how do they add megawatts to this -- to the grid as they ramp up. But they're also very, very focused on the near term, 2026, 2027, 2028. And so we see them still being very active in getting existing power and connecting to existing power -- and that's really, as I said earlier, where we're focused on. And then if there's an ability to also participate in a longer-term solution, as we've talked about in previous settings around SMRs or new build, as Terry was talking about earlier, having those conversations and exploring that as well. But to me, it's -- they're still very focused now on getting power as you saw, I'm sure hyperscaler CEOs talking about doubling their capacity by 2027 from 2025, right? And the only way to do that is through existing power on the grid. And so they're -- from our -- all of our conversations, very, very interested still. Steven Fleishman: Okay. And then PPL also reported today, and I mean, their high probability gigawatts of data center demand by the end of the decade, I mean it's like a double or triple of their current peak. And so I'm curious just maybe Chris could talk to, just are you seeing all the zonal discounts that you historically had in there kind of start going away yet in the forward curve? Is it -- does at some point, this actually kind of flip maybe even to a premium? Or just I'm curious what you're seeing there. Mark McFarland: Yes. Steve, it's Mac. I'll take this. We lost Chris, unfortunately, due to some conflict here. But that, Steve, is something that is the next evolution of what we think is going to happen. But if you think about ramp rates and et cetera, and where generation is on the grid today and the basis differential, I think what you're asking, if I'm understanding correctly, is like PPL zone versus West Hub because PPL zone trades at a discount. Well, over time, as you build load there, you start to sort of soak up the incremental megawatts there and you move the East-West interface west. And so therefore, you get closer to the West Hub. And so therefore, it starts to close that differential. But that's probably not a necessarily near-term phenomenon until these things get ramped up. So if you think about our Susquehanna 1920, that ramps full ramp is 2031, '32. So we're four or five years from that. So there's no -- Steve, there's no way for us to go out and test the market, but I don't know that we would -- I think we would be in 2032, thinking that PPL should be a lot flatter to West Hub in that time frame. Terry Nutt: And Steve, maybe just to add to Mac's comments, that basis market historically, especially in the term, the term will react if there's large transmission projects and there's transmission projects that are being executed and built upon. But excluding that or excluding those projects that are out there and getting those completed, it does have a bit more of a recency bias of, okay, how is it showing up in the real time? How is that basis showing up as load comes in. And so as we see more of that as the load comes into the PPL zone, I think that will inform the term market a little bit more. And then you'll start seeing a change with respect to that. But it's a little bit more of a nuanced market and the fact that it trades off of fundamentals around transmission and then just what sort of a more recency bias, if you will. Steven Fleishman: And then just one last quick one. The Martins Creek issue this quarter, and you mentioned you're just running these peakers harder. Just are you looking at needing to ramp up capital spending at all to do anything to those units for next year? Mark McFarland: Yes, and it was included in what we put into our guidance. And -- but we're also thinking about, Steve, it's sort of this thing -- you've been doing this and covering it I guess as long as I've been doing it, too. But like the -- as power markets come off, you have to start to curtail capital plans and think about the way that the plant gets dispatched. When you go in the reverse direction, you have to do the same thing. We put more capital into '25. We're putting more into '26. But what we're also noticing, and I mentioned this is not only do we -- are we getting extended run times and extended dispatch, if you will, of the peakers, Montour, in particular, Martins Creek, et cetera, that Martins Creek was less than 4% type capacity factor for a couple of years ago and now is running teens. And so -- but what's going on is, in the past, we always had the ability to take the unit offline okay, and had an extended period offline by which we could do maintenance. Now we're seeing that, okay, it's running, it's running for extended duration periods of time, and we don't have to do that. So it's not just the capital that goes in. It's actually how you think about maintenance and maintaining the units during that. That is definitely true. That is not the issue that it had at Martin Creek. We just had a particular ID fan that had some bearing sets that took a while to get, but we just didn't have that downtime by which to recapture, get that ID fan done and get it back in there. And it was just -- it was something we're always fairly -- not fairly, I think we're transparent with respect to giving you some color as to what happened, and that's what happened. And -- but we're excited about, quite frankly. I mean, if you look at it overall, the idea, and it's something that we've been talking about, and it goes back to why are we seeing forwards tick up and why didn't we see them before? I don't know. But why are we seeing them now? It's because we're going further up on the dispatch curve. during most -- every hour is now getting further and further up on the dispatch curve, which means you're going to be up with higher heat rate units. And so we're seeing that manifest itself across our fleet. Operator: And our next question will come from Nicholas Campanella with Barclays. Nicholas Campanella: So just on the commentary about Amazon doubling their overall capacity by '27, that's their number. But just can you talk to the AWS ramp? Obviously, like that data point is supportive, but just any indication that they could be ramping power draw sooner than expected? Any data points on the ground level that you can kind of point to? Terry Nutt: Yes. So Nick, maybe just to touch on that and then I have Cole chime in on this as well. As Mac mentioned in the opening remarks, obviously, the data center is powered, it's energized. They're taking electrons and moving forward. The construction of the site continues in earnest, significant amount of work done over the past several months, and they continue to push forward. Obviously, we don't want to get into too much detail around what their ramp is like and what they're doing from a confidentiality standpoint. But we're fairly comfortable with how they're pushing forward. Cole, do you want to add anything? Cole Muller: Yes. I would just kind of reiterate what we've talked about before and continued progress. There's multiple buildings being built on top of the building that we sold to them additional ground prep, again, anyone who drives by can see all the activity. And just one point to remind folks that we talked about back in June is we transferred the old Nautilus buildings that can take up to 200 megawatts over to Amazon. Now what they do with that, that's, again, for them to speak to. But we're fairly -- we see a lot of signs that acceleration is going to continue and that they'll accelerate faster than the ramps we put out in June. Nicholas Campanella: Awesome. And then just one cleanup question just with the acquisition. I just hear you -- I hear you in prepared you're working constructively with the DOJ, could target closing sooner than 1Q '26 now, but '26 guidance assumes January 1 close. So just talk to the conservatism in that '26 number at this point and your ability to just kind of maintain that range if that gets pushed out. Mark McFarland: Yes. So look, there's a lot of moving pieces to a guidance range, right? Forwards are up. We've got -- that's within the range of what we provide. We've got potential for -- as we stated, this might slip into the Q1. We're still hopeful that we're working hard to get it done this year, and we'll see what happens. And as we get closer to that time frame, we'll provide updates on that. But we're just we're not at a point that suggests to us that we should change that range right now. So as we get closer there, we'll give you an update. Operator: And then our next question will come from David Arcaro with Morgan Stanley. David Arcaro: I was just curious maybe where are we in terms of economics for battery storage in PJM, just thinking about that EOS partnership. And wondering if you could characterize how you're seeing that opportunity across your fleet if you were to add battery storage. Mark McFarland: Yes. We're not quite there, David, and sorry for using your name. Look, I think that -- we're not quite there and ready to get into that. I think we're in the early days. But as we look at the economics and look at the capital build and as the cost of batteries come down and their ability to basically think about -- and it goes back to, I'll call it, load balancing for all practical purposes, you could think of it as supply balancing, which is we've got a lot of incremental megawatts that can be run most of the hours except the peak. So why not use those to charge batteries and then discharge them during the peak. And we think that, that can become a more economic piece over time. Obviously, batteries need to continue to evolve, bring their capital cost down and then bring their optimization methodologies into play. And we think that, that works well when you think about how do you take a load that is, for the most part, a base load, and I'm talking about data centers and then think about how do you clip some of the peaks of that -- and then all you're doing is all using all the rest of the hours other than the 50 to 100. So we think it's going to show some promise, but we're on the early days of getting through the economic model. So it's just -- David, it's just too soon. Operator: And the next question will come from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Look, let me clean up a couple of things here. One, on buybacks. I noticed there wasn't much activity this quarter. Do you want to speak to that real quickly? And perhaps more relevant, again, you're going to laugh here, Mac, but MNPI, anything to talk to on that front? Is there any twist there that's relevant? Terry Nutt: Yes. So, Julien, with respect to the buybacks, obviously, we were fairly active during the quarter with the Freedom and Guernsey acquisition and then also getting ready for earnings and financing. So that really drove sort of the buybacks with respect to Q3, working hard to get those acquisitions done and announced and out there and then working on our Investor Day materials as well. So that was a big driver of where we stood on buybacks in Q3. Julien Dumoulin-Smith: Okay. Sorry, you guys did do buybacks in Q3. That's what I was confused by. Cole Muller: No, we did not. Mark McFarland: We did not. And that's -- you can see that we didn't disclose it, obviously, Jordan. As Terry said, there's a lot going on during the quarter. And whether that's MNPI or getting ready for financings and blackout periods with the results and then closing Freedom and signing and Guernsey. Yes, it's just -- you can call that -- we'll talk about MNPI in arrears, maybe, and that would -- that precluded -- had a large preclusion across the quarter, so... Julien Dumoulin-Smith: Absolutely. A couple of cleanup items. Is there any chance that you accelerate this Sus deal with AWS and then clean up the remainder of the uncontracted Sus here? I mean I just want to come back to that concept. I mean you talked about the ramp-up to [ 31 32 ]. Everyone is grappling to get this stuff faster. In theory, this is a question of execution, right, to get it done faster with you guys. Can you speak to that a little bit on the ability to ramp it up? Mark McFarland: Look, anecdotally, we speak about desires with respect to Amazon. With respect to the contract, we actually want to maintain confidentiality with our counterparty there. We can speak anecdotally about them speeding things up. We said it's a lever that can be pulled. We stand ready to deliver 19, 20 megawatts whenever they want to take it. That was the obligation that we said. And if you just think about where people are going in speed to market, when you have a site that you're building at and you have the megawatts that are ready to go, that -- there's nothing more than speed to market than that. And that's about all we can talk about because we're not going to speak for Amazon. You'd have to talk to them, but we're excited about the possibility for them to ramp up. And if they did, we're willing and able to serve. Julien Dumoulin-Smith: Excellent. All right. No, fair enough. I appreciate that. And then lastly, just would you be in a position to get another gas contract here prior to the close of these acquisitions? Or would you tie those two together to the extent to which you get the acquisition gets kicked out in 1Q? Mark McFarland: Look, I think -- well, you've written about this, frankly. So it's a good thing to have a discussion. I think that when we thought about this, and let's step back before Freedom and Guernsey. Before we had the announcement of Freedom and Guernsey, we were already talking about working on the next deal. And that was even before we revamped the 1920 front of the meter, and that's just a continuation of the process. And that's why when we looked at it, we were talking about we have Montour, we have Martins Creek, we still have 300 megawatts available there. So I don't see the intersection of those two as reality. Obviously, what happens with the Freedom & Guernsey acquisition is if we do a deal, we would eat into that amount of megawatts that we currently have and therefore, Freedom and Guernsey reloads the bank. So that's how we view it. Operator: That concludes our allotted time for questions. I would now like to turn the call back over to Mac for closing remarks. Mark McFarland: Yes. So, thank you, Michelle, and thanks, everyone, for joining us and for the Q&A period. We tried to spend some extra time, and I know there's a couple of people still in the queue that we didn't get to. We're happy to take your questions and look forward to seeing everybody in the balance of this year and early next year with a busy schedule on the road at conferences. And I appreciate everybody's interest in Talen, and we look forward to continuing to execute. Have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Grand Canyon Education Third Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sarah Collins, General Counselor. Please go ahead. Sarah Collins: Joining me on today's call is our Chairman and CEO, Brian Mueller; and our CFO, Dan Bachus. Please note that many of our comments today will contain forward-looking statements that involve risks and uncertainties. Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements. These factors are discussed in our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. We undertake no obligation to provide updates with regard to the forward-looking statements made during this call and we recommend that all investors review these reports thoroughly before taking a financial position in GCE. With that, I'll turn the call over to Brian. Brian Mueller: Good afternoon, and thank you for joining Grand Canyon Education's Third Quarter 2025 Conference Call. GCE had another strong quarter, producing online enrollment growth of 9.6% in hybrid growth, excluding the closed sites and those in teach-out of 19.3%. New ground traditional enrollment grew in the high single digits year-over-year. With that, I would like to review the results of the 4 delivery platforms at Grand Canyon Education. First, the online campus at Grand Canyon University. New starts were up in the mid-single digits in the third quarter of 2025, which was in line with our expectations and total enrollment growth was 9.6%, which significantly sees GCU's long-term objectives. The new online enrollment growth rate was an expected deceleration from the previous quarter's growth rates, but is a strong result given that the third quarter is the largest start quarter of the year, and thus, the prior year comp is large. In the past, I've highlighted 4 reasons for the growth. They include continuing to roll out 20-plus new programs on an annual basis, working with over 5,500 employers directly to address workforce shortages, strong retention levels and holding the line on tuition to maintain GCU's competitive pricing position. A fifth reason and one growing in significance is the number of students between 18 and 25 years old, they're choosing to go to college online. There are very few universities that have 310 programs delivered fully online. The online campus growth is benefiting from the growing trend of recent high school graduates that are doing their total program online as well as students attending the campus that go back and forth between living on campus and using the flexibility of online to engage in other life experiences. Given the trends I just discussed, we believe the momentum that exists will continue. Second, the GCU ground campus for traditional students. New traditional campus enrollments were up in the high single digits and total traditional campus enrollments were down slightly year-over-year in the fall of 2025, while total GCU ground enrollment was flat year-over-year. The slight decline year-over-year in total traditional student enrollment was in line with our expectations given last year's decline in new enrollments caused primarily by the FAFSA site issues and more recently the higher-than-expected summer school graduations. We believe GCU will continue to experience new student growth on the ground campus because of the significant advantages, including the very low price point, very low average debt levels, percent of students completing in less than 4 years, the relevancy of GCU's academic programs to a fast changing and modern economy and having a 20th ranked campus in the country. As we move forward, there are 3 trends that are impacting traditional college campuses throughout the country. Number one, a number of high school graduates on an annual basis continues to decline. Number two, the percent of high school graduates that are choosing the 4- or 5-year baccalaureate path continues to go down, while the number of students choosing shorter certificate or trade programs is going up. Three, the number of high school graduates choosing a baccalaureate path, but doing it fully online also continues to go up. We're in a very strong position given these trends. We have a high-quality affordable offering on the GCU ground campus, but have even greater program choices for students that want to go fully online or to move back and forth between ground and online. In last quarter's earnings call, we discussed the potential to change the categories that we report student enrollments in, so that we most accurately reflect the flexibility that GCU provides to students across the life span, but have decided to report them consistently with what we have reported in prior years as we continue to analyze these trends. We have made some changes to our marketing and recruitment strategy for GCU's traditional campus which accelerated some spend into 2025. Although it is early, those changes to date are producing positive results as registrations for the fall 2026 school year are ahead of last year. Third, Grand Canyon Education's hybrid campus had an increase in enrollment year-over-year of 17.4% in the third quarter. Excluding the closed sites and those that are on teach-out, enrollment increased 19.3% year-over-year. This exceeded our expectations and is the result of a higher-than-expected number of new students starting in the fall. There are 2 main reasons for this continued growth. One, almost all of our active ABSN partners have responded to the younger students interested in ABSN programs by admitting advanced standing students or are in the process of making that change. Students with partially completed degrees haven't accumulated a great deal of debt and are very interested in nursing careers, but didn't have an efficient way to earn the prerequisite science course work. GCU created the science courses and some other gen ed courses so that they could be delivered online in 8 weeks. Students can access these courses from anywhere in the world. There are start opportunities almost every week. These courses have been made very affordable, are taught by experienced faculty, class sizes are low, and there is a tremendous amount of academic support, including an artificial intelligence project, which provides students 24/7 access to tutoring. Since implementing these courses, we have already enrolled 19,410 students. In the summer of 2025 term, 66% of matriculated hybrid students at non-GCU sites took at least one of these courses and of the students, they took 5 courses on average. We have a waterfall report that allows us to know how students are progressing through their prereq courses and when they will be eligible to start at one of our ABSN sites. Graduation rate of students who successfully enter the ABSN programs is in the mid-80s, and the first-time pass rate on the NCLEX examination is approximately 90%. We now have an extremely efficient way to get students academically eligible and prepared to enter the program. These positive results will -- we anticipate will continue. There has never been greater interest among potential students for entering the health care professions and specifically nursing, but because of the low unemployment rate, the interest has shifted to these younger students who haven't accumulated a great deal of debt completing a bachelor's degree in another area and are underemployed. Nearly all our partners have responded positively to the change needed to serve the advanced standing students. Our goal is still to have 80 locations with our partners with 40 of the locations being GCU locations. In 2025, we opened up a total of 5 additional sites, including a second location in the Boston area in the fall, another site in New York City and 3 GCU sites in 2025. One in Albuquerque, New Mexico, which was opened in the first quarter of 2025, one in Lake Mary, Florida, near Orlando, which was opened in the second quarter of 2025 and one in Englewood, Colorado, South of Denver, which was opened in the third quarter. The addition of GCU's 3 new site openings bought its ABSN location total to 11. We are also expanding our programmatic offerings with our hybrid partners by adding a graduate nursing program with 7 specializations with Northeastern University, which started this fall, a hybrid occupational therapy bridge to master's program to the already successful St. Case Occupational Therapy Assistant hybrid program, which will begin in the fall of 2026. An online health science degree with Utica University and GCU launched a BS in Occupational Therapy Assistance program and the Speech Language Pathology program in 2025 at its Phoenix West Valley location, adding programs at our hybrid locations is an important component to our business plan. Our strong hybrid results might come as a surprise to some of the investment community given recent commentary. I believe based upon conversations over the years that investors do not always understand the difference between pre-licensure and post-licensure nursing programs. Pre-licensure nursing would probably be better referred to as licensure as these students are studying to become licensed as first-time nurses. These students need to take premed type science courses such as anatomy, physiology, microbiology, chemistry and biology before being qualified to enter the program and then specialize nursing courses that includes hands-on practice in a lab setting in a real-world experience in patient care during their nursing core. Students can take the premed science courses completely online through GCU's prerequisite courses. They then can become eligible to enter GCU or one of our other partner ABSN programs. The growth of students in both the prerequisite online courses and the ABSN program continues to be very strong. Post-licensure nursing programs today are generally delivered completely online and include the RN-to-BSN, the Masters of Nursing program and the Doctorate of Nursing. These programs are for those that already are nurses. The RN-to-BSN student, for example, is someone that became a nurse by completing an associate's degree and wants to get a bachelor's degree. A Masters in nursing is for someone that already has a bachelor of science in nursing and wants a graduate degree, oftentimes to get a management role. Both of these degree programs are typically management programs and have a minimum number of clinical requirements. Many universities that offer online courses offer these programs and they have become competitive. GCU offers both programs and has a large student body in both of these areas. Because of the competitive landscape in the law of large numbers, the growth of these programs has been less than our overall growth rate for a number of years. That is not concerning to us because GCU has over 300 other online programs, most of which are less competitive and are growing at a faster pace. Fourth, the Center for Workforce Development at Grand Canyon University. GCU now has 4 programs in the Center for Workforce Development, including the electricians pre-apprenticeship program, the CNC machinists pathway program and manufacturing specialist intensive pathway and the construction general pathway, and we'll be rolling out a fifth program, the manufacturing general pathway in the fall of 2026. These programs are all built in partnership with companies that are experiencing labor shortages in that area and are excited about hiring GCU's graduates. These programs are either 1 semester or 2 semester programs. 212 students successfully completed the electrician pre-apprenticeship program in 2024, '25, including 11 in the Austin, Texas hybrid location. 33 students completed the manufacturing CNC machinist pathway program in the 2024, '25 fiscal year. These students attend school for 20 hours a week and then work in the facility as a paid employee for 20 hours. At the end of the semester, they received a manufacturing certificate, become eligible for employment in Arizona's fast-growing manufacturing industry. Students in GCU's growing engineering college are getting experience in this manufacturing facility, which is adding to their engineering education. I started out talking about the relevant programs and creative delivery models that GCE has implemented with its 20 partner institutions. In the 7-plus years since GCE has become a service provider, it has helped its partners accomplish the following: in that time, GCE has helped Grand Canyon University graduate 206,709 students, 55,808 in education, including 26,099 first-time teachers at a time when teacher shortages have created a national crisis. 54,068 in nursing and health care professions including 3,383 pre-licensure nurses at a time when there is a huge shortage of nurses. 42,820 in the college of humanities and social sciences, including thousands in counseling and social work where there are also huge shortages. College of Business has become one of the largest business schools in America and has produced 36,276 graduates. The College of Science, Engineering and Technology has grown by 220% and provided 9,029 graduates. The Doctoral College, Honors College and College of Theology also continue to grow. In addition, GCE has helped as other partners graduate over 15,000 pre-licensure nurses and occupational therapist assistants. The numbers that I have just cited have all happened in the past 7-plus years since the GCU, GCE transaction and since GCE has become an education services provider. All of this has occurred while GCE paid out $612 million in federal and state taxes. While state universities and community colleges pull money out of the tax system, GCE has helped to produce over 220,000 graduates while pouring millions of dollars into the system. Service revenue was $261.1 million for the third quarter of 2025, an increase of $22.8 million or 9.6% as compared to the $238.3 million, up for the third quarter of 2024. The increase year-over-year in service revenue was primarily due to an increase in partner enrollments of 7.9%, including an increase in GCU online enrollments of 9.6%. University partner enrollments at their off-campus classroom and laboratory sites of 17.4% and an additional day of ground traditional revenue at GCU of $0.9 million in the quarter as a result of the one day earlier than last year fall start date, partially offset by a decrease in revenue per student year-over-year, primarily due to contract modifications for some of our university partners in which the revenue share percentage was reduced in exchange for us no longer reimbursing the partner for certain faculty costs, which had the effect of reducing revenue per student and a slight decline year-over-year in revenue per student for online students due to the continued mix shift to students that have a slightly lower net tuition rate. Operating income and operating margin for the 3 months ended September 30, 2025 was $18 million and 6.9%, respectively. Excluding the charges described in detail in our 8-K filed today, adjusted operating income and adjusted operating margin for the 3 months ended September 30, 2025, was $58.2 million and 22.3%, respectively, as compared to $50.3 million and 21.1%, respectively, for the same period in 2024. Net income was $16.3 million for the third quarter of 2025. GAAP diluted income per share for the 3 months ended September 30, 2025 is $0.58. As adjusted, non-GAAP diluted income per share for the 3 months ended September 30, 2025, is $1.78, which is in line with the consensus estimates. With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2025 third quarter, talk about changes in the income statements, balance sheet and other items as well as to discuss the 2025 guidance. Daniel Bachus: Thanks, Brian. Included in our Form 8-K filed with the SEC, we have included non-GAAP net income and non-GAAP diluted income per share for the 3 months ended September 30, 2025 and 2024. We believe the non-GAAP financial information allows investors to develop a more meaningful understanding of the company's performance over time. As adjusted, non-GAAP diluted income per share for the 3 months ended September 30, 2025 and 2024 is $1.78 and $1.48, respectively. Service revenue was higher than our expectations in the third quarter of 2025, primarily due to higher-than-expected hybrid enrollments. Traditional campus and online enrollments were in line with our expectations, although traditional campus revenue was slightly less than expected due to slightly lower revenue per student than anticipated and online revenue was slightly higher than expected due to slightly higher revenue per student than anticipated. The third quarter operating margin was positively impacted on a year-over-year basis by the higher revenue and the contract modifications, partially offset by additional spend for 2026 partner initiatives, but also due to the continued impact of significantly higher-than-expected benefit costs as a result of higher claim costs. The higher-than-expected benefit costs had a $0.06 impact on EPS in the third quarter. We are currently anticipating this trend will continue in the fourth quarter. Our effective tax rate for the third quarter of 2025 was 24.9% compared to 20.8% in the third quarter of 2024 and our guidance of 20.6%. The higher-than-expected effective tax rate is primarily to the tax impact of the key TAM settlement. As we discussed in our last quarter's conference call, we did make $5 million in contributions in lieu of state income taxes in the third quarter of 2025, which had the effect of increasing general and administrative expenses in the third quarter by this amount and lowering income tax expense approximately 3 quarters in the third quarter and 1 quarter in the fourth quarter. We repurchased 219,369 shares of our common stock in the third quarter of 2025 at a cost of approximately $39.5 million and another 38,745 shares were repurchased since September 30, 2025. We have $136.4 million remaining available as of today under our share repurchase authorization. The Board and the company intends to continue using a significant portion of its cash flows from operations to repurchase its shares. Turning to balance sheet and cash flows, total unrestricted cash and cash equivalents and investments as of September 30, 2025 were $277 million. GCE CapEx in the third quarter of 2025, including CapEx for new off campus classroom laboratory sites -- classroom and laboratory sites, was approximately $9.7 million or 3.7% of service revenue. We anticipate CapEx for 2025 will be between $30 million and $35 million. Last, I'd like to provide color on the updated guidance we have provided in our 8-K filed today. As a reminder, the guidance we have provided in the outlook section of our 8-K filed today is GAAP net income and diluted income per share with components to adjust GAAP amounts to non-GAAP as adjusted net income and non-GAAP as adjusted diluted income per share. We have updated full year 2025 guidance to include the third quarter results. We have reaffirmed the previously provided range for the fourth quarter based on current online trends in the fall, ground and hybrid enrollment. It is likely that revenue would have been in the top half of our previously provided fourth quarter guidance, but we anticipate slightly lower revenue from military tuition assistant students due to the government shutdown. A little under 5% of GCU's online students are service members using the Department of Defense program to fund their education. The program provides up to $250 per credit hour, has an annual cap of $4,500 and the aid year begins on October 1 of each year. No courses starting during the government shutdown will be paid on those programs. So not only will new students typically delay starting their program, but continuing students will take a break in their studies and students that had planned to restart their program in October due to previously reaching their annual cap, will wait to restart. Assuming that each of these students is out for one course or 8 weeks, the impact on -- of this on GCE is $3 million. We are hopeful the effect will be less due to timing of when students courses start and end, the length of the shutdown and when the students choose to return once it is over. But if the shutdown continues through Thanksgiving as many predict, fourth quarter likely will be impacted by $3 million. Other than this timing issue, all pillars are performing better than or as we had expected when we significantly raised our guidance last quarter. We continue to anticipate that new online enrollments will be up year-over-year in the mid- to high single digits in the fourth quarter, and that total online enrollments will remain in the high single digits over the prior year. Total online enrollments will continue to be pressured by increasing graduations and a continued decline in reentries, students returning to school after a break due to the high retention rates. We have raised our expectations for the hybrid pillar due to higher-than-expected 2025 hybrid enrollments, revenue growth rates for the hybrid pillar continued to be impacted by changes made to the contracts for university partners that are no longer being reimbursed for faculty costs. We have slightly lowered our expectations for the ground traditional campus revenue per student based on the actual net tuition revenue of the fall students. And excluding the military tuition assistance impact, we have increased our revenue per student expectations for online. As a reminder, the ground traditional campus for GCU starts one day earlier in 2025 and in 2024, which will have an impact of moving $0.9 million in revenue from the fourth quarter to the third quarter in comparison to the prior year. On the expense side, we do not anticipate any material changes in the assumptions we gave last quarter. The current trends that we have been discussing will continue in the fourth quarter. We continue to absorb significant increases in both benefit costs and technology services and we have accelerated some ground campus spend into the second half of 2025. We are estimating that interest income will continue to be down year-over-year due to the decline in cash balances due to more aggressive stock buybacks and a declining interest rate environment. We still believe that the effective tax rate for the fourth quarter of 2025 will be 22.8%, with a full year tax rate of 22.9%. The effective tax rate continues to be impacted by higher state income taxes as we continue to add new sites in states outside of Arizona, which have higher state tax rates and other factors. We have not adjusted our weighted average shares outstanding amount, the number of shares purchased were less on a daily basis through late October, but have accelerated in the last week due to the decline in the stock price. The Board continues to authorize the repurchase of shares as it believes the stock remains undervalued based on the metrics that it uses to evaluate, including the ratio of enterprise value to adjusted EBITDA and the free cash flow yield rather than multiples of other education companies, as although we can be viewed as being in the same sector, there are a few, if any, appropriate comps and the board has instructed us to be more aggressive in stock buybacks when the stock drops like it has recently. I will now turn the call over to the moderator so that we can answer questions. Operator: [Operator Instructions] Our first question is from Jeff Silber of BMO Capital Markets. Jeffrey Silber: Brian, really appreciate the color on what's going on in your nursing programs. Maybe we can just double-click on that. Can you just frame it for us in terms of how large your nursing programs are at GCU and how they differ between pre- and post-licensure programs and how each one of them have been growing. Brian Mueller: Yes. When you think of everything related to health care, at GCU, probably about 30% of our students are in those areas, but that's pretty diversified. That's pre-licensure students on our campus that's ABSN students at our off-site campuses that is prerequisite students preparing for the ABSN. It's RN-to-BSN, it's MSN, it's Doctorate of Nursing. And so like -- unlike other institutions, yes, we are heavily vested in the health care industry. But then I should also include occupational therapy, the nurse practitioner program. And so health care is about 30% of our total enrollments, but even that is highly diversified across program levels and in different programs. And so I know that there has been a lot of concern about less diversified institutions with regards to health care. We're very different and not nearly impacted the way others would be because of how diversified and competitive we are in the programs that we offer. Does that help? Jeffrey Silber: That's really helpful. It does. And of that 30%, and I know you may not have the numbers at your fingertips, but roughly, what percentage of the total of that 30% are specifically in post-licensure nursing programs. Brian Mueller: In post-licensure nursing? Daniel Bachus: Yes. Well, roughly, as you know, 5,000 GC -- of the hybrid student. We have roughly 5,000 hybrid students. We have a couple of hundred GCU pre-licensure students. And then the rest is online nursing students as Brian said, which includes the prerequisite studies. Jeffrey Silber: Got it. Okay. All right. That's really helpful. Let me shift gears and talk about your focus on younger students specifically with GCU online. You talked about some changes to campus marketing. I'm just curious, do you market to the students that will potentially go online, these younger students any differently? And if so, if we can talk about the different marketing channels. Brian Mueller: No, what I referred to in terms of the change -- a little bit of a change in strategy is, so much of the work that we've done for GCU traditional students has been work in high schools. We have a sizable staff that works in high schools throughout the country. We signed contracts with schools. We have over, I think, 8,000 partnership with high schools. And so that's been 95% of our work. But what we figured out is that we can contact through social media avenues students at a less expensive rate and to a far greater extent. And so we are starting to advertise more, especially in social media areas and the -- so we spent some money there where we typically haven't spent it, but the results have been tremendous. Our actual registrations at this time are significantly ahead of what they were last year at this time. And we're watching that carefully. In fact, we watch it every day. But part of our thinking is that, yes, there's fewer high school graduates and fewer as a percent are going to college. But the reasons that are -- that is true, we've answered in space. The value proposition that we have here is just, I think, under -- not understood by enough Americans right now, and we need to get that word out in a way that is more aggressive than just depending upon those people working in high schools. And so our initial results are really good. and we'll keep monitoring them. And if it continues in that vein, we'll spend even more money in January and February. So it's a slight change in terms of the balance really between what we're doing from an advertising standpoint and what we're paying in salaries for people working in high schools. We're moving a little bit out of the salary component. We're moving that into the advertising component. And initially, we're getting a broader reach. We're getting a broader reach, and we're getting very strong interest. So we're excited about that. Operator: Our next question is from Steven Pawlak of Robert W. Baird. Steven Pawlak: You talked about the diversification beyond nursing programs. I know in the past you've talked about education being one of them. I guess, what other programs are you in that are sizable, that are growing at and above nursing program rate? And I guess, how would you just characterize the competitive landscape in those programs? Brian Mueller: Yes. We're having a tremendous amount of success in education. The fact that there's a teacher shortage in this country is really the problem of universities. They're waiting for 17-year olds to decide to become a teacher, go through years -- 4 years of college and then step into a public school classroom. It is our belief that anybody between the ages of 18 and 50 years old may have a reason to re-career into teaching. And so we're signing contracts with major school districts all over the country, helping them take military veterans and people have retired from the police and fire department. People that work in public schools as paraprofessionals or as teachers' aids. And we're bringing education right into the school district, so that they can become baccalaureate prepared and they can -- school districts can license those people and put them in the classroom. That thing is growing tremendously. Our business programs continue to grow. We have one of the fastest-growing business programs in the country. We're really excited about the future of counseling and social work. Those are 2 areas where there's also a tremendous shortage of professionals. And like teacher education, counseling and social work, those are licensure areas. They're very difficult to operate at a distance because you have to do all of the work necessary, not just to teach the student in the classroom, but you've got to provide observation hours, you've got to provide internships, you've got to provide student teaching. Those things have to be viewed and evaluated. And we have a $300 million plus administrative system plus a field force that allows us to provide those opportunities. And so it's very uncompetitive in those -- it was a huge need, but it's not very competitive because those things are very difficult to do at a distance. In addition, we're very excited about where we're going in a number of technology and engineering areas. The engineering is a little bit tougher to do online, although we're going to be doing it, but technology is not. And we're just scratching the surface in terms of what we're capable of from a technology standpoint, especially in areas like cyber and especially in those areas -- and places like military bases, where they can't compete with the outside workforce from a salary standpoint, but they need cybersecurity specialists, wars are going to be fought that way. And so some of the major military contracts that we've signed recently are the result of expansion in those areas. And so I'm glad you asked that question because when people are viewing this industry, frequently, they are responding to institutions that have a limited number of programs so that if something happens that impacts the enrollment in those programs, they're really in trouble. Our programmatic mix is so expensive. And it's one of the reasons our online leads are up, because so many students now, potential students are not searching on universities. They're searching on careers and they're searching on programs to help gain entrance into those careers. And our name comes up first because there's very few universities in the country that have our expansive programs. And so when you think about the ups and downs that have been part of this industry, we look at our 17-year history, we have basically moved through the ups and downs and it's mainly because of the diversity that exists in our programmatic offerings and in our delivery models that allows us to move things around if there are changes. And it just makes us not as susceptible to minor changes in -- or even major changes in a specific area. We can move money and we can move emphasis, and we can do it very quickly. Steven Pawlak: No, I appreciate all the color there. And then you've also talked about sort of the positive spread between -- or sort of the enrollment adviser efficiency as you have over the last few years. Are you still seeing the positive spread between enrollment gains and enrollment adviser growth? And I guess do you expect that to be sustainable for the next couple of years? Brian Mueller: Yes. the we -- there's -- another way that we have become diversified and not subject to the vagaries of changes is that about 33% of our starts through GCU, come as a result of activity working directly inside companies and organizations all over the country. One of the things that people hear us say now frequently and people are responding to is that there are vast amounts of untapped potential in today's American workforce. And that's basically because only about 25% of students that want to access higher education can do it on a college campus and spend 4 or 5 years on that campus. We are really growing, working directly with companies and helping people working at lower levels in the organization move up through education. So whether it's military bases, school districts, hospitals, clinics, social work agencies, all of those areas. And that -- the percent of new starts that we're getting as a result of that work continues to go up, which puts less pressure on our need to generate leads, and it makes our lead purchase that much more effective. And so when you think about GCE and our capabilities as compared to our competitors, we're just more diverse in a whole variety of ways, which allows for the consistency of the performance that we've been able to have. Daniel Bachus: We've reached the end of our third quarter conference call. We appreciate your time and interest in Grand Canyon Education. If you still have questions, please contact myself, Dan Bachus. Thank you all. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to Klabin's conference call. [Operator Instructions] As a reminder, this conference is being recorded, and the presentation will be in Portuguese with simultaneous translation into English. [Operator Instructions] I'd like to make a brief announcement for those following us in English. [Operator Instructions] Any statements made during this conference call in connection with Klabin's business outlook, projections, operating and financial targets and potential growth should be understood as merely forecasts based on the company's management expectations in relation to the future of Klabin. These expectations are highly dependent on market conditions, on Brazil's overall economic performance and on industry and international market behaviors and therefore are subject to change. We have with us today, Mr. Cristiano Teixeira, CEO; Marcos Ivo, CFO and IRO; and the other officers in the company. Mr. Cristiano and Mr. Ivo will start by commenting on the company's performance during the third quarter of 2025. After that, the remaining executives will also be available to answer any questions that you may wish to ask. I will now hand it over to Mr. Cristiano. Go ahead, sir. Cristiano Teixeira: Thank you. Good morning, everyone, and welcome to our earnings call. So on Slide #3, we'll quickly go through a couple of numbers. I brought a few slides for that. So just -- and when it comes to volume, here, we see our sales volume, which was higher due to our higher production. We have 25% more in pulp and 10% more in paper and 7% more in packaging. So this is a very important moment for all of us. But I would like to actually draw your attention to Slide #4. This is -- and this refers to a discussion that we have had recently. For a few years, we've been talking about this since we started the Puma II Project, where the company would be split by [ 1/3 ] between pulp, paper and packaging, so 1/3 each. Obviously, we are preparing the company for its next 10 years, but this is the design that we created when we started investments in this new investment phase starting in 2017. And this is where we are. I would just like to draw your attention to the revenue from the packaging area, which sometimes goes unseen. The company's -- but it is the biggest revenue for the company this quarter. And I'd like to remind you that we are experiencing one of the worst short fiber prices in pulp. There are many ways of analyzing these products that are commodities. One of them is to look at the lowest prices in history and update them based on the U.S. inflation, given that many of the manufacturers are based in the U.S. If we run the numbers that way, we'll see that the prices for pulp and kraftliner are below the historical worst prices with inflation correction, which makes me think that although we are going through a price issue in our curves, these are historical issues that we all know. Despite the fact that we are experiencing the worst time for these products, we are performing very well in our traditional markets, especially paper, and that's the major upside for the company. If we consider the average price of fibers, looking at the historical series that you can all access, we might be USD 100 to USD 150 below the average price for these 2 products I mentioned, so short fiber and kraftliner, which would be an annualized volume through a simple multiplication, meaning if we take our kraftliner and short fiber volumes, we could have at least BRL 1 billion more in annualized EBITDA. That is in Brazilian reais. So I'd like to draw your attention to the fact that this might be one of the most difficult moments the company has ever faced considering commodity prices, and we have had a net margin of 39% and the other businesses in the company have provided stability, which is what we often tell you. And corrugated boxes are playing their defensive role. So now I'd like to bring up Slides 5 and 6. This is something that I've been saying for a while. Our average growth rate in volume versus GDP and paper. So we have been performing above Empapel and the GDP. And when we look at the price, here, we have data from a series of years that we have been working on prices above inflation rates, and that's due to several qualities of the market. Most of our packaging are used in foods and foods have been performing very well in Brazil in the last 10 years. But we're only looking at data since 2019. So prices have also been going up above the Empapel rates and above the IPCA index. But we always have to compare to other companies. And Klabin has twice as much volume as the second biggest company. And there are several other companies ranked third, fourth and fifth. We're still very spread in corrugated boxes. If you look at these companies, Klabin has 5x the volume. So even though we have our performance that is 5x bigger than other companies, we have been outperforming Empapel inflation and GDP, which shows a performance that from my perspective has been flawless throughout this time. And this underscores our flexibility and resilience. So we will continue. Marcos will speak, and we will come back to talk about our dashboard. Marcos Paulo Conde Ivo: Thank you, Cristiano. Good morning, everyone. So on Page 6, since we had higher production, sales volume reached 1,067,000 tons in the period. Net revenue for the quarter reached BRL 5.4 billion, a 9% increase year-on-year. This was driven by the paper and packaging industries or segments, which saw higher volumes and prices. Adjusted EBITDA was BRL 2.1 billion in the third quarter, a 17% increase over the third quarter of 2024 with a margin of 39%, as Cristiano said. This reflects the increase in net revenue and also the effect of the comparison base since the third quarter of last year was impacted by planned maintenance shutdowns. Excluding these effects from the shutdowns, adjusted EBITDA growth would have been approximately 8%. Moving on to Page 7. Total cash cost per ton was BRL 3,104 in the quarter, a 2% sequential decrease versus the second quarter of '25. Compared to the same period in 2024, excluding the effect of the general shutdown for maintenance, cash cost per ton also decreased by 2% consistently. Moving on to Slide 8. Klabin ended the third quarter of 2025 with a net debt of BRL 26.1 billion, a reduction of around BRL 1.8 billion compared to the end of Q2 '25. This is mainly explained by positive free cash flow in the quarter, a receival of BRL 600 million in equity related to SPE [ Immobiliaria ] and the appreciation of the Brazilian real in the period, which affects our dollar-denominated debt. Leverage measured by the net debt to adjusted EBITDA in dollars indicator ended the quarter at 3.6x, a reduction of 0.3x compared to Q2 '25. Moving on to the next slide. The company's liquidity remains robust, finishing September at BRL 12.4 billion. This liquidity consists of BRL 9.7 billion in cash and the remainder in undrawn revolving credit lines. The average maturity of this debt at the end of the quarter was 86 months and the average cost in U.S. dollars was 5.3% per year. Moving on to Page 10. The company delivered solid free cash flow in the quarter with a positive balance of BRL 699 million. This reflects the company's current focus on ramping up production at Puma II, but also focuses on cast and -- excuse me, cost and CapEx discipline with a consequent generation of free cash flow and deleveraging. Cristiano Teixeira: I'll take this opportunity, Marcos, to draw everyone's attention to this slide. As I mentioned, we are stepping out of a long investment period for the company and stepping into a free cash flow generation period in which we try to deleverage the company. Investments are becoming more difficult. So we are taking a look inwards, and this is the new look that the company will have. This level and this pace of generating free cash flow is what we should see from the company from now on. We're quickly deleveraging, and I'm linking here to the average price, as I mentioned before. We are at the worst moment for the 2 most traded products for the company. There's still an EBITDA volume that will still come in due to statistical reasons. And as Marcos mentioned, we have a CapEx discipline, which has been very valued in the last discussions in the last few years. So we feel very confident with our level of CapEx, our operational continuity, the equipment that needed to be refurbished in the company, such as the Monte Alegre boiler, which has been addressed and has made Monte Alegre an cutting-edge side for products and productivity, and that includes cash cost and environmental factors. And Ortigueira, as we know, is a benchmark. It's a state-of-the-art plant in technology and processes. So the company is at a moment in which major investments and the risk of managing and implementing these investments are now past. This risk is in the past. We are ramping up the machinery. We will generate more EBITDA. We are at the worst moment for the curve of some products, as I mentioned. But packaging, for example, has been resilient, and the company will now go through a strong deleveraging process. Go ahead, Marcos. Marcos Paulo Conde Ivo: So continuing on Page 11, the Caete Project, which has greatly strengthened the company's forestry and cost competitiveness continues to advance and deliver results above expectations. When it comes to partnerships with financial investors, especially TIMOs, we raised BRL 3.6 billion, of which BRL 1.5 billion remains to be received. This last contribution is planned to occur by the end of this year. Considering the monetization of surplus land, we completed our first sale in the third quarter of 2025. As a result, we still have approximately 20,000 hectares of usable land that can be monetized over the next few years. Moving on to Slide 12. Earnings distributed to shareholders over the last 12 months totaled BRL 1.3 billion. This amount represents a dividend yield of 5.5%. I'd like to highlight the Board of Directors' approval on November 4 of dividends to the amount of BRL 318 million, which will be paid on November 19. Now I give the floor back to Cristiano, who talk about our business trends. Cristiano Teixeira: Great. So we want to value the last part of the presentation, the Q&A. So we're going through this very quickly, and we'll try to save time for the Q&A. So looking at the market, the first item, pulp or short fiber. We see that inventories for short fiber are building up, and that has favored our price on the last column. We see that prices have been recovering very well. We are not leaders, of course, in this item when it comes to short fiber, but we have been seeing some price recoveries because of the inventories that have been building up as we saw. In fluff, we see some stability when it comes to the market -- or excuse me, some instability when we look at the market. But when we look at the price column, there's some effect from fluff consumption in China, which is moving away from U.S. imports, and we'll have to wait and see what will happen from now on. We'll need to see what happens geopolitically, and we hope that things will normalize soon. The effects from fluff is due to the volumes in the third quarter of 2025 having a carryover effect. So when we look at the normalized rates, we also see stability. Continuing with coated board. Again, this is stable, both on -- from a market perspective, but also with volumes. And corrugated boxes and industrial bags, again, we are at a seasonal moment, and for the fourth quarter, we often see a reduction. Considering prices, this is based on the mix. So we see that harvests are happening in fruit, and this has the best price performance in Brazil due to it being virgin fibers and so on. So we see that the demand will be lower, but I've mentioned some examples in the beginning of my presentation as to why this -- that we're protected against this. So let's continue with the Q&A. Operator: [Operator Instructions] The first question will be asked by Rafael Barcellos from Bradesco BBI. Rafael Barcellos: Cristiano and Klabin team, thank you for taking my question. Cristiano, you mentioned the challenging environment in some markets like pulp. So excluding this market issue that is out of your control, I'd like to explore some questions for the items that are more at your hand. I'll focus on CapEx costs. But here, Cristiano, my question -- we'll leave it open for you to talk about any initiatives that you think can provide value for the company. But I'll focus on cost and CapEx. After some forestry operations, the new boiler in Monte Alegre and so on, are there any cost benefits that you believe we will start seeing next year? And if you can tell us a bit more about how you see costs changing next year? When it comes to CapEx, the company seems to be running at a lower CapEx level versus the guidance. So if you can tell us a little bit more about that? Was that related to any efficiencies that you were able to extract? And what should we consider for CapEx next year, especially considering that next year, you will no longer have that disbursement from the Monte Alegre boiler, which will be about BRL 800 million for this year? Those are my 2 questions. Unknown Executive: Thank you, Rafael. So we can talk about this. We have provided a guidance. I'm going to refer to the company, but I think we set a good example in providing a guidance. When it comes to costs, I've mentioned the Monte Alegre boiler, which will definitely have a benefit. It will make our operation more efficient. There have been other pieces of equipment that were updated, but Monte Alegre is already a reference. I think we've just given a few decades for Monte Alegre to continue to be a reference in cash cost. We will have some marginal benefits, but this is mostly due to these investments. And of course, we have ordinary production and cost figures, but extraordinary events. If we look at the rest of the world, these assets are -- well, this is a very old business, right? There are companies in our industry that have many -- have more than 100 years of history, machines running for over 50 years in some countries as an average. So we've seen increasing extraordinary events with production loss, which, of course, reflects on fixed costs and impacts on volumes as well and price effects. What I'd like to draw your attention to is that Klabin, our main fiber production sites like Ortigueira, which is a global benchmark with 2.5 million tons with the products that you know and Monte Alegre, which has always been a reference. So we replaced an operating boiler, and we've been providing other updates to the plant to -- in order to have stability. So for me, the most important thing is that, well, we have been giving you cost guidance. We've been giving you this space. But the most important thing is that we're providing stability to a site, which is very old, but it's very up to date when it comes to the technology. And that's also going to give the company some price stability. And we're going to continue following our guidance. Concerning CapEx, I'd just like to draw your attention to the investments, the transformational investments that we've made. The cycle is now over with the acquisition of Arauco, construction in Figueira and Monte Alegre. But at the end of the cycle, we still have some disbursements to be made, but there are other items in forestry where we don't still have stability. So we do see benefits, but it's due to the end of the cycle and considers the possibility of having stability. Rafael Barcellos: Of course. And if you allow me to ask a follow-up question, specifically on cost. If I can get an assessment of the performance in the last few quarters. And I'd also like to understand -- well, I know that you're still going to give us a guidance for next year. But I'd just like to understand the magnitude of that. In 2026, will the company be running at a lower cost than 2025? If you could help us understand your cost trajectory and how you think this will happen from now on? Unknown Executive: We're concluding the first phase, I'd say, of our budget process so that we can offer this up for a better debate with the Board. So these numbers are being discussed. What I can say is that, of course, despite some of the situations we have been facing, weather issues, which not only have affected the south of Brazil, but other parts of Brazil and the world. Obviously, these are things that everyone has to face, but we have a platform of areas and average distances that we've been discussing with you. We feel that our implementation of the [indiscernible] project has been very successful in monetizing areas and finding benefits for the management and daily operations always provides the best cost. When we look at this from a quarterly perspective, there might be variations due to the weather and due to these effects that I mentioned. But from a structural perspective, the company's cost platform and all due respect to all manufacturers, but within our own product portfolio, we have the most productive areas in the world. I'm trying not to be too passionate, but to speak about facts. We have the best productivity for pinus and eucalyptus, much higher than the global average. We have been favored by these areas that are closer to Klabin. And when it comes to technology and equipment, as I said, we're closing a huge cycle that places Klabin among the state-of-the-art plants of the world. So of course, as soon as we have more details on the short term for the cost and CapEx, we'll provide more information to the market as soon as this has been consolidated in the company. But the structural responses, looking at the real economy -- we have to refer to that, because in [ AEI ], we are making use of the advantages and productivity that we have in our operations. But the company remains a real-world company. So looking at the real economy, stability and flexibility, the company's equipment and its resources are being placed in forestry and equipment, and this is a global reference. So I apologize, I'm not talking about the short term, but I'm just saying that we're going through the budgeting process. What needs to be known is that in the real economy, the company is absolutely productive. And with long-term contracts, Klabin is positioning itself as a global competitor and maybe that is going unseen. Operator: The next question will be asked by Daniel Sasson from Itau BBA. Daniel Sasson: Cristiano, I really liked your opening speech where you talked about the company being ready to deliver more results in comparison to the rest of the market. The coated board versus kraft spread in importation, I'd just like to ask if at this level of spread, would it make sense to produce 100% of MP28 in coated board value? We know that, of course, this market is much -- much smaller than kraftliner. So are you expecting a better spread in order to do that? So I'd just like to hear this comparison between the cost and the spread in products just so that we can understand the ramp-up for this part. Also, when it comes to corrugated boxes, you've had very strong volumes up to date. The prices are flat, but you're growing in volume and share. But looking towards the future, I'd just like to understand your perspective of this market, considering the reduction in the shavings prices. And what is your commercial strategy for that? Would it make sense to be a bit less aggressive and maybe concede on prices to hold the margins, maybe a value over volume strategy? Or how would you deal with this change and market dynamics? Unknown Executive: Thank you, Daniel. So I'm going to let Soares answer that, and then Douglas will talk about corrugated boxes. Jose Soares: Daniel, thank you for your question. So to answer your question on coated board, we are projecting that we will reach 45% or 47% of machines producing coated board. And why not more than that? As you've been seeing, this market has been challenging in the U.S. and Europe as well. And there's another important factor, which is excess capacity in China. China has invaded the market with very low prices. So going into new markets means that you have to compete with Chinese coated board, and we've been avoiding that. The spread that you mentioned actually disappears when you compare our coated board price. Well, we would need to eliminate that to compete with Chinese coated board. So we haven't done that. We've taken a different route. We've been trying to differentiate our products in the internal market. We launched a new line. We're going into pharmaceuticals, which was a market that Klabin didn't work in. So although there is a premium, volumes are not so expressive. But when we look at the conditions and margins, coated board would be better than competing with Chinese coated board. So we're waiting to see if the global economy, especially in the U.S., gives any signs of a recovery, and that will give us opportunities to go into coated board with profitable conditions. With the conditions we've seen now, it's much better to have white top liner in the machine, which is priced at the same level as coated board. So that gives much better margins than kraftliner. And kraftliner itself in some markets has been providing better conditions than having folding white board. So that's the scenario for coated board right now. Cristiano Teixeira: Soares referred to the American market. So I'd just like to make a comment on that. In the last 2 weeks, I've been speaking to some executives in the U.S. And I'd like to remind you that there are different ways of looking at the economy. The U.S. economy is very strong, as you know, in services, especially. But I'd like to draw your attention to corrugated boxes in the U.S. and its production. The U.S. has significantly reduced in the last 10 years, their production. They're at the lowest in the last 10 years. As you know, this has an impact from e-commerce, but e-commerce still has a very relevant impact to the economy. But the biggest reference in consumption in any country, and this is not different in the U.S. is supermarkets. When we look at supermarkets, 70% of volumes are food products. So this cash expediting is connected to exporting. And it should have reduced more than it is if we consider closedowns in the U.S. due to cash cost. So I don't know if we'll be able to go deep into this during the call, but this has an impact on the short term, especially. On the medium and long term, this is positive for Klabin. But I have to refer to what we were discussing earlier when it comes to the forestry base. At the medium to long term, looking at this reduction in the U.S., we are replacing several products. Kraftliner is one. But I've mentioned that kraftliner, 100% virgin fibers will be at a premium in the future because this will be scarce since it's a niche product. And this will play in our favor in the long term. Douglas will now talk about corrugated boxes. Thank you. Douglas Dalmasi: So about corrugated boxes, we don't see much on the horizon in the short term. So during the last quarter, we saw that the market remains stable and Klabin has been growing over market levels. But about shavings, shaving has been stable. I don't see any relevant changes in price. They're stable. If we compare to last year, it went from BRL 600 to BRL 1,300 or BRL 1,400, and now it's back at BRL 1,200. So it's still stable. It is not changing when it comes to price, and we're still seeing higher prices this quarter or prices growing over the quarters. If we look at the company's price history, we, in the last quarter have increased to a relevant degree, and it has been going up quarter-by-quarter. And now in the last quarter, we still see an increase in -- at a lower pace if we compare to the past because we started this price increase in the last quarter. So again, in the short term, I don't really see any changes. We're growing over the market levels, and we're passing inflation on through the price. Operator: The next question will be asked by Caio Greiner from UBS. Caio Greiner: I have 2 quick questions. The first is a follow-up question after Barcellos question on CapEx. It drew my attention that your numbers in the last 12 months and even the accrued figures for this year are far below the indication that you had for total CapEx this year. So my question is, why is it being slower? Are you expecting to accelerate in the fourth quarter? Or should we imagine that part of this CapEx will carry over to next year as we saw last year? Should we expect CapEx figures for next year to be slightly higher? And the second part of my question or rather my second question is about your CapEx outlook and volumes. We've talked about this in the last quarter, but earlier this year, you went from a growth volume of about 200,000 tons for 2025. And right now, we are at 130,000 tons. But in the fourth quarter, we have maintenance downtimes. So maybe we'll be closer to 100,000 tons, if you can give me that understanding. I'd like to understand what you're imagining for 2026. I've been looking at everything that you've been saying. I understand that for some lines, the market is a bit more difficult. There's an issue of demand in kraftliner and paperboard. But I'd just like to know what you're imagining for 2026. Can we consider one more year of growth to reach those 200,000 tons that you had set during your Investor Day last year? Cristiano Teixeira: Thank you, Caio. Let's start with CapEx. It's true this is normal for the fourth quarter, not for Klabin, but for the industry. The last quarter is when the CapEx requires planning and so on. And we execute this in the fourth quarter usually. We should execute most of it. There is a marginal carryover for 2026. We don't expect higher CapEx in 2026 due to that reason. We're in line with the guidance, and we are confident with what we've been managing here, the company's CapEx, ensuring operational safety, of course, but this is marginal. Structurally, it's like I said in the beginning, we still have some residuals from the boiler, but we are going into a stability period in which we are focusing on operational continuity. That includes plant management, planting and so on. Referring to volume, I'd just like to say one thing, and I'll try to explain myself in the best way possible, but we can explain this offline afterwards if we need to. But you made a reference to the downtime, which is true. This guidance on volume was based on full operations in the recycle -- recycling machines. We always give you updates because we can, considering the market, make choices to use more or less recycled paper in our boxes and to use more virgin fibers for exportation. We had to do this, this year. So we stopped 2 machines that worked on recycled paper throughout the year because export prices were not attractive enough for them. So we gave priority to the internal market and converting more paper through virgin fibers and reduce exports. You can see this because we offset these kraftliner exportations around 45,000 tons per month with the kraftliner from Machine 28. But when we look at containerboard or kraftliner recycled, we have reduced production of recycled paper, and obviously, we've been using more virgin fibers for our boxes. So this is why we're not going to reach the production level that we had mentioned before. Looking towards 2026, Klabin should go in full into virgin fibers. We're very confident with the markets that we're working with, and we still haven't decided what to do with the recycled machines. We're looking at the budget. But depending on how the market behaves, we might continue with downtimes for the recycled machines. So we'll give you more details during Klabin Day. Operator: The next question will be asked by Eugenia Cavalheiro, Morgan Stanley. Eugenia Cavalheiro: I would like to understand leverage. You're close to the upper bound of the range that you had in your leverage policy. So I'd just like to understand if this is something that you're comfortable with, if you would prefer to go to the low end of the range, and I'd also like to understand what the next steps would be for the company either to lower your leverage. I mean, we've seen some initiatives in that direction. And I'd just like to understand if we expect those to continue and how we should understand the company. I'd also like to look at dividends and buybacks, considering shareholder remuneration. I know that you made an announcement, but I'd just like to understand if this will continue or if we are going to get -- change your leverage levels and if that can affect shareholder remuneration. Cristiano Teixeira: Thank you, Eugenia. Marcos will answer your questions. Marcos Paulo Conde Ivo: Eugenia, Klabin has 2 policies. One is for financial indebtedness, which establishes our leverage range. And the minimal leverage established by this policy is 2.5x net debt to EBITDA in U.S. dollars. So we still have a lot of space. And as Cristiano mentioned, due to the harvest cycle and the free cash flow generation in the company, the company will continue to deleverage throughout the next quarters until we get to the lower bound of our policy. So we will continue to deleverage. Considering the dividend policy, we've published a document to help the market to understand how we're doing this, and it establishes that we are making quarterly payments preferably and paying between 10% to 20% of our EBITDA in dividends. And usually, we are at the middle of this policy. This is an announcement that we've made recently that will follow that. And we don't see any reason for that to be changed. Considering buybacks, this is something that we're always looking at. Naturally, it will depend on share prices. It will depend on the project portfolio that we have being executed or being approved. This is all being analyzed. So considering that we are harvesting the investments that we have already made, considering that we don't have any major transformational investments on our horizon, this makes it more attractive, especially when we look at our prices, considering that this is a market consensus. It's a target as decided by market consensus. So this is something that we're analyzing. And of course, we have to look at it so that maybe in the future, we can do something in that direction if it's viable and if it's a good capital allocation decision for the company. Operator: The next question will be asked by Henrique Marques from Goldman Sachs. Henrique Tavian Marques: So my first question is about paperboard. I know that you've discussed this, but we still see strong competition. The domestic market has been very challenging. And according to all signs, as China reviews its 5-year plan, it will continue to export. So this is a significant growth avenue for the country. So I'd just like to know what solutions you find for this market? Is that something that you will do in company? Will you really go to the premium markets even by missing out on some of the volume? And do you think the market should have any protection measures? We know that steel companies are doing that with steel. So that's my question. And also about deleveraging. With this scenario with lower commodities, with the weaker U.S. dollar, is there anything on the macro side that you need to see for this deleveraging to happen? Or can you do all of this in company without needing to depend on pulp prices or changes to the U.S. dollar? Unknown Executive: Thank you, Henrique. So Soares will speak about the advantages that Klabin has with the -- with Machine 28, with the technology and so on. There's still a lot of good things to discuss, but I'll just talk about leverage first. And the answer is no. We don't depend on any macroeconomic conditions. We don't depend on price curves or anything. The company will deleverage strongly because its industrial park is modern, has been up to date. We have capacities. We have orders. To give you an idea of the volume of corrugated boxes that we've discussed, about 70% are in 3-year contracts. You know the contracts that we have, and we're operating at full capacity. Our equipment is up to date, and we're not depending on any macroeconomic conditions. But what may happen is that it can accelerate if the price curves improve, as I said. But even if they are maintained, which is unlikely, deleverage will be very strong. Jose Soares: Thank you for your question, Henrique. So with cardboard -- or excuse me, with coated board, there's no big mystery. You're based on big volumes. You don't need to qualify with the end user, but it's a longer product, which requires a big effort from the technical team. But after it has been qualified, then wonderful. You have a client which is often long-lasting. So that has been our approach to go to new segments, which is a slow process that needs to be continuous. I've mentioned the pharmaceutical industry. We've launched products for frozen foods, cups, white paperboard. So we'll continue doing that. Obviously, we're also depending on the global beer market, which is down. You've seen results for Heineken and Ambev. They had a reduced demand. Milk is also a market that has had different demands. So as this demand changes, we are getting prepared with quality and cost so that we can grow gradually, but don't expect miracles. That's not going to happen within 1 year. It's a gradual process because of how the market behaves. It's fragmented. Volumes are lower, and we need to make a big effort from engineering packages with the end user until you get there. So this is what we're doing. We're going through that routine. And we're tireless at trying to get there gradually. Unknown Executive: Good news, just to confirm what Soares has mentioned. Even though we are not producing the same volume of paperboard in Machine 28, and I'm referring here to the flexibility that we have at Klabin, we are providing very good quality kraft. We really believe in this product, and we're always going to choose based on profitability. This is directed, of course, by our commercial strategy, but we're very disciplined at that at Klabin. We're always going to prioritize our strategic partners and obviously, the company's results. So to answer your question, Henrique, what we're mentioning, the deleveraging that the company will have is for this mix, having less paperboard and more kraft. So that's why we believe the company will be stronger. Operator: The next question will be asked by Marcelo Arazi from BTG. Marcelo Arazi: A couple of questions. The first is about cost again. We've seen that fiber costs have gone up in the last quarters after the acquisition you made for Arauco Florestal, which indicated that you expected these costs to reduce. So what is your perspective on that? And how do you believe this will continue? And my second question is about pulp. Market perspectives are a bit worse. We know that there are structural issues. So we're investing on -- I know that you're investing on price and capacity. So I'd just like to understand your perspective for the industry and how that matches that 1/3, 1/3, 1/3 strategy. So in any case, is this change in the industry changing the percentage that you want to have in each segment? Cristiano Teixeira: Thank you. In order not to take the word again, I'll comment on this. So about the 1/3, 1/3, 1/3 strategy, this is part of the company's strategy. Of course, when we created it, our aim was to give more stability to the company, to be less reliant on commodities, even when it comes to fibers. As you know, 1/3 of this [ 1/3 ] is fluff, which is based on contracts. So this strategic model has been implemented. There is a variation quarter-to-quarter due to the price. When commodities are at their peak, this share will go up. The most important thing is that on relative terms, we're finding more stability with the current model. So Marcos will now talk about cost. Marcos Paulo Conde Ivo: Marcelo, when it comes to cash cost, first, I'd like to highlight that this quarter, we ran it at the lowest part of the guidance for the company. It was at [ BRL 3,104 ]. And this was the third quarter in a row in which we were at that level of guidance. So the message for me is that Klabin in a normalized quarter and a typical quarter will be at the lowest part of the threshold, which is a good perspective for the costs for 2026 because the accrued figures for 2025 have been impacted by this quarter. And there has been a nonrecurring effect. When we look at fiber and wood specifically, the Caete Project, which was the acquisition of Arauco in Brazil has really strengthened competitiveness for forestry and costs in Klabin in the most productive region of the world for pinus and eucalyptus. If you look back, you know that this cost was based on 3 components. First, a reduction in CapEx for buying standing wood from third parties and Klabin had a guidance at the time stating how much CapEx it would spend on buying from third parties. And now we have a new perspective. And you can clearly see a reduction there that has already taken place in 2024 and 2025. So that has been delivered strongly. The next lever was to have financial partners and to monetize our land areas. For that, we are doing much better than we had indicated to the market. We're also delivering this strongly. And the third lever was OpEx. So reducing fiber costs that we see in the company's cash cost, especially due to a reduction in the average distance and operational costs. This is also taking place. As we've been seeing for a long time, and this goes for all companies in the industry, forestry costs are not linear because this changes every quarter. You change the areas from which you're harvesting, there are weather issues. So in Klabin specifically, we try to optimize the cost of wood in the production cycle, the 15-, 16-year cycle for pinus and more than that for eucalyptus. So that means that in the cycle, you're optimizing your wood production costs. So it will be natural to see this change over the quarters, throughout the years. But clearly, the Caete Project will have a very relevant level of value generation for Klabin. Unknown Executive: Thank you, Marcelo. Thank you for your question. So to answer your question about capacity confirmed or in the pipeline to be presented to the Board or approved. Obviously, the numbers surprise us. But in any case, we are keeping an eye on it to see what will be approved. And on the other hand, we believe that the fact that the company is producing 3 types of different fibers means that we're not only exposed to eucalyptus, and that helps us with that context. And this will be a leverage for Klabin. It's a defensive portfolio that will keep our prices stable in the market. But obviously, it's very difficult to talk about the capacity that will go into the pipeline. It's hard to imagine what can happen with prices, but the fact is that the market is adjusting. There's a lot of capacity, at least 100% of the global capacity will have to go through structural changes. Operator: As there are no further questions, I would like to hand the floor to Mr. Cristiano Teixeira for his closing remarks. Go ahead, sir. Cristiano Teixeira: Thank you. Thank you, everyone. We'll see you for the next call. Operator: This concludes the company's conference call. Thank you, and have a good day.
Brad Chelton: Good morning. Welcome to The Scotts Miracle-Gro's Fourth Quarter 2025 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations. Speaking today are Chairman and CEO, Jim Hagedorn; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Jim will provide a business update, followed by Mark with a review of our financial results. In conjunction with our commentary today, please review our earnings release and supplemental financial presentation slides, which were published on our website at investor.scotts.com prior to this webcast. During our review, we will make forward-looking statements and discuss certain non-GAAP financial measures. Please be aware that our actual results could differ materially from what we share today. Please refer to our Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results. Following the webcast, President and Chief Operating Officer, Nate Baxter; and Executive Vice President and Chief of Staff, Chris Hagedorn, will join Jim and Mark for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast. To participate, please join by the audio link shared in our press release. As always, today's session will be recorded. An archived version will be published on our website. For further discussion after the call, please e-mail or call me directly. With that, let's get started with Jim's business update. James Hagedorn: Thanks, Brad. Good morning. I'll start by reminding everyone of our mission. We're getting back to being the safe harbor, high-return equity that was our historic profile before we embarked on our financial recovery. That includes eliminating any drama around our business for investors to have to worry about. When you look at our outstanding fiscal '25 results and what we expect for this year, it's clear we're executing upon the mission. We're generating strong sales growth in our U.S. consumer business and substantial free cash flow. POS units at retailers are even higher, and we're improving gross margin and profitability while reducing our leverage ratio. Our financials are stronger and the balance sheet is healthier. Most importantly, we've deepened the moat around our business with our exceptional brands, R&D, supply chain and sales teams. We're taking more share in the consumer goods category that shows no signs of slowing its growth. Our partnerships with our retailers have never been better and more retailers are recognizing lawn and garden as a high-growth consumer category in this challenging economy. As a result of all this work, we're gaining a greater level of predictability, stability and financial flexibility. Later this month, we'll close on our new credit facility on what we expect will be better terms, a recognition of our progress. I want to thank Mark and our treasury team and our banks for their hard work. In addition, we're looking to take more friendly actions for our shareholders that go beyond our dependable and high dividend. This includes a multiyear share buyback program that I will put before our Board of Directors this quarter for implementation in fiscal '26. That's the only major M&A that I'm interested in right now, buying back our own company. At the start of last year, I laid out our financial imperatives for '25 through '27. They are the foundation for consistent growth in our midterm strategic plans. They include U.S. consumer net sales growth average at least 3% annually, gross margin rates of 35% or higher, EBITDA growth in the mid-single-digit range and a leverage ratio of 3 to 3.5x. I'd like to measure our progress not just by what we achieved in fiscal '25, but by our multiyear performance against those imperatives. It's worth noting that our U.S. consumer net sales the past 2 years increased by a combined 7%, in line with that annual average. Overall, fiscal '25 moved us closer to all of those targets. We delivered on every aspect of our guidance, and the list of positives is long. Gross margin was up nearly 500 basis points, exceeding our projections, allowing us to invest even more behind our brands and deliver EBITDA of $581 million, which was solidly within our guidance. Free cash flow exceeded expectations, too, helping us drive leverage down to just over 4x and reaching $1.3 billion of free cash flow over the last 3 years. Our guidance for fiscal '26 calls for more improvement. We expect to maintain low single-digit sales growth for U.S. Consumer and deliver gross margin approaching 33%. Leverage is expected to get safely into the 3s. My goal today is to demonstrate that Scotts Miracle-Gro is a best-in-class consumer goods company that deserves to be valued accordingly. Mark will cover our fiscal '25 performance in more detail and the guidance that will take us further down this path. I'll address the building blocks for fiscal '26. Central to our plan this year, our sales growth through organic volume increases and modest pricing, along with very positive gross margin improvements through continued cost savings and a strategic shift in mix. Let me explain the mix shift. We will put greater resources behind our consumer activation programs for our branded products while deemphasizing similar investments we've traditionally made in commodity products such as mulch. By stepping away from lower-priced, low-margin commodities and focusing on our higher-priced, high-margin brands, we intend to drive a significant improvement in the quality of consumer sales at the retail level. You may wonder why we invested in activation around mulch and other commodities. The primary reason was to partner with our retailers who use these products as an early season traffic driver, and it works for them. But these commodities are barely profitable for us. They require a commitment to activation dollars, they pull down our gross margin and max out our capacity, forcing us to contract with third parties to fill retailer commodity orders. Our retail partners are accepting of this shift and are committed to ramping up joint activation programs to drive our branded products. They know the importance of our brands, and they see this as a bigger margin play for them, too. There is unmatched power in our retailer programs combined with what we do from a broader advertising and marketing perspective. These activation investments approach $1 billion annually. On top of this, retailers put a lot of their own money into these activities to drive our products in their store online and at shelf. These programs set us apart from competitors and would be a huge investment for any consumer goods company. Our ability to invest with our retailers behind our brands literally drives the entire lawn and garden category. To ensure our associates are focused on our brand strategy this year, we'll present to our Board's comp and org committee an incentive plan built on the metrics of branded sales growth, gross margin and achievement of our strategic initiatives. This differs from incentive plans these past few years, which have been largely based on EBITDA and leverage metrics. The positive fiscal '25 results that we're sharing with you today demonstrate how our incentives drive behavior. Another building block for fiscal '26 is our e-commerce expansion. Online is where brands are created out of nowhere and it's where people learn about products and they shop. We've made huge gains in this channel in fiscal '25. We're doing exciting work to play in this space in a much bigger way. The growth opportunity is huge. If we can capture market share in e-com that we have in conventional retail, it's well over $0.5 billion opportunity. A lot of the e-comm gains last year resulted from our driving our brands through retail or digital channels. In fiscal '25, we achieved over a 50% increase in e-commerce POS units. At our largest retailer, e-com sales doubled. And across retailer sites, our online share has grown. Nate has a dedicated team to expanding this channel. They're armed with more activation dollars and are developing new e-com strategies that include loyalty programs, subscription services and more. We'll expand not only what we're doing with retailers, but through our own platforms as well. Innovation plays into this space, too. We're augmenting our portfolio with products that are tailored to e-com in terms of packaging and what they offer, such as the launch this year of Liquid Turf Builder and liquid Miracle-Gro feeding products. Our supply chain is well positioned for online fulfillment. From a broader product innovation perspective, we're putting greater emphasis on organics and natural solutions. For consumers who want a less chemical approach to lawn and garden care, we're there for them. Much of this will be led by gardens where we're driving record consumer engagement and leading the entire garden category with Miracle-Gro. In fact, our organics portfolio is our fastest-growing product line ever. The team is doing a fantastic job, and I've challenged them to double their growth rate, and they have a tremendous tailwind. Our total branded gardens business has grown over 10% in units in each of the past 2 years. We've been gaining over 1 to 2 points of market share in each of those years, too. We have new things coming this year that will strengthen our ability to drive the entire category and bring in emerging consumers. It includes expansion of Miracle-Gro organic, new packaging and a bigger focus on year-round indoor gardening. Martha Stewart will again champion Miracle-Gro and the health and practical benefits of gardening. In controls, we have exciting things planned to take our Ortho brand to a whole new level. Ortho has often taken a backseat to our other brands, including Roundup and Tomcat, but that's changing. The team is introducing over 10 new ortho products that will strengthen and expand our position in the category, valued at $5 billion. We're introducing ant, mosquito, tick, weed preventer and light trap SKUs. We're also evolving the marketing approach, tapping into social platforms to reach a whole new demographic. Controls is underpenetrated in dot-com and Ortho is well suited for it. Launch would be critical to our brand strategy. It's always been attractive because of its highly favorable margin profile. We're taking a very sophisticated approach, building off the great work in fiscal '25, where we reversed a long-term unit decline to deliver a combined 5.6% POS unit lift in branded fertilizer, grass seed and spreaders. We're changing how we market, advertise and promote fertilizers. We've moved away from consumer activations on single bag combination solutions like triple action in favor of activities that emphasize multiple feedings. And what's happened? In the Midwest, our most important legacy market and where the weather was reasonable, POS unit gains exceeded 13% last year. Across all regions, Halts POS was up 20%, weed and feed was up 9%. This is awesome, and it demonstrates that we're on the right track. At the end of the day, consumers just want a great lawn and the simplest and easy way is to regular feedings for a healthier lawn. In fiscal '26, we'll launch a new turf builder line focused on feeding your lawn 4 times a year. It features brand-new formulations that bring significant results within days. And if consumers encounter weeds, they can spot treat with our control products. We'll still carry combo solutions for consumers who prefer this approach, but we expect the new line to drive even more multi-bag purchases. The partnership between the lawns team and supply chain has led to significant improvements to reduce our production costs. This will enable us to create lower price points for consumers, setting the stage for higher sales while preserving margins. We all know the price of our fertilizer bags was getting high. And with the new Turf Builder line, a consumer with an average sized lawn could feed it all season for about $100. Let's talk about the overall lawn and garden category. It's gigantic. It's growing and it's recession-resistant. And we have the most powerful brands across the entire category. We're not concerned about private label. Its share is less than 10% and according to our industry-leading sources of data intelligence, it continues to decline. People are not trading down from our branded products. This is in stark contrast to what's happening with many other CPG companies. They're not only dealing with private label share gains, they're challenged by an uneasy consumer sentiment, on and off tariffs and macroeconomic noise. We are not in that place. We are relatively unaffected by tariffs given our domestic sourcing. The demographics of our consumer are in our favor. There are homeowners who are not at the lower end of the market, and they're showing up. That's evident in our point of sale. Units increased 8.5% in fiscal '25 on top of last year's gains of nearly 9%. A 17.5% POS unit increase over 2 years far out distances our peer group. It's an outstanding number for any consumer company. Let's address our cost structure. We're being very deliberate but measured to balance out cost savings for margin improvement with necessary investments to fuel growth. We've done an outstanding job in our commitment to pull costs out. We're also undertaking a SKU rationalization to streamline the portfolio for incremental savings and supply chain efficiencies. Nate is looking to substantially invest even more this year in technology, robotics, AI, innovation and marketing, all of which I have approved. I've spent most of my time on our consumer business, so I'll pivot to Hawthorne Gardening, which was cash flow positive and contributed positive EBITDA for the full year. This improvement will aid our ultimate plan to divest Hawthorne and focus on our lawn and garden powerhouse. We are fully committed to being a pure lawn and garden company and moving Hawthorne to a place where they can be successful on their own and in their own category. If they deliver, it could create an opportunity for Scotts Miracle-Gro shareholders to participate in Hawthorne's value creation down the road. Progress is being made here. Earlier in fiscal '25, we divested the Hawthorne Collective, the vehicle by which we invested in cannabis plant-touching operations. In Q4, we sold the international professional horticulture arm of Hawthorne Gardening. The next and final phase is to combine Hawthorne Gardening with a cannabis dedicated entity to create a unique integrated company like no other. It would be diversified between input supplies, cultivation and strong brands with a geographic footprint in industry-leading consumer markets. We're close, and we hope to provide details soon. So we're clear. Everything we're doing with Hawthorne reflects our commitment to our Board of Directors who have charged us with finding a solution that preserves and accelerates our tax benefit of about $100 million, meets the expectations and requirements of our banks, ensures no more cash goes into Hawthorne and finally, positions Hawthorne for long-term independent success. To sum everything up from my comments this morning, I'll emphasize 2 major points. First and foremost, we're executing every day on our mission to make Scotts Miracle-Gro the safe harbor, high-return equity it should be. We're accelerating growth, and we're intent on taking more shareholder-friendly actions. We've brought stability to our company. Second, we're a best-in-class consumer goods company. No one has the brands, innovation, supply chain and in-store merchandising force that we do. We drive our business and the entire lawn and garden category. And we're investing even more heavily in the most powerful franchise in the space. As I look to fiscal '26, we're very bullish on the year, and we have exciting things happening strategically to further support our mission. To put it simply, we got this. Here's Mark. Mark Scheiwer: Thank you, Jim, and hello, everyone. Fiscal '25 marked another year of momentum, highlighted by substantial progress in furthering investments in our brands, innovation and channels, continuing gross margin improvements, strengthening of our balance sheet and lowering of our leverage ratio. We met or exceeded all financial metrics in our guidance. Gross margin expansion, EPS and strong free cash flow surpassed projections. At the same time, we made important strategic investments to fuel our continued growth. We are set up well for fiscal '26 to drive greater shareholder value, and I'll talk about that after I review our financials, starting with the top line. For the quarter, U.S. consumer net sales were $311.2 million, an increase of 3% from volume gains when you exclude the nonrecurring AeroGarden and bulk raw material sales from fiscal '24. The volume gains were driven by strong consumer demand for our lawn products and Roundup. For the year, U.S. consumer sales increased 1% to $2.99 billion when excluding the impact of nonrecurring fiscal '24 sales. Annual sales gains were driven by consumer demand across our categories, maintaining of listing gains from fiscal '24 and the expansion of e-commerce. We also saw a strong performance of new products such as the expanded Miracle-Gro organic line, the O.M. Scott & Sons natural grass seed and grass food lines and the recently launched Ortho Mosquito Kill & Prevent product. The year-over-year increase in sales was partially offset by anticipated slight reductions in retailer inventories as many retailers have modified the replenishment activities to align more closely with the POS sales curve. As a result, in fiscal '26, we expect U.S. consumer to experience a 1% to 2% shift in sales from the first half of the fiscal year to the second half relative to fiscal '25. This shift, while not impacting our full year results, reflects our retail partners ordering closer to the spring and summer POS sales curve, and the impact of this shift will be felt more in our first quarter. This shifting trend is an advantage for us in the long term. And given our superior supply chain capabilities, we expect to capitalize on this in the future. Stacked with fiscal '24, our 2-year U.S. consumer cumulative sales growth of 7% demonstrates the power and strength of our brands and our long-term commitment to delivering at least 3% annualized net sales growth. Our POS trends are a testament to the health of our brands and have helped the power of U.S. consumers net sales growth the past 2 years. Consumer engagement remains high. And for the quarter, our POS dollar growth was 3.6% and unit growth was 11%. Over the full year, we drove unit growth of 8.5% across our categories, POS dollar gains of 1.4%. The unit and dollar growth difference reflects strong POS for our soils and mulch products with lower unit dollar values combined with our planned increase in consumer activation activities for our higher-margin branded SKUs. As we look to fiscal '26, I expect POS dollars and units to be more in line with each other as we increase our focus on the power of our branded products as part of the mix shift strategy that Jim discussed. The full year POS bright spots for fiscal '25 included lawns at plus 4.2% in units, led by strong growth in grass seed and spreaders. Gardens delivered plus 10% unit growth, excluding mulch on the strength of soils, which increased 11.4%. And our overall controls category, which includes Roundup and Ortho was relatively flat after gaining strong momentum to close the year, which helped offset a slow start to the season. Moving to market share. Our retail programs, coupled with incremental advertising investments contributed to increased consumer engagement as our overall category market share in units grew by 1%. We continue to see minimal competitive pressure from private label as recent movements at our major retailers have been insignificant. Overall, excluding mulch, this represents less than 10% of the total category we operate in. Jim and Nate have talked about how channel expansion is a component of our growth strategy. And to that end, we drove substantial e-commerce gains, primarily through our retailer e-commerce sites. For the year, e-commerce POS units were up 51%, while e-commerce POS dollars increased 23%, driving e-commerce up 170 basis points to represent 10% of our overall POS. As you can see, our U.S. consumer business is delivering on its sales goals and has strong momentum as we move into fiscal '26. Looking at Hawthorne, full year net sales of $165.8 million were down 44% in the fiscal '25 as we focused on profitability improvements, exited third-party distribution and evaluated alternatives for divestiture. In September, as part of our broader strategic divestiture initiative for the Hawthorne segment, we completed the sale of Hawthorne's professional horticulture business based in the Netherlands, which generated $35 million of net sales in fiscal '25. Total company sales for the quarter were $387.4 million and for the full year were $3.41 billion. When excluding the impact of the Hawthorne segment and the nonrecurring sales within the U.S. consumer, our total company sales increased 3.4% for the quarter and 1% for the full year. Moving on to our total company gross margin. We saw strong improvements. For the quarter, the GAAP gross margin rate was 6.1% versus negative 7.1% in prior year. And the non-GAAP adjusted gross margin rate increased to 7.2% from negative 3.1% in prior year. The quarterly improvement was primarily driven from the nonrepeat of onetime inventory write-offs of $29 million recognized in Q4 of last year along with favorable product mix and lower material, manufacturing and distribution costs from our transformation cost savings and efficiency initiatives. For the year, we ended with GAAP gross margin rate of 30.6% versus 23.9% in prior year and with a non-GAAP adjusted gross margin rate of 31.2% compared to 26.3% in prior year. The full year gross margin improvement was consistent with our Q4 drivers. This strong increase of 490 basis points in our full year non-GAAP rate to 31.2% exceeded our 30% target and advanced our midterm plan to return gross margin rates to the mid-30% range by fiscal '27. As you might recall, at the start of the year, we targeted $150 million in supply chain savings over a 3-year period and another $30 million in savings in corporate functions. We've already achieved over $100 million in cost-outs in fiscal '25 and have strong line of sight to the remaining savings over the next 2 fiscal years. It is important to note that we continue to reinvest in a portion of these savings back into growth areas, including advertising, R&D and technology. Moving down the P&L. SG&A for the quarter increased $19 million to $137 million due to higher short-term incentive compensation and increased investments in our brands and technology. For the fiscal year, SG&A increased $44 million to $603 million for similar reasons and closely aligns to our original guidance of 17% of net sales. As for adjusted EBITDA, we continue to drive significant improvements. In Q4, EBITDA was a loss of $81.6 million versus a loss of $97.2 million in the prior year. We typically report a loss in our fourth quarter each year. The full year fiscal '25 EBITDA finished at $581 million, a $71 million increase over fiscal '24. Below the line, interest expense continued to fall from lower debt balances and favorable interest rates. Interest expense declined by $30 million from $158.8 million in prior year to $128.8 million. We also significantly reduced leverage, ending the year at 4.1x net debt to adjusted EBITDA compared with 4.86x in fiscal '24, the result of continued deployment of free cash flow to debt reduction, along with strong improvements in adjusted EBITDA. Our free cash flow of $274 million, which exceeded our target by $24 million was deployed to pay our quarterly dividend and reduce debt, resulting in total borrowings at year-end declining by $120 million. Just this week, we kicked off our credit facility renewal process with our bank partners and look forward to completing this process later in November. Based on feedback from our bank partners, we are experiencing strong support for our credit facility renewal as a direct result of our recent financial performance, strength of our brands and consumer position and our long-term growth plans. As always, we appreciate our bank partner support. Looking at the bottom line. For the quarter, GAAP net loss was $151.8 million or $2.63 per share versus $244 million or $4.29 per share in the prior year. For the fiscal year, GAAP net income was $145.2 million or $2.47 per diluted share compared with a GAAP net loss of $34.9 million or $0.61 per share in the prior year. Non-GAAP adjusted earnings for the quarter were a loss of $113.1 million or $1.96 per share. versus a loss of $131.5 million or $2.31 per share in the prior year. For the fiscal year, non-GAAP adjusted earnings were $219.6 million or $3.74 per diluted share compared with $132 million or $2.29 per diluted share last year. As a reminder, non-GAAP adjusted earnings exclude impairment, restructuring and other nonrecurring items. For the quarter, we recognized $41.8 million in charges, which includes the previously mentioned $18 million loss on the sale of Hawthorne's professional horticulture business. Overall, we're very pleased with our fiscal '25 performance and expect to make further progress against our financial objectives and plans for fiscal '26. This includes driving net sales growth, additional gross margin improvements, strong free cash flow and reduced debt leverage. This leads me to our financial guidance for fiscal '26. Jim laid the foundation, and I want to provide our outlook here. We expect to deliver low single-digit growth in U.S. consumer net sales built off the volume growth in our branded product lines and pricing actions. Non-GAAP adjusted gross margin rate of at least 32%, driven by our continued automation and cost savings activities. Non-GAAP adjusted earnings per share of $4.15 to $4.35 per share, inclusive of lower interest expense as we continue to pay down debt. Mid-single-digit growth in non-GAAP adjusted EBITDA as we reduce the use of equity in lieu of cash compensation. free cash flow of $275 million and leverage ratio of high 3x. We are confident in our plans and guidance. We are doing the right things to execute upon all of them. And just as importantly, we hold a powerful position in a very unique consumer space. Thank you, and I will now turn it over to the operator. Operator: A few additional remarks. Nate Baxter: Thank you. Good morning, everybody. This is Nate Baxter, President and Chief Operating Officer. Before we get into Q&A, I really just wanted to build a little bit on what Jim and Mark said and share some of my observations. I think the headline here is the strategy and formula that we put in place in fiscal year '25 is paying off. It's obviously reflected in our results. But when I look at what happened at the retail environment, there was a very, very big indicator of just how important the branded business is for us. For example, retailers that leaned in and really started with brands first grew tremendously, grew double digits. Retailers who, I'll say, lagged or didn't start with that strategy did not. But later in the season, when they adjusted and focused on branded growth, there was some recovery there. So for us, this is really a proof point that our focus on branded goods is extremely important. When I look at the SKU rationalization that Jim talked about, this is extremely valuable from a margin standpoint. And we've been able to prove that, I think, this year because some of the margin gains are not only on the backs of what we did in supply chain, but also mix. As Jim said, we're going to do more of that next year. The commodities that we play in, while important to our retailers, and we will still play in them, we are making intentional decisions to redirect not only our manufacturing capacity, but also our investment dollars into those categories, and it's paying off. If we look at what we did in lawns, for example, it was an amazing turnaround, stemming the bleeding from almost a decade of just declines in units. What Sass and his team did by focusing on frequency, it moves the needle. We're looking for tremendous improvement in that over the next couple of years. We've got innovation coming in '26. John is going to launch the new Turf Builder line that Jim talked about. And in '27, we're going to follow with the combo bags. I want to be clear, I see this not only as a play to increase frequency, but we see it as a way to engage new consumers, bringing new innovation like this to the market and doing it in a way at a price point that we can engage folks who have sat on the sidelines, I think that's going to be key. We're doing the same thing in gardens. It was another record year. The category grew. And as Jim said, there's a lot of runway. When I look at the MGO line, that was our fastest launch ever, more than $200 million in business over the last 2 years. Now we're going to shift our focus to plant food and more importantly, indoor gardening. What Sadie is going to focus on there is broadening the season for gardens and making us a 365-day a year business. I'm actually most excited about what's happening in controls. We're focusing on bog-specific applications. As Jim said, we've probably got 10 or so new pieces of innovation coming into the market. It's going to be exciting. We're going to attack indoor. We're going to attack AP, mosquito, tick and all the challenges that consumers face out there. To build on that, we're going to continue with our channel expansion in '26. This is really what gives me the confidence that we're going to see above-average branded growth. Not only are we bringing new products from an innovation standpoint, but we're going to expand in channels. E-commerce is something that both Mark and Jim talked about. We expect to see double-digit gains again this year. Our retailer partners, in particular, have leaned in and seen tremendous growth, more than 100% at some accounts. So in addition to being excited about the innovation and the channel expansion, on the back end, we're going to continue to invest in robotics and AI. I think the results that were delivered this year are just the beginning. Supply chain has a long road map of opportunities. We're actually going to start to bring consumer-facing in with new digital assets like websites and apps that lean into AI and give the customer a new experience. So when I add all these up, I'm really bullish on '26. And then when I look at the 5- to 10-year road map, R&D is now focused on naturals, biologicals, organics as well as new packaging and form factor solutions. I think the combination of this is going to be powerful. And what we see in '26 is just going to be a continued build of what we've done in '25. So with that said, I'm going to turn it back over to questions now. Operator: [Operator Instructions] Our first question comes from the line of Jon Andersen with William Blair. Jon Andersen: Nate, following on your kind of comments around the focus on the branded business, branded sales and the mix shift associated with that. Wondering if you could talk a little bit more about how the lawns work that you're doing, the lawns strategy, which you've talked about to some extent, fits into that and how that branded focus and some of the changes you're making in the lawns business can kind of work synergistically. Nate Baxter: Yes. Thanks, John. Let me kick it off, and I'm going to turn it over to John Sass, who runs that business unit. Look, I think the thing that we realized as we looked at that unit decline algorithm over the last decade is that not that consumers were trading down to lower-priced products, it's that they were just stepping aside and staying out of the category. So there's a couple of things here that's part of this. We talked about frequency. So I would say John primed the pump in '25 on frequency. While we didn't bring any new innovation to market, we talked about our products differently. We leaned in on 2-for-1s, trying to build that sort of consumer habit. That was a big part of the trade dollars that we spent last year. And I think those were well spent, and we'll continue to spend dollars on those this year because it will take a couple of years to get consumers sort of recalibrated to the benefits of feeding monthly. On the household penetration side, that's a little bit more challenging. You're talking about bringing in new consumers. So I think what John is doing with this new straight food, which is a totally new formula, low cost, easy to apply, going to deliver great results in a quick period of time. I honestly think we're going to see growth both in frequency from existing consumers who will supplement their 2-step process, whether they're using a halt early season or a weed and feed or hopefully both, we think they'll start to supplement that with just straight feeding. But also, we're going to make it simple and low cost for new consumers to come in. So I'm really excited about it. John, I'll let you make a few comments on sort of where you're headed with the business. John Sass: Yes. Thanks, Nate. I would just sort of add a little bit more color by classifying what we're doing on our lawns business as an aggressive category reinvention. It's been said a couple of times here that we've been experiencing category unit decline. And the only way to really reverse that trend was to reinvent this entire portfolio in this business. And we're doing that with the consumer at the center of everything we're doing. Nate just alluded to having a great lawn is not that hard. It just requires regular feeding. And so we're doing that with products that are effective, they're going to be affordable, and they're going to lead with claims like safe to use around kids and pets. That's the crux of the issue, and that's what we're going to be doing starting in '26. changing consumer behavior is the challenge, and that's what we're going to do. Our entire marketing approach is shifted to in order to do that. New advertising campaign, our promotional plans are different. And over the next 2 years, as Nate just alluded to, we have an entirely new revamped product lineup that's going to solve those consumer pain points. So when you look at the -- what we saw from results in 2025, we're super bullish on sort of the start of this reinvention. We're still early in the process, but I believe over the next 2 years, we're really excited on what we're going to do with the lawns business. Mark Scheiwer: And John, maybe -- John, just to add, this is Mark Scheiwer. To me, on the finance side, to me, this translates to higher incremental unit sales, higher shipments, higher POS units. And then from a gross margin profile, this also means very strong gross margin improvement mix as we continue this journey. So I think those are all positive things built off the backs of what they said. And we continue to put investment dollars at work as we make transformation savings activities and adjust our SG&A to fuel this growth. Nate Baxter: Yes. And sorry, John, I'll add one more thing, which is just broadly not specific to lawns. But I want to be really clear. When we -- the guidelines I put in place on anything we're doing from a SKU rationalization standpoint must be margin accretive and must replace any top line we lose. And those are the golden rules. And the team is doing a really good job on it. And look, this is going to be a couple of year process, but I think we're starting to see the fruit of that in terms of our margin profile. Operator: Our next question comes from the line of Andrew Carter with Stifel. W. Andrew Carter: I wanted to come back to the private label point you made. I know that there was a bifurcation in approaches this year, and you kind of reiterated the branded solution. In totality, did that focus -- that unique focus hurt your numbers? Or was it ultimately a trade-off that you just -- it was a zero-sum game and you were kind of indifferent to it. And really, the biggest challenge to you would be a universal approach of private label that would impact you? James Hagedorn: Well, Andrew, it's Hagedorn here. I mean, a couple of ways I would sort of approach that number one, I don't feel like we're under private label pressure at all. I've been running this business for a long time, and I've seen it where there's been much more significant pressure. I think us -- I think the last time we talked, we calculated we were up 2%. I think we ended the year about 1% up in share, which given the amount of share we have in our categories, I think is fabulous. The -- so I think where we got pressure and at least where we heard about it mostly on like these calls with one analyst who wrote about that. I think we looked at it and said it's remember, we don't make hardly any margin on our commodity business. We -- a lot of it we do for retailers. It's important to the category. But the biggest thing was when people told me we were like out of capacity on mulch and we're like going third party. So on a business we made nothing on, we're like paying other people to make it for us, plus there was a lot of activation dollars going behind it. Nate and I just made the decision like we're just -- we're going to pull away from this. It's -- and take -- the biggest thing is take the activation dollars and put the activation dollars against the branded business. We know that works, and we're not talking insignificant money here. So I think refocusing that money on -- away from commodities. And by the way, the -- I've been involved in a lot of these discussions with our largest retailers. There is a very, very significant commitment to our programs next year, less private label pressures than we had before. And so we aren't that interested in the commodity. There are other people who are happy working with no margin. That's good for me. We're willing to play. We're not willing to play to lose money. And the activation dollars are going to go where we make money. And what we're seeing is a really good reaction to that shift change for us. Nate Baxter: Yes. Maybe let me just comment on the state of our relationship with the retailers. I mean it's as strong as I've seen it in the few years I've been here. Again, just referencing sort of what we saw in '25, those that led with branded products, one big, and I think everybody recognizes that. So we're almost done with our program negotiations. We're totally aligned with our retailers. We're focusing on branded products. Look, we'll still serve some of the commodity and private label. It's not like we're going to 0. But when I look at the empty calories associated with those and when we jointly, the retailers and us look at the margin opportunity on the branded product, it's sort of a no-brainer, and we've built all of our programs in '26 really around that thesis. So I'm feeling very good about that. And I think it's on us to show the consumer that we've got efficacy and value. And I think our products speak for themselves. And just to put a punctuation point on the lawns business, I think with the new products coming out in '26 and '27, it's going to just throw accelerant on that fire. W. Andrew Carter: I guess to speak to activation, I wanted to back up on a number you gave a while ago, $200 million advertising support. And there's some puts and takes in that number. I know that's not an apples-to-apples and need some update. But what are your expectations for total commitment to advertising at this point? Did you achieve it in '25? How much increased investment or not is in the FY '26 level? And of course, you're talking a lot about what you consider commoditized bulk business, you're walking away from a U.S. consumer or whatever. Do you have a targeted spend as a percentage of either U.S. consumer or your true branded business to put out there as a target? Nate Baxter: Yes, sure, Andrew. Let me comment. So my longer-term target is I think we need to be around 8%. If I look at CPG companies with an average of 8% to 10%, our model is a little different being seasonal, so I adjust it accordingly. But for us, advertising works. The ROI -- just I'll talk about the Miracle-Gro organics. The work we did with Martha, we saw a tremendous ROAS with that this year. So believe in advertising. I'd like to get to 8%. We're below 5% across sort of the average of all our categories. So there's more we can do. There's a nuance, though. It's not just the raw dollars. One of the big pivots we're making this year as we lean into digital and all that's available from a personalization and targeting standpoint, we're going to spend those existing dollars with much more efficiency. So yes, I think in the midterm, I'd like to be north of $200 million. In the long term, I'd like to be closer to 8% of revenue. We did make incremental investments last year. I intend to make additional incremental investments this year. And again, we're really revamping. We're shifting away from sort of the linear streaming. We'll still be there for the biggest sports events, but we're really starting to get our sea legs when it comes to understanding digital and working both with internal and external partners to figure out how to execute on that. So I think it's exciting times, but advertising works. And as long as it fits with Mark's growth algorithm, we're going to invest as much as we can in that space. Mark Scheiwer: And Andrew, just tactically, I think for the year, we'll land around $152 million of advertising expense you'll see in the K. That's about $11 million increase over prior year. And then within our Roundup commission line, we also -- that's a business that also does advertising. The full P&L of that business is not in our P&L. We just get a commission off of it. They did have around $10 million of incremental spend in advertising as well. So you're talking a $20 million-plus stack increase. Our advertising ratio, I think, will come in about 50 to 60 bps higher than prior year as a percentage of sales. On a 2-year basis over the past 2 years, we've grown that 100 basis points. Our margin expansion at the gross margin line helps fuel that growth. And as I look to next year, we talked about transformation activities and cuts in both the second and third quarter. A lot of those activities and cuts that we did, some of those hard decisions in various areas of our SG&A will help reallocate and put towards advertising. So I very much expect to see our advertising to continue to increase at a level commensurate with what you saw this fiscal year in our results. James Hagedorn: I just Look, I hear this conversation and you're not going to find a bigger supporter for increased sort of ad spend and it is one of our core convictions, advertise because it works. That said, the words we're using activation, I think because of the uniqueness of lawn and garden and the relatively few retailers, the amount of money that we can put behind our business -- and remember, retailers are putting more of their own money into it. It's -- listen, maybe there's another retail category that gets the kind of support that we put behind it. But I think it's very challenging to say what is advertising, what is activation. And I think looking back the old ways where it was like rebates or incentives, it's not like that anymore. This is very much joint marketing between us and our retailers that is so powerful that it's -- I wouldn't want to be somebody else but us. Operator: Our next question comes from the line of Joe Altobello with Raymond James. Joseph Altobello: Just want to go back to the outlook for sales for this year. And I guess, even further back than that, when we were together in mid-2024, given the -- at the Investor Day, you talked about 3% U.S. consumer sales growth. We're obviously very low single digits this year, and it sounds like low single digits next year. So I guess my question is, how do we get back to 3%? Because if I do the math, that would imply '27 would be up, call it, mid-singles. So is that the mix shift toward branded? Is there a very robust innovation pipeline in '27. But how do we get comfortable with that ramp in '27, I guess, is what I'm asking. James Hagedorn: Back up to this year, I don't really want to share our incentive targets on this call. But put it this way, the incentive doesn't even pay target if branded growth doesn't hit 5%, okay? Mark Scheiwer: And you're speaking about '26. James Hagedorn: Yes, I'm talking about the fiscal year we're in. So I think I sort of hate these discussions about like low single digits because what we're seeing in the field is a lot better than that. I think we've got Hawthorne mixed in there. I think it makes us look like a low-growth company. I think we have some mix issues of commodity, which appears to sort of slow the rate down of dollar growth. I think it's the unit growth that really matters. But branded growth next year has to exceed 5%. And if you look at branded growth the last 2 years, it's not a scary number for people because we're already doing it. We're going to start talking and breaking out for you guys branded growth so you can track it alongside of us. But yes, no, I would be embarrassed to say it's low single digits. I think the future is really good for us because I think there's a lot of really good stuff happening here. But I think you'll see it next year. Nate Baxter: Yes, for sure. I mean, Joe, look, my algorithm is pretty simple. I expect a few percent from innovation, 1% to 2% from pricing and a few percent from volume growth through channel expansion and potentially small tuck-in M&A if we find the right deal. So look, I think you're right to ask the question. But when we lay out '26 and we look at the retailer plans that we have and we look at the growth, especially in e-comm and the Hispanic channels, I'm pretty comfortable that by '27, we'll really have the flywheel turning. To your point, there is actually a fair amount of innovation coming in '26. And we're going to do what we did last year with our Mosquito Kill & Prevent product, which is we're not going to necessarily wait if something is available that's a little bit out of cycle with a brick-and-mortar retailer. We're going to launch it online with them and with others. So my intention is that we're putting new innovation out into the market as soon as it's ready versus waiting. And then I would say on the channel expansion side, we've dedicated teams to e-com, nontraditional channels. And as I said, Hispanic and large format, so whether it's large yard or small pros. So we've got irons in the fire that should drive that channel expansion, and I feel pretty comfortable we'll get that a couple of percent out of that. Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: My first one was on AI. Nate, you mentioned it a couple of times. There's been a lot of press about you guys seeking to digitize your library of lawn and garden knowledge. So maybe just update us on how you're bringing your retail partners into the conversation here. And do you see a scenario where maybe their e-commerce website search bars or the handheld devices, their associates use increasingly lean on SMG's data to recommend your SKUs over competitors when the consumer is seeking expertise? Nate Baxter: Yes. Jonathan, great question. Thank you. So yes, we've been on a multiyear journey here, and I think a lot of the press really focuses on sort of the back end and obviously, has driven a lot of our efficiencies. '26 is going to be the year when we're ready to engage with the consumer. Look, our view is this, and it's aligned with retailers. We've talked to almost all of them because I do think there is an opportunity to get our technology in their hands. So we'll have our own proprietary libraries and large language models. We are looking for ways to give them access. The e-com is the easiest. And our view is that as we maintain our digital assets, which will include not only all new PDPs that are modernized, more clear, but will include, if you remember the old ortho problem solver book, we're going to digitize all of that. And not only will it be available to consumers on our websites and apps, but we'll make sure that our retail partners have access to those as well. As for in-store, our associates already have access to that in-store. I'm not sure we can actually get that aligned with their handheld systems, but it is a topic of discussion. And we've always been open with our retailers, not only on giving them that, but also we talked, I guess, probably a year ago less about AI and more about how we've leveraged machine learning to have better predictability for retail inventories. That's data we share constantly with our retailers. So it's a good push and a good point. We intend to do it, but we need to control that data because it is our data, and that's the challenge, and we expect to see that launch to the consumer in Q2 of this year, our fiscal Q2. Jonathan Matuszewski: Okay. And then just a quick follow-up. Mark, with the commentary about retailers ordering closer to the POS curve and the revenue shift between the halves. Just curious if there's any thoughts on the impact to gross margin cadence this year relative to last year, absent the effect of any Hawthorne divestiture? And I guess, similarly, on SG&A, it sounds like there's more of a regular pulsing of advertising going forward versus in the past. So just curious how that impacts the cadence for maybe SG&A dollars this year versus last? Mark Scheiwer: Sure. So I'll -- this is Mark Scheiwer. I appreciate it, Jonathan. On the sales shift, it's going to be predominantly, as you heard in my prepared remarks, Q1 is probably where it's going to get impacted the most. I call out 1% to 2%. I'd say we have good line of sight to the next few months here. So as I look at that 1% to 2% shift first half, second half, it's probably going to be amplified in Q1. Still expect gross margin to improve in all the -- in the subsequent quarters. Obviously, Q1 will be impacted by that shift probably the most and will be more volume related given our fixed cost structure on lower sales. As I think of SG&A, the pulsing, you are on point on that. The thing I would highlight on SG&A, both this year and as we look to next year is we continue to have flex in our SG&A. So I would expect our SG&A rate for the full year to be similarly around that 17% metric. We've done a lot of transformation activities to reallocate dollars to those growth engine areas like advertising. And then at the end of the day, we have other flex within our SG&A spend from an incentive perspective, both when you compare it to this year and into next year. So I think from a modeling SG&A, I would say we should be pretty close in line to what you saw this year. Operator: Our next question comes from the line of Peter Grom with UBS. Peter Grom: So maybe a similar question just on your profit trajectory and maybe just the gross margin guidance of at least 32%. And Jim, I think you mentioned in your prepared remarks, approaching 33%. So can you maybe just walk through kind of the building blocks? And then I guess I'm curious, just considering the outperformance this year relative to your initial guidance, are you embedding similar levels of flexibility this year? James Hagedorn: Well, I'll just take the beginning. I was under pressure from Scheiwer on what I put in my script. My expectation is higher than that, okay? And the incentive is based on a higher number than that as well. So I think we're trying to sort of underpromise here, but I think we have line of sight to kind of -- again, to the incentive targets, which are higher than, call it, [ 33 ] or whatever is I said. Mark Scheiwer: Yes. So maybe, Peter, this is Mark Scheiwer. Just the building blocks of growing at least 100 basis points, and then I can maybe turn it over to Nate also to kind of talk about some of the projects. But the building blocks include pricing. So we have taken pricing with our customer base. And I would expect to net out at least 1 point of pricing on the net sales line. So that should help with the gross margin activity. We've called out in any 1 year, we typically also get cost savings from a supply chain perspective. This is execution of projects to reduce costs. They historically run about 1% of sales. And I would -- and as we've modeled for this year conservatively, we've put in a point. You've seen what we've done this past year in '25, where we initially guided to 30% gross margin rate, and we're able to overdeliver. The team has got a lot of outstanding projects they're working on from a supply chain savings perspective and execution. Our CapEx plan that we've laid out both last year and heading into this year, are focused on areas that provide us some really great returns and provide us strong automation. So I'm hopeful we can outperform that conservative kind of call it plan of 1% cost savings. And then offsetting that will be some level of commodities and tariff pressure that in round numbers is about 1%. So that's how the guide worked from a financial metric. Obviously, there's opportunity to overperform there, and I'll let Nate speak to some of those initiatives. Nate Baxter: Yes, I'll just keep it simple, Peter. I think when I look at the internal plan that I'm building with the team, it's obviously more aggressive. And I've got levers between mix, supply chain who continues to overproduce, pricing. So I'm pretty comfortable that I've got levers and room to operate. And I think to Jim's point, we're going to be aggressive in how we attack that. But early in the season, so still putting those plans together. Peter Grom: Okay. Awesome. And then I guess, Jim, you touched on putting a multiyear buyback program in front of the Board for implementation this year. Any details you can share in terms of the size of the buyback, maybe what the impact might look like this year? And I'm assuming the answer to this is no, but the earnings guidance, that does not include any benefit from any potential buyback, right? James Hagedorn: Yes, that's correct. Look, we have a Board meeting Friday. We've got an hour dedicated to this. I think I've talked to most of the Board members. So I think there's a high degree of support. I know Mark is supportive, and we've been working closely with our largest the investment banks of our largest banks to make sure they're comfortable and help us with sort of the math. I think everybody feels like we can make a significant impact over time. So I don't know if I was throwing a number out, I would just say what would I be looking for, for the Board over a multiyear. So this is not with a definition of how many years, but I'd say $500 million to $1 billion would be kind of what I'm going to be looking for. And I think Mark is not freaking out when I say it. Mark Scheiwer: No. I think, Peter, if you look at our history, we've traditionally had around $500 million to $1 billion program. As Jim alluded to, at this point, no definite time period as to what that would be purchased. We'd obviously govern that activity based on our leverage as we get below 4x, and we've got good line of sight as we head into '26 to get below 4x. So that is really great. So I think the next part will be just the phasing and the execution. And as Jim said, it's currently not in our EPS. James Hagedorn: I mean, look, we look at our -- what we're trading at today, and I don't -- we put a ton of work into it, and I know Wells and JPMorgan have as well. I think the entire consumer goods business are trading off their sort of normal historic multiples. But it's a lot for us, even though we're probably not different than the other companies. But I do think that if you look at our historic multiple, we're trading at a pretty relative deep discount at this point. So we feel like it's an opportunity. The one thing we don't want to do is get ahead of it to the point -- I'm talking within '26, but get ahead of it where we get aggressive upfront, something happens because I think if you look at sort of what does affect our multiples, bad news. And so I think where we are is we'll get approval this calendar year. we'll step into it in '26, I think just as long as we have visibility to kind of our performance and where we're going to be on a leverage point of view. So I think leverage is probably the guidepost for us, which is definitely below 4x. And I think then my view is we will execute. Operator: This concludes the question-and-answer session. Thank you all for your participation on today's call. This does conclude the conference. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Chaitman. Lori Chaitman: Good morning, everyone, and welcome to Kyndryl's earnings call for the second fiscal quarter ended September 30, 2025. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These forward-looking statements speak only to our expectations as of today. For more details on some of these risks, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2025. Also in today's remarks, we refer to certain non-GAAP financial metrics. Corresponding GAAP metrics and a reconciliation of non-GAAP metrics to GAAP metrics for historical periods are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. With me for today's call are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter; and Kyndryl's Chief Financial Officer, David Wyshner. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Martin. Martin? Martin Schroeter: Thank you, Lori, and thanks to each of you for joining us. In the second quarter and first half of the year, we delivered margin expansion, a substantial increase in earnings and strong growth in both Kyndryl Consult and Hyperscaler-related revenue streams. Our trailing 12 months revenue book-to-bill remains above 1, illustrating the quality of our recent signings supporting our future revenue growth. We're reaffirming our outlook for fiscal year 2026, and we're pleased that our internal cash generation and balance sheet strength position us to increase our share repurchase program by $400 million, reflecting our confidence in achieving our fiscal 2028 objectives. Focusing on revenue, even though we successfully signed most of the deals that have slipped out of Q1, our revenue for the quarter again came in about $100 million below what we were targeting. We expected a strong September to drive a sequential uptick in our year-over-year revenue comp that didn't fully materialize. The underlying dynamics are that our growth drivers like Kyndryl Consult and Hyperscaler-related revenue are working well and resonating with customers. We're increasingly working to expand scope in our contract renewals, which has led to longer sales cycles since these large complex deals often involve replacing incumbents or transitioning in-sourced work to Kyndryl. We still expect these expanded scope deals to close before our fiscal year-end. And third, our focus on margin expansion is a revenue headwind for us because we've taken low-margin hardware and software content out of our customer relationships. We estimate that this was roughly a 4-point drag on revenue growth in Q2 without which our constant currency revenue growth would have been positive. You can see the benefit of this strategy in our earnings. We entered the third quarter with a record pipeline that supports second half signings growth and a full year book-to-bill ratio above 1. As a result, we're confident we'll deliver revenue growth in the back half of this year as we're redoubling our efforts to expand our services footprint throughout our customer base. David will walk you through more details on these points, but I want you to keep in mind the following: we're entering the second half of the year with a larger revenue contribution from our committed backlog, including less of a headwind from having removed hardware and software content. We have incremental growth opportunities from Kyndryl Consult and the Hyperscalers and customer demand is driven by IT modernization, AI and cybersecurity. We're also operating with a clear long-term mindset, all fully aligned with our triple-double-single fiscal year '28 objectives, and we remain on track to achieve them. In fact, they represent the culmination of the strategy we've been executing powerfully over the last 4 years. With our accounts initiative, we focus on removing unprofitable content and fixing unprofitable relationships. During this process, we kept adding more gross profit to our backlog even as we were shrinking our revenues. We also began investing in Kyndryl Consult capabilities in our alliances, driving scope expansion with existing customers and our ability to add new logos. You've seen the growth in Kyndryl Consult and in Hyperscaler-related revenue streams as a result of these investments, and that momentum is continuing. We then turned our attention to signings growth, which drove our last 12 months revenue book-to-bill ratio above 1, a level we've maintained for 5 consecutive quarters now. And this has brought us to a spot where over the last 12 months, we're generating constant currency revenue growth aside from the estimated effects of removing hardware and software content. And the next step is for the content removal headwind to dissipate and the consultant Hyperscaler growth to continue so that we're routinely delivering total constant currency revenue growth. It's in this context that we believe the strategy we deployed is working despite the near-term revenue pressures we faced in the first half, and we're well positioned to deliver growth in the second half on our way to our triple-double-single fiscal year '28 objectives. On today's call, I'll provide a deeper dive into the multiple growth drivers available to us, including infrastructure modernization. I'll also discuss how agentic AI will both be an operational and a go-to-market tailwind for Kyndryl. Before diving into the near-term opportunities, let me first highlight areas where we're already seeing profitable revenue growth. Among signings, our fastest-growing practices have been apps, data and AI and digital workplace. Our strongest geographies have been Canada, Spain, India and Latin America, and the projected pretax margin on our total signings continues to be in the high single digits. Kyndryl Consult revenue has increased 32% in constant currency over the last 12 months and is now running at an annual pace of $3.4 billion. And our Hyperscaler-related revenues have doubled since last year, and we're tracking above our initial $1.8 billion fiscal 2026 target. Our excellence in service delivery is foundational to our growth strategy. Our innovative and outcome-based approach to managing, modernizing and optimizing complex technology estates drives significant value for our customers and fuel share of wallet growth opportunities. Simply put, customers entrust us with more work because they appreciate the quality of what we already do for them. We deliver our mission-critical services through Kyndryl Bridge, our AI-powered operating platform. With Kyndryl Bridge, our delivery teams and our customers run on a single open platform for monitoring, managing and securing their IT estate end-to-end with an unprecedented level of real-time observability. Kyndryl Bridge now performs more than 186 million automations and generates 15 million actionable insights each month, making Kyndryl an ever more indispensable enabler of mission-critical services. And we have more than 100 partners integrated on the platform, including Cisco, NVIDIA, Oracle, SAP and ServiceNow, providing real-time observability that spans applications, databases, networks, mainframes and clouds across multiple technology vendors. As a result, Kyndryl Bridge, combined with our knowledge of our customers' infrastructure, dramatically reduces risk. It enhances security. It sets guardrails and accelerates problem solving. It has solidified our reputation as the gold standard for infrastructure services. It's a key driver of our top-tier customer satisfaction and of how we're able to regularly win new scope during contract renewals. It's also a key driver of the $875 million of annual savings that our advanced delivery initiative is generating. Our capabilities position Kyndryl the hardest secular trends like AI, cybersecurity risks, cloud migration, modernizing complex hybrid IT environments and industry-wide skill gaps. Our alignment with these trends is allowing us to drive future growth in multiple ways through expanded partnerships with our alliance partners, through scope expansions and new customer wins through mission-critical infrastructure expertise through incremental Kyndryl Consult engagements that leverage our technology-first mindset by uncovering new opportunities with insights from Kyndryl Bridge and our recently launched agentic AI framework and by capitalizing on the widespread enterprise need for infrastructure modernization that spans all 6 of our global practices. I want to double-click on one of our growth vectors, infrastructure modernization. Our expertise in modernizing mission-critical systems and our deep rooted customer relationships are key drivers behind the double-digit growth we're achieving in Kyndryl Consult and the additional managed services scope we regularly take on. As AI adoption accelerates, large enterprises are under increasing pressure to address tech debt and modernize their mission-critical systems. We hear this from our customers every day, and modernization now extends far beyond just updating front-end applications. Organizations need to transform IT environments to meet the rigorous demand of AI-driven operations, addressing evolving cyber threats, maintaining regulatory compliance and leveraging new technologies. Our experience and innovative solutions uniquely position us to help customers manage tech debt and deploy AI at scale. We know that nearly half of IT systems are at or near end of life, and all this tech debt represents a substantial opportunity for us, especially since most organizations use third-party providers for modernization. In fact, our annual mainframe modernization survey showed that enterprises that have modernized their mainframe applications or migrated selective workloads to other platforms are realizing a two to threefold return on their investment. This underscores the tangible value of IT modernization and driving operational efficiency and business growth. Kyndryl is a trusted services partner that only runs but also transforms and sustains our customers' most vital IT assets. Relatedly, we're both using AI in our own operations and enabling customers to deploy AI in their businesses. For starters, our service delivery through Kyndryl Bridge features advanced AI. Leveraging machine learning, Kyndryl Bridge proactively identifies risks before they impact operations. AI-driven recommendations empower our teams to resolve issues in real time, while our intelligent AI agents streamline knowledge discovery and accelerate incident response, building greater efficiency and resilience across the IT environments we manage. Our customers also need help with their own efforts to build and deploy AI agents using open source tools. By combining our infrastructure-first mindset with our deep systems expertise, we've created a dynamic agentic AI framework for our customers. Our framework incorporates a distinctive design process, specialized tools and an innovative engagement methodology that blends agents within complex IT environments to drive business process innovation and productivity. The Kyndryl ingestion agent uses company documents, procedures and data and goals to develop a comprehensive organizational process map. And with this as context, the framework's agent builder capabilities allow the organization to design, test and launch AI agents to streamline workflows in accordance with relevant security and compliance standards. In other words, we help enterprises turn AI ambition into scalable transformation. And the demand runway is clear as roughly 25% of our signings already contain AI-related content. We're working with insurance companies, banks, manufacturers, health care providers and government agencies to deploy AI agents to streamline processes, deliver real-time analysis and expedite decision-making. Our agentic framework will help accelerate our customers' AI adoption and drive incremental opportunities for us going forward. To look at one example of how we're driving growth with a long-standing customer in the APAC region, we identified an opportunity to leverage our strong relationship to expand the scope of our work to the customers' operations in the Americas. Building on the trust we've earned through consistent delivery excellence over many years, we successfully displaced an incumbent service provider in the U.S. and won the assignment to manage the customer's mission-critical IT estate globally. Under our new contract, we'll be modernizing our customers' environment to enable global synergies and AI enablement while enhancing security and reliability. This modernization will migrate virtualized workloads to the AWS cloud and the entire tech stack will be supported by automation and observability from our Kyndryl Bridge platform. And importantly, this expansion will drive an increase in our revenues from this account of more than 25%. Expanding and winning new scope in our accounts is a key factor behind our positive financial trajectory in fiscal 2026 and beyond. As a reminder, by fiscal 2028, which for us begins less than 17 months from now, we expect to deliver more than $1 billion in adjusted free cash flow. We expect to deliver more than $1.2 billion in adjusted pretax income and achieving these earnings and cash flow targets only requires us to reach the mid-single-digit revenue growth that will progress toward by 2028. With strong conversion of our earnings to free cash flow, we're optimizing our capital allocation by investing in organic growth opportunities, deploying more capital to shareholders through our increased share repurchase program and occasionally pursuing tuck-in acquisitions. In fact, we just announced that we've agreed to acquire a midsized cloud services provider in Europe. Importantly, our fiscal 2026 outlook is consistent with our expected growth trajectory from fiscal 2025 to fiscal 2028. As David will discuss, we'll continue to expect to generate approximately $550 million in free cash flow this year to grow our adjusted pretax earnings by more than 50% and to deliver 1% full year constant currency revenue growth. Keep in mind, 2/3 of our P&L this year will come from our higher-margin post-spin signings, the first time that a significant majority of our revenue is coming from contracts that we signed as independent Kyndryl. As we've discussed before, the investments we've made in our expanded capabilities and partnerships are opening new doors for us in terms of increased share of wallet and our ability to win new logos. We've won 450 new logos over the last 4 years, and there's more opportunity in the market today, and we have a robust pipeline of deals in the works. As a result, I'm enthusiastic about our ability to pivot to a second half that we expect will be demonstrably stronger than our first. And with that, I'd like to pass the call over to David. David? David Wyshner: Thanks, Martin, and hello, everyone. Today, I'd like to discuss our second quarter results, the solid margins at which we're signing customer contracts and our outlook for fiscal year 2026. In the quarter, revenue totaled $3.7 billion, down 1% from the prior year quarter on a reported basis and 3.7% in constant currency. We continue to gain momentum in higher-margin advisory services. Kyndryl Consult revenues grew 25% year-over-year in constant currency, which underscores how we're expanding our share in this higher value-add space. Our Q2 signings, as expected, dipped year-over-year, primarily because of the exceptionally strong Q2 we had last year. That said, our last 12 months signings total of $15.6 billion was 104% of our last 12 months revenue, giving us a book-to-bill ratio above 1. As Martin mentioned, we continue to see particularly strong signings growth in our applications data and AI and digital workplace practices, reflecting strong demand for services in these domains. Earnings in the quarter were solid as more and more of our revenues coming from higher-margin post-spin signings. Our adjusted EBITDA increased 15% year-over-year to $641 million, and our adjusted EBITDA margin was 17.2%, up 250 basis points year-over-year. Adjusted pretax income grew 171% to $123 million, and our adjusted pretax margin increased 210 basis points year-over-year. Our 3A initiatives continue to be an important source of margin expansion and value creation for us and remain integral parts of our operational and go-to-market approach. Through our alliances, we generated $440 million in Hyperscaler-related revenue in the second quarter. This puts us on track to exceed the 50% growth in Hyperscaler-related revenue that we targeted at the beginning of the year. And other alliances from Cisco, Dell and HPE to Databricks, Rubric and Palo Alto Networks are also fueling our ability to offer cutting-edge hybrid solutions to our customers. Through our advanced delivery initiative powered by Kyndryl Bridge, we continue to drive automation throughout our delivery operations, incorporate more technology into our offerings, reduce our costs and increase our already strong service levels. It's a win-win for Kyndryl and our customers. We've been able to free up thousands of delivery professionals, and this is worth roughly a cumulative $875 million a year to us, representing a $50 million increase in our annual run rate this past quarter. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the second quarter, we increased the cumulative annualized profit from our focus accounts by $25 million to $950 million. I can't emphasize enough what an important source of sustainable value creation this has been for us. In short, our strategic progress is driving our earnings growth. Turning to our cash flow and balance sheet. We generated free cash flow of $22 million in the second quarter. Our net capital expenditures were $125 million. Working capital was a use of cash in the quarter, driven by the timing of receivables and vendor payments that we expect to reverse in the back half of the year. We've provided a bridge from our adjusted pretax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix. Under the share repurchase authorization we announced last November, we bought back 2.9 million shares of our common stock in the quarter, 1.2% of our outstanding shares at a cost of $89 million. And yesterday, we announced a $400 million increase in our share repurchase program. The expansion of our buyback capacity reflects the confidence we have in our earnings trajectory and cash flow growth as well as our commitment to distributing cash to shareholders. Our financial position remains strong. Our cash balance at September 30 was $1.3 billion. Our debt maturities are well laddered from late 2026 to 2041, and we had no borrowings outstanding under our revolving credit facility. Our target has been to keep net leverage below 1x adjusted EBITDA, and we ended the quarter well within our target range at 0.7x. We are rated investment grade by Moody's, Fitch and S&P. On capital allocation, our top priorities are to maintain strong liquidity, remain investment grade, reinvest in our business, including through tuck-in acquisitions and regularly buy back stock. I remain enthusiastic about how Kyndryl is poised for future profitable growth by maintaining an LTM book-to-bill ratio above 1 and commanding attractive margins on our signings. The September quarter was a continuation of us winning business with healthy margins. Throughout fiscal 2023, '24 and '25 and now into the first half of fiscal 2026, we've signed contracts with projected gross margins in the mid-20s and projected pretax margins in the high single digits. Therefore, as our business mix increasingly shifts towards more post-spin contracts, you'll continue to see a significant margin expansion in our reported results. We've again included a gross profit book-to-bill chart that illustrates how we've been creating and capturing value in our business. With an average projected gross margin of 26% on our $15.6 billion of signings over the last 12 months, we've added nearly $4 billion of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $3.2 billion. This means we've been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above 1 at 1.2 over the last 12 months demonstrates how we're growing what matters most, the expected future profit from committed contracts. It also highlights the quality of our post-spin signings. And with our gross profit book-to-bill ratio having been consistently above 1, that means that we've been consistently growing our gross profit backlog over the last 3 years. As we've said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings and generate free cash flow. Our outlook for adjusted pretax income this year continues to be at least $725 million. This means growing our adjusted pretax income by at least 50% and increasing our adjusted pretax margin by roughly 150 basis points year-over-year. As a reminder, it also means we're calling for a third straight year of substantial margin expansion, and it keeps us right on track to generate high single-digit adjusted pretax margins in fiscal 2027 and fiscal 2028. We continue to estimate that our adjusted EBITDA margin in fiscal 2026 will be approximately 18%, an increase of roughly 130 basis points versus fiscal 2025. We also continue to see opportunities to drive efficiencies in our operations, both through advanced delivery and in SG&A functions. In fact, our enterprise services headcount is down 8% from where it was a year ago. On the topic of cash flow for the year as a whole, we're forecasting roughly 100% conversion of adjusted pretax income less cash taxes into free cash flow. With cash taxes of roughly $175 million, this implies free cash flow of approximately $550 million. Our outlook for constant currency revenue growth in fiscal 2026 continues to be positive 1%, which implies revenue growth of 4% to 5% in the second half. We're redoubling our efforts to drive this growth by aggressively seizing the multiple avenues for growth that Martin described earlier. Our plan for stronger second half growth is straightforward. Revenues from our opening backlog of already signed contracts for the second half are 1 point stronger than our opening backlog was for the first half. We've anniversaried our divestiture of a small business last year, which helps our second half growth compared to the first half by the better part of a point. We've invested in incremental Kyndryl Consult resources so that Consult revenue, which is now a larger portion of our revenue base, continues to grow well into the double digits, contributing an incremental 2 points of growth. We're growing hyperscaler-related revenue more than we initially planned as we increasingly market solutions to customers hand-in-hand with our alliance partners, producing a 2-point benefit in the second half compared to the first. And the larger pipeline of deals we have for the second half is adding incremental revenue, both because it's larger and because of our emphasis on building additional scope into our customer relationships. This will also contribute approximately 2 points of incremental growth. A key theme that runs throughout these growth vectors is that enterprises' needs for IT modernization, their desire to invest in AI and their concerns around cybersecurity are all driving incremental demand for our mission-critical expertise and services. Looking at the third quarter in particular, we expect to deliver positive constant currency revenue growth and for our adjusted pretax income to be 15% to 25% higher than the $160 million we reported in last year's third quarter. In addition, we remain committed to delivering significant margin expansion and generating free cash flow growth over the medium term. We have a solid game plan to drive our strategic progress, and this game plan starts with the steps we've already taken to expand our technology alliances, realize the numerous growth opportunities available to us, manage our costs and earn a return on all of our revenues. Sometimes investors want to confirm the favorable math that's associated with our forecast to more than double our adjusted pretax income from fiscal 2025 to fiscal 2028, combined with our share repurchase program. And the answer is yes. With our income tax expense projected to be in the 25% range, our forecast implies that we'll generate adjusted earnings in the fiscal year after next of roughly $4 per share. To wrap up, we're well positioned for success as a leading provider of mission-critical enterprise technology services, driving thought leadership in our space, delivering modern hybrid IT solutions, growing our Kyndryl Consult presence rapidly, achieving top-tier service levels and customer satisfaction scores and operating at the heart of secular trends that will fuel customer demand for our services for the foreseeable future. So let me end by again thanking the tens of thousands of Kyndryl's around the world who are powering our progress. With that, Martin and I would be pleased to take your questions. Operator: [Operator Instructions] Martin, are you ready for questions? Martin Schroeter: Yes. Thank you, operator. Operator: Our first question comes from Jamie Friedman at Susquehanna. James Friedman: Congratulations on a strong quarter. I wanted to ask something about the capital allocation opportunities for the company, $725 million of adjusted pretax income is your target for the year and the free cash flow of $550 million. So it gives you a lot of optionality on the capital allocation, which is attractive to the investment thesis. So just trying to figure out from your perspective, what the priorities are from the capital allocation side? Martin Schroeter: Sure. Thanks, Jamie. So and thank you for joining this morning and for the nice comment. I'd say a few things. Obviously, we're investing in our business in the form of CapEx, and we'll continue to do that. And we're also investing in new capabilities and then accelerating our capabilities. And you saw that this morning in the form of our -- now pending acquisition of Solvinity in the Netherlands. And then outside of that, obviously, because we do see very strong cash flow growth, we see an opportunity to return capital to shareholders. We started last year with a $300 million share repurchase, and then we followed that up this year with an increased approval from the Board for a $400 million share repurchase. So I think going forward, we have those same opportunities. We'll continue to invest in the business. We'll continue to accelerate our lead in certain areas where we see opportunities in the form of tuck-in acquisitions, and we'll continue to return capital to shareholders. James Friedman: And then just for my follow-up, I wanted to ask about AI. I know you had some comments last night in your prepared remarks about AI. I think that there's some reference that 25% of the workloads, maybe that's the wrong word, but the number might be right, are informed or delivered through AI. So Martin, a high-level perspective on how AI may inform the competitive position and mind share of Kyndryl going forward? Martin Schroeter: Yes. Thanks, Jamie. So just to make sure we have the number clear in your head. We said in our prepared remarks this morning that about 25% of our signings have AI-related content all ready. And for us, we do AI-related work primarily in our cloud practice and our digital workplace practice and obviously, in our apps data and AI practice. And our AI-related work is focused on data architecture and data migration services that allow our customers' AI models to operate. We have in digital workplace services, obviously, AI-enabled solutions that our customers are consuming. And then we also do, obviously, cloud migration work to enable our customers to adopt AI. And then finally, we have some development agentic AI development that our customers are starting to consume now. And that gets them ready for AI that helps modernize their infrastructure so that they can turn their AI pilots into scaled components of how they run their business. So it's focused on those practices. The other thing I'd say is it's pretty broad-based. We work with insurance companies and banks and manufacturers and health care providers and government agencies as well on deploying agents now because they're really trying to transform -- they're trying to transform their business processes. And obviously, these are very complex IT estates, and that's why Kyndryl Bridge is such an important part of this because it gives them the data they need and the visibility they need to how their business processes are working. And that, again, extends our lead our competitive advantage in these mission-critical workflows. So yes, about 25% of our signings now have that form of AI-related content. Operator: Our next question comes from James Faucette at Morgan Stanley. James Faucette: On your CapEx and acquisitions, you've been pretty clear that you plan to do some tuck-in acquisitions. But can you give a little more color on the kinds of things that you're looking for? And maybe give us a sense of what those valuations look like? And how should we think about allocation to CapEx and acquisitions versus buybacks? Do you have a targeted level or range that we should be thinking about? Martin Schroeter: Sure. Thank you. And thanks for joining. When we -- when I think about the 2 acquisitions we've done so far, I'd say that they have sort of common characteristics. First and foremost, they are very much in -- they are very much part of what we do today, right? We are the world's largest infrastructure services provider. Our acquisition a couple of years ago was focused on moving power architecture on to Microsoft's cloud, very squarely in the middle of how we operate, and it gave us the technology and the IP we needed to help accelerate our customers' move to the cloud. So everything about that is what we do today. It was just a way to accelerate. Solvinity today is, again, it's a managed private cloud sort of a structure where in all over the world, and we see this in our surveys, all over the world, people are worried about sensitive workloads, about regulatory requirements, about cloud sovereignty. And so what this allows us to do is, again, what we already do, we advise, we implement, we manage clouds on behalf of our customers, both private and hybrid. And this is now another step into the sovereign world for us in Europe. So they all have this consistency around what we do today. It's -- again, it's either accelerating what we're already doing or allowing us to move into a very specific part of the market in this case, again, Sovereign Cloud in Europe. And this is about -- look, it's about the right size for us. It was EUR 100 million. You'll see that in the Q later today, it was EUR 100 million purchase price at a reasonable kind of a multiple. So when it -- we would expect it would close probably late our fiscal year, first half next calendar year sometime. And again, we're not looking to change who we are. We're trying to stay -- we will stay focused on mission-critical infrastructure services. With regard to other capital allocation, how to think about it, I think the 2 data points now that you have that we've given everybody on, for instance, on share repurchase are starting to form a pattern. That doesn't mean -- that we can't do something differently if the market changes, but we do view our stock as a pretty good -- as a very good value here. So last year at $300 million, it was sort of what I'll call a trailing the cash flow generation of the business. This year at $400 million, again, it's trailing the cash flow of our business. So as we grow, we obviously have opportunities to continue to increase that, but we'll do it more on a trailing basis, so we keep the flexibility that we need within the business. We keep the strong balance sheet we have, et cetera, et cetera. I'll ask David if he has anything he wanted to add to that. David Wyshner: That's right, Martin. When we -- in terms of capital expenditures, in particular, we expect those to be around 4% to 5% of our revenues over time. The substantial majority of that is to support our customers' infrastructure and IT needs, call it, 3 to 4 points out of the 4 to 5. And the remaining point is really related to our needs as a corporation with more than 70,000 employees around the world. So that's how we get to a 4% to 5% of revenue number. When we think about our free cash flow, it's actually calculated after our capital expenditures. So those CapEx are, if you well funded by -- before we get to the free cash flow that can be deployed elsewhere. And as Martin was saying, I think about us being able to pursue both share repurchases and tuck-in acquisitions. It's not an either/or for us, and you could see that in our announcements yesterday and today, where we announced both the share repurchase authorization increasing and the tuck-in acquisition of Solvinity. James Faucette: That's great. And then just quickly, can you give a quick comment or summary of how you're finding customer decision cycles right now? Do they seem about normal? Or are there any movement in those sales cycles? Martin Schroeter: They seem fairly -- they seem normal to me. I think what we are experiencing is not that they're changing. It's just that as we move to add new scope as we add new customers, there's a tendency given what we do and the mission-critical nature of what we do, there's a tendency to be cautious, and there's a tendency to make sure that everything is right because these have to go well. That's true whether it's a new customer and it's true if you're just adding new scope. We obviously have renewals that we're doing, but in the substantial majority of cases, there's new content coming in. We had an example in our prepared remarks this morning that shows how we grow within our accounts. So I don't see any difference in decision-making from our customer standpoint, but I do see that because of what we're -- how we're growing and the new capabilities we're bringing in, there's -- just a consistent level of care because they have to go well, these mission-critical relationships have to be perfect all the time. Operator: Our next question comes from Tien-Tsin Huang at JPMorgan. Tien-Tsin Huang: Just on the -- just thinking about the revenue, I appreciate the second half discussion and Martin, you said demonstrably stronger second half. But I'm just thinking about the $100 million in revenue below expectations and with the September month and the deal slippage, the revenue conversion then doesn't that push out put greater risk in the second half relative to what you thought in the beginning of the year? Or is that being made up with some of the incremental consultant resources that you also discussed in the prepared remarks? Martin Schroeter: Yes. Thanks, Tien-Tsin. Look, there are, I think, some things we -- obviously, we know, as we sit here today, and we tried to lay this out, David, at the tail end of his remarks, we know that we enter the second half with a contracted backlog that is in a better position, and we also know that we wrap on a divestiture we did last year. So the starting point in the second half is a couple of points stronger than what the first half was, right? So we know that. There is certainty around that. We also know that the demand profile in our consult business and our investments in our capacity will deliver an acceleration in the second half. And that's fairly -- it's fairly evenly split in the third and fourth quarter. And our momentum in the hyperscaler business -- the hyperscaler-related business, there's real momentum here. It's supported by what we see in our customers' cloud growth and we see that continuing as well. And then the last piece is -- and maybe this is part of what you're trying to really, really get to. Yes, we have a stronger pipeline than we had. And yes, the content within that pipeline has a slightly nearer-term realization element to it because of the way these deals are shaped and constructed and because of what's in them. So they could move. As we've always said, we're better at predicting the year in which something signs than the quarter in which something signs. And we don't need to sign all of them, obviously, to deliver. But these -- my experience is that these -- the renewals, the scope expansion, all these deals, they can shift quarter-to-quarter. They're not likely to shift year-to-year. So with what we know, again, second half starting point is an improvement from the first half. The investments in the demand and our ability to meet the demand we see in Consult drives an improvement. The hyperscaler-related businesses do have a lot of momentum and continue to have a lot of momentum. And then the deals we're working on just have stronger near-term content. So I feel good about how we start the second half. Operator: Our next question comes from Ian Zaffino at Oppenheimer. Ian Zaffino: Just on the pipeline, very strong here. Maybe tell us what verticals or geographies have been particularly strong. Also, when we talk about like expanded scope or content, can you maybe give us an example or 2 about that? And also in this pipeline, what sort of confidence that this is going to close and be converted? Martin Schroeter: Sure. I'll start with the verticals, and then we'll go to an example. On the verticals, I'd say retail and travel and TMT, technology, media and telecommunications have been the strongest for us. Financial services has been okay in terms of levels of activity. And perhaps not too surprisingly, given uncertainty out there in the market, I'd say industrials and the public sector have been probably a little bit on the lighter side among our verticals. And then in terms of examples, I think the -- there are a number of them. There's one we talked about, the financial services firm example that we walked through where we're actually doing multiple things. The first is that we're expanding what we do into a different geography for a multinational firm. The second is that we're taking on additional work. And the most typical form that's going to take for us is a situation where we're running historical or legacy elements of the infrastructure ones that we often have been involved in for multiple years. And now with the freedom of action we have as an independent company, we're expanding into areas that are beyond that, hyperscaler-related activity being tops on the list, additional cybersecurity content being common. We're doing often more network-related activity for our customers as well. And the pitch associated with this is really about us being an end-to-end solution provider, which is something that customers really value in their provider of mission-critical IT services, because it reduces the number of, I guess, potential air gaps and finger pointing that can exist and it drives efficiency, it drives faster problem solving. It drives accountability. And it plays to our strengths in terms of our ability to convene all of these capabilities in one spot in a way that really provides great outcomes for our customers. And what we're seeing is really strong customer satisfaction and even stronger service level achievement as we expand the range of services that we're providing to customers. So we view the strategic thrust is that we have of building additional scope into our customer relationships as a real win-win. It's key to us growing our revenues, but it also helps us provide even better quality and scope and scale of services to our customers in a way that helps them meet their business objectives. Thank you, operator. I think the queue is empty. So I do want to thank everybody for joining us today. As you can see, our strategy is driving results. It's creating new growth opportunities for us. We are seeing consistent progress across our business in consult and the hyperscaler work that we've spent a fair bit of time on today, but also in modernization and our AI work. We have a disciplined approach. We are certainly managing for the long -- for the long term, and we are confident in our ability to achieve our financial goals including driving revenue growth, expanding margins, increasing earnings and generating strong free cash flow and creating lasting value for our customers and for our shareholders and of course, for the Kyndryls around the world as well. So thank you, everybody, for joining. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Greetings, and welcome to the Sinclair Broadcast Group's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Chris King, Vice President of Investor Relations. The floor is yours. Christopher King: Thank you. Good afternoon, everyone, and thank you for joining Sinclair's Third Quarter 2025 Earnings Conference Call. Joining me on the call today are Chris Ripley, our President and Chief Executive Officer; Narinder Sahai, our Executive Vice President and Chief Financial Officer; and Rob Weisbord, our Chief Operating Officer and President of Local Media. Before we begin, I want to remind everyone that slides for today's earnings call are available on our website, sbgi.net, on the Events and Presentations page of the Investor Relations portion of the site. A webcast replay will remain available on our website until our next quarterly earnings release. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to several risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements because of various important factors. Such factors have been set forth in the company's most recent reports as filed with the SEC and included in our third quarter earnings release. The company undertakes no obligation to update these forward-looking statements. Included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA. These measures are not formulated in accordance with GAAP, are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable GAAP financial measures can be found on our website. Please note that unless otherwise noted, all year-over-year comparisons throughout today's call are presented on an as-reported basis. Let me now turn the call over to Chris Rip. Christopher Ripley: Good afternoon, everyone, and thank you for joining us. Let me begin on Slide 3 with our third quarter results. We delivered strong performance and met or exceeded guidance across all key metrics. Total revenue of $773 million came in higher than the high end of our guidance range. Core revenues was up 7% year-over-year on an as-reported basis. Most notably, adjusted EBITDA of $100 million exceeded the high end of our guidance range. This reflects our operational discipline and continued focus on cost management across the business. Turning to Slide 4. I'm pleased to report significant progress on our station portfolio optimization within our Broadcast segment, which drives immediate operational efficiencies. As of today, 11 partner station acquisitions have closed. 12 have received FCC approval and are awaiting final closing. 10 are filed and pending SEC approval, and we plan on -- we plan to file several additional partner station acquisitions by year-end. Once all current and planned partner station acquisitions are completed, we expect to generate at least $30 million in incremental annualized adjusted EBITDA with minimal upfront capital requirements. We expect to reach the full run rate EBITDA benefit by second half of 2026. Moving to Slide 5. I want to address the evolving regulatory landscape and its impact on our industry. Recent decisions by the FCC and federal court rulings have created a more constructive M&A environment for broadcasters. The elimination of restrictions on Big Four local market ownership enables highly accretive consolidation opportunities that were not possible before. We anticipate the SEC may raise or eliminate the 39% nationwide ownership cap in the first half of 2026, which would further remove barriers to value-creating transactions. These regulatory changes came at a critical time. The broadcast sector is facing secular challenges within linear TV while having a unique opportunity for significant consolidation. We believe the industry is at an inflection point where scale and operational efficiency will increasingly separate high-performing companies from the rest. Against this backdrop, in mid-August, we launched a strategic review of our broadcast business and an evaluation of a potential separation of ventures to optimize value creation across our portfolio. Under the new regulatory regime, we have already executed several transactions, including partner station acquisitions and select acquisitions and divestitures. Given the magnitude of the opportunity ahead, let me spend a moment discussing what broader industry consolidation could potentially look like and why we believe it represents a transformational opportunity for the sector. The broadcast sector is ripe for consolidation given the various secular and economic challenges we collectively face. Based on our analysis and industry benchmarking, synergies from broadcast combinations typically come from 3 primary sources: Distribution revenue optimization, corporate overhead rationalization and the creation of multi-station markets where permitted. One potential path for industry evolution could involve consolidating into 2 similarly sized scale broadcast groups, creating another group comparable in size to the large broadcast combination announced in August, could unlock an estimated $600 million to $900 million in annual synergies through mergers and subsequent portfolio optimizations. This level of consolidation would strengthen the industry's financial footing and position broadcasters as more capable competitors to big media and big tech. Equally important, it would help safeguard local, independent and diverse news coverage that communities across the country rely on. While we present this as one potential industry scenario rather than a prediction, the fundamental point is clear. The regulatory environment now enables transformational consolidation that can benefit Broadcast Group shareholders, creditors, employees and the communities we serve. Sinclair is well positioned in this environment, and we're actively evaluating how best to participate to maximize value for our stakeholders. Let me now turn the call over to Rob to discuss our political revenue outlook and provide an update on EdgeBeam before we turn it over to Rinder to review the financial results and provide the outlook for the business. Robert Weisbord: Thanks, Chris. Turning to Slide 6. We are providing an early outlook for what we expect to be a record-breaking year for midterm political advertising revenue in 2026. Based on current pacing and early conversations with political buyers, we expect political advertising revenue to be at least equal to our 2022 record of $333 million for a midterm election year. Several factors support this outlook. Highly competitive Senate race in North Carolina, gubernatorial race in Nevada showing early spending momentum, significant races in battleground states, including Maine, Michigan and Ohio as well as our strong station footprint in key competitive districts. Looking ahead to 2028, we are preparing for what should be one of the strongest political cycles in recent history. It is expected to be the first dual open presidential primary since 2016, historically a high revenue environment for local broadcasters. Let me provide a brief update now on next-gen broadcast. In late October, the FCC unanimously adopted a Notice of Proposed Rulemaking or NPRM that proposes giving broadcasters greater flexibility to transition away from ATSC 1.0, which would free up significant spectrum capacity for next-gen TV services. Most notably, the NPRM proposes eliminating the substantially similar programming requirement and allowing stations to sunset their ATSC 1.0 signals which will open significant spectrum capacity to drive improved video offerings and data casting use cases that EdgeBeam is commercializing. We're encouraged by the commission's proactive approach and look forward to working with the industry to advance the transition to ATSC 3.0. Turning to EdgeBeam, our joint venture with our broadcast peers, CEO, Conrad Clemson, is actively expanding the leadership team and securing strategic commercial partnerships. We're particularly excited about an upcoming product showcase with a major automotive manufacturer at CES in January, and we look forward to sharing more concrete progress metrics on future calls. Now let me turn the call over to Narinder. Narinder Sahai: Thank you, Rob, and good afternoon, everyone. Turning to Slide 7. During the quarter, Ventures received $2 million in cash distributions while making approximately $6 million in incremental investments. Our Ventures segment ended the quarter with $404 million in cash. This cash position provides strategic flexibility. While primarily designated for ventures investments and opportunistic shareholder returns, Ventures cash could also support transformative transactions in our broadcast business as regulatory conditions continue to improve. Slide 8 highlights our current capital structure with $526 million in consolidated cash at quarter end. In early October, we redeemed the final $89 million of our 2027 senior unsecured 5.125% notes at par. With this redemption complete, we have no material debt maturities until the end of December 2029, enhancing our financial flexibility as we execute on strategic initiatives. In addition, we expect to close on a 3-year $375 million accounts receivable or AR securitization facility at our Local Media segment as soon as practicable this month. This AR facility will further enhance our flexibility to pursue strategic consolidation opportunities and optimize our balance sheet. Turning to Slide 9 and our consolidated third quarter results. Let me walk through the key drivers of our strong performance. Total advertising revenue came in close to the high end of our guidance range, driven by momentum across most categories with year-over-year growth accelerating in September as the NFL and college football seasons kicked off. Distribution revenue also tracked toward the high end of our guidance range as subscriber churn modestly improved at key MVPDs versus our forecast. Consolidated media expenses came in below our guidance, driven by lower-than-forecasted engineering, digital and sales-related costs due to cost containment initiatives and deferral of certain expenses forecasted in the quarter. These results drove adjusted EBITDA of $100 million, 22% above the midpoint of our guidance range. Capital expenditures at $22 million were $5 million below the midpoint of our guidance range due to the deferral of certain projects. Turning to Slide 10 to examine the financial results by segment. Distribution revenue came in at the high end of our guidance range in our Local Media segment, driven by improving subscriber churn, while core advertising revenue beat guidance. As I mentioned earlier, most categories started to show improvement throughout the quarter, particularly as the NFL and college football returned in September. Both media expenses and adjusted EBITDA were favorable to our guidance ranges for Local Media. Tennis channel results were broadly in line with our guidance ranges on both total revenue and adjusted EBITDA. On Slide 11, we introduce our consolidated fourth quarter 2025 guidance. As a reminder, the fourth quarter of 2024 included $203 million in political advertising revenue during the presidential election cycle, which will obviously not reoccur this year. Note that we do not incorporate any anticipated or pending M&A activity into our guidance and year-over-year comparisons are on an as-reported basis. Media revenue is expected in the range of $809 million to $845 million, which reflects the anticipated year-over-year decline in political advertising revenue as we cycle against the strong 2024 presidential election year. Core advertising revenue is expected in the range of $340 million to $360 million, up more than 10% year-over-year at the midpoint of the guidance range as we are seeing momentum continue in most advertising categories. Distribution revenue is expected to be in the range of $429 million to $441 million. Due to the light renewal cycle in 2025, the rate escalators do not fully offset traditional MVPD subscriber losses, though we are seeing improving churn trends at several key distributors and continued virtual MVPD subscriber growth. Consolidated adjusted EBITDA guidance of $132 million to $154 million reflects our continued cost discipline. Before we open for questions, I want to provide preliminary thoughts on full year 2026 on Slide 12. While we'll provide full guidance on the fourth quarter call in February, I believe it's valuable to establish baseline expectations now for key revenue categories and capital expenditures. Obviously, this is not exhaustive, but covers the primary drivers of our 2026 outlook. As Rob mentioned earlier, we expect 2026 political advertising revenue to be at least comparable to our strong 2022 midterm election year performance of $333 million. The current competitive landscape in our key markets suggests we are well positioned to potentially exceed this baseline. For core advertising revenue, we expect to deliver flat to low single-digit growth year-over-year. Strong political revenue expectations will drive crowd out as it ramps in the back half of 2026 and macroeconomic headwinds could pressure certain categories. However, we remain well positioned given our strong ratings and broadcast advertising's proven effectiveness. We anticipate meaningful ratings growth for our network partners as several major live sporting events are taking place on broadcast next year, such as the FIFA World Cup, the Winter Olympics and a full year of the NBA on NBC. For distribution revenue, 2026 will be a lighter renewal year with no traditional MVPDs up for renewal. As a result, we expect relatively flat gross distribution revenue year-over-year, assuming stable churn levels comparable to those experienced in 2025. Note that our preliminary outlook does not include incremental contribution from partner station acquisitions that we plan to close in the near future, which would provide upside to this baseline expectation. However, 2027 represents a significant opportunity with most of the traditional MVPD subscribers up for renewal. Successful execution on these renewals will drive meaningful revenue growth as updated rate structures take effect. It is worth noting that 3 of our Big 4 networks are up for renewal in late 2026, where we have a significant opportunity to improve our reverse retrans economics. We expect 2026 capital expenditures to remain consistent with 2025 levels. This expectation reflects maturing cloud infrastructure investments and the operational efficiencies from our technology transformation. Our disciplined capital allocation enables us to direct more free cash flow toward debt reduction while enhancing our broadcast facilities and strategic capabilities. These preliminary views represent what we believe are prudent baseline expectations. We will provide full 2026 guidance when we report our fourth quarter 2025 results in February. One additional item to note, beginning with our 2026 guidance in February, we will shift to an annual guidance framework, replacing our current quarterly guidance approach. This change reflects our focus on long-term strategic execution, particularly given the inherent quarterly variability in our revenue streams. We'll continue providing annual guidance on key metrics and update that guidance when warranted by material changes. We will maintain quarterly commentary on business trends during our earnings calls to keep you informed of our progress. This approach enables our stakeholders and investors to focus on the fundamental drivers of sustainable and long-term value creation. So in summary, 2026 represents a substantial opportunity for us to demonstrate the cash-generating power and operating leverage of our business model during a political cycle. This strong cash generation will support delevering while allowing us to advance our strategic initiatives. I will now turn the call back to Chris for some closing remarks before we open the call to Q&A. Christopher Ripley: Thanks, Narinder. Let me wrap up with our key takeaways on Slide 13. Earlier this quarter, we launched our comprehensive strategic review of our broadcast business and began work to separate Ventures. We continue to believe that significant value to all of the industry's stakeholders can be achieved through consolidation of the major players as the evolving regulations create unprecedented opportunities across the sector. I want to welcome our new Ventures' Principal, Craig Blank, who has been tasked with managing exits in our minority investment portfolio while also sourcing new majority investments that will help drive strong risk-adjusted returns as we enhance our investment strategy and optimize our portfolio management. Our third quarter results underscore the strength and resilience of our business model. We exceeded guidance across all key metrics with adjusted EBITDA 22% above our guidance midpoint, driven by operational discipline and improving trends in core advertising. We further strengthened our balance sheet by retiring the final $89 million of our 2027 notes, leaving no material maturities until December of 2029. Our fourth quarter guidance anticipates continued improving trends in core advertising and seasonally high higher distribution revenues and our 2026 preliminary outlook anticipates record midterm political revenue, continued progress on our operational initiatives and substantial free cash flow generation that will further strengthen our financial position. We are as optimistic as ever about the opportunities ahead for both Sinclair and the broadcast industry. Thank you for joining us today. Rob, Narinder and I are now happy to take your questions. Operator: [Operator Instructions] Our first question is coming from Dan Kurnos with The Benchmark Company. Daniel Kurnos: Obviously, nice print guys. Chris, a little off the wall for you maybe, but since YouTube was so noisy last quarter, just do you have any high-level thoughts on what's going on with sort of YouTube, Disney right now and just the broader ramifications for how these things are going to end up playing out in the MVPD universe? And then one for Narinder, now that you finally had a little bit of time to get your hands behind the wheel here, it looks like you've done a great job already on the expense side. I know you're going to leave no rock unturned, but just how much more would do you think you have to chop here from an efficiency standpoint? Christopher Ripley: Thanks, Dan. YouTube has obviously become a very significant player in the industry. And as I'm sure you referenced and you remember, last quarter was a source of some disappointment on the distribution side. And some of that is definitely reversing out, and we expect that to improve into fourth quarter because as you remember, there's a lag. So the people coming back for football, most of that benefit we will start to see in fourth quarter -- near the end of the fourth quarter. But more importantly, YouTube and the rest of the virtuals, we've talked a lot about. And as you know, there's currently a blackout going on between Disney and YouTube TV. So we and many others are caught in this dispute between Disney ABC and YouTube TV. More accurately, it's 2 media giants, right, Disney and Google. And what's been occurring with the virtual MVPDs and specifically this situation is a more recent phenomenon. And that we, as local broadcasters have no say in whether our content and the content we pay to air will be distributed to local viewers. This was clearly not the intent of the Communications Act and seems to be, from our perspective, an antitrust issue as well. This dispute and others like it continue to hurt local viewers and local journalism -- the ecosystem of local journalism. So as we and many broadcasters have discussed with the SEC and antitrust regulators, we believe this practice needs to be stopped. Disney, ABC and other networks should not be able to dictate to us whether we can or cannot distribute content to YouTube TV or even Hulu and Fubo, which coincidentally are now also owned by Disney. And the FCC has opened an investigation into hurtful network affiliation practices, and we're seeing those hurtful practices play out in front of our eyes as viewers are missing local news and local sports, particularly concerning is that consumers are now being forced to buy more streaming services from one of the parties in the dispute to get the content that they literally already paid for. We call on Congress, the FCC and antitrust regulators to further review this and stop the harm to local broadcasters and local viewers. Narinder Sahai: Yes. And Dan, to address the second part of the question on the cost structure. Let me first say that the team here has done a fantastic job so far even before me getting here on just working on the cost and making sure that we are very, very prudent in our investments and continue to realize returns on those investments. And this would not be an exaggeration if I said we have one of the best teams here. Having said that, continue to have conversations across different functional areas since my arrival here. And I think people are happy to have those conversations with me. They're having those conversations with open mind. And we're looking at all of the different options in front of us to see how best we can continue to go to market in terms of what we have in our top line. Those conversations are continuing. We are in the middle of our business planning exercise, budgeting exercise. And I think we'll have more to share, maybe a more fulsome update to share in our fourth quarter call in February. But rest assured, it's team is fully engaged, and we are working through that. Operator: Our next question is coming from Aaron Watts with Deutsche Bank. Aaron Watts: I've got 2, if I could. The first, I'm hoping you could talk a bit more about the core advertising environment for your local stations. It looks like it was down around 5% in the third quarter, but has the potential to be up in 4Q. Aside from the crowd out in the prior year, what's driving that improvement sequentially, whether that's select categories or other items? And any early thoughts on what that signals for station core ads in the new year? Robert Weisbord: Yes. So with our categories, all key categories are either up or flat versus a year ago, and it's sequential improvement from third quarter. And we started seeing that help come about in September. And I think you can attribute it to the growth that you see higher ratings across all live sports. The World Series just had a record viewership for Game 7 with $25 million. The Chiefs-Bills game that just happened last weekend was the second highest viewed game of the year. And there's a big appetite from the advertising community to buy into live sports. And it always helps as the network sell up early with double-digit CPM growth and the local broadcasters are benefiting from the sellout in the network and that need both locally and with national advertisers buying into live sports. Christopher Ripley: So look, I would just add on to that, that obviously, what we saw late in Q3 and should be helping Q4 is a lifting of the uncertainty around the economic situation that was first sparked by tariffs. And so that's definitely helping us pick up pace. And as you saw in our prepared remarks, we're expecting Q4 core to be up 10%, and we're also expecting 2026 to be a positive growth year. Aaron Watts: Okay. That's helpful. And then if I could, one more. There have been reports that the NFL may look to open up negotiations on its media rights early. Extending the runway with the most popular content on TV seems like a clear positive, but we've also heard concerns around that, including the potential for increased rights payments, digital outlets taking more games, the risk of a broadcast network maybe being left out, et cetera. Curious if you view that potential early opening of the rights as a positive or a negative development for you and the TV broadcast universe. Christopher Ripley: So while we can't predict exactly the outcome, I think from our perspective, it's an early renewal when I weigh all the puts -- potential puts and takes is undoubtedly a positive. One of the biggest questions we get from investors is what happens when the NFL rights expire or the outcomes around for some of these deals? And what's being discussed are significant extensions of the rights into the back half of the 2030s, which would give the industry a lot of certainty. And I think that would be very positive for the industry. And having a renewal this early ahead of potential expirations, I think, also is to the advantage of the incumbents who have the existing rights because they'll have so much term left on their existing deals. So it's hard to imagine an early renewal where an existing broadcaster gets left out. I think what's more likely to happen is that a new package gets created. So one thing that's been speculated on, which I think makes a lot of sense is 9:00 a.m. window opens up and international games are played every week as you saw a lot more this year. And that international game could be sold as a separate package to a streamer, for instance. And that would increase the total take for the NFL. And then in terms -- and so I think if that was the outcome and there was maybe one less game in the regional packages with Fox and CBS, I think that's a perfectly fine outcome for the broadcasters. And I think it just would be very politically challenging, not only from a Washington, D.C. perspective, but also from a reach perspective, if the NFL were to actually move wholesale away from broadcast. So I think you add all that up and a scenario like I just outlined is probably the most likely outcome of an early renewal, which I think is a very big positive for the industry. And in terms of paying more, I -- we'll have to see how that process rolls out. All of the media companies are currently monetizing their NFL content in both broadcasting and streaming. And I think one of the strongest arguments we have on our side in any of those discussions on programming is that there's still a very lopsided contribution for paying for that programming on the streaming side. So to the extent that you're monetizing in both, which everyone now is, the burden of the increased costs will have to be borne by streaming and not by broadcast. And we saw that play out in our last renewal with NBC, where we did not pay more because the NBA came to NBC. And we think that was the right outcome, but we're very happy to have the NBA. So I think you add up all those dynamics, we'd be very appreciative of an early renewal. Robert Weisbord: I think when you also look at this is the NBA returning to over-the-air broadcasting this year, we'll have a full year next year. If you believe the rumors, which I actually believe the rumors that MLB is coming back to NBC as well off of the cable channels that there is this rebirth because of the reach of over-the-air and not having to pay and not having to use passwords that it is the most attractive place to drive it, and you're seeing record ratings. And don't forget that the college football championship will be coming back to over-the-air on ABC in 2027. So all points showcase from here forward is that over-the-air is the place that these major sports are coming back to. Operator: Our next question is coming from Steven Cahall with Wells Fargo. Steven Cahall: Chris, we've talked about your vision for some of the remaining more levered broadcasters to consolidate. And I know you think there's meaningful synergies there. So what needs to happen for those discussions to kind of move aggressively if they haven't already? I think there's some control issues there that maybe could be sticking points. So what do you see as the biggest obstacles to getting 1 or 2 of those parties into a transaction that's to everyone's benefit? And then do you need a transaction in order to separate local from ventures? Or do you think that those 2 businesses are in financially appropriate places for the separation to proceed regardless of whatever else might happen with consolidation on the local side? Christopher Ripley: Sure. So look, there are precedent setting transactions that are currently being processed through both the FCC and antitrust DOJ. So I do think getting a positive outcome there, which is what I fully expect will happen, will be very helpful in moving the broader consolidation along. I do think, generally speaking, volumes will pick up when those precedents are set because it derisks any future transactions for others. And so that's one element. You did note of the remaining public broadcasters, they're all control companies. So certainly, there are social control issues to be figured out as well. In terms of our strategic review and the separation of ventures, our ideal process would be to do a simultaneous merge and spin. But we certainly don't view that as an absolute requirement. And just by our math, just the spin alone would unlock over $1 billion of value. So it's well worth doing absent a merger, but a merger and a spin together create the maximum value. So that is our first choice. Steven Cahall: And then just a follow-up for Narinder on the 2026 core outlook. I think core was down about 5% in 2022 in the last midterm. And it looks like you expect -- we all expect this midterm to probably be better than 2022. So can we kind of infer that the incremental sports returning are kind of making up for the 5% that core might have been down in the last midterm to get you to your guide for '26? Narinder Sahai: Yes. I think that's the right way to think about it, Steve. Obviously, we expect 2026 to be a record political year. And so the offset there is 2 parts. One is obviously sports returning. But that has to be combined with execution on our part, has to be combined with how our customers are going and purchasing these ad slots. And I think our team has done a phenomenal job so far in addressing those things. And I think that's driving our outlook for 2026. Robert Weisbord: I would also say that our ecosystem of assets to offer the advertising community has grown substantially from '22 to '26. And in a cross-platform buying ecosystem in 2026, it's much more advanced than 2022. And we spent the last several years building out complete different asset portfolio. So we have a holistic cross-platform offerings that are going after our advertisers as well. So it's not one dimensional. Operator: Our next question is coming from Ben Soff with Deutsche Bank. Benjamin Soff: I appreciate the color on renewals and potentially the ability to improve reverse comp in your negotiations next year. Any sense for how to think about the outlook for net retrans into 2026 and beyond? And then I have a follow-up. Christopher Ripley: So as we mentioned, next in 2026, we're expecting sort of flattish gross retrans because we don't have any meaningful renewals. We are in the process of reviewing how we give guidance, and we're going to have more to update you on when we announce Q4 in February on that, Ben. But that's, I think, all we can say for now. Benjamin Soff: Okay. And then just to clarify, in the $30 million run rate EBITDA from the partner transactions, how much of that contributed in 3Q? How much is in the 4Q guide, if any? Narinder Sahai: Yes, on that. So I think you're referring to the partner station buy-ins. So on that, what you had in Q3 was fairly immaterial. It was very, very immaterial, had no impact on Q3. For Q4, there is going to be some contribution there. But again, it's not material either and not -- and that's not driving our Q4 guide. There is going to be some contribution, but it's going to be de minimis. Operator: Ladies and gentlemen, as we have no further questions in the queue at this time, I would like to turn the call back over to Mr. Ripley for any closing comments. Christopher Ripley: Thank you, operator, and thank you all for joining Sinclair's Third Quarter 2025 Earnings Call. To the extent you have any questions or comments, please feel free to reach out to us. Operator: Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good afternoon. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Nextdoor's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. You may begin the conference. John Williams: Thank you, operator. Good afternoon, everyone, and welcome to Nextdoor's Third Quarter 2025 Earnings Conference Call and Webcast. I'm John T. Williams, Nextdoor's Head of Investor Relations. With me today is Nirav Tolia, our Chief Executive Officer. As a reminder, during this call, we may make statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and in the Investor Relations section of our website as well as the risks and other important factors discussed in today's earnings release. Additionally, non-GAAP financial measures will be discussed on today's conference call. A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in the Q3 2025 Nextdoor investor update released today. And now I'll turn it over to Nirav. Nirav Tolia: Thank you, John, and good afternoon, everyone. I'm Nirav Tolia, Co-Founder and CEO of Nextdoor. Q3 was a quarter of steady execution, and our results are consistent with the plan we've communicated. We delivered our highest quarterly revenue ever and generated positive Q3 adjusted EBITDA. In addition, we are on track for positive adjusted EBITDA in Q4 and are reaffirming our expectation for full year 2026 breakeven. Let's talk more about Q3. Revenue grew to $69 million, up 5% year-over-year and reflecting strong demand from self-serve advertisers who continue to be drawn to our Nextdoor Ads platform. ARPU improved 8% year-over-year even amidst reduced ad load. On the large customer front, we delivered on our commitment to complete our programmatic supply integrations, enabling deeper collaboration with scaled parties who are looking to reach audiences on Nextdoor more efficiently. Our self-serve channel continues to be a growth engine. Q3 self-serve revenue grew 33% year-over-year and made up roughly 60% of total revenue. Advertisers saw meaningful gains, including higher click-through rates and lower cost per click. We also grew our active customer base and associated net new advertiser spend. In short, our ad stack investments are delivering results, and we expect the introduction of new ad formats and deeper AI integration over the coming months may further improve monetization. Q3 platform WAU, defined as users who engage directly on the Nextdoor app or website was $21.6 million, a modest sequential decline. This was driven by an intentional decision to reduce notification and e-mail volumes, reflecting our focus on engagement quality over quantity. In the short term, Platform WAU may continue to fluctuate due to seasonality and our continued commitment to delivering the best user experience. As I've said many times before, we will deliberately make trade-offs even if they are difficult, all in the interest of driving long-term and sustainable growth. Continuing, Q3 GAAP net loss was $13 million. Q3 adjusted EBITDA was $4 million, a positive 6% margin, representing 8 points of year-over-year improvement. This reflects our strong revenue performance and continued focus on operating the company as efficiently as possible. Further, revenue per employee has now increased 21% year-to-date. And at quarter end, we had $403 million in cash, cash equivalents and marketable securities, along with 0 debt. Now let's move on to our financial outlook. We expect Q4 revenue between $67 million and $68 million and adjusted EBITDA in a range between $3.5 million and $4.5 million. This implies full year 2025 revenue growth of 3% to 4% and an approximately $3 million adjusted EBITDA loss. We do continue to expect full year adjusted EBITDA breakeven in 2026. Here are some key factors to consider related to our Q4 outlook. Our Q4 guidance reflects normal seasonality and a full quarter of savings from our recent workforce reduction, partially offset by incremental platform investments. We do not plan to increase ad load in Q4 or into 2026 as we continue to prioritize the best user experience. Consistent with this approach, we also expect to intentionally reduce new user acquisition efforts during Q4. Those are the numbers, and now I'm excited to go into more detail about our product, the true driver of long-term value. The first phase of our transformation, marked by the launch of the new Nextdoor, rebuilt our foundation. We reset our expense base, strengthened our team and instilled greater operating discipline. At the same time, we enriched the platform by pairing user-generated content with trusted third-party local information that drives meaningful conversations and real-world utility. At quarter end, more than 4,000 local publishers are live on Nextdoor, and local news now accounts for approximately 7% of total feed content. We also created a real-time local alert system to help neighbors stay informed and safe during high-impact local events such as fires, inclement weather and utility outages. New integrations include WAU's real-time traffic and road updates and instant earthquake alerts from the U.S. Geological Survey. Looking ahead, we will continue leveraging third-party content to reinforce Nextdoor as the neighborhood's go-to source for what's happening nearby. This foundational work has helped clarify what users truly value and has given us a stronger and more sustainable baseline for growth. That said, the takeaway is clear. We must continue to dramatically increase high-quality content and distribute it more effectively to the right users at the right times. So now we're entering the next phase. We're moving beyond the content feed to build a stronger neighborhood ecosystem grounded in a vibrant, useful and trusted local community. Community-driven content has always been part of our DNA. Our opportunity now is to modernize how we surface and connect it, focusing on the interactions that drive real-world outcomes, providing utility for neighbors and visibility for local businesses. Authenticity is what matters, and we have a material opportunity to invest further in neighbor recommendations. Neighbors want to know why a business is trusted. Real recommendations from verified neighbors build that trust, and we know that's what sets Nextdoor apart. With this in mind, we plan to reinvent our recommendations ecosystem to turn authentic word of mouth into actionable insights that help neighbors make smart decisions and help local businesses thrive. We believe these efforts can meaningfully improve engagement and monetization all across our platform. Ultimately, our goal is to create more relevant and trusted connections that reflect how neighbors engage in the real world with each other and with local businesses. The first phase gave us stability and insight. The current phase is where we take bold swings and begin to see the results. As we move forward, we'll focus on a few key indicators: quality and quantity of content, depth of engagement and the value we create for advertisers. We will avoid chasing short-term metrics in favor of investing in durable compounding growth initiatives. Transformation takes focus, it takes courage, and it takes time. It is not a straight line and is neither predictable nor immediate, but it represents the best path for us to unlock the next phase of growth for Nextdoor and create lasting value for our users, advertisers and shareholders. Before wrapping up, I'd like to share an important leadership update. I'm pleased to announce that we've hired our next Chief Financial Officer. Indrajit Ponnambalam will be joining Nextdoor as CFO, effective December 1, 2025. Indrajit brings more than 2 decades of experience leading high-performing finance and operations teams, most recently as CFO at Premion, an industry-leading connected TV advertising platform and prior to that, at Match Group, Time Warner Cable and AOL. He has a proven track record of driving growth, achieving operational excellence and financial rigor at scale, and we are thrilled to have him on board. In closing, we remain laser-focused on building a platform that makes neighborhoods more vibrant, more connected and more useful. At our core, Nextdoor is about real local connections that create value every day. That vision will continue to guide us in everything we do. Thanks for joining our earnings call today. I'll now turn it over to the operator to begin Q&A. Operator: [Operator Instructions] Our first question comes from the line of James Sherman-Lewis from Citigroup. Jamesmichael Sherman-Lewis: Nirav, first for me here, we're only about 4 months out from the launch of the new Nextdoor and understood the commentary around it being a nonlinear transformation, but would love any insights you have into the underlying customer engagement, specifically that depth of engagement metric that you mentioned? And then I have a follow-up. Nirav Tolia: Great. Thank you for the question. And yes, we're 4 months out, and we are excited about the progress. You may remember that initially, we talked about the new Nextdoor as being focused on news, alerts and recommendations. We now have news as approaching 10% of newsfeed content. We know that alerts are essential to our users, and we've seen that in the metrics. And then finally, I talked about in the comments that recommendations is the big swing that we plan to take next because we think it has the most potential of anything that we've worked on. What we're seeing with our user base gives us a lot of optimism. We know that we've made the content more relevant even amidst reducing notifications and keeping ad load exactly where it is. What we also know is that 7% of new content, which is what the news represents is not enough. The way Nextdoor works best is when there is so much content that's showing up in your neighborhood that we can use AI and ML to show you the most relevant things for you, whether that's from a proximity standpoint or from your affinity standpoint. And so the real focus for us is on dramatically increasing the amount of content. What we've learned from the new Nextdoor is when we add more high-quality content, we see deeper engagement. And so we now have the signal that we need to really bear down and do our best work. Jamesmichael Sherman-Lewis: That's helpful. Second here and potentially a little bit more tactical. The notification changes in 3Q and the planned pullback in new user acquisition for 4Q, can you update us on how you see your user acquisition strategies evolving into 2026? Nirav Tolia: Yes, it's a great question. So the reason that we mentioned that is because as we continue to focus on the best user experience, the thing that we need to do is to ensure that the first time a user comes to Nextdoor, they have the best possible experience. We have a number of things that we plan to release over the next couple of months that we believe will create a better cold start experience. And we use cold start to represent the first time that you come to Nextdoor. Today, when you come to Nextdoor, you see the same thing that someone who's been a Nextdoor member for 10 years may see. And we know that it should be a different experience. And so as we work towards a specialized experience that will be fully suited for the new user to Nextdoor, it makes sense for us not to be aggressive in new user acquisition. We just wanted to make that statement as an example of how we are looking at long-term value creation versus trying to make all the metrics go up in the short term. Operator: Your next question comes from the line of Jason Kreyer from Craig-Hallum. Jason Kreyer: Nirav, so when you talk about adding more content, can you just give us a sense of where that comes from? Like are you talking about inspiring more user-generated content? Or is this an expansion of some of the third-party publisher partners that you've already started to ingest on the platform? Nirav Tolia: Jason, thank you for the question. And you kind of answered it, but I'll give you more specifics. So we've now got at quarter end, 4,000 publishers that are pumping news content into Nextdoor. We think there's more upside there, and we certainly think that there's more upside in integrating more third-party alerts but as you indicated, we believe the greatest opportunity is where Nextdoor's DNA is, and that's user-generated content. And so the next phase for us is to think less about integrating external content and to think more about revving up our internal user-generated content engine on Nextdoor, which has really been, again, at the DNA of how we were created. We think the natural place for that to start and potentially the most impactful is in neighbor recommendations. And so you should expect to hear a lot more about that in the months to come. Jason Kreyer: That's great. Also, I just wanted to see if you could give an update on the build-out of your programmatic capabilities. Curious on kind of what you're doing on platform and then off-platform. I know you recently did a deal with Yahoo. So maybe a little perspective on both would be great. Nirav Tolia: Yes. That's a great question as well because we have spoken about this throughout the year. So the first thing to say very specifically is that we've completed the supply side platform integration earlier this year, and we're currently testing with DSPs. We have announced that off-platform deal with Yahoo!, so now an advertiser can go into Yahoo's DSP, find Nextdoor audiences to target against and then campaign directly from Yahoo. The way we see this is that programmatic generally complements direct sold inventory and is additive. It was a capability that we were asked to add to what we were doing at Nextdoor, and we always knew that we would. We announced it back, I think, in the Q4 earnings call almost 6 or 7 months ago. And I'm delighted to say that we've actually lived up to what we said. And so we expect that to pay dividends again in the months and quarters to come. Operator: Your final question comes from the line of Naved Khan from B. Riley Securities. Ryan James Powell: This is Ryan Powell on for Naved. So I wanted to ask another question on the alerts and notifications. So obviously, you mentioned that you had reduced the alerts. Was there an improvement in engagement for the alerts that you were surfacing? And then also, were there any differences in trends for users coming from alerts versus entering the app organically? Nirav Tolia: That's a great question. So obviously, if we are materially decreasing the number of notifications, but yet experiencing a growth in revenue, you can see that the alerts and notifications that we are sending are more effective. And so that's obviously playing out in the numbers, and we expect that to continue to play out. In terms of what we are seeing specifically in user behavior, the third-party alerts in particular, around inclement weather, around now traffic with ways and earthquake alerts from the USGS, those are particularly effective at resurrecting users who may not have been to Nextdoor in some time. And so if we're very honest with ourselves over the past few years, we lost our way a little bit. And the content was not as relevant as it should have been. Alerts on the other hand, particularly the way we built the new alerts platform, which targets a particular area that is very specifically being affected by the alert, those perform quite well. And we think that they are a way to get lapsed users back onto the platform. And when they come back on the platform, because of the other improvements that we've made, they should come back more frequently. Okay. I think that was our final question. And so I'd just like to make a few closing remarks. We are very excited about this next phase of our transformation. We know that our foundation is strong. We've stabilized the business, driven material gains in productivity and our product and operational changes are starting to bear fruit. But it's very, very important for us to state that we're fully committed to building the best product. There are no shortcuts here, and we will make the necessary trade-offs to unlock long-term and sustainable growth. And that's all because our conviction in Nextdoor's potential has never been higher. We have a clarified strategy. The team is super focused, and now it's all about having the courage to do what it takes to win. So with that, thank you for joining the call and for your interest in Nextdoor. Operator: That concludes the meeting. You may disconnect.
David Hsiao: Welcome to AppLovin's earnings call for the third quarter ended September 30, 2025. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson; and Matt Stumpf, our CFO. Please note, our SEC filings to date as well as our financial update and press release discussing our third quarter performance are available at investors.applovin.com. During today's call, we will be making forward-looking statements, including, but not limited to, the future development and reach of our platform, including the expected timing of product launches, our share repurchase program, the efficiency of our operations, the expected future financial performance of the company and other future events. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them, except as required by law. Our actual results may differ materially from the results predicted. We encourage you to review the risk factors in our most recently filed Form 10-Q for the second quarter ended June 30, 2025. Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2025, which will be filed today. We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be superior to or a substitute for our GAAP results. Please be sure to review the GAAP results and the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update available on our Investor Relations site. This conference call is being recorded, and a replay will be available for a period of time on our IR website. Now I'll turn it over to Adam and Matt for some opening remarks, then we'll have the moderator take us through Q&A. Adam Foroughi: Thank you all for joining us today. First, I'd like to recognize our inclusion in the S&P 500, a huge milestone for our company and a strong acknowledgment of what we built. It's a privilege we do not take lightly. It also means we now carry the expectations of a much broader set of investors, and we must push even harder to continue delivering. Turning to our business. Q3 was another very good quarter. Our performance was strong with gaming advertising continuing on a solid trajectory. Our teams delivered multiple incremental lifts in our core models this quarter. And our MAX supply-side platform, one of the best indicators of our end market growth continues to grow at very healthy rates. We also opened up international traffic for advertisers promoting websites or shops in Q3 ahead of schedule. I'm particularly proud of our team because even while executing a strong quarter, we also delivered our major October 1 launch of our self-service platform and referral form. We did so without any significant hiccups, no major bugs and effective filtering out of low-quality ad accounts, something I was personally monitoring closely. This speaks volumes about our ability to automate and execute. I know everyone wants stats on how self-service is going. And instead of something specific around accounts or ramp-up since we're still very early, I'd like to point out a stat which I watch very closely. While it takes a while for new customers to get going, to integrate, to learn how to use our system and to ramp spend, we're already seeing spend from these self-service advertisers grow around roughly 50% week-over-week. It's too soon to be significant, but this type of early growth gives us even more confidence that our platform will excel at being an open platform to any type of advertiser. Our focus for Q4 and 2026 will be the following, with priority always given to improving our models for all advertisers. We'll continue tuning our onboarding flows and ramping more AI agents into the workflow to support a seamless experience for new advertisers. Once we're satisfied with the quality and experience, we'll open the platform broadly beyond referral basis. We'll be testing generative AI-based ad creatives. Over time, if we can move to mostly automated creative generation, we believe user response rates to more customized ads on our platform will materially improve. We are actively testing paid marketing to promote the Axon Ads platform to new customers. We'll continue tuning this acquisition method so that when we launch the platform beyond referral in 2026, we can scale advertiser count without a reliance on a large sales force. If we maintain execution discipline, we are well positioned to acquire a large volume of new advertisers in the coming years. We believe that giving our powerful recommendation engine, a more diverse set of advertisers to recommend will dramatically improve conversion rates, paving the way for elevated growth rates for years to come. It's worth noting the backdrop. The market is recognizing our platform, our scalability and the reach we offer our partners and the institutional dynamics that come with the S&P 500 inclusion are already in motion. At the same time, we continue to operate in an environment of heightened scrutiny around data, privacy and ad tech practices. We remain committed to strict compliance, transparency and execution excellence. To conclude, we delivered a very strong Q3. We are executing on our strategic priorities, and we are confident that our best days are ahead as we broaden access to our self-service platform and scale globally. With that, I'll turn it over to Matt for a deeper dive into the numbers. Matt Stumpf: Thanks, Adam, and thanks, everyone, for joining us today. Q3 was another exceptional quarter. Revenue was approximately $1.405 billion, up 68% year-over-year due to model updates in the core gaming business, while adjusted EBITDA was $1.158 billion, up 79% at an 82% margin, up 1% quarter-over-quarter from operating leverage and a modest reduction in operational FX. Quarter-over-quarter flow-through to adjusted EBITDA was 95%, slightly above Q2. Free cash flow was $1.049 billion, up 92% year-over-year. Free cash flow margin improved sequentially given no semiannual cash interest paid on our debt this quarter as those payments occur in Q2 and Q4 of each year. We ended the quarter with $1.7 billion in cash and cash equivalents. During the quarter, we repurchased and withheld approximately 1.3 million shares for $571 million funded by free cash flow. Over the last 3 quarters, we have reduced our weighted average diluted common shares outstanding from 346 million in Q4 of last year to 341 million this quarter. During the quarter, our Board of Directors increased our share repurchase authorization by an incremental $3.2 billion. Finally, turning to our financial outlook for next quarter. In the fourth quarter of 2025, we anticipate revenue between $1.570 billion and $1.6 billion, reflecting between 12% and 14% sequential growth. With adjusted EBITDA between $1.290 billion and $1.320 billion, targeting an adjusted EBITDA margin of 82% to 83%. Now with that, let's move to Q&A. Operator: [Operator Instructions] Our first question will come from James Heaney. James Heaney: Could you just start off talking about the characteristics of the advertisers that you've onboarded since October 1? Would you say the GMV of the advertisers are smaller than the initial 600 that you had in the pilot? Or are you going down -- more down market? Just any help there would be great. Adam Foroughi: Yes. Sure, James. They are obviously filtered set of advertisers when we curated the list last year. That was filtered by our team. And then this year, it's filtered through referrals. So these aren't like your local dry cleaner trying to come on to the platform yet. They are predominantly shops. They're not going to be as large as they were in the cohort last year, but they're not going to be materially smaller either. So think of them as comparable in mix. And then it's a broad set of categories. There's no limitation when you're open the way we are through a referral to the type of customer that comes in. So a broad set of shopping categories being represented. James Heaney: Great. And then just one for Matt. Could you just talk about guidance philosophy for Q4? Just curious how you've used e-com seasonality from last Q4 as a proxy for this year? And just interested to hear kind of what's being assumed from sort of the current customers versus new customers on the e-com side? Matt Stumpf: Yes, sure. It's not the best comp. Obviously, last year, we had an entirely new e-commerce business that was ramping. And then this quarter, right, we had an existing base. So it's not best comparison year-over-year. So within the guidance, we took an approach where it reflects a combination of different factors that we have going on at the company, obviously, the optimism around the e-commerce referral program, continued model enhancements, the updates that we talked about previously within the Q3 period and then also kind of normal holiday seasonality. So the combination of those factors led to the larger guidance that we're projecting quarter-over-quarter. Operator: Your next question will come from Omar Dessouky with BofA. Omar Dessouky: Adam, I wanted to get back to your comments about substantially higher conversion rates. So am I to read that as -- that a significant growth in impressions would not be required to absorb a significant increase in e-commerce advertisers in 2026? Adam Foroughi: Yes. I mean, look, we've always said we serve a lot of impressions to a lot of users today, over 1 billion users a day. So we're in a world today where the biggest lever for growth on our business, given we report on a net revenue basis is increasing the conversion rate. And that happens from a couple of things. You've got the model enhancements, which we always talk about. Those are super impactful in increasing conversion rate. That's a continuous effort. We are in the very, very beginnings of understanding how to work with neural nets and these AI technologies. I mean if you think about this industry and the core AI industry is only a few years old of engineers really being able to extract this kind of value out of these tools and technologies across a broad range of industries. So as this goes forward, we're going to have consistent incremental improvements and sometimes large, sometimes small, but additive to high impact on driving up conversion rate from technology lifts. Then you're also going to get advertiser density expanding paired with our recommendation system, giving the model the chance to personalize the advertising to the user better. If we have less advertisers and less categories, we just have less to show. So you can't get a diverse set of content to the customer to maximize that conversion rate. Both those things are just going to naturally happen as we go forward. The third piece that I touched on to your phrase you repeated, is that generative AI-based creative. Today, in our advertising system, the advertiser can do almost no targeting. They can pick their country, they can put in their economic goals, they can put in a budget and off they go. The one manual lever is creative. And in particular, in the shopping category or in this like website advertising business, a lot of the customers come on board and they don't have a creative that's adapted for our platform. The average viewership of our ads is roughly 35 seconds. The average viewership of an ad on social is roughly 7 seconds. So a lot of these customers are coming in and just porting a short ad and trying to replicate what they have on social on our platform, and it's mismatched. It diminishes their possible conversion rate. So what does that mean? Well, when we get into a world where we can use generative AI tools to automatically create ad creatives on behalf of these customers, they're going to get to a point where they can actually expand their conversion rate. We're doing nothing more other than just expanding the count of creatives into our system and ensuring that the types of creatives in our system follow best practices on our platform and doing that at no cost. And so we're really excited about where the tools in the marketplace are going. That's something we're going to be testing in short order here. Omar Dessouky: And if I could just follow up. So you've addressed the conversion rate question I had very clearly. But I did want to touch on how you're thinking about supply, even though, obviously, you've clearly -- you said that the conversion rate is a big driver. So in the past, you've talked about double-digit growth in publisher revenue in MAX, over the past few years. And I'm wondering if you expect that to accelerate as e-commerce ramps. Do you see supply driven primarily by higher ad load as dictated by publishers, higher engagement with mobile games overall or improvements to MAX like those you shipped in 2024? Like which of those factors would be most important? Adam Foroughi: I mean it's a combination of all of the above. The MAX platform ecosystem is growing really quickly. happens from a couple of different factors. One is, as the ads become higher quality, and we look at e-commerce shopping and just demand density, it's higher quality because the user stops seeing game, game, game, game, game when they're stuck to a game that they actually like. So if you bring more diversity of content, you'd expect retention to go up and ad supply to expand. So that's going to be a natural tailwind inside this ecosystem that will unlock as we get more demand outside of just core advertisers that we have today. Second part of that is what we've talked about in past calls is the unlock of getting these publishers who are in-app purchasing predominantly don't tend to run ads or run ads at a very, very small percentage. If you're monetizing a high LTV game and most of the gaming customers are residing in these deep games, you don't want to run ads for your competition. Well, they didn't have a way to monetize as well as gaming ads in the past. So if we can unlock this material demand shift, then we're going to be able to bring more supply into the ecosystem. That's very advantageous for supply as well. So it's a combination of those 2 things. And then, of course, you've got -- as our models improve, the same customer, that publisher can buy more users that are retained in their game, so they can create more growth in audience, and they'll get better tools as well to better monetize that audience. Operator: Next, we'll go to Jason Bazinet with Citi. Jason Bazinet: So a quick question. I appreciate that 50% growth in week-over-week spend from these e-commerce customers. Is there any sort of context you can give us of like when you looked at that same metric during the pilot phase, what was it? Or how do you know that that's a good number or a bad number? I mean it sounds great. Adam Foroughi: I mean, look, like one of the simpler mathematical functions is extrapolation, right? So like we're starting pretty early here. It's a month in. And it does take a while for these customers to ramp up. Remember, ours is not a plug-and-play solution. They got to come in. They have to integrate pixels. They've got to go live. All of that takes time. So just to get to a point of go-live is a week plus usually. Some can do it very quickly, but it's not common to be able to do it in a day. So you have a period of lag time from October 1 to even a cohort going live. And then this cohort is not as big as what the absolute numbers were that we reported, I think we disclosed in Q1 this year of how big that cohort last year swelled to. But given the ramp-up, the ramp-up is really swift. So we're excited that if this continues to compound at the rate it is and then you keep adding new customers, this thing is going to then snowball on itself. And the true value for us right now is not go, okay, how do we extrapolate this out to when customers in this category become a bigger and bigger part of our business. It's more are we actually building a tool that we have confidence is going to succeed in converting a lot of customers over time. And that breaks down into a few things we look at. Of course, I get excited by seeing scaling spend, but I'm more excited about the fact that we didn't introduce a ton of bucks. We didn't have a bunch of customer complaints. We didn't bring in low-quality advertisers. Anything that was low quality was automatically kicked off the platform. So the team enabled a whole bunch of tools to get a product release that was not immaterial into market in a seamless manner. And now we're in a point of optimization. One point of optimization that's key is when a customer signs up, is it easy for them to understand the value proposition and get through integration to the point of go live. That's something we're really focused on optimizing because as we mentioned, we do want to eventually promote the Axon platform to future customers. And if we want to do that, just like any advertiser in the world, we've got to optimize our conversion funnel. The other piece that's important is our teams are constantly working on embedding tools into the interface, so large language model powered tools that allow the customer to get support without interfacing with us. We're not seeing a huge influx of customer support tickets. We're seeing these customers go live, be able to manage themselves, get best practices extracted out of the tools we've enabled in the dash, and that's fantastic to see. So what I look at when I see this ramp-up is not I'm extrapolating to how is this going to become billions and billions of dollars. It's more that the fact that it's working already a month in, and we're not getting bombarded with customer complaints, and we're not seeing a ton of issues implies that we're on the right track to eventually get open in '26 and really be able to bring in a ton of advertisers over the following quarters and years. Operator: Next, we'll go to Clark Lampen with BTIG. William Lampen: Sorry, I have like 4 mute buttons right that I had to take out. Adam Foroughi: Complex setup over there, Clark. William Lampen: Right. It's a little too complicated. Okay. So as we're thinking about, I guess, the growth of what has the potential to be like a really big business for you guys over time, billions of incremental as you just sort of talked about. I'm curious how you think about balancing growth, chasing sort of new pockets of potential supply and building up demand to go after that with displacement for your core gaming customer because you are introducing a new bidder with potentially higher transaction value or consumer LTV. Is that something that model improvements and a faster pace of model enhancement will sort of take care of along the way? Or how do you, if any, think about gating the growth of this business if you have to for managing the core -- for the purposes of managing the core? Adam Foroughi: Yes. I mean, look, one, we don't try to gate growth. So we sort of look at a platform as it's going to develop and evolve as it does. But understanding these models gives me confidence that as we get more density of advertisers, we're actually going to have expanded spend for gaming customers, not diminished spend. And this is a bit counterintuitive, but here's why. The model today, if you go back a year prior to us getting into e-commerce and shops, you ended up having 1,000 impressions to show a user and you bombarded them with games. Well, that's not a great offering. It's as if you had a social network that was showing short-form video and said I'm only going to show golf videos. Everyone who's on the golf videos at that moment would churn. Well, in our case, the customers aren't churning. They're playing games, but they're not going to convert. And our conversion rates are really low. There are moments when the model knows a user is going to be in the game. When those moments happen, the CPM for a game advertiser is phenomenal. It's really, really high. Our average conversion rate is that 1% that we've given a year plus ago. So maybe it's higher now, but just for this example, let's use 1%. We're driving 10 game installs over 1,000 impressions, but we're probably wasting 80%, 90% of those impressions because the model knows in a tight percentage of impressions, games are going to convert, this user is ready for something new and the CPM there will beat anything else that comes along. So you go and bring in demand density. What happens? Now the model can better use all that access impression. And so if it does, what's going to happen is your gaming customer is not going to diminish. It's just going to be more targeted. So maybe impressions go down, CPM goes up for them, but everything is priced to revenue for our customers. So they get the same revenue out. And then these new customers better monetize the user and give them more diversity of content, which hopefully will train them to better engage with our ads. And then you take it to the next level, which is now all of a sudden, we're getting data from way more types of customers. We now know, let's say, tomorrow, someone buys a $5,000 handbag on a website, that's the data point we didn't have a year ago. That data point, my simple mind, can probably tell you that's a good user for Candy Crush if they haven't played Candy Crush. The neural net is going to tell you a lot more than that based on its correlations. And so you're building up a data set that doesn't just limit itself to the shopping category or the website advertising category. It helps enable better advertising for the gaming customers as well. So you put all those pieces together, and I'm really confident that we're not going to squeeze anyone in our platform. We're probably going to have expansion across the board as we add more demand density and get more data into the system. William Lampen: That's helpful. Maybe just as a very quick follow-up. You guys highlighted tuning the onboarding flows and generative AI creative. How far away are you or sort of at what sort of rate are we making progress to sort of getting one of those tools live? Would either of those things, I guess, be a gating factor to launching or introducing GA at this point? Or are they vital to going to a broader customer base? Adam Foroughi: So the Axon Ads site is a prompt at this point. And part of the logic of doing that was to get inputs into that prompt, so we can tune a bot that's external facing and then bring it internal. So we're in the midst of doing that, and that's not far off. So we'll have different implementations of bots inside the site. I mean, as you know, and we've talked about last quarter, when a customer uploads ads or uploads a website to promote, we're not manually checking it. There's a bot there that's automatically checking for our quality and ensuring that the quality meets the standard that we need on the platform, both for the creative and for the website being promoted or the application. So we already have various points of bots into the tool, and we'll have more. It's just going to get better as we get more data in, and we can tune it so that it's actually accurate across the board. The generative AI-based ad creatives don't depend entirely on us. But Sora 2 came out this past quarter. That was another step forward. Veo 3 keeps getting better. So you can assume these tools are getting pretty close. We're not -- we're probably far away from the point where the model itself can recursively just go and create more content and just bring more ads into the system. But we're probably not very far away, and I'm hoping, in a matter of weeks or months to be able to test generative AI-based creative that we create with a little help, some tooling on top of the large language models and then submit to the advertisers for approval. That in itself can really explode the count of ads on the platform. And so that's not far off. So on your last question of are these gating to general release, I don't think so. I think the main thing that we care about there is how we tune the flows. Is the conversion funnel appropriate? Are customers getting confused or are they getting a good experience from onboarding to ramping? If they're getting a seamless experience, and we're not getting overly overwhelmed with inbound complaints or concerns or need for support, then we're ready to go open. Operator: Our next question will come from Alec Brondolo with Wells Fargo. Alec Brondolo: I appreciate it. I think as we've kind of spoken about direct payments and this transition from kind of paying the App Store and the Play Store 30% to going to an O&O payment product, we've kind of talked about this, I think, historically as more of a medium- to long-term tailwind. Do you think that might be manifesting sooner than expected? And did it contribute to third quarter results? Adam Foroughi: I don't think it's contributing much at all yet. I think it is going to be over the quarters that it's going to take impact. I don't think it's realistic that 30% tax goes to low single digits. So let's just take the midpoint, 15%. That's a material lift in LTV for a lot of these in-app purchasing games, roughly 20%. Some portion of that is going to go into development of more content, which is great. They're going to make better games. Some portion of that, they'll bank into the bottom line. Some portion of that will go to marketing companies. I mean I'll say the one thing about our business always is we don't try to think about what's happening outside of us. This is something that's outside of our control. It's up to the platforms, regulators and then the content creators. It's not up to us. What's up to us and inside our control is how good our tools are. Q3 was driven by what we said on the earnings script. The models continue to get better, iterative improvements in the template, more advertisements on the platform, more advertisers on the platform, all of that's compounding to really quick growth rate. even in the core category. We're still believing very confidently in this 20% to 30% long-term growth rate in our core category. But even in the core, we're beating that. And then now you're layering on, on top of that, all this opportunity with the self-service platform. So we're really excited about where we are focused on what we have underneath our control. Alec Brondolo: Perfect. And maybe if I could ask a follow-up. I think there's always been this talk about eventually extending the reach of supply. Like right now, most of the ads are placed in mobile games and then the idea is perhaps over time, we could go to other surfaces. It seems like some combination of AdX and Google Ads Manager might come up for sale as a function of the Google ad tech, antitrust trial. Would you be interested in those assets if they were available? Adam Foroughi: I mean, without commenting on what else is out there, like commenting about our business, the reality with our business is we think about providing the best solution to our partners. For the advertisers, we believe we're on the track to really give them a good way to access a really large audience playing games. For the game publisher and then expanding publishers as we get to more publishers on our platform, we've built them very good tools to monetize and promote their products and grow their businesses. As we think about going broader than that, the open web publishers and other app publishers that currently can't access our tools the same way could use better monetization. We all know that category is pretty slow growth. And then we talked about CTV in the past, too. Everywhere else is struggling to monetize except in the walled gardens and except on games, predominantly because of the success of our platforms. And so if that's the case, we look at that as our potential prospect clients as well. We should be able to extend our product offering over time to those folks. We need more demand. We're not demand -- we're not supply constrained today, we're demand constrained. But if we do our job right and bring on a lot of advertisers, it serves us well because it serves them well to be able to extend our offering out to more publishers. Operator: Our next question will come from Vasily Karasyov with Cannonball. Vasily Karasyov: Adam, I wanted to follow up on what you said earlier about LTV calculations that you think your advertisers do. So if given the variance in growth rates in in-app purchases market and in-app advertising market, right? So can you comment on what you see if the -- your advertisers' LTV calculations are evolving, let's say, compared to a year ago compared to now, I would think that the advertising component would be much higher now, right? Going and how do you -- what it means for you? Adam Foroughi: So look, generally, as a whole, the in-app purchasing market is more mature than the in-app advertising market. So we're seeing much faster growth rates on the MAX platform. We've said multiples faster than the in-app purchasing market grows because those publishers, both the older publishers in that category are getting better tools, both for growth and monetization. And then newer publishers see these other publishers scaling, so they integrate more ads. So you're seeing more supply come online and existing supply monetize better. In-app purchasing market isn't really creating that many more monetization tools. It requires for growth, this tax to go down if the 30% goes to 15%, that creates a really big tailwind, and it creates better monetization mechanics. That's really hard in that category. It's up to the game developers, but it's not uniform across the platform. And then it requires more IAP games. There's a really big set of games that are just mature in that category that frankly don't really have much of a way to grow anymore. And then there are newer ones that constantly come live. If you look in the top 10 to 20 in-app purchasing -- top grossing games, there's a huge mix of games that have launched in the last 2 years that are now on the top 20. So there's new ones that go live that help grow there. But for us, what we're focused on is where we can drive an impact. We can help the in-app purchasing ones promote themselves. The in-app advertising ones are really exciting for us because they power our true market. The true market is the supply side on MAX. And as we give them better monetization tools and better growth tools, we see that supply expanding. That supply expanding the growth rate there is the direct market that helps us grow. And then hopefully, we can grow on top of that even more because of improvements in all the other parts of our business. Operator: Our next question will come from Matthew Cost with Morgan Stanley. Matthew Cost: Thank you for the 50% week-on-week growth metric that is really interesting. Is that the metric that you're managing to try to find the point at which you're going to go general availability? And if not, what are you looking at? Like what will be the things that you need to knock down for that to happen? Adam Foroughi: All these things take time to build. So I don't like spend -- obviously, if spend wasn't going up a lot, I'd be a lot more concerned when you got a business in any scale growing 50% week-over-week, there's a reason to be excited. But what I care more about is that we have time to optimize the funnel. We need to make sure the conversion funnel is optimized. This is just like launching a B2C property. Your first funnel is not going to be your best funnel. We've already optimized it once. So what's today on the site is better than what was on the site 4 weeks ago. But there's room for improvement there. Your communications with the clients, the e-mails that the potential clients get after they sign up, we can improve that. We can improve the tooling inside the dashboard, all the AI bots that we've talked about. And so there's different aspects of this that we just need time to get to a place where we go, this meets our quality standard, then we're ready to open up. Because if we open up today, we may be okay, we may not. We may get inundated with user concerns as you shrink the size of the advertiser. So one day, I'd like to make sure that, that local laundromat that signs up gets a great experience promoting themselves to this gamer audience on our platform. And if we're not ready yet today, we're going to take our time to get there. We don't think it's a long time away. I think I'd said on our prior earnings call for '26. So this isn't a very long time away. We're just going to take our time to ensure that we've got the product at the level that we want. Matthew Cost: Great. And then on the paid marketing front, I think you talked last quarter and maybe even mentioned in passing this quarter, the opportunity to do more of that. It looks like based on your sales and marketing budget in the third quarter that it wasn't something that you started to lean into. So how should we think about the timing and potential magnitude of doing more marketing? Adam Foroughi: Yes. So we're testing right now actively. Testing budget is going to be not large. Even if we ever scale this, the scale of our business is quite large. So like some of the largest advertisers in the world can only spend a couple of hundred million dollars a year. So as you think about the scale of our business, it's never going to be a very large line item against the revenue potential. But because our LTV is so high, and we're optimizing our conversion rate, and we think we can get that to be really compelling and the brand isn't known, the setup is really good for promoting our product to potential end customers. And so -- if that's the case, and we know we have a great LTV to cost of user acquisition, we'll spend. We'll break it out, as it scales, we'll show the unit economics so people can understand what we're doing, but we're really good performance marketers, I think we can all agree at this point. So we're not going to waste money on this. We're not brand marketers. The dollars will be much greater than the dollars we spend on user acquisition. And it's -- for me, it's the full-blown automation of a sales force. We'll need some salespeople, but we can keep a very lean sales team in line with our traditional culture if we can automate onboarding through advertising all the way to point of go live. Operator: Our next question will come from Benjamin Black with Deutsche Bank. Benjamin Black: Is there any reason to think that the take rate or revenue margin from your e-com spend should be any different to that of the core gaming business? So any structural differences, I guess, to the advertising credits you're offering folks early on, perhaps lower the conversion temporarily. But longer term, are there any differences to be aware of? Adam Foroughi: No. I mean, look, the advertising credits we offer is such a tiny fraction to overall value of a new customer. So it's no different than like a cost of user acquisition if we got the customer through paid marketing. So it's just really low. So consider that immaterial. The business is not built to, say, web advertising or shops is treated differently than games. It's one unified auction. We're a single platform. So when we get a higher conversion rate, whether that comes from gaming or shops or any category, it's going to have a constant take rate across the board. It just implies that more density equals better conversion rate, possibly higher take. Benjamin Black: All right. Great. And then second question would be sort of you're clearly growing your ambitions within AI automation more broadly. So maybe talk to us about sort of your investment priorities as we sort of look ahead to the next year. I'd imagine your sort of compute capacity requirements are likely scaling. So sort of how does that play into sort of your expense outlook as we look ahead to the next year? Adam Foroughi: Yes, we're pay-as-you go. So like I mean, we try to project and buy, in particular, GPUs, that being the more lead time dependent part of the stack. We try to buy those a year in advance. So if you've looked at the financials, you'll see spikes in infrastructure investment, but it runs through the P&L. It's not capitalized, and we do plan it really effectively. And we don't try to really overinvest ahead of revenue. We want to make sure we're really disciplined. And that's completely aligned with our culture where we want to be cost disciplined in every aspect of the business. Operator: Next, we'll go to Chris Kuntarich with UBS. Christopher Kuntarich: Hopefully, you can hear me. Just wanted to ask on web-based becoming available to EU advertisers. Any update there? And then, Matt, just a quick follow-up. Are you making any assumptions about advertisers that aren't currently onboarded in the 4Q guide? Adam Foroughi: Yes. On the EU side, so we can work with EU advertisers today. We just don't open up our inventory for website or shop advertisers in the EU region of our audience. So just a clarification bullet. It's -- EU tends to be somewhere in the low teens percentage of our business, if I remember off the top of my head. So it's not a huge priority versus expanding out the business. GDPR rules are more restrictive and require a build-out for us. So we'll get to it in due time. It's not a priority against getting to general release of our platform and building out the rest of these tools we've talked about. Matt Stumpf: Yes. And in terms of guidance, I think we've done pretty consistent to our approach thus far. We've communicated before that we guide to kind of where we feel very comfortable that we could potentially land. So we guide to what we know. We don't guide to try to estimate for something that's unpredictable. And in this case, we can't predict the number or the volume of new advertisers coming on to the system through the referral program and how that potential ramp in spend could happen through the quarter. So there is no incremental assumption built into the guide for onboarding of incremental customers. Operator: Next, we'll hear from Rob Sanderson with Loop Capital. Robert Sanderson: I have 2. Just in terms of kind of understanding more of the sort of the current points of friction to bringing people on, it sounds like you're doing a lot of work to tune the onboarding flow. But sort of what other points of friction are necessary to address to just further optimize? And then you've also said that you're not seeing a ton of complaints, but I'm sure you are getting asks for features and things. So maybe what are some common sort of asks for feature add to Axon Ads Manager? Adam Foroughi: Yes. So the first question, I mean, like you've got 2 points of this funnel, pre getting-to-us. So eventually, we've got to get the brand out there. We got to be able to market the platform. We've got to -- we're constrained by how many referral codes we gave out. So like just advertisers coming to the Axon platform and signing up. So let's set that aside because we purposefully constrained that. After the sign-up, we want to make sure we have as little drop-off as possible. Of course, with any product, when you get a sign-up, not every sign-up is going to be qualified, but we think a lot of these are qualified. So we're optimizing to as high a rate as we can from sign-up to go live. In terms of feature requests, surprisingly, not a whole lot. This is like, I would say, hard to guarantee that it will be that going forward because we're only a month in. So like if there's a lag time to integration and ramp up, and we're seeing the swift growth, you don't have time for these customers to really understand the platform yet. So that may change, but we get more feature requests from our current cohort of customers, the ones that went live a year ago, much more so than what we brought on in the last month. Robert Sanderson: If I could ask on international. You mentioned that you launched a little early. And it sounds like no EU. So maybe where are you available? Anything surprising or different about the behavior from this cohort? And then just anything you can share on next steps to expanding? I mean, you probably have some language optimization to do, I'm sure, and channel development work, but kind of what are -- sort of what are some of the next steps to make international a much bigger component? Adam Foroughi: Yes. So first off, it's everywhere in the world, except for EU traffic for web shops and web advertisers. App advertisers are everywhere in the world. We don't operate inside China, so -- but the rest of the world is there. In our business, the customers that we have today are mostly Western shops. And so those Western shops aren't likely to go into Japan or Korea. Japan being our second biggest market and promote themselves. They're just not going to have a localized product offering. So the countries that have really been successful for this current customer base are the obvious ones, Canada, Australia, New Zealand, et cetera. So English-speaking, similar makeup to the U.S. As we go open up the platform, that's when we'll go try to get local presentation inside Japan, Korea and other markets that are more closed off, but very large markets for us. And in the Western markets, we already have a presence. So it will be faster to get going. I think over time, localization is fortunately not a challenge anymore with LLMs. Language is pretty easy to solve. So we're fairly solved over there. It's just much more built around getting the system to be workable the way we're talking about for the West, goes global, right? Like all users around the world that we see playing games, the human beings behave similarly. They might buy a shot from different shops because there's local merchants in each one of these markets, but humans aren't behaving much differently in Japan or Korea or Canada or Australia to the U.S. So the model translates all human behavior to math. Math is universal. And so as we launch and broaden out the platform, we don't think there's going to be some big lift to really see a lot of success internationally. And we haven't seen that as we've opened up these markets and have these same customers expand out. Operator: Our next question will come from Martin Yang with Opco. Martin Yang: Sort of related to the last question, can you maybe talk a bit more about your current cohort, how they have been performed in 3Q? For example, are they more actively spending, given your improvement in tools, having more features, et cetera? Adam Foroughi: Yes. Look, over the last year, I mean, it's been a year since we've had this product, right? So the team is continuously improving the product. So the return on ad spend for the customers have gotten better. The tooling has gotten better. We went from the old dashboard to the Axon Ads Manager. So the tools that they have at their disposal has gotten better. The customers' understanding of our platform has gotten better. Just that nuance on ad creative that ours are 35 seconds on average, whereas social is 7 seconds. It took months with a lot of customers to explain that fine detail. And that if you're not building a 45-second ad, you're going to lose to your competitor. So all these things just compound. We're 1 year into a product in a very large advertising market, competing with other companies that are years or decade plus into that same market. So as you build better tooling and as you get a better understanding of your tools, you see the effect compounding, the knowledge compounding, the usage compounding. And so we're seeing trends that are positive. But this thing is going to take time to build at the level that we want to build. We've been in the gaming business for 13 years. We're clearly the best channel for the gaming customers at this point. We think we can replicate that success across all these other categories. And as we build to the scale that we're accustomed to operating at, you'd expect a lot of compounding success over time across knowledge, usage and tooling. Martin Yang: Got it. I have a quick follow-up on the PSU issued in October. That's for engineering employees. Can you maybe give us more context? Is it for a small handful, single recruiting, retention? Any additional details would be helpful. Matt Stumpf: Yes. It's a pool, Martin, for a group of engineers, but it's also a future tool that we can use for recruiting as well for new hires into the engineering team. Operator: Next, we'll go to Jim Callahan with Piper Sandler. James Callahan: I just had a follow-up on the referral codes. I guess, are all the codes so far given out? Or is this something we can expect the partners to sort of continue doing through early 2026? Adam Foroughi: Yes. Generally, if there's a partner that we gave X codes to and they run through X and they deliver quality leads, we give them more. And we can measure back to every referral partner success of the customers they bring. So we don't want to constrain good referral partners. The gate is solely to slow it down so that we have time to build the tool the way I've been talking about. But if someone is bringing us good leads, we're going to take good leads. So we're going to be dynamic in the codes that we issue across the board if we see success coming in. James Callahan: Got it. That's helpful. And then I guess just a follow-up on -- you talked about low quality and like making sure you're selective and having the right kind of advertisers. I guess what would you define as like low quality or an advertiser that wouldn't work sort of with the platform? Adam Foroughi: Yes. I mean -- so over time, you broaden out the type of advertisers you have to basically everything because you have a lot of density and a customer is never going to see 200 impressions of the same thing. Where we are today, we don't have a lot of density. So in certain categories, a customer may see 200 impressions of the same thing. Well, the bar we set right now is if our team is willing to buy that product or not. If they think it's a good product, they're willing to buy it, great, we want to run it on our platform. That doesn't mean we're going to maintain the same standard forever. Most of the companies that today we call low quality or we're not letting on the platform, they're running ads on social, they're running ads on search. These are real businesses. They're substantial businesses in many cases. But we just want to make sure that we think about our audience as a very consistent large audience, and we want to train them that our ads are really high quality. But in the absence of that competition, if they're getting bombarded with single offers, we want to make sure each one of those is really, really high value for that customer. Operator: We'll take our last question from Nat Schindler with Scotiabank. Nathaniel Schindler: I'm going to go really high level and touch back on an earlier question someone asked about whether or not you were interested in some of those Google assets if they ever came up. You're growing at obviously absurd rates and you're doing it to -- it sounds like you're going to continue in your core market in gaming and you're adding obviously e-commerce, which is an enormous opportunity. I assume a lot of this is your conversion rates keep improving. You guys have been great at that over time. But some of it has to do with inventory itself. So at some point, conversion rates can improve too much. And if e-commerce is a lower converting area than gaming, when do you run out of inventory on your core gamer market? Adam Foroughi: Yes. I mean, look, we don't know is the simple answer. There's a long way to go, we think, just because we have so little advertiser density today. There's never been any company that's been set up like ours in the advertising space in history. Where -- what we reported, I think it was in Q1 was $11 billion plus of ad spend. And then the disclosures we've given you across web advertisers and gaming advertisers puts it in the low thousands. So you've got such a high amount of spend for such a low amount of advertisers across over 1 billion daily active users. Well, what happens when we get more density? You get more data, you get more density, you get more time to improve your models, that conversion rate is going to go up. If you think about social. It's not like there's more users on social. The growth in social has consistently come from the last few years, more customers getting a higher conversion rate because just the technologies are getting more powerful. And so we think we're going to see the same thing, but we're going to be able to pair it with this advertiser recruitment. And we're starting from such a low point, there's going to be quarters, possibly many years of growth in conversion rate to come before we start worrying about supply. Now that said, we've talked about -- it is interesting to us to go help the broader set of publishers, both in the open web and connected TV to better monetize. We get pinged all the time. It's no secret that we're really good at performance advertising at this point. So at some point, we would like to broaden out the supply base as well. Because, why not? That builds a really good growth catalyst into the future. But today, we're really heads down focused on the demand side of the platform because there's so much work to do there. At some point, you'll see us talking about both sides. Operator: And that concludes the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon. Adam Foroughi: Thanks, everyone. Matt Stumpf: Thank you.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, November 5, 2025. On the call from FAT Brands are Chairman and Chief Executive Officer, Andy Wiederhorn; and Chief Financial Officer, Ken Kuick. This afternoon, the company released its third quarter 2025 financial results. Please refer to the earnings release and earnings supplement, both of which are available in the Investors section of the company's website at www.fatbrands.com. Each contains additional details about the third quarter, which closed on September 28, 2025. Before we begin, I must remind everyone that part of the discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties. The company does not undertake to update these forward-looking statements at a later date. For a more detailed discussion of the risks that could impact future operating results and financial condition, please see today's earnings release and recent SEC filings. During today's call, the company will also discuss non-GAAP financial measures, which it believes can be useful in evaluating its performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in today's earnings release. I would now like to turn the call over to Andy Wiederhorn, Chairman and Chief Executive Officer. Please go ahead. Andrew Wiederhorn: Good afternoon, everyone, and thank you all for joining us. I'm pleased to be back as Chief Executive Officer of FAT Brands. With this transition, Ken Kuick is now focusing exclusively on his responsibilities as Chief Financial Officer of both FAT Brands and Twin Hospitality Group, while Taylor Wiederhorn will continue as our Chief Development Officer. I want to thank Ken and Taylor for their leadership as co-CEOs. They played an instrumental role in navigating the company through an arduous few years of legal matters. I'm excited to continue executing against our key priorities, which I will outline shortly. Before discussing the third quarter results, I'd like to provide an update on the legal matters we discussed during our last earnings call. In late July, the U.S. Department of Justice dismissed all charges against me, FAT Brands, William Amon and Rebecca Hershinger. I'm grateful to the U.S. Jury's office for their thorough review and to all legal counsel involved. We have also resolved the Delaware derivative cases known as Harris I and Harris II filed in 2021 and 2022 relating to our 2020 merger and 2021 recapitalization, respectively. As announced in early August, our settlement agreement resolves all claims without any admission of liability or wrongdoing. The settlement includes the recognition of previously adopted corporate governance enhancements by the Board, a $10 million insurance payment to the company and a contribution of 200,000 shares of Twin Hospitality Group by Fog Cutter Holdings. We received preliminary approval in September and expect final court approval in December. We are now fully focused on strategic execution and enhancing shareholder value. Turning to Twin Hospitality Group. The business continues to gain momentum under Kim Boerema's leadership, who has strengthen both brands operationally and bolstered his executive team. During the quarter, he appointed Ken Brendemihl as President of Smokey Bones, hired [ Rob Churn ] as Chief Operating Officer of Smokey Bones promoted Lexi Burns to Chief People Officer, expanding her role across both Twin Peaks and Smokey Bones and hired Melissa Fry as Chief Marketing Officer. These strategic leadership additions position Twin Hospitality for further growth and operational excellence. In August, I was honored to assume the role of Chairman of Twin Hospitality Group, providing valuable continuity following its successful spinout earlier this year. My deep understanding of the business and direct involvement in structuring the transaction provide a solid foundation for the company. Finally, I invite you to join Twin Hospitality Group's third quarter earnings discussion at 5:15 Eastern Time today with details available in the earnings release published earlier today. Turning back to the business. We continue to take decisive actions to strengthen our financial position and sharpen our capital structure. We are advancing plans for a $75 million to $100 million equity raise at Twin Peaks to pay down debt and fund new unit development. Our dividend pause remains in effect, preserving $35 million to $40 million annually in cash flow. The dismissal of the DOJ case and the resolution of the derivative matters provide at least $30 million a year in additional annual savings. We've already executed more than $10 million of SG&A reductions and continue to look for additional savings. And we are actively negotiating a debt restructuring with our noteholders. Together, these actions put us on track to achieve positive cash flow in the coming quarters, reduce our debt and build a strong foundation for long-term growth. While the restaurant industry continues to face headwinds, we delivered adjusted EBITDA of $13.1 million for the quarter. Most encouraging is the momentum we are building in same-store sales performance. We've narrowed our decline to just 3.5%, down from 4.2% in the second quarter, representing our strongest quarterly performance so far this year. Notably, our casual dining segment demonstrated particularly strong results with same-store sales growth of 3.9%. Now I would like to provide you with an update on our 3 strategic pillars: organic expansion through strategic market penetration, targeted acquisitions to diversify our brand portfolio and manufacturing scale-up emphasizing cookie dough in dry mix production. First, organic expansion. We opened 13 new locations during the third quarter and 60 locations year-to-date with a current target of 80 new openings this year. Development remains concentrated within our 7 highest performing brands, Fatburger, Johnny Rockets, Fazoli's, Roundtable Pizza, Twin Peaks, Marble Slab Creamery and Great American Cookies. Looking beyond 2025, our development visibility is strong. We secured over 190 franchise development agreements year-to-date, contributing to approximately 900 committed locations scheduled to open over the next 5 to 7 years. These represent executed contracts with paid franchise fees. The potential earnings impact is quite substantial. Once operational, these units should generate $50 million to $60 million in incremental earnings through our asset-light model, requiring no acquisition capital or corporate build-out investment. As you know, co-branding remains a key growth driver key growth driver domestically. In August, we opened our first co-branded roundtable Pizza and Fatburger location in Rancho Cordova, California. We leveraged more than 3,000 square feet of unused space at an existing roundtable location and added a Fatburger enhancing sales across dayparts, particularly lunch. Weekly sales and transactions have doubled. With approximately 50 of these co-branded locations in our development pipeline, we see significant expansion potential across California and beyond. During the third quarter, we opened new Great American Cookies and Marble Slab Creamery locations in Maryville, Tennessee and Sanford, North Carolina. The Sanford opening marks both brands entry into the Raleigh market. We also opened our first co-branded Fatburger and Buffalo's Express location in Springer, Oklahoma at the high-traffic Arbuckle Travel Center, marking Fatburger's debut in the state. Beyond co-branding, we expanded our presence with strategic stand-alone openings. Roundtable Pizza expanded in Western U.S. footprint with its first Colorado location in Colorado Springs, a milestone opening that sets the stage for additional growth across the state. The brand also added a third location in the Las Vegas market. Hot Dog on a Stick opened at Downtown Commons in Sacramento, a high-traffic shopping center that reinforces the brand's strong California presence. On the international front, Johnny Rockets continues its global expansion, opening 7 new locations this year across Iraq, Chile, the UAE, Mexico and Brazil. Highlights include 2 openings in Baghdad and new locations in high-traffic destinations such as Cancun's Grand Outlet Riviera Maya and Dubai's Jumeirah district. Additionally, we announced Fatburger's return to Japan through a new franchise agreement that will bring 4 locations to Okinawa over the next 5 years. The first restaurant is slated to open before year-end, strategically leveraging Okinawa's robust tourism traffic and U.S. military base presence as a gateway to reestablish Fatburger's footprint in Japan. Along with new unit development, we plan to complete 100 remodels this year, refreshing our brand's presence and enhancing the customer experience across our portfolio. Also, our portfolio digital mix hit a new record high with year-to-date digital sales increasing 19% from Q2 to Q3. Additionally, our brands received several notable awards this quarter, underscoring the strength and recognition of our portfolio. Great American Cookies and Marble Slab Creamery were named 2 QSR's Best Franchise Deals 2025 list. Hurricane Grill & Wings earned a spot on USA Today's 10 Best list for sports bars. 12 of our concepts were included in the Franchise Times Top 400. Twin Peaks, Roundtable Pizza, Johnny Rockets, Fazoli's, Great American Cookies, Fatburger, Marble Slab Creamery, Ponderosa and Bonanza Steakhouses, Pretzelmaker, Native Grill & Wings and Elevation Burger. And finally, Roundtable Pizza was recognized on Yelp's top 25 U.S. pizza chains list. Now turning to our growth by acquisition strategy. We remain disciplined while preserving flexibility. Strengthening the balance sheet is our near-term priority given current capital costs, but we continue to actively market -- to monitor the market for opportunities at the right valuation. Our focus is on acquisitions that enhance our core brand or add complementary capabilities without compromising our commitment to deleveraging. Our Georgia production facility continues to perform well, generating $9.6 million in sales and $3.8 million in adjusted EBITDA, a 39.6% margin during the third quarter. Importantly, we are operating at only 45% of capacity with meaningful expansion potential at low incremental cost. In August, we announced a major strategic initiative supporting our manufacturing scale-up goals, a partnership with virtual dining concepts to make Great American Cookies available for delivery from Chuck E Cheese locations nationwide. The collaboration is already live at over 450 locations with 500 additional locations targeted through the virtual dining concepts network by the end of this year. In addition to delivery, we are exploring in-venue cookie sales and co-branded menu opportunities. This partnership represents a transformative step in our manufacturing growth strategy, leveraging third-party partnerships to significantly increase production volume and drive our Georgia facility towards greater capacity utilization, all while maintaining an asset-light business model. Before I turn it over to Ken, I'd like to highlight the meaningful impact of the FAT Brands Foundation, which has awarded 42 grants and provided over $170,000 in funding so far this year. In September, the foundation launched a health and wellness campaign aimed at promoting FAT Brands' employee well-being in addition to driving fundraising efforts, the step-up for FAT Brands Foundation Challenge. The initiative saw tremendous engagement from employees and reinforced the foundation's role in giving back to the communities we serve. With approximately $12,000 in funds raised from this month -- from the month-long initiative, the foundation was able to help provide 1,000 meals to underprivileged children in Collier County, Florida, equipped 6 schools and 250 students with books and materials to promote fourth grade literacy and assist families impacted by the Eaton fires in Altadena, California through the purchase of essential gift cards. Looking ahead, our focus is on execution, driving growth across our brands, strengthening our balance sheet and unlocking the full potential of our platform. We believe these efforts will deliver meaningful value for shareholders, franchise partners and team members alike. With that, let me turn it over to Ken to walk through our financial highlights for the third quarter. Kenneth Kuick: Thanks, Andy. Moving on to our third quarter results. Total revenues were $140 million, a 2.3% decrease from $143.4 million in last year's quarter. This was driven primarily by the closure of 11 underperforming Smokey Bones locations as planned, the temporary closure of 2 Smokey Bones locations for conversion into Twin Peaks lodges and lower same-store sales, partially offset by revenues generated by our new Twin Peaks Lodges. Turning to costs and expenses. General and administrative expense increased $8.2 million to $42.7 million in the quarter from $34.5 million in the year ago quarter, primarily due to a $6.9 million store closure reserve and a $1.4 million noncash impairment of fixed assets in the third quarter related to the closure of underperforming Smokey Bones locations and higher noncash share-based compensation expense related to the public listing of Twin Hospitality Group earlier this year. Cost of restaurant and factory revenues decreased to $94.6 million in the quarter compared to $96.8 million, primarily driven by the closure of underperforming Smokey Bones locations, the closure of 2 Smokey Bones locations for conversion and lower same-store sales, partially offset by wage and food cost inflation. Advertising expense varies in relation to advertising revenues and decreased to $12.2 million in the quarter from $10 million in the year ago period. Total other expense net, which consisted primarily of interest expense was $41 million in the quarter compared to $35.8 million in last year's quarter. Net loss attributable to FAT Brands was $58.2 million or $3.39 per diluted share compared to a net loss of $44.8 million or $2.74 per diluted share in the prior year quarter. And on an as-adjusted basis, our net loss attributable to FAT Brands was $45.4 million or $2.67 per diluted share compared to $38 million or $2.34 per diluted share in the prior year quarter. And lastly, adjusted EBITDA for the quarter was $13.1 million compared to $14.1 million in the year ago quarter. And with that, operator, please open the line for questions. Operator: [Operator Instructions] And our first question will come from Joe Gomes with NOBLE Capital Markets. Joseph Gomes: So Andy, just wanted to start off on the debt restructuring that you're negotiating. Can you give us any feel for timing on that? Andrew Wiederhorn: I'm hopeful that during this quarter, we'll come to a resolution on restructuring. The -- we've publicly stated that we're close to raising equity for Twin Peaks. That is held up only by the government shutdown. As soon as the government opens, Twin Peaks is good to go and the majority of the proceeds from the equity raise go to reduce debt with the noteholders. So we'd like to get that started as quickly as everyone would. We're just waiting for the government to open. Joseph Gomes: Okay. And on the Twin Peaks, have you closed all the underperforming Smokey Bones -- or is there still more to do there? Andrew Wiederhorn: Well, for now, we have closed all of them and reserved for them. There are some stores that are not performing well, but they're part of a larger master lease where we have a number of very, very well -- stores are performing very well. And then there's a few that are not performing that well, all in the same master lease. So there's some more to go over the coming couple of quarters, but that will really come to an end once the master lease is sorted out and extended. Joseph Gomes: Okay. And where do we stand on the effort for refranchising the Fazoli units? Andrew Wiederhorn: We've made some material progress on the Fazoli's refranchising. We are evaluating some proposals that we've received and deciding if we want to move forward or continue negotiating with additional parties. Joseph Gomes: All right. Let me see what else do we have here. I'm assuming it's more economic economy related, but the goal was 100 new targeted stores to open in '25, and you said now the target is to 80. I was just wondering if you could give us a little update on that. Andrew Wiederhorn: Yes, there's definitely a slowdown in the pace of which new stores are getting opened. That's a little bit of foot dragging by franchisees to open their stores, so they'll slip into next year. It's not really many projects getting canceled as much as it is just moving a little bit slower. It's always frustrating because every day, every month that a store is delayed, that's $5,000 in royalties you'll never get. And so if you wait -- if the store is delayed a year at $60,000, you add 10 of those and $600,000. So it really adds up quickly, and we are trying to accelerate the throughput and the opening of those new stores as quickly as we can, but you still got to get them open with the franchisees doing their part. Joseph Gomes: Right. And you mentioned about $10 million of SG&A reduction. I was wondering if you could kind of maybe give us an idea of where that came from? And what more do you see as potential for additional cost optimization? Andrew Wiederhorn: Well, there's been -- I mean, it's been across the board. There's staff reductions, there are executive reductions. There's just general G&A. We've closed some offices as we were able to consolidate and consolidate some of the accounting departments and things like that to get further single platform shared services. So that's been very beneficial. I think going forward, we just have to see how the restaurant economy performs. I don't think any of the major restaurant operators would argue that we're in a restaurant recessionary environment. I think they all agree that we are generally in that environment. There are some outliers where guys are putting up some big numbers. But for the most part, people are off a little bit. We're fortunate that it's just a little bit, not a lot. 3% or 4% is okay in this environment. It's not what you want, but it's certainly not off 10% or 20% or closing 30% of our units like some other problems that have occurred. So I think that we push through that. There may be -- when you're in that environment, you're looking at costs and you're looking at what am I spending on new business development or things like that, that may just not be realistic in this environment. And so that's probably where there's additional savings. Operator: And next, we'll hear from Roger Lipton with Lipton Financial Services. Roger Lipton: As you know, this is Roger. You answered the questions I had about the timing of your -- the restructuring efforts. Let me ask you, you made reference to the same-store sales growth in the casual dining. What -- which were the chains that are in that category these days? Andrew Wiederhorn: Well, it's quite a few. I mean you have Hurricane Grill & Wings, Buffalo's Cafe, Native Grill & Wings and Ponderosa and Bonanza, or Steakhouse brands. Roger Lipton: Okay. Andrew Wiederhorn: What's interesting is really you see consumers -- you've seen a lot of information in the industry about the QSR end of things, the consumer has felt pinched and has really, really sought out value. And that's a little bit of a bounce back from when they were bringing a turkey sandwich from home and not going out at all. And now you've seen McDonald's put up numbers where they're showing that if they promote value, they're getting customers to come back and traffic to improve. And so I think on the QSR side of things, it's all about value, and I mean value with discounted kind of deal, not guest experience. As you move into the higher-end brands, it's all about the value of what you're spending for the guest experience, and you've got to justify the price you're charging, which you need to charge with labor and food costs where they are to the guest experience. And so it's kind of 2 different value propositions. And I think on the casual dining side, the consumer is saying if I'm going to spend what it costs to go to a casual dining restaurant, I want the experience to be great, and I'll spend it because I don't want to be -- I can only do so much QSR. Roger Lipton: Right. No, no question. What you're saying is exactly consistent with what we're hearing all over the industry. Talking about Twin Peaks for a second. Can you give us any idea what opening program there could be for next year at Twin Peaks? Kenneth Kuick: Yes, there are a number of new stores slated to convert both Smokey Bones conversions into Twin Peaks as corporate and some as franchise. And then there are new franchise locations that have nothing to do with Smokey Bones that are also under development. And so that's a little bit of a moving target as to the timing and the permitting and the franchisees undertaking as to when they start and when they get them open. But there's active development going on. The brand is -- has a robust pipeline and franchisees who want to get more stores open and build their platforms. So it's a positive. Roger Lipton: Right. And I didn't have too much time to look at their numbers with everything coming up over a couple of minutes in your 4:30 call here, but it looks like Twin Peaks is settling down in terms of their day-to-day operations. Their store level margins improved I think, 50 basis points year-to-year, up to 17%. So that's encouraging. Andrew Wiederhorn: That's a big priority for Kim. The restaurant level margin is a big priority for Kim, and he's very focused on it. And I think we'll see the restaurant level margins go well beyond 17% if you just give it a little time over the next couple of quarters as several initiatives kick into place. And then with Ken Brendemihl coming on board and helping to take the helm at Smokey Bones, there's just a renewed focus there on streamlining the cost structure, so we don't really have duplicative costs by running 2 different brands inside of Twin Hospitality and then also menu management, streamlining purchasing, operational efficiencies. There's just a bunch of things there that they're focused on, and I think we'll see that brand excel. There's going to be a number of Smokey Bones that remain Smokey Bones because they're not convertible into Twin Peaks because of the location or landlord restrictions. And those are good profitable stores. They're solid, and we want to keep those and run them properly. And then there's a bunch that are eligible for conversion. And we have to -- the ones that we've converted so far have been something like doubles. So sales have doubled, profits doubled, it's been worth it, but it's also uses of capital. And so we have to pace that with our ability to fund that. And then there's franchisees that are interested in some of them and some -- they've got additional development opportunities that have nothing to do with Smokey Bone. So it's a combination of those things. Roger Lipton: All right. Well, that color is helpful. No question for your management group, even more than the analytical group, it will be great to get these major structural efforts behind us so that you can talk about opening stores and running stores and improving margins in stores and more day-to-day operational stuff. That will be a pleasure for everybody. So thanks, everyone. Andrew Wiederhorn: From your lips to God's ears, you bet. I agree. Operator: And there are no further questions at this time. I would like to turn the floor back to Andy Wiederhorn for closing remarks. Andrew Wiederhorn: Thank you, operator. I want to thank all of you for attending our earnings call today and feel free to reach out to the company if you have any other questions. Take care. Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
Tomás Lozano: Good morning, everyone. This is Tomas Lozano, Head of Investor Relations, Corporate Development, Financial Planning and ESG. Welcome to Grupo Financiero Banorte Third Quarter Earnings Call for 2025. Our CEO, Marcos Ramirez, will begin today's call by presenting the main results of the quarter and the first 9 months of the year and will comment on the strong results of our core business as well as extraordinary that impacted this quarter's results. Then Rafael Arana, our COO, will go over the financial highlights of the group, providing details on the margin evolution and sensitivity, asset quality and expenses and will cover the adjustments in the guidance to reflect Bineo's impairment and the group's operational strength. Please note that today's presentation may include forward-looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially. On Page 2 of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you, Marcos, please, go ahead. José Marcos Ramírez Miguel: Thank you, Tomas. Good morning, everyone. Thank you for joining us today. Before starting our call, I'm proud to share with you that yesterday, we concluded our 125th anniversary celebrations, with a special Board meeting in Monterrey. We thank you for your patience as we had to move our official reporting dates to make this celebration special. We achieved 125 years of sharing with you, our shareholders, a transformational journey that has a lot to become one of the leading financial groups in the country. Your trust and support has been key as you have helped us to execute and embrace digital transformation, expand our business participation and reimagine the way we operate by placing our customers at the center. Moving on with our results, let me begin by highlighting that this was an overall strong quarter. Our core business continues to demonstrate the structural strength, supported by the solid performance across our business units, expanding margins and disciplined expense management. However, it was overshadowed by 2 extraordinary items that impacted our results. The first item has to do with the NIM. As you well know, we announced itself in September. Although this transaction is still awaiting regulatory authorizations, accounting standards require its classification as a discontinued operation with an initial valuation impairment of MXN 1.3 billion. Second, we recognized a new nonperforming case for the commercial portfolio with its corresponding impact on higher provisions and cost of risk for the quarter. It is important to highlight that, that is an isolated case and we do not expect any particular industry to be at risk. These extraordinary events do not reflect a weakening of the structural strength in our core business or operating trends. Additionally, our cost of risk outlook for the full year is not modified since the possibility of occurrence of such case was previously anticipated. We expect the positive trend in our quarterly results to continue during the fourth quarter, together with the usual seasonal dynamics that characterized the end of the year. Regarding the Mexican economy, our economic analysis team maintains its GDP growth forecast at 0.5% for 2025, driven mainly by Brazil [indiscernible] and signs of recovery in domestic consumption. Looking ahead to 2026, we anticipate a rebound in GDP growth to 1.8%, supported by a combination of factors expected to stimulate private construction and tourism, such as Mexico participation in the FIFA World Cup and the renewing momentum in key sectors such as investment in construction. On the fiscal front, the Mexican government expects to uphold fiscal consolidation efforts to 2025 to 2026, in line with the budget proposal recently submitted to Congress. Additionally, we foresee a continued constructive and collective dialogue between Mexico and the U.S. in the coming months, which could support the process of the USMCA scheduled for next year. Regarding monetary policy, we forecast 2 additional 25 basis cuts in the reference rate, bringing it to 7% at year-end. For next year, we expect 2 further reductions, with the rate reaching 6.5% in the first quarter and remaining stable throughout 2026. Finally, we expect a steady Mexican peso for the remainder of 2025 as the broad weakening of the U.S. dollar and the increased appetite for risk assets have favored the currency. As a result, our economic analysis team forecast MXN 18.80 per dollar by year-end. Now starting off with the financial results on Slide #3, we highlight the group's sound structural performance. Margin for both the group and the bank expanded in the quarter, supported by the neutralization of our balance sheet sensitivity. Cost of fund optimization has absorbed the impact of decline in rates in the loan portfolio, which also reflects the natural hedge of larger fixed rate loan balances. The overall expansion and composition of our credit portfolio continues to support revenue generation, driven by a resilient internal demand and the implementation of the hyper personalization strategy. Our capital generation remains strong, driving the capital adequacy ratio to 22.3% and creating opportunities for capital optimization. We will provide greater detail later in the presentation. As for the extraordinary items that I mentioned before, we see Bineo's impact. And regarding the risk metrics and increase in the NPL ratio to 1.4% and cost of risk reached 2.7%, reflecting the isolated case during the quarter. On Slide #4, net income for the third quarter decreased 11% sequentially and rose 1% with accumulated figures, mainly affected by both extraordinary items already discussed. Nevertheless, results still reflect a strong structural performance in our core businesses. ROE for the first 9 months reached 22.3%, in line with the full year guidance. Results by subsidiary on Slide 5, despite a minus 4% sequential decline in the bank's net income to MXN 11.3 billion, mainly affected by higher provisions that offset the dynamic consumer activities in core banking products and structural efficiency in margins. Consequently, ROE for the bank stood at 27% for the quarter. With accumulated figures, net income from the bank grew 2%, reaching MXN 34 billion. Despite higher provisions, the bank is playing a sound [indiscernible] and higher market-related income from heavier trading activity. The business was positively impacted by the neutralization of our balance sheet sensitivity to rates, supported by larger lending volumes along with the consistent optimization of our funding costs. Our banking operations still showing resilience on consumer dynamics and the positive impact of higher fees from the insurance company. Altogether, these results yielded an accumulated ROE of 28.4%, in line with the guidance. Our insurance business grew 20% during the first 9 months of the year, driven by higher billing issuance, mainly in the life sector. The overall positive evolution of the business is also capturing higher lending activity of auto loans and mortgages at the bank, which offset greater fees paid for the bancassurance operation. Annuities expanded 28% quarterly due to the higher business volume despite a greater competitive market. With accumulated figures, it grew 3% driven by a positive technical result on lower inflation adjusted reserves. In the brokerage sector, the quarterly decline was driven by lower evaluation in securities. However, the first 9-month expansion derived from increased fees due to higher trading operation and market-related gains. Lastly, results in the pension funds business were driven by higher yields on financial products in both comparison periods. On Slide #6, the loan portfolio, excluding the government book, grew 10% year-over-year, driven mainly by consumer lending. In the year, the commercial and corporate book grew 9% and 7%, respectively, still supported by short-term working capital financing, primarily in the tourism, real estate and industrial sectors. Deceleration in both portfolios is in line with our expectations for the year since customers in both segments continue to wait for trade clarity before committing to long-term investments. Moreover, these portfolios were further impacted by FX variations in the dollar book, which currently represents 40% of the total loan portfolio. On the other hand, our government portfolio declined 12% in the year, largely related to lower activity in the federal government and prepayments from states and municipalities. Nevertheless, we reiterate our appetite for the segment, and we anticipate a seasonally active fourth quarter. Turning to Slide #7. Consumer lending continues to drive overall loan growth. The 12% year-over-year expansion was supported by our ability to capture the disposable market with digital capabilities, process efficiencies and hyper personalized business model. In this sense, auto loans sustained stronger-than-expected annual growth, increasing 31%. This expansion was driven by our ongoing efforts with existing strategic alliances to improve our availability and the competitiveness of our offering within the partnership, and our capacity to gain market share by capturing business from competitors. The credit card portfolio rose 16% year-over-year, mainly supported by our resilience on private consumption, improved promotional efforts that derive in larger building balances, targeted marketing campaigns and the continued success of our rewards and loyalty programs with our existing customer base. Payroll loans grew 10% in the year, driven by an observed greater demand, process optimization and increased availability to digital channels. Moreover, we continue to enhance our value proposition with differentiated high liquid products designed to align with evolving customer needs. Finally, mortgages rose 8% in the year, supported by improved origination processes, strategic alliances and our hyper personalization strategy. On Slide #8, the structural asset quality continued to demonstrate solid performance across most of the products. However, as noted at the beginning of the call, our risk indicators reflect an isolated nonsystemic case with the commercial portfolio. I would like to insist that it does not indicate broader sectorial or geographical concerns nor a deterioration in our quality forecast. While the recovery outlook remains strong, such case resulted in elevated provision. In this sense, both NPL ratio and cost of risk rose in the quarter. However, we are still holding our cost of risk guidance range for the year between 1.8% and 2%. On Slide 9, net fees grew 1% quarter-over-quarter and remained relatively stable with accumulated figures. Sequential slowdown reflects lower transaction activity compared to a seasonally high second quarter. With accumulated figures, higher transaction volumes in consumer products and investment funds were offset by regular fees paid on credit origination to the external sales force. Moving on, on sustainability in the Slide #10. I would like to highlight that in line with the high growth rates of auto loans, a growing proportion of this portfolio is related to hybrid and electric vehicles. This supports growth in sustainable products such as Autoestrene Verde [indiscernible] auto loan product. Similarly, on the social front, our book in payroll clients demand stronger support from them through financial education workshops, which help our clients make better informed decisions when hiring the different financial products available to them. Lastly, the environmental front, we are very close for reaching our 2025 target of 226,000 planted trees across Mexico, in line with our commitment to One Trillion Trees organization. So as you can see, our core business and structural expense continue to have a sound evolution. In this sense, apart from Bineo consolidation impact of net income, we are maintaining or improving all of the other operational ratios in the guidance for 2025, being confident we will comply with our commitment to the market. Now before asking Rafa to cover the main financial results of the group and the updated guidance for the year, I would like to address our capital allocation plans. The bank's organic capital generation enabled us the possibility of an extraordinary dividend during the fourth quarter. Accordingly, we are having a shareholders' meeting in the upcoming days to seek approval and proceed with the distribution of around 35% of the net income of 2024, amounting MXN 6.99 per share by year-end. With this, our total payable ratio will reach 85%. With this, I conclude my remarks. And please Rafa, please go ahead. Rafael Victorio Arana de la Garza: Thank you. Thank you, Marcos. Now we move to the financial highlights. And I would like to address and thank you for all the feedback that you give us yesterday concerning the results and some of the questions that allows to really go directly into what's really of concern of what you saw in the numbers. Firstly, let's remember that when we set up the guidance for the loan growth, we were expecting a country that was supposed to grow at 0 GDP. And we set up a loan growth with the exception of the government book, very close to 10% or double-digit growth. I will go in a minute to show that, that's still very feasible for us, and we're still going to keep that on the guidance. But if we see a very strong consumer that continues to grow in a very good way for us, it's not the same on the corporate and the commercial. That is much more a wait-and-see mode for the country, even though we continue to provide working capital and some CapEx for the commercial and the corporate. But that -- I would say that's where you see less activity in the group. The government book is starting to move forward in the way that we always expected that by the end of the year, the government book was going to continue to be trending up based upon many initiatives that were on the making for the -- I would say, for 6, 7 months on the book. So even though there was some concern about that the commercial and corporate was not growing in the bank and that we are only becoming more a consumer bank, that's not exactly the case, and it's most related to what I mentioned about the economic activity that is very related to what's going to happen with the USMCA in the corporate and the commercial. If you look on the positive side, concerning the growth in the lending side, we basically captured market in car loans, payables, credit cards, mortgage books, a piece on the commercial and corporate, but we capture market on that part. Governments start to move. This is positive information. So you we'll see that. We have really started to move from 26.4% to 27.4%, and you will reflect that on the on the fourth quarter. So all on all what we see is that we continue to see very strong demand on the consumer side and very healthy demand on the consumer side and we will see the numbers in a minute. And what Marcos mentioned about this isolated case that was very not expected for us, we're working with that case for many months, but it was really not in our hands to sort it out. And Gerardo will explain that in a moment. So if we now move because what I don't want for the investors to see is that Banorte is starting to really slow down on that part. I think the third quarter is always the most difficult one, but you will see a very good pickup on the fourth quarter on the loan growth to achieve, but we guide the market to [indiscernible]. If you go to the slide that we're showing on NII, I think the key part is looking at the NII, especially on the -- what is loans and deposits. NII concerning loans and deposits is growing at a very healthy 15% on that part. So when you see another part on the NII, when you see the MXN 1.5 million that was really not expected to happen because it's related to the strength of the peso, that is causing us to lose on the net income, on the NII, MXN 1.5 billion that was not expected in any way when we set up the guidance. If the peso starts to go more in a trend to the 18, 19 something, you will see a recovery on that part. But NII, especially on the loans and deposits continue to be very healthy and growing in a nice way. So that's what I would like to result on that part. That expansion on the NII will continue also into the fourth quarter. Based upon all the cost of funds that we have, we will see in a minute how the spread of the book continues to expand based upon all the strategies that we set up on the on the balance sheet. So very reasonable NII in the loans and deposit, 15% year-on-year on that part, and a negative impact in the valorization from FX of MXN 1.5 billion that was really not expected where we set up at the beginning of the year. So if I move now to the next one, the bank NIM continues to expand in an important way. Now it's reaching 6.9% based upon all the strategy that we set up on the balance sheet. And that also has allowed us to compete in the market because by having the lowest cost of risk and NPLs, we can provide the market with very attractive prices if we like the risk. So we are very, very diligent on the risk. But based upon the spreads that we're getting on the group, we can really go for the clients and we like to have that at the bank. So I already discussed the NII. Bank net fees, some people are concerned about the bank net fees. Remember that out of this -- the third quarter is really a kind of a slow month on that. You will see a lot of activity in the fees in the coming next 3 months because of all the promotions and things that accompany the end of the year. We have a very -- I would say, we are very confident that fees will continue to expand. And remember that when you have to look at fees, since we are selling really cars and mortgages in a very important way, I mean we -- in parallel, we are basically the leader in the market and in the mortgage which we are seconding market but very close to the first one, is that you have to pay the dealers on the commission basis what you have with the dealer to the sellers with the sales force that we have and the same happens on the mortgage front. Then you absorb that through the life of the loans. So this is related to the very fast pace that we are growing the group in the mortgage book and in the car loans. And another important thing to mention is that we have 2 very large issuers that was a very important part of the fees that were running to us because of the very large number of transactions. But we decided based upon a very I would say, a profitability metric analysis that we did on those 2 clients, but it was not on the best for the bank to keep on sharing those because there was basically no money to be made on that. You will see that balancing out in the next quarter. So when I go to the next page and the sensitivity continues in the same way that we have been planned in the group. So the sensitivity on an NII basis is nothing and basically, and on the balance sheet on the peso route, this continues to be very, very, very low. On the dollar book, you see that's much more active balance sheet management, not in the same that was in the peso that you have a long way to really position the balance sheet. And the reason for that is that we don't have fixed rate loans on the dollar group. We have a lot of fixed rate books on the peso book that allow us to hedge the balance sheet in a natural way. In the next -- what you see, the bank's net income was basically affected by the -- what Marcos was already mentioned, but that's an extraordinary base that we had on the commercial side. The ROA of the bank continues to stay at 2.5%, and the ROE of the bank, including the loan that was mentioned before, stay at 27%. But in accumulative basis by the end of the year will be very, very in line with what we guide the market today. I will jump to the next one, and it's basically the graph about the managerial NIM, but you see the effect of the annuities and insurance on that part. You see now basically those 2 trending. So there's no -- the only thing that happened on the pension book was a slight effect on the URBI because of inflation that happened in the quarter. The most important part also in the next slide to see why we are confident that NIM will continue to expand and continue to deliver pretty good numbers on the margin side. You see that when you look at the graph, you see the active -- the rate that we are really having on balancing the active rate that is present in the market how we are dealing with the reduction of the fees. But you see, and also a very important part is the reduction that we are having on the funding side that you can see that on the red dotted line on the low part of the graph. And then you move into the next one that is -- no, no, no -- into the next one, that is really the spread. And the spread is 8.9%. And you see that, that spread continues to extend even though the rates continue to drop. And that spread will continue to move up through the remaining of the year and into the next year. So basically, what you saw -- you see in those graphs is that you see the portfolio continues to post pretty good numbers around 12.9%. You see a deep reduction on the active rate that is basically the lowering of the rates that the Central Bank is doing. But you see that the spread goes in the other way, and that's exactly what we plan the balance sheet to do so we started to position our balance sheet. So that will continue in the coming months. The next graph really shows the trend that we have on the funding cost and that graph will continue to grow in the coming months. As you know, basically, October, November and December are pretty rich months concerning the noninterest-bearing deposits, and we will continue to see that drop in the funding cost has stayed there for the remainder of the year and into the next year. There was a concern about -- on the funding side that it was like a drop on the interest-bearing deposits. That was a deliberate move because there was expensive funding that we were holding on the balance sheet and we don't need that anymore. So we got rid of those expensive funds, okay? And in the next graph, it is really what is creating Banorte being such steady on the NPS and cost of risk, it was kind of a surprise for the market and also for us, the big pickup that we have on the cost of risk is -- I think is mentioning that it's tough to keep the risk numbers the way we have been keeping for many, many months and years. And this is really an extraordinary pace. Gerardo will go in a minute to explain exactly what this case is posing. But what I would like to address is that we still hope that Marcos mentioned that we will, on our guidance, on the cost of risk from 1.8% to 2% on that part. And the write-off rate that you see continues to be quite steady on that. So this was the big pickup that we have in the third quarter. And another thing that you will see is that an addition MXN 400 million provisions were put also on the third quarter that those provisions will be reversed in the coming quarter because it was basically because of a calibration of the models from the credit cards that we are coming into -- before integrating the Tarjetas del Futuro, the Rappi integration with us. I will pass and then I will continue, but please Gerardo, you would like to address the case? Gerardo Salazar Viezca: Yes. Sure. Thank you. Good morning, everyone. I will say that the higher provisions recorded during the period is primarily attributable to a single isolated exposure within the commercial loan portfolio. The specific case required an additional reserve following a detailed credit review that considered updated financial information and collateral valuations. Importantly, this adjustment is not indicative of a broader portfolio trend. Comprehensive statistical and credit analytics confirm that the event is idiosyncratic and nonreplicable. The exposure in question has characteristics that differ materially from the rest of the portfolio. That is including sector, geography, obligor structure and collateral profile. And those does not share risk drivers or behavioral patterns with other loans. Portfolio level analysis support this conclusion. Let me explain 3 factors. The first factor is correlation test between the affected exposure and the rest of the commercial loan book show provisions statistically indistinguishable from 0, confirming the absence of common risk factors. Second, migration and delinquency rates across all other commercial cohorts remain stable and within historical norms. And third, vintage performance and profitability of default distributions exhibit no significant drift compared to prior quarters. Consequently, the increase in provision should be interpreted as a one-off technical adjustment, reflecting the institution's conservative provisioning framework rather than a signal of credit deterioration or a change in portfolio quality. This proactive approach strengthens coverage ratios and demonstrates the bank's commitment to prudent forward-looking risk management practices, ensuring portfolio resilience under diverse economic scenarios. Rafael Victorio Arana de la Garza: Thank you, Gerardo. If you've got more questions, we will address that during that. The other thing that we would like to touch, the next slide please, is -- when we commit to the market at the beginning of the year about the guidance, we said that we were going to push hard to go into single-digit numbers, the expansion on the ratio. As you can see on that part, we are very, very close to achieve that to reach lower cost expansion for the year and started to go back again to single digits. And from then, a continuous evolution into what we like our 34% cost-income ratio. This was a big step, and you will see that big drop also on the fourth quarter on the expense line. But we are right on target what we promised the market that we will be below 2-digit numbers into single-digit numbers. That's -- I think that's another part that we will discuss when I touch about the guidance. The next one goes with the capital. Marcos already announced and the distribution of the extraordinary dividend. And the reason for that, you can see easily on the quality of the capital and the size of the capital base, 14.8% is what we have and own on the core Tier 1. That number when we pay the dividend, will go for the first quarter close to the 12.5% and evolve here very close to the number that we would like to have, that is the 13% for Teir 1 ratio, fully compliant with TLAC. No issue with TLAC in any way. So capital continues to be a very strong generation of dividends for our investors, and we continue to hold a very prudent management on the capital base. Now I will move into the guidance to see what are the adjustments that we will have in [indiscernible]. The first one was loan growth. The new guidance that we are putting in the loan growth, the range is open because there's pipeline, but we have to go to make that pipeline a realistic one. But we think that without the government group, we're going to be very close to the double-digit number, if not above the 10% in double-digit numbers, but we have to see how the pipeline evolves on the remainder of the months. The pipeline looks strong, and I think we could achieve what we promised the market on that. Net interest margin for the group will be a bit -- a little bit above what we guide the market on the range. The NIM of the bank, for sure, will be very close to the 6.7%, 6.8%. The recurring expense growth that we were putting double-digit numbers is going to range from 9.4% to 9.7%. That put us on an efficiency ratio from 35.5% to 36.9%, trending to the number that we would like to have that is the 34%. Cost of risk will continue to hold the 1.9% to 2%. We feel confident about that. Tax rate, the same. The net income basically has been affected by Bineo. If you strip the Bineo number, the bank is exactly on guidance. And you have to consider that we were not taking into account MXN 1.5 billion of FX that happened to the bank that really affect the net income in the MXN 1.5 billion basis. So on the net income basis, basically, what you see is the effect of Bineo. And let me tell you this. There's a lot of initiatives trying to minimize this effect. But in order to try to be as close as we can be for the guidance by the end of the year and not promising that we will be on the guidance, but efforts are being made to be very close. We continue to see very good consumer, government is coming alive and also a pipeline on the dollar book is becoming quite effective. At the same time, we don't see any hiccups on the quality of the group on the consumer and no more in extraordinary cases under the commercial and corporate. Return on equity for the group will continue to go from 22% to 23%, up from 21.5% and the return on equity of the bank will be from 28% to 29%. The ROA will stay at 2.2% to 2.4%. So with this, this is the guidance that we have at this moment. But I would like to address the fact that important efforts are being made basis of the dynamic of the bank that we could really achieve a better number on the -- of the net income guidance by the end of the year that will be close to what we promised the market on that. With this, I conclude my remarks. Happy to jump on Q&A. Tomás Lozano: Thank you. We will now move to our Q&A session. As always, we kindly ask you to present only your most relevant question, and we will be happy to take any other questions any time after the call. [Operator Instructions] We are now ready to start our Q&A session. We'll start with Brian Flores from Citi. Brian Flores: [Foreign Language] I wanted to ask you on the proposed interchange rate caps for credit and debit cards. If you have any color on your conversations from the regulator, any, I don't know, initial gauging of impact that you could have I think it's probably going to become a very relevant discussion. So any color you can have on that would be really appreciated. José Marcos Ramírez Miguel: Thank you. Yes, we are aware of that. It's still moving, nothing is said about that. So we should wait. We have a meeting with the Ministry of Finance and [ one of the ] bank of Mexico, and we are waiting to start working and to move on, and we have some days ahead to maneuver and to see what's going on. So far, we don't have anything. And as soon as we know, we will let you know. But so far, we are -- it's a work in progress. And they open the doors, that's very important to negotiate and to hear from the [indiscernible] Mexico, what's going on. So we will see in, let's say, 1 month around that the conversations. I cannot tell the word because I don't know anymore. Tomás Lozano: Now we'll continue with Jorge Kuri from Morgan Stanley. Jorge Kuri: Congrats on the great results. I wanted to ask you about your market-related income. Just trying to figure out what -- what's the number going forward because it's evidently been a really big contributor to the profits this year. You're on track to basically double the amount of market-related income this year versus 2024. And if I just try to benchmark it in any way, the number really looks above trend. If you look at it as a percentage of revenues, it'll probably be around 6% this year versus a very consistent 3% over the last 3, 4 years. If I look at it as a yield on your marketable securities, that's around 1%, which is also exactly double of a very consistent 0.5% that it's been over the last 3 years. So can you walk us through what's behind this really big increase? And I guess most importantly, how sustainable that is as we look into 2026 and '27? José Marcos Ramírez Miguel: It's not sustainable, it was what it was because they saw an opportunity. The rates were going down, the effect was somehow it was clear to see what was going in the market. So we'll take the advantage. But I think, for the future, we are not depending on the trading for the bank. So if we see an opportunity, we will take it. But again, you will see for the next year, the budget is going to be a -- Boeing one, I don't how to say it, but it's going to be the same, but this month. And we do not expect to move the needle there too much. Rafa, do you want to say something? Rafael Victorio Arana de la Garza: Thank you, Jorge, for the question. And sorry that we cannot project this graph, but you will see that even though you see a big number on the trading book, if you compare that number to the expansion on the -- basically on the NII and compared to the expansion that we have on the technical results of insurance and annuities and also the impact of the net fees, the trading when you look on a percentage basis, continues to be basically the same trend. As Marcos mentioned, it was a very easy gain based upon the way we position the balance sheet and the acquisitions. But it's not that we are chasing or changing in any way the strategy on the trading book. But we are very, very -- I would say, very carefully looking at this is that the NII continues to expand much faster than this. The net interest -- NII also for the annuities and insurance continue to expand faster than that and also the fact of the net fees. If we see that this takes another trend compared to this today to what I mentioned about the NII and the fee, then that will make us to put into another strategy on the trading group that we are not really moving anything on the strategy. We will send this graph, I'm happy to put that on the web page for everybody to see that we take a very delicate balance about trading, NII of the insurance and the fee base. And yes, this was a very good part of the year, but also because the other also were not in an important one. Jorge Kuri: Can I just ask a clarification. Rafa, I think you mentioned there's going to be a reversal of loan loss provisions of MXN 400 million during the fourth quarter? Did I understand that correctly? Rafael Victorio Arana de la Garza: Correctly that. Tomás Lozano: Now we'll continue with Yuri Fernandes from JPMorgan. Yuri Fernandes: I would like to explore a little bit the insurance results here. And I know this is volatile and it's hard to predict the dynamic. But this quarter, we saw the premium decreasing a little bit, like 3% quarter-over-quarter. But technical reserves, they were down 17%. So basically, the insurance reserves, they didn't follow as much premiums. And this helped right in the end, like this help insurance results. So if you can provide a little bit of more color why this happened like any clarification? How do you see the insurance results? And a second one, and this is very quick, Rafa and Marcos, just on the guidance. So just make it clear. The guidance excludes -- includes Bineo. So basically, we are doing all the calculations with your accounting earnings, meaning that the 4Q could be stronger, right? Like basically, you are using the MXN 13 billion as net income for this quarter to get to our guidance? José Marcos Ramírez Miguel: I start with the second one. Thank you. Yes, the guidance that we are providing to you, if you see there is a better guidance in some items, and this is the guidance included in the Benio. That's the one that everything is in there. And the first one, taking the insurance, Rafa, please go ahead. Rafael Victorio Arana de la Garza: Yes, I think the first thing to notice is that the insurance business is having an extraordinary good year. We expect net income to grow very close to 20% or above that. You know that the return on equity of the company is 68%. What happens is basically that one wealth management product that we are actively selling on our wealth clients had a small reduction on the year. And that really explains the reduction in the technical reserves because that product basically, you need to reserve 100% when you put on the book. But there was not a lack of growth on the company basically on the property and casualty. And also, we are becoming quite important on the wealth management fees for this product. So nothing really to worry about that something is going on, not in the right trend on the insurance. On the other hand, I think, the insurance business providing the 20% and the 68% of return on equity, and the activity that the company is having is becoming really a very important part of the net income of the whole group, the insurance company. So no, it's basically -- and that is explained very well on the group that we provide to you how the technical reserves went down because of the -- we have a reduction on the placement of this product for this quarter that will start again on the fourth quarter. So that's basically this. And I also want to add another thing on there because somebody would like to ask this, what's going to happen with the insurance provisions in going around the market that some companies didn't provide. Banorte just fully, you can -- fully provide for the issues about the taxes on the insurance part. So there will be no effect for us on the insurance side. So that's for the market to know in that part because that was also another concern for some investors that what's going to happen once the settlement of the insurance business at what's going to happen with Banorte. Banorte is as always fully provided that. Operator: Now we'll take our next question from Ricardo Buchpiguel from BTG. Ricardo Buchpiguel: As you mentioned in the presentation, we have been seeing that the bank has been growing quite a bit in consumer loans. So could you walk us through what is driving that trading demand that you talked in the presentation, especially given the slowing down macro environment? And are you expanding to new customer profiles or regions here? Or is it mostly growth within the Banorte traditional portfolio base? Rafael Victorio Arana de la Garza: I think that what's very important, Banorte has been really revamping all the processes that we have for the consumer and not for the companies. But on the consumer, especially on the mortgage process and on the card process and on the credit card process, you really see most of them of the -- most efficient process in the market that allow us to serve that and go back to the client in a very short period of time. So what you see on the numbers of Banorte, and you can compare that to the other bank that is very active on that bank, on this part is that Banorte really is penetrating the market on a month-by-month basis. And the most important thing, if you look at the NPS of the car loans that stayed really lower 0.6% and also NPLs on the mortgage group that is still very low, just fairly above 1% on NPL is basically all the processes, and we are serving our clients, but also we are attracting a lot of new clients by the products that we sell on the mortgage part and on the car loans and also on the credit cards. If you see the expansion that we have in credit cards and charge, you continue to see that card loans are growing 31%. So many of those clients are clients of Banorte, but a lot also are coming from the market. Credit card was growing 16%. So we are also outpacing the market in that. And the most -- and in the mortgage group that is around 8% to 9%. The most important thing is that we are really attracting the clients that we like and it's basically -- based upon the pricing policy that we follow based upon the risk of the client and the value of the client, we think that we are offering the best deal in the market for the mortgage part. So it's coming from the already existing client base, but also a new -- a lot of new clients are coming to the bank based upon the offers that we've had on the car loans and on the mortgage and on the credit. Tomás Lozano: We'll continue with Ernesto Gabilondo. Ernesto is having some comments, so he sent me his questions to read them. We believe there are 5 negative headlines for next year. One, a potential deceleration on the auto portfolio because of higher tariffs to autos and auto parts from Chinese cars? Two, lower U.S. rates in the loan portfolio that you have in dollars. Third, lower tax banking deductions. Other banks have anticipated the basis points impact of the effective tax rate. Fourth, the value-added tax impact on the insurance sector. Other banks are disclosing the impact for next year. Five, the proposal in the interchange fees, I think Ernesto, that has been already covered. And finally, can you please elaborate on your initial thoughts on these impacts and the potential tailwinds, especially if Mexico reaches the USMCA renegotiation? José Marcos Ramírez Miguel: Yes, that's the bad things. There is also good things. The GDP is going to be [ corporate ]. We still don't know, as we said, the proposal in the interchange fees, so that's out. And regarding the orders, we can work one by one. And yes -- but the insurance sector, we have covered regarding that is not a fit for us. So I see more plus than minus for the next year. Maybe Alex can walk us how we see things for the next year [indiscernible]. Rafa, please go ahead. Rafael Victorio Arana de la Garza: Let me -- Ernesto, let me guide you on the impact of the VAT for the insurance. Remember that Banorte prices the insurance based upon the risk of the client. So we don't have just a single price for that. So I think we could accommodate that impact that the VAT will have based upon this volution that we have. And just before Alex comes and say, look, this year was supposed to be 0 GDP, and we continue to grow on that part. Next year is expected to be somewhat a better year on that part. So there will be headwinds that you mentioned that potentially coming for everywhere. But I would say that if the USMCA goes forward, the tailwind was -- is going to be quite strong. Alejandro Padilla: And yes, this is Alejandro Padilla, Economist. Well, from the macro side and answering some of your questions, first, in terms of GDP, as Marcos was mentioning before, we are holding our 0.5% GDP for this year. We observed a contraction in the third quarter. However, I think that in the fourth quarter, we should see a recovery, why because of what we mentioned before, there are some seasonal factors that tend to be very positive in terms of consumption by the end of the year. Moving forward to 2026, our forecast is 1.8%, and this is supported by several factors. The first one is that we're going to have an inertial growth component of slightly above 40 basis points. Then we expect a recovery in private consumption combined with a rebounding tourism during the summer, this is associated, as Marcos mentioned before, with the FIFA World Cup. This could add between 40 to 50 basis points to growth. Then we have a positive effect on primary activities due to better weather conditions in 2025 that will benefit crops in 2026. The fourth one is that we expect a solid external sector performance as Rafael was mentioning before. Considering that Mexico has an effective tariff rate that is lower than the rest of the world, and this has been supportive of the Mexican exports that have been growing at a 2-digit pace throughout 2025. And I think that although not at the similar pace, but they will continue growing throughout 2026. And the big one is that public construction and also infrastructure projects that the government plans to reactivate as part of its priority programs will be equivalent to almost 1.4 percentage points of GDP, and this could be also beneficial for GDP in 2026. And then if we move into tariffs, well, although Mexico is facing 2 types of tariffs, the specific country tariffs that the U.S. has imposed to Mexico and Canada and the tariffs that are associated with sectoral goods to the rest of the world, the effective tariff in Mexico is less than 7% in the world, is 17.4%. So we have relative position that is stronger vis-a-vis the China and other competitors. So I think that will support exports for the remaining of 2025, but especially in 2026. And then regarding the USMCA, we have a very constructive view in that regard. We believe that Mexico will continue playing a key role within the highly integrated value chains with the U.S. And we think that the review process in 2026 will go in a very positive way taking into account that there is a lot of cooperation and coordination between Mexico and the U.S. and that this will result in a USMCA 2.0 that will allow Mexico to increase its participation in the U.S. market. Tomás Lozano: Now we will continue with Tito Labarta from Goldman. Daer Labarta: A couple of questions. first, just on the Bineo. So there should be no more impairment charges from here, I assume. Is that correct? And would there be any potential tax benefits that you can get from this? And then -- but maybe more importantly, I mean, you sold it to another fintech, I guess, mostly just to get rid of the license and get maybe something in return. But maybe talk a little bit about your own digital operations, how that's evolving, why you feel comfortable selling Bineo and how the whole digitizing the bank is going, particularly as fintechs maybe get a little bit more relevant over time? And then I have a follow-up on provisions after. José Marcos Ramírez Miguel: Thank you, Tito, for the question. First, there is no more impairment charges. That's it. We don't see more -- everything. We don't see any tax benefits on the other hand. So that's it. We won't talk about Bineo anymore. And we learned a lot. There is a lot of experience that we learn. Remember that 4 years ago, we took all the roles, possible roles and we learn from them. So it's obvious that we -- now we are prepared, and we are stronger, and we did take our digital banking inside and whatever. So I don't know if Rafa want to say something else, but yes, there is a lot of learning, obviously. Rafael Victorio Arana de la Garza: Yes. What Marcos mentioned, Tito, is that we learned a lot on that, but what we also discovered that, that it was not just the issuance of having a digital bank from scratch that was supposed to provide that learning process. And I think it did. But the most important thing is that Banorte has a very clear path on how to address the digital evolution that we see on the young people and the newcomers into the banking system with a very good proposition that you will see in the market pretty soon that basically addresses the issues of the newcomers that they really need a lot of financial education and a lot of practical ways to manage the interaction with the client, with the app on that part. And based upon all, of course, that we have learned and all the learning process that we have also in the artificial intelligence part, we will deploy that in a very short period of time to address the capabilities of Banorte to really reach that part of the population that was not really an important, I would say, goal of Banorte for a time because we basically were very happy delivering a very good mobile application for the mid- to the high end of part of the payer mix. But we were losing a little bit on the part that we learned from Bineo and from Rappi, the newcomers into the banking process. But I think we have a very good response to that, and you will see that in a very short period. Daer Labarta: Great. And then my follow-up on the provisions, right? You mentioned the cost of risk excluding isolated case was 1.87%. So it implies the additional provision was about MXN 2.5 billion, if I'm correct when -- is that the right number? And given there could be some guarantees here, do you expect to be able to recover this over time? How quickly? And does the guidance factor in any recovery there? And also, I guess, is this now fully provisioned? Gerardo Salazar Viezca: Yes. Up to now, Tito, it is 45% provisioned. But let me tell you about -- despite this higher provisioning, the intrinsic economic value of the underlying assets and collateral structure supports a favorable recovery outlook. The exposure retains substantial realizable value given the quality, liquidity and marketability of the pledge collateral as well as the borrowers receivable repayment capacity. From a valuation standpoint, internal stress testing and discounted cash flow analysis indicate a higher expected recovery rate, well above typical levels for comparable distress exposures, the assets net present value under conservative recovery assumptions remain significant, limited ultimate loss severity. Accordingly, while the provision reflects a prudent accounting treatment aligned with expected credit loss models, the economic loss expectation is materially lower. This positions the bank to achieve a reasonable recovery ratio as resolution progresses mitigating the impact on capital and profitability metrics. Daer Labarta: Okay. And is that the MXN 2.5 billion the right amount? I had a different number initially, but just want to confirm how much that was the provision for the isolated case? Gerardo Salazar Viezca: Yes. The provision is around 2.2%. Operator: Now we'll take our next question with Marcelo Mizrahi with Banco. Marcelo Mizrahi: So my question is regarding the cost of earnings. So what we see -- we saw very good results coming from that part. And we -- it's important to hear you about the competition, how you guys are thinking about the competition and the cost of funding, why the cost of funding of Banorte is going lower, and it is already impacting the NIM and probably could be some good upside to the next year. So the question is regarding how is the competition? And how do you believe guys that the cost of funding will be in the next couple of quarters? José Marcos Ramírez Miguel: Thank you, Marcelo. I guess the competition -- you're talking about the newcomers, I mean, also, no? Rafa, please go ahead. Rafael Victorio Arana de la Garza: Yes, we continue to see -- as you can see on the funding cost that is going down, not just because of the rates because we are getting rid of expensive funding that we needed when the rate of growth of the asset side really happened to Banorte. Now we are a note we are balanced that with our own funding part. I can give you some numbers on this. So the overall growth of the non-interest bearing demand deposits is around 6%, and it will end the year well above that because of the seasonality of the year. Time deposits also is a pretty good story around 10% with a very reasonable. I would say, price to offer to the client based upon the quality and profitability of the client. So we don't see really the big effect that happened when the new entrance were offering 15%. And that is also going down, and it's becoming a lot more rational on that part. So we continue to see pretty good activity on the funding side, lowering the cost on a permanent basis. And I think. As Alejandro mentioned, next year will be a good activity on the funding side with a very, very balanced cost on the different types of offers that we do for the non-interest bearing and interest bearing deposit. And the mix continues to be quite nice, 31% is in time deposits and 69% in demand deposits. So I think we have a well-positioned bank that provides a lot of services and opportunities for the people. But we see is that we are opening now more new accounts at the branches and on the digital side than any year before. So we continue to see that the clients based upon our model that you can open everything in minutes on digital or in physical, is attracting a lot of good clients, and that is giving us a noninterest-bearing part growth and also the time deposits growth on a very balanced cost. Marcelo Mizrahi: Looking forward, it's possible to maintain you guys believe that if we will see a better environment to growth it's possible to maintain this cost of funding, this percentage compared to the interest rates or not? Rafael Victorio Arana de la Garza: Well, I think so. I think we will continue to keep the funding cost trending down. There's a lot of initiatives all over the place: transactional banking, cash management, SMEs, individuals, all over the place we are looking for funds. Gerardo Salazar Viezca: Let me drop. I would like to make a position regarding the last question of Tito Labarta. Tito, if you are still there -- let me be very precise with the provisioning for the quarter, it's 1.7. José Marcos Ramírez Miguel: Yes. Product specification. Tomás Lozano: We'll continue with Renato Meloni from Autonomous. Renato Meloni: So first I wanted to focus a bit on this decline on the interest-bearing deposits -- was this -- you mentioned that it was some expensive funding that you've eliminated? Was this concentrated or among separate clients? And then your loan-to-deposit rate went to 105%. So I'm wondering if you can still increase leverage here or keep growing with that level. And then just a second follow-up. During the presentation, Rafa was mentioning that the provisions for the credit card business. As far as I understand, would be reversed in the upcoming quarters. So just wanted to make sure that this reversal is happening and why are you provisioning now and then reversing it later? Gerardo Salazar Viezca: Yes. I will tell you, Renato, that from the overall point of view, we see the increase in provisions for credit card loans during the third quarter primarily reflecting the extraordinary expansion of the portfolio. As you remember, Marcos was mentioning a 16.1% growth year-over-year. That's very important to keep into context. And this effect is mechanical and volume-driven as provisioning is applied to a larger base of forming assets, particularly those in early stages of seasoning that naturally carry higher model probabilities of default. Importantly, delinquency rates and risk metrics remain stable across cohorts or clusters and that confirms that the high provisions stem from the portfolio growth and composition effect. Another factor that we must take into consideration for this third quarter should be the extraordinary provisioning with Tarjetas del Futuro credit card portfolio. And this effect is expected to be reversed in the short term due to model calibration. And that's the quantitative effect that Rafa was mentioning is MXN 400 million. So we expect a reversion, but this is not just mean reversion, but reversion in absolute value of around MXN 400 million in provisions. Rafael Victorio Arana de la Garza: Yes. You mentioned about the interest-bearing deposits, remember that Banorte had a very strong years, 2 years ago on the loan growth that really, really overshoot concerning our capacity to fund the book. So that created a need to go into the market and go for market funding. Now that we have been growing the funding side in a very important way, and we are now very balanced assets against liabilities, we have the capacity to get rid of funding that is not necessary anymore. And it was much more expensive against the funding that we can really go into the market today or keeping the growth on the natural funding side on the interest-bearing deposits, retail deposits, commercial and SME deposits. So that's the reason that you will continue to see an expanding size on the -- or the size of the deposit or the deposit growth, but also with a much better price in the coming months based upon the trend that we see in the noninterest-bearing and the trend that we continue to see on the time deposits with a very reasonable rate that really reflects the value and the different values that we provide to our clients. So I think we are getting again into a very balanced position. And you can see that easily on the LDR. You will see that, by the end of the year, the LDR will also drop again around 98%, 97% with a very good funding costs for the year. Tomás Lozano: We'll continue with Daniel Vaz from Safra. Daniel Vaz: Congrats on the strong NIM performance, I was looking at the sensitivity right now is practically 0. So you have been able to expand margins in this easing rate environment. It's quite impressive. And to face, well, I think, Ernesto mentioned, the negative headwinds. You see the funding benefits that you mentioned, you see better GDP? And I want to focus on the favorable loan mix as your consumer lending has been outpacing the portfolio, right? So on retail, looking ahead to 2026, you're growing now 12% year-over-year, right? So on the consumer portfolio, and well above this in car loans and credit cards. I saw -- I noted some acceleration in payroll and mortgage. I think it's normally much more important and tend to perform better on lower interest rate scenario. So my question is, do you see room for this portfolio -- this consumer portfolio to expand above this current base of 12% for the next year? And maybe if that -- it's a follow-up question, would it be enough to guide the market to NIMs even better than your guidance in 2025? José Marcos Ramírez Miguel: Thank you, Daniel. You're pushing the bar too high, but it seems that, yes, there is room for improvement. Yes. We think that next year, we will grow double-digit growth in our portfolio. And we will release that in January, I guess, next year. But yes, we're -- let's call it that way. We are optimistic and documented optimistic. So we expect a good year next year, and we are working on that and that we need to handle a lot of things internally. But it seems that it's going to be a good year, and we are expecting -- and yes, we can grow more than in the consumer portfolio next year, the answer is yes. And the better NIMs, we're happy with the NIM that we have right now, but maybe you can improve them a little bit. That's right. I don't know, Rafael, you want to say something? Rafael Victorio Arana de la Garza: The only thing that I would add is that we see a big opportunity on the payable portfolio. We are launching a lot of improvements on the value proposition on the payable portfolio, and it linked with the commercial and the corporate and the government and the retail part. So the payroll will be a good story. Credit cards continue to be, I would say, the most efficient product to be -- to be acquired in the market and also on the benefits. If you walk into one of our offices and you decide to go into the offices and in 5 minutes, you will get your credit card, the credit card that you like and based upon your profile on that. But if you want to go into the mobile, it would be exactly the same. You will get your digital credit card in less than minutes, in 5 minutes. And then if you want to get your card in physical, that we'll send it to you in a very short period of time. So a lot of improvement on the process side allow us to compete in a better way. And being the first in the market by the response to the client, that gives us an edge that we have been using in this. And also, we are adding more and more value into the propositions for the client to become really a very related client to the bank in cross sell. We expect cross-sell to keep increasing an important way. The hyperpersonalization process that we are using by providing each of the clients base of the risk of the client and the value of the client of what they are outside with us, that is allowing to bring a lot of good clients into the bank. So the processes are in place and improving. I think the analytics are in place and it's very, very relevant the way we do this. And the pricing also, we price every single client differently based upon the risk and potential value for the bank. So that is what really is driving the growth on the consumer. It's not just pure demand, it's that really the value proposition that we are offering on a client-by-client and basis is being the difference in the market. Operator: Now we'll go with Andres Soto from Santander. Andres Soto: My question is regarding some comments that you guys have already made in terms of GDP growth and loan growth for next year. I understand you are expecting rebound to 1.8%, and you expect loan growth to remain at double digit in 2026. I would like -- given that 1 important consideration there is the USMCA renegotiation, I would like to understand what is your expectation in terms of timing for this? Do you expect next year to be and even year in terms of growth? Or do you expect most of the growth to be delivered in the second half of the year given this expectation? And also tied with that, how these shape of recovery will translate into your cost of risk performance over the next few quarters? Alejandro Padilla: Thank you, Marcos. Thanks, Andres. Well, we think that's going to be pretty balanced, the growth dynamics for 2026. Regarding your question about the USMCA review, well, according to the agreement, it will officially start on July 2026. However, some issues have already been addressed by Mexico and by the U.S. as well, like, for example, making the consultations with industry leaders and designing the whole negotiating process. So I think that although it's going to be difficult to have the complete agreement by 2026, we can have a very good idea of what's happening on a sectorial basis. I think it will depend also on midterm elections in the U.S. and how President Trump sees the result for the Republican party because on that, it will depend if he goes and tries to reach a faster agreement or not. Regardless of that, I think that by the third or fourth quarter of 2026, we will have a very clear idea of what's going to happen with the USMCA 2.0. And I think this is going to be positive in terms of investment, for example, that has been one of the main sectors in Mexico that have been lagging behind, obviously, for the uncertainty coming from tariffs, but I think that the 2026 can be a good turning point in the price relationship between the Mexico and the U.S. And that's why we are optimistic and our GDP number of 1.8% contemplates that idea. I don't know, Rafael, you want to go through the loan question. Rafael Victorio Arana de la Garza: On the baseline of a scenario of a 1.8% GDP growth, the cost of risk is expected to remain contained around the same interval between 1.8% and 2%. This is going to be supported by several structural and cyclical factors that are favorable to the bank. On the structural side, the institution benefits from a very well-diversified loan portfolio. We have to remember that. And also a conservative underwriting framework and enhanced early warning and collection models that include to improve -- that continue to improve risk discrimination and recovery rates. Cyclically, stable employment conditions, moderate inflation and gradual easing of interest rate should sustain borrower affordability and credit performance, and particularly on -- in the payroll and mortgage segments. Furthermore, the ongoing optimization of provisioning models after calibration adjustments in 2025 will likely normalize credit cost levels, and that's our expectation. Let me tell you that, Andres, overall, these dynamics suggest that despite modest economic expansion, the bank's cost of risk should remain within historic range, reflecting both prudent risk management and resilient asset quality fundamentals. Andres Soto: If I may, a follow-up question to Alex. In this 1.8% GDP growth expectation, what are you considering in terms of private investment? And I imagine this is mostly dependent on the USMCA renegotiation? Or is there any other factors that make you optimistic about private investment recovery in 2026? Unknown Executive: Well, that's a very good question, Andres, and I can tell you that our forecast in terms of private investment will be highly correlated with the investment that the government will deploy throughout 2026. As I was mentioning before, in the budget of 2026, the government is planning to spend close to MXN 500 billion, 1.3 percentage points of GDP on infrastructure and -- well, I think that's plan Mexico and other type of mix programs between the private and public sector will be deployed in 2026 as well. So I think that's positive. And the second 1 is that, yes, I think that we might see some firms that will start doing some CapEx taking into account more certain scenario in terms of trade between the U.S. and Mexico. So all of these are contemplated into our 1.8% GDP forecast for 2026. Operator: Now we'll take Edson Murguia with from Summacap. Edson Murguia: Okay. I'm not sure if I'm listening. But I have 2 questions. One is specifically for Dr. Salazar. Could you give us a little bit more color about this calibration model, specifically in the consumer loan book? Because you mentioned Dr. Salazar, this was related to calibration, but could you elaborate a little bit more? And my second question is regarding on the brokerage business. Could you give us a little bit more color about why total assets has a reduction this quarter, but the AUM increase stop trying to figure out the rationale between the business, per se. José Marcos Ramírez Miguel: Let's go with the first one. Rafael Victorio Arana de la Garza: Yes. The bank is continuing to refine it's retail credit risk models. And that is to enhance the accuracy or expected loss estimation across consumer and payroll portfolios. The ongoing calibration process incorporates updated behavioral data, revised macroeconomic assumptions and recent portfolio performance trends that assures that the probity of default and loss given default parameters reflect current risk conditions more precisely. And that always gets proven by statistics like called Kolmogorov-Smirnov, the KS, receiver operating characteristics, ROCs, also the area under the curve and R-squared. So if data is telling us that we have permission to calibrate our models, we will go ahead and do it because this is always data and model based. Remember, we use in the retail side of our loan portfolio around 120 internal credit risk models. And they go all the way from different segments, different products around also different clusters of the markets that we are attending. Tomás Lozano: And the second part, Edson, remember that we do see the position between bank and brokerage and we have movements every day or every quarter. So I think it's really not material to see a movement in any of the isolated books. Edson Murguia: Okay. And last, just a clarification. Marcos, you mentioned that the dividend that is going to propose to the extraordinary shareholder meeting is going to be MXN 60.99, or it's going to be MXN 0.90? José Marcos Ramírez Miguel: No, MXN 0.99, sorry about that. Tomás Lozano: You can find the full information if you want in the assembly. Now we'll continue with Carlos Gomez from HSBC. Carlos Gomez-Lopez: First of all, congratulations on your first 125 years of existence many more to come, I hope. Second, in particular, you mentioned the interchange fee, and that is still to be negotiated. However, what is not negotiated, we understand is the nondeductibility of the IPAP contribution. Could you comment on that and would you expect that partially or totally to be passed on to deposit costs? And if Tomas doesn't kill me, just follow-up on the growth question. We understand that you expect better 2026. But when we look at the numbers right now, we seem to be slowing down, at least that is our perception. Is that what you see? Do you see the economy, which is still getting slower, and you expect it to recover during 2026, or you have already started to see a recovery? José Marcos Ramírez Miguel: Let's start for the -- as you can see it's not only Mexico, a lot of countries, they have these regulations, so, we need to live with that. And maybe part of this is going to be passed on and maybe we will, I don't know how to say the word, swallow it. But it is what it is. And for the next year, you will see it on the guide and it's going to be included there. But we don't see that affect us too much. That's the correct answer. We don't like specific taxes, but -- but this is -- if you see in other contracts they have it, so we will manage it. And the second one. First, Rafael... Rafael Victorio Arana de la Garza: Carlos, we -- if you look at the consumer book from the October numbers are pretty, pretty strong, even stronger than the September numbers. So we haven't seen any slowdown in the consumer at all. On the contrary, we continue to see very strong numbers coming from the consumer. And at the same time, very active now is the government book and also dollar book starts to come alive again. So no, we haven't seen as much... José Marcos Ramírez Miguel: Alex? Unknown Executive: Yes. And well, regarding the GDP question, yes, Carlos, as you notice, the third quarter GDP came in with a mild contraction. However, with some high-frequency indicators. This suggests that we might see a rebound in the fourth quarter. Indeed, we are expecting an increase of 0.3% on a quarterly basis. And this is mainly by some more positive drivers coming from consumption, which has been lagging throughout 2025, but we are starting to see some recovery. So I think that this trend can extend into 2026, this recovery that we might observe throughout the fourth quarter of this year. Tomás Lozano: We have a follow-up question from Bradesco. Marcelo, please go ahead. Marcelo Mizrahi: So regarding the efficiency, so the efficiency ratio are thinking about expense into the next year. I believe that the sale of Bineo could bring some upside to the efficiency ratio in the next year or even in the next few years. Could you guys give us some color about that target or something about that? Rafael Victorio Arana de la Garza: Yes. The fact is that by canceling the operation of Bineo, you will see that basically, what we put on the group today on the -- what was the impact of the Bineo operation, we think that just to give you an idea that based upon the cost savings, we will recover that in 7 months. So that gives you an idea of how the evolution of the efficiency ratio comes. Also, once we get the go from the regulators, the Rappi operation will be included into the scale of Banorte. So that will be also a reduction in cost. And the most important part is that when you will look at the recurring days of cost of Banorte and what was Bineo and Rappi adding was close to 5 percentage points. So we started to go down to 3 percentage points less in the coming year. Just based upon on these 2 operations, plus efficiencies that we can we can achieve. So you will start to see -- now it's in 1 single digit, but it's in uppers 1 single digit. You will see those numbers trend from the 7% to the 8% from the next year and then drop again to very close to inflation plus 150 basis points by the third year. That's the evolution that is on the efficiency ratio. Tomás Lozano: Thank you very much. Thank you for your interest in Banorte. With this, we will conclude our presentation. Thanks.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Novo Nordisk Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacob Rode, Head of Investor Relations. Please, go ahead. Jacob Martin Rode: Thank you. Welcome to this Novo Nordisk Earnings Call for the First 9 Months of 2025. My name is Jacob Rode, and I'm the Head of Investor Relations. With me today are CEO of Novo Nordisk, Mike Doustdar; Executive Vice President, Product and Portfolio Strategy, Ludovic Helfgott; Executive Vice President, U.S. Operations, Dave Moore; Executive Vice President, Research and Development and Chief Scientific Officer, Martin Holst Lange; and Chief Financial Officer, Karsten Knudsen. All speakers will be available for the Q&A session. Please note that the call is being webcasted live, and a recording will be made available on our website as well. The call is scheduled to last a little more than 1 hour. Please turn to the next slide. The presentation is structured as outlined on Slide 2. Please note that all sales and operating profit growth statements will be at constant exchange rates unless otherwise specified. Next slide, please. We need to advise you that this call will contain forward-looking statements. These are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For further information on risk factors, please see the company announcement for the first 9 months of 2025 as well as the slides prepared for this presentation. And with that, over to you, Mike, for an update on our strategic aspirations. Maziar Doustdar: Thank you, Jacob. Next slide, please. In the first 9 months of 2025, we delivered 15% sales growth and 10% operating profit growth. We've also narrowed our guidance range to 8% to 11% on sales and 4% to 7% for operating profit. This is because we expect lower growth for our GLP-1 treatment in diabetes and obesity. Karsten will get back to the guidance update later in the call. Looking into the R&D in diabetes, Rybelsus is now approved in the U.S. and EU with CV indications based on the SOUL trial. Within obesity, and business development, we have progressed on a number of projects that Martin will come back to later. In rare disease, we have now submitted Mim8 for regulatory approval in both U.S. and EU. We're now serving around 46 million people living with diabetes and obesity. This is around 3 million more people with our GLP-1 treatment compared to just 12 months ago. Furthermore, I would like to note that 2025 strategic aspirations is our current framework for reporting, and we look forward to updating this next year as the current strategic aspiration runs out. Next slide, please. Since I became CEO, I have said several times that Novo Nordisk will sharpen its focus on core areas, specifically diabetes and obesity. I want to take a moment to explain how we have refined our strategy. For more than 100 years, we have been guided by a simple purpose: to identify and solve major unmet medical needs. This commitment is unchanged. There are many people who can benefit from expertise in diabetes and obesity, and we believe we can serve them better than anyone else. Going forward, we will concentrate on these areas where we can make the greatest difference. Our strategy begins with patients at the center of everything we will do. Way more than 1 billion people are affected by diabetes or obesity. We will work tirelessly to develop products that help them live healthier, fuller lives. Some of these products will be developed internally. Others will be added to our portfolio through partnerships and acquisitions. Many of these assets can address multiple unmet needs. We will explore those opportunities and expand indications where appropriate to serve our patients. Speaking of patients, it is a known fact that obesity and diabetes vary by individual and often comes with comorbidities that lack effective treatments. As with the Akero acquisition, Novo Nordisk will keep pursuing innovation with identification within research and then advancing those to development to address comorbidities within our core and the overlaps with those cores. We are now shaping our focus -- sharpening our focus. In the past, we spread our resources into areas a bit further away from our core. Think about stem cell research for Parkinson's disease. Therefore, during this last quarter, we have discontinued several noncore assets and redirected resources to areas aligned with our strength. We will intensify our commercial efforts to strengthen competitiveness. To meet evolving market dynamics and increasingly consumer-like behavior, we will, for example, expand telehealth capabilities across markets. In short, we remain disciplined about where we will compete within diabetes, obesity and related comorbidities in the years ahead. We will also continue our targeted research and commercial work in rare disease. And to support this strategy, we have launched a company-wide transformation, which I would like to give you an update on its progress right now. Please go to the next slide. We previously announced a company-wide transformation designed to simplify our operating model, accelerate decision-making and reallocate capital and resource towards the highest growth opportunities in diabetes and obesity. This program supports our strategy to capture rising global demand and strengthening our competitive position in the increasingly consumer-like obesity market. As part of the plan, we expect a reduction of approximately 9,000 positions globally. While this decision was not taken lightly, it is expected to drive approximately DKK 8 billion in annual savings by the end of 2026. Those savings will be redeployed to expand our diabetes and obesity franchises and fund strategic priorities. We recognize the human impact of these changes and remain committed to responsible transition for affected colleagues. At the same time, we're confident this transformation will increase operational efficiency and strengthen our long-term future and enhance return for our shareholders. I will now hand over to Ludovic for an update on our commercial execution for the first 9 months of 2025. Ludovic Helfgott: Thank you very much, Mike, and please turn to the next slide. In the first 9 months of 2025, our total sales increased by 15%. The sales growth was driven by both operating units. U.S. operations grew 15% and international operations grew 16%. Sales growth in the first 9 months of 2025 was positively impacted by one-offs in the U.S. of around DKK 6 billion. Our GLP-1 sales in diabetes increased by 10%, driven by both operating units growing at the same rate. Insulin sales increased by 3%, driven by U.S. operations growing 18%. The sales increase was positively impacted by gross to net adjustments related to prior years as well as channel and payer mix. This was partially countered by a decline in volume. International operations sales decreased 2%. Obesity care sales increased 41%, driven by U.S. operations growing 24% and international operations growing 83%. Our rare disease sales increased by 13%. This was driven by sales increase in the U.S. of 14% and in international operations of 13%. Next slide, please. Sales in international operations grew by 16% in the first 9 months of 2025, driven by GLP-1 products. GLP-1 diabetes sales increased by 10%, driven by sales growth of Ozempic and Rybelsus. In Region China, GLP-1 diabetes sales decreased by 4%, which was negatively impacted by wholesaler inventory movements. Obesity care grew by 83% to DKK 22.4 billion. Sales of Wegovy reached approximately DKK 20 billion growing at 168%, driven by sales growth across all regions. Please go to next slide. In the combined diabetes and obesity GLP-1 market, Novo Nordisk remains the market leader in international operations with a volume market share of 68%. Rybelsus is now available in more than 40 countries, and Ozempic continues to be the leading GLP-1 diabetes product within international operations have been launched in around 80 countries. In obesity, Wegovy is now launched in more than 45 countries with more to come. Oral semaglutide 25-milligram or Wegovy in a pill has been submitted in the EU for potential launch in selected EU markets. The GLP-1 class growth of 35% in international operations is encouraging. And while competition in diabetes and obesity across international operations is intensifying, the unmet needs remain substantial. And with that, I would like to hand it over to Dave for an update on our U.S. operations. David Moore: Thank you, Ludovic. Please go to the next slide. Sales of GLP-1 diabetes care products in the U.S. increased by 10% in the first 9 months of 2025. The sales increase was driven by continued uptake of Ozempic, partially countered by Victoza and Rybelsus. Ozempic sales in the U.S. were positively impacted by gross to net sales adjustments and wholesaler stocking. Weekly Ozempic prescriptions are currently around 670,000 in standard units compared to 690,000 standard units in the second quarter of 2025. The GLP-1 diabetes market grew around 10% in the third quarter of 2025 compared to the third quarter of 2024. In the U.S., we continue to invest in commercial activities and have recently launched Ozempic in our direct-to-patient cash offering. Please go to the next slide. Wegovy sales increased by 25% in the U.S. operations in the first 9 months of 2025. The Wegovy sales growth was driven by increased volumes, partially countered by lower realized prices. Wegovy has around 270,000 weekly prescriptions compared to 280,000 weekly prescriptions at the end of last quarter. In August, we announced that the U.S. FDA approved Wegovy for the treatment of MASH. In U.S. operations, we have established a sales force targeting U.S. hepatologists and gastroenterologists while we work to build access in this segment. Generally, we also continue to work on expanding access to safe and authentic Wegovy. Around 55 million people with obesity have Wegovy coverage in the U.S. with more than 10 million people estimated to be covered with Medicaid. However, looking into 2026, Several states have already announced changes to coverage for obesity medicines in response to budgetary concerns, which will affect Medicaid access to Wegovy. Regrettably, Novo Nordisk market research shows that compounding has continued to increase. Multiple entities continue to market and sell compounded GLP-1s and it is now estimated to be well above 1 million patients in the U.S. that are currently on compounded GLP-1. Novo Nordisk launched NovoCare Pharmacy in March of 2025 and together with retail channel, total cash market is up around 10% of total Wegovy prescriptions. Novo Nordisk will continue to invest in the expansion of direct-to-patient initiatives like the recently announced collaborations with GoodRx and Costco. We continue to anticipate a regulatory decision regarding Wegovy in a pill later this year, which then we will be ready to launch in early 2026. Now back to you, Ludovic. Ludovic Helfgott: Thanks, Dave. Please turn to the next slide. Yesterday, we confirmed that we submitted an updated proposal to acquire Metsera to further strengthen our research and development portfolio in diabetes and obesity. As we said before, unlocking the full potential of the obesity market will require a broad and deep portfolio with different treatment options, formats, serving differentiation groups and their very different preferences. Obesity treatment is still in its early stage. And in Novo Nordisk, we foresee future patient segments that, for example, could be categorized based on BMI, age, gender, lifestyle behaviors and comorbidities. We believe that Metsera's innovative pipeline would further enhance our opportunity to meet all these very different needs of all these very different groups. MET-097 is a potential best-in-class once-monthly GLP-1 treatment and MET-233 is a next-generation amylin asset. The pipeline of Metsera also includes a combination of the 2 mentioned above as well as innovative oral and injectable preclinical assets. Furthermore, Metsera's institutional knowledge and capabilities around peptide engineering and synthesis, half-life extension technologies and oral peptide delivery nicely complements Novo Nordisk's core strength in research. The proposed deal structure includes an upfront payment of USD 62.2 per share in cash, equal to an approximate enterprise value of USD 6.7 billion. The cash consideration is paid at signing in exchange for nonvoting preferred stock, representing 50% of Metsera's shared capital. In addition, up to USD 2.8 billion in contingent value right CVRs will be issued upon the closing of the acquisition in exchange for the remaining shares. The CVRs are based on the achievement of certain clinical and regulatory milestones. In total, Metsera is eligible to receive up to USD 10 billion or USD 86.2 per share. Novo Nordisk believes that the proposal, including the structure of the transaction complies with all applicable laws and is in the best interest of patients, who will benefit from our commitment to innovation as well as Metsera's shareholders. The offer highlights Novo Nordisk's commitment to investing in the U.S. and interest in continuing to grow the scale of its U.S. investment. Now over to you, Martin. Martin Lange: Thank you, Ludovic. Please turn to the next slide. As Mike described, we are intensifying our focus on key therapeutic areas such as diabetes and obesity, while continuing our commitment to related comorbidities as well as rare disease. The strategy aligns with our recent acquisition agreements of Akero and Omeros' zaltenibart assets. In early October, we announced the agreement to acquire Akero's efruxifermin, a once-weekly subcutaneous long-acting FGF21 analog with potential to be first to market in F4 and best in class. Efruxifermin complements a strategic position in Novo Nordisk MASH pipeline. Current treatment options such as Wegovy, primarily target patients with F2 and F3 disease states. Consequently, there remains a significant unmet need in the F4 cirrhosis population, for which no approved therapies are currently available. The Phase II data for efruxifermin are encouraging across F2 to F4. Specifically, the SYMMETRY Phase IIb trial demonstrates that after 96 weeks of treatment, 29% of F4 patients show improvement of at least 1 fibrosis stage with no worsening of MASH and 42% achieved MASH resolution with fibrosis -- without fibrosis worsening. This is the first Phase II trial to show statistically significant fibrosis regression in F4 patients for an FGF21 analog. Efruxifermin is currently in the Phase III SYNCHRONY program with pivotal readouts in the coming years and expected launch by the end of this decade. As a result, efruxifermin has the potential to be first-in-class FGF21 analog targeting the F4 population as well as playing a role in F2 and F3 patients, including people who are not responsive to existing treatments. We look forward to leveraging our capabilities to further optimize the SYNCHRONY program trials, assess the potential combinations with our current GLP-1-based portfolio and explore opportunities for additional indications such as alcohol liver disease. Also in October, we announced the agreement to acquire the clinical stage MASP-3 inhibitor zaltenibart from Omeros for rare blood and kidney disorders. This action aligns with the rare disease strategy with a key focus on rare blood disorders. Zaltenibart is currently in Phase II for the acquired rare blood disease paroxysmal nocturnal hemoglobinuria or PNH. Plans are in place to begin a global Phase III program for zaltenibart in PNH. The molecule holds big potential in a number of additional indications within rare disease and kidney disorders, which will be evaluated at a later point in time. We believe our extensive expertise in the development, manufacturing and commercialization of medicines within these fields makes us well positioned to advance these assets, optimize the value of their innovation and ensure they reach the patients in need of these treatments in a very timely fashion. Please turn to the next slide. Looking towards our internal pipeline, we recently published a sub-analysis of REDEFINE 1, focusing on cagrilintide. In the trial, cagrilintide achieved 11.8% weight loss at 68 weeks, assuming full treatment adherence. About 1 in 3 patients on cagrilintide lost at least 15% of their body weight. Overall, cagrilintide was very well tolerated. The most common side effects were gastrointestinal of nature. And the discontinuation rate due to gastrointestinal adverse events was 1.3%. Obesity is a global challenge that requires continued scientific innovation. More treatment options also focusing on tolerability are needed to meet their diverse individual needs and preferences. We are very encouraged by the first Phase III data for cagrilintide from REDEFINE 1, and we look forward to studying it further in Phase III, the so-called RENEW program. RENEW 1 and RENEW 2 will assess the 2.4 milligram dose in people with obesity with and without type 2 diabetes, respectively. Both trials have already been initiated and additional studies evaluating higher doses of cagrilintide are anticipated in the beginning of first half of 2026. Please turn to the next slide. Turning to the upcoming R&D milestones. We're looking forward to the remainder of 2025 with a number of readouts and milestones. In the first half of 2026, we anticipate the readout of the REIMAGINE 3, which is the first of 3 pivotal trials for CagriSema and people with type 2 diabetes. REIMAGINE 3 is a smaller study with CagriSema as an add on to basal insulin. REIMAGINE 2 is the largest study, which will provide comparison to semaglutide and will read out in the first quarter of 2026. We also look forward to the Phase II results of the subcutaneous and oral amycretin in type 2 diabetes in Q4 this year. Within obesity, we completed the Phase I trial with our internal GLP-1/GIP/amylin triagonist. The study assessed the safety, tolerability, pharmacokinetics and pharmacodynamics of the triagonist in the trial. All multiple doses tested appear to have a safe and well-tolerated profile. The result of this study allowed progression to a Phase Ib/II trial in individuals with overweight obesity, which was initiated in October of 2025. Looking forward, we expect the FDA decision regarding the new drug application for the Wegovy pill by the end of this year. Further, the submission of CagriSema as well as the readout of the REDEFINE 4 trial remains on track for the first quarter of 2026. Within rare disease, we have filed Mim8 as once monthly, once every 2 weeks and once weekly prophylaxis treatment to prevent or reduce the frequency of bleeding episodes in people with hemophilia A with and without inhibitors for regulatory approval in the U.S. and in EU. Finally, we anticipate the results of the evoke trials in patients with early Alzheimer's disease later this year. While there are a number of high unmet need for the treatment of Alzheimer's disease, it is important to remind you that this represents a high-risk opportunity. And as the very final remark, while it is not on the slide, I would be remiss if I don't mention that the first readout of ziltivekimab is anticipated to read out in the second half of 2026. With that, over to you, Karsten. Karsten Knudsen: Thank you, Martin. Please turn to the next slide. In the first 9 months of 2025, our sales grew by 12% in Danish kroner and by 15% at constant exchange rates, driven by both operating units. In the third quarter, DKK 9 billion in costs related to the restructuring was booked. The gross margin decreased to 81.0% compared to 84.6% in 2024. The decline in gross margin mainly reflects impact of around DKK 3 billion from the one-off restructuring costs and impairments related to a few production assets. Further cost of goods sold are impacted by amortization and depreciations related to Catalent as well as costs related to ongoing capacity expansions. Sales and distribution costs increased by 12% in Danish kroner and by 15% at constant exchange rates. The increase in costs is driven by both U.S. operations and international operations and is primarily related to Wegovy S&D costs are impacted by one-off restructuring costs of around DKK 2 billion. Research and development costs increased by 9% in Danish kroner and by 10% at constant exchange rates. This reflects increased R&D activity across the early and late-stage portfolio, particularly within obesity care. R&D costs are impacted by one-off restructuring costs of around DKK 4 billion and impairments related to the closure of early noncore projects to free up resources for projects in core therapy areas. This is partially countered by the impairment loss related to ocedurenone of DKK 5.7 billion and other impairments of intangible assets in 2024. Operating profit increased by 5% measured in Danish kroner and by 10% at constant exchange rates. Operating profit adjusted for costs related to the restructuring increased by 16% measured in Danish kroner and 21% at constant exchange rates. Net profit increased by 4% and diluted earnings per share increased by 4% to DKK 16.99. Free cash flow in the first 9 months of 2020 was DKK 63.9 billion compared to DKK 71.8 billion in the first 9 months of 2024, driven by increased capital expenditures. And finally, in the first 9 months of 2025, we have returned DKK 53 billion to shareholders, mainly through dividend payments. Please go to the next slide. For 2025, sales growth is now expected to be 8% to 11% at constant exchange rates. The new range reflects lower expectations for sales growth of our GLP-1 treatments in diabetes and obesity. Given the current exchange rate versus the Danish kroner, sales growth reported in Danish kroner is expected to be around 4 percentage points lower than constant exchange rate growth. In international operations, the updated outlook reflects current growth trends driven by GLP-1 penetration in diabetes and obesity, partially offset by intensifying competition within both diabetes and obesity. In U.S. operations, the outlook is based on current prescription trends for Wegovy and Ozempic as well as intensifying competition and pricing pressure within both diabetes and obesity. Operating profit is now expected to be 4% to 7% at constant exchange rates, negatively impacted by DKK 8 billion in restructuring costs. Given the current exchange rates versus Danish kroner, growth reported in Danish kroner is expected to be around 6 percentage points lower than at constant exchange rates. The narrowing of the guidance range mainly reflects the lower sales growth outlook and costs related to the agreed acquisition of Akero and Omeros, partially countered by reduced spending. Novo Nordisk expects net financial items to show a gain of around DKK 2.6 billion, driven by gains on hedged currencies, whereas capital expenditure is now expected to be around DKK 60 billion driven by adjustments to expansion plans. Free cash flow is now expected to be DKK 20 million to DKK 30 billion, reflecting lower-than-expected trade receivables in the U.S. and reduction in capital expenditure. Furthermore, the free cash flow guidance assumed an impact from the acquisition of Akero contingent on final timing of closing. Potential financial impacts related to the potential acquisition of Metsera has not been included. For the coming years, Novo Nordisk has previously informed that the compound patent expiry of semaglutide molecule in certain countries in international operations is expected to have an estimated negative low single-digit impact on global sales growth in 2026. In 2026, the agreed acquisition of Akero is expected to lead to increased R&D costs with an estimated negative impact on full-year operating profit growth of around 3 percentage points depending on the timing of closing. Lastly, Novo Nordisk accepted the Inflation Reduction Act maximum fair price, MFP, for Ozempic, Rybelsus and Wegovy in Medicare Part D for 2027. The estimated direct impact of semaglutide MFP in Medicare Part D had it been introduced first of January 2025, would have been a negative low single-digit impact on global sales growth for the full year of 2025. The MFPs for semaglutide will be effective as of 1st of January 2027 in Medicare Part D in the U.S. That covers the remaining details on the outlook for 2025. Now back to you, Mike. Maziar Doustdar: Thank you, Karsten. Please turn to the next slide. It's been a busy and productive quarter. Throughout the first 9 months of 2025, we delivered 15% sales growth and nearly 46 million people are now benefiting from our treatments. We have also advanced our R&D pipeline, launched a company-wide transformation program and announced a few strategically aligned R&D acquisitions and agreements. With that, back to you, Jacob. Jacob Martin Rode: Thank you, Mike. Next slide, please. And with that, we are now ready for the Q&A, please. [Operator Instructions] So with that, operator, let's take the first question, please. Operator: [Operator Instructions] And your first question comes from the line of Carsten Lønborg Madsen from Danske Bank. Carsten Madsen: I think I'll start -- I have two. I'll start out with sort of a relatively basic question for Mike now that it's the first time you have your sort of a real quarterly conference call here. If we look at your roadshow presentation, you can see that in the combined obesity and diabetes market, the GLP-1 market, you lost 9 percentage points global market share over the last 12 months. That's quite a massive loss of share. We obviously knew about this trend. But still, when you look at what you can actually do in terms of strategic initiatives to turn this around, what is it the intangible initiatives that you are thinking about implementing? You tried pricing in U.S. in Q3. It doesn't really seem to have a sort of a big delta effect on your momentum in the U.S. market. So maybe if you could give some examples. And question two is for Karsten. The acquisitions you have done or are planning to do will lead to sort of a quite significant cash outflow, especially if you get the Metsera. So if you have Akero, Metsera, you have CapEx, you also need to pay dividends next year, I assume. Is there anything you can talk about the capital planning, capital allocation and also how high in the hierarchy is the dividend payout ratio in terms of being extremely important for our investors, of course? Jacob Martin Rode: Very good. Thanks for those two questions. On the first one on market share development and perhaps market growth also will turn to you, Mike. Maziar Doustdar: Thank you very much, Carsten. So as someone who has been part of the commercial organization for so long, then I would not lie and say I don't like losing market share. But our job right now is to focus the company's strategy around diabetes and obesity predominantly because we see a huge expansion potential as we go forward. We are expanding our pipeline through our own activities as well as, of course, acquisitions. We are getting our costs under control to invest and really make sure that no stone is unturned and we're really putting most of our efforts at this point in expanding the markets. There are millions and millions of diabetes and obesity patients out there, including in the U.S. that are not getting their treatments. Launching new products like our Wegovy pill is one way to go get there. Other ways is through increasing our commercial partnerships. You have seen Costco, Walmart, GoodRx, LifeMD, Ro, all of those are ways for us to expand the market and really make sure that through that we succeed and have a successful future. But it does take time for those measures to take effect. It's a marathon, as I have said a number of times now, not a sprint. Jacob Martin Rode: Thank you, Mike. And for the second question on capital allocation, we'll turn to you, Karsten. Karsten Knudsen: Yes. Thank you for the capital allocation question. We have a clearly articulated capital allocation framework, which is invest in the business, provided attractive return, pay out dividend in a consistent manner, do pipeline additions through BD and M&A and finally, if excess cash, do share buyback. So that's our framework, which has remained unchanged for quite a while. And with that, I'm saying that we do have a consistent approach on dividend and have no intention of changing that. The starting point is clearly to convert our earnings into cash flow, which we focus on each and every day. And then looking at value-generating opportunities, both organically and inorganically as in the case with Akero as an example. So I hope that's clear. Back to you, Jacob. Jacob Martin Rode: Thank you, Karsten. And also thanks to you, Carsten, for the two questions. With that, operator, let's turn to the next set of questions, please. Operator: Your next question comes from the line of Peter Verdult from BNP Paribas. Peter Verdult: Two questions, please, for Mike and Martin. Mike, don't shoot the messenger, but there are many people that view your pursuit of Metsera as an implicit signal that the -- or your confidence in the internal pipeline has waned over the past 12 months. My question is, where do you see the clinical differentiation between the assets you're looking to acquire versus a cagri, CagriSema and amycretin. Is it just the multi-dosing angle? Or are there other factors at play? And then secondly, and this is a very simple question. But we've heard overnight from our network that Novo has been contacted by FTC for information relating to Metsera, I know you're not going to go into any details, but can you at least confirm if this is actually the case? Jacob Martin Rode: Thank you, Pete. And on the first question, on Metsera, we'll turn to you first, Mike, and then Martin, you can add on the different assets. Maziar Doustdar: Thanks very much, Pete. I would say, Pete, that I am very excited about our own pipeline. I think we have a fantastic pipeline. But when you have an ambition to go to hundreds of millions of people and treat them, then no pipeline is broad enough. So we have been looking at Metsera for a long time. We are very excited about these assets. The proposal to acquire Metsera really supports our long-term strategy. And it's mainly because these assets are differentiated and complemented to our products and portfolio. That's why we are doing it. I'll pass it on to Martin, who can more easily explain you the differentiation to our own assets, but I would say it works very complementary to what we have. Martin Lange: I can only echo that. What we are looking for is complementary to our pipeline. You've heard us speak to many, many times, obesity is not just one disease, it's many different diseases with many different presentations. Different patients coming in with different age, different BMI, different behaviors, different needs, different body composition and different comorbidities. They have different focus areas. And for us to really serve the full palette of patients suffering for obesity and their comorbidities, we need a diversified pipeline. What we've seen is differentiation and complementarity. And when we see that, then if we can progress that with diligence and in [indiscernible], then obviously, we're interested. Jacob Martin Rode: Thank you Mike. And thank you, Martin. And then on the second question, the FTC we'll turn to you, Karsten. Karsten Knudsen: Yes. So the short answer is that at this point, we don't want to get into any details around the process. It's still TBD where everything lands out. We note that Metsera board assessed our to be superior, and that's what we can relate to. And then I can say as part of this due diligence, as with any other due diligence, we do comprehensive homework in terms of living up to all laws and regulations in order for the deal to close. We always do that, and we did that here also with the assistance and channels of external experts. So we are confident that this deal can close according to regulations. Jacob Martin Rode: Thank you, Pete, for those two deal questions. Let's turn to the next set of questions, please. Operator: Your next question comes from the line of Florent Cespedes from Bernstein. Florent Cespedes: One question, a follow-up. About Medicare, maybe could you share with us your view on Medicare, on one hand, the opportunity if there is a broader coverage of people with obesity on this channel? And the second, about the potential risk or the IRA -- the next step on IRA, you gave some color on the press release about that. So any comments about this opportunity and risk on Medicare would be great. Jacob Martin Rode: Thank you, Florent, for those two questions. For both of those, we'll turn to you, Dave, on Medicare potential and then on IRA. David Moore: Thanks for the question, Florent. The Medicare opportunity is very important to us and something we've been pursuing since we launched into obesity over a decade ago. And we know that there's roughly 30 million people of Medicare age that are suffering from obesity, and that is something that we feel is really important that those individuals have access to anti-obesity medicines. We can't speculate on what the potential is and how many of those patients will be able to reach, but we do see this as a very important development for us. Regarding your second question about IRA. As Karsten mentioned, we gave an understanding of the expected impact in the company announcement as well. And it's not something that we are able to comment on. We are under strict confidentiality with CMS, and CMS will be making the announcement of what those prices are at some point in the near future. Jacob Martin Rode: Thank you, Dave, and also thanks to you, Florent. And let's move to the next set of questions in line, please. Operator: Your next question comes from the line of Martin Parkhoi from SEB. Martin Parkhoi: Two questions. I have to come a little bit back to the question that's getting from Carsten because I think he was a little bit kind to you, Mike, with respect to market share loss because if we look at the your old area IO and look at reported sales, then Lilly have actually done a sprint. They -- 2 years ago, you had a market share of 80% on all GLP-1 sales on reported numbers. And today, you are at 50%. So can you talk a little bit about what has gone, not wrong for you, but what have they done right in IO to basically capture so much more share than you? Is it commercial execution in IO across the countries? Or is just due to product superiority? Why can they sprint and you cannot? And then second question is just on device strategy. A bit of a setback for Wegovy FlexTouch in U.S., you had argued for that to be an important part of flexibility in the consumer channel. What are you -- going to '26, are your device strategy overall also with respect to launch of products in vials and in which market would that be relevant? Jacob Martin Rode: Thank you, Martin. On the first question on IO, I'll turn it over to you, Mike. Maziar Doustdar: Yes. Thanks very much. So a couple of different ways to answer your question, Martin. There are markets that we are clearly competing well and gaining market share within IO and there are markets that we are losing. So it is market dynamics that dictates IO and averages sometimes cloud the picture. In certain markets, take China as an example, the market is not growing as much as we had anticipated. We have said it in the past. It's predominantly because we have never launched a previous version of obesity drugs in that market. At the same time, we have seen in the same market that we're losing in the online battle to our competitor, predominantly because obesity drugs or Wegovy is not allowed to be sold online, while if you have a mega brand, then it's a very different picture. So that's, I would say, for China. If you take a look at some of the European markets, take U.K. as an example. We have seen how our share of growth over a period of 1 quarter has now bypassed on initiation our competitors' numbers. So this is a dynamic market that changes. And it is really to be seen on a longer horizon and not quarter-by-quarter. We still have a patient base more than -- 2x more than our competitor in international operations. The volume strategy and the future potential of international is still incredibly attractive for us. But we came to this market with a very high level of market share, 100% on our own. So losing market share is something that we had anticipated. And as our competitor comes and as we go also into next year, it will not just be Eli Lilly, but also in some of the markets, other players as we lose LOE. So we have to look at this longer term. And when we do look at it longer term, I am incredibly optimistic for the volumes and the level of unmet need that exists in international operations. Jacob Martin Rode: Thank you, Mike. And let's move to Dave for the device question, please. David Moore: Thank you, Martin. Yes. As you mentioned, it's a setback to receive the CRL on Wegovy FlexTouch. Looking into 2026, we are looking at other presentations. This includes vials. It includes other devices that we're thinking about entering into the market, which would lead to more optionality, especially as we continue to grow in the cash channel as well. On the FlexTouch specifically, we are in active dialogue with FDA and working through the CRL, but can't comment on any specific time lines yet at this point. Jacob Martin Rode: Thank you, Dave. Thank you, Martin, for the set of two questions. And let's move to the next question, please. Operator: Your next question comes from Sachin Jain, Bank of America. Sachin Jain: I have two questions please, one commercial, one financial. Commercial on Wegovy pill, just wondering if you could talk about how you're scenario planning around orforglipron pricing given some news overnight and given your API restrictability, your ability to compete on price? And any further color you can give on launch cadence as we think about that launch? And then second one for Karsten, I'm sure you're expecting the question, but the last couple of years, you've given some high-level color on year forward sort of you'd be willing to just share moving parts as we think about '26. A lot of factors there, gross to net in the base, certain IO patents, Akero, consensus sitting at roughly 7% sales, low teens EBIT, so just any high-level thoughts. Jacob Martin Rode: Thank you, Sachin. The first question on oral sema, let's go to you, Dave, in terms of preparedness. Of course, for competitive reasons, we cannot go into any details, but the high-level picture, Dave. David Moore: Yes. Thanks a lot, Sachin. We're incredibly excited as we move closer to the approval date of the Wegovy pill. I think this is a big step forward in terms of expanding the market and for those individuals that align better with taking a pill for their obesity. We can't comment on specific pricing, of course. But what I would say is we are going to have the Wegovy pill available in all channels. And this is different from previous launches because we will have the ability to focus on Medicaid, Medicare and commercial, but also have a cash offering available through all of our different telehealth partnerships as well as our own NovoCare Pharmacy and the retail partnerships that we've aligned as well. This is a new way to launch for us. And we're also thinking about the competitiveness. This is a competitive profile with respect to efficacy and tolerability, and we're really looking forward to bringing this to people living with obesity in the U.S. Jacob Martin Rode: Thank you, Dave. That's very clear. And the second question, we'll turn it to you, Karsten. Karsten Knudsen: Yes. Thank you for that question, Sachin. And I think you actually already captured some of the key elements going into your own question. So the starting point is we do not guide for next year today. We'll come back to guide for next year at a later point in time as we normally do. What I can say is, as always, current momentum is the foundation for future trends in the business. Not saying everything continues, but current momentum is where we start. Then we have a few specific items worth calling out in relation to next year's growth rates. One is this year, we have some gross to net favorability, I would estimate it to around 2 percentage point on group sales growth this year that will not repeat into next year. So that needs to be factored into a growth rate. Then loss of exclusivity in certain IO markets. We've been calling that out for quite some time, including in our release that will have an estimated negative impact of low single digits on next year's sales growth on group sales. Then on sales, Dave was covering the Wegovy pill, which, of course, is our main launch into next year and upon regulatory approval by the FDA. And then the final discretionary factor to call out is Akero and the step-up in R&D costs associated with that transaction pending closing expected later this year. That will have a 3% negative impact on operating profit growth in 2026. Jacob Martin Rode: Thank you, Karsten, and thank you to you, Sachin, for those two questions. Now let's move to the next one in line and those set of questions, please. Operator: Your next question comes from the line of Mike Nedelcovych from TD Cowen. Michael Nedelcovych: I have two. My first is actually a follow-up on Metsera. Martin, can you articulate what specifically about the Metsera agents is differentiated from Novo's own pipeline candidates other than the potential for once monthly dosing? In response to the previous question, you've restated that Metsera is differentiated and complementary, but I'm wondering what public data lead you to that conclusion or if those data are not public, can you confirm that? That's my first question. And then my second question is on the evoke trials. We are now less than a month away from the CTAD presentation. So I'm assuming that Novo has the data in-house and is simply cleaning them up before top line release ahead of the presentation. So my question is, if it is an unequivocally negative result, would Novo cancel its CTAD presentation? Jacob Martin Rode: Thank you Mike, for those two questions. Now let's start with the first one on revisiting Metsera and the view on differentiation from your side, Martin. Martin Lange: Yes. Thank you very much for the question. I don't want to go into specifics, but maybe just to iterate what we're looking at, where we look for complementarity to our pipeline. It's data on efficacy, and those can be differentiated at many levels. It's data on safety and tolerability, a little bit of the same consideration. Its scalability. And then obviously, in this case, the dose in frequency. We, on more than one parameter, see complementarity to our pipeline. And therefore, this is an effective proposition for us. On evoke, I do want to iterate, we do not know the data in-house in this room. If we did, we would actually had to issue a corporate announcement immediately. So no knowledge amongst any of us in this room. Our starting point is to disclose data, good or bad. So we currently aim to present whatever data that we will have at CTAD in the beginning of December. Jacob Martin Rode: Thanks, Martin. That's very clear. And also thank you to you, Mike, for both of those questions. Now let's move to next question, please. Operator: Your next question comes from Harry Sephton from UBS. Harry Sephton: Two on the U.S., please. So just in light of the agreed IRA direct negotiation discounts on semaglutide. And also some of the press reports yesterday on potential obesity Medicare coverage. I don't want you to comment directly, but it appears you'll end up with significantly different prices for your products across different channels. So I wanted to get your thoughts on how you expect that you're able to maintain this segmented pricing by channel? Or should we assume that all prices gradually trend towards the lowest level? And then the second one on the U.S., just on the current U.S. market trends. Can you discuss how you're currently thinking about the levers to improve access and commercial insurance coverage on Wegovy and Ozempic going into next year? Or do you expect that the majority of the 2026 U.S. growth is really going to come from the launch of the Wegovy pill. Jacob Martin Rode: Thank you, Harry. Noted two questions here. I'll send both to you, Dave. The first one on the pricing dynamics and then subsequently on the current access picture. Over to you, Dave. David Moore: Yes. Thank you much. As we mentioned, we can't discuss any of the specifics around IRA or MFN, but we do appreciate the question. And the fact that historically, we have been able to maintain different prices in different channels, given that be Medicaid, Medicare or commercial and now are increasingly expanding cash channel. Of course, we can't speculate what that will mean in the future. But historically, we have been able to maintain the differentiation between those markets and the access that comes with it. To your second question around the trends in terms of the quality of access, it's something that continues to be really important for us as sometimes receiving an obesity medication can be a challenge because of the friction that exists in the marketplace. So we are continuing to push for and invest in improved access. It's a clear priority for us. This includes both our cash offerings. It's also what we do with payers. But we haven't seen a large uptake yet in terms of that opportunity, but it's something that we're going to continue to push for in 2026 access. We don't really expect the access to be largely changed in 2026, but we do know that each of the payers or Medicaid, as we mentioned earlier, have budget constraints and there could potentially be some loss of coverage as well. Jacob Martin Rode: Thank you, Dave, for those two. And also thanks to you, Harry. Let's move to the next question, please. Operator: Your next question comes from Emmanuel Papadakis from Deutsche Bank. Emmanuel Papadakis: A few follow-ups, perhaps. Maybe taking a step back on U.S. commercial channel trends and obesity. Excuse the background noise. Wegovy scripts are pretty much flat since July despite the NASH launch. Even Zepbound has seen most of the growth coming from the cash channel. So talk us through what you think the obstacles actually are to better penetration in that commercial channel? Is it on the demand side due to product profile, lack of demand beyond the motivated minority? Or is the barrier really on the access side, for example, as you referenced potentially insurance companies making it difficult for patients to actually get on or main on therapy? Maybe a follow-up on Metsera, the deal structure and the risk associated with that. Can you just help us understand your comfort with the risk around the way you are structuring your offer? It seems there's a reasonable chance you could end up with 50% of the company you don't control to its ultimate benefit preventing someone else from owning them. So why are you comfortable with that possibility? Or how do you expect to avoid it? And then just a quick clarification on the Medicare access discussions. What would be upper limit discount you're contemplating be? Would that be in line with the MSP or this would be something in addition to that? Jacob Martin Rode: Thank you, Emmanuel. I noted two questions there. On the first one on the Wegovy scriptions, I'll turn it to you, Dave. And on the second one afterwards, on the deal structure, I'll turn to you, Ludovic. But first, over to you, Dave. David Moore: Yes. Thank you, Emmanuel. As we mentioned earlier, the quality of access remains a focus point and certainly a challenge in the reimbursed channel. Of course, we've got that combined with intense competition. And we also mentioned that the compounding is continuing to increase as well. So that focus and investment in the quality of access, we do think is an important factor with respect to expanding the market. And in addition, you'll continue to see our efforts in expanding the cash channel through more partnerships and certainly having our product offerings available in that channel as well. Jacob Martin Rode: Thank you. And now I'll hand over to you Ludovic. Ludovic Helfgott: Thanks for the question, Emmanuel. Well, I think everything stems from, I guess, what you feel is an excitement for the portfolio of Metsera. We really believe in the assets. We believe in the team. And we believe that the deal structure that we have now, which, by the way, as Karsten said, has been vetted and discussed with external councils and experts. And believe that it's in line with all legal standards, boils down to the quality of the asset and the data that we -- and the confidence we have in the data that we have. So of course, we know when you get into such acquisition that this deal will be reviewed, but we're comfortable that even the 50% of the shares that we would have in our pocket would be actually worth a lot if the product stands out to be the way we think it is, products with an edge, by the way, because as you said, Martin, it's a convention of product. So in all cases, as it boils down to science, we believe that we have a good value proposition. Of course, we would prefer at the end to have that in our portfolio from an operational perspective, but the value there, we believe is really, really high in all scenarios. Jacob Martin Rode: Thank you, Ludovic. And now let's turn to the last two questions. For the second last question. Please go ahead, operator. Operator: The question comes from the line of Richard Vosser from JPMorgan. Richard Vosser: First question, Mike, you alluded to more telehealth involvement, particularly in the U.S. I think the prior arrangements, particularly with Hims, have faced challenges given they continue to bulk compound. So there's been some discussion around continuing or new agreements with Hims, but also the wider involvement of the telehealth. So I wondered what was different this time and whether there's any evidence of any increased pressure around from the FDA or legal pressure to remove the compounders and what could change on that front. And then the second question, just you mentioned a couple of times about coverage, maybe even getting a little bit worse in Medicaid and maybe even the commercial payers, the barriers staying high. Well, in that case, how should we think about the pricing? Normally, we think about increased rebate levels and increased pricing should remove barriers to get more reimbursement. So how should we think about that going into '26? Jacob Martin Rode: Thanks, Richard. On the first one, I'll turn to you, Mike, on the telehealth. Maziar Doustdar: Yes. A couple of comments on that, Richard. There's been no increased pressure to answer your question directly. But what we have been quite consistent with regards to the illicit API that is coming from China and being used by compounders, we find -- since these are not FDA approved, their safety is questionable. And as a pharma company, we don't basically like that. That hasn't changed at all. We also have been saying that we need to increase our access and we need to find ways to get to many more patients. The cash channel and eHealth is definitely an attractive way to go about it. In that context, we're having dialogue and discussions with multiple players on how we could actually increase our access and then we will see with who we should go into partnership. We've made a number of those partnerships available. So we talked about Costco. We have talked about EMed. We have talked about Walmart. And ongoing dialogues with many, many more are ongoing in pursuit of our market expansion that I spoke to earlier on. Jacob Martin Rode: Thank you, Mike. That's clear. And for the second one, let's move to you again, Dave, please. David Moore: Yes. Thanks very much, Richard. We continue to have dynamics that we've discussed in the past, continued pressure, both in GLP-1 as well as in obesity with respect to price as we look to unlock more volumes. But I think it's -- I do want to reiterate that the quality of access is a clear priority for us. We are working with payers to make sure that the experience is one that patients are able to receive their medicine more seamlessly. That means lower utilization management, right? That means less of a prior authorization criteria. When we say we're investing in quality of access, that's really what we mean. And that's the focused conversation that we're having with payers. In 2026, we don't really expect a large difference in terms of access in the commercial channel. As we mentioned, there may be some in Medicaid. But when we look at the commercial opportunity, I think it is important to note that we haven't been making progress in terms of the access. We continue to believe that the CVS opportunity remains there, and that will -- we will see Wegovy as the exclusive brand at AOM, at CVS in 2026 as well. Jacob Martin Rode: Thanks a lot, Dave. That's clear. And let's move to the final question before I hand over to you, Mike, for closing. So final question, please. Operator: Your final question today comes from the line of James Quigley from Goldman Sachs. James Quigley: I've got two left, please. So firstly, on REDEFINE 4, how important is this into demonstrating differentiation from a physician and a marketing perspective versus Zepbound? Have you thought any more about how Zepbound could behave in a flexible dosing scenario versus other trials and real-world data? And can you confirm that you still look to launch CagriSema if REDEFINE 4 shows no statistically significant difference? And second one, can you talk through the launch preparations for Wegovy in ex U.S.? I mean you've highlighted in the release and in the comments that you could look to launch in select countries versus previously when it's likely to be mainly focused in the U.S. So what's happened such that you consider also launching in the ex U.S.? And how do you balance this with U.S. launch processes and pricing, et cetera, as we head into an MFN world? Jacob Martin Rode: Thanks, James. That's two. One on the REDEFINE 4 and one on the orals sema in IO. But on the REDEFINE one, I'll turn it to you first, Martin. Martin Lange: Yes, REDEFINE 4. As you well know, we've taken some learnings from REDEFINE 1 more specifically that we needed to do a lumber study. So we amended the REDEFINE 4 study. That being said, our base case has always been non-inferiority with an upside of superiority. In the case of non-inferiority on weight loss, we still see a potential for upside on gastrointestinal side effects and tolerability. But also we do believe that the CV benefits that we know from semaglutide could also potentially pan out and will read out from REDEFINE 3, thus clearly differentiate CagriSema vis-a-vis potential competitors. But I do want to iterate, there is still the potential for superiority upside. But obviously in an amended study, that should be taken with a little bit of a risk. Jacob Martin Rode: And let's turn to you, Ludovic, for the second one, please. Ludovic Helfgott: Absolutely. So let's take a step back. The real focus and the priority of our Wegovy pill launch is the U.S. and will remain the U.S. in 2026. As you rightly read, we are indeed opening -- we've filed, and we are opening the option to launch in selected markets in the course of 2026, depending, of course, on how things are ramping up, and we are definitely ready to -- in this market to be able to make the -- the best and the most of the Wegovy pill. By the way, we're also very quickly transferring some knowledge from the telehealth channels, for instance, in the U.S. into some higher markets. We are very active right now as we speak in many markets across the world, not just in Europe, but also in Australia, for instance, or in other part of the world where we believe that we really are gaining progress on the telehealth side. So again, we're accelerating our overall experience curve on the telehealth and that will be -- we believe will be proven very helpful at the time we launch the Wegovy pill. It's also not worthy to say that the IO market are also markets where we have some of the nicest experience in Rybelsus in Europe and elsewhere, which means that we can also leverage our experience in the oral markets that have been successful for Rybelsus to build even quicker position with the Wegovy pill. So priority to the U.S., but fully ready to take on some selected markets in IO when time comes. Jacob Martin Rode: Thanks, Ludovic. And with that, let's conclude the Q&A session. Thank you for participating, and please feel free to ask in the Investor Relations for any follow-up questions if that's case. Before we finally round off, I'll just turn it over to you, Mike, for some final remarks. Maziar Doustdar: Thank you, Jacob. Thank you to everyone for calling in. Before closing, I did want to make a few remarks. Although we have narrowed the full year outlook for this year and see currently competitive headwind, the unmet need is huge. The volume opportunity longer term in our core area is enormous. We are sharpening our focus on diabetes, obesity and associated comorbidities in order to address this unmet need. This is our home turf, and this is for us to drive the commercial execution and raise the innovation bar to treat many more patients and treat them better than ever before, and we will not stop until we do that. Thank you. Operator: Thank you. 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 Dine Brands' 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 host today, Matt Lee, Senior Vice President of Finance and Investor Relations. Sir, you may begin. Matthew Lee: Good morning, and welcome to Dine Brands Global's third quarter conference call. This morning's call will include prepared remarks from John Peyton, CEO and President of Applebee's; and Vance Chang, CFO. Following those prepared remarks, Lawrence Kim, President of IHOP, will also be available, along with John and Vance to address questions from the investment community during the Q&A portion of the call. Please remember our safe harbor regarding forward-looking information. During the call, management will discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filing. The forward-looking statements are as of today, and we assume no obligation to update or supplement these statements. We will refer to certain non-GAAP financial measures, which are described in our press release and available on Dine Brands' Investor Relations website. With that, it is my pleasure to turn the call over to Dine Brands' CEO, John Peyton. John Peyton: Good morning, everyone. Thanks for joining us today. As usual, I'll start with an overview of Dine's Q3 performance and key brand updates and then turn it over to Vance, who will discuss our financial results in more detail. Afterwards, I'm going to spend some extra time before the Q&A to share more details about our dual brand program, how it's unlocking a new lever to grow and ultimately, why we're putting our money behind it. Vance will then cover our capital allocation priorities and how our asset-light model is designed to create long-term shareholder value. Now to provide an overview of the third quarter and trends we've seen in consumer behavior. In Q3, we sustained the sales and traffic momentum from Q2, driven by new menu innovation and targeted marketing campaigns. While we continue to operate in a competitive environment, Applebee's and IHOP held their ground, underscoring the strength and relevance of our brands as guests continue to seek value, variety, and an exceptional dining experience. These are the same expectations that have been driving consumer behavior throughout the year. While spending patterns remained relatively consistent, we're observing slightly higher macroeconomic anxiety, leading to more intentional decision-making, where every dollar spent must feel justified across the entire dining experience. Guests continue to manage their check by trading down to lower price for value items on our menus. IHOP's value mix remained at about 19%, while Applebee's value mix slightly increased to about 30% in Q3. Despite the industry headwinds, our focus on everyday value platforms, operational simplification and high-impact guest-centric marketing is delivering results. Lastly, I'll add that we recently completed our annual franchisee conferences that included participation from the leaders of each of our franchisee councils. And across all 3 of our brands, the biggest takeaway is that our franchisees are aligned with our strategy and remain committed to grow. Reinforcing this sentiment is the fact that franchisee health remains resilient with clear improvement in Applebee's, given the sales growth we're seeing and encouraging momentum at IHOP. Now while there's still more work ahead, I'm grateful to our team and franchisees for their ongoing dedication and unrelenting belief in the strength and potential of our iconic brands. So with that, I'll walk through our financial results for the quarter. Applebee's reported a 3.1% increase in comp sales and IHOP posted comp sales of negative 1.5%. Notably, positive comp traffic was an important driver for both brands. Our adjusted EBITDA was $49 million compared to $61.9 million in the same quarter last year, and year-to-date adjusted free cash flow was $68.2 million compared to $77.8 million in the same quarter last year. Now I'll share some updates across our portfolio, starting first with some leadership updates at Applebee's. In September, we welcomed our new Chief Marketing Officer, Michelle Chin; and Chief Operating Officer, Jay Wong, to Applebee's. Both leaders are passionate fans of the Applebee's brand, and they bring fresh perspectives to elevate the guest experience as well as strengthen franchisee and team member relationships. Michelle spent 2 decades shaping consumer marketing and brand strategy for global brands like Starbucks, Godiva and Unilever, where she built high-performing teams and launched impactful insight-led campaigns. And Jay has led global teams and transformations at top-tier brands, including Four Seasons, Starwood Hotels, and Exclusive Resorts. His focus on seamless guest experiences will help Applebee's further enhance how we serve our guests. I'm looking forward to working closely with both of them to continue to promote innovation, operational excellence and long-term brand relevance. Now into the Applebee's results. In Q3, Applebee's achieved its second consecutive quarter of positive comp sales and traffic, continuing the gains in traffic that started in March. New menu items are driving this traffic by appealing to core Applebee's fans while also attracting new guests. Guests should expect to see this continued menu innovation, driven by a robust menu pipeline, with a new appetizer and a new entree added to our menu each quarter. As we shared last quarter, we're introducing new entrees via the 24 section of our menu, which is a pillar of our everyday value platform. In Q3, we launched Chicken Parmesan Fettuccine, which became our best-selling stand-alone pasta dish, representing approximately 13% of transactions and was a key contributor to our traffic and sales growth. Another important menu innovation from this quarter was the launch of our new Ultimate Trio appetizer sampler as part of our second season as the official grill and bar of the NFL. This offer has over 80,000 flavor combinations, highlighting the power of choice that younger guests love without adding more SKUs or complexity to the kitchen, and it's been wildly popular. The Ultimate Trio has become one of the best-selling appetizers, averaging 13.5% of transactions and contributing meaningfully to check growth. As a part of our off-premise strategy, the Ultimate Trio is also available for to-go and delivery, contributing to a 9% increase in off-premise sales in Q3, building on 3.7% growth in Q1 and 7.6% growth in Q2. Our success in the off-premise channel is driven by pairing LTOs with digital promotions to encourage off-premise occasions. Our off-premise remains a growth opportunity for Applebee's, and we're pleased with the momentum and our capabilities to meet guests where they are. An important way to connect with both our dine-in and off-premise guests is reaching them on social media. Throughout the year, we've expanded our marketing capabilities and social media prowess to deepen engagement and reach a broader audience. Since Q3 2024, Applebee's has increased postings by over 300%. And as a result, we've seen a 266% increase in engagement, proving that we are more effectively reaching our guests in real time. And this ties into our ongoing efforts to modernize the brand and elevate the guest experience. Over the past year, guest satisfaction scores are improving, and it's a direct result of our focus on efficiency across both the front and back-of-house functions. The look and good remodel program also continues to progress. Franchisees are reporting strong post-remodel sales lifts and an increase in guest frequency. Approximately 80 restaurants have been remodeled to date, and we expect to exceed our 100-remodel target by year-end. There's more to do and plenty of opportunity ahead, and we're committed to strengthening the brand's relevance, sharpening our competitive edge and driving long-term growth. Now moving to IHOP, where positive traffic trends continue to be the highlight for the brand. IHOP outperformed Black Box traffic metrics every month in 2025, making Q3 our third straight quarter of traffic outperformance versus industry benchmarks. More importantly, this was IHOP's first quarter of positive traffic in many years. I want to take a moment to fully recognize the significance of IHOP returning to positive traffic comps. This is a big win, especially in a category where traffic has been challenged for years. Traffic is a core indicator of customer connection and demand. Our steady industry outperformance, now further supported by positive absolute gains, shows that we're successfully connecting with guests -- especially as they seek exceptional value, abundance, and a great dining experience. In fact, recent third-party research on search trends identified IHOP as the most searched diner chain in the U.S., underscoring its continued relevance with consumers. As it relates to traffic trends, the momentum really accelerated when we launched our IHOP Value menu and expanded and rebranded version of the House Faves menu now available 7 days a week. Notably, this is the first time IHOP has introduced an everyday value menu as part of its core offering. Early results are strong with positive impacts on sales and traffic since its launch in mid-September, and we're seeing continued momentum into the fourth quarter. The IHOP Value menu is one of the largest launches in the brand's history, made possible through strong partnership with our franchisees. As always, this platform was designed and tested to be profitable, and we continue working to improve margins and protect profitability for our franchisees. While our value offerings are important for bringing guests through our doors, we're also focused on increasing check and margin. In Q3, our updated barbell strategy improved check month-over-month by drawing more attention to some of our higher-priced menu offerings, resulting in a decrease in value incidents on weekdays from about 25% of checks to roughly 15%. Looking ahead, we're continuing to optimize check through upselling sides and introduce premium offerings, like our limited time breakfasts in Q4. Operationally, we remain focused on strengthening our foundational basics. As a result, table turn times have reached multiyear lows, and we continue to identify potential for further improvement. Now to discuss Fuzzy's. We saw modest improvements across sales and traffic at Fuzzy's as we work diligently alongside our franchisees to improve technology, streamline the menu, and enhance the in-restaurant experience for our guests. In Q3, new delivery campaigns exceeded expectations, driving growth in off-premise channels. This is one of the many benefits of our multi-brand platform, the ability to use learnings from one brand and apply it to another to enable further growth. Turning to our international business. We continue to have positive engagement with both new and existing international franchisees around development, and we remain on track to double our total international dual brand restaurants by the end of the year. The increase in unit growth is helping offset some macroeconomic headwinds impacting sales, and we remain bullish on the growth opportunities across our key international markets. Now I'll quickly touch on our company-owned portfolio. As a reminder, we now have 70 company-operated restaurants, representing approximately 2% of our total restaurant count. Our strategy is to invest in these restaurants to improve the health of our brands, but ultimately refranchise the restaurants back to our franchisees. We're seeing our strategy deliver results at our company-operated restaurants with sequential comp sales improvement versus Q2. Assuming all restaurants have alcohol licenses, Applebee's locations are now performing in line with the system average and IHOP locations are now outperforming the system average. Although profitability in the quarter continues to be impacted by temporary closures for remodels and dual brand conversions and onetime costs related to catch-up of repairs and maintenance and training, we are optimistic about the upside potential of these initiatives. 12 restaurants have now been remodeled, and we are seeing traffic-driven sales growth, validating the brand's core strength when paired with refreshed physical environment. Additionally, 60% of restaurants now have alcohol licenses, which is supporting check growth. We also recently completed our first company-owned dual brand conversion and -- while early, are excited to see sales increase to 4x pre-conversion levels. This further adds to our confidence around the potential of dual brands, which I will detail later. So now I'll turn the call over to Vance. Vance Chang: Thanks, John. On the top line, consolidated total revenues increased 10.8% to $216.2 million in Q3 versus $195 million in the prior year, primarily driven by an increase in company restaurant sales, offset by a decrease in franchise revenues. Our total franchise revenues decreased 3% to $161.3 million compared to $166.4 million for the same quarter of 2024. Excluding advertising revenues, franchise revenues decreased 3.6%. Rental segment revenues for the third quarter of 2025 decreased $1 million compared to the same quarter of 2024, primarily due to lease terminations. G&A expenses were $50.2 million in Q3 of 2025, up from $45.4 million in the same period of last year, primarily due to compensation-related expenses and an increase in travel and conference expenses. Adjusted EBITDA for Q3 of 2025 decreased to $49 million from $61.9 million in Q3 of 2024. Adjusted diluted EPS for the third quarter of 2025 was $0.73 compared to adjusted diluted EPS of $1.44 for the third quarter of 2024. Now turning to the statement of cash flows. We had adjusted free cash flow of $68.2 million for the first 9 months of 2025 compared to $77.8 million for the same period of last year, driven by an increase in additions to property and equipment, primarily related to CapEx investments in our company-owned restaurants. Cash provided by operations at the end of the third quarter of 2025 was $83.3 million compared to cash provided from operations of $77.7 million for the same period of 2024. The increase was primarily due to a favorable change in working capital due to the timing of federal tax payments postponed due to wildfire relief and of interest payments postponed in connection with our June 2025 debt refinancing, offset by the decrease in segment profit and higher G&A expenses. CapEx through Q3 of 2025 was $21.3 million compared to $10.3 million for the same period of 2024 due to investments into our company-owned restaurants. We finished the third quarter with total unrestricted cash of $168 million compared with unrestricted cash of $194.2 million at the end of the second quarter. Regarding capital allocation, I'll provide an update and a more detailed overview of our framework later in the call, but I want to mention that we continue to make progress on our key initiatives, including remodeling the Applebee's system, which includes providing an early adopter incentive for franchisees and remodeling and/or converting company-owned restaurants to dual brand restaurants. On buybacks and dividends, we repurchased $22.5 million in stock and paid $7.8 million in dividends in Q3 of 2025. As a reminder, as a franchisor, we obtained debt financing through the whole business securitization market, which allows us to have investment-grade cost of debt capital. This is evidenced by the successful refinancing a few months ago of our $600 million senior secured notes with a fixed rate coupon of 6.72%. We continue to monitor the WBS market, and we'll look to refinance our 2023 senior secured notes when the economics are more favorable given the current make-whole premium of approximately $20 million, and the par call window does not open until December of 2026. Next let me discuss Applebee's performance. Q3 same-restaurant sales were positive 3.1%. Average weekly franchise sales in 2025 were $52,600, including approximately $12,000 from off-premise or 22.9% of total sales, of which 11.7% is from to-go and 11.1% is from delivery. Off-premise saw a positive 9% lift in comp sales in Q3 compared to the same period last year. IHOP's Q3 same-restaurant sales were negative 1.5%. Average weekly franchise sales were $36,700, including $7,500 from off-premise or 20.4% of total sales, of which 7.8% is from to-go and 12.5% is from delivery. Turning to commodities. Applebee's commodity costs in Q3 increased by 0.3% and IHOP commodity costs increased by 5.7% versus the prior year. Our supply chain co-op CSCS, now expects commodity costs in 2025 at Applebee's to be roughly flat versus prior outlook of flat to slightly down due to higher beef and seafood costs. At IHOP, we continue to expect commodity costs to increase by mid-single digits for the full year, driven by elevated egg pricing, pork and coffee. As we mentioned on our prior call, the tariff situation remains fluid. As a result, our forecast for commodity costs incorporates the effects from existing tariffs to date, but do not reflect the potential impact of future tariff changes or trade policy. CSCS continues to work across both systems to identify additional cost savings opportunities and support restaurant profitability initiatives through both operational improvements and input costs. To date, in 2025, we have implemented projects resulting in over $42 million of annualized savings across both systems, and we continue to partner with CSCS to leverage our scale and make progress on our cross-functional restaurant profitability initiatives. Before turning the call back over to John, for a strategic update on our dual brand opportunity and our capital allocation framework, I'd like to add that we are maintaining our full year financial guidance at this time. Specifically, with our EBITDA guidance, we are anticipating to be on the low end of the range due to investments to improve our company restaurants, which includes remodeling and dual brand conversion process. In Q3, approximately 10% of our restaurants were temporarily closed due to remodeling and dual brand conversion for a portion of the quarter, impacting our performance, and we expect an even greater number to be temporarily closed in Q4. With that, I'll hand it back over to John. John Peyton: Thank you, Vance. Now I know we've talked about our dual brand strategy before, but today, I'd like to provide more insight into the opportunity we see, what it is, why it's unique and why we and our franchisees are excited about it. We've done extensive research into how exactly dual brands fit into our long-term growth without cannibalizing the independent growth trajectories of the individual brands. The results, as I'll walk through today, are compelling. To start, we are the only franchisor with 2 iconic full-service brands that serve guests across all dayparts, IHOP in the earlier hours of the day and Applebee's in the later hours. Our thesis is that combining these 2 complementary daypart brands into 1 dual-branded restaurant will drive higher sales and create efficiency, resulting in increased profits for our franchisees and growth for Dine through higher system sales and unit growth. After an early prototype in Detroit, we began testing this idea in earnest internationally 2 years ago. And since then, we've opened 20 international dual-branded restaurants that have proved our thesis. These restaurants are delivering 1.5x in sales versus single branded restaurants and are generating significant incremental margin. This year, we're on our way to doubling our international dual-branded restaurant count to 40. With these compelling results, we brought this concept to the U.S. in February. For those who haven't yet had a chance to see it from the exterior, both brands are prominently displayed around the building, and there is one shared entrance. Inside, the aesthetics and seating for each brand are represented in different sections, one being Applebee's iconic red and the other is IHOP's iconic blue. The guest can choose to sit on either side and is presented with one menu organized by daypart that has been simplified to include the best of both brands. The menu also includes some dual brand exclusive items like our popular Buffalo Chicken Omelet. To experience our dual brand concept, you can find a video explaining and touring the first 2 domestic locations on the Dine Brands investor website. There are several key highlights that support our belief in this opportunity. First, from the restaurant operator's perspective, there is one kitchen, POS, a cross-train staff, and the same number of menu items as a single branded restaurant. The simplification of operations allows our team members to focus on our guests and ensure they have a great experience that is representative of both brands' core values. From a guest perspective, feedback is strong. In particular, they're enjoying the expanded choice provided by the combined menu from both brands. In fact, for each daypart, the off brand represents at least 15% of sales. For example, Applebee's items represent at least 15% of sales in the morning and IHOP items represent at least 15% of sales in the evening. And so far in terms of financial performance, we have seen sales performance approximately 1.5x to 2.5x higher post conversion. Sales are relatively consistent throughout the day with no daypart exceeding 1/3 of total sales, further showcasing the complementary nature of the 2 brands. We're seeing a meaningful increase in franchisee profitability with 4-wall margins nearly doubling, and we've seen a reduction in construction costs and time lines for dual brand conversions as the process becomes more efficient and standardized, which we expect will result in a payback period of less than 3 years. Our initial target was to have 12 to 14 domestic dual-branded restaurants open in 2025. And as of today, we can share that we expect to have approximately 30 opened or under construction by year-end and that we expect to achieve at least 50 dual brand openings in 2026. From a long-term perspective, our internal analysis of the U.S. white space opportunity shows potential for approximately 900 dual-branded restaurants over the next decade. While near-term openings will primarily be conversions, we also see potential for approximately 50% of these opportunities to be new builds. It's important to note that dual-branded restaurants are only one strategic development lever for us. It's not a solution for all markets, and we continue to greenlight single-brand restaurant concepts. To summarize, the dual-branded opportunity is a big one. Guest and franchisee feedback is strong. It significantly enhances the unit economics for a franchisee by potentially doubling 4-wall revenue and margin. It represents an approximately 900-unit white space opportunity. We expect to have approximately 30 open or under construction by year-end, and we expect to achieve at least 50 dual-branded openings in 2026. Now I'll pass the call back to Vance, who will discuss our updated capital allocation. Vance Chang: Thanks, John. Given that we are one of the largest franchisors in the full-service restaurant segment, our asset-light model generates best-in-class return on invested capital and margins. We take a disciplined approach to capital allocation to drive shareholder value, focusing on 3 key priorities: organic investments, balance sheet management, and returning capital to shareholders. This financial strength gives us the flexibility to invest in our brands, our company-owned restaurant portfolio and development pipeline while also returning meaningful capital to our shareholders, something we have consistently done over the past several decades, and that will not change. Current time, however, we believe our stock price is currently undervalued, which represents a unique opportunity to be more aggressive with share repurchases to create long-term shareholder value. As a result, the Board has declared the reduction of our dividend from $0.51 per share per quarter to $0.19 per share per quarter, which would imply an annual dividend yield of approximately 3% based on today's stock price. This will continue to generate one of the highest yields amongst our peers. We allocate our capital towards a larger share repurchase program. We will commit to buy back at least $50 million of shares over the next 2 quarters, which will represent a share reduction of approximately 11% to 13% at the current price. This is on top of the approximately 8.5% shares that we have repurchased year-to-date, which would total a nearly 20% reduction in shares versus the beginning of 2025. We're maintaining our current investments into the franchise system either as an ongoing or as needed basis, such as our Applebee's good remodel incentives or IHOP franchisee egg subsidy earlier this year. I want to reiterate that the dividend reduction, increased share repurchases and investments into our business are proactive changes we're making to our shareholder return strategy to drive increased shareholder value. It demonstrates confidence in our plan and our principal view that the stock is undervalued, affirming the Board's alignment with investors. With the momentum that we continue to see in the business and the alignment and shared excitement from our franchisees, now is the right time to be aggressive in investing in our own stock. I will now pass it back to John to close. John Peyton: Thank you, Vance. I'll end the call by summarizing our key initiatives that will create long-term value for our shareholders. At the brand level, our focus is on menu innovation, high-impact marketing and social media, simplified operations, and enhanced guest experience. In terms of development, we will drive unit growth by capitalizing on our dual-branded opportunity, continuing to open single branded restaurants, especially at IHOP, which has for over a decade, consistently opened double-digit restaurants every year and introducing a new lower-cost Applebee's prototype. And last, we will remain prudent with our capital allocation and accelerate share buybacks to take advantage of a significant discount in our valuation, which we believe will be highly accretive to our shareholders. Now with that, we'll turn the call back to the operator and open up the line for Q&A. Operator: [Operator instructions] Our first question comes from the line of Eric Gonzalez with KeyBanc. Eric Gonzalez: Congrats on the positive traffic in both brands. I want to ask about the company-owned stores. You had a decent sized loss, maybe $4 million or $5 million in the quarter. I recognize we had some catch-up expenses in repair and maintenance and training and remodels, et cetera. But do you have a sense of how much of a drag we should expect from these stores going forward and maybe when you kind of -- when that maybe goes away? John Peyton: Thanks, Eric. Vance can address that question. Vance Chang: Good morning, Eric. Just to give you a little bit more context on the sort of the disruption. So year-to-date, we had close to 50 restaurants without liquor license for 30-plus weeks per restaurant. And then on the construction side, year-to-date, we had approximately 500 days of construction closures across 30-plus restaurants or if you do the average math of roughly 15 days of closure per restaurant So that's what happened year-to-date. I point that out to let you know that although that's noise and the headwinds this year, we're comping -- by and large, those factors won't be there next year, right? So it's a onetime investment that we're making to improve the restaurants. For this year, we're expecting roughly $9 million to $10 million of segment profit hit from the company restaurants to answer your question specifically. And then that includes about $2 million of D&A. So hopefully, that helps. Eric Gonzalez: Then maybe just a question on the IHOP side. Again, congrats on the positive traffic. But the overall comps they were down a little bit. So just wondering, you're leaning pretty heavily on value. What are you doing to address the check side? And do you think you can get that mix up in the quarters ahead? John Peyton: Thanks, Eric. Lawrence will take that. Lawrence Kim: Eric, so as I shared probably in earlier calls or earnings calls, we have a 3-pronged approach when it came to driving transactions and traffic. The first was, of course, launching the value platform, which we did last October. And actually, we've now evolved, as John shared earlier, where we launched an everyday value menu this past September. So we're continuing to drive that transaction. And as John shared, we've continued to do so since the beginning of this year. But to your question, in regards to check and overall sales, the third phase of it is actually balancing the value and the transaction growth from that with our barbell strategy to drive check. And so we're doing that in multiple ways from upsell strategies with our tablets and our servers, but of course, also featuring some premium priced items such as our premium priced pancakes, like our pumping spice and our coffee cakes pancakes in addition to combo features, which are primarily displayed in our restaurants with POP, like our recent breakfast, which performed really well last year. So we brought them back this past September a few weeks ago as well. So this is helping to already drive our check balance, improve check flow and overall profitability for our restaurants, and we're going to continue to drive this as we drive value in the next quarter. John Peyton: Eric, it's John. I would just add one more point to what Lawrence said, which is since they moved into Phase 3, which is driving the barbell strategy and featuring the higher-priced items in the restaurants, the incidence of the value was 25% of checks weekdays. And since they started this new program, it's fallen to 15%. So we're seeing a good response to the program to upsell once they're in the restaurant. Lawrence Kim: Great. Maybe just the last one for me. I think you said 3Q momentum sustained. Did you talk about fourth quarter at all yet? I think you said momentum sustained, but I couldn't tell if that was either an Applebee's and IHOP comment or both. John Peyton: Vance? Vance Chang: Eric, so what we're seeing is that the sales volume for Applebee's really sustained from Q3 into Q4, and then it's accelerated for IHOP from Q3 into Q4. Operator: Our next question comes from the line of Dennis Geiger with UBS. Dennis Geiger: Encouraging to hear some of the insights there on the dual-branded concepts. I appreciate that. And what sounds like good franchisee demand. Could we unpack a little more the franchisee demand? Are there certain characteristics for those that have kind of signed up already for the dual-branded box? And then maybe what are the biggest hurdles that you're finding from those that you feel should but aren't yet? Do they just want to see the proof point? Anything on that, John, would be great. John Peyton: Yes. Sure, Dennis. Happy to talk about that. So in terms of franchisee demand, I would characterize the initial wave of dual brand restaurants as, #1, conversions versus new build, which makes sense. #2, more IHOPs than Applebee's. And we attribute that to the fact that Applebee's -- I'm sorry, that IHOP is currently open for dinner, right? And dinner has always been a challenge for that brand. So to add an Applebee's solves an existing challenge for that brand. For Applebee's, they're not open for breakfast. So they're not trying to "fix an issue". And so it's a different decision for an Applebee's to add the IHOP and grow the revenue. What we're seeing now in what I would call sort of Phase 2 as we move toward a robust pipeline of at least 50 for next year is we're seeing our Applebee's franchisees begin to explore 1 or 2 opportunities among the more major franchisees. In terms of the hurdles, I think it's less about the franchisee and more about what we're learning as we go. So for example, we're learning that IHOP franchisees who don't typically have bar experience, we need to give them extra training and support to run a really great bar, which is a key element of an Applebee's. And so we're learning things like that along the way, which is the kind of things we expected to learn and that we can address with our training and our coaching. Dennis Geiger: Then one more, if I could. Just more broadly, I guess, you touched on it some, but in thinking about franchisee sentiment more broadly in this environment that we're in, you touched on the commodities piece. Just if you could touch on that, both across Applebee's as well as IHOP right now. And maybe just tying broader new open demand in and how you're kind of thinking about net growth maybe longer term, if there's anything to share there across either closures as well as gross opens, would appreciate anything there. John Peyton: We're not putting a firm date or time line on net unit growth, Dennis, but we're getting close. That's for sure. What we like about our program now is we have multiple products and almost a product to fit every situation. So to develop a single unit IHOP, which we've been doing 30 to 40 a year for the last several years, 80% of those are conversions. So IHOP is a great conversion brand and a good solution for opportunities to repurpose buildings. As I mentioned, Applebee's, we've got a new prototype that takes about $1 million in cost out of it for a much better return, and we're going to build one of those next year to prove that out. On the international side, same thing. We've been opening about 40 restaurants a year consistently, increasingly dual-branded restaurants there. And now we have the dual brand concept here in the U.S. And each market is unique and each solution has to make sense for that market. But the dual brand is giving us a catalyst to get back to net unit growth sooner rather than later. Vance Chang: Dennis, this is Vance. One more point I would add is that even without net development growth, just the context is that the closures that we've had are obviously lower AUV boxes, right? So they're averaging sort of 1.2, low 1s. And then the new restaurants we're opening are $1.8 million, $2 million. So it's not a 1:1 ratio, even though the net development number, as you pointed out, has not been positive. So I just want to make sure that point is clear. Operator: Our next question comes from the line of Jeffrey Bernstein with Barclays. Jeffrey Bernstein: First question is just on the broader consumer backdrop, hearing from lots of restaurants as they look at their data. More and more companies, I guess, have data on the age of their consumer, the income level, the ethnicity, and there's been seemingly a big change in trend in recent quarters. I'm wondering, one, whether you have any degree of data on any of those cohorts and whether you've noticed any change in trend among any of those for better or for worse? And then I had a follow-up. John Peyton: Yes. Sure, Jeff, it's John. I can take that and speak to both brands because our observations are consistent with both IHOP and Applebee's. We're seeing a slight shift in the guest mix this quarter. We've had more higher-income guests joining us than lower income guests leaving us, which is what's -- the net of that is what's driving our traffic growth. So that is good news. The 2 cohorts that we're seeing who are most price sensitive right now are the lower-income guests and Gen Z. They're dining out less than they have in the past. But all of our guests, that being said, are hyper focused on value, and that hasn't changed all year or for last year as well. And that's our plans for the future as we think that that focus on value is what's going to be on consumers' minds throughout the rest of this year and into next. And that's why we believe the everyday value program at IHOP and the Super 25 program enhanced at Applebee's is driving our traffic right now because it's the match that consumers are looking for. Jeffrey Bernstein: Then just following up on that value mix. I think you kicked off your commentary by saying Applebee's was at 30% mix depending on the way you define it. But you said that was up modestly. So just curious what that was up from. And IHOP at 19%, I think you said was unchanged, which was surprising considering the negative check, which seems significant. So just wondering how to kind of balance the significant negative check with no increase in their value sales mix. John Peyton: So Applebee's is at 30%, which is pretty close to where it's been. It's been 28%, 29% last quarter. So consider that about flat. We define value. We calculate that as the 2 for 25 menu plus LTOs. So any incidence of those as a ticket is about 1/3, 30% of what we see. At IHOP, just to clarify, the value mix grew to 19%. It wasn't down. It grew to 19% during the quarter because of the rollout of House Faves and then turning that into everyday value. So it grew to 19%, and we expect that 19% to be a little bit higher next quarter because we're going to 7 days a week, and that only happened the last 2 weeks of the quarter. Jeffrey Bernstein: It grew to 19% from what was the number that you most recently talked about? John Peyton: Last quarter, I'm going from memory. Vance Chang: It was like 18.9% to 19.1%, slight increase. John Peyton: But pre-everyday, pre-House Faves, it was more like 10%, right before we introduced. Vance Chang: Yes, yes, about low to mid-teens last year is where we're averaging. Jeffrey Bernstein: Just lastly, just to clarify, you said the dual brands that there would be 30 open or under construction by year-end this year. So I'm just curious how many actually you think would be open by the end of this year? And then you said something about 50 for next year. I wasn't sure if that's just the cumulative total number or whether that's incremental openings. So just trying to get a sense for how many actually will be open end of this year and how many in total will be open end of next year. John Peyton: So it's 30 plus 50 for a total of 80. And in terms of this year, the vast majority of that 30 will be open. But as you know, sometimes opening dates slip from December to January. So not giving a precise number, but the openings will be much closer to 30 than not. Operator: Our next question comes from the line of Brian Vaccaro with Raymond James. Brian Vaccaro: I just had a quick question on the guidance, Vance. I just wanted to confirm, has there been any change to your previously communicated comp guide at either Applebee's or IHOP or any change to your unit growth expectations that you gave us in the second quarter? Vance Chang: No, those are staying the same. No change to guidance, yes. Brian Vaccaro: I guess I heard some of your comments about how IHOP has accelerated and Applebee's seems to be holding in. I guess if I do the quick math on Applebee's, and I think my notes are right on this, but I think your previous guide on comp was down 2% to up 1% at Applebee's, if I have my notes correct. So that would embed, I think -- go ahead, sorry. Basically trying to get at what is -- yes, what's a reasonable expectation for 4Q on comps, just to level set, because we didn't have the guide in the release. Vance Chang: Yes. The Applebee's guidance, we actually bumped it up from positive 1% to positive 3%. So that didn't change. We changed that last quarter. And then for IHOP it's negative 1% to positive 1%, and we didn't change that either. So that implies a sort of a decent Q4 for Applebee's and a strong Q4 for IHOP. Brian Vaccaro: Great. You also obviously highlighted the traffic being positive at both brands. Could you firm up just the comp components within that sort of where average check was versus traffic for each brand in Q3? Vance Chang: Yes. So for Q3, I think our check -- so let's see. So traffic was positive for both brands. We have negative P mix for IHOP and sort of flat P mix -- no, actually negative P mix for Applebee's as well. And then about 2-ish percent menu price increase. So that kind of gives you the rough breakdown. Brian Vaccaro: Great. Then last one for me. You talked about the Applebee's remodel program with over 100 planned for this year, I think you said. I'm just curious how you see that potentially accelerating into '26 and beyond? What sort of a reasonable rate on remodels might be? John Peyton: Yes, Brian, it's John for that question. Yes, we said over 100 this year, and we expect to do at least that number next year, if not more. And our goal is to have 2/3 of the portfolio renovated by the end of '27. Operator: Our next question comes from the line of Nick Setyan with Mizuho. Nerses Setyan: Just on the remodels, I'm not sure if I missed this, but did you say the kind of lift you're seeing? John Peyton: Nick, it's John. Welcome back. We're glad you're here. Vance will take that question. Vance Chang: Nick, so it's obviously early days, right? A lot of the restaurants that's been remodeled are pretty new, but we're -- franchisees are very happy with what they're seeing. And from company restaurants, the ones that we've done, we're seeing sort of double-digit lifts for our own portfolio. Now again, one caveat is early. Two is that I think the starting point for our restaurants are a little bit lower than system average. So I'm not underwriting that sort of lift for the entire portfolio. But so far, we're very encouraged by what we're seeing as well as the franchisees. John Peyton: Vance, it's fair to say that -- I'm sorry, Nick, it's fair to say that the franchisees that have renovated recently following the renovation package that we have are seeing lifts that more than cover the cost. The return is good. Vance Chang: Definitely. Nerses Setyan: Thank you for the kind words, John. It's good to be back. Vance Chang: Yeah, good to have you back, Nick. John Peyton: You've had a couple quarters to think about it. Nerses Setyan: Well, I mean 4x on the deal conversion, that's a great number. In terms of just the number of like actual conversions, where it gives you confidence that that kind of lift is possible, is that something that we can commit to? Or is that also kind of too early and the numbers of conversions are too small to really be able to project that out? John Peyton: Well, we can't speculate on forward-looking data, right? And we can't make a firm commitment. All we can do is report on what we've seen so far. What we've seen so far in the close to 40 international dual brands is a 1.5x improvement in revenue or more. And what we're seeing here in the 15 or so that are open in the U.S., we're seeing a range of 1.5 to 2.5 in sales lifts. But again, it's a sample set of 15 in the U.S. Nerses Setyan: Then just in terms of pricing and how we're thinking about just menu price versus mix going into 2026. Is there any kind of early indication you can give us in terms of what we can think of as the right price number in 2026 for both brands? John Peyton: Vance can provide an update there. Vance Chang: Nick, as you're seeing and as we're seeing sort of with menu pricing right now, we're -- both sets of franchisees are in the low -- around low middle -- low single-digit range, which we do expect that to be the case going forward, given the fact that commodity costs have sort of come under control, egg pricing is still elevated, but it's come under control and it's getting better. So that's what we're expecting. Now obviously, the disclaimer we always have is that we don't control pricing. So it's the franchisees that said this. But there's -- we're not anticipating any outsized menu pricing for next year though, having said that. Operator: [Operator Instructions] Our next question comes from the line of Todd Brooks with The Benchmark Company. Todd Brooks: Vance, I wanted to start off with the capital allocation update and just walk me through why we needed to cut the dividend to fund the $50 million in share repurchase. Is there a third component around additional franchise keeping firepower dry for additional franchisee location acquisitions. I think you guys said you'd be willing to take that portfolio up to maybe a couple of hundred at a premium? Or just kind of walk me through why one lever had to be pulled to accomplish the share repurchase. Vance Chang: Sure, Todd. So first of all, our dividend yield implies a dividend yield of approximately 3%, as we said, and it's still one of the highest amongst our peers, right? And second, our asset-light model really generates healthy free cash flow. So it allows us to return meaningful capital to shareholders consistently, and that's not going to change. So it has nothing to do with cash flow or ability concerns on that matter. Lastly, the goal -- to hit your point, the goal is always for us to deliver strong returns to shareholders. Currently, given how undervalued the stock is, right, especially given what we're seeing with the momentum with our business, the best way to increase TSR over time is through buybacks. And while we invest in company restaurants and franchisee restaurant remodeling and development. So we just think at this point in time, this is the most efficient way to increase shareholder return over time. Todd Brooks: So price dependent, obviously, but this -- you signed up for the 2-quarter commitment, but it sounds like share repurchase is a bigger component of returning capital to shareholders going forward? Vance Chang: Price dependent, but that's a fair statement, price dependent, yes. Todd Brooks: Great. Then I wanted to ask Lawrence about with House Faves expanding to 7 days a week, how has the brand been able to handle that operationally? I know that typically, those weekend periods are peak periods for IHOP to begin with. Now you're bringing potentially a value-seeking customer to try to get to the box during those peak periods as well. How are the units handling it? And is there an efficiency gain to happen as we get more than 6 weeks into having the menu available 7 days a week? Lawrence Kim: Yes. So thanks for the question, Todd. One thing that we're very methodical about is ensuring our franchisees and our restaurants are equipped to handle any new type of promotion and especially when it comes to something like an everyday value menu. So we tested this across several months and across different markets to ensure not just is it a transaction and traffic driving, but also profitable program for the franchisees. And also, that ties to your question, which is the operational capabilities. So the main focus of our value platform, in particular, is leveraging core items. So I cook a lot in the restaurants and it's back with the cooks and the chefs back there. And we want to make sure they focus on our core items, pancakes, eggs, bacon, omelets, items that from a speed standpoint, could be managed thoroughly and have no impact whatsoever in terms of speed. And so that's why, as John alluded earlier, our speed has actually improved continuously even with the everyday value menu because we've optimized it based on our core. And so from a cooking standpoint, they're just masters at the trade there. Todd Brooks: Just a follow-up there, Lawrence. If customers were coming anyway on the weekend and the House Faves is focused around core items, that kind of transference into the value bucket, is that greater on the weekends at peak periods? Is it less? Is it pretty consistent with what you've seen during the week? Lawrence Kim: It's still early as we've only been in the everyday value menu launch since mid-September. And so we're continuously tracking. But even throughout the test data as we did it for several months, it stayed fairly consistent. Actually, with the barbell strategy, we are seeing potentially value increasing on the weekends, but the check counter, which is our barbell strategy, introducing new premium items and featuring them on the table with POP and even with the menu inserts, we're seeing a good balance in terms of check growth, even including on weekends. Operator: Ladies and gentlemen, I'm showing no further questions at this time. I would now like to turn the call back to John Peyton, Dine Brands' CEO, for closing remarks. John Peyton: Thanks, Towanda, for taking such good care of us, as you always do. And thanks, guys, for your questions. I'll just sum up with a few key points. We know we've got more work to do, but we are pleased with the effects of the retooling and the refocus that both brands have put in place. We're pleased with the performance from the last 2 quarters. We're pleased with the potential that dual brands is posing to accelerate our return to net unit growth. As Vance mentioned, our stock is undervalued in our opinion, and we are directing our shareholder return strategy through this buyback program because we believe in our strategy, we believe in the future of the company, and we think that's a very good investment right now. So I appreciate your questions and look forward to talking to you later today. Operator: Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the ArcBest Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I will now turn it over to Ms. Amy Mendenhall, Vice President, Treasury and Investor Relations. Please go ahead. Amy Mendenhall: Good morning. I'm pleased to be here today with Judy McReynolds, our Chairman and CEO; Seth Runser, our CEO-elect and President; and Matt Beasley, our Chief Financial Officer. Other members of our executive leadership team will also be available during the Q&A session. Before we begin, please note that some of the comments we make today will be forward-looking statements. These statements are subject to risks and uncertainties, which are detailed in the forward-looking statements section of our earnings release and SEC filings. To provide meaningful comparisons, we'll also discuss certain non-GAAP financial measures that are outlined and described in the tables of our earnings release. Reconciliations of GAAP to non-GAAP measures are provided in the additional information section of the presentation slides. You can access the conference call slide deck on our website at arcb.com in our 8-K filed earlier this morning or follow along on the webcast. And now I'll turn the call over to Judy. Judy McReynolds: Thank you, Amy, and good morning, everyone. ArcBest is well positioned to navigate any environment guided by a long-term strategy built on 3 pillars: growth, efficiency and innovation. At the heart of our approach is a deep understanding of our customers. Delivering for them drives our success and enables us to achieve our financial objectives. Years ago, we recognized that supply chains were becoming more complex, and we took proactive steps to prepare ArcBest for that future. Today, we deliver flexible, efficient and fully integrated solutions designed to meet our customers' evolving needs. By listening closely and solving real-world challenges, our teams position ArcBest as a trusted strategic partner, helping customers succeed not just today, but for the long term. In late September, we hosted our Investor Day in New York City, and we appreciate everyone who joined us, both in-person and virtually. During the event, we shared ArcBest's strategic vision, showcased key initiatives and introduced long-term financial targets that underscore our disciplined growth-focused approach. As we execute on our strategy, we are supported by a strong and experienced Board of Directors whose expertise spans transportation and logistics, finance and capital markets and digital transformation. In that spirit, we are pleased to welcome Chris Sultemeier to the ArcBest Board. Chris brings more than 30 years of leadership in logistics, transportation and supply chain operations. His deep industry knowledge will be a tremendous asset as we advance our long-term goals. I also want to take a moment to recognize Dr. Craig Philip, who will retire from the Board in January after many years of dedicated service. Craig's insights and guidance have been instrumental to ArcBest's success, and we are deeply grateful for his significant contributions. Today's call is especially meaningful for me because it is my final earnings call as CEO. It has been an incredible honor to lead this organization. Over the last 15 years, I've had the privilege of working alongside some of the most talented and dedicated professionals in the industry. Together, we've embraced change, driven innovation and built a company that is truly unique and differentiated. I am deeply proud of what we've accomplished and equally excited about what lies ahead. Seth Runser's transition to CEO has been carefully planned, and the Board and I have complete confidence in Seth's ability to lead ArcBest into its next chapter. I've worked closely with Seth for many years. He knows ArcBest inside and out, has a clear strategic vision and demonstrates a genuine commitment to our people and customers. I know he will lead ArcBest with integrity, purpose and passion. I will always cherish my time as CEO, and I have no doubt that the best is yet to come. ArcBest is built to deliver, and I look forward to watching this company continue to grow and thrive, both as Chairman of the Board and as a committed long-term shareholder. With that, I'll turn the call over to ArcBest's CEO-elect and President, Seth Runser. Seth Runser: Thank you, Judy, and good morning, everyone. Before we dive into the details of our third quarter performance, I want to take a moment to focus on the bigger picture. At ArcBest, our strategy is built around creating meaningful value for our customers. Every day we help them navigate complexity, overcome disruption and achieve stronger supply chain outcomes. That's what sets ArcBest apart. Looking ahead, this commitment will continue to guide us, helping us to anticipate challenges, seize opportunities and lead the industry with innovative, customer-driven solutions. By delivering for our customers, we position ourselves to achieve profitable growth, generate strong free cash flow and create long-term sustainable value for our shareholders. Now let's review the progress we've made on our profitable growth initiatives. In the third quarter, we averaged 21,000 Asset-Based LTL shipments per day, a 4% increase year-over-year. This growth and market share gain reflect the strength of our refined go-to-market strategy and our intentional focus on expanding our core LTL business. As we onboarded new business, we faced some service challenges that caused us to fall short of our expectations, higher-than-expected volumes in certain markets, greater intra-month volume changes, conservative hiring earlier in the year due to macro uncertainty, and peak summer vacation season all contributed. In some locations, increased reliance on Cartage also impacted cost and service. These factors affected on-time pickups and deliveries, which was reflected in our latest Mastio survey results. However, we acted quickly. Hiring efforts have advanced in key markets, Cartage usage has significantly declined, and service levels have returned to normal. Customer feedback is already reflecting these service improvements. As we grow, we remain committed to delivering the premium service our customers expect. Pricing discipline remains a cornerstone of our profitable growth strategy. In our Asset-Based business, we continuously evaluate account and lane level performance to ensure we're appropriately compensated for the value we deliver. Our decisions are informed by shipment profile data, lane pairings, shipment density and pickup and delivery requirements. When freight moves through our network, we monitor performance closely. And if margins don't meet expectations, we partner with customers to identify solutions that balance service quality with sustainable returns. This is an ongoing process, and we are pleased to have achieved a 4.5% average increase on deferred contract pricing renewals during the third quarter. Turning to Managed Solutions. Shipments per day grew by double digits year-over-year in the third quarter, setting another quarterly record for both revenue and volumes. This performance underscores our ability to help customers adapt to a dynamic freight environment and find cost efficiencies in their supply chains. Even amid the ongoing freight recession, growth in Managed helped us achieve an all-time high for asset-light shipments per day. Truckload also showed meaningful progress without relying on macro tailwinds. Our pricing discipline during bid season drove a nearly 9% increase in revenue per shipment with corresponding improvements in gross margins. We're advancing on our strategic initiative to optimize the truckload business mix, focusing on higher-margin SMB customers. We've reorganized sales teams, streamlined processes and leveraged technology to enhance efficiency. As a result, employee productivity in truckload is at its highest level ever. We've also made meaningful progress on efficiency and innovation, key pillars of our long-term strategy. Our continuous improvement team continues to conduct service center visits, coach employees on process and safety compliance, deploy new technologies and ensure confident adoption of new tools. These efforts have delivered $20 million in year-to-date savings. Our strategy and optimization team led by Christopher Adkins is focused on delivering measurable value by combining targeted process improvements with advanced technology. These efforts ensure that AI is applied in ways that enhance productivity, streamline operations and reduce cost to serve across the enterprise. One example is our truckload carrier portal, which includes lane matching and auto offer negotiation. This tool frees up bandwidth for our teams, improves margin and helps reduce fraud. Adoption has grown to 28% and 52% of truckload shipments are now digitally augmented. These initiatives are improving productivity and helping us mitigate inflationary cost pressures. Looking ahead, we remain focused on disciplined execution and continuing ArcBest's legacy of innovation and service. We are confident that our approach will drive growth and profitability despite near-term headwinds. As many of you know, we set ambitious but achievable targets for 2028 at our Investor Day. These include improving the non-GAAP operating ratio in our Asset-Based business to 87% to 90%, delivering asset-light non-GAAP operating income of $40 million to $70 million, generating total operating cash flow of $400 million to $500 million and achieving non-GAAP EPS in the range of $12 to $15. We remain well positioned to deliver on these targets. Before I turn the call over to Matt, I want to thank Judy for her vision, her leadership and the way she has transformed ArcBest. She is an incredible leader, and I am so grateful for her trust and support. I'm glad she's staying on as Chairman and look forward to what the future holds. On behalf of the entire team at ArcBest, we wish Judy and her husband Lance the best in this next chapter. With that, I'll turn it over to Matt to walk through the financials. Matt Beasley: Thank you, Seth, and good morning, everyone. Despite continued softness in the freight environment, ArcBest delivered solid third quarter results that reflect disciplined execution and a continued focus on creating long-term value for our shareholders. Taking a closer look at our third quarter performance. Consolidated revenue was $1 billion, down slightly year-over-year. Non-GAAP operating income from continuing operations came in at $50 million compared to $55 million last year. Our Asset-Based segment saw a $10 million decrease in non-GAAP operating income, while the Asset-Light segment delivered $1.6 million of non-GAAP operating income, an improvement of nearly $6 million over last year. Adjusted earnings per share were $1.46, down from $1.64 in the third quarter of 2024. Turning to our Asset-Based business. Third quarter revenue was $726 million, representing a 2% increase on a per day basis. ABS non-GAAP operating ratio was 92.5%, an increase of 150 basis points over the third quarter of 2024 and an improvement of 30 basis points sequentially. In the third quarter, daily shipments grew by 4%, while weight per shipment decreased by 2%, resulting in a 2% increase in tons per day compared to last year. This growth was driven in part by onboarding new core LTL business through the commercial initiatives Seth mentioned. However, softness in industrial production and housing continues to pressure weight per shipment, reducing revenue per shipment without corresponding cost decreases. To support shipment growth, we added labor conservatively and supplemented network capacity with purchase transportation and local Cartage during peak vacation season. Annual increases in contracted union labor rates, combined with higher purchase transportation spending and equipment depreciation drove operating expenses higher. Despite these headwinds, cost per shipment improved by 1% year-over-year, reflecting ongoing productivity gains. Additionally, Cartage and purchase transportation costs returned to normal levels in September after elevated activity in July and August. We remain disciplined in our pricing strategy, securing deferred increases averaging 4.5%, a strong outcome in a market where many shippers are focused on cost savings. This underscores the strength of our customer relationships and the differentiated value we provide. Revenue per hundredweight declined 1% year-over-year, both including and excluding fuel surcharges, impacted in part by fewer shipments in the manufacturing vertical. Looking at October trends, daily shipments grew 1% year-over-year, while weight per shipment decreased 2% and daily tonnage levels declined 1%. For the fourth quarter, we expect our operating ratio to increase by approximately 400 basis points sequentially, reflecting the softness in the broader freight market that we're seeing across the industry. Moving on to the Asset-Light segment. Third quarter revenue was $356 million, a daily decrease of 8% year-over-year. Shipments per day reached a record high, up 2.5% from the prior year, driven by double-digit growth in our Managed Solution. Revenue per shipment decreased nearly 11%, reflecting the soft freight market and growth in our Managed business, which has smaller shipment sizes and lower revenue per shipment levels. SG&A cost per shipment decreased over 13%, reaching the best level in Asset-Light history, driven by productivity initiatives and a higher mix of Managed business with a lower cost to serve. Shipments per person per day also hit an all-time high. Non-GAAP operating income of $1.6 million was a significant improvement compared to last year's non-GAAP operating loss of $4 million, driven by volume growth, margin improvement and cost reductions. In October, Asset-Light daily revenue was down 9% year-over-year, primarily due to lower revenue per shipment from the soft freight market. Managed continued to show strength, though its smaller shipment sizes contributed to lower revenue per shipment. Shipment growth, which was strong through the third quarter, has moderated as we entered the fourth quarter. This slowdown is typical for this time of year as the second and third quarters generally represent peak shipping periods for our customers. For the fourth quarter, we anticipate an operating loss in the range of $1 million to $3 million, reflecting seasonality and current market dynamics. We remain focused on managing costs and positioning the segment for long-term profitability. We continue to take a balanced long-term approach to capital allocation. For 2025, we've updated our net capital expenditure guidance to approximately $200 million, a decrease from the previous range of $225 million to $275 million. This reduction reflects $25 million in net proceeds from real estate sales completed in the third quarter, which generated a pretax gain of approximately $16 million. These properties were replaced by new locations gained through the Yellow auction sites that strengthen our network and enhance our operational footprint. In the first 9 months of 2025, we returned over $66 million to shareholders through share repurchases and dividends. In September, our Board increased the company's share repurchase authorization to $125 million, a clear sign of confidence in our strategy and long-term outlook. We'll remain opportunistic with repurchases based on share price while prioritizing high-return organic investments and maintaining prudent leverage. Our balance sheet remains strong with approximately $400 million in available liquidity and a net debt-to-EBITDA ratio well below the S&P 500 average. While external conditions remain dynamic, ArcBest is well positioned for the future. We're focused on what we can control, operating with discipline and making smart strategic decisions that strengthen our business and create long-term value. Before I turn the call back to Judy, I want to recognize her leadership. Judy has played a pivotal role in shaping ArcBest into the company it is today, and her vision and commitment has set a strong foundation for our future. On behalf of the entire team, thank you, Judy. It's been an honor to work alongside you. Looking ahead, I'm excited to partner with Seth as we build on that foundation and continue driving our strategy forward. Judy, thank you again. I'll now turn the call back to you. Judy McReynolds: Thank you, Matt. Before we move to Q&A, I want to leave you with this. ArcBest's greatest strength has always been its ability to adapt and lead through change. That resilience transformed us from a small local freight hauler into the global logistics company we are today, and it will continue to drive our success for years to come. As I step away from my role as CEO, I do so with complete confidence in our team and in the strategic path we've set. This company is in great hands, and I look forward to watching its next chapter unfold. To our analysts and shareholders, thank you for your trust and partnership. To our employees, thank you for your dedication and resilience. And to our customers, thank you for choosing ArcBest. It has truly been an honor to serve as CEO. With that, let's open the call for your questions. Operator: [Operator Instructions] Your first question comes from the line of Jason Seidl with TD Cowen. Jason Seidl: Judy, I just wanted to say congratulations just on a great career at ArcBest and I wanted to tell you what a pleasure it was working with you and wish you all the best going forward. I want to jump a little bit, guys, to sort of the guide in 4Q and then maybe what that means to rolling into '26, because it's obviously a lot weaker than I think I would have expected. Is there anything going on seasonally that you think would be sort of abnormal? Like are you more impacted by the government shutdown than maybe one would think? Or is this something where normal seasonality starts you out a little bit on the year-over-year decline side into '26? Seth Runser: Jason, this is Seth. Thanks for the question. So we did see some softness in October, and that's similar to what our peers have been reporting. We always see that step down sequentially from third quarter to fourth quarter, but it's been below our normal expectations as we move through the month. So normally, we step down about 3% on shipments. We're seeing closer to about a 5% reduction. And then when you think about the way the calendar falls in November with only 18 business days and the holidays, that just creates some challenges from a top line perspective. So the weakness in October we really attribute it to multiple factors. You saw PMI was released on Monday, and that continued to be below 50. We heard the stories about inventory pull ahead in July, and that might be a factor. The continued weakness in the market just impacting weight per shipment, which we've been discussing throughout this freight recession. And then there are secondary impacts of the government shutdown. The only area where we really do a good amount of government business is on the Asset-Light on the expedite side with Panther. So we're seeing that impact on Asset-Light results and the guide we gave there. But we can't point directly to Asset-Based impact, but the government is the largest employer in the United States. So I'd imagine there's some secondary impacts there. So we're taking action to reduce our costs and align resources with the level of revenue that's given, and we expect that to continue throughout the fourth quarter. That's something we've done through our entire history as we've navigated these cycles. In Cartage and PT, what we did in September to reduce that cost is a great example. So we're focused on pulling all those levers, but we're also focused on the long term and believe in our strategy and initiatives that we outlined at the beginning of the -- at our Investor Day last month. We see on the growth side, our core business continues to grow. The pipeline continues to be very strong. We've done a lot on the efficiency front. We're taking more cost actions as we move through the fourth quarter. Really proud of the Asset-Light team improving productivity, 33%. We saw improvements in Asset-Based as well. And we have a robust roadmap of future projects that we're working on, which we think is going to provide some efficiency gains in the future. So the way we built this company is to say yes to our customers, and we think we're built for any environment. So, whether it's a little bit weaker or busier, we want to say yes to customers, and that's the way we're built. So we've been doing this a long time, over 100 years. And we've navigated this cycle very well, and we'll continue to make adjustments as we move through the rest of the year and as we move into 2026. Operator: Your next question comes from the line of Brady [ Ste ] with Stephens, Inc. Brady Lierz: Congrats to Judy on the great career, and we're sad to see you go. Kind of following up on Jason's question. Previously, you have talked about 350 basis points to 400 basis points being the normal 4Q to 1Q OR move. That would imply if you add the 400 basis points to -- from 3Q to 4Q, basically, that would imply you have an unprofitable to breakeven LTL. If you can talk about how you expect that to progress? And then I guess also just talking on the pricing weakness here in October. I know I'm sure some of that is mix related and some of it is a declining weight per shipment. But if you can just talk about some of the dynamics in there as well. Matt Beasley: Yeah, Brady, it's Matt. So you're right. We have talked about the 350 to 400. If you were to look at just a straight 10-year history, it's more like 250 basis points, but there were some strong 4Q to 1Q moves during COVID. And so over the last few years, as we've given the history, we've excluded those. I think to Seth's point, we certainly are taking a look at costs at a very detailed level in addition to just all of the ongoing efficiency and productivity projects that we've had and have been working on. Certainly, we're pleased with the results that we've seen, as we talked about with the record levels of productivity on the Asset-Light side and just continued improvement on the Asset-Based side as well. And so, we're continuing to make progress, and we're continuing to identify costs and to pull those out. And so, I think it's a little bit too early to say just given some of the softness that we've seen over the last few weeks. I wouldn't say that we're necessarily expecting that to persist into the first quarter. We're hopeful as we get some resolution on the government shutdown. And as we move into the new year and we see the impact of the recent interest rate moves, we'll get some improvement on the macro. But I would say we're focused on controlling everything that's within our control on the cost side and again, expect continued progress there and more to come on what the sequential guide will look like as we move from the fourth quarter into the first quarter. On your question on yield, Eddie, I don't know if there's anything that you might want to add from a pricing standpoint in terms of what we're seeing? Eddie Sorg: Yes. I mean I actually think it's improving from where we were earlier in the year. There is a lot of noise with our price metrics with account mix changes, profile changes. But we were able to post a 4.5% renewal increase, which was an improvement from second quarter. And really, that increase by month actually improved throughout the quarter. So we're very optimistic we're going to continue that momentum into the fourth quarter and into 2026. So I feel better about where yield is standing right now. Operator: Your next question comes from the line of Jordan Alliger with Goldman Sachs. Jordan Alliger: Judy, it's been great interacting with you all these years and best of luck going forward. I really appreciate all your time. Judy McReynolds: Thank you. Jordan Alliger: So I guess maybe a big picture question then. Obviously, it's still pretty tough out there in the freight world, as denoted by the volumes from you and your peers in October. But pricing seems to be resilient. So I guess my question is, can you perhaps share some thoughts on the capacity setup when we do get to the volume inflection from an industry perspective overall, taking into account the Yellow bankruptcy. Like what are you seeing in terms of terminals sort of going into the next cycle and how it stacks up? And when we do inflect, could the situation lead to what sort of price recovery, if you will? Seth Runser: Jordan, this is Seth. When we think about just excess capacity, there's obviously a lot of that right now in the LTL space and then truckload, obviously, with the way the market has been. From an LTL perspective, I think is where your question was coming from. Long term, we just have less capacity than we had 5 and even 10 years ago. When you look at how the Yellow auction kind of played out, there's a good chunk of those facilities that left the industry. So we've been strategic with where we've invested, where we see growth, service or efficiency opportunities, and it hasn't added a lot of cost to our actual base. We've seen the productivity improvements as we've opened new facilities or expanded current facilities. So, we've talked over the long term, we have a long-term network plan, and we've expanded by about 800 doors. And most of that work is done and past us. So I think when the market actually inflects and we see things start to get busier, that's going to be positive for pricing because there's just less capacity out there. So what I love about our company is we invest throughout cycles. So whether it's a down cycle or up cycle, we're making strategic investments to position ourselves to say yes to customers, whether it's a bad market or a good market, which I already mentioned. So, I feel like we've been really strategic that we'll be able to take advantage when the market gets better. And the relationships that we have with our customers, 80% of our revenue comes from customers over 10 years. That allows us to improve our price as we deliver on the value that our customers see. Matthew Godfrey: Yes. And Jordan, this is Matt Godfrey. I would just add to build on what Seth said. We've been very strategic throughout our real estate journey with the capacity that we've added over the last few years. The Yellow opportunity through their bankruptcy gave us the opportunity to speed up some of the targets that we had. But we take a continuous evaluation approach to our network. And so, we'll continue that process into the future, but we feel very good about where our capacity is when the market turns and the ability to say yes to our customer base. Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: And Judy, I will also echo congratulations on your retirement here and you'll be missed. Seth, maybe if we get a sense of the volume decline that you've seen in the last couple of years. And obviously, you pointed out to the ISM being weak, et cetera. But do you guys have a sense of how much of the volume decline may potentially be cyclical versus structural in terms of LTL shift or maybe some of the private guys ramping up and gaining share? And how much of it is structural versus cyclical? And maybe on that same note, in your opening remarks, you kind of spoke about some of the factors that may have hurt you in Mastio this year. Do you feel like that also is more of a cyclical or a transitory drop and you guys will rebound next year? Seth Runser: Thanks, Ravi. So when I think about what I've done throughout this year, I spend a lot of time with customers and customers are facing just general uncertainty around tariffs and what happens with interest rates and demand and everything that's going on out there. So we've tried to partner with customers if they need to increase inventory or shift where they're sourcing from, and that aligns well with our integrated approach. So this is more cyclical from our standpoint because our retention stats are really in a good spot. We haven't lost customers. They're simply just shipping less, and that's what we've been talking about for the past few years. But when we think about the opportunity that we have, we operate in markets with $400 billion worth of opportunity. So that's just a tremendous way to expand with our loyal customer base that we already have. So with the change in strategy and market approach from a sales perspective, we continue to see our core LTL business grow, managed at all-time highs, and we continue to make progress on our SMB strategy within truckload. So I believe that it's more cyclically related than just the demand softness throughout and I believe strongly in what we're doing to execute to see profitable growth into the future. And then your other question about Mastio, we anticipated that might happen. That's why we disclosed that in our 8-K in August about service challenges. We were really successful with onboarding new business, and we were conservative in our hiring targets earlier in the year. So we just didn't have the staff in place to service that business the way we expect it to. So I'm really proud of the way the team reacted quickly, solve those service challenges. And when we look at our internal metrics, we've improved substantially since the summer peak vacation. So -- and we expect that to continue because we think the better you service customers, the stronger your pricing power and retention is going to be, and that's the type of company we are delivering a premium service for our customers. Operator: Your next question comes from the line of Ken Hoexter with Bank of America. Ken Hoexter: Judy, again, congrats on your upcoming retirement. So, this is the worst OR, I guess, in the fourth quarter forecast here since the first quarter of '20 COVID lows and then going back to the -- if it's the fourth quarter, it's worse since going back to, I guess, to 2017. Matt, you mentioned you continue to make progress, but I'm confused in where the progress is, right? So you're starting off soft on the volumes, noted a corresponding decreasing or inability to decrease the costs. So what moves are you making to then align those costs? Is it the PT that's staying out of whack? Is it something with the extra hiring you've done? Just maybe trying to contrast if you know that the costs are out of whack, what moves can you take to realign that to get the cost back down? Matt Beasley: Yes, Ken. So we have a number of different initiatives that have been ongoing across the Asset-Based organization, including our continuous improvement initiatives and teams have been going out across the footprint. Starting with our largest facilities, we continue to see a lot of runway with that. And certainly, we're continuing to advance our technology initiatives in a number of different ways, including around labor planning, line haul, our city route optimization project, which we talked about the benefits that we're seeing there. And you can see that in the numbers. I mean we have normal, typical inflation in the business. Certainly, we have seen on the depreciation front as we've replaced our fleet using our total cost of ownership model, just the increased cost that we're seeing on the equipment side has shown up in our depreciation. We know that we've just got normal increases on the ABS side under our union contract. And again, in the third quarter, we also used a little bit more Cartage and purchase transportation than normal just as we saw that volume surge. But then if you look on a cost per shipment basis, we were down 1% year-over-year on cost per shipment. So not only being able to mitigate the effects of inflation on a year-over-year basis, but also being able to decrease the cost on a per shipment basis. So I would say, in general, we're focused on what we can control, and we expect to make continued progress on that. As we move through 2026, we certainly are seeing the same macroenvironment that everybody in our industry is seeing. As talked about on their calls, we're seeing show up in industry surveys. And so certainly, that is affecting the guide that we're seeing for the fourth quarter. But we still -- we're seeing the impacts of our commercial initiatives in our results. I mean, you still saw volume growth in October. We're still expecting to see overall volume growth on a shipment per day basis for the fourth quarter. We're taking a lot of action on the yield side that I would say has not yet fully accrued to results, but we're going to expect to see the results of as we move into the first quarter of next year. So again, certainly, like we talked about, a little bit softer macro backdrop than we were expecting or maybe had seen historically with some of the factors that Seth talked about, including what are likely some secondary impacts from the government shutdown, maybe some pull ahead and just continued weakness in the manufacturing economy. But we still feel good about the targets that we gave at Investor Day, and we're continuing to make progress on those, and we expect that we'll continue to see results. Operator: Your next question comes from the line of Bruce Chan with Stifel. J. Bruce Chan: Judy, certainly been a pleasure working with you over the years, and we're going to miss you, but I wish you all the best here. There's a glancing reference to the supply dynamics and truckload earlier in the call, so maybe I'll take that one. I know that we've talked about overflow truckload freight in your model in the past. Maybe you can just remind us of what percentage of your business overlaps with that market? And then maybe more broadly, what are your views on that returning? And are you seeing any signs, even if early or having any conversations about that coming back? Matt Beasley: Bruce, this is Matt. So you're right. I mean we talked about this a little bit at Investor Day just in terms of the potential that we see for -- back to some of the discussion about cyclicality as we think about where we've been in manufacturing housing and truckload rates. If we see those returning to more normal historical levels, that's where we could see the upside of up to 280 basis points from macro improvement as we move from 2024 through 2028. As we think about the truckload overlap into our LTL business, we have seen correlation between the higher length of haul, so think about maybe 1,000-plus miles and heavier shipments, so maybe 5,000-plus pounds. And it's not a significant piece of our overall Asset-Based LTL book of business. It's probably low-single digits. But still, we have seen some of those volumes move away. Of course, those are very strong when you think about how those price out on a revenue per shipment basis, which is why there is some movement back. There has been some movement to the truckload market, just where those truckload prices are. And so I would say as we think about where truckload pricing will be going here over the next year or 2 as we think about capacity dynamics, and then just an improving macro, we would expect for those shipments to make their way back into the LTL network. Operator: Your next question comes from the line of Tom Wadewitz with UBS. Michael Triano: This is Mike Triano on for Tom. And Judy, team UBS here, wishes you all the best in retirement. So at Investor Day, you mentioned an assumption in the long-term target of revenue per shipment outpacing cost per shipment by 80 basis points a year on average. As we look into '26, do you think you need help from the macro to drive better freight mix and revenue per shipment? Or is there enough that you can do from a cost perspective and just stabilizing the mix that can help you achieve a positive spread in that revenue minus cost per shipment metric? Seth Runser: Mike, this is Seth. So when I think about 2026, obviously, no one has a crystal ball about what's going to happen right now. There's been a lot of changes in these last few years, but we do have confidence in our longer-term view and the targets that we outlined at Investor Day. So when you think about from a demand standpoint, we don't see a lot improving on the demand side right now, but lower interest rates could spur increased homebuilding, manufacturing, auto, all those different things. We saw the tax bill get passed that could drive renewed freight demand, clarity over tariffs and the government shutdown as those issues get resolved, we think that could be a positive impact for us. So the supply side is something we're looking at, but we haven't seen the impacts from the ELP mandate or the non-CDL enforcement yet, but we're hearing anecdotal stories that could be positive. So if you just look at the cost to operate a truck and where the truckload market pricing is right now, we could continue to see exits on that regard. But what I will say is despite all the environment and macro noise, like Matt mentioned earlier, we're focused on things in our control, and that's being customer-led, and we're going to focus on managing our costs in the short term as well as being positioned for the long term. And we're taking those actions now, and Cartage and PT is a great example of that. But we have other areas of opportunity that we're looking at. We continue to invest in service improvements across the board. I look forward to launching ArcBest View next year and having a better service for our customers. And we have a robust pipeline that I already mentioned before. So we feel confident that we can achieve that revenue per shipment outpacing cost per shipment by the 80 basis points as we move through next year and throughout our entire target window through 2028. So although, we continue to navigate just the challenging macroenvironment, I'm very confident in our team's ability to generate shareholder value over the long term. Operator: Your next question comes from the line of Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Judy, congrats again on your upcoming retirement. Just 2 follow-ups here. First one, just on the September to October trend. It looks like weight per shipment is stabilizing, but pricing per hundredweights not actually increasing. So I'm just trying to understand if you can clarify that a little bit in terms of the comments, I think, Matt made about maybe being able to catch up for some of the costs you incurred ramping up this new volume with price or maybe it's on different shipments. So a little bit more color there would be helpful. And then also, if you can give us a little more clarity in terms of the productivity per shipment or per person per day rather in Asset-Light setting a new record. Is that driven by some of the mix shift? Or how should we think about how you guys are reaching that? Eddie Sorg: Brian, this is Eddie. In terms of like the price change from September to October, we do still see a lot of volatility when it comes to our account mix. The macroeconomic environment is still pretty -- is a pretty big headwind for us. So we're not getting a lot of help there on weight per shipment. And so, we did see some business come into our network that had a different profile, and it's typically been operationally efficient for us, which helps. But it does put some pressure on our -- your typical revenue per hundredweight yield metrics. But we are very encouraged with the progress we're making with our renewal increases, I mentioned that earlier on the call. But that's momentum going in from the second quarter to third quarter, and we're seeing really good signs going into the fourth quarter as well with those renewal increases. So lot of noise in those typical yield metrics, but I do feel like we're making progress. And Matt mentioned some yield initiatives that we've been taking, and that's having an impact on some of our account mix as well. So progress and there's more to do, and I think you're going to see that in fourth quarter and into 2026. Seth Runser: Yes, Brian, I'll take the Asset-Light productivity question. So we have a lot of initiatives that we're working on at Asset-Light. You saw that 33% productivity improvement that we mentioned. But I still feel like we have a lot of runway to go that will help our people to focus on our customers versus doing manual tasks. So we also measure service from an internal standpoint. On the Asset-Light side, and we continue to see best-in-class results. on the service side. But what gives me a lot of confidence in the future is some of the projects that we've been working on with Christopher's team and the truckload team and managed around inbound call automation. We're automating scheduling and booking loads, and that allows the team to focus on more complex work. We started to implement Truckload quote augmentation, which uses AI to load, build, quote and e-mail responses to customers much quicker than a human can do and focus on those more challenging things. The shipper initiatives on the carrier side, we're doing a lot with third-party load board integrations, routing guide automation, automated offer approvals and then the carrier portal, which I mentioned in my opening comments. We continue to have features like lane matching, auto offer negotiations, which really helps reduce that fraud side of things in the market. So we're going to continue to invest in this area. Managed saw another record quarter from a growth productivity standpoint. We see a lot of runway there with a $1 billion pipeline, like we mentioned at Investor Day. So I think all of this work ultimately comes down to allow us to position ourselves for growth without having to add the cost when the market does inflect because of these productivity gains. Matt Beasley: Yes, Brian, it's Matt. I'll just maybe add on one more comment. So like Seth said, we're very proud of where we've come on the productivity side in the Asset-Light business and the 33% improvement that we saw on a year-over-year basis and where we see that going. And certainly -- so that has been a key driver of the performance. And it's been across our solutions. So truckload on its own reached its highest level of productivity when we look at shipments per employee per day in the third quarter. And then there are some other impacts just because in our managed solution, we do have higher productivity levels just on a shipment per employee per day basis. And as we continue to grow managed, we do see some impacts as well from there. But a lot of it is -- all of the initiatives that Seth has talked about that we've been working on and we're going to continue to focus on. Operator: Your next question comes from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to ask maybe a higher-level question. I know that you have pretty good insight into the housing market with your U-Pack business. So I wanted to hear if you had any insight from what your customers are saying as it relates to this overall housing demand and the expectation this could turn the corner in 2026? Seth Runser: Stephanie, yes, we're seeing the continued weakness on the housing front like it's been reported publicly. We hope with interest rate reductions that we're seeing with the Fed right now take action that that's going to spur some demand. We do think there's pent-up demand in the housing market. It's just been too expensive from an affordability standpoint. So I think as those interest rates lower, that's really going to help improve our U-Pack profit, obviously. When we look at U-Pack in general, we are at a very low point because of just the housing market where it's been over the last 3 or 4 years. So that really does drag on the weight per shipment metrics and some of those profitability metrics. So we think when the market flips, it's going to have kind of an outsized impact for us when the housing market flips. And also housing drives so much of truckload capacity, which then spills into LTL, obviously. So we think when the housing market strengthens, that's going to be impactful to us. But we don't see it in the near term. We think as the Fed continues to take actions, hopefully, into 2026, we see that demand continue to improve. Operator: Your next question comes from the line of Ari Rosa with Citigroup. Ariel Rosa: Judy, let me echo others in congratulating you on your retirement. Definitely a nice career, and it's always been a pleasure working with you. You mentioned in your opening comments market share gains in the LTL space. I'm just curious what you think is driving those market share gains. Given -- I guess it's hard to reconcile with some of the commentary around some of the service challenges. So -- but then also, right, you've talked about pricing discipline and other things. So like what is the process of gaining market share gains? Is that kind of maybe taking on some mix that's less attractive? And if you could just kind of talk about that strategy and how you think about those things? Because again, I'm trying to reconcile it with some of the margin pressure that you're talking about here, given it seems like volumes are actually looking okay relative to others. Eddie Sorg: Yes, Ari, this is Eddie. Yes, I mean, we've been very proud of our commercial team and what they've been able to achieve this year. We had consolidated our customer-facing groups and our business acquisition teams together under this commercial team. And that alignment has really led to a lot of great results when it comes to getting in front of our customers more, developing opportunities. And then one of the best things about ArcBest is we're differentiated in the marketplace. We offer a suite of solutions that are different than most of our competitors. We're an integrated logistics company with assets, and that has resonated throughout the year with our customers, and our sellers are taking advantage of that. From a standpoint of the type of business that's coming in, it's been good for us. It's been profitable. The profile of that business has been different than what our existing business was or is. But that's just because we've acquired that business at still a premium to the market price. If you look at our peers in that space, they have a lower revenue per hundredweight than what our average is. We are the market leader when it comes to revenue per hundredweight and yield. And so I think it's not bad business for us. But it is different, and it has led to some efficiency gains in our network from an asset base standpoint. But there's always an opportunity to utilize this growth to improve our mix, improve our yield in our company. And that's really what we've been focused on the second half of the year. Operator: Your final question comes from the line of Chris Wetherbee with Wells Fargo. Robert Salmon: It's Rob on for Chris. And Judy, we'd like to echo our best wishes as you move on to the next chapter. With regard to pricing, we saw a slight acceleration in the contract renewals in 3Q and a bigger tailwind from fuel, but revenue per bill declined sequentially in the quarter. Can you talk about the biggest drivers of the underperformance versus your contract renewals? And when you expect revenue per bill to better approximate renewals or GRIs as we're looking out? Eddie Sorg: Yes. Rob, this is Eddie again. Yes, I mean, the biggest driver of that revenue per shipment is the drop in weight per shipment. And that's been a headwind for us all year. A lot of the new core business, LTL core business we brought on has been heavier weight, but that softness in the manufacturing sector, industrial production and housing has been a pretty -- put some pressure on our weight per shipment metrics and ultimately, our revenue per shipment standpoint. So that's pretty much the story on that. Again, that profile has been operationally efficient for us. So it's led to some efficiency gains there that's been good for us. And we're just going to constantly look at our book of business. We make good -- we have a strong history of pricing discipline that allows us to really manage this business well. We make account-by-account decisions. And if we run across any business that we don't think is good for us or not contributing, we're taking immediate action on it to improve it. Operator: Your final question comes from Scott Group with Wolfe Research. Scott Group: Best of luck to you, Judy. Judy McReynolds: Thanks. Scott Group: So a couple of things. Maybe can you just talk about the tonnage assumption that you've got within the -- for the OR guide for Q4? Do you assume it gets any sort of better or worse? And then just on the LTL pricing environment, if I look back at the last couple of quarters when the yields have been down a little bit, you've disclosed, hey, we've got growth in lower cost but lower-yielding shipments, and you sort of took that text out and now it's just, hey, yields are flat. Is this -- I know the pricing renewals are getting better, but is this -- like taking that language out, is this indicating that it is, like, tougher pricing environment, and it's not about mix and it's more just sort of underlying price? Matt Beasley: Yes. So Scott, this is Matt. I'll talk a little bit just on the sequential view that we have as we move from the third quarter to the fourth quarter and kind of what we're seeing for tonnage overall. I would say as we're moving forward, we expect to see just a slight increase both on a year-over-year basis and a slight increase, maybe low-single digits on a year-over-year basis as we look at the fourth quarter overall from a volume perspective. And so certainly moderating versus what year-over-year volume that we were seeing in the second and third quarter, just as we've seen a little bit softer macroenvironment. And so I think as we think about big picture on tonnage, we would expect tonnage to moderate as well. Not expecting any significant changes in weight per shipment, but certainly, the overall macro softness could continue to impact weight per shipment as we move through the fourth quarter. On the pricing side, we continue to feel good about all of the actions that we're taking there. You're right. We have seen early in the year, just some of the new business that we took on was operationally more efficient, and we're still continuing to see that dynamic. If you look at just the profile of that business, how over dimensioned that business is versus our overall book of business. It just does not, as over dimensioned, doesn't have as many operational requirements, does generally have a lower cost to serve. And so I wouldn't say that there's anything in general that has changed in that overall dynamic. Eddie Sorg: Yes. The only thing I would add is, I really do believe that the pricing discipline is still right. I think the market is rational when it comes to pricing. I mean we have seen probably in the last couple of quarters just a higher frequency of customer bids, which does kind of create an opportunity for a competitive environment, especially for any carriers who don't have that business. But in those situations that -- where we've been an incumbent, we just lean into our value and our relationship, and that's typically allowed us to get a fair increase while retaining the business. Or worst case, we've used it as an opportunity to price out of some unprofitable business to achieve better yield results. So I don't think it's gotten anything worse in terms of the market. And I do feel like a lot of -- there is a lot of noise with our yield metrics just because of account mix and this macroeconomic impact on existing customers that they're just shipping less. And that existing customer base has historically been priced really well for us. And so, there are some headwinds there when that business is down. Operator: That is all the questions we have. I would like to turn it back over to Amy Mendenhall for closing remarks. Amy Mendenhall: Thank you to everyone for joining us today. We certainly appreciate your interest in ArcBest. This concludes today's conference. You may disconnect.
Operator: Welcome to the Dream Industrial REIT Third Quarter Conference Call for Wednesday, November 5, 2025. [Operator Instructions] The conference is being recorded. [Operator Instructions] During this call, management of Dream Industrial REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Industrial REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Industrial REIT's filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca. Your host for today will be Mr. Alexander Sannikov, CEO of Dream Industrial REIT. Mr. Sannikov, you may now go ahead. Alexander Sannikov: Thank you. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's Third Quarter 2025 Conference Call. Here with me today is Lenis Quan, our Chief Financial Officer. In the third quarter, we reported healthy operating and financial results supported by strong leasing spreads and robust growth in CP NOI. For the quarter, we delivered 4.3% year-over-year FFO per unit growth and 6.4% comparative properties NOI growth, driven by a 7.6% increase in in-place rents. We leased out over 250,000 square feet of vacancies and newly completed developments, which lifted our in-place occupancy 40 basis points to 94.5%. Our balance sheet remains strong with conservative leverage and ample liquidity. We are advancing our capital recycling strategy across our platform. During the quarter, we completed the sale of 2 nonstrategic assets within the Dream Summit venture, and we are firm on a disposition within the REIT's portfolio. In addition, we are currently underway on approximately $150 million of potential dispositions to user and investor buyers. These dispositions reflect our broader program to enhance portfolio quality and total return profile as we redeploy this capital into accretive opportunities, including higher-quality acquisitions that align with our longer-term portfolio strategy. So far this year, we have acquired over $100 million of infill mid-bay industrial product with a targeted stabilized yield of over 7%. These acquisitions are representative of our broader pipeline and of the asset profile we will continue to pursue. Recently, we completed the acquisition of a 130,000 square foot asset in Germany. The asset was acquired on a short-term sale and leaseback arrangement at market rents, delivering a going-in cap rate of over 8%. The asset is well located, features functional design and has existing rooftop solar panels to support our ancillary revenue program. The asset has undeveloped excess land, which can be activated for outside storage or expansion opportunities. In the quarter, we also completed the acquisition of a 90,000 square foot urban logistics asset in the Netherlands. The asset is within a prime logistics node with scarce supply. We acquired the property vacant and leased out the building within the first month of ownership for a 5-year term commencing in November at rents exceeding our underwriting. We achieved a yield on purchase price of over 8%. This leasing success is reflective of the healthy leasing momentum we are seeing across the mid-bay portfolio in Europe. With over 2.5 million square feet of leases signed to date in our European portfolio, we continue to see healthy demand for our assets and continued rental growth in core urban locations. In Canada, the occupier markets remain active and we see sustained demand in particular for well-located mid-bay infill assets. The leasing spread remained healthy. In our wholly owned portfolio in Canada, we achieved around 40% spreads in Q3 when adjusted for one fixed rate renewal this quarter. This is in line with the spreads we achieved in Q3 2024. We continue to work closely with our tenants as they implement their supply chain adjustments in response to the evolving trade dynamics. Notably, we are encouraged by the level of activity from tenants in the automotive sector. So far this year across our wholly owned and managed portfolios in Canada and in Europe, we signed over 1.8 million square feet of new leases, renewals and expansions, including on a build-to-suit basis with automotive occupiers led by blue-chip multinational names, and that is at an average spread of over 40% with mid-3% contractual escalators. While the RFP activity has been gradually ramping up from early Q2 2025 and our leasing pipeline remains robust, we are seeing longer decision-making time lines, impacting the pace of absorption. And while our in-place occupancy increased this quarter in line with our expectations, longer lease negotiations led to a slight decline in our committed occupancy to 95.4% this quarter. Since the quarter end, however, we have signed or advanced new lease negotiations on over 1.7 million square feet on existing vacancies across the wholly owned and managed portfolios, leading to additional commitments. Turning over to our strategic pillars. Partner capital formation remains a key focus for us as we are looking to grow our private partnerships revenue significantly over the next 3 to 4 years. The capital formation environment is improving as investors are shifting their focus from private credit to private -- to equity investments. We maintain an active dialogue with potential partners across our operating footprint, including in North America and Europe, and are encouraged by the progress we're making. Our solar program is progressing well with 2 completed projects and 5 new projects underway in the quarter. Over the past year, our near-term pipeline has grown significantly, now representing more than 120 megawatts of additional solar generation potential in feasibility or advanced stages. We're making progress on our strategy to upgrade power capacity at select properties across the portfolio for data center uses. We completed preliminary due diligence for 13 sites across Canada that could accommodate a critical load of over 600 megawatts. On 2 of these sites, we advanced deposits to local utilities to secure 105 megawatts of power with phased delivery over the next 2 to 5 years. Concurrently, we're in active discussions with operators and end users to explore potential value creation opportunities with the generated power capacity. Overall, we are encouraged by the progress across our key initiatives, including leasing, capital recycling, new revenue sources, positioning DIR well for the year ahead. I will now turn it over to Lenis to discuss our financial highlights. Lenis Quan: Thank you, Alex. Our business continues to deliver stable and consistent growth. We reported diluted FFO per unit of $0.27 for the third quarter, 4.3% higher than the prior year quarter. The solid year-over-year growth was primarily driven by comparative properties NOI growth of 6.4% for the quarter, led by 8.5% growth in Canada. In addition, lease-up of existing vacancies and newly completed developments contributed to overall FFO growth. Our net asset value at quarter end was $16.74 per unit, reflecting stable investment property values. We continue to actively pursue financing initiatives to optimize our cost of debt and maintain a strong and flexible balance sheet with ample liquidity. We ended Q3 with leverage in our targeted range and net debt-to-EBITDA ratio of 8.1x. To date, we have effectively addressed approximately 70% of our 2025 debt maturities. In July, we closed on the issuance of our $200 million Series G unsecured debentures at an all-in rate of 4.29%. We will swap the proceeds to euros at an effective rate of 3.73% starting December 22, 2025. The proceeds were partly used to repay the outstanding balance on our credit facility with the remainder earmarked towards prefunding our remaining $450 million maturity in December and for general trust purposes. We continue to evaluate several refinancing options to address the remaining debt maturity balance, and are currently observing rates in the high 3% range in the Canadian unsecured market with euro-equivalent debt approximately 20 basis points lower. These rates are about 30 basis points lower than what we were seeing this time last year. We completed the quarter with over $828 million in total available liquidity. Combined with the growing cash flow generated by our business, we are well positioned to fund our value-add and strategic initiatives, including our development pipeline, solar program and contributing to our private capital partnerships. Our third quarter performance demonstrates the resilience of our business, and we remain confident in our growth trajectory for the balance of the year and into 2026. Despite a slower pace of leasing in the first half of 2025 as a result of trade tensions, we have delivered healthy organic growth, supported by increasing in-place rents across our portfolio. Our FFO per unit continued to grow at a strong rate, even though we refinanced over 70% of our 2025 debt maturities early. CP NOI has outpaced the higher interest expense. As our in-place occupancy stabilizes, we anticipate the business to produce even stronger NOI growth driven by contributions from stable to higher occupancy and continued growth of in-place rents. For the remainder of the year, we expect the in-place occupancy to remain stable. With that, our expectation is that the pace of CP NOI growth in the fourth quarter will be consistent with Q3. We also expect that our Q3 FFO per unit run rate to continue into the fourth quarter. As such, adjusting for early refinancing of our 2025 debt maturities, we expect the full year results to be aligned with our previously communicated outlook. Looking ahead, we continue to expect a strong pace of FFO per unit growth into 2026. Our FFO growth expectations for 2025 and 2026 continues to be predicated on current foreign exchange rates, leverage levels and interest rate expectations as well as expected timing of the lease-up of our transitory vacancies. I will turn it back to Alex to wrap up. Alexander Sannikov: Thank you, Lenis. We have demonstrated a solid track record of delivering FFO growth while absorbing a 200 basis point increase in our average cost of debt since 2021. Since then, our FFO per unit has increased by approximately 30%, driven by organic NOI growth, contributions from development, accretive acquisitions, and new revenue sources such as our private capital partnerships business. All of these growth drivers remain intact today, and we expect to continue delivering strong results for our unitholders. We will now open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Sam Damiani of TD Cowen. Sam Damiani: Congratulations on the good results and stabilizing in the leasing market. That's great to see for another quarter. Maybe just to start off, Lenis, just to clarify your comments on the outlook for Q4 and into next year. Just with the same-property NOI growth, are you still expecting it to exceed 6% for this year and next year? Alexander Sannikov: Sam, as you know, we generally don't provide guidance for 2026 at this point, but I'll maybe pass it back to Lenis to clarify on the 2025 outlook. Lenis Quan: Yes. So Sam, we provided the buildup for the full year CP NOI growth in the prepared remarks. I think the commentary was that the growth that we're seeing for Q3 would -- that it would be very similar to what we would see year-over-year for the fourth quarter as well. Sam Damiani: Okay. And so that's clear. And just on FFO growth, you're reiterating your target. But again, your commentary, I think, last quarter was similar or higher growth in '26. Is there any change to that outlook? Lenis Quan: No, no. I think we continue to hold that same outlook. Sam Damiani: Okay. Great. All right. And maybe just on the partnerships. Alex, you touched on that. Can you maybe give us a little bit more color on the progress and sort of status of things as you work toward a potential JV over in Europe? Alexander Sannikov: As you know, capital formation of this nature takes time, and we are in dialogue with lots of strategic partners. I think for us, it's very important or as important to set up the right partnership as it is to set up a partnership or grow that business. So we are pretty focused on the profile of the partnership and where it's going to grow, what potential it has. And that informs the groups that we are in dialogue with. And naturally, that takes some time. But as I mentioned in the prepared remarks, we are encouraged by the progress. And that's across the footprint. We're seeing good progress in North America and good progress in Europe as well. Operator: Your next question comes from the line of Brad Sturge of Raymond James. Bradley Sturges: Just following up on Sam's question there just on the partnerships. I think you talked about maybe being -- seeing a little bit more traction around the greenfield fund or partnership. Is that still the case? Or are you seeing good progress across different types of investment opportunities, including core funds? Alexander Sannikov: Yes. We are seeing most traction, I would say, across the core plus to value-add spectrum of return profile. And the nature of the partnership can be greenfield as we call it, which means we just form capital to pursue new acquisitions, or it can involve some seed assets as we discussed previously. Bradley Sturges: Okay. That's helpful. My other question would be just in terms of capital allocation. Obviously, you've got potentially some capital coming back through asset sales. How would you rank sort of the opportunity set in terms of redeploying into your various buckets of growth? And also your payout ratio continues to trend down. And what would it take, I guess, to kind of see a distribution increase as well as you continue to realize AFFO growth or FFO growth? Alexander Sannikov: On the FFO growth and payout ratio, yes, your observation is very much aligned with ours, but also is aligned with the overall strategy we communicated at the Investor Day in terms of how we think about the distribution policy. So we want to see our payout ratio continue trending down. And over time, we see ourselves implementing a distribution policy that would translate into sustained growth in distributions per unit and that growth will be somewhat lower than the pace of growth in free cash flow so that the payout ratio continues to decline and the free cash flow continues to compound for the business. So there's no change to that broad philosophy, if you will. The only thing that we haven't yet communicated, and it's an ongoing conversation, is the timing of when we're going to implement this policy, if you will. So we'll obviously communicate this to the market, but the business is well positioned as you observed with the Q3 results as well. When it comes to capital allocation, nothing has changed really in terms of how we think about it relative to the prior quarter. We continue to see good opportunities that are proprietary to the business, and that includes investing in our private partnerships, including -- includes our intensification opportunities, whether it's excess land or solar. Some of the acquisitions that we are pursuing and highlighting in the Q3 results are at pretty compelling returns, as you can see. And obviously, we're looking at the unit price and availability of capital as to whether continued NCIB activity would make sense. So all of these opportunities are on the list and we continue evaluating them as we get capital. Bradley Sturges: And just to go back to the distribution comment there. The -- I guess, it's a quarter-by-quarter basis you're reviewing it. And at this point, no decision has been made on that. But are we getting closer, at least, to maybe seeing a more formal policy around annual distribution increases? Alexander Sannikov: We will communicate this as soon as we're ready. It's an ongoing dialogue that we're having with -- obviously with the Board and with the [indiscernible] management team. Operator: Your next question comes from the line of Himanshu Gupta of Scotiabank. Himanshu Gupta: So what are your thoughts on 2026 lease expiries? And any space you're expecting back? What kind of rental spreads should we assume? Alexander Sannikov: We generally don't expect to see material changes to our retention ratio in 2026. Himanshu, as you know, over the last decade, we've averaged at around 70%, 75% pretty consistently. We expect that retention ratio to carry into 2026 without any material deviations. So yes, there will be some space coming back to us, but that's normal course for our portfolio. And as far as rental spreads, as you know, we disclosed the expiring rents in the MD&A and we also disclosed the market rents. So we expect market rents to be consistent with the overall market rents for their respective regions for 2026 expiries. So there's no idiosyncratic space that is coming back to us or that is maturing in 2026. Himanshu Gupta: Got it. And in that context, should we assume kind of like stable occupancy into next year as well? Alexander Sannikov: Generally speaking, yes. We'll provide more color on 2026 outlook in February, as we always do, Himanshu. Himanshu Gupta: Okay. Fair enough. Okay. And then looking at the development project, Whitby development specifically, I think that was expected to be completed this quarter around this time. Is it leased up? Or how is the progress on the lease-up there on that property? Alexander Sannikov: It's getting completed. It's not fully complete. So it still is underway. There's still some work happening at the site. The leasing progress has been encouraging. We see good volume of RFPs for that asset, including for smaller footprint. The asset demises into small units as little as 50,000 square feet all the way up to the full building. And this development is 2 buildings of about 200,000 square feet each. So we see RFP activity for the entire range, and generally are encouraged by the feedback and how the asset is positioned in the market. Himanshu Gupta: Okay. Good to hear that. Alexander Sannikov: [Indiscernible] right now. Himanshu Gupta: Yes. And maybe just a follow-up on this. Is like the new leasing environment relatively softer compared to the renewal activity, would you say? Alexander Sannikov: As we've commented before, we've seen new leasing environment gradually improving throughout the second half of 2025, following a muted first quarter. And that's reflected in the lease-up that you see across our portfolio. That's reflected in our in-place occupancy as well. And the progress on our new developments is reflected in that. So we signed a few leases this quarter within our new developments, both for wholly-owned portfolio and some were managed developments, with good pipeline for the balance. The pipeline has actually improved relative to, let's say, August when we reported last time. Himanshu Gupta: Got it. Just last question. Federal budget was announced last night, big infrastructure spending being proposed. Do you see any read-through for your portfolio or industrial leasing demand in general for that? Alexander Sannikov: Yes. We're obviously digesting the budget as everyone else is in the market. One notable area where we see incremental demand is defense. We have already seen this -- the increased defense spending and increased sort of defense focus translate into incremental demand for industrial in Canada in our portfolio, early signs of that. And we expect to see more of it as this develops. Operator: Your next question comes from the line of Mike Markidis of BMO Capital Markets. Michael Markidis: Alex, good to see, I guess, the progress on the data center initiative. I think you said 2 deposits put down. I was hoping you can help us understand, I guess, stage delivery 2- to 5-year timeline. But how does that work? You put a deposit down. Who actually funds the infrastructure? I guess, I'm trying to get a sense of how the CapEx will build as you continue to get more and more approvals at the municipal level for power. Alexander Sannikov: Yes. So, so far, the deposits that we advanced are refundable deposit. This just secures our place in the queue and allows us to engage with occupiers on definitive time lines with definitive power capacity and delivery schedule. As we advance the infrastructure work for these sites, then it will require incrementally more capital to then have more firm visibility into power time lines. And then -- well, the big capital outlay will be obviously the construction itself. So what our priorities are right now is to secure either a JV partnership or a partnership with an operator or a lease on a powered shell basis so that we can continue investing capital with greater certainty of the revenue side of the equation. Michael Markidis: Okay. And then if it's not -- if it's 2 to 5 years out in terms of stage delivery, does that mean that substantial capital isn't really in the pipeline for 2026 and really 2027 at this point? Alexander Sannikov: Not for 2026. Could be for 2027 depending on how quickly we advance some of these projects. Michael Markidis: Okay. And then just as you're contemplating -- I know a lot of things in there, but it sounds like you want to engage with occupiers on the site. I mean, is this something where you would potentially build on spec basis? Or no, would you have to have a user lined up? Alexander Sannikov: A complete spec development would be unlikely at this point. So we'll want to secure some components of the revenue at least to proceed. Michael Markidis: Okay. Just last one for me before I turn it back. Obviously, a lot of focus on building the private capital partnerships. You said -- you gave us good color in terms of what the demand profile looks like in terms of core and -- core plus and value add. I was just curious. You guys have been pretty quiet in the U.S. ever since forming the U.S. JV. Is that market something that's on your radar screen at all? Or is it highly unlikely in the next 12 to 24 months? Alexander Sannikov: It actually is on the radar incrementally more now than, let's say, earlier this year. For the last couple of years, let's say, we haven't really seen strong opportunities in the U.S., and that's why the partnership also hasn't been growing. We are focusing a little bit more on growing that vehicle now and seeing good reactions from potential investors and also are starting to see more interesting opportunities in the U.S. as fundamentals start improving in certain markets. So I don't expect us to do anything sizable, but definitely incrementally, we're looking at growing that part of the business. Operator: Your next question comes from the line of Kyle Stanley of Desjardins. Kyle Stanley: Maybe just going back to Mike's questions on the data center side. I mean, clearly, data center investment is very topical today. It's -- every second article we see is something about AI or data center investment. Has anything changed from when you first brought this up as a strategy last year at your Investor Day in terms of your desire to invest in this asset class or maybe the pace at which you expect it to become a part of the portfolio, just given this enhanced focus? Alexander Sannikov: We continue to see additional data points that reinforce the thesis. And as you know, we're not buying land to build data centers. We are looking at it, at least for now, more from a highest and best use perspective for existing sites and existing assets. And so far everything we've seen, especially with the level of CapEx that goes into AI facilities or AI powering data centers, is encouraging for the thesis. Kyle Stanley: Okay. Maybe just as you kind of are working through current leasing discussions, has next year's review of USMCA come up at all? Are tenants concerned? Is it maybe impacting the term they're looking at for new leases? Just make any commentary on the impact this is either having or not having at all as you're doing your leasing today. Alexander Sannikov: We are not really seeing that impacting leasing decisions in terms of how occupiers are thinking about their footprints. It rarely comes up as a discussion point. If anything, we've seen a little bit more occupiers recently asking for longer lease terms as they are looking to invest in their space and they need term security. We've seen a little bit more of that over the last 3 to 6 months. Kyle Stanley: Okay. That's encouraging. Just the last one. Recent broker market stats highlighted softness in Montreal. I think this was probably expected and influenced by the Amazon departure this year. Just love your thoughts on the state of the leasing environment in Montreal, how you see your portfolio evolving through maybe the soft patch and when you'd expect that market to firm up a little bit? Alexander Sannikov: Yes. So in Montreal, it's a bifurcation between larger bay and smaller bay, small- to mid-day facilities. We see ongoing demand. And leasing strength and spreads are strong for mid-bay leasing and that's reflected in our stats this quarter. So adjusted for a fixed rate renewal that we mentioned in the prepared remarks, our spreads in Montreal and Quebec were 50%, which are pretty healthy relative to last year or the prior periods. And when it comes to larger footprints, that's where we see more supply. That's -- most of the Amazon sublet footprint is -- or all of it is larger-bay facilities. And we're seeing a bit less demand for those kinds of footprints. And that translates into maybe softness in that segment of the market. Most of our portfolio is addressing kind of small- to mid-bay requirements and is seeing good traction when it comes to new leasing and when it comes to renewals. Operator: [Operator Instructions] Your next question comes from the line of Matt Kornack of National Bank Financial. Matt Kornack: Just quickly on the market rent trajectory. It looks like Western Canada is improving, Toronto is kind of stable and Montreal you're seeing a little bit of pressure, albeit off some pretty lofty highs. So how should we think about -- from your earlier comment, it sounds like you're expecting those levels to kind of stick at current levels. But when should we expect or do you think there is an inflection coming in market rents over the next year or 2? Alexander Sannikov: Well, Matt, broadly we maintain the outlook that market rents are driven by the overall trajectory of availability rates in any given market. And so as we see continued absorption in the GTA, in Calgary and over time in Montreal, we expect to see, obviously, overall availability rates stabilizing and start trending downwards. And that's when we expect to see the inflection point overall in terms of market rent development. In the meantime, and I think it's important to highlight, is, even in today's environment that is arguably softer than, let's say, 3 years ago, we are signing leases routinely with 3%, 3.5% escalators for 3- to 10-year terms. And that continues to be very much part of the leasing equation for Canada. Matt Kornack: That makes sense. And then this quarter, I mean, the hit to kind of committed occupancy was mostly in Western Canada. It sounds like you've got part of that space spoken for, but can you give us a sense as to the dynamics there and the timeline on kind of getting back because you had really high committed occupancy in Q2 in that portfolio? Alexander Sannikov: Yes, dynamics are remarkable. We got indeed some space back, about 100,000 feet in Edmonton, and that was late summer, early fall. And within a month, we relet the entire 100,000 square feet to 2 occupiers, and they will be both commencing in fourth quarter. So that committed occupancy will go -- for that particular asset in Edmonton overall will go back out within a couple of months. Matt Kornack: Okay. That's helpful. And then interesting and a little counterintuitive in terms of the auto demand that you're seeing. What would be the rationale for them taking that space at this point? And is it a relocation or is that new space in the market? Alexander Sannikov: Some of it net new space. Some of it is optimizing their supply chains across North America. Some of it is net new entrants into Canada. For Tier 1 automotive, that's in our managed portfolio, we just signed a 200,000 square foot lease with a Tier 1 automotive group. We've expanded a couple of multinational OEM groups. So it's a range, but mostly driven by ongoing kind of optimization of supply chains when it comes to automotive sector. Matt Kornack: And generally, good credits, I assume. But what sort of terms on those leases? Alexander Sannikov: The terms range from 5 to 10 years, very good credits. So these are Tier 1 –- either Tier 1 groups or blue-chip multinational OEMs. Matt Kornack: Okay. Fair. And then just lastly, a technical one. The tax on the European portfolio, it was a bit higher. It's a little over $1 million this quarter. Is that a new run rate because the euro has appreciated? Or should we expect it to kind of come back down to kind of $750,000 or so? Lenis Quan: So yes, the tax there it's -- there's a little bit coming from the U.S. and a little bit from euro. It's probably a decent -- it's a decent run rate. We would have had maybe some lower credits from the prior quarter. So I would probably say in and around that range is a decent run rate. Obviously, as we grow our income in Europe, that will size accordingly as well. Matt Kornack: Congrats on a solid quarter, guys. Operator: A question comes from the line of Tal Woolley of CIBC. Tal Woolley: Just on the data center strategy, I'm just -- can we call these pilots? Or is this really like the official start of the strategy? Alexander Sannikov: It depends on your definition for pilot. But look, the way we're thinking about it is we are making progress on a few tangible opportunities in terms of securing power. And maybe the official start of the strategy will be as we firm up the revenue model. Then we can credibly talk about how replicable any given project is and then it becomes more of a program. Tal Woolley: And the current sites right now, those are largely vacant assets or development land. Can you just talk a little bit about the current sites you're looking at [indiscernible]? Alexander Sannikov: The 2 sites for which we advanced deposit are both existing assets. They're solid buildings. But the data center potential is far stronger from a return standpoint. We have generally redevelopment rights or very short leases on these sites, allowing us to then tangibly pursue data center strategies for these assets. Tal Woolley: Got it. And then also can you give us an idea of like how we should think about like -- I'm not exactly familiar with like when you guys want to acquire power, like that process and how much it sort of cost to walk through that? Alexander Sannikov: Yes. So when it comes to the process of acquiring power, it's very specific to each utility, specific to each location. That's why we've shortlisted 13 sites. Of the 13 sites, some are getting to power faster. But the rest of the sites are still very much on the list and we are continuing to advance the dialogue there. Look, CapEx really ranges per asset. So what we will do as we firm up the plans for any given site, we will articulate the CapEx, the CapEx phasing and the revenue model to our investors and everyone who follows the company for them to -- for you to understand how we're thinking about it and what's involved. So it's a bit premature to comment on that, but we will definitely provide the details as we make progress. Tal Woolley: Perfect. And there was an earlier question about the renegotiation coming up ahead, and I appreciate you're talking to clients and you're not maybe hearing much from them. I guess I'm just wondering more what is your internal base case about how you guys are thinking about how that might impact leasing activity, given your experience this year? Alexander Sannikov: We think that this longer decision time lines are likely going to stay until there's certainty on that front. What we are seeing though is that decisions are happening. They're just happening at a slower pace. So then our pipeline keeps building and keeps growing. And as it grows to a large enough level, then we will see consistent flow of signed commitments and we can very much operate in that environment. But we expect that longer decision time line phenomenon this year to stay until there's clarity. Tal Woolley: And on the partner capital –- or partnership capital side, has there been any real impediments that you found kind of working through the process right now just in terms -- like is it market conditions or other things that maybe slowed this process down? Alexander Sannikov: There's been a lot of changes for -- in terms of how many global pension funds are organized over the last 12, 24 months, lots of changes in terms of how they think about real estate relative to overall real assets portfolios. And that has impacted capital formation processes broadly. And it's kind of well documented that capital formation time lines have been longer over the last 2 to 3 years than normal. And so we're starting to see that changing. We're also starting to see groups shifting focus back to equity investments from credit investments. And so all of these things are likely going to be helpful for what we are trying to achieve. Operator: Our next question comes from the line of Pammi Bir of RBC Capital Markets. Pammi Bir: You mentioned, Alex, that the pipeline is growing from a leasing standpoint. How much of that 1.7 million square feet I think you mentioned in terms of leases that are in progress, how would that compare to perhaps some of the recent quarters? And how much of that do you see is likely getting done? Alexander Sannikov: I would say it's 50% to 70% larger in terms of deals that are sitting in pipeline. So yes, it is a notable increase. When it comes to the conversion rate -- look, these are all tangible requirements, and so we expect that many of them will convert. It's just a question of time. A lot of groups are being very cautious when it comes to new footprints. They want to -- if it's 3PLs, they want to make sure that they have their contracts secured. When it comes to end users, it takes quite a bit of approvals internally to get things going. There are some leases that we signed this quarter for new developments that have been in negotiations for 6 months. So yes, they do convert, the commitments do get signed. It just takes longer to get there. Hence, the pipeline is growing. Pammi Bir: And then just to clarify, none of that -- or is any of that 1.7 million square feet in your committed occupancy numbers? Alexander Sannikov: No, not yet. Pammi Bir: None of it, right? Okay. And then just coming back to the comment around dispositions, the $150 million. What's the sense of timing here? And if you can maybe just provide some color around the geographic mix? I think, if I recall, some of that might be Saskatchewan. But just if you can provide an update on that, that would be great. Alexander Sannikov: Yes. Indeed, our Saskatchewan portfolio is in our nonstrategic bucket. So we are looking to sell some of these assets or most of these assets over time. There are some user buildings in the GTA within the pipeline as well. In terms of overall time line, we'll expect to see some firm up or even close in the first quarter of '26. Pammi Bir: And then just lastly, on the European JV, I think you mentioned potentially seeding some of that potential JV or JVs with some of your existing portfolio. So how much would you consider perhaps vending in? And what sort of retained interest would you be considering? Alexander Sannikov: I think it's a bit early to comment. What we are seeing generally is more interest in a 50-50 JV in Europe. So from a stake standpoint, that is more likely than any other stake. As far as the quantum of a potential seed portfolio, that is a little bit too early to comment on. Operator: This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Sannikov for any closing remarks. Alexander Sannikov: Thank you for your interest and support of Dream Industrial REIT. We look forward to reporting on our progress next quarter. Goodbye. Operator: This brings to close today's conference call. You may now disconnect. Thank you for participating, and have a wonderful day.
Operator: Good morning. My name is Jim and I will be your conference coordinator today. At this time, I would like to welcome everyone to the Minto Apartment REIT 2025 Third Quarter Financial Results Conference Call. [Operator Instructions] Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in the REIT's news release and MD&A dated November 4, 2025, for more information. During the call, management will also reference certain non-IFRS financial measures. Although the REIT believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see the REIT's MD&A for additional information regarding non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Thank you. Mr. Li, you may begin your conference. Jonathan Li: Thank you, operator and good morning. With me today is Eddie Fu, Chief Financial Officer; and Michelle Calloway, Senior Vice President of Property Operations. We generated solid operating results in the third quarter despite headwinds from elevated supply in several markets and slower population growth. On Slide 3, our results were underpinned by the steady revenue growth of the unfurnished suite portfolio, which increased by 2.4% as average monthly rent growth of 4.5% was partially offset by lower occupancy and the use of promotions. We were able to drive our leasing activity through targeted strategic initiatives and active management, resulting in a 50 basis point sequential increase in closing occupancy to 96.5%. In the quarter, commercial revenue became a tailwind and increased 10.3% compared to Q3 of last year. Revenue growth for the same-property portfolio was 1.6% as lower furnished suite revenue impacted our overall growth. Same-property portfolio NOI increased by 0.7% as higher revenue offset the increase in operating expenses. Normalized FFO and AFFO per unit increased by 0.6% and 0.1%, respectively, as a result of accretive unit buybacks and lower G&A costs. We achieved this growth despite the impact of a decrease in capitalized interest and lower interest income following the repayment of 2 convertible development loans. During the quarter, we purchased $3.6 million of units under our NCIB program at a weighted average price of $14.25 per unit. In total, we acquired the maximum number of units allowable under this program at a cost of approximately $43.9 million. On October 1, we renewed the NCIB program, enabling us to acquire nearly 3.5 million units through September 30, 2026. Unit buybacks continue to represent an attractive use of capital and are aligned with our capital allocation strategy at current unit price levels. Finally, we were pleased to announce that our Board of Trustees approved a 2.9% increase to the REIT's distributions. This represents the seventh consecutive year in which the REIT has increased distributions, reflecting the confidence that our team has in the business outlook for 2026. I'll now turn it over to Eddie to review our third quarter financial and operating performance in greater detail. Eddie? Edward Fu: Thank you, John. Slide 4 provides some key details about our operating performance. Same property portfolio revenue was $39.1 million, an increase of 1.6% compared to Q3 of last year. This increase in revenue reflects steady growth in our unfurnished suite portfolio and 10.3% growth in our commercial portfolio. These were partially offset by lower average occupancy, use of promotions and lower revenue from furnished suites. Same-property NOI was $25.6 million in Q3 2025, an increase of 0.7% compared to Q3 2024. The increase reflects the same-property revenue growth, partially offset by a 3.6% increase in operating expenses. Same-property NOI margin was 65.5% in Q3 2025 compared to 66.1% in Q3 2024. Normalized FFO and AFFO per unit increased by 0.6% and 0.1%, respectively, compared to Q3 of last year. Normalized AFFO payout ratio was 55.4%, an increase of 160 basis points from Q3 last year. I'll move now to Slide 5. This chart highlights the REIT's consistent quarter-over-quarter growth in average monthly rent. Our realized gain on lease of 3.2% in Q3 was down marginally from Q2 as market rents have declined and turnover for suites with tenants whose sitting rents are well below current market rents remains low. Moving to Slide 6. We have signed 549 new leases in the third quarter, generating realized gain on lease of 3.2%, down from 4.7% in the previous quarter. As indicated in the lower table, the embedded gain to lease potential at the end of the third quarter remains solid at 8.2% or $11.6 million. Moving to Slide 7. The same-property portfolio annualized turnover was 30% in the third quarter, up from 26% last year. Despite the rise in turnover, closing occupancy increased to 96.5%, up 50 basis points from Q2 2025 as our strategic leasing initiatives led to an increased number of leases signed, allowing move-ins to exceed move-outs. On Slide 8, revenue from commercial leases increased by 10.3% from Q3 last year, the result of a new tenant taking occupancy at The Carlisle in the previous quarter. We have 2 additional commercial leases that will further strengthen occupancy, one at Kaleidoscope in Calgary, which commenced in November and another at Minto Yorkville set to commence in January 2026. With respect to the furnished suite portfolio, revenue decreased 14.5% from Q3 2024 due to a lower number of occupied suites and a decrease in average monthly rent. Since Q3 2024, we have converted 24 furnished suites to the unfurnished portfolio, including 19 at Minto One80five. We expect to continue reducing the number of furnished suites over time. However, the pace will be subject to local market leasing conditions and cash flow optimization. Turning to the operating expense breakdown on Slide 9. Same-property portfolio operating expenses increased 3.6% due primarily to higher property operating costs, which were the result of filling previously vacant staffing positions and increased marketing costs incurred to drive leasing activity. Same-property were effectively flat as lower assessed values and rates in Calgary were offset by increased rates in Montreal, Toronto and Ottawa. The year-over-year increase in same-property utility costs reflected higher average electricity and water rates across the portfolio and higher water consumption in Calgary. These increases were partially offset by a decline in natural gas costs attributable to the cancellation of the carbon tax, partially offset by an increase in supply rates and consumption. Moving to suite repositioning on Slide 10. We repositioned 16 suites in the third quarter, generating an ROI of 11.6%. Over the past 4 quarters, we repositioned a total of 58 suites and generated an average ROI of 9.3%. We recorded a lower average cost per suite this quarter as a result of suite mix and the location among those renovated as compared to the last 2 quarters. We expect to reposition a total of 50 to 70 suites this year compared to 48 last year. Slide 11 highlights our key debt statistics. Our maturity schedule remains well balanced. As of September 30, 2025, the weighted average term to maturity on our term debt was approximately 5.1 years with a weighted average effective interest rate of 3.65%. As of the end of Q3, 97% of our total debt was fixed. Total liquidity at quarter end was approximately $124 million. I'll now turn it back over to Jon. Jonathan Li: Thanks, Eddie. The next 2 slides detail the current status of our development pipeline. On Slide 12, stabilization of 88 Beachwood in Ottawa is expected later in Q4 of this year. And at University Heights in Victoria, move-ins have begun at the first building and leasing has started at the second building. Stabilization of the 5 building projects is anticipated to occur in 2027. On Slide 13, we provide recent pictures of our 2 on-balance sheet developments, 610 Martin Grove and The Towns at York Mills & Leslie, which continue to progress well. At Martin Grove, occupancy at our affordable suites in partnership with the City of Toronto will begin shortly and stabilization is expected to occur in Q4 2026. At The Towns, preleasing activity is underway for the first phase of suites and we expect first occupancy to occur early next year. Stabilization of the second phase is expected to occur at the end of 2027. On Slide 14, you can see we continue to make meaningful progress on our sustainability initiatives and we are proud to share some highlights from our 2024 Sustainability Report that was published in September. I'll conclude with our business outlook on Slide 15. Despite the near-term uncertainty facing our industry, such as elevated supply in certain markets, slower population growth and affordability challenges, the long-term fundamentals supporting Canadian urban rental housing demand remain intact. We have been actively managing the portfolio to increase occupancy and optimize rents and are pleased with the progress we made in Q3. The performance of our commercial portfolio has now shifted to being a tailwind and the wind down of our furnished suite portfolio continues, subject to local market leasing conditions. We also expect to continue returning capital to unitholders through our accretive unit purchases as it remains an attractive use of capital at current trading levels. We have undertaken multiple initiatives to strengthen the REIT, including improving the balance sheet, prudently allocating capital, while at the same time high-grading the portfolio. We remain keenly focused on delivering strong returns to unitholders through continued active management of our portfolio, disciplined capital allocation and balance sheet management. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] We'll hear first today from Sairam Srinivas at Cormark Securities. Sairam Srinivas: Just a question on the condo market. When you talk to your guys on the Minto property side of things, how are they seeing the condo market evolve? And do you think that the supply is kind of at an end right now? Jonathan Li: Thanks for your question. Yes, it's an interesting time in the condo market and especially as we have the lens from the private company, I would say, I guess, #1, there's very little new starts obviously coming to fruition or shovels going into the ground right now. And I think certain well-capitalized experienced developers are starting to see or look into the future and see that in 4, 5 or 6 years, there is going to be quite a dearth of supply, especially in Toronto. And I think some folks are seeing that as a bit of an opportunity to potentially deliver within that time frame if they start now. And so I guess what we're starting to see is, again, a handful of developers who have a long-term view and are well capitalized that are looking at those new opportunities today, maybe deliver in 5 or 6 years, we're seeing pockets of capital become attracted to that as well. And so I wouldn't say it's pervasive for everyone. I think it is a unique opportunity for some folks to start getting shovels in the ground today with a view that they're probably making some conservative assumptions around what rents do between now and then, what cap rates might be in 5 years. But when they put that all into the melting pot and kind of look at what it looks like, I think it's starting to look a little bit attractive. And I think -- I guess the other kind of interesting nuance that I think is emerging is that new construction lending seems like there's actually quite a bit of that capital out there and it's quite competitive. So that when you look at that side of the cost equation for developments, LTVs are quite attractive and rates are at a point where, some of that math, I think, makes a bit more sense. Sairam Srinivas: That's interesting, Jon. So when you look at markets across, I'm assuming considering the concentration of the condo market in Toronto, would that be one of the markets these long-term developers are looking at? Or would that be other markets? Jonathan Li: We're seeing it mostly in Toronto, a little bit in Ottawa as well. So those are kind of the 2 markets. Vancouver, a little bit -- there's always pockets of capital interested in developing in Vancouver. And then Calgary, I think a lot of capital in Calgary is focused on kind of the low-rise kind of out in suburbia developments, less high-rise today is kind of what we're seeing. Sairam Srinivas: That makes sense, sir. Maybe just looking at the turnover numbers over here. Obviously, it's been trending up. But when you kind of look at the leases that have kind of turned over, are you able to comment on the age of these leases or a split? A general breakup would probably be great. Jonathan Li: Yes. And we track this. And so we are seeing the folks basically who have moved in the last 2 to 3 years those are predominantly the people moving. So that's why you're seeing quite the delta between embedded rent and gain on lease because the folks who just moved in are the ones turning in. I think it's a bit exacerbated today because folks who signed a lease 12 months ago and 18 months ago, there's quite a large gap between where they agreed to pay rent 12 months ago and where market rents are today, especially in a market like Vancouver, as an example. So we are seeing elevated turnover in that kind of cohorts who have recently moved and the gap to market is pretty big downwards. So that is where we're seeing some of that churn. Operator: Our next question will come from the line of Jonathan Kelcher at TD Cowen. Jonathan Kelcher: Just going back to Sai's first question there. When you were talking well-capitalized developers, were you talking condos or purpose-built rentals? Jonathan Li: I think a lot of folks are looking at those as one and the same and almost option value for them to swap from one to the other. I think purpose-built rental, probably that math hangs together a bit better today than just condo. But as you know, that can flip relatively quickly. But there still is a decent gap on the condo side of things between in-place and where kind of pro forma sale prices on a per foot basis makes sense, so either way purpose-built rental. Jonathan Kelcher: Okay. Okay. So mostly purpose-built rental because I think you'd still need like quite a bit of presales to get condos up and going or [indiscernible] equity. Jonathan Li: Yes. Agreed. Agreed. Agreed. Jonathan Kelcher: And then I guess related to that, maybe give your thoughts on anything you saw in the budget yesterday? And what do you think it means for near-term fundamentals, both, I guess, on the supply side and the demand side? Jonathan Li: Yes. I don't want to be too anticlimatic but I don't -- I didn't get -- my kind of knee-jerk was that there were no major surprises. We heard through the grapevine that the MURBs that they were considering were not going to be included, which was the case. We understood they're -- they were going to increase some of the lending and the debt funding coffers they were going to open those up a little bit, which did occur as they said they're going to put $20 billion more into the [ CMB ] market. I think on the immigration front, it was kind of as expected, I think their target of [ 380 ] per year in the next 3 makes sense. I think -- not make sense but was consistent with what they had previously announced. And in terms of reducing some of the temporary foreign workers -- sorry, international students, consistent with what they've been saying, we're cautiously optimistic about -- they mentioned they're targeting certain folks for -- temporary residents, folks who would be in high-value jobs and in high-demand jobs and going to pay pretty attractive wages. I think that's probably positive on the margin as we have kind of a stickier, more tenant credit, steady tenant or credit steady tenant. And so hopefully, that's positive for our market. But having flat to slightly up overall immigration for the next few years is a decent backdrop for how we're thinking about it. No major kind of surprises up or down in the budget, at least from our perspective. Operator: Our next question today will come from Kyle Stanley at Desjardins. Kyle Stanley: Would you say the elevated number of new leases that you signed in the quarter speaks to any shift in market level demand? Or is this more seasonal in nature or maybe driven by the incentives and promotions that you guys are offering to push occupancy? Jonathan Li: I think it's -- I think what we're dealing with is -- turnover is higher because of supply because people have lots of choice, higher in our kind of immediate competitive markets just because it's where we compete. But I think we've been actively managing our leasing and marketing efforts to drive as much occupancy as we can, especially leading into the colder winter season in Q4. I think that's going to continue on both sides, the demand and our kind of active management. And I'm kind of -- we're internally kind of anticipating a bit more of the same for the next months and few quarters. So it's kind of all -- like I don't think there's one thing, Kyle. I think there's just -- there's lot of turnover and we're sprinting from an operations perspective and leasing and management perspective to just drive occupancy and that's kind of what we're doing. Kyle Stanley: Okay. No, that makes sense. I guess last quarter, you kind of indicated that on turnover, net of incentives, the increase was roughly flat. Just wondering, I guess, where are incentives now? I think last quarter, you said about 1 month, maybe 1.5 months of free kind of being offered. And where would that net number be today? Is it much different from kind of what you saw last quarter? Jonathan Li: It's pretty consistent over the last 2, 3 months, Kyle. We're not doing -- in certain units, in certain markets, we're doing a little more. In certain units, certain markets, we're doing a little less. And again like Vancouver, right now, there's more. That seems to be a market that is just -- affordability is top of mind. There's a decent amount of supply. So the newer build buildings where the rents were closer to market 12 months ago, 24 months ago, those are experiencing some pretty high turnover. The older ones where the rents are -- have been under rent control for 15, 20 years, those -- whose rents are just lower on an absolute dollar basis, those tend to be more full. I think that's one dynamic that we're seeing in Vancouver. But in Montreal, Ottawa, we're -- it's kind of steady as she goes on the incentive front. So I think just overall, our incentive use is probably pretty consistent with what it was last quarter. Kyle Stanley: Okay. Okay. Fair enough. Just last one, I guess, going back to the budget a little bit. It does look like through now and the end of the decade, there will be some public service cuts. And with work from home, that's not necessarily entirely concentrated in Ottawa anymore, the way it might have been historically. But your portfolio has been through ebbs and flows in public service employment in Ottawa. Can you just remind us, have you seen much of an impact over the years when things change in Ottawa? Or is it fairly steady? Jonathan Li: I think it's been relatively steady. I think the fact that the condo market in Ottawa is such a small portion it kind of eliminates some of that volatility. And the unions are a powerful entity. And so we're -- Ottawa for us has been very steady as she goes over the last number of decades. And we don't see too much of a change. I mean, look, on the margin, maybe a little bit. But what -- the advantage for us is our portfolio in Ottawa is quite well positioned from a cost perspective and from a size perspective. And so that's kind of how we've been -- like we're coming from a bit of a position of strength. I don't want to oversell but that's -- it's quite a resilient portfolio that we have now. Operator: Our next question will come from the line of Brad Sturges at Raymond James. Bradley Sturges: Just following up on the leasing discussion here. You talked -- you touched about it -- talked about it a little bit just on focusing on occupancy and you're heading into a bit of a slower leasing season from a seasonal perspective. Just curious, do you think your leasing spreads have stabilized at this level, particularly net of incentives? Or could they still come in a bit further just given where we are in the cycle of the market? Jonathan Li: I think we're -- they can still -- there's still opportunity for them to come in a little bit. Not a ton in our kind of estimation or guesstimation. I don't -- I feel like if we're not nearing stabilization, we're kind of close. So maybe I hope I believe that answers your question. Bradley Sturges: Yes. That helps. My other question would be just from a capital allocation perspective, you obviously have focused on incrementally more capital towards like the NCIB. What would you think -- what do you think your balance sheet capacity is to continue to be active on that program? And would that need to be tied to more asset sales? Or could you do it just with incremental cash flow being retained today? Jonathan Li: Look, I think we're pretty -- we're very comfortable where we are in terms of leverage. I think there's probably room to go up a little bit if we had to. I don't think that's the goal. But we're comfortable at [ 45 ], we're comfortable at [ 47 ], we're comfortable at [ 48 ]. Is that where we want to be long, long term, if we have unfettered access to capital and everything was hunky-dory, probably not, we probably want to be lower. But just given our access to CMHC, given the cost of debt today, we're very comfortable kind of where we are and slightly above that. I think if we were to go materially above that, I think asset sales would probably come into play. I think the good news is, in a market like this, high-quality, well-located residential real estate is in really high demand in the private market and we're seeing evidence of that as it relates to inbounds that we keep getting. So -- and I would say those inbounds are significantly supportive of our book value or better. Like forget about consensus implied cap rates and forget about where our share price is implying cap rates. It's a bit of a joke. But there's a significant gap between the private investment market and public markets and residential real estate today. And that's one thing that we're trying to deal with. But to your point, we're comfortable with leverage. I think you can -- unit buybacks is still today, at least the most attractive thing we can do with our capital. And I guess that's how we're looking [indiscernible]. Bradley Sturges: All right. Given those inbounds continue to happen at pretty supportive valuations to your book value, would you contemplate more asset sales at this point? I know there's puts and takes to that on a short-term and longer-term basis. But what would be the sort of the appetite to continue to sell assets to either fund other growth or to buy back stock? Jonathan Li: Yes. Look, I think it's a balance, right? I think to the extent if we can sell something for a low cap rate and buy something for a higher cap rate, I think that all makes sense. I don't think we're just -- the prospect of selling something at an attractive cap rate to just "show" the market that we're undervalued, I mean, I think that's been tried and true and it doesn't -- hasn't really moved the needle. We've sold 5 of our lowest quality assets for -- at book value or higher. And I don't think we were rewarded with any pop in the unit price. Our largest peer, InterRent was sold that didn't -- that short-lived euphoria was very short-lived. So we've kind of come back down. And so like I think just the public markets are kind of -- things like that are falling on the public markets' deaf ears right now. I think that's just the reality of where we are. And so I think any asset sale will likely be linked to something that makes sense on the use of proceeds side in terms of growing as well. Operator: Next question comes from Mario Saric at Scotiabank. Mario Saric: Jon, I just want to circle back on the last question with respect to capital allocation. I did note that you included a reference to the high investor demand for quality assets in your outlook section. What would you say is the opportunity set available in terms of selling low cap rate to buy higher cap rate of desired quality? Like how likely could that be in the next 6 to 12 months? Jonathan Li: I mean I think it's possible -- it's likely impossible. Like I said, we're -- we have some pretty, very attractive trophy-like assets. We never -- the long term north -- like the North Star is to grow. But we are very aware of the factors that are at play today and understand that growing in today's market has to make sense and you can't issue dilutive equity and all that stuff. But I think there -- we are -- we do have a portfolio that there are a number of assets that are attractive to many people and those cap rates are today lower than what acquisition cap rates are in similar or better markets even. So that math can work today. And so I think we're looking at all opportunities that make sense for our unitholders for both the immediate and long term. Mario Saric: Got it. And presumably, those would be FFO per unit accretive transactions if they were to materialize? Jonathan Li: Correct. Mario Saric: Okay. Is there -- in your opinion, is there anything specific within the public markets that you feel is not recognizing the quality of the portfolio, like the low cap rate assets within the portfolio. Is there something specific in your view that is preventing the realization of that? Jonathan Li: Yes, there's a lot of things, I think, in the public markets that aren't recognizing. I mean, #1, fund flows are negative. So that's always tricky because investors are just horse trading. I think, #2, unfortunately, I heard some stats where real estate used to be 4% of the index. Now it's less than 2% of the index. And what is real estate is actually Colliers and someone else. So it's not even kind of the fundamental REIT guys as we think about it. So I think some generalist investors, other investors simply aren't as interested in the REIT sector today. And I think they feel like they have a lot of runway to get back in because there isn't necessarily, I think, an obvious catalyst for folks to pile back into the real estate market today. And so when you have all that as a background, I think public real estate isn't valued at NAV. And so that's exactly, I think, what's happening today and that's what we're dealing with. Mario Saric: Got it. Okay. Two more quick ones, just on the operational side. You mentioned kind of re-leasing rents or leases that were done 12 months ago. It'd be notably lower today relative to 12 months ago. What would that spread be like in Toronto and Vancouver today, as an example? Jonathan Li: So in Vancouver, I was just there last week. We -- to give you an example, like a 1 bedroom was rented out for $2,800 approximately. Today, with incentives, that net number is closer to $2,350. So that's Vancouver. That's new build. So it's like I'm not saying it's the whole market. I'm just saying kind of that's what we're seeing in some of the new builds. In Toronto, it's probably similar, like maybe a little less but a little bit similar, new builds I'm talking about. So that's a pretty big gap, right? Like so folks are moving for that. And we're in constant dialogue with these folks. We're approaching people 5, 6 months ahead of expiring leases to just have that dialogue, open up that dialogue, see if we can keep them in. And so I thought this isn't pervasive through the whole portfolio. I'm giving you very specific -- when I go look at -- when we go look at properties, we look at kind of the units that are vacant and this is the dynamic that we're dealing with in certain units. And so that's a bit of color as to what we're seeing right now. Mario Saric: Okay. My last question, in terms of -- when you look at your individual markets in terms of relative strength and relative strength maybe being kind of conviction level to start pushing up asking rents heading into the spring leasing season, how would you rank the individual markets in your portfolio, maybe kind of the market you're most encouraged about versus the one that you think is most challenged? Jonathan Li: Well, I think it's pretty consistent with what everyone is seeing, right? I think it's going to be more challenging to push rents in Toronto and Vancouver right now. I think Calgary, it's challenging -- more challenging today but it -- I think that's a market that can easily flip back to positive. And then we're seeing relatively more consistency in Ottawa and Montreal. So that's kind of how I would rank them from the lowest to the highest. But we're actively managing everything and we're -- I think we're going to try to drive occupancy as much as we can over the next 2 quarters and kind of see where we get to. Operator: Next question today will come from Jimmy Shan at RBC. Khing Shan: So just a couple of question on the incentives. So incentives as a percentage of revenue, what would that look like roughly today? And then are you also having to offer incentives on renewals at least on a portfolio-wide basis? Jonathan Li: I'll start with the second question, not on a portfolio-wide basis on the renewal front. That's very specific units that would have a large gap between what the person rented at and today. So I wouldn't say that there is a ton there like, one of them in Vancouver was, I will offer you a free storage locker but not -- nothing more than that. Eddie, do you have the numbers on -- in front of you on the other? Edward Fu: Yes. Jimmy, it's Eddie. In terms of promotion, you said, maybe I'll quote kind of in dollar value. But in Q3, we would have offered incentives in the $800,000 range. And that's just the value as you know, that [indiscernible] amortize reduction in revenue throughout the quarters. But that should give you a perspective of what it would have been for this quarter. Khing Shan: Okay. And I think you mentioned that, let's say, roughly $800,000, that's been fairly consistent over the last little while, hasn't really been trending up. Jonathan Li: I mean, yes, it was -- it's trended up, I guess, from June or July to now. As we look forward, we anticipate keeping it around the same from where it is today. Khing Shan: So given your comments about population growth turnover and then the supply that's coming next year, so how should we think about revenue and expense growth next year? Jonathan Li: Yes. I think for us, we're thinking about revenue growth in that like 3% to 5% range. I think expense growth will probably be in that same range but maybe towards the higher end. So if you think about NOI margin flat to slightly compressing. And then -- so NOI growth in that kind of same thing, 3% to 4% growth range. Commercial is going to be a little bit of a tailwind for us coming year. And furnished suites will hopefully be kind of less of a headwind as you move forward. And then on the interest expense line, I think we're anticipating doing -- we don't have a lot in 2026 but there are some upward refinancings that are available to us if we choose. So interest expense will probably be a little higher in '26 than it is in this year. And then as you know, the CDL income that we're going to receive is going to be reduced a little bit. And I would just point out that your assumption on the Beachwood CDL being repaid and when -- like when that will be repaid will really impact your numbers in 2026. So as an example, like this -- the -- if it's repaid in December of 2026 versus June 30 '26, that's a huge difference. Every quarter difference in terms of what you think is about 2/3 of $0.01 for the Beachwood CDL repayment. And -- so yes, so that's -- in a nutshell, I think that's kind of how we're seeing 2026. Khing Shan: Okay. But on that, we should be modeling December because that's when it matures? Jonathan Li: No. Jimmy, it's prepayable at any time. Khing Shan: Oh, I see. Okay. Jonathan Li: It's prepayable any time and it will probably be linked to whatever -- Jimmy, to either stabilization or if there's a transaction [indiscernible]. Khing Shan: And the revenue of 3% to 5%, how do you get there? Jonathan Li: We get there because our renewals are still growing at 2.5% to 3.5%. If we're -- if our -- and then the turns will grow call it, 0% to 5%, in that range. And then commercial is a bit of a tailwind. There's going to be a little bit of dilution from some of the new, like I have said, that is below the line. Occupancy kind of flattish to -- we're aiming to be flat on occupancy. So that's how we get there. Operator: We'll move now to the line of Matt Kornack at National Bank Financial. Matt Kornack: I think you kind of answered it in that last comment for Jimmy. But we focus a lot on new leasing spreads. But are you roughly getting on -- in aggregate on a blended basis, the allowable rent increase on renewals in the rent-controlled market? Jonathan Li: I think pretty much everywhere, yes, except I think Vancouver is probably like closer to flat. Matt Kornack: Okay. And on [indiscernible] sale, obviously, you had a lot of turnover vacancy increased in this quarter. Do you have a sense as to how that trends into the colder months? Are you going to be able to pick up that occupancy in the next few quarters? Or is it a waiting game until the spring again? Jonathan Li: I think based on what we're seeing today, it's probably going to be a spring thing. It's highly competitive. Matt Kornack: And then maybe just lastly on the development side. Is -- has the decrease in construction costs, a little bit more favorable interest rates, like can you make today's market rents work from a yield on cost standpoint? Or is it still a bit skinny in terms of returns, do you need to get some market rent growth or at least get back to kind of where pro formas were 1 year or 2 ago to justify building today? Jonathan Li: I think the math is pretty close, Matt. I think it all depends on kind of what your rent growth assumptions are going forward and all that type of thing. But I think for us, it's almost more of a capital allocation decision. I think it would be -- that would be a lot of capital to tie up for yields and margins that are not guaranteed. And so I think it will be unlikely to see us start any -- and like us starting new developments in the near future. But I think if you're not us, so you're just a developer looking at the math, I think it's pretty close. Matt Kornack: Okay. And do you think that keeps a lid to some extent on market rent growth a few years out? Or it's not going to be big enough to kind of meet the eventual return of demand as population growth returns? Jonathan Li: I think it has more to do with like the existing supply that's there in terms of where the rents are going. And there's still, at least in Toronto, some pretty decent supply to chunk through 18 months or so. Operator: Our next question today will come from the line of Mike Markidis at BMO Capital Markets. Michael Markidis: Jon, I mean, maybe I'm reading into this too much but on Beachwood, it sounds like your base case assumption for your budget would be that you get that capital back. Is that safe to say? Jonathan Li: I mean that's kind of our base case on everything right now, especially as it relates to the CDLs. Michael Markidis: Okay. And when you quote that dilution, what are you assuming you do with the capital? Jonathan Li: Sorry, the dilution of what -- like Beachwood would not be dilutive. The on-balance sheet developments would be dilutive. Michael Markidis: Oh sorry, I thought you said the return of the Beachwood capital would be dilutive. Did I mishear that? Jonathan Li: Well, it would be dilutive in the sense that like it's earning 3.25% above our revolver. So we get that paid back and then you assume we use the proceeds to pay back our revolver, that spread of 3.25% is what we would be missing right between when it -- like the end of 2026 or whenever it's paid back. Michael Markidis: Right, right. Okay. No, that's fair. But what would you assume that would be your base case is paying down the revolver with that? Jonathan Li: Yes. Michael Markidis: Okay. Just with respect to -- last question for me because I realize we're running long in the tooth here. But with respect to the strong demand that you've talked about, can you maybe just talk about -- is it on a like asset-by-asset basis? Is it still mostly private investors? Is there any institutional capital has come back would be question 1. And then #2, has anyone looked at it, is it always just like, "Hey, I like this asset, I want this asset." Or does anybody come to you and say, "Hey, there's 5 assets here and we'd like to do $300 million." I'm just trying to get a sense of what that demand looks like. Jonathan Li: Sure. I think the demand is still somewhat specific to assets, like we have demand for specific assets. I wouldn't say there's kind of like I have $500 million, I want to spend it on whatever is available. I think it's very much asset specific. The buyer pool, I think, is a mix of local privates. Institutional capital is start -- is looking. They're being quite, I guess, picky or selective. But that is -- there is some pockets of institutional capital. But I think right now, like there's quite a bit of -- I think there's still a little bit of a gap between seller expectations and buyer expectations. But for certain assets, people just want to own them and there are transactions that are happening. Operator: And we'll move to Dean Wilkinson at CIBC. Dean Wilkinson: It's probably a bit of a continuation of Mike's question and I realize this might be a tough one to answer, Jon. But given the sort of $9 differential between book value and where the units are trading, has there been any conversation or thought given to a sale that might not be, let's say, at the asset level and something more meaningful? Jonathan Li: I mean, I guess what I would say there, Dean, is yes, you're right. I can't say anything. But like if you're -- look, the private company, they don't -- they're keeping Eddie and I out of any discussions about anything like that, like if those are even going on. But you'd have to think that [indiscernible] everything is on the table for people to like figure things out. Operator: And that was our final question from the audience this morning. Gentlemen, I'll turn it back to you for any additional or closing remarks that you have. Jonathan Li: Thanks very much, everyone, for your time and we'll look forward to speaking to you guys in the New Year. Take care. Operator: This does conclude today's Minto Apartment REIT conference call. We thank you all for your participation and you may now disconnect your lines.
Operator: Hello, and welcome to the SolarEdge Conference Call for the Third Quarter ended September 30, 2025. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Events Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved and any recording, reproduction or transmission of the call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Events Calendar page of the SolarEdge Investor website. I would now like to turn the call over to J.B. Lowe, Head of Investor Relations for SolarEdge. Please go ahead. John Lowe: Good morning, and thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2025, as well as the company's outlook for the fourth quarter of 2025. With me today are: Shuki Nir, Chief Executive Officer; and Asaf Alperovitz, Chief Financial Officer. Shuki will begin with a brief review of the results for the third quarter ended September 30, 2025. Asaf will review the financial results for the third quarter, followed by the company's outlook for the fourth quarter of 2025. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in our earnings press release and our filings with the SEC for a more complete description of such risks and uncertainties. Please note, during this earnings call, we may refer to certain non-GAAP measures, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are being presented because we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. Reconciliation of these measures can be found in our earnings press release and SEC filings. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended September 30, 2025, press release may obtain a copy by visiting the Investor Relations section of the company's website. With that, I will turn the call over to Shuki. Yehoshua Nir: Thank you, J.B. Good morning, everyone, and thank you for joining us. I'm pleased to report that we delivered a strong third quarter. We believe this is a clear evidence that we are making solid progress on our turnaround and that the company is on the right trajectory. Our results and our Q4 outlook demonstrate that the momentum we have built throughout the year is continuing. We are executing on our plan, and I'm very proud of the way the team has performed in recent quarters. As for our key priorities, first, on financial strength. In Q3, we delivered 44% year-over-year revenue growth and continued expanding our margin for the fourth straight quarter. The midpoint of our Q4 outlook follows the same trajectory of year-over-year improvement. I'd like to highlight that both our Q3 financials and our Q4 guidance do not include significant onetime or pull forward of revenue, either from safe harbor or from the 25B (sic) [ 25D ] rush towards the end of the year. We have also kicked off several operational excellence initiatives. For example, a major change that should have a long-term positive impact is the single SKU. We have implemented a software-defined platform that significantly reduces the complexity of our business for residential and commercial applications globally. It allows us to manufacture and ship one SKU of the inverter to the market. Then the installers can program it to the desired kilowatt rating in the field. This framework simplifies everything from forecasting and manufacturing to inventory management, logistics, service and support, saving time and money for us, our distributors and our installers. It also adds flexibility for home and business owners. If they need a bigger system in the future, a simple over-the-air software update can boost the inverter rating. It is a true win-win-win solution, and we are working on additional solutions as we continue to improve efficiencies across the business. At the same time, we have been hyper focused on our cost discipline and reached the lowest non-GAAP OpEx to revenue ratio in the last 2 years. This helped us to generate positive free cash flow in Q3 and exit the quarter with a cash and investment portfolio of approximately $550 million. We also expect to generate positive free cash flow in Q4 and for the full year. This performance and outlook gave us confidence to repay the '25 converts from our balance sheet upon maturity in September. Our second priority is gaining market share. Starting with the progress in capturing market share in U.S. resi. We are proud that Wood Mackenzie reported SolarEdge as regaining the #1 residential inverter market share position in the second quarter. This is the first time we've had a leading market share position since the third quarter of 2021 and is a reflection of our improved quality and service and our team's performance. Looking into 2026, the resi market is expected to undergo a structural change in favor of the TPO model. We believe this market shift plays directly into SolarEdge's unique strength. We have developed deep relationships and integrated infrastructure with TPOs for years. We have delivered high-quality domestic content and non-FEOC products that the TPOs require. And our technology platform is perfectly suited for the TPO model due to its superior energy production and native DC architecture. Safe harboring is an additional and crucial element that can secure future market share. Certain of our partners have safe harbors with us through the 5% method. Additionally, we designed and executed customized safe harboring strategy for our TPO partners through the physical work test. Such transactions have several benefits. For our customers, it lets them qualify their projects over multiple years for a lower capital outlay. For SolarEdge, these transactions provide better visibility into our business for future years. By helping our customers safe harbor through the physical work of significant nature methods, we are able to manufacture and deliver the full product closer to the time the customer needs it. Therefore, we can manage the manufacturing over time, and there is no pull forward of revenues that is typically associated with a 5% safe harbor transaction. We believe that our strengths are even more pronounced in the C&I space in the U.S. Some of the largest enterprises in the U.S. have already safe harbored C&I products from us via the physical work method. In addition, we believe that we are the only scaled player capable of delivering a non-FEOC and domestic content compliance C&I solution. This combination positions us very well to gain additional market share in the years ahead. Turning to Europe. While the markets remain challenging, the majority of our distribution partners hold normalized levels of inventory. This resulted in EU revenues reaching $100 million in the quarter, up 45% quarter-over-quarter and up 21% year-over-year. We believe our position in Europe will continue to improve as we ramp up sales of commercial storage, deliver products made in the U.S. and roll out the next-generation Nexis platform in the coming quarters. This brings me to our third priority, accelerating innovation. The SolarEdge value proposition is simple. Whether you are an installer, a homeowner or a business, our solutions save you money or save you time and in many cases, save you both. The markets we serve are increasingly looking for integrated systems. And over the last year, we've expanded and improved our technology platform to deliver holistic end-to-end solutions that save our customers even more time and money. In Q3, we continued the development and field installation of our next-generation Nexis platform. And in the last few weeks, we have shipped initial volumes of the new 3-phase inverter to customers. Even at this early stage, the feedback we are getting is that installations have been significantly simplified compared with our previous generation. Two weeks ago, we rolled out our ONE for C&I energy management system across our entire C&I installed base. Now customers can control and optimize all types of behind-the-meter devices and loads from solar to storage to EV charging to HVAC, all from a customized dashboard. We intend to add additional enhanced features in the quarters ahead that will generate recurring revenue streams. Our fourth priority is ramping up our U.S. manufacturing. In Q3, we reached an important milestone by exporting our first U.S. manufactured residential products to Australia. We expect to begin shipping both residential and C&I products to additional markets in the coming weeks, which will allow us to be more competitive in markets outside of the U.S. To summarize, we believe our turnaround is delivering tangible results. We're improving our finances. We are driving efficiencies across the business. We are strategically positioned to capture market share in our main markets, and we are progressing with our next-gen platform. While we are encouraged by our progress, there is still plenty of work to be done. We remain relentlessly focused on building a healthier, more profitable and more innovative business for the long term. There is one more thing. This morning, we announced a collaboration with to advance our solid-state transformer platform for the data centers of the future. This has the potential to strategically expand our core technology into the data center market, positioning us to help build smarter, more efficient energy systems for the AI era. We are in the early stages here, and we'll share more as we make progress. With that, I will turn it over to Asaf. Asaf Alperovitz: Thank you, Shuki, and good morning, everyone. Starting with our quarterly results. The non-GAAP revenues for the third quarter were $340 million, up 21% quarter-over-quarter. Revenues from the U.S. this quarter amounted to $203 million, up 10% quarter-over-quarter and representing 60% of our revenues. Revenues from Europe were $101 million, up 55% quarter-over-quarter and representing 30% of our revenues. International markets revenue were $36 million, down 8% quarter-over-quarter and representing 10% of our revenues. Non-GAAP gross margin this quarter was up to 18.8% compared to 13.1% in Q2, reaching the higher end of our guidance. The higher gross margin is largely due to higher revenue, which drove increased utilization of our operational costs and higher sales of U.S.-made products. This was partly offset by incremental tariffs, which impacted our gross margin by approximately 2%, in line with our expectations. During the third quarter, we continued to take action to streamline our operations and focus on core business. As such, we sold our Sella 2 manufacturing facility in the third quarter for total proceeds of $26.1 million. As part of this transaction, we recorded a small capital gain. We also settled certain claims associated with the discontinued energy storage division that resulted in a onetime gain of approximately $15 million that was recorded as an offset to our GAAP COGS. Going forward, we continue to seek avenues to rightsize our business with an emphasis on cost reduction and a focus on our core activities. Non-GAAP operating expenses for the third quarter were $87.7 million at the midpoint of our guidance despite headwinds from the continued strengthening of the new Israeli shekel, net of hedging. Last quarter, we reported non-GAAP OpEx of $85.2 million or $89 million when adjusted for onetime reversal of accrual for bad debt and other items. Non-GAAP operating loss for Q3 was $23.8 million compared to a non-GAAP operating loss of $48.3 million in Q2, cutting our operating loss by more than half. This is a promising result and speaks to the progress we have made in executing our turnaround plan and is another step on our journey back to profitable growth. Our non-GAAP net loss was $18.3 million in Q3 compared to a non-GAAP net loss of $47.7 million in Q2, a reduction of over 60%. Non-GAAP net loss per share was $0.31 in Q3 compared to $0.81 in Q2. The lower operating and net losses are largely due to a higher revenue and a higher gross margin. Turning now to our balance sheet. As of September 30, 2025, our cash and investment portfolio was approximately $547 million. Net of the repayment of $342 million of our 2025 convertible notes in September, our cash and investment portfolio increased by approximately $77 million. This is the result of our positive free cash flow for the quarter of approximately $23 million, which was largely driven by working capital items and our continued CapEx discipline. It also includes the proceeds from the sale of our Sella 2 facility of $26.1 million and other items. For the first 9 months of the year, we generated approximately $34 million in free cash flow. We also expect to be free cash flow positive in the fourth quarter and therefore, are on track to meet our expectation of generating positive free cash flow for the full year of 2025. This should allow us to head into 2026 with a healthy cash position to support our growth plans. Our inventory was flat at approximately $530 million despite our manufacturing ramp-up to support anticipated growth. Our DIO declined from 217 to 177 as we continue to improve our inventory management processes. AR net increased this quarter to $286 million compared to $217 million last quarter, mostly due to higher revenues. DSO increased from 57 to 68 days due to the timing of collections, while DPO increased from 59 to 77. In total, our cash conversion cycle days declined from 215 to 168 days as we are laser-focused on improving our working capital management. Turning to an update on our disclosures. As Shuki mentioned, we are in the process of rolling out the single SKU framework across both residential and commercial applications globally. Under this framework, we will no longer know the kilowatt ratings of the inverter at the time of shipment as the power rating will be set through a software update when installed in the field. As a result, we will be discontinuing the megawatt shipped metric starting in the fourth quarter. Instead, and as you can see in the earnings release this morning, we will be providing the number of inverters, optimizer and megawatt hours of batteries that we recognize as revenues during the quarter. Additionally, starting in Q4, we intend to begin disclosing revenue derived from inverters, optimizers and batteries on a quarterly basis within our Form 10-Q. We believe this additional disclosure will help analysts and investors more accurately analyze our operating and financial performance. This move is part of the evolution that we started talking about last quarter. The market is moving to more system-based solution and is less focused on discrete products. Our technology platform, including the single SKU, the launch of our Nexis platform and the introduction of additional elements like EV chargers, batteries and energy management software are helping to drive this evolution. Our solution deliver flexibility and scalability to meet the growing needs of our customers. Turning now to our guidance for the fourth quarter of 2025. We're expecting revenues to be within the range of $310 million to $340 million, which reflects a better-than-normal seasonal trend for the fourth quarter. We expect non-GAAP gross margin to be within the range of 19% to 23%, including approximately 2 percentage points of new tariff impact. We expect the non-GAAP operating expenses to be within the range of $85 million to $90 million. I will now turn the call over to the operator to open it up for any questions. Operator? Operator: [Operator Instructions] We'll take our first question from Philip Shen with ROTH Capital Partners. Philip Shen: Congrats on hitting free cash flow positive and making progress there. I was wondering if you could talk through -- I know, you don't have guidance for 2026, but I was wondering if you could help us understand what revenue growth you might be able to see for the year and maybe sequentially? And then if you can commit to positive free cash flow for '26 as well. Asaf Alperovitz: Philip, thank you for the question. As you know, we do not guide for the next quarter. Without providing guidance, what we can say is that typically, Q1 is down around 10% versus Q4 due to the typical historical seasonality. At this time, we don't have any reason why it would be much different than Q1 of [ 2006. ] In terms of relating to 2026 free cash flow, I mean, we don't guide for free cash flow or provide any target on that. As we noted for this year, we're going to be free cash positive. Q1 to Q3 were $34 million free cash positive. And we also noted with the fact that we will be free cash flow positive in Q4. More than that, I don't think we can elaborate. Philip Shen: Okay. Got it. And then shifting over to the Infineon announcement. I was wondering if you could talk through what the timing of any commercialization might be? Do you have any bookings yet? Or do you think it's more likely for like the '27, 2028 time frame? Is it more of a medium-term or longer-term effort? Or do you think near term, there's an opportunity to generate revenues or bookings? Yehoshua Nir: Yes. Thank you, Philip. I'd like to provide some more color before I get to your specific question. I think that everybody is aware of the fact that the data center of the future is going to be based on DC architecture. There are white papers around it, and everybody understands that DC architecture is better for these data centers. And the goal is basically to maximize the utilization of the data center and to squeeze as many GPUs as possible. So DC architecture is directly in our wheelhouse. We have 20 years of experience with this architecture. We have dozens of gigawatts installed in the field in conditions that are much harsher than data centers. And what we have from past developments and past experience is we have all the building blocks for the solid-state transformer that we're aiming at that market. And so we have started discussions with different players in the ecosystem. And the feedback has been very, very positive. Our potential solution is very relevant and competitive. We are talking about 99% efficiency rate. And efficiency is very, very critical, as you know, because it increases the utilization of the GPUs as we push more energy through the system, and it reduces the heat that is generated, so you need less cooling in the data center. And with all of that being said, what we announced today is the evolution of our long-term partnership with Infineon. They are considered to be one of the leaders in the power electronic supply chain for data center and in general. So we are very happy with the partnership with them. And as I mentioned, we've engaged with other people and other companies in the ecosystem. And we are trying to, if you will, scale towards where the pack is going to be. And the 800-volt DC architecture is expected to really start in 2027. And so you said and rightfully so, this is something that we are looking into 2027, 2028 time frame. Operator: We'll take our next question from Christine Cho with Barclays. Christine Cho: Just as a follow-up to your last comment. So you said that you expect to see the financial impact in '27, '28. Are you going to sort of give any indications to the market about how the progress is going with respect to bookings and any contracts that you might sign before that? Yehoshua Nir: So when we get to it, we will -- as we said, we will share more information as we make progress. At this stage, I think that the most important thing is this new architecture is about to happen 2 years from now. And we feel and not just feel based on the inputs that we are getting is that the solution that we have developed that is not final yet, obviously, the building blocks that we have are definitely -- they fit what the market is looking for, and we will update you as we make progress. Christine Cho: Okay. Moving on to gross margins. Those continue to come in nicely. In prior calls, you've mentioned that one of the biggest drivers is the fixed cost absorption with higher revenues. But in 4Q, your revenue is sequentially down, but gross margins continue to improve. So can you just give us an idea, is this primarily due to 45X ramping? Or is there a material impact from like sell-in of your new products, which are better margin? And I'm assuming that the sequential top line decline in 4Q is mostly due to seasonality. So if you could give us an idea of how much margin improvement there would have been had revenues been flattish? And lastly, for most of this year, I think you had quite a bit of legacy European products in the inventory on your balance sheet that was probably lower margin. Has that largely washed out at this point? Asaf Alperovitz: Christine, you asked a couple of questions there. So I hope I'll cover them all. If we're not, please remind me. So -- you are right, we did indicate that the major driver of gross margin is revenue, where we have leverage as we utilize our fixed cost position. You're also right in terms of the Q4 that we do feel there's a seasonality impact in terms of the guidance we provided on revenue. Just to remind you, in terms of some additional levers on gross margin, I think you've related to some of them. The ramping up of the U.S. production. As we said in the past, it's the most economically attractive location for us to manufacturing, of course, considering the IRA credit. And as you know, we started selling U.S.-made products globally. We had a PR on initial sales to Australia, and we're going to sell more into the international markets and customers in the coming months. Also in terms of the Nexis, the new product introduction, I think we had started, and we're going to gradually ramp up the introduction. And these will have a positive contribution because they are coming up with a better margin profile, and they also represent some new revenue streams and some new segments for us, such as the bigger roof in Germany with a 20-kilowatt, which we had underpenetrated, I would say, until today. These new products are, again, coming with a structure and -- a cost structure and higher margin. And of course, Shuki alluded to the fact in the script about the single SKU framework. We discussed that, and we believe that this will significantly help us improve our margin. It simplifies and improves the efficiency of the entire supply chain. By the way, for both us and our customers. It starts from very efficient planning to component sourcing, logistics, warehousing, manufacturing, of course, inventory management, all the way through service and support. And of course, whenever you think about the margin profile, you need to consider that it also depends on the mix of our product, geographies and segments. And in terms of Europe, you asked, I think, about the utilization of existing inventories from our balance sheet towards sales. So we said that at least until the end of the year, we will do that. And throughout next year, I think we'll see lower impact of that. And again, as we ramp up the shipments of the Nexis and sending U.S. produced products to export markets, we will enjoy the 45X impact into a further extent. Anything I missed in my response? Christine Cho: No, that's it. Operator: We'll take our next question from Mark Strouse with JPMorgan. Mark W. Strouse: Sorry, Shuki, can I go back to the Infineon partnership once more? Can you just talk about the go-to-market there, the plan there? Is that -- would that continue to be through your normal distribution partners? Or is there any kind of incremental investment that would be needed on the go-to-market? And then I've got a quick follow-up. Yehoshua Nir: Yes. Thank you, Mark. So as you know, this market is basically -- the ecosystem is pretty tight. The number of potential customers and customers is not that large. We will actually -- I believe we will be able to approach them directly or through some of the distribution partners, but we've not finalized our plans on that regard yet. We are looking at that piece as something that is not going to be a major investment from our side. And I didn't mention earlier, but one of the things that is actually working in our favor is that in the past, we built the infrastructure to support similar systems here in our labs. So there is a significant amount of CapEx that was going into that infrastructure, and now we don't have to actually spend that money. Mark W. Strouse: Okay. And then you mentioned the market share within U.S. resi. Curious, if you can give similar color on kind of how your market share is trending in Europe. You've lost share over the last several years. How much have you bounced back? How far off the bottom are you? And how far away are you from getting back to where you were several years ago? Yehoshua Nir: Yes, absolutely. So as we said last quarter, we felt that we turned the corner and we actually did. So between Q2 to Q3 -- and we don't have final numbers for Q3 yet, but the numbers we have are more or less the same as Q2. So we definitely feel, based on information coming back from our partners as well as from the field, is that we've turned the corner. There is still a lot of room to grow in terms of market share compared to where we were in the past and where we believe that we can be moving forward. The reason for our optimism about the momentum -- the positive momentum in Europe is a combination of several different things. One is the commercial storage that we have now, we sell now, and we expect that to continue growing. The second one is, as we said, most of our distribution partners have normalized levels of inventory. So now they can use new products and bring them quickly to the market. And the third one is the introduction of Nexis that Asaf covered earlier. It does open some new segments for us as well as it has a better cost structure by itself, and also due to the fact that it's going to be manufactured in the U.S. and exported to Europe, this will allow us to be more competitive in the marketplace while not sacrificing margin necessarily. And all of these reasons are giving us optimism as to where we can grow, and there is definitely room to grow. Operator: We'll take our next question from David Arcaro with Morgan Stanley. David Arcaro: I was wondering if you could maybe update us on the trajectory that you're expecting in terms of the tariff impact. Are you still on track to offset tariff impacts over the next couple of quarters as we look into 2026? Asaf Alperovitz: David, thank you for your question. We reported a net impact from incremental tariff of 2% in our Q3. We guided pretty much roughly to the same estimated tariff impact in Q4. And I think we -- as we've said in the couple of recent quarters that we are extremely focused on diversifying and finding alternative sources and optimizing the supply chain to address this dynamic tariff involvement. And of course, at the same time, the quality and reliability of our product is very, very important for us. And I don't think we'll disclose any more information in terms of our sourcing. But overall, we expect in the coming few quarters to have pretty much the same impact. And we also said the net impact also may be mitigated by some pricing actions that we may take. David Arcaro: Okay. Sure. That makes sense. And then could you elaborate on what you're seeing in the U.S. in terms of demand? How healthy has the residential market been? Maybe if you could touch on C&I and if you expect any pull forward to happen in 4Q? I know you didn't bake it into the guidance, but curious what you're seeing there. Yehoshua Nir: Yes, absolutely. Thank you, David. So as mentioned and as I believe most analysts and players in the market expect the U.S. resi market next year to undergo a significant shift that the 25D is going to end. So overall, the market is expected to go down by 20% to 30%. And the share that the TPOs are going to gain is going to come at the account of the cash and loan, as you know. We feel for a variety of reasons, as I mentioned in our prepared remarks, that our partnership with the TPOs is strong. We have built the infrastructure, the relationship and the advantages of our products are such that they play to what the TPOs require as well as the different transactions that we've engaged with the TPOs, as we mentioned, about the safe harboring. So all of these things give us confidence about future market share. As for pull forward, as we said earlier, we don't have any significant pull forward of revenue in Q3 or in our guidance for Q4 due to the -- any safe harbor or the rush towards the end of the year of the 25D. So we are looking at, as I said, no significant pull forward in this quarter. Operator: We'll take our next question from Dylan Nassano with Wolfe Research. Dylan Nassano: I just want to come at the solid-state transformer partnership from a little bit of a different angle. Anything you can provide on just kind of how meaningful that opportunity could be, whether that's like a TAM or maybe just how many dollars are spent on this kind of product per an average sized data center? Yehoshua Nir: Yes. Thank you, Dylan. We can provide -- everybody are -- most people are talking about the 100 gigawatts of data centers that are going to come on board online in the next decade. All of them will need transformers. And now it's a matter of math of what percentage of these data centers are going to be with the new DC architecture and what kind of share we can get out of this piece. But it's a very -- based on every analysis that we've looked at it and that we have seen, it's a very significant opportunity. And we are very excited about it because it's not that we are seeing a large opportunity out there, and we're trying to chase it. Actually, the core competencies of this company and the components that we already have are all pointing us to that direction, almost regardless of the size of the opportunity. So we are very happy that the opportunity is very large, but we also feel that we are very well positioned to capture on this opportunity. Dylan Nassano: Got it. And then for my follow-up, just going back to Europe. It sounds like you're in a better spot now relative to the last couple of quarters. So just any kind of outlook on just underlying demand going into 2026? Is there any reason to maybe expect the market to be a little bit stronger or weaker? Yehoshua Nir: So there are -- you can hear opinions why the market can be stronger and why the market can be weaker. And as you know, Europe is a collection of countries and not a single market. So some people are talking about U.K. being stronger and the battery opportunity in the Netherlands. And Germany for us is going to be a very, very large opportunity because of the Nexis opening a new segment for us. But we have to recall, as I mentioned earlier in one of the earlier questions, the share gain opportunity for us is significant. And whether the market goes up or down 10%, it doesn't really matter in terms of the size of the opportunity for us. I think that we are well positioned, as I mentioned earlier, we believe that we are well positioned to capture additional market share in Europe in 2026. And once we capture more market share, obviously, it helps if the market is growing. But even if the market is stable or declining, it will still show positive momentum for us. Operator: We'll take our next question from Colin Rusch with Oppenheimer. Colin Rusch: Can you talk a little bit about sell-through on the stationary storage systems and commissioning for systems that aren't attached to solar or are retrofitted? I know you guys have some visibility into where those things are going, but I just want to get a sense of that growth driver. Yehoshua Nir: Are you referring to storage systems that are not attached to PV? Colin Rusch: Exactly. Or would it be a retrofit into an existing PV system that didn't have a storage system previously? Yehoshua Nir: Okay. So for stand-alone storage, it's an insignificant amount that we are seeing. I'm talking about the SolarEdge installations, not about the market in general. We are not seeing anything significant there. As for the retrofit or the upgrade to the installed base, the opportunity for us is huge. Our installed base is very significant, as you know. And in some countries, homeowners and business owners are going to be driven into adding storage to their existing systems, either by just buying storage or by upgrading the PV and adding storage to it. So we've started experimenting in this area. It's -- these are early days today. I think that as the market evolves and as the opportunity -- as we leverage more on this opportunity, we will provide you with more information. But what some people tend to forget is also the same opportunity exists in the C&I market actually. For businesses, having the ability to use their PV during the day in order to charge batteries or to store excess PV production can actually be even bigger opportunity than for residential. Colin Rusch: That's super helpful. And then I mean, I guess a follow-on question there, just around some of the evolution in battery chemistries and different duty cycles that we're starting to see in some of these larger systems. Can you talk about maybe adjacent to some of the work you're doing with Infineon and this DC architecture for larger-scale systems, but also at the commercial systems where the solutions may be a bit more complex here and performance may be enabled by newer chemistries that you're seeing on the battery side. Is that an opportunity that you guys are seeing real time? Or is it a little ways out in terms of being able to mix and match some of the chemistries and optimize performance for different value capture on those storage systems particularly for C&I? Yehoshua Nir: Yes. It's a great question. And rest assured that our CTO and technical team is looking into all the different technologies that are out there from sodium to others. At the moment, the solutions that we have are -- we have one solution that is based on NMC and the other ones are using LFP. These are the ones that are today in mass production. These are the ones when we report revenues. These are the solutions that we are selling. We are obviously looking into all directions. And when other chemistry or other solutions are going to come online and are going to be available either from a cost perspective or from a functionality perspective, we are going to introduce them into our solutions. As it pertains to data centers, there are many different discussions about what storage can be doing there, whether it's for backup only or is it for spikes from the grid or is it a potential replacement for UPS, but these are early days before we can comment about our solution for storage for data center. Operator: And we'll take our next question from Brian Lee with Goldman Sachs. Brian Lee: I hopped on a little bit late, so apologies if some of this is redundant. Did you guys provide -- or could you guys provide a bit of an update on where your manufacturing footprint stands today in the U.S., whether megawatt units or just kind of percentage of overall shipments? And then kind of what's the thought process around getting that up to, I guess, presumably 100% U.S. manufacturing? What's sort of the time frame and cadence to reach those targets into 2026 or beyond? Yehoshua Nir: Yes. Thank you, Brian, and welcome to our call. It's -- so what we've done, if you look at the last 2 years, we've ramped up the manufacturing in the U.S. in order to support mainly the U.S. demand. The levels that we were talking about in the past were along the lines of 70,000 inverters per quarter and the capacity to manufacture 2 million optimizers per quarter. And what we have done in the last 2 quarters, I would say, or 1.5 quarters is we've continued the ramp-up in order to start supporting the exportation from outside of the U.S. into Europe and other international markets. As we announced a few weeks ago, we started by shipping some residential units -- residential inverters to Australia. And in the coming weeks, we are expecting to continue shipping to Europe and -- to some countries in Europe and then some other countries in Asia. And the goal or the end goal, the end state, if you will, is to have most, if not all of -- I would say most of the manufacturing done in the U.S. There will always be pockets that will be made outside of the U.S. for a variety of reasons, whether it's a small volume or whether it's something that is needed in a specific non-U.S. market. But the intention is to concentrate the manufacturing in the U.S. because it helps our scale up. It helps our operational efficiency, and it's closer to our largest market. Just to add in terms of the units because I -- so we started -- I mentioned what we said before. What we are -- our ramp-up now is mainly around the commercial inverter. And we are reaching about 20,000 inverters in Q4, and we expect to continue increasing this number in the following quarters as we are going after not only the U.S. market, but actually the European market and the Asian market. Brian Lee: Awesome. That makes a lot of sense. And just my follow-up was on, I guess, the near-term revenue cadence. I think you guys mentioned earlier in the call, you're expecting Q1 to be down 10% or so, so kind of in line with normal seasonality. But you're not seeing much, if any, safe harboring or 25D pull forward at the moment. As you think about your Q1 view, that seems to be much better than some of your peers and kind of what we're hearing across the channel, at least in the U.S. And as you said, U.S. is still your biggest market. Are you anticipating 48E safe harboring and pull forward in your Q1 outlook? Or is that something that you're seeing visibility into 2Q of next year? Just kind of want to understand a little bit about how you're thinking about safe harboring into 1Q and 2Q of next year. Yehoshua Nir: Yes. Also thank you for highlighting the Q1 thing, Brian. As for safe harboring in -- in Q1 '26, at this stage, we don't anticipate any significant pull forward of revenue into Q1. So the direction that Asaf provided is excluding something like that, should it happen. And what we described during the call is that we've worked with our TPO partners and also with the enterprises and the strategic C&I customers on what is referred to as the physical work test safe harboring. And there are several advantages to that method. One of them is that it allows our customers not to outlay a lot of cash upfront, but actually due to the continuous nature of the transaction, they consume the units as they need them and not just within the first 105 days. For us, what it does is it gives us better visibility into future manufacturing, supply chain and revenue, and it's not creating pull forward of revenue because the units are supposed to be consumed as they need them. So for that reason, in this type of safe harboring, we don't -- we don't see revenue when the transaction is signed. And so we don't expect any significant other type of safe harbor in Q1 when we talk about the numbers. Operator: We'll take our next question from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: I just wanted to come back to the Infineon opportunity here. And a, I want to ask you guys very specifically, how do you think about sort of the content per megawatt, sort of the split if you think about the solid-state solution here? How much of that is coming from the Infineon side? Or how much per megawatt is coming from your side as you think about this technology? I know you said it's still obviously in development as you ramp into that '27 opportunity. But as it stands today, how would you frame that -- the split, if you will? Yehoshua Nir: So Infineon has been a very, very close and strategic partner for us for many, many years. And their components have been instrumental to the success of our inverters in the past. But at the end of the day, it's one of the components that is putting together the hardware of the solution. And on top of that, we have different -- obviously, we put different components together as well as the software or the firmware that makes the entire thing tick. And here, in data center, we believe that we will have to have another layer that will manage the redundancy and other things. So all of these things, SolarEdge is doing. So I don't know whether it -- I don't know how to split it to megawatts, but think about it as they are a very strategic vendor for us, but then we sell the solution eventually. Julien Dumoulin-Smith: Got it. So it sounds like you all maintain the majority of that sale to the extent to which you deliver a product here versus Infineon. Yehoshua Nir: Yes, we deliver the product. Knock on wood, but we would deliver product. Julien Dumoulin-Smith: Right. No, no, no, of course. And then if I can ask a broader question here. Obviously, in some respects, you're pivoting out of what was an inventory challenge situation. How do you think about providing longer-term views? You guys had a '22 Analyst Day. How do you think about providing a longer-term multiyear view of some sort in '26, especially as the C&I opportunity and as the SST opportunity becomes a little clearer over a multiyear view? Asaf Alperovitz: What we said in our recent meeting is that sometime during the first half of next year, we will provide a financial model, financial algorithm. We'll go through the main blocks that will represent our growth trajectory and opportunities, both on revenue and margin. We'll share this model again sometime in the first half of next year, including the C&I opportunity and others, of course. Operator: And we'll take our next question from Jeff Osborne with TD Cowen. Jeffrey Osborne: Just 2 quick ones. I was wondering on the fixed costs. I think you folks had talked about $90 million to $95 million. I didn't know if that's a good run rate to think about over the next couple of quarters. That was question one. And then question two is just any thoughts on pricing as it relates to SolarEdge heading into year-end and into '26 for both yourselves and the industry would be helpful. Asaf Alperovitz: So in terms of the fixed cost, yes, we mentioned that it's around $90 million. And of course, being fixed cost, we don't expect them to change dramatically. We are focusing on trying to reduce cost through further automation. I think I believe the single SKU concept, again, will help us streamline the entire supply chain with the simplicity and more efficiency. So we also want to reduce the fixed cost. It may take a couple of quarters. And again, as revenue increase, we'll have better utilization of such fixed costs. The second question was? Yehoshua Nir: I take that one. Asaf Alperovitz: Yes, go ahead. Yehoshua Nir: So for pricing, as you know, pricing is determined by the value we bring to the market and as well as the competitive landscape. And in a way, you can look at the U.S. market and see that pricing over there, I would say, is more or less the same. It's not -- we haven't seen any pressure -- downward pressure. In Europe and in other markets, while in the past, we did see price reductions and as we shared with all of you earlier -- or not earlier, in November '24, we reduced our prices in Europe. And since then, the feedback that we are getting is that our pricing is competitive compared to the premium and the additional value that we are bringing. So we haven't seen any significant pressure in terms of pricing also in markets outside of the U.S. Operator: We will take our next question from Chris Dendrinos with RBC Capital Markets. Christopher Dendrinos: I wanted to follow up on C&I demand here, and I know you all kind of stopped reporting some of the metrics there, but maybe just kind of help frame up what that demand picture looks like right now? And then I think you mentioned you'll be the only ones that can offer a FEOC-compliant product with U.S. manufacturing. So do you have the scale, I guess, to ramp manufacturing for that C&I product if demand really strengthens? Yehoshua Nir: Yes. Thank you, Chris. It's -- we said that we believe that we are the only scaled manufacturer who is capable of providing non-FEOC and domestic content compliant products to the U.S. C&I. And we've actually -- we've already started doing it, obviously. We've started with -- we've executed some safe harbor transactions with C&I customers for future years as well. And we are -- overall, we believe that we are well positioned to gain additional market share in this important segment in the U.S. So overall, the way we look at it is that we are well positioned in that market, and we believe that we have the solution that our customers need. Outside of the U.S., as we mentioned, we've continued seeing increased attach rate to storage in commercial. So we are seeing growth on that piece of our business, the commercial storage. And as we will start exporting from the U.S., the commercial units, we believe that we can be more competitive in markets in which we were more constrained, I would say, until now. Operator: We'll take our next question from Jon Windham with UBS. Jonathan Windham: I wanted to pivot back to the manufacturing conversation you were on previously. Just to be clear, this U.S. manufacturing for export, one, you're entitled to the 45X for that. Is that correct? And then two, how do you think about expanding U.S. capacity in a flexible way given that the tax credits do expire? Asaf Alperovitz: Yes, you are right. We are getting a 45X credit for manufacturing, whether we sell in the U.S. or whether we export to non-U.S. market. We work with the world-leading providers, Jabil and Flex, mostly, as you may know. We have a very scalable operation with them within the existing premises. So we will be able to support the anticipated growth trajectory we have with them. And again, continue to enjoy the leverage of higher volume of the operation. Operator: And there are no further questions on the line at this time. I'll turn the program back to our presenters for any additional or closing remarks. Yehoshua Nir: So thank you, everyone, for attending our call today. As we said, we're excited about the opportunities ahead of us. We've executed well so far, and we're thankful to our team, but there's lots of work to be done, and we are all on it. Thank you, and talk to you next quarter. Asaf Alperovitz: Thank you. Operator: This does conclude today's program. Thank you for your participation, and you may now disconnect.
Kevin Lorenz: Good afternoon, ladies and gentlemen, and welcome to WashTec's conference call on the Q3 results 2025. My name is Kevin Lorenz, Investor Relations Manager at WashTec. And with me today, I have our Chief Operating Officer, Michael Drolshagen, who will provide an update on the current developments at WashTec and our Chief Financial Officer, Andreas Pabst, who will guide you through the results of the first 9 months. Following the presentation, the floor will be open for questions. [Operator Instructions] Of course, this call will be recorded and made available on our Investor Relations website. With that, I'm handing over to our CEO, Michael Drolshagen. Michael Drolshagen: Ladies and gentlemen, thank you, Kevin, and a warm welcome to WashTec AG's earnings call for the third quarter of 2025. My name is Michael Drolshagen, I'm CEO and CTO of WashTec AG. Before my colleague, Andreas Pabst presents the figures for Q3 2025, I would like to present to you the most important recent developments. Let's start by looking at the general economic environment in our core markets, the U.S.A. and Europe. In Europe, we are seeing the first signs of recovery, but uncertainties remain due to geopolitical risks and protectionist measures. In the U.S.A., new tariffs and a weak dollar are making export conditions more difficult, while demand for capital goods remains stable. Due to the low level of exports to the U.S.A. shown in the last call, the risk for WashTec is low. General economic growth is suffering from the current trade barriers, which is also reflected in the lower market forecast for Europe and the U.S.A. for 2026. This means that WashTec's challenge going forward, such as subdued investment willingness. But given the current order backlog for WashTec, we remain positive. This is supported by our digitalization and sustainable technology offering, which gives us great opportunities for differentiation and growth. Let us take this opportunity to take another look at the core of our strategic orientation and where we currently stand, our house of strategy. Our increasingly smart products form the basis of our business model. However, we go far beyond this by bundling these products into modular tailor-made solutions that are precisely tailored to the needs of our customers. The focus is on the entire customer journey from the initial contact to long-term support. We offer complete solutions from a single source, machines, chemicals and software. With the scope configurator launched in Germany in August this year, we can now configure our products in the same way as a car and create bundles with chemicals and services. This not only makes the job of our sales staff easier, but also gives our customers greater transparency and streamlines the entire process from order creation to machine installation. In the coming months, we will roll out this solution to all markets and also integrate all our products. Our digital products enable intelligent payment and control systems, data analysis and performance optimization as well as customer loyalty through smart user guidance. We are clearly positioning ourselves as a solution provider with a focus on Europe and North America. But strategy is nothing without culture. That is why we focus on customer orientation, enthusiasm and personal responsibility as well as a corporate culture that motivates and supports our employees. Our strategy is brought to life by the people who implement it. And in order to be able to act quickly and empower our employees, we have defined and described 4 core areas to provide clear guidance for all employees into WashTec family. Clear statements for our employees and our organization, expectation management for our financial figures, lean processes and a clear customer focus. The framework is in place. Now it is up to the team to bring the strategy to life step by step. And as we can see today, we are already well on our way. A special milestone in 2025 was the completion and official launch of our new rollover machine, SmartCare Connect as well as our first and most important digital products in May of this year. With SmartCare Connect, we have created a digital solution that not only complements our product range, but also sets new standards in the industry. The market launch was extremely successful. We received very positive feedback from the market in the first few months after the launch. Our customers particularly appreciate its initiative usability, its intuitive usability, integration into existing systems and the wide range of options for data analysis and performance optimization. The system achieves top washing results with short washing times, especially when used in combination with our sustainable chemicals. The positioning of SmartCare Connect is clear. It is the digital heart of our new generation of washing systems and stands for innovation, efficiency and sustainability. With SmartCare Connect, we offer a solution that creates real added value for both large fleet operators and individual locations throughout the entire life cycle of the system. At the same time, our SoftCare SE remains a central component of our portfolio. It stands for proven quality and reliability. While SmartCare Connect focuses primarily on digitalization, smart networking and washing speed with washing time, SoftCare SE impresses with its robust and proven technology. Both product lines complement each other perfectly and enable us to offer the right solution for every customer. The first few months after the launch of SmartCare Connect confirm that we are on the right track. Demand is high, customer feedback is extremely positive and the market response shows that our strategy is spot on. We will continue to pursue this path consistently. Our efficiency programs are a key component in achieving our midterm target EBIT margin of 12% to 14%. Just to repeat our midterm targets, we are aiming for free cash flow of EUR 40 million to EUR 50 million, average revenue growth of 5% per year and a ROCE of over 28%. As just explained, the key levers with regards to our EBIT margin target are our efficiency program. These are the global scope configurator, cost reductions through modularization, quality improvement, optimization of the product footprint and reduction of installation costs. We will discuss these programs in more detail during our Capital Markets webcast on November 20. Our message is clear. We have had a very strong third quarter and are fully on track to achieve our targets 2025. For 2026, it will be crucial to focus on our further efficiency programs in order to realize this proportional EBIT margin growth by 2027. As part of our strategic goals, we are focusing on sustainable reductions in production costs, particularly for our SoftCare SE and SmartCare products. We see great potential here through complexity reduction, modularization and standardization as well as the harmonization of central components. We estimate a reduction in variant diversity of over 20% at component and module level, which will also have an impact on our supplier base and its consolidation. However, the effects here will be felt downstream. The goal is clear and is being pursued with enthusiasm, significant savings and further simplification of our product platforms by 2027. A key highlight of the current financial year is the successful rollout of our new digital products. Following an intensive preparation phase, we are already in the middle of the rollout phase with pilot projects. We have been able to launch our EasyCarWash PRO and CarWash Assist solutions on the market and gradually expand their introduction. EasyCarWash PRO and 4U and CarWash Assist are already in use in over 50 pilot facilities in more than 5 countries. Further pilot facilities are planned in over 7 countries and over 500 new facilities are planned for 2026. The feedback from our key accounts and from area sales is extremely promising. The rollout of our digital products is an important component of our growth strategy and sends a clear signal to the market. WashTec is shaping the future of vehicle washing digitally, networked and customer-oriented. Another important step we decided on is WashTec's new share buyback program. The Executive Board and Supervisory Board gave the green light on the 23rd of October. The program will start tomorrow on the 6th of November and will run until 4th of May 2026. A total of up to 100,000 shares or a maximum value of EUR 5 million can be repurchased. Why do we think this is a good program? First, a share buyback is a clear sign of our confidence in our own financial strength and the future development of our company. We have a solid balance sheet, a strong liquidity position. With the buyback, we are sending a signal to the capital market that we believe in the sustainable success of WashTec. Second, our buyback program increases the value of each remaining share, reducing the number of outstanding shares increases earnings per share. I will now hand over to our CFO, who will present the detailed financial figures and the performance of the individual segments. Thank you for your attention and enjoy the second part. Andreas, the stage is yours. Andreas Pabst: Thank you, Michael. Also from my side, a very warm welcome. I really appreciate that you are all in our call today. Let's go directly to our results. I am pleased to present our results for the first 9 months of 2025 as the numbers speak for themselves, not only compared to prior year, but also in a 5 years perspective. We did very well, strong top line growth and outpacing growth of profitability. We achieved revenues of EUR 358 million, up 7.2% year-on-year, confirming the strong market demand especially in Europe. EBIT grew disproportionately by 17.4% to EUR 32 million, significantly outpacing revenue growth. This is the second highest EBIT in the last 5 years. Only 2021, the year after COVID showed a higher number here, which had a significant catch-up effect. Our EBIT margin improved to 9.0% compared to 8.2% last year. This reflects the success of our cost discipline and operational excellence initiatives, combined with a tailwind from higher revenues. Also, free cash flow rose by 11.2% versus the prior year to now EUR 28 million. This is mainly driven by optimized working capital management and higher net income. The free cash flow ratio of 7.8% is highest in the last 5 years. And if you now look at Q3 stand-alone, the figures are even more impressive. EBIT increased by 35.8% compared to prior year, and it even outpaced the double-digit revenue growth of 10.3%. Also on the long run, WashTec had never seen a higher increase in those numbers year-on-year. Overall, we achieved revenues of EUR 126 million in the third quarter with an EBIT margin of 11.8% or in absolute terms, EUR 50 million. So overall, in Q3, we are clearly on track according to our ambitions. Top line growth accompanied by an overproportional growth of profitability. As you see from this slide, we have a pretty strong top line growth in all business lines. It's a broad-based growth and a solid foundation of recurring revenue, meaning the sum of service and consumables, which now accounts for 47.5% of total revenue. Revenue from equipment grew especially in Q3 with 13.7% year-on-year. For the first 9 months of 2025, this results in an increase of 6%, reaching now EUR 184 million. Growth momentum in Europe and other segments successfully offset the subdued performance in North America, especially Germany and France continued their very strong performance also in Q3. Service revenue grew by 7.5%, totaling EUR 116 million. This improvement reflects our focus on process optimization, digital connectivity and expanded capacity. We hired additional service technicians and field service solution software. By September, we had approximately 13,000 machines connected, an increase of around 14% compared to year-end 2024, a clear indicator of our progress in building a digitally enabled service ecosystem. This will help us in future to grow our profitability even further. Consumables delivered the strongest growth, up 11% to EUR 53.7 million. Looking at the revenue share, equipment remains our strong or largest contributor at 51.2%, but recurring revenue, meaning services, which accounts for 32.5% and consumables, which accounts for 15% are catching up. Therefore, the recurring revenues are now up to 47.5%, last year's 46.9%. The revenue mix develops further to our goal of 50% recurring and therefore, higher predictable revenues. Let's now turn the perspective and take our segments into the focus. Our results clearly demonstrate resilient growth in Europe and other regions, while North America faced headwinds not only but also from currency effects. Revenue, Europe and Other segment increased by 10.3% year-on-year, reaching EUR 309 million. EBIT rose even more sharply, up to EUR 23.6 million to EUR 33 million, driven by strong revenue performance across all business lines. The EBIT margin improved to 10.5% compared to 9.8% last year. These results reflect execution and the benefits of our high capacity load in our production plants. Besides this, we work full steam on our efficiency programs and have already achieved important milestones this year, further to come. Nonetheless, we will see the full contribution of these efforts as planned next year or part-wise even in 2027. Despite that, we had some additional expenses related to corporate strategy and ongoing IT projects. Contrary, revenues declined in North America by 9% in the first 9 months. FX had some impact. On a U.S. dollar basis, revenue is down by 6.1%. However, operational performance stabilized in the third quarter, especially equipment revenues came back. Overall, North America delivered an EBIT of EUR 1.4 million in Q3, up from EUR 1.0 million in the prior year. With that much better Q3 result, the segment stands now after 9 months at breakeven. This gives me some optimism for the coming quarters. To visualize different influences on our EBIT, this bridge might be helpful. Due to higher revenues, we could book EUR 7.3 million additional gross profit and another EUR 3.1 million due to higher gross profit margin. The gross profit margin is now at 31.6% compared to 30.4% last year. This positive performance was mainly due to the increased business volume in Europe, as already mentioned, given in the current setup of our production plants and working close to the limit, and we are facing in some regions, installation capacity constraints. The product and the regional mix also supported this development. Contrary, we had higher selling and marketing costs resulting from higher outbound freight rates in connection with the revenue growth and of the expansion of our sales organization as well as from the launch of the new products. Higher administrative expenses are mainly linked to IT expenses for ongoing projects such as already named SAP investments and new software for the service optimization. In total, earnings before interest and taxes are up by EUR 4.8 million to now EUR 32.4 million. This results in an EBIT margin of 9.0%. Now some other important KPIs. In line with EBIT development, net income increased compared to last year, similar earnings per share. We achieved EUR 1.57 compared to last year's EUR 1.30. Our net financial debt of EUR 60 million is EUR 5 million above prior year's level. with credit lines of around EUR 100 million, unused by more than 50%, our financial position is quite strong. In respect of net operating working capital, we see more or less similar numbers by around EUR 90 million compared to end of September last year. Compared to the end of last year, which was at EUR 94 million, we are down by EUR 4 million. We are still cautious about investments, meaning after 9 months, we spent EUR 5.5 million. The main portion of those investments is linked to our North American production plant, where we bought some machines to strengthen our local production footprint and to our digital products and solutions. Our equity ratio is at 25.5% compared to 26.7% end of Q3 2024. But our balance sheet is still very solid and very healthy. In terms of employees, 85 more people work for WashTec compared to 1 year ago. The majority is hired for service. I already spoke about this one. Let us now debate a little bit about our order backlog. As usual, this slide doesn't give absolute numbers, but index numbers based on a 5 years view. In the first 9 months of 2025, WashTec Group did very well in terms of order intake, especially in Germany and France, we had a very strong order intake, whereas North America remained at prior year's level in euro and a little bit above in U.S. dollar. Especially in Q3, we saw here some progress. Consequently, this overall higher order intake results in higher order backlog, which is 20% over year-end 2024 and a comparable level compared to end of Q3 2024. Knowing about this good order backlog, we have some clarity on increasing equipment revenues in the next 6 months in all segments. This provides us with a solid base for the months ahead. Coming now to our guidance. WashTec confirms its guidance for the group for 2025 based on our current order backlog as well as progress of our initiatives. Especially the EBIT development in Q3 supports our guidance with regards to a disproportional increase of EBIT compared to revenues. We now expect revenues and earnings growth in Europe and other segments to be comparatively stronger and in North America, relatively weaker in local currency. But overall, we expect for the group, a full year growth of revenues by mid-single-digit percentage and a disproportionate EBIT increase in excess of revenue growth. Full year's free cash flow is expected to be in the range of EUR 35 million to EUR 45 million, and we also see improvement in our ROCE number. Summing up, we confirm our group guidance for 2025, and we look optimistic into the future. This forecast is based on the assumption that the current global trade conflict will not have any significant negative impact on investment behavior in the car wash market. Next slide, please. So before we start with the Q&A session, a quick reminder about our upcoming capital markets communications. Feedback we got from you after our first capital market webcast on July 10, we feel ourself-confirmed that this type of communication really adds some value. Therefore, we have recently announced to do our second capital market webcast on November 20. Currently, we are working on the details. But I can tell you that we want to explain in much more details what is the plan in future for our consumable business as well as some deep dive into our efficiency programs. These are essential part in our plan to achieve our midterm profitability targets. So we hope that you dial in. Straight after, we will be in November at the German Equity Forum where we can meet in present. We are looking forward to meet you there. So that's it from my side. Thank you for listening. Kevin Lorenz: [Operator Instructions] And we already have the first question from Stefan Augustin from Warburg Research. Stefan Augustin: My first question is actually on the very strong European margin. If I look at the recurring revenues, it's likely not a positive mix effect. So is this then driven by the efficiency programs? Or is that simply driven by the volume and load? That would be my first question. And from that one, I have likely a follow-up. Andreas Pabst: Let me take this one, Mr. Augustin. Thank you for asking that question. So yes, you are right. In Europe, we are doing very, very well. And our gross profit margin is influenced by similar different topics. For sure, there is a higher revenue, which helps us there. The production load is better. And there is also a small contribution by better material prices, but also we see the first effects on the efficiency programs, not at a stage where we wanted to have them. That is what we have announced a little bit, but we see that they are also contributing. Stefan Augustin: Okay. From that one, looking maybe into Q4 and taking your full year guidance, which implies that we have maybe a slightly lower or roughly the same volume in Q4 as the last year. If you have savings on the material side, gains, would it be fair to assume that on the European business, you should at least be able to get the same absolute amount of EBIT with the same volume? Andreas Pabst: So indeed, yes, we are planning that we reach or achieve our guidance in total. We will be stronger in Europe compared to last year and weaker in North America. So if I look at the Q4 for Europe stand-alone, as you asked, I'm positive that we are doing here pretty well again. Stefan Augustin: Okay. And then maybe a bit on the order intake. If I read your slide correctly, my assumption would be that we have a book-to-bill in Q3 that is very close to 1. And what it does not show me is the actual growth in the order intake Q3 year-over-year. Can you comment on that one? Andreas Pabst: Yes, a very important topic, which is a regular bigger order, which we receive once in a year is related to North America, where we -- in the comparable numbers last year, we had from bigger customer, a great order in the figures. We did not have received this order this year, but we expect to receive it in the fourth quarter. So that is one part of the explanation. Stefan Augustin: All right. And the last one, could you help me a little bit with how much the IT and other implementation costs have burdened Q3? Andreas Pabst: It will come in future when its Q3 already. So it's -- the question is how much was it in Q3? So we are really -- we are facing the implementation of, for example, SAP S/4HANA is pretty expensive, and we started the program in beginning of this year and every quarter, it's a little bit more. So stand-alone in Q3, if you ask me right now, I would say it had cost us between EUR 0.5 million and EUR 1 million together with the other programs. Stefan Augustin: Okay. And that one, you indicated it's going to go up a little bit going further. Andreas Pabst: Correct. Yes. So according to the plan, which we see is that we will need next year for fully implement S/4HANA and some other IT programs as well. It's not only S/4HANA, but the plan is that we will have done this with the first 2 major steps until Q4 2026. Michael Drolshagen: We do a lot of SAP S/4HANA has advantages that is driven by cloud costs, and we started in parallel to reduce the cost for cloud data storage that we -- with all our manpower and efforts to -- that you have only the data in the cloud in SAP S/4HANA that really need there and the others are still on-premise or somewhere else to have our costs under control in the IT sector. Stefan Augustin: I don't want to spoil the upcoming Capital Markets Day, but I assume that, let's say, you skipped how much that could be in 2026. Would you be happy to share at this point or... Andreas Pabst: Probably -- we will not give a detailed number for our introduction cost of S/4HANA. Probably that is too much insight, but we will give an indication about it, how we see it. Stefan Augustin: Okay. And then finally, do you think -- would you describe yourself at this point also very confident to achieve your full year guidance with respect to sales? Andreas Pabst: Yes. Simple answer, yes. We feel confident. Kevin Lorenz: We have another question from Nicole Winkler from Berenberg. Nicole Winkler: Maybe starting with a housekeeping question. In your report, you mentioned that all 3 business lines contributed to revenue growth in Europe in Q3. How about North America? Was it mainly driven by service and consumables again in Q3? Or do you already see the uptick of equipment sales? Andreas Pabst: North America, that goes along with the story which we already said in Q2 about a major customer who places orders again. So what we now see in North America is that especially equipment in Q3 contributed here. But also there was not too bad in terms of service and consumables. But comparable to last year, the equipment topic was in favor for us. Nicole Winkler: Perfect. Maybe this also goes along with this one big customer, but you also mentioned that contract negotiations in North America are finally finalized and order intake increased significantly. Now looking at the order backlog, you cannot see this yet. So basically, can you give us some more color here when we should see also these kind of orders coming in from big North American client in your order backlog? Andreas Pabst: So I assume the client you are mentioning is we are confident with it. Yes, the orders are coming in. The order backlog is fine. The client I mentioned in my speech before is a different one, where we expect to get the orders in Q4 this year. Nicole Winkler: Okay. Understood. Maybe also regarding the service revenue, can you give us some more detail in which amount the optimization of processes, the digitally connected equipment and increased capacity in this area contributed to revenue growth. What I would like to understand is because you mentioned it that now you have like, I guess, 13,000 connected units by now. Do they already contribute to service and consumable business? Andreas Pabst: Yes. The more machines are connected the better we can work with the data, the better we can push the efficiency of our service business line. What is important for this year also, and maybe I just mentioned it somewhere in between the lines, we have hired throughout the year a lot of new service technicians. And you understand immediately that if you hire a new person, you need to train this person, you need to educate this person. So at the beginning, this person contributes to the top line, but not necessarily in the same amount to the gross margin. And what we see now is in Q3 that we are catching up here again, and we are in the same EBIT margin in service like we have been last year. And I think that is really something very positive, understanding how much new service technicians we have hired. Michael Drolshagen: And it takes us 3 to 9 months currently to train them. And this is also where we work on to reduce our complexity that in future that they contribute faster to revenue and EBIT margin than it's today. Nicole Winkler: Okay. Understood. And one last question regarding your shift of workforce from Germany to Czech Republic. Have you had any restructuring costs? And if yes, which amount in Q3? Michael Drolshagen: We have cost because we have to train the people and we have some processes and people in parallel. How much it is, I can calculate it in my brain fast if you have the number. Andreas Pabst: So the topic is that in the moment when we shift, we need additional people. So we need the people here and we need the people there in Czech because they have to train. But if your question is referring to severance payments or stuff like this, so we are really happy that we could do this and can do this without any major severance payments. So we are just using fluctuation. We are reducing temporary workers. And so as of today, and we are not fully through, but as of today, we do not have any significant severance payments. Michael Drolshagen: You can calculate around 10 to 15 people in parallel for 2 to 3 months. And this is over 1 year time period. This is our extra cost here. We have calculated this in the savings and we hope that after the starting phase that the savings we gain that we can cover the extra cost in the following months. Kevin Lorenz: And we have another question from Alexander Galitsa from Hauck Aufhäuser. Aliaksandr Halitsa: I have a couple of topics, different ones. Maybe first one, just a clarification. You mentioned in your remarks that for 2026, you will be focusing on pushing forward the initiatives that are underway to prepare the company for disproportionate growth in 2027. I'm not sure if I heard it, maybe I misheard, but could you just clarify that should we read it in a sense that one should not necessarily expect disproportionate EBIT growth in 2026 or it was not that -- it was not meant that way? Andreas Pabst: What I meant was that we will have still some costs with doing all those efficiency programs and that we will see the efficiency gains from those programs on a full year's perspective in 2027. And we really need to execute those programs and that they really kick in because in the Capital Markets Day and also Michael today repeated it again that in 2027, we want to achieve an EBIT ratio between 12% and 14%. So if you go from 2025 to 2027, I do not think that it will be a linear growth. So there will be a little bit of burden in 2026, but we will also grow in 2026, that's what I believe. Aliaksandr Halitsa: Perfect. And maybe just a quick follow-up since you mentioned the range, 12% to 14% is obviously a big bandwidth. The upper end of this bandwidth, what would you say you need to achieve to get there? Michael Drolshagen: We have calculated this already. Otherwise, we couldn't promise that we try to achieve it. So we need revenue growth in our segments. We think we can do this not only in equipment also in chemicals and service. And on the other side, we have really to focus on our bottom line. There is a lot of opportunity there. And if we do this in the right way, so reducing complexity by 20%, 30%, implementing our installation process in the next levels, which we are focusing on currently. And I think we are close to implement the next phase. We have some standard programs, how we want to achieve efficiency in the indirect areas. So if the growing is coming as we expect it, and it looks like in the order intake and we do our homework in the bottom line with our program, then I'm really confident that we can achieve that. Aliaksandr Halitsa: Perfect. Then maybe briefly on consumables growth. I just wonder if you could somehow elucidate to what extent consumable growth is already driven by the bundling initiatives? And maybe what's the sort of natural progression in terms of time frame when those bundles are going to play a role in that regard? Michael Drolshagen: We implemented the scope configurator just a few months ago. So there is not a lot of revenue and EBIT margin due to bundling in that area. So we expect more in that area 2026, but we have to roll out the system. We have to train the people and so on that the full scope we think we will get in 2027. So it's a step-by-step market by market. We started now in Germany with focus on Germany and now we go from the biggest markets to the smallest markets to get efficiency as early as possible, but this takes time. And we think full gain is in 2027. Aliaksandr Halitsa: And you're generally confident that this would -- is getting traction within customers and there's not going to be a major pushback on the bundle offer? Michael Drolshagen: We are deeply convinced that this will ease up the process and also for our customers that they clearly see what they order for what kind of money and what they get finally. And we can use and chemicals are driven by headcount as more headcount you put in the system as more you can achieve. And with that, we can also use our equipment salespeople in a better way than we have done it before. Aliaksandr Halitsa: Understood. And then just 2 last topics I have. One is on equipment growth. I think you already mentioned that backlog gives you certain visibility. Could you confirm or is that reasonable to expect that equipment should be also growing year-on-year in Q4? Because I think you're kind of competing also against a strong base. But based on your backlog, is that a reasonable assumption that equipment should grow? Andreas Pabst: Being a little bit cautious. Last year Q4 2024 was a pretty strong equipment quarter. We expect that this year will be on the same level like last year. But in equipment, you really have the topic that you are -- you do not have it always in your own hand if the revenue slips to the beginning of January 2026 or if you can make it in 2025. So our expectation is that we can repeat what we had last year. Aliaksandr Halitsa: Okay. Perfect. And then very last one. I don't know how material this topic is, but there has been a press release from you some time ago on a partnership with Prag, I believe, is the owner of 100-plus petrol stations. And I think they've commented that they are delighted to have 30 of those stations digitalized. Just wonder what does WashTec get incrementally from a partnership like that? Will you start selling more services and consumables into this specific customer? Or how should one read that news flow? Andreas Pabst: I think the most important thing here is that we are confident that our digital initiatives, they are accepted by the customer. And Prag is for sure, one of midsized customer where we tested if it works. And we got really positive feedback from the cooperation with Prag, and I think it's moving here in the right direction. I do not want to comment if we make now much more revenue or EBIT with one single customer. I think that is not here the place to speak about a single customer. Michael Drolshagen: What we see -- probably in that direction, what we see in the data with our pilot facilities, not only with that customer is that we increase on our operator side, the number of washes per site. So this we see already with our pilots. And this is good news for our operators. And this on mid- and long-term run is a good news for our equipment sales, which is in a year's perspective, but it's also good for our service and equipment as more washes we have as more we have traffic here in that business. So this is what we see, and we have to support here that we have good numbers that we have a good app and good equipment installed and that we have transparent data available and can provide this to our operators and they set in place, the next step will come automatically. Kevin Lorenz: We have no further questions. Michael Drolshagen: Okay. Then ladies and gentlemen, on behalf of the Management Board, we would like to thank you for your interest in our company and wish you a pleasant day. Thanks. Andreas Pabst: Thank you very much for joining. Bye-bye.
Operator: " Michael Gross: " Bruce Spohler: " Shiraz Kajee: " Erik Zwick: " Lucid Capital Markets, LLC, Research Division Melissa Wedel: " JPMorgan Chase & Co, Research Division Robert Dodd: " Raymond James & Associates, Inc., Research Division Finian O'Shea: " Wells Fargo Securities, LLC, Research DivisionGood morning, everyone. Welcome to today's Third Quarter 2025 SLR Investment Corporation Earnings Call. [Operator Instructions] Also, today's call is being recorded. [Operator Instructions] Now at this time, I'd like to turn things over to Mr. Michael Gross, Chairman and Co-CEO. Please go ahead, sir. Michael Gross: Thank you very much, and good morning. Welcome to SLR Investment Corp's earnings call for the quarter ended September 30, 2025. I'm joined today by my long-term partner, Bruce Spohler, Co-Chief Executive Officer; as well as our Chief Financial Officer, Shiraz Kajee, and the SLR Investor Relations team. Shiraz, before we begin, would you please start by covering the webcast and forward-looking statements? Shiraz Kajee: Thank you, Michael. Good morning, everyone. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of SLR Investment Corp and that any unauthorized broadcast in any form is strictly prohibited. This conference call is also being webcast from the Events Calendar in the Investors section on our website at www.slrinvestmentcorp.com. Audio replays of this call will be made available later today as disclosed in our November 4 earnings press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections. These statements are not guarantees of our future performance or financial results and involve a number of risks and uncertainties. Past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. We do not undertake to update any forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670. At this time, I would like to turn the call back to our Chairman and Co-CEO, Michael Gross. Michael Gross: Thank you, Shiraz, and thank you to everyone for the earnings season. We're pleased to report that our third quarter results continue to reflect broad stability in our portfolio, which we attribute to both our multi-strategy approach to private credit investing and our conservatism. Summarizing our results, SLRC reported net investment income of $0.40 per share and net income of $0.43 per share in the third quarter. Net asset value per share of $18.21 as of September 30 increased slightly quarter-over-quarter and was approximately flat year-over-year. Our net income for the quarter equates to a 9.4% annualized return on equity. Net investment per share was $0.01 below our base dividend of $0.41 per share in the third quarter. We believe the stability demonstrated in our net asset value per share and the resilience of our earnings since the peak of private credit's golden age compares favorably to peer publicly traded BDCs, which on average have been exhibiting gradual declines in portfolio yields, rising credit losses and increasing balance sheet leverage. During the third quarter, SLRC originated $447 million of new investments across the comprehensive portfolio and received repayments of $419 million. Year-over-year new originations were up 12.7%. During what is typically a seasonally slow quarter, our commercial finance strategies experienced significant deal activity, resulting in the second highest quarter of originations in the company's history and a high degree of churn in the portfolio from elevated repayments. Overall, we remain pleased with the steady expansion of our comprehensive portfolio, which has produced an annualized growth rate of 17.1% since 2020. We are aware of the elevated concerns about the growth in the private credit industry and underlying credit quality, which have garnered significant investor attention and headlines lately. For investors that have followed our story and appreciate SLR's ability to tactically allocate in a multi-strategy approach to private credit investing, it should come as no surprise that we too share this concern. We believe our deliberate decision to be more discerning in cash flow lending has safeguarded SLRC's performance through the prolonged high interest rate environment and positions the company favorably to withstand the potential softening in the economy. Conditions in the sponsor-backed cash flow market remains fiercely competitive, resulting in elevated credit risk, deteriorating lender protections and shrinking illiquidity premiums. Alternatively, we continue to find more attractive opportunities to deploy capital across SLR's ABL strategies, which typically offer all-in spreads of SOFR plus 600. Direct corporate ABL, a strategy we've been in since 2012, contains high barriers to entry through underwriting complexity and the labor intensity of collateral monitoring. This makes it difficult for private credit managers who enter the strategy to build a book of asset-based loans that can withstand the pressures of changing economic conditions. We believe this difficult to replicate expertise, specialization allows us to deliver more consistent returns and true portfolio differentiation for BDC investors. Year-to-date, SLR has originated close to $840 million of asset-based loans, which is almost double our volume during the comparable period in 2024. Today's asset-based lending market has successfully evolved from lending to distressed borrowers to today serving creditworthy companies and flexibility for their portfolio companies. Demand for our corporate asset-based lending solutions from both sponsor-backed and non-sponsor-backed borrowers remain strong as companies seek liquidity solutions to navigate uncertain economic conditions and challenging exit conditions for private equity. The broad-based demand we've experienced for ABL financing solutions spurred us to hire a well-known and respected industry veteran as President of Asset-Based Lending at SLRC's investment adviser. [ Mac Fowle ] will focus on expanding SLR's asset-based lending capabilities across the platform's existing ABL franchise. His arrival comes on the heel of over 100 new hires across the SLR platform over the last two years. We think Mac's decision to join from JPMorgan, where he was Global Head of Asset-Based Lending, underscores the growing theme of opportunity for private credit in the direct asset-backed market due to bank retrenchment. We believe SLR's investments in people and infrastructure have contributed to our expansion in deal flow and a greater recognition of SLR's leadership in the ABL marketplace. As a reminder, SLRC's ABL platform provides the infrastructure to further grow our comprehensive investment portfolio, including through potential portfolio and business acquisitions. The company's strong quarter of ABL originations furthered our portfolio mix to asset-based specialty finance strategies over the last couple of years, which we believe provide greater downside protection from strong credit documentation integrity and underlying collateral with a lender retaining permitted discretions. Approximately 93% of our third quarter originations were in specialty finance due to the more attractive risk-adjusted return profiles and favorable conditions in those markets. During the quarter, we passed on the refinancings of several cash flow investments within our incumbent portfolio, allowing our sponsor finance portfolio to further shrink. As a result, approximately 83% of our loan portfolio consists of specialty finance investments as of September 30, with the remainder of the portfolio comprised of cash flow, sponsor-backed loans to companies in defensive noncyclical sectors such as healthcare and insurance brokerage services. With cash flow loans representing 15.3% of our comprehensive portfolio, the allocation of cash flow loans remains at the lower balance of our historical mix. We will, however, continue to approach new investments in cash flow lending opportunistically and believe our deep industry expertise in the health care sector presents selective attractive opportunities for us to be active in cash flow lending today. Overall, we remain pleased with the composition, quality and performance of our portfolio and the portfolio constructed afforded by SLR's multi-strategy approach. At quarter end, 94.8% of our comprehensive investment portfolio was comprised of first lien senior secured loans, 99.5% of our debt investments at cost are performing, and PIK income continues to comprise a de minimis percentage of total income. We believe these key credit quality metrics, along with the de minimis total trailing 12-month loss rate compared favorably to public peer BDCs. At September 30, including available credit facility capacity at SSLP and our specialty finance portfolio companies, SLRC had over $850 million of available capital to deploy. Our liquidity profile puts us in a position to take advantage of either stable economic conditions or softening of the economy. At this point, I'll turn the call back over to Shiraz to take you through the third quarter financial highlights. Shiraz Kajee: Thank you, Michael. SLR Investment Corp.'s net asset value at September 30, 2025, $993.3 million or $18.21 per share compared to $18.19 per share at June 30. At quarter end, SLRC's on-balance sheet investment portfolio had a fair market value of approximately $2.1 billion and 109 portfolio companies across 31 industries compared to a fair market value of $2.1 billion in 115 portfolio companies across 32 industries at June 30. SLRC's investment portfolio is funded by a combination of our revolving credit facilities and the issuance of term debt in the unsecured debt markets. Company is investment-grade rated by Fitch, Moody's and DBRS. During the quarter, the company was active in the management of various credit facilities across multiple banks and the issuance of unsecured debt in the private markets with institutional investors. In regard to secured debt activity in the quarter, the company increased its total revolving commitments to just under $1 billion. In the unsecured market, the company issued $50 million of 3-year unsecured notes at a fixed interest rate of 5.96% in July and issued $75 million of 3-year unsecured notes in August at 5.95%. We believe the issuance of these notes reflects an attractive and flexible cost of debt capital for shareholders and enhances the mix and diversity of the capital base. The company does not have any near-term refinancing obligations with the next unsecured note maturity occurring in December 2026. We expect to continue to prudently issue unsecured debt in the future. At September 30, the company had approximately $1.1 billion of debt outstanding with a net debt-to-equity ratio of 1.13x. We believe we have ample liquidity to support unfunded commitments. Moving to the P&L. For the 3 months ended September 30, gross investment income totaled $57 million versus $53.9 million for the 3 months ended June 30. Net expenses totaled $35.4 million for the 3 months ended September 30. This compares to $32.3 million for the prior quarter. Accordingly, the company's net investment income for the 3 months ended September 30, 2025, totaled $21.6 million or $0.40 per average share compared with $21.6 million or $0.40 per average share for the prior quarter. Below the line, the company had a net realized and unrealized gain for the third quarter totaled $1.7 million versus a net realized and unrealized gain of $2.6 million for the second quarter of 2025. As a result, the company had a net increase in net assets resulting from operations of $23.3 million for the 3 months ended September 30, 2025, compared to a net increase of $24.2 million for the 3 months ended June 30. November 4, the Board of SLRC declared a Q4 2025 quarterly base distribution of $0.41 per share payable on December 26 to holders of record as of December 12. With that, I'll turn the call over to our Co-CEO, Bruce Spohler. Bruce Spohler: Thank you, Shiraz. As Michael indicated, we've continued to shift the portfolio towards our specialty finance strategies due to their more attractive risk-adjusted returns in today's market. Our specialty finance strategies offer higher pricing than sponsor finance and greater downside protection through their underlying collateral support. We view these more favorable terms as a complexity premium earned through investing in complex structures that require significant expertise and infrastructure that most private credit firms don't have. Before delving into our portfolio, I'll touch on the recent headlines concerning ABL. Recent events have brought the asset-backed finance market under sharper regulatory and investor scrutiny. The high-profile bankruptcies of both First Brands and Tricolor revealed alleged instances of fraudulent collateral reporting, over pledged receivables and falsified data. While preliminary investigations suggest that these were idiosyncratic failures tied to misconduct and inadequate third-party oversight, they have nonetheless raised questions about collateral verification practices and information integrity in syndicated asset-backed securities. Our own due diligence during several opportunities to invest in First Brands identified a series of red flags that led us to decline the investment, including prior fraudulent conduct, a questionable track record and a history of very difficult to decipher financial statements. The lack of management alignment also provided a further element of elevated risk. These examples underscore the critical importance of rigorous underwriting and serve as a warning to the broader ABS market. While First Brands and Tricolor have cast a temporary shadow over the ABS sector, they serve as a powerful endorsement of our model that is built on direct bilateral lines of credit with active monitoring, verification, scale and experienced ABL infrastructure. With our focus on direct asset-based lending, we underwrite management teams and companies supported by strong assets that collateralize our loans, not pools of assets as in asset-backed securities. We believe ABL remains the most compelling risk-adjusted opportunity in private credit heading into 2026, particularly as the existing middle market maturity wall drives borrowers to asset-based refinancing solutions. Now let me turn to the portfolio. At quarter end, the comprehensive portfolio consisted of approximately $3.3 billion with an average exposure of $3.6 million. Measured at fair value, 98.2% of the portfolio consisted of senior secured loans with approximately 95% in first lien loans, including those investments attributable to our SSLP and only 0.2% was invested in second lien cash flow loans, with the remaining 3.2% invested in second lien asset-based loans. At quarter end, our weighted average yield on the portfolio was 12.2%, consistent with the prior quarter. Our portfolio has largely been insulated from spread compression in the cash flow market due to our focus on less competitive specialty finance sectors. Based on our quantitative risk assessment, our portfolio continues to perform well. At quarter end, the weighted average investment risk rating was under 2 based on our 1 to 4 risk rating scale with 1 representing the least amount of risk. Just under 98% of the portfolio is rated 2 or higher. Moreover, 99.5% of the portfolio on a cost basis and 99.7% on a fair value basis was performing with only one investment on nonaccrual. Now let me touch on each of our 4 investment verticals, starting with our Specialty Finance segments. As a reminder, we actively allocate to our strategies based on market and economic conditions, which allows us to source attractive investment on both a relative and absolute basis across market cycles. Let me first touch on asset-based lending. Two areas of private credit illustrate the balance between opportunity and vigilance more clearly than ABL lending. ABL has been the clear beneficiary of bank retrenchment and elevated funding costs as borrowers seek liquidity solutions backed by working capital assets. Direct corporate ABL opportunity set that we focus on includes 3 primary types of transactions. First, providing working capital and liquidity to businesses with abundant assets but volatile cash flows due to rapid growth, seasonality or restructuring. Second, we provide incremental liquidity to sponsor-owned companies whose access to the incremental term loan market is limited and where an ABL facility can leverage unencumbered working capital assets alongside an existing term debt facility. And lastly, we provide M&A financing in which working capital assets support an ABL facility and are used to finance a portion of the purchase price, thereby reducing the amount of equity or high-yield bonds required to fund the acquisition. SLR's focus on corporate versus consumer ABL relies on old-school fundamental credit analysis of both the borrower and the collateral, requiring heavy hands-on due diligence and bespoke loan structures, which typically include cash Dominion. Most importantly, we leverage our experienced middle office infrastructure and resources for intensive collateral monitoring and control of that collateral during the life of our investment. At quarter end, our ABL portfolio totaled over $1.4 billion across 265 borrowers, representing 44% of our total portfolio. For the third quarter, we originated just over $300 million of new investments and had repayments of approximately $244 million. In the third quarter, our weighted average asset level yield on the ABL portfolio was 13.4%, consistent with the prior quarter. Now turning to Equipment Finance. At quarter end, the portfolio totaled just over $1 billion, representing 32% of our total portfolio across 590 borrowers. The credit profile of this portfolio was unchanged versus the prior quarter. During the third quarter, we originated $112 million of new assets and had repayments of $133 million. The weighted average asset level yield was 11.4%, down 20 basis points from the prior quarter. Our investment pipeline has recently expanded, and we are seeing demand from our borrowers to extend existing leases on our equipment rather than buying new equipment at higher tariff-adjusted prices. Now let me turn to Life Sciences. Strong public and private equity markets for life science companies during COVID resulted in lofty valuations and led to a trend in the life science debt market of new entrants with looser underwriting and structure standards. Since then, life science valuations have begun to moderate as interest rates increased and equity was harder to come by. That moderation has continued, including during much of this year as the market digests some of the more recent regulatory uncertainty. Also, while recent industry investment activity has focused on life science, health care, IT and services and earlier-stage development companies, our focus continues to be on late development and early commercial stage drug and medical device companies. Competition amongst lenders has increased in select situations, and we are seeing occasional signs of structural give from newer entrants seeking to deploy capital. These are market conditions that reward disciplined and experienced life science teams such as ours. Our team possesses a deep understanding of the unique and often nonlinear value creation inherent in life science companies. We know that progress is rarely a straight line and requires experience to properly assess the deployment of significant investments and the potential value of intellectual property. With over $5 billion in life science committed investments over the past 25 years, our advisers' life science finance team has significant experience navigating these cycles and the ongoing evolution of regulatory and policy changes, including possessing extensive expertise with the complex FDA and CMS processes. The market is beginning to turn more positive as FDA concerns have softened a bit. Although uncertainties still exist, they are not as concerning, and we are seeing more momentum and better pipeline opportunities for both drugs and medical devices. Our current pipeline is the highest that it's been in over 2 years and is triple the size of where it stood just a year ago. The late-stage venture debt environment remains selective but constructive for specialist lenders such as ourselves. With IPOs still scarce and equity capital more discriminating, nondilutive senior debt has become a strategic bridge to milestones, expansions, IPOs when viable or strategic exits. Our focus remains on first lien senior secured by all assets, including cash and control over a company's IP to companies with products at or near FDA approval and generation of commercialization revenue. We underwrite to specific value realization events rather than to open-ended runway extensions. Across our platform, we've had 3 investments totaling just under $350 million pay off year-to-date, while adding over $360 million of new life science commitments. In an uncertain and valuation challenged environment, we view getting repaid on certain investments and generating attractive mid-double-digit returns is a very good outcome for SLRC. At quarter end, our life science portfolio totaled approximately $218 million across 9 borrowers. 88% of this portfolio is invested in companies that have over 12 months of cash runway. Additionally, the vast majority of our portfolio companies have revenues with at least one product in the commercialization stage, which significantly derisks our investments. During the third quarter, the team funded approximately $2 million to an existing borrower and had just under $1 million of contractual amortization repayments. It was a quiet quarter on the origination front and our portfolio benefited from the continued duration on our existing portfolio, while the industry continues to grapple with the headwinds of recent cuts at the FDA and NIH involving public policy as well as continuing valuation challenges. At quarter end the weighted average yield on this portfolio, including success fees but excluding warrants, was 12.3%. Now finally, let me touch on our sponsor finance cash flow business. Middle market sponsor activity improved modestly in the third quarter, and the momentum appears to be carrying over into the fourth quarter, yet competition for quality assets remains intense and the looming '26-'27 maturity wall continues to shape borrower behavior. In this highly selective market, we believe discipline is the differentiator. We remain focused on lending to sponsor-backed businesses with predictable recurring revenue in sectors where we have deep domain expertise, including health care services, business services, and financial services. At quarter end, our cash flow portfolio was just under $500 million across 31 borrowers, including our senior secured loans into the SSLP or just over 15% of the total portfolio. With approximately 99% of this portfolio invested in first lien loans, we believe that we are well positioned to withstand tariff and economic headwinds. Our borrowers have a weighted average EBITDA of approximately $90 million and carry low LTVs of 44%. Our borrower fundamentals are trending positive with portfolio company average EBITDA and revenue growth in the mid-single digits year-over-year. Overall, our portfolio companies have successfully managed the transition to an environment with higher cost of capital and input prices. The weighted average interest coverage on this portfolio was 1.9 at quarter end, up from the prior quarter's 1.8. Additionally, less than 2% of our gross investment income is in the form of capitalized PIK from cash flow borrowers resulting from amendments. During the quarter, we made investments of $31 million in new first lien cash flow loans and had repayments of $41 million. The average yield on this portfolio was 10.2%, down from 10.3% in the prior quarter. Lastly, let me touch on our SSLP. During the quarter, we earned total income of approximately $1.5 million, representing a 12.7% annualized yield. During the quarter, we made $18.5 million new investments in 4 portfolio companies and had $15 million of repayments. Net leverage totaled 0.9 at quarter end. We expect to continue to rebuild this portfolio opportunistically. At quarter end, we had approximately $40 million of undrawn debt capacity. Worth noting that we are active in the repricing of various credit facilities in the quarter with our banks at our ABL platforms as well as at the SSLP credit facility. We expect these adjustments will be accretive to our cost of debt going forward. Now let me turn the call back to Michael. Michael Gross: Thank you, Bruce. With the maturation of private credit into a more mainstream asset class over the past 5 years, investors now have numerous ways to access private credit beta products. We continue to believe that SLR's multi-strategy approach to private credit investing, our emphasis on preservation of capital, and our portfolio construction with the specialty finance emphasis differentiates us from the majority of our BDC peers and provides an investment portfolio that contains very limited issue overlap with other private credit managers. The combination of a diversified momentum across our investment strategies and a growing investment pipeline tilted heavily towards specialty finance positions the company favorably to navigate the current climate. We will continue to be opportunistic and prudent as we deploy capital. We think that recent volatility in BDC share prices over the last 6 weeks stems from burgeoning investor anxiety about corporate and private conditions regarding the realization of the potential impact of base rate cuts on floating rate index investments, fears of deteriorating credit quality among corporate borrowers relative to very tight risk premium. While we think SLRC's earnings sensitivity to change in base rates is one of the one, if not the lowest amongst our peers, we acknowledge that we are not fully immune to the impact of recent reductions in base rates by the Fed. Our North Star continues to be protecting capital, avoiding losses, and not chasing higher spreads at the expense of structural protections. While maintaining dividend coverage is important as many of our investors rely on the distribution of our income, we believe it must be done in a way that doesn't compromise credit quality. We made significant investments in resources across the SLR platform, and we have some levers to pull at SLRC that can help offset base rate declines, including expanding our portfolio leverage from 1.13x to 1.25x. While it's hard to predict the timing of market changes, we think investors should take comfort in the quality of our investment portfolio today with our nonaccruals, PIK income, watch list percent of fair value and leverage all below the averages for our peer group. Bruce and I have been in this business long enough to appreciate the nuances of rate cycles. It is natural for the BDC industry's earnings collectively to decline with declining base rates. A decline in base rates oftentimes could accompany wider spreads and higher volume as offsets. The dispersion performance may continue, we expect top-tier private credit portfolios to continue to provide an attractive yield premium to other liquid fixed income alternatives and serve as a portfolio balance for both wealth and institutional investors. In closing, SLRC currently trades at an approximately 10.7% dividend yield as of yesterday's market close, which we believe presents an attractive investment for both income-seeking and value investors and also offers a more diversified investment portfolio compared to cash flow on private credit strategies. Our investment adviser alignment of interest with SLRC shareholders continues to be one of our significant hallmark principles. The SLR team owns over 8% of the company's stock and has a significant percentage of the annual incentive compensation invested in the stock every year. The team's investment alongside fellow institutional and private wealth investors demonstrates our confidence in the company's portfolio, stable funding ,and earnings outlook. We thank you again for your time today as we know it's a very busy time for those that follow the listed BDC marketplace closely. Operator, would you please open up the line for questions? Operator: Certainly, Mr. Gross. [Operator Instructions] We'll go first this morning to Erik Zwick of Lucid Capital Markets. Erik Zwick: I wanted to first just make sure I heard something correctly. Did you mention that you'd hired 100 new people over the past few years? Bruce Spohler: We have, and primarily in our asset-based and special lending strategies. Erik Zwick: Got you. So I guess kind of safe to assume there that with the banks retrenching in addition to having augmented lending opportunities, I guess, some of the individuals coming from the banks as well, have you had opportunities to kind of pull teams out as, I guess, as they maybe become disenfranchised with their prior employer? Bruce Spohler: Yes, it's a combination of that. And as you know, we've also made some tuck-in acquisitions. And with that selectively added people that we're managing portfolios that we acquired to expand our footprint further. Erik Zwick: Got it. And then I appreciate the commentary you provided in terms of underwriting discipline and some of the specifics that you have to go through with ABL, there's certainly been questions in the market regarding that. So that was helpful. A bit of a follow-up there. I was reading about another BDC recently, and they mentioned that some of their ABL investments did not meet the criteria to be qualified assets, kind of in the BDC structure. So just curious, from your perspective, is there something specific that you guys do? And I guess I don't know if 100% of yours are qualified assets. But curious if you could just kind of maybe talk around that topic a little bit to provide a little better understanding. Bruce Spohler: Nothing on qualified assets. That said, we have not been limited in being able to grow our specialty finance and asset funding strategies by that 30% issue. We have plenty of room. Some of our lender finance are the companies that would not qualify. But again, we have plenty of capacity to take advantage of it. But in the direct ABL market, they are all qualifying assets where we're lending direct to asset-backed borrowers against their working capital assets. Operator: We go next now to Melissa Wedel of JPMorgan. Melissa Wedel: I wanted to make sure I'm understanding what's driving this really elevated churn in both. Obviously, you're finding good opportunities in ABL, but there is a lot of churn. And then also on the equipment finance side, can you dig in a little bit there? Bruce Spohler: Yes. On the asset-based churn, but you're very often working with companies that are in transition. An asset-based structure is very often a 2- to 3-year duration. And so you will see a churn if they can tap into a covenant-light, more flexible cash flow structure. So that will drive that elevation asset class. Sometimes there's a subset where you're just providing the working capital facility longer term. But very often, these are short-duration facilities. Melissa Wedel: And then on the equipment finance side, you talked about borrowers looking to extend existing leases on equipment rather than going out and purchasing new. I'm curious, as you do that, it sounds like that's an area of opportunity that you're investing in. How do you adjust the underwriting to account for depreciating equipment and things that may be getting closer tend to replace? Bruce Spohler: Sure. It's not so much that it's a new opportunity, Melissa, it's more that we retain our existing leases longer and they'll come back and rather than at renewal, take us out and buy new equipment, they'll extend our existing lease on the existing equipment, which we have already amortized out and have a de minimis, if any, residual remaining. So any extension is effectively profit to the bottom line for us. Operator: We'll go next now to Robert Dodd with Raymond James. Robert Dodd: I think, Bruce, in your remarks, you said you think the ABL side is going to be the most attractive of all the areas going into 2026. I mean, what do you think that because you expect a pullback in the marketplace, with all the other noise and banks often retreating when this happens? I mean, what's the risk of incremental capital, if you will, coming out of the woodwork, right? I mean, in COVID, to your point on the Life Sciences side, a lot of things look quite attractive, and a lot of things got somewhat out of hand, and so you were cautious. What's the risk that incremental capital comes out and kind of distorts the ABL market? Or is that -- it's already distorted and we're undistorting it at the moment with all the noise around these problems. Bruce Spohler: So great question. I'm just going to hit the life science first. I think the barriers to enter are lower for life sciences than ABL, which we'll touch on in a moment. But as we have seen in the marketplace, it's easy to get into life sciences. It's not so easy to succeed in life sciences. So people get in and stub their toe rather quickly and exit. But they first have to enter and realize that it requires a substantial amount of expertise. On the ABL side, we view it more as a manufacturing business than a service business, service being the cash flow business where it's easy to enter. To get into the ABL business, it's not just capital. You need this infrastructure that we have created organically and inorganically over the last 15-plus years. And that makes it difficult for new entrants to come in because it is, as these recent examples have highlighted in the market, you do need that infrastructure not only to source, but to monitor your collateral, which is what's so imperative in structuring your investments. And that's a challenge. I think new capital, if it were to come in, would be regional banks coming back in, but they would have to rebuild what they have exited also. I mean the example, as you may recall, last fall, we bought the business, the factoring business out of Webster Bank. So they are out of that business. If they want to come back in, they would need to rebuild that infrastructure in order to issue asset-based loans and monitor them. Michael Gross: Because if you look at what's happened to the traditional cash flow lending market over the last few years, the biggest driver of the deterioration of yields and structures is how much capital formation has taken place. And it's primarily been driven through these non-listed BDCs that have exploded, but not one of them that I know of is focused on asset-based lending because, to Bruce's point, you have to have the existing infrastructure in place to take advantage of that. And so we have not seen new capital inflows into the space, nor do we really expect it from kind of traditional private credit. Robert Dodd: Got it. Just one more, if I can. On the dividend, obviously, you mentioned you do have levers to pull, taking up leverage a little bit, growing some of the specialty vehicles, et cetera. What's your confidence level that you have enough levers given what the forward curve looks like? I mean, where is the calculus on? Is this dividend sustainable? Can you catch back up to it? Michael Gross: Last several quarters, we've been plus or minus up or down $0.01 or $0.02 from our dividend. And it's kind of too early for us to kind of call the ball, if you will, about where this is going to go. I think we're going to obviously watch our portfolio performance closely, and we're going to align our dividend to what we think our earnings potential is. Operator: We'll go next now to Finian O'Shea with Wells Fargo. Finian O'Shea: Just continuing on the dividend discussion there and tying into Michael, a couple of your closing remarks mentioned SOFR. For one, the sensitivity tables that you disclosed in the Q, I know those could probably be rigid or quirky as opposed to how BDCs really work. But the SOFR-based NOI downside has been creeping up or worsening. I think it's $0.07 for 100 bps in NOI now. So seeing if there's any nuance there in the say, composition of the FinCos that make you more interest rate sensitive recently. But also given it's sort of clearly going down, you've already been paying a return of capital for a couple of quarters. There's a little bit of leverage headroom, but not too much. So seeing why you're still declaring the $0.41. And to what extent would you continue to pay out a return of capital? Michael Gross: First of all, just to clarify, the last 2 quarters that we underearn by $0.01, our NAV actually increased in those quarters. And so we did not return capital. We grew our net asset value. So that's... Finian O'Shea: But your disclosure says, well, the dividend from a taxable perspective, the payout constitution entailed a return. Michael Gross: Capital from a NAV perspective, we did not. And again, look, I'll stick on the answer before. We're obviously aware of what these theoretical hypothetical curves that were required to put in the 10-K today. We are among larger shareholders. So our interests are completely aligned with the rest of our investors. And as the portfolio develops, we'll decide how to adjust our dividend if necessary. Finian O'Shea: Okay. That's helpful. A follow-up on the ABL franchises. So I think it's North Mill and Kingsbridge are continuing to appreciate. Can you remind us the context of that? Is it a retained earnings driver or a valuation expansion this quarter and in recent quarters? Michael Gross: Yes. So those are valued externally, and they're looking at a combination of the growth in the portfolio, to your point, the return on the portfolio as well as market comps as inputs in their valuation. So obviously, the businesses have continued to perform extremely well in this environment. But an overlay is also the market comps for the asset class ABL lending. Finian O'Shea: Okay. So more multiple than retained earnings? Michael Gross: Both. Operator: We'll go next now to [ Dylan Hynes ] with B. Riley. [p id="A00" name="Unknown Analyst" type="A" /> I was just wondering, so with common reports of increasing private equity M&A activity, are you seeing more quality cash flow opportunities? If so, would you be looking to start investing more in your sponsor finance originations? Or is ABL just more advantageous? Michael Gross: Great question. We are opportunistically seeing better investments in cash flow. As you know, we're very tight in our industry focus there where we think we can get a complexity premium without taking on additional risk and predominantly in health care. And what we like to do is rather than go to new platforms exclusively, we tend to skew towards add-on financings for existing issuers who are getting bigger. That's a very good time as those companies are seasoned and their credit facilities are seasoned. So we'd like to come in. And you saw us do a lot of that in 2023. I'm not expecting that same volume given, to your point, our opportunity set in ABL and elsewhere, but we are seeing some selective opportunities in cash flow as well. And the last thing I would add on that is our cash flow sponsor origination team is spending a lot of time out there with the sponsor community trying to originate ABL assets. And as we mentioned, increasingly, you're seeing sponsors use ABL facilities rather than cash flow for acquisitions, for liquidity lines. And so we view that as a strategic advantage being able to offer both cash flow and ABL solutions to the sponsor community. Operator: [Operator Instructions] We'll take a follow-up question now from Lisa with JP Morgan. Melissa Wedel: Just one follow-up for me. I noticed that on a sequential basis, there was a little bit of a tick up, I think, maybe almost by $1 million on sort of G&A expense. I was wondering if there was anything onetime in nature? Or is that related to sort of building out the team and the platform and maybe that's more of a run rate going forward? Michael Gross: Yes. I think that was a onetime true-up on some expense accruals. I think if you look at our sort of track record the last 2 years, the sort of quarterly average should be $1.1 million, $1.2 million. So we'd expect that to be the run rate going forward. Operator: And gentlemen, it appears we have no further questions at this time. Mr. Gross. I'll hand things back to you, sir, for any closing comments. Michael Gross: Again, we thank you for your time and attention during this busy time. And as always, if anyone has any questions, feel free to contact any of us. Have a great day. Operator: Thank you, gentlemen. And again, ladies and gentlemen, that will conclude today's third quarter 2025 SLRC Earnings Call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.
Operator: " Curtis Frank: " David Smales: " Omar Javed: " Etienne Ricard: " BMO Capital Markets Equity Research Irene Nattel: " RBC Capital Markets, Research Division John Zamparo: " Scotiabank Global Banking and Markets, Research Division Mark Petrie: " CIBC Capital Markets, Research Division Martin Landry: " Stifel Nicolaus Canada Inc., Research Division Michael Van Aelst: " TD Cowen, Research Division Vishal Shreedhar: " National Bank Financial, Inc., Research Division Operator: Good morning, everyone. Welcome to Maple Leaf Foods Third Quarter 2025 Financial Results Conference Call. As a reminder, this conference call is being webcast and recorded. [Operator Instructions] I would now like to turn the conference call over to Omar Javed, Vice President of Investor Relations at Maple Leaf Foods. Please go ahead, Mr. Javed. Omar Javed: Thank you, and good morning, everyone. Before we begin, I would like to remind you that some statements made on today's call may constitute forward-looking information, and our future results may differ materially from what we discuss. Please refer to our third quarter 2025 MD&A and financial statements and other information on our website for a broader description of operations and risk factors that could affect the company's performance. We've also updated our third quarter investor presentation to our website. As always, the Investor Relations team will be available after the call for any follow-up questions you may have. With that, I'll turn the call over to our President and CEO, Curtis Frank. Curtis Frank: Thank you, Omar, and good morning, everyone. It's great to be with you today to share our third quarter 2025 results. Joining me on today's call is David Smales, our Chief Financial Officer. I'll first speak about the business developments from a strategic and operational standpoint, then Dave will provide a more detailed summary of our financial results, and I'll return with a short summary to close out our call here this morning. This quarter marks a historic moment for Maple Leaf Foods. On October 1, we completed the spin-off of our pork operations into Canada Packers, one of the most significant portfolio transformations in our company's history. Canada Packers is now an independent public company focused on delivering premium, responsibly produced pork to the world. Maple Leaf Foods now operates as a purpose-driven, protein-focused and brand-led consumer packaged goods company with a bold vision to be the most sustainable protein company on earth. We will maintain a strategic relationship with Canada Packers through a 16% ownership stake and an evergreen supply agreement will ensure long-term security of high-quality, sustainably raised pork supply. Before diving into our business commentary, I want to take a moment to acknowledge and to thank the entire Maple Leaf and Canada Packers teams who have executed with focus and resilience during this period of intense business transformation. I'm incredibly proud and grateful for their dedication, passion and living expression of our Maple Leaf values. We also wish the Canada Packers team continued success as they prepare to host their first earnings call as an independent public company a little later this morning at 9:30 a.m. A transaction such as this naturally introduces some additional complexity to our financial reporting for this particular quarter. The third quarter represents the final period in which Maple Leaf Foods will report total company results for our pre-spin-off combined business that are inclusive of the pork operations. Accordingly, David and I will speak to the total company results, which include Canada Packers as well as to the continuing operations of the CPG business, which exclude Canada Packers. Additionally, we have provided pro forma financials for Maple Leaf Foods going back 8 quarters to support comparability and transparency as we transition to our new reporting structure. Now given the increase in financial reporting materials, our goal is to keep the key messages clear, simple and focused on what matters the most. To that effect, 4 headlines serve as our key takeaways from our quarter. First, we delivered another very strong quarter of results for the total company, highlighted by exceptional top line growth and significantly improved profitability year-over-year. Second, our year-to-date total company performance through the end of Q3 was firmly on a run rate to deliver in line with our previously announced full year 2025 adjusted EBITDA guidance of $680 million to $700 million. Third, the composition of these results inside the quarter played out a little differently than we had anticipated given a rapid and sustained increase in raw material markets. This dynamic benefited profitability in our pork operations while driving input cost inflation and short-term margin pressure in our CPG business. And finally, we remain on strategy, and we are tracking well against our priorities for the year. Underscoring the strength of the quarter was total company sales growth of 8% and adjusted EBITDA increasing 22% to $171 million. Our adjusted EBITDA margin improved by 140 basis points to 12.6% as compared to 11.2% last year. Our continuing operations also delivered solid results with 8% sales growth and 110 basis points of adjusted EBITDA margin expansion to 11.1%. We continue to view our 8% revenue growth, more than 2x the CPG market growth rate in Canada and 3x the CPG market growth rate in the U.S. as an exceptional outcome that underscores the resiliency and the durability of our proven growth strategies. This momentum also drove market share gains in prepared meats, plant protein and poultry, led by double-digit growth in our prime poultry sustainable meats brand. That said, while we delivered year-over-year margin expansion from an EBITDA perspective in our continuing operations, we also experienced short-term margin pressure on a sequential basis driven by the rapid and sustained increase in raw material markets that I noted earlier. During the quarter, when compared to Q2, key inputs such as pork trims increased by over 70% in a very short period of time. It is quite normal in these periods of rapid inflation to experience temporary margin compression due to the lag time in flowing through price increases to recover costs. These situations are common in CPG, and we know how to respond effectively. In response, we are taking decisive actions to mitigate these effects and to improve profitability looking forward. But firstly, to address the input cost inflation, we have initiated pass-through price increases in the CPG business. Given the timing of these inflationary impacts and the extended lead times required by retailer policies for all CPG companies during the holiday season, these price increases will fully materialize in the first quarter of 2026. Second, with the spin-off now complete, we are advancing the next phase of our Fuel for Growth initiative. Last week, we announced a second wave of SG&A reductions designed to streamline operations, enhance cost discipline and align resources with our strategic blueprint. These changes are now being implemented across several areas of the business, including manufacturing and will result in a leaner organizational structure and further cost efficiencies in 2026. And third, with the separation of Canada Packers, our previous natural hedge against rapid fluctuations in pork markets is no longer available. As you know, all CPG food companies experienced some degree of quarter-to-quarter margin movement, the driver of which is simply normal lag times in executing pricing action, which can vary at certain times of the year and in certain market segments. Going forward, we believe we will have to modify the tools we use in an effort to reduce that quarter-to-quarter movement as much as possible. Our continued success as a purpose-driven protein-focused and brand-led CPG company will depend on the disciplined execution of our proven growth strategies. These include investing in our portfolio of leading brands such as Maple Leaf, Schneider's, Greenfield and Maple Leaf Prime to grow the core business; leveraging our leadership in sustainable meats, expanding our geographic reach into the U.S. market, plugging what makes Maple Leaf unique into our customer strategies and accelerating the pace of impactful innovation. On the innovation front, this was an especially exciting quarter as we once again demonstrated our capability to shape the next generation of Maple Leaf brands and products. We were very pleased to announce the launch of 2 meaningful new brands, Mighty Protein and Musafir. Mighty Protein positions Maple Leaf to leverage the growing protein moment that is upon us, offering healthy, high-protein fuel on the go. Consumers are seeking lean, nutrient-dense complete protein in convenient formats, and that is exactly what Mighty Protein delivers. It is a poultry-based high-protein meat stick, providing 12 grams of complete protein per serving with only 110 calories. It is gluten-free, sugar-free and made with poultry that is raised without antibiotics or added warmines. Mighty Protein will be available in 3 distinct flavors across major mass retail, online and convenience channels. Musafir, which means Traveler, expands our presence in the frozen food section of the grocery store with South Asian-inspired protein-forward dishes designed for today's busy households. South Asians represent Canada's largest and fastest-growing demographic and millennials and Gen Z are driving escalating demand for global flavors and convenient meal options. Musafir offers a variety of globally inspired flavors in familiar formats and ready-to-eat meals, including vegetarian and poultry-based options such as burgers, nuggets and savory bites, all prepared with traditional ingredients. Together, Mighty Protein and Musafir demonstrate the strength of our innovation engine and the momentum behind our CPG growth strategy. As we said last quarter, we are not only brand builders, we are brand creators. Greenfield and MENA have proven this approach and Mighty Protein and Musafir represent the next step in that journey. These new brands alongside over 50 products that we have launched this year, exemplify our commitment to translating consumer insights, disciplined execution and our unique capabilities into compelling growth platforms for the future. With the historic transaction complete and a strong financial and strategic foundation in place, our focus now turns fully to the future. While our previous consolidated 2025 guidance no longer applies following the completion of the spin-off, our 2025 priorities are clear and remain unchanged. We are focused on delivering strong revenue and adjusted EBITDA growth, generating healthy free cash flow and using it to strengthen the balance sheet. We are not providing updated guidance for the remainder of the year as that would imply quarterly guidance. However, we do plan to update our long-term guidance framework in the months ahead. As a diversified protein CPG company, armed with a bold vision to be the most sustainable protein company on earth and supported by thousands of passionate Maple Leaf people, we have never been better positioned to take on the future. Leading in protein, one of the most attractive segments of the global food market, which continues to grow at approximately 2x the rate of population growth provides us with tremendous strategic opportunity. As we look ahead, we are ready to capitalize on this growing consumer demand for protein. We operate in a large and expanding total addressable market, and our strong portfolio of leading protein brands is our advantage. We've established proven revenue growth platforms. Our margin expansion program is well underway, and we remain differentiated by our bold vision and our clear focus on shareholder value creation. It's an exciting time at Maple Leaf Foods. With that, I will now pass the call over to Dave to walk you through the financials. David Smales: Thank you, Curtis, and good morning, everyone. I'll begin with a brief overview of our total company results before turning to a discussion of continuing operations, cash flow and balance sheet. On a total company basis, sales were $1.36 billion, an increase of 8% compared to last year, while adjusted EBITDA increased by 22% to $171 million and adjusted EBITDA margin improved by 140 basis points to 12.6% compared to 11.2% in the third quarter last year. Our strong top and bottom line performance for the total company was driven by robust profitable growth in both our CPG business and pork operations compared to a year ago. As Curtis noted, the overriding factor in the quarter for total company results sequentially was the benefit to pork operations from strong market conditions, while the CPG business experienced the opposite side of this through higher raw material input costs in Prepared Foods. Turning to continuing operations. Sales were $1 billion, an increase of 8% compared to last year. Prepared Foods sales increased by 5.3%, driven by the impact of inflationary pricing taken earlier in the year, along with improved product mix in the quarter. In poultry, sales were up 15.7% due to improved channel mix with growth in both retail and foodservice volume as well as pricing impacts. Adjusted EBITDA for continuing operations increased by 19% to $112 million in the quarter versus the third quarter of last year, with adjusted EBITDA margin improving 110 basis points to 11.1% compared to 10%. Profitability improved in both Prepared Foods and Poultry, supported by favorable mix, efficiency gains and the benefits from the investments in our London poultry and Bacon Center of Excellence facilities. These gains were partially offset by input cost inflation in Prepared Foods, including a 40% increase in pork belly prices and a 50% increase in average poult trim prices versus the same quarter last year. This resulted in a timing impact on margins in the quarter due to the standard lag required to execute appropriate pricing actions. To address this, we have initiated price increases with benefits expected during the first quarter of 2026. SG&A for continuing operations increased by $4.7 million in the third quarter compared to last year, driven by higher variable compensation costs, partially offset by a higher level of consulting fees incurred in the third quarter last year. Earnings from continuing operations for the quarter were $23.3 million or $0.19 per basic share compared to a loss of $1.8 million or $0.01 per basic share last year. After removing the impact of the noncash fair value changes in derivative contracts, start-up and restructuring costs and items included in other expense that are not representative of ongoing operations, adjusted earnings for continuing operations represented $0.21 per share for the quarter compared to a loss of $0.01 per share in the third quarter of 2024. On a total company basis, capital expenditures totaled $27.8 million for the quarter compared to $25.8 million in the third quarter of last year and $77.7 million year-to-date compared to $65.6 million last year. Total company free cash flow was $46 million in the quarter and $378 million over the last 12 months, reflecting the robust performance of the business and disciplined capital spending and following on from the $385 million generated in full year 2024. This strong free cash flow momentum was reflected on the balance sheet with total company net debt ending the quarter down by $242 million versus a year ago to approximately $1.35 billion and down from a peak level of $1.8 billion during our large capital project investment phase. In line with our stated priorities, our leverage ratio remains well within an investment-grade range with a total company net debt to trailing 12-month adjusted EBITDA ratio of 2x at the end of the quarter compared to 2.1x at the end of the second quarter of 2025 and 3.1x a year ago. Upon closing the spin-off on October 1, Maple Leaf repaid $389 million of debt. We also remain focused on disciplined capital allocation, executing on our NCIB in August to repurchase approximately 250,000 shares. And yesterday, Maple Leaf declared its fourth quarter dividend. When combined with the dividend announced by Canada Packers yesterday, the total exceeds the pre-spin quarterly dividend paid by Maple Leaf Foods and reflects our prior commitment that the first post-spin dividends for Maple Leaf and Canada Packers combined would be at least equal to the dividend level immediately prior to the spin-off. I'll now turn the call back to Curtis. Curtis Frank: Okay. Thank you, Dave. Before we move to questions, I want to take a moment to bring it all together. This was truly a historic quarter for Maple Leaf Foods. We successfully launched Canada Packers as an independent public company and at the same time, delivered another very strong quarter of results. Our combined third quarter performance for the total company, 8% revenue growth and over 20% increase in adjusted EBITDA reflects the continued strength and the resilience of our business. In our continuing operations, we have achieved 8% year-to-date sales growth, a 26% increase in adjusted EBITDA to $358 million year-to-date and a 180 basis point improvement in adjusted EBITDA margin to 12.3% year-to-date. That's an outcome we are all proud of, especially given that our sales growth is materially outpacing the North American CPG market, and our margins continue to show strength relative to our protein industry peers. We're also fully aware that we have work to do to recover the sequential margin pressure we experienced this quarter, and we are taking decisive and proactive actions to restore that momentum. Now stepping back, the big picture is clear. We are on strategy. We are executing against our priorities, and we are building momentum for the future. Lastly, I want to thank the entire Maple Leaf team for their dedication, resilience and hard work, delivering a major spin-off, strong financial results and 2 new brand launches all in 1 quarter is an extraordinary accomplishment, and I couldn't be more proud of what we've accomplished together. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Mark Petrie of CIBC. Mark Petrie: Maybe first, just on the top line strength. We saw some sequential deceleration in prepared meats, but acceleration in poultry. Could you just give some color on that? How much of that is pricing? And then maybe just some detail on sort of the volume and mix components? Curtis Frank: Yes, for sure. Mark, thanks for the question. We were -- as I noted in my comments, especially pleased this quarter with the sustained top line growth that we experienced relative to our CPG peers in North America, relative to our pure protein peers continue to see a very, very solid outcome. At an aggregate level, it was a function predominantly of positive mix benefits and price that recall that we took some level of pricing in Q2, turned out that wasn't adequate. We have to take some steps forward, obviously. And also the volumes were relatively flat, but important to note inside of that, that our branded volumes were quite positive. You noted in Prepared Foods that the prepared meats component has slowed. And there's a couple of important nuances inside of that. Prepared Foods includes our Prepared meats and our Plant Protein business combined now that we've consolidated plant protein. And we actually saw what I would -- what we view as pretty strong growth in the Prepared Meats business on the top line. I grew at almost 6%, which implies double-digit declines in plant protein in line with the category, and that's kind of exactly what happened. So very strong growth on the prepared meat side as well at nearly 6%. In poultry, -- you would have noted in our supporting materials that the revenue growth was in and around 16-ish percent. And that's really a function of the positive benefits of the London poultry investment really starting to shine through in a material way. Operationally, everything is obviously on track. It's been an incredible startup. We're through that phase. And the ability now to get more product into a value-added tray with a brand on it is really showing through in better mix. We did have increasing allocations as poultry demand continues to be strong in the Canadian market and allocations are growing alongside of that. So that drove some positive volume impact. And then we also saw the benefits of our sustainable meats business, our Prime RWA brand, in particular, was quite strong in the quarter. We saw double-digit growth in the sustainable meats component of poultry, which was also positive. And you could view 16% maybe structurally as a little on the high side, but there's no question that poultry continues to be a growth category for us and one that's very positive. So all in all, it was a really great outcome on the top line. Mark Petrie: Yes. Okay. I appreciate that color. And then just to follow up, you obviously highlighted the pressure from the higher input costs. Could you just give some more detail on the price actions you've taken, some context on how you expect Q4 to be impacted versus what you felt in Q3? And then will those be fully implemented for Q1? Or will there also be some spillover effect to Q1? And obviously, this is pending how the cutout trends from here. Curtis Frank: Yes. I mean there's some moving parts inside of that, as you're well aware. But I think the headlines would be, first and foremost, we don't offer quarterly guidance. So we didn't provide an outlook for Q4 specifically. But I do feel as though adding some color is important. In Q3, the headline would be pleased with the progress year-over-year from a margin point of view, added more than 100 basis points of margin. So that was, again, very positive, very constructive and shouldn't get lost in the overall narrative. We did see sequentially, as we noted, I think, with full transparency that there was a sequential headwind mostly due to raw material input costs, and that impacted us on a sequential basis. As we look to Q4, I think the headline would be expecting kind of more of the same would be similar market conditions overall would probably be the best headline I could give you for Q4, a similar market conditions overall. We have taken steps to proactively restore the margin on a sequential basis. That includes but isn't limited to, includes taking price increases effective Q1. Those take effect, Mark, in and around the very first week of February. So think about that as impacting Q1 in most of Q1, I think, would be the headline, and we fully expect to get back right on track after that. Operator: Your next question comes from Martin Landry of Stifel. Martin Landry: I just want to go back to the comments on Q4. You take a lot of effort to highlight the fact that raw materials are rising have risen fast. But I'm not too sure what will be the impact on your margins for Q4. You -- the previous answer was not too clear for me anyways. Just do you expect margins to be under pressure on a year-over-year basis in Q4? Curtis Frank: Martin, as I noted, -- we expect similar conditions in Q4 than Q3, which would imply similar types of margin pressure in the fourth quarter as we experienced in Q3. The remedy for that is advancing our pricing forward. And we're doing that now. We've communicated that to our retail customers and our retail partners now, and that will be in place for February. There's a normal period of time that all CPG companies face over the holiday season that's upcoming where the retailers implement what's essentially a blackout policy to protect and preserve the holiday season. So you won't see price changes for all consumer packaged goods companies, all consumer packaged goods, food companies through that time period. That window reopens on February 1, and we're taking steps to improve our pricing in February. Martin Landry: Okay. It's not easy to read between the lines, but you're saying that you expect similar market conditions. Your gross -- your profit margins expanded on a year-over-year basis in Q3. So is -- when you say similar market conditions, is that what you imply? Curtis Frank: When I say similar market conditions, I'm implying we'll have sustained margin pressures in the fourth quarter like we did in the third quarter. Martin Landry: Okay. Okay. And then just to talk about your new brands that you've launched. I understand these are available right now in Canada. Can you talk a little bit about the distribution you have currently and then how that may expand on a go-forward basis? Curtis Frank: On the 2 new brand launches? Martin Landry: Yes. Curtis Frank: Yes, I can. Actually, Martin, the one thing I would add on the margin side that you might want to consider as a follow-up and our team can help as well is to explore the relative margins that we have in the business even under sustained raw material pressures as compared to our protein peers. And our team would be happy to follow up with you and kind of walk you through our view of that because I think it might be helpful and informative. On the 2 new brand launches, we're really excited about Mighty Protein and Musafir for very different reasons. I kind of dug into that in my opening comments. Both are being incredibly well received in terms of -- they're both being launched into the market in real time right now to start this fourth quarter. So they'll start to show up on grocery stores in the short next couple of weeks. And the distribution support has been very, very strong. They'll be broadly distributed -- we tend to have really great coverage across all of our brands in the Canadian retail market. These are Canadian brand launches, and they will be incredibly well distributed throughout the Canadian market. Mighty Protein actually being a shelf-stable product also gets us access to some alternative channels where we traditionally haven't had as much penetration, things like convenience, could be gyms, convenience locations, areas where shelf-stable products are more prevalent. So it actually expands our distribution reach. And that's another reason why we're so excited about that product, both incredibly on trend, taking full advantage of the protein moment, which we don't view as a fad, we view as foundational to the human diet and 2 brand launches that we're really, really excited about. And we have a history of being able to scale up brands in the Canadian market. Last quarter, we highlighted 2 very important ones, I think, in Mina and in our Greenfield Natural Meat Company offering. And these are just the next 2 brands that we're launching in our large portfolio, and we're probably equally, if not more excited about. Operator: Your next question comes from Michael Van Aelst of TD Cowen. Michael Van Aelst: So I just wanted to follow up one more time on the Q4 pressures, margin pressures. I mean I fully understand the timing delay in passing on higher costs. The one thing I wanted to ask you about, though, is we obviously came into the quarter with much higher pork costs. But we've seen a big drop off -- a big seasonal drop-off in the hog price over the course of November. So can you explain like how early you lock in prices for the quarter, your cost for the quarter, sorry? And if the hog prices and therefore, the pork cutout were to stay at the current levels for the rest of the quarter, would that create a reasonable amount of relief to the pressures that you saw to start the quarter? Curtis Frank: There's a few things that matter inside that question, Mike, first. There is a lag effect in terms of when those cost benefits flow through. So the effects of early -- of late Q3 spill into Q4, the benefits that we'll see in Q4, hopefully, as markets come off, hopefully, we'll experience in the first quarter and so on. There's a combination of risk management programs, the pricing lags that naturally take effect and the time it takes for those meat costs to flow through into the P&L. So that's one component that I think is important. The other thing is the composition of the cutout in technical terms matters. But really what that means is the cuts of meat that carry the increases are really important. And the cuts that go into the prepared meats business, things like trims and bellies have been particularly impacted. So you have to look beyond the cutout to the individual cuts that are affected from an inflationary point of view. and that's important. And then the last thing I would note is it's not just pork inflation that's impacting the business. And I know we've talked about that a lot, particularly given the communication importance of this quarter with the separation of Canada Packers and the moving parts between the two companies. But beyond pork inflation, we're seeing a situation, I think, as you're well aware, where beef inputs are at all-time highs. Turkey in real time is being impacted by the avian influenza implications in the North American markets. Poultry demand is strong and markets continue to be strong. So all competing proteins have relative strength all at the same time. And it's really the combination of those inflationary effects that impacted the third quarter, and I think will continue to impact Q4. And as I said, is normal in CPG, you feel inflation there's a normal amount of lead time to flow increase pricing through against that inflation, and we'll do that in the first quarter. Other than that, I'll resist the temptation, as I always say, to give you quarterly guidance because I think that would be inappropriate at this time. But that just gives you some further context for why we're saying we expect similar market conditions to persist into the fourth quarter. Michael Van Aelst: Okay. Great. That's helpful, Curtis. And then you also touched on or teased us with some comments about how that you plan to modify some tools and use them to minimize the volatility quarter-to-quarter. Can you provide some examples of how you may do that going forward and I guess, why you weren't doing it previously? Curtis Frank: Yes. Well, we have -- great question. Thank you, Mike, an important reminder for me to talk about. We have been doing them previously. So the -- there are 3 things we're doing in response to the inflationary impacts we're feeling. We've talked about the pricing changes, and that's one that's important. Always important in these inflationary environments to manage our costs to the best of our ability. And you would have heard me comment in my remarks earlier that we've taken the next step in our Fuel for Growth playbook around cost reduction, and we're completing another SG&A reorganization actually in real time here in the last week or 2, and it's continuing on. So that's -- number two is managing our costs in an effective way. The third question, which is the one you asked is what steps can we take that we're not taking today. to improve the stability of our margins kind of quarter-to-quarter. I would start by noting, and this is a very important context that all consumer packaged goods companies in food, virtually all of them in food have some level of quarter-to-quarter margin movements embedded in their business. All food CPGs have that. We do too. This just happens to be a quarter where that was clearly evident. There are 3 things, Mike, that we're exploring given the separation. And we did have a bit of a natural hedge between the pork business and the Prepared Foods business. I think it's important to be transparent about that. We knew that was obviously going to be disrupted. That's not necessarily new news, but this quarter just happened to illuminate the significance of that. The 3 things that were studying only to see if there's something we can do different beyond what we're doing today are, number one, our pricing mechanisms. How much is on formula relative to list price, how we manage our deal and future pricing inside of any particular quarter. And I think it's just good hygiene to explore those pricing rhythms and pricing mechanisms. So we're just stepping back in that area. The second is the role of physical hedges, meaning using physical inventory as a natural hedge in the procurement function. And there are implications to storage and things like that, that we're evaluating and studying. And then the third is the efficiency and the efficacy of our derivative hedges, our financial hedges. And of course, in pork, you hedge hogs, not individual cuts of meat. So there isn't always a straight line to perfect efficiency, and we're stepping back to study our effectiveness in that area. It doesn't mean we don't deploy all 3 of these mechanisms today. It does mean that we're taking prudent steps to evaluate whether there are further opportunities to kind of manage the quarter-to-quarter movements in margin. There will always be some. There is in all CPGs. These steps won't be perfect, but we do believe there's potential that they could be helpful. Operator: Your next question comes from Vishal Shreedhar of National Bank. Vishal Shreedhar: With respect to the pricing, it seems like Q3 got -- had margin impact related to commodity inflation. You anticipate Q4 will as well and then part of Q1 will. So it just seems like a very long lag. And I'm wondering if there's something about Christmas that's causing you to not be able to take pricing quicker than you otherwise would have? Or should we anticipate in an inflationary environment, it could be upwards of a 6-month lag? Curtis Frank: That's an excellent question. I appreciate that, and I appreciate you asking and giving me the opportunity to clarify. Normal lead times in consumer packaged goods are about 12 weeks, about, depending on the channel, maybe even 8 to 12 weeks. Christmas, the holiday season is a unique time. And it's a unique time because it has abnormally longer lead times. And all CPGs face those abnormally longer lead times over the holiday season, all CPGs, and we are one of them. And that's because retailers have policies where they don't accept price changes over the holiday season. And the first date they allow after the holidays is February 1, and that's when we're moving forward. So it's an abnormally long period of time. We acknowledge that. And we're simply operating within the normative rules that apply equally to the industry. Vishal Shreedhar: Okay. With respect to the product launches and the 50 new product products that you referenced earlier in the call. Given that this is a new spinout, I'm having difficulty understanding the magnitude of this. Is this a regular year? Is this something strong? And what should we expect from that growth initiative in terms of numerical quantification to help us quantify how meaningful this is? Curtis Frank: On the 2 brand launches, Vishal? Vishal Shreedhar: On the 2 brand launches... Yeah... Just in total of your innovation pipeline and how significant I anticipate that to be as I look forward? Curtis Frank: It's -- we included a couple of slides in our deck, and that might be the materials that you're referencing. The first slide was just demonstrating the fact that we put out more than 50 items into the market this year. And then the next 2, obviously, highlighting the 2 new brand launches. And those are there for a reason. And I would start by saying if you took a little bit longer lead time, and we were backed up to a certain extent given the implications of the pandemic and the fact that not a lot of innovation went out the door in the pandemic in the early parts of the post-pandemic economy, and we're now getting back into, I would say, above-average rhythm of launching products into the market. I mean, keep in mind, Maple Leaf is a company that has 8% revenue growth. And when you compare that to the broader consumer packaged goods market to our peers, it's very, very strong. And our desire and goal and commitment is to keep that level of growth sustainable well into the future. So when you're looking to quantify the impact of these -- this is what great CPG companies do. They launch items, they launch items that have the potential to be impactful. Some of them simply are aid in the sustainment of the current trajectory of growth. Some of them tend to be more incremental where you move outside of core categories and into new adjacent categories. That's why we're excited about the meat snacks opportunity, in particular, because it's an adjacency. But I would think about these more as this is a business that's growing above mid-single-digit levels at or above mid-single-digit levels of growth. We want to sustain that. These are the types of activities that we're taking to sustain that level of growth. This, combined with our leadership position in sustainable meats our U.S. growth platform that we continue to be excited about. The brands we launched last quarter that we highlighted like Mena and Greenfield, the core brands that we have in our portfolio that are #1 and 2 brands in the category, Maple Leaf, Schneider's, Maple Leaf Prime. When you pull all that together, that's the very reason that we're experiencing the outsized growth rates that we are in the market today. And these brand launches are intended for us to continue that level of success. Vishal Shreedhar: Okay. With respect to SG&A, the SG&A initiatives that you have coming in Fuel for Growth, is there an ability for you to give us some sort of magnitude of the benefits I should anticipate in 2026? Is it... Curtis Frank: Yes, we will at some stage. I think that would tie into our 2026 outlook, which is which we understand there's a desire to understand and will come after this particular call. What's important to note is even in the last quarter, Vishal, we did pick up 50 basis points of leverage in our SG&A rate as a percentage of sales. So you're starting to see the benefits of some of the reorganization work that we've done shine through, and there's more work coming, obviously. But that will all be embedded in terms of the 2026 benefits of things like our SG&A work, the procurement work that we've already completed, the work we're doing from a manufacturing point of view, that will have a multiyear benefit. You can expect to see that when we provide more clarity on our 2026 outlook. Vishal Shreedhar: Okay. And sorry, just to jump back to the pricing comment and the pricing coming in, in Q1. So is that pricing that's coming in for Q1 reflects the situation today? If the commodities continue to escalate, at what point is there a cutoff such that Q1, you won't be able to pass on the entirety of the price subsequent to that date, that February date that you mentioned. And this commodity impact may linger into Q2 or Q3. Obviously, we don't have the history to gauge MFI's RemainCo vulnerability to these commodity swings. So I want to be able to triangulate that in future quarters should commodity prices continue to run. Curtis Frank: We're pricing for all the known inflation we have today. That's essentially what the market kind of allows for. It's very difficult to move forward and price for what we don't know. So we'll continue to adjust our pricing as required moving forward if it's required. But at this stage, we're very confident that we've included all the known inflation that we have in the business. Very uncommon that, that would linger Vishal for several quarters, very uncommon. What we don't know is the consumer response to new pricing in the market and the volume impacts that come with that, and that will certainly play itself out over time. Very important to have the #1 and #2 brands in the category and the type of marketing and innovation support that we do have in inflationary environments like this. Vishal Shreedhar: If -- so to ask my question another way, if the inflationary environment continues to the end of the year, your pricing -- your pricing in December reflect -- in February, sorry, will reflect the commodity price today. Is that -- do I characterize that correctly? -- with that? Curtis Frank: Yes. Operator: Your next question comes from Irene Nattel of RBC Capital Markets. Irene Nattel: I want to come back to consumer behavior. And obviously, we're hearing a lot of discussion about yesterday, Pet Value used the term uneven. We're hearing a lot about value-seeking behavior. And in the release, you noted promotional spending was up. It was a factor in both poultry and prepared foods in Q3. So I was just wondering what you're seeing out there and also what the retailers are kind of demanding or asking for in terms of promotional support. Curtis Frank: I would view the headline for the consumer environment as stable but cautious. And the caution is a result of all the things we know about today, ongoing inflation, some of the geopolitical tension that exists in today's world. And as a result, value seeking continues to be a key theme. And that hasn't changed quarter-over-quarter from our perspective and it is certainly a key theme. Where we're excited is where we're positioned in the market to offer value to value-seeking consumers, I think, is really, really positive. Number one, we're a protein-focused company at a time when protein demand is very strong and growing. Our leading brands allow us to have capabilities across all value segments in the grocery store, whether that's our leading premium brands, our RWA brands or some of our regional value brands, which give us an opportunity to compete in different areas of our categories and across different parts of the grocery store. We have a scalable growth platform in the U.S. that we're obviously excited about that gives us some level of growth support and our leadership in sustainability and sustainable meats continues to kind of differentiate us in a really positive way. You combine those things with the innovation that we're putting out and feel really good about our ability to compete and grow inside of what's clearly a difficult and continues to be challenging consumer environment. That will be tested in the first quarter when we take additional inflationary pricing and continue to be really confident that the volume response will be positive. I mean we did already take pricing in the second quarter from an inflationary point of view. So it's not like we didn't see this inflation coming, just the magnitude and the duration exceeded our original forecast, and now we're coming forward with another wave. And the volume response in the last quarter has actually been pretty positive, like the branded volume growth was up this past quarter, and I view that as a success story. Irene Nattel: That's great. And just on the trade promotion piece of it, would you say that it's sort of normal levels, above normal levels right now? Curtis Frank: No, still more promotional, still above kind of "normal levels" Irene, still above. There's still more promotional support required to get the volume and the market share outcomes that we're seeing. And that's, to a certain degree, one of the reasons why you're seeing strong growth, 8% and margins that are pressured somewhat in the short term. You take the combination of the inflation and the consumer environment, those 2 things combined are really what's putting pressure sequentially on the margin. But again, on a relative basis, really happy. On a year-over-year basis, really happy from the top line perspective, really happy, need to own the fact that we've taken a step back sequentially, and we need to get that back on track. Operator: Next question comes from Etienne Ricard of BMO Capital Markets. Etienne Ricard: As it relates to the U.S. business, what sales performance are you seeing in this geography? And how would the pricing power differ between Canada and the U.S. given I believe the U.S. tends to be more sustainable meats. Curtis Frank: Yes. That's a very important point. I'll answer the second part first. We're obviously a much smaller player, both in terms of our brand presence and our absolute size in the United States market. But what gives us pricing power in the U.S. is our meaningful point of difference in sustainable meats. We've got a leadership position in the sustainable meats segment, while small portion of the United States market growing rapidly. We're growing inside of that. So that gives us pricing confidence. And I don't think given the inflationary support, that's very clear that exists today that we'll have any problem in a material way of passing that through in the U.S. market. So that brand leadership gives us that level of support in sustainable meats, which is a competitive difference and continues to be positive. We did see positive growth in our prepared meats business in the U.S. this past quarter, and we expect that to continue. Operator: Your next call comes from John Zamparo of Scotiabank. John Zamparo: I wanted to follow up on trade promotions and specifically the seasonality. But I think in the past, you've said that Q3 is typically the peak. Is that still the case? And I don't suspect you'll quantify a year-over-year change in Q3, but whatever that number was, do you expect it to remain similar in Q4 on a year-over-year basis? Curtis Frank: Yes. I don't think you'll see a material departure Q4 versus Q3 from the promotional intensity and frequency that exists in the business. It tends to shift. Summer tends to be hot dogs and sausages, winter tends to be ham and bacon so -- and the peak season throughout the holiday season. So the category dynamics change, but the -- from a materiality perspective, it's not significantly different between Q4 and Q3, I think, in the new business. John Zamparo: Okay. And I wanted to ask broadly about price elasticity from consumers at the current time. I know there's a lot of uncertainty here. You don't have a crystal ball, but it doesn't seem like you're seeing trade down based on your comments about branded sales and RWA, but I wonder if just the general context of the consumer environment makes you think differently than you otherwise would. And it's early in Q4, but any signs that you've seen any change there? Curtis Frank: Well, we've seen a margin impacted by higher levels of promotional intensity for certain. That's happened for certain. Otherwise, we think we'd be operating at higher levels of margin than we are today, even higher than we are today. So that's played out. And I don't expect that will change materially in the quarter ahead. John Zamparo: Okay. And lastly, on the Buy Canada theme, it's always tough to measure this, but I wonder what you can say about what you thought the impact was in Q3? And is it fair to say we're seeing a more moderate impact in Q4? Curtis Frank: I think so. I mean it's -- like you said, it's very difficult to quantify the impact. We'd like to think there's positive tailwinds in that area. There's lots of pride in all things Canada these days as I think there should be. Very difficult to quantify, and I would suspect it's moderating. I've been in the camp squarely that from day 1, we should expect that, that will be momentum that's maybe a little shorter lived than we would all like. And at some point in time, it would moderate. And I think we're -- what you're seeing here in terms of our growth is less by Canada and more really solid execution of what our proven growth strategies in the market are proving to be resilient, durable, effective and growth strategies that we think will take us well into the future. John Zamparo: Okay. And sorry, just one more. On the long-term guidance framework that's coming near term, I assume you don't want to steal its thunder, but any sense of what investors can expect? Is it likely to focus on a specific margin target? Or are you leaning more towards an overall growth algo? Anything you're willing to share at this point? Curtis Frank: Not much I'm willing to share. I think it's premature. We're in the process right now, and this is normal in our business that we'd normal at this stage. Our 2026 budget gets presented to our Board in the month of December, along with our forward-looking strategic plan for the future. And the outcome of that dialogue discussion and approval and alignment process will ultimately guide our communications around guidance. So I think it's premature today. And -- but you should expect us to be coming forward with that in the short coming months ahead. Operator: [Operator Instructions] Your next question comes from Michael Van Aelst of TD Cowen. Michael Van Aelst: I just want to follow up actually on the top line growth, which has been impressive this year, even if it is slowing a little bit as we kind of cycle tougher comps as well. But the 2 new brands that you're launching, can you talk about the addressable market for these? And if you don't have a specific number, maybe something what you think relative to the MENA and the RWA, for example? Curtis Frank: Well, the Musafir brand, MENA is probably a good proxy, Mike, in terms of the total addressable market, a very fast demographic opportunity in the Canadian market. But what's interesting, and we commented on Gen Z and millennials having a really interest -- having a real and sustained interest in global food flavors and maybe less of a propensity to cook from scratch. And those 2 things combined, the desire for more diversity in flavor offerings, a more diversity in food offerings but in a prepared meal occasion makes the total addressable market for Musafir maybe even larger than the Halal opportunity. So I would say equal to or greater than what we've seen and experienced in MENA Hal without putting a number around it. have to spend some time doing that. I haven't, but I could. On the meat snacks opportunity, this isn't your normal kind of meat stick. Number one, it's not refrigerated, it's shelf stable. Number two, 12 grams of protein at 110 calories is a really awesome nutritional benefit for people who are looking for healthy protein on the go. And that's a large and very rapidly growing total addressable market. What's exciting about meat sticks is the ability to, number one, have success in our core business, which would be the retail environment, but also extend distribution into alternative channels, health food stores, convenience locations, gas and convenience locations, drugstore offerings, which obviously, as you know, are large and growing gyms, workout facilities, the shelf stable reach makes the distribution opportunities much more material, and we're already having success in gaining distribution in those areas. So I'm excited to -- looking forward to report out a little bit more news around the success. Right now, we're just getting the product into the market. And our supply is selling out quickly, which is always a very positive outcome in a product launch. And I'm sure we'll give some positive updates along the way. Michael Van Aelst: Great. That's helpful. And last question. With leverage down at 2x now, what is your -- what's the plan for free cash flow next 12 months? And should we -- and given the weakness in the share price, is it your intention to be active on your NCIB? Curtis Frank: David, maybe you'd cover this one. David Smales: Mike. Similar to Curtis comments around outlook for 2026, obviously, this view of capital allocation and how that aligns with our view of the next 12 months all kind of wrapped up together. What I can say is -- and consistent with what we say in the outlook, we intend to continue to build on the track record of growth in the annual dividend that is a key focus for us. We are evaluating those future capital allocation opportunities with a desire to return capital to shareholders. And we're just working through the strategy for that, timing for that, the quantum of that, but that will all be wrapped up in the guidance we give going forward as well as our view that the share price is undervalued today. I talked about this last quarter. Nothing has changed in our view today post the spin. And so all those factors will be things that we're considering as we lay that out going forward. But I'm not going to talk to specifics today, but it is a very active conversation. Michael Van Aelst: Is there anything preventing you from buying back stock this quarter? David Smales: Obviously, been in a blackout period up until now this quarter. There's nothing in and of itself presenting any obstacles to implementing share buybacks when we're outside of blackout period. We are mindful of the Butterfly structure, and that has some restrictions around it. But as we demonstrated in August, we have some flexibility to operate within that. And that's all part of the algorithm we're working through right now as we decide on the right strategy going forward. Operator: There are no further questions at this time. I will now turn the call back over to Mr. Frank. Please continue. Curtis Frank: Great. Thank you for joining us today. It was obviously a historic quarter with the completion of the spin-off of Canada Packers. There was lots of complexity required in our reporting this quarter, but we tried our best to simplify the key themes for you that are of most importance and appreciate your patience in taking the time to walk through with us today. On the surface, it was a very successful quarter, 8% growth on the top line, a significant improvement in our adjusted EBITDA. And our focus moving forward is obviously on sustaining the growth momentum we have in the business and continuing to create value in a way that's inspiring and enduring, and we're looking forward to speaking with you next quarter. So thank you, and have a great day. Operator: Ladies and gentlemen, that concludes today's conference call. Please thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the OraSure Technologies, Inc. 2025 Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jason Plagman, VP of Investor Relations. You may begin. Jason Plagman: Good afternoon, and welcome to OraSure Technologies Third Quarter 2025 Earnings Call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath, our Chief Financial Officer. As a reminder, today's webcast is being recorded, and the recording can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, shipments and markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are discussed more fully in OTI's SEC filings its annual report on Form 10-K for the year ended December 31, 2024, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide more complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on information available to management as of today. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I'm pleased to turn the call over to Carrie. Carrie Eglinton Manner: Thanks, Jason, and thank you to everyone for joining us today. Today, I will discuss some highlights from Q3 and our progress on key priorities for 2025 and beyond. Overall, we continue to significantly advance our strategic transformation and execute with discipline as we position OraSure for a return to growth in 2026. We have delivered meaningful progress and continued strengthening our foundation. We're also elevating our core growth by expanding and diversifying our product portfolio and customer relationships plus we're accelerating profitable growth through investments in internal R&D as well as acquisitions and partnerships that leverage our existing capabilities and to offer an attractive risk-adjusted ROI. Looking at our Q3 results, total revenue was $27.1 million, and core revenue was $27.0 million, which included Diagnostics revenue of $14.5 million and Sample Management revenue of $10.3 million. Broadly speaking, our key end markets remain mixed, and we continue to partner with customers that are navigating an environment with elevated levels of uncertainty related to funding for public health programs and research as well as the government shutdown in the U.S. That said, we view 2025 as a transition year, and we're excited about pipeline opportunities in attractive markets that align with our strengths to drive growth in 2026 and beyond. In our International Diagnostics business, we discussed on our last earnings call that we anticipated a slower pace of orders for our HIV test in the second half of the year as our in-country partners work through their existing inventory and national health programs adapt to changes in the funding environment. That trend played out as expected in Q3 and thus far in Q4. For the full year 2025, we now expect that revenue from our International Diagnostics business will be in the low to mid-$30 million range, representing a decline of approximately 20% compared to 2024, which was a record year for International Diagnostics. Staying with our International business, we are pleased to share that OTI signed a definitive agreement to acquire BioMedomics. This tuck-in acquisition expands OTI's Diagnostic portfolio by adding Sickle SCAN, a rapid point-of-need test for sickle cell disease that is sold outside the U.S. The global sickle cell testing market, particularly in high burden regions in developing markets, is underserved and fragmented. We believe Sickle SCAN addresses this need with a high-quality, affordable rapid point-of-care test and there is support from government agencies and global health organizations to increase access to sickle cell testing at the point of need. We see an opportunity to expand the reach and adoption of Sickle SCAN by leveraging OTI's strength including our international sales channels and our existing relationships with national health programs, particularly in Africa and Latin America. Furthermore, many of our international customers and partners have expressed interest in a reliable, low-cost, rapid diagnostic test for sickle cell disease. Transitioning to our U.S. Diagnostics business. Our public health customers are adapting to significant reductions in staffing at HHS, CDC, SAMHSA and other federal agencies that support public health programs, along with budgetary uncertainty and challenges related to the federal government shutdown. We are continuing, however, to see traction with our syndemic approach that leverages our portfolio of rapid tests across multiple conditions. And we are expanding our customer base in nonpublic health markets such as urgent care, hospital emergency rooms and correctional facilities for rapid hepatitis C testing plus online channels specializing in consumer-initiated testing. Overall, for the full year 2025, we expect our U.S. Diagnostics business to generate revenue in the low to mid-$30 million range representing a low single-digit percentage decline compared to 2024. We also wanted to provide an update on Together Take Me Home, a collaboration funded by the federal government that makes HIV self-test available through the mail in order to advance the President's goal of ending the HIV epidemic. We are pleased to share that this highly effective life-saving program was renewed by the Trump administration with strong bipartisan support in Congress. As a result, Together Take Me Home is continuing for program year 4, which runs from October 2025 to the end of September 2026. We expect to recognize approximately $1.8 million of revenue from Together Take Me Home in Q4 and anticipate a similar pace of quarterly revenue in 2026. Switching gears to our Sample Management business. The overall trend continues to be mixed. SMS revenues increased on a quarter-over-quarter basis in Q3, but we anticipate a sequential decline in Q4, which is consistent with the typical seasonal ordering pattern for this business. For the full year, we expect revenue from Sample Management products in the high $30 million range, which would be approximately flat compared to 2024, if you exclude the impact of the decline in orders from a large consumer genetics customer. Looking ahead, we are confident that the Sample Management business is positioned to return to growth in 2026 and beyond. As genomic end segments gradually return to stronger growth driven by clinical adoption of precision medicine. Our confidence is also supported by continued scientific and technological advancements such as the increasing utilization of short-read and long-read genomic sequencing, the decline in unit costs for sequencing and analysis and advancements in areas such as proteomics. We are also seeing early signs of positive trends in some international markets, such as the Middle East, that are planning to invest in population health studies using novel sample collection devices in order to accelerate precision health and life sciences research in the region. We're also pleased to share that the ENDO 100 projects has selected multiple kits from our OMNIgene and Colli-Pee product lines for the collection and stabilization of a variety of sample types, including saliva, urine, stool and vaginal swab. The ENDO 1000 project is a United Kingdom wide initiative aimed at accelerating discovery and advancing data-driven research into the diagnostics and personalized treatment of endometriosis. By collecting biological samples and lifestyle data from participants over 2 years, the study seeks to uncover patterns that can inform more effective individualized care strategies. The inclusion of our sample collection kits in this landmark study underscores their value in enabling high-quality research and positions us for continued growth in the Precision Health and Clinical Research segment. Now I'll transition to our exciting pipeline of innovation, including an update on several products targeting attractive markets. Midyear, we launched a blood collection tube with stabilization chemistry for research use only, or RUO, markets in the burgeoning field of proteomics. We also anticipate near-term milestones for Colli-Pee urine collection, initially for sexually transmitted infection, or STI, indications and future expansion in the liquid biopsy. And our Sherlock Molecular Diagnostics Rapid Test platform whose first assay is expected to serve the large and growing chlamydia and gonorrhea, or CT/NG, segments of STI. As we discussed last quarter, our HEMAcollect PROTEIN product launched in July 2025 in the RUO market, like I just mentioned. Since this launch, we've received positive and insightful feedback from our customers and early adopters that will help inform our road map as we enhance our proteomics product line and build additional momentum in 2026. Additionally, OTI is presenting at the upcoming Human Proteome Organization World Congress to highlight HEMAcollect PROTEIN's proprietary stabilization capabilities and its performance across a range of proteomics technology platforms. Moving to our Colli-Pee device, which is designed for first-void urine collection. We plan to submit clinical trial data to the FDA for STI indications by late 2025 or early 2026. Receipt of approvals for these applications subject to regulatory review, would be in addition to our existing Colli-Pee RUO product and is expected to further strengthen our competitive position in novel urine collection. Our analytical and clinical studies are demonstrating strong performance and flexibility across multiple target analytes. We're in advanced discussions with leading diagnostics platform providers that are interested in enabling self-collected noninvasive testing across large and growing markets, including STIs, HPV and other disease states. Next in product innovation. Regarding our Sherlock over-the-counter Molecular Diagnostics self-test platform and its first assay for CT/NG, we are making good progress in our clinical trial and our plan for submission to the FDA in late 2025 or early 2026. We anticipate gaining momentum for our product launches for innovation, and it's the work we've done in transforming our enterprise that also allows us to invest in creating a pipeline of earlier-stage opportunities in high-value growth markets that fit well with our strengths and our product platforms where we can compete and win. Examples include categories where we already have a presence like in infectious disease and STIs plus in newer ones like liquid biopsy or say antimicrobial resistance, where rapid tests and differentiated chemistries have outsized potential to create and add value. We look forward to sharing more details as new product opportunities progress through our development process. With that, I'll turn the call over to Ken to discuss our financial results and guidance. Kenneth McGrath: Thanks, Carrie. Total revenue in the third quarter was $27.1 million. Core revenue, which excludes COVID-19 products and the molecular services and the risk assessment testing businesses that we exited was $27 million. Diagnostic products generated $14.5 million of revenue in Q3, and Sample Management Solutions revenue was $10.3 million. Excluding the headwind from the consumer genomic -- genetics customer, Sample Management revenue from the rest of our customer base grew on a year-over-year basis in Q3. Our GAAP gross margin in the third quarter was 43.5% and non-GAAP gross margin was 44.2%, which was slightly better than our expectations due to lower scrap expenses. GAAP operating expenses in the third quarter were $27.9 million, which includes $2.8 million of noncash stock compensation expense and $376,000 of expense related to an increase in the estimated fair value of acquisition-related contingent consideration. Depreciation expense was $2.6 million in the quarter. Our GAAP operating loss in Q3 was $16.1 million, and our non-GAAP operating loss was $12.7 million. Looking at our balance sheet. We ended Q3 with 0 debt and total cash and cash equivalents of $216 million. Operating cash flow in the third quarter was negative $10 million, which was consistent with Q2 and our expectations given our investments in the Sherlock platform, the CT/NG clinical trial as its first assay and other innovation projects. We deployed $5 million during the third quarter to repurchase approximately 1.5 million shares of our common stock. Consistent with our capital deployment strategy, we also continue to evaluate organic and inorganic growth opportunities. As Carrie mentioned, we have signed a definitive agreement to acquire BioMedomics as a tuck-in commercial stage acquisition for $4 million upfront and potential contingent consideration upon achievement of revenue milestones. BioMedomics is currently approaching $1 million of annual revenue, and we believe OTI has the potential to grow back to several million dollars of annual revenue over the next few years. BioMedomics is expected to be cash flow breakeven with a path to a very attractive ROI as revenue grows over the next few years. We anticipate minimal incremental operating expense for OTI given that BioMedomics can be plugged into OTI's international commercial organization and leverage our administrative and regulatory capabilities to expand availability and adoption of the Sickle SCAN rapid test. Turning to guidance. We are guiding to fourth quarter revenue of $25 million to $28 million, which includes less than $100,000 of COVID-19 testing revenues. Our guidance also assumes continued disruption in ordering patterns from our SMS customer in the consumer genetics industry. This customer represents approximately $4 million of revenue in Q4 last year. We expect our gross margin percentage in Q4 to be in the low 40% range, which is slightly lower than third quarter due to typical seasonality and a greater mix of international revenue as a percentage of total revenue in Q4. Moving to operating expenses. In Q4, we expect core operating expenses of approximately $20 million, plus $10 million of investments in innovation, which includes $7 million to $8 million of investments related to Sherlock. With that, I'll turn the call back to Carrie to conclude. Carrie Eglinton Manner: Thanks, Ken. We'll plan to exit the transition year of 2025 and head into 2026 with important near-term catalyst for growth as we advance into the next phase of our multiyear strategy. We've done the work in the last 3 years that gives us the confidence and the capabilities we need to achieve our goals. We have delivered cost productivity at the business level and product level, develop our people and infuse new talent in the organization, leveraged our commercial strength to diversify our customer base and implemented enterprise-wide rigor and built a strategic innovation road map, strengthened our cash flow profile while maintaining a strong balance sheet that has allowed us to invest in attractive innovation pipeline opportunities, including internal product development along with M&A. We've also refreshed our Board with the addition of 3 new independent directors over the last 3 years, including last week's announcement, adding Steven K. Boyd as a Director and appointing Jack Kenny as Chair of the Board. Also, we'd like to thank Mara Aspinall, who has decided to step down after over 8 years of service to pursue new opportunities. We're grateful for her many contributions and wish her the very best. Our foundation is strong, but our work is not done. We recognize that in order to capitalize on the many opportunities ahead of us, we must continue to execute on our priorities and deliver more innovation. Our entire team is working with urgency and is aligned in purpose to decentralize diagnostics and connect people to care that is more accessible, convenient, private and personalized to create long-term value for customers and shareholders. We're confident in the path ahead. With that, I'm pleased to turn the call over to the operator for Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Mac Etoch from Stephens Inc. Steven Etoch: I appreciate you taking my questions. just a few for me, and I'll let others ask some. But maybe could you just discuss this bio -- sorry, apologize if I am pronouncing incorrectly, BioMedomics acquisition and what attracted you to that asset just to start, and I'll follow up on that. Carrie Eglinton Manner: Yes. It's a really nice tuck-in that aligns precisely with our portfolio internationally. So rapid diagnostic testing for underserved markets -- the strength we have in Africa, including -- we don't talk as much about Latin America. But for low-cost tests that identify pressing health care challenges whether it's the infectious disease success we've had in HIV or HCV, sickle cell is one of those opportunities where the populations in those underserved regions are often undiagnosed. So we had heard that need. We've been talking with BioMedomics for many years and working with them. And so the opportunity to bring that -- to tap that into our portfolio, leverage the strength of our relationships, our commercial distribution and reach and just put it right into the portfolio made a ton of sense. So a very promising potential for what we think are smart capital deployment. Kenneth McGrath: And Mac, we also -- we think it has a strong return on invested capital. You noticed in the deal structure, we said it's a small upfront with some contingent considerations if they achieve certain milestones, 3 to 5 years out. We believe that structure allows us to really deliver value. We mentioned also that it will be breakeven cash flow. And what that -- as Kerry mentioned, it's leveraging a lot of our capabilities. So we really don't need to add a lot to deliver this and to put it into our channel. And then as we grow the revenue, we'll be able to leverage and be accretive going forward. Steven Etoch: I appreciate the context there. And then secondly, pretty good cost management on your part, both at the gross margin level and in terms of OpEx. Just given where revenues fell, can you just highlight some of the puts and takes around gross margins and then given the in-sourcing was completed in 2Q, are there any lingering costs that might have fallen into the quarter? Kenneth McGrath: Yes, that's a great question. Yes, for gross margins, we did do a little bit better than guided than expected. A lot of that was driven by our lower scrap than expected, which is really a complement to our operations team and their continued automation and operational efficiencies. As far as OpEx, that was in line with our spend. And really, our core business essentially is breakeven and what we -- where we do choose to spend our dollars beyond that are on innovation. And in this case, innovation focused on delivering our Sherlock CT/NG clinical trial submission as well as internal innovation. And then a little bit other benefits of gross margins, there was a little bit of a mix benefit in Q3. And we did mention we guided in Q4 that will be a little bit below Q3. Part of that is the mix, seasonality and the mix change where we expect to see a little bit more international revenue in Q4 as a mix, which will lower the margins a bit. Operator: [Operator Instructions] There are no further questions at this time. I would now like to turn the call back over to Carrie Eglinton Manner for closing remarks. Carrie Eglinton Manner: Thank you, Mac, for your questions and everybody for participating today. We appreciate your continued interest in OTI. And with that, we'll close the call. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.